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Executives

Gail Gerono - VP, IR

Randy Dearth - President and CEO

Bob O'Brien - COO

Steve Schott - CFO

Analysts

Ben Kallo - Baird

Tim Feron - Janney Montgomery Scott

Dan Mannes - Avondale

Steve Schwartz - First Analysis

Jinming Liu - Ardour Capital

Nick Prendergast - BB&T Capital Markets

Doug Thomas - JET Investment Research

David Rose - Wedbush

Calgon Carbon Corp. (CCC) Q2 2012 Earnings Call August 8, 2012 10:30 AM ET

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Calgon Carbon Corporation's Second Quarter 2012 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

I would now like to turn the conference over to Gail Gerono, Vice President of Investor Relation. You may begin your conference.

Gail Gerono

Thank you. Good morning everyone and thank you for joining us.

This quarterly call is the first for two of our speakers, Randy Dearth and Bob O'Brien. Randy joined Calgon Carbon as President and CEO on August 1. So, this is his one week anniversary. He had been President and CEO of LANXESS, an international chemical manufacturer, and has also been a member of Calgon Carbon board of directors since 2007.

Many of you know Bob O'Brien. Bob has been with the company for more than 35 years and he was named Chief Operating Officer earlier this year. Steve Schott, our CFO, will be our first speaker providing a review of Calgon Carbon second quarter financials.

Before Steve begins, I would 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 certain statements that are forward-looking. Forward-looking statements typically contain words such 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 saving, 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 in the presentation 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 future performance are high energy and raw material costs, costs of imports and related tariffs, labor relations, availability of capital and environmental requirements as they relate both to the operation and to our customers.

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. Steve?

Steve Schott

Thanks Gail. Good morning everyone. Total sales for the second quarter of 2012 were $148.4 million versus $135.3 million in the second quarter of 2011, an increase of $13.1 million or 9.7%. Sales in each of our three segments increased in the second quarter of 2012 as compared to 2011. Currency translation had a negative impact of $3 million on sales for the second quarter of 2012 due to the stronger dollar.

Regarding our segments. Sales in the Activated Carbon and Service segment increased $4.8 million or 4% for the second quarter of 2012 compared to 2011's second quarter. Contributing to this quarter over quarter increase was a higher demand in the potable water market and the higher pricing the metals recovery market.

Equipment sales increased $8.2 million or 70.3% for the second quarter of 2012 compared to 2011's second quarter primarily due to higher revenue recognition from ballast water treatment Systems.

Consumer sales increased slightly by approximately $68,000 or 3.2% for the second quarter of 2012 compared to 2011's second quarter as a result of higher demand for activated carbon cloth products.

Consolidated gross profit before depreciation and amortization as a percent of net sales was 31% in the second quarter of 2012 compared to 32.8% in the second quarter of 2011, a decrease of 1.8 percentage points. The decline was primarily in the activated carbon and service segment as a result of higher coal and plant maintenance costs.

Depreciation and amortization expense was $6.4 million in the second quarter of 2012 compared to $5.7 million in the second quarter of 2011. The increase of $700,000 or 12.3% is primarily the result of additional depreciation related to capital improvements made at the company's Feluy, Belgium and Catlettsburg, Kentucky facilities.

Selling, administrative and research expenses were $23.1 million during the second quarter of 2012 versus $22.5 million in 2011, an increase of $600,000 or 2.7%. This increase was primarily related an increase in advance product testing costs related both to mercury removal from flu gas and the use of activated carbon in ultra capacitors. As a percent of sales, these expenses were 15.6% in the second quarter of 2012 as compared to 16.6% for the second quarter of 2011, a 1 percentage point improvement, as well as a 1.9% point improvement over the first quarter of 2012 which was 17.5%.

The company reported a tax provision of $5.2 million or 32.4% versus a provision of $6.1 million for the second quarter of 2011. The company's full year 2012 tax rate is currently estimated to be 34%.

In summary, our net income for the second quarter was $10.9 million or $0.19 per diluted share versus net income of $11.3 million or $0.20 per diluted share in 2011.

