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

Dec. 7.07 | About: ICO Inc. (ICOC)

ICO, Inc. (ICOC) F4Q07 Earnings Call December 7, 2007 11:00 AM ET

Executives

A. John Knapp, Jr. - President, ChiefExecutive 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

Operator

Good morning ladies and gentlemen andwelcome to thefourth quarter ICO2007 earnings conference call. At this time, all participants are inalisten-only mode. Later we will conduct a question and answer session. Please note that this conference is beingrecorded. 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 conferencecall for fiscal year of ’07. Before webegin this call I should tell you that inthe roomwith me Ihave Charlotte Ewart, our general counsel, and Jon Biro, our chief financialofficer. Charlotte, I think you have a few words.

CharlotteEwart

Thanks, John. As always, I must caution everyone listeningthat certain matters discussed inthis conference call areforward-looking statements intended to qualify for the Safe Harborand Liability established by thePrivate Securities Litigation Reform Act of 1995. Inparticular, statements regarding trends inthemarketplace and potential future results areexamples of such forward-looking statements. Forward-looking statements include risks and uncertainties, includingbut not limited to restrictions imposed by thecompany’s outstanding indebtedness, changesin the costand availability of polymers, demand for thecompany’s services and products, business cycles and other industry conditions,thecompany’s ability to manage inventory, thecompany’s ability to develop technology proprietary know-how, the company’s diversification, it’sability to attract and retain keypersonnel, 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 expressedfrom time to time inthecompany’s filings with theSecurities and ExchangeCommission could cause actual results and developments to be materially different from thoseexpressed inthis call.

Any forward-looking statements made duringthis call areonly made as of thedate of this call, and thecompany undertakes no obligation to publicly update or revise anyforward-looking statements to reflect subsequent events or circumstances.

On to you, Jon Biro.

JonBiro

Thank you. Themomentum we experienced during thefirst 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, operatingincome, and earnings pershare. The very solid results for the fourth quarter were fueled by the renewed strong growth in sales and earnings for BayshoreIndustrial, our North American compounding business, and our operations in Europe. Thesolid volume growth we areexperiencing combined with modestly improved selling prices for our productsoffset by higher SG&A expenses led to higher quarterly profits and higherreturn on vested capital. Compared toour fourth quarter of last year, our revenues increased 42% or $36.3 million to$123.6 million during thequarter ending September 30, 2007.

This was theresult of a12% growth insales and service volumes, achange in product and service sales mix andstronger foreign currencies. The volume growth was driven bycontinuing strong growth inAustralia,where we experienced year over year volume growth of 3% and lower, butnevertheless impressive growth inEurope where volumes were up 16%. And last but certainly not least, forBayshore, where volumes grew 11% year over year.

The growth inAustraliawas due to thesignificant increase and demand for water tanks which began in our quarter ending March 31, 2007 due to water shortagesin Australia. Offsetting these volume gains was a decline in business for our ICO Polymers North American business,due in largepart 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 to17.3%. This decline was primarily due tothe change in product and service sales mixed,including thefact that our foreign businesses, namely theEurope and AsiaPacific segments, grew more quickly than our businesses in North America.

A changein productsales mix for our Bayshore Industrial operation also reduced gross marginsmodestly. More importantly, gross profitrosedramatically from $5.3 million or 33% to $21.4 million for the quarter. This substantial improvement was driven by the strong sales growth, slightlyimproved [feed stock?? ICOC001 8:28]margins on our product sales, and stronger foreign currencies.

SG&A expenses increased $1.6 million or19% to $10.2 million. Most importantly,SG&A as apercentage of revenues dropped to anall time low of 8.3% compared to 9.9% lastyear. Operating income increased $4.3million or 78% to $9.7 million due to thehigher gross profit partially offset by higher SG&A expenses.

Operating margin was a solid 7.8% as all of our business segments generatedimproved operating income year over year. Inparticular, Bayshore, Europe, and Asia Pacific improved the most. During thefourth quarter we recognized a$300,000 benefit included inimpairment, 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 offsetby asset impairments primarily related to equipment in Australia no longer in service.

Interest expense was higher by $400,000 in thequarter due to debt we incurred to redeem almost all of our preferred stock in early fiscal year 2007. Fourth quarter pretax income from continuingoperations was $8.9 million and income from continued operations was $6 millionor $0.22 perfully diluted share, allsignificant 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%, mostlydue to a change in product and service sales mix, aswell as a 5%increase involumes. Most of the volume improvement sequentially wasdue to Bayshore growth, where volumes were up 31%.

