A. Schulman F1Q08 (Qtr End 01/12/07) Earnings Call Transcript

A. Schulman (SHLM)

F1Q08 Earnings Call

January 4, 2008 2:00 pm ET

Executives

Terry Haines - Chairman of the Board

Paul DeSantis - CFO, VP-Finance, Principal Accounting Officer, Treasurer

Joe Gingo - CEO, President

Analysts

Robert Felix - Gabelli and Company

Christopher Butler -Sedoti and Company

Saul Redwick -KeyBanc

Gregory McCostal - Lord Abbott

Presentation

Operator

Good afternoon and welcome to this A. Schulman’s First Quarter 2008 conference call.

Before we begin, the company would like to remind you that statements made during this conference call which are not historical facts may be considered forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from those expressed or implied. In addition, this conference call contains time-sensitive information that reflects management’s best analysis only as the date of this live call. A. Schulman does not undertake any obligation to publicly update or revise any forward-looking statement to reflect future events of information or circumstances that arise after the date of this call.

For further information concerning issues that could materially affect financial performance and related forward-looking statements please refer to A. Schulman’s quarterly earnings releases and periodic filings with the Securities and Exchange Commission.

I would now like to turn the call over to Mr. Terry Haines, Chairman of the Board, please proceed, sir.

Terry Haines

Thank you very much. I would like to thank everyone for tuning in. I think we have a nice, large group on the phone today.

This will be my last call with the analysts and investors. I’d like to take this time to say thank you for the past associations with the people on the phones. It goes back many years and I have enjoyed the association. I do thank you.

I’d like to do a real quick review of our first quarter, and then I’ll be turning it over to Paul DeSantis to give a comprehensive review of the financials and the press release.

Also later, I will be introducing Joe Gingo, our new President and CEO for the company. Then we’ll open it up for Q&A, answer any questions that you may have about the company. I’ve been advised that we will not be able to take any questions that would relate to any of the proxy issues. I wanted to get that out there.

I’d first like to congratulate Joe Gingo for his start in reviewing all of our businesses and all of our business units worldwide, and I think even our best opportunities for the company in the future. I think this no-stone-unturned approach is not only necessary to make sure that we have the right strategies for these businesses we have worldwide and continue the improvements that we’ve seen in the company’s performance in the two quarters. I commend Joe strongly for this important effort.

The quarter, to me, confirms the right candidate for the CEO position for Joe’s expertise, not only his technical background and understanding of polymers and understanding the plastics business as well as the rubber. His international experience and his understanding, certainly of our company, has allowed him to make this quick start.

In the quarter, in my opinion, it was an excellent quarter. I believe this confirms the effectiveness of our cost improvement programs, including getting the best cost savings in SG&A and I congratulate the employees and the company for this first quarter improvement, in fact, on top of our strong fourth quarter for our last fiscal year. We promised that we’d make improvements and profit this year and I think that we’re on track for our expectation of $36 million in net income for fiscal year 2008.

I’d like to add that I believe that this performance for the first quarter was done in a somewhat difficult marketplace and certainly a challenging economy here in North America. I’m pleased with what we have for a report for the first quarter. I am getting really proud of our team and what they’ve achieved and the fundamentals for the quarter were positive for gross profit, sales and tonnage. The positive translation effect that we had for the most part was offset by certain charges to the P&L that Paul’s later going to detail.

The 30 basis point improvement in gross profit is the result of the company successfully passing through the raw material price increases to our marketplace. I would expect that we would see additional improvement in our next quarter if, in fact, our volumes continue to hold at high levels. I believe this gross profit improvement and other performance improvements will be an ongoing focus for the company in the future under Joe’s direction.

With that, I’d like to turn it over quickly to Paul DeSantis for his detail of the financials. And then I’d like to introduce Joe Gingo and then again have an opportunity to answer questions you may have about the company.

Paul DeSantis

Thanks, Terry.

We have a few unusual items to report during the quarter. We had a $1 million pre-tax charge for approximately 700,000 after-tax related to employment termination costs in Europe. And we had a $400,000 pre and after tax charge in North America related to the final settlement of an insurance settlement claim related to Hurricane Rita.

For the first quarter of last year we had several unusual items as well, including a pre-tax charge of approximately $1 million or $600,000 after tax for writing off costs associated with an acquisition in Europe that was not completed. And charges totaling $400,00 in North America with $100,000 related to restructuring costs and $300,000 to accelerated depreciation.

