Calgon Carbon Corporation

/ Equity Research / CCC | Page 1

Calgon Carbon Corporation

/ (CCC-NYSE)
We are upgrading our recommendation on Calgon Carbon to Neutral on its upbeat guidance. Both revenues and earnings for the first quarter matchedZacks Consensus Estimates. Revenues fell modestlyas declines across activated carbon and equipment businesses masked an increase in the consumer unit. The company seesa strong second quarter on strength in the global drinking water market. Calgon Carbon should gain from contract winsand capacity expansion initiatives. Moreover, its aggressive cost reduction measures shouldcontribute to margin expansion in the second quarter. However, the company is exposed to currency headwinds and weakness in its equipment business. Moreover, demand foractivated carbon remains weak in specific markets.
/ Equity Research / CCC | Page 1
Current Recommendation / NEUTRAL
Prior Recommendation / Underperform
Date of Last Change / 06/05/2014
Current Price (06/04/14) / $21.82
Target Price / $23.00

SUMMARY

/ Equity Research / CCC | Page 1

SUMMARY DATA

52-Week High / $21.97
52-Week Low / $16.28
One-Year Return (%) / 19.30
Beta / 0.83
Average Daily Volume (sh) / 306,310
Shares Outstanding (mil) / 55
Market Capitalization ($mil) / $1,200
Short Interest Ratio (days) / 4.19
Institutional Ownership (%) / 83
Insider Ownership (%) / 2
Annual Cash Dividend / $0.00
Dividend Yield (%) / 0.00
5-Yr. Historical Growth Rates
Sales (%) / 7.9
Earnings Per Share (%) / 2.4
Dividend (%) / N/A
P/E using TTM EPS / 26.0
P/E using 2014 Estimate / 22.3
P/E using 2015 Estimate / 18.8
Zacks Rank*: Short Term
1–3 months outlook / 3 - Hold
* Definition / Disclosure on last page
Risk Level * / Below Avg.,
Type of Stock / Mid-Blend
Industry / Pollution Cntrl
Zacks Industry Rank * / 203 out of 267

OVERVIEW

Calgon Carbon Corporation (CCC) is a Pittsburgh, Pennsylvania-based pollution control company that manufactures products and provides services to decontaminate and deodorize liquids and gases. It is a global leader in the manufacture, reactivation, and application of activated carbon, ballast water treatment (“BWT”), ultraviolet (“UV”) light disinfection, and advanced ion-exchange technologies The company has three operating segments based on product line and associated services − Activated Carbon and Service, Equipment and Consumer.

Activated Carbon and Service segment

The sale of activated carbon is the principle component of the Activated Carbon and Service business segment. The company is the world’s largest manufacturer of granular activated carbon products and sells more than 100 types of granular, powdered, and pelletized activated carbons made from coal, wood or coconut. This segment manufactures granular, powered and extruded carbon. These chemicals remove and absorb organic compounds from liquids and gases. Granular activated carbon (GAC) is especially useful in water purification. The company produces and sells a broad range of activated, impregnated, or acid-washed carbons in pellet form. GAC particles are irregular in shape and are generally used in fixed filter beds for continuous flow purification processes in carbon that has been pulverized into fine particles. It is used in batch purification processes, in municipal water applications and for gas emission control.

Pelletized activated carbon is typically used for gas phase applications. Another important component of this segment is the various services associated with the supply of products and systems for purification, separation, concentration, taste and odor control. These services include carbon reactivation, handling and transportation as well as the supply of equipment through leasing arrangements. The company supplies complete process and treatment services at customers’ facilities, which are particularly suited for treating fluids or gases containing either − or both − non-hazardous and hazardous organic compounds. The service is based primarily on the reactivation of spent carbon and its transportation to and from the reactivation facility. It also includes feasibility testing, process designing, on-site equipment, initial activated carbon supply, performance monitoring and major maintenance of company-owned equipment.

