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Executives

A. John Knapp, Jr. – President and CEO

Charlotte Ewart – General Counsel and Secretary

Brad Leuschner – CFO and Treasurer

Analysts

Christopher Butler – Sidoti & Company

Jackson Spears – Robbins Group

George Gaspar – Robert W. Baird

Dennis Kennel [ph] – Rudebager Capital [ph]

Ryan McGaver – Capstone Investments

Mitch Almy – McAdams Wright Ragen

ICO, Inc. (ICOC) F1Q09 (Qtr End 12/31/08) Earnings Call Transcript February 5, 2009 11:00 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to the first quarter fiscal year 2009 earnings report conference call. At this time, all participants are in a listen-only mode. Later, we will conduct the 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.

A. John Knapp Jr.

Thank you. Welcome to the first quarter fiscal ‘09 conference call. With me today are Charlotte Ewart, our General Counsel; and, Brad Leuschner, our Chief Financial Officer. Before we turn to the substance matters, let’s listen to Charlotte.

Charlotte Ewart

Thank you, John. As always, I must caution everyone listening that certain matters discussed in this conference call are forward-looking statements involving risks, uncertainties, and assumptions intended to qualify to the Safe Harbors from liability established in the Private Securities Litigation Reform Act of 1995.

The company’s statements regarding trends in the marketplace and potential future results are examples of such forward-looking statements. The forward-looking statements include, but are not limited to, restrictions imposed by the company’s outstanding indebtedness, change in the cost and availability of resins or polymers and other raw materials, general economic conditions, demands for the company’s services and products, business cycles and other industry conditions, international risks, operational risks, currency translation risks, the company’s lack of asset diversifications, the company’s ability to manage inventories, develop technology, and proprietary know-how, and attracting retained key personnel as well as other factors detailed in the company’s Form 10-K for the fiscal year ended September 30, 2008 and the company’s other filings with the Securities and Exchange Commission.

The factors discussed in this conference call that are 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 and the company undertakes no obligation to properly update or revise any forward-looking statements to reflect subsequent events or circumstances. And thanks, John, back to you.

A. 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 first quarter results 2009 to the first quarter results of 2008. For the three months ended December 31st, 2008 revenues decreased 28% or $31.5 million to $79.4 million. This decrease was a result of a 21% decrease in volumes sold, which negatively impacted revenues by $18.3 million; the translation effect of the stronger US dollar, which reduced revenues by $9.2 million; and finally, the net impact from changes in product mix and prices, which negatively impacted revenues by $4 million. These declining volumes was experienced throughout each of our regions. The volume decline was a result of two important factors, first, the global economic downturn, which is reducing demand of our customers’ products, and secondly, caused by an unfavorable resin price environment.

The unfavorable resin price environment, was a result of very high resin prices in our fourth quarter fiscal year 2008, which was followed by rapid and dramatic declining in resin prices during our first quarter fiscal year 2009. This downward trend in resin prices lead our customers to de-stock their inventory as they wait for lower prices. These had the effect of reducing demand for our products and services.

Our gross profit decreased $9 million or 47%, and our gross margins fell from 17.2% to 12.7% These declines are primarily a result of the lower volume sold as well as the impact from the unfavorable resin price environment on our margins. The unfavorable resin price environment I described previously not only had the effect of reducing demand for our products and services by our customers, but also put a lot of pressure on our pre-stock margins since resin prices were falling so rapidly.

Sales, general, and administrative expenses decreased $1.5 million or 14% to $9.1 million, primarily due to lower compensation cost, the translation effect of stronger – of the stronger US dollar, and lower external professional fees. These benefits were partially offset by an increase in bad debt expenses of $600,000. We had two customers who filed for bankruptcy during the quarter or shortly thereafter, which was the primary cause of the increase in bad debt expense.

During the first quarter of fiscal 2009, we had a benefit and impairment restructuring and other cost income of $300,000. This was primarily a result of reimbursement from our insurance company of $400,000 on the financial losses we incurred as a result of the power outage that occurred in our Bayshore industrial location in September 2008 as a result of Hurricane Ike.

Additionally, we recognized a net benefit of $100,000 from the July 2000 far – sorry, July 2008 far [ph] and our New Jersey location as a result of recording an additional receivable related to the insurance claim of $200,000. We’re currently in the process of finalizing the claim related to the July 2008 far.

Finally, we recognized $200,000 of plant closure costs related to the facility closure of our plant in the United Arab Emirates. During the first quarter, we ceased production in that facility, and our lease agreement for that facility terminated January 31st 2009.

As a result of the items I just mentioned, the operating income year-over-year decreased $6.9 million to a loss of $448,000. Our interest expense declined $380,000 or 38% as a result of our lower average debt levels. Our debt outstanding as of December 31st, 2008 was $42.8 million, which has declined 37% from the $68.1 million of debt outstanding of December 31st, 2007. Income from continuing operations was a loss of $1.1 million or $0.04 per share, compared to income of $3.5 million or $0.13 in the first quarter of the prior year.

Now, turning to the comparison of our first quarter results through our fourth quarter results. Revenues were down $28.6 million or 27%. The decrease was caused by a reduction on volumes sold at 12%, which negatively impacted revenues by $14.4 million. The translation effect of the stronger US dollar reduced revenues by $10.4 million and lower average selling prices as a result of declining resin prices reduced revenues by $3.8 million. Our volumes were impacted in the first quarter compared to the fourth quarter by the global economic slowdown and the unfavorable resin price environment as well as the seasonality of our first quarter, which is typically a seasonally slow quarter for us due to the holiday period in December.

