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AMCOL International (NYSE:ACO)

Q1 2006 Earnings Release Conference Call

April 21, 2006, 10:00 a.m. CT

Executives

Larry Washow, President and Chief Executive Officer

Gary Castagna, Senior Vice President and Chief Financial Officer

Jennifer Melsheimer, Investor Relations Manager

Analysts

Jay Harris, Goldsmith and Harris

Rob Norfleet, Davenport Company

Steven McBoyle, Lord Abbott

Rich Wesolowski, Sidoti & Company

Al Kaschalk, Wedbush Morgan

Robert Smith, The Center for Performance

Andrew Nelson, Nelson & Associates

Operator

Good day everyone and welcome to the AMCOL International first quarter 2006 earnings results conference call. Today’s call is being recorded.

A replay of this call will be available starting at 12:30 p.m. Central Time today. You may access the replay by dialing 888-203-1112 and referencing pass code 3346637.

The speakers today will be Mr. Larry Washow, President and Chief Executive Officer, Mr. Gary Castagna, Senior Vice President and Chief Financial Officer, and Ms. Jennifer Melsheimer, Investor Relations Manager.

At this time, I would like to turn the call over to Mr. Larry Washow. Please go ahead, sir.

Larry Washow, President and Chief Executive Officer

Thank you, Michelle, and welcome everybody. Appreciate you joining our conference call today.

Hopefully by now you’ve had an opportunity to look over the press release that went out this morning describing the earnings. We’ll follow our usual pattern on the conference. I’ll give you a little bit of the business color, Gary will talk about some of the financial issues, and then we’ll open it up for questions in just a few minutes.

As we mentioned in the press release, the first quarter for AMCOL historically has been a little bit unpredictable. And that’s primarily because the environmental segment a lot of the activities that are involved in building construction, landfills, things of that nature that are obviously weather-dependent, in the first quarter can be very good or very bad historically, depending on the weather.

Well, we had a little different dynamic this year. First of all, the building groups did well. Lining Tech was OK, good activity in Asia as well as Europe in the building side for sure. But, in addition to that, the Oil Field Services group really stood out as a significant growth driver for us in Q1. Those are the products that are used primarily in the offshore area. There is some onshore activity as well, cleaning up the wastewater.

And the business, not surprising with the price of oil today, is booming. So, a really positive result coming out of that group, really driving the environmental results to a record first quarter and a very strong start for AMCOL overall. So, we’re certainly enthused about that.

And with the Oil Field Services growth as a percentage of our business, obviously that’ll help a little bit of that cyclicality over the course of the year. So, it’ll certainly still be there in relation to the building products, but somewhat less when you look at the company overall.

Don’t mean to ignore minerals. Obviously a nice solid quarter for the minerals side there. We do see a little bit of softness in the metal casting side, in the U.S. particularly, and that’s primarily the automotive-related activities. Not a huge surprise there, I don’t think, for anybody.

The heavy construction, truck, railcar building is still going on very well. And it looks like that will continue for most of the year.

While the U.S. business is a little bit softer, we do see some strength in Asia in metal casting as well as the other minerals markets. So, on balance, we’re fairly solid and kind of following that market wherever it needs to go to show the strength. And obviously for the foreseeable future a big portion of that will be in Asia.

Another area that was a little bit softer than we like is our European detergents business. We talked about that in the past. We are formulated in and formulated out products over time. And depending on where we are in the cycle, sometimes we’re a bit stronger than we are right now.

The positive news coming out of there is, as we have done with many of our businesses, we’re beginning the expansion of that globally. We now have a business base building in Asia, one that we’re going to expand on and expect over the course of the year and onward the detergents business will represent a very nice contributor for us, particularly from Asia, in the years ahead.

Can’t ignore the oil impact on our minerals business either. Certainly from a cost side it’s had an impact. You’ll notice the margins are fairly stable, up slightly year over year. And that is, in part, because we’ve been able to raise prices to meet the increased costs related to the energy.

The good side for us on the energy side is – on the energy price, rather, is the growth in our petroleum products group, which from the mineral side of our business is really involved in the drilling of oil and gas wells. And, needless to say, at $70 plus barrel of oil that is booming as well.

So, some good news-bad news on the energy front. It certainly helps a portion of our business, but certainly has a negative impact in terms of the cost.

I should probably mention good news from our joint venture partners as well, particularly in India. And we expect that to continue throughout the year.

With that, Gary will highlight some of the financials.

Gary Castagna, Senior Vice President and Chief Financial Officer

Thank you, Larry. Good morning, everyone. I’ll just follow along the financial overview area of the press release.

On the sales, of the $20.7 million of increase in the quarter over quarter sales, 62 percent is driven by the environmental segment, as Larry elaborated on earlier. The water treatment – wastewater treatment area with the Oil Field Services was the principle driver there, and minerals and transportation contributing 32 and six percent of the 20 percent - $20.7 million growth.

And just a couple other facts along with that, about 95, 96 percent of the growth year over year was through base businesses, a slight amount, four percent, of that growth due to an acquisition that we made in the middle of last year in the environmental segment.

Geographically, an estimate of the distribution of sales approximately 68 percent of our revenues in the quarter were just in North America, 24 percent in Europe, eight percent in Asia Pacific. A slight movement toward North America and Europe as we saw the conditions again in the environmental segment in the Oil Field Services, principally more geared toward North America in that period.