Equipment segment

The Equipment segment provides solutions to air and water purification problems through the design, fabrication and operation of systems that utilize a combination of the company’s enabling technologies: carbon adsorption as well as UV and advanced ion exchange separation among others. The company participates in five primary areas: Potable Water, Industrial Process, Food, Environmental Water, Environmental Air and Specialty Markets. Potable Water applications include municipal drinking water purification as well as point of entry and point of use devices. Applications in the Industrial Process markets include catalysis, product recovery and purification of chemicals and pharmaceuticals as well as process water treatment. Food applications include brewing, bottling and sweetener purification. Remediation of water and volatile organic compound removal from vapor are the major sub-segments for the two Environmental markets. Medical, personal protection, cigarette, automotive, consumer and precious metals applications comprise the Specialty markets.

Consumer segment

This segment brings consumer purification technologies in the form of products and services including carbon cloth. Carbon cloth, which is activated carbon in cloth form, is manufactured in the United Kingdom and sold to the medical, military, and specialty markets. Zorflex Activated Carbon Cloth can be used in numerous additional applications, including sensor protection, filters for ostomy bags, wound dressings, conservation of artifacts, and respiratory masks.

The Activated Carbon and Service segment accounted for roughly 88% of the company sales in 2013 with Equipment and Consumer segments representing 10% and 2%, respectively.

REASONS TO BUY

Calgon Carbonbelieves that mercury removal could become the largest U.S. market for activated carbon and has made great strides in establishing itself as a market leader. The company strengthened its competitive position by developing a line of advanced FLUEPAC brominated powdered activated carbon products that can reduce carbon consumption by 50% to 70% below that of standard products, while exceeding mercury removal requirements.Calgon Carbon has entered into a 2-year contract with a leading U.S. power generator to supply FLUEPAC for removing mercury from the fluegas of coal-fired power plants in the Midwest. The value of the contract is estimated between $16 million and $22 million. Moreover, Calgon Carbon has won a contract to supply second-generation advanced FLUEPAC powdered activated carbon to a large Canadian electricity generator. The contract is valued between $25 million and $30 million. The U.S. Environmental Protection Agency’s(EPA) Mercury and Air Toxics Standards (MATS) regulation will generate demand for 20 million to 30 million pounds of reactivated carbon annually. The implementation of this regulation should boost demand for Calgon Carbon’s FLUEPAC carbon reactivated products for mercury removal.

The company’s ballast water treatment business is rapidly evolving into one of the most exciting longer-term market opportunities. Through its Hyde Marine acquisition in Ohio, Calgon Carbonhas ventured into the global market for ballast water treatment using UV technology.Hyde Marine's Hyde Guardian system (Guardian), which employs filtration and ultraviolet light technology to filter and disinfect ballast water, offers cost, safety, and technological advantages. This strategic acquisition has provided the company immediate entry into a global, legislative-driven market with major long-term growth potential.Calgon Carbon, in late 2012, won a contract worth $12.4 million from the Los Angeles Department of Water and Power (LADWP), the second-largest water provider in the U.S. The company will supply Sentinel ultraviolet disinfection systems for the Los Angeles Aqueduct Filtration Plant (LAAFP) and the Los Angeles Reservoir (LAR).The project represents Calgon Carbon’s second big contract in California. Moreover, Hyde Marine hasentered into a partnership deal with UK’s largest shipyard Cammell Laird to install chemical free Hyde Guardian (HG) Ballast Water Treatment (BWTS) System for a broad spectrum of vessel types.Hyde Marine has already sold 300 Hyde Guardiansystems.

