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Calgon Carbon Corporation (NYSE:CCC)

Q2 2014 Earnings Conference Call

August 8, 2014 10:30 AM ET

Executives

Gail Gerono – VP, IR

Randall Dearth – Chairman, President and CEO

Stevan Schott – SVP and CFO

Bob O’Brien – EVP and COO

Analysts

Kevin Maczka – BB&T Capital Markets

David Rose – Wedbush Securities

Hasan Doza – Water Asset Management

Dan Mannes – Avondale

JinMing Liu – Ardour Capital

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Calgon Carbon Corporation Second Quarter 2014 Results Conference Call. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. (Operator instructions)

It is now my pleasure to turn the floor over to Gail Gerono, Vice President of Investor Relations. Please go ahead.

Gail Gerono

Thank you. Good morning and thank you for joining us. Our speakers today are Randy Dearth, Calgon Carbon’s Chairman, President and CEO; Bob O’Brien, our Chief Operator Officer; and Steve Schott, our CFO.

Before we begin, I’d like to remind you that the Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for forward-looking statements. Today’s presentations or 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 provision 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 during this webcast. 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 future performance of the company or changes in or delays in the implementation of regulations that cause the market for our products, acquisitions, higher energy and raw material costs, costs of imports and related tariffs, labor relations, capital and environmental requirements, 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 call and 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. Randy?

Randall Dearth

Thanks, Gail, and good morning everyone. In the second quarter, we continue to make progress in building a stronger Calgon Carbon and I’m pleased with the results. Both top and bottom line showed improvement sequentially and quarter-over-quarter.

In fact, as noted in the news release that we issued earlier this morning, we had one of the best sales quarters in our company’s history. I am extremely pleased with our efforts to consistently expand gross margin which increased quarter-over-quarter by 1.4 percentage points and year-over-year by 1.7 percentage points. In fact, we have improved gross margin in six of the last seven quarters.

On a year-to-date basis, both operating income and EBITDA improved by approximately 5% as compared to the same period in 2013. Our aggressive cost improvement program has been a major factor in our success. We are on track to reach our goal of $40 million on an annual basis by the end of 2016. And we continue to look for additional opportunities to improve cost.

Our success has not been limited to improving results. Our investments in new product development have positioned Calgon Carbon to take full advantage of opportunities provided by two regulatory driven emerging markets – mercury removable and ballast water treatment. There were some important developments in each of these markets during the second quarter which I would like to report on today.

First, mercury removable. In April, the U.S. Court of Appeals upheld MATS concluding that the regulation was appropriate and necessary. In July, the plaintiffs announced that they would petition the U.S. Supreme Court to review the lower court’s decision. There is no deadline for the Supreme Court to decide whether or not it will review the lower court’s ruling. If the Supreme Court decides to review the case, we believe it should take several months to a year for the appeal to proceed.

Request for quotation for our FLUEPAC products ramped up in the second quarter and we expect activity to further increase in the third quarter. Feedback on our advanced products continues to be very positive and additional test of utilities are scheduled.

Based on the RFQs received to date, it appears that the length of the contracts will average two to three years. We continue to expect some contracts to be awarded by the fourth quarter of 2014.

Let’s switch to ballast water. There were several positive developments in our ballast water treatment business in the second quarter. We received 27 orders, including four for our new Hyde Gold system. To date in 2014, we have received a total of 59 orders which represents the largest number of orders placed for Hyde systems over any two-quarter period. This is very encouraging.

In fact, if we include orders placed in July, the dollar value of orders received in 2014 already exceeds the value of orders received in 2012 and also exceeds the value of orders booked in 2013.

A significant portion of Hyde Marine sales had come from repeat business with both shipyards and ship owners. Eight Hyde Marine customers have ordered Guardian Systems for 14 or more vessels in their fleets. In the aggregate, orders from these repeat customers represent approximately 30% of all Hyde orders to date. We consider this a testament to the ability of Hyde Marine to satisfy customers and to support our efforts to comply with ballast water regulations.

