John Knapp - President and CEO
Charlotte Ewart - General Counsel and Secretary
Brad Leuschner - CFO and Treasurer
ICO, Inc. (ICOC) F1Q10 (Qtr End 12/31/09) Earnings Call February 5, 2010 11:00 AM ET
Welcome to the First Quarter Fiscal Year 2010 Earnings Report Conference Call. 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 would now turn the call over to Mr. John Knapp, Jr. Mr. Knapp, you may begin.
Thank you. Welcome to the first quarter 2010 conference call for ICO. This is of course a bitter sweet call for ICO as there is a reason or probability that our transactions with A.
Schulman, we'll close before the time or we’d otherwise have our next call. So this may be our last call.
With me today I have Charlotte Ewart, our General Counsel; and Brad Leuschner, our Chief Financial Officer. Before we turn to the substantive matters, let’s listen to Charlotte.
Thanks, John. Everyone please note that information reported on this call speaks only as of today, February 5, 2010, and therefore you are advised that time sensitive information may no longer be accurate at the time of any replay listening.
Also, 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. The company’s statements regarding trends in the marketplace, potential future results, and any proposed transaction and the timing and effects are examples of such forward-looking statements.
Risks and uncertainties that could cause the forward-looking statements to become untrue or otherwise affect the outcome thereof include without limitations the failure to receive the approval of the merger from the Company’s stockholders; satisfaction of the condition at the closing of the merger causing difficulty relating integration of businesses and operations, delays caused and difficulties relating to the merger and related transaction; restrictions imposed by the Company's outstanding indebtedness; changes in the cost and availability of resins, polymers and other raw materials; changes in demand for the Company's services and products; business cycles and other industry conditions; general economic conditions; international risks; operational risks; litigation risks; currency translation risks; the Company's lack of asset diversification; the Company's ability to manage global inventory, develop technology and proprietary know-how, and attract and retain key personnel; failure of closing conditions in any transaction to be satisfied; integration of acquired businesses; as well as other factors detailed in the Company's form 10-K for the fiscal year ended September 30, 2009, and the Company’s other filings with the Securities and Exchange Commission.
Should one or more of such risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those indicated. Any forward-looking statements are made only as of the date of this conference call, and the Company undertakes no obligation to publicly update any such forward-looking statements to reflect subsequent events or circumstances.
During today's call, management will discuss both GAAP and non-GAAP financial measures. With regard to the non-GAAP financial measures discussed in this call, including debt and earnings per share, excluding merger related expenses, please refer to the press release issued yesterday on February 4, 2010, which can be found on the company's website for disclosures about these measures and for reconciliation to the most directly comparable GAAP financial measures.
Back to you John.
Thank you, Charlotte. Now let’s turn to Brad for the number for the quarter and for an update on the proposed combination with Schulman.
Thank you, John. Let me begin by giving an update on the proposed merger with A. Schulman. On December 30, 2009 A. Schulman filed a preliminary S-4, which includes ICO’s preliminary proxy statement with the SEC. On January 18, 2010 we announced that the Federal Trade Commission granted early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1936. At this time we are waiting for the SEC to complete the review of the preliminary S-4. Once their review is complete, we would expect to be in a position to announce the date of our shareholders meeting. We still expect the transaction to close in the spring.
Now, I would discuss the results for our first quarter. I would begin by discussing the first quarter results to 2010 compared to the first quarter results of 2009. Our revenues for the first quarter increased $6 million or 8% to $85.4 million. This was the result of 11% increase in volumes. This increase was throughout the Company as all regions reported an increase. The increase highlights the recovery we began to experience at the tail end of last year. All three months in the quarter had higher volumes than the same months last year, a trend that started in September.
