奇異 (GE) 2003 Q3 法說會逐字稿

Good day everyone, and welcome to the Ionics' quarterly conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Doug Brown, Chief Executive Officer. Please go ahead, sir.

Welcome everybody to our conference call to review our third-quarter financial results. Before I start the presentation, I would like to remind everyone that there will be forward-looking statements in this conference call or news release that involve risk and uncertainty. The statements contained in this call which are not historical facts are forward-looking statements. These forward-looking statements are based on management's current views and assumptions, and are neither promises nor guarantees but are subject to risks, uncertainties and other factors that could cause actual results to differ materially from management's current expectations as described in such forward-looking statements, including overall economic and business conditions, competitive factors such as acceptance of new products, pricing pressures, and competition from competitors larger than the Company, risk of nonpayment to Accounts Receivable including those from affiliated companies, risks associated with foreign operations, technological and product development risks, availability of manufacturing capacity, and other factors described in the Company's filings with the Securities and Exchange Commission, including a January report on Form 10-K for the year ended December 31st, 2002.

You should not place undue reliance on the forward-looking statements in this press release. And the Company disavows any obligation to update or supplement those statements in the event of any changes in the facts, circumstances or expectations that underlie those statements.

I would like to start off by just reviewing some of the highlights of the financials that we distributed in our press release this afternoon. You can see from the press release our top line showed a little over 90 million in revenue, which compared to about 83 million in Q3 of 2002. Cost of goods sold was 73.6 million, representing a gross margin of 19 percent.

I will get into in a couple of slides what is in that cost of goods, but there are non-recurring charges that are reflected in the cost of goods line, which has reduced the recorded gross margin.

SG&A was $26.5 million. Restructuring and impairment of long-lived assets, which were separately spelled out on the P&L, totaled 17.7. And as I just stated other non-recurring charges were in the cost of goods line. In summary, pre-tax loss from continuing operations was $26.8 million.

Now I would like to review what were the non-recurring charges that were included in that P&L. We see a separate line item for goodwill impairment charges totaling $12.7 million. This is primarily made up of write-down in goodwill associated with three subsidiaries, RCC, Allsinger (ph), and Speritech. The total, 12.7.

We had restructuring and impairment expenses which is also separately identified of about 5 million. There were two components to that $5 million. The first was severance costs related to employees that were laid off between the time we announced our restructuring and the end of the quarter.

A second asset impairment was related to a build own and operate project that we had installed in Spain for a customer in the food processing area. This customer unfortunately started to experience financial difficulties and entered the Spanish equivalent of bankruptcy proceedings. And we stopped getting paid for operating the facility -- for operating our plant. Unfortunately, the plant itself is very specific to this application. Unlike the seawater RO plants which we operate around the world, we did not view that we had the ability to remove the equipment and use it in another installation. So we took the decision to write off the asset completely.

A third item on the list that is not reported -- the first item on the list which is not reported separately is what we referred to as a product retrofit program. This $4.8 million charge shows up in the cost of goods line. This charge is related to a decision that we undertook in the quarter to make improvements, out our warranty improvements, to systems which are currently operating in the field.

Some of these improvements we have established the policy where we're prepared to share the costs with the customer. Some of these improvements we have decided to take on our own costs. The total cost of the improvement program is estimated to be $4.8 million. We think it is important to undertake to achieve improved reliability and performance of systems that are currently installed in the field. And so we are undertaking to take this expense in this retrofit program.

The next non-recurring charge relates to the decision to discontinue our activity in Europe in the home water business. This is basically selling water softeners to homes in the UK and Ireland. We have made a decision that we were going to discontinue this activity. There are two charges related to that decision. The first is $1.7 million, which is an inventory write off, which shows up in the cost of goods line. And the second is a $400,000 charge, which is a write off of receivables, which shows up in the SG&A line.

Another decision we took was to discontinue our activity in Australia in the Watertec business, which is a business that makes ozone disinfection systems. We decided that this business was not strategic for the Company, and was not a sufficient size, so we decided to discontinue the operation. The bulk of the $800,000 charge is related to a write off of inventory.

One item we also decided to take in the quarter was to write off a receivable that was related to a customer in which we are in litigation trying to collect that receivable. We have been trying to collect the receivable for some time. We have been incurring legal expenses associated with that. We have made a judgment about the collectibility of the receivable, and have decided to write the value of that receivable down to the level we believe we can collect.