Turning briefly to the company's business segments, the Activated Carbon and Service segment recognized $20.5 million in operating income before depreciation and amortization in the second quarter of 2012 compared to $24.9 million in the second quarter of 2011. As a percent of sales this measure declined from 20.5% to 16.2% in comparison of those two periods. The decline was primarily due to the previously mentioned higher plant maintenance and coal costs. The second quarter of 2011 included a $1.3 million reduction in an environmental liability at the company's Columbus, Ohio production facility that favorably impacted our 2011 results.

The equipment segment recognized $2 million in operating income before depreciation and amortization in the second quarter of 2012 as compared to a loss of $500,000 in the second quarter of 2011. The increase was primarily due to higher revenue recognition of ballast water treatment systems. Equipment backlog was $29 million as of June 30, 2012, which represent a decline of $9.2 million from March 31, 2012.

The consumer segment recognized $500,000 in operating income before depreciation and amortization for the second quarter of 2012 as compared to a loss of $1.3 million in the second quarter of 2011. The second quarter of 2011 included a $1.3 million related to a discontinued product line.

Regarding our balance sheet, cash increased during the second quarter of 2012 and at June 30, 2012, we had approximately $18 million of unrestricted and restricted cash. Receivables were $102.4 million for the second quarter of 2012 which was comparable to year end 2011.

Inventories were $118.3 million for the second quarter of 2012, also comparable to year-end. As of June 30th, the company had total debt outstanding of $37.9 million, which represent an increase of approximately $10.6 million from year-end and relates to both Calgon Carbon Japan and borrowing under our US credit facility.

Operating cash flow was $20.8 million for the second quarter, as compared to $12 million for the second quarter of 2011. The $8.8 million increase is primarily due to favorable working capital changes, as well as lower 2012 pension contributions.

Capital expenditures totaled $25 million for the second quarter of 2012 and $36 million for the first half of 2012. Capital expenditures for the second quarter of this year include over $11 million related to the capacity expansion project at our Pearl River production facility. Our estimated spending on capital for the full year 2012 is currently estimated to be between $65 million and $75 million.

That is my summary of the second quarter from a financial perspective.

Gail Gerono

Thanks Steve. Our next speaker is Robert O'Brien, Executive Vice President and Chief Operating Officer.

Robert O'Brien

Thanks Gail. I'm going to provide an operations report focusing on significant factors that has an impact on our second quarter.

First topic is Pearl River maintenance and capacity expansion. We perform major maintenance or turnarounds on each of our virgin activated carbon production lines approximately every 18 months, which means we conduct between two and three maintenance turnarounds a year on our four lines. A number of factors are considered when we set the schedule for the maintenance turnarounds.

In the second quarter of 2012, turnarounds occurred on a production line at Big Sandy and on the production line at the Pearl River plant. The turnaround at Pearl was coordinated with a capital investment project, which was aimed at reducing cost and expanding capacity. The two turnarounds, which were one more than that performed in the second quarter of 2011, had an adverse impact on gross margin.

The Pearl River capital project which is near in completion will increase our annual granular carbon production capacity by approximately 8 million pounds. We also added equipment at the plant that should enable us to reduce coal costs by providing more flexibility in the types of coals that we utilize.

On the subject of coal cost, coal cost also contributed to the decline in gross margin, as compared to last years second quarter. We had expected our coal cost to increase in 2012 as the contract with our largest coal supplier ended at the end of 2011. Going into 2012, we had contracts in place with a number of other coal suppliers to meet our needs.

One the suppliers, however, did not live up to their contractual obligations and we were forced to conduct a number of full scale plant trials to identify suitable alternative suppliers. These trials along with the expiration of our long term contract added approximately $1 million in coal cost for Q2 2012 versus last year's second quarter.

On the plus side, however, we were able to secure a three year contract with a new supplier that is approximately 10% lower in price than that of the problem supplier. We should begin to see the favorable effect in the beginning of the fourth quarter.

Moving to Suzhou reactivation facility, our new reactivation plant in Suzhou, China did not operate in the second quarter. A number of our major customers reclassified their spent carbon as hazardous which required them to obtain revised permits to shift these spent carbons across the provincial borders. We were also required to obtain revised permits. We have received the necessary permits for our plant but our customers are still in the process of resolving their transportation permit issues. Until they are resolved the plant will run intermittently and will not contribute to Calgon Carbon's financial results.

