ICO Inc F4Q08 (Qtr End 9/30/08) Earnings Call Transcript

| About: ICO Inc. (ICOC)

ICO Inc. (ICOC) Q4 2008 Earnings Call December 9, 2008 11:00 AM ET


John Knapp, Jr. - President and Chief Executive Officer

Charlotte Ewart - General Counsel

Brad Leuschner - Chief Financial Officer


Chris Butler - Sidoti & Company.

Sean Willard - Signis

Scott Moore - Kornitzer Capital


Good morning and welcome to the fourth quarter fiscal year 2008 reports. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Mr. A. John Knapp, Jr. Mr. Knapp, you may begin.

John Knapp, Jr.

Thank you. Welcome to the fourth quarter ‘08 conference call. With me today I have Charlotte Ewart, our General Counsel and Brad Leuschner our Chief Financial Officer. Before we turn to the subset of matters, let’s listen to Charlotte.

Charlotte Ewart

Thanks, John. As usual I must caution everyone listening that certain matters discussed in this conference call are forward-looking statements intended to qualify for the Safe Harbors from liability established by the Private Securities Litigation Reform Act of 1995. In particular, statements regarding trends in the marketplace and potential future results are examples of such forward-looking statements.

The forward-looking statements include risks and uncertainties including, but not limited to, restrictions imposed by the company’s outstanding indebtedness, changes in the cost availability of polymers, finance for the company’s services and products, business cycles and other industry conditions, the company’s ability to manage inventory, the company’s ability to develop technology and proprietary know-how, the company’s lack of asset diversification, its ability to attract and retain key personnel, litigation risks, risks related to the company’s former Oilfield Services business, international risks, operational risks, currency translation risks and other factors detailed in our most recently filed Form 10-K.

The factors discussed in this conference call and expressed from time-to-time in the company’s filings with the Securities and Exchange Commission could cause actual results and developments to be materially different from those expressed in this call. Any forward-looking statements made during this call are only made as of the date of this call and the company undertakes no obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances.

Back to you John.

John Knapp, Jr.

Thank you, Charlotte. Now, Brad will you review the financials?

Brad Leuschner

Thank you, John. Let me begin by discussing the comparison of the fourth quarter results of 2008 to the fourth quarter results of 2007. For the three months ended September 30, 2008 revenues decreased 13% or $15.6 million to $108 million. This decrease was a result of a 21% decline in volumes sold, which negatively impacted revenues by $20.3 million.

The net impact from changes in product mix and prices negatively impacted revenues by $2.7 million. These declines were partially offset by the translation effect of stronger foreign currencies which benefited revenues by $7.4 million. The volume reduction which led to the decline in revenues was most notable at our Bayshore and Australia locations.

Our gross profit decreased $5.1 million or 24%, and our gross margins fell from 17.3% to 15.1%. These declines were primarily a result of the lower volumes sold. Sales, general and administrative expenses decreased $400,000 or 4% to $9.8 million, primarily due to lower compensation costs, partially offset by the translation effect of stronger foreign currencies and higher bad debt expense.

During the fourth quarter, we had impairment restructuring and other costs of $400,000. This was a result of several items. First, we recorded a $450,000 impairment associated with the decision to close our plant in the United Arab Emirates. Second, we incurred a net cost from a second fire at our New Jersey facility that occurred in July 2008 of $800,000. Third we incurred $100,000 of property damage from Hurricane Ike.

Finally, these items were partially offset by recognition of the final $1 million from our insurer providing coverage in connection with our insurance claim relating to the July 2007 fire at our New Jersey facility. The total amount recovered from our insurance carrier to compensate us for damages and losses due to that July 2007 fire was just over $5 million.

In the fourth quarter of fiscal year 2007, by contrast to the fourth quarter of fiscal year 2008, we recognized a net benefit of $340,000 in the impairment restructuring and other line items, primarily a result of recognition of the initial payment by our insurance carrier, compensating us for damages and losses due the July 2007 fire.

As a result of the items I’ve just mentioned, operating income year-over-year decreased $5.6 million or 58% to $4.1 million. This decline in operating income was primarily driven by a decline in operating income at Bayshore, which had $4.2 million or 74% decline in operating income. This decline was due to the lower volumes sold as a result of reduced customer demand, the impact from the lack of power after Hurricane Ike and higher operating costs.