And the final charge listed here is related to process re-engineering. This is related to our overall reassessment of our reporting process that is going on concurrently with our Oracle implementation and with our systems re-engineering to ensure that we're compliant with Section 404, readiness related to the Sarbanes-Oxley Act. In total, these non-recurring charges totaled about $26.4 million.

Next, I would like to take a look at the guidance that we gave in our last webcast, where we indicated and where we reviewed with you the restructuring program that we were undertaking. And we indicated the approximate cost we expected to incur and the savings we expected to realize related to this restructuring. In that call, we totaled approximately $18 million of charges that we expect to take, not including the write-down of goodwill. You can see the list of them here in this slide.

We also indicated in that call that about 50 percent of that 18 million would be realized in Q3, and the Goodwill write-off, which at the time we had not quantified. We also indicated the balance of the 9 million would be written off over subsequent quarters four and one and two of next year.

What have we done? This shows the amount of the cost that have actually been implemented in the third quarter. And you can see that it totals about 10.3 million. It is a little bit more than 9 million that we indicated. And it also includes the 12.7 million of goodwill.

In addition to what we anticipated, there were other non-recurring charges that we decided to undertake. I have explained these in the previous slides, but basically these are charges which we have not highlighted in the previous conference call for you -- that $9 million.

This summarizes the balance sheet as reported in the third quarter. You can see that basically in the period -- in the first nine months of this year we have had a slight reduction in our cash balance, and corresponding increase in our investments in affiliates and our investment in GP&E (ph).

On the liability side, there has basically been no change except the reduction in shareholders equity, which is a result of the losses we have taken in the quarter as a result of the write-downs.

On the revenue side, comparing Q3 of this year versus Q3 of last year, there is basically no change. The only change is related to revenue from affiliated companies, and that is the revenue related to the sales of equipment to the UBC project, which is our project in Kuwait.

Finally, on the booking side, you can see that in Q3 we booked about $82 million in bookings. It was about even with the bookings of last year. However, I would like to point out that there are several projects that are not -- that have not been booked and do not show up in backlog. And just to review for you where they stand, because they are significant projects.

There basically three projects. The Carmel desalination facility, which we refer to as CDL. Another facility, which we refer to as Ashdod (ph), and the Algerian project which we recently released in a press announcement. The CDL project is a seawater reverse osmosis build, owned, operate and transfer facility. The customer is the Water Development Authority of Israel. And it has a specified capacity of 82,000 cubic meters a day, although the customer is currently talking to us about the prospect of increasing that to well over 100,000 cubic meters a day.

We have yet to secure long-term financing for the project, which is why this project is not considered booked. We're in the process of seeking that financing and expect to receive it in the near term. We expect construction on the project to begin in June of 2004 and continue into January of 2006. At which point we will commence a water supply agreement lasting for 24 years. This project is in the form of a 50-50 joint venture with our partners, Baron (ph), and is an off-balance sheet project because it is pure joint venture. So the economics from this transaction will ultimately flow through our equity income line.

The joint venture itself will expect to -- using Ionics' policies for bookings, would expect to book five years of revenue at the time that the project is complete and it has long-term financing in place. That would mean that by June of 2004, it would have realized 90 million in bookings relating to five years of annual revenue. And you can see from this slide that we expect the joint venture in the beginning to start -- in the early years of the project to have about 18 rolled over -- $18 million in revenue, and a profit after-tax of about $2 million. Again we're a 50-50 joint venture partner in this venture. In total, the joint venture did make an equity investment of $17 million, therefore, Ionics' commitment on the equity side is half of that.

The second project is a project that was announced just as we were doing our conference call last quarter. It is in Ashdod in Israel. It is a seawater RO design and build. So this is basically a capital equipment project. The customer is Necarat (ph), which is the National Water Carrier in Israel. It's capacity is 136,000 cubic meters a day, and construction is expected to begin at the beginning of next year. As I said, this is also a 50-50 joint venture with Baron, and has a total contract value of just short of $100 million.

The final project is one we just announced recently. We were just awarded, or selected as the winner, in a competitive bid for supplying a seawater RO build, own and operate project in Algeria, just outside of Algiers. The customer, or the guarantor in particular, is Sonatrack (ph), an organization that Ionics has been dealing with in Algeria for over 30 years. It is the Algerian National Energy Company.

The capacity of the plant is 200,000 cubic meters a day, which is something over 50 million gallons a day. Construction is expected to begin in the middle of next year once we have secured project financing. We expect that project financing to be non-recourse project specific borrowing. Once the project is completed in the middle of 2006, we will commence a water supply agreement which will last for 25 years. The project is 70 percent owned by Ionics, with 30 percent of the project owned by the Algerian Energy Company.

