Ladies and gentlemen, thank you for standing by, and welcome to Calgon Carbon Corporation's Third Quarter 2012 Results Conference 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). Thank you. I will now like to turn the call over to Gail Gerono, Vice President of Investor Relations. Please go ahead.

Thank you. Good morning and thank you for joining us. We chose this date for our third quarter call so it would occur after November 1, when the Department of Commerce was scheduled to announce the final tariff on carbon imports from China. Unfortunately, federal government offices were closed for part of this week, due to Hurricane Sandy. As a result, the DOC has postponed the announcement until Monday, November 5. Shortly after the announcement, our lawyers will issue a news release regarding the final tariffs and we will post it on our website. Please look for there and if you have any questions about the tariff, give us a call. Before we begin this morning, 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 made during the Q&A may contain 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 presentations or during the Q&A. Further, the company operates in an industry sector where securities values may be volatile and may be influenced by economic and other factors beyond the company's control. Some of the factors that could affect the company's future performance are higher energy and raw material costs, costs of imports and related tariffs, labor relations, availability of capital and environmental requirements as they relate both to our operations and to our customers, changes in foreign currency exchange rates, borrowing restrictions, validity of patents and other intellectual property, and pension costs. In the context of the forward-looking information provided in this webcast, please refer to the discussions of risk factors and other information detailed in, as well as the other information contained in the company's most recent Annual Report and 10-K. And now Randy Dearth, Calgon Carbon's President and CEO will make some introductory remarks. Randy?

Thanks Gail. I would also like to welcome you to our call today. In addition to me, our speakers today are Steve Schott, Calgon Carbon's CFO; and I have with us today Bob O'Brien, who is our Chief Operating Officer. Steve will review the third quarter's financials and Bob will provide a review of our global operations. Following Bob's remarks, I will provide a progress report on our various corporate initiatives, including our cost improvement program. With this we have a full agenda. Let's get started. Steve.

Thanks, Randy. Good morning, everyone. Total sales for the third quarter of 2012 were $135.5 million versus $143.6 million in the third quarter of 2011, a decrease of $8.1 million or 5.6%. Currency translation had a negative impact of $3.2 million on sales for the third quarter of 2012, due to the stronger dollar. Regarding our segments. Sales in the Activated Carbon and Service segment decreased $15 million or 11.6% for the third quarter of 2012 compared to 2011's third quarter. Sales for this segment declined in each of the company's three regions, however most significantly in the Americas. The primarily reason was the favorable impact of a large municipal carbon supply that occurred in the third quarter of 2011 valued at $8 million. Also contributing to the quarter-over-quarter decrease was lower demand in both the environmental air market where our mercury removal product sales were $3.1 million in the third quarter of 2012 compared to 2011. Finally, the environmental water market revenue also declined year-over-year by $2.1 million. Equipment sales increased $6.6 million or 57.5% for the third quarter of 2012 compared to 2011's third quarter, primarily due to higher revenue recognition from ballast water treatment systems, up $3.8 million and ion exchange systems of $1.2 million. Consumer sales increased by approximately $269,000 or 13.3% for the third quarter of 2012 compared to 2011's third 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 27.3% in the third quarter of 2012 compared to 33.8% in the third quarter of 2011, a decrease of 6.5 percentage points. The decline was primarily in the activated carbon and service segment for several reasons. First, let me address our business in the Americas region. Cost increased…

Thanks, Steve. Bob O'Brien is up next with the global operations review for the quarter.

Thanks Gail. Let's start with sales. Sales of $135.5 million were lower than we had expected. As Steve mentioned, in the third quarter of 2011, we delivered virgin activated carbon to the city of Phoenix valued at $8 million. There were no comparably-sized shipment of activated carbon in the third quarter of 2012. Sales of powdered activated carbon for mercury removal were 3.1 million lower in the third quarter of 2012 than in the comparable period of 2011. The decline in sales resulted from lower utilization rates for coal-fired power plants due to the low price of natural gas. I'm pleased to report, however, that we shipped a significant quantify of flu pack to a major customer in October and we anticipate that shipments will continue throughout the fourth quarter. Requests from customers to delay large shipments of activated carbon are inherent in the nature of our business. In the third quarter, customer delays reduced expected sales by about $4.5 million. These orders are scheduled to be shipped in the fourth quarter of 2012 and the first quarter of 2013. On the positive side, we are currently finalizing agreements for some major new business for traditional carbon and UV applications. In Europe, we are in final discussions with a large water provider in the UK for a multiyear contract similar to our contract with the City of Phoenix. If successful, we could supply virgin carbon and potable water reactivation services for up to a 10-year period. In US we were selected by the Los Angeles Department of Water and Power to provide a 12.4 million Sentinel system for disinfection of drinking water, confirming that UV remains the technology of choice for controlling cryptosporidium and giardia under the LT2 regulations. In Asia, Calgon Carbon was awarded a contract to supply 5.7…

Thanks, Bob. Next Steve will comment on the outlook for the fourth quarter. Steve?

