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Amcol International Corp. (NYSE:ACO)

Q1 2008 Earnings Call

April 18, 2008 11:00 am ET

Executives

Larry Washow - President and CEO

Gary Castagna - SVP and CFO

Analysts

Jay Harris - Goldsmith & Harris

Rich Wesolowski - Sidoti and Company

Al Kaschalk - Wedbush Morgan

Todd Vencil - Davenport

Ralph Marish - First Manhattan Company

Operator

Good day and welcome to the AMCOL International first quarter 2008 earnings result conference call. Today's call is being recorded. A replay of this call will be available starting at 12:30 PM Central time today. You may access the replay by dialing 888-203-1112 and referencing pass code 2460089.

Today's 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.

Larry Washow

Thank you and good morning, everybody. Welcome to the first quarter call. First, you all have a chance to look over the information on the press release that was sent out. As this is our format, I'll give you few highlights of the business side and Gary will talk about financials and then we'll open up for questions.

The good news, there is a little bit good news obviously. The revenue is up and certainly across the Board that -- we think that bodes well for the future. Obviously, the challenge is in the margins and the profit. And we'll talk about that quiet a bit.

As you know, if you follow our business the first quarter and fourth quarters are the most difficult to predict, particularly the environmental sector. But in this case, in reality the primary issues are around the mineral side, so I'll start with that.

Again, that has been the -- or it is the case I should say for all the groups. Sales are up but the margins are down. If there is bright spot in that is that the margins from Q4 to Q1 are flat. Certainly, the cost side of the equation in terms of energy increased much faster in Q1 than we had anticipated. And that definitely had an impact.

We did have additional overheads. Fortunately, that related to acquisitions in Turkey and Mexico, neither of which by the way really contributed to the profitability. So, that had an impact on the margins as well.

And there was the freight component that we talked about in the past. There was a greater element of freight in the sales line, and obviously, that provides little contribution. But the fact that the quarter-over-quarter's consecutively gross profit was flat, I think is a good sign. And our expectation is that we're going to see some of the benefit coming from price changes as well as cost exercises show up in our numbers in the quarters ahead.

Environmental, first quarter is always a tough one for them predicting wise. Good sales growth though in their case is well particularly in Europe. And gross margins were down combination of things, cost being an element there as well but also the product mix, as we've talked in the past couple of quarters, a greater percentage of the environmental business is now becoming some of the installation as well as the product sales.

And those sales tend to have lower general profitability. But we do see a little impact on the gross margin. The prospects going forward for environmental are really strong. The projects we will specify down around the world represent a bigger potential than we've ever had at this stage starting the year. So the prospects reading for environmental for 2008 are very good.

Oilfield services, we learned one thing in this business over the last couple of years and that there is a little element of seasonality. Now, we started off 2008 very similar to 2007 with a soft couple of months and then we began to see the uptick.

Oilfield repeated that pattern again in 2008 and the end result is okay, certainly, sales growth and as operating profit growth. But not indicative of what we think we're going to see, certainly from growth for the balance of the year that presumes that the market stays strong as it is. But really a reasonable start and, again, if we look back and forecast, we probably will in the future forecast a bit of a softer quarter in Q1 for the Oilfield Service group.

Transportation not a big factor, but actually very nice job with that group, in a tough market sales and [even] operating profit both up very well. We did mention JV income was down just a little bit and that's really a function primarily of the volume of oxide shipping that goes out of India from our partner there, and they were down just a little bit in getting shipments out. No issues or concerns with the business there is a very, very strong. So we think that's going to be fine for the balance of the year as well.

So the end results costs certainly an element and lots of activity going on there, but also very aggressive on the pricing side as well.

And with that, I'll let Gary talk about some of the other financials.

Gary Castagna

Thank you, Larry, and good morning, everyone. Just I will add some further remarks around the year, statements of operations, highlights, as well as the financial position and cash flow data we provided in the release.

You'll see here that we have a breakdown of our sales with respect to the organic growth versus acquisitions and foreign exchange benefits. Yet, you'll also notice in this release we also added some supplementary information at the end of the release, this is other table that parties have asked for over a period of time that, that we thought would be added information for your benefit for the call and the segments themselves supplementing, of course, Larry's opening remarks in the mineral side.