Once we have secured long-term financing for this project, we will end up booking five years of the operating revenue of the plant into backlog. Because this will be a consolidated activity -- because we'll own 70 percent of the project, it will be a consolidated activity. And therefore we will be as Ionics expecting to ultimately receive something over $50 million a year in revenue that are related to specifically to water sales. The project is projected to produce over $4 million a year of profit after-tax in the early years. And our total investments in the project is expected to be $31 million.

I would like to before opening this call to questions, I would just like to summarize where I think we stand today. We undertook a significant restructuring program that started at the end of the third quarter of this year. As a result, we have not seen in the quarter the benefit of the restructuring, but we are reporting a large part of the costs associated with the restructuring. We expect the cost savings to start -- to commence in Q4, but to become fully apparent in the beginning of 2004.

That, in combination with what we see as an improving bid environment in the marketplace, means we believe that we will be well-positioned in 2004 to deliver strong performance, and are looking forward to a successful 2004. In the meantime, we are undertaking our restructuring program on plan. And we feel confident that we will be able to achieve the objectives that we have set out in our previous call. At this point, I would like to open the call to questions.

Tracy Marshbanks with First Analysis.

Just a couple of clarifications on the charges. You broke it out as far as cost of goods SG&A. Just to be explicit on the product retrofit and the receivable, what division are those associated with?

I will turn that over to Dan Kuzmak, our CFO.

The product retrofit that Doug spoke of is part of the Equipment Business Group. The receivable related to the shutdown of the home water business in Europe is part of the Consumer Group Segment.

The receivable that is in litigation was Consumer?

I am sorry. There was a couple, and the receivable that I believe you're referring to, which is the one that was in litigation, is also in the Equipment Business Group segment.

Very good. A couple of questions. Just looking at the P&L the equity income line looked a little bit light, although it jumps around. Was there anything in particular going on there, which also leads into how are the Trinidad operations going?

I'm not sure I understand. The equity income line -- we still have occurred -- we've got three items in the equity income line, two of which were producing income. We were still showing a loss in Trinidad related to costs there, but I don't think that they reflect any long-term issues.

But Trinidad is still a bit of a drag there?

Trinidad is still a bit of a drag, but we expected that. I think at the last quarterly conference call we thought we would be -- really not until the fourth quarter of this year that we started to realize earnings from that project.

I just wanted to make sure that was all there was in there. Finally, and I will let some other folks jump in here, on the Ultrapure, I believe he had had a shipment that maybe got pushed into this quarter. Did that occur, and did it help the number, and maybe more importantly, what is the activity like, and you position in Asia with the activity going on there?

The project got booked in the quarter, but it didn't get shipped. And I am sorry, I missed the second part of the question?

This second part was really just the tenor of the Ultrapure. There has been some positive noises coming out of the semiconductor industry. And specifically how is your position in Asia, and how are you going after additional business there?

There was the one slide I showed that showed the revenue by the different groups. And Ultrapure actually was a little bit larger this quarter versus a year ago. But we are not seeing a material change. We have two basic business activities that relate to microelectronics. One is, of course, capital equipment sales, which continues to be very soft, although we have recently got some bookings there that are encouraging.

The other is that we actually have a service business where the amount of revenue that we get is proportional to the amount of water that the customer uses. And when the semiconductor plants are running at low utilization rates, the water usage rate goes down, which reduces our revenue. When the water -- when the fabs start running at a higher utilization rate, it increases their water consumption, which leads to more revenue for us. So that part of the business has actually picked up a bit.

But I would say it is premature to say that a recovery in the semiconductor industry is going to result in a significant uptick in our capital equipment sales, although it is true that we have actually received a couple of bookings this quarter in that space.

Debra Coy (ph) with Schwab Capital Markets.

Just to clarify Tracy's question in terms of breaking out these charges, and we can run through some of these numbers ourselves. But can you're just kind of give us a sense of what you think the normalized gross margin is in the Equipment and the Ultrapure groups? And it looks to me, as fast as I could tell, that you still had -- taking out all of the charges -- that you still had a loss of about 5 cents on the quarter, give or take. So I'm trying to see where the margin trends are in those key groups, because actually the sales trends are decent.

