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Executives

John Knapp – President and CEO

Charlotte Ewart – General Counsel and Secretary

Brad Leuschner – CFO and Treasurer

Analysts

Christopher Butler – Sidoti and Company

Jackson Spears – Capstone Investments

Sayu Khan [ph] – Lordis Partners [ph]

George Gaspar – Robert Baird

Tim Griffin – Griffin Securities

ICO, Inc. (ICOC) F3Q08 (Qtr End 06/30/08) Earnings Call Transcript August 7, 2008 11:00 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to the third quarter FY 2008 earnings report conference call. (Operator instructions) I would now like to turn the call over to Mr. John Knapp, Jr. Mr. Knapp, Jr. you may begin sir.

John Knapp

Thank you, Sandra. Welcome to third quarter of '08 conference call. With me today I have Charlotte Ewart, our General Counsel; and Bradley Leuschner, our Chief Financial Officer.

Before we turn to the numbers, let us listen to Charlotte.

Charlotte Ewart

Thanks John. Certain matters discussed in this conference call are forward-looking statements involving certain risks, uncertainties, and assumptions intended to qualify for the Safe Harbors from liability established by the Private Securities Litigation Reform Act of 1995. The company’s statements regarding trends in the marketplace and potential future results are examples of such forward-looking statements. The forward-looking statements include but are not limited to restrictions imposed by the company's outstanding indebtedness, changes in the cost and availability of resins and other raw materials, demand for the company's services and products, business cycles and other industry conditions, internal risks, operational risks, currency translation risks, the company's lack of asset diversification, the company’s ability to mange global inventory, develop technology and proprietary know-how, and attract and retain key personnel, as well as other factors detailed in the company’s Form 10-K for the fiscal year ended September 30, 2007, and in its other filings with the Securities and Exchange Commission.

Should one or more of this risks or uncertainties materialize or should underlying assumptions prove incorrect, actually results may materially vary from those indicated.

John Knapp

Thank you Charlotte. Brad will you review the financials.

Brad Leuschner

Okay, thank you John. Let me begin by discussing the comparison of the third quarter results of 2008 to the third quarter results of 2007. For the three months ended June 30, 2008, revenues increased 2% or $2.3 million to $115.7 million. This increase was caused by the translation effect of stronger foreign currencies compared to the US dollar of $8.9 and higher average selling prices and changes in product sales mix of $1.8 million.

These benefits were partially offset by the impact from a reduction in volume sold which reduced revenues by $8.3 million. The volume reduction was primarily seen in our Bayshore and Australia locations. Our gross profit decreased $2.1 million or 10% due to the decrease in gross margins from 18.1% to 16.0%. The gross margin decline was primarily caused by the lower volumes sold, higher resin prices and to a lesser extent higher operating cost.

Sales, general and administrative expenses, increased $700,000 or 7% to $10.4 million primarily due to the translation effect of strong foreign currencies. During the third quarter of fiscal 2008, we recorded a net benefit in impairment, restructuring, and other costs/income of $400,000 as a result of an estimated insurance recovery of $500,000 recognized during the quarter related primarily to business interruption expenses and lost profits. The insurance recovery relates to the fire that occurred in our New Jersey facility in July 2007, which has reduced our operating capacity in New Jersey. We are working to finalize this claim in the fourth quarter.

So as a result of the above items, operating income decreased $2.5 million or 28% to $6.5 million. This decline is primarily due to a reduction in operating income in our Asia Pacific region and also due to a reduction in operating income by Bayshore Industrial.

The rest of our regions showed improvement in operating income led by Europe's operating income improvement of $500,000 or 16%. The operating income reduction in our Asia Pacific region was primarily due to a reduction in volume sold in our Australia locations and competitive pressures on our prices in that region. The operating income reduction for Bayshore Industrial was primarily due to a reduction in volume sold.

Interest expense was higher by 240,000 due to our higher average debt levels during the quarter. During the quarter, we reversed a valuation allowance on prior tax losses in Brazil of $700,000, which reduced our tax expense and effective tax rate to 17%. So as a result of the decline in pre-tax income offset partially by the lower tax expense our income from continuing operations decreased $1 million or 18% to $4.6 million, or $0.17 per share.

Comparing the third quarter results to the second quarter results, revenues were up $3.6 million, or 3%. The increase was caused by a higher average sales prices and a favorable change in product sales mix as well as translation effect of stronger foreign currencies. Volumes declined 4% overall during the quarter primary driven by a reduction in volumes sold at our Bayshore location. We did volume improvement in several plants including Malaysia and several European locations. Thus, European revenues increased $4 million or 7% due to the volume improvements, higher prices, and the translation effect of stronger foreign currencies.

