March 04, 2015 Calgon Carbon Corporation Current Recommendation Prior Recommendation Underperform Date of Last Change 06/05/2014 Current Price (03/03/15) $20.64 Target Price $22.00 NEUTRAL (CCC-NYSE) SUMMARY We are retaining our Neutral recommendation on Calgon Carbon. Its revenues rose in the fourth quarter of 2014 as higher sales in the activated carbon business was offset by declines in other areas. Earnings for the quarter matched the Zacks Consensus Estimate while sales beat. Calgon Carbon should gain from contract wins and capacity expansion initiatives. Moreover, its aggressive cost reduction measures should contribute to margin expansion in 2015. Calgon Carbon is also well placed to gain mercury removal market share. However, the company is exposed to weakness in its equipment business. Moreover, demand for activated carbon remains weak in specific markets. SUMMARY DATA 52-Week High $22.93 52-Week Low $18.80 One-Year Return (%) 3.61 Beta 1.07 Average Daily Volume (sh) 289,965 Shares Outstanding (mil) 54 Market Capitalization ($mil) $1,115 Short Interest Ratio (days) 3.02 Institutional Ownership (%) 82 Insider Ownership (%) 2 Annual Cash Dividend $0.00 Dividend Yield (%) 0.00 5-Yr. Historical Growth Rates Sales (%) 4.6 Earnings Per Share (%) 3.1 Dividend (%) N/A using TTM EPS 22.4 using 2015 Estimate 20.0 using 2016 Estimate 16.8 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page Risk Level * Average, Type of Stock Mid-Blend Industry Pollution Cntrl Zacks Industry Rank * 156 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 135 A 140 A 139 A 133 A 548 A 2014 132 A 145 A 138 A 141 A 555 A 2015 136 E 150 E 149 E 153 E 588 E 2016 665 E *Note: Quarterly revenues may not add up to the annual figure due to rounding-off. Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.18 A $0.24 A $0.22 A $0.20 A $0.84 A 2014 $0.18 A $0.28 A $0.23 A $0.23 A $0.92 A 2015 $0.21 E $0.28 E $0.26 E $0.28 E $1.03 E 2016 $1.23 E Projected EPS Growth - Next 5 Years % N/A 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
OVERVIEW Calgon Carbon Corporation (CCC) is a 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, ultraviolet 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. 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. 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 UK and sold to the medical, military, and specialty markets. The Activated Carbon and Service segment accounted for roughly 90% of the company sales in 2014 with Equipment and Consumer segments representing 8% and 2%, respectively. REASONS TO BUY Calgon Carbon believes 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 is seeing healthy demand for its products from utility customers and expects to capture roughly 30% share of the North American mercury removal market. 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 (expected in 2015) should boost Equity Research CCC Page 2
demand for Calgon Carbon s FLUEPAC carbon reactivated products for mercury removal. The company is also looking to boost its foothold in Latin America, especially Brazil. The market for activated carbon products in Brazil is currently around 75 million pounds (mostly powered products), providing ample opportunity for Calgon Carbon. 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 Carbon has 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 longterm 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 has entered into a partnership deal with UK s largest shipyard Cammell Laird to install chemical free Hyde Guardian (HG) Ballast Water Treatment System (BWTS) for a broad spectrum of vessel types. The company has also been chosen by Edison Chouest Offshore ( ECO ) for supplying its BWTS to ECO s extensive fleet of ships. This deal is expected to generate roughly $35 million of revenues over seven years. Hyde Marine has already sold 400 Hyde Guardian systems. Overall, the company sold a record 1,113 BWTS in 2014, demonstrating strong demand for the product. 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 Scottsdale to 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 and Big Sandy plants. The move is expected to boost granular carbon production capacity by roughly 6 million pounds in 2015. These projects coupled with other projects that are currently underway are expected to help the company achieve total annual production capacity for granular activated carbon of 172 million pounds in 2017. 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 also clinched 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. Equity Research CCC Page 3
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. Calgon Carbon has successfully completed its $40 million cost improvement program and is launching new actions to realize cost saving of $10 million starting 2016 with full benefit expected in 2017. 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 persistently challenging economic scenario in Europe continues to impact Calgon Carbon. Calgon Carbon is also seeing weak demand for activated carbon in specific markets including specialty carbon. 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. Calgon Carbon 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 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 Carbon could experience reduced net sales as a result of having fewer resources than these competitors. Equity Research CCC Page 4
