ICOC F4Q07 (Qtr End 09/30/07) Earnings Call Transcript

ICO, Inc. (ICOC)

F4Q07 Earnings Call

December 7, 2007 11:00 am ET

Executives

A. John Knapp, Jr. - President, Chief Executive Officer, Director

Charlotte Ewart - General Counsel, Secretary

Jon C. Biro - Chief Financial Officer, Treasurer, Director

Analysts

Christopher Butler

Jackson Spears - Capstone Investments

Kenneth Pound - Nutmeg Securities

George Jasper - Robert W. Baird

Mitch Elmay - McAdams, Wright, Reagan

Steve White - Marlin Capital

Shawn Willard - Sigmus Capital

Presentation

Operator

Good morning ladies and gentlemen and welcome to the fourth quarter ICO 2007 earnings conference call. At this time, all participants are ina listen-only mode. Later we will conduct a question and answer session. Please note that this conference is being recorded. I will now send the call over to Mr. John Knapp, Jr. Mr. Knapp, you may begin.

A. John Knapp, Jr.

Thank you very much. We appreciate you attending our conference call for fiscal year of ’07. Before we begin this call I should tell you that inthe room with me I have Charlotte Ewart, our general counsel, and Jon Biro, our chief financial officer. Charlotte, I think you have a few words.

Charlotte Ewart

Thanks, John. As always, I must caution everyone listening that certain matters discussed in this conference call are forward-looking statements intended to qualify for the Safe Harbor and Liability established by the Private Securities Litigation Reform Act of 1995. In particular, statements regarding trends inthe marketplace and potential future results are examples of such forward-looking statements. Forward-looking statements include risks and uncertainties, including but not limited to restrictions imposed by the company’s outstanding indebtedness, changes in the cost and availability of polymers, demand 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 proprietary know-how, the company’s diversification, it’s ability to attract and retain key personnel, litigation risks, risks related to the company’s former service business, international risk, operational risk, and other factors detailed in our most recently filed Form 10-K for the fiscal year.

Factors discussed in this conference call and expressed from time to time inthe 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.

On to you, Jon Biro.

Jon Biro

Thank you. The momentum we experienced during the first three quarters of fiscal year 2007 continued in our fiscal fourth quarter as a result for an all-time record in terms of revenues, volumes, operating income, and earnings per share. The very solid results for the fourth quarter were fueled by the renewed strong growth in sales and earnings for Bayshore Industrial, our North American compounding business, and our operations in Europe. The solid volume growth we are experiencing combined with modestly improved selling prices for our products offset by higher SG&A expenses led to higher quarterly profits and higher return on vested capital. Compared to our fourth quarter of last year, our revenues increased 42% or $36.3 million to $123.6 million during the quarter ending September 30, 2007.

This was the result of a 12% growth in sales and service volumes, achange in product and service sales mix and stronger foreign currencies. The volume growth was driven by continuing strong growth inAustralia, where we experienced year over year volume growth of 3% and lower, but nevertheless impressive growth inEurope where volumes were up 16%. And last but certainly not least, for Bayshore, where volumes grew 11% year over year.

The growth inAustralia was due to the significant increase and demand for water tanks which began in our quarter ending March 31, 2007 due to water shortages in Australia. Offsetting these volume gains was a decline in business for our ICO Polymers North American business, due in large part to the fire we had in our New Jersey facility in early July.

Gross margins were down from 18.4% in last year’s fourth quarter to 17.3%. This decline was primarily due to the change in product and service sales mixed, including the fact that our foreign businesses, namely theEurope and Asia Pacific segments, grew more quickly than our businesses in North America.

A change in product sales mix for our Bayshore Industrial operation also reduced gross margins modestly. More importantly, gross profit rose dramatically from $5.3 million or 33% to $21.4 million for the quarter. This substantial improvement was driven by the strong sales growth, slightly improved [feed stock?? ICOC001 8:28] margins on our product sales, and stronger foreign currencies.

SG&A expenses increased $1.6 million or 19% to $10.2 million. Most importantly, SG&A as a percentage of revenues dropped to anall time low of 8.3% compared to 9.9% last year. Operating income increased $4.3 million or 78% to $9.7 million due to the higher gross profit partially offset by higher SG&A expenses.

Operating margin was a solid 7.8% as all of our business segments generated improved operating income year over year. In particular, Bayshore, Europe, and Asia Pacific improved the most. During the fourth quarter we recognized a $300,000 benefit included in impairment, restructuring, and other costs on the face of the income statement. This amount includes a $900,000 gain for assets destroyed n the New Jersey fire and the associated insurance benefits offset by asset impairments primarily related to equipment in Australia no longer in service.

