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Calgon Carbon Corporation (NYSE:CCC)

Q2 2013 Results - Earnings Call Transcript

August 6, 2013 10:30 AM ET

Executives

Gail Gerono - Vice President, Investor Relations

Randy Dearth - Chief Executive Officer

Rob O'Brien - Chief Operating Officer

Steve Schott - Chief Financial Officer

Analysts

Ben Kallo - Robert W. Baird

Kevin Maczka - BB&T Capital Markets

Steve Schwartz - First Analysis

Michael Gaugler - Brean Capital

Jinming Liu - Ardour Capital

Christopher Butler - Sidoti & Company

Dan Mannes - Avondale

David Rose - Wedbush Securities

Operator

Ladies and gentlemen, thank you for standing by and welcome to Calgon Carbon Corporation, second quarter, 2013 results call. All lines have been place on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. I'll now turn the call over to Gail Gerono, Vice President of Investor Relations. Please go ahead.

Gail Gerono

Thanks, Laurie. Good morning and thank you for joining us. Our speakers this morning are Randy Dearth, Calgon Carbon's Chief Executive Officer, Rob O'Brien, our Chief Operating Officer and Steve Schott, our Chief Financial Officer.

Before we begin the presentation, please be advised that the Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for forward-looking statements. Today's presentation and perhaps some of the comments that Calgon Carbon's executives make during the Q&A may contain statements that are forward-looking.

Forward-looking statements typically contain words such as expect, believe, estimate, anticipate, or similar words indicating that future outcomes are uncertain.

Statements looking forward in time including statements regarding future growth and profitability, price increases, cost savings, broader product lines, enhanced competitive posture and acquisitions are included in the company's most recent annual report pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

They involve known and unknown risks and uncertainties that may cause the company's actual results in future periods to be materially different from any future performance suggested in the presentations or during the Q&A.

Further, the company operates in an industry sector where securities values may be volatile and may be influenced by economic and other factors beyond the company's control.

Some of the factors that could affect the future performance are higher energy and raw materials costs, costs of imports and the related tariffs, labor relations, availability of capital and environmental requirements as they relate both to our operations and to our customers, changes in foreign currency exchange rates, borrowing restrictions, validity of patents and other intellectual property, and pension costs.

In the context of the forward-looking information provided in this webcast, please refer to the discussions of risk factors and other information detailed in, as well as the other information contained in the company's most recent Annual Report and 10-K.

We'll go with Randy first, opening remarks.

Randy Dearth

Thanks, Gail. Welcome everyone. Let me begin by saying that I am very pleased with Calgon Carbon's performance for the second quarter of 2013, and for the six months that ended June 30. The improvement in both gross margin and operating expenses versus last year's second quarter and first half are especially gratifying as they were indicative of our progress in implementing our cost improvement initiatives and our focus on reengineering the corporation.

I will provide more details on our initiatives later on the call. But first Steve will review the financials for the quarter followed by Bob's operation review. Steve?

Steve Schott

Thanks, Randy. Total sales for the second quarter of 2013 were $140.4 million versus $148.4 million in the second quarter of 2012, a decrease of $8 million or 5.4%. Currency translation had a negative impact of $3.2 million on the Activated Carbon and Service sales for the second quarter of 2013 due to the weaker yen.

Regarding our segments, sales in the Activated Carbon and Service segment decreased $2.3 million or 1.9% for the second quarter of 2013 compared to 2012's second quarter.

In addition to the decline from currency translation, our Activated Carbon and Service segment had lower demand for Activated Carbon in the environmental air and environmental water treatment markets.

The decline in the environmental air treatment market was as a result of lower demand for powdered Activated Carbon for mercury removal from electric generating units in the Americas as well as lowering pricing on a large contract that was renewed in early 2013.

The environmental water market decline was principally due to a customer order in Asia that occurred in the second quarter of 2012 and did not repeat in second quarter of 2013. Offsetting these decreases was an increase in demand in the potable water market in Japan, higher sales in the specialty market for respirator carbons and our 2013 price increase.

Equipment sales declined $5.6 million or 15.5% for the second quarter of 2013 compared to 2012's second quarter primarily due to lower revenue for ballast water treatment systems of $7.6 million, partially offsetting this decrease, were higher sales of traditional ultraviolet light systems and ion-exchange equipment.

Sales for the consumer segment were comparable quarter-over-quarter. Consolidated gross profit before depreciation and amortization as a percentage of net sales was 33% in the second quarter of 2013 compared to 31% in the second quarter of 2012 an increase of 2 percentage points.

The increase was in the Activated Carbon and Service segment as a result of our 2013 price increase, lower plant maintenance cost and favorable impacts from our corporate wide cost improvement initiatives.

Depreciation and amortization expense was $7.3 million in the second quarter of 2013 compared to $6.4 million in the second quarter of 2012. The change was primarily due to increased depreciation related to the company's new Gila Bend Arizona facility; that was placed in service in the early part of the second quarter 2013, as well as capital improvements made in 2012 including expenditures related to the company's (inaudible) virgin carbon manufacturing facility.

Selling, administrative and research expenses were $18.9 million during the second quarter of 2013 versus $23.1 million in 2012 a decrease of $4.2 million. The decrease was due to lower and employee related expenses in part due to the company's cost reduction initiatives.