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

Now for theoutlook. As is always the case, we expect seasonable weaknessdue to theholiday season inour quarter ending December 31, 2007. Having said that,we expect to continue producing year over year quarterly improvements andrevenues, operating income, and earnings pershare from continued operations. Weexpect that this improvement will bebroad-based and will beprimarily driven by improved performance of our Bayshore, European, and Asia Pacific business segments.

During thefourth quarter, our [advanced??ICOC002 1:27] balance sheet continued to strengthen. AtSeptember 30th, cash was $8.6 million, total debt was $57.3 million,and stockholders equity ended theyear at $91million. For the year, stockholders’ equity declined$700,000, very impressive considering that we redeemed our preferred stockwhich had theeffect of lowering our equity by $28 and ahalf million. In November 2007 we took out the remaining outstanding preferredstock. Of the approximately 185,000 [deposited ?? ICOC002 1:58] shares thatwere left outstanding, holders owning 177,000 shares elected to convert theirshares to common stock, thereby increasing our common shares outstanding byjust under half amillion shares.

Capita expenditures during the quarter were $4 million and were$11.6 million for thefull fiscal year. Last, creditavailability 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 wehave ample opportunities for growth and improvement.” That line is certainly true today. We have record volumes, record operatingrevenues, record operating profits, reasonable cash flow inlight of theincreases inboth receivables and inventory due to strong growth. Theteam running ICOon aday-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 theprocesses we provide aremore complicated or value-adding than our commodity size reduction orcompounding and we arestriving to build thehigher value segment of our business. Webelieve we’ve made progress inimproving our product mix and will continue to do soin ’08. However, volume is the natural statistic easily measuredwhich we continue to monitor. For the fourth quarter, our volumes are up 12% over the same quarter the previous year, with much strongervolumes as Jon pointed out inEurope, AsiaPacific, and Bayshore; somewhat weaker volumes in North America. This volume increase is in line with our expectations, as webelieve we arepositioned for reasonable, organic growth. Please note that itwas achieved without significant contribution from either the new plant in Dubaior the newline in Malaysia.

For theyear our volumes areup 5% reflecting aweak first quarter caused by falling resin prices, and we’d like to believe the momentum that we’re building, Margeand those of you who’ve listened to our calls in thepast know that I, for one, amI margin fanatic. As I’ve stated in thepast, thepeople at ICO who keep most of our plants workingtwenty four hours aday often sixor even seven days aweek put forth too much effort inmy opinion to earn anything less than a20% gross margin and asatisfactory return on invested capital. This quarter our margin was 17.7%, slightly lower than the last quarter. We seeopportunity for improvement inmargin, itwill just take consistent and hard work.

SG&A. One of thebenefits of our revenue growth hasbeen therelative decline of SG&A as apercentage of revenues. For the quarter this was 7.9% which webelieve is asatisfactory number.

Taxes. For thequarter our global income tax amounted to just over 32% of income. We find this figure to be unsatisfactory and we’d like tobelieve that we can reduce this number over time. Of note, today the United States has thehighest corporate tax rateof thenations inwhich we operate, and itis ahandicap to firms such as ICOwho compete globally. For the year our tax rate was 25.3%, a more acceptable figure.

Operations. Jon Biro hasreviewed thenumbers, soI’ll make afew comments about our operations. Asdetailed inour 10-Q, 10-K to befiled shortly, we divide our business into five operating segments to which weadd corporate.

Bayshore. As suggested inprevious calls, we have agood management team atBayshore and they proved themselves inthis quarter. Fourth quarter volumeswere up over 10% over theprevious year. Bayshore’s resultscontinued to improve during this quarter due to increased volumes and productmix. We have great confidence in themanagement team atBayshore and their position inthemarket. These operations are run very well. Bayshore earned over $5.7 million in operating income in thequarter, up significantly from $3.3 million from the quarter ended June 30, 2007 and the $4 million earned in theprevious years’ quarter. Recall asstated that much of what Bayshore profits to date is distinctively differentfrom production some eighteen months ago. I suspect that we will beable to make thesame statement or observation eighteen months from now.

