奇異 (GE) 2003 Q4 法說會逐字稿

Good day everyone, and welcome to this Ionics Inc. 2003 financial review teleconference. This call is being recorded -- at this time for opening remarks I will now turn the call over to the Chief Executive Officer, Mr. Doug Brown. Please go ahead, sir.

Thank you very much and welcome, everybody, to our webcast, where we intend to review our financial results for the fourth quarter which ended December 31 of 2003.

The first thing I would like to point out is that under the Safe Harbor statement, that this webcast will contain certain forward-looking statements. Forward-looking statements are not guarantees and contain risks. Future results may materially differ from the forward-looking statements made today, and I would encourage everybody to read our 10-K which was filed yesterday for a complete listing of the risk factors.

In the 10-K and our press release, we announced the results for the fourth quarter. This first slide has a summary of selected P&L information, and as you can see we reported revenues in the quarter of 89 million. Cost of sales were 66.4. SG&A, which included R&D, was 34.4. We have had restructuring charges and impairment, along with asset charges of about 2.1, and we reported an equity income loss of 4.4. So our earnings before interest and tax was negative 18.3 million for the quarter. After 700,000 of interest income, our pre-tax loss from continuing operations was 7.6 (technical difficulty) million. The next several slides I am going to go through, though, are intended to review for you specific items that were in the P&L that affected that P&L summary. And I'm going to break them down into four categories -- items that, first of all, affected COGs or cost of goods, items which affected our SG&A line, items that were in the restructuring or the impairment of long-lived assets and then items -- unusual items or specific items that were in the equity income line. So I am going to try and take you through a number of costs that were in the P&L in each of those categories that resulted from specific decisions that we were taking in the process of restructuring our business.

The first item is related to consolidation of our manufacturing operations. We had previously had manufacturing operations in many locations around the United States and around the world. I think those of you who are on our restructuring conference call recalled that we were going to consolidate those manufacturing operations into fewer, larger facilities. We felt that that would improve the efficiency of our manufacturing activity.

As a result of closing or discontinuing the assembly of water treatment systems in certain facilities in the United States -- in particular, in the West Coast and in Phoenix, we had inventory that we wrote down at the end of the period, because we would no longer be using data inventory in the process of making systems in Phoenix and on the West Coast. That resulted in a cost of about 500,000 or a charge of about $500,000, which showed up in our cost of goods line on the P&L.

The next item is related to our U.S. home water business. This is the business where we sell water softeners to residential users. This business had previously been conducted in two principal or managed in two principal locations, one in California and one in Pennsylvania. We made the decision that it would be more efficient to consolidate that business into our California facility, where we had a particularly good management team with a demonstrated record of being able to successfully manage this business.

However, that California business was acquired by Ionic's several years ago and had a purchase contract which involved the payment of annual payments to the sellers based on the performance of that business. The nature of that contract made it difficult for us to consolidate our Pennsylvania business into the California business without restructuring that contract that would have resulted in inflated payments to the sellers of the California business. So we restructured that purchase contract, which resulted in the acceleration of payments to the sellers. That allowed us, then, to go ahead and consolidate our Pennsylvania softener business into the California management activity. That resulted -- that was the primary expense related to the U.S. home water business, which showed up in the SG&A line.

Process reengineering had about 1.4 million of costs in the quarter. The majority of this 1.2 million is for our Oracle implementation, which is underway. There was no such expense in the fourth quarter of 2002. So this is a new expense item for us, as we undertook this program starting Q3 of this year.

In addition, we had about 200,000 of expenses that were repaid to Ernst & Young related to our 404 readiness program. We have an active program underway to prepare for Section 404. It's involving not only the commitments of inside resources, which are not in these cost items, but it also includes the retention of Ernst & Young as an outside consultant to help us get ready for that. And this is reflecting only the outside expenses related to those programs.

The next item and the largest line item in the restructuring plan relates to a decision that was made by the Board on December 30th of 2003 to freeze the benefit accruals of our defined benefit retirement plan. This benefit accrual freeze has been implemented effective March of 2004. But as a result of the decision made by the board, we took a charge in Q4 of 5.4 million, which is related to the acceleration of the deferred service cost of the benefit plan. The objective of taking this decision is to reduce our fixed cost compensation schemes and replace them with performance-based schemes. And so the defined benefit plan has been reduced by a combination of defined contribution plans, which includes plans involving company-match of contributions to the 401(k) program and a company profit-sharing plan that pays out, in the event that the Company hits its financial targets. In 2003, for reference, the defined benefit plan and SERP costs that were contained in the P&L was approximately $3.5 million before curtailment.

