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Executives

Martin Jarosick – Executive Director of IR

Paul Carrico – President and CEO

Greg Thompson – CFO

Analysts

David Silver – JP Morgan

Charles [ph] – Citi

Frank Mitsch – BB&T Capital Markets

Kevin McCarthy – Banc of America Securities

Mark Connelly – Credit Suisse

Bo Hunt – Banc of America

Tarek Hamid – JP Morgan

Roger Spitz [ph] – Merrill Lynch

David Troyer – Credit Suisse

Jonathan Goldrep [ph] – Fortress

Andrew Chen – Barclays

Barrett Evnon – Brownstone Asset

Doug Dedder [ph] – Broadpoint Capital

William Merritt – Gulf Stream Asset

George Charlie [ph] – Lightspeed [ph]

Georgia Gulf Corporation (GGC) Q3 2008 Earnings Call Transcript November 5, 2008 1:00 PM ET

Operator

Good afternoon. My name is Denise and I will be your conference operator today. At this time, I would like to welcome everyone to the Georgia Gulf third quarter financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator instructions)

I'll now turn the call over to Mr. Martin Jarosick, Executive Director of Investor Relations. Please go ahead sir.

Martin Jarosick

Thank you, Denise, and good afternoon, ladies and gentlemen. Thank you for participating in today's conference call to discuss Georgia Gulf's 2008 third quarter financial results.

There are slides available to you on Georgia Gulf’s Web site. These slides are for your reference but we will not be speaking directly to each slide.

Participating on today's call are Paul Carrico, President and Chief Executive Officer, and Greg Thompson, Chief Financial Officer.

During this call, we will be making forward-looking statements. As you will appreciate, any business projections and assumptions about future events are subject to risks and other factors that may cause actual results to differ materially from our current outlook. A listing of factors that could affect future results is included in our 2007 Form 10-K. Any forward-looking statements made on this call should be considered in light of those factors.

In addition, during this conference call, we may refer to certain non-GAAP financial measures. We have provided a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure as an appendix in the slides on our Web site at www.ggc.com.

I will now turn the call over to Paul to begin our third quarter review. Paul?

Paul Carrico

Thank you, Martin, and good afternoon, ladies and gentlemen. Georgia Gulf delivered a relatively solid operational performance during the third quarter. This was accomplished despite the continued softness in the U.S. housing and construction related markets, higher raw material and energy costs and the impact of two major hurricanes on our operations.

Hurricanes Gustav and Ike reduced our production capacity by about 15% during the quarter. We estimate the negative earnings impact of the hurricanes was approximately $18 million or about $0.53 per share. US housing starts continued to decline and we are now approaching levels not seen since the 1990-1991 recession.

For the third quarter, we reported a net loss of $17.4 million or $0.50 per share compared breakeven results in the previous year. Excluding the impact of the two hurricanes third quarter 2008 would have beat third quarter 2007 earnings by about $0.03 per share.

Net sales in the third quarter were $819 million or up $3 million from the same quarter last year. The increased sales were driven by sales price increases in vinyl resin and caustic partially offset by soft housing and construction markets in the United States and lost sales due to the two hurricanes.

Greg will cover our financial performance in more detail in just a moment.

But first I'd like to provide an update on some of the actions we've taken during the quarter towards our 2008 goals. Early in the third quarter, we announced the settlement of the alleged default claim made by Sandelman regarding our 7.125% bonds. We’re pleased with the outcome which includes three significant positives for Georgia Gulf.

The first is that the settlement cleared a roadblock to amending the credit facility and the future refinancing of the company’s debt. The second is we amended the indenture on that bond to avoid similar issues in the future. And finally we were able to maintain the favorable 7.125 coupon.

Following the settlement in September, we announced an amendment to our credit facility that adjusted our covenants to provide relief until June 30, 2009 to better reflect the current market conditions. We continue to monitor the financial markets for an opportunity to refinance into a capital structure with greater long-term flexibility.

We have significantly reduced SG&A from about $53 million in the third quarter of 2007 to $44 million this quarter. The reduction is driven by lower professional fees and consolidation and centralization of support functions. We are on pace to deliver more than $15 million of SG&A reductions in 2008 compared to 2007. We will pursue additional SG&A cost reductions in 2009.

Given the continued weakness in many of our markets, we’re evaluating further restructuring actions that may result in cash charges and noncash write-downs in the fourth quarter. I would also note that our recent credit facility amendment includes a $12 million cash restructuring exclusion from EBITDA for purposes of the covenant calculations.

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

Greg Thompson

Thank you, Paul. Good afternoon, ladies and gentlemen. Now let's look at our performance from continuing operations during the third quarter. Georgia Gulf reported operating income of $14.2 million for the third quarter of 2008 compared to operating income of $44.8 million in the third quarter of 2007. We estimate the negative effect on operating income of the two hurricanes at $27 million driven by approximately two weeks of lost production at our Lake Charles, Plaquemine, and Pasadena facilities.

Excluding the impact of the two hurricanes, operating income would have been about $41 million or 8% below the third quarter of 2007. For the third quarter of 2008 we had a $2.5 million tax benefit.

Our effective income tax rate is very sensitive to changes in our pretax results and dependent on the tax jurisdiction where results are generated.

We currently expect an effective tax rate for the year of about 33% in the US and around 0 for Canadian operations for an overall blended rate of around 10%.

In the Chlorovinyl segment, third quarter 2008 sales increased 2.4% to $365.5 million from $356.8 million during the third quarter of 2007. This segment posted operating income of $28 million compared to operating income of $43.6 million during the same quarter in the prior year. Sales and operating income were impacted by hurricane disruptions and higher feedstock and energy costs partly offset by strong ECU value increases and higher resin prices.