Revenues in Asia Pacific increased $1.8 million or 9% due primarily to higher volumes. Gross margins declined from 17.2% to 16%, which caused gross profit to decline $800,000 or 4%. The margin decline was primarily a result of the reduction in volume sold as well as higher resin prices, which reduced our feedstock margins.

SG&A was essentially flat in the quarter at $10.4 million, impairment restructuring and other cost income was down $1.2 million from income of $1.6 million to income of $400,000. This decline was because in the second quarter of 2008 we recorded $1.9 million of insurance recoveries compared to only $500,000 recorded in the third quarter. We did not record any recoveries in the first quarter of 2008. So, the second quarter essentially included recoveries for the 6 months ended March 31.

So, as a result of lower gross profit and lower insurance recoveries, operating income fell $2.2 million of 25%. Income from continuing operations fell $400,000 or 7% due to the lower operating income offset by lower tax expense as a result of lower pre-tax income and the reversal of the valuation allowance in Brazil.

Turning to the balance sheet, our debt decreased $10 million during the third quarter. This was primarily caused by reducing our inventory in Australia. Our equity has increased $22.4 million in the 9 months of this year due to earnings as well as stronger foreign currencies.

During the quarter, we generated cash flow from operations before capital expenditures of $13.5 million. Our net capital expenditures during the quarter were $3.3 million, and much of that related to the expenditures we made on the build-out of our new Pennsylvania facility.

Our liquidity remained very strong with total available borrowing capacity at June 30 of $68 million, which is an increase from March 31 of $11 million.

John back to you.

John Knapp

Thank you, Brad. The last several conference calls have begun with the line that our line is business is generally good, however we see pockets of weakness in a slowing global economy which is cause for some concern. On the other hand we see very interesting opportunities for growth and of course improvement. That line remains true today. As Brad has reported, our revenues continue to grow although the growth is slowing and for the first time since I have been CEO our volumes are down from the same quarter a year ago.

Let us talk about volumes. I need to remind all that measuring our business on volumes alone is not really an accurate measure of the business. Some of the processes we provide are more complicated or value adding than our commodity size reduction are compounding. And we are striving to build the higher value added segment of the business and we believe we are making progress in doing that.

But volume is a natural statistic easily measured, which we continue to follow. For the quarter, our volumes were down 9% from the same quarter in the previous year. That figure is disappointing to us. We believe we should have the intelligence and foresight to maintain at a minimum modest momentum even in this global economy. Despite the current challenges we believe that ICO is well positioned for reasonable organic growth over the long-term given our global footprint and a product and service portfolio. So, we remain confident for the long-term while the headwinds of today's economic conditions may affect growth in the short-term.

Margin. Those of you who have listened to our calls in the past know that I am a margin fanatic. And as I've stated in the past, my view is that people here at ICO work too hard, some of the plants working 24 hours a day, often six days or even seven days a week put too much effort to earn anything less than a 20% gross margin and a satisfactory return on invested capital.

This quarter, our margin was 16% down from 17.2% in the last quarter. As Brad had stated, the margins were negatively effected by the decline in volumes, but also due to pressure on prices. Where we have the ability to do so we pass price increases on to our customers. However, in many of our markets we were unable to do so due to either competition or in some cases supporting our customers in sustaining their margins. In those later cases, we choose the long road of viewing customers as partners.

In our last call I clearly stated that we would put less emphasis on margin and more emphasis on sustainability. This quarter’s numbers reflect that emphasis. We are hopeful that we will see some margin increase as we move forward. We continue to see opportunity from improvement in margin. It just takes consistent work.

SG&A. For the quarter, SG&A dropped to 9% of revenues, a modest decline from the last quarter. At this percentage level, SG&A is only slightly higher than we would expect to achieve in the long run. Please recall that we stated that ICO is devoting resources and energy to business development with emphasis on the growing international economies. Today and during the previous quarters, we have devoted resources to analyze, strategize, and develop foreign markets, including the Indian market. Those expenses will be ongoing and will grow. We believe that they are good investments and we continue to build sales activities in these new markets.

