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Executives

John Knapp - President and CEO

Charlotte Ewart - General Counsel, Secretary

Brad Leuschner - CFO

Analysts

Christopher Butler

Jackson Spears

Mitch Almy

Shawn Willard

Dennis Hall

Tim Griffin

Mike Anahan

ICO Inc. (ICOC) F1Q08 (Qtr End 12/31/07) Earnings Call February 8, 2008 11:00 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to the first quarter FY 2008 Earnings Call. (Operator Instructions).

I will now turn the call over to Mr. John Knapp, Mr. Knapp, you may begin.

John Knapp

Thank you very much. With me today is Charlotte Ewart, our General Counsel, and Brad Leuschner our Chief Financial Officer. And before we can commence with anything Charlotte has a few words to share with us.

Charlotte Ewart

Thanks, John. As always I must caution everyone listening that certain matters discussed in this conference call are forward-looking statements, involving certain risks, uncertainties and assumptions and candidate to qualify for the Safe Harbor's liability established by the Private Securities Litigation Reform Act of 1995. In particular, statements regarding trends in the marketplace and potential future results are examples of such forward-looking statements.

The forward-looking statements include, but are not limited to risks and uncertainties such as 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 and proprietary know-how, the Company's lack of asset diversification, its ability to attract and retain key personnel, litigation risks, currently translational risks, risks related to the Company's former oilfield service business, international risks, operational risks and other factors detailed in our Form 10-K for the fiscal year ended September 30, 2007.

The factors discussed in this conference call and expressed from time to time in the Company's filings with the Securities and Exchange Commission could cause actual results and developments to be materially different from those expressed in this call. Any forward-looking statements made during this call 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.

Back to you, John.

John Knapp

Thanks Charlotte. Brad, will you review the financial results please.

Brad Leuschner

Yes, thank you. Good morning. Our business continued to grow year-over-year as the momentum that we obtained in 2007 lead to the growth we experienced in the first fiscal quarter of 2008 compared with the first fiscal quarter of 2007. Our revenues increased 29% or $24.6 million to a $110.9 million during the first quarter of fiscal year 2008, compared to the first quarter of fiscal 2007. This was a result of an 8% growth in sales and service volumes, a change in product and service sales mix and strong foreign currencies.

The volume growth was driven by continued strong growth in Europe, where volumes were 13%, growth at Bayshore, where volumes grew 7% and Asia-Pacific where we experienced year-over-year volume growth of 10%, much of which was experienced by our operation in Malaysia.

Our gross margins improved compared to the prior year’s first quarter, increasing from 16.8% to 17.2%. This increasing margin along with the increasing revenues improved gross profits from $14.5 million to $19.1 million, an increase of $4.6 million or 32%. Much of the gross profit increase was due to our European operation, which had an increase in gross profit at $2.9 million or 68%. Bayshore and Asia-Pacific also contributed to the increase in gross profits.

Sales, general and administrative expenses increased $2.2 million or 26% to $10.6 million. The increase in SG&A was due to the translation effect from weaker U.S. dollar, an increase in compensation costs due impart to new employees as a result of our growth and due to higher external professional fees.

During the first quarter of fiscal 2008, we incurred $200,000 of additional costs associated with the July 2007 fire in New Jersey. We did not book any additional insurance proceeds during the quarter, but we are working very hard with our insurance carrier regarding further insurance payments.

Operating income increased $2.2 million or 51% to $6.5 million due to the higher gross profits, partially offset by higher SG&A expenses and expenses related to the fire. Europe in Bayshore’s operating income improved the most. ICO Polymers North America's operating income declined $600,000 primarily as a result of the impact from the July fire.

Interest expense was higher by $400,000 due to our higher average debt levels during the first quarter of this year as compared to the first quarter of last year, as a result of financing our higher inventory levels and to finance the redemption of 85% of our preferred stock in the middle of our first quarter of 2007.

Income from continuing operations was $3.5 million or $0.13 per fully diluted share, an improvement from the $0.09 per fully diluted share in the prior year quarter. As a reminder, in the prior year first quarter the effect of the redemption of the preferred stock mentioned earlier, resulted in a gain of $6 million that is included in basic earnings per share, but is not included in diluted earnings per share for the first quarter of the prior year.

Comparing the first quarter results to the fourth quarter results of 2007, our revenues were down $12.7 million or 10%, the decline was mostly due to decline in volumes sold of 11%, partially offset by the effect of the stronger foreign currency to the U.S. dollar. The decline in volumes was due to the typical seasonality of our first quarter, as well as some slowdown in our Australia water tank market.

As a result of the revenue decline, our gross profit declined $2.3 million or 11% as gross margins were relatively flat compared to Q4. SG&A was up 4% or $367,000, as a result of higher external professional fees. Operating income fell $3.2 million or 33% as a result of these items, along with the fact that in the fourth quarter we had a net gain from the entrance proceeds related to the fire New Jersey, compared with the $200,000 of expenses we incurred in the first quarter.

