Avient Corp (AVNT) 2005 Q3 法說會逐字稿

Good morning. My name is Felicia and I will be your conference facilitator today. At this time I would like to welcome everyone to the PolyOne third quarter earnings conference call with Mr. Bill Patient, Chairman and CEO; Mr. Dave Wilson, Chief Financial Officer; and Mr. Dennis Cocco, Vice President of Investor Relations. [OPERATOR INSTRUCTIONS] Mr. Cocco, you may begin your conference.

Thanks, Felicia. Good morning, everyone and thank you very much for joining us this morning. In today's call we're going to have Bill Patient make some opening comments followed by Dave Wilson. I should point out that bill Bill is joining us via a phone hookup so he's not actually physically here. We understand your time is constrained during this period of earnings season so we're going to promptly end this call at 10:00. Because of that we'd like to restrict the questions, at least, to the investor community. If you represent the media, or have a question, please feel free to give me a call at the conclusion of this conference call.

The earnings release was posted last night on our website . If, for any reason, any of you need a copy of that please feel free to give my assistant, Darlene Hansen, a call and she can give you either a copy of the 10-Q or the press release. We are webcasting this call, and a copy of this call will be available for replay purposes on our IR site for approximately two weeks after today.

A couple points I want to make sure you're aware of. On today's call, we will likely discuss statements of information defined as "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements give current expectations, or forecasts, of future events and they're not guarantees of future performance, they are based on our PolyOne's management expectations, and they involve a number of business risks and uncertainties, any of which could cause the results to differ materially from those expressed or implied by the forward-looking statements.

I would recommend you review those updated factors, which we do update regularly, and they are available within the press release and in the 10-Q. In addition, today we will likely use both GAAP and non-GAAP financial measurements. The non-GAAP financial measurements will be talking about our operating cash flow, operating income before specials, per share impact of special items, and Earnings Per Share before specials.

We do that for a variety of reasons. Again, an explanation is provided in the press release as to the purpose for that, but primarily, it's management's need to communicate internally and also for our own incentive programs. A detailed list of special items is found in the press release, as well as a reconciliation of non-GAAP financial terms, and the reconciliation back to the most directly comparable GAAP financial measures.

Finally, we recognize you'd all like an update on our discontinued operations and the status of our process there. However, as has been the past practice, we will refrain from commenting on the sale of the remaining business, and we really have no further comments about our recently signed letter of intent on Engineered Films. With that long and, unfortunately, long preamble I'd like to now turn it over to Bill Patient for some of his comments. Bill?

Good morning, everyone. Dave is going to talk more specifically about the third quarter financials in a minute. But I want to spend a few minutes kind of outlining my views of our most critical priorities for the fourth quarter, especially, and then I'm going to -- I want to review four overriding goals that I've set for the organization in this interim period between now and when the new CEO joins us.

In the fourth quarter, our priority focus must be getting our price increases in all of our businesses. Our margins, we're in a classic cost/push situation and our margins have slipped and we have to fix them. Like our industry peers we've got to match the cost increases we are facing with price increases. And we have to confront the marketplace and quickly restore our margins in each of our businesses.

We have to be just as aggressive as our suppliers have been. At the same time, we want to manage our working capital costs to maximize the amount of cash we create. And we've been doing that. And Dave is going to provide some excellent examples of what we can do in this area when he discusses the third quarter results. I think the organization has really done some outstanding things here.

The rise in the inventory costs that confront us, though, are going to give us -- they'll create some problems in cash flow in the fourth quarter, so we have to really maintain firm discipline in this area. This immediate agenda supports four overriding goals that I'm asking our people to achieve.

First of all, let's start with restoring vinyl compound spreads. As I said, gaining price increases must be a primary focus of all of our businesses. But nowhere is it more important than in the vinyl compound unit, which remains the largest part of PolyOne. Although third quarter volume in this business was strong, we did not get the pricing we needed to offset steadily rising raw material costs. So going forward it is critical that we manage our vinyl compound sales margins well.

And we are going about that business very aggressively. Another important goal is a long-term implication, is to accelerate our growth and enhance our presence in Asia. This goal is not new, of course, but we've got to bring a new sense of urgency to it. The opening of our plant in Shenzhen was a milestone, in China, of course, and we are installing the manufacturing equipment there to expand our product offering.

We've got to capture that business now in this booming region, or we could lose the opportunities. So that's one of the focuses that I'm going to be -- or issues I'm going to be spending some real concentrated time on. And we want to also accelerate the growth of our North American color business. And a key word there is accelerate. We are challenged to grow rapidly now because of the maturity of the North American plastics market. But we are market leaders and we need to expand our business by gaining market presence. And if we expect this unit to generate the kind of returns we want we're going to have to do that right now.