Interest expense was higher by $400,000 in the quarter due to debt we incurred to redeem almost all of our preferred stock in early fiscal year 2007. Fourth quarter pretax income from continuing operations was $8.9 million and income from continued operations was $6 million or $0.22 per fully diluted share, all significant improvements compared to last year.

The fourth quarter results also compare favorably to the result of the third quarter ending June 30, 2007. Revenues were up $10.2 million or 9%, mostly due to a change in product and service sales mix, as well as a 5% increase in volumes. Most of the volume improvement sequentially was due to Bayshore growth, where volumes were up 31%.

Gross margins were down modestly to 17.3% compared to 18.1% inthe third quarter. Gross profit on the other hand was up $800,000 to $21.4 million, an increase of 4%. This, combined with a modest increase in SG&A expenses, resulted in a $700,000 or 8% increase in operating income. Sequentially improving the operating income was driven mostly by our Bayshore business.

Now for the outlook. As is always the case, we expect seasonable weakness due to the holiday season in our quarter ending December 31, 2007. Having said that, we expect to continue producing year over year quarterly improvements and revenues, operating income, and earnings per share from continued operations. We expect that this improvement will be broad-based and will be primarily driven by improved performance of our Bayshore, European, and Asia Pacific business segments.

During the fourth quarter, our [advanced?? ICOC002 1:27] balance sheet continued to strengthen. At September 30^th, cash was $8.6 million, total debt was $57.3 million, and stockholders equity ended the year at $91 million. For the year, stockholders’ equity declined $700,000, very impressive considering that we redeemed our preferred stock which had the effect of lowering our equity by $28 and a half million. In November 2007 we took out the remaining outstanding preferred stock. Of the approximately 185,000 [deposited ?? ICOC002 1:58] shares that were left outstanding, holders owning 177,000 shares elected to convert their shares to common stock, thereby increasing our common shares outstanding by just under half a million shares.

Capita expenditures during the quarter were $4 million and were $11.6 million for the full fiscal year. Last, credit availability under committed credit facilities totaled a very adequate $70.6 million as of September 30, 2007. With that, I’ll turn it over to you, John.

A. John Knapp, Jr.

Great. Thank you, Jon. It’s been a good year for ICO and I appreciate the opportunity to work with such a dedicated and talented group. We’re actually most optimistic about the coming year. This is now very repetitive. Each of our recent calls has begun with the line, “Our business is good and we have ample opportunities for growth and improvement.” That line is certainly true today. We have record volumes, record operating revenues, record operating profits, reasonable cash flow in light of the increases in both receivables and inventory due to strong growth. The team running ICO on a day-to-day basis is executing very well.

Volume. As I’m reminded often, measuring our business on volumes alone is not a really accurate measure. Some of the processes we provide are more complicated or value-adding than our commodity size reduction or compounding and we are striving to build the higher value segment of our business. We believe we’ve made progress in improving our product mix and will continue to do soin ’08. However, volume is the natural statistic easily measured which we continue to monitor. For the fourth quarter, our volumes are up 12% over the same quarter the previous year, with much stronger volumes as Jon pointed out in Europe, Asia Pacific, and Bayshore; somewhat weaker volumes in North America. This volume increase is in line with our expectations, as we believe we are positioned for reasonable, organic growth. Please note that it was achieved without significant contribution from either the new plant in Dubai or the new line in Malaysia.

For the year our volumes are up 5% reflecting a weak first quarter caused by falling resin prices, and we’d like to believe the momentum that we’re building, Marge and those of you who’ve listened to our calls in the past know that I, for one, am I margin fanatic. As I’ve stated in the past, the people at ICO who keep most of our plants working twenty four hours a day often six or even seven 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 17.7%, slightly lower than the last quarter. We see opportunity for improvement in margin, it will just take consistent and hard work.

SG&A. One of the benefits of our revenue growth has been the relative decline of SG&A as a percentage of revenues. For the quarter this was 7.9% which we believe is a satisfactory number.

Taxes. For the quarter our global income tax amounted to just over 32% of income. We find this figure to be unsatisfactory and we’d like to believe that we can reduce this number over time. Of note, today the United States has the highest corporate tax rate of the nations in which we operate, and it is a handicap to firms such as ICO who compete globally. For the year our tax rate was 25.3%, a more acceptable figure.

Operations. Jon Biro has reviewed the numbers, so I’ll make a few comments about our operations. As detailed in our 10-Q, 10-K to be filed shortly, we divide our business into five operating segments to which we add corporate.