Our European and Brazilian segment had improved operating income for the sequential comparison while Bayshore, ICO Polymers North America and Asia-Pacific had lower operating income.

Looking ahead to the second quarter, we believe we will see year-over-year quarterly improvement in revenues and operating income.

Turning to the balance sheet, during the quarter ended December 31 our equity rose $7.3 million to $98.3 million, this equity levels surpassed our equity level as of September 30, 2006, which was prior to the preferred stock repurchase of 28.5 million. As previously announced, during the first quarter of fiscal 2008 44,000 shares of preferred stock were converted into 486,000 shares of common stock and we repurchased 2,000 shares of preferred stock for $200,000. As of December 31, 2007 we no longer have any preferred stock outstanding.

Our working capital increased $7.1 million, primarily due an increase in our inventory levels of $18.1 million. The higher inventory levels resulted in us increasing our short-term credit facility bonds by 9.7 million during the first quarter.

Our capital expenditures during the quarter were $2.5 million and were mainly used for expanding production in Asia-Pacific and expenditures incurred for our New Jersey facility, as a result of the fire. We expect our CapEx to be higher next quarter.

John, back to you.

John Knapp

Thank you Brad. First I am going to welcome Brad to his first conference call as CFO of ICO. Remembering my first call, I just encourage him to relax. I have had the pleasure of working with Brad for the past 28 months and assure you that he is confident and through, and fortunately for me remarkably detailed in his work. He is been with ICO for 12 years, he knows our people and our business. He will serve ICO very well in this role.

The last several conference calls began with the line our business as good and we have ample opportunities for growth and improvement. That line remains true today. Although we, along with many other companies are concerned about the direction of the U.S. economy and its impact upon global demand for our products and services. I think the term used today is that we are consciously optimistic. As Brad has reported, our revenues and volumes process continue to grow year-over-year and our net momentum remained intact.

Volume; as you may recall, as I am reminded often here, measuring our business on volumes alone is not really an accurate measure as 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 added segment of our business. We believe we have made progress in improving our product mix and we continue to do so in '08. However, volume is the natural statistic easily measured, which we continue to follow.

For the quarter our volumes were up 8% over the same quarter in the previous year. Compared to the previous quarter our volumes were down 11%, which is a little more than we would have liked. We experienced the usual seasonal slow down in mid December, once our teams and customers returned to work in January, our business has again picked up. Perhaps this year, I will be wiser myself and takeoff with a second half of December, rather than closely experience the slowdown in shipments.

As I indicated, we believe that ICO remains well positioned for reasonable organic growth with our global footprint and product and service portfolio. The volumes delivered were achieved without significant competition from either the new plant in Dubai or the new line in Malaysia. We expect that to change in the course of this year.

Margin; those of you who have listened to our calls in the past know that ICO one item margin fanatic. I have stated in the past that people at ICO who keep most of our plants working 24 hours a day, often six days a week, put forward too much effort in my opinion, to earn anything less than the 20% gross margin and a satisfactory return on invested capital. This quarter our margin was 17.2%, essentially flat as compared to that of the previous quarter. We continue to see ample opportunity for improvement in margin, it just take consistent work, some strategic thinking and a lot of effort.

SG&A; for the quarter SG&A rose to 9.6% of revenues, higher than the previous quarter and slightly lower than a year ago. This figure is disappointing and unsatisfactory. We will strive to do better in the future. During the quarter fees from third party professional were usually high we anticipate that they will return to normalized levels.

Please recall the previously we stated that ICO was devoting resources and energy to business development with emphasis on the growing international economies. Today, and during the previous quarter, we have two consultants working with us to analyze, strategize and develop these markets. These expenses will be ongoing and will probably grow.

We believe that they are good investments. One of the markets we’ve targeted is India. During the quarter we had modest shipments to India and we expect them to continue and grow with this quarter. Consistent with this international effort, we have nominated Kumar Shah to our board. Kumar Shah was born India, was educated in both India and in the United States, and has had a very successful career in the chemical and plastic industry here in the United States. We hope shareholders will support the nomination.

Taxes; for the quarter our global income tax amounted to just under 34% of income. This figure included some unusual items, which are one time in nature. We find the figure to be higher than our liking and quite frankly unsatisfactory. A note, today the United States has the highest corporate tax rate of the nations in which we operate, and it is a handicap for firms such as ICO, who compete globally. I'll remind you that last year our tax rate was 25.4% and more acceptable and satisfactory figure.

Operations, Brad reviewed the numbers and their detailed in the 10-Q that we will soon file. So I'll make a few comments about operations. As you may recall, we divide our business into five operating segments in which we add corporate or zonal office.

