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Amcol International Corp. (NYSE:ACO)

Q1 2009 Earnings Call

April 24, 2009 11:00 am ET

Executives

Larry Washow - President and CEO

Don Pearson - SVP and CFO

Analysts

Rich Wesolowski - Sidoti & Company

Al Kaschalk - Wedbush Morgan

Jay Harris - Goldsmith & Harris

Nat Kellogg - Next Generation

Robert Smith - Center for Performance Investing

Operator

Good day and welcome to the AMCOL International first quarter 2009 earnings 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 passcode 9892174.

Speakers today will be Mr. Larry Washow, President and Chief Executive Officer, and Mr. Don Pearson, Chief Financial Officer.

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

Larry Washow

Thank you, and welcome everybody to Q1 2009. I guess by now you had a chance to look over the press release and the information. I would describe it as sort of a reasonable start to what undoubted will be a very interesting year.

As you note, the earnings for the quarter is $0.14 a share; sales were down 14% as well; and the revenue decline, certainly we talked about currency being a big factor, freight revenue also comes into play there. We'll talk about that a bit more, but obviously, the volume is down. Certainly, that's the biggest story we have in the mineral sector. Volume decline in minerals, the biggest sector for AMCOL in total.

If we look at metal casting which is the biggest segment of minerals, not a big surprise that the volume is down there. You have all read and keep track of I'm sure the activity in the automotive sector, which has been greatly in the news in last few weeks, the heavy equipment guys are as well and all those businesses are down. So, big impact on our volume.

The other factor that had a big impact on volume is oil drilling. And in this case, if you look at our minerals oil drilling business, the rig count is a pretty good proxy for what's going on.

From the earnings calls in the last few days from oil-related companies, you'll note that the rig counts are down more than half of what they were a year ago. Lots of forecasting of continued rigs decline really depends on what happens with the oil pricing, but the rig count definitely down and dropping. So that is an ongoing concern.

The good news in the mineral sector though is the margins. While the margins were down a little bit from Q4, hanging around that 20% mark on much lower volume, certainly I think is a pretty good performance to start the year. Part of that related to pricing that we've talked about over the last several quarters, but an element of that is cost as well.

We have been pretty aggressively trying to make sure that our operational capability size, staffing and cost sort of match up with the demand requirements. To that end, we have closed three of our smaller metal casting related blending plants, and we announced last week that we were idling one of our larger Western operations.

Our three major Western operations are more efficient and certainly capable of absorbing the volume that was going through the small operations. So, we expect that all of that will help us be sized drive for the business as we see it going forward.

The Environmental sector, Q1 is always a bit of a challenge. In a normal year, I think we'd probably be talking more about weather, because it was a very difficult January and February, particularly in Europe and parts of the U.S. So, many projects that were planned were slow to get going.

One element of the environmental business is definitely down, and that is, commercial construction. We see that decline globally and really don't expect that to turnaround anytime soon. When we talk about the segments, you will note in there that that's one of the biggest declines year-over-year across the company.

Our Lining Tech business declined as well, but that's a little bit less volatile. We think over the course of the year given the projects that are lined up and the expected activity particularly in Europe, but also the landfill business which is relatively stable, not completely but certainly a lot of the sales that are planned will be built. So we think over the course of the year, Lining Tech is actually going to be not great, but okay, but commercial construction, again, we don't look for that to come back anytime soon.

Oilfield Services would be a surprise I guess in terms of the performance this quarter. A couple of elements go into that. We acquired the coil tubing business mid-year 2008. So that was not included in Q1 2008. So that's our portion of the increase in revenue and profitability.

But the real story there is, sort of, the business mix and most of our business in Oilfield Services is offshore. Depending on the nature of the projects and the size of the business is there, that's good profitable business.

I think the gross margin in Q1 were unusually high for what I would expect over the course of the year. I think a more realistic proxy is probably in the low 30s, as oppose to the mid 30s as we saw in Q1.

There are some positive things in Oilfield drill. The acquisitions that we've done over the last several of years were with the idea that we would create a bundle of projects and products and services. We're doing much more aggressive job by cross-selling those products and going into companies and providing a number of services on the rig instead of just one or two that we might have historically.