Last quarter, we announced that Andy Ubhi had joined ICO to run the new regions for us, the Middle East and India; and that Kumar Shah had jointed our board. Both bring knowledge of India and its markets to ICO. A further note on board changes. This quarter, we welcome Phil Ashkettle to our board. Phil has a broad industry knowledge having served as CEO of Reichhold Chemicals Inc. and M.A.Hanna. Phil replaces retiring director Charles McCord who served for over 6 years as a director. Charles proved to be a steady, gracious, and active participant during that time. We wish Charles much continued success in the oil exploration world.

Taxes. For the quarter, our global income tax amounted to 17.2% of income and brought our year-to-date tax rate down to 28.6. This lower figure is the result of utilizing previous tax losses in Brazil as well as other incentives. I suppose Brad will tell me not to get too spoiled by that 17.2.

Operations. Brad has reviewed the numbers and they are detailed in the 10-Q. So I will make a few comments about operations. As you are aware, we have five operating divisions to which we would add Corporate.

Bayshore. As we suggested in previous calls, we have had a very good management team at Bayshore. They encountered a rough quarter and a shifting customer demand. Please recall that Bayshore reserved capacity for longstanding customer with a service or product and these customers provide projections for their demand. It is a proven management tool. During the quarter, several customers didn’t use their reserve capacity.

Second quarter volumes were down 14% from the previous year. Bayshore earnings declined from the previous quarters from $3.3 million to $2.0 million. The volume impact on Bayshore weighted heavily on our overall volume results. These numbers are disappointing but we observe that June was the strongest month in the quarter, which is encouraging. Last quarter I did state that Bayshore’s management was concerned about prospects for the short-term as customers are increasingly uncertain about both the economy and direction of resin prices. Last quarter I also said that Bayshore’s management nevertheless remained confident about their prospects for the long-term. The same confidence exists today. Plenty of opportunities are in trial phases or early customer negotiations.

Last quarter I observed that resin producers really needed to raise prices to maintain any real margin, but that softness in the North American resin markets made price increases difficult. While Dow lead the charge and aggressively raised prices and other followed suit. Bayshore’s customers who are moving towards being inventory light, very recently changed course and tried to increase inventories in advance of price increases. So, Bayshore’s June volumes are good as they are today.

Our export demand of Bayshore continues to grow and we expect to do so as long as the dollar remains low.

IPNA, which is ICO Polymers North America. As stated in the last several calls, IPNA's tolling and procurement business remains strong. IPNA's second [ph] quarter volumes are down from a year ago, more affected by the July 2007 fire and related damage in the New Jersey plant, which is IPNA's largest plant. While we expect IPNA to return some volume margin pressure from the economy their business appears stable. The New Jersey plant did incur a second fire some 10 days ago. As before the safety systems worked and damage was minor. However, the fire will impact IPNA’s production capacity until we are able to get the full production in Pennsylvania.

This event confirmed that we have made the right decision to relocate to a new facility in Pennsylvania, which has state of the art packing, cleaning, and exhaust systems designed for finer grinding and size reduction activities that are prevalent and growing today. IPNA’s new plant at Allentown, Pennsylvania commenced operations (inaudible). Reduction lies in the past 45 days, which represent 30% of the line to be placed into the service, which we expect to be completed no later than the end of October. IPNA’s operating income was $1.8 million in the quarter up from $1.6 million a year ago. The quarter’s results were impacted by the $500,000 in insurance proceeds that Brad mentioned, lastly the opportunity cost loss that we have been incurring.

Given that IPNA is operating without much of the New Jersey capacity we are pleased with the quarter’s results. As stated before we remain enthusiastic about the oil field product development and commercialization, which is led for ICO by IPNA.

Finally ICO Asia-Pacific, we used to call it Australasia. Business in Australia remains disappointing, while in Malaysia it is mixed but improving. For the quarter, this region lost $11,000 in operating income compared to earning $2.3 million for the same quarter last year. Volumes were down 20% compared to those of last year. These results certainly did not meet our expectations. The region is carrying the startup cost of Dubai and the operating expenses incurred in doubling the capacity of Malaysia. The new compounding line at Malaysia ran at an average of 50% of capacity and exceeded break-even in the quarter. Our expectations for this line and all of Malaysia for the fourth quarter as well as all of ’09 are quite high. The compounding line appears to be a very well executed endeavor.

A note on the Australian market. In the last call we commented that the water tank market in Australia boomed in 2007, fueled by government subsidies in the form of a rebate. The process for receiving rebate has been modified. The market has not yet recovered to the robust levels of last year. While we are uncertain of the water tank market for the balance of this year, we expect it to be stable or even robust in the years to come. We have a good management team in Australia in whom we have confidence. However, they are learning the art of inventory management in a more competitive environment than they have experienced in the past.

