Avient Corp (AVNT) 2004 Q3 法說會逐字稿

Please stand by for a realtime transcript. Good morning, my name is Bonnie and I will be your conference facilitator. At this time, I would like to welcome everyone to the PolyOne earnings conference call hosted by Dennis Cocco, Thomas Waltermire and David Wilson. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, 1 on your telephone keypad. If you would like to withdraw your question, press star, 2 on your telephone keypad. Thank you. Mr. Cocco, you may begin your conference.

Good morning everyone and thank you for joining us this morning. I realize this is a busy time for you and we're going to try to keep this call to one hour this morning. As in the past, if we don't get to everyone's calls, certainly Dave and I would like to chat with you folks later. I would like to restrict the calls -- the questions that we're going to have a little later to the investment community. If the media is on this call, we're obviously glad to have you there, but we'd liked to take your calls a little later to give the investment community an opportune time to talk to Dave.

As you know, we released our earnings release last night and included was our 10-Q. If for any reason you did not receive those documents, they're on our website and you certainly can call Darlene Hanson at 440-930-1522 to pick up any. We are webcasting this call as we have done in the past, and this call will be kept on the website for approximately six weeks for access.

As we have talked, we will be -- as we talk in the release and as we will probably talk today in the call, we will be discussing some forward looking statements. These forward looking statements give expectations and forecasts of our future events and obviously are not guarantees of what our future performance will will be. They're based on our expectations and our judgments of business risks and uncertainties. We would specifically ask you to look in either the 10-Q or the earning release, where we list a very detailed list of all of the factors that you should really consider when considering the business conditions and forward looking statements that we're going to make today. In addition to that, as in the past, we continue to use some GAAP terminology in describing our financials, but to help you and to obviously -- for our purposes we use non-GAAP financial measurements, specifically operating cash flow operating income, or specials and impact to specials. The Chairman thinks we shouldn't be doing that, I guess. We have supplied in the press release on the schedule -- it is going to be posted on our website, a reconciliation from GAAP to non-GAAP terms so you can go back to our financials to see how we derived our non-GAAP financial measurements. It is best that you ought to look at that (indiscernible) in the press release. With those brief comments, I'll turn it over to our smiling chairman, Tom Waltermire.

Thank you, Dennis, and welcome everyone to the call. I will just have a few brief comments and we'll get right to Dave, who will work through the numbers with you and try to get onto your questions as rapidly as possible.

We are, as you would expect, quite pleased with the -- our results in the third quarter and the nine months. I want to especially thank you the people -- our people throughout PolyOne for really an outstanding job. This is-- these results in a certainly challenging environment show the dedication, team work and the spirit that we're building in the organization.

The economy has -- is not as robust as it was earlier in the year. It certainly hasn't deteriorated, but it's not accelerating like we saw earlier in the year and we all know that raw material costs continue to come at us, like everybody in our industry, and raising prices when demand is not as robust is always a special challenge, and it takes -- We've got a bleep in the saying throughout our organization that raising prices -- you know, it takes the whole company to raise the price, as the people in our operating positions and our manufacturing and service jobs or logistics jobs are just as critical to raising prices because -- it is -- we need to remove, I guess I'd say, every excuse for our customers to give us for not allowing us to raise our price and that means it starts with excellent products and excellent service, and so we're a full team dedicated to doing that, and we're making good success at that.

The improvements, as we have been saying all year long, that we've achieved here in the third quarter, came from a variety of sources and, most of them, through our own initiatives. Certainly our volume is improved, in part because of the economy is better today than it was a year ago, but we also know we're achieving a greater rate of new business closes in -- throughout our organization, we are operating at a lower cost structure, as well, and that is certainly helping us. And so the results we're seeing today are the direct consequence of tough decisions and hard work we have been focused on over the last two to three years.

I think particularly noteworthy in the quarter is the strong cash generation and our people continue to do an excellent job in getting steadily more efficient in our working capital management and, of course, obviously, our improved profitability contributes to that as well.