The next and the last item in the SG&A line is related to bad debt expense. Now, normally we would expect bad debt expense in every period. But the 1.8 million was clearly more than what we anticipated. And this is related to, really, two key decisions. The first one goes back to the consolidation of our home water business in California. In addition to restructuring of the contract related to the purchase of the Fidelity business in California. We also then took our portfolio, our loan portfolio, and transferred it from Pennsylvania to California. Now, when we sell home water softeners, we offer the consumers the financing for the softener. The financing is attractive from our perspective, because it carries with it an interest rate in the mid to upper teens. And so it's an attractive portfolio.

But before we had consolidated these businesses, we had two portfolios, one managed in California, one managed in Pennsylvania, using different management methodologies. When we convert the business and consolidated in California, we transferred the Pennsylvania portfolio to the California system, which used a different methodology. And the conversion process resulted in a $400,000 write down in the value of that loan portfolio.

The second major item was a $750,000 write-off related to a few contract receivables. These are older contracts that are still working their way through the system. We are actively trying to collect these receivables. But, given the difficulty of collecting, we made a decision to take a reserve against them.

That results in the total charges in Q4 related to our SG&A column -- or SG&A line -- of almost $10 million. The next set of charges are related to restructurings and impairment of long-lived assets. On the impairment of long-lived assets within Ionics, we took a $1.8 million charge in total. This really is the sum of a number -- about half a dozen smaller items. For example, in Phoenix -- we used to assemble water treatment systems in Phoenix, and some of those were assembled for the microelectronics customers, where we would assemble the systems in a clean room. We had about $400,000 invested in a clean room facility in Phoenix, specifically for assembling water treatment systems. And the process of deciding no longer to assemble systems in Phoenix, we wrote off the $400,000 clean room. There were about half a dozen items like that totaled up to 1.8 million. They were all related to the decision to consolidate our manufacturing into fewer locations.

Next item is a restructuring charge of $300,000. This is basically severance costs, related to layoffs which occurred in the quarter. As of December 31, we had achieved a total headcount reduction of 160 people from the time we started our restructuring program. In Q1 there had been another 20 reductions that have come through a combination of some layoffs, but mostly through management of attrition. We expect that -- we had a program which we described in the fall that involved a period that extended through the second quarter of this year. But the bulk of the restructuring activity has already been done.

That resulted in a total of 2.1 million related to restructuring and impairment of long-lived assets.

The last set of items is related to equity income. The first line item is an asset impairment that actually occurred in one of our affiliates. TMA, which stands for Torre Manufacturing of America, is a joint venture we have with Torre, who owns 51 percent, Ionics owning 43 percent, and the balance is owned by Mitsui. And they are in the business of making reverse osmosis membrane elements. TMA owned assets which were intended to be used for membrane sheet extrusion and membrane manufacturing. Recently, Torre made an investment in Japan, in equipment which was more efficient than the equipment that was owned by TMA. And it was determined that TMA could lower its membrane manufacturing cost by supplying materials or by purchasing materials from Japan instead of making them in-house. As a result of that decision TMA was going to take a -- is taking an asset impairment charge against the assets that were going to be used for membrane sheet manufacturing. The $3.8 million charge is Ionics 43 percent share of the total charge incurred by TMA.

The last item on the list is income from affiliates of minus 1.2 million. Now, in total, the equity income for Q4 was showing a loss of 4.4 million. You can see that these two items total 5.1. The obvious implication is that without these items, we would have had 700,000 of equity income in the quarter. But as a result of these items, we are reporting a loss of 4.4.

So the balance of 1.3 is related to two specific items. The first item relates to Trinidad. We have reported in the quarter an equity loss of about $.5 million. We had actually expected to make about 300,000. The 800,000 in unexpected loss was a result of an unplanned shutdown that occurred in the facility in the quarter. That occurred because of a control system malfunction. We have analyzed the situation and the plant is back online. We believe that the shutdown was created by a component failure, and we have modified the system to eliminate this possibility in the future. This is the first unplanned shutdown caused by the plant in its 1.5 years of operations. But it did result in lost water sales during the quarter which cost the Company about $800,000 in lost margin. And as a result, instead of reporting and income of 300,000 for the quarter, (technical difficulty) reported a loss of 500,000 in the quarter.

