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Axiall (NYSE:AXLL)

Q1 2013 Earnings Call

May 08, 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

P. J. Juvekar - Citigroup Inc, Research Division

Hassan I. Ahmed - Alembic Global Advisors

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

Bill Hoffman - RBC Capital Markets, LLC, Research Division

Roger N. Spitz - BofA Merrill Lynch, Research Division

Gregg A. Goodnight - UBS Investment Bank, Research Division

Christopher W. Butler - Sidoti & Company, LLC

Charles N. Neivert - Cowen Securities LLC, Research Division

Dhaval Patel

Bill Young

James P. Finnerty - Citigroup Inc, Research Division

Operator

Good morning. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the Axiall First Quarter Earnings Call. [Operator Instructions] Thank you. Mr. Jarosick, you may begin your conference.

Martin Jarosick

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

There are presentation materials available for your reference on the website and our press release issued last night with the first quarter financial results contains a forward-looking statement, 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 involve risks and uncertainties which may cause actual results to differ. Axiall does not undertake 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 measure are provided in the earnings press release and 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. It's my pleasure to welcome you to the first conference call for Axiall. Today, we'll be discussing the performance of the combined company. Throughout my prepared remarks, my comparisons will be based on our reported first quarter of 2013. This includes 2 months of the PPG chemicals results and 3 months of the GGC legacy results. This combination of results will be compared to GGC legacy financial results reported for the first quarter of last year.

In the current year first quarter, we generated $133.4 million of adjusted EBITDA for the period, and that compares to $75.4 million in the same quarter last year.

Specific to the Chlorovinyls segment, we reported $134.2 million of adjusted EBITDA in the first quarter of this year compared to $45.6 million in the first quarter of last year. Compared to the first quarter 2012, market caustic prices increased and market chlorine prices decreased so that the net effect was -- the ECU value was essentially flat.

On the PVC side of our business, the industry successfully implemented domestic price increases of $0.03 in February and $0.05 in March. Due to the timing of when these prices -- price increases get applied in our business, some of the pricing benefits will occur in the second quarter.

On the input side, we saw a $15 million increase in our ethylene cost due to changes in our ethylene supply portfolio at the end of the year. This represents an average cost increase of about $0.025 per pound of PVC, which more than offset the pricing benefits realized in the first quarter. There are a number of variables involved but based on the current conditions, we expect a similar increase in ethylene cost each quarter this year.

Our volumes and product mix during the quarter were negatively affected by several small, unplanned outages and the continued impact of the PPG -- or PHH fire that occurred at the end of December 2012. We estimate that these impacts in total reduced our segment adjusted EBITDA by about $14 million during the quarter.

Our Building Products segment reported negative $2.5 million of adjusted EBITDA in the first quarter of 2013 compared to $3.3 million in the first quarter of last year. The decrease in sales volume and profitability was mainly due to the normal winter weather patterns this year compared to the unseasonably warm weather winter -- warm weather last year. In addition, there are softer year-over-year conditions in Canada at this point.

We expect volumes to improve going forward as we move into the spring selling season and the U.S. housing market continues to show solid signs of recovery. This will be partially offset by a weaker Canadian housing market.

Our Aromatics segment reported $13.3 million of adjusted EBITDA in the first quarter compared to $37.9 million during the same period last year. Last year's results included a $20 million inventory gain and the benefit of a surge in opportunistic exports at favorable margins. The first quarter of 2013 included a $5 million inventory holding gain, partially offset by a $2.8 million lower of cost of -- or market adjustment.

Before I turn the call over to Greg, I want to point out that this week marks the successful completion of our first 100 days as Axiall. Bringing together 2 large organizations with established cultures and work processes is not an easy task. I'm very proud off the positive attitude and level of engagement demonstrated by our 6,000 employees during our first 100 days. We've made significant progress on integrating the organizations. And most importantly, we've done this while maintaining a steady focus on safety, environmental stewardship and operational excellence. We've also seen product quality and superior customer service remain at a high level.

With all of these activities, we still know there's lots of work ahead of us. The good news is we're already -- we've already begun to see our -- how this merger enhances Axiall's scale and integration across the Chlorovinyls chain and how it expands the benefits we expect to gain from low-cost natural gas in North America and growing global demand for our broadened product portfolio.

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 first quarter. From a reporting perspective, this was a complicated quarter, so I would like to take a few minutes to discuss some of the accounting items, including required purchase accounting adjustments related to the PPG transaction, which affected our financial statements. 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 a net loss attributable to Axiall of $3.5 million for the first quarter of 2013 compared to net income attributable to Axiall of $35.3 million during the same quarter in the previous year. Results for the first quarter of 2013 were impacted by the following items: a $10.2 million step-up of the fair value of inventory on hand on January 28 related to the former PPG chemical assets; an asset impairment charge of $2.6 million related to real estate for a window and door plant that we closed in 2009; and $10.1 million of transaction-related costs.