In the face of very strong and relentless raw material pressure, by and large, we have been able to hold our margins. It's not totally true, but for the most part, we have and, relative to the challenge that's come at us, we feel like we've done a pretty good job there. The number one priority in basically every one of our businesses at this point is raises prices. That is not easy but, as I've said, that is the top focus.

But when you look at the quarter overall we, frankly, were expecting as we were getting into the quarter that we might see more raw material -- more margin compression than what we actually have seen. And I think it just shows that our purchasing people are doing a good job, our technical people are doing a good job reformulating products, and we're doing the job out in the marketplace. I think those things combined are helping us to offset a lot of was we have coming in the back door in the way of costs.

When I look at our top four priorities that you've heard us talk about at every one of these meetings, these sessions, for the last four years, at the top of the list is reducing our debt. We were happy to be able to report to you that year-to-date, we have generated $200 million of cash that we can apply to debt reduction. Dave will go through the specifics of how we have deployed that, but that, of course, puts us on track to hit the first milestone, the $200 million level, on our way to moving that higher, as we generate additional operating cash flow and also, continue with our divestments of the two remaining businesses that we're working on.

At this stage I'm sure someone will probably ask anyway we don't have anything new that would be appropriate for us to report on that. We are in active discussion with a variety of people with respect to both those businesses, but we're at that stage that the next announcement will have to be one -- the next announcement will be one where we say we actually have a deal. And we're not ready to say that yet.

The second priority was getting our North American color and engineered materials businesses to the right level of profitability. We continue to make a lot of progress there and those businesses are together on track to the improvement that we targeted for them for this year, and it's significant. As we said in the release, it's $18 million improvement, comparing 9 months to 9 months. The businesses, both of them, have generated positive cash flow in the third quarter.

And another very important development progress for us is that, beginning the first of October, we now have a new leader for our engineered materials business. His name is Richard Burns. He's the former CEO of the Americas for LNP. LNP being a premiere specialty plastics compounder that was acquired by General Electric about 3 years ago. And we're delighted to have Richard on our team. He knows the industry inside and out. He brings credibility to the organization and, I think his joining us is a testimony to his assessment of the opportunity potential we have in that business both in North America, as well as around the world.

A third area being one of our priorities -- getting our over overhead in line, particularly on a continuing operations basis to recognize the fact that we are working on having a smaller revenue base with the divestments. We are virtually at the finish line on that goal. We're just a tick above the 10% level that we had targeted, and we continue to have someone additional programs in the pipeline, but we are moving that whole initiative more into a continuous improvement mode, where we're constantly generating new ideas, which we know we need to do every year, rather than one that's a major program. So we've just about got that one completed.

And very importantly, and I'm looking forward to this being our top priority going forward as we move into 2005, and that is our top line. We're seeing a credible top line improvement versus a year ago, and, as I said earlier, we're measuring and focusing on new business closes and we see that steadily improving as we're going through the year.

I think we have good progress on all four of those areas. We know we've got a lot more to do. We are not satisfied with where the company is. We're proud of our progress, but we're not satisfied on where we are today, and that is keeping us motivated, with urgency, to continue the progress of the company. So with that, David let's go through the specifics of the quarter.

Okay, thank you Tom and I will be covering, hopefully quickly, three topics. Third quarter earnings, third quarter cash flow and liquidity, and then talk a bit about our fourth quarter outlook, as we put it in both the release and the Q. Each of these topics reflects a continuation of the strong performance and accomplishment that we saw in the first half and each, frankly, is enabling greater financial strength and flexibility. In the quarter we earned 21 cents per share before special items, generated approximately $140 million positive cash flow, and reduced our debt further $84 million.

The 140 of cash flow is divided between net proceeds from the divestment of the Elastomer business of roughly 100 million and 40 from positive cash attributable to our operations. On a year-to-date basis, we've earned 59 cents before special items, generated approximately $200 million of cash, as Tom said, through the combination of divestments and our operations. And, as of the end of the third quarter, have reduced our debt $134 million. Each of these demonstrates a substantial turnaround in performance from a year ago.