Along with the volume increase the translation effect of stronger foreign currencies caused an increase in revenues of $8 million. Lower average selling prices as a result of lower average resin prices reduced revenues by $10 million. As a result of the increased volume and lower resin prices our gross margin increased 440 basis points to 17.1%. Gross profit increased $4.5 million or 44% as a result of the increased revenues, and gross margins, partially offsetting the benefit from a gross profit improvement was a $1 million in SG&A.
This increase was primarily the result of merger-related expenses of $940,000 or $0.03 per share related to legal and consultancy fees In addition, we incurred a $142,000 of restructuring cost, related to the relocation to a new plant in Australia, as previously announced in connection with the MicroPellets transaction, which is recorded in the long lived asset impairment restructuring and other cost line up. As a result of the above items, operating income improved $2.7 million to $2.3 million, up from a loss of $450,000 in the prior year.
Our effective tax rate was 39% this quarter. The higher rate was a result of certain of the merger expenses not being deductible. Net income was $1million or $0.04 per share. Excluding the impacts on the merger expenses net income would have been approximately$0.07 per share.
Looking at the segments, ICO Europe’s operating income improved $1.8 million to income of $1.7 million. This was primarily a result of an improvement in volumes of 10 %. Our Asia-Pacific specific region improved from a loss of $1.3 million to a loss of $200,000, an improvement of $1.1 million. $700,000 of this improvement was related to no longer having an operation in Dubai, which incurred a loss of$700,000 in the first quarter of last year.
The remaining improvement was related to the increased level of volumes and an improvement in the stock margins. We also incurred a little over $400,000 of costs in our Australian operation associated with the relocation from our old site to the former MicroPellets site and from operating for a period of time during the quarter in both plants. We expect these costs to decline next quarter.
Our Brazilian operation which had volume increase of 47% improved its operating income by $477,000 to an income of $490,000.
Now, looking at the sequential quarterly comparison. For the second quarter in a row we are reporting revenue and volume improvement. Revenues increased $4.9 million or 6% and volumes increased 6%. Offsetting the impact from the revenue improvement, our gross margins declined 130 basis points to 17.1%, which led the gross profit declining slightly during the quarter. The gross margin decline was related to a less favorable product mix as well as the impact from the trend in resin prices, which trended upward in the fourth quarter, while in the first quarter trended flat to slightly down, depending on the region.
SG&A increased $300,000 or 3% as result of an increase in legal and professional fees associated with the proposed merger. Operating income declined $387,000 or 15% as a result of the higher SG&A and slightly lower gross profit.
Looking at our segments Bayshore had much stronger first quarter then fourth, mostly the result have an increase in volumes at 28%. This resulted in operating income improving 70% to $1.8 million.
Our European segment had an operating income decline of $963.000 or 37% as a result of the 6% volume decline and lower feedstock margins as a result of the trend in resin prices mentioned earlier.
Looking at the balance sheet, our cash declined $8 million during the quarter. $3 million of this was some debt repayments, $1.4 million due to the $0.5 per share dividend paid on December 31, 2009 and the rest primarily related to an increase in inventory as a result of the increase to business volumes.
Capital expenditures were low during the quarter at $1 million and we expect them to be approximately $2 million next quarter with the completion of the installation of the second Bayshore in Malaysia and the installation of a new compounding line in Brazil.
Last, the Board declared a $3.7 per share dividend for the quarter, which is payable on February 19, 2010 to shareholders on record as of February 15, 2010.
John back to you.
Thank you Brad. Let’s go with the big picture. We believe that our business is now stable and as noted in the last call, and it continues to improve. We stated at that we saw strength in Brazil and Malaysia and that trend continues today. As in other multinational firm, the emerging markets are driving our growth.
In Europe where the general economy is quite soft, we are gaining market share and our results are quite reasonable. In the US our volumes are slowly coming back and our management is cautiously optimistic. In Australia, while we have the challenge of integrating the volumes we acquired in closing our old plant, we believe that our prospects for later in 2010 are quite good.
