CCC Intelligent Solutions Holdings Inc. (CCC) Q1 2008 Earnings Report, Transcript and Summary

Good afternoon, and welcome to Calgon Carbon Corp.’s First Quarter 2008 conference call. (Operator Instructions) Now I would like to turn the conference over to Ms. Gail Gerono, you may begin.

Thank you. Good afternoon and thank you for joining us today. As usual our speakers today are John Stanik, Calgon Carbon’s Chairman and CEO, and Leroy Ball, our CFO. After John makes some brief introductory remarks, Leroy will provide the standard review of the first quarter financials. Then John will add some color on first quarter performance, provide an update on important developing markets, and comment on the second quarter of 2008. Before we begin I would like to remind you that the Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for forward-looking statements. John or Leroy’s comments, or perhaps some of the comments during the Q & A may contain certain statements that are forward-looking relative to Calgon Carbon’s future strategy and performance. They involve known and unknown risks and uncertainties that may cause the company’s actual results for future periods to be materially different from any future performances discussed in the presentation. Further, the company operates in an industry where it may be influenced by economic and other factors beyond the company’s control. The information in this call related to other forward-looking statements may be relied upon subject to the previous Safe Harbor statements as of the date of this call and may continue to be used while this call remains on Calgon Carbon’s website or on PR Newswire’s website. John?

Good afternoon, and welcome to our 2008 first quarter call. I am pleased to report that once again year-over-year comparisons for revenue and net income were all very positive. In fact, revenue was at a record level of Calgon Carbon’s first quarter. In addition, gross margin showed improvement both sequentially and quarter-over-quarter. After Leroy presents the financials I will add some detail on the quarterly results, and present some information and updates on a number of different topics relative to the first quarter and future quarters. Included will be an update on key capital projects, business conditions in China, and the flu gas mercury removal market and as usual a brief discussion of the second quarter. But first, Leroy?

Thanks, John. Good afternoon everyone. Total sales for the quarter were $90.3 million as compared to $83 million in the first quarter of last year which equates to an increase of $7.3 million or 8.8%. The carbon and service segment increased by $8.2 million, or 12%. The increase was a result of increased price and volume compared to last year’s first quarter and a favorable exchange translation impact of approximately $2.3 million. Equipment sales were down by $1.3 million, or 11.6% compared to last year, due primarily to lower ion exchange system sales. Consumer sales in 2008 first quarter were $.4 million or 10.5% higher than first quarter 2007 due to higher demand of carbon cloth in Europe and preserve products in the U.S. Currency translation had a $2.6 million positive impact on the quarter-to-quarter comparison due to the stronger Euro compared to last year’s first quarter. Consolidated gross profit before depreciation and amortization as a percent of net sales was 31.6% in the first quarter of 2008 versus 29.6% in the first quarter of 2007, an increase of 2 full percentage points. Improved carbon and service pricing more than offset increased costs in quarter-to-quarter comparisons. The gross profit percentage was in-line with our expectations as communicated back on our February call. Looking ahead, we believe that the second quarter percentage may exceed last year’s second quarter number of 2.7% as we continue to be able to realize fair market pricing in the U.S. as a result of the tariffs being enforced on Chinese activated carbon entering the United States. The second quarter percentage is likely to represent the peak for the company in 2008 due both to the higher seasonal sales expectation and the fact that we have already experienced higher costs thus far in 2008 and expect that…

