AMCOL International Q4 2007 Earnings Call Transcript

Jan.22.08 | About: AMCOL International (ACO)

AMCOL International Corp. (NYSE:ACO)

Q4 2007 Earnings Call

January 18, 2008 11:00 am ET

Executives

Lawrence Washow – President, CEO

Gary Castagna – Senior Vice President, CFO

Analysts

Rich Wesolowski – Sidoti & Co.

Jay Harris – Goldsmith & Harris

Al Kaschalk – Wedbush Morgan

Operator

Good day and welcome to the AMCOL International fourth quarter 2007 earnings release conference call. (Operator Instructions) Speakers today will be Mr. Larry Washow, President and Chief Executive Officer and Mr. Gary Castagna, Senior Vice President and Chief Financial Officer. At this time I would like to turn the call over to Mr. Larry Washow. Please go ahead sir.

Lawrence Washow

Thank you and welcome everybody. We are going to talk about the fourth quarter and for us certainly it will be a little different discussion, a little more unusual than the past several years. Certainly there was a lot of good news in the quarter and we’ll talk about that but one challenging area as well.

As you’ve seen from the press release, good strong revenue growth, 25% year over year growth and 10% operating profit growth, so obviously not getting the leverage that we expect and there really is one obvious area to focus on and that is minerals and the gross margin in minerals down quarter over quarter. Overhead up and I want to talk about a couple areas related to that and some of the things going on to improve it.

Obviously the cost side, we got caught with a number of things going on. Energy costs certainly have a big impact on our business and had a greater impact in Q4 than we had expected. That impacts everything from the raw material where we do our own mining or contract mining to the shipping of material to customers to shipping it to our own plants. Just a number of cost increases greater than what we had anticipated. In addition we actually did have several issues related to maintenance and productivity, all of which we recognize and think we have good plans and have had good plans in place going forward to improve.

The overhead increase in minerals primarily related to the acquired businesses. In Turkey in particular but we also have increased the overhead in our Asian operations and probably should mention that as well, our new plants, particularly in China, starting to come up to speed but again in Q4 they were not contributing at the levels that we will look for them to contribute in 2008.

So when you put everything together, kind of a perfect storm of ugliness in the minerals segment. The good thing is, good news anyway, on the other side of the business is that they’re very strong. Environmental typically has a moderate fourth quarter but they really had a strong fourth quarter. Really good numbers all the way around. The one area which might cause a question is on the gross profit margins for environmental. We did see a drop of three percentage points there primarily related to the nature of the business. We mentioned in past calls that we have a growing element of our business in the service related areas and proportionally in Q4, that was a bigger part of the business, so having that impact on the gross margins, good operating margin leverage though in that case. Very nice year overall.

Oil field services broke through the $100 million revenue barrier with a very strong quarter. Good solid numbers again up and down the line, good growth all the way across. Really given the different nature of the businesses that they operate in, most of them performing well, certainly areas for improvement but I think the overall result and the growth prospects in oil field continue to be very positive.

Other area, corporate overhead certainly an impact as well. Saw a large jump quarter over quarter. Part of that is there was some things last quarter, fourth quarter that were beneficial that were not there this year in addition higher benefits cost, a lot of personnel cost, we do have some programs ongoing for example a new ERP system we’re installing and there’s some costs associated with that and some other areas where we’ve got outside professionals helping us and needless to say that is a cost. Again we will see improvement in those numbers as we get into 2008.

The other big impact in the quarter clearly was the tax change. I’ll let Gary talk about that along with the positive news on cash and working capital.

Gary Castagna

Thanks Larry. I will summarize our elements of the release in the financial overview section. The table that we presented in the release detailing the composition of our sales growth certainly a trending again strongly toward higher relative contribution from base businesses and that’s actually across the board. Probably our best quarter this year actually on a relative contribution organic growth there. As we say on the minerals side, the Asia Pacific region continuing to be a strong contributor, volumes in shipments in the metals castings market there as well. Solid growth in the pet products volumes in the US and the bulk side of that business and the specialty materials areas such as the health and beauty, detergents as well having higher volumes.

Mentioned in the past calls about freight revenues, freight revenues of course tag along especially with the larger volume elements of the business in the quarter we didn’t have the exact figure at press time but roughly speaking about 20% of that minerals segment sales growth for the quarter was attributable to pass through of freight which of course is meaningful in that it has a dilutive effect on gross margins. And of course currencies are really driven by the general trend of the weakening US dollar.