Bayshore. As suggested in previous calls, we have a good management team at Bayshore and they proved themselves in this quarter. Fourth quarter volumes were up over 10% over the previous year. Bayshore’s results continued to improve during this quarter due to increased volumes and product mix. We have great confidence in the management team at Bayshore and their position inthe market. These operations are run very well. Bayshore earned over $5.7 million in operating income in the quarter, up significantly from $3.3 million from the quarter ended June 30, 2007 and the $4 million earned in the previous years’ quarter. Recall as stated that much of what Bayshore profits to date is distinctively different from production some eighteen months ago. I suspect that we will be able to make the same statement or observation eighteen months from now.

IPNA, which is ICO Polymers North America. As we stated in the last several calls, IPNA’s tolling and procurement business remains strong and to date, our product sales have stabilized. IPNA’s fourth quarter volumes which were down 10% from a year ago were adversely affected by the July fire and related damage in the New Jersey plant, which is IPNA’s largest plant. Although the vast majority of the damage was water-related, IPNA will not be fully operational until late next summer or even the early fall. When we do become operational, we will have upgraded our capacity and efficiencies. These improvements will require capital investment and will delay full restoration of production which will serve our customers well for years inthe future.

IPNA has continued to support some 85% of the affected customers, serving them through facilities in Tennessee, Texas, and Indiana. This has taken a tremendous effort by all of the IPNA employees, for which we are most appreciative. From most of our customers, this firehas been a meaningless event. When we say we have redundant capacity, we mean it.

Further, the financial impact has been minimized as Jon pointed out through insurance. IPNA’s operating income was $1.7 million in the quarter, up from $1.3 million inthe same quarter and $1.5 million last quarter. Eric Parsons and his team continue to run their business with focus on selecting customers where IPNA can add substantial value.

ICO Asia Pacific, which we call Australasia. Business in Australia and Malaysia remains good but we suspect that the [torn?? ICOC002 9:45] growth in Australia has now subsided. For this quarter the region earned $1.6 million in operating income compared to $700,000 for the same quarter last year, but down from the $2.3 million inthe previous quarter. Volumes were up over 58% from last year and down slightly from the previous quarter. This region’s carry book Start up costs of Dubai and the operating expenses incurred have doubled in capacity in Malaysia. We note that the Dubai facility had one month of... The new Dubai line had one month of operation inthe quarter but would require plenty of attention to run smoothly. Opening a new line in a new country is never easy. As noted ina previous call, the Dubai operation will focus initially on providing product for water tanks; however, we have a keen interest inthe region and will continue to patiently explore additional opportunities for expansion.

The new compounding line in Malaysia which we stated was running, we call it Bayshore Malaysia. That line was built at Bayshore to Bayshore’s design specifications, disassembled, shipped to Malaysia, and reassembled. Our first shipments from this line occurred in October and we expect this business to build over fiscal year ’08 as customers conduct trials and become fully satisfied with our products. Initial reception has been most encouraging.

Europe. As noted inthe last call, Europe continues to surprise us with its vigorous demand. I would be negligent not to mention that we believe one of the reasons for the strength of the European economy lies in their governments willing to reduce the corporate tax rate which has assisted in improving the overall economy. Our numbers in Europe are good this quarter, particularly in light of the August vacation which closes some of our plants, as well as plants of many of our customers. We earned $2.4 million in operating income, compared to $1.1 million for the same quarter last year, but down from $3.4 million the last quarter. Volumes are up strongly by 16%. These results are the product of the hard work of Derek Bristow and his team. The leadership changes we have implemented and continue to implement, our relationships with our quality resin suppliers, a stronger European economy, and of course the rising value of the euro. We have much work to do in this region and see ample room for improvement, including increasing margin as well as opportunity for expansion.

Brazil. The turnaround in Brazil reported last quarter continues this quarter. Our operating income was $36,000 compared to a loss of $100,000 last year. Paul and his team continue to be enthusiastic about the future in that market. I should have said operating losses of $10,000 last quarter. While this is a small operation product, we have approved modest expansions for fiscal ’08 which should impact this region in our third fiscal quarter.

Corporate. As I indicated inthe last call, we’ve completed thecost cutting and we’re building for the future. Corporate expenses for the quarter are up by $500,000 from a year ago. We’ve enhanced business development for the purpose of steady customers and markets which is where most of the increase in operating expenses occurred.

We’re traveling to those markets. Thankfully we have increased incentive payments for management virtually across all regions due to performance. I believe a comment on our compensation philosophy is in order. We intend to hold our senior management ata modest base salary well below some of our peers. We have a robust bonus plan driven by metrics which we believe shareholders would find attractive. These include growth and operating income, return on invested capital, investment turnover, and return on equity.