SA&R expense for the second quarter of 2013 also included an approximate $900,000 or 0.7% benefit from the reduction of the multiemployer pension plan liability. Absent this benefit, SA&R expense as a percentage of sales improve to 14.1% as compared to 15.6% for the second quarter of 2012.

The income tax rate for the second quarter of 2013 was 34.4% and the company's full year 2013 tax rate is currently estimated to be between 34% and 35%.

In summary, our net income for the second quarter was $13 million or $0.24 per diluted share versus net income of $10.9 million or $0.19 per diluted share in 2012.

Turning again to our business segments, the Activated Carbon and Service segment recognized $27.7 million in operating income before depreciation and amortization in the second quarter of 2013, compared to $20.3 million in the second quarter of 2012. The increase was primarily due to the previously discussed gross margin improvements and lower employee costs stemming from our cost improvement initiatives. This segment also benefited from the $900,000 reduction in our multiemployer pension plan liability

The equipment segment recognized a $600,000 operating loss before depreciation and amortization in the second quarter of 2013, compared to $2 million of operating income in the second quarter of 2012, the decline was primarily due to the lower volume of revenue from ballast water treatment systems and an increase in estimated cost to complete several projects in process.

The Consumer segment recognized $400,000 in operating income before depreciation and amortization in the second quarter of 2013, compared to $500,000 in the second quarter of 2012.

Regarding our balance sheet, cash increased during the first six months of 2013 and at June 30, we had approximately $21 million of cash. Receivables were $100.5 million for the second quarter of 2013, which was slightly lower than year end 2012 but $10.4 million lower than the balance as or March 31, 2013.

Inventories were $108.5 million for the second quarter of 2013, which was $1.3 million higher than year end 2012. Our finished goods inventory decreased by $4.1 million but this decline was more than offset by a $5.4 million increase in our raw material inventories, primarily coal as we secure a good quality coal for more consistent supply for our virgin carbon manufacturing lines.

We believe our product rationalization and other improvement initiatives will lead to lower inventory levels and improved cash flow. As of June 30, the company has total debt outstanding of $56.1 million, which represents a decrease of approximately $8 million from year end and relates both to Calgon Carbon Japan and borrowings under our US credit facility. Cash flows provided by operations were $18.4 million for the second quarter of 2013 versus $20.8 million in 2012. Capital expenditures totaled approximately $5.3 million for the second quarter of 2013 and our estimated spending on capital for the full year 2013 is $40 million to $45 million.

Finally, regarding our share repurchase program, as a reminder, we will be required to return shares to Morgan Stanley for daily weighted average price over the execution period, price represented by the initial shares delivered to us. If this program had been completed on June 30, we would have been required to return 236,000 shares. We currently expect the program will conclude nearly end of the third quarter and by agreement we'll conclude no later than September 30.

Gail Gerono

Thanks Steve, Bob next with operations.

Rob O'Brien

Thank you Gail. Concerning operations all plants trended well during the quarter and we are realizing the benefits from the 2012 upgrades to our Pearl River Calgon Carbon plant. They include increased capacity in cost savings from changes that we've made to our manufacturing process. Both of our virgin carbon manufacturing facilities are operating at full capacity.

During the quarter, we also reached an agreement on a four-year contract with hourly employees in our employees at our Big Sandy plant that are represented by the united Steelworkers Union. We are pleased with the terms including increases in employees share healthcare costs over the life of the contract.

On the commercial side, we also remain on track to achieve our plan of $10 million price increase for 2013. Now I'll update on emerging markets, which are disinfection byproducts, mercury removal and ballast water treatment.

Let start with disinfection byproducts, we are awarded the virgin carbon supply and two DBT projects in the second quarter and one also included the supply of carbon adsorption equipment. Our marketing efforts in the disinfection byproduct market segment continue to be focused on medium and smaller facilities. We expect opportunities at our facilities to increase as the use of core demands of the disinfectant becomes less desirable, more closely regulated.

Because we've been successful in convincing more units for drinking water customers in the US to convert to the use of reactived carbon, revenue from customer activations has grown significantly. In the first half of 2010, we reactivated about 2 million pounds of carbon used for checking water, in the same period in 2013 that the number was 10.6 million. Increasing our reactivation volume is a very important component for our global long-term strategy. So we are pleased with our progress to-date.

Moving on to mercury, in the second quarter US EPA announced the MATS for [ICI] major which is industrial, commercial and institutional facilities and various source borders with compliance required by January 31, 2016 and the MATS performance submit with the compliance date of September 9, 2015.

We estimate that these regulations will generate demand for 20 million to 30 million pounds reactivated carbon per year. This demand is included in our projections for the size in mercury removal market from 380 million to 765 million pounds. As Randy mentioned in last quarter's call, the individual states have primacy in the implementation of the EPA's Mercury and Air Toxic Standards commonly known as MATS.

They are approximately 900 coal-fired generating units that most compliable MATS. We believe today that phase have a little more than 100 request for one year extensions. We expect that most utilities will release their compliance plants by the end of the first quarter of 2014.

As of 2015 compliance state for MATS approaches, the number of trails for our advance Fluepac carbon reactivated carbon products for mercury removal is increasing. During the first half of 2013, there were five trails. So far another six is scheduled to the second half of this year. This increased activity indicates that power generators have begun their process of selecting suppliers back to the carbon in order to meet the April 2015 time state for MATS. We believe Calgon Carbon is the leader in advanced products designed to reduce the cost and increase the performance of activated carbons for mercury removal market.