Additionally, the international side of that business we think has some real opportunity. So, Asia, in particular, we've got a good team of people hardworking there. And I think I mentioned last time we have, finally after a couple of years, a good project going in Brazil. We expect that to be the first of the several additional projects.

But, obviously, overall for AMCOL, clearly, we need to manage the costs in face of these slowdown in business which is very real and most importantly, is the balance sheet. It's obviously a critical element and certainly subject of our internal discussions on a daily basis.

We have made some good progress in 2009. I'll let Don talk about that along with the other financial issues.

Don Pearson

Thank you, Larry. Before I get into some of the financial highlights, I just want to point out that AMCOL has adopted FASB 160 noncontrolling interest in consolidated financial statements. There is no material impact on the company, but it essentially takes what was previously referred to as minority interest and put that in different locations on both the balance sheet and income statement. So, all public companies are doing this. It's nothing new for AMCOL.

Moving to the statement of operations. Larry mentioned the decline of revenues of about 14%. I do want to highlight that 54% of that was due to foreign currency and 25% of that was from freight and fuel surcharges decline. So, almost 75% of that revenue reduction related to currency and freight passthrough.

Looking at corporate G&A. While we saw an increase of $900,000 quarter-over-quarter, about half of that represented one-time professional fees that we incurred as we had to do the restatements for joint venture with Ashapura for Q2 and Q3 in 2008. If you looked sequentially comparing corporate overhead from Q4 of '08, we're about flat. So if you excluded those, one-time cost would be down.

I'd want to highlight that the other net item on the income statement represents foreign currency transactions. So you'll see an increase there of about $1 million. Again, we had quite a bit of currency volatility in the quarter, although we did see some softening of that in the March month.

Interest expense is obviously up a bit due to the higher debt levels. And the other item I want to point out is the income from joint ventures is down from the prior year quarter. That's all due to Ashapura, which was $1.2 million in Q1 of '08 as a result and then that was down again because of the stopping of the bauxite shipments last May.

If we move to the balance sheet, I want to point out a couple of things here. Certainly, on the working capital, we're pleased with the progress that we had in the reduction in receivables in inventory. That's obviously a combination of both buying has been down, but also new efforts by management really focusing on that. So the challenge for the rest of the year is to make sure that we improve the performance of that.

We'll typically see increased working capital in the second and third quarter as business activity increases. So our objective is to make sure that on a relative basis, our performance on working capital improves. In other words, if there is an increase in those quarters, it would not go up at the same rate as prior years, and then we'd expect to see a net reduction in working capital by the end of the year.

Also, I want to point out that we did the purchase of the chrome mine in the first quarter, and the way we account for that is we consolidate that. So in looking at the balance sheet, the big changes you'll see there is the increase in mineral rates. That's the result of South Africa.

Also, you'll see about a $3 million or $4 million increase in other liabilities that's picking up some obligations on South Africa. With the new accounting rule of FASB 160, the minority interest are now called noncontrolling interest and that's down in the equity section. So the increase there is reflecting our partner's minority share in South Africa.

I want to point out on debt. We saw a slight decrease there in debt of about $4 million. Again, we hope to keep debt flat, ideally down during the year. Q1, of course, we had had to absorb the purchase of South Africa. So we're pleased that we were able to have debt come down slightly.

Also looking at the availability of debt, our unused facility has about $61 million available on it. We also have an additional line of credit that has $12 million at the end of the quarter. So we have about $73 million of available borrowing at the end of the quarter.

Also, note that our cash balance of $32 million is a bit higher than normal. We typically target about $25 million balance. So that higher balance is really basically due to funding the dividend payment that was in early April.

Now, let's take a look at the statement of cash flows. I really want to focus on the investing section here, just to make sure that's clear with everybody. You'll see some activity on the corporate building that's an in and an out, so that's a wash. We will see several million of that in Q2 and then that should be the end of that.

Down below you'll see a receipt from Chrome Corp. of $6 million. If you recall, this was a loan that we made to Chrome Corp., the company that we bought the South African mines from. When we close this deal, the way that the cash flows worked was we collected that receivable, so we had an injection of $6 million of cash and then the cash outflow to purchase our 53% of Chrome Corp. was $15 million. That $15 million is included in the capital expenditures line item there of the $23.6 million. So the net cash cost of South Africa in the quarter was appropriately $9 million.