Europe. No change here during the second quarter. We have great leadership in Europe with Derek Bristow and we are now building a strong management team to support our efforts. Our numbers in Europe were good again this quarter. We earned $3.9 million in operating income during the quarter compared to $3.4 million for the same quarter last year. Volumes were slightly down from the previous year. Despite the relatively strong performance in the quarter, in my view we still have much work to do in the region and see ample room for improvement including increasing margin as well as opportunities for expansion.

Brazil. The turnaround in Brazil continues our operating income of $220,000 compared to $63,000 last quarter. Paulo Palhares and his team continue to be enthusiastic about their future in that market. Volumes continue to grow increasing 17% compared to last year. While this is a small operation for ICO, we remain enthusiastic about the future. Indeed we expect Brazil to become much more significant to ICO in the balance of this year and be meaningful in the future years.

Cash flow and inventory. I believe that a comment on cash flow and inventory is appropriate. We promised to watch cash flow carefully. And as Brad stated our operational cash flow for the quarter was $13.5 million before net Capex of $3.3 million. That Capex was most notably in Pennsylvania. We continue to have confidence in the cash flow for the balance of this year.

We also watch our inventory carefully. It has declined by 18% in volume since December 31st but less in dollars as both price of the resin and currency fluctuations. We are as stated in the last call aiming to reduce inventories across the globe. During the third quarter, we changed the strategy slightly as the price increase of resin was announced, but as price movements of resins are uncertain as a general principle we find little benefit to maintain excess inventory.

Brad has highlighted the increase in shareholders equity now $4.90 per share on June 30th, well above that which one would expect from our retained earnings. Last quarter I stated clearly currency translations have contributed to the increase in shareholders equity while we expect our shareholders equity to grow, we doubt the impact of currencies will continue and that is really better for all of us. Same is true today. We would prefer a stable US dollar.

We will take questions if there are any at this time.

Question and Answer Session

Operator

Thank you. We will now begin the question and answer session. (Operator instructions) The first question is from Christopher Butler from Sidoti and Company. Please go ahead.

Christopher Butler – Sidoti and Company

Hi. Good morning guys.

John Knapp

Good morning Chris.

Christopher Butler – Sidoti and Company

I wanted to start with the Asia Pacific segment; you had mentioned that you had sold off some of the inventory there during the quarter. Where it stands going into the third quarter, can we see more of that or is that was that done – was that completed in the second?

John Knapp

No I think you will see further inventory reduction in Australia in this coming quarter. We certainly had substantial inventory reduction in the month of July.

Christopher Butler – Sidoti and Company

And the sale of inventory is that – to read that an indication that we are not going to see any significant uptick in demand from water tanks in the near term due to the red tape that is now in the three-day process.

John Knapp

I think, yes we are going to – we are not robustly optimistic about the water tank market for the balance of this year but as I indicated we are very comfortable with the market for the long-term. Plus we have maintained 30% market share there for the past few years and we believe we will continue to maintain that market share. We like our customers and we just – I think it is a market that is not robust at the moment.

Christopher Butler – Sidoti and Company

And could you provide a little bit more color with the oil field opportunity where that stands in the testing process and any customers that you might have at this point?

John Knapp

Chris as you aware we sell polymers or resins that we processed into cementing, muds, and fracking. The fracking of well stimulation is the area that we are kind of the leading edge. We have products that is in trial in multiple wells. It is certainly here in North America and unfortunately you have to – you got to wait for the long time. The customers want to make sure that the polymers that you put into their wells don’t change the characteristic of production and clog up the well after 6, 9, or 10 or 12 months, but we get more wells that are in trials each month.

Christopher Butler – Sidoti and Company

And I would have to imagine that the conversation from the Presidential campaign about offshore drilling would have a positive impact there as well.

John Knapp

Yes. Certainly in the offshore area of our – I think we sell into cementing that is particularly the kinds of products that we have are used for some of the deeper wells in the offshore that have a nice impact on us.

Christopher Butler – Sidoti and Company

Just one more and I will go back in the queue, you had mentioned that over the long-term your SG&A was reportedly higher than where you had liked it to be, could you give us an indication of where you would like to see that long-term?

John Knapp

Chris you are not supposed to ask questions that are so specific. You know, once we say somewhere less than 9. If we could get to 8 that would be attractive. Nice goal to have.