Bayshore, as Brad has indicated and we talked about in the past, we have a good management team at Bayshore. Indeed, I think it's very good. In fact it's so good that ICO's board has asked the man who has played a major role in building the customer base at Bayshore, Max Kloesel to serve on our board. Max knows our industry, our products, our customers and our suppliers. He is one of those men who has an uncanny ability to see around the corner and anticipates changes in our marketplace. We are very excited to have Max join us on the board.

Quarterly volumes were up 7% over the previous year although down from the previous quarter. Likewise, Bayshore earned $3.9 million in operating income up significantly from the $3.3 million in the quarter ended December 31, of 2006 but down from the quarter ended (inaudible), but September 30th, when it earned $5.7 million. The team at Bayshore was a little disappointed in this sequential of the economy, but remained confident in their plan for '08. Currently, 85% of the compounding lines are running 7 days a week, 24 hours a day. The balance are running 5 days a week, 24 hours a day.

One observation at Bayshore, increasingly Bayshore products end up being exported. This is a result of the weak U. S. dollar, Bayshore's reputation, its multinational customers base and its location adjacent to used in container board to serve the export markets. We are doing our share to help the U.S. restore its balance of trade.

IPNA, which is ICO Ploymers North America, as stated in the last several calls IPNA's tolling procurement business remains stable. That's big term that means its good, but not with enough growth. IPNA's quarter volumes are down 1% from the year ago continue to be adversely affected by the July 2007 fire and related charges in the New Jersey plant, which is IPNA's largest plant. Roughly two-third of that plant is out of commission.

Please note that as Brad has indicated, we believe ICO carry's adequate business interruption insurance and we believe that we will receive a reasonable insurance settlement to offset both the business that has been lost and the increased cost of serving customers in North East from our other plants. This later item has increased the complexity of the insurance claim.

As mentioned previously, IPNA will not be fully operational until late December. And when we do become fully operational, we will have upgraded our capacity and our efficiencies. These improvements will require capital investment and will delay for restoration, production but should serve our customer well for many years in future.

IPNA's operating income of 450,000 in the quarter, is down from a million in the same quarter last year and down from 1.7 million last quarter. As in the case of base or IPNA was somewhat disappointed with quarters results. At this time IPNA's plants are working at a high percentage capacity and business is good.

ICO Asia-Pacific, which we call Australasia, business in Australia is fair, business in Malaysia is good. For the quarter, the region earned $862,000 compared to 718,000 same quarter last year, down from 1.7 million in the previous quarter. Volumes were up 10% over the last year, but down 27% from the previous quarter. The regions carrying the start up cost at Dubai and the operating expenses incurred in doubling the capacity of Malaysia. We note that the Dubai facility is in operation, but we require plenty of attention to run smoothly and profitably.

Opening a new facility in the new country is never easy, but the Dubai operation will focus initially in providing product for water tanks. However, we have a keen interest in this region and we will continue to patiently explore additional opportunities for expansion.

The new compounding line in Malaysia is now running. We call it Bayshore, Malaysia. Demand for product from this line appears quite robust. In the quarter we began running the line at 10% of capacity, in January it was running at just under 40% of capacity. Again, building this business will require patience.

A note on the Australian market. Early in 2007, demand for our product, serving the water tank market began to grow rapidly, as we had anticipated, due to government supported rebates for water tanks in existing houses.

In late 2007 the water tank market subsided, primarily due to changes in the form of the subsidy. Essentially, the rebate now requires what I would call, union labor to install the water tank. One might note that the [level] party is now in power as compared to formally when the conservative party, which was in power until November.

We expect that the water tank market is likely to bring, regain strength over the course of the year and remain robust for several years as the consumer gains understanding of the rebate in place.

Europe; gosh, there is no change here. Europe continues to surprise us with its vigorous demand. I believe that one of the reasons for the strength of the European economy lies in their government's willingness to reduce corporate tax rate, which is assisted in improving the overall economy and quite frankly our management team is well positioned our facilities within the marketplace.

Our numbers in Europe are good again, this quarter in particularly in light of the December holiday. As Brad indicated, we have $3 million of operating income compared to $700,000 same quarter last year. Volumes were up strongly by 13% from the previous year. Derek Bristow and the team Europe are doing a great job.

We still have a lot of work to do in this region. We see ample room for improvement, including increasing margins, as well as, opportunity for expansion. We welcome [Tom and Newton] as our marketing sales manager for our European activity, that’s another step towards thinking Pan-European.

Brazil, the turnaround in Brazil continued during the quarter. As Brad reported our operating income is a $137,000 compared to $77,000 last year.

last year. [Paul Hodes] and his team continue to be enthusiastic about their future in that market. Indeed ICO is opening two small satellite facilities in Brazil. Together these facilities will increase our capacity there by 25%. The first of these facilities commenced operations effective the 1st of February. While this is a small operation for ICO we remain most enthusiastic about it's future. I know that ICO supplies powders that are used to manufacture fuel tanks and ancillary parts for the agricultural equipment market and this is a key market for us and Brazil and it should continue to be in other markets as well.

