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AMCOL International (NYSE:ACO)

Q1 2006 Earnings Release Conference Call

January 20, 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

Rich Wesolowski, Sidoti & Company

Rob Norfleet, Davenport Company

Al Kaschalk, Wedbush Morgan

Steve Riccio, Landmark Capital

Hardin Bethea, DePrince, Race and Zoll

Operator

Good day everyone and welcome to the AMCOL International fourth quarter year-end 2005 earnings release conference call. Today’s call is being recorded.

A replay of this call will be available starting at one p.m. Central Time. You may access the replay by dialing 888-203-1112 – again, that number is 888-203-1112 – and referencing the pass code: 9666348.

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

At this time for opening remarks and introductions, I would like to turn the conference over to your host, Mr. Larry Washow. Please go ahead, sir.

Larry Washow, President and Chief Executive Officer

Thank you and welcome everybody. Hopefully, you’ve had a chance to look over the earnings announcement that went out this morning talking about Q4 and a wrap up of 2005.

So we’ll follow our usual format. And I’ll discuss a little bit of the overview. Gary will get into some of the financial details, and we’ll open it up for questions in just a few minutes.

Certainly, as far as the quarter goes, we’re pretty pleased with where it all ended up. Interestingly, the environmental segment, which normally you would expect to see some pretty significant (cyclicality), really finished the year on a very strong note. Still a bit slower, certainly, than previous quarters, but for a fourth quarter in that business, it was very strong.

(And) looking at the rationale for that, a couple things jump out. First, our global expansion; we’re operating in many other parts of the world now that really don’t follow necessarily the same holiday cycle that we do in the Western areas that we typically have been. And secondarily, and very importantly, our offshore business has really been booming. Not terribly surprising, with the activity in the oil marketplace. And that has no concerns, obviously, about holidays or time off, or anything – so that business continued to be very strong, right on through the quarter.

So the environmental segment really delivered a nice year and a nice quarter all the way through; total revenue up about 22 percent, as you note on the press release, and a substantial jump above that in operating profitability.

The mineral segment – a bit more difficult there. Certainly a good quarter and a solid year. But when we look at margins, obviously, we see the impact. (It, in) that case, primarily related to the oil and natural gas pricing. The mineral segment – even in our operations, we do use natural gas to drive some of the material. Obviously, in moving substantial quantities of our product around the country and around the world, we’re consuming diesel fuel or gasoline, or any of those materials that obviously have a much higher price today than they did a year or so ago.

So we do see the impact of those higher costs. And particularly in the fourth quarter, natural gas really spiked up far higher than we had expected. That impacts us even in some of the packaging areas, like our pet products, where we’re using resins derived from natural gas and oil as well.

So a little bit – little bit of a challenge margin-wise, but we did see fairly stable margins quarter over quarter, and for the year just down a touch on the gross margin for the mineral sector. General selling and admin – our overhead expenses were flat year over year. So that enabled us to show an improvement in the operating profitability.

The transportation group, just a quick mention – obviously a very solid year, focused in a developing customers outside of the AMCOL service that is provided, who can really contribute some value. And we’re seeing that in the margin improvement and the sales growth there. And it looks (that) that should continue to be strong as well. One of the other interesting benefits we are seeing from our joint investments around the world, our joint ventures – certainly a very nice contribution this quarter of income, helping bring the bottom line to a pretty successful end result.

So on all, 2005, I think we’re pretty pleased with where we are. Looking ahead a little bit, I think there’s definitely opportunities for improvement. We certainly see operational areas where we expect to get better in the – in the quarters and the year ahead. From the market standpoint, we do see continuing strength in many of our markets, and with our global footprint believe that we can expect to see continued growth as we get into 2006.

So with that, I’ll let Gary talk about some of the details on the financial side.

Gary Castagna, Senior Vice President and Chief Financial Officer

Thank you, Larry and good morning, everyone. I’ll just follow along our financial overview a bit to hit some of the highlights we mentioned there.

