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AMCOL International (NYSE:ACO)

Q4 2013 Earnings Call

January 24, 2014 11:00 am ET

Executives

Ryan F. McKendrick - Chief Executive Officer, President, Director and Member of Executive Committee

Donald W. Pearson - Chief Financial Officer, Chief Accounting Officer, Senior Vice President and Treasurer

Analysts

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Andrew Nelson

Operator

Good morning, ladies and gentlemen. Welcome to the AMCOL International Fourth Quarter Results Conference Call. At this time, I would like to turn the call over to Ryan McKendrick, President and CEO. Please go ahead, sir.

Ryan F. McKendrick

Thank you, Melanie. Good morning, everyone, and welcome to AMCOL International's Fourth Quarter 2013 Earnings Conference Call.

AMCOL achieved Q4 2013 net sales of $259 million, which is a record high versus any prior year Q4 and concluded 2013 with net sales exceeding $1 billion. A significant milestone and new annual record for the company representing 4.8% top line growth for the year.

Before we get started with the review of each of the segments, we're going to have Don Pearson, our CFO, provide some insight into the financials including some of the special items. So, Don, if you'd like to take over?

Donald W. Pearson

Thank you, Ryan, and good morning, everybody. Starting off for the quarter, we had 9.7% growth on the sales line, so we're pretty happy about that. Operating margin, 7.8%, which is comparable to last year. However, I will talk about some special items and pro forma that would've been 8.9%. The earnings in the quarter were $0.73, and there is quite of number of special items that I'm going to talk you through.

First of all, we had a $0.35 gain, that's included in the earnings from the sale of our all of the shares of our investment in Ashapura Minechem Limited. So we've sold 100% of the shares and no longer are in that investment.

We also had a tax effect of $0.03 from the finalization of the South Africa impairment that we had in Q3, and there was also $0.05 of special other items that we do list out in a table. There is $2.1 million in our Energy Services group. We call out specifically a receivable of $1.6 million that we rolled off. And our Performance Materials unit, we had 300,000 of inventory that we rolled off from a business that we're exiting. And then in Corporate, we had $300,000 of cost relating to -- for advisors and consultants on the impairment of South Africa in the third quarter. So excluding these items, the underlying business performed at $0.45.

We also had severe weather in late November, December. There's a big storm and a series of storms at the West Coast, in Texas, all the way up to the mid-Atlantic that severely impacted our construction technologies and our energy services segment, and the impact of that was about $0.05 due to projects that were delayed and then are now starting up in January or in Q1.

On the effective tax rate, it was low in the quarter, 21.4% compared to 27.5% last year. Between the South Africa impairment and the sale of the Ashapura shares, that is what made the effective tax rate a little bit different than it normally would be. Excluding those items, the effective tax rate in the quarter was just under 26%. So more importantly, going forward, we would look at an effective tax rate for 2014 in the range of 27% to 28%.

Moving to the balance sheet, just point out that debt remained about flat or comparable to the prior year. On the cash flow, just call out, we don't show it on here, but free cash flow measured as operating cash flow minus CapEx was $12 million for the year, below the $34 million last year, however it was positive and we expect to have improved free cash flow in the business going forward.

And Ryan, that's the conclusion of my report.

Ryan F. McKendrick

Great. Thanks, Don. So I'll -- a little bit of analysis now on each of the major segments, starting with Performance Materials. For the segment as a whole, we saw a 13% increase in sales and a 17% increase in operating profit for the quarter, and we see positive signs for our key business lines within the segment as we enter 2014.

With respect to metalcastings, we see steady performance for our domestic metalcasting products through the next quarter, through the year. For Q4, the positive results were coupled with growth in the mid-teens in Asia resulting in high single-digit growth globally for the product line in the quarter. The gross margin for metalcasting also improved across the board. Our key customers for metalcasting products primarily supplying castings for the auto industry are anticipating steady demand in the U.S., with demand increasing in China as we look forward in 2014.

Moving on to chromite, our chromite business generated sales of $12.8 million in the fourth quarter. About half of which was included in the metalcasting product line for typical steel foundry end-use. The other half was included in our basic minerals product line, primarily for refractory and other end-use applications. Our chromite sand for use in foundries accounted for about 9.3% of metalcasting sales in the quarter. So overall, sales for chromite were up 5.8% versus Q4 last year with growth -- with gross margin exceeding 20%, which is slightly ahead of the prior year quarter. Pricing for foundry grade chromite appears to have stabilized, and our efforts to build sales volume in a broader range of end-use applications is bearing fruit.