Sequentially, gross profit fell $6.2 million or 38%, and our gross margins declined from 15.1% to 12.7%. Both of these reductions are primarily from the reduction of volumes sold as well as the unfavorable resin price environment. They impacted not only our volumes, but our pre-stock margins as well.

SG&A declined $685,000 or 7%, primarily due to the translation effect of the stronger US dollar. We went from an expense of $410,000 in impairment restructuring and other costs in the fourth quarter to a benefit of $300,000 in the first quarter. These items led to the reduction in our operating income from the $4.1 million we reported in the fourth quarter of fiscal year 2008.

Now looking at the balance sheet, we are very pleased with our cash flow during the quarter, which led to our ability to reduce our net debt position. Our net debt fell from $44.3 million as of September 30th, 2008 to just under $32 million at December 31st, 2008. This $12 million reduction was primarily a result of the cash flow we generated from operations. A large part of our cash flow was the result of the reduction in working capital as a result of the declining sales volumes, but also due to lower average prices held in inventory as a result of lower resin prices and our average to reduced working capital.

Capital expenditures for the quarter were $1.4 million, $600,000 of which was related to our facility relocation to Pennsylvania, which is now substantially complete. We would expect capital expenditures for the remainder of fiscal year 2009 to range between $2 million to $4 million, but will depend on the global economic environment throughout the year. John, back to you.

A. John Knapp, Jr.

Thank you, Brad. Let’s begin with the big picture. Clearly, these are extremely challenging economic times. Please know that we at ICO understand that the reason investors entrust their capital to management in any company, including ICO, is to earn a satisfactory risk adjusted return. And while an investor’s time horizon maybe long, it is inevitably made up of a series of quarterly returns. And it is for that reason that I am truly disappointed to report a quarterly loss at ICO.

Here, even though we are facing challenges in the current environment, by far the largest of which during last quarter was the dramatic decrease in resin prices, we had hoped to have positive earnings during the quarter. However, slowing demand combined with dramatic resin price movement, and to a lesser extent, reserves for bad debt and currency losses prevented us from being profitable in the quarter. For that, we are most disappointed.

As Brad pointed out, we’re satisfied with our cash flow, which is a key metric that we are focusing on today. We believe we have a relatively strong balance sheet, which should be attractive to the best of the resin producers who are our suppliers and to wise customers, this business is required – a dependable source of processed resins. Balanced sheets are important.

Our management is focusing intensely on inventory. At ICO, inventory means commodity resins repurchased from major resin producers and processed for customer applications. Along with most commodities, the global prices of resins that we buy rose dramatically during 2008 calendar year to record highs, and then fell even more dramatically as much as 50% over a 90-day period during the last three months of 2008, which is ICO’s first quarter of 2009.

Our investment in inventory, which was $78 million on December 31st, 2007 declined to $53 million as of September 30th, 2008, and further declined to $35.9 million as of December 31st, 2008. As resin prices fell dramatically during the last quarter, we are really pleased to report the reduced inventory levels. During the second quarter, we maintained this focus on inventory management.

A corollary to our inventory management is the management of our debt. On December 31st, our net debt, which is the measure I particularly use, was $64 million, on September 30th 2008 it was $44 million, December 31st, 2008 it was $32 million. We are pleased with this reduction in our net debt, and we expect it to continue in the second quarter.

In our last call, in August, I noted that we shifted our game plan to defense rather than offense. In addition to inventory and debt, we are focused on reducing the risk in our business in our operating expenses. Our overall headcount at ICO is approximately 10% lower today than it was on September 30th of 2008. We have frozen most salaries across the globe. We will continue to monitor our operating expenses and make those reductions that we believe are required. We believe that we’re in a position to take advantage of opportunities that may arise during difficult economic times such as this, and we’re seeing several interesting opportunities.

Volume, as you may recall and I’m awful reminded as measuring business on volumes alone is not really an accurate measure of the success of our business. We think we’ve improved our product mix and we anticipate we will continue to do so in the future. The volume is the natural statistic that we can easily measure as we continue to – and we continue to follow.

In the first quarter, our volumes are down 21% in the same quarter of the previous year. We believe that there were two major factors that contributed in this decline, which were the slowing global economy resulting in a reduction of global demand for customers end products as well as effect of the dramatic fall in resin prices during the quarter. While we are disappointed with volume decline, we recognize the slowdown is a global reality, and we anticipate the volumes will continue to be a challenge in the immediate future. We do believe that our competitive position in the market, our nimbleness in product mix, will serve – stabilize our business. While the headwinds of today’s economic conditions may affect growth in short term, we remain confident about our business prospects over the long term.

Margin, for those who listen to our calls in the past, you know that I for one, am a margin fanatic. As I stated in the past, it is my view that people of ICO can keep most of our plants working 24 hours a day, open six days a week, but for too much effort, in my opinion, turn anything less than 20% gross margin and a satisfactory return on invested capital.