Operating income at our Asia-Pacific segment was down $1.5 million or 88% due to lower customer demand in our Australian plant and to a lesser extent, the impairment loss taken from our plant closure in the United Arab Emirates. ICO Polymers North America’s operating income was down $1.3 million or 75%, but about $800,000 of that decline was a result of lower net insurance recoveries.

Income from continuing operations was down $3.8 million or 63% from the same quarter last year as a result of the lower operating income offset partially by the reduction in income tax expense as a result of lower pretax income. During the fourth quarter of 2008, our effective tax rate was 20.3%, due in part to a tax benefit recognized as a result of the closure of our plant in the UAE. Diluted earnings per share were $0.08 in the fourth quarter of 2008 as compared to $0.21 per diluted share in the fourth quarter of 2007.

Comparing the fourth quarter results to the third quarter results, revenues were down $7.7 million or 7%. The decrease was caused by a reduction in volumes sold which negatively impacted revenues by $9.5 million. This was partially offset by the effect of higher average selling prices of $2.5 million, as a result of higher raw material costs in the fourth quarter. The reduction in revenues as a result of lower volumes was due in part from the seasonality of the fourth quarter in Europe due to vacation periods in Europe.

Additionally our revenues and volumes were impacted from hurricane Ike, which hit the Gulf coast in September 2008 and caused us to be without power at our Bayshore and China Texas plants for several days. Revenues in our Asia-Pacific region increased in the sequential quarter due to higher volumes sold, primarily in our Australian and Malaysian plants.

Sequentially gross profit fell $2.2 million or 12% and our gross margins declined from 16% to 15.1%; both of these reductions were primarily from the reduction in volumes sold. SG&A declined $600,000 or 6% primarily due to lower compensation costs.

Operating income declined $2.4 million or 37% as a result of the above items, as well as from higher costs in the impairment, restructuring and other cost line items, which went from income of $350,000 in the third quarter to an expense of $400,000 in the fourth quarter.

In the third quarter of 2008 we recognized $500,000 of insurance recoveries from the 2007 fire in New Jersey. In the fourth quarter, income from continuing operations sequentially declined $2.4 million or 52%, primarily as a result of the lower operating income.

Turning to the balance sheet, our debt decreased $8.5 million during the fourth quarter, primarily a result of cash flow from operations. In the quarter we generated cash flow from operating activities of $10 million before CapEx of $2.5 million. A little over half of the CapEx was spent in connection with the relocation from our New Jersey plant to our new facility in Pennsylvania. The majority of the expenditures related to the relocation to Pennsylvania are now behind us.

For 2009, we expect capital expenditures to be approximately $4 million with another $8 million that we could possibly spend on expansion opportunities, but the nature and extent of those expenditures will depend in part on the economic environment as we go through the year. Our available borrowing capacity under existing credit facilities as of September 30, 2008 was $62.8 million.

In September of 2008, our Board approved a share repurchase program and we repurchased 90,000 shares in September. In October another 488,000 shares were repurchased. No shares have been repurchased in November and December. The total amount incurred by the company to date for share repurchases under the share repurchase program approved by the Board is $3 million. The specific timing and amount of future repurchases under the share repurchase program will vary based on market conditions and other factors and I must mention here that the share repurchase program may be modified, extended or terminated by ICO’s Board at any time.

John, back to you.

John Knapp, Jr.

Thank you, Brad. In our last call which was in August, I noted that while our business appeared to be good, we had increasing concerns about the future. Those concerns were and are very warranted.

Demand in most of our business around the globe slowed during the fourth quarter. Resin prices have been falling dramatically and currency fluctuations are substantial. Given this scenario, we have shifted our game plan to defense rather than offense. We are focused on reducing inventory and debt and reducing the risk in our business. We believe this strategy is appropriate and will serve the shareholders well.

My remarks in this call will focus on the quarterly numbers, whereas the 10-K will focus on annual numbers. This focus reflects the defensive posture noted above. We believe that reducing our debt through cash flow will allow us both the flexibility to take advantage of opportunities that may arise during difficult times such as these and the assurance that our major suppliers and customers will be very confident in electing to do business with us.