Environmental, as Larry mentioned before, not only because of the service based businesses but again [unintelligible] a very attractive trend in the Central Eastern European base areas of the business, Poland in particular, a very strong point for that segment as it had been for the other quarters this year.

And oil field again continuing across the board in its filtration or now we more internally refer to as water treatment side of the business, pipeline service levels, but still very strongly Gulf of Mexico or shelf based operations here in the US is the dominant geographical market for that segment. We did see some nice pickup as well though in the West Africa operations there as we’re starting to seed that market.

Gross profit and gross margin, obviously the number one aspect in terms of, little light for the quarter, gross margin at 25.1% versus 26.8% in the prior period and certainly from a sequential basis, the lowest level this year. Larry has already mentioned some of the aspects of that and certainly we’ll take your calls and get more insight on the minerals segment target areas for improvement and also the product mix levels actually in both of the other segments were also a little bit below prior trend, certainly not as much on the oil field services side as in the environmental side and again that service element to the business does have a dilutive impact to gross margins although very attractive still from the overall operating margin perspective.

Selling and admin costs again an area, really across the major reporting segments in the quarter that just really I think if I can summarize were sort of cumulative effects of various expense points. This is not sort of a step change move by any means in our view as the actual operating levels of our businesses but unfortunately it just seemed to culminate in the quarter where we had various expense projects, personnel et cetera that kind of came through into the fourth quarter.

Operating profit and the margin of course suffering a bit in terms of the relative growth compared to the sales and probably just skipping down into the income taxes to illuminate further on the remarks there. Essentially what we have here is a change in the final quarter of the year of where our ultimate estimated tax liability would be at the end of 2007 and the movement is caused by the distribution of earnings between foreign based operations versus US based operations and as many of you know we have a very attractive effective tax rate in our overseas operations.

But in updating our profits by geographical area at year end, we really realized, essentially because of a strong movement in the oil field services business towards the end of the year, the tax jurisdictions changed and that essentially moved up the effective tax rate, but if you look at the effective tax rate for the year, we ended at 25.5% which if you go all the way back to the beginning of the year, is pretty close to where we guided everyone on that, it’s just unfortunate that we were at about a 23.5% effective tax rate going into the quarter and you essentially have to push through the movement in the final quarter and that push through and accumulative effect is approximately $1.4 million of additional tax expense that we recorded in the quarter to sort of true up the tax expense.

Affiliates and joint ventures again continuing a strong trend there no real new news there in terms of the solid contribution particularly from India.

And now highlighting some of our financial positions and cash flow elements of the quarter. Long term debt ended the year at $164.2 million which is practically identical to the end of the third quarter so we ended at 31.8% debt to capitalization as compared with 27.6 in the prior year. Our tax balance did tick up a little bit to $25 million, that’s essentially because of the timing of movements of cash in our overseas operations as we are obviously having strong profitability over there, most of the funds we maintained invested in those overseas operations.

Working capital ended the year at $204 million, again almost identical to where we were actually all the way back to June. As you recall, we’ve put a focus point on working capital management, elements of working capital and we’re pleased to see some success in tempering the growth of working capital despite the strong movement on the top line of the business and that consequently has resulted in probably the best statistic we had to report today in terms of our operating cash flow ending the year at $66.9 million over $25 million of operating cash flow actually generated in the fourth quarter as we had targeted.

And then in terms of investing, some highlights here, we ended the year actually at total capital expenditures of $53 million as compared to $42 in the prior year. That is higher I think than what we guided in the past, however, one element to that which we had not talked about in the past, we are in the process through initially investing in a new technical center and corporate headquarters facility in the area here that will be brought online at the tail end of 2008 but in the initial side we are outlaying cash for that but as we say here we will be imminently looking to enter into a sale lease back transaction for that facility such that there will be a neutral effect on our cash flow with respect to that facility in the next year.

And then finally finishing on the share repurchases, we did have a modest purchase of shares in the fourth quarter, ended the year at 260,000 shares repurchased at an average price of $24.64. And dividends ended the year at $18 million and at 22.7% increase over 2006. Larry.

Lawrence Washow

Alright William lets open the call for questions if we could.

