Axiall Management Discusses Q3 2013 Results - Earnings Call Transcript

Nov. 6.13 | About: Axiall Corporation (AXLL)

Axiall (NYSE:AXLL)

Q3 2013 Earnings Call

November 06, 2013 10:00 am ET

Executives

Martin Jarosick - Executive Director of Investor Relations

Paul D. Carrico - Chief Executive Officer, President and Director

Gregory C. Thompson - Chief Financial Officer and Principal Accounting Officer

Analysts

Brian Maguire - Goldman Sachs Group Inc., Research Division

Andrew W. Cash - SunTrust Robinson Humphrey, Inc., Research Division

John Hirt

Sabina Chatterjee - Wells Fargo Securities, LLC, Research Division

Hassan I. Ahmed - Alembic Global Advisors

Christopher W. Butler - Sidoti & Company, LLC

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

Richard O'Reilly

Operator

Good morning. My name is Molly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Axiall Third Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Martin Jarosick. You may begin your conference.

Martin Jarosick

Thank you, Molly, and good morning, everyone. Welcome to today's conference call to discuss Axiall's third quarter 2013 financial results. Joining me on the call today are Paul Carrico, President and CEO; and Greg Thompson, CFO.

There are presentation materials available for your reference on our website. And our press release issued yesterday afternoon with our third quarter financial results contains forward-looking statements, which is incorporated into and considered a part of this conference call. The discussion during the call will contain forward-looking statements reflecting Axiall's current view about future events. These statements do involve risks and uncertainties, which may cause actual results to differ. Axiall does not take any obligation to provide updates to these forward-looking statements.

This presentation also contains certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are provided in the earnings press release and in the presentation materials available on our website. For additional information, please refer to Axiall's filings with the SEC.

Now I'll turn the call over to Paul. Paul?

Paul D. Carrico

Thanks, Martin, and good morning, everyone. We thank you for joining us this morning. Today, we'll provide comments on our third quarter performance and also discuss our views on the fourth quarter.

In the third quarter, we generated $175 million of adjusted EBITDA for the company compared to $106.7 million in the third quarter of last year. The $68.3 million increase was mainly driven by the contribution realized from the merged assets.

Taking a look at the Chlorovinyls segment and comparing just this year's third quarter to the second quarter, we reported $151.5 million of adjusted EBITDA compared to $177.6 million in the second quarter of 2013. This decrease was driven by a number of factors. First, we experienced higher maintenance costs and lower operating rates in the third quarter due to planned turnarounds. Second, certain caustic volumes, originally scheduled to ship at the end of the quarter, slipped into the fourth quarter due to shipping delays. These impacts were partially offset by the positive trend of lower natural gas costs.

Our Building Products segment reported $31.1 million of adjusted EBITDA in the third quarter of 2013 compared to $24.9 million in the same quarter of last year. Volumes grew 10%, driven by strong volume growth in the U.S., partially offset by a declining demand in Canada. Additionally, the average price declined due to product mix and competitive price pressures. The increase in adjusted EBITDA was driven by the higher volume and the lower SG&A cost. We are encouraged by the recent uptick we are seeing, both in our Building Products volumes and the industry's PVC shipments in North America.

Our Aromatics segment reported $5.5 million of adjusted EBITDA in the third quarter compared to $11.4 million during the same period last year. This was primarily due to lower sales volumes in this segment. We also experienced higher maintenance costs in the third quarter of 2013 as we moved forward a planned outage into the quarter that originally had been scheduled for the current quarter of this year.

Moving to the vinyls chain, demand growth this year has not met our expectations, so we have increased our focus on areas that are within our control. Synergies related to the merged assets have clearly been a key area that provides an opportunity for improving our competitive position. We're focused as an organization on taking full advantage of this area. I am pleased to report that we are ahead of schedule and now expect to exceed the synergy targets we've previously set.

As you'll recall, when we announced the merger last summer, we outlined $115 million of synergies in 3 categories: $40 million in procurement logistics, $40 million in G&A reduction; and $35 million in operating rates. The synergy targets were based on a comparison of the combined business -- businesses' results for 2011 to those we expect to realize on a run-rate basis beginning in the year 2015. For the first 2 categories, procurement logistics and G&A reduction, we achieved $16 million in the third quarter.