On Calgon Carbon Japan, which we refer to as CCJ, while CCJ margins declined both sequentially and year-over-year in the second quarter. We hired a new President and a new Director of Operations which should have a positive effect on future results.

CCJ was also awarded a significant contract for municipal water treatment valued at $2.5 million.

Overall pricing for activated carbon and related services was flat for the quarter. However, preliminary tariffs on imported Chinese thermally activated carbon to United States for period of Review 4 were announced in May, and the average freight rate per pound increased from the current rate of approximately $0.13 to approximately $0.61. That's a $0.48 per pound increase.

If the preliminary tariffs are upheld when the final determination is released on November 1, 2012, fair market pricing in the US will be reestablished and we should benefit.

Now some updates on our growth opportunities. Disinfection by-products. In July, we announced a ten-year contract from the City of Scottville, Arizona to reactivate spent carbon used to treat the city's drinking water. Also in July we broke graph of reactivation facility to serve Phoenix, Scottsville and other communities in the region.

As you may recall, municipal water treatment plants that don't currently meet the EPA's Stage II disinfection byproduct regulations will most often consider two options, either changing the disinfectant from chlorine to chloramines or installing activated carbon to remove natural organic matter from the water prior to chlorination.

Switching to chloramines is a relatively low cost alternative, but citizens groups are beginning the question the health effects of byproducts formed with the use of chloramines. A group in Tulsa, Oklahoma has started a petition drive to convince city leaders to stop using chloramines to disinfect their drinking water.

Last week, the local governing boards in Charlottesville, Virginia voted against the adoption of chloramines and approved the study of granular activated carbon as a replacement technology. Members of the community in Vermont persuaded officials to consider using activated carbon instead of chloramines for drinking water disinfection.

In June, a committee in Rutland, Vermont proposed using chloramines to comply with EPA regulations on disinfection byproducts. But Rutland City Council voted down the proposal until it can conduct more research.

This type of public concern surrounding chloramines gives us confidence that the use of activated carbon in drinking water treatment will continue to grow. The fact to remember is that less than 10% of the water plants in U.S. currently used granular activated carbon.

Moving to ballast water treatment. In the second quarter of 2012, we recognized a large portion of the revenue for the $20 million Korean contract that we were awarded in 2010. In the second quarter, we received 13 orders, but the value of these contracts did not offset the revenue from the Korean project. Therefore, Steve mentioned our backlog dropped.

We expect only moderate growth in the backlog as the number of new ships to be built this year is expected to be 600 to 700 versus the historical average of 2000. However, proposal request continue to be strong and more of these proposal requests are for retrofits and fleets.

There were no new signatories to the International Maritime Organization's convention on Ballast Water Treatment in the second quarter. 35 member nations representing 28% of the global shipping tonnage have approved the convention which is 7% short of the needed tonnage for ratification.

In U.S., we are working with other UV equipment manufactures through the international UV association to educate the U.S. Coast Guard on the effectiveness of the UV treatment for the disinfection of ballast water. The current ballast water treatment regulations set forth by the U.S. Coast Guard require that organizations be killed. This is not completely in line with the UV disinfection process, which both kills and inactivates organisms by scrambling their DNA.

Since the USEPA has accepted the viability of UV technology for drinking water and waste water disinfection and the fact that 60% of the ballast water treatments sold to date employ UV technology. We anticipate that the US Coast Guard will also accept UV technology for ballast water treatment. The coast guard regulations as written also pose substantial challenges for ballast water treatment systems using disinfection chemicals.

On mercury removal. Last week the EPA issued an administrative stay on the Mercury and Air Toxic Standards rule for MATS for new coal fired power plants. The state delayed monitoring, record keeping and reporting requirements for these plants until November 2, 2012.

As the number of the planned new coal fired power plants is small we have not changed our activated carbon demand projections for this application, approximately 400 million pounds to 750 million pounds per year.

There has been relatively little bid activity in the mercury market of late, but a number of carbon supply contracts to the power industry are set to expire at the end of the year. These facilities have been very active in testing and evaluating products to best beat their needs. Based on the test that we've conducted and the positive feedback that we have received at a number of these customer trials we are optimistic that our new advanced products will provide significant value to the power industry and allow us to increase our market share.