Volume. As you may recall and I’m often reminded, measuring our business on volumes alone is not really an accurate measure of our business, as some of the processes we provide are more complicated or value adding than our commodity size reduction or compounding services and we are striving to build the value added segment of our business. We believe we’ve made progress improving our product mix and we anticipate that we will continue to do so in the future. However, volume is the natural statistic easily measured which we continue to follow and we believe should be placed in front of all of us.

In the fourth quarter, our volumes were down 21% from the same quarter in the previous year. Approximately half of that decline in volume was due to slower global demand and the other half was due to the impact of hurricane Ike on our operations at Bayshore and La Porte Texas and the IPNA plant in China, Texas. While we are disappointed in the volume decline, we recognize this is a global reality and we anticipate that volumes will continue to be a challenge in the immediate future.

We do believe that our competitive position in the market, our nimbleness and our product mix will serve to stabilize our business. While the headwinds of today’s economic conditions may affect growth in the short term, we remain confident about the long-term.

Margin. Those of you, who have listened to the calls in the past, know that I for one am a margin fanatic. As I stated in the past it is my view that the people at ICO who keep most of our plants working 24 hours a day, often six days a week, put forth too much effort in my opinion to earn anything less than a 20% gross margin and a satisfactory return on invested capital. This quarter our margin was 15.1% down from 16% in the last quarter.

In last conference call, I clearly stated that we would put less emphasis on margin and more emphasis on sustainability. This quarter’s numbers reflect the emphasis on sustainability and that will continue in the immediate future.

Earlier in the year, specifically in the months of June and July, resin producers raised prices dramatically and did so with big public announcements. In the past 60 days, or actually past 90 days, resin prices have fallen in an equally dramatic measure, although there have been few public announcements. We anticipate that this dramatic fall in resin prices in the short term will have a negative impact on our results; perhaps some simple numbers could illustrate these price movements.

On June 1, a major resin producer announced actually in The Wall Street Journal, a 20% price increase across the board, on all resin grades. On July 1, the producer announced an additional 25% increase on most resin grades. Since July 31, many of those resin prices have fallen 50% to date. That means that $100 of resin rose to $150 and then fell to $75. Movements such as this have taken place over a very short time period.

Currency fluctuations have also been dramatic. After falling against most currencies, the US dollar has risen dramatically in the past 90 days. In the case of Brazil and Australia, the recent movement is over 30%. This fluctuation impacted our results in the September quarter and we expect it will continue to do so in this quarter.

I should note that while we hedge a substantial portion of our long term fund, our product obligations, we do not do so for short delivery or advances; our instinct is to remain with that policy. Having stated all of this, we believe there’s ample room for improvement in margin at ICO over the long run. It just takes consistent work.

SG&A. For the quarter, SG&A was 9.1% of revenues; essentially flat from the past quarter. At this percentage level, SG&A is only slightly higher than we would expect to achieve in the long run.

We’ve made it clear in the past that we are incurring costs in developing several foreign markets including India for ICO products. Although we have shifted much of our game plan to defense, we are not yet willing to abandon efforts that should reward our shareholders in the long run; therefore, these costs will remain ongoing.

Further, a note on Board changes. In the fourth quarter Philip Ashkettle resigned from our Board due to conflicts with other personal and business reasons. In his place, Gene Allspach recently joined the Board. Gene has tremendous experience in the resin industry, most recently as President and Chief Operating Officer of Equistar. A chemical engineer by education, Gene’s product and industry knowledge will serve ICO well and we welcome Gene to our Board.

Operations. Brad has reviewed the numbers and they will be detailed in the 10-K, so I’ll make a few comments about operations. As you may recall, we divide our businesses into five operating segments, to which we add corporate.

Bayshore Industrial. As suggested in all previous calls, we have a good management team at Bayshore and they continue to manage well in difficult environments. Be they in economic or as in the case of this quarter, weather-related. During the quarter Bayshore was down approximately 20 days due to hurricanes. While the facilities were not damaged, the plant was taken fully offline two times and electrical power was out for a substantial period of time.

We have filed a claim with our insurance carrier for business interruption, which may serve to offset some of the lost income. ICO’s insurance however will not cover the damages suffered by some of our employees, our suppliers or our customers.