SG&A expense for the first quarter of 2013 was $78.3 million compared to $47.7 million for the first quarter of last year. The increase was mainly due to the inclusion of 2 months of the merged company in our results, as well as $10.7 million of amortization of intangible assets, all related to the merger. Going forward, we expect SG&A expense to be in the range of $80 million to $90 million per quarter.

Also, on the P&L, we reported a $23.5 million gain on acquisition of controlling interest. This is related to our purchase of the other 50% of the PHH/VCM joint venture that we shared with PPG prior to the merger. When we acquired the other half, as part of the merger, we were required to remeasure our equity interest in PHH and recognize this gain.

Our net interest expense for the first quarter was $18.3 million compared to $14.4 million for the first quarter of 2012. Going forward, we expect quarterly interest expense on the P&L of about $18 million and cash interest expense in the range of $16 million to $17 million.

During the first quarter, we completed the RMT financing by entering into a $279 million term loan and issuing a $688 million 4 5/8% unsecured note, which is due in 2021. Due to the favorable market conditions and response to our RMT financing, we also refinanced $450 million of 9% secured notes due in 2017 with a new $450 million of 4 7/8% unsecured notes due in 2023. The redemption of our 9% notes and the issuance costs of components of the RMT financing resulted in $78.5 million of costs primarily comprised of $57.7 million of make-whole payments, call premium and professional fees for the $450 million 9% note and $8.5 million to write off the remaining unamortized financing fees from the bonds that we extinguished.

For the first quarter of 2013, we reported a tax provision of $800,000, primarily due to income tax expense on the gain attributable to the acquisition of the 50% interest in PHH that I mentioned earlier, as well as the impact of state income taxes due to the merger. During 2013, we expect to make cash tax payments of approximately $150 million, and we expect an effective tax rate in the range of 30% to 35%.

At the net income line, you will notice that we now present both consolidated net income and net income attributable to Axiall. The difference is the income attributable to the 40% of the TCI chlor-alkali plant in Taiwan that we don't own.

I will also like to take a moment to walk through the combined company's depreciation and amortization expense. On a full year basis, the former GGC assets had about $90 million of depreciation and amortization. As part of the harmonization of accounting practices between the merging companies, we benchmarked against peers and determined that GGC was using shorter lives for depreciation than was typical. So effective January 1, 2013, we adjusted our estimate of depreciable lives for the former Georgia Gulf assets to lengthen them. This will result in a reduced depreciation expense by about $21 million for the full year.

With purchase accounting, we were also required to write up PPG's property plant and equipment assets to fair value. Our preliminary determination of fair value is approximately $957 million. This is being depreciated over a weighted average life of about 10 years. So the merger with PPG's chemical assets adds about $88 million of depreciation expense on a full year basis.

Through purchase accounting, we also assigned a preliminary value to intangible assets of $1.2 billion. Compared to the pro forma estimates we have filed since last July, the value of the intangibles has grown considerably as our stock price has increased, driving up the value of the 35 million shares in the purchase price calculation. This asset will be amortized over 19 years, adding about $64 million of annual amortization. In total, we estimate that our full year run rate for depreciation will be about $160 million, and our annual run rate for amortization will be about $75 million.

In the cash flow statement, we have also broken out depreciation and amortization into separate lines, so you will see the depreciation independent of the now large intangibles amortization.

The total FIFO impact for the first quarter of 2013 was a $13.6 million benefit with about $10.2 million in Chlorovinyls and the remainder in Building Products. In Aromatics, there was a small FIFO benefit that was more than offset by a $2.8 million lower cost or market adjustment. This compares to the first quarter of 2012 with the FIFO benefit of $11.1 million composed of a $14.7 million benefit in Aromatics, partially offset by a negative $4.1 million impact in Chlorovinyls.

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 increased by $344 million from December 31, 2012, to March 31, 2013. This sequential increase was largely driven by the net working capital associated with the PPG chemical assets along with the normal seasonal build of the merged company. Compared to the first quarter of last year, controllable working capital increased $244.6 million, driven primarily by the net working capital associated with the PPG chemical assets.

On the cash flow statement, you will note that we consumed $104.8 million of cash in operating activities for the first quarter of 2013 as compared with $85.5 million for the first quarter of 2012. Capital expenditures were $16.4 million for the first quarter of 2013 compared to $13.5 million in the first quarter of 2012. For 2013, we expect to invest about $125 million in maintenance CapEx and also in the range of $50 million to $75 million for returned-based capital projects.

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 with Goldman Sachs.

Brian Maguire - Goldman Sachs Group Inc., Research Division

I was hoping that you could explain a little bit more about the change in your ethylene cost. It sounds like you've given up about a $0.025 advantage that you had over the market, is that right? And sizing the full year impact, you're kind of saying that annualizing the $15 million increase in the quarter is about right. So it's about $60 million for the full year that you're looking at?