Larry mentioned a strong quarter on the – on the top line, which has been consistent with the prior quarters of the year; actually, above the prevailing average (through) the first three quarters and growth at 19 percent over the fourth quarter of 2004. Base businesses all contributed to the growth of foreign currencies, and acquisitions were pretty minimal impact in the quarter.

Our regional sales distribution – 67 percent in the Americas, 24 percent for Europe and nine percent for Asia Pacific – actually is a slight shift, actually, from the first nine months of the year, where the Americas were very strong, as well as Europe. And as Larry said, I think a lot of that has to do with the environmental segment’s strong finish to the year.

Gross margin for the quarter was 25 percent, as compared with 24 percent in the prior year. Our environmental segment is again the leader in improving our gross margins. GS&A increased by $4 million over the 2004 fourth quarter. Corporate segment, as well as the environmental segment costs, were the principal reasons for the increase over the prior year. R&D spending actually was flat as compared with the prior year, at $1.5 million. But the moderate increase in GS&A allowed operating profit to increase at 33 percent rate over the 2004 fourth quarter. And our operating margin improved to seven percent as compared with six percent.

Also in the quarter, the effective tax rate was 21 percent, as compared with 17 percent in the prior year. We did mention previously that the – that the company was going to take advantage of the workplace act that was limited to this year, that allowed a favorable tax treatment for repatriation of foreign dividends. That repatriation, which – actually in total, we repatriated around $18 million of foreign earnings back to the U.S. – resulted in a tax charge of six million – excuse me – 600,000 on that repatriation. But the quarter was positively impacted, again by our increase in depletion allowances, research and development, and again – and as Larry mentioned before – (and) – the largest phenomenon, really – positively impacting our effective tax rate, (shift) to foreign jurisdictions, and in particular jurisdictions where we have tax holidays, which are allowing us to actually bring all of the profit to the bottom line.

Joint ventures, again as Larry said, were very strong for the quarter. Our outstanding shares were pretty flat at the quarter, at $30.8 million.

And in terms of our financial position, long-term debt was about 12 percent of capitalization as of the end of the year, as compared with 13 percent; working capital at$149 million at the end of December, as compared with 129 million last year. (It) also mentioned – it’s been a subject we’ve talked about previously – that we actually did have a slight decline in working capital from the third quarter. So hopefully that’s the trend we’re setting here.

Operating cash flow for the year – a strong increase: up to 37 million, as compared with 17 million last year – capital expenditures at 27.4 million versus the 21 million last year. Again, I think we indicated that certainly this year, our expansion. Especially overseas in some new green-field sites, we’re going to increase our capital spending levels. And acquisitions were modest, at two million this year as compared with 13 million last year.

And then finally, we had purchased around 105,000 shares this year at an aggregate cost of $2 million, at 18.71 a share. And we have $8 million remaining in our stock repurchase authorization.

That’s the roundup.

Larry Washow, President and Chief Executive Officer

OK. Thank you, Gary.

(Andrea), we’ll open it up for questions now.

Question-and-Answer Session

Operator

OK, great, thank you, Mr. Washow. Ladies and gentlemen, the question-and-answer will be conducted electronically today. 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. We will take as many questions as time permits. If you’re using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is star one to ask a question. And we’ll pause for just a moment.

Our first question this morning is from – excuse me – from Rich Wesolowski at Sidoti & Company

.

Rich Wesolowski, Sidoti & Company

Thank you, good morning.

Larry Washow, President and Chief Executive Officer

Morning, Rich.

Rich Wesolowski, Sidoti & Company

Morning. Could you guys give us a sense of what stage you are at with the major cap ex projects that you initiated in 2005?

Larry Washow, President and Chief Executive Officer

Sure. One of the big ones we’ve talked about is our environmental expansion into Spain. That operation will be coming on-line by the end of the first quarter. We also are in the early stages of a substantial project in (Tenzin), China. That operation won’t come on-line until closer to mid year, maybe even early in the third quarter. Those are the two large green-field areas that show up in the capital.