Finally, our long -term incentives in theform of restricted stock and options is driven by building the intrinsic value of the firm. We strive to see that these are awarded to those members of a team who build that value. As I’ve stated in the last call, working atICO is not a specific home job. I appreciate the long hours of travel, days and weeks away from home, enthusiastically undertaken by so many at ICO.

Finally, we continue to work with an [age of conservaty ?? ICOC003 4:57]in an effort to find $300,000 for the purpose of improving the stewardship of rainforests in Asia. We do so recognizing our commitment to minimize our carbon footprint.

I’ll close with the same line with which I began. Our business is good and we have ample opportunities for growth and improvement. We’ll take any questions at this time.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Christopher Butler. Please go ahead.

Christopher Butler

Hi, good morning gentlemen.

A. John Knapp, Jr.

Hey Chris.

Christopher Butler

I wanted to start with the business in Europe. I posted a pretty strong quarter there. Over the past few months I’ve been getting some hints that certain areas of Europe might be flowing for plastics companies. I just wanted tog et an idea of what you guys might be seeing over there.

A. John Knapp, Jr.

Our European business continues to be robust

Christopher Butler

And also looking at Bayshore, it was the fourth quarter here compared to the third quarter is a pretty substantial turnaround with top line growth. Can you give us an idea of some of the markets that you’re serving that are providing the growth for you?

A. John Knapp, Jr.

They’re all, I would state, consumer markets that we’re serving. Remember, we don’t serve automotive or residential construction. Bayshore also benefited from a falling dollar that we find that we’re exporting more of Bayshore’s production and it’s extremely well-located immediately adjacent to thecontainer port in Houston. Does that help?

Christopher Butler

It does a little bit. Now looking at the consumer and some of the concerns with consumer spending, is this... Is that something that would have an impact on the results looking into 2008?

A. John Knapp, Jr.

We’re very optimistic about Bayshore and find that demand is indicated from our customers looks very strong at the moment. You know, clearly there’s a drought in the US economy. We nay find that we’re running into headwinds.

Christopher Butler

And then finally and then I’ll go back into the queue, resin prices seem to be spiking here. I just wanted to get your feel on what the raw materials situation is moving into the first quarter and the success that you may have passing that on to customers.

A. John Knapp, Jr.

You know, we have just completed our overall management meeting for ICO from around the globe, so resin prices were a great deal of discussion as you can imagine and there appears to be an abundance of resin available in North America. We’re not sure that any kind of spike will continue. We look to do some selective buying of resin. It’s hard to state that they’ll continue to increase in price.

Jon Biro

And Chris, this is Jon, we’ve shown our ability to raise our selling prices as resin prices rise. So again here in this fourth quarter where we actually expanded our product sales market slightly. So we’re hopeful that we can continue to do that into the future.

Christopher Butler

Is ICOin a position to cost-effectively source globally and be able to take advantage of pricing differences around the world?

A. John Knapp, Jr.

Boy, we certainly know that there are pricing differentials around the world. The truth is that we do, ICO allows each operating division to make its resin purchases as it believes appropriate for the region in which they’re in. That does in fact mean from time to time that one region will be buying resin from resin producers in another region and so we do try to source globally.

Christopher Butler

Thank you, I’ll go back in the queue.

Operator

Our next question comes from Jackson Spears from Capstone Investments. Please go ahead.

Jackson Spears - Capstone Investments

Congratulations on another good quarter.

A. John Knapp, Jr.

Thanks, Jack.

Jackson Spears - Capstone Investments

Could you give us a little more color on Bayshore? I think you said that you had some export sales inthe forth quarter? What order of magnitude was that and how much did that attribute to the fourth quarter growth?

A. John Knapp, Jr.

Jack, I’m not sure that we can tell you the amount math of the export sales. I’m not even sure I could tell you about... what do you think, Jon?

Jon Biro

I’ll say it’s significant, but that’s all we can say.

Jackson Spears - Capstone Investments

It was significant n the fourth quarter?

Jon Biro

Yes.

Jackson Spears - Capstone Investments

Is this the first quarter that it’s been significant?

A. John Knapp, Jr.

No, but it just fascinates me Jack that it’s absolutely true, Economics 101, it’s doing what we expected with the falling dollar we find that we have the ability to ship out of the United States.

Jackson Spears - Capstone Investments

What’s your operating rate at Bayshore? Are you pushing the limits? Do you need to again increase capacity there?

A. John Knapp, Jr.

Bayshore is operating at a high level today.

Jackson Spears - Capstone Investments

Does ata high level mean close to 100%?

A. John Knapp, Jr.

It means ata high level.