Volumes at Bayshore were down 36% from the previous year’s fourth quarter. Bayshore’s earnings declined from the previous year’s quarter from $5.7 million to $1.5 million. We anticipate the volumes will show improvement after the fourth quarter, but margins will remain under pressure.

Last quarter I stated that Bayshore’s management was concerned about prospects for the short term as customer are increasingly uncertain about both the economy and the direction of resin prices. I also said that Bayshore’s management nevertheless remained confident about their prospects over the long run. That confidence exists today with plenty of opportunities and trial phases are early customer negotiations.

While export demand at export has been reduced due to currency movements, we continue to distribute Bayshore product in South America through our Brazilian operations. We believe that demand in that market for film packaging will grow over the long run.

IPNA which is ICO polymer’s North America. IPNA’s tolling and procurement business remains steady in the fourth quarter as our reputation as the leading size reduction specialty Service Provider in North America has grown. Product sales however were lower in the fourth quarter compared to the third quarter, due to the economy and in the latter portion of the quarter, falling resin prices.

IPNA’s fourth quarter volumes were down significantly, 25% from a year ago, affected by the July 2008 fire and related damage in the New Jersey plant which is now closed, as well as hurricane impacts in our China, Texas facility. While we expect IPNA to incur volume and margin pressure from the economy, their overall business is expected to be stable. Our business of providing size reduction, shaping specialty services to major multi-national customers, really as an outsourced and shared resource should be somewhat recession resistant.

IPNA’s new plant in Allentown, Pennsylvania is now running at 65% of planned capacity. It is truly state-of-the-art for size reduction and shaping. We believe that it will serve customers, employees and shareholders well for many years in the future.

During the quarter, IPNA incurred startup expenses in Pennsylvania, write-off and shutdown expenses in New Jersey. Partially offsetting these expenses IPNA recorded insurance proceeds of $1.4 million in the quarter. We expect that additional insurance proceeds will be received in subsequent quarters.

Finally, IPNA’s operating income was $424,000 in the quarter, down from $1.7 million a year ago. The fourth quarter of 2007 had higher net benefit from insurance proceeds as compared with the fourth quarter of 2008.

As stated before we remain enthusiastic about the oil field product development and commercialization, which is led by ICO, by IPNA, but remember that’s a global business. However, we’ve learned that the new oil field products have great patience.

ICO Asia-Pacific; Astral-Asia. Business in Australia remains disappointing while in Malaysia it is quite reasonable. We expect to see improvement in Australia, New Zealand over the course of the coming year as the excruciatingly competitive market becomes more rational. We expect our Malaysia performance to remain reasonable, as our well positioned management incurs some economic headwinds.

Of note, we made a decision to close our operations in Dubai. We believe we have a superior means of service in the Mideast roto markets. In the past calls I’ve discussed cultural challenges we’ve encountered in Dubai. These challenges, combined with our focus on eliminating or restructuring any operation that was not profitable, led us to the decision to close the Dubai plant and initiate an alternative strategy in the Mideast. During the fourth quarter we reserved $450,000 for closing of Dubai. We will incur additional costs in this current quarter.

Overall, this region of Astral-Asia earned $200,000 in the quarter, after the Dubai reserve, compared to a $1.750 million in the ‘07 fourth quarter. Volumes processed in the region declined 6% from the previous year as the weakness in Australia exceeded the growth in Malaysia.

We are pleased with the performance of the new compounding line in Malaysia which ran at an average of 60% of capacity during the quarter and contributed to income. Our expectations for this line are quite high. This appears to be a well executed new endeavor. In fact, our expectations are so high that we elected to start an additional compounding line with a capacity of 6,000 metric tons, which we hope to have operational in May of ‘09.

Europe. We have great leadership in Europe, in Derek Bristow and are building a strong management team to support our efforts. While progress there has been made, much work remains to cause the European operations to function as one whole team and to diversify our product base.

Our numbers in Europe are good again in the fourth quarter. We earned $2.8 million in operating income during the quarter compared to $2.45 million in the same quarter last year; however, volumes are down 11% from the previous year and we clearly see a slowing economy and its effect on our business in Europe.