Thank you, Leroy. Let’s begin with first quarter performance. Considering that history tells us that the first quarter is typically the weakest revenue quarter for Calgon Carbon, we are very pleased with achieving $90.3 million. This value represents a growth rate of nearly 9% over last year’s first quarter and as I mentioned earlier, the highest revenue ever for the first quarter of Calgon Carbon. As Leroy noted, the increase was comprised of a combination of price increase, volume growth, and foreign exchange impact. Considering that our virgin activated carbon production capacity is fully committed and that equipment sales declined year-over-year, this was quite an accomplishment. Furthermore, I am happy to report that there was no indication of an economic slow-down anywhere in our business. Looking at the company’s revenue from a segment perspective, two segments, carbon service and consumer were up, and from a regional perspective revenue grew in all three regions: the America’s, Europe, and Asia. Moving on to the cost of sales: during last quarters call we discussed inflationary cost increases and a price increase that was rolled out in October of 2007. I mentioned that we expected to see that price increase gain traction during the first quarter, and our gross margin begin to increase, returning some time this year to the levels achieved in the second and third quarters of 2007. But as you heard from Leroy’s report, gross margin in the first quarter was 31.6%, 2 full percentage points better than the fourth quarter. Obviously the October price increase did take hold and we are pleased to have made such progress so quickly. During last quarters call we talked about inflationary cost increases abruptly hitting the fourth quarter of 2007. Additional cost increases continued in the first quarter. Coal, pitch (which is another raw…

Can you give us an estimate for the increase in demand for the UV systems? And then if you could give any color on what is driving the demand? And I think that in the past you have said that your market share is around 25%. Is that constant, or is it growing?

The question is becoming a little more complex to answer, Ben. What we have said in terms of Calgon Carbon results is that we expect our business to grow by at least 25% per year. That statement is not being changed at this point. The market for UV technology is growing. Primarily in the past it was one of drinking water disinfection and wastewater. Drinking water disinfection mostly being a North American market, and the wastewater being a global market. Over the past several quarters there are new developments that are opening up two additional markets. One we refer to as a “taste and odor” market for drinking water that combines ultraviolet light technology with chemical oxidation to handle taste and odor. The second new one is of water re-use which is getting a lot of ink in the media. Those latter two are fairly new. Competition is limited for both of them, and we are rolling out and developing new products and new strategies to handle both of those. Going back to the more established markets, we believe that we have a very solid market position in drinking water. I am not exactly sure what that percentage is. You mentioned 25%, and that may have been something mentioned in the past. We believe that we are not number one in the market, we believe that one of our competitors is, but we believe that we have a very solid position in that market. Regarding the glob al wastewater market we are gaining traction with our products, getting more contracts, we are becoming successful but we still hold on a global basis a very small market position. The bottom line is I think that we still expect to grow that business by at least 25% per year. We grew it last year in 2007 by 35-37% . The company still has to make that commitment of developing new products for these other market opportunities that are opening up. That business potential is getting bigger and bigger and I think that is a very important characteristic to understand.

You talked about the disinfection by-products rule. I read somewhere that would create 600 new systems that would require activated carbon. Can you give a pound estimate on that?

That is a third party report. We have read that also and we believe that is a realistic number. Some of those will be small, some of those will be larger. The two that I reported on are obviously large ones. You will probably read something from us about the second one once we get a little more confirmation about the status of the contracts on it. But we expect to see more of those this year, hopefully, and we expect to see more of them in coming years as a result of LT-2.

As far as pounds go, how should we think about it?

It is a moving target because one of our strategies will be to play in the market both ways. One will be to get the initial virgin carbon and then try and convert the customer to service. If that doesn’t happen it could be potentially millions and millions of pounds. If it does happen, then we will be shifting the business off into something we are very happy to do which is the reactivation business and Evergreen contracts and so forth. It is too early to call which way this is going to go. If it does go service, I should add this comment because it is important, if it does go service, obviously that puts us in the strongest competitive position.

One housekeeping question, and then I will jump back into the queue. When you start getting significant sales to the utility market are you going to break out the percentages that are going to water purification versus utilities or mercury?

We haven’t done that in the past. I am not sure there is a problem with doing that because it is going to be such a big market opportunity. You have probably seen our presentations where we pull out a pie chart of our revenue breakdown. We will talk about that and if that is what you guys want to see we can do that I think.

