Amcol International Q3 2005 Earnings Conference Call Transcript (ACO)

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 |  About: AMCOL International Corporation (ACO)
by: SA Transcripts

October 21, 2005 10:00 a.m., CST

Operator:

Good day and welcome to the AMOCOL International third-quarter 2005 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 pass code 3784827.

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

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

Larry Washow:

Thank you. And welcome, everybody. Hope you've had a chance to look over the results that we sent out this morning.

Overall a very good quarter. Sales on a consolidated basis, as you can see, up about 15 percent for the quarter. Gross profit numbers similar to ’04, although we’ll talk about some of the segments here in a minute. Operating profit more than a 50-percent improvement. And down to the bottom line, earnings per share of 37 cents compared to last year’s 27, plus, of course, we had the 14-cent-a-share amended tax return benefit that came through in the third quarter of last year. So overall we’re very pleased with the operating results for Q3.

Looking at some of the segment data. The minerals side, good sales growth as you can see. You'll note that the gross margins are down a touch. And again, we’re working very hard and continuing to battle the every-increasing energy prices and having fairly good success, but obviously not 100 percent, in recovering the additional cost. But the good news is that GS&A, our expenses for the year, are flat. For the quarter it shows a reduction in GS&A on the mineral side, and that really relates to a situation last year in the third quarter where we took a substantial accrual towards bad debt expense for a couple of metal casting customers. So the year-to-date numbers are more representative there, but certainly GS&A spending this year up modestly across the board.

The environmental segment, kind of the star of the show, I guess, in the quarter. Really strong virtually up and down the line. Good sales growth of better than 20 percent, modest overhead growth. Margins in that case did improve, and, again, we’re looking at the strength around the world helping that out and when you get down to the operating line, very, very nice growth in the operating percentages and dollars recorded by environmental.

I should mention in both cases, minerals and environmental, the international business was very strong in the quarter. It doesn't represent the biggest share of our business by any means, but on a percentage growth basis we really see very good things happening in Asia and other parts of the world. So very encouraging from that perspective.

Environmental, the primary contributors, oil field services, part of our waste water group, certainly had a very strong quarter, and the lining side continued to do very well, again, with our six plants around the world.

Looking down the line. Transportation, good quarter. We had a lot of business obviously and they're certainly the beneficiary of that. But also looking at higher value, higher margin business outside of our own reflected in better operating earnings there. I should mention one other earnings benefit. Certainly the minority interest again, primarily our partners at India making a nice contribution, and that’s something we expect certainly going forward will continue. So all in all a very good quarter.

Gary, if you'll cover the financial information we’ll come back around to questions.

Gary Castagna:

OK. Yes, just I'm picking it up from where Larry had led it in terms of our operating performance for the quarter. Really the summary there is very strong operating leverage that we achieved as gross profit really dropped to the operating line, and that allowed operating profit to improve by 55 percent over the third quarter of the prior year and operating margin increasing nicely to approximately 11 percent compared with the eight percent in the prior year quarter.

One other matter to note. We mentioned in the earnings release in the quarter our effective tax rate did increase over what we had mentioned before in the past in terms of our expectation. Year to date the effective tax is now 27.1 percent, and that sequentially increased from 22.4, and that results from a charge related to a valuation allowance on certain deferred tax assets that is part of our review of those assets in the quarter. We made a judgment based on really understanding the complexities of the tax situation and deductibility of certain costs that we have held as assets that there was question that it was perhaps less than likely that we could achieve those deductions in the future, and we elected to record this valuation allowance of $1.5 million in the current reporting period. So that is an issue that we think is dealt with, of course, in this quarter and don't expect an impact on that hereafter. If you exclude that particular charge, the effective rate for the quarter from being 33 percent would have been approximately 25 percent.

Also very positive for the quarter were our minority interest in joint venture investments. They contributed three cents per share in the quarter as compared with one cent in the prior year. We mentioned in the past certainly a lot of developments of the investments we have in India. We have two investments there, both of which have been performing extremely well in the last year.

In terms of our financial position as of the end of the quarter, debt certainly as a percentage of capitalization has increased since the end of the year, but actually has remained consistent at 14 percent from the prior quarter. Working capital nudged down slightly from the end of the second quarter and now stands at 151.8 million. Cash flow from operations, 17.5 million from the first nine months of the year compared with 13.2. So we are seeing a moderation essentially of the working capital growth that we’ve seen over a period of time which we hopefully expected to come through and hope to continue to push hard for in the fourth quarter. Capital expenditures at $20 million for the first nine months as compared with 12. Again, and we indicated this year the considerable investments going on really around the world again with the company. So this is really on track with where we believe the cap ex will be by year end at approximately 24 to 25 million. Acquisitions in the quarter were obviously small. We did announce an acquisition of a business related to our environmental segment and contracting services that was reflected in the quarter. Also in the quarter we did have some payments related to prior acquisitions with respect to earn-out payments to former owners of those businesses.