I would say, Deborah, that one comment that we've made to bear in mind is that the restructuring savings are not really apparent yet. And that does effect to some extent, COGS and also SG&A. What that said, if you take the margins, gross margins, for the quarter, absent the items that we discussed as non-recurring, they were approximately, and this would include Elite, the business that was moved to discontinued ops, of course, taken out of the picture. They are running at about 26, 27 percent, and essentially flat with the prior quarter. And that is in aggregate.

So no deterioration, they are just kind of hanging in?

Right. The other thing, Deborah, to keep in mind is that the increase in revenues is largely coming from Kuwait, and we have to defer 25 percent of our gross margin.

And that continue through the next couple three quarters?

About six more months, yes.

Then the big picture question. Obviously these are three very large significant projects that you're in the process of booking. Can you talk a little bit about what you see as the risks? We can look at these basic outline of the economics, they are certainly potentially very significant on the earnings lying, although some ways out. Do you see you risks in financing? It looks like you have pretty strong partners. What do you see that may or may not keep these things on schedule?

Typically it is the upfront work of securing the contracts, the legal supply agreements, and then the financing. Unfortunately, you can't tell you can get the financing done until you've got a supply agreement that is done. And so it is hard to parallel process the activities that have to go on. A number of them by definition have to be done serially. And so the risk -- I think the financing risk is there.

I think the commitment in Algeria is strong toward solving its water problem. The government has announced since this project was awarded that they have, I believe, three or four more projects. They are about half the size individually, but they total twice as much water as what this project is committed to.

Yes, that's right.

I think the government in Algeria is committed to it. I think the government in Israel is committed to solving its water problem. The Ashdod job, that actually is a job that doesn't have a financial risk, because for us it is just a capital project. So I think that that one is -- I don't really see the risk for delay of that project. I don't see what could get in the way there. But both CDL and Algeria, probably the thing that most likely result in an extension of the project timeline would be a delay in securing financing. And sometimes that can happen if it takes us a long time to secure the water supply agreement.

And the water supply agreements are backed by basically government guarantees? I am just thinking about what -- I presume these are -- you don't have the issue of a Trinidad Bank. These are global banks that will be looking to finance these projects. Are they backed by government guarantees on tariffs? I'm just trying to get a sense of how much risky you face? Obviously that is the bottom line.

The reason why Sonatrack is the guarantor in Algeria is because it has got highest credit rating of any part of the government. It is the part of the government that deals with the National Oil Company. And it is a well-known credit in the market. And that is why they are the guarantor of the water supply agreement. So I don't --.

That is about as sure as you can get it.

About as sure as you can get it, yes.

Just to finish up, on the timing on those, you won't be booking -- since that is a majority-owned project, you won't be booking any revenue until it is actually up and running?

Correct.

And on Ashdod you will be booking revenue during the construction process on a percent complete basis?

Yes, although it will flow through equity income.

But it will flow only through equity because it is a 50-50 JV?

Right so --.

But there's no holdback because there isn't an operating agreement?

No.

CBL then also is a 50-50 JV. It also comes in through your equity income. And you would book revenue during the construction with a 50 percent hold? How does that work?

Yes, on CDL we would do essentially that.

Nathaniel Pulserfer (ph) with Pulserfer and Associates.

During the presentation one of the slides you referred to the Algerian Energy Company, I presume this is Sonatrack?

Yes, that's correct.

Could you discuss the method of pricing sales to affiliates, with a specific reference to the UDC Kuwait project?

The method of pricing of sales to affiliates. In UDC we are 25 percent shareholder. We had negotiated a supply agreement with the company, which is 75 percent owned by the Kharafi Group, for the supply of a combination UF RO treatment facility. And that was negotiated basically with Kharafi.

And then from an accounting perspective, as we sell and supply equipment to that project, we realize the revenue in proportion to the cost that we incur on the project. Except we have to defer 25 percent of the gross margin because we own 25 percent of the company that is buying the equipment. The sale price on the equipment is a negotiated -- effectively it is negotiated between Ionics and Kharafi.

Thank you for that clarification. The 4.8 million charge for a product retrofit, I understand that was in the Equipment Group. What products or products groups are subject to this retrofit charge?

We would like to -- we haven't been public about the specifics because we want -- we are in the process of contacting our customers with our proposal and program, and trying to solicit their support. So I wouldn't want to go into too much detail.

Fine, leave the matter right there. We will pick on that later on. And finally, I would like to print the slides, but I'm not able to. Is this a possibility or can somebody send me a set?

Usually there's a print screen function I believe. We are filing this presentation as part of a 8-K filing, which will give you the opportunity to get it.

Lorraine Maikis with Merrill Lynch.