The next question comes from Rosemarie Morbelli of Ingalls & Snyder. Please proceed with your question. Rosemarie Morbelli- Ingalls & Snyder: Congratulations. Even taking AST settlement it is still a pretty good quarter. John, could you talk about the Chinese competition in Japan? Could you give us a little more detail on that, and how it could turn out with the Olympic Games and even less capacity. Would that eliminate the competition temporarily?

I don’t know, Rosemarie. First of all let me start by saying that previously the Japanese weren’t high on Chinese products. So the significance of the statement that we are making is that Japan is now beginning to open itself up to competition for activated carbon from China. That is significant. Costs are going up everywhere, and they are going up in China, obviously that was the point of one of my segments in my presentation. But if any Chinese carbon products are less expensive in Japan than say American made products then that will give the Chinese a little bit of an edge. Those are the important things. The potential business interruption if it does happen due to the Olympics is reported to be from June until the end of September or when the games end. I don’t really think that will have a long-term effect. I think what that will do in Japan at least is that will have some people scratch their heads and worry about reliability which is a smart thing, not only in Japan but throughout the world. I think that is going to rock some people’s confidences but in terms of Japan when you consider the rising cost of Ocean freight and all of the elements associated with getting product it is not a far trip and I think that Chinese carbon may get over the hurdle that it has had in the past to get accepted in Japan. Rosemarie Morbelli- Ingalls & Snyder: If that is the case, will that help you with your Chinese capacity?

Our Chinese product isn’t considered Chinese in the Japanese way of thinking. It is fully re-agglomerated product, so it is though of as American product. Rosemarie Morbelli- Ingalls & Snyder: Even though all of the process is in China?

Yes Rosemarie Morbelli- Ingalls & Snyder: And even though you have a Japanese partner, it still doesn’t make any difference?

No, in fact our Datong plant sells the majority of its product to Japan. Rosemarie Morbelli- Ingalls & Snyder: And if you could talk about the [inaudible] mixer and the increased competition on the consumer side?

On the cloth side? We are seeing significant growth in all regions in many markets in cloths. Some of them are very new. When we talk about mix we talk about aggressive pricing to get into these new markets and prove our products. That is one element of what we are talking about there. But we are doing very well, and unfortunately when a product that is relatively new like activated carbon cloth is successful it breeds competition so competition has been working on products that are similar to ours, maybe not exactly fully activated cloth like ours, but in order to try and take business from us, take share from us, there is an attempt to try and do it at low price and we feel than in order to protect our market we are going to have to reduce our price and we will wait and see how we play that game. It is a little too early to call. Rosemarie Morbelli- Ingalls & Snyder: And the fact that the margin is down versus last year? You haven’t yet reduced the price?

It depends on the market, how well it is established, what our market share is, how superior we feel our product is in the customers application compared to the other technology which probably isn’t as good as ours. So all of those things will have to be taken into consideration when we set our specific price for that particular customer. And I am serious about that. Rosemarie Morbelli- Ingalls & Snyder: You said in the fourth quarter that you are going after higher margin business and that was in regards to the equipment business. The fact that the margins are lower but you are selling less ion exchange and more UV equipment, is it fair to translate that your margins are higher on the ion exchange side of the equation?

No. What we are trying to say in the comment you are referring to is we are forcing the equipment technology business that we do to have higher gross margins. That could results in the volume of our equipment business or our technology business dropping somewhat. That is one of the messages that we have tried to pass along. Having said that, the ion exchange business has been one of the higher technology profit pieces of that business, UV being another one, carbon and the odor business the other two being much more established and lower margin potential segments. So when the ion exchange business which is flat right now, and when we are talking about service agreements where resin manufacturers are now trying to go directly to the customer and there is a pricing compression there, that is all part of what is happening within the ion exchange business.

The next question comes from Kevin Maczka from BB&T Capital Markets. Please proceed with your question. Kevin Maczka- BB&T Capital Markets: I have a couple of pricing related questions. The first one is that you mentioned that your big mercury contract you recently announced was your third contract. I don’t know that you have ever commented yet on pricing or margins as it related to either that contract or what you might expect to see in mercury in general. I am just wondering if you could give a little more color on that.