The plant is up and running. It has been up and running for some time. The Phase V expansion, which we previously talked about, is underway. And we expect to have that online in Q2. And so we are quite pleased with the operation of the facility. We are obviously not pleased with an unplanned shutdown in any plant we have. But in my opinion, the question is, how do you respond to an unplanned shutdown? They happen -- it happens in the industry. We responded quickly. We got the plant back online as quickly as possible. And I think we did a good job of analyzing what the problem was, fixing it and making sure it's not going to happen again.

The second item in that 1.3 million is a 400,000 loss related to the operations of TMA. I think it's important to understand -- TMA during the quarter of Q4 and in fact currently is primarily running at 24 hours a day, seven days a week, primarily to produce reverse osmosis membranes for our Kuwait project. However, TMA does not use percentage-of-completion accounting. And because the membranes have not started to ship to Kuwait and in fact won't start to ship to Kuwait until Q3 of this year, TMA records no revenue related to the sale of those. So it is reporting the expense of operating itself -- it's reporting the expense of its overhead. But it is not generating margin from the sale of membranes, because it is not shipping the membranes to Kuwait. So, as a result, in Q4 TMA reported a loss of 400,000 -- or our share of the loss was 400,000, I should say. But when membranes start to ship in Q3 of this year for the Kuwait project, we think TMA will realize significant revenue and earnings from the shipment of those membranes.

In total, then, that provided about $17.5 million of what we would categorize as unusual items in the P&L for the quarter. I'd just like to make two observations relating to the P&L. The first is on the SG&A line. In Q4 of 2002 we recorded 28.7 million of SG&A. In Q4 of 2003 that SG&A increased to 32.5 million. However, that 32.5 million, as you have seen in the previous slides, included a number of restructuring charges. So we think we have been successful at significantly reducing SG&A in the Company, although we also recognize we're not finished with this task. This task is also complicated by the fact that, while we are trying to achieve these reductions, certain costs have increased substantially. For instance, on the insurance side, our D&O insurance was renewed during the year at a $400,000 cost increase. Our auditing fees with PWC in 2003 are some $1.2 million higher than they were in 2002. And on the benefit plans -- pension plan -- expense increased from some $2 million in 2002 to 3.5 million in 2003. So, despite those increases in costs in the SG&A line, we think we have been successful at achieving a significant reduction.

The next item I would just like to point out is on the revenue line. On the surface, the first thing that the reader would see is a reduction in our gross margin from Q4 of 2002, where it was 29.5 percent, to Q4 of 2003, where it was 25.3 percent. However, I think you need to understand the reason for that gross margin reduction and what is driving it. In 2002, in the fourth quarter we had $84 million of revenue. About 81 million of that was third-party sales with an average gross margin of 30 percent. $3.1 million of sales was primarily related to Kuwait, where our margin is low because of a combination of it being a large project, where margins can be lower and the fact that we have to defer 25 percent of our gross margin to reflect our ownership position in the joint venture company which purchased the equipment.

In Q4 of 2003, we actually reported higher revenue of 89 million. But third-party revenues were down from 81 to 75 at approximately the same margin, and affiliate revenue was up substantially from 3 million to 13.8. And a large part of that revenue was actually affiliated with Trinidad, where we are doing the Phase V expansion -- where we get to recognize zero gross margin on the shipment of that equipment. So if you look at Q4 of 2003, of the 13.8 million in revenue, 9.5 million is related to Trinidad at about a 13 percent gross margin, and 4.5 million of that revenue is related to Trinidad at zero percent. So the first part was Kuwait and the second part was Trinidad. And where you add the net result is a combination of those two is about an eight-percent margin on 13 or 14 million of revenue.

Now, it is concerning, on the next slide, we will see -- you know, it is concerning. The decline -- the shows the revenue graphically -- the revenue comparison of Q4 2002 versus Q4 2003. We were not expecting a decline in third-party revenue. And this is of course something that can be concerning. But we have taken a look at what is behind that. And although there obviously was some softness during the quarter, in terms of booking -- there were two things going on in the organization at the same time, which we think led to distractions on the part of the sales force and the management team, which resulted in a decline in third-party sales.