And then finally on the quarter, and in terms of financing activities we did execute some stock purchases in the quarter. We purchased 104,000 shares in the quarter, aggregate cost of 1.9, almost $2 million actually at an average price of $18.70 a share. Then that leaves us with approximately $8 million remaining in the authorization from our board from 2004.

And that’s an overview of the financials.

Larry Washow:

OK. Thank you, Gary. (Nikki), we can (offer) questions now.

Question-and-Answer Session

Operator:

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question today, you can do so by pressing the star key followed by the digit one on your touch-tone telephone. If you are joining us on 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 if you would like to ask a question today.

Our first question will come from Caller.

Caller:

Good morning, Larry and Gary. How are you? I was wondering if you could expand on your new nano-bentonite antiviral – that has the antiviral properties and what’s happening there.

Larry Washow:

Yes, we had an announcement mid-September about the initial results that we have seen. And certainly we’re encouraging that there could well be some interesting development opportunities in that regard. It is early days. We do have work to do. But the lab that conducted the work for us on the three viruses we’ve tested so far was very enthusiastic and quite surprised at the results. Obviously the path forward is to determine how exactly this could be applied. We talk in the (poster) we presented about creams as an example or hand-washes or that type of thing. So we’ve got some ideas on where to go with this and we’re working with some people on the outside. But it’s very encouraging, and I think it’s, to me, indicative of our continuing research effort. Even though we’ve been around 80 years and do lots of things with bentonite, we certainly don't believe we’ve captured all of them yet.

Caller:

Larry, does that mean that it’s more a topical application like hand-washing soap and things like that or that has to do more with any kind of antiviral vaccines or what?

Larry Washow:

It’s really early days. Certainly the obvious applications would be, you know, hand-washes and filters and things of that nature. We certainly ourselves don't know enough about exactly how the application could potentially work on the human side internally, so there’s work that needs to be done there. And we’re certainly looking forward down the road to doing that.

Caller:

Yes, just had one more quick question. On the minority interest and joint ventures you mentioned – I guess that related to the two in India. Are there are others? Is the China one involved at all?

Larry Washow:

No, our investments in China are now on a fully consolidated basis. The other joint venture and minority interest that we have, we have a 50-percent interest in a Japanese bentonite company and we have a investment – a couple of different investments in Egypt that are approximately 25 percent equity investments, and Mexico where we have a 49-percent investment.

Caller:

All right. Thank you. It was a great quarter and good to talk to you guys.

Operator:

Thank you. Our next question will come from Caller.

Caller:

Thank you. Good morning. Hey, Larry, I was just hoping to break down a little further the progression that we’ve seen in the mineral segment over the past four or six quarters. The margins have stabilized somewhat right around 20 percent on the gross line amid the higher commodity costs. But then you've seen the sales growth add to the mid-teens, you know, earlier this year and then into the low teens here. Is that a function of you guys trying to maintain the price amid the higher oil and gas prices?

Larry Washow:

Well, we’re certainly trying to maintain the margins, you know, as best we can obviously. And earlier in the year the cost increases were actually going through at a greater rate than they are now. Some of the reflection you see there is somewhat higher pricing leverage early on. Now, we did – or do indeed see continuing cost pressures, but, you know, it seems to be at least a little more ameliorated than it was and somewhat balanced here as we go forward, obviously depending what happens with petroleum and natural gas for us. But I think in terms of the growth side, you know, we certainly had a good strong start to the year, we’re still seeing very strong growth on the sales side in Asia. One of the factors here that shows up probably more this quarter than previous, our detergent business we mentioned a couple times has been a bit softer in the last couple quarter than it has – last year, which happened to be for them a very strong third quarter. So that’s an element that we didn't really get growth in that area that we would normally expect in a previous years, certainly, and quarters had. So overall I think the growth profile is pretty good, but there are, as always, there’s a couple spots we’d like to see better.

Caller:

OK. Detergent. You guys are amid an unfavorable product schedule or a cycle. If I remember correctly, is that something that would be a temporary lull or it’s something that you would need to alleviate over the course of, you know, four or six quarters.

Larry Washow:

No, it’s temporary. Typically it’ll be a two or three-quarter type thing, and we’re a good two quarters into it. So we should see some – we will see some improvement here fairly quickly.