We haven’t done it contract by contract and never will for competitive reasons. But we have said in the past that we believe that this is a market due to its size and due to the logistical requirements for it that should command a reasonable margin, or a good margin. Another element of that will be in global supply and demand and so on and so forth it could affect that margin. Beyond that I am not sure what else to add other than we have given some pricing ranges to you in previous calls. I could repeat those for you if you like? Kevin Maczka- BB&T Capital Markets: Was that the around a $1 a pound, or somewhere in that ballpark?

We have quoted two levels. We have said that we felt that the low end range, the un-impregnated range $.60-$.80 and then on the impregnated side, the upper end, we felt that it was going to the in the $1-$1.20 range. Kevin Maczka- BB&T Capital Markets: And then on your core activated carbon business now, how much farther do you think you have to go in terms of pricing and pushing that envelope? It sounds like your domestic capacity is certainly very tight, and with all the volatility in China I don’t know how much that will disrupt any in-flows from there, but you would think there is a long way to go yet in terms of pricing power?

It is hard to answer that question. Costs are going up seriously. By a serious or significant degree. We ship product all over the world and that used to be a fairly insignificant piece of the puzzle, and now it is becoming a very significant piece and some day our coal contracts are going to run out and hopefully we are going to do the best that we can and not suffer too much of a hardship in terms of price increases. We believe right now that we won’t have trouble passing those on. That is the good news. What you are referring to is beyond that. And then I think I have to defer that question into what is going to happen in the rest of the world? If you have been reading some of the information that is out there, and I think it was Fredonia that just put out a report that said that demand was going to be 3 billion pounds by the year 2015. Three billion pounds compared to today at 1.2 or 1.3 billion. That is 1.7 billion pounds of carbon that doesn’t exist today. We are talking about countless amounts of numbers of activated carbon plants that are going to need to be built in a relatively quick timeframe. I call that literally an explosion of the technology. If that really happens I think that price is going to go up, and it could go up very significantly. I am hoping that global market demand is real and then I think the answer to your question will be that there is going to be a lot of upside to price. It may not be for the next couple of years, but I think as we look at our market opportunities; mercury, disinfection by-products, we haven’t talked to you about medicines getting into drinking water sources, endocrine disruptors, that is all prime real estate for activated carbon. There are air applications that we have alluded to in Europe; gas storage and so many technology potentials for this product in addition to all of the water applications in the developing countries of the world. I am sorry that I can’t give you a better answer, but I think that the way I cook it down is I believe there will be a lot of pricing power, maybe not in 08’ and 09’, but I think the really big stuff might be at the beginning of the next decade. Kevin Maczka- BB&T Capital Markets: If I could just ask one more on the capacity side. It sounds like domestically you are pretty well sold out, so as you look at the second quarter and beyond in 2008, will the total top-line increase essentially come from pricing and what was the timing on the B-line restart and the recent expansion program that you just mentioned on the call?

I will do the second question first. We broke the B-Line project into two pieces. When we configured that project we wanted to get some marginal, incremental capacity in 2008. We decided we were going to put all our resources on the press room, which is the initial unit operation. We finished that part of the project and it is running now for almost a month. We are now beginning to make more pounds than we had in our business plan which is what we wanted. We want a little bit of upside and market opportunity there. The remainder of the project won’t finish until April or May, I think of 2009. That is when the big volume will come online. What was the first question again, please? Kevin Maczka- BB&T Capital Markets: Will top-line growth be driven primarily by price?

If you looked at the first quarter, the top-line growth was a function of three things; price, volume, and currency translation. I think that a sizable piece of it will be from price, hopefully. I think a sizable piece of it will be volume, because we do have carbons to sell that are outsourced; coconut, Chinese, etc. We don’t see the currency translation situation changing dramatically over the next three months; I don’t think anybody does. I think we will have that same combination of three continuing in the second quarter. Then we will see what happens as we get closer to the third.