This quarter, our margin was 12.7%, down from 15.1% in the last quarter. The dramatic reduction in resin prices during the quarter was a major factor contributing to this reduction. We’re hopeful that resin prices have found the floor of being in as much lower level. And we’re optimistic that the future will not bring such extreme price volatility. Assuming this is the case, we’re hopeful that our margins will improve over the course of the year. As been stated all of the above, we believe there’s ample room for improvement in margin over the long run. It just takes consistent work.

Over the past three years, our average gross margin was 17.7%. SG&A percentage, for the quarter, SG&A rose to 11.6% of revenues, up from 9.1% last quarter. At this percentage level, SG&A is higher than what we’ve expected to achieve in the long run. Over the last three years, SG&A has averaged 9.5% of revenues. We’ve made it clear, in the past, that we are incurring costs in developing in 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.

Operations, Bayshore industrial. As suggested in all previous calls, we have a strong management team in Bayshore and they can continue to manage well in difficult environments. In fact, it is very refreshing to spend time n Bayshore today. Bayshore’s management, while concerned about the prospects for the short term, are remarkably confident about the long term. They see opportunities in working with good customers on new products today. Volumes in Bayshore were down 24% from the previous year’s first quarter, but were up 3% from the previous quarter when our volumes were impacted by the hurricanes.

Operating income improved sequent but declined from the previous year’s quarter from $3.9 million to $1.7 million. We believe that Bayshore’s currently operating at approximately 75% capacity, which is stronger than it averaged last quarter, but down from the 90% to 95% we are accustomed to see in Bayshore operating at. While export demand at Bayshore has declined due to currency movements, we plan to continue to distribute Bayshore products in South America through our Brazilian operation. We believe demand in that market for film packaging will continue to grow in the future. We should note that operating income in Bayshore has averaged $13.5 million in the past three years.

IPNA, which is ICO Polymers North America, IPNA’s first quarter volumes were down significantly 29% from a year ago affected by solid economy falling resin prices. We continue to expect debt net to incur volume and margin pressure from the economy, but we expect our overall business to stabilize over the course of the next few months. In this environment, all customers will strive to control inventories, which should make our order flow choppy, but we should benefit from those who wish to minimize capital investment and reducing cost by using our services.

Finally, IPNA’s operating income was $600,000 in the first quarter, up from $450,000 a year ago. The first quarter 2009 had a higher net benefit from insurance recoveries compared to the previous year by $300,000, which counts for our increase. As stated consistently, we remained product development and commercialization, which has lead for ICO by IPNA. We’ve learned that oil field products take great patience. Please note that our average operating income in IPNA has been $5.6 million per year over the past three years.

ICO Asia Pacific – Australasia. Business in Australia remains disappointing while 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 Malaysian performance to remain reasonable as our well positioned management occurs some economic headwinds there.

Inventories have proven to difficult to manage as Australia – New Zealand are effectively at the end of the supply chain. During the quarter ended December 31st, these inventories cost us dearly as we unloaded in the market. As of December 31st, 2008, our inventories in this region were $1 million to $2 million more than we would have preferred. We expect this will impact our results in the second quarter. Currently, they are focusing on opportunities to restructure operations in Australia – New Zealand so as to benefit our global – from our global resin supply relationships and to streamline SG&A.

As announced in the last call, we made the decision to close our operation in Dubai and we believe we have a superior means of serving Mid East rotor markets. Our focus on eliminating and restructuring any operation that was not profitable led us – or is not profitable led us to the decision to close the Dubai plant and initiate the alternative strategy for the Mid East. We’re expecting to incur modest addition cost in this quarter in connection with the closing of the Dubai Plant.

The recent loss $1.3 million in operating income in the quarter, including the Dubai losses compared to earning nine-tenths of May in the first quarter of fiscal ’08. Volume processed in the region declined 3% from the previous years. The weakness in Australia exceeded the growth in Malaysia. Note, we continue to be enthusiastic on the prospect of Bayshore Malaysia compounding from masterbatch concentrate to serve the film packaging industry. We expect to expand the capacity of the course of this year as previously disclosed. Over the past three years, our average operating income in the region has been $3.4 million.

In Europe, we know that we believe that we have a great management in Derek Bristow and are building a strong management team to support the efforts there. Our numbers in Europe were impacted by the soaring economy, falling resin prices, and, as Brad pointed out, bankruptcy of one of our customers. We lost $150,000 in operating income during the quarter compared to earning $3 million in the same quarter last year. Embedded in those numbers is the loss – the bank or customer which cost us $350,000. Volumes are down 20% from the previous year and we clearly see a slowing economy has an effect on our business in Europe. On the other hand, we expect improved performance in Europe in this quarter as our competitive position in the marketplace and our inventory position are favorable. Over the past three years, our average operating income in Europe has been $9.4 million per year.

Brazil. Brazil suffered from the soaring of the economy and the resin price decline. Our operating loss from the quarter was $58,000 compared to an operating income of $140,000 last year. Volume was down 16% compared to last year. We expect that demand will remain muted in the short run. However, we expect Brazil and all of Central South America to become much more significant to ICO in the future years. During the last three years, operating income in the region has averaged $300,000 per year.

Cash flow and inventory. In the last quarters, I have addressed cash flow and inventory at this point of the call. This quarter, I moved it to the beginning of the call because of their significance. Rest assured that we will continue to focus on the balance sheet. Given the balance sheet and cash flow, we believe that ICO’s in a good position to think strategically. Over the past year or so, there have been changes to our Board of Directors to increase our industry experience and to guide ICO in developing a strategy to build value in the future. So we try to balance our concern for today’s economy with enthusiasm we have for the future.