Again, while we saw strong base business growth actually in the quarter-over-quarter comparison a significant element one-third is added to freight pass-through revenue here. Again, most of that here in domestic operations, however, we also do see that now in international operations as shipping cost, bulk shipping, rail long haul shipping, etc cetera, are added cost to our cost-to-goods as you know. Those are pass-through oriented terms in many cases.

On top of that though, we did actually see overall higher volume both in the United States as well as in our Asia-Pacific markets. In the Asia-Pacific markets the metalcasting leading the way, US across the major business line. We also mentioned here importantly that that the pricing in certain markets has been implemented in terms of not only passing through for the freight I am mentioning here, but base pricing initiatives in across our major market line.

However as a result of essentially the shipping patterns and customer order patterns of the first quarter, the mix of the product and customer somewhat lowered the average selling prices for the quarter in terms of just the mix effect. That's somewhat of a temporary type of situation.

Larry mentioned acquisitions and really our Mineral segment is the only segment that has significant contribution from acquisition activity at this point. The acquisition in Turkey, which was completed in May of last year and we mentioned here our Mexican business, just a little bit of background that actually a minority owned venture, but for the accounting rules is classified as a variable interest enterprise and requires us to actually consolidate those operations on to our financial statement. But we will be showing the sales cost of goods etcetera. That’s really in a start up stage, but at this point as Larry mentioned before, both of those operations had negligible impact on operating income.

Environmental, again supplementally the discussion from Larry’s opening remarks, our strong quarter again driven by our overseas emerging market areas in Poland in particular. We also did see though in the US, a large volumes relatively speaking from our lining tech group here, however when we will talk a bit about the gross profit effect there in a short while.

Oilfield Services again continuing the strong market of the Gulf of Mexico in the water treatment area, a slow start there actually in the quarter and the end of the quarter certainly more reflected where we saw shipping and I should say service patterns for that business.

In transportation, as Larry said also maybe counter the overall economy level, we have seen some fairly positive traffic volume. Gross margin, nearly again the area of focus and the point of which we saw the large effect from last year with a 240 basis point decline in gross margin. Again the Minerals segment and importantly as Larry said we've seen here is to our view a trough effect, where the fourth quarter and first quarter gross margins are very comparable overall in the segment.

However, we do have a number of points of impact on that gross margin area. That clearly most pronounced is the US with energy prices and mining costs such that are also related to energy. But just in general our mining patterns and so forth have been resulting in overall higher input cost into our major mineral processing operations here in the US.

We also are seeing due to the higher impact of shipping rate delivered across into the Asia-Pacific region to our operations there of goods input such as bentonite materials and we are suffering a bit at this point of margin contraction in that region in advance of what we still believe are positive pricing pattern, that can help lift the margin there.

And the Environmental segments, we experienced a 260 basis point decline in gross margin and again that as Larry mentioned is somewhat driven by the strategic move in the services areas, not only here in the US, but more so in the emerging market areas. In Europe a lot of our business these days has been geared to an installed pricing pattern. So, we do believe that there is positive out comes there in terms of the overall profitability, but the gross margin on service oriented areas will be lower.

We also saw here in the US and it’s not as pronounces in our Mineral segments, certainly input costs and direct materials related to the environmental processing operation impacting margin.

General, selling and administrative expenses, up 16.8% over the prior year quarter, again this was spread out different components from different businesses, a little over 20% of that total increase of $4.8 million was attributable to acquired businesses and in fact most of that was in the Minerals segment and that is the area, where we have most of our acquisition activity about two-thirds of the growth of the Minerals segment.

GS&A over the prior year period was due to higher the cost associated with our joint venture in Mexico plus our operation in Turkey. And we also saw some base business GS&A growth especially in product development and personnel costs in the Asia-Pacific area.

The Environmental segment and most of the GS&A really gear in terms of the growth has geared toward the emerging market areas, the support, the developments there. And on the Corporate segment this was somewhat more of a variable type of issue from the costs perspective. We more of a coincidence that experience higher amount of benefit related costs that we observe in the Corporate segment of the company. This is an area that somewhat unpredictable, but while we have been pretty good in overall and maintaining within on our health and welfare costs, this first quarter at least in the comparisons to the prior year did experience some higher levels of those kind of costs.