As for the International Maritime Convention, prospects for ratification appear to be improving. Following a recent meeting of the International Maritime Organization, it was reported that Argentina, Italy, Japan and Turkey had declared that they will ratify the convention before the end of 2014.

This would bring the percent of the ship tonnage represented by flag states that have ratified the convention to 34.2%. As a reminder, 35% is needed for the convention to go into force. Indonesia, the Philippines, Belgium and Finland which in the aggregate represent over 2% of the world’s tonnage have also indicated that the ratification process is under way.

Turning to the U.S. Coast Guard’s ballast water treatment regulations, we continue to work with other ballast water treatment companies to develop a test protocol for UB-based systems which would be acceptable to the Coast Guard. Testing on a propose protocol is under way at three laboratories.

We remain excited about both the mercury removal and the ballast water treatment opportunities and their potential to significantly contribute to Calgon Carbon’s future.

Now let’s move in the second quarter financial review. And I’ll have Steve take over.

Stevan Schott

Thanks, Randy. Good morning everyone. Total sales for the second quarter of 2014 were $145.1 million versus $140.4 million in the second quarter of 2013, an increase of $4.7 million or 3.3%.

Currency translation had a positive impact of $1.7 million primarily on Activated Carbon and Service and consumer sales for the second quarter of 2014 due to the stronger British pound sterling and euro.

Regarding our segments. Sales in the Activated Carbon and Service segment increased $6 million or 4.8% for the second quarter of 2014 compared to 2013’s second quarter. The increase in sales is principally due to higher demand in the environmental water market of $5.3 million which includes sales of $3.2 million to a water remediation customer in the Americas region.

Sales were higher in the industrial process market by $2.8 million which was driven by volume increases primarily in Europe. Also contributing to the increase was higher demand in the food market of $1.6 million primarily for sweetener customers in the Americas.

Partially offsetting these increases was lower volume in the specialty carbon market of $3.6 million which was primarily due to lower demand in the Americas region for respirator carbon products as a result of a slowdown in U.S. government purchases.

Equipment sales declined $2.5 million or 17.2% for the second quarter of 2014 compared to 2013’s second quarter. The decrease was due to lower sales of ion exchange systems of $2 million and traditional UB systems of $2.1 million as a result of several large contracts that were completed during the quarter ended June 30, 2013.

Partially offsetting these decreases was an increase in sales for the company’s traditional carbon adsorption equipment and ballast water treatment systems of $1.4 million and $700,000 respectively as a result of new contracts that were awarded in 2014.

Net sales for the quarter ended June 30, 2014, for our Consumer segment increased $1.2 million or approximately 58% as compared to the second quarter of 2013, due to higher demand for Activated Carbon Cloth from a single, large customer.

Consolidated gross profit before depreciation and amortization, as a percentage of net sales, was 34.4% in the second quarter of 2014 compared to 33% in the second quarter of 2013, an increase of 1.4 percentage points. The increase was primarily in the Activated Carbon and Service segment and included an estimated $600,000 from price increases in the Americas region that were instituted in March of 2013.

The second quarter of 2014 also benefited from a more favorable product mix, particularly in Europe, where margins improved by an estimated $300,000, as more 2014 sales worth of products produced by the company versus a higher percentage of outsourced carbon that were sold during the second quarter of 2013.

In fact, our carbon and service production volume increased by over 12$ in 2014 compared to the second quarter of 2013.

Finally, the second quarter of 2013 included unfavorable adjustments that increased the estimated cost to complete several projects that were in process in the equipment segment that totaled approximately $700,000.

Depreciation and amortization expense was $7.5 million in the second quarter of 2014 compared to $7.3 million in the second quarter of 2013. The increase was due to depreciation related to the company’s Gila Bend, Arizona reactivation facility that was placed into service during the second quarter of 2013.

Selling, administrative and research expenses were $21.2 million during the second quarter of 2014 versus $18.9 million in the second quarter of 2013, an increase of $2.3 million or 12.2%. The increase was primarily due to $1.1 of expense related to our SAP reimplementation project in 2014.