Paul D. Carrico

Yes, that's a general range that we're forecasting at this point.

Brian Maguire - Goldman Sachs Group Inc., Research Division

And I thought you had quite a bit less volume that was advantaged on the legacy Georgia Gulf side, so is this coming from the PPG side of things? Or is this really equally spread between the legacy Georgia Gulf and the PPG assets?

Paul D. Carrico

Well, we look at it kind of as a combined group at this point in terms of the way it's been approached for this year. And the advantaged, I guess, when you say advantaged, there's different levels of advantage. We had contracts that normally roll off on a periodic basis, and it just reflects the continuing increase in terms of the ethylene coaxability to get to a better margin on their part, so...

Brian Maguire - Goldman Sachs Group Inc., Research Division

Okay. And just related to that, you've talked about a mid-cycle EBITDA number of $850 million or better. Just wondering if that contemplated this $60 million increase or should we adjust that down based on kind of the new ethylene environment?

Paul D. Carrico

No. We -- I guess, my opinion at this point would be that the chlor-alkali VCM PVC producer would seek a level that gets to those same numbers that we talked about in the past so the ethylene prices and margins are all going to vary from year-to-year. So that story about the $850 million mid cycle is any different today than it was before. Now periodically quarter-to-quarter, year-to-year there'd be some changes based upon how ethylene moves around. But all things being equal, the producers of vinyl and chlor-alkali should seek to get a return on their assets the same as we've talked about before.

Brian Maguire - Goldman Sachs Group Inc., Research Division

Okay. Just one last one, if I could. Just the $50 million to $75 million of expansion CapEx. What are you guys targeting there? I don't think you've done much expansion in the last couple of years, but with a new company and a new outlook, maybe if you could just expand on what opportunities you're seeing.

Paul D. Carrico

Well, we think it's a mix between Building Products and chemicals, probably a little bit more weighted towards the chemical side. But Building Products is entering the period where we think there's solidly the expectation of improved volumes and improved levels of activity going forward this year and next. So there's opportunities that are fairly simple there in the context of existing sites. And then on the chemical side, it's the various things that we've looked at over time, and we think we're in a position to make those investments since they have a return, so...

Operator

Your next question comes from the line of Andy Cash with SunTrust.

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

Just 4 quick ones. First of all, the PVC production number, you gave us 2 numbers, $15 million for ethylene cost or $0.025 per pound of PVC. So does that imply that you produced 600 million pounds of PVC in the first quarter?

Paul D. Carrico

That was kind of an average number, just rounded, so I don't think we've given specific numbers there. I would tell you that we continue to operate at rates above the industry. So you can kind of look at it in that context.

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

Okay. So that -- is that true for the middle of the second quarter, you're above industry rates?

Paul D. Carrico

We expect the same pattern for this year -- for this quarter, too, yes.

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

Okay. One thing I'm a little confused about. I think you said in your comments that PVC price increase -- you had some PVC price increase in the first quarter. But then in the release, you're talking about how the PPG chemicals benefit was offset by lower resin sales prices. So did prices go down in the first quarter for you on PVC compared to last year?

Paul D. Carrico

I think that was compared to last year. And yes, and with the net effect of all the pricing and contracts and whatever mostly, I think, because of the resets that normally occur and that seems to be missed in a lot of the forecasting out there. But resets occur and that causes a situation that's a difficult to see from the outside world as far as what the exact pricing levels are, but...

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

I mean, could that be related to your mix? Maybe last year you had more export business, and this year you have less export business?

Paul D. Carrico

No. It's an industry phenomena. Every year, there's a reset on contracts. And typically, there's price increases to compensate for that plus to reflect whatever the market conditions are. The first quarter was decent, but I think the industry averaged about 85%. So that isn't at the level that really strongly pushes the pricing normally, and I think that's what we saw. There was a third increase on the table that didn't get followed through by everybody. So I think the question becomes, as we go into the next 2 or 3 quarters, the industry forecasters would say that we're going to be at a higher level on PVC operating rates. So we'll see if that plays out related to -- particularly on the domestic demand side.

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

Okay. Just a final question. Going back to the merger, last year you had mentioned you're looking for annualized cost synergy run rate of about $115 million and cost to achieve that, about $55 million. Has that changed now that you've been able to look at the business on more detail? Is that about the same, do you think?

Paul D. Carrico

Yes. We said that $115 million would be the run rate by the end of the second year, and nothing has changed in that respect in terms of what our objectives and our targets are and what are expectations now, so...

Operator

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

P. J. Juvekar - Citigroup Inc, Research Division

So Paul, this was an important quarter for you. You bought PPG assets. You changed the name of the company. So the miss today seems like it was driven by factors that you knew maybe a month or 2 months ago, especially this ethylene contract, I'm just wondering why this issue wasn't flagged in the fourth quarter call. So that's first question. And second question related to that is, what percent of your contract got repriced and what percent of your contract will be priced next year?