In the second quarter, we raised our fifth pattern related to Fluepac technology. All five patterns include claims directed to composition, use and manufacture of high performance materials from mercury removal from fluegas.

Okay, now on the ballast water treatment. In May, our committee of the International Maritime Organization or IMO approved the resolution designed to facilitate ratification of its convention that will mandate treatment of ballast water on a global basis. The resolution adjusted the required compliance states. The dates that are coming by because of delays, these days I should have come and gone because of the delays in the ratification of the convention were shifted into future. Also the period of which shifts necessitate compliance was changed from 2.5 to 5 years.

We believe this change is a positive, because they reduce in earnings cost in the first year after ratification of the convention and mitigate concern about a potential borrow back in technology installation in the first year. Also the compliance periods in convention now match those in the US Coast Guard's regulation. As a result of these changes, many in the industry expect the IMO convention to be ratified by early 2014.

Another second quarter development was in fact Germany's ratification of the IMO convention. There are now 37 signatories in the convention that represent 33% of the world shipping tonnage 35% is required for the convention to build in to force. Five individual countries have sufficient time to achieve ratification of the convention, Panama, China, Hong Kong, Greece, the Bahamas and Singapore.

As for the activity in the second quarter related to the U.S. Coast Guard regulations, Norwegian company became the second independent lab authorized to test ballast water treatment systems for coast guard type approval. The U.S. Coast Guard regulation is in force and compliance states are approaching. Vessels built after December of this year must treat their ballast water as soon as they are commissioned. The mid-size vessels built before December must comply following their first dry dock after January 2014 and all vessels must comply following their first dried up after January of 2016.

Reflecting these imminent compliance states over the past six months, Hyde Marine has experienced a steady increase in the number of requests or proposals for ballast water treatment systems. Percentage of those requests that are for retrofits of existing vessels has also steadily increased.

Additionally in the second quarter, we received more orders for Hyde GUARDIAN systems than in any other previous quarter to-date. These orders were for smaller vessels however with the average price persistent being approximately $180,000. We expect an increase in retrofit orders in the coming quarters driven by these approaching U.S. compliance states.

Last week we announced the contract with Thames Water in the U.K. to reactivate approximately 11 million pounds per year of spent carbon for a period of 10 years. Our customer, Thames Water, is the largest provider of drinking water in the U.K. and it had been reactivating its own spent carbon. We intend to reactivate this carbon at our Tipton plant near Birmingham, England after completion of a $9.5 million capital project to increase the plant's efficiency and expand its production capacity. Till that project is completed, we'll reactivate the Thames carbon at our facility in Feluy in Belgium.

Gail Gerono

Thanks, Bob. Steve is back now to comment on the outlook for the third quarter. Steve?

Steve Schott

Thanks Gail. Sales, we currently expect our third quarter sales to be approximately equal to our second quarter 2013 sales. Our Carbon and Service price increase should be offset by sequential decline in equipment sales, with increases in Hyde Marine's ballast water treatment system sales not expected into at least the fourth quarter. In addition market conditions in Europe remain challenging.

Margins, we expect our gross profit before depreciation and amortization as a percent of sales to improve for the fourth consecutive quarter. We believe a sequential improvement of at least 50 basis points is likely in the third quarter. This improvement should come from our 2013 price increase, our cost improvement initiatives, and consistent good virgin carbon plant performance. Consultant costs for several of our phase 3 initiatives and plant maintenance costs will somewhat limit our total third quarter margin improvement.

Operating expense, we expect our operating expenses to be higher sequentially. An estimate they will be at least 15% of sales, which will be approximately in line with our first quarter 2013 result.

In the third quarter, we expect increases in our research and development spending for further development of our advanced mercury removal products and increases in other spending related to various corporate initiatives. And that concludes my report.

Gail Gerono

Thanks Steve. And Randy is our next speaker.

Randy Dearth

Thanks, Gail. It was a year ago, almost to the date that I participated in my first quarterly conference call of Calgon Carbon. On that call, I told you I was unhappy with the decline in the company's gross margin and it was my intent to reverse that decline by identifying ways to reduce costs and improve efficiencies. This resulted in some fundamental changes and how we run our business. So let me review again some of the key changes.

First, we reengineered our organization reducing headcount worldwide and changing the organizational structure in the Americas to a market driven business unit configuration. We also globalized procurement and supply chain activities to realize optimal value for the company and we implemented the global savings efficiency program to permanently lower cost structure.

Let's discuss each of these changes beginning with the most ambitious initiative the $30 million cost equipment program. I am happy to report that we are on track to realize $15 million in savings this year, $9 million from phase 1 and $6 million from phase 2, and we continue to believe that all three phases will be implemented by the end of 2014. We are currently evaluating additional opportunities that are not included in the $30 million of cost improvements, but I hope to shed more light on during our next quarterly call.

Next let's talk about procurement and specifically coal, our number one key raw material. Obtaining a reliable supply of coal and acceptable price is a key factor in improving and maintaining margins. Our Global Procurement Group has been working to reduce our cal costs and I am pleased that for the second quarter of 2013 they were down slightly versus last year's second quarter.