Calgon Carbon’s reactivation facilities have remarkably helped in its growth and have established its presence in different markets.Calgon Carbon’s reactivation capacity increased from roughly 160 million to more than 200 million pounds annually with the addition of reactivation facility in Feluy, Belgium, and greenfield construction of a $15-million reactivation service center in Suzhou, China, in 2011. The global demand for reactivation services is expected to climb, as regulations for water quality strengthen around the world. In February 2012, Calgon Carbon was selected by the City Council of Phoenix, Arizona to provide reactivation services for a ten-year period, and also to construct a reactivation facility in Maricopa County, Arizona. Moreover, the company sealed the second ten-year reactivation services contract in Arizona in July 2012 when it landed an agreement with the city of Scottsdaleto offer its reactivation services for GAC used as drinking water treatment.The value of the contract is expected to be around 6 million pounds. The company has also inaugurated the new carbon custom reactivation facility in Gila Bend, Arizona. Calgon Carbon is expanding capacity at its Pearl River plant. The move is expected to boost annual granular carbon production capacity by roughly 8 million pounds. It also plans to spend as much as $70 million over the next two years to expand capacity at its Big Sandy plant. Calgon Carbon has also sealed contracts to supply activated carbon for a water provider in the UK, a portable water treatment in Singapore and to BlueScope Steel in Australia. The company, in August 2013, won a 10-year contract from UK-based leading drinking water and wastewater services provider Thames Water to reactivate spent activated carbon used to treat drinking water.The contract value will depend on the amount of carbon reactivated on an annual basis, which is expected to be around 11 million lbs (5,000 million tons).Calgon Carbon has alsoclinched the third ten-year reactivation services contract in Arizona. The company has signed the third contract with the City of Glendale, under which, it will provide reactivation services to the latter for activated carbon used to treat the city’s drinking water.The value of the contract will depend on the amount of spent activated carbon that is reactivated annually, which is expected to be roughly 1.25 million pounds. The company, in Feb 2014, was awarded with a contract to supply 5.6 million pounds of GAC to a plant in South Korea for drinking water treatment.

Calgon Carbon has embarked on aggressive cost reduction initiatives to boost margins. The company’s cost improvement program, which includes consolidation of operations and headcount reductions, is expected to offer savings in raw material costs, warehousing, transportation and personnel expenses, among others. The company expects $20 million in savings from Phase 1 and 2 of this program this year. Moreover, it expects to realize benefits from Phase 3 in 2014, which should generate savings of at least $5 million during the balance of the year. The company’s price increase actions should also drive sales and profitability.

REASONS TO SELL

The Equipment segment generally has a long project life cycle from bid solicitation to project completion, and often requires customers to make large capital commitments well in advance of project execution. In addition, this business is usually affected by the general health of the overall economy. As a result, sales and earnings from the Equipment segment could be volatile. Costs associated with ongoing investments in the ballast water treatment systems is hurting profitability in the company’s equipment business. The company is also seeing lower revenues for ballast water treatment systems.

The persistently challenging economic scenario in Europe continues to impact Calgon Carbon. Moreover, unfavorable currency exchange movements (stemming from a weaker yen) may continue to weigh on its revenues.Calgon Carbonis also seeing weak demand for activated carbon in specific markets including mercury removal. Sluggish bidding activities are also keeping prices for powdered activated carbon for mercury removal low in the U.S.

The company uses bituminous coal as the main raw material in the activated carbon production process. It has various annual and multi-year contracts in place for the supply of coal that expire at various intervals from 2012 to 2015. Interruptions in coal supply caused by mine accidents, labor disputes, transportation delays, breach of supplier contractual obligations, floods or other events for periods longer than normal could have an adverse effect on its ability to meet customer demand. Coal is currently in high demand. CalgonCarbon’s inability to obtain high-quality coal at competitive prices in a timely manner due to changing market conditions with limited high-quality suppliers could also have an adverse affect on its financial results. In addition, increases in the prices for coal under its supply contracts could impact the financial results by significantly raising production costs.

The Activated Carbon business faces significant competition from Norit N.V. (the Netherlands, Europe), Westvaco Corporation (Virginia, U.S.) and Siemens Water (Pennsylvania, U.S.), along with the European and Chinese producers and East Asian producers of coconut-based activated carbon. UV technology products face significant competition from Trojan Technologies Inc. (Ontario, Canada), jointly owned by Danaher Corporation (Washington, U.S.) and Wedeco Ideal Horizons (Charlotte, North Carolina) – owned by ITT Industries (New York, U.S.). In each case, competitors include major manufacturers and other diversified companies, a number of which are more resourceful and can adapt better to developing more advanced or cost-effective technologies, increase market share or leverage distribution networks. Calgon Carboncould experience reduced net sales as a result of having fewer resources than these competitors.