Gross margin at 25 percent for the period, up 70 basis points over the prior quarter. Again, that’s a shift movement of the businesses. The environmental segment is growing with a higher relative gross margin, although we were also pleased with a 30 percent basis point improvement in our minerals segment.

GS&A at $23.7 million for the quarter, an increase of 10 percent. Environmental segment, as you will see in the tables, was the principle component involved with the growth. We were also pleased to see our corporate segment costs flat in the quarter, as we are more in tune, I guess you would call it, with compliance-related costs with respect to Sarbanes-Oxley, external audit, et cetera.

Operating margin had a nice improvement of 170 basis points to 8.4 percent. And, again, that is just essentially the operating leverage through all of the segments of the company.

Our effective tax rate was 28.9 percent in the quarter. That is – you should note is substantially higher than last year’s comparable quarter, which would have – if you look at a year over year impact was about a penny a share. The quarter did include some additional expense related to true up of liabilities for taxes payable, both in the U.S. as well as Europe in the first quarter. We have an estimated effective rate for the year at this point of 27.7 percent.

And Larry mentioned as well our affiliates and joint ventures and, in particular, India – our Indian-based investments. As you know, we have two sizable important investments there that have been outstanding contributors in the quarter.

And the weighted average shares outstanding did moderately increase to 30.9 million shares.

The financial position of the company you will note the fairly sizable increase of about $13 million of long-term debt in the quarter. That gets broken down by components of working capital and capital expenditures – I’ll talk about here shortly. Consequently, long-term debt is 16 percent of total capitalization, up from 12 percent at the end of the year.

Working capital principally on the heels of an increase in accounts receivable, commensurate with our sales as well as a decline in current liabilities. This is a typical factor for the company. The first quarter generally sees accrual payments – payments of accruals from the prior year and the current year period and then, of course.

Cash flow from operating activities, as a result, was a negative $4 million in the quarter as compared with a generated cash flow of $2.7 million in the prior year. Another point to note is the first quarter is usually when we have funding of employee benefit plans, pensions, and whatnot. So, that is another major outflow that we typically see in the early part of the year.

Capital expenditures were quite high at $9.3 million in the quarter versus $5.2 million in the prior year. On a breakdown of that, approximately $5 million of the $9 million was related to our environmental segment. Within that, the principle expenditure was the further completion of the plant in Spain as well as a expansion of our activities in the southeast, with a plant that we are reorganizing our activities to in Georgia, our domestic minerals expenditures of around $2.7 million, and then we’ve continued expansion of our plant in China in the quarter. And that was about $2 million.

And then we did spend approximately $1.1 million on repurchases in the quarter, 40,000 shares, an average price of $26.89. And we do have $7 million remaining in our repurchase authorization.

So, that’s our review of the financial position and results of the company.

Larry Washow, President and Chief Executive Officer

Thank you, Gary. And Michelle, we’re ready to open up for questions.

Question-and-Answer Session

Operator

Sounds excellent. And today’s question-and-answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit one on your touch-tone telephone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. And we’ll pause for just a moment to allow those questions to come in.

And our first question comes from Jay Harris of Goldsmith and Harris.

Jay Harris, Goldsmith and Harris

Good morning, gentlemen.

Gary Castagna, Senior Vice President and Chief Financial Officer

Good morning, Jay.

Larry Washow, President and Chief Executive Officer

Morning.

Jay Harris, Goldsmith and Harris

Three areas. One, I’m sure you weren’t raising prices in minerals to compensate for higher energy material costs, transportation costs, surcharges, et cetera. But we seem to be not making progress. When do you think the gross margins will start to move back towards a more normal level?

Larry Washow, President and Chief Executive Officer

Good question, Jay, and one I wish I could give you a solid answer to. I think the challenge has obviously been trying to keep up with the rapid acceleration of the energy prices, which we had sort of hoped after last quarter would stabilize and obviously have been proven wrong in the last quarter.

Certainly we are enthused about a little movement in the right direction and would expect in the quarters ahead to see more movement. But the rate of that change is pretty difficult to predict, quite frankly. I wouldn’t expect it to see it a little stronger than we are right now based on where we thought we would be at this juncture. And if you look at the impact on pricing, which is a reasonable share of the increase in the sales, very little of that ends up going to the bottom line. It really does just keep us even on the cost.

So, it’s hard to say. I think, our goal is obviously to get back up to the traditional 20 plus percent gross margin.

Jay Harris, Goldsmith and Harris

What do you anticipate your percentage price increases would look like this year? What do you think you’ll be able to put in place?

Larry Washow, President and Chief Executive Officer

It’s hard to say. We’ve already implemented some, certainly. Primarily, I guess, in the mid single digits, I suppose would be the norm. There are areas where it needs to be greater than that and others where the prices are pretty good already. So, it’s quite a mixture given the nature of our businesses. But we, again, would expect to see the margins start to improve to get back to what I’d like to see, which is 20 plus percent. It’s hard to call exactly when we’ll get there.

Jay Harris, Goldsmith and Harris

Are you having difficulties with railroad surcharges that exceed their actual cost increases for diesel, as some people were complaining about?

Larry Washow, President and Chief Executive Officer

Well, the surcharges, at least the ones we’re involved in, are formula driven based on published pricing for fuel. So …

Jay Harris, Goldsmith and Harris

All right.

Larry Washow, President and Chief Executive Officer

… we kind of know what they are. They’re obviously ugly, but we’re not surprised at what they are.