Moving on to our basic minerals product line. The product line generated $6.2 million in revenue growth for the quarter. Bentonite sold for end users such as Iron Ore Pelletizing and also certain non-foundry grades of chromite are included in this product line and sales for these products increased in comparison to the prior year. Drilling fluids also sales -- drilling fluids sales also increased versus the prior year.

Moving on to the Specialty Materials product line. Our Fabric Care products are the major component included in this product line. The Fabric Care team delivered $11.2 million in sales for the quarter, which was a 23% top line growth with nice improvement in gross margin as well. Our products are supported by a strong technical team, and they continue to gain acceptance with major customers.

Specialty Materials also includes our Bio-Ag products, where we're gaining sales momentum supported by data from multiple crop validation studies being conducted by a number of universities and government agencies. The sales for this product line in the quarter was $4.7 million, which is a 55% increase versus prior year Q4 as Bio-Ag area continues to be an important growth opportunity for AMCOL.

The last product line within the Performance Materials area is pet products. As we discussed on our last quarter's call, we expected continued good performance from our pet products group both from new customers for fully packaged products, as well as from increased volume from existing customers. In Q4, the pet products team delivered a 35% increase in sales with gross margin also improving.

So moving on to the construction technologies segment. For the quarter, the construction technologies team delivered sales of $56.5 million, representing growth of 12.8% versus prior year Q4, with operating profit improving significantly as results of the restructuring and operational streamlining accomplished during the early part of 2013. The increased sales, along with the SG&A reductions has generated $3.73 million in operating profit, which was 163% increase in operating profit for the quarter versus last year.

There are 3 main product lines in this segment: building materials, lining technologies and drilling. With respect to building materials, our global sales were up 2.7% in the quarter. Growth in the U.S. and Asian markets continue to be offset by decline in Europe. In Europe, we're still seeing building activity was pretty slow, but we are seeing some signs of increased activity there. Several large projects were delayed in late 2013, and we expect a strong start as these projects get underway.

Moving on to lining technologies. The management team for lining tech delivered a 26.5% increase in sales for lining technologies products versus prior year Q4. That's despite the fact that a number of projects scheduled to start in late Q4 have been pushed to early 2014 due to the weather-related delays that Don mentioned.

Standard end-use applications in the landfill market remain relatively flat, but large mining and industrial projects are continuing to support the growth. Remediation products are also included in this product line and the outlook for these products is good. We have secured a large remediation project in the U.S. with revenue opportunity of approximately $13 million scheduled for the first half of 2014. Excluding a couple of these large projects, our growth expectations for this product line remained conservative in the mid to upper single-digit range.

In drilling products, which is the third grouping within the segment, the drilling products team delivered 25.6% sales growth globally for Q4. The end use for our products includes horizontal drilling for placement of utilities and pipelines, which are -- is becoming more active. A number of tunneling projects are getting underway as well, which support a promising outlook for this product line.

So although we experienced significant improvement in operating performance, results for the quarter did not meet our expectations as business was impacted by weather-related project delays in late November and December. The total of 18 different individual projects we expected to start in late Q4 were impacted by these weather delays. These projects amounted to approximately $4 million in revenue or approximately $1.4 million in operating profit that got pushed into 2014. So as we enter 2014, our growth expectations for this segment are in the low- to mid-teens range with gross margin targeted above the 30% mark that the team achieved in 2013. SG&A should increase by about 6% from the current Q4 run rate but will be $1 million to $2 million lower than full year 2013, which includes restructuring cost for 2013, I think it was $3.1 million. The restructuring initiative we've started in early 2013 throughout the segment is having the expected positive impact on the business.

So our last -- the last segment we'll talk about is our Energy Services segment. Sales for the quarter were up 1.5%, but operating profit of $5.7 million was $2.5 million below last year's Q4. Gross margin was 26.3%, which is a nice rebound from Q3 this year as our cost-reduction initiatives took effect along with the focused sales effort in certain areas.

The quarter started with a very strong performance in October, generating over $4 million in operating profit just that 1 month. Performance in November was on target but December is when the full impact of the weather-related delays that affected a lot of oilfield service companies was experienced and we incurred an operating loss for the month as a result.