Let's start with sales. In contrast to the third quarter, I would characterize October sales as strong at approximately $50 million. This was partly aided by some sales that, as we mentioned, had been delayed from the third quarter. November and December sales are expected to return to historical levels and thus we expect our fourth quarter sales to be higher sequentially and higher than the fourth quarter of 2011, mostly driven by the strong October start. Margins; based on the sales forecast and the non-recurring nature of certain costs incurred in the third quarter, we expect that margin will improve. We expect our gross margin before depreciation and the amortization to be approximately 30% for the fourth quarter of 2012. Gross margin benefits from our cost improvement programs. We'll begin to yield benefits in the first quarter of 2013. Operating expenses; excluding the third quarter charges, these expenses have been well controlled throughout this year and we expect this to continue as we continue to focus on other cost improvement initiatives. With respect to the restructuring related charges, as previously noted, we expect the reported charge for pension settlements of $1 million to $2 million. This charge will either be in the fourth quarter of 2012 or first quarter of 2013 depending on the timing of employee elections. In addition, Phase 2 of our cost reduction program that Randy will cover could include additional charges. Because we have not yet completed all of our plans around Phase 2, we cannot yet estimate the amount of the charges that will be incurred. However, we do not expect the charges to approach those of the third quarter. I will say that we expect to complete our Phase 2 cost improvement initiatives during the fourth quarter of 2012.

Thanks Steve. Our next speaker is Randy Dearth, Calgon Carbon's President and CEO. Randy?

Thanks Gail. Bob mentioned three significant new business opportunities. The supply of activated carbon and reactivation services for a water provider in the UK, the Sentinel system for Los Angeles and activated carbon for portable water treatment in Singapore. These projects exemplify our commitment to grow our traditional business in all regions. The potential agreement with the water provider in the UK is also consistent with our strategy to grow through geographical expansion of our reactivation services. Since our Grace facility near London is operating at full capacity, we intend to reactive the spent carbon at our Tipton plant which we purchased last year for $2.7 million. Tipton is located on 4.5 acres in an industrial area and can be expanded as we continue to grow the reactivation business in the UK. Reactivation is transportation sensitive and Tipton location in the center of England near Birmingham should provide us with a competitive advantage from a transportation perspective. So in order to run Tipton as efficiently and cost effectively as possible, some modifications to this facility are going to be necessarily. Calgon Carbon's Board of Directors has approved a $10 million capital request for the upgrade and expansion of the plant's production capacity. We will be doing the modification in stages, returning to operation in 2013 with additional capacity and plant upgrades to be completed in 2015. Now let's move on to a progress report on our cost improvement program. During the quarterly call in August, I told you that we would immediately begin implementation of a program that would significantly improve the cost structure of the company. I am happy to report that we have completed Phase 1 and that we achieved our goal of $10 million. Let me break this down. $5.3 million of the $10 million will be…

Let's start the Q&A now.

(Operator Instructions). Your first question comes from the line of Kevin Maczka of BB&T Capital Markets. Kevin Maczka -- BB&T Capital Markets: First question, it seems that revenues and volumes in the activated carbon segment this quarter were down maybe more sharply than what we saw in the recession. So I know you talked about a difficult comp here and also some push-outs and it sounds like October is rebounding nicely. But, is it your message that this is business that is just delayed and pushed out into Q4 and Q1 or is there some underlying change happening in terms of either share or price in these markets, the drinking water and waste water markets?