In the Window & Door Profiles and Mouldings segment sales were $124 million for the third quarter of 2008 compared to $147 million during the same quarter in the prior year. Sales on a constant currency basis declined 16%. The segment’s operating loss was a $0.6 million for the third quarter of 2008 compared to operating income of $8.4 million during the same quarter in the prior year. Sales and operating income in the Window & Door Profiles and Mouldings segment were negatively impacted by the continued weakness in the U.S. housing and construction markets and higher raw material costs.

In the Outdoor Building Products segment, sales were $163.6 million for the third quarter of 2008 compared to $162.5 million during the same quarter in the prior year. Sales on a constant currency basis where about flat compared to 2007 with growth in Canada offset by the continued weakness in the U.S. market. The segment reported operating income of $0.5 million for the third quarter of 2008 compared to operating income of $3.8 million during the same quarter in the prior year. Operating income declined as sales price increases failed to keep up with higher material costs.

In the Aromatic segment, sales increased 11% to $165.5 million for the third quarter of 2008 from $148.9 million during the third quarter of 2007. However, the segment reported an operating loss of $4.5 million compared to an operating loss of $3.1 million during the same quarter in 2007. The increase in operating loss was due to lower sales volume and higher feedstock costs that were not fully offset by sales price increases.

As expected the FIFO benefit from the second quarter of 2008 did reverse in the third quarter and was a negative impact of $21.1 million compared to $22.5 million benefit in the second quarter of 2008. This compares to the third quarter of 2007, which had a $6.4 FIFO benefit. The third quarter of 2008 negative impact was driven by rapidly increasing feedstock costs near the end of the quarter.

Now let's discuss working capital. During the third quarter controllable working capital defined as accounts receivables plus inventory less accounts payable decreased by almost $48 million compared to third quarter of 2007. This was principally due to the loss of about two weeks of production from the hurricanes and our own working capital efficiency efforts. Compared sequentially controllable working capital dropped $42 million driven by the lost production of the hurricanes and declining feedstock and energy costs compared to second quarter 2008.

As a result, we generated $72.5 million of cash in operating activities during this quarter as compared with $90.7 million for the third quarter of 2007. We continue to tightly manage our capital expenditures while supporting the maintenance requirements and growth opportunities of our businesses.

Capital expenditures were $12.3 million for the third quarter and we are on track to hit our $60 million to $65 million target for the year.

Now to financing activities. As you know the third and fourth quarters are typically a period when we generate operating cash flow and reduce our borrowings. As the uncertainty increased in the credit markets we adjusted our cash management activities to maximize our financial flexibility. We normally try to carry $10 million to $12 million of cash on hand. However, due to the turmoil in the credit markets we elected to maintain higher levels of cash on hand and as a result we ended the third quarter with $52.7 million in cash.

Therefore under normal circumstances we would have further reduced the revolver by an additional $40 million. Lehman Brothers is a participant in our revolver and represents about 12% of the $375 million facility. Due to their bankruptcy filing and inability to fund future revolver draws we now have about $7 million of our revolver that is not available to us. Even with this at the end of the third quarter we had about $160 million available on our revolver. We’re continuing to explore opportunities for other institutions to replace Lehman.

I would also add our accounts receivables securitization balance was $165 million at the end of the quarter.

As Paul mentioned, we worked with our lenders on an amendment in early September and that provides the flexibility we need to operate our businesses. Covenants have been relaxed until June 30, 2009. Despite the negative impact of two hurricanes we maintained compliance with our debt covenants for the third quarter. The consolidated leverage ratio required in our covenants was a maximum of 7.2 times and our actual ratio for the third quarter was 6.3. The consolidated interest coverage ratio required in our covenants was a minimum of 1.7 times and our actual ratio for the third quarter was 1.9.

I would also like to mention two items that will impact our interest expense starting in the fourth quarter. First the interest rates increase based on the new amendment starting October 1. So you will see the 250 basis point increase on the interest rate for the credit facility standing as of October 1. Additionally, we had $225 million of fixed for floating hedges that will terminate in the fourth quarter. This should reduce interest charges as the current floating rate is lower than the hedged fixed rate. With these two impacts, we expect our interest expense to be about $34 million to $35 million in the fourth quarter of 2008 based on end of the third quarter debt balances.

Now, I will turn the call back over to Paul for the outlook.

Paul Carrico

Thanks, Greg. Now let me provide an update to our outlook for the rest of the year. Last quarter I mentioned that energy and feedstock cost volatility made it very difficult to forecast the remainder of the year. At that time we established a range of possible outcomes for 2008 EBITDA with the low end of our expectations as much as 15% below the 2007 level of $222 million.

Since then the amplitude of the energy volatility has only increased and the decline in the US and global economies has added considerably to the uncertainty. Based on the information we have at this time we’re reaffirming that guidance. But with the recent decline in energy and feedstock prices, and strong ECU pricing we may perform better than the low end of that range. This estimate includes the gain on asset sales earlier in the year and the negative impact of the hurricanes but excludes any further restructuring charges.

We continue to develop our plans for 2009 and I want to share our perspective on a few factors with you. Based on our limited visibility into the housing and construction markets we expect continued softness through 2009. We expect feedstock and energy costs to remain volatile. We also expect strength in the ECU value to continue during the coming year.

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

Question-and-Answer Session

Operator

(Operator instructions) And your first quarter will come from the line of Mike Judd with Greenwich. And Mike your line is open. Please go ahead. Hello, Mike check your mute function on your phone. Okay, we will move to the next question and that will come from the line of David Silver with JP Morgan.