Cash flow and inventory. I believe a comment on cash flow and inventory is appropriate. We watch our cash flow carefully, indeed one of the metrics which drivers our compensation is investment turnover. Over the past nine quarters we've grown revenues by just under 50.6%. During this period, we've had one quarter of negative cash flow from operating activity which is the past quarter. I think that is quite satisfactory. In fact, last quarter I stated that it was quite remarkable that we had done so well. We are comfortable with our cash flow projections for the coming year and believe they will continue to be quite satisfactory.

There are two items that give us that confidence. First, on our balance sheet we shown asset as prepaid and other. Included this category are rebates from resin suppliers. These rebates which have been earned through quantity purchases, across the globe of resin over the course of calendar '07. That sum is approximately $5 million. This sum will be credited against resin purchases made during the course of this year.

Second as of December 31, 2007 we are carrying over $78 million in inventory across the globe. That is up from $38 million, a year ago or 107%. While revenues have risen 29% over the course of the year, driven by the volume increases, currency movements, resin price increases and product mix, inventories are higher than we intend to maintain over the course of the year. There are two reasons for high inventories, the first is strategic. Our operating present elected to build inventories at the end of the calendar years, because they thought it made good business since. And second in an view of the plans we are simply carrying too much inventory. Following the change strategy our inventories should decline over the next two quarters. This were the items that generally - these items and the generally good state of most of our business gives us confidence in our cash flow going forward.

At this point we will take any questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Our first question comes from Christopher Butler. Please go ahead.

Christopher Butler

Hi. Good morning gentlemen.

John Knapp

Good morning Chris.

Brad Leuschner

Hi Chris.

Christopher Butler

I am just wondering if you could talk on the impact of raw material cost during the quarter with the run up there we've seen during the last year?

John Knapp

Chris, rest assure we talk about that everyday here. Can we pass on our price increase fast enough Chris, in some of our facilities, and some of our business managers we think they are doing that. Others, its more difficult and its more complex and so we are eating some of that price increase. On the other hand we have learned, Chris that if prices fall, our customers delay orders waiting to see if they are going to continue to fall. So our volumes are strong, because prices increases and customers are happy and anticipating further increases, I shouldn’t say customers are happy. But I am not sure that we are doing as good a job as we should or could in passing on those price increases. And that is one of the topics that we talk in our management meetings or address in our management meetings regularly.

Christopher Butler

And shifting gears over to Europe, we hear is that the economy seems to be slowing a bit and yet the results that you posted are pretty good. What can you say to us that's going to help us understand where the strength is in this business and maybe more importantly they will provide confidence that a quarter or two down the road ICO's not going to follow everybody else down the path.

John Knapp

Well, Chris, the first statement I made, I believe that our management team has positioned ICO very well in the European markets. We've got terrific relationships with our resin suppliers, which are really our partners in Europe and so we've done a good job in that. As we've indicated in the previous calls, Chris we are slowly getting everyone to think as a Pan-European business. They didn’t do that at all two years ago. It was simply independent facilities and independent nations. That teamwork, we’re seeing the benefits of that team work, as we can supply customers from a variety of plants. And I think we will continue to see more benefits from that. So, those are two elements that -- we had some low lying fruit that we could harvest and we are seeing the benefits from that activity.

Chris, as to the strength of the European economy, we’re anxious like others, we wonder how long that is going to continue, but one of the observations that we would make is that we are shipping a reasonable amount of product into Eastern Europe. If you think about water tanks we’re just one of the markets that we serve, as the Eastern European economies as they begin to pickup. People have the incomes to build water tanks adjacent to their homes and we see that as a market where that’s going to continue to be demand -- for a long time Eastern Europe is just playing strong. So those are things that give us reasonable comfort. We can get anxious if we talk ourselves in to it, but we like our position in the market.

Christopher Butler

And as far as, the new plants in Dubai and Malaysia could you give us an idea of where you are in the quarter, as far as, approaching breakeven there?

John Knapp

Well, Chris, we’re coming closer as I indicated in Malaysia, in January we ran about new compounding line, which has capacity of 9000 metric tons, that 18 million pounds of resins. We rented that in January just under 40% and Chris we think that that's probably right at getting close to breakeven right there, okay. We opened the last quarter at under 10% in October. So if we can continue to develop that business we hope that we'll see close to breakeven in this quarter and it should contribute to income in the second quarter. And I think that that's probably true and Dubai is well. We hope to see breakeven this quarter and hope that it contributes income in the second quarter. I think that's probably all I can state on that.

Christopher Butler

Thank you. I'll go back in the queue.

Operator

Thank you. Our next question comes from [Jackson Spears]. Please go ahead.

Jackson Spears

Hi, Jon. Could you talk a little bit more about the inventory level? It sounds like you are surprised by demand and one of your reasons that I listened to your comments about Australasia, that was down 27% in the prior quarter. Was that the problem area it caught you little by a surprise and why inventories were higher than expected?