At this point, we’ll take any questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator instructions) Our first question comes from Christopher Butler from Sidoti Company. Please, go ahead.

Christopher Butler – Sidoti & Company

Hi. Good morning, guys.

A. John Knapp, Jr.

Good morning, Chris.

Christopher Butler – Sidoti & Company

I wanted to start off with the inventory correction on the – I understand with the weakening economy, it makes everything very murky, but can you try to give us an idea, just the impact that we saw during your fiscal first quarter and how things have looked thus far through January?

A. John Knapp, Jr.

All right. So Chris, we ended the quarter with $53 million worth of inventory. Oddly enough, our inventory volumes are down roughly 10% from September to December. December, well obviously $53 million to $35 million is a much more dramatic number so that gives you some sense of what we were going into in terms of those headwinds. We’re pretty happy with the inventory position that we have as of December 30th. As I indicated, it probably may end to $2 million heavy in Australia, but otherwise, it’s in pretty good shape.

If we were spot buyers of resin, which we are not because we value the resin supply relationships we have, they are very important to us. We may have been able to replace that $35 million worth of inventory for a few million dollars less than it was on our book set, that is, we may have been able to. So again we like both the quantity and relative price valuation we have December 31st. Since December, prices have been stable. In fact, in some areas, prices are rising slightly. That’s good for us. So we’re pretty comfortable in that resin position, our cost base is in it, and we enjoy seeing the current stability in pricing. Did that answer your question?

Christopher Butler – Sidoti & Company

Well, there’s two of them now. Looking at your customers, they’re going through a similar process on their inventory, could you give an idea of the impact to your volumes that came from that and I’d have to imagine that if we’re seeing base resin prices coming up a little bit, would that spur customers to begin purchasing in an effort to get in front of future increases down the road?

A. John Knapp, Jr.

In some of our markets, we see that spur for customers purchasing. The answer to that would be, in some of our markets we’ve see that. Undoubtedly, in this last quarter, you’ll hear a lot of people in the industry talk about de-stocking. Everybody was desperate to go inventory light. We suspect that many of our customers are relatively inventory light although we know a few that would wish to be still lighter. I think that the whole world is going to try to run with less inventory going forward, Chris. And that makes what I refer to as choppy orders. The order pattern that we’re seeing – let’s say a customer in the past would buy 100 units a month. Now, they’ll let you know that they’re going to try to run on 70 or 80 units and then they’d like to break that order into two orders instead of one, if that makes sense to you. It’s just choppier. Does that make sense?

Christopher Butler – Sidoti & Company

It does. And just going back to the cash flow a little bit, it sounds like the lion’s share of the working capital for Probe man [ph] are behind us. Could we expect a less intense reduction of debt going forward as we’ve seen here for the last couple of quarters from you guys?

A. John Knapp, Jr.

You sound like Brad Leuschner. Yes, I’ll think you’ll see some slowness. That was a big quarter in terms of cash flow. Brad didn’t point out that we bought $2 million worth of our stock during the quarter as well. It doesn’t look so smart. $5 a share, we thought that was a great bargain. We do expect our cash flow to be good this year, for this quarter and for the coming quarter, so I’m an optimist to see this net debt figure decline and in a meaningful manner. We’ll see.

Christopher Butler – Sidoti & Company

I understand. I’ll go back in the queue.

A. John Knapp, Jr.

Great.

Operator

Thank you. (Operator instructions) Our next question comes from Jackson Spears from the Robbins Group. Please, go ahead.

Jackson Spears – Robbins Group

Good morning, John. Could you give us some feel for the – I believe you used FIFO inventory? Is lion’s share here the decline resin based behind you or is there still some margin impact going into the second quarter?

A. John Knapp, Jr.

Brad, you want to answer that?

Brad Leuschner

Sure. Yes, the inventory is on a FIFO basis. I think during the first quarter, I think it was about $2.5 million to $3 million with the impact on our reduced feedstock margins, on our profitability. And I do think that the lion’s share, that is now behind us. But trying to predict margins this next quarter is very difficult.

Jackson Spears – Robbins Group

John, you seem to have some experience with bad debts. Are you taking any steps to tighten the screws with your client to step up collections and could that impact volume going forward?

A. John Knapp, Jr.

You sound like Brad Leuschner again. We–

Jackson Spears – Robbins Group

You set that question up, John.

A. John Knapp, Jr.

Brad has – we have credit calls regularly. We have tightened credit. And I suspect that our tightening the credit is reducing volumes that we’re selling. And we just – it’s easier. It’s less expensive to lose a sale than it is to have right offs going forward. I wonder though, when I look at this check are, in the last two quarters, we have a $500,000 credit reserve in the fourth quarter of ’07 – of ’08.

Brad Leuschner

’08.

A. John Knapp, Jr.

We had a $600,000 write off in the first quarter of ’09. And they average about two-thirds of 1% of revenues. And I wonder, going forward, we’ve done a lot to improve our credit. There’s a little bit of me that says, maybe went on to think that there’s going to continue to be some credit hedge somewhere in the globe and hopefully, we maintain it at a level that is something that’s palatable. Does that answer your question?