Question-and-Answer Session

Operator

(Operator Instructions) I’ll move to our first question from Rich Wesolowski, Sidoti & Co.

Rich Wesolowski – Sidoti & Co.

Good morning, how are you guys doing? Gary could you quantify the effects of the freight revenue on minerals for the year, I know you gave the quarter.

Gary Castagna

I believe for the year, Rich, it is in the range of around $12 million.

Rich Wesolowski – Sidoti & Co.

$12 million of incremental pass through expense?

Gary Castagna

Yeah, that’s right, so out of near $39-$40 million of revenue increase, approximately $12 million of that for the full year is attributable to freight revenue increases.

Rich Wesolowski – Sidoti & Co.

Is that a pattern you expect to see in ’08, organic revenue growth accelerating at a faster clip than we saw earlier this year, margins coming down, gross profit year over year higher, not by much, is that a fair picture for ’08 in the minerals?

Lawrence Washow

Rich, this is Larry, I’m not sure, we would certainly expect to see continued sales growth, we expect to see margins going up obviously on the gross margin side as we improve the cost elements. The amount of the freight revenue impact we think will probably be a lesser impact in terms of the incremental growth in 2008 than it was in 2007 but there will be some. So we really look for a positive trending on the minerals side in 2008 for sure.

Rich Wesolowski – Sidoti & Co.

How much visibility do you think you have in that business? I mean we read a lot of headlines as we have for the past year or so about the deepening slide in the auto market, I mean, what is the probability that this business is actually down profit wise in ’08?

Lawrence Washow

I think on an aggregate basis I don’t expect it to be down, I think it’ll be an unlikely possibility certainly, can’t say never, but given the fact that a bigger piece of this business is overseas, both in the European markets where we’ve got some interesting prospects, in Asia where we see substantial growth. The decline, which is not a surprise in the US side, in fact our metal casting business in Q4 certainly was down quarter over quarter to some degree, but again we expect overall when it’s put together, the other elements of the specialty business, health and beauty and things like that will continue to be growing and positive so on an aggregate basis, when it’s all put together, we think minerals, the likelihood of a lower profit in 2008 is extremely low.

Rich Wesolowski – Sidoti & Co.

Okay good. I understand, moving to the environmental margin, I understand the contracting service effect on it but could you remind us what services are coming to dominate the mix elsewhere in that segment?

Lawrence Washow

A lot of it relates to the installation. In many cases the products that we make and typically have sold to other people who do the installation. Particularly in Europe that’s a growing segment of our business and one that enables us actually to typically sell more dollars and more volume into the customers because we can install, we can bring in the full range of product, those that we produce and we also buy outside product that they need for their project and that creates value. It tends to be again slightly lower margins than our regular business but certainly provides good growth and opportunities for sales that we might not otherwise have.

Rich Wesolowski – Sidoti & Co.

Is this a change in how you’re marketing the landfill products and what spurred the change?

Lawrence Washow

It’s not really a change in Europe when we purchased a company over there a couple of years ago in Spain, that had been the model they had built their business on.

Rich Wesolowski – Sidoti & Co.

Alright, okay.

Lawrence Washow

And we followed that and actually expanded into Poland and other places as well.

Gary Castagna

And Rich I don’t think that that’s necessarily just geared towards the landfill side to be honest, to be clear on that, particularly in Poland. A number of different infrastructure projects were actually involved with their, well beyond the landfill side and even in the building materials area actually. Another one where again installation services that we can cost effectively add on to our product offering in that case.

Rich Wesolowski – Sidoti & Co.

So is the 33% percent-ish gross margin that we’ve seen in environmental the last couple of quarters, is that the run rate now for ’08 and ’09 as you see it?

Lawrence Washow

Probably in that 33-35% range, really depends a lot on the mix and where the markets are going, but, or is the magnitude, you know we don’t expect it to be down from there at all.

Rich Wesolowski – Sidoti & Co.

Okay and lastly, looking at the trend, the operating margin from acquired businesses, you started off the year like a rocket, 16 and 20% and then it’s come back to the 11-12% range in the back half. What changed there? Are these living up to your expectations? What stands out as far as plusses and minuses of the businesses you acquired in the last year?