John Knapp

Australian it does have higher inventories then we like, Jack. I think of that 60% of our inventory increase is very much on purpose, Jack. We got to carry inventories in Dubai, we have to not carry inventories for the Bayshore line in Malaysia and we got to carry more inventory in Europe for our increased activities. So I think 60% of our increase is on purpose, okay. That means if some of the increase we are not so happy about, but you had raised the question of Australian. We were a little surprised that the follow off in demand during this quarter, this last quarter. We fully expect that Australia's demand will stabilize at the kind of level that was achieved in the calendar year '07 and here is our analysis of Australia from the numbers as we understand the market.

In calendar year '06, the water tank market, the Roto market use 60,000 metric tons of powder, that's the whole market. We believe it grew to between 110,000 and 120,000 metric tons in '07 so it almost doubled '06 over '07. Clearly, we participated in that market and in that doubling. We believe that our market share is roughly 30% of Austrian market. So we believe that this year, that the market over the course of the year the range -- the consultants we have talked to state that the range for that Roto market will be between 100,000 and 130,000 metric tons. So it will be similar to last year's market, that was a very robust market for us Jack.

As I indicated, the nature of the rebate changed and instead of getting the rebate from man that sells you the water tank, now you have to have it installed by a licensed plumber in order to get the rebate. So it’s a little more complicated and we are in a market that we're seeing an education of the consumer on the how the rebate works. But, the rebate in fact, may in fact be a little larger in terms of the actual amount of the rebate that a consumer can receive. That's a complicate answer to your simple question.

Jackson Spears

Yes, thank you. What about the SG&A line, you refer to some professional fees could you give us the number how much higher they were and is that kind of go away going forward?

John Knapp

Yes, I think it was probably about $400,000 higher than we would and we anticipate that that will be greatly diminished going forward. And I guess that would be the answer as appropriate.

Jackson Spears

And so the basic in the economic environment a lot of people are worried about it. I guess your responses I am cautiously optimistic, but you are not going to be immune to it, you will be affected by what's going on here and possibly in Europe there's some softness reasonably in Europe?

John Knapp

Yeah. Remember right now, Jack we cannot say that we're being effected by any kind of downturn in Europe. Our European operations. In fact honestly, our European and our North American operations are right now feel pretty good Jack. We're just a little anxious that how long can we buck the trend okay? And so we would be dishonest not to tell you that we ask ourselves a question, but right now our demand feels good.

Jackson Spears

And of that $7 million $8 million inventory how much of that is for raw material resin? Can you give us a ballpark figure?

John Knapp

95% Brad?

Brad Leuschner

The raw material part of it, it's I think it's close to like 65%.

John Knapp

Well that would be non, (inaudible) non processed?

Brad Leuschner

Right.

John Knapp

Finished inventory, which would include raw material those would be 35% of our inventory.

Jackson Spears

Thank you, John.

Operator

(Operator Instructions) Our next question comes from [Mitch Almy] please go ahead.

Mitch Almy

Good morning, John.

John Knapp

Mitch. Good morning, Mitch, how are you?

Mitch Almy

Not bad, thanks. Last quarter on the call we discussed some of the implications of retaining the preferred and what that might mean for dividends, buybacks and even potential acquisitions. Can you comment on that a little now?

John Knapp

Absolutely. Well, Mitch, in the call last time, the first thing that I have said is that, we at ICO we have a high threshold for reinvesting our capital. And we have - we see ample opportunities to invest in our own businesses. So in the call I indicated that we had the term of acquisition test was not something that we were inclined to jump into. Mitch, during the quarter, to my surprise we've seen a couple of interesting acquisitions, and in fact conversed heavily and even drew out a figure on one division California that we found attractive.

And Mitch, one of the observations that I would make is that with the private capital markets being in disarray, we're getting more opportunities that look very compelling at prices that we might find attractive. So that is perhaps one change from the last call. I would be dishonest to state, if I didn’t mentioned, at our Board we did in fact spend some time discussing either dividend or share repurchase and we elected to table that conversation for a period of time, because we have flexibility at present. And undoubtedly that conservation will continue at going forward during the course of the year.

Mitch Almy

Okay. Second question, you talked about the prepaid and other on the balance sheet as you are going through the call I looked at that number. Did I understand correct that if this is a rebate, based on customers achieving volume amounts that they buy, that number would essentially conclude in it a little bit of possibly future demand, which would have a relation to inventory or am I off on that?

John Knapp

I think you off on that. I think when we first, specially is our purchases from resin suppliers.

Mitch Almy

Okay.

John Knapp

Okay. So resin suppliers will quote to you, lets say that’s the sum of $100 is what you are paying them and they will tell you if you buy a certain volume during the course of the year that you can get rebate if you achieve that volumes. And that rebate schedule is one that it is incremental, so it may begin at a lower percentage, but as your volumes increased during the course of the year you can achieve a higher rebate figure. So I guess to be a substantial amount of money, just in order to get the rebates most expeditiously you just continue making your purchases into the next year.