Christopher Butler – Sidoti and Company

I appreciate your time.

John Knapp

You bet.

Operator

Thank you. The next question is from Jackson Spears from Capstone Investments. Please go ahead.

Jackson Spears – Capstone Investments

John good numbers in this environment.

John Knapp

Thanks Jack.

Jackson Spears – Capstone Investments

Could you give us some color on the inventory levels and what you expectations going forward would work to and how much of it is raw material and how much of it in process?

John Knapp

The June 30th, 55% of the inventory, I am talking in terms of dollars was raw material, 45% finished goods. And that the same as what it was at March 31st.

Jackson Spears – Capstone Investments

Isn’t that level a little bit higher than you would like?

John Knapp

You mean in terms of –

Jackson Spears – Capstone Investments

(inaudible).

John Knapp

Finished and raw material.

Jackson Spears – Capstone Investments

Yes.

John Knapp

Actually I think that is pretty good balanced Jack. So, I am not – I don’t think we are upset about that. Where we would like to be in inventory, you know, we would like to carry inventory of about 45 days of sales and that would be an inventory that we would be comfortable with on average. Today our inventory is probably closer to what Brad.

Brad Leuschner

We are closer around 60 days.

John Knapp

So Jack that gives you the idea that maybe our inventories are 25% higher than we would expect to be in a normal period. We do carry more inventory when we suspect that there is going to be an increase or scarcity of resin. And obviously that Dow announcement caused us to be some of our operations to be impacted by resin.

Jackson Spears – Capstone Investments

What about Europe in the next 2 quarters, specifically the fourth quarter and first quarters are sluggish for Europe, and why Europe (inaudible) in the last quarter, what does it look like [ph] next 2 quarters?

John Knapp

Well, as I stated, Jack first August is a terrible month in Europe because everyone goes on vacation. So, it makes that quarter a little bit difficult and it may there the seasonal break at the end of the year little more seriously than we do here in the States. So those two periods are difficult. You know, everyone has talked about a slowing economy in southern Europe. Some loss of confidence in the German economy is what I have been reading in the paper as you probably have Jack. But remember one of the things that we have been doing is improving our management, and as I indicated to you, we have got a good team coming together and they are getting more efficient in their operations and they are kind of working together to think Pan European. So, we see some efficiencies that we are gaining and we understand the market better. So, can we – can the efforts that we are making offset a slowing economy. What we hope are some lesser demand. We hope that we are going to be able to swim upstream a little bit. If what we have accomplished in Europe is spectacular.

Jackson Spears – Capstone Investments

I sense some real optimism based on your last quarter’s stock for Bayshore but you seem to be a lot more optimistic both what happened in June and then July?

John Knapp

If Bayshore management were here they would be more optimistic then we were 90 days ago. That is correct.

Jackson Spears – Capstone Investments

In the last couple of conference calls you talked about acquisitions in this environment with capital short [ph], can you give us an update on your acquisition strategy and what kind of success you seem to be having?

John Knapp

Well it takes patience of job [ph] to buy something that you really want at a price you really want in order to make sense for everybody. Okay, so we have got several targets Jack and I think we will probably see more targets going forward but we are not going to spend our money or your money unless we think it is the right acquisition with the right profile and the right products in the right location. And we are patient.

Jackson Spears – Capstone Investments

Are you looking at joint ventures as one way where you buy joint ventures with one of the one of the other suppliers to open up capacity like for Bayshore to keep that as an option?

John Knapp

Jack you must have been listening in on our board call. We are interested in joint ventures. We are cautious about joint ventures. We have to make sure that the partner has the same objectives, the same ethics, and the same accounting principles. But in some of the markets we are looking at joint ventures may make more sense than doing it on our own.

Jackson Spears – Capstone Investments

And lastly, you have pretty good, strong EBITDA, you have a strong balance sheet, have you looked at any stock buyback or possibly paying a dividend as another way of use of capital to help your stock and help what the other shareholders?

John Knapp

Yes Jack, you did have a call – and you have been hearing to that board call. As before, we talk about share repurchase, we talk about dividends and we have some directors that are more interested in such than others. Patience today has been wise and maybe the system of having a board of directors that has patience and wisdom is a good system and it is working. But clearly Jack we paid down debt by $10 million to $58 million in the quarter. What is our investment in plant and equipment level on our balance sheet?

Brad Leuschner

I think it is $68.5 million. We have $65 million PP&E.