With respect to the weather delays, a total of 17 projects scheduled for December with total revenue of $4.7 million were postponed due to the severe weather. Operating profit from these delays is estimated at about $1.4 million. And as of earlier this week, 10 of those 17 projects on our delayed list are either underway or completed with the balance to be started in late January or February.

As Don mentioned, the bid has also incurred a onetime bad debt reserve expense of $1.6 million, which impacted the results during the quarter. So for the quarter, again, for energy services, the coil tubing and well testing in the U.S. accounted for 40% of the segment's sales revenue. The combined revenue for these 2 domestic service lines was 19% below prior year. We're now starting to see additional demand for our land-based services especially coil tubing. This is partly driven by our new eelReel technology related to coil tubing.

Our pricing in both of our primary land-based service areas, which are coil tubing and well testing has stabilized over the last few months. Our filtration business globally generated $25.5 million in net sales for the quarter, up 11.8% versus the prior year Q4 with significant increases in gross margin and operating margin. And we're experiencing increased demand for filtration business offshore in the Gulf of Mexico where our primary service offering is related to produce water, well completions and well simulation flowbacks. Our expectation as we enter 2014 for this segment remains for sales growth in the mid to high single-digit range and with gross margin in the mid-20s, 25% plus for the energy services segment.

So that's a quick summary of the business results and operations. And we'd now like to open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Al Kaschalk of Wedbush Securities.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Looks like things are firming up in terms of the outlook. I just want to focus initially on the construction technology area. If you look at narrowing down on building materials, could you elaborate on Europe? I don't know that I recall what percentage of that business is now in Europe and when you see signs in -- of that picking up, does that mean you've got some bid work that you're out there looking out? You've got contracted work that you're ready for the season to start? Could you just elaborate a little bit on that?

Ryan F. McKendrick

Yes, first thing that we're doing in Europe, Al, is we really revamped our sales force and the organization there to focus a lot more on specification work, and we're already seeing the results from that. There are several areas within Europe that we've been historically very strong. In U.K., for instance, some areas in Eastern Europe, the Italian market, but other areas such as Germany and some other areas within Europe where we haven't had very good coverage, so we've really improved our coverage in those areas. So better market penetration and market coverage is one of the key factors that really supports our expectations for some more success there in Europe.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

So is that more pounding on the door as opposed to -- I know philosophically the company doesn't like to wait for the economy to turn. But how...

Ryan F. McKendrick

It really is, it really is more pounding on the door, as you put it. I mean, a lot more effort going into generating specifications for our products. So but we really look at this as a global business, and I think the outlook for the product line overall in 2014 is for sales growth percentage in the low-teens actually, $9 million to $10 million range. So we're starting to see increased activity in some of the nonresidential segments of the market in the U.S. And we're about -- we're anticipating about 10% growth domestically, which supports about 40% of the growth expectations for the growth in the U.S.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Okay. I'd like to, I guess, maybe classify '13 as the year, the restructuring and turnarounding, and so it didn't get you guys out there in selling but I thought it was interesting you said that's -- SG&A would be up or around 6% from the fourth quarter run rate. How does that compare to -- what did you see in the top line in terms of the growth? In other words, how's the pull through?

Ryan F. McKendrick

The growth for construction technologies -- I don't recall that number offhand, don't you?

Donald W. Pearson

Al, you're talking to the segment or for AMCOL?

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Well, I think the segment, because I think -- I thought the reference -- if SG&A, maybe you can clarify first for me the SG&A number, I thought you were denoting that for the CT segment.

Ryan F. McKendrick

That's correct, right. So the way our run rate -- where the run rate now, around 12.3 or something like that per quarter?

Donald W. Pearson

Yes, 12.5.

Ryan F. McKendrick

12.5 per quarter. And we're expecting that run rate will be about 6% higher through 2014. The sales though, we're expecting to be up about, well, around 10%-ish, high single-digits.

Donald W. Pearson

Al, so the -- we had restructuring in 2013, $3 million or so. So obviously, we'll get the benefit of not having that and then having SG&A be flattish to slightly down.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Okay. Well, I guess if I look at...

Donald W. Pearson

Up from the Q4 run rate though.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Okay. If I look at that portfolio, though, I guess the question that, to get to that upper single-digit low-teens growth rate, is the mix of business -- how do you feel about what you're seeing in terms of the margin profile in that business? And that's an aggregate for the CT segment.