Lawrence Washow

I think it’s a combination of the different businesses having an impact. The latest acquisition in Turkey minerals business that we know needs work and we are working on it. Certainly doesn’t deliver the margins that the rest of our businesses do. It will over time for sure, but we think that’s going to be one of those situations where long term it’s going to be a great business, short term it’s been not delivering the same kind of margins we have. But that’s probably the primary one acquisition wise that, and actually it is doing what we thought it would do, but on a relative basis when you throw it into the acquisition mix it does suppress the numbers.

Gary Castagna

Right, one other point there Rich, just to make sure, because of it being a quarterly report and the way it is, I wanted to remind you too that some of these acquisitions reached their one year anniversary, they no longer are classified an acquisition in terms of their contribution and in the fourth quarter for the most part these two acquisitions related to the oil field service areas would not have been accounted for as acquisitions.

Rich Wesolowski – Sidoti & Co.

So those high margin businesses dropped [overlay].

Gary Castagna

Those were higher margin contributors indeed.

Rich Wesolowski – Sidoti & Co.

Okay and Larry just to clarify, that’s the [unumin custom] acquisition that you were speaking to?

Lawrence Washow

I was talking about our acquisition in Turkey.

Gary Castagna

Yeah, that one Rich would also actually have reverted to being a organic in the fourth quarter because we acquired it on the first of October of ’06, so the fourth quarter for the additional metal castings plants actually would not have been in with respect to Larry’s comment.

Rich Wesolowski – Sidoti & Co.

Okay great, thank you.

Operator

And we’ll move to our next question from Jay Harris, Goldsmith & Harris.

Jay Harris – Goldsmith & Harris

Morning guys. Just to follow up on that last item. What businesses contributed this $12.6 million of acquired revenues in the fourth quarter?

Gary Castagna

It would be, for the full effect would be Turkey, the health and beauty acquisition [overlay].

Jay Harris – Goldsmith & Harris

You said Turkey was no longer in that category I thought.

Gary Castagna

No, the metal castings acquisition, Jay, that was done in the previous year.

Lawrence Washow

The US metal casting operations we bought fell off [overlay].

Gary Castagna

We call it custom [overlay] mix plants and the acquisition in the environmental segment that we completed in January of ’07, so those are two [overlay].

Jay Harris – Goldsmith & Harris

Is there anything in the use of, contributors to this $12.6 million that’s seasonal? Any of these businesses seasonal in nature?

Gary Castagna

The environmental business would probably have a bit more seasonality behind it.

Jay Harris – Goldsmith & Harris

And what are the weak seasons for that? Just the acquired business.

Gary Castagna

Well you know if you look at it in general, that would be the only one of the businesses, I guess Turkey could possibly, because there is some up and down in terms of the season there but for the most part you’re probably only talking 25% or so of that $12 million or so that I would call effected by seasonality.

Jay Harris – Goldsmith & Harris

And the winter season would be the weak season?

Gary Castagna

Correct.

Jay Harris – Goldsmith & Harris

Okay. What was the revenue decline in metal casting in ’07 versus ’06?

Lawrence Washow

I haven’t got the number right in from of me Jay, but it certainly, we did see a decline [overlay].

Gary Castagna

If I extract out the acquisition effect Jay, I actually think that that number isn’t startling. I’d be surprised if it was more than 10% to be honest with you.

Jay Harris – Goldsmith & Harris

I was looking for [overlay].

Gary Castagna

Domestic metal castings. You’ve got, we also because we look at these as global in terms of the product [overlay].

Jay Harris – Goldsmith & Harris

Well at the beginning of the year I think on a conference call you indicated you were looking for a decline in metal castings and I’d forgotten the number.

Gary Castagna

It was double digits, I mean and I think that’s probably realistic, maybe [overlay].

Jay Harris – Goldsmith & Harris

And so this number is larger than the one you were looking for at the beginning of the year obviously?

Lawrence Washow

Not really, I think we’re about on track in the metal casting declines.

Jay Harris – Goldsmith & Harris

Alright.

Gary Castagna

Yeah, domestic metal casting definitely. We were probably looking in the range of 10-15% I believe Jay is when we [overlay].

Jay Harris – Goldsmith & Harris

What should we be looking for, I’m sorry that was 10-15% of US or worldwide?

Gary Castagna

US. Right [overlay]. Asia Pacific is obviously growing.

Jay Harris – Goldsmith & Harris

Growing, alright. What kind of tax rate should we look for in ’08?

Gary Castagna

I believe that we’re still right where we ended, the 20 [overlay].