Our earnings progress is encouraging, as Tom said, as provided in our earning release. We reported net income of 13 cents per share, which included 8 cents of special items for a total of 21 cents per share before special items. This 21 cents compares favorably against the 3 cents loss before special items we reported last year.

And for the quarter, both continuing and discontinuing OPs, made money. Sales for continuing operations were $552 million. That's up 12% from the year ago. Compared to the second quarter, sales were down, but down only 1%. Largely reflecting improved pricing that nearly offset an 8% quarter-to-quarter volume decline, and this volume decline would be more typical of what you would expect due to seasonal slowing in both North America and Europe, and also having divested the Melos Rubber Granulos business in the second quarter.

For the year, our sales are up 10%. Operating income was $38 million, this included $7 million of special items, and was $31 million -- and was up $31 million from a year ago, and down $9 million from last quarter, which included a million dollars of special items. Before special items, therefore, operating income was down $3 million sequentially, due to lower volumes offset by lower plant and S&A costs and improved earnings from our upstream Resins & Intermediate business, both OxyVinyls and Sunbelts. Earnings from our discontinued operations were up, compared to 2003, partially as a result of the improved operating performance by our specially resins and engineered filming businesses, but down from the second quarter due to the Elastomers divestment.

I also want to point out that operating income this quarter benefited by approximately $8 million of gains associated with changes and accounting assumptions for both our pension plan and other post-retirement benefit plans, an unusually large adjustment to profit and inventory associated with PolyOne products sold through our distribution business, and several other one-time credits. Even though the impact of of these changes appeared in this quarter, they primarily reflect the outcome of actions that we've taken over the past year or two to lower our cost structure.

Year-to-date, total operating income before special items were up over $100 million. This improvement was balanced, reflecting higher sales volume, which accounted for a little over 20% of the total increase, significantly lower plant and S&A costs, the absence of depreciation from our DO businesses, and improved OxyVinyl's earnings. And as Tom mentioned and was mentioned in the release, our S&A-to-sales was at 10.1%, that's down 2.3 percentage points from a year ago, indicating that we're clearly on pace to achieve that less than 10% target that we set, by year end.

Turning to cash flow and liquidity, here too our performance continued to show good progression of strength that we witnesses during the first half. Year-to-date, we generated $200 million to cash from both operations and divestments. Through the third quarter, $134 million of this cash was used to reduce debt and to bring our receivable drawings to zero. The balance of this cash, plus expected fourth quarter flows, will be used in the fourth quarter to repay the $20 million of maturing debt in December, to purchase further public debt selectively, and to make supplemental contributions to our pension fund. To date, we've generated the cash to meet our $200 to $300 million debt reduction commitment.

In the quarter, we generated approximately $40 million of cash flow, which brings our total year-to-date to approximately 80 million, excluding net effects of divestments and acquisitions. This cash flow performance primarily reflects contributions from earning, further improvements in working capital processes, capital expenditures lessened depreciation, and the diminishing cash outflows associated with restructuring initiatives that we undertook in 2002 and 2003.

For the year, our internal working capital, as a percentage of sales metric, which now excludes Elastomers and Melos, was -- for comparability, was 15%, an improvement of 2 percentage points from a year ago. We continue to see progress in accounts receivable and inventory management. Base sales and receivables ended the quarter at 51.3 days, down 3.8 days from a year ago. Days in inventory finished the quarter at 46.2, down 4.7 days. Each metric reflected improvement compared to the end of the second quarter, and the average year-to-date metric improvement has resulted in lower aggregate investment receivables and inventory required of approximately $60 million.

Consistent with the solid cash performance, we ended the quarter in a strong liquidity position with no drawings on either our receivable facility or our bank credit facility. And, as outlined in our 10-Q, we had $151 million available drawing capacity on our short term borrowing facilities, plus cash balances of 115 million. We also note in that 115, there's about $50 million which is transactional cash or float so you really can't grab at it. Still, substantial liquidity approaching at least 200, if not more, million dollars. And, as a result of improved earnings and the debt reduction, we did see a further decline in the debt-to-EBITDA leverage ratio. At the end of September, this ratio was 4.6, as compared to a leverage ratio of 12.5 at the end of the 2003.