David Silver – JP Morgan

Hi, can you hear me.

Paul Carrico

Yes we can David good afternoon.

David Silver – JP Morgan

Okay great. Usually it is me that has the mute button on too long. First I was just hoping Greg you could clarify a couple of key numbers that you mentioned. So first of all at the operating income or EBITDA line you mentioned that the hurricanes cost you $27 million, is that correct?

Greg Thompson

That is correct.

David Silver – JP Morgan

And then you also mentioned for the third quarter you mentioned negative FIFO effect I guess also at the EBITDA level of $21.1 million, is that correct?

Greg Thompson

That too is correct.

David Silver – JP Morgan

And can you just repeat the second quarter number, was it positive $22.5 million.

Greg Thompson

Yes.

David Silver – JP Morgan

Okay. Thank you for that. I appreciate it. So Paul I was wondering you mentioned strong ECU values and I know that in the current environment now I mean there is a lot of volatility, can you discuss how you see caustic soda pricing developing in the fourth quarter. I know there were some price increase nominations. Have you seen success on those, partial success, how would you characterize the caustic market in 4Q?

Paul Carrico

Well during 4Q there were multiple price increases and announced our plan and yes we have seen some success on those. It remains to be seen if the full level is implemented but it would appear that it is where it is headed at this point.

David Silver – JP Morgan

Okay, and then this is more a broad question about kind of the effects of the hurricane broadly in let us say the Louisiana area, but a number of chlor alkali and PVC facilities were affected. In your estimation have all the units returned to service now or are there some competitor outages that seem to be persisting or could hamper their production rates for a longer period of time.

Paul Carrico

My general impression and this is without direct knowledge of the number of different producers out there but my general impression is things are back to normal. I think the thing that will influence a little bit going forward is that we understand or think that there is going to be some outages in the first quarter relative to turnarounds.

David Silver – JP Morgan

Okay and then last question. You mentioned in your EBITDA forecast you are including the land sales from a previous quarter. In your guidance are you also anticipating any future proceeds from asset sales or other nonoperating sources. Thanks.

Paul Carrico

No. We don’t have anything in there for those kinds of activities David.

David Silver – JP Morgan

Thank you very much.

Operator

Your next question will come from the line of PJ Juvekar with Citi.

Charles – Citi

And it is actually Charles [ph] for PJ. Are you planning to take capacity of for building and hardware products for the winter?

Paul Carrico

We’re looking at scaling the plant operations to meet whatever the demand is out there and certainly with the current environment you could assume that the demand that normally is in the fourth quarter and the first quarter is fairly reduced and probably will be further reduced this year. So we will target our operations to match whatever those needs are. We don’t intend to carry inventory.

Charles – Citi

Okay. Do you have any update on an aromatics divestiture or any interest that you have seen in the market on that asset?

Paul Carrico

No, I don’t have any real comment. You know that the current market environment is not good for any kind of discussions along those lines from my point of view and I don’t expect that to be the case for a while.

Charles – Citi

Okay, thank you.

Operator

Your next question will come from the line of Frank Mitsch with BB&T Capital Markets.

Frank Mitsch – BB&T Capital Markets

Hi. Good afternoon gentlemen.

Paul Carrico

Good afternoon Frank.

Frank Mitsch – BB&T Capital Markets

Looking at the results for the year-to-date, obviously margins are off and you are expecting ‘09 to be a similarly soft year in terms of the construction markets and I was curious in terms of the cost reduction efforts where are you looking and what is the order of magnitude in terms of the cash and noncash charges that you are looking at and you know how comfortable are you that with this deceleration in the market or at least the very weak market that you are able – you are going to be able to meet your covenants in the second half of next year.

Greg Thompson

Well the – I guess in terms of cost reduction you know that has been certainly a key priority for us and that will continue to be as Paul said in the prepared remarks and so you know particularly relative to Royal given the reductions in U.S. housing and construction as well as our overall demand level there. That is where we focus the greatest. So we will continue to look at our overall capacities and size it appropriately not just for the short term but for the longer term. In terms of order of magnitude I guess you could – and we’re still evaluating that as we said in the prepared remarks and Paul mentioned we have got – we do have a carve out in the debt covenants of $12 million or so. So it could be something in that kind of order of magnitude for the cast restructuring component that we’re looking at for the fourth quarter and noncash is – that would be something that would follow along and we always go through our evaluation of that every year during the fourth quarter. In terms of covenants, that is something that we all always continue to be highly focused on. I gave you the numbers as part of the call. We’re right on track where we expected to be in the covenants and I think we have got some. We continue to feel comfortable with where those covenants are going forward obviously considering the volatility that we see in our markets.

Frank Mitsch – BB&T Capital Markets

Okay. It is probably a bit unfair to project out into the uncertain market of ‘09. But in the third quarter you cited some factors behind the working capital as a source of cash and I was curious if you anticipate that to be also a source of cash in the fourth quarter and the reason why I asked that is, I guess in one of the slides you mentioned that you expect to generate ample cash in ’08 to reduce long-term debt.. And so I’m assuming, I’m wondering if that is going to be one area where you would get the money.

Greg Thompson

Yes that is definitely the case Frank. I mean seasonally our working capital we generate cash usually in the second half of the year. I would expect that would continue to be for us in the fourth quarter just like it was in the third quarter just given the seasonality of our business and it is also an area that we continue to be highly focused on working capital – working capital and inventory in particular and you can – if you look at the balance sheet you can see some of the results of that focus to date and that will continue to be something that we look at.