Jay Harris, Goldsmith and Harris

All right. I’ll get back in queue to other questions.

Operator

Thank you. And our next question comes from Rob Norfleet with Davenport Company.

Rob Norfleet, Davenport Company

Hey, Larry. Great karma. Good quarter – excuse me. Just a couple of quick questions. I guess first and foremost on the metal castings area can you give us a little more detail on the weakness that we’re seeing in the U.S. automotive market? I mean, clearly, as you stated, it’s not a surprise, I guess. Even through the fourth quarter of last year we were still seeing decent volume in that business. And I just want to get a better sense is it just – does it all of sudden kind of drop off in the – some time during the quarter? Or what kind of trends are we seeing in that market and what do we expect going forward?

Larry Washow, President and Chief Executive Officer

Yes. I don’t think it really dropped off a great deal, Rob. It more – last year we really saw some pretty reasonable growth over the course of the year, not dramatic double-digit type growth, but solid growth building on quarter on quarter.

The first quarter this year we didn’t see any growth and saw just a little bit of drop in the volume. Again, it wasn’t huge. I don’t think it’s a trend that’s going to go a long time, but it’s not a surprise in the U.S., given all the machinations the automotive guys are going through to see a little bit of softness. You certainly see the announcements on the production reductions for both of the major U.S. producers.

And so, I think we’re just really reflecting that in terms of how we see the business. Certainly no concerns at this juncture with market share, customer base, or anything like that, but it’s definitely a little bit slower and we’re not really looking at any U.S. growth in that market at all this year. It’ll certainly be flat at best.

Rob Norfleet, Davenport Company

OK. And in terms of – if you look at the North American automotive market for the whole metal castings area, can you give us some kind of rough percentage of how big that is on a percent of sales basis?

Larry Washow, President and Chief Executive Officer

Yes. Generally it’s around the 60’ish percent mark. The heavy equipment’s been strong, so it might be slightly towards the bottom end of that 60’ish range, but it’s right in that range.

Rob Norfleet, Davenport Company

OK. And how did the margins for the auto market compare to the margins for, let’s just say, the heavy equipment and the more industrial-based equipment?

Larry Washow, President and Chief Executive Officer

They’re not too dissimilar. There’s a couple of product differentiations we have. In some of our specialized products we’ll have a greater margin, but generally if you look across the board they’re not widely different.

Rob Norfleet, Davenport Company

OK. And I guess the last question on this topic, if you look year over year – I mean, clearly year over the year the margin was up, but sequentially the margin was down modestly. Obviously with strength in other areas of the minerals group is it fair to say we should still see margin expansion for the year in this segment even with the North American auto market weaker?

Larry Washow, President and Chief Executive Officer

I think we should, Rob. I think some of the other markets clearly are very strong and providing some of the margins that ought to help offset the slowness in metal casting. So, I would expect improvement throughout the year, definitely.

Rob Norfleet, Davenport Company

OK. And last question and I’ll get back in queue. I know that over the last year you’ve been asked this question a number of times about acquisition. I guess my question is – I know there are acquisitions out there and I know you look at them. But are you more inclined at this juncture to look at joint ventures versus acquisitions, or are you still finding some opportunities in the niche acquisition markets that you’re likely to pursue?

Larry Washow, President and Chief Executive Officer

A little bit of both. There’s certainly some areas where JVs are pretty appropriate as we get into parts of the world that we haven’t got a lot of operating experience on the ground. In other cases, if it’s ongoing entities that seem like a great fit we’re not at all shy about doing a complete acquisition of it. So, really situation dependent. And we certainly do look at both.

Rob Norfleet, Davenport Company

Great. Well, thanks, Gary and Larry. Nice quarter.

Larry Washow, President and Chief Executive Officer

Thank you.

Gary Castagna, Senior Vice President and Chief Financial Officer

Thanks, Rob.

Operator

Thank you. And our next question comes from Steven McBoyle with Lord Abbott.

Steven McBoyle, Lord Abbott

Yes. Good morning.

Larry Washow, President and Chief Executive Officer

Morning.

Steven McBoyle, Lord Abbott

First, maybe just to follow-up on the metal casting line of question. First, could you just elaborate on what the mix is again auto versus industrial, and maybe if you could break down the industrial by heavy equipment versus rail?

Larry Washow, President and Chief Executive Officer

Yes. The auto side has certainly been the majority, 50 plus, into the 60 percent range historically. The rail versus heavy equipment, heavy equipment probably the bigger segment left.

Gary Castagna, Senior Vice President and Chief Financial Officer

Yes. That’s probably right, Steve. It’s not broke out very easily because, frankly, a lot of our customers really have multiple channels. There are certain specialized products, like Larry said, particularly like the railcar area, where there’s distinct channels. That might be around 10 percent or so of our sales there.

Steven McBoyle, Lord Abbott

And so, just to elaborate, on the auto side of the equation you saw decline year over year, but yet you’re anticipating flat. What gives you the confidence there? Is that further share gains? I think you had a pretty healthy share level. I don’t know if that’s an opportunity. But is there content gains? What gives you confidence that you have the ability to remain flat in a …

Larry Washow, President and Chief Executive Officer

Yes. Clearly, we don’t expect really share gains, Steve. I think when I talk about flat I’m talking about the sales side, meaning our – the pricing will help drive pretty consistent year over year results on the revenue.

