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AMCOL International Corp. (NYSE:ACO)

Q3 2008 Earnings Call

October 17, 2008 11:00 am ET

Executives

Lawrence Washow - Chief Executive Officer, President, Chief Operating Officer

Donald Pearson - Chief Financial Officer and Vice President

Analysts

Al Kaschalk - Wedbush Morgan

Rich Wesolowski - Sidoti & Co.

Jay Harris - Goldsmith & Harris

Todd Vencil - Davenport

Andrew Nelson - Nelson Associates

Operator

Good day and welcome to the AMCOL International third quarter 2008 earnings results conference call. (Operator Instructions)

Speakers today will be Larry Washow, President and Chief Executive Officer and Don Pearson, Vice President and Chief Financial Officer. At this time I would like to turn the call over to Larry Washow.

Larry Washow

Lots of information presented in the press release. So I will hit a couple of the highlights on the business side and Don will come back around with some of the key points on financials and we’ll open it up for questions.

As you’ve seen the numbers by now, a very good revenue growth, about 24% quarter-over-quarter, which we are enthused about. Certainly that’s were all the potential success starts, so continued revenue growth is a very positive impact and I think the key for us is to deliver the margins that that revenue should provide and we did see a little bit of the benefit of that, but certainly not what we expect to see in the quarters ahead.

To the factors on the bottom line earnings in the quarter, one of them that we mentioned, the benefit we had last year of the sale of some land at one of our operations was $0.06 a share and the negative this quarter was the impact of the hurricanes on the weather on our oilfield service business.

Let’s talk about Oilfield a little bit. Certainly in Q2 of this year that was a very strong performer, excellent margins and nice growth. We’re looking at Q3 and service off some growth year-over-year, but if you look at the sequential quarters, pretty modest growth especially in light of the fact that we did an acquisition mid quarter, last quarter and we would expect to see a greater benefit from that, but the hurricanes really took much of the Gulf of Mexico out of operations for several weeks in September, actually towards the end of August and on in to September and most of the real profitable business is in the offshore area in the Gulf itself.

We certainly kept busy on land with some work and that’s good. The international side was okay, but obviously no where near enough volume to offset the loss of the activity in the Gulf itself. So it’s difficult to say exactly the impact of that. We estimate about $0.03 a share, probably that’s conservative. It could be a bit more than that, but certainly that had an impact and even today the Gulf is not fully back on track; it’s slowly coming back.

One of the benefits that we actually do see from the business side as the Gulf comes back into operation is there’s lot’s of work on the pipelines to make sure they are sealed, cleaned that if they’ve been broken, repaired and a lot of that ends up being good business for us. So looking ahead, there is a benefit with the hurricanes and looking back certainly it was a negative impact for us last quarter.

Minerals segment, again pretty nicely growth there. We are looking at a good sales growth and continued, slow, steady margin improvement and we’ve talked about that the last few quarters and we gained another 60 basis point improvements in the sequential quarters on the gross margins and a long way to go for sure, but we’re certainly starting to see some of the benefit of the pricing come through and obviously everybody’s watching the oil and the energy prices comedown. That should certainly be a benefit for us, showing up even greater in Q4 as well. So that front will definitely continue.

Second, environmental sales growth 13%, a bit lower rate of growth in Q3 than the rest of the year and kind of a function of the basic product portfolio in the mix around the world normalizing the operating profit that is taking out the benefit of last year, good growth in operating profits this year as well. We did see a slight drop in the gross margin again as we’ve talked in the past, mostly related to the installation business, which is not quite as profitable as our products themselves.

So with that it’s a kind of business overview, I will let Don hit some of the key points in financials.

Donald Pearson

One point I want to make on our minerals group as Larry mentioned regarding the energy costs, Q3 still had the burden of higher energy cost particularly on the diesel side. So going forward, we are putting a program in place to address energy costs including diesel, natural gas and electricity. The hedging programs and some forward purchases, but the intent is to get a better handle on and control these costs and avoid these surprises.

Moving on the GS&A as Larry mentioned, we had a $2.4 million gain of our land last year. If you exclude that, GS&A increased 18% which given our growth in revenues is not bad. What I do want to point out is the rate of increase is declined when compared with the prior quarter. Last year GS&A as a percentage of sales was 15% compared to 14.3% this year.

Also to point out in the past quarters we talked about increases in our benefit costs in our corporate segment. We put measures in place to contain the growth in these costs in our benefit plan, so in 2009 we expect to see lower growth in these areas, while we expect to keep our benefits competitive with the marketplace.