Rich Wesolowski, Sidoti & Company

You had previously mentioned that the cap ex budget for ‘06 would be somewhere in the mid (20s). Is that still the case?

Larry Washow, President and Chief Executive Officer

It is. I think it’ll (be) pretty similar to where we ended up for 2005, yes.

Rich Wesolowski, Sidoti & Company

OK. So what are the projects that would keep it up? I mean, if you have Spain and China, you know – the spending presumably falling off for those in the first half of the year – what are some of the other ventures that you’re taking on that would keep the cap ex up?

Larry Washow, President and Chief Executive Officer

A lot of – a lot of what we’re doing this year will be kind of upgrading facilities and expanding capacity (within) already-existing (operation), so there’s a good bit of spending in it, especially in the mineral sector, to provide more throughput and more efficiencies in productivity in the products that we’re making now.

Gary Castagna, Senior Vice President and Chief Financial Officer

Yes. I think one other area, too, Rich, that is certainly – we’re gaining more attention with the business growth is in the oil field services area. There’s quite a bit of equipment involved there, both in the testing and certainly in the filtration side of that business, that we have considerable and ongoing investment for to support that growth.

Rich Wesolowski, Sidoti & Company

OK. You mentioned that logistics issues are one of the contributors of (the frod margin) that you saw in the mineral segment. What specifically were you referring to there?

Larry Washow, President and Chief Executive Officer

(The) challenge there – and if you look at the U.S. in particular (is) probably the – example – railroad service is an ongoing challenge. And the railroads are very enthused about the coal business these days and dedicate lots of resources there. Some of the other minerals, like bentonite, that are not as voluminous in terms of how many railcars they load every day, or trains in the case of coal, it’s difficult to get the level and the quantity-quality of service that we need to continue to ship out everything we could possibly ship out. And unfortunately, if you miss a shipment today, it’s hard to make it up because we can only deal with so many cars a day. So that’s been a challenge for us. We’ve been working on it, and I think we’ll see some improvement in 2006. But the overall rail system in the U.S. has really not been very beneficial for us, and yet it’s a critical part of how we move materials around. So we spend a lot of time and effort to focus in on ((inaudible)).

Rich Wesolowski, Sidoti & Company

OK. Shifting around in the mineral segment – did you begin to see the improvement in the detergent business that you had expected? Or can you give some detail on the length of the product cycle we may have in front of us, and how successful you expect to be in getting your items in those products?

Larry Washow, President and Chief Executive Officer

Yes, we did see the improvement we expected. The fourth quarter actually was the strongest of the year for the detergent group. And we look for 2006 to continue to build on that. Again, every year there will be, you know, a product or two that falls off in terms of formulation in the cycle. And that’ll certainly be the case in 2006 as well. But we look for that group to really be a pretty solid contributor all the way through 2006.

Rich Wesolowski, Sidoti & Company

How much visibility do you have there, and (as to) when, you know, the product’s going to fall off? I mean, you mentioned just now the 2006 – but, you know, are the innovations that are going to be, you know, moving into the consumer products in 2007-2008 – I mean, are they already on your radar screen?

Larry Washow, President and Chief Executive Officer

2007 is a little fuzzy, but certainly, 2006 we have a good picture, based on the activity in 2005 and what’s developed and evolved. There are, obviously, ongoing activities that, if they do get implemented into new products, would impact 2006 (late), but most likely 2007. But those are not, you know, 100 percent sure that the companies are going to actually utilize it.

Rich Wesolowski, Sidoti & Company

OK. Finally, Gary, is (26 and a half) still good tax rate to you? Is the – you know, the growing proportion of international income suggests that may be high?