Steven McBoyle, Lord Abbott

OK and the breakdown in price versus volume in the quarter?

Larry Washow, President and Chief Executive Officer

For the minerals overall pricing was more than half of the sales growth.

Steven McBoyle, Lord Abbott

And when would you say you became more constructive on attempting to be more aggressive on pricing initiatives?

Larry Washow, President and Chief Executive Officer

We’ve been fairly aggressive, quite frankly, over the last couple years. It – what we did not anticipate was the rate of acceleration of energy costs.

Steven McBoyle, Lord Abbott

OK. Flipping to the detergent side of the equation, as you rightfully point out often get formulated in, formulated out. I thought we were potentially in a formulated in period here in Europe. I was just curious if you could elaborate on that.

Larry Washow, President and Chief Executive Officer

Yes. We actually are. We’re probably in – over the course of the last few quarters anyway two or three new products – early phases of new product introductions. So, the good part about being formulated is you’re in. The bad part is you don’t know how big it’s going to be or how successful it’s going to be.

In a couple of cases they’re fairly innovative products that are obviously going to take a little bit of time to get some market acceptance.

Steven McBoyle, Lord Abbott

And typically when would you have better visibility into how that ought to affect the business?

Larry Washow, President and Chief Executive Officer

It depends obviously on the customers, how aggressive they are in advertising and promotion. But certainly over the course of the next couple quarters we’ll have a very good feel if these are going to be significant contributors or just kind of nice little products that go.

Steven McBoyle, Lord Abbott

And is this a situation where that which could contribute on a formulated in, just simply offsets a formulate out, or as we look at detergent growth through the year how should we think about that?

Larry Washow, President and Chief Executive Officer

Detergent growth for the year in total will be positive. And I mentioned Asia because that’s certainly a ripe area for expansion and one that we now have products well established and are expanding. So, when you look at the aggregate it’s going to be larger, in Europe probably flattish over last year. If some of these products that we’re newly into are really successful, we could certainly see some growth. But for the segment overall, I do expect a better year this year than last year.

Steven McBoyle, Lord Abbott

And can you elaborate on the Asian opportunity? Obviously you’ve highlighted it a number of times. I just wonder if you can put some meat around the bones there.

Larry Washow, President and Chief Executive Officer

Yes. We’ve been very active in Asia, as you know, in all of our markets. And detergent was one of the latter ones we’ve gotten into over there. We have production capability in Thailand and we’re considering other countries to put the capability. And our – the feedback from the marketplace has been extremely positive as we get on the ground there, bringing the expertise and expertise from our European operations.

Steven McBoyle, Lord Abbott

And again, these are serving similar customers, but for local consumption?

Larry Washow, President and Chief Executive Officer

That’s correct. Similar customers, some global guys as well as local producers in those countries.

Steven McBoyle, Lord Abbott

And your revenues in Asia today would be what?

Larry Washow, President and Chief Executive Officer

Pretty modest.

Steven McBoyle, Lord Abbott

And how about when we think about how much they could contribute for the year?

Larry Washow, President and Chief Executive Officer

Hard to say.

Gary Castagna, Senior Vice President and Chief Financial Officer

Maybe in the single digits, I think, Steve.

Steven McBoyle, Lord Abbott

OK and switching over to the environmental side of the equation, I wonder if you could just broadly talk about the growth that you’ve seen there. How much of that is just simply end market growth versus some of the initiatives that you’ve had in place? I know you’ve been certainly consciously trying to move more towards the solution sale. Maybe you can just kind of size the business as you see it today, and specifically your expectations for the year.

Larry Washow, President and Chief Executive Officer

Certainly with results of the strong first quarter we’re looking for a very good year. Obviously one of the big drivers there is the construction. There’s lots of activity going on in Europe. Still a very, very robust construction market in well established areas like the U.K. and Ireland as well as developing areas as you get into Spain and some of the Central and Eastern European countries. Asia, clearly China with the Beijing Olympics coming and all the normal building going on there, is booming. A tremendous amount of infrastructure activity, subways and things like that, that we see are very important part of our business growth. And I think it’s going to be a very, very strong year.

Lining Tech we are opening the plant in Spain. It is now operating. That’s going to provide us some better leverage, better return, and shipping everything from Poland or the U.K., and I think our opportunity to expand the market as well. So, that combined with the Oil Field Services and wastewater area we’re looking for a really very good year from the environmental group.

Steven McBoyle, Lord Abbott

And maybe just to break it down a little bit further, of the $55 million you reported in environmental what would the split be between wastewater versus what I’m going to call oil and gas, for lack of a better definition?

Larry Washow, President and Chief Executive Officer

Wastewater it’s about 30 percent of the whole segment. And of that, Oil Field Services…

Gary Castagna, Senior Vice President and Chief Financial Officer

Seventy-five.

Larry Washow, President and Chief Executive Officer

… probably – yes, 70, 75 percent of that would be Oil Field.

Steven McBoyle, Lord Abbott

And how would that have changed year over year sequentially?

Larry Washow, President and Chief Executive Officer

Oil Field certainly – well, the category itself is much larger in terms of dollars.

Steven McBoyle, Lord Abbott

Right.

Larry Washow, President and Chief Executive Officer

And the Oil Field section is much larger.

Gary Castagna, Senior Vice President and Chief Financial Officer

Yes. It’s probably on a quarter over quarter basis you’re looking at a 30 to 40 percent increase.