Jackson Spears – Capstone Investments

At that cost that market would be higher wouldn’t it?

John Knapp

I think that the market would be less depreciated book of course?

John Knapp

So, you know, our debt is at a very, very, very reasonable level. So, one would have to observe that a prudent board is looking at this and thinking about what the options are that we are looking at for investing capital in the business versus the share repurchase of dividends.

Jackson Spears – Capstone Investments

Thank you, John.

Operator

Thank you, the next question is from Sayu Khan [ph] from Lordis Partners [ph]. Please go ahead.

Sayu Khan – Lordis Partners

Hi John. I am trying to figure out at Bayshore, how much of your volume declines are for the quarter that you reported are because of the inventory in resin stocking and destocking of your customers and how much of it is because the economy is weak and so therefore demand might be off some amount in this environment.

John Knapp

Well demand is off in the environment and I think that we were definitively. I can’t tell you that you can put on your hand on it. But we were definitively affected by customers that were trying to build inventory like and we were just – uncertainty of resin prices means just as I have indicated there is no reason for ICO in an uncertain resin pricing environment to carry excess inventory and that would be true for our customers. I think if the sales team of Bayshore were here they would also tell you that it is – that they got plenty of prospects to go out and work other customers, new customers, the new products. They just need to – they need to be out on the street working them hard because Bayshore has got such a great reputation and has got such a good cost structure. It is just well positioned. And as I have indicated our export sales are growing and they continue to grow at the same rate and have been of help to fill in any shortfall that we have got from domestic demand.

Sayu Khan – Lordis Partners

So, John is it fair to say in the quarter you have done about 26% sales in Bayshore, but is it fair to say that if this inventory, destocking inventory change amongst your customers, if that would not have taken place, if that was not an issue then the number might be somewhere in the single digits down at the end of [ph] – in terms of revenue for the quarter?

John Knapp

That is not an unfair assumption.

Sayu Khan – Lordis Partners

Okay.

John Knapp

That is not an unfair assumption.

Sayu Khan – Lordis Partners

And so, is it also fair to think that you know we might see some of that kind of come back here in the next quarter meaning that as your customers reverse past that you would not only, you would have some decrease because of maybe the overall economic situation but in the next quarter you might actually gain something on top of that and so things might be better. I mean is that –

John Knapp

But as we indicated you know the guys at Bayshore are pretty optimistic, more optimistic now. Although they are keenly aware there is just a lot of uncertainty out there, okay? But they have been working hard. They are very competitive group and so they have – they don’t enjoy not having their capacity being well utilized. And I indicated I think in the previous call, you all may recall that I said that the Steve Barkmann, we approved and purchased some new compounding lines. Actually they were used compounding and slightly used, compounding lines and we have got plans for those lands for at least the largest of the two even if the work in the not to distant future, it will take a while for him to get it installed, but you have got a building to put it in, you have got land, you have got a product that he is interested in, and it will be a new product array for us, and it is going to be fun to go down there and see all of it and I wish I understood the pieces better but if you will go down there, you will sense some optimism and excitement there.

Sayu Khan – Lordis Partners

John, in terms of capacity, if you get capacity in at the right level at Bayshore, does the – do you hold margin in this environment or are you effectively also comprising some in terms of pricing on the contracts that you are doing and so even if we could get Bayshore’s sales number at the right level because capacity was more fully utilized, you would still see some decrease in the margins?

John Knapp

You know, no one works margins harder than Steve Barkmann, but he is faced the raw material issue, power cost, you know compounding use a lot of electricity. In Texas we use natural gas to run a lot of our electrical generation. So, and third logistics. You know, the cost of transport is up. So, we have got to juggle all of those and you know for some products and some customers he can’t get all the price increase through as fast he would like to, but I don’t think that it is going to affect over a long period of time I will bet Steve is able to maintain his margin that we have seen in the past. It may affect in this quarter or the next quarter some, but he knows what his road path is to maintain that margin.

Sayu Khan – Lordis Partners

So, it sounds like a lease in the short-term what you are really facing is a capacity issue and perhaps some pricing issues and sort of in the longer-term you believe you can correct those pricing issues and capacity will be whatever it is depending on the economic situation?

John Knapp

Right.

Sayu Khan – Lordis Partners

Thank you John. I appreciate it.

Operator

Thank you. The next question is from George Gaspar from Robert Baird. Please go ahead.