The first was related to the overall restructuring of the Company. In addition to, as you recall, the restructuring effort is taking a large number of independent subsidiaries that have operated quite independently from each other, and consolidating them together and operating the group as one integrated group. Not only does that apply to manufacturing, which we talked about in purchasing. But it also applies to sales and marketing, where we had sales force that was not operating as an integrated sales force. But rather, individual salespeople working for individual subsidiaries and not necessarily doing a lot of communicating between each other. The process of reorganizing the sales force without a doubt led to disruptions in the sales process as people started to understand how they were going to work together, what their new assignments were going to be and how the group was going to be managed. So that was a disruptive force in organization during the quarter. And a second, of course, was the overall disruption caused by management's focus on trying to complete the Ecolochem acquisition.

Now, this slide looks at bookings by quarter. And it does show that bookings in the fourth quarter actually were reasonably strong, in the $86 million range. But I would point out that about 12 million of that booking occurred very late in the fourth quarter. And so we didn't have an effect on the fourth-quarter revenue and P&L.

At this point, I would like to just quickly touch-base on the balance sheet. I think you have seen the balance sheet in the press release. There is really not much to talk about materially, a very slight reduction in cash through the year -- increase in PP&E and investments in affiliates. And on the liabilities side debt is relatively stable at about $15 million.

At this point, I would like to conclude with a few comments about our current outlook for the business. In fact, I would say that we are encouraged about 2004 because of several things. The first, of course, is that we have additional cost reductions we have planned for Q1 and Q2, which we are in the process of implementing. And we think those will have a positive effect on the balance of the year. But also we expect to realize the benefit of cost reductions that we implemented in Q4 that will have an effect in early -- Q4 of 2003, which will have a positive impact on 2004.

For instance, as I talked about in the defined benefit plan, the fact that we have replaced that with a more cost-effective defined contribution plan -- that alone should save us 1 to $2 million a year.

The third point is that we have seen a significant recovery in the electronics sector. In the second half of Q4, and so far in Q1 of 2004, we have seen a significant recovery in electronics -- bookings for the electronics and microelectronics industry -- very strong interest in activity. This is encouraging for the balance of the year.

The fourth point is, of course, that as of the 14 to February of this year, we will begin to consolidate the Ecolochem results.

And then the final thing is that we do expect to be able to realize significant synergies of the combination between Ionics and Ecolochem. Certain things result in expanded coverage. For instance, Ionics has a facility in northern California and San Jose. Ecolochem's West Coast operations are outside of Los Angeles. We believe that we can use Ionics' facility in San Jose to regenerate Ecolochem's trailers, allowing them to get an access to customers in other California and the Northwest United States. And so this is a market opportunity for Ecolochem to penetrate a new region that they have not been able to penetrate before. There are obviously cost reduction opportunities. We have two sites in Southern California, Ecolochem has one, Ionics has one. One is well-suited for regenerating trailers. One is well-suited for regenerating bottles. We think that by better managing the load sharing between those two facilities, we can lower our overall cost of operations at those two sites.

In Texas Ionics has a relatively expensive bottle regeneration activity in Dallas. Ecolochem has a much more efficient trailer regeneration facility outside Houston. We are in the process of developing a plan that allows us to leverage Ecolochem's low-cost operation in Houston to lower the operating costs in Dallas.

In membranes, Ecolochem is a significant consumer of membranes. We intend to convert their business over to using TMA membranes that will save the business substantial cost.

On admin side, there are number of areas such as insurance and benefits plans, where we have gotten some proposals and some indications from outside vendors that we can save substantially by combining the two companies' activities -- the two companies' insurance programs and the two companies' benefit plans.

I think the key is that Ionic's will be consolidated with Ecolochem. We think that this brings substantial benefits to the customer base by providing for a better product offering. We not only are able to offer better full-water service to customers who want to outsource their water supplies. But we are also able to offer Ecolochem's customers capital equipment utilizing leading membrane technology for those that want to purchase their own systems.

So, between the benefits of consolidation, the improved consolidated product offering, we are encouraged that 2004 will prove to be a successful turnaround year for Ionics. The first half will continue to remain a bit choppy as we integrate Ecolochem and we complete Ionics restructuring program. But our long-term outlook for 2004, and for the latter half of the year, is positive.

At this point I would like to open the line up for any questions.

(OPERATOR INSTRUCTIONS). Tracy Marshbanks with First Analysis.

Good afternoon, all. I appreciate the timeliness of the 10-K and also the thoroughness -- plenty of bed-time reading there.