Jackson Spears – Robbins Group

Yes, sir. You indicated that there are opportunities that could bring up and as you and I’ve talked before, this is an ideal environment if you have a strong balancing and strong will to acquire people. What’s happening in that front? Are you seeing any some distinct possibilities and how big are they?

A. John Knapp, Jr.

All right, Jack. One, we’ve talked about acquisitions in the past and we have a couple of acquisitions that we are very interested in and we hope that we could make them over the course of this year. We’ve also seen opportunities and I’ll give you an example. In Holland, one of our competitors for our total service business filed bankruptcy a week and a half ago. And in Europe, bankruptcy means liquidation much more than it does in the United States. So that is an opportunity for us to pick up some customers and perhaps some equipment or look at further things. So we’re obviously, trying to be on top of that environment. Jack, we got some wobbly competitors in other markets and sometimes wobbly competitors are hurt you for a while because they do things that don’t make sense and you just wonder if they’re going to fall off their bicycle at some point. So we see several very wobbly competitors and we think that they’re going to create opportunities for us as we move forward. Does that answer your question?

Jackson Spears – Robbins Group

Yes, sir. And the last question, you indicated that you reduced employee levels by, I think you said 100 in the first quarter. Any further reductions going forward? Any more reductions in SG&A going forward?

A. John Knapp, Jr.

All right, Jack. We did reduce our headcount by 10%. I don’t think that’s quite 100. I think it’s in the order of 80 people. And Jack, we don’t make public announcements about headcount production and we don’t have a line item that says severance cost and try to state that’s something that shouldn’t be counted in our normal operations. And there was substantial severance cost included in downsizing. Going forward, we’ve talked about – we see some opportunities in Australia – New Zealand to improve SG&A. We’ve seen a couple of opportunities. So I’ll expect that you’ll see some continued improvements in our operating expenses. We’re like every firm you know, Jack. Across the globe, we have three levels of contingency planning. The first level’s pretty well been taken care of. The second level, we’re trying to tweak a little but we don’t want to hurt our core ability to grow the business once the world stabilizes. Have I answered your question well enough?

Jackson Spears – Robbins Group

Yes, sir. Thank you. Let me go back to the queue. Thanks, John and–

Operator

Our next question comes from George Gaspar from Robert W. Baird. Please, go ahead.

George Gaspar – Robert W. Baird

Yes. Good morning.

A. John Knapp, Jr.

Good morning, George.

George Gaspar – Robert W. Baird

Just a follow up on how you’re doing with oil field applications relative to two perspectives. One, decline in volume overall and how has that affected anything that you’re doing in oil field application wise and has there been anything happening in terms of R&D that gives you some confidence going forward that you can generate additional volume on a percentage basis from where you are that may be greater than your general business?

A. John Knapp, Jr.

Hi, George. For those of you later in the call, George is a man that focuses on the oil and gas world. The oil field is frustrating and it certainly requires patience. We have several products that we’ve very excited about and we’ve got several customers and product champions within those customers that are very enthusiastic about those products as well. So they have the potential to be substantial at ICO and meaningful to both our volumes and income statement. But they certainly require patience and the slowdown in the oil field, which has been dramatic as well, has affected our ability to get those products out in the actual wells. One particular product I was reading the report on, George, it’s now in seven different wells in trials and it’s been very successful in six of the seven and that’s used in defragging [ph] well stimulation. So I’m hopeful that people will continue to want to defrag and stimulate even existing wells. And so that product may get some legs. But it does take patience.

George Gaspar – Robert W. Baird

Yes. Okay. Thank you.

Operator

(Operator instructions) This time, we have a question from Christopher Butler from Sidoti Company. Please, go ahead.

Christopher Butler – Sidoti & Company

Hi, guys. Just a quick follow up. You have mentioned that Bayshore is operating at 75% capacity. Just looking for a little clarity on that, was that referring to the fiscal first quarter or is that what you’ve seen thus far in January?

A. John Knapp, Jr.

Currently, that is our – what we’re seeing in January.

Christopher Butler – Sidoti & Company

Can you give us an idea of what was the capacity of the station was in the fist quarter?

A. John Knapp, Jr.

It‘s slightly higher than it was – current capacity operates slightly higher than it was in the first quarter. Slightly.

Christopher Butler – Sidoti & Company

Thank you very much.

Operator

Our next question comes from George Gasper from Robert W. Baird. Please, go ahead.

George Gaspar – Robert W. Baird

Yes. Thank you. Just a follow up on your general outlook. Where through your broad spectrum of activity, is there one or two particular areas you’re trying to focus on as maybe the admission points for the company to get back on track or is it just a (inaudible) points that you’re waiting on to see some indicators?

A. John Knapp, Jr.

Well, George, we’ve made it very clear that Bayshore has a great reputation and masterbatch concentrate on the film packaging world. And we’ve made it very clear that we can expand the Malaysian operations for Bayshore product during the course of the year. We’ve talked about developing the Brazilian markets and South American markets for Bayshore products as well. We see that as a when I look at ICO and I look at those of you that – such as you that are good Dennis Kennel – Rudebager Capitals.

And you look at the 10-Qs and the 10-Ks in the past and see all kinds of operating income and revenue base that Bayshore has been successful in building in its single site operations, one has to say a very good strategy for ICO to take that product base and take it to other areas of the world that are growing dramatically. So that perhaps is the best strategy piece that one would look for ICO. The second is to develop niches such as the oil field, where if we can get the traction and the products, we can deliver that product anywhere in the world consistently with the different plants we have in the world, and that’s valuable to the bigger players in the oil field. So those are two strategic pieces that we continue to focus on.