George Gaspar – Robert Baird

Yes, good morning. Just you may have kept these highlights along the way, but I don’t know if you are projecting a debt reduction for the coming quarter or the fourth quarter here. Do you have a specific target and secondly on the Pennsylvania and the switch to Pennsylvania and your operations there, do you feel comfortable with your cost structure improving right off the front end or relative to New Jersey or is that going to take a while to accomplish?

John Knapp

Hi, George. So the first question was about debt. What we have stated that we were comfortable with our cash flow projections for this quarter. So that we indicate that we think cash flow will be positive and we don’t have any major Capex projects other than Pennsylvania that have been approved by our board. So, if the cash flow is positive as we anticipate and we don’t have any surprising Capex, then one might summarize that debt will be reduced as one of the alternative uses of that cash. I doubt we will give a target to state what that would be. The second question about the move to Pennsylvania. I suspect that if we won’t see efficiencies from the Pennsylvania move until the first calendar quarter of next year. That just is what I would summarize. It is expensive to move equipment from one plant to the another. You have got inefficiencies as you set up and then you know finally we are going to have – we got this New Jersey facility that we are either going to lease or sell and it is an old facility but it has got an interesting location with rear load access above the economy. The US also it may take us a while to move it but it is on our books at an attractive price and we will see if we can realize something at or above what is on our book.

George Gaspar – Robert Baird

Okay. And then just an ongoing question on the oil field application. There have been several articles recently in oil and gas journals, offshore magazine, relative to some aspects of the use of (inaudible) in the oil field drilling completion process; I know that you indicated that it is relatively extended a number of months before the customers have a good feeling about what they are doing. Do you have – you have been at this now for I think well over a year to some extent maybe longer than that –?

John Knapp

Maybe longer, it is much longer in my mind. It seems like forever.

George Gaspar – Robert Baird

Okay, do you have some level of results that would indicate that this approach is successful and that it is a leading edge kind of situation that you could really push in the future?

John Knapp

George we have some very encouraging results that you know used to (inaudible). I believe our oil field service total revenue has approached 10% of our total revenues at ICO today and we believe that they are growing and we know that they are growing nicely this year. We like to believe that they will continue to grow going forward at the same rate but that is uncertain or they might grow even faster. So, if the new products revenues come in and they are in the area of organic polymers we really could see some traction there?

George Gaspar – Robert Baird

Okay, all right, well again and I know that one of the – in the Q&A you were complimented on the operations considering economic conditions and I want to say the same. I think the company is doing well under restricted operating conditions right now. So keep up the good work.

John Knapp

Thanks George. Thank you.

Operator

The next question is from Tim Griffin from Griffin Portfolio. Please go ahead.

Tim Griffin – Griffin Securities

This question is for John. I wonder John if you could just elaborate a little bit on the progress on the relocation for IPNA, specifically when you do you expect the relocation to the completed and then with respect to sort of the revenue capacity of that new Pennsylvania operation, you know, I think your latest quarter annualizes to about $48 million revenue from it, IPNA, where do you think its capacity will eventually be?

John Knapp

Tim that is a very good question. Let us see if we can deal with the first. When is the move from New Jersey to Pennsylvania going to be completed? I think it will (inaudible) it is not completed upon October 31st, okay. I expect to have equipment up and running by October 31st. As I have indicated they have gone live with I think their sixth line and seventh line have gone operational now. So, they are making great progress. I can actually tell you that we know that there is a truck that has come with more electronic – electrical components that is somewhere between Texas and New Jersey that will help move off that (inaudible). We have been following that truck’s progress.

As to volume that facility is by square footage about Brad 35% to 40% larger than New Jersey. What we suspect it’s capacity will be substantially larger than just that size change and that furthermore it will be a more efficient operation. So, Brad if I asked you what percentage of IPNA’s overall capacity was in New Jersey. Detroit is the largest plant of IPNA would it be 30% of the capacity? So, let us say that we expect that at least I think a good figure would be 50% capacity increase over a 30% base a 15% greater capacity. Does that make sense to you?

Brad Leuschner

So, ultimately this – the Pennsylvania facility will increase IPNA’s capacity by what you think 30% to 50%?

John Knapp

No, not IPNA’s capacity by 30% to 50%. I think it probably increases IPNA’s capacity by 15% maybe 20% but more likely 15%.

Tim Griffin – Griffin Securities

Very good. That is such a big help. Thanks.