Jackson Spears - Capstone Investments

[inaudible ICOC004 01:53] And your CapEx plans for the new year, what’s the order of magnitude? Where will we allocate... Was it another $12 million and where do we allocate those dollars? Europe, Asia, or Bayshore again?

Jon Biro

Well I think what we’ll do is allocate our capital to the high growth regions that generate the highest returns on capital. It’s what we did last year. We will also have investment as Charlotte mentioned related to theNew Jersey fire, rebuild that operation.

Jackson Spears - Capstone Investments

So we can [inaudible] and CapEx for the new year?

Jon Biro

It will be somewhat higher than that, however, we will receive some insurance proceeds to cover that investment.

Jackson Spears - Capstone Investments

Your inventory seemed high in the fourth quarter. Why, and should I just assume that it’s worked down with the oil having spiked during the first quarter?

A. John Knapp, Jr.

Our inventory is high to support the sales, Jack. If you’ve got the increase in sales that we’re having, you have to have some more inventory. I think that’s the simplest answer.

Jon Biro

That is the primary reason for it, absolutely.

Jackson Spears - Capstone Investments

And is there any one product or any one factor driving growth?

A. John Knapp, Jr.

Well water tanks in Asia are clearly the activity where we have a lot of focus and I suspect that will continue in the future. We have diversified our product mix in Asia and certainly the installation of the base line in Malaysia will continue to diversify product mix going forward, and we seea lot of opportunities to continue to build on that diversification.

Jackson Spears - Capstone Investments

As all of us worry about what a recession would impact on you, I’m sensing you’re saying some of the risks that’s mitigated by what’s going on with the falling dollar gives you another place to sell your products overseas.

A. John Knapp, Jr.

That’s correct and those that are economists, if they are truly believing that the brick nations and the growth there will continue to build a global demand, then we expect to benefit from that.

Jackson Spears - Capstone Investments

And this is unfair, but it is anyway. You’re relatively small in a huge industry of plastics, and it would appear that you need to either look at your opportunities how to grow and you said you’re expanding corporate development. Does that mean in the new year that if the opportunity is there you’d look at acquisitions to diversify or strategic to help your product line?

A. John Knapp, Jr.

You know Jack, what we count on is building the business that has a regional organic growth rate. So that is the first element, and if we’ve got that business, then that means that acquisitions, and we’re not against acquisitions, we just recognize that they had better be very attractive and fit into what we do.

Jackson Spears - Capstone Investments

But you clearly need to pass an acquisition and help you service your existing customer base and organic growth may come in a different way through expanding their operations using your clients.

A. John Knapp, Jr.

That is true, Jack, but acquisitions can come with different cultures and different problem and if we build it ourselves, at least we have an understanding of what we’re doing.

Thanks John. I’ll let you go to another person.

Operator

Our next question comes from Kenneth Pound from Nutmeg Securities. Please go ahead.

Kenneth Pound - Nutmeg Securities

Good morning gentlemen. Great quarter and great year.

A. John Knapp, Jr.

Thank you.

Kenneth Pound - Nutmeg Securities

I’d like a little more about Asia. Obviously you did great in Europe but Asia was the real superstar this year and I was wondering if you could have a little color on, you said you diversifying inMalaysia, your product line, and what other investments could you do for the Asian market? It sounds like you’re perhaps exporting to Asia from Bayshore in Houston now, so I just kind of interested in that, and you mentioned water tanks a lot. Is this oil tanks or other types of tanks, things that you’re looking into?

A. John Knapp

We doin fact ship to markets for other tanks as well as water tanks. Fuel tanks would be something that we have interesting exposure to, that we ship to. You know, we put a lot of capital, we announced it during the course of the year and actually atthe end of the previous year. We substantially increased our investment in the Australasian market and Asia. You know, we’ve got a large employment base there today. In our minds you have to execute well with expansions so for a while we had to execute with new facilities and new investments we’ve made. The Bayshore line inMalaysia was a very substantial investment for ICO and it is the first time that we put a major compounding line outside of Bayshore. We’re very excited about the prospects for this line and so we will continue to develop products we’ve never had inthe Asian markets before. Does that help you?

Kenneth Pound - Nutmeg Securities

Yeah. Is there any kind of geographical breakdown? You mentioned Malaysia and Australia. Is there meaningful other countries out there you’re selling to?

A. John Knapp

Well yes sir, there sure are. Malaysia is a great export market for us, so we’re trying to develop it and we are developing. We’re shipping Malaysia to India, we’re shipping to China from there, we’re shipping to other Asian countries, and one would think that over time... You know we’re a... We have to grow people in order to be able to expand in new areas but over time that’s clearly where the demand in the world is just exploding. We just have to figure out how to be able to build a people base that we can continue to use the people to move into additional markets.