This is Bob O'Brien. I think the only decline that we saw that would not be just a movement of a rolling of sales will pick up later will be in the mercury market. There we have seen a decline and as mentioned, it's basically because more natural gas fired units are being used to generate power than coal. So there has been a decline there, which will eventually pickup in 2015 when the new regulations come. In the environmental markets, I think it's pretty much business as usual for us. I think pricing has remained steady. In the municipal market, you do see fluctuations in big projects and so that can create some quarter-to-quarter or year-to-year changes and I think that's what we're seeing here. And we did have a couple of, as I mentioned, big projects that we expected to go in the third quarter that due to construction delays at the municipal plants being built, the orders were pushed out. So we'll get them back. So we don't see any real structural change in the business. Kevin Maczka -- BB&T Capital Markets: And Bob, in terms of pricing, did you comment about it being relatively steady. Did that apply to the carbon segment as a whole or just that subset of the market?

I think it applies to it on the whole. Again, the only area that – because the regulations for the mercury have not yet kicked in and there is some overcapacity in that segment regarding powdered activated carbon for mercury control. There is some price pressure being applied there and I think we mentioned that in the past. But in general, I think the pricing is pretty stable. Kevin Maczka -- BB&T Capital Markets: Okay. And just to be clear on this new Phase 2, this additional 10 million. So Phase 1 is complete. You got the 10 million that you had previously said you were after and we should start to see the benefits of that kind of immediately in Q1. First, is that correct? And then what's the timing for the Phase 2 benefits?

No, that is correct. At Phase 1 you will see benefits. As I said in my remarks, we're seeing it now, but from an annualized basis you'll see that starting in January 1, 2013. In terms of Phase 2, let me expand on that. In terms of some of the initiatives and where we're coming from with these to give you some more background. I mentioned in my remarks, product rationalization. We're looking across our whole global portfolio of products and a global team has been in place now since April under Bob's leadership. And we're actually at the point where we're looking at reducing our product portfolio by 50% between now and in some point 2013. That all needs to be looked at. What's that going to do is help us reduce our working capital. It's definitely going to improve in our warehousing and transportation costs and it's going to lead to improved margin. So that is a little bit more detail about one of those. I mentioned global warehousing is also an initiative. We expect globally that through optimization of where we have warehouses, why we have warehouse and how do we use them. And we can also bring in at least over $1 million towards the 10 million by doing that initiative. Processing cost improvements, especially at CCJ and at our virgin plants. We did a lot of work at Pearl as you heard. We have a lot of learnings that we could take to our big plant, Big Sandy and we're going to be doing that throughout next year. I don't have a detailed timing when that will be implemented and when we'll see the savings. On the next call, I hope to be able to outline as I did today what exactly is in Phase 2 and when we will see that implemented. Kevin Maczka -- BB&T Capital Markets: Randy, just a follow-up and this will be my last question, did you say 50% product rationalization? And if so, that would be hundreds of products. What kind of revenue impact would that have? I can't imagine that all of those are very low runners?

This is Bob. We make a lot of products that are similar and so we have in the past tweaked, met size, tweaked activity or surface area of our products which leads us to end with higher warehousing costs, our inventory costs and perhaps less efficient manufacturing than would be optimal. As we've gone back and looked at this rationalization, we have found that we think we can combine the number of products under a given banner. So we're not looking at abandoning the products – abandoning customers, we're looking at trying to consolidate our product line and being able to offer products that serve their needs in a more efficient way. So there'll be very few products that actually we abandon that will cause us to reduce our sales. And let me expand on that. This is again in overall paradigm shift. Everything right now is being looked at. The products we sell, where we sell the products, the customers we serve, how we sell to our customers, all of which this new organization I outlined is going to be able to help us facilitate and facilitate it much quicker. Kevin Maczka -- BB&T Capital Markets: Okay. Thank you.

Your next question comes from Chris Kovacs of Robert Baird.

Thank you for taking my questions. First, I just want to start out in mercury, obviously demand there is still tough given we're waiting on MATS, but can you maybe talk to any opportunities you identified to potentially find other markets to divert that capacity into?

This is Bob. We've been very prudent as to our expansion of virgin carbon production and one of the things that I believe, has been talked about numerous times in the past, is that in our production lines, we have the flexibility to make granular or powdered products. So as we go forward and we continue to rationalize products and look to determine where we can best sell products that we make on our production lines, we'll be looking at the municipal markets, the industrial markets on a global basis. So we have the opportunity if we're not utilizing the capacity for mercury to be able to utilize it in other markets for granular products on a global basis.

Okay. I want to make sure I heard this correctly. So Pearl River you said began operating as you would like it to or close to the levels you want it to and in early September. You said the cost reductions probably won't happen until Q1 and the benefits from that there. But when will we see the incremental capacity available? Would that be Q4?