Also, in the second quarter of 2013, we realized a $900,000 benefit from the reduction of a multi-employer pension liability that did not repeat in the second quarter of 2014.

The income tax rate for the second quarter of 2014 was 27.3% versus 34.4% for the second quarter of 2013. The current year second quarter tax expense included $1.4 million benefit or approximately $0.025 per share related to the completion of an IRS examination and the effective settlement and release of uncertain tax position liabilities. The company’s tax rate absent this discreet event was approximately 34%.

In summary, net income for the second quarter of 2014 was $15.2 million versus net income of $13 million for the second quarter of 2013, an increase of $2.2 million or 17.2%. On a fully diluted share basis, earnings per common share were $0.28 for the second quarter of 2014 as compared to $0.24 for the second quarter of 2013, an increase of 16.7%.

Turning briefly again to our business segments. The Activated Carbon and Service segment recognized $28.6 million in operating income before depreciation and amortization and restructuring in the second quarter of 2014 compared to $27.7 million in the second quarter of 2013. The increase was primarily due to the previously discussed price increases and more favorable mix of products sold.

The Equipment segment recognized a $600,000 operating loss before depreciation and amortization in both the second quarter of 2014 and 2013. Our equipment backlog at June 30th was $20.9 million, but is expected to grow by at least 15% in July based on orders for ballast water treatment and traditional carbon adsorption systems.

The Consumer segment recognized $800,000 in operating income before depreciation and amortization in the second quarter of 2014 compared to $400,000 in the second quarter of 2013. The increase was related to higher sales volume from a single customer.

Regarding our balance sheet. Cash increased during the second quarter of 2014. At June 30th, we had approximately $43 million of cash. Inventories were $109.2 million for the second quarter of 2014 comparable to the yearend of 2013.

As of June 30th, the company had total debt outstanding of $55.9 million, which represents an increase of $23.6 million from yearend. The increased borrowings are in part due to our 2014 share repurchases. During the second quarter, we spent $9.7 million for the purchase of approximately 472,000 shares. Year-to-date, our purchases totaled approximately $30 million for 1,485,000 shares.

Cash flow. Operating cash flow was strong totaling $30.2 million for this year’s second quarter as compared to cash flow provided by operations of only $18.4 million in 2013. The $11.8 million increase was primarily due to improved income from operations and $7.9 million of favorable working capital changes.

For the first six months of 2014, our operating cash flow was over $22 million better than 2013’s cash flow. Capital expenditures totaled approximately $16.8 million for the second quarter of 2014 and were primarily for improvements to the company’s Catlettsburg, Kentucky and Pearlington, Mississippi virgin carbon manufacturing facilities.

For 2014, capital spending is now estimated to be $70 million to $75 million.

Gail Gerono

Thanks, Steve. Bob O’Brien is next with the operations review. Bob?

Bob O’Brien

Thanks, Gail, and good morning everyone. I would like to begin by commenting on the performance of our plants in the second quarter.

Production in our virgin carbon manufacturing plants slightly exceeded last year’s second quarter volume despite a 21-day maintenance turnaround with our Pearl River facility. The increase was due to productivity improvements from capital investments made in 2012 and 2013 and the implementation of recommendations on operating methods and procedures from consultants that we engaged last year.

We are very pleased with our progress in reducing costs and improving yields but we continue to be capacity-constrained and expect in the future to utilize more outsource products to meet demand in Europe and Asia.

On our call to discuss fourth quarter results, I spoke about some major projects underway at our Big Sandy Kentucky plant to improve our manufacturing efficiency, reduce costs and at the same time increase virgin carbon production by approximately 19 million pounds of granular and powdered products. I would like to review the status of two of those projects.

First, we’re implementing a project to improve the consistency of our steam supply which will increase annual production of virgin carbon by approximately 1.5 million pounds. Construction is underway and the project should be complete by the end of this year.