Your next question comes from Christopher Butler of Sidoti & Company. Please proceed with your question. Christopher Butler- Sidoti & Company: Just wondering if you had any preliminary thoughts or plans for capacity beyond the B-line expansion? It seems like we are getting a little benefit from that.

Yes, we have talked about going as far as completing the design for two lines at Pearl River; we are working on another project in another place in the world that we are not really sharing with anyone at this point; and there are some things beyond that. So right now the company is very aggressively planning for a considerable amount of capacity, potentially a few hundred million pounds. Christopher Butler- Sidoti & Company: And with the purchase of the grinding equipment that you mentioned had a long lead time; is that associated with new capacity that you are planning down the road, or is that a transition of what you have currently?

It will have upside compared to what we have and what we will have in the short term, because that equipment will be located at the Big Sandy plant in Kentucky. Of all the things that we are considering in terms of capacity expansion beyond B-line, none of them are in Kentucky at this time. Although we do have room there to do that. Christopher Butler- Sidoti & Company: And looking at the contracts that you are signing for the disinfectant market, the recent one in Arizona; what are your thought process and decision process as to signing contracts that could last a number of years for granular carbon for this market versus the powdered carbon for mercury?

Our philosophy has obviously changed over the past few years. We are not as interested in long-term contracts unless they have escalator clauses that we believe are based on proper indexes. And we are having trouble right now finding a great index for coal. But we are willing to sign long-term contracts for more than mercury, long-term being more than a year. But we are very reticent to signing any contracts without an annual adjustment capability of some kind. Christopher Butler- Sidoti & Company: And when we are looking at the carbon sold for the disinfectant are we looking at the impregnated or how does that carbon work?

The DVP market will be a very high quality non-impregnated granular activated carbon. Not too many people will be able to supply this carbon that can have the kind of longevity that our product will and have the same trace capacity removal that our product will.

The next question comes from Michael Gaugler from Brean, Murray & Carret. Please proceed with your question. Michael Gaugler- Brean Murray Carret & Co.: Most of my questions have been answered, but thinking about your comments John about mercury removal sort of leave the impression that with the states not waiting for the federal government to come up with final regulations and introducing their own standards; does is really even matter if the feds drag their feet anymore, that the states are going to go ahead and do their own thing and there is not really substantive down time left in terms of demand?

I can’t speak for all the states. When we talked to you last we talked about three categories of states. Those three categories still exist. The one category of states is going full speed ahead, and the way you describe it, although I would never speak for a state saying that their powers that be are doing whatever they want, they seem to be moving forward, seem to be comfortable that their states regulations are the ones they have to adhere to and are moving forward. The second category of states is those that are trying to get into that first category. And then the final category is the guys that are waiting. Then you have this other group of people that either have consent to [inaudible] because they have a new plant or because they have issues somewhere in their company and they have agreed and consented to whatever these orders are. And then there seems to be another category who are concerned that when it is their turn that there isn’t going to be enough product, or the product that they want, or where they want that product to come from, so they want to tie up some of that capacity. So we are really seeing all of that. I can’t really speak to that second and third category of states as to whether they are saying “we are going to do whatever we want” and I don’t know if they are that bold or not. But it does seem in many states that they feel comfortable that their state regulator is going to set the limit that they are going to follow.

Our next question comes from Matt Schaenen from Somerset Capital. Please proceed.

Good afternoon everybody, it is Stu Goldberg. First and foremost John, I assume your plants are running three shifts a day, is that correct?

Oh Goodness, Yes.

Talk to me a little bit about the price increases and what clients are saying. When you were on the call two quarters ago there was some concern that maybe volumes might disappear because you were raising price, and that was before everybody saw these huge price increases in energy and commodity costs. Has the attitude changed? Are they more willing to accept price now so that you might not lose as much volume with price increases, or are they still fighting you tooth and nail over that?