But consequently on the operating profit side and the margin decline at 240 basis points over the prior year period due to the lower gross margin, interest cost increasing with our average debt level and the income tax fairly comparable effective tax rate slightly higher rate than the overall rate from last year some of this more a sort of not a planning element of an issue.

But we do have a research and development credit that we normally each years adds about or I should say reduces our effective tax rate by 1 percentage point and technically at this point that legislation is lapsed. So, we have not taken any benefit for our research and experimentation credit to this point.

Larry mentioned already the timing related to the shipping patterns of our major investment in India. Quickly onto cash flow and financial position scenario long-term debt increasing in the quarter that's a bit higher than what we normally would see in a first quarter. But somewhat in the typical element of debt level and commensurate with working capital, where first quarter of the year are generally our softest quarter from an operating result standpoint. But our balance sheet tends to have more of a working capital need, as we build up into the high season if you will for those businesses.

We also had a little bit of a higher cash balance some of that is more cash planning initiatives that we have underfoot, but essentially the rise in the cash balance this is sort of a temporary situation.

Next paragraph is really giving some more background on a sale leaseback transaction we just finished in the first quarter. The working capital I already just mentioned in terms of the increase there prior to just skipping along to the investing activities you will see that our CapEx in the first quarter for plant and equipment and so forth was $12.9 million bit of an increase over the prior year, but probably setting a pattern for the year that we are kind of predicting in terms of the overall spending level for the year that we have mentioned before especially when it comes down to the Oilfield Service area that will be an area that we have been adding more emphasis too in terms of the CapEx buildup to support that business.

And finally on share repurchases, we completed or I should say we added the 80,000 shares in the share repurchase in the first quarter approximately $2 million total. There was an oversight. We didn't mention it here. But I believe there is approximately $6 million of share repurchase authorization remaining from our Board approval. And that's it.

Larry Washow

Thanks, Gary. Steve, why don't we open up for questions?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question will come from Jay Harris from Goldsmith & Harris.

Jay Harris - Goldsmith & Harris

The sun is shining in New York and the stock price is down $5.35, just an observation you guys don't give guidance, therefore you're not required to telegraph, where the numbers are going. But when you see street estimates north of a year ago and you're coming in significantly south of a year ago, why do you wait for the conference call to drop the bomb? Why don't you open the door earlier? The stock never should have gone to 34 or 35over the last week or so anyway?

There are two issues that it seems to me, that you've to address, I don't know if you'll have enough time that we address them in enough detail on this conference call. One is, to what extent have you been able to get your arms around the issue of rapidly rising cost structure, which as [plagued] your margins and obviously this quarter on a disastrous basis.

And why should we believe that your margins will recover in the Minerals division going forward when it is so far below the, I don't know, late 90s early 2000 decade structure that were had been in place. And if we're in an environment in which crude oil is going to continue to go up and therefore your freight surcharges and your input costs are going to continue to go up. Why should you be in a position to grow your company at an acceptable rate over the next few years? I mean, those are two separate issues I'd like to see you address them as best as possible?

Larry Washow

Hey, Jay, thank you. And there actually was an earthquake in the Midwest this morning. I trust our earnings had nothing to do with that, but….

Jay Harris - Goldsmith & Harris

Well, it might have been a reaction, who knows?

Larry Washow

Minerals margins clearly, the obvious concern is appropriate and understandable. And I could tell you it's going to get better and I believe it will, but obviously the proof would be what it does. What we're doing thought to change some of the past history is certainly on the pricing side to the degree we've had and we've had some pricing in some of the major markets, where the flexibility was on an annual basis or semiannual basis. I think our longest term these days is a quarter for pricing and sometimes it's a month and that's a relatively recent change over the last couple or several months I should say, and that's going to have a positive impact in the quarters ahead. There is no doubt about it.