Next, building on the success of the modifications to our Pearl River Mississippi plant in 2012, we were upgrading one of the three existing production lines at Big Sandy in order to continue to reduce costs and increase production by approximately 8 million pounds per year. The project will be executed in two phases with the final phase being completed by mid-2015.

In addition to these Big Sandy projects, we continue to evaluate construction of another production line at Pearl River. The decision to go forward with this project will be largely determined by our commercial success in markets such as mercury removal.

Shifting to reactivation, those facilities also performed well in the second quarter. As previously announced, we intend to upgrade two of these facilities. The modernization and expansion of our potable water reactivation facility at Tipton in the U.K. is proceeding as planned. Completion and startup with the first phase is scheduled for the fourth quarter of 2014.

Engineering work on the complete refurbishment of our Neville Island, Pennsylvania industrial reactivation facility is underway. Actual construction will begin once our permitting work is completed. We will strive to minimize the time that the plant is out of service. The cost of this project is expected to be approximately $30 million and it will expand the capacity of the facility by 40%.

In New York, the North Tonawanda potable reactivation facility which we started up in March performed very well in Q2. We expect it to operate at a high percentage of capacity throughout the remainder of the year.

Similarly, the industrial reactivation kiln at our Suzhou, China plant ran at a high percentage of capacity during the quarter and is also expected to operate at a high rate through the remainder of the year.

In the second quarter, the City of Palmdale awarded us our fourth 10-year contract to reactivate carbon that has been used to control DBPs. We had supplied Palmdale’s initial [indiscernible] with approximately 2.5 million pounds of DAC and has been reactivating that carbon under a five-year contract. We are pleased with the opportunity to extend our relationship with the city for an additional 10 years.

Shifting to the topic of tariffs, I would be remiss if I neglected to mention that in May, the U.S. Department of Commerce or the DOC announced preliminary tariffs on coal-based activated carbon imported from China to the U.S. The average tariff announced which was based on the period of review from April 1, 2012 to March 31, 2013 was calculated to be $1.42 a pound, the highest rate since tariffs were first introduced in 2006. The current average tariff rate is $0.075 per pound.

Certain exporters which are under review have challenged the surrogate values used in the calculation of the tariff. After considering this input and other information, the DOC will issue final tariff rates in October or November of this year. Whatever the outcome, Calgon Carbon will be assigned the average tariff rate.

Gail Gerono

Thanks, Bob. Next, Steve will make some comments about the third quarter.

Stevan Schott

Thanks, Gail. Following our strong sales in the second quarter, typically our best sales quarter, we believe that our third quarter sales could decline sequentially by approximately 2% or 3%.

Margins. Our net sales less cost of products sold before depreciation and amortization is expected to increase sequentially to approximately 35%. In the second quarter, we did not quite achieve the margin improvement that we had expected. This was due primarily to temporarily higher natural gas prices in the latter part of the first quarter that caused an unexpected increase on our inventory costs which in turn impacted the second quarter cost of sales.

Operating expense. We expect a small increase in these costs sequentially.

Finally, our income tax rate is expected to be approximately 34% in the third quarter.

Gail Gerono

Thanks, Steve. Next we’ll hear from Randy.

Randall Dearth

Thanks, Gail. Calgon Carbon has been selling activated carbon products in Central and South America for decades through agents and distributors. A few years ago, we decided to look more closely at the market there to determine if we could significantly increase our sales, particularly in Brazil, which is the region’s largest economy.

The current market for activated carbon in Brazil is approximately 75 million pounds and a high percentage is powdered product. This provides the opportunity for us to introduce the use of granular activated carbon with reactivation in our service model. We now have in place the key components to successfully conduct business in Brazil, which includes the hiring of the Director of Business Development who has a proven track record for growing businesses in Central America and South America as well as Brazil.

With our experience in activated carbon and a business plan that focuses on making the activated carbon technology both easy to use and cost-effective, we believe that the South and Central American regions, especially Brazil, will provide an excellent environment in which to grow our core business.

We are now ready to take your questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Kevin Maczka of BB&T Capital Markets.