During the continued over capacity in the marketplace for mercury control carbons, however, we expect margins on new contracts to be lower in the near term until we move closer to the EPA compliant state for mercury control.

Moving to our cost improvement program. The cost improvement program that was previously mentioned on the first quarter earnings call is now underway. The program is designed to produce savings in the following areas: raw material costs, warehousing, transportation, waste disposal, manufacturing efficiency and personnel costs. We expect that this program will result in recurring annual savings of more than $10 million beginning in 2013.

That concludes the operations report for the second quarter.

Gail Gerono

Next Steve will make some comments about expectations for the third quarter.

Steve Schott

Thanks Gail. Regarding our third quarter, we expect our revenue will be down sequentially given the forecasted drop in the use of activated carbon for mercury removable and because of lower equipment revenue primarily related to Hyde Marine. Compared to 2011's third quarter, we expect revenue to be approximately flat. Including last year’s third quarter revenue was approximately $8 million of virgin carbon provided to the City of Phoenix, carbon sales mercury removal are also expected to decline significantly year over year.

Finally, revenue growth in Europe will likely be offset by the unfavorable effects from the foreign exchange. In addition, our reactivation capacity expansions are not yet providing their expected contributions to our growth. As you heard, the Suzhou plant in China is not expected to contribute positively to the third quarter. In Europe, our capacity expansion has helped us to grow but the overall European market remains challenging and it will take us longer than expected to fill our furnace capacity at reasonable margins.

Regarding margins, we expect that the margins in the third quarter will be approximately equal to our second quarter margins. They are expected to be adversely impacted by the completion of the Pearl River plant maintenance and expansion project and will not yet benefit from lower coal costs. We expect that benefit to begin the fourth quarter.

As Bob discussed, however, the cost improvement program initiatives target margin improvement and we expect to see that improvement beginning in the fourth quarter.

Operating expense. Given the forecasted sequential decline in revenue, our selling administrative and research expenses as a percent of revenue are expected increase sequentially by approximately 100 basis points. This increase excludes the charge related to the retirement of our former CEO. It also excludes charges associated with Phase 1 of our improvement program which are not expected to exceed $4 million. Gail?

Gail Gerono

Thanks Steve. Randy will now provide his comments.

Randy Dearth

Thanks Gail and good morning everyone. First I would like to say how pleased I am to be joining Calgon Carbon’s management team. I am convinced that focusing on emerging environmental markets should provide our company with opportunities for significant earnings growth. And based on what I have seen so far I believe that the company has the strong technological base, the financial strength, and the right management to capitalize on these growth opportunities. And as CEO I now have the opportunity to directly influence how goals can be achieved.

That being said, I will tell you that I am unhappy with the decline in the company’s gross margin. I also recognize that delays and regulations may slow the development of some of our growth markets and that competitive environment in some of our traditional markets has become more challenging within the last six months. In order to address these issues it is absolutely clear to me that we must complete the cost improvement program that Bob outlined as quickly as possible. This is in my opinion just a Phase I of an overall cost improvement strategy.

As I continue to learn more and more about the day-to-day operations of the company. I’m hoping to utilize my experience working in the chemical industry to identify additional ways to reduce cost and to improve efficiencies. Therefore, I do expect that there will be additional phases to this cost improvement program. Details will be announced as we identify the initiatives and going forward, we’ll provide quarterly updates on our progress.

In specific terms for our operations outside the U.S. and the challenges that we face there, I supported the creation of a Chief Operating Officer position with global responsibility and the appointment of Bob O’Brien to that position last year. With Bob’s knowledge of our company’s products, markets and manufacturing processes and my 24-year experience working for a global company I believe we will be able to tackle the global issues we face especially in Japan.

In summary, as I begin my tenure here as CEO of Calgon Carbon, this company is a company with solid fundamentals and is recognized as a leading provider in environmental solutions. It has been well-positioned in both its traditional and emerging markets, which include ballast water treatment, disinfection byproducts, mercury removal and reactivation expansion, many of the topics that you heard about today.

In my new role, I will continue to support the company’s strategic direction and I do look forward to taking the company to the next level, which includes significant and sustainable earnings growth. Thank you.

Gail Gerono

Thanks Randy. We will now take your question.