It's very clear that the energy cost we can't predict, we have no idea, we sort of assume that towards the end of last year that things might have -- if not [peak tight] at least we will see marginal increases. And obviously, in Q1, the increases were dramatic, far greater than we had anticipated. And it's immediate impact on us when we're shipping internally with freight, surcharges. We're buying diesel, fuel. We're buying the material. We're buying gas to dry the clay. So the impact on the energy was far, far greater in Q1 than we had anticipated in terms of raising price.

Again it's not pretty to say that the margins were flat, but the fact that they were in light of higher pricing, a higher costing I should say, I would hope gives people on the outside some comfort that, yeah there are -- there is light coming at the end of the tunnel. But it is going to take some time for sure. And again I do believe it will get better but until we can show it and see it and you see it, it's a lot of talk. But on the inside, quite frankly, there is a lot more confidence going forward than probably the outside might have at this juncture.

In terms of the growth question, the real strength I think will continue to be international. Our Asian growth is very nice quarter-over-quarter. We think that's going to easily continue. Eastern Europe in particular represents a great opportunity. We continue to see a good growth in all those segments on the European side but particularly the environmental, the mineral side we really look at Asia to be the main driver.

No question the U.S. business is flat and the metalcasting is down. No question about that. So really the growth that we're seeing is coming from other businesses, other markets and other opportunities. And we still think there is some lots of ways that we'll continue to grow the business in the quarters ahead.

Jay Harris - Goldsmith & Harris

You've put some price increases into effect. Can you talk in terms about the dollars of price increase that you expect to be effective in the second quarter versus the first quarter or for the year? And as you look at things now, what are the dollar increases that you anticipate in new infrastructure for the same periods of time?

Gary Castagna

Yeah. Certainly, looking ahead for the balance of the year, and again, assuming that the cost inputs don't go completely crazy, we have several million dollars of net benefits that will show up in the margin assuming that the costs, again, stay reasonably inline with our expectation. So it's a fairly sustainable number in terms of the mineral segment that we have a price increases built in.

Jay Harris - Goldsmith & Harris

And is this -- will we see significant progress on this front in the June quarter?

Gary Castagna

I believe you'll see a good step forward in June. Yes.

Jay Harris - Goldsmith & Harris

All right. Last question is, have you guys have less time in your schedule so that you can take one on one calls, and if so, what days are available?

Gary Castagna

Yeah, we'll deal with that, Jay. We'll certainly be available over today and early next week.

Jay Harris - Goldsmith & Harris

All right. Thank you.

Gary Castagna

Thank you.

Operator

Our next question will come from Rich Wesolowski with Sidoti and Company.

Rich Wesolowski - Sidoti and Company

Thanks a lot. Good morning.

Larry Washow

Good morning, Rich.

Gary Castagna

Good morning, Rich.

Rich Wesolowski - Sidoti and Company

Larry, you just mentioned that freight so long is the costs or the cost escalation sticks reasonably to your forecast, what is basically the forecast? I mean, are you assuming that this is an anomaly that you faced in the last six months or that this is basically the status quo that's going to prevail for the rest of the year, maybe if it's '09?

Larry Washow

Yeah. We don't think it's going to go down anywhere. So I think -- and that's quite frankly, where we were perhaps too optimistic assuming that there was a peak some time in Q4. I'm out of the guessing business in terms of the cost for energy because I don't think we know even when the Journal [for the day] talked about the gas price increasing dramatically for natural gas in the future.

So we're anticipating that the cost components are not going down and, in fact, probably will continue to ramp up at some level. And again, I think with our pricing flexibility having the capability now to respond very quickly to that on the surcharge component to some degree, but again, in the overall pricing, on a much more regular basis, we're better positioned to deal with whatever happens.

Rich Wesolowski - Sidoti and Company

Gary had mentioned the margin contraction in Asia in metalcasting specifically in the prepared remarks. I was under the impression that that was a lot higher margin business than what you typically do in the U.S. Is that the case here the early going or you have to maybe price the product a little bit more aggressively than you thought out of the gate?

Gary Castagna

Yeah. I mean, the margins over there are better than here generally, Rich. But the transport cost getting material there the internal transport cost even within places like China has escalated dramatically. And that's the area we do need to be more aggressive and moving the price up where we are. But that had an impact on us in Q1 as well.