Ryan F. McKendrick

Margin profile right now is running right around 30%, and we see that there's some upward momentum there. We can probably be 1 or 2 percentage points higher than that, and that's driven largely by -- the biggest growth area within the segment that we're expecting is in the lining tech area, which includes, as you know, the -- our typical geosynthetic clay liners, some of the new technology that we're having a lot of success with, and also some of these remediation projects, which are starting to gain some real nice momentum.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Okay. Maybe one more and then I'll turn it over, maybe. In terms of CapEx, obviously, came in lighter than what you'd guided, but can you talk a little bit about as you work your way to a more growth environment, what types -- type of project -- where is the growth capital dollars being spent whether it be segments, the nature of those items? And how should we think about a dollar of growth capital in generating incremental return?

Donald W. Pearson

Sure. Hi, Al. So you're right, we came in at about $88 million in CapEx below the $100 million. A large portion of that is in the energy services area where over the last 3 years we had invested pretty significantly in the land-based services, principally coil tubing and well testing. And the focus going forward is really more on the filtration areas and international. We'll continue to maintain the coil and then the well testing, of course, in the Gulf. So that will be -- that probably accounts for half of the shortfall, relative to the target that we had set. We also continue to look at the maintenance type of projects that we're working on, so there's some underspending in the Performance Material areas. But more broadly, to your question, we have had some heavy spending over the last several years into the basic capacity of the business, putting several new plants in. And going forward, we see the CapEx probably normalizing towards the type of spending we're expecting in 2014, which is about, probably about $80 million so that's going to be less than 8% CapEx to sales. The spending in the energy group will be down over $10 million, again, focusing in the areas I just mentioned. The construction technologies segment is a very low consumer of capital, maybe about $3 million a year. Now the 1 large investment that is not included in the $80 million expectation for next year would be the Novinda expansion of capacity, and we're evaluating adding capacity there over 2014 and '15, and we'll probably have more to talk about that in the next earnings call, but that could be $10 million to $15 million spend over the next 2 years. But in general, I think as far as -- outside of a project like that, we do expect we have the ability to grow without major incremental new capacity. There's one other large project I'll call out next year, which is a bleaching earth plant in Turkey. That's about $12 million, again, kind of a one-off growth project. But outside of those 2 areas, the majority of the spending I would consider more maintenance, there's another be $10 million or $12 million in the SAP project. So I think you will see just a more normalized CapEx spending. We've got a lot of capacity in the infrastructure today that we can grow from.

Operator

[Operator Instructions] The following question is from Al Kaschalk of Wedbush Securities.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Okay. Ryan, I just wanted to -- more of a -- I know there's a lot of work going on in energy services and getting that turned around. The margin even after the adjustment for the items here, I'm talking about operating margin, was probably a little bit lower than sort of your target and where you want this to be. Can you talk structurally about how you're going to be able to work to get that operating margin in that 9%, 10%, north of 10% range? And then secondly, just an update on maybe the competitive landscape within there and whether you're seeing pricing pressure in one area versus another service line?

Ryan F. McKendrick

Okay. So that's a few questions mixed in there, so I'll try to break them down. First of all, to talk about the margins and the sales outlook, okay, I think, first of all, on the domestic side of the business, our filtration product line continues to deliver great results. Sales up 12% for the quarter and the outlook for growth domestically is very good. Pricing is also good and margins are great there. The pricing for our land-based services including the well testing and coil tubing, appears to be stabilizing. And just to give you an idea on the pricing situation, and comparison to a year ago, our pricing for those services is about 20% to 30% lower in the Eagle Ford area and about 15% lower in the Permian area. But despite that pricing pressure, we've been able to rebound our margins in those areas by the initiatives we took last quarter basically to reduce cost and focus sales and so forth. So we're not in bad shape there. We're excited about this new eelReel technology enabling us to use our coil tubing equipment in a broader range of applications and also with significantly higher margins than typical coil tubing jobs. So we think we've got some upside potential on the margins as a result of increasing demand for our technically differentiated product line on the filtration side, and also with respect to coil tubing because of this the eelReel technology, which really opens up a lot of new business for us. So moving on to the international side of things. When you look at the areas where we operate, Nigeria, Brazil, North Sea, Mexico, for the quarter, all of those areas contributed nicely both to sales growth and to growth and margin. We had some downturn in Malaysia that offset the growth that we generated in those other areas, but we're working to regain business there. So all in all, we feel pretty good about our position in the international markets. And in most of those areas, we've got very good margin business. So overall, as far as the outlook, despite the weather-related softness in December, the gross margin rebounded nicely to 26% for the segment, up from just 19% in Q3.