Also I would like to note that we now have more than 54% of our coal requirements under contract for the remainder of 2013 and we do not anticipate any major changes in the price of metallurgical coal through the first half of 2014.

A team led by the Head of Global Procurement Group continues to explore every option for securing a long-term coal supply at favorable pricing. The process consists of evaluating each option for quality of coal, accessibility, size of the reserves and price. I'm pleased with the work our procurement team has done and believe they are on the right track to bring us more cost improvements.

I want to also talk a little about our initiatives to expand our global presence. Let me start by updating you on our activities in Japan. The change in leadership at CCJ has had a significant positive impact on its performance. Through June sales in local currency are over 10% higher compared to 2012, gross margins have improved and operating expense as a percent of revenue has improved by 4 percentage points. I'm pleased with what we are seeing in Japan.

Following that model, we have hired a Chinese national who has business experience with global companies and he will direct our China operations. We are exploring the expansion to other geographies as well, where demand for activated carbon is expected to grow significantly in the short and long term.

Now let's talk about our balance sheet, our strong balance sheet and how we can create value by making the best use of it. These include options, such as spending monies on capital investments, acquisitions and stock repurchase programs. Let's discuss each.

Capital investments, as you may recall capital projects are included in the cost improvement initiative and are suitable use of our balance sheet. Last week our Board approved a $19.4 million investment in two capital projects. This should result in lower production cost at our Big Sandy plant. I have challenged our operations groups globally to further evaluate the best projects of course with acceptable returns to help support our strategic initiatives.

Acquisitions, this is an area we have spent a lot of time discussing over the last year. To help us understand what could be an appropriate purchase, I have established a task force to begin to identify suitable candidates that would complement our existing portfolio and of course this will be ongoing process for us and we will report more as that occurs.

Last, the software purchase program. As you're aware, we initiated a $50 million program last November. Its completion is expected by the end of the third quarter. At that time, we will review our options and proceed with an additional repurchase if it makes sense. So these are the key uses of our balance sheet that we are focused on currently.

On a different topic, let's talk about our board. Yesterday, we announced John Paro has joined our Board of Directors. John is the CEO of a specialty chemical company, HallStar and I believe that he will be an excellent addition to our board. He has sales, marketing, manufacturing and M&A experience and under his leadership, HallStar has shown consistent significant growth, in both sales and profitability.

Some of the highlights from John's career at HallStar include transforming HallStar from an industrial chemical distributor to a specialty chemical producer, divesting HallStar's chemical distribution business and acquiring six businesses in the personal care and industrial sectors.

I think you can appreciate why I am so pleased to have John on Calgon Carbon's board and look forward to having his perspectives.

I have one more announcement to make today. Calgon Carbon will hold an Analyst Day on November 07, in the Phoenix area. The focal point of this meeting will be our customary activation capabilities and strategy, there will also be presentation about the other aspects of our business.

We also plan to discuss some promising new applications for Activated Carbon that we are very excited about. In the afternoon, we will a drinking water treatment plant that uses our granular activated carbon to prevent the formation of DBPs, we'll follow that by tour of our newest reactivation facility in Gila Bend.

Gail is negotiating with hotels and when arrangements are completed she will announce the details. You'll be able to register to attend the event on our website. So I hope that you can join us.

So that concludes my remarks and we will now take your questions.

Question-and-Answer session

Operator

(Operator Instructions) Your first question comes from the line of Ben Kallo of Robert W. Baird.

Ben Kallo - Robert W. Baird

Thank you and good quarter guys. Starting on Activated Carbon, can you talk to us about, you talked about capital investment of Big Sandy is there any way you can elaborate on maybe the returns on that investments what they entail and then as we forward to when mercury market goes full effect, what are the plans for a kind of larger expansion to meet that market? And then I have a follow-up.

Randy Dearth

Let me start, Ben, by saying in terms of these projects and projects going forward representative of the board, they have to have a suitable return. We obviously well above our cost of capital, it is what we're basing that on. So I don't think we're going to give specific details as to what those returns are, but let me just say after a thorough review the projects that indeed will provide value for Big Sandy and for the corporation going forward.

Rob O'Brien

Yeah, and Ben, they'll be a little longer term projects, so these in particular are not included in our phase 3 savings, which we should have truncated at the end of 2014, so these are a little longer dated.

Randy Dearth

Yeah, but that being said we'll get back to the fact we have some other projects that are currently being done a few smaller projects as well that'll occur this year and next year which indeed fit into $30 million cost initiative program.

I will differ to Bob, all in terms of capacity?

Rob O'Brien

We continue to I think we've said this previous meetings and we continue to evaluate now we can debottleneck our existing facilities and get more out of them. And some of the capital that was just recently improved in fact, it does achieve that but there's still more opportunities to go in our existing facilities.

And we continue to explore other options to increase capacity in the U.S. and other places and that remains very high on our to do list, we're spending a lot of time looking at that, nothing that we're ready to share now, but in the future, we may be able to say more about our long term plans.

Ben Kallo - Robert W. Baird

Okay, when you look at the overall activated carbon market for mercury, how are you guys viewing on any potential new regulations on coal-fired power plants, have your estimates changed for the total market there?