With that, Larry, I'll turn it back to you.

Larry Washow

Okay, Don. Rhonda, why don't we open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). We'll take our first question from Rich Wesolowski with Sidoti & Company.

Rich Wesolowski - Sidoti & Company

Looking at the oilfield in March here versus December, you did a much higher margin on about $1 million less in sales. Can you explain what happen there?

Don Pearson

Yeah. The product mix has a huge swing, which is why when you look at quarter-over-quarter sometimes, if we've got more of the higher value offshore business than onshore, it really does play out very well. But this why I mentioned as well that I think the 36% is really, probably unusually high. Just given the nature of the market as it is today, 28 is probably a bit lower than I would expect. So if we look at somewhere 30 plus or minus is probably a more realistic target given this sort of environment. But if there are some big projects offshore that have really good margins, we might see drifting up towards the mid 30% again. But it's really just a product mix thing, Rich.

Rich Wesolowski - Sidoti & Company

Well, I imagine that the natural gas drilling services are down as you mentioned and the offshore seems a lot steadier. So why would the product mix change so much to bring it down to 30 in coming quarters?

Don Pearson

It really just depends on that mix again. We had a probably unusually strong mix we think in Q1 of the offshore activities. Again, we're still going to have offshore activities but there are some of the services we provide that are much higher value than others. Filtration was extremely strong in Q1. We've already seen in Q2. Not bad at all, hanging in there, but probably not at the same levels. So, I think we are going to see a drift down, again not probably to the 28% but certainly up of 36.

Rich Wesolowski - Sidoti & Company

If I look at the 17% segment organic growth rates, that means you would have had to have a much larger increase in that in the offshore to offset what I imagine was a decline in onshore?

Don Pearson

Correct.

Rich Wesolowski - Sidoti & Company

Is the dividend safe?

Larry Washow

Obviously, that's a board decision as you know, Rich. But the company has paid a dividend for 72 or 73 years. I think we will continue to pay a dividend. Obviously, the size will be a discussion as it is every quarter with the Board Meeting coming up in May.

Rich Wesolowski - Sidoti & Company

So, if there is a change, you will still pay dividend, will just be at different size?

Larry Washow

I think that's fair to say. I don't see the dividend going to zero at all. No.

Rich Wesolowski - Sidoti & Company

Finally, if you backup the currency effects as well as the one-time corporate item, I have your SG&A up about $0.5 million and your organic sales declined. Are you keeping the resources high in the expectation of better business in quarters ahead or is there a potential for lower overhead cost as you move through the year?

Don Pearson

I think we'll see the overhead cost trend down. We're certainly not keeping them high. The building does, the new building and all those, bring a bit higher cost level that wasn't here last year. We really kept R&D at about the same kind of level. So that's hanging in there.

We have also actually done a bit of work to try to create some grooves that can bring some real value and savings. For example, we didn't really have a full group to support our tax efforts last year, we do now. But the net impact of all that should actually be a lower cost of overhead as we get everybody in place because we reduced the outside spending.

So some of the things we are doing should actually show up this year as a reduction in overhead, and I think we'll see that continue to trend down throughout the year.

Operator

We'll take our next question from Al Kaschalk with Wedbush Morgan.

Al Kaschalk - Wedbush Morgan

Just a follow-up on the oil field services question. If you take that down to the operating line, how should we think about the trend there, because as you know, last year was quite varied as well.

Larry Washow

It is a tough call, Al. I mean in the fourth quarter even with the lower gross margins. I think the operating profit was still 13%. It's 15% now. There is a higher overhead burden this year in part because we've got the coil tubing business included in there.

So, again, I think if you are looking orders of magnitude, the 15% plus or minus is probably not going to be way far off where we expect it to be.

Al Kaschalk - Wedbush Morgan

Have the components to drive this business changed, given the mix of assets that you've added over the last one or two years? In other words, what should we think about here? Because this, clearly, moves the needle on a given quarter given the strength.

Larry Washow

Yeah, it certainly does. Given the nature of this business, it's hard to give you kind of a clear forecast because these are projects that I was talking with our guys yesterday in fact, and they had some projects that the big oil companies said these are going to happen. But we're going to slow down and it might not be in April, it might be in May, it might be in June.