Caller:

OK. Looking at the domestic metal casting business, is the problems that we’re seeing from the domestic manufacturers’ potential for further production – capacity reductions there, is that having an effect on your outlook?

Larry Washow:

It’s really hard to say, again. We fortunately are in a position in the metal casting side where we deal with all the manufacturers, not just the domestic guys. So it seems like the units being built and sold continue at a pretty high rate, albeit not all of them, the domestic producers. At the same time, and we’ve talked about it in the past, a substantial component of the growth this year has really been in the heavy equipment sector. That seems to be doing well, although you hear some rumblings from those guys that it may be slowing a bit and the rail building sector, which is still way behind. So we don't think that one’s going to slow down for quite some time. So I guess on an overall basis, yes, you – automotive, we would expect to see a little bit of an impact if they continue to reduce the number of cars being built. But on an aggregate basis not substantial.

Caller:

OK. Can you give a little bit of detail on what your cap ex went towards this quarter and what stages you're at in the major projects?

Gary Castagna:

Yes, I think that – we don't have it right down to the project, but certainly the bigger investments this quarter have been in Europe with our Spanish plant that we’re building, a liner plant. That’s probably the biggest component really kicking into this quarter. Did kick off a new metal casting facility in China this last quarter as well. So those will be probably the two major sort of greenfield projects that we were into.

Larry Washow:

OK. Thank you.

Operator:

And our next question will come from Caller

Caller:

Good morning, guys. I was wondering maybe, just as a follow-up on the cap ex question, could you give us an update on the facility in Spain in terms of the lining? In other words, types of volumes you'll see through that and when it will be fully running.

Larry Washow:

The Spanish facility, it’s well under construction now and we expect shortly after the first of the year, sometime by, you know, no later than sort of mid-first quarter that should be in production. We’re servicing that market now from our Polish plant and U.K. plant. So incrementally we don't expect, you know, a big volume jump right away. It’s certainly going to give us a logistics advantage and leaving us opportunities to increase our market share there. But we’re pretty well represented already in the marketplace. So it’s going to make it more cost effective, it’ll give us an opportunity to improve margins, and it will give us I think ultimately a bigger market share as it goes forward.

Caller:

Are there other places where we may see down the road another plant or is this something in terms of – as you look out in terms of growth sufficient for the demand.

Larry Washow:

We’re looking at that right now. And, again, given the nature of the logistics requirements here, several locations really are an advantage provided they're situation appropriately. So that would be our third – our third plant in Europe ((inaudible)) see if it makes sense to have one farther south or farther east at this point. But we think we’re in pretty good shape right now. We have a client in China that’s pretty well positioned, but that’s a very big country, so we’ll have to see over time if that really will suffice for the entire country. And with our joint venture partner we’re in the process of building a facility right now in India which we think is going to be a good market as well.

Caller:

OK. You mentioned India. I think the comments or the prepared comments were about continued strength. And I – if I recall, it was roughly three cents for the quarter, the contribution.

Gary Castagna:

Yes, that’s the total. Yes, that’s right, in aggregate.

Caller:

How should we interpret or read into those comments about continued strength? Does that mean five to six cents for the full year and then next year we should see 10-15-percent growth on that or – if you could add additional color on maybe the business and how that would translate into the operating results.

Larry Washow:

If you look at the kind of results year-over-year, I think last year was probably a penny, this year’s three cents. So it’s really been growth. And a lot of that – not all, but a lot of that – is India. And our partners there are very active in a number of markets beyond kind of our traditional bentonite market. Bauxite in particular’s been very strong. It looks like that will continue. They're into some other minerals as well, but it’s really the Bauxite that’s kind of been driving the good results over there. We do expect that to continue. How much that can grow from here, it’s hard to say exactly. We do expect to see more growth and I think they'll continue to be a good solid contributor. Percentage-wise, again, I don't know exactly because we only get a relatively small portion of that growth because we own 22-odd percent of the company as a whole. So the growth that we’ve seen over the last year is obviously pretty substantial from an earnings standpoint as it relates to that portion.

Caller:

OK. On the automotive front with the number of the press news stories on some of the foundry issues and suppliers, are you seeing any more pressure there as it relates to some of your customers that we should be thinking about in terms of, you know, whether it’s something like you had last year in the third quarter where you took a reserve?

Larry Washow:

At this stage we don't think so. Again, the industry’s had a pretty good shake-out over the last five years. And the guys who went through the bankruptcy route last year were primarily those who were trying to get some leverage and who were successful in doing it, actually, with the contracts that they had with some of the major car companies. And the – you know, I can’t say like the lesson has been learned, but I think the message has been delivered anyway and our customers today seem to be in pretty good position to continue to do what they do and maintain their business and be profitable. And so we’re – you know, we’re still fairly bullish on the – on the metal casting market.