It is kind of all over the map. I think that ultimately everyone is accepting price increases. The Chinese costs are going up so significantly and in the U.S. you also have the tariff. In Europe they are going up even without a tariff. I think there is a certain reality that is setting in either because of coal, or shipping costs or for whatever reason that costs are just going to go up. But that is not to say that customers are not complaining, or researching other alternatives, particularly service customers who felt like being a service customer they were somewhat insulated compared to a virgin carbon buyer. It is hard to do what we are trying to do. Nobody wants price increases. Calgon Carbon doesn’t want any cost increases so every time someone comes up to us we give them a lot of grief. But I think people are accepting it. I think people understand what is going on. I said we implemented a fuel surcharge two or three weeks ago. What I am hearing so far is that is working; people understand it. We are being tougher on customers with demurrage where you can’t let our trailers stand there full of spent carbon for a day or two because you are not ready to release it. You have to pay us for that now because it is so much more expensive. I think there is a certain amount of reality associated with that that has set in. That is the best I can do, Stu.

With the increase, you said that over the last thirty days you have had at B-line, what kind of capacity are we talking about?

Small, between 5-10% of that plants output.

And that is granulated at this time?

Absolutely; it could be either, actually.

And the way I understand it is that you are shipping powdered carbon at this point and time?

Yes.

Is that mostly for tests, or is that for usage?

The contract we have had for a couple of years took quite a bit of carbon in the first quarter. Other than that, our second customer I think took a small amount and the rest was for tests.

And when you say they took quite a bit in that first quarter is that for the year, or the quarter, or a onetime pop we need to worry about?

I think they were building a reserve, or building an inventory. So there was a slightly higher amount than they plan to take in the rest of the year. But that particular contract is viewed by us as an “x number of trucks per week” kind of contract.

Our next call comes from Scott Blumenthal with Emerald Advisors. Please go ahead.

John can you give us some idea, you don’t have to give me exact numbers, but what would be the spot price now for powdered versus granular because I think on my last visit to you that you mentioned there was kind of a two to one production ratio between powdered and granular. Does that play out in the current costs?

I see where you are getting to, and I am trying to think first whether I need to correct your impression about the 2:1. Where that comes from is we have said as a rough rule of thumb when you take the conversion of a B-line at Big Sandy or a D- line or an E-line, and say that it currently makes 35-40 million lbs. of granular product, about how much can you get out of that in powdered? We quickly in our heads multiply that by two which is obvious. It is not really that simple, it depends on what the specification requirements are for the product. Let us assume for now that we do accept that as a rough estimate. But I remind you it is not exactly accurate. No, the answer is not that the cost would be half. Various things could affect that. Are we using the same coals? How quickly can we transition from one product to another product which would affect the amount of dead time for the production line as we transition from one to another. That would influence the product cost. I think the labor part of that would be the same, so that wouldn’t be a factor either way. I wouldn’t jump to the conclusion as to whether the cost is going to fall in line. Please don’t ask the next question as to whether one is cheaper than another because I won’t tell you!

I have a kind of general idea. I understand there is a little bit more processing involved in making something powder. And I was just wondering that if in the current market if the spot price of a pound of powdered plus the premium for extra processing is kind of in-line with what you are charging for granular or if those are separated now especially in lieu of the fact that it appears there is going to be an explosion in the demand for powdered soon.

And hopefully granular. You are right, and your information is good. When you think about activated carbon production it is perhaps in many cases more difficult to make granular activated carbon within the production line, but when you are done and it is coming out of its final stage of production basically you just package it. With powder, the work and a lot of the money still has to be spent at that same point in the production process. There is a lot of processing. The logistics costs can also be significantly higher with powder. We could be shipping rail, we could be shipping truck or small containers. I am talking more about the cost of capital when I make that comment because now we are talking about more bins, railroad siding, more elevators and conveying of product, more packing, more labor. That is a piece of the puzzle, you are right.