Overall, net income in the quarter was $10 million, or $0.36 per diluted share, up $7.6 million from last year’s $2.4 million or $0.09 per diluted share. The benefit of a strong Euro accounted for 1.6 million of the increase. The remaining $6 million breaks down as follows: gross profit for the quarter was up 7.6, excluding the 4.8 million for foreign exchange gross profit was up about 3 million. I’ll talk more about gross profits and gross margins later in the call. SG&A was up approximately 600,000 for the quarter with the translation effect of foreign exchange increasing SG&A by 2.4 million. Excluding foreign exchange effect, SG&A was very favorable, which reflects the efforts of the organization to control costs. For the company as a whole, SG&A as a percentage of sales had declined to 8.2% this year from 9.1% a year ago.

Net interest expense was favorable by 300,000 driven by slightly lower borrowing levels throughout the quarter. Other income was unfavorable by 300,000 due primarily to the final insurance settlement from Hurricane Rita mentioned previously. Currency losses for the quarter were 100,000 which compares unfavorably with the gain reported in the first quarter of last year. As I also mentioned previously, last year we recorded approximately 400,000 restructuring expense, including 300,000 of accelerated depreciation.

Finally taxes were $1.2 million favorable for the quarter with an effective tax rate for the first quarter of 30.6%, a decrease from the 70.2% in last year’s comparable period. The decrease in the effective tax rate was driven by four items: the decrease in the US pre-tax loss; an increase in foreign pre-tax income from lower rate jurisdictions; recently implemented tax planning strategies; and recently enacted tax legislation in Germany which reduced the German statutory rate by approximately 10 percentage points.

Excluding the previously mentioned significant unusual items in the quarter, net income would have been 11.1 million or $0.39 per diluted share compared with 3.4 million or $0.12 a share a year earlier, excluding unusual items. The improvement reflects a favorable gross profit and SG&A performance. We’ve added a new schedule to the press release to reconcile these non-GAAP measures and to detail the amounts and segments affected by the significant unusual items. We’ll keep a running tally throughout the year to make it easier for you to understand what’s happening with our underlying performance.

Total sales were 496.6 million, up 53.9 million from last year’s 442.7 million. Tonnage continued to be a positive story for both North America and Europe in the first quarter with increases of 8.6% and 1% respectively. Foreign exchange, primarily the Euro accounted for 36.1 million of 8.2% of the increase.

For the first quarter gross profit was 57.2 million compared with 49.5 million in last year’s comparable quarter. Foreign exchange contributed a benefit of 4.8 million while operating performance was up nearly 3 million, with Europe contributing about half and North America contributing about half.

European performance was negatively impacted by the million pre-tax cost of terminations as previously mentioned and North American results included additional expense of 700,000 related to Envision. Excluding the Envision effect, North American gross profit was up more than $2 million. Losses in gross profits for Envision were 1.6 million during the first quarter of ’08 compared with 900,000 during the comparable period of ’07.

In the first quarter SG&Q expense declined by 1.7 million, excluding the effect of foreign currency translation of approximately 2.4 million. The decline was primarily due to the company’s North American segment which reported a decrease of 1.8 million in SG&A expenses including foreign currency. This was largely the result of the companies North America restructuring and efforts to control the overall level of selling, general and admin expenses.

As mentioned previously interest expenses decreased to 1.6 million in the first quarter from 1.8 million a year ago due to lower levels of borrowing. We anticipate beginning our share repurchase in the new calendar year and expect to repurchase 2 million shares throughout the course of the year. The share repurchase will contribute incremental interest expense during the remainder of the year of a little bit more than $1 million.

Operating income for Europe including Asia, increased to 22.6 million for the first three months of fiscal ’08 compared with operating income 18.8 million for last year’s first quarter. The $3.8 million increase was primarily due to the translation effects of foreign currencies of 2.4 million and the 1.5 million increase in gross profit, excluding the translation effect. SG&A was about flat excluding the effect of currency.

The North America operating loss which now excludes general corporate expense decreased 3 million from 6.2 million last year to 3.2 million this year. This decrease in loss was due to both an increase in gross profit margins and a decrease in SG&A expense of approximately 1.7 million compared with the same period last year. As mentioned earlier this was primarily a result of the North American restructuring efforts.