Paul D. Carrico

Yes. I -- Well, I guess relative to the first part, I think that all of the discussions around ethylene and the components of what the different contracts would be were not really firmed up until very late in the year in terms of where we're going to be. But in addition to that, the expectation would have been that there would have been a stronger move on PVC pricing, which from a long-term perspective, should offset those increases. So the fact that there was a bigger reset and the increases were, I'll call it, not as quick in the quarter, and all of that pushed together, it will be very challenging to predict all of that ahead of time. In terms of the percent of volumes that rolled over or got redone this year, it was a fairly significant percentage in terms of the kind of the typical renewals on a basis of a couple of years or whatever. The majority of that was done this year, and a lower percentage would be done next year. However, I'll keep commenting on this point, the key is whether or not the producers of chlor-alkali and PVC take those increases to the extent it can be managed in the domestic and world market, and they should be getting a margin of over and above that.

P. J. Juvekar - Citigroup Inc, Research Division

Okay. And just one question looking forward. Natural gas prices have gone up recently, so do you have any hedges? Can you help us understand your gas position?

Paul D. Carrico

Yes. We tend to not do too many hedges in most situations. Sometimes ahead of maybe a hurricane or winter weather or whatever. And in this current time frame, very limited hedges. I don't think there's any actually at the moment.

Gregory C. Thompson

Yes, we don't have any hedges currently up.

Paul D. Carrico

And typically in the past if you look at the last several years, doing that has not necessarily been a good thing based upon the future's position. So we'll keep evaluating that on a quarter-to-quarter basis, so...

P. J. Juvekar - Citigroup Inc, Research Division

So how should we think about gas costs going up for you?

Paul D. Carrico

Well, it's kind of the same situation as the ethylene going up. You would like to think that there's room and certainly, the ethylene producers have managed to get to the global price that reflects their margin benefit associated with natural gas and ethane. We should be of the same mind. So even though it's gone up a bit, there's certainly room in the pricing internationally to realize those margins at a higher level than what's been done recently. So we'll have to see how the industry plays that going forward.

Operator

Your next question comes from the line of Hassan Ahmed with Alembic Global.

Hassan I. Ahmed - Alembic Global Advisors

Just want to revisit the ethylene side of things. I mean, obviously you guys have given some guidance, quarterly guidance in terms of what sort of a hit we should expect through the course of this year. Are you guys expecting ethylene prices to be relatively flattish with current levels embedded within this guidance?

Paul D. Carrico

Yes. I think that's the general trend of the forecast out there. I don't think we have any deeper insight than folks that write -- do this for a living in the forecasting. But the general forecast is called relative flat at this point.

Hassan I. Ahmed - Alembic Global Advisors

Okay. Now on a separate note, I mean, the synergy number you have given, 2 years synergies and the like. Were any of those synergies achieved within, I know early days and the like, but within these first quarter results? And if they were, could you quantify those?

Gregory C. Thompson

Yes, it was -- this is Greg. So I mean, with the closing at the end of January, it was very small, any synergies that we captured in the first quarter. And so we're really focused on that going forward. And being, as we've talked about before, getting the -- getting a healthy run rate by the end of this year and up to the $115 million in year 2.

Hassan I. Ahmed - Alembic Global Advisors

Fair enough. And one final one if I may. Pricing, resin pricing, you discussed was down year-on-year. Obviously, there were a series of price hikes through the course of Q1. Just from a portfolio perspective, I'm trying to understand that the realization and, call it, positive impact of those pricing hikes, I mean, is it one of those phenomenas where we should see that rather than popping up in Q1 results in Q2?

Paul D. Carrico

You should think about more of the effect being in Q2 than Q1.

Operator

Your next question comes from the line of Jeff Zekauskas with JPMorgan.

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

So I'm a little bit puzzled. And if I remember your description of cost savings last year, I think you said that you would save about $40 million in costs from more efficient ethylene and natural gas purchases. And in the call, so far, I think you said that your costs are elevated by $60 million. Can you reconcile the 2 numbers?

Paul D. Carrico

Yes. I think that, first of all, was over the 2-year period in terms of the objectives of the synergies, and we still believe that we were always going to move a little bit closer to market in terms of where things are until we put something else in place for the future. And I think when we made those comments and even today, we think as a significant buyer that we'll be able to continue to leverage that position. But it's -- $60 million is more of a market increase. The savings intends to reflect what we can do relative to market circumstances.

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

Okay. And the first quarter was an unusual ethylene price quarter in that spot ethylene I think averaged $0.63 a pound and contract was maybe $0.48. And many people that have -- that buy ethylene on contracts have their contractual terms affected by spot price changes. Is that something that's happened to you. And given that spot ethylene is now, I don't know, $0.54. Does that make an overall difference to your ethylene cost in the second quarter?