Turning to the fourth quarter, I would draw your attention to the outlook discussion we have both in the earnings release and in the 10-Q, as well as to our forward looking statements. Since we cover it in pretty good detail in both of those, I'll only hit the high points. Our view is that sales will decline sequentially between 6 and 10%. We believe this is in the range of a typical seasonal downturn, especially within an environment that has seen growth decelerate since the middle of the year. Nevertheless, this level of sales would represent a 5 to 10% increase compared to a year ago.

As you know, industrial production gave ground in September and it would appear to be moderating. Similarly, leading indicators growth rates have turned negative and our October sales are generally down from third quarter averages and November and December will likely continue that progression, in line with our sequential viewpoint. We also expect current margin pressure across all our businesses to continue unabated through the quarter and we anticipate the quarter vinyl margin pressure on our compound and specialty businesses -- specialty resin businesses will intensify further. It is essential that efforts to raise product prices, reformulate products, and secure sourcing leverage be realized to mitigate the majority of adverse affects from this pressure. The combined effect of this lower sales range of 6 to 10% and increased pressure on our margins could result in an operating income decrease for our continuing operations of $10 to $16 million, compared to the third quarter. Also in the third quarter, as we discussed, we received cost benefits of approximately $8 million, of which only a portion will carry forward as a structural cost improvement.

When we look at our R&I segment, as always, earnings will be affected by varying movements of materials within our chlorovinyl chain. Earnings should benefit, on the one hand, from further PVC resin and caustic (indiscernible) price increases. On the other hand, increased chlorine cost and higher ethylene and natural gas costs, will place considerable pressure on earnings. Additionally, PVC volume will likely fall off following typical seasonal demand patterns. All these factors add up to an expectation that R&I earnings will be down 2 to 4 million in the fourth quarter compared to the third.

Also, we need to remain mindful the further downside risk to R&I earnings and pressure on compound margins, with natural gas prices as high as they are currently, and hydrocarbon (indiscernible) stocks trading off in even higher oil price on an energy equivalent basis. For our DO businesses, the principal variables are the divestments of the Elastomer business and seasonal downturns of the resins and engineered films demand. We believe these factors could result in a 3 to 4 million lower net income number for the quarter. Below the line, interest costs should be less and we also don't believe that we'll incur the same level of premiums associated with further debt repurchases.

We believe that he that we're providing an appropriate, yet cautious view of the fourth quarter, barring the potential downside from a severe energy shock. Even though we're projecting fourth quarter earnings to be down from the third quarter, performance is expected to be up substantially from the 7 cent loss before special items we reported last year. Moreover, we are projecting to generate positive operating cash flow in the the fourth quarter, which will continue to further strengthen our financial position. As Tom said, be assured that, going forward, we'll continue to take the actions necessary to improve our earnings and cash flow results and to achieve our priorities in order to enhance our value to all of our financial holders. With that, I thank you and we'll turn the mike back to Dennis and open the conference call up for questions.

Let's start the Q&A, Bonnie, please.

If you would like to ask a question, please press star, then the number 1 on your telephone keypad. We'll pause for a moment to compile the Q&A roster. Your first question comes from Michael Judd, Greenwich Consultants.

Good morning and congratulations on a good quarter. Couple of questions for you. You mentioned in your release that you thought your working capital would be a little lower in the fourth quarter. Is there any way you could provide a little more detail on that? And lastly, could you give us a sense of what's happening in the PVC resin, in terms of price increases for the fourth quarter.

We would expect seasonally, our working capital to come down with sales demand. Year-to-date, our average working capital, as a percentage of sales is 15%. And so if you take that percentage against the expected sales decline, probably come in the range of what we would expect for really point-to-point, end of third quarter, end of fourth quarter working capital reduction.

