Welcome to the Calgon Carbon Corporation first quarter 2014 results conference call. (Operator Instructions) It is now my pleasure to turn the floor over to Gail Gerono, Vice President of Investor Relations. Please go ahead.

Thank you, Lorie. Good afternoon and thank you for joining us. Our speakers today are Randy Dearth, Calgon Carbon's Chairman, President and CEO; and Steve Schott, our CFO. Our Chief Operator Officer, Bob O'Brien is traveling and couldn't be with us today. This afternoon's presentations will follow our standard format. Opening remarks from Randy, review of the first quarter financials by Steve, the operations report which will be given by Randy, followed by Q&A. Before we begin, please be advised of the Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for forward-looking statements. Today's presentations or perhaps some of the comments that Calgon Carbon's executives make during the Q&A may contain statements that are forward-looking. Forward-looking statements typically contain words such as expect, believe, estimate, anticipate, or similar words indicating that future outcomes are uncertain. Statements looking forward in time including statements regarding future growth and profitability, price increases, cost savings, broader product lines, enhanced competitive posture and acquisitions are included in the company's most recent Annual Report pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. They involve known and unknown risks and uncertainties that may cause the company's actual results in future periods to be materially different from any future performance suggested during this call and webcast. Further, the company operates in an industry sector where securities values may be volatile and may be influenced by economic and other factors beyond the company's control. Some of the factors that could affect future performance of the company or changes in or delays in the implementation of regulations that cause the market for our products, acquisitions, higher energy and raw materials costs, costs of imports and related tariffs, labor relations, capital and environmental requirements, changes in foreign currency exchange rates, borrowing restrictions, validity of patents and other intellectual property, and pension costs. In the context of the forward-looking information provided in this call and webcast, please refer to the discussions of risk factors and other information detailed in as well as the other information contained in the company's most recent Annual Report. Randy?

Thanks, Gail. Good afternoon and thank you for joining us today. Calgon Carbon had a good first quarter and operating income increased approximately 4% compared to the first quarter of 2013 and net income was comparable to last year's first quarter, despite slightly lower sales. In addition, gross margin percentage quarter-over-quarter increased by 2 percentage points. In fact, we saw margin expansion in all regions. As expected, operating expenses increased by $700,000, primarily due to our SAP reimplementation project, which has significantly improved the functionality of our enterprise resource system and allow for further efficiency improvements. These results demonstrate that the strategy we have adopted, a disciplined sales approach combined with global cost improvement initiatives, continues to be successful, moving our company forward. Among the many positive developments in the first quarter, we are most excited about the recent U.S. Appeal Court ruling that upheld the EPA's Mercury and Air Toxic Standards or MATS. Our advanced FLUEPAC products have performed very well in trials conducted by power generators, and we believe that we are in an excellent position to play a major role in serving the mercury removable market. Activity accelerated in this marketplace in the first quarter. This we'll address later in our discussion. Before Steve takes you through the financials, I would like to address one more topic. Many of you have asked about the effect of the severe winter weather on our first quarter. Historically, the first quarter is not our strongest, partially due to the cold weather, and I believe that the first quarter of 2014 was no exception. We did experience impacts from the weather, which included higher costs to our plants and difficulties in delivering product. The weather is also partially responsible for the movement of more than $2 million in sales from the first to the second quarter. On the positive side, those sales will help to contribute to what we expect to be a very strong second quarter. That concludes my opening remarks. And I'll be back with the operations review, after Steve's presentation. Steve?

Thanks, Randy, and good afternoon, everyone. Total sales for the first quarter of 2014 were $131.6 million versus $135 million in the first quarter of 2013, a decrease of $3.4 million or 2.5%. Currency translation had a negative impact of $500,000, primarily on the Activated Carbon and Service sales for the first quarter of 2014, due to the weaker yen. Regarding our segments. Sales in the Activated Carbon and Service segment decreased $1.2 million or 1% for the first quarter of 2014 as compared to 2013's first quarter. The decrease was principally due to $3.3 million of lower sales of Activated Carbon in the environmental air market, primarily in Asia. Also contributing to the decline were lower sales of $3 million in the Americas portable water market, as two large municipal fields that occurred during the quarter ended March 31, 2013, were not replaced by similar sized orders. Partially offsetting these declines were higher demand and pricing in the food market of $5 million for activated carbon products and services, which were primarily in Europe for two large orders. Equipment sales declined $3.4 million or 24.7% for the first quarter of 2014 compared to 2013's first quarter. The decrease was attributable to lower sales of Ballast Water Treatment Systems of $1.8 million due to the delayed ratification of the International Maritime Organization ballast water treatment regulations and other U.S. coastguard related issues. Also contributing to the decline were lower sales of traditional ultraviolet light systems of $2 million, as several large contracts were completed in the quarter ended March 31, 2013. Partially offsetting this decline was a slightly higher sales for ion exchange systems of $300,000. Net sales for the quarter ended March 31, 2014, for our Consumer segment increased $1.2 million or 54% as compared to the first quarter…

Thanks, Steve. The operations report is next. Randy?