Just to follow up on the retrofit, could you just clarify. Was this a problem with one of the products you had sold, or is this just something that you are doing to upgrade for your customers?

It really resulted from an examination of what was going on in some of our plants that were aging in the field. They were out of warranty, so it is not a warrant expense. It is not something that we were having a problem with because products were failing in the field. But what we realized is that there was an issue regarding maintenance on plants as they aged. And we have an improvement in parts that are used on the system that help deal with that.

And we just felt that it was important enough that we should offer to go to the customers and share the costs of making these upgrades. I think it is an effort on our part to try and make sure that our customers view us as being a quality supplier of water treatment systems. We didn't -- arguably I don't think we had to do this. But we decided to undertake it. It is frankly part of our overall effort to improve the image we have in the marketplace. One thing I can say about this, this is not related to our seawater RO activity, so if that is a concern.

Just from a strategy perspective, are most of these repeat customers, or are you concerned about word of mouth?

Some of them are repeat customers, yes. And some of it is just a general level of customer satisfaction. We believe that customer satisfaction in many projects is a competitive advantage for us, and we want to maintain that.

Moving on to the build, own, operate write-off in Spain. I know this was more of a onetime event. I guess what I'm trying to get a feel for is the possibility of further build, own, operate write-offs. Do you often have long-term guarantee supply contracts or is this a danger for other projects?

My own view of it, my own assessment, and I was the one that actually really took the decision that we should write-off this plant. This is a project that I wouldn't want -- I wouldn't want to enter into this kind of a project today. The plant was designed for a specific application. Almost all of our other BOOs -- most of our other BOOs are seawater RO. There are other BOOs that are surface water treatment or brackish water treatment, but they are water treatment systems and basic water treatment technology.

If we have a situation where a customer decided to stop paying us, we could take the equipment, remove it and use it in another application readily. In this particular case, because the equipment was specifically designed for this application, we were not able to do that. That is the main reason for the write-off.

I think, in general, we have been careful about credit risk and credit assessment on the part of the purchaser. Certainly when you get into larger jobs, we're dealing with government agencies or large corporations, and credit risk is important in assessing the job. But in this particular case, the combination of poor credit of the customer and the specificity of the equipment is what led to the problem. I would say that this was the first time in our history that we've had a credit problem with a buyer of one of our operating services.

And then finally, what is the remaining goodwill balance on your books?

It is about 7 million, 7 to 8 million.

(OPERATOR INSTRUCTIONS) Berna Pashi (ph) with ATI Capital.

Just a couple of housekeeping questions before a more a general one. The Watertec Australia, that you said -- that would be in COGS, is that correct?

That was basically inventory write-offs which would be in COGS(indiscernible).

And that is the in the Consumer Group?

That was in Ultrapure.

Ultrapure, okay. The AR write-off in equipment, the .8 million, that you said was in the Equipment business does that go in SG&A?

That is in SG&A.

Okay, and the process of reengineering, $200,000, that is not segment related, is it?

No, that's SG&A.

Let's see. You went pretty quickly through the slides, but in talking about that CDL project, I think you said that you were looking for the GAV to do a profit after-tax of 2 million on 18 million of revenue, and 17 million of equity, is that right?

Yes.

So I guess what you're looking at it for the JV to have a 12 percent ROA?

Yes.

And is that the threshold from which -- I can't remember on the prior calls what you said about IRRs and ROEs.

Yes, we're using a 15 percent IRRs, and a 10 percent ROE as a threshold.

And when you think about the ROE, it is a projected ROE, so I guess, whether you are a company or a private equity investor, whoever is looking at an ROE when something is projected, you have to discount what the rate -- discount the possibility of a shortfall, or any other kind of noise around what your end result is. So I guess when you think about what is a good conservative ROE and how much do you have to -- 20 percent -- if 10 percent is the benchmark, is 20 percent enough room to give you for the fact that you are forecasting?

We deal with that by putting contingencies in our cost estimates and our operating cost estimates. So we put in contingencies in the cost of the facility. And we put in contingencies in the operating cost of the plant. And of course the higher -- we're dealing with a higher risk area, we put in a higher contingency.

So when you talk about a 17 million equity investment, if you were -- I don't how much you leverage these things, but say you are levering at 100 percent, and it was 34 million to build. Does that does that mean when you say contingencies, does that mean that it might actually cost less than 34 million to build? That you are leaving yourself a little room?

Correct.

And the same thing on the profit after-tax, you're assuming an operating margin that might be a little bit lower than what you think you can reserve -- what you can actually achieve? Or the interest rate is little higher than what you think it might actually end up being?