We're actually starting to see the benefits from Pearl River now on everything that we're producing, starting in September. From the financial standpoint, we made products that have gone into inventory. So when we go into the fourth quarter, some of our sales are being met with products that were produced before we start to see this benefit from Pearl. But we're actually on a day-to-day basis, we're seeing the benefits that we expected with the modifications that we made to the Pearl River plan.

Okay. And then lastly, we think about ballast ramping as a market, I think a lot of projections are out there for the market to once the IMS standard goes through sort of markets or to ramp pretty significantly as the retrofits go through mid to late teen years. However once the retrofits are done, obviously the size of the market declines as you can only get new builds. So how do you think about building out capacity to address this significant boom in the market followed by a pretty sharp downturn?

That's obviously a very good question, something that we consider in our strategy. We'll have a mix of manufacturing that we do ourselves in our other plants and facilities and a mix of components that we purchased from the outside. So we will try and make sure we have a good balance that will not put us in a position that when the market eventually starts to decline that we'll end up with fixed overhead expenses that we won't be able to utilize. So that's something we are very much aware of and would be in our planning as we go forward.

Okay. Thanks for the time guys and look forward to having you at the conference on Monday.

Thank you.

Your next question comes from Dan Mannes of Avondale.

Hey, good morning everyone.

Hi, Dan.

So kind of moving forward and maybe going past Phase 2 and I'm not asking for timing on Phase 2 or if there was a Phase 3, but can you maybe give us a bit of a roadmap as to – maybe over the long term where you'd like to target either gross margins going to or SG&A as a percentage of revenue, just kind of giving us maybe just a long-term guideline as to where to think this can get back to? And I just want to understand this in the context of where margins have been in the past and maybe some of the differences in the business today versus where it was three to four years ago?

Well, let me first say Dan, I mean 30% is not a gross margin I'm happy with and we definitely need to move beyond that. And you rightfully point out we need to get back to at least historical levels. And we're working hard to do that. Various reasons, and we talked about mercury being one of those has changed the environment for us. We're also dealing right now with the global economic situation that we were trying to get our arms around and see what effect that's going to have on our 2013 business; Europe, Asia as well as here in the Americas. So I can't at this moment in time say where we anticipate we're going to be in 2013 in terms of our margins. You've heard me outline I think in pretty good detail the things that we're doing to make the margin better. And I can guarantee to you that we're going to do everything we can to get there. Next week, we started our profit planning process where I get involved in looking at the detail. And that may lead to a Phase 3. We're not stopping with a Phase 2 if indeed the business justifies the need for a Phase 3.

Okay. So I guess – and I wasn't talking about '13, I'm looking a little more long term. But maybe let me re-characterize it is how much of these improvements are really just going to offset maybe the market degradation you see in the last few years rather than being truly incremental versus how much of this is sort of real bottom line improvement rather than just sort of staunching some of the bleeding?

Dan, this is Steve. Certainly, we need to stop bleeding and a lot of what we're doing should go a long way to doing that. Some of what you'll see in OpEx, a lot of Phase 1 was to reduce OpEx, that will be meaningful longer term improvement and would love to get that number down into 15%. We've been between 16% and 17% for the year. So to put a target on that, that's a good benchmark for us next to get to. And margins obviously, we want to get back to levels we enjoy historically which are several hundred basis points higher than the 30% that we target for Q4. A lot of moving parts. Rand mentioned our profit planning process is underway. We'll be looking at that and that's our near-term goal is the mix of sales changes longer term and there's more equipment. Our expectations may change, but that's years out.

Sure. And just one other topic real quick. I mean the last couple of years, you got a pretty substantial investment in assets, Feluy and Suzhou and now Phoenix and now you're talking about the UK. We haven't really seen it flow through from an earnings perspective. I guess what I'm wondering is, can you talk maybe about any changes you're looking at as it relates to either planned return on invested capital or anything like that as we think through maybe the next phase or lack their own of capital investments?

Well, let me first make it clear on Tipton and perhaps it didn't come out on the call that we are only going to make the investment in Tipton if we get this agreement with this UK water supplier. So I'll be clear on that. We're not investing less stacks there. So that will have then a long-term agreement to justify that capacity.

Sure.