Kevin Maczka – BB&T Capital Markets

Thanks, good morning.

Gail Gerono

Good morning, Kevin.

Randall Dearth

Good morning, Kevin.

Kevin Maczka – BB&T Capital Markets

Randy, can we just go back to mercury and your comment about the Supreme Court there? I guess just to be clear, how does this change, if at all, you’re thinking about the April deadline? And you mentioned maybe as much of the year processed here if in fact that the court takes up the case, I guess I’d like to get a little more clarity on your thoughts there and how that’s impacting how your customers are planning to treat with a deadline just about eight months away now.

Randall Dearth

Well, Kevin, as noted, we’re looking at this as a long-term issue, if an issue at all. And we do not believe that that’s playing into the decisions of the end users, the power utilities in terms of what carbons and how much carbon they need. So to go back to my comments, we’re not too concerned that this is going to be a short-term issue.

Kevin Maczka – BB&T Capital Markets

And so then I guess as a follow-up, how do you see this playing out? It sounds like you had a little bit better order rates coming in, you’ve all along been thinking Q4 is when that would really take off. Is that still how you see this playing out – the customers don’t need to procure the product sooner than that given again that we’re eight months out from having to treat?

Bob O’Brien

Right. This is Bob O’Brien. I think the market is moving along the way we expected. We’re working actively with a number of utilities that have issued request for quotes. We are seeing that they are taking a lot of time to make decisions. I mean they’re really doing their homework. They’re evaluating our products and I’m assuming that the competition as well.

So I think the number of projects that we’re involved with is in line with our expectations, perhaps a little bit surprised that it is taking the utilities as long as it’s taking them to make a decision. But we think we’re basically following the track that we expected.

Kevin Maczka – BB&T Capital Markets

Okay, Bob, and just finally is pricing in line with your expectations as well and your win rates as well?

Bob O’Brien

Well, I’m not going to comment on pricing because we’re in the middle of a number of discussions so I don’t think it’s really prudent for me to say anything. I think there really haven’t been decisions made. So there really is no track record on a win or loss at this point to say whether it’s meeting or not meeting our expectations.

Kevin Maczka – BB&T Capital Markets

Okay. All right, I’ll get back in queue. Thank you.

Operator

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

David Rose – Wedbush Securities

Good morning. I was hoping you can possibly work through on a margin expectations on the equipment side. And you’ve been struggling to get the profitability on this and given the ramp, I would have expected to see a little bit more profitability. And maybe you can help me understand what are the puts and takes and what the expectations for the back half of the year.

Stevan Schott

Hi David, yes, this is Steve. And I think when you look at the revenue from the equipment segment, it remains relatively low this year compared to last year and the year before. We do expect to ramp up in the second half the year. And I hope by year’s end we can get that revenue number close to where we were a year ago. So that would suggest a fairly significant improvement. And as I indicated in my prepared remarks, we’ve certainly seen some good activity in the early part of July. As for margins –

David Rose – Wedbush Securities

So can you get the profitability? Oh, sorry.

Stevan Schott

I think we can be close. I think if you look at having lost $1 million or so in the first quarter that has dropped to $600,000 in the second quarter. And as we mentioned, I think on the first quarter probably have a number of cost improvement issues directed really at our Hyde and UB business which we believe will take effect in the second half of the year. So could we get the profitability? Yes, I think it will be certainly an improving scenario as we look out the second half of the year.

David Rose – Wedbush Securities

Okay. And then my follow up question is on the opportunities in South America particularly Brazil. You talked about serving that market but at the same time I understand that you’d still have to outsource more products. So your commentary around Europe margins are probably going to go down because we have to outsource more product, how do supply Brazil if you don’t have product?

Randall Dearth

Well I think, David, we’re looking at a longer-term approach to this. We realize we’re not going to walk in and have this business overnight. As I mentioned in my remarks, there’s not a lot of granulated activated carbon today that’s being sold. So we have to develop the market, we have to hire the staff, we have to really understand and sell the value of activated carbon, granular activated carbon and reactivation. That’s not going to happen right away.