George Gaspar – Robert W. Baird

Okay. And then, question on your expenditures, on Cap Ex the rest of the year, you may have mentioned that, but just to reiterate, what your thought process is as you look the whole year?

A. John Knapp, Jr.

Brad?

Brad Leuschner

Yes. The number that I said was – it’s going to range between $2 million to $4 million depending on the global environment the rest of the year.

George Gaspar – Robert W. Baird

Okay. All right. Thank you.

Operator

Our next question comes from Dennis Kennel [ph] from Rudebager Capital [ph]. Please, go ahead.

Dennis Kennel – Rudebager Capital

Yes. Good morning. Just a couple of quick things, to drill down deeper on the bad debt, I think, John, you mentioned $600,000 for the quarter, $350,000 in Europe – in Holland. Where was the other bad credit?

A. John Knapp, Jr.

Actually, the $350,000 in Europe was in England. The other bad credit was in our LA store [ph], I think we can state that.

Dennis Kennel – Rudebager Capital

Okay.

A. John Knapp, Jr.

Okay.

Dennis Kennel – Rudebager Capital

So here in North America?

A. John Knapp, Jr.

Here in North America, right.

Dennis Kennel – Rudebager Capital

So what have you been generally seeing in your receivables? I mean it sounds like Brad has his team pretty tight on this but have you seen some age in there or some places where you might be concerned? And then, as a follow up on that, have you boosted your provision at all or does the tight credit senders [ph] take care of that?

A. John Knapp, Jr.

We have produced – we have increased our provision slightly and we have seen the slight increase in DSL. Brad, will you address that?

Brad Leuschner

Yes. Our DSL was 69 days at December 31st, compared to 64 days September 30th, and 66 days a year ago in December 31st, 2007. So our DSL – we are seeing some aging on the receivables we have. In addition to the two bankruptcies, we did also make some additional provision increases for our slow paying customers. We are in the process of the global update to the credit limits we’ve established for our customers. That will just take some time, but we’re in the process of doing that, so.

A. John Knapp, Jr.

You know, Dennis, one of the decisions that we have to make, and if you look at ICO’s credit – actually, a couple of the people that go over sixty days, Dennis, are names that you recognize extraordinarily well. They are famous, very large corporations, and it’s actually interesting that they’re affecting our balance sheet. The majority of ICO’s credits, a lot of those credits are very large terms of great credit. We’re going to have decisions at ICO though, for some of the smaller businesses that are good businesses run by very fine businesses people, they’ve been around for a long period of time. And in an environment like this where the banking is just so difficult, we’re going to work with some of those folks, if that makes sense to you. It is very management intensive.

Dennis Kennel – Rudebager Capital

Yes, absolutely. That makes a lot of sense. Just a couple of other quick things on volume, do you have an estimate of what was in December or within the December quarter, either year-over-year or sequentially, how much of that negative volume would have been de-stocking versus the weekend market?

A. John Knapp, Jr.

Oh, Dennis, boy, you are – that’s the question that we talked about a lot here and I even tried to address it, but Charlotte suggested that we really don’t know well enough to give an estimate. But in my mind, I mentally, and this is my opinion, it’s kind of 50-50 in the last quarter, but that is a guess, my guess, okay?

Dennis Kennel – Rudebager Capital

Yes.

A. John Knapp, Jr.

The other question is but what, going forward, if that is the case, if we do a good job running our business, what would our volume be going forward, and that’s something we’re trying to get a great handle on. We see, in some of our markets, good pickup from that last quarter. Others we don’t see, and we’re trying to understand why it is some markets show that pick up and others don’t. Obviously, we’re greatly relieved when we do see the pick up. And when we don’t see it, we’re pretty concerned. Some people have said in this industry that you won’t know until February 15th. And I don’t like that answer very well. But well, I hope I’ve shed some light on that.

Dennis Kennel – Rudebager Capital

Yes, yes. Absolutely. Would it be – would it be fair to say then in January that, overall, would you have seen a slight pick up quarter-over-quarter? Again seasonally, I would think that you would get some left. Or is it again just to early to tell?

A. John Knapp, Jr.

As we said, in some of our markets, we’ve seen a refreshing lift or relieving lift. Okay. Others we haven’t. And we’re concerned about those.

Dennis Kennel – Rudebager Capital

Yes. The size that – would it be 50/50 in terms of lift and no lift? Or more weighted towards the lift?

A. John Knapp, Jr.

That’s a hard number to know right now, but why not use 50/50.

Dennis Kennel – Rudebager Capital

Fair enough. Just two last things, you mentioned $2 million worth of shares repurchased, I guess, early in the first quarter?

A. John Knapp, Jr.

Very early in the first quarter.

Dennis Kennel – Rudebager Capital

Yes. You’re still working under an authorization or would we expect you to be quiet for share repurchasing –?

A. John Knapp, Jr.

We have an authorization. I think we’d like to understand the world before we were to continue. So we’re going to tell you that we have the authorization. And the market conditions are – we’ll watch it.

Dennis Kennel – Rudebager Capital

Absolutely. And then one last thing, in Australia. Are you guys out of the debt there? Or are you still – do you still have a debt balance that you’re working on?