Rob O'Brien

I think we've left our estimates fairly consistent, we think we've been conservative in that area from day one. So changes in regulations or the potential for regulations that might force closures of power plants more than perhaps, submit it on the table, I think we've taken that into consideration or we plan to take that into consideration. There are lot of power plants out there and their need for activated carbon will be strong certainly in the short term, it's difficult to predict whether anybody is going to build another coal-fired power plant in the near term. But there's significant market size with existing plants that, it's certainly going to keep us busy, and keep our attention focused on that market.

Randy Dearth

And if you recall that we said at the call that about 5% of our business is tied into this market, I mean we're fortunate in that, the products we've produced for plant granular and also powder have different markets that are also growing and interesting to us. So we're going to follow the regulations, but we're going to do the things that we can fix that are under our controls, we make our company stronger and better.

Ben Kallo - Robert W. Baird

Okay. And then my final was on ballast water, looks like there's progress being made by the IMO. But with the elongated compliance period have you guys view competition, have you seen new entrants and does that worry you that longer time for compliance laws more folks that come in there and compete with you guys and I'll jump back in queue.

Randy Dearth

I think that's the reality we have been the leaders, we still consider ourselves the leader of the market, would have been better for us if things had moved ahead full speed and quickly. But it's still a very, very large opportunity. We still think we're the head of the pack from the technology standpoint particularly with UV.

And there are some new people entering the market, but certainly no one with the experience and background that we have. So we think long term that will -- our experience will be a key factor in the (Inaudible) decision to make a purchase decision. So we still think we're in pretty good shape there.

Operator

Your next question comes from the line of Kevin Maczka of BB&T Capital Markets.

Kevin Maczka - BB&T Capital Markets

Thanks, good morning.

Randy Dearth

Good morning.

Rob O'Brien

Good morning Kevin.

Kevin Maczka - BB&T Capital Markets

First a question on price, mercury still a challenge. It sounds like you are confident in the US that you will get to 10 million of weight from mercury that you previously planned to get. Can you talk me on the US about the pricing environment in general and any plans you might have to take a similar increase?

Rob O'Brien

We're actually getting price increases in all regions but we knew that most of our opportunity for increase in price was in the US. But we've been trying to improve pricing at all regions. We've seen definite signs that we've been able to do better in Asia and we also had some signs and have got price increases in Europe as well although Europe remains more challenged. Our biggest focus this year has been to make sure that we're providing our products to those areas and those customers are getting a little bit of that in fact value of what we have to offer and are willing to pay the best price.

So in some cases, we're not necessarily getting what might be called a traditional price increase but we're in fact able to offer our products to the particular customers that are willing to pay for the value we deliver. So most of the price increases in the US, but we're getting some in the other regions as well.

Kevin Maczka - BB&T Capital Markets

Okay, the question shifting over to SG&A. It looks like that was probably the line item that was more, provided more of the upside units this quarter than we expected in. It looks like it's better than what you maybe had thought to and I think I heard Steve say, that will be a little bit higher in Q3 on higher R&D spend. Was there some push out there or I guess just speaking about run rates going forward, is this kind of run rate we ought to be at now because I think your phase 2, 3 are not targeting that line item as much as phase 1 did?

Steve Schott

Yes, it's the R&D I would characterize more than just timing as to when we undertake our efforts and further improving our products into serving standpoint when trials are recurring. So, we are probably a little ahead of the $0.5 million target, I think we had set, or the target we had set in phase 1. So we are well ahead of where we thought them to be but for certain extent we'll catch up a little bit over the balance of the year. We got excellent costing for in all parts of our business and I think that will continue but we are spending on corporate initiatives as I also alluded in our comments. And that for long-term run rate, if we could stay in the 15 to 15.5 percentage point basis I think that would serve us well and we won't stop looking for improvements though.

Rob O'Brien

Absolutely, I'll just chime in on that just to reiterate phase 1, lot of our CapEx, our SG&A reductions now well into the margins, and he estimated this quarter that it was probably about $1 million of margin improvement coming in from phases 2, and little bit from phase 3.

Kevin Maczka - BB&T Capital Markets

Okay. And then finally from the gross margin line Steve, I think you called out there that really helped this quarter, the price increase, the cost action both aren't going away, but maintenance cost, plant maintenance cost for favorable year as well and those we know tend to bounce around sometimes quite a bit. How should we think about that going forward, are we looking at any major initiatives or shutdowns or things like that may cause that line items to move significantly in the back half?

Steve Schott

Yeah. We are in I think around the middle of the third quarter, so we tend to have on our virgin lines which are the most impactful, we tend to have around three of our five lines down in any one year and so when those occur, which we will tend come to talk about, as we reference that one “advanced” when they occur we will have an impact, last year in the second quarter we actually had two and I think that's why last year second quarter results were particularly negatively impacted.

Operator

Your next question comes from the line of Steve Schwartz of First Analysis.

Steve Schwartz - First Analysis

Can you give us an update on Neville Island and Blue Lake, I think you had Neville Island on for a couple of months and then I think you were going to take Blue Lake down, once Gila Bend came on?

Bob O'Brien

Yeah, it's Bob. Blue Lake is down as a result of our starting up yields then and probably that for the foreseeable future until we build up enough volume to want to restart it, that will add on, we had expected it would be down for most of the year but our business has been strong enough but in fact we operated it, and we are operating now, and probably we'll operate it for about five months.

So that we actually did not expect but we have enough volume that makes sense for us to operate. We'll probably take it down somewhere during the third quarter.