Gary Castagna, Senior Vice President and Chief Financial Officer

I think it might be a touch high, Rich. It certainly does have some influences based on a number of factors, like what we can get from our mineral depletion here in the U.S., which is a big component. And then, indeed, if we’re looking at the kind of expansion we’ve had so far overseas, that should benefit us.

So I think the mid (20s), if you will, is still the right range. But maybe (26 and a half) might be on the – on the high end of it.

Rich Wesolowski, Sidoti & Company

OK thanks a lot, guys.

Larry Washow, President and Chief Executive Officer

Thank you.

Gary Castagna, Senior Vice President and Chief Financial Officer

Thank you.

Operator Our next question is from Rob Norfleet with Davenport & Company.

Rob Norfleet, Davenport Company

Hi, great quarter.

Gary Castagna, Senior Vice President and Chief Financial Officer

...Rob...

Larry Washow, President and Chief Executive Officer

Thanks, Rob.

Rob Norfleet, Davenport Company

Just real quick, I wanted to just get back to the minerals business a little bit in terms of the margin, obviously impacted by higher energy and gas prices. Can you kind of walk through, you know, on a – on a percentage of cost of goods sale line, what the energy and fuel costs are? And again, I’m just – I’m trying to get my arms around that relative to how price increases and passthroughs, and the recent decline in gas, ought to look as we look out into the first half of ‘06, (to) get some margin restoration back.

Larry Washow, President and Chief Executive Officer

Yes, it’s certainly an important component of the gross margin impact there. And as far as cost goes, it’s definitely – varies a lot. But obviously, when you look at a quarter, like the fourth quarter, where we saw the spike in natural gas, it had a much bigger impact on the overall cost numbers.

The – what we’re doing about all that – obviously, there still is coal available at very reasonable prices. And most of our operations are set up to use coal as a drying fuel, in addition to instead of gas. Those operations that are not set up that way are being converted so that we have the flexibility to use coal or natural gas, depending on which is the most cost-effective tool.

So we think as we get in towards the – (sort of in the) second quarter – (after) the second quarter and the third quarter of 2006, we’re going to have a much better – much better operational flexibility to utilize more cost-effective energy than we had been able to in 2005. So in terms of the cost impact, it’s real. It’s – I don’t have a percentage right in front of me here. Gary, I don’t know if you have any good idea. But certainly, we should see the improvement in that as we get into 2006, almost no matter what happens.

Gary Castagna, Senior Vice President and Chief Financial Officer

Yes, that’s right. Because I think that if you look at the overall – Rob – the cost profile that we have, and that are related to those factors, it’s probably hit the high end for us at this point. I think that frankly, the more key issue is in the markets we’re in, (as) to being able to continue our pricing initiatives: probably as much important in terms of restoring margins.

Rob Norfleet, Davenport Company

OK and that kind of gets to my second question. Obviously, we are using price increases to help offset that (debt). I mean, have we been successful in passthroughs or surcharges? And what kind of lag should we expect before we start seeing some recovery from that perspective?

Larry Washow, President and Chief Executive Officer

Yes, (generally), we have been successful. I think the markets understand kind of what’s happening in the energy side of the dynamics. And in our business, it’s a very busy time, quite frankly, for most of the markets that we serve. So price increases are definitely coming on through. And we should see probably the real impact of those more toward the second quarter; a little bit in the first quarter 2006, but more of that coming through in Q2.

Rob Norfleet, Davenport Company

OK, great. And would you mind just spending a couple minutes kind of giving us an overview of some of the trends you’re seeing in some of your – some of your end markets, such as metal (castings) – (if) we’re still seeing, obviously, the strength in global demand, the automotive industry and heavy equipment – and then get a little bit into the environmental segment, especially in the (oilfield) drilling services side?