Brazil. Our Brazilian business continues to grow and strengthen. Our operating income for the fourth quarter was over $400,000 as compared to $35,000 last year. Volumes continue to grow increasing 49% compared to last year. We know that demand will slow in the short-term but in the long term we expect Brazil and all of central and South America to become more significant to ICO in the future years.

Cash flow and inventory. I believe a comment on cash flow and inventory is appropriate. We promise to watch cash flow carefully and as Brad has stated, our operational cash flow for the quarter was $9.9 million before net CapEx expenditures of $2.5 million, most notably in Pennsylvania. Further, we spent $1 million repurchasing our shares. We continue to have confidence in our cash flow.

As Brad has emphasized, our net debt at the end of the quarter was $44.3 million and our equity was $107.8 million. Although we find that ratio to be satisfactory, we have strong desire to reduce our debt further and believe we will do so through cash flow. We have seen good progress to-date this quarter.

We also watch our inventory carefully. We are as we stated in the last call, aiming to reduce inventories across the globe. By volume, our inventory in the fourth quarter was approximately 19% lower than a year ago and 24% lower than the third quarter. This is a fairly substantial reduction and it has continued into this quarter.

Finally, we should address shareholders equity. Last quarter I stated that clearly currency translations have contributed to the increase in shareholders equity. I further noted that we doubted that the impact of currencies will continue to add to our shareholders equity. I probably did not anticipate the wild ride we’ve been on.

Although we produced over $2 million in net income after tax in the quarter and used $1 million to repurchase shares, our shareholders equity, actually fell by $6 million during the third quarter to $107.8 million. Currency movements reduced equity by approximately $8 million during the fourth quarter. That is a startling number. Our instinct is that the dollar may stabilize in the coming year.

We will take any questions at this time. Thank you.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Chris Butler - Sidoti & Company.

Chris Butler - Sidoti & Company

I wanted to first ask for a little bit more detail on the impact of the hurricanes. You had mentioned that I think you said about half of the volume losses that you had seen are due to hurricane related outages and customer outages as well. Could you give us an idea of what the [Multiple Speakers]

John Knapp, Jr.

We said that Bayshore’s volumes were down 36%, Chris, okay. We had said that Bayshore was down for 20 days out of I guess 91 days in a quarter. That would be a ratio of about 24% of the quarter; does that make sense to you? So if Bayshore’s volumes are down 36% and the days they operated were down 24% that would be a reflection of kind of the impact that the hurricane had on volumes. Does that make sense?

Chris Butler - Sidoti & Company

It does now. How about looking at the bottom line impact as far as reduced profitability as a result of softer volumes?

John Knapp, Jr.

Well, I don’t know that we want to give a specific number, Chris. It’s an impact that’s pretty substantial because you’re paying your full team during those periods of time and you’re not producing anything. So it has a pretty good size impact I imagine. We tried to discuss that number and pinpoint it, so we have a pretty good idea of range, but I just think it would be misleading to try to address it.

Chris, let me add one other thing about hurricanes. When you go back down to Bayshore, when they’re up and open after the hurricane, it’s chaotic and you have some customers that their business is way down. Some of the plants along the Gulf Coast were dramatically damaged and you have other customers that are desperate for product. So your order flow is very chaotic and so I actually think the impact is greater than the number of days that you’re down. It’s chaotic, but it’s interesting chaos to watch. Go ahead.

Chris Butler - Sidoti & Company

Shifting over to Astral-Asia, I know with the last quarter you were selling down some of the inventory there; was there any hangover into the fourth quarter from that that we saw in the third quarter?

John Knapp, Jr.

We have a slight hangover of the inventory, but it’s a lot less than it was at the previous quarter.

Chris Butler - Sidoti & Company

Looking at Europe, it was the one segment that you have that other than Brazil, obviously that showed better profitability year-over-year, despite all the difficulties with resin costs. Could you give us an idea of what you were doing right there and where that strength comes from?

John Knapp, Jr.

We’ve got a management team that has been making a lot of changes in Europe. So we’ve got a different set of players on the bus and that’s the first change you have to make. Then you’ve got to get everybody working together. We got better systems. We do a better job of sharing customers between plants. Chris, if that makes sense to you and kind of specializing in some of the activities of plants versus trying to have them all be generalists and we’ve just really begun to do some of that.