Steven McBoyle, Lord Abbott

And how do you think about visibility in that portion of the business? Again, oil and gas – I know a portion of the businesses sale, a portion of it is lease. How do you think of just visibility in your order book that you might have on the sales side of the equation?

Larry Washow, President and Chief Executive Officer

It’s very strong all the way around. We certainly – as you know, we sort of prefer the leasing route when we can do that. And in most cases many of our customers prefer that as well. And the equipment is very well utilized. Like everybody in that business, quite frankly, the challenge is getting enough people and skilled people to service all the opportunities, but we’ve been fortunate in that. We’ve got a good, strong team all the way around. And we really expect to see the type of growth we saw in the first quarter certainly sustain itself and deliver a very solid year.

Steven McBoyle, Lord Abbott

OK, great. Thank you very much.

Operator

Thank you, Mr. McBoyle. And as a reminder to our audience to ask a question on today’s conference, it is star one on your telephone. Our next question comes from Rich Wesolowski with Sidoti & Company.

Rich Wesolowski, Sidoti & Company

Thanks. Good morning.

Larry Washow, President and Chief Executive Officer

Morning, Rich.

Rich Wesolowski, Sidoti & Company

Excuse me. Larry, would you expect to see the same pattern of profitability in the mineral segment that we saw last year, meaning that March and December would roughly be in the same ballpark and then June and then September would be the highest?

Larry Washow, President and Chief Executive Officer

Yes, historically. You get a little bit of the first quarter effect, but certainly you get the holidays in the fourth quarter. So, yes, the middle quarters we should be pretty solid.

Rich Wesolowski, Sidoti & Company

OK. The JV contribution was again higher sequentially, as it has been three or four quarters in a row now. Is that the same breakdown of the contributing ventures? And should we expect that to continue to go up in June, September, December, et cetera?

Gary Castagna, Senior Vice President and Chief Financial Officer

I think that the – that certainly that we’ve hit a peak in terms of that growth rate, Rich. The – of course, you’re kind of getting – in terms of routing it to pennies here. So, it’s on a relative basis going to be more moderate. But both in the ventures are very strong.

The one company is a major player in the bauxite business right now, which is ultimately used in aluminum. And they’ve got a significant presence in the exporting of that particular mineral. And it’s looking – still continue to be promising.

And our venture for a bleaching clay business, which is used in edible oils, is expanding. And we’re collaborating together to continue to expand it. And both of those really have good underlying factors. So, that should continue on.

I just would say that we’ve had a very rapid rate of increase here in the last three quarters. And it’ll probably be more modest here after.

Rich Wesolowski, Sidoti & Company

OK. Gary, did I hear you correctly, that your tax rate for the year is projected to be 27.7 percent?

Gary Castagna, Senior Vice President and Chief Financial Officer

Twenty-seven seven is based on an estimate. And the way you’d need to compute that is essentially through determining where you think you’ll be at the end of the year, absent any adjustments that may occurs that – and from time to time they do occur. You would say absent those adjustments based on the jurisdictions we’re in. It would be in the range of 27.5 to 28 percent.

Rich Wesolowski, Sidoti & Company

So, that’s the best range for modeling purposes?

Gary Castagna, Senior Vice President and Chief Financial Officer

Yes.

Rich Wesolowski, Sidoti & Company

OK. Could you comment on the – a little further on the working capital use of cash? I know that you had the accrual payments and benefit payments and whatnot. But if you look at the cash cycle it is something that was escalating pretty steadily and we had focused on as we move through ’05. And then in September/December it looks a little better, but we saw a deterioration in March. Were there any sorts of customers, segments, products that went into that?

Gary Castagna, Senior Vice President and Chief Financial Officer

There’s no doubt that as the environmental business and certain businesses that you get into in foreign territories have a greater weight, Rich. There’s definitely going to be a movement on receivables. The day sales outstanding, if you look at it, are approximately overall around 70 days if you’re looking at using a trailing 90-day basis for that. And, sequentially, that’s up from 68 days. So, indeed, you’re going to – you are going to get some of that.

The other part to advise, though – and this happens very often for us in that first quarter – is it’s an uneven distribution of revenue. March tends to be a significant revenue month for the quarter as a whole because of our environmental segment again seeing seasonal pattern. So, you get a little bit of a accentuation of the increase in the receivables due to the timing.

Rich Wesolowski, Sidoti & Company

Because the quarter itself is back-weighted?

Gary Castagna, Senior Vice President and Chief Financial Officer

Yes.

Larry Washow, President and Chief Executive Officer

That’s right.

Gary Castagna, Senior Vice President and Chief Financial Officer

And so, you’re going to get that. And I’d say that it wasn’t entirely unexpected to see working capital increase. The goal is still really looking at it of $150 million working capital level, which is where we were last year.

I think the good news out of the quarter was we had our inventory programs in pretty good shape and when you kind of starting look at the balancing of it as the year goes along, it should moderate.

Rich Wesolowski, Sidoti & Company

Are you still expecting to see similar levels of cap ex for ’06 that we saw in ’05?

Gary Castagna, Senior Vice President and Chief Financial Officer

It’s definitely going to be up. I wouldn’t say definite in the sense that we’ve added more than from the last time we discussed. We were at over $28 million last year. But one of the items that we certainly see here as we specify projects is the cost of infrastructure elements of these projects. As we’re getting into either green field or major brown field work, your cement, aggregates, steel are significantly higher today than they had been.