It should also be noted that included in the loss for the current year quarter was a total of 1.9 million in costs related to Envision while last year’s quarter included about 1.2 million in Envision related costs. You’ll notice starting in the first quarter fiscal ‘08we began to exclude corporate and other charges from the North American and European operating segment results to better reflect the actual operating performance of the two segments. The supplemental segment table included in the release provides this information for fiscal first quarters for both ’08 and ’07.

Corporate operating losses for the current year’s quarter were 3.4 million compared with 3.5 million a year ago. This number approximates our annual run rate, giving us an expected number in the 14 to 15 million range. Corporate is composed principally of the CEO, Board of Directors, CFO, corporate finance, tax, treasury, risk management and internal audit departments. We’re making a significant effort to ensure that direct business unit expenses are not included in our corporate number and have spent some time reclassifying expenses on an actual basis.

Historically in our segment reporting we allocated approximately 1/3 of the corporate expenses to Europe and the remainder went to North America. In this year, neither Europe nor North America are showing any North America expenses in their segments. At the end of the first quarter of fiscal 2008 we had 41.8 million of cash on hand compared with 43 million at the end of fiscal ’07. Net debt increased to 92.2 million compared to 82.8 million at the end of the last fiscal year.

As noted in our release, cash flow from operations was 8.8 million for the first quarter of fiscal ’08 compared with 19.6 million in the first quarter of last year, with the decline due primarily to an increase in both the cost receivable and inventory offset by an increase in accounts payable.

Working capital which includes inventory, cost receivable, accounts payable and accruals was up 42.4 million over fiscal 2007 year end. First quarter days receivables were 63 days compared with 62 days at year end. Days in inventory increased slightly from 62 days from 60 days at year end 2007. Last November we reported 64 days of inventory.

Receivables were up 30.8 million as a result of stronger sales in the first quarter fiscal ’08 particularly in Europe, along with the effect of foreign which contributed almost $18 million of the increase. Inventories were also up 29 million from year end with the foreign currency effect primarily the Euro increasing inventory by almost $15 million. Lastly, accounts payable increased by 19 million due primarily by the translation effect of currencies and higher production levels. We recognize that inventory and receivable levels are not where we want them and are continuing with our ongoing efforts to reduce them.

Depreciation for the first quarter was 7.1 million, up from the 6.2 million reported in last year’s comparable quarter. Capital expenditures were 8.2 million; up from the 5.3 million reported a year ago, due primarily to our continued investment in Envision. And more specifically in our Greenfield site in Finley. CAPEX for Envision was 3.4 million for the quarter compared with 2.1 million a year ago. As noted in today’s release, the company expects challenging marketing conditions throughout the remainder of the fiscal year as a result of high and volatile oil prices and a slowing automobile market, both of which put pressure on our results. To offset this pressure the company expects to see continued benefits from both it’s ongoing savings initiatives and it’s newly reorganized North American business units.

For the full year of fiscal year 2008, we continue to expect net income to exceed $56 million. This would be a significant improvement over last year’s net income; however the agreements to the CEO transition are not finalized. The company will provide more details related to any charges during the second quarter fiscal release.

With those comments, I’m going to turn the call back over to Terry.

Terry Haines

Thank you, Paul, well done.

Before we move into our Q&A, I am actually delighted to be able to introduce Mr. Joe Gingo our new CEO and President for A. Schulman.

Joe Gingo

Thank you, Terry, thank you very much. And thank you for your contributions to the corporation over these many years.

I really look forward to this opportunity to speak to the analysts and investors. And I thought I might start out by giving just a very brief description of my own business experience, just for those that are not aware of it. Actually I worked for 41 years for the Goodyear Tire and Rubber company and during that period I had the pleasure of operating both business units and technical operations and quality operations for Goodyear. Fourteen of the last 20 years I have headed four strategic business units for the Goodyear Corporation, in each case reporting directly to the CEO of the corporation.

The business sizes ranged from 300,000 million to 1.2 billion. Three of these businesses were global and one was regional. The size of the number of employees that were in my region in my operations were anywhere from 3,000 to 10,000. I also had the opportunity during 2003 when Goodyear was facing some very difficult financial situations, to be a team member of the turn-around team that developed the strategic plan. That was with outside help from both Bing and Blackstone.