Our systems are still kind of coming together so that we truly understand the inventories that we have so that we could supply customers where we have excess inventories of a particular product type in one plant and have shortage of that inventory in another plant.

So that information is transparent through all the plants, making it so that the actual products throughout Europe are all the same. When ICO was pulling all of this together over the years Chris, each plant in each nation had its own product specification sheets. So those are the change that they’ve been making over the last two years in Europe and that’s greatly helped our business.

I also might add, they’ve done a great job of managing their supply relationships. So those are the benefits that we’ve seen in Europe.


(Operator Instructions) Your next question comes from [Sean Willard - Signis].

Sean Willard - Signis

Sorry, I just want to go back and go over a couple of things. I got interrupted in the middle of this and so I apologize, but right at the end of your formal comments, you said something about a 24% drop from Q3 and a 19% drop from a year ago. What were you referring to specifically there?

John Knapp, Jr.

Inventory volumes. Sean, you don’t see these, because you’ve got resin price movements and currency movements, okay. So if you look at our balance sheet, I’m looking at our balance sheet right in front of me and a year ago we had $60 million of inventory and September 30 we had $53 million of inventory. One might think that we had 10% less volume in inventory, that’s not the case.

Sean Willard - Signis

Yes. No, I understand. I noticed it was down and then like I said I heard the two numbers and then I got interrupted and I didn’t quite know what the reference was back to and you said that that was continuing into this next quarter as well; did you mean the same quarter-to-quarter or year-over-year or both?

John Knapp, Jr.

I mean for this current quarter, we’re continuing to reduce volumes right now.

Sean Willard - Signis

And you had good cash flow again for the quarter and you mentioned what you had repurchased in shares through the end of October; are you planning on continuing that or have you abated since the end of October?

John Knapp, Jr.

We have a share repurchase approval from the Board and we will monitor the world and determine whether or not we’ll be buying at any point in time.

Sean Willard - Signis

Okay and the current portion of the debt that moved up is simply a reflection of one of the term notes starting to come due or was there any particular movement that caused that other than just timing?

John Knapp, Jr.


Bradley Leuschner

It’s about half and half due to two things; one, we entered into a new $5 million term loan in April of this year, with our US bankers, KeyBanc, and that’s a $5 million term loan. So a portion of it is related to that current piece.

Secondly, we’ve had to classify our Australia term debt all as current, because we violated the financial debt covenant that we have there in Australia. It’s the covenant that we have violated last quarter as well. So the accounting rules make you record that as current, even though at the current time we’ll continue to pay down the term debt based on the scheduled principal payments.

Sean Willard - Signis

Okay and I remember you and I talked about that before and I just hadn’t seen the 10-K available yet to see if that was still the case. Are you going to ask for a permanent modification of that or is it going to resolve itself shortly?

John Knapp, Jr.

Well, that debt is being paid down. I’m saying our overall debt in Austral-Asia, Australia and New Zealand in particular is being paid down rather dramatically from reduction of working capital.

Sean Willard - Signis

No, no, I understand that, but what I’m saying is whether it’s material or not, any breach of that, you have to record it as short-term when the reality is it’s a longer term. So have you talked to them about modifying the terms such that you can reclassify or are you just going to pay it off and put a new line together or have you really worried about it all that much or is it just a technical issue?

John Knapp, Jr.

Because it’s not that large okay, we probably haven’t worried about it that much but I’m going to be in Australia in January and will carry on conversations.

Sean Willard - Signis

Okay and then just in general, you spoke briefly about it but the tolling line in Malaysia; can you describe that business a little more? Is that more of a longer term contractual type of business that you get involved with the people or is it more of a traditional turns type business where you may only have one or two months of visibility of most of that business, how is that progressing?

John Knapp, Jr.

I think Sean, the answer to that is your visibility is one or two months, but that is a Bayshore compounding line that we put in, so it’s a major line with capacity at 9,000 metric tons and what you do is you get qualified with different customers to provide a master batch concentrate for the film packaging business.

That qualification time it takes can be quite lengthy. So once you develop customers in that business, you have some stickiness with those customers, if that’s makes sense to you and it’s for a wide product range, the additives that are compounded into the resins.