IPNA, which is ICO Polymers North America. As we stated in thelast several calls, IPNA’s tolling and procurement business remains strong andto 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 theNew Jersey plant, which is IPNA’s largest plant. Although thevast majority of thedamage was water-related, IPNA will not befully operational until late next summer or even the early fall. When we dobecome operational, we will have upgraded our capacity and efficiencies. These improvements will require capitalinvestment and will delay full restoration of production which will serve ourcustomers well for years inthefuture.

IPNA hascontinued to support some 85% of theaffected customers, serving them through facilities in Tennessee, Texas, and Indiana. This hastaken atremendous effort by allof the IPNAemployees, for which we aremost appreciative. From most of ourcustomers, this firehas been a meaningless event. When we saywe have redundant capacity, we mean it.

Further, thefinancial impact hasbeen minimized as Jon pointed out through insurance. IPNA’s operating income was $1.7 million in thequarter, up from $1.3 million inthe samequarter and $1.5 million last quarter. Eric Parsons and his team continue torun their business with focus on selecting customers where IPNA can addsubstantial value.

ICO AsiaPacific, which we call Australasia. Business inAustralia and Malaysia remains good but we suspect that the [torn??ICOC002 9:45] growth inAustralia hasnow subsided. For this quarter the region earned $1.6 million in operating income compared to $700,000for the samequarter last year, but down from the$2.3 million inthe previousquarter. Volumes were up over 58% fromlast year and down slightly from theprevious quarter. This region’s carrybook Start up costs of Dubai and theoperating expenses incurred have doubled incapacity inMalaysia. We note that the Dubai facility had one month of... The new Dubai line had one month ofoperation inthe quarterbut would require plenty of attention to run smoothly. Opening anew line in a new country is never easy. As noted ina previouscall, theDubai operation will focus initially on providing product for water tanks;however, we have akeen interest inthe regionand will continue to patiently explore additional opportunities for expansion.

The new compounding line inMalaysia which we stated was running, we call it Bayshore Malaysia. That line was built at Bayshore to Bayshore’s designspecifications, disassembled, shipped to Malaysia, and reassembled. Our first shipments from this line occurred in October and we expect this businessto build over fiscal year ’08 as customers conduct trials and become fullysatisfied with our products. Initialreception hasbeen most encouraging.

Europe. As noted inthe lastcall, Europe continues to surprise us with its vigorous demand. I would benegligent 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 ofour plants, as well as plants of many of our customers. We earned $2.4 million in operating income, compared to $1.1million for thesame quarter last year, but down from $3.4 million the last quarter. Volumes are up strongly by 16%. These results are theproduct of thehard work of Derek Bristow and his team. Theleadership changeswe have implemented and continue to implement, our relationships with ourquality resin suppliers, astronger European economy, and of coursethe risingvalue of theeuro. We have much work to do inthis region and seeample room for improvement, including increasing margin as well as opportunityfor expansion.

Brazil. Theturnaround inBrazil 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 haveapproved modest expansions for fiscal ’08 which should impact this region in our third fiscal quarter.

Corporate. As I indicated inthe lastcall, we’ve completed thecost cuttingand we’re building for thefuture. 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 andmarkets which is where most of theincrease inoperating expenses occurred.

We’re traveling to those markets.Thankfully we have increased incentive payments for management virtually acrossall regionsdue to performance. I believe a comment on our compensation philosophyis inorder. We intend to hold our seniormanagement ata modestbase salary well below some of our peers. We have arobust bonus plan driven by metrics which we believe shareholders would findattractive. These include growth andoperating income, return on invested capital, investment turnover, and returnon equity.

Finally, our long -term incentives in theform ofrestricted 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 thelast call, working atICO is not a specific home job. I appreciate the longhours of travel, days and weeks away from home, enthusiastically undertaken by so many at ICO.

Finally, we continue to work with an [ageof conservaty ?? ICOC003 4:57]in aneffort to find $300,000 for thepurpose of improving thestewardship of rainforests inAsia. We do sorecognizing 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 ampleopportunities for growth and improvement. We’ll take any questions atthis time.

Question-and-AnswerSession

Operator

(Operator Instructions) Our first questioncomes from Christopher Butler. Please goahead.

ChristopherButler

Hi, good morning gentlemen.

A.John Knapp, Jr.

Hey Chris.