The third significant synergy category is operating rate improvements. For the year-to-date 2013, since the closing of the merger, Axiall is above the industry chlor-alkali rates and above the prior year's performance for the merged assets when comparing to both 2011 and 2012 rates. The fourth quarter results should continue this trend, particularly with the reduced number of scheduled outages and our focus on taking advantage of the diversification in the product portfolio.

If you annualize the third quarter achievements for all 3 categories, we are already running above our 2013 year-end target of a $60 million run rate. As we look to the future, this improves our competitive position as the North American energy costs continue to be advantaged and as it appears, there's a continuing recovery in housing.

At this time, I'll turn the call over to Greg to review our financial results in greater detail.

Gregory C. Thompson

Thank you, Paul. Good morning, ladies and gentlemen. Let's look at our operating performance during the third quarter. To help understand all the items, we have added reconciliations to our press release that reconcile net income attributable to Axiall to adjusted net income and adjusted earnings per share, as well as consolidated net income to adjusted EBITDA.

We reported net income attributable to Axiall of $39 million or $0.55 per diluted share for the third quarter of 2013, compared to net income attributable to Axiall of $39.3 million, or $1.12 per diluted share for the third quarter of 2012. Results for the third quarter of 2013 were impacted by the following items: $11.4 million of merger-related costs compared to $14.8 million in the third quarter of 2012; $6.4 million of costs to attain synergies; and a write-down of assets, primarily in our Window & Door business of $25.8 million.

The impact of the protracted downturn and slow recovery in the U.S. housing market and recent weakness in the Canadian market caused us to conduct an interim test for the impairment of goodwill and other intangible assets in our Window & Door profiles business. Based on the results of this test, we recorded a noncash impairment charge to write down goodwill and other intangible assets. In spite of the write-off, we expect our Window & Door business to be a long-term contributor in the Building Products segment with the recovering housing market.

After adjusting for these items, we reported adjusted net income of $68.3 million and adjusted earnings per share of $0.97 for the third quarter of 2013, compared to adjusted net income of $47.5 million and adjusted earnings per share of $1.12 for the third quarter of 2012.

Regarding synergies, as Paul mentioned, our third quarter adjusted EBITDA reflects about $16 million of recurring cost synergy realization for procurement and logistics and G&A reduction. Additionally, our year-to-date operating rate was higher than last year, which generated operating rate synergies on top of the $16 million. This puts us above our run-rate target of $60 million, a full quarter earlier than our original expectation of year end 2013.

SG&A expense for the third quarter of 2013 was $93.9 million compared to $53.5 million for the third quarter of last year. The increase was mainly due to 3 months of the merged company in our results.

Our net interest expense for the third quarter was $19.7 million compared to $14.7 million for the third quarter of 2012. For the third quarter of 2013, we reported a tax provision of $18.7 million and an effective tax rate of 32%. During 2013, we expect to make cash tax payments of approximately $130 million to $140 million and expect an effective tax rate of 30% to 35%.

The total FIFO impact was a positive $2.4 million for the third quarter of 2013, and was mostly related to Aromatics. In the third quarter of 2012, the FIFO impact was a positive $1.6 million composed of $4 million positive impact in core vinyls partially offset by a negative $1.8 million impact in Aromatics, and the remainder in Building Products.

Now let's discuss working capital. We define controllable working capital as accounts receivable plus inventory less accounts payable. As you know, we historically invest working capital in the first half of the year and recover most of that working capital in the second half due to the seasonality of our business. Compared sequentially, controllable working capital decreased by $60.5 million from June 30, 2013, to September 30, 2013. This sequential decrease was driven primarily by lower volumes in certain shift -- shipments that shifted into the fourth quarter.

From a working capital days perspective, we achieved a decrease of 1 day sequentially due to improvements in payables and inventories. Compared to the third quarter of last year, controllable working capital increased approximately $246.8 million, driven by the net working capital associated with the merged business.