That's correct.

And in terms of the Algeria project, you said that you expect to start building that in July '04, so that is eight or nine months away. Will you start building that before you have financing in place, or will you wait for your financing?

We will wait until we have financing.

I think that is all my questions. And I would just echo what the other caller said, it would be helpful if you filed the slides because it could go faster then.

We will do that.

Richard Eastman that with Robert W. Baird.

I have to clarify one more of these charges. The account receivable write-off that is in litigation that you essentially wrote down, is that in SG&A?

Yes.

Then in terms of the payback to you, I just want to clarify too, on this product retrofit, this is out of warranty. There is no payback to you on this other than, I guess, goodwill, right?

Yes, --

Goodwill on the operates?

Right, there are some revenues that is generated because some of what we're undertaking is going to be on a shared revenue basis -- a shared cost basis, I should say. But in terms of a tangible return on investment, no, we can't measure a tangible return on investment. It is goodwill.

Okay. On the balance sheet, just wanted to clarify just one item. The due from affiliates number declined by about 17 million -- the receivables from affiliates companies? Is that the collection on the Trinidad project?

You are talking about from the prior quarter?

(indiscernible) sequentially?

The biggest of that was the Trinidad project, and the collections that we had following the close of financing. We also caught up on the Kuwait project. We are a little behind as of Q2, and that influenced that number as well. So the combination of the two brought the affiliate receivable number down.

On Trinidad, I know we had talked about that not being much of a contributor until the fourth quarter, but I was perhaps expecting in the third quarter here that it would be close to break even, in which case, sequentially, we might be able to show some progress. Did we take a step back or something delayed there? Because I think in the second quarter we lost about 3 million I thought? And in the third quarter we're still losing?

Yes, in the second quarter of course we had some abnormal charges related to the closing of long-term financing and some of the settlement issues. But, yes, you are correct, Q2 was extraordinary in that sense.

But we're still losing money here in the third?

Yes, we lost about 300,000 in the third quarter.

And this lastly, Doug, you had mentioned on the bookings front ,82 million, the tone was a bit better. Do you have any confidence that our bookings in the fourth quarter can push to the 90 or better million?

Well, we believe we have the opportunity to do that. Obviously, closing deals -- I am a little cautious to forecast, but bidding activity is significant. I think there are clear signs that the economy, the improved economic environment is starting to have an impact on people's view of their water needs. I think that there is a good prospect for that, of course, notwithstanding what is going on with these big projects.

Is the improvement in the tone at least, is that more industrial or is that Ultrapure, and is it here or in Asia?

Ultrapure here in the U.S. I would say is fairly stable. Ultrapure in Asia is picking up. But the main issue I think is our industrial customers in general, which do tend to be Ultrapure users right, because they're looking for processed water, that is improving.

We've got some big projects that are coming out of the petrochemical chemical and the petroleum industry, for instance. The other area is just the whole area of desal. Desal is -- I think as the markets have absorbed the fact that they can get desalinated seawater on the order of 70, 75 cents a cubic meter, I think the more people are recognizing that is a solution to their water problems. And we're seeing a lot of interest out there in developing these projects. Some of which are smaller projects, for instance, in the Caribbean. And some of which are big projects. The big projects obviously take a long time to matriculate.

Adam Kamora (ph) with Intrust Capital.

The last time you had your conference call it sounded like you were talking about potentially moving away from build, own, operate and for us to sort of thing about the equipment business as sort of a no growth stable business. But now you've had a little bit more time, and it sounds like you're excited about Algeria, should we now think that you guys are going to refocus on the build, own, operate?

If I misled you, or gave you the impression that we were getting away from the build, own and operate, I am afraid that was not the right conclusion I wanted to get across. We are focused on -- we like the build, own and operate business. Effectively we look at that as being in the business of being an unregulated water utility. And we like that business. It's got recurring revenue, higher margins. It requires an investment of capital. It requires us to be smart about how we build and how we operate the plants.

But we think we've got the experience base to do that, which is why we have actually said we wanted to focus on plant operations as the part of our business that we wanted to build. And so we did say in the last call, where we talked about restructuring, that we don't plan to grow our capital equipment business, but we do plan to grow our plant operations business.

The thing that was -- I always was trying to get across was the desire to build a balanced portfolio, balanced both in terms of size. We don't want to become over reliant on large projects. But also balanced based on geographic location. We don't want to be overly concentrated in the specific country or a specific area.