Christopher Butler

I wanted to start with the business in Europe. I posted apretty strong quarter there. Over the past few months I’ve been gettingsome 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 topline 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, consumermarkets that we’re serving. Remember, wedon’t serve automotive or residential construction. Bayshore also benefited from a falling dollar that we find that we’reexporting more of Bayshore’s production and it’s extremely well-locatedimmediately adjacent to thecontainer port inHouston. Does that help?

Christopher Butler

It does alittle bit. Now looking at theconsumer and some of theconcerns 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 andfind that demand is indicated from our customers looks very strong at themoment. You know, clearly there’s a drought in the US economy. We nay find that we’re running intoheadwinds.

Christopher Butler

And then finally and then I’ll go back intothe queue, resinprices seem to bespiking here. I just wanted to get your feel on what the raw materials situation is movinginto thefirst quarter and thesuccess that you may have passing that on to customers.

A. John Knapp, Jr.

You know, we have just completed ouroverall management meeting for ICOfrom around theglobe, soresin prices were agreat deal of discussion as you can imagine and there appears to be anabundance of resin available inNorth America. We’re not sure that anykind of spike will continue. We look to do some selective buying of resin. It’s hard to state that they’ll continue toincrease inprice.

JonBiro

And Chris, this is Jon, we’ve shown ourability to raise our selling prices as resin prices rise. Soagain here inthis fourth quarter where we actually expanded our product sales marketslightly. So we’re hopeful that we can continue todo that intothe future.

Christopher Butler

Is ICOin a position to cost-effectively sourceglobally and beable 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. Thetruth is that we do, ICOallows each operating division to make its resin purchases as it believes appropriate for the region in which they’re in. That does infact mean from time to time that one region will be buying resin from resin producers in another region and so we dotry to source globally.

Christopher Butler

Thank you, I’ll go back in thequeue.

Operator

Our next question comes from Jackson Spearsfrom Capstone Investments. Please goahead.

Jackson Spears - CapstoneInvestments

Congratulations on another good quarter.

A. John Knapp, Jr.

Thanks, Jack.

Jackson Spears - CapstoneInvestments

Could you give us a little more color on Bayshore? I thinkyou said that you had some export sales inthe forthquarter? What order of magnitude wasthat and how much did that attribute to thefourth 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 youthink, Jon?

JonBiro

I’ll sayit’s significant, but that’s allwe can say.

Jackson Spears - CapstoneInvestments

It was significant n thefourth quarter?

JonBiro

Yes.

Jackson Spears - CapstoneInvestments

Is this thefirst quarter that it’s been significant?

A. John Knapp, Jr.

No, but itjust fascinates meJack that it’s absolutely true, Economics 101, it’s doing what we expected withthe fallingdollar we find that we have theability to ship out of theUnited States.

Jackson Spears - CapstoneInvestments

What’s your operating rate atBayshore? Are you pushing the limits? Doyou need to again increase capacity there?

A. John Knapp, Jr.

Bayshore is operating at ahigh level today.

Jackson Spears - CapstoneInvestments

Does ata high levelmean close to 100%?

A. John Knapp, Jr.

It means ata highlevel.

Jackson Spears - CapstoneInvestments

[inaudible ICOC004 01:53] Andyour CapEx plans for thenew year, what’s theorder of magnitude? Where will weallocate... Was itanother $12 million and where dowe allocate those dollars? Europe, Asia, orBayshore again?

JonBiro

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 mentionedrelated to theNew Jerseyfire, rebuild that operation.

Jackson Spears - CapstoneInvestments

So we can [inaudible] andCapEx for thenew year?

JonBiro

It will besomewhat higher than that, however, we will receive some insurance proceeds tocover that investment.

Jackson Spears - CapstoneInvestments

Your inventory seemed high in thefourth quarter. Why, and should I justassume that it’s worked down with theoil having spiked during thefirst 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 tohave some more inventory. I think that’sthe simplestanswer.

JonBiro

That is theprimary reason for it, absolutely.

Jackson Spears - CapstoneInvestments

And is there any one product or any onefactor 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 willcontinue in the future. We have diversified our product mix in Asia and certainly the installation of the base line in Malaysia will continue to diversifyproduct mix going forward, and we seea lot ofopportunities to continue to build on that diversification.

Jackson Spears - CapstoneInvestments

As allof us worry about what arecession would impact on you, I’m sensing you’re saying some of the risks that’s mitigated by what’sgoing on with thefalling 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 tobenefit from that.