Paul D. Carrico

Well, we don't typically discuss the specifics of the contracts, but I think in terms of your trying to understand is there a significant sizable difference, I'd say, no. We tend to contract at the beginning of the year and seek to contract the majority of our needs. So yes, some of those mechanisms might include it. Some of the others might not or some, or even the ones that do might have offsetting inputs that make it difficult to predict. But in terms of the movement of the spot price, no, you shouldn't assume that there's a big change there of our ethylene costs.

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

Okay. So April has been relatively -- or April was relatively wet. Is that something that affected your overall PVC volumes or how did PVC volumes in general hold up in April? Were they affected by the weather or are there weather effects for the second quarter?

Paul D. Carrico

Yes. I would say that as a general comment, I was a bit disappointed about the first quarter in terms of PVC volumes. I think that the domestic demand was up but just a couple of percent or something like that. And most people would tell you that, that was weather related. I think some of that continued into April but we're certainly getting to the point in time now in the year where that's starting to fade away. And certainly, it's not an explanation if there's still lower volumes. We see mixed signals in the market right now in terms of where things are going, but I think you got to kind wait till the end of this month and the end of the next and see if these projects -- and we certainly see a lot of projects going on out there in the housing and such that don't play into a better strength in demand on PVC.

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

And then as a last question, again, on ethylene. You talked about this $15 million in extra costs that you might have to bear for the remainder of the year. So as contract ethylene in the fourth quarter was maybe a couple of cents lower than it was in first quarter of the year. And we talked about how spot ethylene was really up a lot, and there was some lag in your contractual prices in PVC. So what exactly is this sort of $15 million number that you're talking about? Is it just from your own contractual changes or does this have to do with the sequential change in contractual ethylene prices? Or -- so what's in that?

Paul D. Carrico

It's more focused on our contractual changes as a general comment. We tend to think that folks playing in the industry for purchases of ethylene -- it's not that we're the Lone Ranger in this situation. A lot of contracts are rolling off. So unless you're an integrated player, those contracts are, I'll say have a different set of terms than what they had a couple of years ago. And so from an industry point of view, on the specifics of the vinyl, I would assume that other players are in the same situation unless you're integrated. But the market moves are something separate, so...

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

I see. And did we -- did you sign any long-term contracts this year in ethylene that were of any meaningful size?

Paul D. Carrico

We're still working on our future ethylene portfolio, so I would say that with the current circumstances, we're out in the future a bit. But some of that's being left open to see how things play out in that market.

Operator

Your next question comes from the line of Bill Hoffman with RBC Capital.

Bill Hoffman - RBC Capital Markets, LLC, Research Division

Paul, I wonder if you could talk just a little bit about the operating problems that you'd had. Whether anything sort of underlying there that requires additional maintenance. And also on the PHH assets, whether that's back up and running full at this point.

Paul D. Carrico

Yes. PHH certainly is back up and going, that was I guess phased in during the quarter. The issue started in, I guess it was December, and it was phased in during the quarter so we felt some of the effects of that all through that period. And then separately, there were the issues that we've mentioned in the release about smaller outages due to various pieces of equipment that we'll start to get our hand -- our arms around that and get those reliabilities to a higher level. I think in general, when we move from a level of lower operating rate requirements to a higher level that we're trying to achieve with the combined organization, there's going to be some fits and starts in that because chemical plants tend to get into, I'll say, a mode, and there's a difference between operating regularly at 80-some percent versus 90-some percent, and so there's going to be some growing pains in that respect.

Bill Hoffman - RBC Capital Markets, LLC, Research Division

And if you could just address the Building Products segment, just curious sequentially now we're here and almost into mid-May, kind of whether you see the sequential improvement there, whether it's not just weather effects but the fact that Canada just doesn't have any kind of building recovery or improvement that we have here in the U.S.

Paul D. Carrico

Yes. It's too early to predict for the quarter how this all shakes out but we've definitely seen a step-up from where we were in the first quarter. And so, that activity, particularly U.S., is there. Canadian market is a little bit uncertain at this point because most projections do show it to be a bit soft this year. And I think also, we have to see how remodeling plays out. Remodeling is certainly an important piece, and you get mixed signals about whether that's going to improve going forward, at least in the near term. So...

Bill Hoffman - RBC Capital Markets, LLC, Research Division

And then just last one, Paul. What about -- as you see a multiyear sort of recovery in housing here U.S., any thought of further acquisitions in the U.S. markets right now?

Paul D. Carrico

You mean for [indiscernible]

Bill Hoffman - RBC Capital Markets, LLC, Research Division

Building Products, yes.

Paul D. Carrico

Yes. I think we'll keep looking at opportunistic possibilities the same we've talked about before. So it all depends on what's out there and what's in the market. I've said this before though, we have plenty of opportunities internally to make some investments. And so, we'll have to gauge whether something like that's more important than doing it a different way, so...