So even though, we've got some visibility as for things that are coming, it's very difficult to say, second quarter is going to be good, bad, or indifferent. But, frankly, we do have with the acquisitions over the last couple of years as we are now selling a much more complete portfolio of projects, or products rather, and services than we ever had before.

So what we have seen is, some of this bundling as we'd call it, there is a benefit to that and that we've got the sales people dealing now with a whole range of products and not just going in and selling filtration. They can sell nitrogen, they can sell coil tubing. Then it's really beginning to develop the skills with the people in the marketplace, so they can bring more to every project than we have in the past. That we think bodes well. So I think the work over the last couple of years will definitely pay off.

It is, again, a business that's going to be heavily driven by oil and gas pricing. I've read all sorts of projections there, so I don't even have sort of to guess anymore as to where that might end up. But I think you're really going to need to see pretty consistent oil prices, probably above $60 a barrel before you see a rebound in activity.

Al Kaschalk - Wedbush Morgan

So is it fair to say, if you take out the ups and downs on some of the project work, meaning timeframe once it'll start or complete, can you say that's kind of doing a high single-digit quarter year-over-year type of growth or is it like you said a function of where we're sitting on oil and gas prices to drive this topline?

Larry Washow

I think the oil and gas prices are going to have a big influence. About half of the increase, if you look quarter-over-quarter, is really related to coil tubing. We actually thought it will be a much bigger portion of it, because the business declined quite a bit in coil tubing. And that's all related to price of oil and gas.

So, I don't know that we're going to really a good strong first quarter which is good, but to expect that kind of continued growth over the course of the year after the change in oil and gas pricing, I think is probably not realistic.

Al Kaschalk - Wedbush Morgan

If I may switch to saying ones to the environmental side on the supplemental information you provided, it highlights the negative trend, the dollar trends in the composition of that segment, but in particular, building materials down nearly 35%, 40%.

Larry Washow

Right.

Al Kaschalk - Wedbush Morgan

How was the visibility there? I appreciate your comments in the press release and prepared remarks that it's going to be an interesting year. But, can you help us try to round the edges there a little bit in square foot number?

Larry Washow

Yeah, it's building materials. I mean, it's really the building we see going on is primarily government-driven. Some of the universities and a little bit of a hospital sector are kind of still building. But even in places like we buy, there is none of the builders to keep up with them, slowdown dramatically. So I think that commercial construction, the building materials activity, the sort of decline we saw in Q1 is probably not going to change a great deal. I think we'll see that kind of continued throughout the year.

Lining Tech on the other hand, the first quarter rather was difficult because of the weather. Certainly, there is a bit of a slowdown there as well. There is no question about it. But I think the first quarter slowdown there has probably exaggerated from what we'll see over the rest of the year. So I think Lining Tech will actually end up with a pretty solid year when it all said and done, and the declines won't be of the magnitude we saw in Q1.

Al Kaschalk - Wedbush Morgan

Then not to leave Don out. Can you, maybe, comment on the change in or the benefit in working capital you expect or are targeting for 2009 given the strength you had in Q1?

Don Pearson

Yes. I think the way we kind of frame that is, looking at 2008, we probably invested $60 million or $65 million in working capital. So, internally, by the end of this '09, we'd like to see an improvement of a minimum of half of that. But certainly with the start of the year, we're encouraged by that.

We do know, again, that we'll probably invest a bit in Q2 and Q3, but we want to, like I said before, improve the performance. But by the end of the year, we absolutely expect to see working capital benefited at least $30 million.

Operator

We'll take our next question from Jay Harris with Goldsmith & Harris.

Jay Harris - Goldsmith & Harris

Don, I'd like to start with you, if I could. I'm confused on the change of the AMCOL shareholders equity, which is down some $8.5 million. The dividend exceeds the net earnings by about $1.5 million. Where did the rest of the decline come from?

Don Pearson

This is probably going to be in that line item other comprehensive income. So, you note that that change is by $8 million or $9 million.

Jay Harris - Goldsmith & Harris

I am sorry. You're on the P&L statement now?

Don Pearson

Yes. I am on the balance sheet.

Jay Harris - Goldsmith & Harris

You are on the balance sheet, equity. Where do I find that?

Don Pearson

Your question was the decline in equity.

Jay Harris - Goldsmith & Harris

No, the other comprehensive income. That's on the P&L statement.