On the cash flow statement, you will note that we generated $188 million of cash in operating activities for the third quarter of 2013 as compared with $80.6 million for the third quarter of 2012. Capital expenditures were $52.9 million for the third quarter of 2013 compared to $15.1 million in the third quarter of 2012. For 2013, we expect to invest about $180 million to $200 million in total capital expenditures.

For the year-to-date period through September 30, when excluding merger and integration-related costs, we generated approximately $101 million in free cash flow compared to $37 million during the same period last year. For the third quarter alone, we generated about $153 million of free cash flow. This strong free cash flow generation to date provides further evidence of the solid cash generation fundamentals of Axiall. We expect in the fourth quarter the normal seasonal release of working capital resulting in further substantial free cash flow.

Before we open up the call for Q&A, let me make a few comments regarding the fourth quarter. We expect sales and adjusted EBITDA for Building Products to be impacted by the normal seasonal slowdown in North American construction activity.

In Aromatics, we see the low industry operating rates continuing for the fourth quarter.

In Chlorovinyls, based on trends we are seeing today, we do expect some downward pressure on the ECU value in the fourth quarter, as well as normal seasonal pressure on vinyls' margins. We completed several turnarounds in the third quarter, including some that we've pulled forward from the fourth quarter.

We have no major maintenance activities scheduled for the fourth quarter and expect our plant maintenance costs to be significantly lower than the fourth quarter.

Prior to the merger, the fourth quarter was a typically a period of lower operating rates for both sets of assets. Now that we have combined the businesses, we have the ability to run at higher operating rates as long as market conditions support those levels.

We expect to realize additional procurement and logistics synergies and also G&A synergies as we exit several transition service agreements and bring those functions in-house at a lower cost.

I will now turn the call over to the operator so we can take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Brian Maguire.

Brian Maguire - Goldman Sachs Group Inc., Research Division

Paul, just want to get your comments around availability of ethylene in Louisiana. I know there's 1 of the 3 major pipelines from Texas, the Evangeline pipeline, has been out for a while and it sounds like it will be out for a little bit more. Just -- and we've seen spot prices in Louisiana pick up quite a bit. I was just interested in what impact that's having on your purchased ethylene costs. I think, as I remember, you're mostly protected by contracts, but just wanted to try and get a sense of the mix there. And then just any force majeure or kind of inavailability of that ethylene, and what impact that might have PVC operating rates in the fourth quarter?

Paul D. Carrico

Yes, certainly a lot of turmoil in that area right now. And for us, fortunately, particularly with the -- again, this is kind of another, I guess, opportunity for us. With the combined assets, we have a lot of interconnectivity in ethylene lines and other ways to move ethylene around. So it's really not going to be factor in our fourth quarter numbers.

Brian Maguire - Goldman Sachs Group Inc., Research Division

Okay, great. And then Greg, I think you commented on the ECU margin, seeing a little bit of pressure in the fourth quarter. I was just interested if you kind of quantify maybe the third quarter of '13, what the average ECU margin was versus a year ago? How much of erosion you saw year-over-year? And then kind of how that margin is today versus the third quarter of '13 average, just to kind of size the impact there.

Paul D. Carrico

Maybe I'll take that one. I'd say that related to how the pricing went, you can more or less look at the published numbers on the ECUs when you look at chlorine and caustic and get a sense of where that's gone and where that's going. Certainly, in the current market, what you see is the price drifting down a bit related to the year end and I guess related to some of the uncertainties around the new capacity coming on. But we think that, that's a drift down that would be expected in a situation where some new capacity is coming on and probably is more focused on, I'll call it, the end of this year and the beginning of next year, as contracts are put in place.

Brian Maguire - Goldman Sachs Group Inc., Research Division

Okay. And just one last one if I could. I think out into 2014, as some of that new capacity that you mentioned does come online, as one of the bigger merchant chlorine sellers, just wondering if there's any major customer you've already identified that you might lose as a result of that? Or just kind of how to think about the impact of that on our operating rates and volumes for chlor-alkali? And maybe tied to that, any update on the future for Natrium and your mercury sale capacity?