Also, in terms of PVC, we follow the market similar, I think that you do. I think that there's an expectation that price increase in November. We have heard that there are some announcements for December. We've also heard that there's some expectation of announcements in January -- now those maybe the same announcement really and just a question of implementation, but the expectation is that PVC pricing will continue to go up. We're expecting our fourth quarter average to be up about a penny and a half from the third quarter average, largely due to increases that incurred in the third quarter, but, as compared to other years, we really are not anticipating that there to be the typical fourth quarter slide. Demand continues to be good, and with energy costs pushing the whole stream up, resin pricing is expected to continue its upward trend.

Plus the export market seems to be pretty -- continues to be pretty solid, so if you have a -- we know we'll have a slowdown in demand in November and December in resin, but we export markets that should help get through that period as well. With the tightness out there and with no more capacity coming on next -- you know, at this point, we'd expect a pretty tight situation as you get into early next year. But the fourth quarter we're not expecting much -- no big falloff in price, at least.

And lastly on caustic, we've seen nice increases there. You know, some folks are beginning to look at higher oil prices and what kind of impact that could have potentially on the manufacturing economy next year. Do you have any sense in terms of what kind of impact that could have on caustics?

I guess our concern about the higher oil having an impact on the economy overall just higher energy having the impact, and the strengthening of caustic I believe is dependent upon the North American economy staying at a relatively good level of strength, So, if we do, in fact, see an industrial downturn, that has to have a negative influence on caustic pricing, but still our expectation is that, this quarter and into at least early 2005, caustic soda pricing ought to continue to improve. Certainly off the trough that we saw in the second quarter.

Thank you very much.

You're welcome, Mike.

Your next question comes from Saul Ludwig Keybanc.

Good morning. First of all, Tom, I wonder if you could comment on the volume declines that we saw in the quarter in both formulators and engineered materials. If those are particular -- particular end markets that are soft or is there intentionally giving up certain pieces of the pie. But maybe just comment on those volume trends.

Sure, Saul, in both of those cases, around this time last year or maybe even -- about a year ago, we had customers, formulators who took some business in house, and we've been replacing a lot of that as we've been going along throughout the year. I think year-to-date our volume in there is relatively flat, but quarter-to-quarter, I think we saw particular effect on that. So that's really what -- mainly what we've seen in formulators. In the case of our engineered materials business, we had a large piece of business that, frankly, we weren't making much money on. We ran into an e-bid, held our ground, ended up not keeping the business and, frankly, we may be making more money without it.

That's a one shot deal and we would expect volumes --

Yeah it's not a (indiscernible), in both cases, it's sort --

Individual instances.

Thank you,. And Dave, on the debt repurchase, you're buying back the 6 and 7/8th.

We were buying back primarily the '05 and '06 maturity, Saul.

I see '05. Those are all the 6 and 7/8 percent? How much of that $77 million that was due in '05 has been repurchased?

About half.

And then is your plan to buy the rest of those or are you going to also buy any of the 10% plus bonds.

We're in the market looking at what makes sense to buy, depending upon the pricing and tradeoffs, we'll make the one over one financial decisions as bonds become available to buy. But clearly, when you've got 10 and 5/8ths bonds out there, we have to be looking at them. They're trading up nicely but still, it maybe attractive to bring some in, if there are any to bring in. We will continue.

The $8 million of gains that you booked in the third quarter, which segment bucket got credit for that $8 million?

Primarily in the performance plastics and corporate and other. There would have been a little bit that hit the distribution segment.

Could you be more specific?

No, not at the moment, I'm afraid. Maybe we can get back to that. You have to think it's about half performance plastics and half corporate.

So we're going to see some of those gains in the fourth quarter and also in the corporate, we'll see in additional hits from premiums on repurchase of debt in the fourth quarter as well?

I would expect you to see some but probably not to the extent that we saw this quarter.

And then just finally, the OP income guidance that you gave for the fourth quarter of down 10 to 16, was that inclusive of the 2 to 4 drop in R&I or were they separate?

They were separate.

Thank you very much.

All righty.

Your next question comes from Allan Cohen, First Analysis.

Good morning, gentlemen. This is a little bit longer term view. A couple of quarters ago, you talked about what kind of operating margins might ultimately be sustainable. Could you, one, revisit that by business area, with a view of higher sustained hydrocarbon prices and whatever you've learned since a couple of quarters ago. And then also, as your balance sheet comes back into, if you will, real balance, what about long term growth opportunities?