A couple items -- you mentioned impact on the sales force as well as managements' focus on sales. A lot of times that isn't only a one-quarter phenomenon, when you undergo a consolidation like this. What is your outlook on, if you will, the trend of driving your third-party sales?

Well, I think it's a fair statement that it's not a one-quarter effect. We expect Q1 probably to have some choppiness as well. We have worked through the quarter to not only restructure our own sales organization but now also two integrate it with Ecolochem's. Although we did some advanced planning from the deal, we could not really start making significant progress until after the deal closed in the middle of February, so in the end of the day it's probably the end of the quarter by the time we think we've got a sales organization and structure in-place that we are ready to run with. So, Q1, I think it's reasonable to think we'll be, again, a bit choppy on third-party sales.

On the other side of that equation, we have been encouraged on the capital equipment sales side by activity in the electronics and microelectronics sector. But bookings of new billed, owned and operated plants has been slow. The good news is that the business that we have doesn't go way. But we have not added new plants at the rate that we would have originally thought. But we think that, with the reorganized sales force and a recovering economy, that that is going to change going forward.

So, from your internal view, it's sort of the natural consolidation of the sales force, not some unwanted churn or losses that have impacted you?

No, I don't think so. They're been a couple of individual losses of people that we had not anticipated. But for the most part, we have been encouraged that the team -- people want to stay with the Company. They understand restructuring, they believe that it is the right thing to do. And they want to be members of the team going forward. So I think we have been pretty encouraged, by and large.

A couple questions on projects that you highlighted in the K. At Ashdod Desalination, you referred to a delay in that project. Could you discuss it a little bit? And at least, based on my notes in the prior quarter, I had CDL as a 50-50 -- and it looks like it showed up as a one-third. Was there a change, or did I miss it?

First on Ashdod Desalination -- Ashdod Desalination has been delayed because macro of the customer has been restructured. There's, I think, a review in Israel going on of the structure of the whole Macrob and the VSAL program that they were working on. We do believe that Ashdod will be a project that will go forward. It is true, I think you have read in the press and I think other analyst reports that -- there is speculation that some of the other projects may be restructured.

On CDL, that was originally a one-third, one-third, one-third joint venture. At one point, it was anticipated that one of the partners might drop out and we would become a 50-percent holder. That actually has not been done, and under the circumstances I don't think that is going to get done. So CDL, in all honesty, is a project that I think there are discussions going on about how to structure that. We had project awarded, subject to financing. We have been unable to obtain that financing. That is a common situation with other of the projects in Israel. And so I think that they're having to take a hard look at overall how those programs are structured.

Final question -- you talked about the pickup in microelectronics and semiconductor. Typically, that shows through in ultrapure. Have there been some offsets, or is it really the activities (technical difficulty) in the bookings, at this point? And yet to really flowthrough strongly? You can see some improvement from your lows (technical difficulty)

So far, it has only showed up in bookings. You have not seen any effect of it in the P&L.

Lorraine Maikis with Merrill Lynch.

I just wanted to get an update on the Kuwait project. Where we in terms of completion on that?

I am going to ask Ed Cichon to answer that question, who's here with us.

As of the end of February, we were 80 percent complete on construction.

So we should expect that affiliated revenues number to decline pretty sharply second quarter/third quarter?

It will play out over the first several quarters of this year.

Just so I understand it, the Torre joint venture relationship -- they are making membranes, selling them to Ionics for the Kuwait project? Or selling them to your joint venture?

They are selling them to the joint venture, ultimately. The joint venture buys the membranes. But that's part of an equipment supply contract that Ionics has with the joint venture. So the sequence is that we negotiate with TMA to purchase the membranes. We incorporate them in the plant, we build the plant, and then we sell the plant to the joint venture.

So you are buying from the joint venture but then you're also recognizing the equity income from the joint venture?

Yes, from the TMA joint venture -- right, not from the Kuwait joint venture.

And then, under the new reporting structure that you had discussed in the K, I assume that in the water systems line, we will have all of the Ecolochem revenue flow through there?

Yes, and we will have in water systems all of Ecolochem. And we will have additional data on equipment and operations. It will fall into the operations category.

And then we will also see your old equipment and ultrapure segments in there as well?