Paul D. Carrico

Well, I guess, first of all, related to the new capacity, I think one of the key things that people don't dwell on enough is the fact that you've got 2 things going on here that are relatively important: One is that, to bring on new capacity, you have to put the chlorine some place; and number two, both in the chlorine case and the caustic case, it really is a global market and gets more so every day. So of course the biggest challenge for new capacity is finding a place for the chlorine. And there's a limited markets as to where that can go, either via normal transportation or pipeline. So that sorts of sets the tone as to what you can get x the volume going out on a global market. And I would label our portfolio in this area as a resilient portfolio. If you look at the product segments we have available to us to move material around, we have a number of different areas and we take full advantage of that knowing when things are happening and what things are looking right in the future. So we really are in a good position to weather the storm, if you will. And particularly, too, from a global point of view, I don't know what the capacity increase is exactly on a global basis, but it's about 1% or a little bit more. And so in the scheme of things, it's like a bit of a wave in an ocean, if you will. And that just needs to balance out with the proper balances between what North America is seeing, what Asia or what Europe is seeing, and that will happen over a period of time.

In terms of our capacity, I think we've said this before, particularly on Natrium, we'll continue looking at that. There's only a percentage of that, that's -- the mercury sale material there. But we'll continue evaluating that as we go forward and make decisions as they're appropriate. We don't have anything to share with people right now.

Operator

From the line of Andy Cash.

Andrew W. Cash - SunTrust Robinson Humphrey, Inc., Research Division

Hey, Paul, just on PVC, it looks like, at least data that I've got through August, PVC exports were down 17% year-over-year. And yet, you and your comments there in your release, you mentioned strong export demand. So I just wondering, were you referring to PVC, something else, or what were you referring to there?

Paul D. Carrico

Well, I'm speaking relative to our position, number one. Number two is I think there certainly was volumes available for some people. I think either because of outages or because they had a better place to go with ethylene, they may have opted to do something different. But we see adequate strength in the export market, recognizing that we are in the mode of not having as big a percentage as the other folks do. We're probably half of what the industry does. I'd say the other thing that's going to be continuing to be a looming factor is, if you look at the rates projected for VCM, they're pretty strong over the next 2 years, even higher than PVC. And the game, so to speak, will shift a little bit from PVC to VCM. And to think that the VCM plants are going to run quite at the rates that are projected, that's a pretty tall order when you look at what history has been in that area.

Andrew W. Cash - SunTrust Robinson Humphrey, Inc., Research Division

Okay, and just one other one. You also mentioned about you're seeing increased evidence about U.S. housing recovery. I mean, if you look at some of the housing stocks, like Pulte or Hortons or Lennar, I mean, they're all trading below their 52-week highs. And some of them were citing weak new orders. So what are you seeing that gives you that confidence to state that you're seeing increasing evidence of recovery?

Paul D. Carrico

Well, when you talk with people in the industry, I think the largest impact is, is there a sudden slowdown because of mortgage rates or if things are going the way -- the right way on the debt ceiling or whatever else might be out there as looming clouds. But that's, I think, a bit of a blip from our point of view. We've seen solid volumes in the third quarter for the first time in a long time and particularly, in the U.S. And I'd tell you that as we look through October and November, that general trend looks to continue. And so for us, we get to see that picture both on the Building Products side and we get to see it on the resin side. And both of those pieces of the equation are telling us that there's still momentum going the right way.

Operator

Your next question comes from the line of P.J. Juvekar.

John Hirt

This is John Hirt, sitting in for P.J. today. With caustics sort of prices having fallen probably dramatically over the past few months, when you think about the path to profit recovery for the U.S. producers, in your mind, what has to happen for profitability to improve, and how might that process -- how long might that process take to play out?

Paul D. Carrico

Well, there is couple of scenarios. One, if you look at it from a global point of view and it really is a relatively small percentage globally, then this impact will be tempered by the fact that people always have an option to go to global markets. And we can compete almost any place in the world with our caustic. It goes back to, okay, is there other alternatives for chlorine? There's really limited choices how chlorine gets moved in a big way going forward. So what I would say is that it could take a little while or it might be relatively short term, but we see some strength in caustic going into next year. We see chlorine being supported by uses such as frac-ing, HCL as an example, different areas. So there's multiple things that soak up a bit of that capacity. There's also the likelihood that probably, there will be some reduction in the East-West Coast input of caustic as this capacity comes on. So it's really a question more about getting past these annual contracts, and then for the new players, to set the tone as to where they're going to go with their product. It can't be a continuously long, say, fight over putting volumes in places. The industry is just not structured that way. So we'll have to see how it plays out in the early part of next year. I guess, from our point of view, we think it will play out still with us, as I said earlier, having a resilient portfolio. So the volumes will be there. The pricing is more of the question right now.