Don Pearson

Well, your question, sorry, Jay, was regarding the decline in equity.

Jay Harris - Goldsmith & Harris

No, but you mentioned other comprehensive income change. Where do I find that?

Don Pearson

Okay. So if you go to the equity section, within equity, there is accumulated other comprehensive income.

Jay Harris - Goldsmith & Harris

What's the nature?

Don Pearson

Yes, included in that is going to be a lot of accounting type activity, but it's principally going to be foreign exchange and pension related. Thank you.

Jay Harris - Goldsmith & Harris

What will happen going forward in the year in that account?

Don Pearson

That's going to be a function of what happens with the translations on foreign exchange, on pension accounting, and I think to some extent the way we account for Ashapura also falls down there.

So this is non-cash. This is the way we'll get into complex accounting treatment. This is where it really all falls. Its non-cash activity that the FASB elects according to this relatively new area called other comprehensive income.

Jay Harris - Goldsmith & Harris

Does it changes in the other comprehensive income flows through the P&L statement?

Don Pearson

No.

Jay Harris - Goldsmith & Harris

So this is just a change in the valuation of assets?

Don Pearson

It's a combination of variety of accounting principles.

Jay Harris - Goldsmith & Harris

I hear you and I've been confused for years on those. Larry, could you comment a little on where and how you would like to drive the oilfield service business over the next few years?

Larry Washow

I think the big opportunity for us there and we started the process already is bringing the whole portfolio of services on a more consistent basis to our customer base and expanding the customer base. We think there's a lot of opportunities. I'm afraid I don't have the number offhand, but 80 plus percent of the business is really in the U.S. in this sector and a lot of the oil activity is outside the U.S., particularly in Asia, certainly in South America. We're really very early days in getting there with our technology, with our service and with our skilled people.

So I think the growth opportunities there are very real, but we're pretty well established in the Gulf of Mexico, and we're certainly going to be aggressive and try to grow the business there. But I think in the years ahead, it's really going to be outside the U.S. that we see some substantial opportunities. But, again, even that, it's really going to be driven by that oil and gas price.

Jay Harris - Goldsmith & Harris

How long do you think it's going to take to achieve what kind of goal in terms of percentage of revenues from outside North America?

Larry Washow

It'll take a couple of years. We started the process over a year ago in Asia and actually more than 2.5 years ago in South America. But these tend to take some time and you'll finally get a project and you have to prove yourself on the project, and then you get more. So it takes some time.

So I think over the next couple of years, we should see some of the benefit of the work we've been doing. So I would look down the road three years and hope that instead of 10% or 15%, 30% of this business would be outside the U.S. At least 30% of our bigger business.

Jay Harris - Goldsmith & Harris

Will you be taking advantage of the depressed activity levels to acquire other complementary services?

Larry Washow

It's a possibility. But I think we believe that and we've got a nice package right now. So, it's really more taking what we've got, translating that into other parts of the world as opposed to acquiring more services. We think we've got a good portfolio right now.

Jay Harris - Goldsmith & Harris

Can we switch over to metal casting for a moment?

Larry Washow

Sure.

Jay Harris - Goldsmith & Harris

It's heavily weighted to the U.S. GM has indicated its going to take an extended plan closed down this summer. Do you have any notions as to how your first quarter activity levels might have changed, if there had been no inventory reductions in the channels?

Larry Washow

I don't have a good feel, to be honest with you. I think in the first quarter like the second quarter, there were really lots of shutdowns. I mean, the Christmas shutdown extended well into January. So we saw a lot of slowing down already. It's really hard to say, what all the activity talked about in Q2 means.

Keep in mind, that we do have a broad customer base, including all the foreign national that produce cars here as well. So, GM is an element, but the other guys are very important as well. So, this is one area, it's really hard to predict. Obviously, the build rate is well off of the highs. Nobody expects us to just get back there anytime soon. But if it hangs in the 9 million or 10 million unit range, the decline we saw on the first quarter is probably order of the magnitude what we would expect for the year.

Jay Harris - Goldsmith & Harris

Well, I guess, I was approaching it a little differently. If I took your first quarter activity level, I was trying to get a sense of how much that might increase on a quarterly basis, once the inventory correction was behind us and without any necessarily any change in 9 million or 10 million final demand levels.