Rich Wesolowski - Sidoti and Company

Okay. And two more, and first, can you give us an updated outlook on your expectations for the construction materials business both in the U.S and Europe?

Gary Castagna

Overall for environmental, certainly the lining tech, that this is extremely strong, the activity is very, very strong. On the construction side, there's a few pockets that are a little bit soft. One are the bigger areas for Europe in last couple of years have been Ireland, that seems to be a little bit softer this year, good strong business levels in the U.S., and certainly, in Asia continues to be strong.

So overall, I think the environmental sector, it looks very good overall probably lining tech being stronger than we've seen in quite sometime. Construction products a bit -- there are pocket of softness, but there is also some really strong developments in areas, where we continue and projects that have been specified sometime ago that are now coming into provision. So, I think overall it's going to be a good year there.

Rich Wesolowski - Sidoti and Company

Okay. And finally you had about $6 million bucks in acquisition revenue, I think just about all of that with the Turkish Minerals business. Why didn't that that generate income?

Larry Washow

Turkey and Mexico were the combination there, Rich, but the income side we really found ourselves, we got that business towards the late summer last year -- in the middle of summer I should say. And there was quite frankly just not enough material mind to get through the winter across effectively and that's the situation. Obviously now that we understand the business better and we know what the demand is, and it's one of those situation where there is more demand that we have the ability to supply, which is the good side.

The bad side is the material we did supply and was came at a very high cost. So, I think as we get into Q2, we will start to get out of that, the mining season. In Turkey is short, it's just starting now and it wraps up in October. So, we've got the mining contractors lined up in a much higher level of material that we expect to get out of the ground. So, it will be a contributor in the quarters ahead, but it definitely hasn't been so far.

Rich Wesolowski - Sidoti and Company

Great, thank you, Larry.

Larry Washow

Thank you.

Operator

(Operator Instructions) Our next question will come from Al Kaschalk from Wedbush Morgan.

Al Kaschalk - Wedbush Morgan

Good morning, guys. Just wanted to follow-up on the couple of businesses you acquired and the costs that you about getting prices through. Somewhat I think what Jay said, I assume we've had a number of quarters where we've done lagging and then taking sometime get through.

Is there just a fundamental inherent part of your business that we always going to have this lagging behind us. And then secondly, as we look at the top line benefiting from business conditions, opportunities the margin on that dollars, it seems to be extremely low. So, as you diversify geographically, it seems like the ability to control some of these operations I alluded to [John] just I wondered maybe if you can comment on that?

John Hughes

Yeah, I don't agree with that necessarily Al. I think when we get into completely new areas like, Turkey is a good example. There is a learning curve for sure. There was in China. There was in Thailand. There was in Korea there. There was in Australia probably as well. In all those cases, as we get the business turned around in the way, we run our business and we are proving that it's a very successful model.

So, to the degree that there is a lag time, it probably is only in the Mineral sector quite frankly. I think if you look at the Oilfield Service and Environmental acquisition, they tend to hit the ground on running. They tend to be sort of bolt-on type products, where as on the Mineral side, we are into operations, we are into mining, we are into the nuts and bolts of the business and making sure that is all in line. I have taken a bit more time on some of these acquisitions and some of the others, but I don’t think there is a fundamental problem with the model. If you look back at the overall history in acquisition, it is very good.

Al Kaschalk - Wedbush Morgan

In terms of the corporate target current consolidated gross margins, is that something now where we should be thinking getting something close to 26 this year, is a reasonable achievement and then 30-40 basis points after that and into ‘09 or we still with the mix of businesses, the acquisitions. The cost equation remained challenge to reach that level.

Larry Washow

I think to get back in that kind of range is certainly realistic Al. And again it's obviously not the kind of first quarter we wanted to deliver, but we’ve had lots of discussions in view of the business and where we are at and what expected the rest of the year, what’s already kind of bake in the cake and we are going to see improvement. There is no question about it.

That is the level on the degree environment is really strong quarters and second and third quarter great base of business. Oilfield until the hurricane season should be very solid and then we have to see what happen is there, but hopefully that’s good.