RECENT NEWS Calgon Carbon's Q4 Earnings In Line, Revenues Beat February 19, 2015 Calgon Carbon reported fourth-quarter 2014 earnings of $0.23 per share compared with $0.20 per share in the year-ago quarter. The quarterly results were in line with the Zacks Consensus Estimate. The company posted net income of $12.1 million in the fourth quarter, up 9.9% from $11 million recorded in the prior-year quarter. Revenues increased roughly 5.7% year over year to $140.6 million in the reported quarter from $133.1 million recorded in the year-ago quarter. Revenues beat the Zacks Consensus Estimate of $140 million by a small margin. Currency translation had a negative impact of $5 million on sales, stemming from a stronger U.S. dollar against the euro and yen. 2014 Results For full-year 2014, earnings were $0.92 compared with $0.84 in 2013. The results were also in line with the Zacks Consensus Estimate. For full-year 2014, revenues were $555.1 million, a 1.3% increase year over year. However, revenues fell short of the Zacks Consensus Estimate of $605 million. Foreign currency translation had a $3.2 million negative impact on sales due to a stronger U.S. dollar against the yen. Margins and Expenses Gross margin was 35.9% in the fourth quarter, an increase from 34.3% a year ago. Selling, administrative and research (SG&A) expenses rose 4.9% year over year to $23.3 million. The company attributed the increase to higher employee-related expenses. Segment Performance Revenues from the company s core Activated Carbon and Service segment increased 8.4% year over year to $126.2 million in the quarter. The rise was driven by higher demand for GAC for use in safe drinking water in Asia and the Americas, industrial processes in all geographic areas and mercury removal from the air in the Americas. The Equipment division s revenues fell 8.2% year over year to $12.2 million owing to lower revenues from carbon adsorption equipment, partly offset by higher sales of ballast water treatment systems. Sales from the Consumer segment slumped 34.4% year over year to $2.3 million in the quarter owing to lower demand for activated carbon cloth. Financial Position Calgon Carbon had cash and cash equivalents of $53.1 million as of Dec 31, 2014, up 61.3% year over year. Long-term debt jumped more than two-fold to $70.4 million as of Dec 31, 2014, from $32.1 million as of Dec 31, 2013. Equity Research CCC Page 5
Dividends & Share Repurchases Calgon Carbon s board announced a quarterly cash dividend of $0.05 per share for its shareholders of record as on Mar 5, 2015, payable on Mar 15, 2015. Calgon Carbon repurchased 445,700 shares at an average price of $20.69 in the fourth quarter. Outlook Calgon Carbon expects its involvement in the mercury removal market to be effective for growth in the future. The company is also favorably positioned to capture at least 30% of the mercury removal market. Calgon Carbon remains focused on returning higher values to shareholders through share buybacks and dividends while making strategic investments to incite growth. Calgon Carbon's Q3 Earnings and Revenues Miss Estimates - November 5, 2014 Calgon Carbon reported profits of $12.2 million or $0.23 per share in the third quarter of 2014, up 2.5% year over year. Earnings per share, however, missed the Zacks Consensus Estimate of $0.25. Income from operations was $18.9 million in the third quarter, an increase of 5.6% year over year. This company posted revenues of $137.7 million in the third quarter, down 1.2% year over year. Lower sales in the Equipment division were partly offset by a slight increase in the Activated Carbon and Service division. Currency translation affected sales positively by $0.6 million, led by the stronger British pound sterling. Sales also missed the Zacks Consensus Estimate of $141 million. Gross margin (before depreciation and amortization) increased to 34.6% in the reported quarter from 33.3% in the prior-year quarter. The company s global cost-saving measures and increased pricing for some activated carbon products and services led to the rise in gross margins. Segment Performance Revenues from the company s core Activated Carbon and Service segment increased 1.1% year over year to $124.4 million in the quarter due to higher demand for activated carbon products across the environmental water and industrial process markets. The Equipment division s revenues fell 19.5% year over year to $10.8 million on lower sales of carbon adsorption equipment and conventional UV systems, partly offset by higher sales of ballast water treatment systems. Sales from the Consumer segment slumped 13.8% year over year to $2.5 million in the quarter. Financial Position Calgon Carbon ended the quarter with cash and cash equivalents of roughly $42 million, a 40% yearover-year rise. Long-term debt was $53.1 million, up roughly 9.9% year over year. Outlook Calgon Carbon expects earnings to be driven by its aggressive current and future cost-reduction programs. Moreover, it expects top-line growth from increased volumes based on new contracts and agreements for supplies of activated carbon. Moreover, the company hopes to secure contracts for its advanced mercury removal products from electric utilities in the fourth quarter. Equity Research CCC Page 6
VALUATION Calgon Carbon s current trailing 12-month earnings multiple is 22.4x, compared with the 17.2x average for the peer group. Currently, the company s shares are trading at 20x our 2015 EPS estimate of $1.03. Calgon Carbon is seeing weakness in its equipment business and sluggishness across some of its major markets. However, it should benefit from its cost reduction program and corporate initiatives. Our longterm Neutral recommendation on the stock indicates that it should perform in line with the market. Our $22 price target is based on 21.4x our 2015 earnings estimate. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Calgon Carbon Corporation (CCC) 20.0 16.8 N/A 13.9 22.4 29.4 14.9 Industry Average 88.9 24.5 15.8 20.3 17.2 162.4 11.7 S&P 500 16.8 15.7 10.7 14.9 18.5 18.4 12.0 Progressive Waste Solutions Ltd. (BIN) 21.8 18.7 10.0 10.6 21.4 31.9 16.6 Tetra Tech Inc. (TTEK) 15.8 14.1 11.5 10.1 15.5 41.0 13.2 Metalico Inc. (MEA) 10.0 2.3 132.0 7.5 Casella Waste Systems Inc. (CWST) 3.5 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Calgon Carbon Corporation (CCC) 2.7 3.1 1.8 12.0 0.2 0.0 10.9 Industry Average 3.5 3.5 3.5-39.7-1.8 0.6 5.0 S&P 500 6.2 9.8 3.2 25.4 2.0 Equity Research CCC Page 7
Earnings Surprise and Estimate Revision History Equity Research CCC Page 8
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of CCC. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1126 companies covered: Outperform - 15.5%, Neutral - 75.6%, Underperform 8.2%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research CCC Page 9