You tie that to our other comments, looking at our capacity going forward, as you know that’s a discussion that we have quite a bit here internally. And so anything we do in Brazil obviously would play into that.

David Rose – Wedbush Securities

So on a margin comment from or at least the implications on margins from outsourcing, you should see more margin pressure as your outsource more product to sort of the European market, is that right?

Randall Dearth

That is true, yes.

David Rose – Wedbush Securities

Okay. All right, thank you.

Randall Dearth

Thank you.

Operator

Your next question comes from the line of Hasan Doza of Water Asset Management.

Hasan Doza – Water Asset Management

Good morning, Randy. How are you?

Randall Dearth

Hey, good morning. How are you?

Hasan Doza – Water Asset Management

Hi, just a follow up on your third quarter commentary. Did you have estimates for your gross margins in the third quarter?

Randall Dearth

Yes, we did. We suggested it would be about 35%. So a slight improvement, a little over 50 basis points from the second quarter.

Hasan Doza – Water Asset Management

And can you explain to me how the increase in net debt price – net debt prices led to your higher inventory cost in the second quarter?

Randall Dearth

I’d be happy to – and that’s a comment made against our own expectations. And I think in the February and March timeframe, the polar vortex caused gas prices – the prolonged cold winter caused gas prices to rise somewhat at least for us unexpectedly. While we didn’t see that in the first quarter results, those gas prices were incurred in the production of our inventory which then was sold in the second quarter.

And so we simply had a higher cost of sales than we had forecasted to have. Pleased to report that’s stabilized since and that is not an ongoing issue.

Hasan Doza – Water Asset Management

Got it. Thank you.

Randall Dearth

You’re welcome.

Operator

(Operator instruction) Your next question comes from the line of Dan Mannes of Avondale.

Dan Mannes – Avondale

Hey, good morning everyone.

Randall Dearth

Good morning, Dan.

Dan Mannes – Avondale

First maybe more of a comment. I guess I’m surprised that you’re surprised that utilities are taking their time.

Randall Dearth

Okay.

Dan Mannes – Avondale

But I do want to – I would like to touch first – and I apologize I missed the first couple of minutes of the call. Can you maybe go back in your commentaries that relates to ballast waters orders?

And also if you can just remind me on the current status of the regulations because our understanding is IMO is still kind of up in the air, though it seemed like some progress was made in terms of reviving the timeline to make it a little more achievable. But if you can kind of remind me of where that stands, I’d appreciate that.

Randall Dearth

Well, today, in 2014 we’ve received 59 orders, okay? And as I mentioned in my comments earlier, that’s really the largest number orders at any two-quarter period which is very encouraging to us.

So we’re excited things are moving in the right direction. We’re continually marketing as much as we can market globally to make sure that we’re positioned for the retrofit market, position also with the new builds which we’ve been successful. And we’re waiting for the IMO to get closer.

And I know you’ve heard us say that quarter after quarter. And we’re just optimistic at some point in time that this ballast water will go over the hurdle and we’ll able to sell products.

Dan Mannes – Avondale

But given I think some of the changes to the IMO before ratification, what is the new expected timeline in terms of installations and how stretched out if at all will it be versus maybe what you previously expected?

Bob O’Brien

Well, I think – this is Bob. I think it’s still the same timeframe. It’s just a matter of when that timeframe starts. And again as Randy mentioned, you’ve heard others and ourselves make projections of when the IMO is going to get ratified.

Things were adhering, could make that as early as the end of the year. And then the talk would start about a year after that. So if it would be the end of this year, we would expect to see then orders starting right at the beginning of 2016 and probably with something like a seven-year timeframe to have all the ships equipped.

Dan Mannes – Avondale

And then if you’ll indulge me, I was going to ask one more question on mercury. Given the amount of time utilities had to kind of look at things, we continue to see new products and solutions come out of the woodwork. Whether they’d be kind of fixed bed like lagores [ph] product or other sorbents like silicates, not to mention other activated carbon sources from the biomass sources. So again I’m just wondering – I don’t know if you can frame any changes in terms of the mercury market from maybe what you previously expected? Or do you still – your pack [ph] number one is the primary solution and all these other things are kind of just sidelines?