Steve Schwartz - First Analysis

Okay, is it fair to say that, the way your operations are running right now it's been unexpected in the sense that your virgin capacity is maxed out and you are not completely selling the react capacity?

Bob O'Brien

I don't know but that is unexpected, I think we basically been fairly tight on virgin capacity for the last number of years and so that's one of the reasons we are doing things like looking to incrementally expand production, looking at product rationalization so we can get more product out the door and things like that. Our react strategy is one that we built capacity to try and take advantage of being first in markets and that's really where our focus is now to try and grow that business and to fill up the capacity that we've been, we have in fact invested in. So I don't know it's a surprise, I think that's really discontinuing to in fact implement our strategy.

Kevin Maczka - BB&T Capital Markets

Okay. And then as my follow-up just on the equipment segment, I think on a year-over-year basis from a revenue standpoint, you did a couple of million higher than you expected from the last call. When you look at margin on a sequential basis, obviously things went negative and you did mention a few factors in there. But can you give us some idea what's happening in that segment?

Steve Schott

The adjustments that I referenced Kevin on the call were about $700,000 and we used percent complete, we had some cost increases on some projects and process and that's directly impacted the quarter. And obviously with the decline that you compared back to a year ago, we were $5 million or more or less in equipment revenue. We staffed up ready for the ballast water market and we have to carry those costs and revenues were down and that burdens the bottom line to that business. And they also get allocated corporate overhead, but they also have to carry, so, when the ballast water picks up and we expect it will, we should see that segment return to the profitability.

Kevin Maczka - BB&T Capital Markets

But how is that you were positive in the first quarter with the similar level of revenue?

Steve Schott

Yeah, in the first quarter although it wasn't as bigger number, there were actually some positive adjustments in other contracts, several hundred thousand dollars worth and I think aided and it could just be having in front of me, but maybe the margins on the jobs and process at that point were better. All jobs aren't bid with exactly the same margin. So it's probably a mix issue.

Kevin Maczka - BB&T Capital Markets

Sure. Okay, so mix and timing. Okay, very good. Thanks for the color and look forward to seeing you in Phoenix. Sounds like it will be a great day.

Randy Dearth

We are looking forward to it. Thanks.

Operator

Your next question comes from the line of Michael Gaugler of Brean Capital.

Michael Gaugler - Brean Capital

Randy, when I go back to your previous comments this morning on acquisitions, as I look at your Board, including the recent addition and your own background, it's certainly heavy in chemical experience. Are you signaling here that future transactions will be chemical oriented or are equipment and service opportunities under consideration?

Randy Dearth

No, not at all. What I want to say is that first off whatever we buy, buy for the sake of buy, it's got to be something that's going to add value to our shareholders, but also something we believe is close to our sweet spot which is carbon, service and equipment. And we've been looking at a few things over the last several months that hasn't met our criteria and we will continue to do so. So anything within that, that sweet spot if you will, we will evaluate.

Operator

Your next question comes from the line of Jinming Liu of Ardour Capital.

Jinming Liu - Ardour Capital

First question, regarding your expectation for the low sales in Europe for the third quarter. Is there only a mix impact from your current price increases in that region?

Randy Dearth

Well, I think actually sales has essentially been flat in Europe from quarter two 2012 and I think for the year-to-date. So we have probably lost the small amount of business, which I think one can expect. If you're trying drive price, you may occasionally give up a customer on the lower end and I am sure that's happened, but we've been maintaining our business pretty constant from the sales standpoint and even in phase of the challenging economies that are in Europe. So I think our European team has been doing a pretty decent job from that standpoint.

Jinming Liu - Ardour Capital

Okay. What was the sales breakout by region in the second quarter?

Randy Dearth

I don't have that in front of me, so we are not be able to answer that on this call.

Jinming Liu - Ardour Capital

Okay. It's all right. Lastly, related to your coal supply, I remember before you company has stated different types of coal or cheaper different type of coal, is there any progress to report?

Randy Dearth

In terms of evaluating different types of coals?

Jinming Liu - Ardour Capital

Yes.

Randy Dearth

Yeah, we are constantly looking at and I am very pleased with what you have seen in the years that I have been here in our ability both from an R&D perspective as well as from -- and plant perspective as well as from procurement perspective and been able to successfully do that. I think that's critical for us going forward that we have a knowledge of all the coals that are available to us and how do use the coals and how to transport the coals etcetera and that will continue. We are living in different world today. There is a lot of things happening as you are aware in the coal market, especially here in the United States with closures and divestment and bankruptcies. So it's imperatively that we continue that strategy and I think it's working.

Jinming Liu - Ardour Capital

Okay. Thanks a lot.

Operator

Your next question comes from the line of Christopher Butler of Sidoti & Company.

Christopher Butler - Sidoti & Company

Just to hang on the coal question quickly, you had indicated that your inventory of call increased during the quarter, but you also said that you are looking for in the sort of flat going forward. Why we're building inventory, we're just securing the supply or what is the thought process there?

Randy Dearth

Just favorable pricing at a given time that it made absolute sense for us to more or less bring it on the inventory. So as you know we have utilized different types of coals not just one. So being that pricing is good, we hope we will manage it.

Christopher Butler - Sidoti & Company

And as we look at the activated carbon segment in this quarter, could you give us a sense to how much mix played here as far as the environmental waste water contracts from last year versus increased reactive sales this quarter?