From my standpoint, I was the head of the divestiture team and I was a member of the restructuring team. I did not get involved in the refinancing, thankfully. On the divestiture team, my recommendations included the sale of one of the divisions that I headed the engineer products division. That was successfully concluded last year, when we made a $1.475 billion sale of that division. In addition, another division in which I have been very involved, our fabric division, was also sold for a smaller amount.

In addition to that background I was responsible for technology and all new product development within Goodyear and that included the new product engine that we feel was very key to the turn-around. I had the responsibility from concept to market introduction; advertising and pricing were handled regionally. I led the 20% budget cut in 2003 when we were forced to reduce our R&D expenditures. We did that without really missing a beat in terms of new product development. I also was responsible for our fixed joint venture with our Japanese partners.

In addition I thought I’d take just a few seconds to tell you as I look forward, what I’ll be focusing on in the next 100 days. I’ve been very fortunate to have been a member of the Schulman board since 2000. It was not an unknown entity to me when I stepped into this new position. Terry complimented me on being able to get on and run fast from the start, well that background sure allowed me to do it.

What I’ve seen over this period of time is the similarities between Schulman and other North American manufacturing companies are very similar. What I’m suggesting to do at Schulman are actually key elements of what we did at Goodyear and what many people do in North America manufacturing companies. I’m first of all going to take a hard look at a more efficient and effective utilization of North American manufacturing facilities. That potentially could include restructuring if that was financially justified.

What we leave in our plant has to be high-value-added. If your plant’s in high cost locations, you’ve got to be running products through those plants that will provide you profitable growth. That’s where we’re going to focus in both the polybatch and engineered compound segments, both in North America and Europe. We’re going to enter a reassessment of Schulman’s North American automotive business to emphasize profitable areas.

The one thing that I am probably more sensitive to than even Terry is the automotive market. The business area I came out of was very affected by the cyclic nature of automotive. That is an area to which I am fairly sensitive. We’re going to take a hard look to see what type of businesses we are in in automotive and what type of businesses we want to stay in.

That really leads to the next item, because what we’re going to do, I want to make this clear, we’re not stopping our investment in Envision, we are going to delay any further capital expenditures on Envision until we have a marketing strategy that is a little more balanced between automotive and non-automotive. In the past Envision has been focused on automotive. I’ve already told you in my previous point, that’s just not one of the areas that I generally like to focus on. There are a lot of reasons for this.

What we’re going to do, And Sherman had already started the work before I got involved, of looking at other non-automotive applications. I would like to look at how much that could be accelerated. I’m going to be focusing on that. I think also our European operations, as many operations in Europe, has some additional efficiencies in sale and administrative structure that give us opportunities for cost reduction. We have done a good job in North America of already accomplishing that. You can see that through some of Paul’s comments on the results.

Finally, I’m going to ensure that the best leadership team is in place to execute our strategy. That’s really my comments.

Terry Haines

Thank you very much.

At this time I’ll open it up for the Q&A and we’ll try to answer any questions you have about the company.

Question-and-Answer Session

Operator

[Operator instructions] The first question comes from the line of Mr. Robert Felix with Gabelli and Company, please proceed, sir.

Robert Felix - Gabelli and Company

Hi, guys, just a couple of quick questions. I was hoping you could elaborate a little more on the decision to suspend CAPEX on Envision. In the release that you’re still seeing strong customer interest, yet you’re suspending further investment just a couple of weeks ago. You were pretty gung-ho about continuing with it. Is the demand not ramping up as quickly as you had hoped?

Joe Gingo

Let me clarify where I stand on Envision. I believe it’s a fantastic product, I think it has a fantastic future. I’m very comfortable that the process is in very good shape for manufacturing the product. If I look at what we’ve done in Envision, it’s a 100% automotive focus up to now. Automotive is an unbelievably difficult market. There’s a long approval process, many specifications along the way. In addition, it’s very capital intensive due to volume requirements.

As we all well know, it’s really right now probably one of the worst markets that we’ve ever seen 14.9 million units. When is this market going to recover? One other concern I have is what do Envision’s competitors do to cover their fixed costs in this environment? Traditionally in most automotive businesses, what they do is cut their cost and even in some cases go down to variable. I believe that non-automotive, which I mentioned Sherman was looking at, but maybe not in the depth that I would like, you have an advantage to mix up. The specifications are much easier to meet. The process is very flexible and very good on short runs which also is very good for non-automotive and margins are higher.