Larry Washow

I don't know, because there is a big element of it that's outside of automotive, as well 30 plus percent of it outside of automotive, and how that business develops and whether the heavy equipment guys comes back at all has a big impact. But, certainly, that slowed down pretty dramatically as well. So I guess, I'm not giving you a very good answer because we just don't have really good visible picture of how the second, third quarter is going to shape up.

Jay Harris - Goldsmith & Harris

I guess post Labor Day, you'll have a better picture, right?

Larry Washow

We'll know as the second quarter get by then for sure.

Operator

We'll take our next question from Nat Kellogg with Next Generation.

Nat Kellogg - Next Generation

Just I wonder if you guys could, now that the acquisition is closed, maybe talk a little bit about your expectations for Chrome Corp. acquisition. I guess really, I know longer term what you guys are planning to do, but how much is that going to move the needle this year if at all?

I think you guys have talked to really get that business up and going there is you will need some CapEx associated with that mining. So, maybe when that might happen? Is it this year or next year and maybe just a little more detail there?

Larry Washow

We really don't expect to do any needle moving at all this year. We do have small plant there that is producing and we would be selling some material out of there. But relative to our big plant expectations and market opportunities, that's really going to be a 2010 event.

Now, what we do hope is in the second half of the year to be able to start on the plant. We are in the process now of really trying to find two may whole investment opportunity there to make sure we're looking at the right sort of capacity and try to minimize the expenditure we have to make to get that underway. But that plant, in a best case scenario, probably wouldn't be running until Q1 of 2010.

So in the meantime, we'll be feeding the market with some materials from our other plant and trying to be in a position when we have the new plant that we're really ready to turn them on and start shipping finished products to our customers. But 2009, no real benefit. I don't think 2010, certainly in the second, third and fourth quarters, we expect to see some real positive things out of it.

Nat Kellogg - Next Generation

I realize this is difficult to say exactly, but I mean if I would pack in the sort of typical seasonality you guys had, I mean obviously Q2 and Q3 are up from the current levels. But I think we've seen a lot of other companies given what's going on in the world that sort of thrown a lot of curved balls instead of typical seasonal movements.

So I am just curious if you guys had any comments or any further insight to give us as far as businesses that you might think might not respond. I mean, obviously, the GM shutdown, how that might affect metal casting, but beyond that, how seasonality might be normal or different this year given sort of what's going on in the broader economy?

Larry Washow

Our big cyclical business is the environmental. It's really weather dependent. So the second and third quarters tend to be far busier than the first and the fourth.

We expect that trend will continue.

There is a lot of projects out there. This will be the first year. We don't see growth environmental I suspect, but we certainly think there will be a lot of good activities in the second and third quarters, much greater than the first and the fourth.

So, will it be the same magnitude increase as it was last year? Probably, not, but we'll definitely see a pickup in the business over the next couple of quarters.

Nat Kellogg - Next Generation

I think you mentioned this is at the very beginning, but it's just moving quickly. So I wonder if you could either go back over it or may be give a little clarity. How much is sort of revenue decline was tied to sort of lower fuel and freight sort of passthrough costs?

Larry Washow

Yes. About 25% of the revenue was related to freight or fuel passthrough.

Nat Kellogg - Next Generation

Okay. So the 25% of the revenue decline was really a...

Larry Washow

Yes. It's sort of $6 million, $7 million.

Operator

We'll take our next question from Robert Smith with Center for Performance Investing.

Robert Smith - Center for Performance Investing

Could you give us an update as to beyond the effort, what's been happening in the recent months?

Larry Washow

We've got number of projects going. And as you can see…

Robert Smith - Center for Performance Investing

Yes, I'm speaking more in Nano area and also mycotoxins and things like that.

Larry Washow

Yeah, the Mycotoxin thing is probably one of the more exciting areas. It's not a new business for bentonite, but what we are doing is working with some large global companies who are in the animal care business and really trying to broaden our base. Historically, bentonite has been used as a cattle feed supplement, but it clearly has benefits for a number of other animals; swine, chickens, and what have you.

So we've got a lot of projects going that we think are going to enable us to partner with these global guys and really build a stronger business and a higher value technical business at the same time. That's a very good project ongoing, and we think we'll see some benefit out of that in the quarters ahead.