John Hirt

Okay. And how much of your caustic soda did you export in the quarter? And as prices came down in the export market, did you pull back from the export volume there, given the steep price declines?

Paul D. Carrico

No. Exports, for the most part, as long as ethylene doesn't get too carried away related to costs going through the vinyl chain, exports are open to us most of the time. And if you look at export pricing now, you know as people want to talk about the collapse in export pricing. In fact, prices, such as Asia, are bottoming and moving up. So there's an in-between point that we'll get to, and then there's a leveling of pricing that's going to occur at some point. And for that perspective, if -- I would say we're probably like the other folks in the industry. If there's not that room for it in the U.S. market, then we're going to take advantage of opportunities in some other part of the world.

John Hirt

Okay. And then just lastly, I know you've been interested in securing about half of your ethylene requirements. Can you give us an update on how those discussions are progressing?

Paul D. Carrico

Yes, on the ethylene side, we continue to make good progress sorting through the various options, and there were a lot of them. We've gotten to the point where we've narrowed that down to, I'll call it, less than a handful, a handful or less. And we're continuing to fine tune the assessment of those different pathways. I remain optimistic that we can either give you some color late this year, but more likely into the first 6 months of next year and start to provide a view of how that's going to play out.

Operator

Your next question comes from the line of Frank Mitsch.

Sabina Chatterjee - Wells Fargo Securities, LLC, Research Division

This is Sabina, in for Frank. Just building on Andy's question earlier, that 26% increase you saw in U.S. Building Products volumes. Can you just comment a little bit more on maybe what specifically went well for Axiall to see that gain, and maybe how that compares to the year-over-year growth that you saw in Q2?

Gregory C. Thompson

I think it was pretty broad-based for us in our U.S. growth really across all the different businesses that we have and Building Products. So if you look at ours, we -- as we've always talked about, we are -- we do tend to be more Northeast-focused and Midwest, and we started to see some improvement there in the third quarter. And I think, admittedly though, the first half of the year was slower than we would like, just based upon the weather conditions that were around. And so figuring on how much of that was seasonal versus really strong fundamentals for the entire 26% is a little difficult to put your finger on it, but all the factors are there, we think, for a positive momentum going forward.

Sabina Chatterjee - Wells Fargo Securities, LLC, Research Division

Okay, great. And if you could just quantify 2 items: What was the final financial impact of those turnarounds in Q3? And -- just so that we can figure out a better the normalized number for EBITDA. And then could you also just size the core vinyl sales that you mentioned slipped into Q4?

Paul D. Carrico

Yes. On the turnaround situation, we don't really provide exact numbers, but maybe I could characterize it in this way. We had a couple of larger turnarounds, plus some extension of the turnarounds to take advantage of what we thought were really good opportunities to enhance our reliability. And those are usually going to be in the range of low-double digits, if you want to look at it in that respect. We also had a couple smaller turnarounds, which can be in the low-single to mid-single, depending upon what's going on there. So that's the kind of activity we had in the third quarter. For the most part, most of that is not there, except for a few small outages in the fourth quarter.

Sabina Chatterjee - Wells Fargo Securities, LLC, Research Division

Okay. And then Chlorovinyls sales that you said slipped into Q4?

Paul D. Carrico

We'd say mid-single digits, something like that, in that range.

Operator

Your next question comes from the line of Hassan Ahmed.

Hassan I. Ahmed - Alembic Global Advisors

A question around caustic inventory levels. Obviously, a bit of a choppy quarter in terms of caustic pricing. Probably, part of the issue was the Alumina outage out in South America, but obviously some speculation around incremental capacity as well. So have you've seen a fair bit of destocking as far as caustic goes? And where do you think inventory levels are right now?