Larry Washow, President and Chief Executive Officer

Yes. The metal (casting) business, the U.S. side, you know, is pretty stable. We’re not seeing, you know, really booming business, but very solid business; they’re running hard. The business is good. And the prognostication going forward is generally positive. I think they looked at 2005 as a real strong, almost turnaround year in some cases for the metal casting guys. So whether they can continue to grow as much in 2006 as 2005 is a question, I think. But I think the stability of the market is going to be there, and the strength will be there. How much growth we’ll see, I think time will tell.

But internationally, obviously, China’s doing very well. And we expect – like everybody, we expect that to continue. Seeing lots of opportunities develop there. So that will provide, certainly, a segment of the growth. Our business in Thailand in the metal (casting) area as well has been very good, as some of the automotive companies have made that a bit of a hub for their Asian operations. So we look at the metal (casting) market globally as definitely one of the growing areas that we will see in 2006.

The environmental sector – a very strong year in our (lining tech) group. We’ve got a new plant coming on in Spain which will be beneficial. The plant in China that really came into its own towards the second half of 2005 is really ready to go for a very strong 2006, and we see good opportunities there. The environmental offshore business has really been strong. And that group is very active anywhere in the world where there’s substantial activity in the oil patch. So it really is a very international business, with lots of exciting activity.

We’re seeing a strong demand for the products we have dealing with the waste water on the rigs offshore, as well as good growth in the land-based pipeline work, where we’re providing cleaning capability for pipelines that need to be checked and cleaned periodically. So that business, we’re looking for another very strong year of growth.

Rob Norfleet, Davenport Company

Great and lastly, what is the sales capacity for both the Spain and China plants as they come on-line?

Larry Washow, President and Chief Executive Officer

The plants – the (lining tech) plants we build are very high-capacity relative to the sort of demand that’s there. Because it’s kind of a one-size, and a needle-punch machine that can really produce a tremendous amount of throughput. So we have yet to really sell out any of our plants. And the benefit of that is, obviously, we can run them very efficiently. Because what happens is you really run out of logistical capability, in terms of cost-effectively delivering a product, before you run out of the ability to produce more.

So the capacity issues at the (lining tech) plant (is) not anything like they are at the mineral plants, where the cost of capital is substantially higher. So it’s really not a – not a big concern. We – you know, we expect that Spanish plant, though, to be very busy very quickly.

Rob Norfleet, Davenport Company

Great. Thanks again. Good quarter.

Larry Washow, President and Chief Executive Officer

Thank you.

Gary Castagna, Senior Vice President and Chief Financial Officer

thanks, Rob.

Operator

And our next question comes from Al Kaschalk with Wedbush Morgan.

Al Kaschalk, Wedbush Morgan

Morning, Larry. Good morning, Gary.

Larry Washow, President and Chief Executive Officer

Morning, Al.

Gary Castagna, Senior Vice President and Chief Financial Officer

Hi

Al Kaschalk, Wedbush Morgan

On the environmental side, can you talk about how the mix of business is affecting gross margins? Because I believe there’s certainly a difference in each of those businesses on the margin side, particularly as we move out into ‘06.

Larry Washow, President and Chief Executive Officer

Yes, I think the – you know, that margins that we saw for the year in environmental should hold up through 2006. The (lining tech) area continues to be good. We’re seeing, you know, the range of products in markets that we’re into kind of supporting the margin growth that we had in 2005. So we think that’ll be stable for 2006.

The environmental offshore – there are some opportunities to see a little bit of margin improvement, but they generally have pretty solid margins in that service-related business. And we expect that to continue.

Our building products group – again, very solid margins going into 2006. And we expect that to continue. I don’t think we’re going to see rapid increase in the gross margins in environment, but I think we should see very stable, and maybe a nudge up every once in awhile, in the overall gross margin. But it’s pretty healthy. And we think that’s going to continue.

Al Kaschalk, Wedbush Morgan

Is it fair to say that the water business is the higher-margin business of those three?

Larry Washow, President and Chief Executive Officer

Not really, no.

Al Kaschalk, Wedbush Morgan

OK. So if we’re adding equipment, would we expect any pressure on margins, relative to the service aspect of that business?