Our results for the quarter, which conclude in December historically our slowest month, as reviewed by Brad are acceptable. Indeed if we had not incurred extraordinary SG&A expenses, the operating results would have been encouraging.
We believe this trend continues into the current quarter and find that our volumes are satisfactory in January. That said, we remained cognizant to the macro picture, particularly here in the United States is daunting. Unemployment and large government deficits cause us a great concern.
Our core profitability remained very much intact. As Brad has pointed out, our net income was $0.04 a share, if we had not incurred extraordinary corporate expenses primarily related to the merger, those earnings would have been $0.07 a share.
Unfortunately, the above SG&A expenses were not deductible for US tax purposes. That was a surprise for me. These earnings were achieved with an average estimated capacity utilization of just over 60%.
We continue to state that we are proud of the work of the people of ICO during these times. Our balance sheet remains strong. Out net debt is now some $15 million, up from $10 million last quarter. Increasing sales requires working capital and we use cash to buy discounts from vendor’s volume.
I would skip my mumble preamble, volumes sold or processed but they are a better measure of progress than our revenues. For our fiscal year of 2009, for the whole year, volumes were down 18% from 2008. In the first quarter of 2010, our volumes were up 11% compared to the first quarter of 2009. We have confidence in our positions in the market we serve. Our nimbleness and our product mix and believe that these will serve to stabilize and grow our business.
Previously, we stated that, we thought we would be the first of the public resin processors to return volume to volume growth. These numbers confirmed that statement.
Margin: This quarter our margin 17.1% down from 18.4% in the last quarter but a whole lot better than December 2009 quarter. While we are pleased with this increase, we believe there’s ample room for improvement in margin over the long run. It just takes consistent work.
SG&A percentage: For the quarter, SG&A was 12% of revenues, which includes some $950,000 of direct cost related to the transaction with A. Schulman. If the transaction costs were excluded, SG&A would be 10.7%, which is almost an acceptable figure. Operations: Let's begin with Bayshore. The Bayshore’s prime location at the heart of petrochemical industry in North America and its scale as one of the largest operating compounding facilities in Northern America, Bayshore continues to manage well in difficult environments. Volumes at Bayshore were up 4% from the previous fiscal year’s first quarter, which led to an operating income increase of 6% from the first quarter of fiscal 2009 of $1.7 million to $1.8 million.
Business in the current quarter remains encouraging, although visibility is limited. However the current backlog at Bayshore is greater today than it has been for more than two years.
One should note that operating income at Bayshore has averaged $11.7 million over the past four fiscal years. IPNA ICO Polymers North America, IPNA’s first quarters volumes are encouraging/. They were up 19%, from a year ago, the same percentage increase we saw on the fourth quarter of 2009, compared to the third quarter.
Clearly we remain confident in the management team at IPNA and their position in the market, as we stated in the last call, what may take few quarters to shake up, we expect to see the competitive landscape improved. IPNA’s, operating income was $750,000 in the first quarter, up from $600, 000 a year ago. Please note that average operating income at IPNA has been $4.7 million over the past four completed fiscal years.
ICO Asia Pacific or Australasia: Our business in Malaysia continues to be quiet reasonable, and Australia the challenges to integrate great customers required for MicroPellets, and move ahead of our old Melbourne space and in to the former MicroPellets plant. Our old plant was closed as of December 31, 2009. This quarter our challenge is to streamline our product mix and achieve production effectiveness.
As stated in last call, we don’t expect this transaction to begin to positively impact our earnings until the second quarter fiscal 2010 and as it continue to do so with more effect during the balance of the fiscal year. The relocation and integration is an intensive effort and we are grateful to all of our team in Australia for their work and commitment in this effort.
As noted earlier, our Malaysian operations are performing quite well. Expansion of our compounding capacity for Malaysia, for Bayshore products in that market with the installations of second production line is progressing smoothly. It is scheduled to begin production in April.