Jay Harris – Goldsmith & Harris

25-26%?

Gary Castagna

26% is a representative rate as we speak now, I believe that, knowing where we are with our earnings forecasts and everything.

Jay Harris – Goldsmith & Harris

Alright, if your plans work out, what kind of a range do you look for in terms of gross profits for the company as a whole in ’08? [overlay] Gross profit margin I mean.

Lawrence Washow

Yeah, we should certainly see a little improvement I think over ’07 as we see improvement in the minerals. We talked about environmental gross margins in that 33-35% range, oil field services kind of in the 38% range. Those should hang in there. The improvement will really come from minerals, so depending on how [overlay].

Jay Harris – Goldsmith & Harris

So on average maybe one to two percentage points?

Lawrence Washow

Yeah [overlay].

Jay Harris – Goldsmith & Harris

From 26-27.5 or something like that?

Lawrence Washow

Over the course of the year that’s probably realistic [overlay].

Gary Castagna

Well we were running you know through September, Jay, I mean in excess of 26% to 27% was moving along especially with the higher growth segments and the relative margins and that you know if you look at just even at a constant ratio, you should be starting there and obviously we still have some, what we believe, good growth prospects in the environmental as well as oil field that should continue to, by virtue of the math, move the [overlay].

Jay Harris – Goldsmith & Harris

So does that make your first quarter the most difficult quarter for you?

Lawrence Washow

It typically is because of the weather impact on the environmental business and the cost impact on the minerals side when you’re doing all the mining and things in the winter so yeah the first quarter will, it’s historically it’s been our most challenging one.

Jay Harris – Goldsmith & Harris

Alright, I have sort of a strategic question to put to you guys. If you look at the minerals segment during the decade of the 90’s, it was highly cyclical. And during this decade you’ve diversified in terms of globalizing a lot of your businesses, getting into oil and gas. On a thematic basis, are there things you’re working on that could have somewhat of a similar impact over the next five years that we don’t see today?

Lawrence Washow

We certainly continue to look for big impact businesses that logically fit with what we’re doing and there are some prospects out there, there always are that could be interesting. Nothing anywhere near a fruition stage at this stage of the game, but yeah, if I understand the question right Jay, we really do look for those opportunities that are going to have an impact over a horizon that we look at, which is obviously more than quarter over quarter, we do look at a multi-year horizon and I think there are some things out there that could come to fruition over the next year or two [overlay].

Jay Harris – Goldsmith & Harris

But nothing that’s incubating at this point that you could mention?

Lawrence Washow

Nothing we could mention at this stage, no.

Jay Harris – Goldsmith & Harris

Alright.

Gary Castagna

Incubating I think is, you know we’re always trying to incubate new ideas of course and you hope that one of those ends up being a game changer but I think the other part that’s pretty important for us is continuing investment overseas and international markets and there’s definitely strategic markets out there that we want to and have opportunities to get ourselves further into and those are probably more where we will see the movement for the company.

Jay Harris – Goldsmith & Harris

Alright, thank you.

Operator

Okay, we’ll move to our next question from Al Kaschalk, Wedbush Morgan.

Al Kaschalk – Wedbush Morgan

Morning Larry, morning Gary. Just a follow up on the capital expenditure. How much is going international versus North America and with that, have you seen anything near term that would put a damper on spending that in the next 12 to 18 months in terms of outlook.

Gary Castagna

In terms of the composition, Al, I have not had an opportunity to get right into the detail of it but I would say of this year, you probably have, I would say 60-70% of that money is still US and mainly because of the energy area, we definitely, when we get this compiled for the 10K will have had a pretty sizable year in terms of investment for equipment and infrastructure for the oil field service area. Last year we only spent I think it was just over $4 million of capital, this year, when it adds into this year would be significantly higher than that. For the most part North America, we can move that equipment around to use in international markets but you count that into the overall mix of where it’s spent, it’s probably still 60% or so US. And in terms of the outlook…

Lawrence Washow

Yeah I think if you were really just finishing up a couple of a big projects in Asia with our plant in China and expansion in Thailand, we have some other ideas of things we want to do over there that are some months away from fruition. We’ll be expanding the Turkish operation we bought so there is certainly going to be expenditures outside the US but if you look at the aggregate magnitude, I would think that the number in the $40-$45 million range is probably a good number to look at for 2008.