Larry Washow, President and Chief Executive Officer

I don’t think so. The equipment that’s added in there – it’s typically sort of demand-built. And when we have opportunities to utilize it is when we will typically go ahead and build it and get it out there. Leases are established, and time is set up. And so the paybacks are fairly predictable on that. We obviously have a little bit of surplus equipment all the time. But in general, when we’re spending new capital of substantial quantity, it’ll be for more specific projects.

Al Kaschalk, Wedbush Morgan

OK and then, in terms of top-line growth, are you able to share with us the split of that growth between volume and pricing? (In other words) ...

Larry Washow, President and Chief Executive Officer

It’s both. Certainly, the volume is definitely up, but the pricing has helped. I haven’t got the numbers right in front of me, Al, as to what the breakdown is.

Gary Castagna, Senior Vice President and Chief Financial Officer

Yes, I’d say on the (minerals) side, Al, that out of the – at least from the quarter, and probably even to the year, there’s probably a fairly equal, frankly, split between pricing-to-volume type improvement. Pricing has certainly been a principal driver, say, in the domestic markets we’ve had here. And then volume has been a major growth aspect in consideration of the Asia Pacific area for our metal (casting) type businesses.

And environmental – you probably have a bit more (still) on the volume-oriented front than pricing. We have increased pricing, as raw material costs have increased in that particular business sector as well – say, in the (lining technology) area, as an example. But most of that top-line growth is definitely volume-driven.

Al Kaschalk, Wedbush Morgan

I’m not sure I got clarity on the previous questions that were asked by others, related to restoration of margins in the – in the minerals segment. Given that (the) majority is driven by (tat) and metal (casting). So I guess the question I’d like to re-ask, maybe, is, are we in a stage now, in terms of the contract, that price increases are fully through or (are there) still more coming? Or are we in a stage where, with the increase in oil and gas prices that we’re seeing now in the market, that we may have that price impact offset the cost increases?

Larry Washow, President and Chief Executive Officer

(No,) I think the simple answer, Al, is that we believe that the opportunity to recover margin is very much there. There’s very little of our business that is contract per se. And obviously, as those contracts come up, we incorporate the higher pricing. So we do think we are going to see some margin improvement this year.

Al Kaschalk, Wedbush Morgan

OK. One little bit more strategic question – if railcars are an issue in terms of access – or seem to be hearing that – is there any consideration of acquiring an internal fleet, if you will, and having cars available?

Larry Washow, President and Chief Executive Officer

We do have – and it has increased pretty dramatically over the last 18 months – a reasonable fleet of lease cars. And we look at that to see if that – and it does help us, obviously. And we will continue to explore that as an option to make sure that we can get as much service (in) car availability as possible.

Al Kaschalk, Wedbush Morgan

And finally, on (NYSE:HPS), is there any comments you can make in terms of where – perhaps new revenue opportunities we should be looking for over the next couple of quarters, or (in year)?

Gary Castagna, Senior Vice President and Chief Financial Officer

I think that the (HPS) side, as we’ve said before, certainly has some very interesting product lines out there. The sun screen side, Al, probably is an area where we’ve seen some more recent success. And it looks – at least, in the near term – to help us there. Again, when you look at the overall level of the segment, that is still a pretty small piece of it. But certainly, it’s an interesting piece, in that we do see the potential to improve profitability – relative profitability and margin-wise, nicely.

Al Kaschalk, Wedbush Morgan

Are you able to add any more details on where you’re at in either discussions or distribution of product? Or is it completed, and you’re now looking at marketing opportunities at partners? Or are you further, and we should see product on shelf over the next six months?

Larry Washow, President and Chief Executive Officer

Yes. Certainly, some of those things are in the pipeline that would mean that we do have confidentiality issues with respect to disclosing specific customers. But we have had products already in the markets this last year that include our sun screen additives. And then, the upcoming year, we do expect that to expand further, with certain name-brand manufacturers of sun screens incorporating our materials.