Question-and-Answer Session

Operator

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

Ben Kallo - Baird

On the margin front, was margin impacting the quarter because of the higher Ballast Water mix?

Steve Schott

Ben, this is Steve. It was, but frankly slightly favorably. That is an important revelation. The margins in our equipment business overall are actually very, very closed to now and actually are slightly ahead of the carbon margins given the decline we saw in the carbon and service margin.

Ben Kallo - Baird

Okay, that’s interesting. And then Bob, it seems like I don’t know if you were down playing the opportunity or things are just taking longer on the ballast water now that you are running through your Korean card contract. But could you just give us an update? In the past, you talked about RPs are responding to and anything you’ve seen there on timing and when those move forward to contracts?

Bob O’Brien

Well, up until at this point most of the orders that have been received for ballast water treatment systems have been supplied to new builds to new ships. And so, with the decline in new ship building that is going on this year, we are seeing a decline in opportunities in supply of systems for new ships. It's our expectation that that will be dramatically overcome by opportunities to quote on retrofits or basically quote to supply units to existing ships.

We are starting to see more requests from operators existing shipping lines to provide quotes for systems for again the existing fleets. It is difficult to predict exactly when those orders will start to come but we are encouraged that we are seeing a higher parentage of quotes we are making are through these retrofits systems.

Ben Kallo - Baird

Okay. Then, on the deep (inaudible) making efforts. The first on the cost sides affecting gross margin, was there something new that happened in the quarter? I guess when you give the expectations for the quarter that was underway. And then, should we expect the (inaudible) revenue to contribute to Q4, or is that moreover 2013 type of contribution?

Steve Schott

Ban, this is Steve. In terms of the effects on Q2 as you no doubt remember, we did not anticipate a significant impact from the turnaround outages but we did quite a bit work at Pearl River. When the plant was down, again we spent over $11 million in capital improvements. In total the project will probably cost at least $14 million. When the plant was done, we did a significant amount of maintenance, definitely was a big part of the total cost we incurred through the quarter. It will affect Q3 slightly. And then, we should begin to see positive effects from the capital and maintenance efforts in the fourth quarter.

Ben Kallo - Baird

And now, are we still sticking to the $8 million incremental increase in volumes there or looking some other work you're doing it can that be higher?

Steve Schott

I think that our best estimate right now is the $8 million, Ben.

Ben Kallo - Baird

Okay. And then, my final question. Have you seen anything in the marketplace any destruction from the (inaudible) acquisition (inaudible)?

Bob O'Brien

We have not seen any change in the marketplace as a result of that acquisition.

Operator

Your next question comes from Ryan Connors of Janney Montgomery Scott.

Tim Feron - Janney Montgomery Scott

Hi, this is actually Tim Feron sitting in for Ryan

Unidentified Company Speaker

Hi Tim.

Tim Feron - Janney Montgomery Scott

You guys mentioned last quarter that your margins in Europe were headwind due to the pricing environment there. Your margins improved sequentially in carbon service, so did that situation improve a little bit or are you still seeing a challenging pricing environment there?

Bob O'Brien

It is still challenging for us but our margins in Europe were actually flat quarter-over-quarter. So, in the comparison of the two periods there was really no impact from Europe.

Tim Feron - Janney Montgomery Scott

Okay. And then, my next question is just, last quarter you guys did had a higher percent outsource sales that also impacted your margins. Did that go away this quarter or was that a factor?

Steve Schott

It was not a factor. The factors were higher maintenance cost and higher coal cost and those were the drivers to the margin decline in this quarter.

Operator

Your next question comes from Dan Mannes of Avondale.

Dan Mannes - Avondale

Hey, good morning. And welcome on board Randy.

Randy Dearth

Thank you.

Dan Mannes - Avondale

Sure. A couple quick follow-up questions first. And I'm sorry, I missed some of the prepared commentary. On Europe, I mean clearly you have some currency headwinds. Can you talk a little bit about maybe some of the other factors going in there, in terms of both demand issues? And then secondly, any interaction because I know historically your currency issues have been exacerbated because you export a lot of products to Europe. So, could you walk through a little bit your overall European exposure?