Moving to other net expenses; again the majority of the expense within this line items is the foreign currency impact. In Q3 we experienced a sharp increase in the value of the dollar against our other foreign currencies, but that had a negative impact on us, so again a majority of that $1.8 million in this quarter coupled with $1.6 million is all foreign currency, which is probably about a 4% impact.

Similar to the energy costs, we’re putting currency risk management programs in place and I expect that by 2009 where we should have the majority of our foreign currency exposures, probably some type of derivatives or hedge in place.

Moving to income taxes, there is really one key point I want to point out. The effective tax rate in the prior year quarter Q3 was low at 25% when you exclude the benefit of the contingency reserve. We had higher than anticipated profits in Q4 of last year, where meaning we had to take a high effective tax rate in Q4 last year of 34%. So, what’s important to note is in Q3 when you compare it year-to-year, that actually works against us, so looking forward to this year if we have an effective tax rate in the range that we’re expecting, a little above 27%, that should work out as a favorable comparison in to Q4.

Moving to the balance sheet and cash flow; first, I want to talk briefly about cash or cash balance of about $34 million, is higher than we typically run, which is around $25 million. That’s really a function of some timing of certain vendor payments that we have beginning in the quarter and it is just more efficient to have the cash here and pay it rather than get into borrowings which we do in franchise, but we generally shoot for a cash balance of about $25 million.

Our debt balance was about $288 million at the end of the quarter. I want to point out that $20 million of that is debt for our new corporate headquarters. We’re moving in November and we are moving to this building which is treated as sales leaseback. So, we will effectively remove the asset and the debt from our books. Our point of availability on our line of credit right now is about $57 million, so when we take that and our cash balance we have liquidity of about $90 million right now.

Looking at the cash flow statement, the largest use of cash in the nine month period was due to working capital increases of about $86 million. So, this is certainly reflective of our sales growth into somewhat an extensive seasonality where we typically build working capital to the highest level in Q3 and we’ll generally see a reduction in Q4.

Although, our working capital is generally inline with prior years, this is an area we would like to see some improvements, so we are monitoring our receivable and our inventories and look to put programs in place to contain and ideally improve working capital levels here.

Looking at capital expanding for the nine months, at about $30 million, that’s a bit lower than the $36 million for the nine months in ’07. That’s primarily due to lower spending of maintenance items in 2008 and 2007 had some higher spending, particularly on the completion of a plant in China.

I just want to briefly acknowledge the financial crisis right now and note that AMCOL has a new credit facility that we put in place back in Q2 of $225 million and it goes I believe to 2013. Relative to market pricing right now, our terms are very favorable.

So, we are pretty comfortable in saying we’ve got adequate financing in place to fund operations over the foreseeable future. With that said we are continually looking at our capital structure trying to optimize that to make sure we’ve got capital in place to finance our growth.

One last point I’ll make is, our 2009 earnings calendar, we are going to adjust the date of earnings releases from the third Friday of the month following a quarter to the fourth Friday of the month, following the quarter and we’ll certainly send out invitations with the dates as with our current prices.

So with that I’ll turn it back to you Larry.

Larry Washow

We will open up to questions now.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Al Kaschalk - Wedbush Morgan.

Al Kaschalk - Wedbush Morgan

Larry, I wanted to start on sort of the more macro side here on the volume of activity, what change you may have seen relative to your customer base across each of the segments as you’ve looked out over the next 12-months to 18-months and specifically if you can comment on whether you’re seeing any slowdown in that activity or maybe just some hesitations as we look out?

Larry Washow

Sure, I think the areas that are a bit concerning, Al I won’t surprise you at all, the metal casting certainly is a big business for us. A fair portion of metal casting products end up in automotive applications and there is no question that the automotive market is down and we’re seeing that particularly in the U.S., but even in some of the international operations there is a bit of slowdown. So metal casting, it’s not a new trend, it’s been ongoing all year and we expect that to continue to be soft; I think certainly for the foreseeable future well under 2009.

The offset to that, some of heavy equipment guys here in moving and farm equipment have been fairly strong and that continues to be the case as well. Now with the overall commodity slowdown whether some of the major corporations without moving equipment are ultimately impacted, but that time will tell, but so far that business has been pretty steady.

Looking at environmental, the process we see there is primarily in the building materials area, where commercial buildings again certainly we’re benefiting now from projects that were started a years or two year ago that are going on, but the rate of that activity going forward certainly looks like its slowing down at least in the U.S. and some of the Western European economy.

We don’t see similar slowdowns in China, we don’t see similar slowdowns in Eastern Europe. So, there certainly will be somewhat of an offset, but in terms of the kind of Western economic growth areas, that would be one that will be a concern. Some of the offset, there are two government buildings, infrastructure projects; all of those also use our environmental materials, so we do expect a bit of an offset there to migrate some of that softness, but your question on the amount of softness there.