Al Kaschalk, Wedbush Morgan

OK. Finally – sorry – on (Nanocor), you made the announcement. Do you see any – with bringing manufacturing internally – any increase in additional cap ex? Or is that kind of the mid-25 number that would help you in terms of manufacturing and marketing of the products?

Larry Washow, President and Chief Executive Officer

Really not any impact on capital at all, Al. I think the benefits of the changes we’re doing is better access to getting people in the marketplace that are closer to the customers that can really commercialize the opportunities.

Al Kaschalk, Wedbush Morgan

Thanks for taking my questions.

Larry Washow, President and Chief Executive Officer

Thanks, Al.

Operator

As a reminder to the audience, that is star one if you would like to ask a question or pose a comment. Our next question comes from Steve Riccio with – out of Landmark Capital.

Steve Riccio, Landmark Capital

Yes, hey, guys, great quarter. Al stole most of my questions, but I have one additional one.

Larry Washow, President and Chief Executive Officer

OK.

Steve Riccio, Landmark Capital

You mentioned that the change in working capital quarter to quarter was down a little bit?

Larry Washow, President and Chief Executive Officer

Yes. It was, Steve. Actually, the actual absolute working capital level slightly declined over Q3.

Steve Riccio, Landmark Capital

OK. And the – you said you’re hopeful that that’s an ongoing trend. So is it possible that the change in working capital for ‘06 – you know, you could be shipping some of that out of your – you know, your working capital needs? That’s going to be going down?

Larry Washow, President and Chief Executive Officer

Certainly, I think we’re all internally, management-wise, looking at focusing on the areas that we can control. The one detriment, as we mentioned in the past, with working capital – and it’s pretty simplistic – but in accounts receivable, a lot of foreign-based revenues now that we have in a company – some of those businesses have pretty long payment cycles. As those businesses have come on, you don’t necessarily see the same impact as you’ve seen in this ramp-up stage, where they’ve absorbed working capital.

Inventory is a different story. Some of that had to do more with our own internal plans, because of the shipping markets, et cetera, and stocking at facilities, particularly overseas, where we felt it was necessary to get more stock on the ground in those countries. However, we’ve certainly topped that out and think that there’s ways to optimize that. And I think that’s an area this year on the inventory management side that we’ll be looking at much more closely.

Steve Riccio, Landmark Capital

Got you and can you maybe provide some guidance as to what you expect perhaps your free cash flow to be, maybe in a range for ‘06?

Larry Washow, President and Chief Executive Officer

Expected to be higher. (NYSE:I) think that the – you know, certainly, we want to see operating cash flow flow through right from the net income growth of the company. There’s no reason at this stage of the game – and hopefully, the trend of working capital is going to – going to show that. That’s really the bottom line of it, Steve. It’s not too much of a hard science to figure out. But that’s what the goal is.

Steve Riccio, Landmark Capital

OK. And one additional question – I might have missed this; I was off the call for a bit – your margins in the environmental segment, obviously, have been trending up. What is your long-term goals for margins in that area?

Larry Washow, President and Chief Executive Officer

We’re right around the goal, Steve, I think realistically, for that market. Kind of in the mid 30s is a good place to be. You know, depending on the product mix, it may be up a bit, down a touch. But that kind of range we think is pretty good spot.

Steve Riccio, Landmark Capital

Cool.

Gary Castagna, Senior Vice President and Chief Financial Officer

Yes, I think if you go back a couple of years, Steve, we (maybe were) a little bit higher gross margins than we were today. And then last year, we came down with a couple of the add-on businesses. And the service-oriented businesses, which offer a lot of promise there, tend to have a bit – a lower gross margin than we have on the gross – excuse me – on product sales. But the whole portfolio now, I think, is pretty well (in like) what we might call a balanced (level). To move that up or down a lot at this point would be pretty big.