Thanks, Gail. I'd like to begin by discussing several significant contracts we were awarded in the first quarter. In Korea, we were selected to provide 5.6 million pounds of granular activated carbon to treat drinking water in Seoul City, South Korea. We delivered about 1.6 million pounds in Q1, and the remainder is scheduled to be shipped in Q2. At Chemviron Carbon, our European branch, sales were strong and margins also improved, driven in part by two new orders for the treatment of sugar. The value of these contracts was approximately $2.3 million. In the first quarter, we delivered carbon valued of $1.7 million. So the remainder of carbon is scheduled for delivery in the second quarter. In the U.S., we received a $1.5 million contract to replace spent carbon with new virgin carbon, following a chemical spill that affected the drinking water at a treatment plant downstream from the spill. The majority of the carbon is scheduled to be delivered in the second quarter. These three contracts demonstrate the continuing demand for activated carbon for traditional applications. Next, let's turn to the plants. Our virgin carbon production facilities, Big Sandy and Pearl River continue to operate well in the first quarter, despite the winter weather. Our reactivation plants also performed well. Activity at two facilities, one in Asia and one in the U.S. was especially noteworthy. As a result of a targeted sales effort, we are seeing a significant increase in demand for industrial reactivation at our Suzhou, China facility. In fact, sales increased 100% in the first quarter as compared to the first quarter of 2013. I am also pleased to report that its customer base has expanded to include Chinese companies, in addition to the multinationals, who also use our reactivation services in Europe and in the…

Thanks Randy. Now, Steve will make some comments about the second quarter. Steve?

Thanks, Gail. Sales, our second quarter sales are typically strong and for the second quarter of 2014, we expect sales to increase sequentially by more than 10%, mostly attributable to our global drinking water market segment. This should result in a strong quarter, not only for revenue, but also for earnings. Margins, our net sales, less cost of products sold as a percentage of net sales, before depreciation and amortization is also expected to show significant sequential improvement. The sequential improvement is expected to be at least 150 basis points, which should result in margins, pre-depreciation and amortization exceeding 35% for the second quarter. Reasons for this expected improvement include a favorable sales mix, higher sales volumes, which allow for better overhead absorption. And as Randy mentioned, lower cost directly related to several of our cost improvement initiatives as well as the absence of direct cost related to our Virgin Plant efficiency study that is now being completed. Operating expense. As Randy noted in his presentation, we have launched our SAP reimplementation project. At the time of our fourth quarter call in February, I forecasted that this project would increase our operating expenses by as much as $1 million in each quarter. The expense in fact in our first quarter, as I previously mentioned was approximately $600,000. We expect that the second quarter impact will be more and could approach $1 million. Nevertheless, the significant anticipated sales levels will result in our operating expense as a percent of sales to be 15%. Our tax rate in the first quarter was 34.4%, approximating our full year expected rate. However, in April, we were notified by the Internal Revenue Service that the joint committee review of our amended 2008 U.S. federal income tax return have been completed. Accordingly, during the second quarter, we will release the income as a reduction to income tax expense, $1.4 million of uncertain tax position liabilities, which will substantially lower our tax rate for the second quarter and add $0.250 per share to our earnings. The corresponding cash refund will be approximately $2.5 million. Share repurchases. As of December 12, 2013, we had $150 million of orders. From that date through May 2, we have purchased approximately 1.6 million shares, a total investment of $33.5 million. We now have remaining authorization of $116.5 million. Thank you and I'll turn it over to Randy.