Certainly we’re not reevaluating those investments. They’re still good investments. But you recognize that those sort of infrastructure-related costs are having an impact on that capital. But clearly for the quarter it was heavily weighted – for the year actually – at $9 million here because we’re really in full construction phase of a couple of major plants.

Rich Wesolowski, Sidoti & Company

After you finish up the Spanish lining plant and the metal casting out in China, as you look out towards ’07, even ’08, are there other projects that you see are going to be next up on line, or would you expect your cap ex to recede from this high 20s level?

Gary Castagna, Senior Vice President and Chief Financial Officer

I’m not certain I’d say recede. As much as we’d like to think that we can recede it, there’s reasons – there’s good reasons why you’re looking at expansion of the company. I think in China alone we recognize where we would have to be a decade from now. There’s going to have to be continued investment every year in China alone, a lot of that green field, some of that brown field, but mainly green field. So, it’s going to be there. And you have emerging markets that do require more cap ex. So, I think where we’ll hit is another plateau to support the revenue base of the business.

Rich Wesolowski, Sidoti & Company

Yes. These aren’t donations you’re making or anything. OK. Thanks, guys.

Gary Castagna, Senior Vice President and Chief Financial Officer

Thank you.

Larry Washow, President and Chief Executive Officer

All right.

Operator

Thank you. And we have a question from Al Kaschalk with Wedbush Morgan.

Al Kaschalk, Wedbush Morgan

Good morning, Gary and Larry.

Larry Washow, President and Chief Executive Officer

Morning.

Gary Castagna, Senior Vice President and Chief Financial Officer

Morning.

Al Kaschalk, Wedbush Morgan

Could you – just to follow-up on the cap ex, are you able to share either on the outlook here percentage, maintenance or dollars of cap ex versus growth cap ex?

Gary Castagna, Senior Vice President and Chief Financial Officer

It’s a rough number of where we break that up. We kind of look at growth and productivity together. Certainly a majority of it is in that category. But, as an example, here in the U.S. where we’ve had long-established assets, some good businesses that every once in a while you’ve got to reinvest in, we’ve got a couple of major projects this year to support those businesses. So, you kind of get that, which you wouldn’t necessarily say adds significant capacity, but we do it with the intent that we’re going to add to productivity, that we’re going to be able to get a lower operating cost as a result.

So, if you kind of combine that in with true growth in capacity cap ex, it’s certainly a pretty great majority. I’d say probably 50 to 55 percent of it.

Al Kaschalk, Wedbush Morgan

OK. On the two plants, Spain and the metal casting in China, have you commented on capacity either in dollars or output in units? Or what type of number should we be thinking about from those plants?

Larry Washow, President and Chief Executive Officer

It’s hard to do that with the lining tech plants because they’re relatively low investment cost and very high capacity. So, we typically situate them geographically to provide competitive advantage in the marketplace.

In the case of Spain, it’s a very important growing market for us. And that also frees up some capacity in Poland to handle other parts of Central and Eastern Europe.

So, the net effect is we do certainly expect growth out of that plant, but we certainly had a strong Spanish business last year as well before we were there. So, you have to look at it kind of from the standpoint that it’s going to give us the benefit. We will grow the business, but it’s not as if we’re going into virgin territory with an entirely new facility.

A little bit the same in China. We’re certainly expecting to grow our business there, providing higher value products with better margin. But it’s a business that we’re in already in terms of the metal casting, supplying some of the materials from the U.S., some from China. We’ll definitely see growth once that plant is on line, but it’s – the capacity of the plant will certainly be significant – more than significant and not terribly relevant to what we ultimately sell because we don’t have to sell a great deal of the capacity to start the payback on the plant.

Al Kaschalk, Wedbush Morgan

Are there existing plants that may be shifting productivity or production out of and into these locations, or is it just the strategic positioning?

Larry Washow, President and Chief Executive Officer

In the case of Spain, certainly some of the material that was produced in Poland last year will now be produced in Spain, as that plant is running. In China, because we’re actually going to be making higher value products, a lot of that will be new products, although some of it will go to the same customers that have been using other products. So, it’ll end up providing a better contribution and expanding our customer base because logistically we’re going to be in a stronger position very close to one of the major foundry markets.

Al Kaschalk, Wedbush Morgan

OK. On an earlier question – I missed the prepared remarks. We had trouble getting into the call. But are you able to elaborate further, because I’m not sure the question answered on the detergent side, why it may have been a little bit slower than you expected …

Larry Washow, President and Chief Executive Officer

Yes.

Al Kaschalk, Wedbush Morgan

… in terms of new – it’s not taking off or the nice little products that maybe the estimates were too, pardon the expression, aggressive or – something seems to be occurring there that didn’t meet your expectations.

Larry Washow, President and Chief Executive Officer

Yes. Basically, Al, what’s going on is – and I mentioned it before – the customers really provide the product expectations to us. And we were formulating a couple of new products this year in particular that started towards the end of last year that potentially are very exciting if our customer is successful in creating a demand in the marketplace and expanding their share. So far, the growth that we’re seeing and the growth that obviously they are seeing is less than they had hoped and certainly less than we had hoped.

Does that mean the products are not going to be successful? Not necessarily, but it’s going to be another quarter or two in those cases anyway before our customers are going to be able to say, “Wow, the consumers really love this,” or, “Oops, the consumers aren’t that excited and it’s not going to be a big product.” So, it’s a little hard in this case. We’re sort of a step removed obviously from the consumer, but we rely on our customers to give us the visibility. And right now they’re not meeting the expectation that they thought, so it’s presented to us the same way.