Caller:

One more than I’ll hop in queue – or back in queue. Can you talk about where we’re at in the cycle on pricing and perhaps flow-through of the increased costs that you are seeing and the ability to pass those either along in surcharges to your customers or in cost recovery mode so that we see the additional leverage that you saw in the current quarter? Or on the other – on the flip side, any “negative” surprise that could come through because you're not able to pass cost along.

Larry Washow:

Yes, it varies a lot by market, quite frankly, and the – you know, the environmental side we’re – we’ve been pretty successful in passing through any of the cost increases and maintaining margins. The mineral side is more complicated. When you get into things like our products where we’re buying packaging and putting material in and then shipping it, we have a big chunk of the costs there that are somewhat variable and have been increasing over the last several months. It’s harder there to continue to get the price increases in the margins, and I think that’s going to continue to be the case. But we’re we'll positioned there and I think the customer base we have, the larger portion of it, are the majors that understand the nature of what’s going on. So they're working with us to make sure that, you know, it all comes out reasonably o'clock for both of us. But that area probably more than others is going to be a challenge. But I think you've seen most of that reflected in the margin already. You know, we’re down sort of 900 basis points from last year’s third quarter and down a little bit over Q2. And I don't expect to see further deterioration on the mineral side.

Caller

All right. At some point strategically do you – I mean, if it’s – is there business you should – you were thinking about walking away from because you're not able to get your response or the response you need in terms of accepting the price increases?

Larry Washow:

I mean, it’s always an option, but we’re pretty cautious about that. But certainly if there’s a situation, and it would probably be with a small customer that just doesn't want to, you know, take it forward, yes, we would be willing to walk away. But, again, I think the majors that are the real powerhouses in any of our businesses understand the nature of what’s going on.

Caller:

OK. I’ll hop back in queue. Thanks.

Larry Washow:

Sure.

Operator:

Our next question will come from Caller.

Caller:

Good morning, guys. I’ve got a fairly long list of questions. If you look at the 17 – roughly $17 million of sales gains for minerals and environmental together, geographically where do they come from?

Larry Washow:

All over. But I would say when you look at the – at the mineral side, it’s certainly the U.S. and Asia primarily. If you look at the environmental, that’s probably a little more distributed, but again, Asia moving up very nicely in their business as well.

Caller:

And was the bulk of your revenue gains in the United States?

Larry Washow:

Dollar-wise...

Gary Castagna:

Probably dollar-wise it had been, because on the metal-casting front obviously that’s a bigger component of the entire company, and that market certainly with pricing and volume has been strong. And on the environmental side, actually, the water treatment business, primarily related to the oil field services, had a very strong quarter. And that is still predominantly a U.S. business, although we did see some new business in emerging markets there as well, too. But dollar-wise that’s a – it’s a big component.

Caller:

Do you sense some softening in your U.S. metal casting activities going forward?

Larry Washow:

Haven't really seen that yet. Again, as we talked – you know, depending on the (car builds) and things that could certainly be something we should keep a very close eye on. But so far it’s really – it’s continued to be strong. And, again, it’s more than just the automotive, as I’ve said. So it’s a marketplace for us that looks very good right now and we expect that to continue.

Caller:

What would you consider a normal gross margin in your mineral segment?

Larry Washow:

Historically when we’re kind of running well it’s in the low 20s. I mean, it’s not a – you know, it’s not like the environmental where you're going to see a 35-percent margin. But certainly I would like to see it a couple, three points higher than it is.

Caller:

And how long do you think it’s going to take you assuming energy prices stay flat from this point forward to restore those margins?

Larry Washow:

: I would hope that we could see some improvement, you know, within the next couple quarters to get back to kind of the historic levels. Probably take a year I would imagine at least.

Caller:

One year. OK. I noticed that you have an awful large amount of your working capital in receivables. To what extent is that due to a lot of orders in September or just a lot of orders from international accounts?

Gary Castagna:

Yes, that’s actually probably on both counts, the contributors, in terms of seeing the actual gross level of the receivables increase. Day sales outstanding is around 70 days, and actually that’s a fairly comparable overall number to where we were at the end of the last quarter. But both in the international side, especially the environmental segment, it’s peak quarter. Those tend to be the longest collection cycle customers and so that’s probably the biggest reason that you see the bump up.