The sector I think are is in cost and pricing and some of the cost that we just do not react quick enough to deal with the energy impact, we are now and that’s going to improve the margin for sure.

Al Kaschalk - Wedbush Morgan

And then how quickly currently from what the share price works at, do we suspect that the dollars available out there you can go back to the board. There is something you have to wait for I guess board meeting next month or can you do it immediately.

Larry Washow

Those of…

Al Kaschalk - Wedbush Morgan

Assuming your -- at some point here I mean the inherent value, which you continue to describe to us for the business is being discounted and might be today in the market and I’m just trying to understand you’re certainly at pretty strong level in that debt and you have $6 million left on the repurchase program. Can you go back to the board immediately and get reauthorization on that?

Larry Washow

Sure, I mean that will be a topic at the board meeting coming up in May in terms of where to invest the money, yeah.

Al Kaschalk - Wedbush Morgan

Okay. Thank you.

Operator

Our next question will come from Todd Vencil from Davenport.

Todd Vencil - Davenport

Thanks guys. Good morning.

Larry Washow

Good morning.

Gary Castagna

Good morning, Todd.

Todd Vencil - Davenport

You know just a follow-up on one of the comments earlier, I mean you talking about the confidence level on minerals internally been pretty high maybe higher than externally. I mean does a lot of that come down to the fact that it sounds like you sort of put this new pricing structure in place?

Larry Washow

Well some of it is just more aggressively recognizing that we're in a position in the marketplace that the demand is such we've to recapture the cost and maintain the margins and the costs are not going to get any better. So, I think it's the realization of that and quite frankly going to the market and talking about pricing in this sort of environment nobody is surprised and you're not (inaudible) oh, my god nobody else is talking about higher prices obviously everybody is.

So, I think it's a combination of things, recognition that the market has changed, recognition of the cost profile has changed and is unlikely to improve substantially at least in those components we don't control and from that I think the activity of the marketplace has been very encouraging.

It's a pretty solidly busy industry that we're in. So, there is not enormous amount of excess capacity anywhere and I think everybody is looking at the same kind of cost input. So, we're finding reasonable understanding and expectance on the customer side and where we need to maintain some margins.

Todd Vencil - Davenport & Co

So, just so I understand what you've done is basically go from a situation where you at on the Mineral side and any color around product by product is appreciated here? On the Mineral side you had been pricing annually maybe semiannually now you're pricing monthly?

Larry Washow

Well it varies by market and by customer. But certainly there is nothing that's annual. There is nothing that semiannual. The longest horizon we do is quarterly. And a lot of times what we've done is going back and put in surcharges to capture the energy cost monthly.

Todd Vencil - Davenport & Co

Okay.

Larry Washow

That makes sure that we're not loosing anything in terms of the overall. Obviously that could have a little impact on the margin because there is more revenue dollars and we recapture that on a quarterly basis.

Todd Vencil - Davenport & Co

Right.

Gary Castagna

And Todd just to add on to that, that there were also though product line areas that indeed we had not been really getting proactive on the pricing front. And now this is across multiple product categories. For instance, for a longtime really have had metalcastings business here pricing structure is such that the transparent if you will fuel surcharges and so forth to be priced fairly rapidly back in to our customer base under the terms of those agreement.

However some of the other input costs that have come in more from the manufacturing mining side of things have not necessarily been areas that we've been as quick to in the past to push through in the marketplace. In today's world that now has to happen.

Todd Vencil - Davenport & Co

Right.

Gary Castagna

And so there is -- it's not that we've never been raising prices, we've been. And this quarter as I mentioned we did some of that being a mix issue there that we've seen [unaffected], but key issue it's there. And it's also going to be in our Environmental segment an area we haven't talked about it again as much. But again pricing patterns in those construction related material areas in our segment anyway are going to require also some pricing changes.

Todd Vencil - Davenport & Co

Okay. And then turning to Environmental segment for a minute because really relative to my model on the operating side that's where things fell bit of short. And I guess, I was surprised that we didn't really see you guys getting more leverage on the SG&A there, was I just sort of calibrated wrongly on that or I guess that's how thought that we'd start to see a bit more leverage than what we did see?