Not as such. The equipment revenue -- put it this way. We will have two broad categories within water systems -- one for equipment, one for operations. Equipment will include the capital equipment sales along with spare parts, and the operations side will include all of the billed, owned, operated -- the plant operations. All of Ecolochem will be in there, as well and service revenue and regen sales. So all of those will fall in the operations category. So what used to be equipment business and ultrapure will be put into those new categories.

(OPERATOR INSTRUCTIONS). John Quealy, Adams, Harkness & Hill.

A quick question, Doug. On the K last night, you mentioned that there is potential for over 15 million in a reduction of operating expenses moving forward in fiscal 2004, if I read that correctly. Doing the quick math here on your SG&A slide, if you take out about 10 million of one-time costs, it looks like year over year normalized SG&A dropped about 6 million. Number one, is that math right? And number two, can you fill in the rest for a potential further $9 million decrease in SG&A in 2004?

I think you had better be just a little careful about that analysis. I think SG&A in Q4 was a high number compared to the first three quarters of the year, so that's one thing. SG&A was always high in Q4, I think, it is what it comes down to, a bit higher. But I think we're trying to get down to an SG&A line that is in the mid-22's -- 21 or 22, for 2004. So that's probably the better way to look at.

Not all of the 15, also, flows through SG&A. A significant portion of that also impacts cost of sales.

Okay, great. Two other questions -- following up on the TMA and Kuwaiti relationship. Again, my understanding is you recorded or recognized 100 percent of the cost of sales of some membranes that had yet to ship. Is it reasonable to explain or anticipate that in a couple quarters you will have shipments with 100 percent revenue coming?

Let's be careful here. Again, what's happening in TMA is that they are building to inventory. So the cost of materials related to the production of those membranes is being accumulated in inventory. But they are not generating any gross margin. So all of their overhead is resulting in all loss. So when they go to start shipping membranes that they have made, that are in inventory, they will get gross margin from the sales, which will then more than cover the overheads that have been accumulated.

Also in the K, it looks like you consolidated 100 percent of Desalcott losses this past year, right around $5 million. Could you breakout in terms, if you can, how much of that was related to financing and other sort of closing costs that you did when you came on board, Doug, a couple of months ago?

We took charges in the $3 million vicinity mid-year that were related primarily to the financing in the negotiation of the EPC issues. And then we had the $800,000 impact in this quarter, which Doug just spoke about, related to the shutdown. So those items make up the biggest proportions of the loss for the year.

(OPERATOR INSTRUCTIONS). Deborah Coy with Schwab Capital.

Just to follow up on TMA and on the other equity income line in general. It has been dramatically difficult to predict where that is going to go, and I understand that there is one-time items again. But it seems like we have had a few of those of various sorts. Can you give us any help on what we should look for in terms of how this TMA -- higher margins with the new shipments is going to flowthrough? Obviously, hopefully, no more shutdowns at Desalcott. There were some other cats and dogs in there, related to Mexico. What I'm trying to understand is if we can have any visibility on what the equity income line should look like going through 2004? Because we can't see -- obviously, we can't -- I mean, is it 300 a quarter from Desalcott regularly? I know you are ramping up production down there. What should we expect from TMA? This is the line that is really yanking your earnings around lately.

I would say, under normal operating circumstances -- so if we assumed that there are not unusual events -- we're budgeting on the order of 2 to 3 million of earnings from the equity income line for the year. Desalcott should be running on the order of 2 or 300,000 quarter or more, frankly -- we're trying to be conservative with our outlook there. TMA is going to report a loss in Q1 again, because they are not shipping membranes to Kuwait yet. But by Q3 and Q4 those are going to be strong quarters, because they are going to be shipping something close to $10 million of membranes to Kuwait. So, that is going to be a good period for them. So I would say, if you are -- the quarterly predictions are a little bit difficult. But if you want to think about it from an annual perspective, again, the 2 to 3 million number is probably a good ballpark.

And then, looking on the capital equipment side, from what you're saying it sounds like CDL is delayed, perhaps indefinitely. I think you said in the K that you hoped that Macurat go forward with Ashdod around the third-quarter. Can you give us kind of update on the major project side, Ashdod -- and also where we stand on Algeria, where I think you do have financing? In terms of, as the Kuwait-affiliated low-margin income line is down, where we are likely to start ramping up on these other large projects that are still in the pipeline?

In the case of Algeria, we're actively in the process of seeking financing for that. We do not have the financing yet.

You do not have financing?