Frank Mitsch – BB&T Capital Markets

Great. Thanks Greg.

Operator

Your next question will come from the line of Kevin McCarthy with Banc of America Securities.

Kevin McCarthy – Banc of America Securities

Yes, good afternoon. Paul I was wondering if you could comment on inventory levels for PVC and fabricated products both at the producer level and any insights that you may have on levels that your downstream customers as well?

Paul Carrico

Tough to say across the board but I think certainly at the end of the third quarter inventories were an extreme low considering the effect of the hurricanes and then people tried to kick back into normal operations as we started the fourth quarter and for the most part because of lower demand we were able to catch up. If I had to make a general assessment of where producers and consumers are I am thinking it is low across the board. Everyone would be concerned about reduced pricing and the subsequent effect is going to be rather substantial for a number of folks out there. So their target is to have as minimal inventory as possible and I would believe that would continue into the first quarter of next year.

Kevin McCarthy – Banc of America Securities

Okay, and then on the subject of international trade, what are you seeing with regard to trade flows given the stronger dollar over the last couple of months and what implications – what are your expectations for industry operating rate let us say 4Q versus this time last year?

Paul Carrico

I guess it is difficult to predict the effect of the stronger dollar because it is in my mind so much overshadowed by the reduced demand. If you look at what is happening in Europe and Asia and other parts of the world demand is dropping substantially. So that’s the bigger issue. There is just not the need to move products from one spot to another unless there is a pricing advantage of some sort. So, it has clearly influenced the ability to do exports from the U.S. say on the vinyl side and again I would say that also would continue into the first quarter.

Kevin McCarthy – Banc of America Securities

Where is operating rate for 3Q and how do see that playing out?

Paul Carrico

For 3Q in which area?

Kevin McCarthy – Banc of America Securities

Let us say PVC resin.

Paul Carrico

I don’t know what the final numbers came out, fairly strongly down. If you’ll give me just a second I will get you a number. The operating rates for 3Q08 most people will have use something in the middle 70s, maybe somewhat lower in various cases depending upon your circumstances. When you look at the fourth quarter it is a bit early to tell but it is probably not going to be very good when you think about the normal slowdown and then the economy effects that we’re having right now. In addition to the exports we talked about will be less than they were available earlier in the year.

Kevin McCarthy – Banc of America Securities

Great. And then final question if I may on aromatics, the benzene settlement for November was down 62% versus October, and I haven’t heard a propylene number yet but I think that is going to be down big as well. Can you talk a little bit about your expectation for sequential profitability trends there, in other words are you in a position to keep some of that relief or do you think it will be passed along to your customers in fairly short order.

Paul Carrico

Generally speaking in that business pricing on cost get passed along. That is the way that the business works, that is just the way it plays out. The bigger issue is the same thing we talked about on some of the other aspects of the businesses is this dropping value of inventory and in the case of benzene it is just massive. I don’t think I’ve seen anything like that before. I suspect there has never been anything like that. So the inventory is the bigger issue not only for us but for other producers and for consumers themselves too.

Kevin McCarthy – Banc of America Securities

Thank you very much.

Paul Carrico

Okay.

Operator

Your next question will come from the line of Mark Connelly with Credit Suisse.

Mark Connelly – Credit Suisse

Thank you. I got two questions. First, could you give us a sense of where your caustic soda customers are clustered and you know, given what is happening with pricing and the potential for more prices are you seeing evidence of demand destruction in any of those markets? Second question is with respect to (inaudible) you know capacity just coming on line now. I’m curious if you are expecting pressure on PVC when we get towards year end and contracts are being renegotiated.

Paul Carrico

Okay, starting off I guess with the first question about the caustic that we really don’t intend to discuss the customer base and where the locations are in terms of the supply demand balance on the caustic. That’s a very difficult thing to predict. The reason we got to where we are is that supply demand balance favored caustic because of our reduced chlorine production. Everything I see right now says that chlorine is dropping off substantially on production as we go through this coming quarter and next year. So it is going to retain that residual effect on caustic most likely. The demand destruction, certainly there will be some demand distraction for caustic but the key is how that balance plays out. And there is too many variables in that equation for me or I suspect for anyone else to be very accurate in predicting that. In terms of the additional PVC capacity coming on, I made this comment I think in the last call, there has essentially been about as much capacity idle as there will be capacity coming on during the year. The whole effect of PVC supply and demand balance and pricing is much more overshadowed by the total demand on the operating right situation as we have right now. That is startup of additional capacity although it’ll add some percentage points to the operating rate but we’re still in a very unfavorable range as you look into 2009.

Mark Connelly – Credit Suisse

Helpful. Thank you.

Operator

Your next question will come from the line of Bo Hunt with Banc of America.

Bo Hunt – Banc of America

Hi yes. One more follow up on ECU. I know you said it is difficult to gain visibility here but you had mentioned that you expect ECU margins to remain strong in 2009. Just wondering if you could tell us, are you anticipating the margin would remain at or near current levels, are you just saying that you expect another strong year for example above 2008 levels or something like that?

Paul Carrico

About as far as I will go is that if they will still be strong to say whether they are at or above it is difficult to predict. We got to see how this shakes out as we go into the first quarter and some demand comes back particularly on the chlorine side. And how that supply demand balance plays out. Just way too many factors right now to forecast that I think.

Bo Hunt – Banc of America

Understood. Okay. And then are you planning any plant shutdowns at any of your chlorovinyl’s assets in the fourth quarter of 2009. I don’t know if you addressed that already?

