BENTONITE | But will multitude of uses, global expansion be able to offset growth lag?
May 19, 2008Recommend (1)
TED PINCUS email@example.com It took 50 million years of volcanic ash under pressure to create a substance called bentonite. Now Larry Washow is in a hurry to make up for lost time and use the stuff for everything from metal casting molds to cat litter to oil drill lubrication to maybe fighting the flu and AIDS.
You likely never heard of bentonite -- and neither had I until I met Larry 15 years ago, when he was earning his stripes as a senior manager at Amcol International Corp. (NYSE: ACO). At that time, known as American Colloid, it was a tiny Chicago firm placing risky bets on this claylike material that seemed to have mystical properties that could be a unique binder to improve the way sand forms a sand casting -- one of the major ways that the world molds metal.
Relentlessly, Larry kept probing a wide range of new applications for the product, which today include French wine filtration, removal of water from oil in Nigeria, lubrication of drill bits in Texas, providing nitrogen for gas pipeline cleaning in China, a safety blanket for European landfills, and as a base for skin creams. Currently, Amcol is working with Tetroscreen Virology Ltd., a London-based researcher, to follow up lab tests that have demonstrated, the companies say, how nano-bentonites can inactivate viruses of HIV, human flu and Asian flu.
At the same time, Amcol has moved aggressively to stake out the lion's share of bentonite deposits, found mainly in the United States and Turkey. It has four U.S. mines, 10 abroad, and its 2.5 million-ton output capacity makes Amcol the world's No. 1 producer. In total, its 68 facilities in 26 nations worldwide employ a lean 1,750 people.
Snooping into newer and newer uses for the stuff has enabled Amcol to build a growth record quite unlike that of the average plodding producer of natural resources. Since 2002, sales have compounded at a 20 percent clip from $298 million to $744 million in 2007 (not counting acquisitions, growth rate has been 15 percent). On the larger scale of volume, the firm has been able to widen gross margins to 26.4 percent and net margins to 10.1 percent, with earnings per share from continuing operations soaring from 43 cents to $1.84 last year.
But is the party about over? Wall Street took a look at Amcol's heavy sales proportion in the foundry market (think auto parts castings, rail car parts and other industries now under pressure), and saw sales growth slowing to 12 percent in '07, reaching $356 million or almost half the company's total volume for the year. More worrisome was profit margin slippage, even though it was nicely offset by strengths in environmental markets ($252 million sales) and oil field services ($100 million).
Not surprisingly, they bombed the stock, sending it from a 52-week high of $42 to $23, from which it has recovered somewhat to $30 last week. The analyst consensus is for only modest growth in earnings per share to $1.92 from $1.78 last year, and to $2.27 in 2009, on painfully sluggish sales progress.
But unflappable, Washow sees new opportunities to sustain his prior trajectory. Part of his confidence is based on the expected payoff of heavy additional bets since he took the helm as CEO in 2000. In that time, he has boosted R&D investment from $4.6 million to $7.3 million and capital expenditures from $14.9 million to $53 million. He thinks that sets the stage for improved bentonite applications and penetration of new markets.
The 54-year-old Kellogg MBA grad hopes his goal of at least 10 percent annual growth can be supported by further gains in Russia and Asia. "With the pace of industrialization there," he says, "there's a fast-growing concern about environmental controls. With our six plants worldwide producing geosythine clay liner from bentonite for landfill protection, we've wound up with an almost 50 percent market share and see major openings in China, India and Brazil. Meanwhile, oil-field services are in growing demand in Malaysia, Brazil and elsewhere."
In sum, like many American CEOs facing a rapid softening in domestic markets, Washow is banking on shifting his current 68/32 percent sales mix of U.S./international to higher foreign volume in a renewed effort to turn clay into gold.
Ted Pincus is an adjunct professor at DePaul University and managing partner of Stevens Gould Pincus, merger and management consultants.