We do not in the financing commitments in place. But we have a process in-place for (technical difficulty). We believe that that's going to be quite manageable as the economics of that program -- of that project -- I think, are quite attractive. I think what you're seeing in Israel and the difficulty of raising the capital in Israel is related to less attractive economics in the project and then changes that happened in the project between the time that the bids were awarded and now, which have had a negative effect on those projects. So we don't think that the problems in Israel are related to our ability to get financing for Algeria. Algeria is a completely different program, on much better terms.

Understood. So what sort of timing on Algeria?

Well, we're actively working on it. But to be honest, it's probably Q3 by the time we have got financing commitments in-place.

So realistically, we won't really expect to see this impacting revenues until 2005?

Yes. And don't forget that because we own 70 percent of it, there will not be an equipment sale to the project. We will be investing capital in PP&E that will show up in our books, and we will be investing that capital over 2005. And we don't expect to get water sales until 2006, 2007. Probably during 2006 we're talking about a startup. And so you will see partial revenues in the year 2006.

On the other hand, when that plant starts up, that's going to have a material effect on our performance, we believe.

So you don't book any partial revenues at deferred margin upfront on Algeria -- based on your partial equity?

No. Because we will consolidate it, Deborah, we will not take any equipment revenue on that particular project.

No equipment revenue. There will be no revenue associated with that project until we actually start selling water.

And what is your current thinking on the timing for Ashdod, then?

Ed, do you want to answer that question?

Deborah, this is ED. I would say right now, probably we're looking at Q3. Just to echo what Doug said earlier, I was over there are couple weeks ago. They want to do the project -- the Macurat reorganization put some delays in the schedule. So I am looking at about a Q3 time right now.

And how will that work, then, Ed? As we are assuming that you're right on the timing -- how would that work in terms of the ramp up? Because I know that one is a capital project with no POO (ph) tale.

It's a joint venture, straight capital sale. And it's about a 21 to 24 month construction.

But again, given the normal ramp of the construction, that's really an 2005 event too?

That's probably a safe assumption. There will be some costs incurred in the second half of this year if we if we get the green light in Q3. There will be costs incurred in the second half of the year. But POC accounting will look at the total cost of the project and you won't see a big slug of that cost going through until 2005. So I think you're right.

All right. Sorry to belabor those issues. Last question -- just looking at what you have said about the sales side, some restructuring disruptions here, perhaps. Can you talk about the competitive landscape? Certainly, GE is ramping up on the industrial side and US Filter is obviously for sale. But one for instance is that GE is now talking about a mobile trailer service that they are starting to launch. Can you tell us what you're seeing out there in the competitive landscape? Is that having any impact on your sales and bookings growth?

I would say that, on the one hand, we have seen a bit less competition from Filter and from Suez, because of the capital constraints that they both have from there parents. On the other hand, we have got a new entrant in GE that can be a formidable competitor. So there's no question that the competitive landscape is changing. On the mobile trailer business, the thing that GE does not have to support its operation that Ecolochem does, is a network of regeneration facilities around the Country. I believe that they will probably go after the mobile business using a combination of reverse osmosis and EDI technology. The EDI technology is related to what they bought with a Gleg (ph), is typically used in low-flow-rate applications, although they can probably get higher flow rates by ganging together a number of EDI stacks. We don't believe that that is the most efficient way to do it. But I am sure that GE will find a way to make that work. So we expect that -- we have certainly heard the discussions and the stories about GE building 20 trailers. So we have got 500 trailers. So we believe that -- it's a huge investment in facilities when you look at the investment in 500 trailers. Between Ecolochem and Ionics, we have at least eight or nine regeneration facilities in the United States. And those regeneration facilities involve a significant investment in both assets and in operating permits.

So we believe that we are well-positioned. But we are obviously watching what GE does carefully.

Stewart Scharf with Standard & Poor's.

Could you tell me what your projected tax rate is for the year and for Q4? What are you using?

We'll be -- we're expecting for 2004 to be in the mid to high 30s in terms of an overall tax rate. And in Q4, 28 percent.

(OPERATOR INSTRUCTIONS). Tracy Marshbanks with First Analysis.

You mentioned the Oracle implementation. Could you just update us on are there any sort of key milestone dates there and what the progress is?

Don Curtis, would like to handle that question for us?