Paul Carrico

Yes, we are idling some of our VCM capacity during the fourth quarter based upon the reduced demand requirements. And in the first quarter we do plan a turnaround in our chlor alkali facility and also having a turnaround in some of our VCM operations. It is kind of split between the first and the second quarter.

Bo Hunt – Banc of America

Okay. That is very helpful. And on the chlor alkali there I mean do you have the inventories necessary to deal with caustic customers for example, or would you expect your volumes to be down a little bit from the shutdown?

Paul Carrico

We sort of position the shutdowns seeing what developed here in the last 3 or 4 weeks to position the shutdown so that it occurred at a time where we could manage the whole situation and be in a comfortable position. So we don’t think it will affect us other than what we got planned on the outage there.

Bo Hunt – Banc of America

Great. And just one last question, you do not hedge your natural gas purchases on a forward basis. Right?

Paul Carrico

For the most part no. If we have a specific need because of something we have committed to we made buy that type of volume but very limited and no we didn’t go out once into the future on hedging natural gas.

Bo Hunt – Banc of America

So you don’t have any significant hedges put in place right now?

Paul Carrico

I would say that would be a dangerous game in today’s world.

Greg Thompson

And when we do Bo the duration is usually not much more than 30 days or so. So, we don’t have any long-term hedging that we do.

Bo Hunt – Banc of America

Understood. That is great guys. Thanks.

Operator

Your next question will come from the line of Tarek Hamid with JP Morgan.

Tarek Hamid – JP Morgan

Good afternoon guys.

Paul Carrico

Good afternoon.

Tarek Hamid – JP Morgan

On the – question geographically, can you talk a little bit about what you’re seeing in Canada versus what you are seeing in the United States in terms of demand for products?

Paul Carrico

Maybe in a general sense I don’t think the drop off of the housing market has been severe or is forecasted to be severe in Canada as it was in the U.S. So that is a bit of a positive factor. If you look at the general economy there I think the last forecast I saw as far as projections going forward and these are all subject to things like weekly or biweekly changes. But the last forecast we saw was a moderation of the economy as we go through the next couple of quarters. But again not quite as bad as the moderation that we might see in the U.S. market.

Tarek Hamid – JP Morgan

Okay, and then you know we saw the FIFO loss this quarter sort of reversing the gain in the second quarter given some of the deflationary environments on some of the feedstocks and energy. Should we expect some more effect of losses in the fourth quarter?

Greg Thompson

Yes there could be some more and we have baked that into our expectations around the forecast. The bottom end of the range of the forecast as Paul discussed earlier.

Tarek Hamid – JP Morgan

Okay, great. Thank you very much.

Operator

Your next question will come from the line of Roger Spitz [ph] with Merrill Lynch.

Roger Spitz – Merrill Lynch

Thank you. Good afternoon.

Paul Carrico

Good afternoon, Roger.

Roger Spitz – Merrill Lynch

How are you. Do you have any take or pay chlorine purchase contracts and if so could you provide the annual volume requirement?

Paul Carrico

I don’t think we would comment on those kinds of issues. There is nothing of substance there for you to try to analyze I would say as a general comment.

Roger Spitz – Merrill Lynch

I’m trying to get a handle on the extent you have to take or pay chlorine from somebody else. You may have to turn down your own chlor alkali plant if you don’t have enough outlook for the PVC? But anyway, can you update us on when Royal’s VCM purchase contract matures?

Paul Carrico

You are referring to the Westlake? Can you repeat the question?

Roger Spitz – Merrill Lynch

Yes, exactly Westlake.

Paul Carrico

Again that is an ongoing discussion and I would say that I will defer that to later.

Roger Spitz – Merrill Lynch

Okay, how long was your Plaquemine chlor alkali plant operating, excuse me, was it operating flat out during the Q3 ‘08 outside the two week outage related to the hurricane?

Paul Carrico

There was a bit more of outages associated with a couple of small problems but we had but not a big time number. No.

Roger Spitz – Merrill Lynch

Just you mean, just on the order of days?

Paul Carrico

Yes right on the order of days the biggest effect by far was the hurricanes.

Roger Spitz – Merrill Lynch

And how many days do you expect your chlor alkali turnaround in Q1 ‘09 to take?

Paul Carrico

Again typically information we don’t hand out or provide. So it is probably comparable to other folks in doing a full plant turnaround.

Roger Spitz – Merrill Lynch

Okay and finally – go ahead.

Paul Carrico

It is a full turnaround, it is not partial in this case.

Roger Spitz – Merrill Lynch

Meaning you are changing diaphragms and that sort of thing?

Paul Carrico

Just a full turn, it includes going through the whole unit.

Roger Spitz – Merrill Lynch

Okay. Finally the FIFO loss in Q3 ‘08 was that mostly in chlorovinyls or did a material amount happen in aromatics as well?

Greg Thompson

It is mostly chlorovinyl. There was a small amount for aromatics.

Roger Spitz – Merrill Lynch

Some of the feedstocks for aromatics went down fairly dramatically as we discussed, is that because your inventory is holding (inaudible) very small?

Greg Thompson

Exactly. We don’t carry a lot of inventory.

Paul Carrico

Well I think that that is that factor but the larger drops have just now occurred if you look at the numbers it wasn’t nearly as much of a drop. I don’t believe if you look at the numbers for the third quarter. So this quarter is where it is more so than the third.

Roger Spitz – Merrill Lynch

Great. Thank you very much guys.

Paul Carrico

Okay.

Operator

Your next question will come from the line of David Troyer with Credit Suisse.

David Troyer – Credit Suisse

Good afternoon. A couple of questions. First I was wondering if you could just maybe discuss the methodology you used to reach the $27 million pre-tax hurricane impact just generally.