Donald W. Pearson

Just as an example, the jobs that we didn't do that were delayed, the average gross margin on those is probably in the range of 28%, 29%, and that was a pretty good mix across the portfolio.

Ryan F. McKendrick

So filtration is slated to grow nicely. Our well testing in Nitrogen Services group are expected to be fairly flat. But for the segment as a whole, our expectation is for gross margin to improve slightly as we pass through our progress through 2014 with top line growth in the upper single-digit range, probably around 9%. So that's about the most thorough summary I can give there, Art -- I mean, Al, sorry.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

No problem. So does that mean within the top line number, I guess, does that assume there are mid single-digit pricing compression on average or -- and in volumes up double digits to get you to that high single-digit or...

Ryan F. McKendrick

No, we've seen price stability for probably the last 4 months especially in those areas that I talked about that were really subject to big price drops over the last year. So we're not anticipating any real price compression in those land-based services and -- nor in the filtration business that we do primarily offshore.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Right. But coil tubing, you can think you can compensate that pressure from -- let me see that definitely -- the stabilization, is that a function over the new technology, or is it a function of securing for some period of time work in those areas that maybe you were...

Ryan F. McKendrick

Yes. The stabilization is for the standard run-of-the-mill coil tubing work. The eelReel technology gives us some upside potential both in terms of additional business and in terms of margin.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

All right. Okay. One final, just a clarification, on the chromite business, are you -- did you change how you're recording that in terms of the segment or within business units? Or is it the same? It's just that you were articulating where the growth is coming from.

Ryan F. McKendrick

There's been no change in terms of how we apportion the sales of those materials into different buckets. I was just trying to be a little more concise in terms of illustrating it. About half of our chromite business is going into the metalcasting, the other half is going into our basic materials classification. And a lot of the growth that we saw in the quarter was in that non-metalcasting area.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Okay. And for '14, how should we think about this part of the business in terms of...

Ryan F. McKendrick

Well, I think with respect to chromite?

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Yes.

Ryan F. McKendrick

The oversupply situation that we see in the market is continuing. And as I've mentioned on the last call or maybe 2 quarters ago, it's caused primarily by a strong shift in utilization of certain lower grades of metallurgical quality chromite for ferrochrome production. Our plans are to continue the process of building market share for the foundry grade chromite. At the same time, we were focused on increasing sales of chromite into the refractory end market, which has resulted in some nice sales volume increase. So that's our plan going forward. As a result of the impairment charge we took last quarter, our ongoing depreciation expense will be reduced by about $4 million a year. So at our present sales volume, we're expected to generate gross margin in the mid- to high-teens range with annual sales in the range of about $45 million to $50 million this year. So that's the basic summary on chromite.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Okay. But in the quarter, I thought you said you did a little bit better than 20%, not to hold you to too many details here.

Ryan F. McKendrick

We did, we did, right. But I'm trying to be conservative on projections here because there's a lot of volatility in this market.

Operator

The following question is from Andrew Nelson of Andrew Nelson & Associates.

Andrew Nelson

As I look over your income statement and everything, and your positive talk for the future and, of course, all the adjustments to your earnings, of course, here, net income for this year was down substantially when you add it all together. Can you give any forward guidance of what you anticipate 2014 earnings might -- the range they might come in to put the whole picture into a summary?

Donald W. Pearson

Hi, Andrew. It's Don Pearson. We don't give guidance at the earnings level. I'm not sure if you are on the entire call, but Ryan did talk through the sales and the margin profile of the big segments.

Andrew Nelson

Right, I did hear that, but I just didn't -- maybe I missed something when I was listening, [indiscernible] right, what you anticipate the total sales or earnings per share might be next year?

Donald W. Pearson

We did not provide that.

Andrew Nelson

Okay, it's something you don't do then?

Donald W. Pearson

Correct.

Operator

There are no further questions registered at this time. I'd like to turn the meeting back over to Mr. McKendrick.

Ryan F. McKendrick

Thank you, Melanie, and thanks, everyone, for joining the call, I appreciate it, and I'll look forward to joining you again next quarter.

Operator

The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.

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