Paul D. Carrico

I think it's our perception that the inventory was destocked to a certain extent primarily because people are reading all the stories about lower pricing and so scaled back to smaller numbers. At some point, that has to bottom out and turn the other way. I don't know exactly when that's going to be. I don't think it was driven by a lot of new capacity showing itself in the market and detracting from what people were doing. It was more about this perception that there would be lower prices.

Hassan I. Ahmed - Alembic Global Advisors

So it's fair to assume it's well below normal levels?

Paul D. Carrico

I don't know how to quantify that. I'm just saying, yes, it feels like it's low. But also you have year end. It's in a state of flux right now because you've got year-end targets that people want, and some people want low just because of that. So it depends upon what periods you compare to. But certainly, people are a little bit more geared towards reducing inventory at this time of the year, regardless of what the circumstances are.

Hassan I. Ahmed - Alembic Global Advisors

Fair enough. Now, in terms of the sort of North American capacity additions, let's assume -- clearly, a theoretical exercise, but let's assume that there is no rationalization in North America. How -- in that scenario, how quickly, if at all, do you think the European sort of capacity would rationalize, particularly the sort of high proportion of mercury based capacity out there?

Paul D. Carrico

That's tough to call. Let's say there's no rationalization in the U.S.. It gets back to my previous issue, where does that chlorine go? There's not a clear place for that to move to, and certainly, in large quantities. So you'll probably get more to a situation where it gets rearranged in North America. And people are somewhat rational about how they treat the North America market. But any excess is going to have the opportunity to go that way to Europe. And the tendency there is particularly not quick about reacting to things like that. So it could be that they just operate at lower rates, but they certainly will be blocked out in terms of the product movements at some level.

Operator

Your next question comes from the line of Christopher Butler.

Christopher W. Butler - Sidoti & Company, LLC

Coming back to the caustic question, could you give us a sense on where your inventories are? And as we look here to the fourth quarter with lower operating rates seasonally, how tight are you going to be looking into this quarter?

Paul D. Carrico

I think -- of course, we had a little bit of a higher inventory when the ships didn't show up. But if you look past that, we'll be seeking to have a low inventory at year end. There -- it just doesn't seem that it would be of any great value of having a high one. And so it's probably a situation where producers could wind up with a low inventory. Some of the customers out there could wind up with lower inventories, and so we'll see what next year brings. But that's probably a nice start for 2014.

Christopher W. Butler - Sidoti & Company, LLC

And just continuing on that, one of your peers had indicated that because of the inventory levels and because of production levels that they were going to be pretty tight in making the contractual supplies this quarter, and that could lead to higher caustic prices for the beginning of -- at the end of the year, at the beginning of next year. What are your views on that?

Paul D. Carrico

Now that's an equation that's really too complicated for me to call because of the capacity additions. So whether that happens or not will be more a function of if we all lower inventories for year end and then we kick off a new year, what does it feel like to those folks buying the caustic, and how does that dynamic of the supply-demand balance play out, so...

Christopher W. Butler - Sidoti & Company, LLC

And switching over to Building Materials, we saw some good housing starts out of Canada in September. Is that a good indication going forward, or are we too far into the season to really get a good read on the Canadian housing market from September?

Gregory C. Thompson

Yes, I'll tell you, it was -- they were good numbers for September. But overall, I think the trend has been pretty consistent for the year in Canada. Unfortunately, that both repair and remodel, as well as the single-family portion of new housing starts is down for us. And so I think long term, the Canadian economy is a very strong one and so we see that reversing going forward. But for the year, I don't think the trend is going to change generally for somewhat downward pressure in Canada. But we do have the offset to that with the strong U.S. numbers.

Operator

Your next question comes from the line of Tony Delseron [ph].

Unknown Analyst

Gentlemen, could you give us sense of what a pro forma number would have been for EBITDA, either for the Chlorovinyls section or for the company as a whole a year ago?

Paul D. Carrico

Yes. You probably have to give us a few minutes on that.

Unknown Analyst

That's fine. It's hard to do so on the slide.

Gregory C. Thompson

Yes. And so we've made -- and I'll give you a rough number for that for the third quarter last year. And we've made some kind of some pro forma adjustments ourselves related to gas prices and that sort of thing related to the UPT side. But it's around $185 million, $190 million, the way we have pegged it for the Chlorovinyls segment for third quarter last year.