Mitch Almy

Would that evidenced itself in cost of good sold or is it cash to you?

John Knapp

Bard can you.

Brad Leuschner

Yes. The rebate builds up over the years as we buy the resins and it reduces cost of goods sold.

Mitch Almy

Okay.

Brad Leuschner

So when we receive the payments, when we obtain this $5 million in calendar year 2008 it will just run through the cash flow statement and it's already been recognized in cost of goods sold.

Mitch Almy

Okay. Thank you very much.

Operator

Our next question comes from [Shawn Willard]. Please go ahead.

Shawn Willard

Hi. Good morning gentlemen. I am going to follow-up a little bit what Mitch started with, but let me backup first. If you take everything that's occurring on a go forward basis, I have a question on your cash flow what that's going to net and let start with couple of things. You've got the rebate that's coming through that's going to be roughly $5 million in a year. You have an inventory take down that's going to occur over the next two quarter that if I am guessing, you are probably looking at bringing it down 10 million to 12 million and so you are probably picking up another $4 million to $5 million of cash there. You've been running North of 35 million 40 million run rate of EBITDA for last year, which again is going to increase your cash. And the only use that you had for the cash its been big, big number was the repurchase or redemption of the preferred stock.

So won't by sometime in the second half of this year, won't you have paid down a significant portion, if not all of the debt that was incurred for that and being in a position to make a decision about share repurchase, more aggressive on acquisition, dividends what have or am I missing something in there?

John Knapp

Shawn, I think you analysis is pretty correct. You must be reading our palms.

Shawn Willard

I just want to make sure I wasn't missing a big number or something related, because the cash burn and CapEx for Malaysia expansion and Dubai should be pretty much done I would think.

John Knapp

That's true.

Shawn Willard

Okay. Second question, your tax rate just in the last year has been anywhere from 10% in one quarter to 34% this quarter. Is there anything that you can do to stabilize that somewhat. It seems to be very difficult and in particularly in context of the guidance that you have given for next quarter, you have talked about revenue and operating income, but quite frankly your tax rate in Q2 of '07 was so low that I am not sure you are trying what your net guidance really would be off of all of that. So..

John Knapp

Yes, Shawn, you are really good. Right Shawn, so believe me. Let's just talk about tax, first of all the 34%. Mr. Leuschner is giving me lessons daily in tax accounting. One of the delightful things that happened effective at some point, I guess January 1 of this year was that Italy lowered its tax rate to, what Brad? To 28% or something?

Brad Leuschner

I think it is still in the 30s.

John Knapp

Well I guess, it's lowered its tax rate. We in United States should do the same. But when he did that, one of the reasons that you saw the tax rate in the second quarter last year is that we had a net operating loss carried forward in Italy that was clearly going to be used and therefore we created a tax asset in the second quarter of last year.

Shawn Willard

Right, I remember that.

John Knapp

Alright, now Shawn, when they drop the tax rate, the value of that tax asset declines. Does that make sense to you?

Shawn Willard

Yeah.

John Knapp

So during this quarter we had to recognize a hit, which was to that tax asset and it therefore increased our tax obligation for the quarter. Does that make sense?

Shawn Willard

Yeah.

John Knapp

Okay. It barely makes sense to me Shawn, but so that's why we’re 34% in this particular quarter.

Shawn Willard

And that life of that tax asset basically expires when?

John Knapp

Brad?

Brad Leuschner

We are going to use it up. If Italy will continue to be profitable. I don't know top of my head exactly when it expires.

Shawn Willard

But the bulk of it probably used within 18 months, 24 months something like that?

John Knapp

Yes. The way they are making money, that's true.

Shawn Willard

So probably a minimal chance of that asset being re-priced significantly go forward?

John Knapp

Right.

Shawn Willard

Any other tax assets on your books that look they might need to be adjusted?

John Knapp

Probably don't want to - don’t need to comment on that.

Shawn Willard

Okay. And then, just a couple of quick numbers if you could. I know you put these in your 10-Q, but do you have the volume number for the quarter, the gross volume number, just whatever it was, so I can look at that part of it?

John Knapp

Yeah. It was 81,900 tons.

Okay. And given the adjustment for what happened with this quarter in the Texas, where do you think you are going to be at for the year? I was kind of thinking it was going to be in the in the 27, 28 range, but does that kick it up a little bit or you are going to get that back?

John Knapp

We can't comment on that either.

Shawn Willard

Okay

John Knapp

And we know what we think is satisfactory, Shawn.

Shawn Willard

I would be very satisfied if it was zero, but I don't think you are going to get there.

John Knapp

No. But we want to be both realistic and satisfactory.

Shawn Willard

Okay.