And, finally, the overall goal is to increase the pace of the engineering material fix that we've talked about in the past. This core business has got to be a strong, reliable earnings contributor soon. And it will get there through growth and a change of our product mix. And the team has been adding resources to reach our customers and develop important new applications. And it's important that we begin to see new business results from these efforts.

So that kind of summarizes the four things that I'm going to be working on with the organization. Of course, there is a fifth thing that I'll be concentrating on. I'm sure everyone on this call is aware that PolyOne CEO Tom Waltermire resigned a few weeks ago. My focus is to aggressively go after a new CEO and we expect to announce a selection no later than the early part of next year. And I hope it's even sooner.

We have Russell Reynolds doing a international search for a new CEO and I'm sure we're going to find someone that will drive this business forward in the future. But in the meantime, my job is to focus the whole organization on the critical issues that are in front of us right now. I think the organization all understands the priorities and goals that we have in front of them, and I am confident that we're going to achieve those goals and be successful. And now I'm going to turn over the call to Dave Wilson and he's going to talk about the third quarter and some thoughts on the fourth quarter.

Thank you, Bill. Let me start by just commenting first on the third quarter P&L results. Sales, sequentially, were down 1%, but our volume was up 1.5%. And this was encouraging. As you'll recall, at the end of the second quarter for our third quarter outlook we talked about continuing operations seeing 1% to 3% volume improvement in the third quarter as we were anticipating we would start to see the end of a inventory depletion cycle that we saw through the second quarter.

In our mid-quarter update we talked that we had not really seen the momentum start, but we did see it as of September. And frankly, the improvement that we did get in the third quarter, compared to the second, was caught just a little bit short by some impacts that the hurricanes had on our September volumes. But nevertheless, the momentum coming into the fourth quarter was encouraging for us.

As far as earnings go, you'll note that on the face of our P&L our EPS for the quarter was a loss of $0.21. That compared to a gain of $0.34 in the second quarter of 2005, and a $0.13 profit in third quarter of 2004. On attachment 5, we do reconcile the differences between our GAAP reported Earnings Per Share and the Earnings Per Share that we would look at on a before specials basis. And you'll notice that when we take the specials out, our third quarter performance was a profit of $0.10 per share split evenly between continuing and discontinued operations. That would compare to $0.2 a year ago, and $0.24 in the last quarter.

Similarly, when we look at operating income, and we have this broken down in further detail on attachment 6 of our earnings release, in the third quarter of 2005 we report a loss of $1.4 million. That compares to a gain of $38 million a year ago, and about $43 million in the second quarter of '05. When we add back the special items and also add to it the earnings from our discontinued operations we would be reporting $33.5 million for the third quarter, and then $51 million for the year ago quarter, third quarter, and about $49 million for the second quarter last year.

Now, the difference as we look at our operating income on a before specials basis, the $17 million decline compared to a year ago is primarily seen in three areas. One, margins on our R. & I. business, higher energy costs, as it's impacting our conversion costs for our compounding business, and the shortfall in volume. Compared to the second quarter, the reduction is almost exclusively in R. & I. This is a combination of margin deterioration and also some hurricane impacts.

As we look at the hurricane impacts on PolyOne's third quarter performance, it's not a exact science but we would estimate that through a combination of plant production disruptions and its consequent loss of sales, higher energy costs, higher raw material costs and some compound volume that we weren't able to sell or get out in the third quarter that we would be looking at roughly $8 million to $10 million.

And I would hope that some of that will be mitigated in the fourth quarter as we move our prices up, as Bill said. You know, the key challenge we have in the fourth quarter is getting our prices up to restore the margins from the very high energy and energy derivative raw materials, in particular, ethylene. So that's where we were at the end of the third quarter from a P&L standpoint.

The specials, which were fairly considerable in the third quarter, are outlined on attachment 5 and we go into details. There's about $32 million pre-tax of specials and they are primarily the $23 million impairment charge that we took as we wrote off the remaining asset value of the idled chloralkali plant within OxyVinyls. You'll recall that that plant was idled several years ago.

We also took a $3 million charge associated with environmental remediation for nonactive sites. Frankly, going forward I would guess that a $3 million charge is probably likely each year. And we'll be looking at our accounting processes, frankly, to look and see if we can do this quarterly rather than have it be a once-a-year event. That's what we're going to do.