I do think in light of the automotive focus, a further investment in light of a declining market was the best opportunity – we still have a huge amount of customer interest and we hope to be announcing within the next two to three months further approvals and further sales. I hope that answered your question.

Robert Felix - Gabelli and Company

Just to follow-up on it, a couple of months back Paul and Terry expected that Envision would narrow its loss, I want to say by about $5 million this year. Yet the loss on Envision picked up year-over-year in the first quarter. Given the weak automotive market, do you still think you can narrow that loss by 5 million, and then perhaps you can also delve into why it increased on a year-over-year basis.

Paul DeSantis

I think what we said was we’re going to narrow the loss to 5 million from I think 6 million that we had last year. The reason that we have an increase now is that we’re expecting to ramp up the business throughout the year. When we did our last call in the last quarter, we said that we expect to see sales start earlier in the year and then expect to see sales come in later in the year and as we go through the year, we expect to see the loss decrease.

When we compare this quarter against the first quarter of last year the biggest single item is everything that we’re talking about in terms of sampling the product. We’re sending lots of product samples out. Those are driving up the costs. We’re paying for the material; we’re sending it out so that people can use it and test it. We’re also starting to depreciate the facility. Those are sort of driving up the costs in this quarter compared to the first quarter of last year. Our expectation is, as Joe said, as we start to get some programs approved and some material volume flowing through we expect to start offsetting those costs. We’re sort of looking at it quarter by quarter.

Terry Haines

If I could add one perspective to that, as we said on our last conference call we’re lagging in the area of ramping up and launching the programs, maybe by as much as six months. That certainly is disappointing. The attractiveness of the product and looking at the markets, our anticipation for the business looking forward, expecting about 75% outside automotive with automotive appearing to be some of the quickest hits to launch the business.

In fact, we’re lagging a little bit behind, but I’m confident that the Envision team and what we have out there as expected approvals, as Joe mentioned, coming up towards the early spring of the year, that will be on track, we’ll get this launched and absorb some of these high expenses of development and sampling of product.

Robert Felix - Gabelli and Company

I guess one last question, if I may. If you look at the price cost after the balance of the year, we see raw materials continue to rise at a pretty fast pace here. You’re not getting much pressure, at least you didn't during the first quarter, I would imagine you’ve yet to see the higher cost work their way through the P&L. So do you look at the balance of the year, do you either expect that you’ll get pricing enough to offset at least the bulk of the raws or that margins will compress. I was hoping that you could elaborate on that a little bit.

Terry Haines

I’m going to take just a second on this. In looking back, as we passed through the increases we saw some basis point improvement, I think, 30 basis points improvement in the quarter. There are more increases that are falling in line as we’re going forward. It’s really difficult to predict what the markets are going to do in pricing they’re going for. I can tell you the strategies for the business teams are to pass this on to the marketplace to prevent any erosion and frankly make improvement in the gross margins.

Paul DeSantis

We’re trying to pass on price increases as soon as we possibly get those price increases in.

Robert Felix - Gabelli and Company

Would you say that the end markets are strong enough to support those price increases at this juncture?

Joe Gingo

I actually come from the industry also that has a big tie to raw materials. One of the first questions I asked was how many of your contracts are indexed. The answer I got was “close to 75%”. What you generally have with an index contract is a lag about 30 days. The key thing you want to do with your customers today in any business where there’s any raw materials is get indexes. It’s the only way to try to stay whole.

I’m fairly on the ability to pass through, particularly with that number of index contracts.

Robert Felix - Gabelli and Company

Thanks for taking my questions.

Operator

Your next question comes from the line of Mr. Christopher Butler of Sedotti and Company, please proceed.

Christopher Butler - Sedotti and Company

Good afternoon, gentlemen.

The first questin, the improvement that was seen in North America, can you give us an idea how much of that was due to the restructuring efforts. I don’t know if you’ve given that, I must have missed it.

Paul DeSantis

That’s a good question. Clearly we can see what’s going in with SG&A. We’re somewhere in the range of $2 million of favorability in SG&A. There’s probably another 1 million scattered across the P&L, primarily in some savings that we’re really seeing flow through distribution and gross margin. One of the things, looking at it, when we did those savings, we did those a few months ago, we built them into the budget and we’re holding people accountable for delivering on their budgets. So far people are stepping up to that task and delivering.