Okay I'll take a crack at it and I'm sure Dennis and Tom will jump in. I don't think we can say we've learned anything profound over the last two quarters on the long term opportunity our business platforms represent. If energy prices continue to stay high, we will simply have to get our margins recovered. I think that the guidance that we've provided, that our operating businesses, for the most part, ought to be 10% return on operating income businesses holds. The distribution ought to be 3 to 4%. I don't see any difference there. I think, as far as our, we'll call it the year-over-year investments, we will continue to look for opportunities to improve our growth and margin profile and those, then as now, would be largely international - eastern Europe and Asia and China, where a lot of our investment has gone.

As the balance sheet continues to improve, then I would -- we will continue to look for opportunities to invest. I think we've got a premium that we would place on organic growth and developing technologies that can really improve the growth and margin profile of our portfolio. We recognize that, starting from scratch, it would take a lot to make a material difference to us, but we've got to continue to go and, as we've said, even through '02 and '03, we did keep pilot lights under about a half dozen of such technology programs, so now that, as our earnings improve and as our financial position strengthens, we can put more investment behind those to bring them to market more, hopefully successfully and more rapidly.

Obviously as our balance sheet strengthens, larger than simply plug-and-play type acquisitions could come on the screen, but I think it's premature for us to consider that at that point. Acquisition multiples -- got to create shareholder value. And between then and now, we've still got a lot to do to continue to improvement our existing business space and to continue to bring the balance sheet to the level of strength we deem appropriate.

Could you bring us up-to-date on how the joint venture or coordinated activity with AMCOL on nanocomposites is moving forward?

We continue to -- we actually -- we're looking into adding some resources in that area. We've had some pretty good successes in some of the product testing in the marketplace. We continue to be encouraged based on the early feedback we've gotten in some of the products we've put out there. So we're still encouraged; hopefully our partner is too. We've been doing some joint marketing with them and, as I said, we've actually taken and -- created a separate nano technology group that is going to be focused on marketing those products going forward. So I think -- we're not, it's still -- it's still embryonic technology from the prospective of the marketplace, but we think we're on the leading edge of the some of the opportunities there.

Let me add to that briefly. Allan, I'm glad you asked about it. It is -- the resource we've put behind this is the biggest new product introduction commitment that we've certainly made as PolyOne, and I'm sure it is true with regard to any of our predecessor organizations.

It is -- we are at that very interesting and exciting stage where we actually have, as we get trials out with people, we get -- we keep finding, actually, new opportunities and new uses and new benefits for these materials. And that's a bit of a challenge because we don't want to spread ourselves so thin that we're not focusing on bringing the ones that are here near term right to commercialization. We actually have repeat customers at this pint for the product, and we'll have more to say about that down the road.

But we concluded, 3 or 4 months ago that this area looked attractive enough that we needed to really put a lot behind it. We've got quite a few people dedicated to, technically and commercially, to this product area, so that over the next 6 to 9 months, we really proved to ourselves whether we have an opportunity here as big as what we believe. The only way to really find that out is to really go after it, and then come to a conclusion. You can't just fiddle with these things you've got to go after them.

Just to take that a little further, another clay company, I believe Huber, got a composite approval for a bumper at GM. Perhaps other car parts. Do you know if those are the market already or are they still just scheduled to go onto platforms and, if they're in the market, any thoughts on how GM likes it?

By they, you mean parts that include what you're describing that Huber has, I don't know was their product is.

It's a comparable nanocomposite clay that then gets compounded into plastics.

May be. I'm not familiar with their technology. There are a variety of people who have attempted to make these kinds of products and, what we've seen is, most of them have not stood the test of time.

Thank you very much.

Thanks Allen.

Your next question comes from Andrew O'Connor, Strong Capital.

Good morning guys. Wanted to know -- are there any strategic actions or consolidations underway or anticipated within the industry that might help PolyOne -- might help you guys accelerate the return to profitability of North American Color and Engineered Materials. You know, that you can speak to? Thanks so much.