Bob O’Brien

This is Bob again. I think I would say, we would be in line with your latter comment. We believe that powdered activated carbon is going to be the dominant or the most utilized technology I’ll say in meeting the mercury issue.

And there are other people that look to enter the market because it is a large market. I think our expectation is there will be people who will try and enter it with different technologies. But at this point, we still feel very convinced that activated carbon, powdered activated carbon is going to be the solution. And we continue to be convinced our products will have value in the marketplace and we’ll get a good share about this [ph].

Dan Mannes – Avondale

Sounds good. Thank you very much.

Randall Dearth

Thank you.

Operator

(Operator instructions) Your next question comes from the line of JinMing Liu of Ardour Capital.

JinMing Liu – Ardour Capital

Yes, just a quick follow up on the metro gas [ph] cost impact now on your margins in the second and first quarter, I mean I’m just trying to get some idea how big the impact metro gas [ph] have on the cost of activated [ph] carbon production. And also do you currently have on the [indiscernible] in place on metro gas [ph].

Randall Dearth

We do hedge. We don’t necessarily discuss how much we hedge. But we do have hedges that go out 18 months. The impact, JinMing Liu, on the second quarter cost was over $0.5 million and if we look at the aggregate impact of natural gas, it in terms of our product cost, it impacts reactivation as a percent of total cost more than it does virgin carbon. But it’s important to both but it’s less than a third of the cost of coal. So to be sure, it’s not by any means the largest input factor.

But we did see an unexpected increase at the end of the first quarter which impacted Q2, as I noted. And then as I also noted, that will not continue for the rest of the year. It has stabilized.

JinMing Liu – Ardour Capital

Okay. My next question just relate to your work in the granular capacity with your capacity [ph] constraint, is there anything given [ph] for you to build a new larger working capacity?

Stevan Schott

We are. Yes, and I think in our prepared remarks we talked about the fact that we continue to look at that. We focus mostly at the moment on expanding our Pearl River production capacity by potentially adding another line. And in the meantime, we’re making some fairly significant capital investments to, as Bob O’Brien mentioned in his remarks, add as much as 19 million pounds of capacity over the next year or two by expanding some of our virgin production principally at our Big Sandy plant.

Randall Dearth

[Indiscernible]

JinMing Liu – Ardour Capital

Well, the –

Randall Dearth

I’m sorry, go ahead.

JinMing Liu – Ardour Capital

Yes, well I was – because before you mentioned that potentially greenfield or brownfield, they have working capacities on this, is that still on the table?

Randall Dearth

Yes, right now, I mean we’re spending a tremendous amount of time both at the management level as well as in the engineering side looking at all of our options around the world, looking at greenfield sites, looking at expansion of existing sites, looking at debottlenecking. This is a very high priority for us.

We want to make sure that we have the right product at the right place, at the right time. And like you said, we’ll continue to focus on that. We’ll announce to you as we can announce whether it be a debottlenecking project or perhaps even in the future a greenfield. But at the moment, we’re just continuing our analysis and doing the work we need to do.

JinMing Liu – Ardour Capital

Okay, got that. Thanks.

Randall Dearth

Thank you.

Operator

At this time, there are no further questions. I will now return the call to management for any additional or closing remarks.

Stevan Schott

No, let me just say thank you all for joining us today for our Q2 call. We do look forward to hearing – for you to hear again from us in the fall about what’s happening with Calgon Carbon as we continue to build a strong company. Thank you all for joining us and have a great weekend.

Operator

Thank you. That does conclude today’s Calgon Carbon Corporation Second Quarter 2014 Results Conference Call. You may now disconnect.

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Source: Calgon Carbon's (CCC) CEO Randall Dearth on Q2 2014 Results - Earnings Call Transcript

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