Oilfield services address the nature of what we do. We look for that to continue to grow. There is obviously threshold pricing, if natural gas gets super cheep that reduces the land activity. If oil pricing got down to incredibly low levels that might have an impact, but most of these projects tend to be much longer-term, big projects in the oil pads, so the oil drilling activity especially the offshore activity tends to go on as they look at multi-year horizons, but the onshore activity in the natural gas that could be impacted.

I guess overall if I at looking everything we are sort of cautiously optimistic. We’re in a broad range of markets and a broad range of geographies. There certainly is a general softness economically that is well publicized around the world. In our markets I think we’re fairly comfortable that we’re positioned about as good as anybody can be to continue to grow in spite of those areas that will be slow.

Al Kaschalk - Wedbush Morgan

Will it be fair to say that building materials is the one we see as a outgrowth slowing the fastest or would that lining or which one is...?

Larry Washow

Probably the later growth in building materials has slowed some, its not unlike lining, in fact I think they are both fairly similar and part of the benefit we have there is in our building materials group. We’ve actually broadened our product portfolio pretty substantially over the last couple of years. So, we are bringing more things to the market and even on the same projects we’ll end up having more dollar coming our way just because of the nature the range of products we have now versus years ago. So, we have ongoing activities obviously that help offset some of the decline that would actually occur.

Al Kaschalk - Wedbush Morgan

Have you seen any of these churn negative in terms of volume, if currency was flat and pricing was flat or no change?

Larry Washow

General businesses, it’s kind of steady as it goes, but we’re not seeing a massive new condominium projects in Florida and things like that, certainly it’s stopped, but the ongoing, there is still work going on architecture, they are looking at China, they are looking at India, Eastern Europe has got a tremendous amount of activity, Poland is doing very well, Ireland is extremely slow, Spain is very slow, the U.K. even slightly slowing down as such, so it’s kind of an offset.

It’s truly hard to say that it’s going to continue a decline. We think certainly a softening at the rate of growth is probably a realistic way to describe it, but it’s very depended obviously on the whole broader economic cycle and the credit really drives so much of the business that when we are in terms of construction, that will ultimately be a far greatest determined as I think of how fast or slow the business grows.

Al Kaschalk - Wedbush Morgan

So let me turn just real quick to automotive, metal testing in particular. With the industry consolidation of the big three and then some of the Asian players, how would that impact your foundry business?

Larry Washow

Most of the major customers we have sell; about in a broad base they sell the major foundries. Some of the automotive guys still do a little bit of their on cash and get over the last several years and most of that has been outsourced to actually more efficient newer foundries and those guys tend to supply a pretty broad range of the automotive company. So I don’t think it would impact our business at all if anything if you end up with stronger automotive companies that have to be held.

Al Kaschalk - Wedbush Morgan

Okay, switching over to the joint-venture line, I was wondering, if you could comment maybe on the broader sense of that growth component of the story, but it seems based on over the last three years here that we’ve sort of had a ceiling or at least a flat line on our run rate per quarter. I know there is a seasonality with Q1 begin a little bit softer than most of the other quarters, but could you comment or update us on business activities there and give me your thoughts on whether that stays at these levels or is there a mixed step up at some point?

Larry Washow

Yes, the biggest component of the joint venture is obviously our Indian joint venture and a large part of the growth over the last couple of years in that joint venture has been of the entry into the box side business. That business has been very strong for our partner entrepreneur.

Several months ago the Indian government basically halted the export of bauxite, with the idea that they wanted to create more value within the country, things that we see in China and South Africa as well. That has certainly impacted us. The expectation is that there will be a resolution for that issue sometime before year-end and they will be able to resume the bauxite shipments, but the softness and the flatness reflects the fact that that business is not there right now. So, if that does come back that certainly will be a positive impact.

The other joint ventures are doing fine, but on a relative basis they are pretty modest, so even though they are improving and they are improving pretty much across the board it just doesn’t move the needle.

Operator

Your next question comes from Rich Wesolowski - Sidoti & Co.

Rich Wesolowski - Sidoti & Co.

Larry, it was great to see the $9 million or whatever it was in that area, pricing gain in the mineral segment, but given that gain, I would have expected to see a higher minerals margin in the quarter where gas prices and the diesel prices came way down. You mentioned it in your prepared remarks that were a little unclear. Did those later items take a little longer to filter through or is there something else that I’m missing?