John Knapp

Rest assured that we sit and stare at other, whether they are usually bigger multinational companies and we scared their tax rates and what to know exactly how they’re being achieved and it wouldn’t surprise you that perhaps some of the money that we spend with professionals over the course of years is with tax consultants and trying to think how to plan for, but it takes a long time to get a lot of planning in place Shawn.

Shawn Willard

Right. Couple of people focused on the gross numbers from Q4 to Q1 for the Australia, Asia market. Real quick on Bayshore you mentioned that they were disappointed it was down but then in Q4 it had spiked to quite a high number. Was there anything specific in the Bayshore numbers that were surprise to you in the revenue or was it pretty much across the board or customer or product specific any flavor I can get there?

John Knapp

No I think Bayshore numbers are actually -- gosh, they do such a great job at the business Shawn is just amazing. Bayshore in particular was -- it would have liked to have continue product delivering in the second half of December. Okay, that's really where they had some sort of effort but otherwise Bayshore is in good shape.

Shawn Willard

So, it truly was a holiday impact for them not a demand across the board issue?

John Knapp

Well as I said right now 85% of the lines are running 24/7. The other percentage, 15% is running five days a week 24 hours a day. We'll take that all if that could happen all year long we would all smile.

Shawn Willard

Okay. Thank you very much.

Operator

Our next follow-up question is from Christopher Butler. Please go ahead.

Christopher Butler

Hi guys. Looking at the ICO North American business remember from the last conference call that you had about 85% of the business from New Jersey had been shifted to some of the other plants. Can we assume that is at or near 100% for the first quarter and can you give us an idea of what the additional cost in this quarter were from having to do that?

John Knapp

It's hard to do. In our press release that you can see out there, you can see our volumes were down 1% and comparing the volumes we processed in this last quarter to a year ago, our operating income was down 500,000 to 600,000 perhaps.

Christopher Butler

Year-over-year?

John Knapp

Year-over-year.

Brad Leuschner

Yeah $560,000.

John Knapp

$560,000, when I look at that and I know that we did almost the same amount of business but we are aware that; we are tracking material, we are moving plant employees, supervisors so that we don't kill the plant, we are shipping material too with too much work for the number of people that are there. And that has made -- that's when I refer to the claim being complicated, the insurance claim being complicated, because if you just had the fire. And I remind you also, because most of the damage that was done in the fire was done by our water system that did in fact work too well, I think.

If we just didn't have the business it would be an easier claim and an easier number to follow. One number you have mentioned now that I think would be wrong. We have some business that we just can't handle, but we don't have the equipment running that we need to have running. So its still probably 80% to 85% of our former customers that we are currently taking care of. Does that make sense?

Christopher Butler

Yeah.

John Knapp

Right.

Christopher Butler

And looking at the balance sheet with the refund of the preferred shares you're now about $26 million on the credit facility. Any plans to shift that to the longer term debt?

John Knapp

You must be reading Brad Leuschner mind. We'll certainly look at doing some of that. On the other hand that gentleman named Shawn also read our palm about cash flow. So we are thinking through that opportunity a little bit and then so we are exploring it I guess.

Christopher Butler

Thank you, again guys.

Operator

Our next question comes from [Dennis Hall]. Please go ahead.

Dennis Hall

Hi good quarter, gentleman. It seems like the real driver was Europe and you mentioned Eastern Europe. Could you give us a little more color on what country is there and what opportunity is it Poland, Russia whatever and what are ways you might be able to expand your business over there through alliances or more capacity and so forth?

Brad Leuschner

Well I think what I said is that one of the things that's driving our business is the strength that the overall growing economies in Eastern Europe. And growing economies because people may be building houses and doing things but they get to houses even before water lines are attached. Therefore they need water tanks. And that's a kind of product that we would be serving in Eastern Europe. We are asking ourselves should we put a facility in to Eastern Europe and we are exploring opportunities or as you state alliances. And that exploration (inaudible) continues to cost money as we think about how to do that and look at the various markets.

You happened to mentioned Poland, we got a talented man in Poland and it would be a country that would be a logical place for us to have some form of facility. You mentioned Russia and Russia is a market that is truly emerging in terms of demand for some of the products that we have and how one serves that market is one that we are spending time and effort in as well. I think that's pretty well all I can say, but gosh it looks fascinating and interesting.

Dennis Hall

Okay. Thank you.

Operator

(Operator Instructions). Our next question comes from Tim Griffin. Please go ahead.

Tim Griffin

Sure. Can you tell us what percent of revenue came from outside the U.S. in Q1?

Christopher Butler

Well, Tim, he is very precise on that.

Brad Leuschner

62% other revenue came from outside the U.S.

Tim Griffin

Good. And then what was total share count, diluted share count at the quarter end?

Brad Leuschner

Right. On a diluted basis it was 27,873,000 shares.

Tim Griffin

Okay. And what was it a year ago. I don't think, it was in the earning release?

Brad Leuschner

A year ago, Q1 '07 is actually higher it was 28,204,000.

Tim Griffin

Right.