Greg Thompson

We looked at – we really did – we analyzed the – looked at the rates and the costs that we incurred related to the hurricane in all of the plants as well as some known sales that we missed as a result of not having the plants up and running for orders that we knew we had as well as just the fact that at times during the quarter because they were still issues with transportation. We had products ready to ship but we couldn’t get a barge, barges in to ship the product out. So it was a fairly granular analysis that we did.

David Troyer – Credit Suisse

Okay, and then I know it is a very short window between the hurricanes occurring and then the entire system kind of freezing up. But at one point in time during or shortly after the hurricanes you talked about the combination of lost production on an industry-wide basis and the fact that inventories were very low going into the hurricane that you maybe there would be some pent up demand you would see some inventory rebuilding and some strength, some seasonally above average strength in the fourth quarter. The world may have changed a little bit but I was wondering if that is still a view that you hold or if there has been any tangible evidence that that is occurring?

Paul Carrico

Our view is the world may have changed a little bit right now. It is not a carryover. I think everybody thought that might be a possibility early on but that has really disappeared considering the economic environment.

David Troyer – Credit Suisse

Okay, a couple of I guess housekeeping, the AR, you gave us the balance I was wondering if you could give you thought the availability was at the end of the third quarter?

Greg Thompson

Yes the facility is $165 million accounts receivables securitization facility. So we actually had it maxed out at the end of the third quarter.

David Troyer – Credit Suisse

Okay, and then you know you talked about the rate stepping up at the beginning of October for covenant compliance purposes, you don’t have to adjust interest expense on a pro forma basis. Or do you have to adjust interest expense on a pro forma basis. So quarters prior to the rate ramp aren’t adjusted to meet your covenant interest?

Greg Thompson

That is correct. There is no pro forma adjustment. The calculation the way it works it is actually cash and cash interest is the basis for the interest coverage.

David Troyer – Credit Suisse

And then some of your securities particularly bonds are trading at significantly depressed levels. I am just wondering if you could discuss either or both the appetite and the ability to be able to buyback the bonds in the open market?

Greg Thompson

Well we certainly have the appetite but the ability is unfortunately constrained. We are actually not permitted by our – the amendments of our senior secured facility. We don’t have the ability with the terms of the senior secured facility to go out and buy any debt like our bonds.

David Troyer – Credit Suisse

And then last question. I will start with the clarification Paul when you reiterate your guidance today you were not adding back the hurricane impact.

Paul Carrico

That is correct.

David Troyer – Credit Suisse

So, this is – you are reiterating guidance that was originally provided on the second quarter call or the second quarter press release back in the beginning of August and predated the hurricanes. So aren’t you reiterating today, are you in effect raising your guidance by you know, essentially $27 million?

Paul Carrico

I don’t know about raising it by $27 million but we’re adding firmness to the bottom and saying that there is a bit more of an upside then there is a downside to that number.

David Troyer – Credit Suisse

But when you originally issued the guidance you had I suspect you did not foresee the hurricanes or their impact.

Paul Carrico

That is true. That is true. Yes.

David Troyer – Credit Suisse

Okay, that is all I have. Thank you.

Operator

Your next question will come from the line of Jonathan Goldrep [ph] with Fortress.

Jonathan Goldrep – Fortress

My questions have been answered. Thank you.

Operator

We will move on to the next question from the line of Andrew Chen with Barclays.

Andrew Chen – Barclays

Good afternoon guys. I have noticed that the accounts payable days outstanding has been reduced again sort of quarter-over-quarter. Could you speak about that relationship that you have currently with your say creditors?

Paul Carrico

Yes, I mean the accounts payable balance did come down. That was in the third quarter again over where it was in the second quarter. That was mainly due to the rapid decline in energy costs at the end of the quarter and also to a much lesser extent related to the hurricane impacts that Paul spoke of earlier. As far as the terms I would say that the trade terms that we have with our vendors at the end of the third quarter was relatively unchanged from where it was at the end of the second quarter and as we talked about in the second quarter we were – there was some reduction of trade terms due to the Sandelman issue and now with that obviously behind us as well as the amendment of the senior secured facility with the much looser covenants we were actually looking and working with vendors to get our trade terms lengthened and back to a more normal level. But you didn’t see, you wouldn’t see any of that as of September 30.

Andrew Chen – Barclays

Okay great. Thank you.

Operator

Your next question will come from the line of Barrett Evnon with Brownstone Asset.

Barrett Evnon – Brownstone Asset

Hi, a follow up on your – I don’t see it is mentioned earlier about the revolver availability. I guess it is 159 this quarter, which is I guess unchanged sequentially even though you paid down net debt I guess by $50 million is that – are there some more letters of credit out there and what exactly explains that?

Paul Carrico

I’m not sure of your reference point is. And I think the letters of credit were roughly the same as I recall. I don’t have those numbers in front of me September 13 to June 30. Are you comparing to June 30?

Barrett Evnon – Brownstone Asset

Yes.

Paul Carrico

And in terms of the debt pay down, most of the debt pay down was related to the Term B.

Barrett Evnon – Brownstone Asset

I guess the revolver than drawn then was about 160ish?

Paul Carrico

The revolver drawn at the end of the September was $125 million. The revolver outstanding at the end of June was $134 million.

Barrett Evnon – Brownstone Asset

Okay. And then on your EBITDA calculation sort of confused, you have $47 million in your reconciliation. Are you – are you not including that’s $3.4 million as part of your EBITDA calculation as an add back?

Paul Carrico

The 3 point – you mean the restructuring.