Larry Washow

No, they really do. That key factor is very promising, should clarify it a bid more. Things for example, we move a lot of material which we have processes that are put upon railroads. The railroads and their fuel surcharges, they run probably a 60 day lag time, so we really in Q3 saw hardly any benefit of the declining cost in terms of the rail rates, but diesel prices they do tend to move a little bit quicker, but a lot of the diesel we use is for mining material, so the cost of that already mined material as an inventory obviously that doesn’t change, the new material coming in will certainly help that.

So I think, what you’ll see is, in Q4 a greater impact of the energy components that are coming down than we saw in Q3 was really with sort mid Q3 kind of towards that end that some of that started to come through. So, we didn’t really get a big benefit on the cost side. So, the benefit we did too was more on the pricing and again I think that’s going to continue to improve as well, but we should see a bigger step forward in Q4.

Rich Wesolowski - Sidoti & Co.

So, even if it was apples-to-apples pricing in December versus September, you would see a kick to the margin from the energy and you expect to see a better pricing as well?

Larry Washow

That’s right.

Rich Wesolowski - Sidoti & Co.

Okay. Thanks for the pretty detail that look on your end markets. Has that outlook changed any of them specifically within the last month? Because a lot of things that we had spoken about, we’re kind of seeing there played out all year?

Larry Washow

This really hasn’t probably changed that much Rich, I think its probably a bit more consternation on the automotive business only because now with the credit markets as tight as they are and people get money to buy cars, with the economy slowing down, it’s the mindset going to be a better hold off on buying their car.

So, that’s one area that is probably a big more concerning in the U.S. that it has been in the previous quarters and we’re seeing that in the bill numbers really coming down. We figure it wasn’t too many years ago, we had 17 plus million units in the U.S. and the numbers now I think are trending down under $13 million, so that’s a significant drop. If that continues to drop to the kind of rate it has over the last couple quarters that would certainly be a concern.

Rich Wesolowski - Sidoti & Co.

Okay, finally the overhead cost curtailment was a good deal better this quarter than it has been in the recent past; could you go through maybe a little detail, why was that so and whether maybe the economic changes you’re even talking about have prompted you to reconsider what portion of these costs are really necessary as you head into’09?

Larry Washow

We’ve really changed our approach at all. I think we added a lot of overhead costs in anticipation of some of the growth and the program that’s are going forward including IT and things like that as we put in a global ERP system. As those things gradually rollout and get installed around the world and the people that we brought in to support that are here and the business continues to grow and the relative impact then I think starts to show up as we saw it now and that’s where the lower overall, overhead ratio to sales and that should continue.

We are well positioned, the major programs that Don talked about are well under way, so we really expect if anything to see more benefit from them going forward. The costs, they are in there. So, it doesn’t mean the costs are going to go away, but they should be fairly stable.

Operator

Your next question comes from Jay Harris - Goldsmith & Harris.

Jay Harris - Goldsmith & Harris

Don, let’s turn to the balance sheet for a movement. Can you share with us, where you expect the debt levels to be at the end of the year?

Don Pearson

I would expect Jay that they’d probably be lower at or probably down. We’ve the pending South African deal. It will probably run $30 million in net or so and then probably $10 million in CapEx. So, we will probably also have substantial reduction in our receivables, so all things considered that is expected to be lower at or maybe a little bit down.

Jay Harris - Goldsmith & Harris

What is your unused line at this point in time?

Don Pearson

$57 million.

Jay Harris - Goldsmith & Harris

So, I presume the receivables are up because you did a lot of business in September. The working capital, if you take receivables inventories less payables was $285 million, what kind of targets are you establishing to reduce that?

Larry Washow

We typically look at DSO and we look at that at the three segments, so we are looking at putting some targets to increase those by at least several points if not more. Our Oilfield service group for example is much higher than we’d like it to. It’s a function of some turnover down there and some systems and the hurricane and things like that, so we expect substantial improvement in the Oilfield collections for sure.

Mineral is actually running pretty well. Across the global network environmental we’ve got some room to improve, so I’d say minimum five point improvement probably across the board and DSO is probably a starting point.

On the inventory side, I think that’s really a function of our supply chain and how we manage our supply chain. So, we’ve recently hired a supply chain director, while we have a ERP system put in place and we’re building it out and we should have that in place in 2010, but that’s not an excuse to not have good visibility and good metrics on the supply chain.

So, we’re looking on understanding where our inventory is or why it is at the level that it’s at, so we can improve it. So, I’m still studying it a bit, but let’s say by the next quarter or so we should have a better understanding of some targets, but the intention is to have it comedown in relative terms.

Jay Harris - Goldsmith & Harris

Is the South African deal likely to close soon?