Steve Schott

Overall Dan, we have increased our exposure to Europe by increasing our plant capacity by 30 million pounds as you know. We have been able to successfully fill some of that additional capacity but certainly nowhere near all of it. As we look back a year, pricing has been reasonable. It's a challenging market. It has been a challenge to grow as much as we had hoped. But we are doing okay. Margins again as I indicated, were flat year-over-year for Europe, which frankly with all that's going on is not a bad thing. The headwinds have been from currency. If we go back a year the exchange rate was probably more than the $1.40 and we are now $1.23 or something. So, we are going to lose in terms of a year-over-year revenue from FX probably $3 million to $4 million.

Dan Mannes - Avondale

Right. But in the past, you are talking the currency is on the top line but when you export products to Europe then any you sort of get double hit, and does the start to Feluy facility does that mitigate to some degree?

Steve Schott

It will -- not really because we are still selling a significant amount of virgin carbon into Europe and I choose this makeup for the reactivation. So, you are right, there is an impact to that probably in total it has cost us to $0.005 to a $0.01 in terms of earnings because of the FX issues. We are trying to hedge that exposure but we do not do so fully and so there absolutely is not an impact.

Dan Mannes - Avondale

Got it. And then, real quick on the mercury market, I heard you telling especially as it relates to the over capacity. Can you talk at all about unit level demand and not just with your new products but just generally given the reduction in output from lot of coal fired utilities? Is that hitting demand as well exacerbating the oversupply issue or utility still using the similar volumes as to what they have used in the past?

Bob O'Brien

This is Bob we are seeing our volumes going down with some customers. I am sure you realize it with the low price of natural gas if the utilities have the ability to switch from firing coal power plants to switch to natural gas power plants so that’s what they are doing. So, we have seen volume decline at a number of customers who have been able to utilize more natural gas and less coal. So that definitely is a factor.

Operator

Your next question comes from Steve Schwartz of First Analysis.

Steve Schwartz - First Analysis

Can you just give us an update on how the muni and the industrial markets are looking for you right now both in the US and well primarily in US but also Europe?

Bob O'Brien

The municipal market in the US is still progressing nicely. Sales were up 10% in the second quarter last year. As like I mentioned in my comments, we are seeing number of utilities we are faced with this disinfecting by product regulation control looking to adopt activate carbon as the technology of choice. So, we continue to see growth in that market that’s our expectation. So, I think the growth is basically on whether our expectations in the US.

In Europe, I think the business in potable water has been steady. Sales, I believe, are up slightly in the second quarter over last year, and so that business is continued to solid. We do -- we are concerned though or continued to be concerned with the European economy and whether we will in fact see an impact on our municipal business. Right now that the problems in Europe are more in the southern countries Spain, Italy, and more of our business tends to be in Northern Europe so we haven’t completely seen an effect of that but it’s something we are certainly watching.

Steve Schwartz - First Analysis

Okay.

Steve Schott

And in terms of the total industrial market as it impacts us, comparing last year’s second quarter to this year’s it was essentially flat.

Steve Schwartz - First Analysis

Last year was flat, okay. Just as my follow up with respect to the equipment business, you had a very strong first quarter and $16 million or so in revenue $20 million here in the second quarter. It sounds like things are going to normalized again for revenue. Can you give us some idea of where that number might fall for the second half of the year? You are going to go back to $12 million and $13 million revenue quarters?

Steve Schott

Certainly at this point without some significant new ballast water orders being booked we are going to see a decline. Through six months we achieved just over $36 million revenue this year compared to little less than $21 million a year ago. And many of you know, our traditional equipment revenues total $45million $46million annually so we certainly exceed that. We will probably decline and I am sure it will be and $12 million may not be a bad estimate for Q3, and it will depend on how many new orders we are going to book frankly.

Operator

Your next question comes from Jinming Liu at Ardour Capital.

Jinming Liu - Ardour Capital

Just can you share with us what meets your current coal water situation how much is your -- what percentage is contracted and what percentage is open to the spot market?

Steve Schott

Sure we can do that it’s at the moment. We have for the balance of this year we will have over 60% of our needs hedged, and frankly that’s what we desire. So about two thirds. As we look forward to next year we have over half of our coal needs hedged, and we are comfortable at the moment that that’s where we want to be. So, that’s where we stand. We are always looking at opportunities and testing coals but that’s our present situation.