John Knapp

Tim of the things you should remember at IPNA, our revenues are $48 million but IPNA has a majority of its business I believe that is service not product. So, sometimes if your service revenues, you know, what you work are much smaller than product sales when you are in the service business. So the $48 million does not reflect the kind of volumes that IPNA runs compared to the other facility. Does that make sense to you?

Tim Griffin – Griffin Securities

You know, I can’t say that it does fully.

John Knapp

Okay, let us try this.

Tim Griffin – Griffin Securities

Okay.

John Knapp

When we sell a product, we buy the resin and we process it and we sell it. Okay?

Tim Griffin – Griffin Securities

Right.

John Knapp

So, let us say that that purchase and sale is 100 units, $100 okay. If we process the resin, the bill maybe $15. Do you follow me?

Tim Griffin – Griffin Securities

Yes.

John Knapp

So, you may not see this dramatic increase in revenues from IPNA, but the contribution because it is so much oriented towards service versus product sales. Does it make sense?

Tim Griffin – Griffin Securities

Yes, good profitable business.

John Knapp

But it is if we balance out what we are doing well, the margins can be very attractive.

Tim Griffin – Griffin Securities

Yes, very good. It is a big help, thanks.

John Knapp

And the efficiencies are really important to get there. Okay?

Tim Griffin – Griffin Securities

Good, we look forward to seeing that contribution pretty soon.

John Knapp

We will.

Operator

(Operator instructions) Christopher Butler from Sidoti and Company is online with a followup question. Please go ahead.

Christopher Butler – Sidoti and Company

Hi, thanks for taking my followup. Just wanted to touch back on the issue of debt that has come up as a couple of questions thus far. You got about $30 million that is either your current or credit. Could you give us an idea of what the credit market looks like for you guys? At this point do you expect any difficulties? It sounds like there is something that you are going to shore up something longer term?

John Knapp

Brad you want to address that.

Brad Leuschner

Help me out there Chris, ask your question again?

Christopher Butler – Sidoti and Company

Sure. Looking at the balance sheet, you have about $30 million of your debt that is either short-term borrowings or current portion of your long-term debt. It doesn’t sound like you are looking to pay off any more of that. Just want to get a feel for you know how that credit markets look if you are going to extend that into a longer-term issuance?

Brad Leuschner

Well, the short-term borrowings under the credit facility that is the revolver piece. That can go up or down. So, I think if we are able to generate, reduce the inventory in the fourth quarter and if we pay down some debt that will be the debt that goes down. The current portion of long-term debt that $17 million it has actually got some longer-term debt that we had to classify as current particularly in Australia. We have got that debt classified as current in the balance sheet. The credit markets – I mean they are okay, you know, a few months ago we extended our credit agreement in the US with KeyBank and Wells Fargo by one year. We obtained an additional $5 million essentially a term loan. Does that answer your question?

Christopher Butler – Sidoti and Company

Yes, and why don’t you –

John Knapp

I like to elaborate on one element Chris that we think about, we have a fair amount of real estate in Europe and I keep thinking you know maybe we have to try to put really borrow on what I would call mortgage money because I am a real estate guy in Europe. But what we are seeing at the moment is that our cash flow in Europe has been pretty good and the questions that move as well, but so we have I guess as an answer we might have some assets that are traditional kinds of assets that you could put term credit on. Does that help you?

Christopher Butler- Sidoti and Company

Yes, you had also mentioned natural gas is a source of your electricity. We have seen prices of natural gas pull back, could you give us an idea of know, could we look at the benefit from this in the second half of the year or the rising costs of resin is going to greatly outweigh that. How are we looking here?

John Knapp

Chris you know, we follow electrical costs regularly and we allow each of our operations to make decisions about whether they want to term and contract for electricity or they want to go in and market on a short-term basis to buy their power and so we as an operating cost, I imagine we are going to see some benefit from the fall of natural gas prices from what we are seeing. Will that benefit be offsetting another escalating cost that is certainly a possibility? I might add it is kind of interesting to watch.

Christopher Butler – Sidoti and Company

So, it is safe to say that from a material side we are still going to be looking at increasing cost here as we go into the second half of the calendar year?

John Knapp

I don’t know if we will see any decrease in cost going forward.

Christopher Butler – Sidoti and Company

Thank you.

John Knapp

Something else with go up.

Christopher Butler – Sidoti and Company

Thank you for your time.

John Knapp

You bet.

Operator

There are no further questions at this time.

John Knapp

All right. Thank you all for listening to this conference call and I hope that you will come back for our year-end call, which will be in the first week of December.

Operator

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

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