The Nano business is, if you've followed us at all we've been working on for 10 or 12 years and we've got some really interesting technology. But we haven't found a big home for us. There are some applications in automotive for lightweighting that are going on. Some of the barrier uses are very good. There is potential that this could be part of the fuel tank barrier program to try to minimize emissions from that. But it's still a very, very small business.

If anything, I think what we've learnt from the technology is the ability to take that into other markets. So, we're really looking at a broader base of that technology. And instead of just saying, okay, it's got to be a nanomaterial going somewhere, maybe that surface treatment technology redeveloped in creating that Nano product has application in a broader range of areas.

One of those being some of the, either the Mycotoxin could be a potential. Some of the work we're doing in sort of the exotic things like cholesterol reduction have been driven from our work in the nanoclay side. But they are quite some time away from really being revenue producers.

Robert Smith - Center for Performance Investing

Anything further on the work you've been doing instead of, I call healthcare as pharmaceutical area?

Larry Washow

Yeah, in pharmaceutical, the cholesterol is probably the active project we have now. We've had interesting results in a number of studies. We're still away the way from determining, kind of what the product is and where it would go and where it would fit. But, we do show some efficacy that is interesting. We think in the quarters ahead, we might have something to talk about there. But, right now, it's an ongoing R&D project. It has not really even begun the transfer to determine commercial potential or how we might go for that.

Robert Smith - Center for Performance Investing

The work you did in the HIV area, did that go away or...

Larry Washow

It's still there. It's still there. We are still looking for applications. We've got some areas and vibes, for example that we think has some interest in that. But we've really not found and in that case, clearly, need a partner to take that into any human sort of activity. And we've not really found a partner yet who says, yeah, that's the technology. I'll work with you to develop it. So, still ongoing, we certainly haven't given up on it. But it's clearly not going to be a big impact for us any time soon.

Robert Smith - Center for Performance Investing

You mean the efficacy of it as such.

Larry Washow

Efficacy is real in particular applications and there is other ways to deal with the same issues. So whether this is one that's going to get some favor and turn out to be the best or the most interesting, so far it hasn't. There's other ways to skin the cat.

Operator

(Operator Instructions). We'll have a follow-up question with Rich Wesolowski with Sidoti & Company.

Rich Wesolowski - Sidoti & Company

Can you talk about any notable recent changes in activity at the margin in the various geographies you serve, maybe which you're seeing signs of at least stabilizing in which are perhaps getting worse?

Larry Washow

Probably the one area and unfortunately, its not big enough on a relative basis in our business to move the needle dramatically, but China does seem to be showing some signs of life. The automotive sales there in March were $1.1 million, which is an all-time record and the construction market there appears to have opened up a little bit.

So I guess, if any thing sort of seems to be turning around the other way, it would appear China. Not any real visible exciting signs anywhere else, so we can point to and say, yes, there is some real difference happening. Unfortunately, lots of questions we get as to where is the bottom or are we at the bottom? I think like everybody that ends up on this side of the microphone, it's really hard to know.

And I think the rate of decline certainly seems to have slowed but when you read about all the activity in automotive sector, what does that mean for consumer confidence buying cars and all that? The housing market still in the U.S. is in tough shape. So, they'll see a great deal of positive response in the U.S. But like I said, China maybe the first glimmer where you start to see things and hopefully, that portends some good things down the road across the region there.

Rich Wesolowski - Sidoti & Company.

This now two quarters where the pricing for the mineral businesses have held. Have we passed the point where customers would have bogged to paying higher rates?

Don Pearson

Washow I don't know that you ever pass it, but I think we are very confident that we're fairly and reasonably priced. So, I think the customers came to the same realization that this is a valuable input and a product. We do a great job of supplying it and there are fair prices. Again a 20% margin in minerals is nothing we get super excited about better than we were. But from the stand point of the customer, it's not as if we're minting money in this business. So I think we are in pretty good shape there.

Rich Wesolowski - Sidoti & Company.

Your volume was down as well, which makes the 20% margin look little better.

Don Pearson

That's right. It does, yes.

Rich Wesolowski - Sidoti & Company.

Can you talk about any actions you've either taken or considering on hedging energy costs, diesel and natural gas are lock in, these are better margins in minerals?