Operator

Your next question comes from the line of Roger Spitz with Merrill Lynch.

Roger N. Spitz - BofA Merrill Lynch, Research Division

Just wondered if you could tell us your sales in EBITDA for PPG chemicals from January 1 to January 27.

Gregory C. Thompson

Say that again, Roger.

Roger N. Spitz - BofA Merrill Lynch, Research Division

Just to get -- I just want to do the pro forma of sales and EBITDA for the company so for the period PPG chemicals for that first month.

Gregory C. Thompson

Yes. We don't -- we wouldn't be able to comment directly on that. I think PPG had some of their numbers but we don't have that number for you.

Operator

Your next question comes from the line of Gregg Goodnight with UBS.

Gregg A. Goodnight - UBS Investment Bank, Research Division

You commented that your operating rates for PVC were both industry average. Would you comment on chlor-alkali in total? Are you above the industry of average, which I think was reported by Cornell [ph] Institute at 85% effective in Q1?

Paul D. Carrico

Yes. We were above it. We were not above it as much as we'd like because of the different issues that have been talked about but we were above it.

Gregg A. Goodnight - UBS Investment Bank, Research Division

Okay. Longer term this year, you mentioned higher operating rates with the merger. Would you be a few percent above it or could you quantify that for us?

Paul D. Carrico

Yes. I don't think we're in a position right now to put a number on that. I guess I'll just leave it that we're above industry operating rates for the quarter, first quarter. And we expect to be better than that as we go forward. So however you want to gauge that.

Gregg A. Goodnight - UBS Investment Bank, Research Division

Sure. Exports of PVC from the U.S. were down fairly significantly in February. Have exports rebounded? How would you look at exports in the second quarter compared to the pretty healthy rates they've been running in recent past?

Paul D. Carrico

Yes. I think they were partially down because of the pricing started to dip. And I'm not sure everybody could justify that lower pricing and so you had some pull back and probably the traders were looking for seeing where the bottom was. So as we go forward, it just depends, particularly with the increased ethylene cost that I think a large number of the industry has seen related to the resets for this year. Those export prices have to reflect that, and that could be a draw, and people could be selling ethylene rather than PVC. But I think the volumes are there. It's just a question of whether there's some agreement on pricing.

Gregg A. Goodnight - UBS Investment Bank, Research Division

Okay. Have you seen a rebound so far?

Paul D. Carrico

Well, I don't know what the industry is doing. I think we're bit more targeted towards the domestic market. And so, that's not as big a factor for us as what it is for the industry. So we don't have any issues in moving the volumes we want to move, but we never had that problem in the first quarter either. So I don't know what the industry is seeing at this point.

Gregg A. Goodnight - UBS Investment Bank, Research Division

Okay. Last question. Going forward with the merged companies, your disclosures in the financial area are pretty good. But in terms of fundamentals, volumes, prices and the like, are you considering adding some more detail in your quarterly disclosure just so we can drill down and do some of the workings of what's going on?

Paul D. Carrico

Yes. We'll always assess that and see what's appropriate to give a reasonable amount of information. But at this point, we don't have anything on the table that we're planning to add, so...

Gregg A. Goodnight - UBS Investment Bank, Research Division

Okay. Well, hopefully, Mr. Mark Hazy [ph] is still around so he might be able to give us some good guidance here.

Operator

Your next question comes from the line of Christopher Butler with Sidoti & Company.

Christopher W. Butler - Sidoti & Company, LLC

I was hoping you might be able to talk to the chlor-alkali price increases that are out there. The caustic soda seeming to gain some traction and then more recent increase there, and how that outlook might dovetail with the price increases on the PVC side with the strengthening volumes through the year.

Paul D. Carrico

Yes. Well the -- there was actually a price increase for the chlorine and the caustic out in the market, and I think the chlorine price was maybe derailed by a couple of things in terms of a delay. Hopefully, it still comes around. But the fact that we had a really slow start to the water treatment season, and then secondly, the PVC market has been up and down in terms of the expectations for the quarter. So those things kind of took the air out of some of the chlorine situation. On the caustic side, as you mentioned, I believe there's further interest in getting those increases through the kind of offset what's not being seen on the chlorine, and there's an equivalent of about $70 on the table at this point in the coming months. So we believe that there is certainly the dynamics to support that. We'll just have to see what the industry does in terms of implementation.

Christopher W. Butler - Sidoti & Company, LLC

And if you're confident on the caustic increases, does that, in some way, erode the confidence on the PVC side because it would imply slower growth on volumes there?

Paul D. Carrico

It doesn't erode it. I think there's actually room for both. I think the bigger question is, how does the domestic market play out in the next 2 quarters and for the rest of this one to the next one in terms of demand. And is that -- you see all these houses being built and this activity. Does that result in a pickup in demand larger than what it's been so far.