Caller:

I presume you'd – you're looking forward to converting a fair amount of working capital to cash here in the fourth quarter.

Gary Castagna:

Yes

Caller:

All right. You – just incidentally, you talk about debt-to-total-capital. On a net debt-to-total-capital basis you're I think just a little light of 10 percent.

Gary Castagna:

That’s right, yes, we look at it on a gross basis.

Caller:

And if you – you know, and if you bring those – if you take – if you collect 30 or $30-some-odd million worth of receivables it’ll come down net in the fourth quarter, it’ll come down significantly below that as well.

Gary Castagna:

Certainly that. And again, we are, though, going to be continuing investing in cap ex in the quarter as well. So it would definitely under normal patterns – historical patterns of the company have seen the fourth quarter be our largest operating cash flow generator.

Caller:

You indicated that currency penalized earnings or revenues.

Gary Castagna:

Actually, I think it was other way. I didn't have a significant impact. The base businesses really accounted for I think we say 93 percent of the sales growth. The remaining growth of sales was attributed primarily to foreign exchange. We did have an acquisition in the quarter, but it just was very minor impact to the quarter.

Caller:

Do you guys hedge your receivables?

Gary Castagna:

Not really. Not to the – a great extent.

Caller:

All right.

Gary Castagna:

That’s mainly because if you look at it on local currency basis, we’re virtually self-hedged. We are looking at some activities in terms of trying to keep more balance there. But for the most part we’re balanced.

Caller:

I have one conceptual question on R&D. The company has been fairly inventive in terms of new applications of clays, Nanocor, what you're doing in the toiletry and cosmetic field, and now the antiviral applications of nano-bentonite. Why – conceptually, why don't we see you stepping up your R&D as the company is growing and try to accelerate some of these developments?

Larry Washow:

That’s a good question, and we actually are expanding our R&D capability, primarily overseas, in the last couple quarters. It doesn't really show up yet in our spending. I think in the next couple quarters you'll see that come through because clearly there are some opportunities here that just take a bit more – a bit more work and a bit more skill than we have available at any given time. So you will see the R&D spendings continue to – probably not just creep up, but it would move up, you know, reasonably well over the next few quarters.

Caller:

And finally, could you sort of comment on where the surprises were in the third quarter and year-to-date?

Gary Castagna:

Well, I don't know. I guess I could say – and that, in terms of surprises, certainly from an operating level, I don't know whether we would necessarily attribute anything that was either a spike or a detriment, say …

Caller:

Well, it seems to me you've – I would gather you've exceeded your budgets.

Larry Washow:

Well, we’re fairly aggressive in our internal expectations. So we’re not unhappy where we are for sure. But, you know, we really expect our business to continue to grow pretty aggressively.

Caller:

All right. But the results you've reported here in the third quarter were pretty much in line with your budgeted expectations?

Gary Castagna:

It was a little stronger than we – than we budgeted last year. Yes.

Caller:

OK, thanks very much, guys.

Gary Castagna:

Thank you.

Operator:

Our next question will come from Caller.

Caller:

Hi, good morning. Congratulations on a good quarter. Could you circle back and just speak a little more in detail about the antiviral work? It seems that, from a footnote, that it traces back to, say, seven, eight years. And I'm wondering what the – what the framework of this was, how it started and where you're going as far as do you plan to enter the clinic soon or – can you give us some color on that?

Larry Washow:

Yes, it’s – I mean, the use of bentonite in various activities like this has been around for quite some time. Some of our scientific guys, you know, looking at what was going on today said maybe it would even work on some of the more difficult viruses that are out there today just because of the nature of the surface and what we can do, whether we can modify this material. The theory was to potentially attract the protein sort of ends of different viruses. And the work that has been done so far suggested that is exactly what’s happening. We don't even – at this stage we can’t even define the mechanism, to describe exactly what’s going on. So we’ve got a lot of lab work going on as well as just getting into a little bit more practical work to see if we can get some real-world testing out there and see how applications might be working for this material. It is early days. You know, I think it’s pretty exciting stuff, but it is early days. We’ve got a lot work to do. And we haven't – we haven't even, quite frankly, considered the prospects of going into, you know, the pharmaceutical type applications which would clearly take a partner who has that sort of skill set. But that – to us anyway that’s a ways down the road. We’ve got – we’ve got some more work to do here.

Caller:

Sure. OK. Thank you.

Larry Washow: :

Thank you.