There were also some asset impairments of a couple million dollars and then on the D.O. [PH] side there was about a $4 million impairment associated with the carrying value of the films business. Headline and highlight for the third quarter performance was cash flow. And we provide an reconciliation of our cash flow on attachment 6. And here you'll note that cash from operations was around $48 million in the third quarter.

We've got improvement in our working capital. Our quarter-end working capital metrics were the best that the Company has ever recorded, as referenced by Bill. Our receivables were under 50 days. Our inventory was under 40 days. And you'll recall two years ago our inventories were higher than the mid-50s. So we have brought down our inventory levels consistently with sustainable processes.

And I think, also, if you look on the balance sheet you'll see that our inventory investment at the end of the third quarter despite the inflation we've seen in raw materials and, in fact, the higher business activity that we're experiencing now compared to the end of the year, that investment is, in fact, down compared to where we were at the end of the year 2004. And so cash flow, and as a result of that, the liquidity and available liquidity that the Company had at the end of the third quarter were very strong.

You'll note in our 10-Q we talk about our liquidity, and there you'll notice that we had available in excess of $150 million. In the third quarter we used our operating cash flow to reduce our debt. We reduced the maturity that came, or we eliminated the maturity that came in the third quarter. The balance of the M.T.M. was about $18 million and we also brought down our receivable facility.

And, clearly, as we look to the fourth quarter our expectations are that we we will generate cash. That cash will be used for further debt reduction. And if there are proceeds from investment those proceeds, in all likelihood, would be used for debt reduction, as well. That remains our focus. We look at the fourth quarter, we see a challenging environment.

Bill has mentioned the fact that goal number 1 is getting our prices up in order that we can restore our margins. The type of increases that we're seeing in raw materials are incredible compared to history and incredible in terms of the absolute level. And I'm sure that's a fairly consistent theme you're hearing from everyone in the chemical industry. As we look at the fourth quarter, PVC resin prices, potentially, will increase between $0.13 and $0.20 per pound. Ethylene, $0.13 to $0.17.5 per pound. Natural gas, up almost $5. As we've talked about our high leverage variables and the penny impacts that these commodities have on us, the flows, pluses and minuses, are substantial.

And the net balance, if we are not successful getting our prices up, would be very, obviously, would put a lot of pressure on our margins and, as a consequence, every business unit that we have is out in the marketplace with announced price increases and we will endeavor to get those prices into the market in order that we can restore our margins. As we look at the volume activity for the fourth quarter, seasonally you'd expect the fourth quarter to be down. Last year it came down between 7% and 8%. And, frankly, this year we would anticipate probably a similar volume movement compared to the third quarter.

This year, compared to last, we saw, or we are seeing, I would say, stronger momentum early in the quarter. The issue that we may all be facing is the economic activity overall and what that may do to volumes towards the end of the quarter. But at this juncture we're seeing stronger momentum than we saw last year. However, that will be partially offset by the hurricane-related supply disruptions.

We have to recall, also, that the hurricane, unfortunately, had a severe impact on the Gulf Coast. A lot of the rebuilding will come through the building and construction markets, about 24% of our continuing operation sales go to that segment. So there should be, and we would anticipate, a lift in demand as a result of the rebuilding projects. We are not anticipating that we will see that in a material way, however, until early next year. Again, the other focus, clearly, that we have is, as I mentioned earlier, is generating cash. And as I said, we do anticipate to have positive cash in the fourth quarter and use that cash to further reduce our debt. With that let's open it up for questions. Dennis?

Felicia, let's go ahead and key up the first question.

[OPERATOR INSTRUCTIONS] We'll pause for just an moment to compile the Q & A roster. Your first question comes from Roger Smith of Merrill Lynch.

Good morning, Roger.

Good morning. How are you doing, guys? A couple questions. One is, do you have any view, or new information, on the timing of the building of the Shintech facility in Louisiana?

No, I don't. I think it was scheduled to be completed in 2007, but we're not that close to that. We don't know.

Okay. You've said the ability to expand vinyl compound spreads is based on strong demand and tight supply demand. Given what I presume would be a tight supply right now and your 7% sequential growth, what would be the catalyst to move up spreads? Or, I've just already said it?

You've just already said it. And that's very important. But what we've also seen is a substantial increase in PVC resin prices in October. Announcements for November. And it's imperative that we be able to move our pricing. Now, we have announced price increases that aggregate $0.15 so far this quarter. And it's important that we achieve those, we realize those increases to restore the margins from the costs that we know are already hitting us.