So BOO is definitely an area that we're building our business and we're investing our capital. I think the reason why we are encouraged about the market is there is definitely a trend in the market to outsource water services. Both industrial customers and municipalities recognize the benefits of having somebody who's experienced in building and operating water plants, take that responsibility. And so we are trying to leverage off of the market trend, and what we believe is a good market position for Ionics.

What percentage of your revenues right now are those sort of maintenance or, excuse me, recurring operation type revenues?

In the last call I had shown that we are actually considering revising the format in which we report our financials as we restructure the Company to separate -- to look separately at capital equipment sales versus what we refer to as plant operations. Plant operations currently is about 110 million business for us, and capital equipment sales is about 175.

I'm assuming based on that -- so it is about 40 percent of your revenues are those plant operations. And I have to assume that they are running sort of at those margins that you're saying that the new projects are going to run at. So given those two facts, are we still -- it looks like we're losing money on the capital equipment sales. Am I going to the right analysis, or maybe your older plant operation contract is not as profitable as the future ones that you're signing now?

When we get to the point of being able to present our financials in our revised format, I think you'll see that the plant operations is a much more profitable business. Capital equipment business has not been profitable for us necessarily in the past. But part of the reason why capital equipment hasn't been profitable is because of our organization structure that we've had. So the reorg we're anticipating is reducing our costs of our capital equipment business so that can be profitable as well.

Just on some targets for Q4 and '04, and maybe if you can just help us understand what 2004 CapEx might look like including some of the JV investments?

We haven't given an estimate for Q4 at this point, because with the restructuring going on there is a lot of moving parts, and frankly we didn't feel it was appropriate to give guidance on the quarter. We did give quarter guidance for next year on about 60 cents a share before restructuring charges. Our capital spend is about 30 million -- forecasted about 30 million for 2004.

That includes JV investments?

There is probably about another 5 to 10 million in JV investments.

John Queely (ph) with Adams Harkness and Hill.

Just a quick question on the macroenvironment and the competition in the water filtration space. This quarter we have seem significant announcement of divestitures, or planned divestitures US Filter and Beolia, as well as ITT saying that they would actually like to do some acquisitions in this space.

First question. How is this changing environment affecting pricing of your products in your business. And secondly, would you folks look to pick up any types of business moving into '04?

First of all the pricing environment. We think that our two biggest competitors, Suez and Vivendi (ph) -- Onvay (ph) and Vivendi -- the parents are both experiencing some financial difficulty, which is I think put a constraint on their capital availability to invest in these own and operate projects. We saw that, for instance, in Algeria we had limited competition for that, which is why we pursued it, and why we think we got a contract award that what looks to us to be an attractive water rate.

So right now, I would say that from a competitive perspective on the build, own and operate it is a pretty decent environment. It is hard to forecast what was split up with Filter is going to mean. Obviously they have been the giant in the industry, given how big they were. They are clearly going to be distracted right now as the business gets split up and sold off in parts. And the fact that it is going to be sold off in parts could mean that in the long-term it won't be as competitive an organization as it was when it was three times its size. But we will have to see. I think that is hard to forecast.

Right now the turmoil in the marketplace, frankly, is good for a company like us. We're focused and we're independent. In terms of, are we looking at properties that are in the market, we don't speculate on rumors about acquisitions or divestitures. We won't talk about acquisitions or the divestitures that aren't real and committed. But needless to say, we're going through a restructuring program.

We have announced a divestiture of certain noncore assets. And you can imagine that we're taking a look at other businesses that we think might be strategic. We made a small acquisition in Cooler Smart (ph) earlier in the year. Admittedly it was small, and for a specific purpose. We certainly are aware of what is going on in the market on the M&A side, and looking at it from the prospect, is there something in it for us.

The second question, with regard to the '04 guidance at about 60 cents per pro forma, I believe in the restructuring call a month, that that was just taking into account much of the savings just from severance and employee cutbacks and consolidations, etc. I did not think it included things like the consolidation of the supplier base our medical employee benefit plans.

Have you folks don't anymore calculations in the interim month here about the potential additional savings moving into '04 and beyond?

We certainly have. But we're keeping that to ourselves, I'm afraid.

Cliff Josephy (ph) with HD Browse (ph).

Doug, I guess earlier this year when the backlog got reported incorrectly, and last year when the intercompany transactions between the Company and its French subsidiary were erroneously recorded, were you the CEO?

No.

Were you working for the Company at that time?

No.

Were you the head of the audit committee at that time?