Operator:

And as a reminder it is star one to ask a question today. We’ll move on to Caller

Caller:

Good morning. Great quarter. Just a couple quick questions. Most of mine have been answered. Larry, I know you brushed on the subject of obviously how we’re dealing with higher costs. But specifically in pet product I know clearly last quarter you discussed fuel surcharges and some other initiatives aimed at reducing the impact that obviously we’re seeing both from petroleum-based products as well as higher resin costs. But can you – can you just discuss in a little more detail the success you're having in offsetting that and kind of where are we on a lag basis relative to getting that catch-up?

Larry Washow:

Yes, we’re still – we’re not where we need to be yet, but we are making progress. And it’s, quite frankly, a little bit disappointing, because we had finally kind of gotten through this whole surcharge thing on the fuel related to transportation, and then over the last couple months the resin costs have just skyrocketed. In fact, resin availability in some cases itself is a big problem. So now we’re kind of back into the mode of, well, here’s the real world guys and the resin pricing is what it is, and to provide that package we’re going to have to raise the price, or we can offer some alternative packages which people are taking a look at. So we’re actually making very good progress on the transportation fuel cost which was significant to us here over the last few months, and the resin packaging cost is having an impact. So it – we’re a little behind where I’d like us to be, but I think we were making good progress. And, again, for the most part the guys that are the professionals in this business, the big consumer products companies, understand what’s going on and they are working with us to try to figure out, you know, how we get through the whole process. But if there’s one area that really does have a – have an impact on margins still – and we’re not out of the woods yet completely as I’d like us to be – it would be that products area.

Caller:

OK. And just quickly, you had mentioned sources and supply. You know, I’ve heard too that there have been some suppliers that have had to declare (force major) on contracts. I mean, have you run into that in any of your markets?

Larry Washow:

Not yet. I mean, we certainly had to scramble some and we’ve been, you know, hand to mouth in areas where – especially on the packaging side again. But generally speaking, so far anyway, we’ve not had any of the (force major) activity impact our business.

Caller:

OK. Quickly on – just moving on to environmental. I mean, obviously a very, very good quarter in terms of the operating margins and overall sales growth. I guess if you look at this quarter in general, was there any – you know, clearly we’re obviously realizing pricing and operating leverage in this business. But can you – was any specific segment that’s maybe a higher margin business, did it contribute at a higher level to kind of, you know, result in this operating margin kind of growing at, you know, up to 16 percent as opposed to just saying this is more of a culprit of operating and pricing leverage.

Larry Washow:

Yes, I think the real plus for the quarter – and it’s starting to come into its own in a positive way – is that – is that waste water part of our environmental segment, and particularly the oil field services. And if you'll recall, a year plus ago we bought a company to add that group that does well testing, determining sort of materials that are in gas or oil wells. That business is booming. I mean, as you would expect given the oil prices and gas prices, anybody that has a rig has it operating and is trying to identify what they've got by way of wells. So that’s been a real plus for us. At the same time our traditional offshore business, the hurricanes notwithstanding, in both the North Sea, off West Africa, and the Gulf have really, really been strong. So some of this relates to kind of the whole demand cycle on oil and gas just given the pricing that’s out there, and we’re positioned well, I think, to continue to be a participant in that growth and that segment provided we can get, you know, enough people and equipment and everything we need, which so far we have. It should really continue to grow, and it is a very – it’s a very nice margin business when it’s running at the kind of rates it’s running now.

Caller:

And the last one. I know there’s obviously some seasonality in the business, but is it fair to say that, again, given some of the leverage we’re seeing and the strength in the oil field services business, I mean, is this – I guess as a stated goal of the company is a 14 to kind of 15-percent operating margin, is that from your perspective an achievable kind of baseline?

Larry Washow:

The company overall?

Caller:

Yes. I mean, for environmental.

Larry Washow:

Yes, yes, environmental for sure. Yes, I think that’s a very realistic target in terms of where we should be and need to be given the kind of gross margins that that business can deliver.

Caller:

OK. And, lastly, in just in terms of hurricane-related issues, what products of yours specifically in environmental would you possibly perceive to kind of benefit, as obviously we have this huge reconstruction going on in Louisiana and Mississippi. I would think that some of your lining technologies might be in higher demand. I mean, can you point at any past hurricanes or significant, you know, issues that saw kind of a spike in demand for specific products?

Larry Washow:

Yes, typically what happens – and it did with – I think it was Andrew was the one where there was a tremendous amount of damage that had to be disposed of. The major reclamation companies – or waste companies, rather, typically will open up cells in their landfills faster than they had anticipated because they just got a huge influx of waste. And the amount in this case is enormous. How forget how many, you know, millions of cubic yards. It’s just a tremendous amount. And we will see more activity on the – on the waste side from landfills. When the reconstruction starts we typically participate certainly on the commercial building side with waterproofing, which will be a benefit, I think. The downside is the oil field service itself in the Gulf. Even now we’re not as active out there as we would normally be. But that’s a temporary thing. I think by November that’ll substantially be back around.