Okay. And do you expect Alabama Power to add any surcharges even though they use very little natural gas fuels?

I don't know. I don't know.

And last question. In terms of market share in either vinyl compounds or, in particular, in colors given the events going around a showman [PH]. Have you been able to maintain market share, grow market share, losing market share?

I could not relate any of our volumes to whatever goes around any specific customer -- or competitor including the one that you mentioned. I would say that in this market, our color and vinyl teams are aggressively pursuing, but I think it's tough for us to sit here and say that we're seeing any material change in share, plus or minus. We certainly don't believe it's minus, so I guess we don't see anything material on the plus side.

Okay. Guys, thanks very much.

Thanks, Roger.

Our next question comes from Rosemarie Morbelli of Ingalls & Snyder.

Good morning, all.

Good morning, Rosemarie.

How do you combine the two focuses from the getting market share and getting price increases? It sounds as though one goes against the other. You might be able to get price, but you will have to give up volume. So can you address what you are actually doing out there?

Well, we are being very aggressive at landing new business. We've talked about the new business close process and targeting accounts. At the same time, it's just imperative that we move our prices to restore our margins. So it is a balance. It is a difficult task, but it's one that we have to accomplish and it's one that the business teams understand that they need to deliver on, and they're working hard to do that. Don't diminish for a minute that it's not going to be a challenge. The competitors are aggressive. You know that from each point in our markets. But it's twin objectives that we need to accomplish.

Rosemarie, I think that we're not Pollyannish, either, about what's going on out there in the marketplace. But we also, I think, you have to look at this in two ways. One is that certainly it's an unbelievably competitive marketplace out there. But at the same time everyone of our competitors are facing the same reality that we are in the marketplace. And that is that -- this is what I've said before, it's a classic cost/push situation out there. And I think that assuming that there is some rationale in the marketplace, one could expect that under those circumstances prices should go up. And at the same time, the normal competitiveness of the marketplace wouldn't be affected. So I don't think people are going to run around trying to steal market share that's going to cost them -- I don't think any of us or our competitors are in the business of shipping money with every box out the door.

I realize that. However, almost everyone, and I think including PolyOne, is talking about not eliminating as it was in the past, talk about not eliminating any more capacity. And the key to returning to profitability was to put more volume through the plants, which sounds difficult to do in this environment when price increases. You know, everyone wants to get their margins back but everyone also wants to boost more volume to those plants which no one is will to shut down.

Rosemarie, your point is well taken. It's not going to be easy, but I think it's achievable. I really do.

Okay. And regarding the economy out there, have you seen any areas, any markets where you can actually feel a slowdown to start in terms of the demand?

Yes. I mean, we did highlight in the release that although automotive is a smaller component of our business, especially after we sell the engineered films business, automotive continues to be the, probably, slowest sector of anything that we have exposure to. I don't think we saw any other specific market trends. We did see some pickup in pipe fittings relative to our color business and a little to our vinyl business. But we didn't see any particular shift in market trend at this point in time, other than automotive.

And, lastly, do you have any supply problems which would prevent you from servicing customers in certain areas?

We have pockets where there's still some disruptions, Rosemarie. I think we're hard pressed to say that we have any problems. There are some specific raw materials and we're working with alternative suppliers, or selling out of inventory, or working with customers to reformulate to be able to meet their requirements. I don't think, at this juncture, we view that as a significant risk to our business or our volumes going forward. We had some issues earlier in October. We're hopeful that those issues, well, one, are behind us, but, two, that the demand that we didn't supply we will be able to supply in November or December, so that, overall, in the fourth quarter a lesser impact on volume and demand than what may have been a concern, certainly, at the early part of October when the hurricanes had just hit and there were a lot of force mazur [PH] sales control type situations.

Okay, thank you.

Your next question comes from Mike Judd of Greenwich.

Hi, Mike.

Hi, good morning. So you're basically near the end of October. October and November would be the months where there would be a balance back, hopefully, in demand. And after Thanksgiving, obviously, things are going to slow down. So it seems like if you're going to get the price increases in the vinyl compounds area you need to have already started that in October. I take it that you have started that. And would you consider also an energy surcharge? There are really kind of two questions here. How successful have you been with those price increases in October? Would you be willing to consider an energy surcharge? And I have a follow-up question. Thank you.