Al Kaschalk, Wedbush Morgan

Right. On the environmental with oil and gas, or oil field services – and on the mineral side with the drilling fluid, what type of visibility or outlook do you have in those businesses?

Larry Washow, President and Chief Executive Officer

It’s a tough call. I mean, I think the wastewater activities, which include Oil Field Services, there’s a tremendous amount of work yet to be done, if for no other reason in the North American market, to still sort out all the issues from Katrina. There’s a tremendous number of the pipes under the Gulf that are yet to be sorted out, fixed up, cleaned out, and put back together. The expectations on the land side of cleaning up the pipelines is still very high. There’s a huge number of pipes and we’ve got great technology to do it.

We certainly think that’s going to continue to be a very strong area. I don’t know that oil prices are dramatically going to impact that near-term anyway, so we’re looking for really strong results from both of those areas, including the drilling, certainly throughout this year and hopefully in the next.

Al Kaschalk, Wedbush Morgan

And are those contracted out for short duration, i.e. less than three months, or are they longer duration, perhaps six to 12 months?

Larry Washow, President and Chief Executive Officer

It varies a lot, Al. Some of it’ll be kind of a project where you’re out there for three or four weeks. Other times we have equipment on a rig that’ll be there two years. So, it really varies tremendously by the nature of the project, the job, what we’re accomplishing, and what the customer is trying to do.

Al Kaschalk, Wedbush Morgan

OK. Thank you. Good quarter.

Operator

Thank you, sir. And we do have a question from Jay Harris of Goldsmith & Harris.

Jay Harris, Goldsmith and Harris

Gary, what – where do you think you’ll end up this year in terms of debt levels going – in other words, will you end up at the end of the year with your debt levels higher than they were at the beginning of the year?

Gary Castagna, Senior Vice President and Chief Financial Officer

I would suspect that they may be higher, yes, Jay. I …

Jay Harris, Goldsmith and Harris

And is that all due to the acquisition programs?

Gary Castagna, Senior Vice President and Chief Financial Officer

Yes. I think if you even it out I think working capital will probably get back into, in terms of an incremental impact, a more modest level from what we saw in the first quarter, as I mentioned before. But if you look at the capital investment, certainly other reinvestment type programs that we may have, increasing our joint venture interests, et cetera, that we do from time to time, other type of potential acquisitions, you’re going to expect that those programs are definitely going to increase over the prior year. So, indeed you’re going to have an increase overall on the debt service side.

Jay Harris, Goldsmith and Harris

And how much of this result is this reduced margin in minerals that we talked about earlier? Is that a significant contributor to this result that we’re talking about?

Gary Castagna, Senior Vice President and Chief Financial Officer

No. I think that it’s pretty well – if you look at the margin compression, I guess, if you look at anything, as you kind of think about it it’s baked into where we’ve been at here for a while. Sequentially we’re kind of in a range that we’ve been in here for a while. So, I don’t necessarily see an acute issue of the margin compression on minerals necessarily falling back through on us. Overall, minerals is a very high cash flow generating part of the business. Most of those customers are situated. So, I don’t necessarily see that as an impact point. I see it more in reinvestment.

Jay Harris, Goldsmith and Harris

On the environmental group it’s normal as weather moderates from winter in the northern hemisphere and we get into warmer weather that your activity levels picked up. Both – you mentioned in your press release you had construction projects in Europe and you did very well in the water treatment area in the March quarter. Was any of that due to milder weather patterns such as we had here in North America in the winter? Should we expect a – from the base of operations that you established in the March quarter the normal acceleration that one gets in these businesses going into the June and September quarters?

Larry Washow, President and Chief Executive Officer

I think we’ll see a pretty good acceleration through the next few quarters. Yes. I think you have to look at it in a context, though, of the environmental segment. The 30 plus percent of that was related to the wastewater area – 36 percent, in fact. I think I may have missed that. Or 36 percent this year in the first quarter was wastewater. Last year it was 30 percent. So, a bigger portion of that is there.

Jay Harris, Goldsmith and Harris

Geographically, where was that business?

Gary Castagna, Senior Vice President and Chief Financial Officer

We have a lot of it still in North America right now, Jay. It’s not really weather-dependent, though, because where those areas are, no matter where it is, and particularly now because there’s money to be made, the energy industry is not too weather dependent.

Larry Washow, President and Chief Executive Officer

But the building materials weather was OK in Europe, but not great. There were some areas in the U.S. it was OK, but we would expect to see the normal second and third quarter strengthening of the building materials and Lining Tech group.

Jay Harris, Goldsmith and Harris

Both because construction activity picks up and you have these new levels of activity that you can sponsor out of Spain?

Larry Washow, President and Chief Executive Officer

Out of Spain and, again, China is doing very well as well.

Jay Harris, Goldsmith and Harris

All right. Great quarter, guys. Thank you.

Larry Washow, President and Chief Executive Officer

Thank you.

Gary Castagna, Senior Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. And we have a question from Robert Smith with the Center for Performance.

Robert Smith, The Center for Performance

Hi. Good morning. Could you give us an update on the R&D effort in Nanocor? And also, a little color on what’s been happening since the initial announcement of work in the antiviral area and its role – potential role – in Avian Flu.