Jackson Spears - CapstoneInvestments

And this is unfair, but it is anyway. You’re relatively small in ahuge industry of plastics, and itwould appear that you need to either look atyour opportunities how to growand you said you’re expanding corporate development. Does that mean in thenew year that if theopportunity is there you’d look atacquisitions to diversify or strategic to help your product line?

A. John Knapp, Jr.

You know Jack, what we count on is buildingthe businessthat has a regional organic growth rate. Sothat is thefirst element, and if we’ve got that business, then that means thatacquisitions, and we’re not against acquisitions, we just recognize that theyhad better bevery attractive and fit into what we do.

Jackson Spears - CapstoneInvestments

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

A. John Knapp, Jr.

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

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

Operator

Our next question comes from Kenneth Poundfrom Nutmeg Securities. Please goahead.

KennethPound - Nutmeg Securities

Good morning gentlemen. Great quarter and great year.

A. John Knapp, Jr.

Thank you.

KennethPound - Nutmeg Securities

I’d like alittle more about Asia. Obviously you did great in Europebut Asiawas the realsuperstar this year and I was wondering if you could have a little color on, you said youdiversifying inMalaysia,your product line, and what other investments could you do for the Asian market? Itsounds like you’re perhaps exporting to Asia from Bayshore in Houstonnow, so Ijust kind of interested inthat, and you mentioned water tanks alot. Is this oil tanks or other types oftanks, things that you’re looking into?

A.John Knapp

We doin fact shipto markets for other tanks as well as water tanks. Fuel tanks would be something that we have interestingexposure to, that we ship to. You know,we put a lotof capital, we announced itduring thecourse of theyear and actually atthe end of the previous year. We substantially increased our investment in theAustralasian market and Asia. You know, we’ve got a large employment base theretoday. In our minds you have to execute well withexpansions sofor a whilewe had to execute with new facilities and new investments we’ve made. TheBayshore line inMalaysiawas a verysubstantial investment for ICOand it is the first time that we put a major compounding line outside ofBayshore. We’re very excited about the prospects for this line and so we will continue to develop productswe’ve never had inthe Asianmarkets 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 thereyou’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’reshipping to Chinafrom there, we’re shipping to other Asian countries, and one would think thatover time... You know we’re a... We have to growpeople inorder to beable to expand innew areas but over time that’s clearly where thedemand 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 touse thepeople to moveinto 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, oravailability for ships and soforth to transport your products?

A.John Knapp

Absolutely. It isclear that we’ve got resin or our products on the seas all thetime sowe’ve got to paywhatever thecost is andas 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 Jasperfrom Robert W. Baird. Please go ahead.

GeorgeJasper - Robert W. Baird

Thank you. And congratulations. Awonderful quarter and asuper trend on your developing thecompany.

A. John Knapp, Jr.

Thank you.

GeorgeJasper - Robert W. Baird

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

A. John Knapp, Jr.

So let mesee if I canunderstand 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?

GeorgeJasper - Robert W. Baird

Yes.

A.John Knapp

All right. So remember that the Bayshore compounding facility thatwe have in the United States is perhaps the largest compounding facility of highvolume in North America. So what we’ve done in putting the first Bayshore line into Malaysia isobviously much much smaller than thecapacity that we have inBayshore in the United States. Jon, what would you say thecapital investment that we have inthat line, but that line is just aninvestment alone compared to theBayshore itself. Real estate buildingsand lots.

JonBiro

It’s apretty small investment if you compare itto theinvestment that we have inBayshore. You know I think capacity wiseit’s probably about 5% of Bayshore’s capacity.

GeorgeJasper - Robert W. Baird

I see. Okay and interms of thespecific product line that you would beinitiating inMalaysiaversus 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?

GeorgeJasper - Robert W. Baird

Yes, Malaysia Bayshore versus here.

A. John Knapp, Jr.

Not really because remember Bayshore servesthe consumermarket. Specifically, packaging would be thearea that we will focus on and I imagine that that’s... You know, t hat’s a global demand. There’s alot more packaging material than theworld of Asia. We seethat as something we know well.

GeorgeJasper - Robert W. Baird

Yes. Yes, I know there’s some very major expansion recently in thepackaging area going on inMalaysia. Then question on the oil field polymer. Is there anything being done to push the technology in theoil 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 haveseen apresentation on oil fields and what thetypes of products that we areworking on are, and some of them look like they could be very interesting products, so we aredefinitively working on new products for theoil field.