We are in the market, as you suggest, in October, not just in the vinyl compound business but across. We're being very aggressive and we're counting on being fully successful. As far as energy surcharges go, that's spotty depending upon really the acceptance within specific markets. We've tried that in the past. It hasn't been successful. At this juncture, with the tail that's likely on energy and energy-related costs, price increases is the general route that we're going, that a surcharge has a connotation of being a fairly short period. And I don't know that that's necessarily appropriate. Now, we have seen surcharges from certain of our suppliers. And we have put surcharges on some of our business. But as a general pricing strategy, we've been selective.

David, you might want to mention just in passing the transportation surcharge in distribution.

Yes.

And as a follow-up question, actually it's a separate question. I'm glad to hear you're making progress in terms of searching for a new CEO. But I'm wondering, are you also considering other alternatives for the strategic direction of the Company? In other words, would you consider -- let's face it. PolyOne is a combination of two other companies. Would you consider joining together the Company with someone else?

Mike, we couldn't comment on that and we can't comment on that. We have to on strategic initiatives we've never put anything out in advance and we certainly can't now.

Okay. So just in terms of the CEO, then, it sounds like you are in discussions and that, hopefully, there's going to be some sort of result fairly soon?

Yes. As I said, Russell Reynolds is doing the search. And we've got very specific criteria for the new guy. And we've got some very interesting candidates. And so we're moving forward.

And how is the specific requirements that you're looking at, how is the skill set, so to speak, of the new CEO different than potentially the previous skill set?

Well, I don't think that necessarily we're talking about differences in skill sets. We're talking about someone -- you know, first of all, for anyone to be successful in any business when you bring him in he has to share your values. And I think that that's pretty meaningful at PolyOne. We were looking for someone who is really customer-focused and that understands we're in the service business, not in product-driven businesses. And the next guy has got to be absolutely results-oriented. And I think that -- and results-driven. Because what we're looking for is someone who's going to take this business forward and grow it and increase its value for the shareholder. And that's his job. And so we're -- I think that that's probably the same job every CEO in the world's got. But we're looking for somebody who can very specifically do that. And, obviously, to be able to do that he's got to have a strong industry background. And we're seeing people like that out there.

Okay. That's great. It teams to me that the goals that you've outlined are goals that you guys have had for some time now. And I'm just trying to understand how things are different.

Right.

Mike, I don't think the goals, obviously, that Bill outlined earlier in his remarks are not -- obviously, we're not talk talking about a significant change here. If you're looking for a strategic change announcement today you're not going to find one. So what we're saying is that there are some very important things that we have. What Bill has outlined is some very specific focuses on things that are critical. They're not that different, but the emphasis on them may be a little different going forward. And so some of that will, obviously, evolve as we bring a new CEO in, also. But that will come with time.

Okay, then lastly not about the CEO, but have you changed -- with the new focus on increasing prices, have you changed the incentive for the line sales people in terms of how they're compensated? Or is there anything like that that can really help drive that process?

No. We have not changed our incentive plan. Sales incentive is largely driven by growth in spread, market contribution dollars, and, obviously, pricing helps to do that. But we've found that selective quarterly incentive programs, unless they're very targeted aren't really effective. This what we need to do as a team. And getting -- serving our customers has got to be not only the salesperson's role, everybody in the company has got to support that. We need to be in front of our customers. We need to be explaining the importance of being able to raise our prices to preserve our profitability and margins, but also help our customers be able to move their prices down the chain, as well. It's part of what we need to do. And putting a special incentive in place I don't think would be appropriate and I also don't think experience would say it would be necessarily effective.

Thank you.

Okay, Mike. Thank you.

Your next question comes from Saul Ludwig of KeyBanc.

Good morning.

Good morning, Saul.

First a nitty gritty question. What was the earnings contribution from SunBelt and OxyVinyls?

It is in the Q.

We've got it in the Q, Saul.

Didn't get through that yet.

It's about 5 and 10, OV, SunBelt, respectively.

5 from SunBelt?

5 from OV.

Okay. And 10 from SunBelt. That's a lot. Okay.

But before specials number.

Before specials.

Right.

Okay. And Bill, back just to get on a theme that's been asked before. But let me just focus on North American color and engineered materials. Now, the same two guys are running these businesses for the last two years. They've both understood the challenge, the issues, the need to get better. And the business has continued to lose money and they're run by the same people. What all of a sudden are they going to do differently to change the dynamics of those businesses? And why would you feel more optimistic about the odds of success going forward versus the strong effort that each have put in to try to turn these businesses around over the last two years?