Jinming Liu - Ardour Capital

Okay. Switch to CCJ, Japan region. How much was the sale for the last quarter for that region, and the what are you going to do to improve margin over there?

Steve Schott

We haven’t given that number and we have said that historically Japan sales and total have been in the $70 million, $75 million range. I would only say that in the second quarter it was probably a little bit below that run rate.

Bob O'Brien

From a margin standpoint, this is Bob, we see a lot of opportunities to improve our costs position. We are having transportation efficiencies in the operations of our reactivation facility. And frankly, having the right staffing level to further business that we have in Japan. So, we have a number of activities going on that are aimed at improving our margins by improving our cost position.

Jinming Liu - Ardour Capital

Lastly, that’s for a long-term view with natural gas price stays low and the many utilities are looking at with higher their coal alternative in capacity, what -- what’s your plan in terms of real relaxation and the long-term capacity planning for your activated carbon production nearly relates to that?

Bob O'Brien

Well, I think that chapter is yet to be written. I think the utilities has decisions to make because you suggest relative to the price of coal and the price of natural gas, and in the short-term, natural gas is certainly is attractive and so the power industry is firing all the natural gas facilities that possibly can. I think it’s much more difficult to predict what’s going to be the relative cost position of natural gas with coal 5, 10, 15, 25 years from now and that’s what the power industry is going to have to struggle with what are the cost of fuel going to be. So, our decisions and how we prepare for production volume to meet the needs of the power industry is going to be determined basically of how the power industry is making the decisions on what they viewed the long-term - their long-term energy source will be.

Operator

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

Nick Prendergast - BB&T Capital Markets

Hi, good morning, this is actually Nick Prendergast standing in for Kevin this morning.

Randy Dearth

Good morning, Nick.

Nick Prendergast - BB&T Capital Markets

Good morning, I just had a quick question here on Japan. I know you commented on - that you had some kind of upper management shifting going on. Do you feel that you have filled the necessary key positions there? Are you still kind of working on filling some holes?

Steve Schott

We’ve got a most I think we have one more key position less that I would like to fill. But we have the top positions filled and I think we’ve got a very good people. So, I think they will be helping us from definitely moved in the right direction at CCJ.

Nick Prendergast - BB&T Capital Markets

Got it. Also I guess shifting to Hyde, in the past as orders were ramping, you guys were also adding to your staffing. Now, with the - it looks like your backlog you expect it to drop off. Have you maybe tapped the breaks on some of your hiring activity within Hyde?

Steve Schott

Yeah, we’ve been watching that closely. I’d say it’s a challenge for us obviously because we do expect at some point in time the tsunami of orders to come and so, we are trying to balance our position of how we staff up to handle that yet keep control of our cost. So, I think we are in balance and certainly - it’s certainly something that we are watching very closely.

Nick Prendergast - BB&T Capital Markets

Got it. And then if I could just one more question regarding your capacity. Can you may be just update me where you guys are now and I guess the status of some of your expansions?

Steve Schott

Well, we - in U.S. from a virgin carbon perspective, we would now say once Pearl River starts up here shortly that will be, I think 148 million pounds of granular virgin production capacity. And we’ve talked about our reactivation capacity expansions around the world and mentioned on the call that we are not yet realizing full benefit from the mainly Suzhou in China where we have 13 million plus pound capacity that we're not yet really getting any benefit from. In fact, it’s probably been a net burden to our cost.

And then in Europe, we added 30 million pounds of capacity that upon running, but not built perhaps there is 10% to 20% probably closed to 20% capacity that remains for us there that we can eventually fill.

In the U.S., from a reactivation perspective, we still have the North Tonawanda plan that we have to startup. Hope to do that later this year, another 12 or 13 million pounds of capacity. So, quite a bit of capacity remains available to us to fill and we do expect future growth from that capacity.

Operator

Your next question comes from Doug Thomas of JET Investment Research.

Doug Thomas - JET Investment Research

I also -- I know what I mean I know you didn’t decide to take the job for the second quarter or probably not the third quarter either. So, I’m wondering is may be everyone seems to be so focused on near-term stuff these days and may be that hasn’t changed. But I’ll be interested if you could talk about in sounds that may be your decision to take the job, what’s your long-term? What should we think about when we think about Calgon over the intermediate term or what your visions for what this company should look like a couple of years out?