Unknown Analyst

So that's for the segment, and that is adjusted for kind of the one-off changes in gas prices?

Gregory C. Thompson

That would be the -- actually, I guess I'd say, we -- I think all of the hedges that PPG commodity chemicals had in place had all played off, had all rolled off by the third quarter of last year. They had some of that earlier in the year, so that number actually is pretty clean for the third quarter.

Unknown Analyst

Great. And that's at the segment level for the 2 combined companies?

Gregory C. Thompson

That's right.

Operator

[Operator Instructions] Your next question comes from the line of Jeff Zekauskas.

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

I remember that at the beginning of this year, you had some expiring ethylene contracts that weighed on your ethylene cost I think by $60 million. In 2014, are there other contracts, ethylene contracts that may expire? And if there are, what's the magnitude by which you would be affected by those expirations, all things being equal?

Paul D. Carrico

Yes. There's always a continuous move of contracts from year-to-year, and there will be some more in the current year coming up. I'd say, as a general comment, 10 to 15 million, something like that -- percentage-wise. Excuse me, it was percentage.

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

I'm sorry, 10 to -- I don't understand what the 10% to 15% refers to.

Paul D. Carrico

10% to 15% of the ethylene that we have that's changing out with new contracts. And that can be in, I'll call it, the low-double-digit range in terms of the effect, but it's also balanced by what the new contracts are. So we really can't predict all that at this point in time. It's not anywhere near the order of magnitude we were talking about last year.

Operator

Your next question comes from the line of Richard O'Reilly.

Richard O'Reilly

Revere Associates. On your synergies targets, it looks like you've reached a point where about 80% on the procurement and G&A. What's the next step-up? You're running at a $16 million. What's the next step-up that we should see in the fourth quarter or early next year to get to that $115 million rate?

Gregory C. Thompson

Yes. So they won't -- we're looking for some further improvement in the fourth quarter, but it's not necessarily linear. And so we do have a lot of annual contracts that we're working on that really have more of a year-end kind of expiration. So we'll expect some improvement in the fourth quarter related to that. And also, we commented on the transition services agreements. We've exited a number of those, and we have some that expire more toward, or we're looking to exit more toward the end of the year also. And so there again, we're looking for more acceleration in the savings that we're generating into next year, into early, early next year.

Richard O'Reilly

Okay. Okay, good. Second question on the Aromatics. Sequentially versus the second quarter, EBITDA is up a little bit and sales down a little bit more. Can you talk about that on a sequential basis?

Paul D. Carrico

Not really to give you a clear background on it, because it's just the ebb and flow of the various contracts we have and the volumes and whether we have opportunities that sometimes relate to the industry, since a lot of our sales do go to other participants in the industry, particularly on the cumin side.

Gregory C. Thompson

Yes, and the top line is more a factor of the indexed nature of the pricing off of the key feedstocks, benzene and propylene. And so there's -- as those go down or go up, depending upon your kind of on average, what it did, in the quarter, it drives top line growth, as well as -- or shrinkage, as well as certainly, the operating rates. And as I've commented there in the -- looking forward, those operating rates are down a bit in Aromatics, and we don't see any huge change in that going forward.

Richard O'Reilly

Still on that business, a number of years ago, George [indiscernible] talked about trying to exit that business. Any update on your thoughts or philosophy on that business?

Gregory C. Thompson

Yes, we will -- I mean, we've openly talked about that business as being non-core to us going forward, so we'll continue to evaluate that business. We do run it in such a way that the capital, both CapEx, as well as working capital deployed in the business, is very minimal. And so it does it generate a pretty reasonable return on capital in spite of the bottom line not being a huge, huge amount. And so we'll continue to run the business that way and continue to evaluate our alternatives going forward for all the different things we've talked about previously there.

Operator

And there are no further questions at this time.

Martin Jarosick

Thanks, everyone, for joining us. We'll be speaking in a couple of conferences in the next couple of months, and we look forward to catching up with the fourth quarter earnings announcement.

Operator

Thank you for participating in today's conference call. You may now disconnect.

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