Well, I think you have to take an look at the two businesses in a, separately to answer that question at all. Part of my confidence may be ego. I don't know, Saul. But the one point I will make is that if you look at the EM business, especially in North America and in Europe, there has been a strong effort to upgrade the product mix. And of course, that takes time. And we recognize that. But I feel very comfortable that it's happening in both geographies. And we can see the results. And I think you're going to start seeing the results in the near future. And in the color business, we have the same person has been running color in North America . And well, I guess the same people have been running it in each geography.

I think that -- and especially in North America I think we have revamped our selling effort. We've refocused it. We have put an absolute emphasis on this whole issue of focus on getting new sales, new customers, increasing our footprint in the marketplace. And I feel that it's starting to pay off. I met with that team just last week and we sat down and we talked very candidly with each other about that it's everybody's job in that organization down to the guy sweeping the floor to make sure that we're positioned to be able to service not only our current customers but all the new customers that we want to bring into the fold.

And so it's just blocking and tackling, Saul. And I think we can do it. We've got great technology. We've got great plant facilities. And I think we can do good stuff in that market. And I'm convinced we can and I'm going to pay a lot of attention to that and, hopefully, make it happen.

I was wondering if structurally, the people who are in the color business tell me that what's key is quick turn around, quick delivery, close proximity to customers, and an lot of hand holding and customer relationships. Now, in years past I think with the consolidation the number of color plants were closed in order to have fewer plants, but larger ones. And I just wonder if in retrospect that was a structural mistake in that the lack of proximity to as many customers as you used to have ties your hands a little bit in being able to be as successful as you would like.

Well, I think, we can always look back. But I really don't think that that really does us a lot of good. I think, Saul, in retrospect that could be argued. But I think looking forward I feel very confident that, like I said, if you walk through any of our color plants anywhere in the country, and we've got how many of them now? 6, 7?

Yes.

And, you know, we're strategically located. There's been a lot of time studying where those plants should be. And if you walk through our plants, I think technically, I spent an lot of time in this business. I think they're as good or better than any that I've ever seen. I know our technology is great. It really is. It's exceptional. And I think that if you can't put that -- I think we've got some excellent people now in place. And I think if we can't make that work, there's something wrong with us.

Yes. Let me adjust an quick couple points to what Bill just said, Saul. We, obviously, don't talk externally about the metrics that we manage the business under. But we look quarterly at turn around times, lead times, color matching turnaround, how effective we are at color matching, and so forth. And we do try to benchmark where we can with the industry. I don't think we have found anything particular that we're out of step. I don't think our plant structure, necessarily, is an inhibitor for us to be successful here at all. So I think from the metric perspective, at least, relative to how we compete with the industry we believe we're at least on a par with them at the very least.

Thank you very much.

Your next question comes from Bob Amenta of J.P. Morgan.

Good morning, guys.

Good morning, Bob.

A couple questions. On the price increases, is there any percentage of your business that, due to contracts or other, that you just aren't going to be able to attempt that at this point in time?

About 30%, 35% of our vinyl compound business is on index. So to the extent that -- and those indexes are tied to resin and some to plasticizer cost increases. Those are on a 30, 60, 90-day lag, depending on the customer. To the expend that those contracts preclude getting the price realized in the fourth quarter we'll see it in the first.

Yes. If you recall that -- well, you can't really see it, but we did realize price increases in the second quarter that occurred in the first quarter as a result of those contracts. So there is some lag there in the vinyl business.

Most of the other businesses are -- there are no extended terms on pricing.

Okay. And then in your press release you mentioned, and you said on the call, positive operating cash flow from operations in Q4. The definition of operating -- are you strictly just looking to the cash flow statement, cash from operations, and is, therefore, that before CAPEX? CAPEX doesn't sound like it's going to be that big.

I would use the definition that we have as we outlined it in attachment 6, Bob, where in the third quarter we had 48 million of positive cash. That same definition for the fourth quarter would result in positive cash flow. So it's really cash in our pockets after we've paid our obligations that we can then use to reduce debt.

Okay. And then on related question, where do you stand now, or I guess at least on September 30, on the 6 7/8 that are due in the next month or two, and then next couple years on the M.T.N. schedule?

We will retire a little less than 30 million of the remaining balance of the '05 notes. And then our maturity next year is about $1 million on the '06 M.T.N., '07, '08, '09 we're looking at $20 million of M.T.N.'s each year. So we've got a very light maturity schedule coming forward. As we've talked before, the first date that we can bring in the high yield bonds, or really call the high yield bonds is May of '07, and that remains a target for us.

So for this year the 6 7/8s have basically 30. So there are no M.T.N.s due December '05?

No. The '05 maturities were September and those have been, obviously, taken care of.