Barrett Evnon – Brownstone Asset

Yes.

Paul Carrico

The $47 million has been reduced by any restructuring charges we have. So, if your question as are we improving $47 million, the $47 million for restructuring charges. The answer is no. We leave those restructuring charges in as a component of a – and a reduction of our reported EBITDA.

Barrett Evnon – Brownstone Asset

Great and some things yourself (inaudible). Could you think on the face of the balance around the income statement you are about $54, but you’re saying you’re 47, because you’re not getting yourself the add back potentially?

Paul Carrico

That is correct. That is consistently the way we have done it.

Barrett Evnon – Brownstone Asset

And what did you mention the chlorovinyl operating rates were during the quarter? I know there were 71% in the second quarter but I didn’t hear what they were in the third quarter.

Greg Thompson

For the third quarter it varied between PVC and chlor alkali. Chlor alkali, typically for us as you may know from past discussions runs at a fairly high rate, except reduced by the hurricanes and PVC industry in general was in the mid 70s with our numbers being a bit lower than that?

Barrett Evnon – Brownstone Asset

(inaudible).

Paul Carrico

And sorry, if I could just clarify the answer I just gave you relative to reported EBITDA that was correct. But and now – if you were asking about for covenant purposes as we were mentioning earlier, actually as Paul mentioned in his prepared remarks we do have a covenant add back for cash restructuring of $12 million. (inaudible) $3 million was cash and there was some portion of it, not a lot but some portion of it that was cash. We do add that back for covenant calculation purposes.

Barrett Evnon – Brownstone Asset

So you are anticipating more cash charges in the fourth quarter then I guess?

Paul Carrico

Yes.

Barrett Evnon – Brownstone Asset

Similar amount or you are not quantifying it.

Paul Carrico

You know we – I mean there was an earlier question on that. We’re not quantifying it there are some different alternatives we are looking at what I said then was it could be in the range of that $12 million or so carve out that we have for amendment purposes, but we are evaluating those – some of those actions currently.

Barrett Evnon – Brownstone Asset

All right. And you said on the $27 million hurricane impact that was because of two weeks of lost production. Do you expect to recover that lost weeks as lost weeks, or that is sort of gone, you can’t do anything about it?

Paul Carrico

Unfortunately with the current economy I believe that is gone.

Barrett Evnon – Brownstone Asset

The $27 million that you are absorbing it, then you are not going to recover that in upcoming quarters as it stands right now?

Greg Thompson

Yes that is right. I mean I would say because of that it probably has helped the caustic pricing some because that volume got taken out, but the orders are gone unfortunately because of the dramatic slowdown in the economy.

Barrett Evnon – Brownstone Asset

Right. And then one other question on the AP, so your days have tightened pretty I guess from the last there were 34, this quarter they went down to 18, 19 and in your thinking that is – are you thinking you will be able to restore those back to sort of the mid 20 day level?

Paul Carrico

Yes, relative to last year if that is your reference point it certainly has declined, the days, and that is something that we experienced most significantly in the second quarter when the Sandelman issue occurred and lots of vendors got concerned with that and so as I said with now that issue behind us as well as an amendment to the senior secured with relaxed covenants then we do look to get that – get some of that back.

Barrett Evnon – Brownstone Asset

So, you feel that despite a weaker economy and the fact that you only have a – I guess you have minus 2 in the first and second quarter, I guess the fourth and first quarter of next year that that is going to give vendors confidence to restore those days do you think?

Paul Carrico

Well I guess that will be for them to decide, but that’s something we’re working on and we look to get some of that back.

Barrett Evnon – Brownstone Asset

Okay. And you’re still in constant I guess, conversations with your banks about the – about your covenants I guess, the potential to do a new facility.

Paul Carrico

Yes, and certainly the market it is not receptive right now. The credit markets while they are getting better, but we have good communication with the banks and keep them updated regularly.

Barrett Evnon – Brownstone Asset

So what do you think will need to have to happen, because as going into the fourth quarter and first quarter this year your weakest seasonal periods. So, you’d have to have a pretty dramatic EBITDA improvement to get a new – to be compliant number one, yes, you would, but to get actually get a deal done you would have the pretty significant EBITDA improvement I would guess in the fourth and first quarters of this year and the seasonally weak parts of your business. So, there are certain things you’re doing to sort of position yourself that way or how do you see – how are you seeing that playing out in terms of how you get the improvement there to get an amendment done.

Paul Carrico

Well you know our focus is no different than what we’ve been talking about all year. You know, we were – we remain focused on cost reduction, improving, generating cash to improve our liquidity position and improving the profitability of our businesses and making sure their size consistent with the economy, and whatever you know, external factors happen in the credit markets continuing to stay focused on that will certainly improve the results, be it – be it a refinancing should the markets be a little more receptive than they are now, or an amendment process, another amendment process with the banks.

Barrett Evnon – Brownstone Asset

So, one last question.

Paul Carrico

I would just add, you know, certainly our preference is to complete that amendment and give us a long-term capital structure that provides some flexibility and our ability to grow the business for the future.

Barrett Evnon – Brownstone Asset

All right. And how much do you say and how much do you pay down the term loan exactly in the quarter and I didn’t make the calculations, the first and the second quarter.

Greg Thompson

Versus the –

Barrett Evnon – Brownstone Asset

Did you pay down the term loan in the third quarter versus the second quarter.

Greg Thompson

Yes, the term loan paid down was only a million dollars within the third quarter versus the June 30 balance.

Barrett Evnon – Brownstone Asset

Okay, but the availability was still the same sequentially under the revolver.