I'm not aware of anything that's been announced that is having a material effect on the competitive landscape. I suppose you could always speculate about things, obviously that's not something we would do.

Fair enough and then, Dave, are you in a position to hazard a guess about CapEx for '05, not including the subsidiaries to be sold?

Yeah, we should be no more than $40 million. I think we're going to hold our CapEx to about 5 to 10 million, closer probably to the high end, below our depreciation so that CapEx, per say, is paid for through our depreciation.

And I'd add in that, at that level, we can still do a moderate amount of expansion work within that level. Down the road -- I think as David and I look at it, we probably have -- should have one more year here where we're working pretty strongly on finishing the job on the balance sheet. By this time next year, we should have that largely done. At that point we could probably be more liberal on those kinds of investments. But, at that level, we ought be able to take good care of our facilities, as well as add selective capacities in some of the areas where we need it.

Can you further characterize where the monies might be spent?

We have probably still the single biggest project would be the -- and I should have commented on this earlier -- would be the completion of our fifth plant -- that's 5, 5 -- our fifth plant in Asia and our third in China. We're expecting that plant to be in operation by next -- this coming spring, so we're kind of in that peak spending curve right at the moment. So that's probably the single biggest thing. Others would be incremental capacity in a variety of areas.

Okay. Thanks very much.

Again I would like to remind everyone, if you would like to ask a question, please press star, 1 on your telephone keypad. Your next question comes from Chuck Peterson, Lehman Brothers.

Good morning. One quick one for you. The expense credits in the third quarter, the 8 million that someone had mentioned before. Can you help us roll that forward to the fourth quarter? I'm a little unclear as to what would be in there and what would not be in there in the fourth quarter. Could you help clarify that?

We would expect, of that number, 2, $2.5 million rolls forward. The portion that was associated with the pension and other benefits adjustment was more of a year-to-date trueup based on changes in accounting assumptions. We took the benefit in the third quarter -- it has some year-to-date implications, but it's a reflection of actions we've taken that will lower our costs going forward. We would expect that to be a couple million dollars and hold it there.

So the comparison then, just to be clear, in the fourth quarter relative to the third, would be negative 5.5 to $6 million.

No, the 8 million basically applies to the first 6 months -- the 8 is net of all of that.

We're expecting that, to benefits rolling forward would be relative, and the trend line -- in our guidance we're saying take out 8, on a relative basis. In terms of our cost structure going forward, we're expecting to get 2, $2.5 million benefit because our costs are less.

That's already there in the third quarter, so if you take the third quarter, as adjusted and say it's describing -- and then apply the factors in the outlook, then you're in good shape. I mean you don't want to do anything, just take the third quarter as is, with that 8 million out of it and then use that as a base, and then apply what's the outlook, I think you start to get in the right area.

So then the 8 -- so then number as reported, whatever it was $34 million of EBITDA, adding back the charges you took, and then we would just take 10 to 16 million off of that.

Yeah, if you go down to the earning release, we mentioned the 10 to 16, we mentioned the 8, we mentioned the 2 to 4 and we mention the comments on DO business and then the interest and premiums, those are all separate and should be added and subtracted to come up with the total net quarter-to-quarter view point.

So there's 3 pieces the 10 to 16, the 2 to 4, and the 8. Gets us to what your expectation is for the fourth quarter.

You've got the sales, you've got the R&I, you've got the cost adjustments, you've got the DOed businesses, and then you've got the below the line adjustments if you're going to net income.

Okay. Okay. Thank you.

At this time, there are no further questions.

Well, that's terrific. I'm glad that you folks that could join us, joined us this morning. If there are no further questions -- we'll -- I don't have any closing remarks unless Tom or Dave do.

Closing remarks are -- nice to see the Red Sox come through and kill the curse. It's a sign that all under underdogs can come back and win. So good for them, and thank you all for calling in, and we're going continue to work very hard to generate positive quarters going forward. Let's get back to work.

Dave and I will be available later today for any follow-up questions. Take care, everyone.

This concludes today's conference call. you may now disconnect