The last topic that I want to cover today is our capital budget for 2014. I had the opportunity to meet with many of our investors, following our last call. There was a recurring theme at our meetings, surprised at the size of our $85 million capital plan for 2014. As you learnt today, we have revised our estimates downward and now expect to spend between $75 million and $80 million. Those are still big numbers and it is important that we understand them in the strategic context. First, as many of you know, our production capacity for granular activated carbon is approximately 150 million pounds and we've been selling our entire production each year for several years running. In order to meet projected market demand in the next few years, we must either add carbon production capacity or sell more carbon from other manufacturers at lower margins. Second, demand from the mercury market may cause us to add powdered activated carbon capacity. Third, running all plants, virgin and reactivated as efficiently as possible to improve our cost profile was also an important part of our long-term strategy. Let's look at the major components of our 2014 capital plan in the context of those strategic objectives I just laid out. We expect maintenance capital this year to be on the high side, perhaps $20 million, because of an extra virgin carbon plant maintenance turnaround year-over-year. A total of $70 million is targeted over the next two years for debottlenecking and cost improvements their Big Sandy carbon manufacturing plant. This project should result an additional 8 million or 9 million pounds of granular activated carbon production capacity. A total of $30 million will be used in 2014 and 2015 to modernize and expand the production capacity of our Neville Island reactivation facility over 40%. The Neville Island plant is older and must be upgraded to perform cost effectively. Since the facility will be offline, we are taking the opportunity to expand its capacity at the same time. $15 million to $20 million is expected to be spent this year for additional improvements at our virgin carbon manufacturing plants and also for some small infrastructure projects. $5 million is earmarked to 2014 for completion of the expansion and refurbishment of our reactivation facility at Tipton in the U.K. The remainder of the spend will be dedicated to infrastructure improvements, including the reimplementation of SAP that we had talked about today. These are major components of the capital plan. With the exception of the maintenance spend, our expenditures are aligned with our strategy to grow our business by increasing carbon production capacity or improving plant efficiency. So thank you very much for your attention. And we will now take your questions.

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

I was hoping if you could touch on the equipment sales. Obviously, that sector was at a loss this quarter. And just wanted to get your long-term thoughts on that, on that ballast water factor there going forward?

We obviously are encouraged by the first quarter activity and as Randy pointed out the number of orders that we got, but obviously are still waiting for more regulatory clarity in the IMO Ballast Water Treatment Regulations to take effect. So for us it's difficult to see significant changes in our year-over-year performance in that entire business segment, without those Ballast Water Treatment Regulations taking effect and having a greater impact for us. So as we mentioned, we're going to continue to manage cost to try and minimize the losses that we're incurring in that segment. Many are driven by our willingness to remain in a state of preparedness for the ballast water treatment market. And we'll do our best in the meantime and certainly continue to have sales. And I think with regulations eventually coming into our favor, we'll be ready and well-prepared to take advantage of this.

Let me add to that. It's not that we're losing sales, right now. It's a market that's influx because of regulation, as Steve said. I will reiterate what we said in the call here that, we do recognize that we need to look at this business. We need to look at the costing and the expenses that are incurred. And we have been working with the business unit. And I am happy to report that we're going to be managing that to make sure that if we had to ramp up quickly we could, but in absence of the regulation that we're running this business as profitably as we can.

And then I just had a quick follow-up. The capital spending you guys revised down, is that due to things just not causing effect as you thought they would or what makes up that $5 million to $10 million downward revision?

Certainly, some of it is a revision downward and some of our cost estimates, and as Randy pointed out many of the projects expand more than one year. So we're also trying to estimate how much we'll incur this versus some of those expenditures that may fall into next.

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

I want to follow-up real quickly on mercury. Obviously, we were pleased to see DC Circuit uphold it. I guess the question is can you talk a little bit more about the nature of the interactions with the utilities? What's their willingness at this point to start locking up capacity? Are they still by and large looking at sort of shorter-term contracts?

We've had experience with before. I mean, we've been in this market, as you know a few years ago, when the rules were such that utilities had to comply. So we know it's a long process and have to report that we are part of the process and we have received RFQs, as we said. We do have a seat at the table and we're excited that because of our advanced FLUEPAC products and the service and the quality of the Calgon Carbon products that we will have the market share going forward. So we are pleased with that and when that will happen. Again, we strongly believe that we won't see contracts in the short-term, it will probably be later this year before this happen. We don't see a lot of early adaptors out there. But nonetheless, we'll keep our shareholders abreast when we do receive those contracts. And in terms of weather, there will be a year-contracts or multi-year. We believe there will be multi-year contracts. It seems that that's the direction they seem to be going.

And then in terms of, you are expanding capacity a little bit around the edges. I know last quarter you talked about maybe something more meaningful in terms either a large brownfield or greenfield. Number one, is that still on table? And number two, is that then relying on long-term contracts on the mercury side or somewhere else?