A. John Knapp, Jr.

When we release 10-Q, you’ll see we have a modest, very, very modest debt balance in Australia.

Dennis Kennel – Rudebager Capital

Great, great. That’s good to hear. Thanks a lot, and good luck.

A. John Knapp, Jr.

Thank you, Dennis.

Operator

Our next question comes from Ryan McGaver from Capstone Investments. Please go ahead.

Ryan McGaver – Capstone Investments

Good morning, guys.

A. John Knapp, Jr.

Good morning, Ryan.

Ryan McGaver – Capstone Investments

Most of my questions have been answered. But I was wondering if you could maybe speak to resin prices again. I guess they stabilized and maybe even moving up slightly in the past few weeks here.

A. John Knapp, Jr.

They have –

Ryan McGaver – Capstone Investments

I guess just maybe – oh go ahead.

A. John Knapp, Jr.

They have stabilized. And there’s certainly pressure by the resin producers to try to get some increases. They have been very modest, the increases to date.

Ryan McGaver – Capstone Investments

Okay. Do you think that they might have overreacted or overshot the downside?

A. John Knapp, Jr.

Well, they certainly hope so. The resin producers certainly hope so. I can’t answer that. You got to look at the globe for a second. Resin supply, the production of resin globally, is growing, particularly in the Middle East. Obviously, those resin producers, they have older facilities that are not as efficient. And those that have – that don’t own the feedstock that goes in the resin are going to find themselves in a less competitive position. And it’s some – we should expect to see some resin production curtailed or closed. And that will be particularly North America and Western Europe, I imagine. Because when one looks at the investment in the production that has been made in the Middle East and in Asia, it’s a staggering amount of money.

So that would suggest resin prices are going to stay low for a period of time. Low resin prices in the long run is good for ICO and for our customers. Imagine that you are manufacturer that – you are our customer and you make water tanks in, let’s say, Brazil. Think about the consumer that goes to the store and they see a beautiful rotor molded water tank and it’s got a certain price to it, compared to one that is metal or fiberglass, which are not as good in terms of quality. Well, with low resin prices, that water tank that is rotor molded with our powders is now more competitive. Does that make sense to you?

Ryan McGaver – Capstone Investments

Yes. It certainly does.

A. John Knapp, Jr.

Okay. So we on just as a – we like our suppliers to be profitable. That’s good. Okay. We like to – our business will be stable and profitable. And we like relatively low resin prices. Okay. So those are – and we don’t like volatility. Volatility in resin is particularly difficult. We have customers, again, in the film packaging world – we’ll dig through this for a second.

Let’s say that you’re an ice cream maker. And you have a choice of using paperboard containers or plastic containers. Plastic containers have a lot of benefit. They can be square so that there’s less air in the freezer sections at the grocery stores. If that makes sense to you? But the paper guys have been much better at being able to give to the ice cream firms a fixed price for a long period of time on their packaging. Does that make sense? Whereas the plastic guys are seeing these huge volatilities, and they’re less able to make a fixed price. That’s bad for our overall business. I hope that wasn’t too long an answer.

Ryan McGaver – Capstone Investments

No. It made sense. Thank you. The rest of my questions have been answered.

A. John Knapp, Jr.

Right. Thanks.

Operator

Our next question comes from Christopher Butler from Sidoti & Company. Please go ahead.

Christopher Butler – Sidoti & Company

Hi, guys, just one last follow up for me. You talked about holding off on share repurchases looking into ’09 here yet acquisitions are something that you are looking at. Could you give us an idea of the decision making process as far as the strategic acquisitions versus buying back ICO shares that – at discounted price?

A. John Knapp, Jr.

All right. I think that a prudent investor will look and say, “What is the return that I’m going to receive going forward if I’m going to make an investment in a new acquisition or repurchasing my years? And what does that acquisition do for the firm strategically that might change our metrics in some manner going forward?” So we would look at it – what we would think an investor would look at and say, “Which one adds greater value for the long run for the shareholders of ICO?” Have I done enough to – does that help?

Christopher Butler – Sidoti & Company

It just seemed – it just seems to me that as far as the use of cash, a strategic acquisition would also be a more risky proposition in this environment than not repurchasing shares.

A. John Knapp, Jr.

It should have a higher risk adjusted return, right?

Christopher Butler – Sidoti & Company

Sure. Absolutely. So that would be the type of acquisitions that you would look – or looking at what need to be pretty solid ones, I guess.

A. John Knapp, Jr.

You’re right. You wouldn’t want to go out – and today, and move very far from your core expertise and really know that – what you are looking at to acquire.

Christopher Butler – Sidoti & Company

All right. That’s it for me. Thank you very much.

A. John Knapp, Jr.

Thank you, Chris.

Operator

Our next question comes from Mitch Almy from McAdams Wright Ragen. Please go ahead.

Mitch Almy – McAdams Wright Ragen

Good morning, John.

A. John Knapp, Jr.

Mitch, hello.

Mitch Almy – McAdams Wright Ragen

A couple of these questions have already been answered. But the first one is, the current portion of long term debt, given the pace of debt slowdown, it’s probably going to diminish a little bit. Would you be having to go into your credit facility out there to replace that? And then sort of a corollary question is, what is the term of your remaining long term debt because I know you fixed that a while back?

A. John Knapp, Jr.

Brad, why don’t you take that.