That’s where we get out confidence level, if you will on where we are going through the end of the year. I don’t know if that answers your question, it’s fairly difficult, especially as we go forward through the year it will be fairly difficult to say what kind of basis point improvement is due to the savings plan and what kind of basis point improvement is due to other aspects because we have new business units that are focused on driving profitable higher mixed product.

What we do know is we take the entire savings into our outlook for the end of the year and we’re sticking to our outlook.

Christopher Butler - Sedotti and Company

Looking forward a little bit in North America as part of the 100 day plan, it was mentioned that there could be potentially more restructuring in North America. Tying that into an 89% capacity utilization rate in a soft plastics market, it seems that if capacity gets taken up further it may limit upsize when we eventually see the rebound in plastics in the US.

Joe Gingo

I think therefore mix becomes a very important thing. What we’ll be looking at is this. In our plants we want to run high value-added products. I don’t really want much capacity above high-value added products. You can attain the lower value added products from other people if you’re willing to give them your technology. Generally that technology is the low technology for commodity type products. I think we’ll be using third-parties to support the lower end if we get into that capacity crunch.

The big plus you have is if you have the right level of capacity even in a crunch you can even fill your own plant with not only high-value but any kind of commodity business so you can keep your plant full. My experience is that I really [refer to have my plant full. I also by the way have more leverage on price increase than if I have open capacity.

Christopher Butler - Sedotti and Company

On the strategy that focuses on more specialized products, oftentimes you see an up-tick in sales and marketing expenditures as part of that in order to segment market and better understand customers. With the 100 day plan, you specifically mentioned looking to improve efficiencies in sales and marketing in the European operation, are you moving in different direction, can you help me with that?

Joe Gingo

Slightly so, because if you look at Europe right now, Europe is running at a very level of capacity utilization, in addition to that Europe is piling on automotive with a number in the 5% to 10% range. I think in Europe a lot of the things that I focus on and believe in are in place. What I’d like to do there is take a look and see if there are some efficiencies in the back office. By the way, I’m not looking so much at sales and marketing as back office. As you might be aware, in Europe many companies are run by country, As you go into a European Union you have some real opportunities for synergy in back office activities, purchasing, accounts receivable, things of that sort. I’m not looking to cut the sales and marketing in Europe, I’m really looking at back office.

Christopher Butler - Sedotti and Company

With the focus towards specialized products in the US are we looking at a situation where new investments ad new products are being earmarked for more specialized products? Are we looking at a situation where we have that and walking away form specific businesses?

Joe Gingo

I can only go to my past and what I’ve done. In 2003 we cut the R&D budget at my company by 20%. What we did and I was responsible for it was to run right from technology to marketing, one organization and you focus. If you really link your technology organization to your marketing organization and you focus on products you don’t necessarily have to increase your costs at all. I cut my costs by 20%. If you look at the track record you’ll see that the products being produced by my company, they are considered comparable or better in many products. It’s this focus, integration all the way from the concept to market. That is something that we’re going to spend some real time on because I am familiar with Schulman’s technology, they have very good technology. I just want to see more focus.

I hope I answered your question there.

Christopher Butler - Sedotti and Company

Yes, thank you, I’ll go back in the queue.

Operator

Your next question comes from the line of Mr. Saul Redwick with KeyBanc, please proceed.

Saul Redwick - KeyBanc

Good afternoon. Joe, welcome aboard.

Joe Gingo

Thank you, Saul.

Saul Redwick - KeyBanc

Paul, with the company in the taxes that you had some business and low tax rate jurisdictions, the German tax rate cut and also the tax planning strategy, what was the tax rate that was applied to your international earning this quarter compared with last year and what might we expect going forward?

Paul DeSantis

I’m looking at our tax rate reconciliation that will be published in the Q4 that’s coming out. So hopefully I won’t quote this number wrong. If you remember how we do our reconciliation, we start with statutory US at 35%, we then add domestic losses with no benefit, we then subtract the foreign taxes at less than US statutory rate, the we have an “other” that reconciles to the US statutory tax rate. Domestic losses with no benefit was about 15.7%, say 16%, foreign taxes at less than US statutory rate gave about a 22% benefit which was more or less doubled from what last year was that went in 70.2% and then some other rounded out the difference to get to 30.6. In terms of outlook for the rest of the year, I think it’s going to range between that 30 and let’s say 30 and between 35 or 40 depending on North America’s performance.