Kenneth Pound - Nutmeg Securities

That sounds like a great way to do it. Finally, is there any concern about rising shipping rates? We’ve heard a lot about that this year, or availability for ships and so forth to transport your products?

A. John Knapp

Absolutely. It is clear that we’ve got resin or our products on the seas all the time so we’ve got to pay whatever thecost is and as we become, as we have more and more resin on the seas, how to manage that has become a much more significant activity.

Kenneth Pound - Nutmeg Securities

Great. Thank you.

Operator

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

George Jasper - Robert W. Baird

Thank you. And congratulations. A wonderful quarter and a super trend on your developing the company.

A. John Knapp, Jr.

Thank you.

George Jasper - Robert W. Baird

Just a little bit further on Bayshore and the growth in Malaysia and the Malaysian situation. Can you give us a percentage of what the initial Malaysian operation would represent relative to US Bayshore in terms of revenue capacity or total investment that’s been made?

A. John Knapp, Jr.

So let mesee if I can understand your question. Is it specifically what is the Bayshore compounding capacity in Malaysia as compared to the capacity that we have at Bayshore in theUnited States?

George Jasper - Robert W. Baird

Yes.

A. John Knapp

All right. So remember that the Bayshore compounding facility that we have in the United States is perhaps the largest compounding facility of high volume in North America. So what we’ve done in putting the first Bayshore line into Malaysia is obviously much much smaller than the capacity that we have in Bayshore in the United States. Jon, what would you say the capital investment that we have in that line, but that line is just an investment alone compared to the Bayshore itself. Real estate buildings and lots.

Jon Biro

It’s a pretty small investment if you compare it to the investment that we have in Bayshore. You know I think capacity wise it’s probably about 5% of Bayshore’s capacity.

George Jasper - Robert W. Baird

I see. Okay and in terms of the specific product line that you would be initiating inMalaysia versus US, is there some expanded product that you’re offering in theFar East versus what is being done here in terms of marketing?

A. John Knapp, Jr.

You mean as compared to Bayshore?

George Jasper - Robert W. Baird

Yes, Malaysia Bayshore versus here.

A. John Knapp, Jr.

Not really because remember Bayshore serves the consumer market. Specifically, packaging would be the area that we will focus on and I imagine that that’s... You know, t hat’s a global demand. There’s a lot more packaging material than the world of Asia. We see that as something we know well.

George Jasper - Robert W. Baird

Yes. Yes, I know there’s some very major expansion recently in the packaging area going on inMalaysia. Then question on the oil field polymer. Is there anything being done to push the technology in the oil field from where...Initially you were talking about this more than a year ago, year and a half ago. Is there anything going on there?

A. John Knapp, Jr.

Well, if you had been in our management meeting you would have seen a presentation on oil fields and what the types of products that we are working on are, and some of them look like they could be very interesting products, so we are definitively working on new products for the oil field.

George Jasper - Robert W. Baird

Okay and then there’s a question on your materials, the inventory increase that you’ve experienced obviously and you related to that because of your increased sales volume. Has the inventory changed in terms of the make up of it or is it still fairly consistent as you’re growing in terms of the materials that arein it for your various product lines?

A. John Knapp, Jr.

I think we have the same material that we’ve always had, Jon --

Jon Biro

Yeah, yeah.

A. John Knapp, Jr..

And there’s no --

Jon Biro

There’s no major changes in terms of mix if that’s your question.

George Jasper - Robert W. Baird

Yeah. That’s the question. Okay, thank you.

Operator

Our next question comes from Mitch Elmay from McAdams, Wright, Reagan. Please go ahead. .

Mitch Elmay - McAdams, Wright, Reagan

Good morning guys.

A. John Knapp, Jr.

Good morning, Mitch.

Mitch Elmay - McAdams, Wright, Reagan

I just have one question. I didn’t know if the elimination of the preferred enabled you to do anything regarding your capital structure that you haven’t been able to do while that was outstanding.

A. John Knapp, Jr.

Mitch, it allows us to pay dividends if we were to desire to doso or to repurchase shares, so those are two things we couldn’t have done before. I mean dividends on the common.

Mitch Elmay - McAdams, Wright, Reagan

Great and is there a target debt-to-equity that you care to throw out that I might use as sort of a guidepost as to when I see your expansion numbers, whether you may at some point begin to buyback shares?

A. John Knapp, Jr.

There’s no target there to --

Jon Biro

The only kind of target we want to --

A. John Knapp, Jr.

Yeah, we did that at our management meeting, Mitch. W\e had a lot of fun kind of looking at what the effects of different debt loans would beso we had a lot of conversations about that, but suffice it to say we think we’ve got a really terrific balance sheet today.