Larry Washow

No, we’re really waiting for our final regulatory approvals Jay in South Africa, so nothing happens quite as planned, but we could expect it over the next several weeks to close.

Jay Harris - Goldsmith & Harris

So that this will be done, we’ll see a press release between now in the end of the year.

Larry Washow

Yes, [Inaudible].

Jay Harris - Goldsmith & Harris

In terms of the value-added in that business, is a significant portion of that done outside of South Africa?

Larry Washow

In terms of the current business, the finished products actually it’s all produced in South Africa and it is shipped as a finished products. So that’s one of the things where we are in the process. We met with the regulators in South Africa to make sure that it was a beneficiated product as they call it their evident.

Jay Harris - Goldsmith & Harris

I’ll see that the news papers have been carrying stores about shift in the politics in South Africa to more populous leaders. Do you have any concern about tax increases and other earnings impairment issues that might arise over the next couple of years?

Larry Washow

Yes, in a country like South Africa, it’s always a little bit interesting I guess is the word to see what’s going to happen. I don’t worry as much about earnings impairment as perhaps lack of getting the full potentially earnings that we might if things are handle well.

South Africa really has been dependent in building success on their mineral growth and the people we talk to down there indicate that obviously it’s a very different type leader coming in now, but recognizing that you have to have the economic prosperity to support the groups that are looking to move up.

One of the changes that occurred over the last couple of years even before the government change was they’ve had black empowerment groups as part of every mineral investment for several years, but what they’ve done recently is really now made that a broad-based black empowerment group, so you’re dealing less with a smaller group of fairly well blacks in Johannesburg and having a much broader base where you’re giving down to the tribes.

The benefit of the mineral well is actually getting distributed much more to where it should be and that’s in the local areas, in the local regions. Those types of things, I think will continue and if anything strengthens in the new government, but I still think there is a fundamental benefit that comes out of mineral activity in South Africa. We’ll really give sort of an important, very visible category for them not to go too crazy on.

Jay Harris - Goldsmith & Harris

Coming back to the various businesses, on your minerals product line, what are the end uses for the basic minerals?

Larry Washow

It’s a phase here that we talked about for years now, obviously metal casting, oil drilling.

Jay Harris - Goldsmith & Harris

No, no, you have categories under one of your exhibits were you break the mineral product lines into metal casting, special materials, pet products, minerals and then other product lines and a very substantial portion of your revenue growth over September quarter that came in sub-segment basic minerals?

Larry Washow

Yes, basic minerals include things like oil drilling.

Jay Harris - Goldsmith & Harris

So that’s a lower margin?

Larry Washow

Not really. It just doesn’t fall into the other categories, so just try to give a range of kind of what’s in there.

Jay Harris - Goldsmith & Harris

Is that growth in revenues comparable margin to the total business?

Larry Washow

Yes, or better.

Jay Harris - Goldsmith & Harris

I presume that you’re looking for additional growth in that area, looking out over the next year?

Larry Washow

We are. I mean right now the oil drilling, gas drilling business is very strong and the price incurred is somewhat depending on the final commodity pricing that develops over the next several months, but at this age that’s very busy. Some of the other key mineral areas, again more export for our international partners not necessarily the U.S., but the iron ore palletizing business has been very strong.

We are seeing a bit of softness now, in the steel market which is where iron ore pellets end up, but in the general that market has been a real solid business force out of India and also within the U.S. on a smaller scale, but those areas again are good opportunities. As long as they stay reasonably okay, we do expect to see continued growth.

Jay Harris - Goldsmith & Harris

I may have missed it, but your comments on metal casting given the current state of new core registrations in Europe and the United States was I thought kind of upbeat.

Larry Washow

It is an area of concern. It is one area that metalcasting obviously and that’s the biggest end use for metalcasting products within automotive. The U.S. numbers are way down and that certainly we see that in the softening of our volumes here. In Europe, we are not that big in the automotive foundry sector, so it’s not quite as visible. The other area in Asia, where we are fairly good size is foundry business, that seems to be a bit more stable hasn’t come down as much or as fast as the U.S.

Jay Harris - Goldsmith & Harris

But, where do you think this will net out over the next six months; flat still showing some growth or worse?

Larry Washow

The automotive or minerals overall?

Jay Harris - Goldsmith & Harris

Metalcasting.

Larry Washow

Metalcasting, I think we’ll actually still see some growth in part because, when the South African business comes online, all that end product ends up in the metalcasting market.

Jay Harris - Goldsmith & Harris

Alright, but ex that, in other words looking at what’s going into iron foundries?