Well, as I mentioned at our Investor Day last November, I think it's very prudent of us to be looking at our options in terms of a greenfield plant or an expansion of existing plant. And I will say, and we have said, that there is engineering work going on. There is a lot of strategic analysis going on to help us better understand, if we were to do that, what would that look like, where, why, when, et cetera. To the point of waiting, I mean, we're curious to see what's going to evolve here, absolutely. We are taking the time. We are going to do this prudently and see how this market evolves. We do have the abilities. You know, Dan that I can bring product from other parts of the world to service our needs and then that's kind of the buffer that we've had. So we don't believe even a later decision is going to harm our business. But nonetheless, let's see how things go and we'll make our decision accordingly.

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

First, on the mercury side. Just for longer-term, do you see the trend that the utility companies switching their coal power plants to natural gas or even to biomass, whether that will impact your longer-term demand for your products?

We estimate today, it is anywhere between 800 units, 900 units that are out there. I believe the 100 today are currently using or required to use on some type of mercury maintenance system and they're using carbon. So roughly it's about 800 out there that would have to comply with the MATS Ruling coming next year. Yes, we have seen some closures. And quite honestly based on the information we've received there were probably plants that should have closed any how. And will there be a few more, probably, just because of the age of the plants and the cost-to-convert. All that being said we don't believe that the 800 units are going to go away overnight. We believe that there will be a huge market for activated carbon for a long period of time to comply with the MATS. The other element here is natural gas itself. We've been told that the natural gas pricing exceeded about $4 a unit. The economics tend to really favor coal and I'm not sure what's going to happen in the coming years with subsidies on natural gas, export of natural gas and the impact it will have on pricing. Natural gas may not be attractive, a year or two from now, as it was, say, last year or last two years.

Just second question is on your coal supply. I may have missed it, but the two new five-year coal supply contracts. Are they fixed price or is this some kind of index-based?

They do contain an indexed-base increase in each of the agreement. So there is some level of increase that can occur in the agreements. It's something that's managed in the agreements as well though, so they won't increase disproportionately to two markets in other conditions.

The index, are you referring to just likely an inflation or CPI and those types of index?

There is more than one in the contracts. There are more than one factor that can increase the pricing.

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

I had couple of questions. The first one is would help me understand a little bit about the 10% projected increase in sales for Q2. I am curious as to how much of that we should consider as recurring in nature versus a one-time contract or sales shifting from Q1 to Q2?

Certainly we try to highlight some of the contracts success that we had. We did have some sales push out of Q1. We had total debt at $2 million. The water contract in Korea was a nice contract for us and will impact Q2. We had some food contracts in Europe, as we noted on the call. And some portable water contracts, one noted on the call. So some things will hit Q2 and the timing for Q2 is very good. Much of the contracts or many of them are in core businesses. And I think it's a little early to predict whether that's an ongoing increase in demand or not. But certainly there is some that will affect Q2, perhaps more than our Q2 as normally it would have been impacted by such things.

And the contract that you mentioned in terms of a -- for a chemical spill, is that a kind of one-time spill or is the purchaser going to purchase that material from you every quarter?

Well, right now it's a one-time. So obviously, in the municipal market it's a candidate for reactivation. So there'll probably be a reactivation business to follow. But given the nature of the chemical spill, perhaps a reactivation may occur on more regular basis then it did before, which is obviously positive for us. But this still indeed shows that having good quality carbon in your beds is a positive for the people you serve with your drinking water.

I agree, but the full impact of that specific sale, we're going to see it in Q2.

Yes.

Yes.

And one last follow-up question, on ballast water. In terms of the profitability on the EBIT line for the remainder of the year, I mean how should we think about the profitability, given approximately $1 million loss in the first quarter?

I think as we call it, difficult to forecast, how the year will play out, particularly in ballast water. We were pleased with the contracts we signed in the first quarter. Candidly, we lacked visibility to see or to know, if that level of business will continue over the course of the year, and so pleased with the first quarter. Obviously, we did incur a loss and we're looking to manage those losses. But we're not in position yet to let you and others know over the rest of the year, whether we can turn those losses into breakeven or profit. But certainly, we're going to do everything we can to manage any losses, if they occur to be as small as possible.

Microscope is on the business.

But for modeling purposes, to be conservative for modeling purposes for the remainder of the next three quarters. Like, if I model like negative $1 million loss for the next three quarters, that's reasonable or how do you think that?

I think that would be on the high side. And I think we didn't highlight that we increased our backlog by $5 million. And so I would expect some better sales compared to Q1, as we go through at least the near-term part of the rest of the year.

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

Couple of follow-ups. One is on the Q&A side, just to be a little bit clear. The reduction in Q in capital expenditures for 2014 roughly at $5 million number, are you thinking that next year will be reduced or above or equal to that same sort of level? I mean as you start to -- I'm not seeing the products you talk about potential brownfield or greenfield projects, it doesn't sound like 2015 comes down from '14. Am I mistaken in thinking that and I know there are a lot of variables, but how should we think about CapEx going forward?