Saul Redwick - KeyBanc

Would you say that your tax rate was 30% and you had big losses in North America that meant that your tax rate everyplace else would have been 15, 16, 17%, which really contributed a lot of the additional earnings per share, am I correct?

Paul DeSantis

Actually what really contributed a lot to the additional earnings per share was SG&A and gross margin. Taxes certainly played their role as well. [OVERLAY] tax was certainly favorable and certainly from an international perspective we’re expecting big favorability coming in there.

Saul Redwick - KeyBanc

Do you think those numbers, 16, 17, 18% is the right place to think about your international number.

Paul DeSantis

If I read the tax rate reconciliation that’s exactly the way it reads.

Saul Redwick - KeyBanc

Next question, Terry, I think you’ve been over to Asia recently. How would you characterize the plastics business there, are the guys that open plastics plants in Asia, are they making money, is Schulman making money and if not what do you have to do to reverse the course of results there?

Terry Haines

It’s a challenging market, it’s competitive. We put the plant in, we have the capacity there. It is not profitable for us and the plan of course, is looking both at application and growing the business and getting the approvals for the large OEMS that are moving from Europe and North America to China that will be able to be a supplier so that it’s a timing issue.

Plus we’re looking at the other issues of cost of living that Hoe talked about earlier. It applies also for China. In Asia in total we’re profitable, but we in launching the plant in China it has been challenging. We’ve talked about that before. The one thing that I’m pleased with, we’ve got such a strong team over there. We’ve built it up with individuals in the sales, marketing and technical areas that just thrilled with the expertise and what we have as resources and it won’t be long before that will start to be profitable. It hasn’t turned profitable yet.

Saul Redwick - KeyBanc

The next question, the million dollars that you had for employee severance over the year, was there any change in senior management, or was this just a lot of personnel reductions and how many people were reduced as a result of that, that's a large charge.

Terry Haines

Related to a key management individual in manufacturing and that charge was totally just one person.

Saul Redwick - KeyBanc

Two final quickies here, in North America the 8% sub-volume increase was an impressive number. Was that primarily manufactured product or was it heavily related to distribution and merchant.

Terry Haines

Balanced but weighted towards manufacturing. Paul maybe has the breakout there, I don’t have that. People have done a good job pushing through, we’ve been working on new programs, and those don’t come overnight. It’s been a successful development and I think most of it – half of that would be manufacturing unrelated to automotive. Automotive is relatively weak. Paul, do you have that number?

Paul DeSantis

I don’t have a breakout between those two, but if I look across what I see, we see growth in all three of our business units there.

Terry Haines

Pretty basic, 50% is related to automotive. It’s about the same balance of distribution, merchant and –

Saul Redwick - KeyBanc

My final question, Joe you were talking about value-added product. With the gross margin in North America, it’s been about 10% plus or minus a little bit for the last five years. When you make only 10% in the gross margin, you can’t make any money. What do you think that the gross margin ahs to get to in North America for you to consider ti to be a respectable business?

Joe Gingo

Saul, I haven’t had a ton of days here, but I’d like to see it at the 14 to 15% range at a minimum. That’s what I’d target for in the short term.

Saul Redwick - KeyBanc

As you think about how to restructure North America, it’s by looking at all these different projects that you have in plan. You want to come out of this 100 days with a plan that will get you closer to that number than where we’ve been.

Joe Gingo

Absolutely, Saul.

Saul Redwick - KeyBanc

Thank you very much.

Operator

Your next question comes from the line of Gregory McCostal with Lord Abbott, go ahead.

Gregory McCostal - Lord Abbott

Thank you. You spoke about two different things that I’d like a little clarification on. The utilization today is 95%, it’s 89% in North America, you mentioned that you want to increase the value-added which makes a great deal of sense and will certainly move you toward the 14 to 15% gross margin goal. You also mentioned that you want to keep the utilization high and you are suggesting that you might use commodity product to do that. Could you give us a sense of how you’re going to balance that because if you could cut back in capacity to some extent you automatically have higher utilization of value-added

product?

Joe Gingo

I probably wasn’t clear, so let me try to elaborate. If it still requires clarity, let me know. Here’s my idea, you do have to cut back capacity so you can get into utilization rates really in the high 90s. What I like to do is be running high value added product through that. If there’s a market demand for more than that, to take your less high value added and run them through tolling. What it does give you, if you face a very poor economic situation, say the whole market shrinks on you, you take the items that you were tolling and bring them back in. Is that clear?