Greg Thompson

Yes, that is right. I mean of course, the term B outstanding has nothing to do with that. So yes the revolver came down a little bit, came down a little bit, that’s the – and I guess, so you’re thinking about that $9 million or so, but as I said in the prepared remarks the $160 million of availability we do have $7 million that we don’t have access to the default of Lehman Brothers. So that would be the principal difference even though we paid the revolver down, the availability is the same.

Barrett Evnon – Brownstone Asset

And how is the (inaudible) look right now for you guys, I know it is something you guys have done in the past.

Paul Carrico

Yes, we’ve done some of that in the past. There is nothing, you know, as that market has tightened up a bit as well. So you know, we’ll continue to look at those kinds of possibilities, but nothing we are focused on right now.

Barrett Evnon – Brownstone Asset

All right. Thank you very much.

Operator

Your next question will come from the line of Doug Dedder [ph] with Broadpoint Capital.

Doug Dedder – Broadpoint Capital

Thanks for taking my question here. I might have missed this, but in your amendment to your credit facility recently, it required you to hire a financial advisor. I just wanted to know if you hired one and who it is?

Paul Carrico

Yes, we have hired a financial advisor and that was actually something that we were looking at to accelerate our cost reduction activities at Royal. We’ve, you know, we’d identified some operational improvements that we weren’t – we just didn’t have the bandwidth to improve as quickly as we wanted, and so that was a you know, pretty easy give as part of the amendment process, but we don’t publicly identify who our advisors are.

Doug Dedder – Broadpoint Capital

How is the cost, where can we find the cost on the – is it on the P&L or where will that be.

Paul Carrico

The costs.

Doug Dedder – Broadpoint Capital

Where will it be found. I mean is it just in SG&A, is it an add back, part of restructuring.

Greg Thompson

Yes the cost for the financial advisor.

Doug Dedder – Broadpoint Capital

That is correct.

Greg Thompson

Yes, I mean they are in – they would be included in SG&A cost there. They’re not all that dramatic.

Doug Dedder – Broadpoint Capital

Okay. Thank you very much.

Operator

Your next question will come from the line of William Merritt with Gulf Stream Asset.

William Merritt – Gulf Stream Asset

Thank you. All of my questions have been answered.

Operator

And the next question comes from the line of George Charlie [ph] with Lightspeed [ph].

George Charlie – Lightspeed

I wanted to check with you – in the commentary you made – in the press release you basically say that you’re focused on some cash management issues. I guess the AP term is one of them, as you just mentioned, going into next year. If you aren’t successful in some of the stuffs you are doing, and if you can explain to us what they are. Do you expect your working capital to be a source, or a use of cash in 2009?

Paul Carrico

Yes. I would expect working capital to be continuing to be a source where inventories you can see the progress that we made there in particular, and there we think there is more to more that we can still do.

George Charlie – Lightspeed

And on the payable terms also.

Paul Carrico

Yes. As I mentioned earlier that those terms got pulled in back in the second quarter when we had the issue on the alleged indenture default. So now with that behind this as well as the amendment on the senior security facility with significantly loosened covenants then you know, we’re going back and working with vendors to lengthen terms and restore them back to more normal levels.

George Charlie – Lightspeed

Okay. Do you have a CapEx budget for ‘09.

Greg Thompson

Yes. We’re targeting the same range of $60 million to $65 million.

George Charlie – Lightspeed

Okay. Can you mention overall obviously it is a little bit tough to do, given the headwinds in the industry overall, but if you look at some of the stuff that you’re doing on the cash management side, along with your CapEx budget, are you comfortable in basically coming out the cash flow breakeven or potentially positive in ‘09, or you think it’s going to be little bit of a drain on cash.

Paul Carrico

You expect in ’09.

George Charlie – Lightspeed

Yes.

Paul Carrico

I think it’s premature to make, there’re just way too many variables for ‘09 right now to make those kinds of – put out those kinds of estimates for you at this point.

George Charlie – Lightspeed

Okay. And last do you mind if – I missed probably the parts of the call where you mentioned the covenants resets for next year. Do you mind going through those again if they’re not very complex, they are not very long.

Paul Carrico

The covenant resets, what do you mean?

George Charlie – Lightspeed

I thought you mentioned that you went over the call on what the no covenant levels are.

Paul Carrico

No I didn’t but I mentioned what our – what it was as of the end of the third quarter, I mean, as far as the resets it – for the leverage ratio it increases to 7.75 at December 31st, and to 8 times at March 31st and on the interest coverage ratio, the interest coverage loosens from it was 1.7 at the end of September down to 1.5 December 31st and 1.45 March 31st.

George Charlie – Lightspeed

Perfect. Thank you very much.

Paul Carrico

Good.

Operator

And at this time, there are no further questions.

Paul Carrico

Okay. Just to make a few closing comments. For the first three quarters of the year, economic conditions really challenged all the four of Georgia Gulf’s businesses with soft demand and volatile feedstock cost. The magnitude of the changes has been unprecedented in some cases. We expect the economic outlook to continue to be challenging for the fourth quarter and into 2009 as we discussed. We pursued the numerous options and opportunities during the past year that allowed us to move closer to achieving our 2008 goals despite the challenges we faced. Likewise, we envision continuing these efforts as we move forward into 2009. We will focus on reducing debt through the coming year, adjusting our cost structure to match the market conditions and improving the productivity of our assets. I want to thank you for joining us today and we look forward to speaking with you in February.

Operator

Ladies and gentlemen, this does conclude the Georgia Gulf third quarter financial results conference call. You may now disconnect.

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Source: Georgia Gulf Corporation Q3 2008 Earnings Call Transcript
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