Larry Washow

I think it will really depend on the whole economic cycle. Really if it continues to slowdown dramatically, it will be flat. If things kind of continue as they are now, we expect to see a continuing modest growth just given the breadth of the range of markets that we’re in around the world.

Jay Harris - Goldsmith & Harris

And you would attribute that what to market share increases in Europe and net growth in Asia?

Larry Washow

Net growth in Asia primarily.

Jay Harris - Goldsmith & Harris

In the environmental product lines, just to sort of repeat a little of what you’ve gone over already, you seem to indicate that the new products are offsetting the cyclicality caused by lower construction activities in North America and Western Europe. Is that something that could continue right through 2009? How do you come to an equation on these issues?

Larry Washow

Tough to predict really, the cycle all through 2009. Again one of the benefits, we have a broader product line, a small acquisition we did in Europe early in the year provides a much greater aggressive products that go into the building construction side. All of those are things we haven’t had until the last year or two so.

To the degree that the market slowed down which they are, we can offset that by having more products in more lines and material on each job. Again we got to win the jobs obviously and that can certainly help offset some of the slowdown. So, the net end result is hard to say, but we do not really look for a significant drop in that business at all.

Jay Harris - Goldsmith & Harris

Lining technologies have you seen any evidence yet of funding issues which would slowdown projects?

Larry Washow

Haven’t yet; most of these projects that are being built now were approved and funded probably a year ago or something and seem to be going on just fine. Landfills in particular, they tend to be necessary things, so go through. Some of the areas that we’ll keep a close eye on the fast growing is the use of our lining material in funds related to mineral activity and mining and that’s been a nice growing area for us.

Depending on what the commodity cycle ultimately does, it regularly slows down across the board, that could be an impact, but I think long-term again we’re looking at pretty strong commodity demand around the world, so even that business if it slows down a little bit, we don’t expect it to be a significant factor.

Jay Harris - Goldsmith & Harris

Finally in oilfield services, are there any initiatives outside the United States that are likely to show a meaningful rapid growth in kind of looking out over the next 12-months?

Larry Washow

Meaningful rapid growth is hard, we certainly will have a good bit of activity in Brazil that we’ve never had before. Relative revenue is a huge, Asia has been a very active in building up a good team of people there, a lot more activity in that region. We should certainly see some more activity there. Nigeria has been in the mix for quite a while, so that’s pretty stable. So, I think those areas where there’s growth opportunities we will be there, but in U.S. it is 80% of business, so even if they grow very nicely it’s not going to have a huge impact on the overall.

Operator

Your next question comes from Todd Vencil - Davenport.

Todd Vencil - Davenport

It’s good to see the pricing come along in the minerals business; can you sort of give some color on that half? What products are you really pushing price on, how is that going, where do you think you are in and sort of the process of implementing that?

Larry Washow

Pretty much across the board; I mean the U.S. market for bentonite is very tight and the tightness has really come about because of the substantially increased demand in the drilling market and you can’t do a lot of the drilling that gets on without bentonite. So the demand there just continues to be extremely strong.

The foundry business obviously has slowdown some, but that’s going to offset by a combination of the drilling in the iron ore pellitizing. So all of those areas, drilling, foundry, iron ore pellitizing, specialty products have been part of our margin improvement program and the pricing has gone up in all of those areas. We expect a continuing round of addition of price increases as we get into 2009, so our price increase is going in Q4 as well.

So, we’re moving the pricing up and I won’t say customers were overjoyed with it, but they see the margins as well as we do and understand the need to do that and the nature of the market supply, demand situation is such that it’s a good position for us to be able to do that.

Todd Vencil - Davenport

So given in terms of what we’ve been able to see the results so far on the impact that we’re in the third inning there or we’re in the sixth inning in terms of the impact?

Larry Washow

We’re early on Todd. The margins in mineral seem to be at least in the mid-20% range, so we’re at 17.7% now, that’s a long way to go, but we’re going to get there.

Todd Vencil - Davenport

In terms of the energy hedging program, can you guys may be elaborate a little bit on what you think and like doing? How much your exposure is, over what period you’re thinking about hedging, things like that?

Larry Washow

Yes, and Todd we’re really just starting the process now, kind of evaluating and studying it, so we’re talking to some of our banks and others to get a sense of what the opportunities are, so we probably have some type of laddered approach on diesel with some type of hedges on the natural gas and energy or/and electricity, we probably give some type of forward purchasing of contracts, we’re working with a energy consultant there, so we expect both of those programs to be in place as we get into probably Q1 of ’09. So, again we really just kicked off these projects within the last month or so for evaluating.