Gregory McCostal - Lord Abbott

Yes, the point I’m hearing pretty strongly would be facility consolidation in North America going forward from this point.

Joe Gingo

At this point, I don’t have all my financials in front of me, but I would have to say to you that that’s something I’m going to look at very strongly, again based on my own experience in any area in the world that has high costs. By the way, North America is where we’re going to focus now, but if you look at experience, Western Europe eventually faces the same kind of problems.

You fundamentally cannot manufacture commodity products in high cost areas of manufacture. Right now we’re in very good shape in Europe and once we can get North America in good shape, we’ll begin actually to look at what we would like to do to shift capacity in Europe to Eastern Europe.

Gregory McCostal - Lord Abbott

With regard to new plant relative to Envision in Central Ohio, I assume there’s been nothing done in that plant. Are there any expectations for that plant at this point?

Joe Gingo

The plant is built and at this point, until we have a clearer look at the entire marketing opportunity both automotive and non-automotive we don’t plan to put any Envision equipment in that plant; however one of the things that we are looking at is this: we have made an announcement of expansion in our polybatch business, which by the way is 100% non-automotive. We’re looking at a site very close to our Envision plant. What we will most likely do is take advantage of the existing plant facility and put the polybatch operation there if the number is justified, I haven’t seen it. We’re taking a look at that. That way we would utilize the plant and we would not have to build a new plant.

Gregory McCostal - Lord Abbott

Good, very good. Paul, with regard to the working capital reduction and goals there, what held things back there to the DIOs and DSOs?

Paul DeSantis

I think where we are, we’re seeing some chop form the end of the year. I don’t view us as being materially different from where we were at the end of the year. I think that going forward to the rest of this year, one of the things we’ve done, one of the things we’ve talked about, is we’ve linked incentives to cash flow in the organization. As we go through the rest of the year, I fully expect the teams to really continue the improvements we’ve made from last November to now, to see that continue.

Gregory McCostal - Lord Abbott

Those linkages are new as of the beginning of the fiscal year?

Paul DeSantis

Actually we had them in last year for the North American team and we saw tremendous cash flow come out of North America based on that linkage to the incentive plan. We’ve got that linkage in the incentive plan again this year. We expect to see favorable working capital.

Gregory McCostal - Lord Abbott

That also relates to Europe as well?

Paul DeSantis

Yes, Europe has a balance sheet cash low component in their incentive comp as well. We expect to see improvement there as well.

Gregory McCostal - Lord Abbott

Thank you.

Operator

Your next question is a follow-up from the line of Christopher Butler of Sedoti and Company, please proceed.

Christopher Butler - Sedoti and Company

Thanks for taking my question. I wanted to ask about the European business, tonnage was up 1% for the quarter which was off a little bit from what you’ve been able to do in recent quarters. I wanted to get an idea, are we looking with strong utilization is this a shift to a better mix of products, or are we starting to see any sort of softness in Europe?

Terry Haines

I’ll take a crack at that, the utilization numbers sometimes can be a little misleading depending on mix for the business. We’re running real, real high volume products through the plants, and phenomenal numbers for utilization. I think the 1% increase is kind of indicative of a strong quarter to quarter comparison from last year to this year. Maybe there was a bit of a slow down relating to customers and inventories. There was a lot pr pre-buying those prices weren’t moving up. I don’t know if that’s going to be indicative of what we expect going forward. I think it’s pretty much what we expected, It they had done more I would have been surprised. Next quarter, frankly will be a tougher quarter for us in the volume side,

Joe Gingo

[Inaudible] tends to reduce capacity. Going to more higher value added products they tend to be shorted runs. They’re more profitable to you and they’re very good. But because of change times and such you lose a little bit if your capacity. Those losses of capacity, by the way you like a lot, they’re very good. We could have seen a little bit of that but I have to admit to you I’m not into that kind of detail yet, but I will be.

Christopher Butler - Sedoti and Company

Thank you, guys.

Operator

At this time there are no additional questions. At this time I’d like to turn the call over to Mr. Terry Haines for the final remarks.

Terry Haines

Thank you, I think everybody can see Joe’s capabilities in understanding markets, and the company and his digging in quickly to make the necessary improvements going forward for the company. Being a shareholder, I’m delighted to have Joe Gingo running this company. I would again just like to thank every body for tuning in, good luck.

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