GeorgeJasper - Robert W. Baird

Okay and then there’s a question on your materials, the inventory increase that you’veexperienced obviously and you related to that because of your increased salesvolume. Has theinventory changedin terms of the make up of it or is it still fairly consistent as you’regrowing interms of thematerials 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 --

JonBiro

Yeah, yeah.

A. John Knapp, Jr..

And there’s no --

JonBiro

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

GeorgeJasper - Robert W. Baird

Yeah. That’s thequestion. Okay, thank you.

Operator

Our next question comes from Mitch Elmayfrom McAdams, Wright, Reagan. Please goahead. .

MitchElmay - McAdams, Wright, Reagan

Good morning guys.

A. John Knapp, Jr.

Good morning, Mitch.

MitchElmay - 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 capitalstructure that you haven’t been able to dowhile that was outstanding.

A. John Knapp, Jr.

Mitch, itallows us to paydividends if we were to desire to doso or torepurchase shares, sothose aretwo things we couldn’t have done before. I mean dividends on thecommon.

MitchElmay - McAdams, Wright, Reagan

Great and is there a target debt-to-equity that you care tothrow out that I might use as sort of aguidepost as to when I seeyour expansion numbers, whether you may atsome point begin to buyback shares?

A. John Knapp, Jr.

There’s no target there to --

JonBiro

The only kind of target we want to --

A. John Knapp, Jr.

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

MitchElmay - McAdams, Wright, Reagan

Great. Okay. Thanks and great quarter.

A. John Knapp, Jr.

Thanks Mitch.

Operator

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

SteveWhite - Marlin Capital

Hi John, how are you?

A. John Knapp, Jr.

Steve, hello.

SteveWhite - Marlin Capital

Got aquick question for you. Are Dubai and thenew line in Malaysiacurrently profitable?

A. John Knapp, Jr.

Steve, what an interesting question. You know, they’re not generating profits at themoment. I stated somewhere in here that the Bayshore line with its... we’reshipping and we’re shipping cautiously and running the line carefully in Malaysia. Mitch, what we make in Malaysia gets highly diluted into ourcustomers products, sowe really have to make itcarefully and customers conduct alot of trial sonthose products, on what we make to make sure that it’s going to be effective and there’s nocontamination because you could really mess up their products if it’s not doneright. So ittakes alittle patience and you want to beable to know that you’re running theline very well soit does takea littlepatience as you put ittogether, but I assure you that Bayshore inMalaysiahas beenexecuted to date very, very well.

SteveWhite - Marlin Capital

Would you care to comment on when you thinkyou would seethese two lines contribute to earnings?

A. John Knapp, Jr.

I don’t think we should give you --

JonBiro

We don’t --

SteveWhite - Marlin Capital

Okay.

A. John Knapp, Jr.

But we’re optimistic.

SteveWhite - Marlin Capital

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

JonBiro

Thank you.

Operator

Our next question comes from George Jasperfrom Robert W. Baird. Please goahead.

GeorgeJasper - Robert W. Baird

My question relates to your success in therepurchase of preferred and elimination of theshare, theincrease in the share outstanding number. Doyou have atotal as to what you were able to avoid interms of share distributions by buying preferred back?

JonBiro

Okay. Let mesee here.

A. John Knapp, Jr.

You’ve got him calculating here.

JonBiro

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

GeorgeJasper - Robert W. Baird

Yes. If itwould have converted intotal, what’s theeffect of number of shares outstanding would have been? You said about 27 and you issued 500,000 orapproximately very recently and that’s not very much, but I’m sure that the number that you avoided by acquiringthe verbalpreferred back was significant and itwas a matterof --

JonBiro

We’re talking about 2.8 million commonshares, roughly.

GeorgeJasper - Robert W. Baird

2.8 million was voided?

JonBiro

Roughly, yeah.

GeorgeJasper - Robert W. Baird

Okay. So the reason I’m asking you this is Ithink one of thereal critical measurements of how successful ICOhas been isif you added those shares from what would have been there to your current, Imean this company would have had... itwould have been looking atat least 30million 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 inexcess of 400 million. The number, the sales per share on a diluted basis if you were to considerthose added shares out if they would have gone out but are probably suggestive that your sales per share would have been less than $7or $8 and if I calculate, you’ve got thepotential of generating about $16 pershare insales versus thenumber of shares that arecurrently outstanding. I mean, have youthought 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 aremetrics that we’re interested in. Sometimes the... but remember if we were doing total revenues versusproduct sales, those revenues aremuch smaller but they can benicely profitable revenues.