Gary Castagna

Yeah Q1is always a difficult one there Todd. I mean the GS&A is pretty similar to the fourth quarter, a little higher in Environmental without a great deal and they are kind of positioned more for Q2 and Q3 strength, where you did tend to see a little bit of impact, more impact in Q1. It is a difficult comparison too and fairness there were some kind of one off things in Q1 2007 that reduced the overhead numbers there a little bit, so made the comparison look a little worse than it really is.

But I think if they're going to leverage on the overhead certainly we have wasted in part to have more direct selling in some of our divisions, which pay commissions and is not always the best way to do it. Lot of times we think the direct selling is going to provide a much better value and it definitely provides higher contribution in terms of margin. So, some of that is built in there and again I think we'll see the benefit of that in the quarter.

Larry Washow

Yeah and Todd just on that the relative percentage to sales the GS&A it was almost dead on the prior year quarter and but if you do notice that the SG&A in the Environmental segment as a fraction to the sales line is tends to be the highest in the first quarter because of the pattern.

Todd Vencil - Davenport & Co

Sure.

Larry Washow

And so there is not a pure correlation by any means on SG&A with sales though in general in that group. There will be some but not a lot. So, as the seasonal patterns picks up and as you're aware, where the business is growing you should able to see that relative SG&A level decline.

Todd Vencil - Davenport & Co

Okay. So, we look at the year do you think SG&A, as a percentage of sales can be better this year than last year or was last year pretty reasonably good?

Larry Washow

I'd say it's probably going to end up being more comparable to the prior year.

Todd Vencil - Davenport & Co

Okay. All right. And then as we think about sort of relatedly as we lookdown in the segment breakout at the corporate expense line that was running high and you talked about some of the reasons for that, I guess, we were up about 26% year-over-year. But I mean -- you just talked some of the reasons. Can you kind of rank and give sort of a sense of the magnitude of what the impacts were there, whether it was from acquisitions or from healthcare, what have you?

Larry Washow

Really more a couple of things. The benefit costs as Gary mentioned was the biggest single impact.

Todd Vencil - Davenport & Co

Okay.

Larry Washow

No question about it. And as you guys know that's -- some are unpredictable and it tend to be just a function of people count. There were lot bigger claims in Q1 this year than we've had previously and lot of those ended up in corporate.

Another element is, certainly, in the overall spending, when you look at spending, research and development is up about $600,000 quarter-over-quarter. And not all of that goes into Amcol, but there is certainly a reasonable chunk in there, that's in Amcol plus business developments in another couple of hundred thousand.

So, it's really -- it's a function of kind of the benefit costs and additional research and business development costs that make up the majority of that change.

Todd Vencil - Davenport & Co

Okay.

Gary Castagna

Yeah. There won't be acquisition related expenses that we would ever get classified there, Todd.

Todd Vencil - Davenport & Co

Yeah. Okay.

Gary Castagna

Yeah. This is really more on what we kind of absorb and even like in the pension funding area, pension-related expense, a lot of that is absorbed into that segment.

Todd Vencil - Davenport & Co

So, not even the overhead from the acquired companies?

Larry Washow

No.

Gary Castagna

No, not.

Todd Vencil - Davenport & Co

Okay. That [one] on top of the segments. Okay.

Gary Castagna

Right. That's quite right.

Todd Vencil - Davenport & Co

And then, I guess, really final question, in the oilfield business, you had just sort of mentioned that you think it starts out slow. Are you seeing levels of activities now and late in the quarter that make you feel confident about that, maybe it starts out soft slow, but then it's going to pick up and ramp for the rest of the year?

Gary Castagna

Yeah. Certainly,

25

Gary Castagna

Yeah certainly it’s doing exactly what it did last year and in the first couple of month quite frankly we are slower than all of sudden. In March we have everybody we have available out there and that’s what happened last year, that’s happening this year and continuing on in the Q2.

Todd Vencil - Davenport

Okay. Thanks a lot.

Gary Castagna

Thank you.

Operator

Our next question will come from [Ralph Marish] from First Manhattan Company.

Ralph Marish - First Manhattan Company

Good morning.