You mentioned that there might be some concern from Japanese customers who are dipping their toe into the Chinese carbon market now, when during the Olympics there might be some supply constraints when the Chinese keep a lot of that stuff at home for domestic use, at least during the Olympic Games. Is any of your capacity there at risk? Is there anything that the Chinese government can do since your stuff is already in the country to prevent you from getting your carbon out of the country?

I may have misled you. That is not the right way to think of it. What may be done during the Olympics, from June through September is that the government may be shutting down heavy industry within a certain radius of Beijing. One could conceivably expect that heavy industry would include activated carbon producers. Our activated carbon production facility will not be shut down, we don’t think, because it does not have any environmental problems. But we don’t make the finished product. We work with a number of partners who activate the material that we prepare. It absolutely could have an effect on our plants output. And it could have the effect of shutting down production for a number of different people and it could be tens of millions of pounds on an annual equivalent, not during that particular period of time. Well, it actually could be tens of millions of pounds because it is four months.

That is helpful. Was there any change in the breakdown of your foreign and domestic revenues in the quarter? I know that you are traditionally about 2/3 U.S. and 1/3 foreign. Does that pretty much plat out that way?

It should have. If anything it might have been a little more weighted on the American end of things, but not by much.

And Leroy did you give us a D&A number that you expect for 08’?

Are you asking if I had disclosed anything?

I have not previously. I would expect for this year that if you would annualize our first quarter it probably wouldn’t be far off from our full year number for this year. A lot of the significant capital spending that we are doing this year will begin to get depreciated in 2009.

Our next question comes from Dan Manns from Avondale Partners. Please proceed with your question.

A couple of follow-up questions. First as it relates to China. You had mentioned there may be an impact, maybe not on your plant directly, but maybe indirectly due to one of the activators. But given the overall potential there do you see this as a net positive or a net negative for you given the potential to tighten supply elsewhere? And secondly, what are you doing to mitigate any potential shortfalls you may have?

I think that there are two ways of looking at it. If there is a shortfall volume wise price will rise, so that is a positive. The other way to look at it is, a smart company would have prepared for this and probably could insulate themselves from problems. So I told you I think we are prepared.

And interestingly one of the things that you mentioned fairly early on related to the inventory. Is that one of the ways, because your inventory does look a little bit higher, or is most of that just driven by price?

Leroy’s point was that when you compare our inventory in your past records you may question whether the company is actually improving their working capital or not. And we were concerned because we have communicated several times to you that working capital management is an important strategy for us. So as we look at the data and we talk to our board about the data we need to understand that $11 million of that $88 million is cost increase and value of inventory change from over the past few years. So it distorts the impact of what we have been able to do to actually make our inventory turn, to try and control our inventory, our SKUs to make our working capital situation tighter.

Changing subjects a little bit; you talked a couple times about how tight the market in the U.S. and potentially tighter with the demand for mercury products and other things, and you talked about the B-line, but do you have any other near-term ways of adding capacity in the market today, outside of incremental importing? Are there any other sources of potential supply, whether virgin or reactivated that you could get your hands on?

Yes, we haven’t talked about those. We have programs in both areas, react and virgin again Dan they are small but they are helpful, and we haven’t really disclosed what we are doing. We are trying to do some clever things to get a few million more pounds here and there which adds up.

I guess I am pointing directly at one opportunity. You guys did idle the facility out in California a few years ago. Is that one of the types of options that might be available to you?

Perhaps, but we have some plans in mind for Blue Lake that are different than what you are suggesting.

And lastly, turning to the mercury market. You mentioned you weren’t changing the market size as you saw it and just refresh my memory, I think you said around 200 million pounds in a year or so?

In 2010, yes.

On the other hand you said it seemed like activity had intensified. Can you give a little more color on what you mean there, or is the market size the same and it is just the activity level of the players more aggressive?