Then a quick question. SG&A was down in dollar terms, anyway, in the third quarter. Is there -- obviously, you're trying to cut costs. Is that a good number to use for a run rate, or is that lower than what it will be on the next three or four quarters?

It's a bit lower than I hope it would be, particularly when we get into '06. I think the third quarter percentage was around 7.4%. I think our ongoing run rate is in the 8.1%, 8.2% range. So down substantially. But third quarter doesn't have, as we talked last quarter, it doesn't include a full boat for incentive accruals. And that's a reflection of where we are. But the 8.1%, 8.2% should be a good run rate particularly looking at '06.

Okay. Then just lastly on the distributions, you used to report EBITDA and you don't. But basically you guys look at it EBITDA plus income from equity investments. I would look at it, maybe, EBITDA plus cash from equity investments. But cash versus income it seems there's lags and everything. But net net, it seems over the course of the year they roughly equal out. So I would assume that the reason distributions was so high in Q3 was a catchup from the good earlier part of the year?

That's correct. It was catch up. You'll notice on the one [inaudible] slow statement that we were within $3 million or $4 million equity earnings versus cash distributions.

Okay. So, obviously, it's forward looking. But the fourth quarter for the JVs sounds like it could be a little rough, could be, you had negative income from equity operations in Q3. So, is it safe to assume, if it was a negative number or zero in Q4 would that almost by definition since you've kind of caught up already imply that a zero-type distribution?

I think we're we've got to look first at the equity earnings themselves were negative because of the large cash writeoff. You pull that back out and in earnings we're down. No question. And I think it's fair to say that the distributions in the fourth quarter will follow earnings. OxyVinyls is aggressively working to restore margins. But it's a tough battle with ethylene where it is and natural gas where it is. On the other side, Chloralkali profitability on our SunBelt venture, and then the Chloralkali business within OxyVinyl has stayed strong. So we would anticipate that we would see a fourth quarter of earnings out of our chloralkali business is fairly comparable with the third quarter and we would expect cash flow to follow that.

I assume at this point for '06 distributions versus '05 you're not really saying anything?

No. In fact we haven't said anything about '06 in any way.

Okay. Thank you.

But what I would say is our perspective now for the resin intermediate sector is the chloralkali will continue to be strong through '06 and that, based upon success at restoring margins through good pricing on the PVC side, OxyVinyls should see a strong year, as well. So as we look at '06 I'm not anticipating -- obviously, we're going through our planning process now. But I'm not anticipating a deterioration in our R. & I. performance in light of the facts that we're looking at now. Obviously, with ethylene moving in dime increments and PVC doing the same, a lot can happen. But, fundamentally, the market dynamics support continued good profitability from those two businesses.

Okay. Great. Thanks.

Thanks, Bob.

Your next question comes from Bill Hoffman of UBS.

Good morning, Bill.

It's Seth Harvey [PH].

Good morn, Seth.

Good morning. I guess I just wanted to follow up on the OxyVinyl SunBelt. Given where the supplies have been interrupted. Where are OxyVinyls and SunBelt back up to 100% operating rates, or have they been affected and they're kind of running at reduced rates?

SunBelt is back up to, for all intents and purposes, full operating rates. It was down a week after Katrina, and it was down a bit after Rita. OxyVinyls is also, I would say, for all intents and purposes, operating at near capacity. I think some of the Houston complex may not be running full out just now. There are still some sales controls in place, which would reflect that there is catchup needed. But by and large, I don't think that production curtailments should adversely or materially have an adverse effect on R. & I. performance in the fourth quarter.

And I guess just to kind of circle back to the pricing question, I know you're doing a lot. In terms of kind of timing this part of the year, the business typically seasonally slows, could you give me some type of sense of what percentage of the business do you think you can realistically get price increases on? Or are you kind of targeting the whole of the vinyl compound?

We're in the market, you know, each business has announced increases and we're in the market pushing as hard as we can. And we need to be successful across the board. There are certain contracts that may limit the timing, or limit when implementation occurs. But once the timings's done we expect implementation. So it's broad based and we have to be aggressive. Our costs are going up.

And in terms of, I guess, in terms of customer response, I mean, is there any indicator that customers are definitely pushing back, delaying their purchases because of this, or are we seeing more the phenomenon where people buy ahead of what they see are significant --

You know, it's tough to generalize. But I mean, the type of increases that we're seeing in the chain, there is some pre-buying occurring, as it can happen. The supply disruptions in inventory is a position naturally limited that. So customers are doing that. It's an aggressive, competitive market. So there's some to-ing and fro-ing. The supply concerns that many of us had in the early part of the quarter was the primary topic.