Randy Dearth

I am not sure I completely understand.

Steve Schott

I don't think mix had much of an impact. So when we are looking at this quarter compared to what we would call an expected quarter in the Carbon and Service segment, mix wasn't an important driver or we would have talked about it.

Christopher Butler - Sidoti & Company

And just finally with natural gas coming down again, are you seeing an increase of conversion from coal to natural gas from utilities or anybody who would have done that at this price level has already done that?

Randy Dearth

I don't think we are seeing any great recent movement, but I think plants that could easily switch to natural gas or if a fire company had had a mix of generating plants of natural gas and coal, they have been firing the natural gas plants probably at full capacity. I think it's difficult to make the conversion of coal and natural gas and there is probably more expense involve than many might expect.

So that certainly something that people who are in prior companies are going to have to keep in the forefront and having the decision making process, but I don't think we're seeing a rush of closures despite of any recent change in the price of natural gas.

Operator

Your next question comes from the line of Dan Mannes of Avondale.

Dan Mannes - Avondale

Couple of follow-up questions. First on pricing, it sounds like you're making good progress towards the $10 million. I just wanted to understand that in the context of, we are seeing some softness in coal prices which usually not a great environment to raising price and we've heard kind of anecdotal that [Coconut AC] pricing has been sloping. Have those been challenged at all or if the price increase has been taking fairly readily?

Randy Dearth

Yeah. Keep in mind that all that was out there, I mean this is just a small percentage the coal is of our quality that we can use, high grade met coal. So even though coal prices overall have come down and you read about it and hear about it that really hasn't had a big impact on us.

Dan Mannes - Avondale

Okay.

Steve Schott

And relative to coconut, I think the coconut prices have dropped even in the marketplace, there seems to be some oversupply of coconut carbon on a global basis now. There are some markets obviously where coal and coconut carbons are interchangeable and in those markets, it would be difficult to drive any significant price increases for coal. But the majority of our products that we make ourselves, at Big Sandy and Pearl, don't compete (inaudible) and coconut market. So in those areas and in reactivation, we've been able to get some price increases because I think the customers that we supply to appreciate our quality, value, service, timeliness of delivery and all that.

And again if you raise price to everyone, I'm sure there are customers who go out and check the market and make sure that we're giving them value for the products that we supply and we did lose a few but we've lost very few customers as a result of our price increase initiatives.

Dan Mannes - Avondale

Okay, that's good. Real quick UK, you've kind of been hint -- talking about this contractor a little bit for a while,

Unidentified Company Representative

(Inaudible).

Dan Mannes - Avondale

(Inaudible) trying to make like of it, I am happy you got it. But if you could just walk us through, it sounds like, number one, from a revenue perspective, this should be fully incremental since the previously self reactivated. I guess the secondary question is, until your UK plant is up and running, will you be making meaningful margin on it as you have to ship (inaudible) or do you have some kind of depressed margins until the UK starts up and running?

Randy Dearth

I think, once the UK plant is up and running, we'll have margins that are consistent with our normal reactivation business. We are going to see depressed margins when we were taking the carbon back to (inaudible) because the transportation costs are significantly higher. So that will impact us.

Rob O'Brien

And we're looking at about a nine month timeframe by which we want to get the plant upgraded and ready to go.

Randy Dearth

Okay and then just a couple sort of admins. First of all, what was your backlog on equipment at the end of the quarter?

Steve Schott

It's just over $25 million.

Dan Mannes - Avondale

So it's actually down sequentially in spite of what you've been seeing in ballast water side.

Steve Schott

That's why my commentary on third quarter revenue highlighted that equipment will be down again sequentially.

Dan Mannes - Avondale

Down again sequentially? Okay. Number two, R&D expense, can you actually give us, your press release, it's usually in your Q, but not in your press release, can you walk us through what your R&D expense actually was in the second quarter and because it sounds like that you were going to see a bit of an [awful] less in the second half of the year?

Steve Schott

Yeah, in the second quarter was about $1.46 million, which was down from $2.5 million in 2012.

Dan Mannes - Avondale

And we should, it's fair to expect that to increase you sequentially?

Steve Schott

That's correct.

Dan Mannes - Avondale

Got it. And then the last one, can you just remind us what the CapEx expectations are for the year and if you can give us any thoughts on next year that will be helpful?

Steve Schott

$40 million to $45 million for the full year and it would be a little early to highlight what next year's might be because as Randy pointed out we're looking very hard at all opportunities believing that's one of our absolute best uses, the total balance sheet to work. So we are scouring for opportunities that are very accretive for earnings, well beyond our cost of capital we're finding some and as we - as we get approval for those from our board if necessary. Then we'll be bringing in to your attention as we did today.

Rob O'Brien

Yeah this is really an exciting time. And again there are projects that have been sitting there that we are now revisiting and hopefully in the next quarter or two we'll be able to talk a little bit more about those projects (inaudible) meaningful future of this company.

Dan Mannes - Avondale

Okay. And I am sorry one more follow-up on the AFR is there any cash impact here, or you'll just have to sort of I guess it will like a call back of the shares effectively?

Steve Schott

That it will be a call back of the shares, Tim, not cash.

Dan Mannes - Avondale

Okay. Great thanks a lot.