So on a net basis – and it’s a terrible way to get business and I don't even like to talk about it – but on a net basis it actually turn out that we’ll probably have a modest plus as a result of the hurricanes.

Caller:

Great. Well, again, thanks for everything and congratulations on a great quarter.

Larry Washow:

Thank you

Gary Castagna:

Thanks.

Larry Washow:

We’ve move on to Caller.

Caller:

Hey, Gary, how are you? Two quick questions maybe for you, Gary. Do you have any insight into the cap ex budget for next year at this point?

Gary Castagna:

Just on the outlook I would say, that it’s probably not far away from where we are at the present time. Every year we find new areas to invest in, and I think the full plan next year will still have some new greenfield type investment or certainly reconstruction in some areas where we need to really add capacity. So I think given just the overall infrastructure of the company, the – certainly the mid 20s is probably a starting point as to where we look at a annual cap ex outlook.

Caller:

OK, that’s helpful. And in terms of – I know there have been a lot of tax initiatives you guys have had underway over the last couple of years that go a number of years back. Is there anything else in the near future that one way or the other would impact your – either recovery of previously paid taxes or the tax rate going forward?

Gary Castagna:

On the recovery front, I mean, last year – and in fact it’s reflected in the results of last year not only as part of the reason why we actually had a net benefit of income tax last year, we also had a prior period adjustment reported last year relating to federal income taxes that are now under audit. It does quite a bit of time, but you're looking at the aggregate level of potential recovery there in excess of $10 million related to our past efforts that are still pending. We do not foresee any other different initiatives per se that would be like a cash flow impact, but that are certainly of the nature of what we just executed in the last year.

Caller:

OK

Gary Castagna:

In terms of where tax rates are, really the major impact points of tax rate are the depletion deduction that we’re allowed for our domestic mining activity. And then you really have the effect of lower tax jurisdictions and our overseas location. So the mix of our business – and I guess this is another indicator of our positive international development – as we’re getting more earnings from foreign locations it tends to bring down the overall tax rate.

Caller:

OK. And then a bigger picture question related to acquisition opportunities or kind of non-organic growth opportunities. Can you – can you kind of talk about where you might focus your efforts and, you know, I guess how much capacity you have to grow the company that way?

Larry Washow:

Certainly, financially we have the capacity to do a lot. It’s really a question of finding the right fit. We have looked at just in the last quarter a couple of very interesting potentials, one for environmental, one for minerals. In both cases for a lot of reasons it got a little richer than we thought would be appropriate for us. But we’re continuing – we’re out there, we’re looking at things all the time, and if it’s a good fit we’re quite ready, willing, and able to take something on and add it to the business, certainly recognizing that that is an element of our growth strategy going forward, is to continue to grow through acquisitions, whether that’s renewed technology or other skill sets or other markets that we’re not participating in.

Caller:

In the – in the absence of those types of opportunities or, you know, an unwillingness to pay prices that are – that are being sought, would you continue to repurchase your shares or would you consider other opportunities to distribute that cash flow?

Larry Washow:

Yes, we certainly still have the $8 million left for share repurchase. And as you know we do that sort of opportunistically, we think, as we see what happens with the share pricing. And that’ll continue. We have the authorization to do that. The board obviously on the dividend policy has been pretty consistent over the years and does a distribution in the 30-percentish range of earnings typically. And that’s move up nicely pretty much year over year for the last several years. So that’s another mechanism obviously to provide a return to shareholders. And we do – you know, even with the – without acquisitions, the organic growth does consume cash and – as we expand and grow in businesses we currently participate in. One quick example, the detergent area that I mentioned, which was primarily European-based when we bought it. We will now have activity there in Asia, in the U.S. as well, and that’ll require new facilities and investment. Even though it’s not another acquisition, it’s certainly expanding our business levels as a result of an acquisition a couple years ago. And that happens fairly frequently.

Caller:

OK. Great, thanks.

Larry Washow:

Thank you.

Gary Castagna:

Thank you.

Operator:

Thank you. Our next question will come from Caller.

Caller:

That’s good. I just wanted to follow up on one of the other Caller’s questions and your answer to that about the long-term gross margin expansion – or return, I should say, for minerals. Obviously the resin and the transportation costs will be contributors to getting back to more historical norms. But is there anything else there that you see in the next 12 months?