Don Pearson

We have been for last few quarters working with an outside firm who does this for a living. So we have been, especially on the natural gas, trying to make sure we've got that covered. Coal is one of our bigger inputs in terms of graying at our operation and we have got good contracts established on that.

Diesel is something we are looking and trying to really sort of consolidate our purchasing, because we end up consuming diesel ourselves to our freight operation, mining operation and the transport of the material around.

So if we can really get our arms around, then a lot of that is contracted out. So it's not something we directly control, but we are trying to figure out if it is a good way to leverage that. We are working again with an outside consulting group who does this for a living, so trying to figure out there is a way we can strengthen and get a better long-term stable situation as best we can in these volatile energy markets.

Rich Wesolowski - Sidoti & Company.

Are there kind of back of the envelope numbers as to how much of your cost of sales comes from energy and maybe rank those three inputs as far how big they are?

Larry Washow

I think in terms of the cost of the material, diesel is probably the biggest because it's used in mining and the transport to our plants. And then it would probably be coal, I would guess. Not positive about that, but coal and natural gas would be the next two. But diesel is the big one.

Rich Wesolowski - Sidoti & Company.

And how much of your total company's cost of goods would you say is energy? I am sure it shifts around with the prices.

Larry Washow

I think in the mineral side, I think we've said up 25% at times can be due to energy, Rich.

Rich Wesolowski - Sidoti & Company.

Lastly, the Lining Tech sales trends have swung from plus 17 to minus 17 during the past few quarters. I don't know what that is ex-currency. I am sure it's a lot less, but I'm sure the direction is the same. Can you give some more detail as to what gives you the confidence that the business will prove as steady as it's assumed to be over the next year or two?

Larry Washow

It's driven by the nature of the business and the projects. A lot of these projects were bid on a year in advance or six months in advance, so we have a strong fracturing system. We know what the activity levels are

Historically, we got a pretty good idea at determining which projects actually get built because not all of them do. It really depends on financing. And especially when you get into places like Eastern Europe, if there is not some World Bank financing or something lined up, you don't really count it as a project that'll go forward.

But given the levels of activity, the projects that we're looking at, the breadth of the business we're in, we're pretty comfortable. Again, it's not going to be a growth year by any means, but I think we'll see smaller declines in the quarters ahead because the business will be there.

The benefit too is with eight plants around the world, we're active now in places like India, where we weren't before. We've been solid in China now for a few years, so we're well established there. Our European operations are well-established as well. So we are extremely well-positioned for this marketplace and have been actively out there talking to architects and project managers for many, many years.

So there is a good comfort level. I think the difference, if you look at building materials, the commercial construction activity can stop very quickly, and it has. These are projects that the others are building, somebody wants to build, but there is no money, so they're not going to dig a hole in the ground and they're not going to do waterproofing.

A lot of these lining projects are related to environmental activity that needs to be done, they want to get done and the money is there. So, reason we counter them, I'm not going to predict, its going to be a great year by any means. But I think the Lining Tech area will be pretty solid for our environmental business.

Rich Wesolowski - Sidoti & Company.

Can you flush up the situation with the Indian government and potentially export in bauxite again. I mean is that even on the board?

Larry Washow

It's certainly a topic of ongoing discussion, but there is no reason to expect it's going to happen anytime soon. In our discussions with our partners, the government is fairly strong in their position that they really need to enhance the value in the country. So we don't see that situation changing anytime soon.

Operator

We'll take our next follow-up question from Robert Smith with Center for Performing Investing.

Robert Smith - Center for Performing Investing

Just circling back to the Mycotoxin's. Is this area would begin to blossom? What kind of a market opportunity is there, I mean as far as size?

Larry Washow

It's certainly on a global base. It's a huge market potential and it really depends on the success we have with our partners and how it can develop. I don't have a good number in terms of dollar volume. Certainly, the potential is in the tens of thousands of tons of business at very good margins.

Operator

And it appears there are no further questions at this time. Mr. Washow, I would like to turn the conference back over to you for any additional or closing marks.

Lawrence Washow

Thank you. We appreciate your interest in the call today and look forward to talking to you again next quarter. Thank you.

Operator

That does conclude today's conference. Thank you for your participation.

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Source: Amcol International Corp. Q1 2009 Earnings Call Transcript
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