Randy Dearth

Sure.

Operator

The next question comes from the line of (inaudible) Advisors.

Unidentified Analyst

Good morning everybody great quarter.

Randy Dearth

Thank you, good morning.

Unidentified Analyst

I'm not sure if this is a question for Randy or Bob, but I think it would Bob, not I think it was Randy who was talking about 54% of coal requirements are under contract for 2013 and I would imagine you are probably competing mostly with steel manufacturers for that high grade net coal. And with the state of the steel industry right now, utilization rates being as lowest there with steel as though this would be particularly good opportunities for you to be able to negotiate some of those long-term deals in lieu of what's going on.

Just wondering if you might be able to go through some of the pitfalls, some of the reasons why you haven't been able to get some more of that under contract and would you want a 100% of your requirements under contract or you think you might wanted to be able to go out in the spot markets for some of that just to maintain flexibility?

Randy Dearth

I think it's exactly Bob just tried a the few minutes ago that there are so many things happening right now in the coal market and to rely on one source or one theme, I think right now it's probably not the right thing to do, but one, coal companies for that matter given all the changes and I think it is similar to risk of that so that is why our strategy to diversify our coal supply as much as possible has been the indeed the right way to go and we will continue with that. So answer to your question do I see a 100% of our coal to one supplier? I don't see that happen.

Rob O'Brien

And I think, this is Bob, we continue to evaluate options. We don't want to commit necessarily a 100% because then we could pass out potentially better options that are out there as a result of changes in the market. So we are continuing to look at opportunities and trying to lock in those that were good not only from the cost per ton perspective but then again trying to understand how that coal processes throughout facility and what the final cost is from an end product standpoint.

Randy Dearth

Yeah, we have an excellent team of folks here including an outside consultant who with us full time and that is full time job just looking at the coal situation and to drive this with tremendous guidance. But this is a very process to make sure we understand what's happening out there and we're on top of things.

Unidentified Analyst

Got it. And I guess for Steve, Steve in your comments you mentioned lower pricing on a contract that was renewed earlier this year. What's kind of, is diametrically close to the typical of Phase 2 here which is margin improvement and then, so I guess my question is under what circumstances what do you need to take overpricing on a contract and was that a special circumstance?

Steve Schott

Yeah. Well, I would characterize that circumstances being included in the mercury removal part of our business. And we had said in the past that's been a challenging market, it's one where capacity exceeds the current supply opportunities for all of us participating in that space and the contract related to the space guard. So that's a one-off limited circumstance of the contract that we had with that customers entered into five years ago. So, just an evolution in that market, we think pricing will better when MATS compliance comes into…

Randy Dearth

And the factor that price went down another surprise certainly was expected and we expect.

Unidentified Analyst

Okay, all right. And one more if I may, I know that we're now into the rates for the sub 100,000 customer utilities to be implementing some of the DBP regulations and I was wondering if you expected to see more of a bump ups in sales due to those things are coming into effect or if you think that and if you think that there might some period of catch up here, or do you think we have to start to seeing out some regulatory enforcement to go back after some of the municipalities that may not have been in compliance?

Randy Dearth

I don't know whether I can comment on the regulatory enforcement because it's something we have the information that I know if there are in fact communities out there, water plants that aren't meeting the rights. What I can say is that why I look at this market is our new plants putting activated carbon online as more plants continue to install activated carbon and more activated carbon is in fact being used for treatment, that increases the market price for reactivation. And in the first half of this year, in the U.S., projects bid to install approximately 5 million pounds more activated carbon put online for just in fact the byproduct control.

So it shows me that the market is growing basically in line with our expectations. I think we have projections for the amount of activated carbon that eventually be installed and 5 million pounds being -- new carbon being bid for the first half pretty much following our expectations.

Operator

Your next question comes from the line of David Rose of Wedbush.

David Rose - Wedbush Securities

I wanted to follow up on the question on margins for the equipment business, particularly the ballast water systems. As you start to see backlog or see backlog deeper and you start to see more competitors in the marketplace, are you getting a sense if there is more pricing pressure or is it just related (inaudible)?

Randy Dearth

David, there has a time when competitive processes that have led to price pressure, particularly in advance of very much like mercury right, where we have more suppliers in this state and the regulations are not yet in full effect. So there has actually been some pricing pressure.

David Rose - Wedbush Securities

Are you starting to revise your long-term expectations for margins vis-à-vis where they were historically on the improvement side, would you expect them to be perhaps spending lower than what you initially thought?

Randy Dearth

No, we are not revising our long-term estimates at this time.

David Rose - Wedbush Securities

Okay. Great, thank you.

Operator

At this time there are no further questions. I will now turn the call to Randy Dearth for any closing remarks.

Randy Dearth

Thank you very much. Let me just say that in conclusion that our second quarter results certainly now demonstrate the success of the initiatives that we've implemented. What we're seeing is improving the profitability of the company. Going forward we are going to focus on these cost improvement initiatives and we are going to hope to improve not only in the short term, but in the long term the optimal growth in the performance of the company.

For the future I believe we are positioned well to capitalize on these regulated markets, and in doing so, we will have a much better margin bottom line situation. So that concludes my remarks and thank you all for joining us. And we will see you in Phoenix.

Operator

Thank you for participating in Calgon Carbon Corporation second quarter 2013 results call. You may now disconnect.

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