Larry Washow:

Well, some of the things we’re doing beyond that – certainly we have identified and are continuing to work on productivity and efficiency improvements that can certainly leverage, you know, better margins. And part of that is we’re running the plants pretty hard right now, but we certainly think we can continue to eek out improvements and without large investments in additional capital get more productivity, more volume through the facilities that we have. And that’ll give us somewhat better margins. It’s a tough call, though, Ralph, as to how quickly you see a return there and not knowing exactly what’s going to happen in all the energy areas, which I probably should mention, too. We have some – for example, some operations that use natural gas as a drying fuel. We could be more cost effective in things like coal, and we try to do that where we can to convert back. So as conversions takes place that’s beneficial as well. So there’s lots of little things. There’s not any one thing that’s going to get us back into kind of the low 20s where I’d like to see it, but it’s going to be a series of sort of incremental small things in both the pricing and internal processing that hopefully will get us there over the next, you know, year, year and a half.

Caller:

OK. And so it wouldn't necessarily even depend on one particular use, like just pet products, it would be across the board in minerals.

Larry Washow:

Oh, yes. I mean, a lot of it really is related to volume and processing and efficiencies and things like that internally that clearly we can – can and do continue to try to improve.

Caller:

OK, thanks.

Larry Washow:

Thank you.

Gary Castagna:

Thanks.

Operator:

And we’ll move on to Caller.

Caller:

Yes, I just wanted to see if you could add any more color, Larry, on some of these new growth opportunities or historical growth opportunities that maybe we haven't seen further commercialization or advancements, particularly on Nanocor or HBS. I wonder if you could elaborate on that, where things stand and if you're seeing increased volumes of materials or dollars being spent. It looks like it’s relatively flat in terms of cost year over year.

Larry Washow:

Yes, in the case of Nanocor, you know, as we’ve talked in the past it is – you know, there’s definitely some interesting market opportunities out there in various stages, primarily early development. We’re – you know, we’re not projecting or expecting giant leaps of revenue or anything to occur in that area any time soon. But certainly in some of the specialty areas, especially in some of the niche markets, it’s encouraging. The HBS activity continues to go pretty well. We’ve got some products coming out again, and the evolution of that business is basically getting formulated into products, which typically takes a bit of a cycle. And we’ve got kind of a nice base of business now. And the challenge going forward, as these other products come out and get formulated into new ones, you know, to really see that revenue continue to grow, and we certainly expect that to be the case. But, again, on a relative basis when you're looking at the sort of sales we are this year, the growth in HBS and Nanocor – we’ll take all we can get, believe me. But it’s not going to have a material impact on the overall numbers.

Caller:

But in terms of the expectation or what you had indicated about increased R&D dollars and maybe as a strategic effort and expansion in that area, are you contributing more dollars to historical efforts or are these more with the recent announcements on the antiviral side more into new markets going forward?

Larry Washow:

It’s a lot of – it’s a lot of newer things. Obviously some will go into improving what we’re doing now. But we’ve got other areas that we think are pretty interesting that we’ve got a lot of developments. Again, early days in the R&D side, but continuing to broaden the base of business.

Caller:

Great, thank you.

Larry Washow:

Thank you.

Operator:

And a final reminder, it is star one if you would like to ask a question. We do have a follow-up from Caller.

Caller:

Hey, guys. I thought of a more – when you look at the sequential movements from seasonally or otherwise into the fourth quarter and then as you look into 2006, is there anything you can help us with regarding, you know, the pace of growth or any change in your expectations for the long-term targets you've set for the company.

Larry Washow:

I think we’re still pretty comfortable, with kind of where we are in terms of obviously looking to grow the sales line at double-digit type rates. And whatever that turns out to be, the bottom line it’ll be a better rate than that. And I think that’s still pretty realistic, we’re pretty comfortable with that. A lot of questions today on kind of the automotive section. I mean, obviously if a big sector goes into a big slump somewhere in the world that could have an impact on us. But we continue to believe that the strength we have is being as diversified as we are geographically as well as in different markets. Nobody’s ever insulated, but I think we’re – it’s a little softer cushion we have maybe if things happen, the slow-down in China or slow down in the U.S. or speed up in Europe, we’re positioned we think to kind of leverage that into continuing growths in our ((inaudible)).

Caller:

OK, fair enough. Thanks.

Larry Washow:

Thank you.

Operator:

And Mr. Washow, we have no further questions. I’ll turn the call back to you for any closing remarks.

Larry Washow:

Thank you very much. Certainly appreciate everybody joining the call today and look forward to talking with you next year.

Operator:

That does conclude today’s conference. We do thank you all for your participation.

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