Al Kaschalk – Wedbush Morgan

And what majority of that, 60% is maintenance type cap ex or is it a little bit above 50%?

Lawrence Washow

It’s a little bit of both, I mean there’s a lot of spending we’re doing for productivity and effectively expanding our capacity as well, albeit not by building new plants, more from operational improvement issues. So there is certainly an element of that, that’s maintenance cap ex, there’s new spending as I said in Asia and Europe and some new things in the US as well.

Al Kaschalk – Wedbush Morgan

One of the main contributors, certainly internationally, not to focus too specifically on one particular project, but it was the Beijing Olympics, you’re certainly seeing some benefit from that. Are there any projects, Larry, as you look out here in ’08 that are either winding up or could be forthcoming that could be beneficial?

Lawrence Washow

Yeah, you mentioned the Beijing Olympics which certainly most of that work is done. That was certainly a benefit for us but obviously China from an infrastructure standpoint is nowhere near done. There’s just tremendous opportunities continuing. There were some specific projects related to the Olympics that were nice to run through but I don’t think we’ll see a substantial decline in our business over there at all, in fact it’s just going to continue to grow given what China has to do. I think we see similar opportunities developing albeit it in different ways in India, interestingly on the Olympics we were just meeting recently with some of the people related to the London Olympics coming in 2012, tremendous amount of work they have to do there and lots of our products may well be applicable for some of the issues they have to address. So I think you look at those big opportunities there, they’re always out there somewhere and for us we look at India and China together, we think there’s just tremendous opportunities across the board for almost all of our products.

Al Kaschalk – Wedbush Morgan

And then if we could just switch over to what is I guess the main topic for the quarter and more of a macro discussion I guess, mining costs over the last couple years appear to be creeping up. I wonder if you could comment on that and what, maybe a little bit more meat around how we’re going to get towards this longer term target of 20% margins in the mineral segment in particular on the growth side?

Lawrence Washow

Sure, yeah the mining costs no question, you’re right Al they have crept up over the last couple years. A little bit of that quite frankly, given the rapid volume growth, we were scrambling a little bit more than we should have had to do. Now that we’re kind of better positioned to sort of predict where we’re going to be on the volumes, we’ve got a better plan laid out to address the mining costs.

The fuel costs are up, there’s no question about it so whenever you’re hauling material around as bulky as ours is, you’re going to spend money on fuel. I don’t think we’re going to have any impact on the fuel price so that’s a continuing issue and a higher cost. What we’ve done historically is really do a balance of mining areas that are close to the plant and farther away and use the blended costs, just kind of our mineral cost which helps kind of balance some of the increase costs as you have to mine farther away. In the last couple of years we haven’t done as much of that as we normally do in part because we had to scramble to get enough material in.

For 2008, I think we’re going to position ourselves much better in terms of the planning so as we go through the year, the mining costs again, the fuel relationship, that probably won’t change, but I think in terms of our efficiency in mining and our costs overall, we’re going to be able to stabilize it. I’m not going to tell you we’ll see dramatic reductions in costs in that area because you’re dealing with heavy equipment and fuel and time and moving a lot of material, but I think we can do a much better job and be more efficient going forward than we had in the last couple of years.

Al Kaschalk – Wedbush Morgan

Great and then just on the efficiency standpoint or having enough material available, is the question of the quality of the clay or is it a function that demand was so strong it arguably caught you off a little bit in terms of planning.

Lawrence Washow

Certainly we really saw the movements start to move up a couple of years ago in the pet products, that is a business we’ve been in forever and did not really anticipate the rate of growth that was going to come into that. That’s a different material typically than we use for some other markets so we did have to do a little balancing act in juggling around to get the right qualities, but they’re all there, not a question of quality or quantity, it’s just getting the planning right so I’ve got the right materials in place.

Al Kaschalk – Wedbush Morgan

Thanks a lot.

Operator

And again as a reminder, please press star one to ask a question. We’ll move to our next question from Rich Wesolowski, Sidoti & Co.

Rich Wesolowski – Sidoti & Co.

Thanks, considering the evolving macro and demand environment, your current balance sheet, stock price, et cetera, can you review the capital allocation strategy for ’08?

Lawrence Washow

Capital allocation in terms of?

Rich Wesolowski – Sidoti & Co.