Yes, I'd say it's early to predict 2015. And let's take greenfield or brownfield out of our discussion. In the absence of one, I would hope that our 2015 expenditures would be less than 2014's, but to be sure they'll still be significant. We did have one more maintenance turnaround this year than we would incur in a typical year. That should not be present next year. That should be helpful. And we are beginning to undertake a lot of projects this year, which we talked about. So if things push out of this year into next, then this year we'll spend less, some of which we've already noted. But in the absence of anything of that nature, I would expect next year to be a little bit less, pending our potential investment into new plant.

And then the last question is, the progress you made on food and beverages, it's really encouraging. And I know in the past you've struggled with the sweetener market. Is there some other dynamic that's at play maybe new markets, product positioning that's helping you do better than the market or you're growing with the market and maybe provide some color, if you would please?

One of the large that we did at the initial field and it was attributed to our Europe segment and had to be in Africa for our new plant. So we are seeing activity in the industry. The increase in food was highly attributable to sweeteners, and we're pleased to see that increase in activity occur.

And one of the things, David, we did last year is we created business units. And the business units were focused around the key market areas, making sure it has the right resources, the right focus. And quite honestly, I'm very pleased with how that developed. And as you may recall, we have industrial and food business unit, which is a lot of our traditional business. The other area that I am hoping we continue to pursue is the globalization of our business. And when you look at countries like Brazil and India, they provide, I believe great opportunities going forward for product like ours to get into these emerging markets, where they want clean sugar, white sugar, clean beverages. So that's exciting.

Are there any other market opportunities for you outside of the sweetener market as it relates in beverage?

It's not really directly related. We talked a little bit about this on our Investor Day, but in the bio space where people are using biomass to produce things, whether be ethanol or biochemicals, we are seeing an uptick, where during the processing of their chemicals they need to do a purification stage, and activated carbon indeed works. So that gives us some optimism. A totally new market that's developing very rapidly that there might be something for us going forward.

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

So just one question, as always a very colorful presentation. You mentioned that the U.S. coastguard pushed out, I guess, the deadline for 1,000 units. Randy can you give us an idea of whether that's one-time in nature or is there a possibility that could expand broader into the available fleet for your product?

Well, just a point of clarification, it's actually 100 units, have been granted extensions. And, no, so we don't believe that that's going to be an ongoing issue. We believe that the Coast Guard -- we know the Coast Guard is working very diligently, because we're part of the discussion in terms of coming up with the testing protocol to be able to test these systems. So we believe it's a temporary extension and we don't expect them going forward.

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

I was wondering if you could give us an update on the impact of other regulations that are out, with the court's weighing in on the Cross-State or some others that may have an impact on activated carbon demand over the next few years.

We're actually watching that very closely, because it's an evolving issue. For those that don't know, this is the Cross-State Air Pollution Rule, and it was recently upheld by the U.S. Supreme Court. What's it's going to say is that 28 states are going to have to control emissions like SOx/NOx. Let me say, you're early into this discussion. We look at this from a positive perspective in two ways. First off that the Supreme Court did uphold this decision. So for any challenges against MATS, we think we have a good idea where the Supreme Court will line up. And the second thing is that, we see activated carbon also as a solution, our pallets for instance for de-SOX and de-NOx, they could help address some of those rules, if and when they were ever to come into fruition. So we believe it's way too early. We believe a lot of things are going to happen before that, but as always we're going to keep our ear to the ground in Washington, with EPA, and see if we can as always be part of the solution.

As we look at your reactivation, your push towards reactivation, it sounds like you're having greater success than you've had historically. Is there anything that's changed, any approach that you've had or a change in the marketplace that created this?

Well, I think it's been a big push from our sales and marketing folks. As we've announced before, we hired a new team in China, that was a problem child for us, and we see as we reported today some success in their efforts in improving our reactivation business there. As we talked about we've added some plants strategically. And we're now seeing the benefit of having those plants near the customer and we're getting business there. But it's just been now the push with our sales folks to say, this is a great value proposition for Calgon Carbon, let's push it to as far as we can.

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

Thanks. As I said in the opening remarks, I am really satisfied with the progress we made this quarter, and we're really focused on these long-term objectives. We're really excited about the second quarter and we will continue to demonstrate the success for our initiatives. And we hope that the metrics and we believe the metrics that we'll show for the second quarter will be evident of our progress. So I look forward to sharing those results with you at the second quarter. And we thank you very much for being with us today.

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