Christopher W. Butler - Sidoti & Company, LLC

And as we're looking at the cash that you intend to generate over the course of this year, most of that's going to be back-end loaded. So as far as your thoughts on using this cash, maybe returning cash to shareholders, maybe speeding up the plans with ethylene due to the cost increases, is that something that we should expect at the back end of the year then?

Gregory C. Thompson

Well, I think on ethylene, Chris, we'll continue to look at all different opportunities there, and we'll just see how that develops. And that's a long-term thing that we're focused on that won't be so dependent on first, second, third or fourth quarter cash generation this year. I think in terms of the kinds of cash flows that we've always talked about expecting going forward, nothing has changed on that. And our pattern, our typical pattern that you saw when we were Georgia Gulf only now in Axiall will still hold true where in the first quarter, it's a heavy working capital build and big cash consumption. Second quarter, maybe a little bit more but not a lot. Third quarter, we'll unwind a bit and then big cash flow generation as seasonally the business contracts a bit in the fourth quarter.

Christopher W. Butler - Sidoti & Company, LLC

And the increases on ethylene, does that change your timing or view on moving in that direction or is that status quo?

Paul D. Carrico

On ethylene, we've always been moving forward as quick as reasonable. And so, no, I don't think there's any change there from what we're trying to accomplish, but it does take time because of the build and all, so...

Operator

Your next question comes from the line of Charles Neivert with Cowen Securities.

Charles N. Neivert - Cowen Securities LLC, Research Division

There was an announcement, I think, recently about a fairly significant merger in the European PVC business. Do you see that as being sort of helpful over time that there's a possibility of significant consolidation? I mean between the 2 companies, there's an awful lot of properties in both the VCM and PVC market. And I guess the thought is there's going to be some significant consolidation there. And also, has there been any increase in Chinese product in the export market since they're sort of a high cost player with all the acetylene-based production they have, I wouldn't think that they'd be a big player out there, but has that been, in effect, replacing some of the stuff that U.S. producers might have pulled out because they didn't like the pricing?

Paul D. Carrico

Well, on the first point about the European consolidation, I guess in the press release I saw, they said that there wouldn't be. So I don't know whether -- but logically, Europe has a bit of an issue there. There's a lot of mercury production and there's a cost disadvantage. So I think there needs to be some changes and I suspect that combining the 2 entities gives them a better chance to make those changes. So we'll see. In terms of Chinese exports, I don't think that, that is a significant pressure at this point in terms of moving volumes and being competitive. I think they'll ebb and flow. I guess I would have expected that and still do is if the domestic demand picks up the way it would be expected to, then naturally, Chinese exports would have some room to jump into the market then. And that probably ebbs and flows with time.

Operator

Your next question comes from the line of Dhaval Patel with TIAA-CREF.

Dhaval Patel

Can you talk a little bit or try to quantify the impact from the outages in the first quarter to the Chlorovinyls business, in terms of how much lost EBITDA or lost earnings that you guys had from it?

Paul D. Carrico

Yes. I think we had it in at the $14 million, $15 million range, something like that.

Dhaval Patel

Okay. And you talked about 85 -- or you guys are operating at above 85% for the quarter. But is that excluding the assets that were down or had operational issues so it's just the plants that are running?

Paul D. Carrico

Well, on PVC, there was not any merged assets added there. So that was for PVC historically, the assets we've talked about. In terms of chlor-alkali, it was the combined assets, so...

Dhaval Patel

Yes. Just mainly on the chlor-alkali because it looks like there was mostly PPG's assets that were down for most of the quarter. So maybe if you can give us some more color on what kind of rates they were operating at, and just [indiscernible]

Paul D. Carrico

I know I'd say that I'll say separating the 2 sets of assets gets increasingly difficult every day because we kind of operate together. But the combined assets, what was legacy Georgia Gulf and legacy PPG operated at higher than industry operating rates for the quarter.

Dhaval Patel

Okay. And that's taking into account the assets that were down?

Paul D. Carrico

Yes.

Operator

Your next question comes from the line of Bill Young with ChemSpeak.

Bill Young

Two quick questions. What's your best guess as far as the drop in PVC export prices, say, from the end of the year to currently, rough idea?

Paul D. Carrico

You're talking about for December 2012 'til now?

Bill Young

Yes, yes. Over the past 3 or 4 months. Right. How much has the drop been?

Paul D. Carrico

It's been on the order of $150 to $200 a ton, something like that, when you look at all the puts and takes there, depending on what you're selling into.

Bill Young

Okay, great. And then secondly, if you were to look at your portfolio in Building Products, could you kind of rank the products, which ones are growing the most now, rebounding the most and which ones are lagging?