In terms of where you aim to invest, I mean this stock at $26 here, does that have you looking at your Board authorization of which I’m not sure what it is and maybe enlarging it or at least using it up versus buying more companies versus spending that $4-$50 million in cap ex?

Lawrence Washow

I think we’re, certainly from an availability of funding standpoint, we’re good to do all of the above. Obviously we are pretty opportunistic when we look at the stock price. I think we still have $9 million left on our authorization and that’s something we’ll see what happens over the next couple of days and we’re not shy about addressing that or going into that market.

In terms of the capital, those, the way we do capital projects have to create the right internal rate of return and if they’re justified and make sense and create value for us in the areas we want, we do them. So I wouldn’t see any reduction, Rich, in the capital spending itself, our dividend policy has been pretty consistent over the years and I think it will be again, so as the earnings increase we’ll see the dividend increase as well, but again I don’t see any issues in terms of concerns about generating cash to do that.

Gary Castagna

Yeah I think that the stock price or how it is in the whole stock repurchase plan is sort of the residual as to where we stand with ideas of growing the company and right investments back in the business and obviously our financing capabilities to do that are more than adequate at this point, so the ability to let’s say reallocate the capital given let’s say where the internal value of the company is at this point, and obviously something you always consider and we try to do from time to time but it doesn’t lead us into a different direction.

Rich Wesolowski – Sidoti & Co.

Is it possible that we see another $55 million of acquired revenue in ’08?

Gary Castagna

Acquisitions wise, well, a number of different target areas are out there, no doubt about that. I’d say from my perspective it’s unprecedented in terms of us spending over what six, seven business $100 million in a year in acquiring in that type of revenue. But I think it all depends on where the circumstances are and the prospects behind them. But certainly we have the financing capability and we will do it.

Lawrence Washow

Yes, we continue to look Rich at opportunities and if they really make a lot of sense we do them. We are certainly very critical about it, I mean there’s lots more out there that we could be buying that we don’t buy because it really doesn’t fit strategically with what we want to do. We’d really like to focus on, even on the businesses we purchased in the last couple of years that are now part of our organic growth, making sure that that continues to develop and expand on a regular basis. So it really is a combination and it’s hard to predict what we will find really is a good fit this year but we are out there looking.

Gary Castagna

Yeah, but it doesn’t take the focus off of knowing what we have to do right now internally and you could get distracted, so we’re not going to do that.

Rich Wesolowski – Sidoti & Co.

Well, now that you know the economy seems to have turned over at least in the US, do you get a lot more companies knocking on your door, maybe ones that you had scouted previously, multiple was too high, you know looking at the outlook for their businesses and saying maybe this is a good time to sell?

Lawrence Washow

There’s a little bit of that I think, you know certainly some opportunities that come across when you look at the economy the way it is. But I don’t know that we’ve seen a big surge in that quite frankly.

Rich Wesolowski – Sidoti & Co.

Okay, thanks a lot.

Operator

And as a final reminder, please press star one to ask a question. We’ll take our next question from Al Kaschalk, Wedbush Morgan.

Al Kaschalk – Wedbush Morgan

Hi Larry, just one question I wanted to follow up on and partly more of a comment or an observation and hopefully you’ll comment or respond. In terms of the quarter, I think it was up 20-25% revenue top line, but operating income didn’t quite hit the double digit line. And so as you’re looking at ’08 and ’09, it would seem to me that focusing more internally on the minerals business and trying to regain that health would be a key area to be focused on, I’m just wondering if you had any observations on that or comments.

Lawrence Washow

Yeah, I certainly don’t disagree with that at all. It’s an absolutely correct observation and one that we made some months ago quite frankly and have employed some people, some outside services and things that are helping us get to the stage that we know we can and should be at. Clearly we didn’t see the impact of that in Q4. I think certainly as we get into 2008 you’re going to see the benefit of that. But there’s an absolute clear focus and a very specific set of targets, objectives and goals that are defined, as well as the process and the method to get there that is going to provide improvement in our minerals business. Because this quarter was certainly not acceptable in my mind.

Al Kaschalk – Wedbush Morgan

Great, thanks a lot for taking my question.

Operator

And we have no other questions at this time.

Lawrence Washow

Okay, thank you for joining the call and look forward to a good result when we can talk about it in Q1. Thank you.

Operator

And that concludes our conference for today, we thank you for your attendance and have a nice day.

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