Steve Riccio, Landmark Capital

Great. Good quarter, guys. Thanks.

Larry Washow, President and Chief Executive Officer

Thanks, Steve.

Operator

Thank you. And we have a follow-up question from Rich Wesolowski, out of Sidoti & Company.

Rich Wesolowski, Sidoti & Company

Thanks.

Larry, you mentioned on a previous call, either second quarter or third quarter, that the R&D expenses were set to rise dramatically. But that’s not what we saw in the fourth quarter. Is that still the expectation? And if so, by how much would you expect?

Larry Washow, President and Chief Executive Officer

I didn’t – I didn’t mean to say “dramatically,” if I did, Rich. So I apologize for that ...

Rich Wesolowski, Sidoti & Company

Rob probably put words in your mouth.

Larry Washow, President and Chief Executive Officer

OK. We did see a rise to like a $6 million sort of rate, from a $5 million (cap) rate that we had – that’s – orders of magnitude, that’s what we’re going to see for 2006.

Gary Castagna, Senior Vice President and Chief Financial Officer

Yes. I think the quarter this year was flat mainly because last year we had certain development type expenditures that we incurred in the quarter last year, (more of it to do, then) flattening out this year. But if you look at the running rate, as Larry said, that (fix to) perhaps trend up more than $6 million rate is probably in the plans for ‘06.

Rich Wesolowski, Sidoti & Company

OK and finally, on the income from joint ventures, you had about double the contribution in the second half that you had in the first. A, is that mostly the contribution from that Indian (bulk side) company? And if so, is it an anomaly, or would you expect it to continue out into ‘06?

Larry Washow, President and Chief Executive Officer

Big chunk of that contribution is from our Indian joint venture; Egypt and Japan contributing as well, though. And in terms of India, we expect that to continue in ‘06, yes.

Rich Wesolowski, Sidoti & Company

Thank you very much

Larry Washow, President and Chief Executive Officer

...you...

Operator

And ladies and gentlemen, as a final reminder, that is star one if you would like to ask a question or pose a comment. We have a question from Hardin Bethea with DePrince, Race and Zoll.

Hardin Bethea, DePrince, Race and Zoll

Hey, Gary, maybe this is a question for you – or Larry, I’m not sure if you’ll want to comment as well. But the last acquisition you guys did was, I guess, more than a – more than a year ago, or about a year ago, of significant size. And I guess I just want to gauge kind of where you see potential acquisition opportunities, if any, and if that’s something you’re actively pursuing today.

Larry Washow, President and Chief Executive Officer

Yes, Hardin, we’re definitely actively pursuing acquisitions. It’s tough to find things that really fit well with the kind of future that we see for AMCOL. And yet we have – there’s always things sort of lurking around that are interesting. And a lot of what we’re interested in isn’t necessarily for sale. But we’re definitely continuing to look at that. And while there’s absolutely nothing that’s even close to a step forward in terms of a real deal, it is part of our strategy to continue to be out there. And obviously, given our balance sheet, we’ve got a lot of flexibility in terms of what we could do. And, you know, if the right opportunity presents itself tomorrow, we’re going to be right there to do it. And in the meantime, we’re pretty active almost anywhere in the world in looking at things that might be a good fit for us.

Hardin Bethea, DePrince, Race and Zoll

OK. Fair enough.

Larry Washow, President and Chief Executive Officer

Thank you.

Gary Castagna, Senior Vice President and Chief Financial Officer

Thanks, Hardin

Operator

And gentlemen, there are no further questions at this time.

Larry Washow, President and Chief Executive Officer

Thank you, (Andrea). And with that, we will wrap up our call. Very good 2005, and look forward to hopefully a strong 2006. Thank you much.

Operator

That does conclude today’s conference. Thank you for your participation. You may now disconnect.

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Source: AMCOL International Q4 2005 Earnings Conference Call Transcript (ACO)
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