Your next question comes from Chris Butler - Sidoti & Company.

Chris Butler - Sidoti & Company

I just wanted to check back concerning the conversation on working capital. I noticed that despite the work that you’ve done on the inventory and receivables side, that working capital was up because of payables. Are we basically reflecting with the drop in payables all of the drop in resin price or have there been any changes to the terms there?

John Knapp, Jr.

Well, there’s no change to terms, but if we haven’t been buying in the last 30 days, then if you’ve been paying on 60 day terms, your payable goes down. That was a good time not to be buying, Chris.

Chris Butler - Sidoti & Company

And looking at the oil field business, we’ve seen a fairly substantial change in the price of oil; does that change the outlook at all as far as making investments into new products, new technologies, things of that nature, that may slow you down a little bit?

John Knapp, Jr.

Chris, one of my great nightmares is that we’re going to get really good in the oil field business and those oil field service companies that used to trade at huge multiples are getting crushed. Remember that polymers are used in the oil field in the cements, in the muds and in the fracking of well stimulation. So there may be less drilling which means less cements and muds, if that makes sense to you, but there will be plenty of people that want to continue to frac and stimulate existing wells in order to enhance production.

Chris Butler - Sidoti & Company

Sure, but you’re not dependent on the like plant drilling and some of the more sophisticated techniques that they have out there that would be more viable if we were back up over $100 a barrel?

John Knapp, Jr.

If we’re going into cements, if our product’s going into cement, our product goes into pretty sophisticated cements that are going into deep wells, because our polymers that go into cements change the characteristic of cements. So there may be less of those wells drilled if the price doesn’t recover. Some of those players are pretty big and long term thinkers, so the big majors may not change their drilling programs that dramatically if oil is at $44 a barrel, unless their long term picture of where oil is going, changes.


(Operator Instructions) Your next question comes from Scott Moore - Kornitzer Capital.

Scott Moore - Kornitzer Capital

I was wondering if you could talk a little bit about what we’re seeing. Obviously this was the quarter ended September. What have you guys seen in October, November and the first part of December relative to what was happening at the end of the fourth quarter.

John Knapp, Jr.

So, Scott we would be lying if we didn’t say that demand looks weaker than it was before on many of our product types, not all of them and that demand is affected, Scott, by two things. Remember, if resin prices are falling, a customer would prefer to wait two weeks to buy what they think might be cheaper resin than the current price of resin, if that makes sense to you.

So some customers drive themselves to be as inventory light as they can in anticipation of resin prices falling. The great thing about that Scott is, once resin prices do reach the bottom, they’re out of inventory and they are anxious buyers, okay. So usually when the bounce is there, we see a bounce.

We see demand weaker today than it was during the fourth quarter. We expect that that demand was influenced both by the slowing economy and in anticipation of being to buy the resin at a cheaper price.

By the way, it’s great to hear from somebody from Cornitzer Capital.


Your next question comes from Sean Willard - Signus.

Sean Willard - Signis

I forgot about one other thing I was going to ask. The insurance claim for discontinued or interrupted business conditions that you submitted, do you have a rough expectation of when you’re going to receive that and can you roughly quantify the amount of the claim?

John Knapp, Jr.

Well, we don’t quantify amounts of claims and I really couldn’t tell you when we’re likely to receive it either, because it’s called off premises business interruption and has to do with the power being gone for such a long period of time. I believe we were out of power for 15 days, at Bayshore which is a big hole for us. So we’ve never participated in that kind of claim before, so really the timing is nebulous to us.

Bradley Leuschner

Sean, is that the claim you were asking about?

Sean Willard - Signis

Yes, that’s the one I was asking about. Because like you said, it’s something different than you normally had done, so I was kind of curious if it’s a one quarter delay kind of thing from the calculation, when you guys finally agreed with the accountants and actuarial, because it was the power grid for the whole area, whether or not there’s some federal or local input that has to go into that before they can process the claim?

John Knapp, Jr.

Well it is a more complicated claim than the ones we’ve been involved with previously.


At this time I show no further questions.

John Knapp, Jr.

Thank you all for listening to this call and we look forward to talking to you in February. Thank you, bye.


Thank you ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may all disconnect.

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