Mitch Elmay - McAdams, Wright, Reagan

Great. Okay. Thanks and great quarter.

A. John Knapp, Jr.

Thanks Mitch.

Operator

Our next question comes from Steve White from Marlin Capital. Please go ahead.

Steve White - Marlin Capital

Hi John, how are you?

A. John Knapp, Jr.

Steve, hello.

Steve White - Marlin Capital

Got a quick question for you. Are Dubai and the new line in Malaysia currently profitable?

A. John Knapp, Jr.

Steve, what an interesting question. You know, they’re not generating profits at the moment. I stated somewhere in here that the Bayshore line with its... we’re shipping and we’re shipping cautiously and running the line carefully in Malaysia. Mitch, what we make in Malaysia gets highly diluted into our customers products, so we really have to make it carefully and customers conduct a lot of trial son those products, on what we make to make sure that it’s going to be effective and there’s no contamination because you could really mess up their products if it’s not done right. So it takes a little patience and you want to be able to know that you’re running the line very well soit does take a little patience as you put it together, but I assure you that Bayshore inMalaysiahas been executed to date very, very well.

Steve White - Marlin Capital

Would you care to comment on when you think you would see these two lines contribute to earnings?

A. John Knapp, Jr.

I don’t think we should give you --

Jon Biro

We don’t --

Steve White - Marlin Capital

Okay.

A. John Knapp, Jr.

But we’re optimistic.

Steve White - Marlin Capital

Sounds good. All right, that’s it for me. Thanks a lot. Great quarter, even better year.

Jon Biro

Thank you.

Operator

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

George Jasper - Robert W. Baird

My question relates to your success in the repurchase of preferred and elimination of the share, the increase in the share outstanding number. Do you have a total as to what you were able to avoid in terms of share distributions by buying preferred back?

Jon Biro

Okay. Let mesee here.

A. John Knapp, Jr.

You’ve got him calculating here.

Jon Biro

So your question is what would it... if all of it converted, what would have been the effect of that?

George Jasper - Robert W. Baird

Yes. If it would have converted in total, what’s the effect of number of shares outstanding would have been? You said about 27 and you issued 500,000 or approximately very recently and that’s not very much, but I’m sure that the number that you avoided by acquiring the verbal preferred back was significant and it was a matter of --

Jon Biro

We’re talking about 2.8 million common shares, roughly.

George Jasper - Robert W. Baird

2.8 million was voided?

Jon Biro

Roughly, yeah.

George Jasper - Robert W. Baird

Okay. So the reason I’m asking you this is I think one of the real critical measurements of how successful ICOhas been is if you added those shares from what would have been there to your current, I mean this company would have had... it would have been looking atat least 30 million shares out and when this management team came in if I measure the revenue screen at that point, this is what you can be generating now, it could be in excess of 400 million. The number, the sales per share on a diluted basis if you were to consider those added shares out if they would have gone out but are probably suggestive that your sales per share would have been less than $7 or $8 and if I calculate, you’ve got the potential of generating about $16 per share in sales versus the number of shares that are currently outstanding. I mean, have you thought about that kind of comparison before?

A. John Knapp, Jr.

We always think about what’s your revenues per share, what’s your revenues per employees. Those are metrics that we’re interested in. Sometimes the... but remember if we were doing total revenues versus product sales, those revenues are much smaller but they can be nicely profitable revenues.

George Jasper - Robert W. Baird

Right. Right.

A. John Knapp, Jr.

You know, since I’m the optimist at ICO, I’m always fascinated with watching the growth and revenues and you’re going to trace that sequentially over the last two or three years and quarters and it certainly is a nice chart.

George Jasper - Robert W. Baird

Yeah and then lastly, since you’ve really improved your position and you really have a lot of momentum going here, is the acquisition potential out there at this point in time or is it going to be basically internal organic growth that you’re going to concentrate on?

A. John Knapp, Jr.

You sound like Jack Spears. You know, I believe firmly that a company that has the ability to grow organically and that hasa very clean balance sheet should look at acquisitions, but you compare the risk and the returns of the acquisition to your continued organic growth and so it just means that we would be interested in acquisitions but we recognize that any acquisition we make, we have attractive investments that we can make in expanding our existing businesses. Does that make sense?

George Jasper - Robert W. Baird

Yes. Sure.

A. John Knapp, Jr.

You know, we put it up on the wall, we have to compare the returns that we can make internally with our growth with what we might make if we make an acquisition and the risks associated with it. Both operationally and culturally with the people that come on board with an acquisition.