Yes.

I have no further questions. Thank you.

Debra Coy.

I promise that my question will be a little different than that.

I appreciate that, Deborah.

Actually, in fact, I think you kind of answered this, but I'm wondering if you -- and I understand that you're not willing to comment on what you're seeing in terms of savings. But are you feeling pretty comfortable with your restructuring charge expectations? You have been out there uncovering stones. Are you turning up other stuff, or is the outlook for additional restructuring charges over the next couple of quarters still looking pretty much like what you laid out at the beginning, or a month ago?

We go through -- we're going to go through a process every quarter of evaluating the businesses that we have. I don't feel -- I feel based on what I know today, I don't see any other charges, other than what we have forecast in our previous call that we expect to undertake in the subsequent quarters. But I want to reserve the right to make a decision to change our strategy -- refine our strategy, I should say, by deciding that a small or nonstrategic business may not be part of us in the long-term.

So things like that could happen that could result in a change in our outlook or a change in our strategy. The basic strategy, though, the basic study of focusing on the plant operations business, of continuing to be in the capital equipment side, but making sure that we have got our costs under control so we make money on capital equipment sales, that is not going to change. There could be one or two other decisions relating smaller parts of our activities that could result in additional charges. I don't see them today, otherwise I would tell you about them. But I do feel good about the direction we're going and the effect the restructuring is having.

Sure. Certainly it is an ongoing process. But what I'm trying to understand more in the next quarter or two is whether you're sort of through the process of doing the financial and the project review. Because one of the issues with Ionics has been that with this project in Malaysia, or now it is this project in Spain, or this project here and this project there, have you pretty much run through the portfolio? Have you looked down through all the organizations? Do you feel like you know what you've got out there at this point?

I feel pretty good I know we've got. It is still possible that there are one or two things out there that I'm not aware of that could be of future surprise, but I feel pretty good about it. I certainly feel like, Deborah, that all of the big boulders have been turned over.

So we're down to little rocks?

Yes.

And so that we could look forward to a clean quarter in, say, at least by the June quarter, if not March?

I certainly intend it to be that way. I want to be in good shape by the beginning of next year.

Nathaniel Pulserfer.

Doug, if Ted Papastavros is there, Ted, good afternoon. And perhaps in the next quarterly report you could include a cash-flow statement. That would be very helpful. Thank you.

Tracy Marshbanks.

Just a couple of quick ones. It was very helpful that you ran through some of the parameters on projects that you have in the pipeline. What are you likely to discuss as far as, if you will, ongoing operations and similar parameters on your larger BOO projects? Can we look forward to something like Trinidad is running out X revenue and doing X pretax, or after-tax, or is that too much?

We're wrestling with that right now. So I would like to ask for a quarter or two to be able to give you some better view on that. But my bias is to try and be more transparent. We know that the Company has had issues in the past about its transparency. I would rather be more transparent. The only thing I have to balance again that is the need to maintain confidential information, which I wouldn't want our competitors to get a hold of.

Good now. As long as you are wrestling with it. Final question from me, you did the Cooler Smart, a small acquisition that you had mentioned, and you sort of alluded to at the time that you are going to look at that business, see how you like it. And you may have had some of your own developments. Have you learned anything yet? And what size type of timeframe might it be before you have conclusions? And whether you announce them explicitly, we might be seeing some activity in that area?

We are obviously working with Cooler Smart. We're actually quite happy with that acquisition. I would say that we are developing a better understanding. We actually, I don't believe, have any significant surprise that have come out of that. And our model seems to be proving out, but we're also working on some refinements to the model to see if we can improve it. But overall, we're pretty encouraged by what we have seen so far, but being cautious and conservative about it. It is a little too early for me to declare any conclusion.

The real issue you're dealing with is more that your business model, business quality and market versus a particular technology?

There is a technology issue too, in terms of what do we put in the coolers, and the cooler design. And we are looking at some alternatives there. We actually have an interesting play there we think with our own technology. But again, it is still a little bit early to come to conclusions.

Mr. Brown, there are no further questions. I will turn the call back over to you for any additional or concluding remarks.

I would just like to take the opportunity to thank everybody for participating. I appreciate the late hour. And we look forward to talking to you again next quarter about our results.

This is a format that we would like to use, where we provide both visual information along with the conference call. We will take the feedback about the slides and being able to spend a little bit more time on the slides as we go through them. I appreciate that. So thanks again for your interest, and thanks for participating.

And that does conclude today's conference call. We thank you for your (technical difficulty).