GeorgeJasper - Robert W. Baird

Right. Right.

A. John Knapp, Jr.

You know, since I’m the optimist at ICO, I’m always fascinated withwatching thegrowth and revenues and you’re going to trace that sequentially over the last two or three years and quartersand itcertainly is anice chart.

GeorgeJasper - Robert W. Baird

Yeah and then lastly, since you’ve reallyimproved your position and you really have alot of momentum going here, is theacquisition potential out there atthis point intime or is itgoing to bebasically 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 theability to groworganically and that hasa very cleanbalance sheet should look atacquisitions, but you compare therisk and thereturns of theacquisition to your continued organic growth and so itjust means that we would beinterested inacquisitions but we recognize that any acquisition we make, we have attractiveinvestments that we can make inexpanding our existing businesses. Doesthat make sense?

GeorgeJasper - 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 internallywith 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.

GeorgeJasper - Robert W. Baird

Okay, fine, thanks for your comments.

Operator

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

ShawnWillard - Sigmus Capital

Good morning.

A.John Knapp, Jr.

Good morning, Shawn.

ShawnWillard - Sigmus Capital

Just acouple 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?

JonBiro

The end of theyear 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.

JonBiro

Yeah, we’ve got additions for stock optionsnow that many more of theoptions are in themoney and theway that incremental calculation is made, rising stock price causes an increase in thenumber of shares that we add into come to diluted, weighted average shares outstanding. We will have an additional 500,000 shares roughlyrelated to theconversion of some of thepreferreds into common and that will come into play fully in our second quarter, our Marchquarter, and probably about half of that will come into play for our firstquarter since theconversion happened mid-year, or excuse me, mid-quarter.

ShawnWillard - Sigmus Capital

Okay.

JonBiro

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

ShawnWillard - Sigmus Capital

Okay and then several people have askedthis question some different ways solet me recapsomething real quick and then ask you ina moregeneric way. In thefourth quarter you had theeffect of theEuropean holidays, thecost of the ramp up for Dubai, theramp up of Malaysiathat both had animpact from anexpense perspective as well as obviously contributing to the revenue and then Bayshore was just the homerun for the quarter. Given allof 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 fromQ4 to Q1 hasbeen roughly flat to slightly up. Nowwithout going through each division or allof that, ingeneral, what should people belooking for abaseline to begin next year given that you’re going to have continuedproduction from Malaysia, continued or increase from Dubai; granted, that will be small, sounds like Bayshore is doingvery well, you ramped up inventory significantly compared to where it had been the previous three quarters saying thatthat’s anexpectation of revenue growth, sowould Q1 being flappish or slightly up from Q4 be anunreasonable expectation inaggregate?

JonBiro

It wouldn’t necessarily beunreasonable. As I stated when I spokeof theoutlook, we’re confident that we’ll improve year over year. Atthis point I couldn’t saywhether we’ll beup or down versus theSeptember quarter. You know, we always see some seasonal weakness in theDecember 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.

ShawnWillard - Sigmus Capital

Okay and then my last question that’s sortof a followon 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 roughly35 to 40 million of [inaudibleICOC006 07:15] for 2007 soon a freecash flowbasis, let’s sayit’s 15 million plus. You’ve gotobviously thedebt impact from thepreferred 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 freecash flowand fifty million of [inaudibleICOC006 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 externalevent.

JonBiro

Or barring the trend in resin prices is an important factor when you considerfree cash flow. I’m not sure how you’recalculating free cash flow, but theway we calculate itis we take cash flowfrom operations which includes working capital investment and we subtractcapital expenditures.

ShawnWillard - Sigmus Capital

Yeah and then my last question would be, ofthe increasein 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 theworld market?

JonBiro

I would saythat... If you look atthe yearover year changein 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 thentheremaining, roughly theremaining 20% would bedue to price changes. Those arevery rough numbers, keep that inmind.

ShawnWillard - Sigmus Capital

Sure. I appreciate it. Thank you verymuch.

JonBiro

Sure.

Operator

At this time I’m showing no further questions.

A. John Knapp, Jr.

Thank you all for attending our conference calland we hope that we’ll getanopportunity to visit with you when we have thecall for thefirst quarter of ’08. Again, thank you.

Operator

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

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