Brad Leuschner

And that's because we had some of the effect of the preferred stock that we bought back in that diluted number.

Tim Griffin

Okay, good. And then two other questions with respect to your SG&A. Do you think that actual dollar spend of SG&A would stay around the current level in the next couple of quarters or do you expect it to cut down or what do you expect?

John Knapp

Let me state I hope that it would come down, but right now one way to expect that it would come down a little bit. I now realize from time to time we pick up the phone and we call people to get us to help to look at things, opportunities to come around and there is a cost when we do that and we are small enough that if its somebody good at the other end of the phone if we see the lump go through SG&A.

Tim Griffin

I think you said that your professional fees were maybe I get this wrong were $400,000 or so, more than you were $400,000 higher due to professional fees is that correct?

John Knapp

That's right. SG&A in this quarter was $400,000 higher than the previous years professional fees.

Tim Griffin

Okay but and you really don't know can you say whether you expect that to come down or what do you expect that to?

John Knapp

Well, the set of professionals we had last quarter, we will not have this quarter, we don't think.

Tim Griffin

Okay.

John Knapp

But one gentlemen asked question about taxes okay and we spent money in an effort to understand how we might strategize and position our firm so that our tax rate as I indicated you got to put the planning and process for now that it begins to effect two to three years out. Opportunities, another gentleman asked about Russia or Eastern Europe, when we hear about opportunities like that that means we have the opportunity to spend money and so those things -- those are probably good reasons to spend money.

Tim Griffin

Yeah, that's right. Okay, let me ask you one other question John. This is the kind of relates to your outlook in your earnings release. Your top line just grew 29% year-over-year?

John Knapp

Right.

Tim Griffin

Your indicators suggest that demand will increase and you expect year-over-year revenue growth that's good. But year-over-year revenue growth could be achieved with a 13% sequential revenue decline. So I guess assuming normal caveats is it reasonable to expect sequential revenue growth from Q1?

John Knapp

Well we don't have the month of December. So that's a good sign. And there we're like anyone, the kind to question that causes us try to project what we are doing. What we would like to say is we think we can grow our company at a attractive organic rate year-over-year and do that consistently over several years. Does that make sense?

Tim Griffin

Of course I mean you guys have just knocked the cover of a ball last several quarters.

John Knapp

So, that I am really honest. I am asking myself what our revenues may look like over series of years going forward and I don't know that I am worried about particular quarters. Okay.

Tim Griffin

Well that's our job.

John Knapp

So I love the fact there is not a December in this quarter, okay. And that is a pretty good sign to me and we told you that our indications are our business is pretty good right now.

Tim Griffin

Okay.

Brad Leuschner

One things our revenues are impacted by currencies, by price movements. So it is hard for us to come out and give guidance like that.

Tim Griffin

Well, I wasn’t asking. I am not asking for precision but somewhere between -- and don't take this a wrong way, I am just trying to make a point here, somewhere between growing year-over-year at 13% sequential revenue decline, which could still produce year-over-year growth would be a maybe a little more closer, a little clearer picture.

John Knapp

I think we are going to leave it where we had left it.

Tim Griffin

That's right, I appreciate it. Thanks.

Operator

(Operator Instructions) You have a question from [Mike Anahan]. Please go ahead.

Mike Anahan

Hi John, thanks. Nice quarter. I wanted to ask you where do you think your gross margins would be two to three years from now.

John Knapp

Well I have made it extraordinarily clear that I think the people at ICO work too hard, keeping their plants operating long periods of time not to achieve a 20% gross margin. Will we achieve it, okay, that's something we can never make a commitment to. But you can read clearly what my expectation and what we would like to see achieved. And I think it is achievable it just takes a lot of work.

Mike Anahan

Okay, do you think your gross margins in Australasia will that be higher or lower than the ones here in U.S.?

John Knapp

It depends on the product that we are talking about, okay. I don’t think that we would make a comment about higher or lower just. But first, let me give you an example of what would be initiated. In the U.S. clearly today 35% of the volumes we process toll servicing, correct Brad okay. We would like to achieve that in Australasia, it is not currently anywhere near that level, does that make sense to you?

Mike Anahan

Yes.

John Knapp

Okay. Toll processing, by its nature, has a higher margin than the product sales, correct? And so, if we achieved tolling processing, if we build up the kinds of multinational customer relationships that we acquired tolling processing and that is one of our objectives, then we are going to see our margin grow in that part of the world, does that make sense to you.

Mike Anahan

Okay. Thank you very much.

John Knapp

Okay.

Operator

(Operator Instructions). And I'm showing no further questions.

John Knapp

Thank you for listening to this conference call, and we look forward to talking to you again when we release the next earnings. Good Bye.

Operator

Thank you, ladies and gentlemen. This concludes the first quarter FY 2008 earnings conference call. Thank you for participating. You may all disconnect.

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Source: ICO Inc.F1Q08 (Qtr End 12/31/07) Earnings Call Transcript
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