Brad Leuschner

Okay. Well first, the current portion of long term debt in our balance sheet, $13.6 million, part of that – it has the Australia debt in it that we’ve had to classify as current because of violation with the financial covenant with the bank. And it also has Malaysia long term debt in it – just that the bank agreements in Malaysia typically say the bank can call it in at any time. So our true current portion of long term debt is about $8.5 million. And so due – we do – right now, we expect to continue to generate cash flows we talked about earlier. I do not expect to have to dive into our revolver in the US based on the current numbers I’m looking at.

And you asked about the term of the long term debt. It does vary. The long term we have in the US with our main banks, KeyBanc and Wells Fargo, and that’s $13 million between two pieces of debt. It roughly expires in – one of them expires – or the last payment is in October 2011. And then another piece matures October 2012. But we make quarterly amortization payments of a $1 million on both of those, each quarter. So it’s – the debt matures at various times, but it’s $8.5 million is what matures roughly each year.

Mitch Almy – McAdams Wright Ragen

Okay. Okay.

Brad Leuschner

That help?

Mitch Almy – McAdams Wright Ragen

And second, this quarter compared to earlier quarters had so many more moving parts. Resin prices, the dollar, bad debt inventory. And you told us what the capacity utilization is at Bayshore. But can you speak a little bit to, I guess, where you think business is going to land? You said there’s been some – I’m trying to figure that out, but I know it’s a difficult question. But just tell me, what’s the real underlying level of business we sort of adjust for the dollar and selling up inventory, and bad debts and some things like that? (inaudible) land.

Brad Leuschner

Let’s talk about volumes. Because we can’t tell you, obviously, we think resin prices have stabilized, but volumes. During the last quarter, volumes were down 21%. It is simply a guess that half that volume decline was de-stocking of customers and the other half would be the slowing economy. I expect going forward, our volumes will continue to be hampered by the slowing economy. And we just don’t know to what extent that that’s going to be the case. And so, I think it’s hard – the position that we’re in, we’re not supposed to throw what we think are the estimates going forward for volumes that we feel are – we’re at. As I indicated, in some of our businesses, we see nice pick up and others we haven’t. And are we going to – is that a delayed reaction in the others. We intensively go look at those to see what it is that’s going on in those businesses. The ones that have recovered, obviously, we feel very good about.

The other element, Mitch, that’s very difficult is – I’m referring to the wobbly competitors. And I’ve mentioned, very specifically the competitor in Holland that filed bankruptcy. That competitor’s bankruptcy, if we were to pick up a reasonable share of that business, that could affect our volumes attractively. That makes sense to you? We don’t know how many more of those we’re likely see come across. I realize that that’s the vaguest answer that you could have possibly gotten, but I don’t think anybody’s crystal ball is very good at the moment.

Mitch Almy – McAdams Wright Vegas

Okay. Thank you.

A. John Knapp, Jr.

Okay, Mitch.

Mitch Almy – McAdams Wright Vegas

Let me follow up one more thing, are there any trade shows recently that you’ve been to or anybody in the firm that has been to – or you got any clarity as to what is happening in the industry? Are there shows forthcoming or has there been some?

A. John Knapp, Jr.

Well, there’s a trade show ongoing right now in India, and we’ve got people there. I guess we have three people at the India trade show at the moment. And they’re getting back some upbeat comments about the world of India that are certainly interesting to read on the emails, okay? And once again, they require interesting patience because I’ve learned, Mitch, the term trial in our business, if you send samples off for people to do trials, you get excited. Well, I’ve learned that people can keep doing trials for a long period of time. But otherwise, I would say clarity is just not very good overall. Let’s talk for one, however exception – let’s talk about film packaging demand in the United States, okay? There are industry pieces out that talk about film packaging may be down 5% or 7% or 8% because people may be downsizing in terms of what food they choose to buy, but it’s still package, do you follow me?

Mitch Almy – McAdams Wright Vegas

Yes.

A. John Knapp, Jr.

Well, that’s an encouraging figure. If I have 7% or 8%, that’s a market we’re very active in. And so you feel good about reading that kind of number. And you think, we can certainly maintain market share in there and that might be how we would measure management in that space. It’ll be interesting to look back and see if those industry, and that industry has a lot of folks that study it, and see how accurate their studies are. In turn, in Asia, they’re using a similar number for SMS for the film packaging. And what drives that one is a little bit different because in Asia, some of the – in fact, anti-stat [ph] built into electronic packaging is a great product for us. But there’s not a lot going on at the moment because the US market for electronics is down much more than 7% or 8%, if that makes sense to you. But where there’s growth is in food packaging in Asia because they’re still improving overall standard of living in a lot of those markets. So there’s growth. It’s just a little more competitive growth banks than it is in electronic packaging. So we actually feel good about that Asian market for that particular niche. Does that make sense?

Mitch Almy – McAdams Wright Vegas

Yes.

A. John Knapp, Jr.

So what we try to look at is the markets we serve and how to make sure there’s much of our facilities and people resources are going to those spaces where there’s still growth and focusing on those, okay?

Mitch Almy – McAdams Wright Vegas

Okay.

Operator

At this time, there are no further questions.

A. John Knapp, Jr.

All right. Thank you all very much for listening in this call and we look forward to being with you in another 90 days or so. And again, we appreciate your interest. Bye.

Operator

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

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