Larry Washow, President and Chief Executive Officer

Nanocor, indeed, (Bob), what we’re really focused on – and you’ve seen from some announcements over the last few months that we’ve restructured that group a little bit and are really focused now on trying to bring these products to commercial success. And I think over the next few quarters hopefully we’ll see some benefit from that. We have a partner selling into the barrier market. We’re very optimistic about that. We think that is looking stronger now than it ever has, in part because of Europe’s activity in that area, which historically has been very low. It’s now picked up pretty dramatically.

So, Nanocor we’re not really doing a great deal of pure R&D. It’s far more application-driven right now and really focused on trying to generate commercial success and working technically with our customers so they can be successful.

The antiviral – our announcement, as you recall, last year really was initial results from one lab in the U.K. And we continue to pursue collecting additional data with a variety of other labs and consultants, really trying to identify the appropriate path to market for those products. Certainly it’s an exciting one for us. We don’t really expect any revenue of any consequence for a while in that area, but hopefully by year end we’ll have a much better sense as to what the product can do, where it fits, where the markets are, and who the customers might be.

Robert Smith, The Center for Performance

But could you give me an idea as to specifically what is being done? Because it seems that this Avian Flu question is upon us. And everyone is kind of scurrying around looking at potential avenues to approach the danger. So, I just would like – I know this is something that doesn’t happen overnight, but I just wanted a little feel is there – it’s not a sense of urgency about this about what can be accomplished, as you say, perhaps by year end?

Larry Washow, President and Chief Executive Officer

Certainly we have a sense of urgency, definitely. We’re – with the labs we’re doing a range of work, including some ultimately that could determine whether or not this is appropriate or how it would be appropriate to apply to an Avian Flu application. What the idea is for a lot of people is how do you stop the transmission of this – of the flu. And if you can stop it from bird to bird, you certainly have made a giant step.

And the methodology for the bird transfer varies somewhat, but we think there may be an opportunity to interject this material into that system. But, again, it’s very early days. We’re not sure of that. Potentially you could get to where it could be ingested in the Avian Flu category. That takes a lot of work and we’re in the process of doing that as well.

So, it’s – I would love to be able to tell you we got a product that’s in the market and we got things going, but …

Robert Smith, The Center for Performance

Well, I’m not asking for that, but I just wanted to get sort of a feel for the progress that’s apparent to you.

Larry Washow, President and Chief Executive Officer

Yes. We are progressing. One of the challenges, quite frankly, is that the labs – we’re not the only product that’s out there trying to get tested and …

Robert Smith, The Center for Performance

Sure, I understand.

Larry Washow, President and Chief Executive Officer

… path forward. And the labs are amazingly busy and incredibly slow in getting results. So, we’re the few are not all around Avian Flu, I think you’d see faster results from us and others as well, but we’re certainly pushing, (Bob), to try to get that stuff moving.

Robert Smith, The Center for Performance

Thanks very much.

Larry Washow, President and Chief Executive Officer

Thank you.

Operator

Thank you and, gentlemen, our final question comes from Andrew Nelson with Nelson & Associates.

Andrew Nelson, Nelson & Associates

Hi, Larry and Gary.

Larry Washow, President and Chief Executive Officer

Hi.

Gary Castagna, Senior Vice President and Chief Financial Officer

Hey, Andrew.

Andrew Nelson, Nelson & Associates

Just to follow-up on that previous discussion, are you in your R&D area doing any – you mentioned development of products in your environmental segment. Or are you making improvements to the liners or are you doing anything with any other parts of your business to improve your products, which would lower your cost or improve your profit margins?

Larry Washow, President and Chief Executive Officer

All of the above, Andrew. One of the interesting products that’s really starting to take off in our building materials group is composite material of super absorbent clay in a kind of unique format that creates a much lighter, much more effective water barrier for difficult applications, like brackish water, saltwater type things. And that product has been under development. It’s now commercial. And we’re seeing really outstanding feedback from the marketplace on that. It provides higher margins, higher value product.

And we’ve got others in the works as well similarly situated for Building Material and Lining Tech that are going to give us opportunities into new markets and, we think, really expand our business in those areas. So, a lot of good activity in the environmental segment on the R&D.

Andrew Nelson, Nelson & Associates

Is there – do you have any kind of timeframe for this, Larry, at all?

Larry Washow, President and Chief Executive Officer

The product evolution is hard to call, Andrew. We certainly – as we identify opportunities, we try to move them quickly through to production. There are some situations where mastering the production technology takes as long as the initial development of the product. So, we have some of that going on now, but I think you’re going to see some of the growth to come through from our research efforts this year certainly in that area.

Andrew Nelson, Nelson & Associates

Great. Well, thanks. Good quarter.

Larry Washow, President and Chief Executive Officer

Thank you.

Gary Castagna, Senior Vice President and Chief Financial Officer

Thank you.

Andrew Nelson, Nelson & Associates

Bye.

Operator

Thank you. And gentlemen, at this time there are no further questions. I would like to turn it back to you, Mr. Washow, for any closing remarks.

Larry Washow, President and Chief Executive Officer

Thank you, Michelle, and thank you, everybody, for listening on today’s call. Look forward to talking with you next quarter. Thank you.

Operator

Thank you. And this does conclude today’s conference. We would like to thank everyone for your participation. And have a wonderful day.

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Source: AMCOL International Q1 2006 Earnings Conference Call Transcript (ACO)

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