It was more can we get the supply to serve our customers rather than what's the cost of that supply. But as supply starts to come back, obviously, the discussion will change. But clearly in the market there's a clear recognition that natural gas is at historic highs, oil is over $60, ethylene and really energy-based raw materials are going up, that every supplier that we have that is connected to the energy, and that's just about everyone of them, has or is trying to raise their prices.

And so it's not us.

As Bill mentioned, it's all of our competitors are looking at the same type of cost dynamics and what's important is that we not only be successful at raising our prices but we also provide support and help to our customers so that they can help in their discussions with their customers so that we continue to move the cost bubble, if you will, down the value chain.

Thanks an lot.

Thanks, Seth.

Your next question comes from Philip Beberer [PH] of Banc of America.

Good morning, Philip.

Hey, good morning. You mentioned that working capital is a important focus right now. You've already made some good progress with regard to that. But is there any room for improvement from where you are? What do you expect for the fourth quarter?

Well, far be it for me to ever say there's not room for improvement. But the September results were very strong. We expect for the fourth quarter where there's some natural tendencies for some of the metrics to go up because of where demand is, and positioning for the first quarter resurgence in demand, we are working on that and we're working to keep the bubbles down in our working capital. So if we end the fourth quarter with metrics on top of where they were in the third quarter, it would be a very successful performance. And it's key that we do that October-November, not just December.

Okay. And it looks like based on your fourth quarter capital expenditure guidance that you're going to be well below your budget for this year. Is there some spending which is being deferred into 2006, and do you have a 2006 CAPEX budget?

There's really not any spending that we're deferring, specifically, that would be material. When the hurricanes hit we talked about the importance of preserving cash but we also talked about the importance of if we were going to see a natural slowdown in our ability to produce, that was the time to do maintenance, that was the time to do, perhaps, some capital tie-ins so that we would be fully prepared to be able to operate at 100% as our ability to get the raw materials and then to go back into production at full strength to meet demand. So we really haven't deferred. And I would -- we've talked about our capital and every year we talk about $40 million or so. And that's the target that we are looking at, plus or minus $5 million is probably a good number.

We've got $15 million to $20 million of maintenance capital. That will still be there. And then we'll have $20-plus-million dollars of strategic capital that can go into expansions. And we certainly are seeing very strong demand growth.

We brought the Shenzhen plant up. But it's our expectation that we will be putting new lines into that plant every year and we've got capital for that. And so I would expect that our capital target next year, 40 million plus or minus 5. And we'll be more specific later once we've got our plans fully hammered down for '06. But that should be the range.

Okay. And results at OxyVinyl were down sharply in the third quarter versus the second quarter, even excluding the impairment charge that you took there. What was the impact of the hurricanes on OxyVinyl in the third quarter? And is there a way that you could help us out with the hurricane impact on the fourth quarter?

I would estimate -- I haven't talked to OxyVinyl, specifically. But as I look at the margin challenges and where the costs hit us, you have to think that for our percentage of OxyVinyls there was a $3 million to $4 million impact. And that really comes from taking into consideration that ethylene and natural gas were rising in August before Katrina hit. But when Katrina hit there was a step-up. So that step-up cost us $3 million to $4 million. And that was starting to moderate some and then Rita hit and natural gas and oil set records. And they're still up very high.

And so one of the lingering impacts is the high energy that was reinforced by the supply disruptions to the energy infrastructure. And in the fourth quarter, we can see the costs but the challenge is to get our prices up to offset those cost increases.

In the third quarter we can look back and know that in September the price increase at the resin market saw really only compensated for the $0.02 decline that occurred in July and August. So looking forward for October there was time to react.

And so the prices are going up in the fourth quarter. The challenge will be to offset the costs that we know are there. And the costs are substantial. We're looking at natural gas being up almost $5 in the fourth quarter, compared to the third, and as I mentioned, ethylene being up $0.13 to $0.17 depending upon how successful you believe the initial nomination for November would be, and those are horrendously high cost impacts for us that do require the type of PVC resin increases that are being put into market.

Okay. Thank you.

Thanks, Phillip. We are now just past the top of the hour and I do apologize, I realize there are some folks still left in the queue. But we're going to call the time here at this moment. Dave, and at least I will, and Dave for part of the day will be available to take any follow-up questions anyone may have. We want to thank everybody for joining us on the call this morning. And we will certainly talk to everyone shortly. Thank you.

And this concludes today's conference call. You may now disconnect at this time.