This is Bob. I think as we look forward on capital, I would expect in the next few years that any capital investments we make, other than this Tipton, will tend to be focused on cost reduction activities, taking in part again what we learned at Pearl River and applying it to our Big Sandy plant, continuing to look for flexibility in manufacturing, driving our cost down. There may be some component of that that increases capacity, but that won't necessarily be the focus. Our focus will be on cost reduction.

Got it. Thanks a lot.

Your next question comes from Jinming Liu of Ardour Capital.

Thanks for taking my question.

Good morning.

First of all, I have a question regarding your pricing strategy for your carbon products. I remember maybe two calls ago you mentioned that potential for (inaudible) price increase, that combining with your current product portfolio optimization. What is your pricing strategy for your activated carbon products right now?

Well, as Randy mentioned, this is Bob, we're going through our profit planning efforts. And certainly looking at our pricing strategy going forward is going to be key part of that. As in any company, we continue to look to try and maximize the return we get on the products that we sell. So that is something that certainly is in the front of my mind. We haven't had a general price increase in approximately two years. So it is something that we're going to be looking at very strongly here in the profit planning procedures.

And also let me add to that. The product rationalization project is giving us some excellent opportunity to look across, again not only the products we produce but how they are price and are we getting the value for those products if indeed we decided to keep those and service key customers.

Okay. My last question is regarding your – what happened in third quarter regarding the coal power plants produced less electricity and then used less of your carbon. My question is do you believe that trend will be a permanent structural change because of the availability of natural gas in this space?

This is Bob, again. I don't think it's permanent. If I was an operator of a power plant or power facility and I had the option at least in the short-term of using natural gas if it was cheaper than coal, I'm sure I'd take that option. We buy natural gas, so we track the pricing and I think our expectations over the next few years is that we will see in fact some increase in price and natural gas. So probably not going to remain at the current state that it's in. With the regulation of MATS taking effect in 2015, even if there is some small change in the amount of electricity that's generated through coal fired power plants, it's still -- the regulations will create a very large market for activated carbon in the US. So there still is a lot of potential. And then we can't forget that the mercury pollution is not just a problem in the US. I mean it's a global problem. And there will be opportunities we believe because countries such as China and India and others are looking at mercury pollutions. So even if the US market at the end of the day does not turn out to be quite as big as what may have been projected five or six years ago, there will be many opportunities we believe on a global basis that will more than offset that. So we continue to believe that the efforts we spend making high performance products will have advantage in the US and then we continue to think that long term, they will have opportunities for us to apply outside the US.

Okay. Thanks a lot.

(Operator Instructions). Your next question comes from David Rose of Wedbush Securities. David, your line is open. Please state your question.

Pardon me. I was hoping maybe you could get in a little more detail about how you're thinking about Phase 2 in terms of metrics and return on invested capital or is it payback, is it one-year, two-year, three-year and help us – I think this goes back to one of the previous questions in terms of guiding our expectations about margin improvement?

Well, I think again looking at some of the initiatives that I outlined for you that could have immediate effect in 2013 once implemented. And again, we're looking at $10 million on an annualized basis, again more than likely that would a 2014 estimate from year-over-year. But as I said, in the next call we will outline as I did today in detail what those measures are but also what the impact will have.

So to be clear, that $10 million will ramp up on an annualized basis, we won't get $10 million in the first quarter on an annualized basis, right?

That's correct.

Okay. So we start to see that annualized number maybe in the back half of the year?

Yeah, David, that's a good assumption.

Okay, that's fair. And then to clarify another point, on Datong, how much should we see from savings from Datong? I didn't get that number correct?

$600,000 with more than three quarters of that being related to depreciation. We had already idled the plan, so the ongoing costs that's being idled for a year, the ongoing costs were very low. So it's mostly just depreciation, $600,000 in total.

Is that kind of a non-cash event?

Yes.

Okay. And then lastly, if I may, on Hyde. As the business slows down, does this mean that you've reduced the pace of the SG&A increase to offset your fixed cost absorption?

Yes.

Okay, great. Thank you very much.

At this time, there are no further questions. I'll now turn the call to management for any closing remarks.

Thank you all, again, for joining us today. We had a lot to talk about. Hopefully we were able to answer a lot of your questions. As I said before, we were on the path, I believe, to making these improvements. I will commend our management team and my efforts to do so. And have a good afternoon.

Thank you for participating in Calgon Carbon Corporation's third quarter 2012 results conference call. You may now disconnect.