And then can you -- if you wouldn’t mind tying that to sort of this idea I have in my head of that alignment with shareholders. Obviously, you are very familiar with the company clearly the history of the company as we’ve got -- we have the management with significant shareholdings in Calgon. And I thought may be you could talk about what your expectations are with regard to how we should also view compensation tied to performance?

Randy Dearth

Let me begin by answering the question, why join the Calgon team. And like you said I have been on the board for the past 4.5 years. So, I truly understand what the company’s about, what their focused on, what their direction is, and I totally support that. And really, as I said my comments, being focused on environmental solutions because they do have a good technology base and good people to do that.

What I hope to do and again that’s the why and the what in terms of our strategy. I can now influence the how. And I think this is what really exciting for me to come in with the team and technology and working with a great board and be able to take it one step further and work it. Look at how we want our business globally, bring my experience from Bayer, from LANXESS into play and be able to again add guided shareholders and to move the company. That’s essential why I took the job.

In terms of what I’m going to bring, you did refer to the short-term, we have to improve our margins. We have to get to this as quickly as possible.

For those who know LANXESS, LANXESS is indeed a restructuring story. From day one when I took over as CEO it was absolutely imperative, but I come in and be able to focus the team and the organization on process improvements, cost reductions. It part of our survival on the company. Eight years later it's doing quite well on that. So, I’m going to be bringing a lot of this techniques, a lot of those procedures, policies, processes into play, and we will look into each and every one of those.

With regard to the holding employees accountable for results that’s all going to tie into that. Once it’s absolutely clear the direction that we’re taking the company the employees will be clearly held to the KPI that we set forth, and again it’s going to benefit the shareholders ultimately.

So, a lot of work to do. I’m very excited about it, but I’m absolutely convinced with the fundamentals of this company and markets we're in we are going to get there.

Doug Thomas – JET Investment Research

And the only other question and obviously I wish you the best of luck. Obviously someone referenced the (inaudible) transaction and this is the second time we’ve seen a deal with (inaudible) I guess in the last few years. By any valuation analysis, Calgon is trading at a significant discount to my estimate either the last two transactions. I’m just wondering if you and I’m not asking you to talk about a competitor obviously or deal prices and so forth. So what is it if you think investors are missing when it comes to the long term, even replacement value of the asset that you have or the diversified portfolio? I mean I think about the equipment sales, I think about all the stuff you have that they don’t have is it just a complicated story where you feel like you need to execute better to get people's attention, focused back on the real value of the company?

Gail Gerono

Hi, this is Gail. Yes, this is a complex company as you know and I think that it’s been difficult for both the sell side and the buy side to really get their arms around the entire company. Something that Randy and I will be working on and of course Steve as well, will be that how we present the company, how we can make it easier for people to understand what we are and the value that we bring.

Randy Dearth

Just to add to that, again, from the experience that I have had in working industry, this one area that I think I can help the company move ahead. There is a tremendous positive story to tell at Calgon and we will be telling that story. Even as the disinfection byproduct market is an example, people are really getting upset about these byproducts and we are there with the solution. We need to be our legislators. We need to be with those that are concerned. We need to be out there. And that is marketing the company and marketing the technology we have. And you will see a more that in the coming months.

Operator

(Operator Instructions)

Your next question comes from David Rose of Wedbush.

David Rose - Wedbush

Good morning. I just had a one follow-up question. I was wondering if you can quantify the margin you had from reduced sales from at the ballast water. And probably do you see margins in the equipment side look much like the first quarter or somewhere between first and second?

Gail Gerono

We have never talked about the margins in the equipment business. And I do not think that we are prepared to do that now.

Bob O'Brien

No, David, I would just add. The margins between the carbon and servicing equipment businesses have grown very, very close together. So, that they do not divert significantly at this point.

David Rose

Even what the decline in sales in equipment?

Bob O'Brien

Even with the -- yes. It will not make a big difference.

Operator

At this time, there are no further questions. I would now want to turn this call back over the management for any closing remark.

Gail Gerono

Thank you very much for participating in the call. If you do have additional question please give me a call at 412-787-6795. That's it. Thank you.

Randy Dearth

Thank you.

Operator

Thank you. This concludes today's conference. You may now disconnect.

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