George Jasper - Robert W. Baird

Okay, fine, thanks for your comments.

Operator

(Operator Instructions) Our next question comes from Shawn Willard from Sigmus Capital. Please go ahead.

Shawn Willard - Sigmus Capital

Good morning.

A. John Knapp, Jr.

Good morning, Shawn.

Shawn Willard - Sigmus Capital

Just a couple of quick things before I forget. What was your fully diluted share count for the fourth quarter and what are you going to be using in Q1 given the effect of the conversion?

Jon Biro

The end of the year we were 27.9 million shares fully diluted.

A. John Knapp, Jr.

You might explain how the share count changed over the course of the year with growth of the share count.

Jon Biro

Yeah, we’ve got additions for stock options now that many more of the options are in the money and the way that incremental calculation is made, rising stock price causes an increase in the number of shares that we add in to come to diluted, weighted average shares outstanding. We will have an additional 500,000 shares roughly related to the conversion of some of the preferreds into common and that will come into play fully in our second quarter, our March quarter, and probably about half of that will come into play for our first quarter since the conversion happened mid-year, or excuse me, mid-quarter.

Shawn Willard - Sigmus Capital

Okay.

Jon Biro

Also I should note that our basic weighted average shares outstanding will go up since we’ve issued new shares but the adjustment for the preferred stock in our diluted weighted average shares calculation will come down so I can’t tell you precisely right now what the increase in the weighted average shares for the diluted calculation will be but it’s probably going to be a few hundred thousand shares net.

Shawn Willard - Sigmus Capital

Okay and then several people have asked this question some different ways so let me recap something real quick and then ask you ina more generic way. In the fourth quarter you had the effect of the European holidays, thecost of the ramp up for Dubai, the ramp up of Malaysia that both had an impact from an expense perspective as well as obviously contributing to the revenue and then Bayshore was just the homerun for the quarter. Given all of that and going into first quarter where you’re going to have the Thanksgiving holiday, the Christmas holiday, New Years, the week in Malaysia, all of the things that happened there, over the past couple of years typically from Q4 to Q1 has been roughly flat to slightly up. Now without going through each division or all of that, in general, what should people be looking for a baseline to begin next year given that you’re going to have continued production from Malaysia, continued or increase from Dubai; granted, that will be small, sounds like Bayshore is doing very well, you ramped up inventory significantly compared to where it had been the previous three quarters saying that that’s an expectation of revenue growth, so would Q1 being flappish or slightly up from Q4 be an unreasonable expectation in aggregate?

Jon Biro

It wouldn’t necessarily be unreasonable. As I stated when I spoke of the outlook, we’re confident that we’ll improve year over year. At this point I couldn’t say whether we’ll be up or down versus the September quarter. You know, we always see some seasonal weakness in the December quarter but what we have going for us is we do have quite a bit of momentum. But having said that, I won’t forecast the first quarter relative to the fourth quarter this time.

Shawn Willard - Sigmus Capital

Okay and then my last question that’s sort of a follow on to what Mitch brought up, and I’m just going to do this in very rough numbers, so excuse me if they’re a little bit off, but you have roughly 35 to 40 million of [inaudible ICOC006 07:15] for 2007 so on a free cash flow basis, let’s say it’s 15 million plus. You’ve got obviously the debt impact from the preferred and everything that’s happened there. If you’re using some sort of modest growth on that, let’s say you’ve got 20 million plus of free cash flow and fifty million of [inaudible ICOC006 07:40], you’ve only got 11 million or so of current long term debt, so that should give you a pretty substantial positive cash flow next year barring an acquisition or some external event.

Jon Biro

Or barring the trend in resin prices is an important factor when you consider free cash flow. I’m not sure how you’re calculating free cash flow, but the way we calculate it is we take cash flow from operations which includes working capital investment and we subtract capital expenditures.

Shawn Willard - Sigmus Capital

Yeah and then my last question would be, of the increase in the inventory, how much would you say was for that issue, just simply an increase in resin pricing because of the overall change in price in the world market?

Jon Biro

I would say that... If you look atthe year over year change in the inventory, I’d say that about 60% of the increase is volume-related. Currencies also cause the inventory to go up some 20% and then the remaining, roughly the remaining 20% would be due to price changes. Those are very rough numbers, keep that in mind.

Shawn Willard - Sigmus Capital

Sure. I appreciate it. Thank you very much.

Jon Biro

Sure.

Operator

At this time I’m showing no further questions.

A. John Knapp, Jr.

Thank you all for attending our conference call and we hope that we’ll getan opportunity to visit with you when we have the call for the first quarter of ’08. Again, thank you.

Operator

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

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