The question was the timeline on the Oracle implementation. And the current plan still remains to go live here in Watertown during Q3, which will be the replacement of our currently existing mainframe system and then a subsequent rollout to other locations, including overseas in 2005. So we are working hard to stay on that schedule and currently still planning to execute on that basis. And all such implementations are fraught with challenges. But we are continuing to move on that timeline.

I assume you have dealt with those challenges a few times before?

We have confronted them before. And I'm sure we will confront them again.

Final question -- this may be a tempest in the teapot. But it looks like you and your customer in Spain are fighting a little bit. And they came back with the bigger suit then you had. Is there anything to it?

Well, I think this is, from our perspective, legal posturing. You may remember that we were actually the plaintiff in that case, where we had initiated a suit to collect a receivable that was due to us. They responded to that by countersuing with a big claim that we think is frivolous. We obviously believe it's a negotiating tactic on their part to get us to drop our original claim for collection of our receivable. We don't intend to drop that claim, and we intend to pursue our position vigorously, because we think we have got the right to do that.

And final question. You had given some guidance for what you thought -- to how it would turn out. Are you sort of sticking with that, or has it been modified and you're just not updating it? What is your stance?

To be honest, we are in a period or we are working heavily on consolidation. I would say the restructuring in Ionics, the bulk of that really happened last year. But now we're going through a period of trying to consolidate our activities with Ecolochem's. So I am a little bit hesitant to try and give you specific guidance at this point, with all the chopping and changing that's going on. But we still expect that -- the result to be accretive going forward and thus to realize significant benefit from the combination with Ecolochem. But right now, I think there is little bit too much going on for us to give you specific guidance going forward.

John Quealy, Adams, Harkness, & Hill.

Just a last quick question on the domestic desalination market. We're starting to see some rumblings out in California on the municipal side. And I see that you folks are at least entertaining the idea of trying to save the Tampa desal facility, depending on how the costs work out. Doug, could you, or could someone comment on the attractiveness of that municipal market here in the States of the next couple of years?

Well, my personal opinion is -- personally, I'm a bit skeptical about where this is all going to pan out. Yes, we are one of three vendors looking at the Tampa situation. Tampa, I think, got into this situation in the beginning by being quite aggressive in the way they manage the competitive bidding process in the original project. And so, it will be interesting to see whether they take the view that cost is most important or reliability is most important. Because the two things don't necessarily go hand-in-hand. Ionics has built its reputation for building reliable systems because we typically design more safety factor in them, we put more membrane area in them. We build them more ruggedly. So our capital cost is often a bit higher. But our operating cost is lower, because we have high reliability. So I am not sure -- it will be interesting to see how Tampa unfolds. We know we have the capability to fix that plant. We know we can make it work. We're making water in Trinidad, on worse quality water than you have in Tampa and we have been doing it reliably for a year and a half. So that part of it, we feel competent in.

As far as the California business -- again, I think we have to approach that business with a bit of caution. The U.S. market has a tendency to attract a lot of people to the business who think that they understand how to design and build water treatment plants and how to operate them reliably and cost efficiently. That's not always the case, as we have seen in some other project in the States. So we're certainly going to participate in the process of reviewing projects that come live in the U.S. But personally, I am a bit skeptical about whether they are going to be attractive enough opportunities that we're going to want to get heavily involved.

And just a last quick follow-up question -- in terms of the guidance for 2004 -- what your original forecast was. Do you expect to update that guidance moving forward in the next couple of quarters? Or is it just too early to say right now, given the things you have going on with your Ecolochem integration?

I think that's right, John. I feel it just a little early yet to try and give any better guidance. We would like to wait a couple of quarters so that we can get the integration with Ecolochem in-place. We can start to see what kind of synergies we actually can realize. There are a number of theoretical synergies that we should be able to realize. But we want to see actual results before we start talking about guidance for the future.

At this time we have no further questions. I would like to turn the conference back to Mr. Brown for any additional or closing remarks.

Well, I would just like to close by thanking all of you for your interest -- for our investors -- for their interest and support in the Company, for those employees, for their commitment to helping turn the Company around. I know that this has been a challenging period for the Company. We have had a lot to do. But I am encouraged that we're making solid progress. We still have a lot of work to do. And, as I just mentioned, we have got to prove it in the numbers. And that is our intention to do that. And so we appreciate all of your patience while we go through that process. Again thank you, everybody, for participating today.

Ladies and gentlemen, this does include today's teleconference. We thank everybody for their participation. Thank you for attending. Have a nice day.