Larry Washow

Good morning Ralph.

Ralph Marish - First Manhattan Company

Could you just comment on the strength in cat business?

Larry Washow

Yeah actually in the cat business is strong. The transition from sort of traditional litters to bentonite-based litters, which had plateaued a couple of years ago, seems to be building again. So, in terms of the market percentage there is greater demand for our type of product in the marketplace.

And we are supplying a lot of the packaging side of that business, which we have a small component of continues to improve, probably we had a much better quarter starting this year, than we did last year certainly. So, that business is very strong Ralph.

Ralph Marish - First Manhattan Company

Or it’s more than just your customer order patterns.

Larry Washow

It is, it is I mean the whole demand cycle for the bentonite-based litters is up quite a bit.

Ralph Marish - First Manhattan Company

Okay. And I wanted to go back to gross margins for a minute. In January you’d talked about the neighborhood of 27% for the year and I’m wondering if you could just clarify that in view of the margin sort of first quarter. If you still expect to be in the 26, 27% percent neighborhood?

Gary Castagna

Yeah, I think I want to supplement what Larry mentioned earlier, that you also have to remember that the pattern of the year this is definitely a low point at 24% Ralph, but as Environmental and Oilfield segments continue a higher growth trajectory. There is going to be some natural shift there. That question I think in terms of our respect of forecasting as well as I’m sure others outside is just the restoration of the margins if you will on the Mineral side that impacted. And that impact could be substantial on a point or two bases frankly between now and the end of the year in terms of that overall gross margin level.

Ralph Marish - First Manhattan Company

Okay. Thanks very much.

Larry Washow

Thank you.

Operator

And we do have a follow-up question from Jay Harris with Goldsmith & Harris.

Jay Harris - Goldsmith & Harris

Change of subject. Progress report on the chrome sands venture in South Africa?

Gary Castagna

We announced the pending acquisition there a few weeks ago. We had announced it because it is a public company in Australia that owns the asset in South Africa. And there is really nothing to update beyond that. We've yet to determine a closing date and we're obviously still on the due diligence process on those issues that were mentioned in the press release. So….

Jay Harris - Goldsmith & Harris

Where do you stand in terms of having the mining site fully permitted?

Gary Castagna

The previous owners have pretty much gone through the entire process. There is not -- it's not a final permit yet but much of the groundwork has already been done.

Jay Harris - Goldsmith & Harris

And I understand there is a capital investment that's required before I call it the ore can be used in foundries. How long does that take?

Gary Castagna

Well, a six month process to build the plant.

Jay Harris - Goldsmith & Harris

And….

Gary Castagna

However Jay on that we've already made provisional moves there such that we can process ore and we're actually getting some of that on a total process if you will today not from the site that we're obviously looking to control. But there are other sites that you can actually process the ore at.

Jay Harris - Goldsmith & Harris

Well, are you accessing sand at this point in time and expanding your sales operations during the June quarter?

Larry Washow

We won't do a lot of expansion in June but in the second half of the year we will. We're certainly supplying our U.S. base business, which is where we've been selling [in Europe] for the last 30 plus years. As we get more capacity coming through the processing facility there, we will definitely expand our presence there.

Gary Castagna

Yeah, I'd say it's a limited impact for fiscal '08, regardless of having the transaction completed. Because in reality, we won't have enough access to production capacity to really enable us to move to a larger level that we certainly plan to do and especially in the global marketplace outside of North America.

Jay Harris - Goldsmith & Harris

Has there been any change in your mind in terms of the closing dates on the deal?

Larry Washow

Hard to say, Jay. There are certainly some issues that we're still dealing with. I hope it should wrap up maybe a year but it's not affirm date yet.

Jay Harris - Goldsmith & Harris

Okay. Thank you very much.

Larry Washow

Thank you.

Operator

And at this point we have no further questions.

Larry Washow

All right. Thank you, everybody. We look forward to our call in Q2 and I'm sure it'll be better one. Thank you.

Operator

And this concludes today's teleconference. We thank you for your participation. Have a great day.

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Source: Amcol International Corp. Q1 2008 Earnings Call Transcript
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