We did the best we could when we put that estimate out there last call, or call before last. What isn’t changing is when these people will take the carbon. So we don’t think it is prudent at this point to change the 200 million. Other people apparently have stuck with the three, or said more than three; we just want a little more evidence, we want to see more awards. I told you that things have intensified but really there have been a lot of contractual things going on in the last month or so in terms of contracts being awarded.

Intensified just means you are having more serious discussions with a larger number of people?

We are negotiation terms and conditions with a lot more people. There are more people who have put out RFQs; there are more people talking about RFQs; some of the people we have been talking to have definitely progressed towards an order. All of the above.

Is it going to be defined by seeing more RFPs and RFQs out there for you to grow the potential market size, or is it also a sense of timing in that maybe there is a lot more, it just doesn’t have to be until 2010 or 2011 or after?

I think it is probably the former. I think we would rather see more commitment, more numbers coming out before we are comfortable increasing our estimate. Once we increase our estimate we believe we are going to have a very attractive market share, that is going to change all of our projections for the business and that means that we would like to have a little more confidence that we are going to have these contracts hand and understand what the volume ramifications will be year by year by year.

Our next question comes from Eric Almaraz from Avis Capital. Please proceed.

I was looking at the $55 million contract that you signed and the rough back of the envelope looks like that takes a few percentage points of North American capacity out of the market, or commits it. How many more contracts like that do you think need to be signed in the market before maybe some of your existing customers start to worry about capacity and start to face issues of allocation, etc.?

I am not sure I understand the question. You mean where they believe they are being rationed, or not giving enough of our carbon? Maybe granular customers?

I guess what I am saying is, if one large contract could take that much capacity out how many more of those would need to be signed before you started to see your other customers coming to you requesting long-term contracts because they are worried about supply?

I think there will be more. With the signing of that one customer, and the other two we already had, we are not anywhere near close to filling up B-line. Having said that, we are managing the amount of product that we are already shipping to certain customers who demand our American made product. It has been very difficult. The company has not realized some of the sales that it could have realized in the first quarter. That will happen again in the second quarter. We are doing everything we can to work with those customers and to try and help them through this time because they really do not have a lot of good alternatives at this point. Things will get better in ten or eleven months when we bring B-line on, but until that point in time it is getting kind of difficult, and it would have to be a cooperative arrangement between us and the customer.

You also talked about putting through another price increase, it sounded like ASAP. Can you put that into context of maybe the last price increase? I can’t remember what the amount was, but in the last part of 2007?

We don’t communicate a percentage because our methodology is to do each customer individually, which is why when I say as soon as possible I didn’t give you a month or something. It takes us quite a bit of time to put together a price increase. And it is because we do it customer by customer, and the reason we do it customer by customer is because our customers are at different pricing which creates a different margin situation for each one. We try and be fair and be strategic, and we try and value customers to perhaps shed the low margin customers in exchange for higher margin customers. All that strategy has to go into a price increase and then we need to have the indexes or other factors that we need in there so that we cover ourselves in the short term, because we don’t want to put out a price increase in June and find ourselves short three months later, which is in September when we are starting to get traction from the first price increase and then we find out we have another problem. It takes quite a bit of effort for us to put a price increase together

My last question, on the competitive front; is there any update on competitors supply and how much you are seeing other folks saying about bringing capacity on?

There is not a whole lot new about that. One of our largest competitors has made their plans public for an expansion. We suspect that that is coming along for them and that they will meet whatever date they projected. ADAES, another company, has announced publicly plans to build a plant. Other than that, there isn’t a whole lot of information that I am aware of about things that are going on. Every once in awhile you will hear a rumor or information about people doing this or selling this asset that once upon a time made carbon. I would say that the two I mentioned are the only plans off the top of my head that have been set and communicated publicly.

Sir, we show no further questions at this time.

That closes the call. We don’t have a closing comment.

Thank you for joining this conference; it is now concluded. You may now disconnect.