Donald Pearson

As it probably know Todd, we’re fairly conservative, so we’re going to learn about these things and set off in a kind of measured steps; we’re not going to jump out there and start doing wild and crazy things, but we do think there’s an opportunity, especially give in the current energy situation to kind of secure our potions over a much longer time horizons and sort off re-subject to the week to week, month to month in the market.

Todd Vencil - Davenport

That makes sense. A question on the think quarter, Don in terms of the 1.6 million or so of foreign exchange hit there is another expense; what’s the mechanics on that? I mean where is that exactly and how does that end up being in other.

Donald Pearson

Well you balance sheet translation goes down and the other compressive income, so this is really the transactions; paying cash, paying bills, receiving cash from customers, so those transactions go down to that line item. Generally in the past couple of years the dollar has been relatively flat to declining so this has kind of been a non-event to the company, but in Q3 the dollar appreciated probably 8% to many be 10%, 12% against some of the major currencies that we’re in and that just ends up working against us.

Todd Vencil - Davenport

Yes the feel for that adjustment would be in Q4 is currency at the end of the quarter, where it’s at right now?

Donald Pearson

If it is where it is right now, then that means we have a limited effect. The function of again when these transactions were receivables and/or payables put on the books and for the most past of it, it dropped substantially to the extent that things are flat. What we want to do is again get our arms around these exposures and these currencies and take a conservative as Larry said, takes a conservative approach towards hedging, but put some colors in place so that we live and contain these spikes and these surprises.

Todd Vencil - Davenport

Thanks for the color around the DSO chart and things like that. I mean at the end of the day what kind of cash do you think we can bring out of that. Do you have an idea about that?

Donald Pearson

I mean it’s a large number, so I mean certainly its in the millions and it should be $10 million there.

Larry Washow

Its fare to say it’s really around the growth of the company. On a relative basis if you look at DSO, it really hasn’t gotten a whole lot worse in the last few quarter; there’s areas we can definitely improve in and we’re going to do that, but obviously as we continue to grow sales and that’s going to require cash, but clearly there is strong focus on making sure that we’re ready to get the cash and we pay the bills in the right time, get on top of some of the receivables that have been stretching out there.

Donald Pearson

I think also that as we build out this ERP, just having global systems where you have visibility certainly makes it much, much easier to do the type of things we are talking about, so again I don’t use that as an excuse but we are building out all of our systems across our global enterprises and that will gives us more visibility to take the action that we need to take.

Todd Vencil - Davenport

That’s a certainly 2010 completion.

Donald Pearson

Ultimately yes, although we do have elements of it in place in Europe and in Asia, but again I don’t use that as an excuse. It’s easy enough to understand what your receivables are and make improvements.

We are, as an example putting a credit manager in Asia Pacific that we never had. We also have a new credit person starting on Monday in fact in our oilfield services group, so it’s having somebody on top of those things can have an impact. Of course we don’t want to be backward and just collect, we want to be proactive in managing credit, in managing cash collections, having technologies, electronic funds etc. We want to look at everything to improve the cash coming in more quickly.

Operator

Your next question comes from Andrew Nelson - Nelson Associates.

Andrew Nelson - Nelson Associates

I just got three quick question; are you going to break out or may be you already do, your foreign sales verses your domestic?

Larry Washow

Yes we do Andrew in terms of the overall numbers. One of the charts were at the back of the press release and the last page is really a break out by a segment of the group, the sales in Americas, Asia Pacific and Europe and the Middle East.

Andrew Nelson - Nelson Associates

My second question is have you changed your risk return outlook due to the current crises that we are in right now. Are you looking to increase your rate of return relative to the risk you’re going to take?

Larry Washow

I think in terms of acquisitions Andrew, we probably would certainly look at that in the context that financing of those is going to be a higher expense, so they have to be able to return a greater reward than they might have when the financing costs were a lot lower.

Clearly it is a different environment. We tend to be fairly conservative no matter what the environments are. I don’t know that our risk profile really has changed a lot and we’re pretty careful about what we’re doing and what we look at, but certainly in terms of new things and new acquisitions, the payback would have to be strong enough to support the obviously higher cost that we are all going to pay on financing side.

Andrew Nelson - Nelson Associates

My last question on your line of credit, I guess you had $50 million sales which you haven’t drawn down.

Donald Pearson

57.

Andrew Nelson - Nelson Associates

Are you having trouble getting it or keeping it; are clients beginning to squirm or…?

Donald Pearson

No, no. Again we have a pretty strong bank syndicate. We are talking to them all the time. They are fixing in group, they are fortunately stronger banks, so we have no issues. We always talked to other banks as well, just to keep relations there, but we feel that we are in a pretty good space right now.