The Asia Pacific region lost $200,000 in the quarter primarily due to closing cost of the Melbourne plant. This compares to operating loss of $5,000 in the previous quarter and an operating loss of $1.3 million a year ago. Volumes processed in the regions increased 19% from the same quarter of last year.
Over the past four fiscal years our average operating income excluding goodwill impairment in 2009 in the Asia Pacific business has been $1.9 million. Clearly we have great expectations for this region under direct Derek Bristow’s leadership in the future.
Europe: As noted in all calls we have got a great team in Europe and are building a stronger team deeper into the management group to support these efforts. The results speak for our teams efforts. While our numbers in Europe continued to be impacted by the slowing economy they also reflect strength of our position in that market. We earned a $1.7 million in operating income during the quarter, compared to losing $150,000 in the same quarter of last year.
Volumes grew up 10% from the previous year. We suspect that we are winning market shares. We think that the European demand is weaker than our numbers reflect and we continue to see opportunity for improvement. Over the last four fiscal years, our average operating income in Europe has been $8.5 million.
Brazil: In the past calls, we have voiced confidence in our team and market position in Brazil. This quarter that confidence was confirmed. Our operating income for the quarter was $420,000 compared to an operating loss of $60,000 in same quarter last year. Volume was up 47% year-over-year.
Our previously announced expansion capacity in Brazil where we are adding an additional compounding line in our Sao Paulo, Americano plant is on schedule, production should begin in April. As we have consistently stated, we see opportunities to expand our business in this market, so that it becomes more meaningful to ICO.
We expect Brazil and all of Central and South America to make a significant contribution to both ICO and Schulman going forward. During the past four fiscal years, operating income in Brazil has averaged $250,000.
Big picture: We believe that ICO is well positioned to prosper in the current global economic environment. We have a lean and focused management team that has proven it can weather these storms and our plants are well located across the globe and evidently, this confidence is shared by A., Schulman.
Comment on the Schulman transaction: In our last call, we discussed the rationale for the combination with Schulman and Brad has updated you on the status of our regulatory filing and prospects for the date of the shareholders’ meeting. I am going to address the planning for this combination.
Both we and the team at Schulman are excited about the prospects for synergies in this combination. Both parties anticipate that core synergies are expected to include elimination of duplicate corporate functions, savings from US income taxes and efficiencies in purchasing, but the real strength of this combination is the natural fit of our operations. Akin to baseball and a baseball net. The strength of this combination is both geography and product.
I have traveled with Joe Gingo and his team to most of our operations over the past 30 days. We’ve seen the enthusiasm of both teams who were working together and we’ve seen the opportunities to cross-sell our different but complimentary products and services and we’ve seen the opportunities to develop in the emerging markets in South America, Asia and India.
We’ve learnt of the strength of Schulman management team in the field, we’ve seen the professionalism and the opportunities in their masterbatch labs in Europe and we’ve seen that their drive to win business. ICO brings to the combination a spirit of entrepreneurship, which if nourished, can benefit the combined companies greatly. There’s some risk that this spirit becomes buried in the larger organization but I assure you that Joe Gingo knows and appreciates that risk.
We know that execution of this integration is the key to success and we pledge our very best to insure that it is done well. After all, a large percentage of the consideration we’ve received by ICO shareholders is Schulman common shares.
In closing as I say stated in the last call, I thank the ICO team members throughout the globe for their support and effort over the past four years. We have accomplished a great deal, we’ve learned to work together regardless of plant location or nationality and to treat our associates across the globe with respect. So the announcement of this merger with Schulman is truly a bitter/sweet. Once the transactions closes we will give up our independence as lean and effective team to join a larger organization. It will be a different environment so we are excited for our customers, suppliers, employees and shareholders
We’ll take questions now.
Thank you. We’ll now begin the question-and-answer session (Operator Instructions). Standing by for questions. We have no questions at this time,
Great. Thank you for listening to this conference call and I guess it is our last call. Good bye
Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.
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