Larry Washow

We did check with the loan agreements in the banks and in some cases it works with us for decades, so they are very familiar with us and very comfortable that we are there. We don’t see any issue at all in terms of the company and the availability of credit.

Operator

Your next question comes from Al Kaschalk - Wedbush Morgan.

Al Kaschalk - Wedbush Morgan

I just wanted to follow-up on the acquisition here. I think you’ve already made some covenant or prepayment on the acquisition; what’s left in terms of [Inaudible].

Larry Washow

The Australian acquisition, we did already put $6 million down. If the deal didn’t go forward that would come back, but we believe it will go forward and get done here in the next several weeks. The total deal is AU$41 million Australian and at this juncture it would be currency that would be an additional…

Donald Pearson

Yes, so we have AU$41 million moving in our favor. So the net cost there would probably be $30 million, $35 million. We got a hedge actually in place there where we’ve locked in a very favorable rate and then as Larry said we put $6 million in as a receivable, so that will net against it. So the net cost would be about $29 million, $30 million.

Larry Washow

After that Al we have to do the plant and that will be in 2009, most likely and most of that anyway, so the total investment will end up being less that US$40 million, spread out over a few quarters.

Al Kaschalk - Wedbush Morgan

Naturally all of us are concerned about the strategy here, this 57 available…

Donald Pearson

Plus 33 cash. If you look at our liquidity, through that $90 million of liquidity…

Al Kaschalk - Wedbush Morgan

I mean peak to trough are just working capital in the gaining quarter.

Larry Washow

Yes exactly, working capital would come down. The third quarter as you know having followed us is really one pretty strong environmental and tend to be the highest cash consuming quarter. We usually start to see that really generate and come back in a positive way in Q4 and we’ll see that again this year.

Operator

Your final question comes from Rich Wesolowski - Sidoti & Co.

Rich Wesolowski - Sidoti & Co

You mentioned in the press release a product mix change that contributed to the whole sale margin, what was it? Is it something you expect to continue?

Larry Washow

It actually functions in the hurricanes as much as anything because depending on which of the services we are providing, the land based will not be as profitable as the off shore. If we’re doing filtration onshore, it just doesn’t generate the same kind of margins. It does offshore, because not all the competitors can go offshore.

The products themselves, the product mix, we don’t know how to describe that very well Rich, but the content is the nature of the service and where its provided, determine the ultimate value you’ll get out of it and when you take us out of the Gulf of Mexico for several weeks, what get replaced in terms of the product or the service just doesn’t create the same value.

Rich Wesolowski - Sidoti & Co

Is there anything that would say that if energy prices go up or if they go down you will do more of land based to offshore activity?

Larry Washow

The only impact that you might see is the land based activity tends to be more natural gas related and if that activity slows down then the land based activity could slow down. We don’t think the offshore activity is going to slow down there. Again there are massive projects that are multi year, so things that are happening we think will continue to happen offshore.

Rich Wesolowski - Sidoti & Co

So is 38% still a sustainable gross margin for that segment?

Larry Washow

I think it is. It’s going to be up to 37, 38 is the range we’re pretty comfortable with it.

Rich Wesolowski - Sidoti & Co

The contribution from the two way acquisition fell a bit short of the annualized rate that we were expecting, was that still affected by the hurricanes?

Larry Washow

Definitely. That had a big impact and that was actually one of the bigger impacts for the quarter because a lot of that had planned to be used offshore and it’s a nicely profitable business, but it just passed.

In some cases when they saw the hurricanes coming, they said “oh don’t ship anything else out there” and when the second hurricane was coming they said “well that’s why [Inaudible].” Even though the hurricanes are just a few days each, the time wall was several weeks and that’s one which I talked about in the press release as well. You can get an idea of what they see in the Euro market, but the hurricanes have a bigger impact on the business than most people realize.

Rich Wesolowski - Sidoti & Co

And finally does the Indian government’s action on the bulk side exports accelerate your efforts to monetize your investment?

Larry Washow

Certainly it keeps it very visible and important for us to make sure we know what’s going on there, yes it makes it perhaps a bit more difficult to do all that, but we’re very close to what’s going on there and the same people are still running it, so I think we’re going to be okay there. This is sort of an unexpected blip over the last several months, but I’m assuming they did get it sorted out. I think they’re going to be in great shape there for next year.

Operator

And with no further questions I’d like to turn the call back over to today’s speakers for any closing comments.

Larry Washow

Thank you all for joining us today. Lots of good questions and we look forward to talking to you after the end of Q4.

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Source: AMCOL International Corporation Q3 2008 Earnings Call Transcript
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