Paul D. Carrico

Yes. I think, in terms of the general trends, it varies by country, of course, but the natural expectation would be that North America has room for further growth and from -- versus where we've been. And things like siding and windows and all that tend to be put on later in the process of building a house. And I don't know about other areas, but here in Atlanta, we see houses going up, but it's mostly still foundations. So some of those kind of things will play into stronger activity in the second, third quarter, so we're still expecting that. But that -- the area of new construction, while it's picking up, it's not picked up in a robust way just yet, so...

Operator

Your next question comes from the line of James Finnerty with Citi.

James P. Finnerty - Citigroup Inc, Research Division

Quick question just in terms of credit metrics and ratings targets. Do you see over the next couple of years progressing into an investment-grade credit? And would you look to use some of your cash potentially to pay down the term loan?

Gregory C. Thompson

Yes. I think that on your first question, that's not high on our priority list of objectives. I mean, our focus is really on the long term and of generating shareholder value. I think that just from a leverage and a capitalization level, from a rating agency perspective, based upon our concentration in certain segments from a rating agency perspective, we're not as diversified as we would -- as they would like us to be. And so I think that based upon our current portfolio, it would always be a challenge for us to try and get to an investment grade. And so, and that's the thinking there as to why that's not a high priority for us. And your second question, tell me again? I'm sorry.

James P. Finnerty - Citigroup Inc, Research Division

It's -- given that you're going to be generating a decent amount of free cash flow over the next couple of years, would one of the uses be for potentially paying down the term loan ahead of its maturity?

Gregory C. Thompson

Yes, that's certainly a possibility. The -- we can take that out at any time. I think we'll look at that versus what other investments, opportunities we have and kind of address that as we go along going forward.

James P. Finnerty - Citigroup Inc, Research Division

And just one follow-up. Do you have any sort of credit metrics that you're targeting in terms of debt-to-cap, debt-to-EBITDA, interest coverage?

Gregory C. Thompson

Yes. I mean, we've always talked in terms of 2x is, based upon mid-cycle EBITDA leverage, is a spot that we think makes sense from an optimal capital structure standpoint, and we're very comfortable at that level. We're below that right now. And the other metric that we've talked about consistently is always making sure looking forward to the next trough of EBITDA that we will be at least 3x covered, and we're certainly well within that right now and whenever that we think our next trough is probably a long ways off, but whenever that next trough develops.

James P. Finnerty - Citigroup Inc, Research Division

Okay. Sorry, one more follow-up. It goes back to Roger's question. You said you're below 2x debt-to-EBITDA now. Is that sort of a way of backing into what the pro forma LTM EBITDA is? Is it about $735 million? $741 million?

Gregory C. Thompson

I actually wasn't even trying to do that math for you, so don't read more -- don't be -- think I'm more insightful than what I'm trying to be.

Operator

Your next question is a follow-up from the line of Jeff Zekauskas with JPMorgan.

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

Are there any outages that -- or turnarounds that you expect for the second quarter or for subsequent quarters this year?

Paul D. Carrico

Yes. We do have some outages particularly on the VCM side of the equation and some on the PVC, so they will be playing into the next couple of quarters.

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

Are they larger or smaller than the outages that you experienced in the first quarter, if you can tell?

Paul D. Carrico

I would say the outages are more of the planned type going forward, and so they were built into our plans related to operating rates. And I guess the other thing is, particularly on VCM as an example, we have significant capacity, more than what we need for PVC point of view. So all of that's planned out, if you will, in terms of where we're going to go for those 2 quarters, so...

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

So if I understand what you just said to me, there was roughly $15 million or $14 million burden in the first quarter that at least relative to your plan, you don't expect the company to bear in the coming 3 quarters?

Paul D. Carrico

That's right.

Operator

Your final question comes from the line of Andy Cash with SunTrust.

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

Greg, I was wondering if you could -- you gave us the D&A number, and I know first quarter's is a big working capital quarter for you. I was wondering if you could help me out just in terms of the full year. I mean, you can leave it up to me to make the net income estimate. But as far as working capital use for the year or any other use of cash, just trying to have better understanding what the cash for operations might look like.

Gregory C. Thompson

You see, I have to think about that, Andy. So the -- normally, kind of working off of where we are now, normally, I think we've talked about $100 million working capital build in the first quarter. It was a little bit higher than that including from the legacy Georgia Gulf side, as well as the PPG side of the business, which obviously we didn't have previously in that $100 million. So we expect all of that certainly to come back to us by -- and most of that will happen in the fourth quarter. I mean the other big -- so that will be a big return in the fourth quarter. The other big -- the areas we talked about CapEx level for the...

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

And I was talking about cash from operations, not CapEx.

Gregory C. Thompson

So cash from operations. I guess a lot of that will be driven by, certainly by the EBITDA level that you have built into your model.

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

Right. But of that $211 million change in assets in the first quarter, so $100 million of that was your working capital build. But what else was in that number?

Gregory C. Thompson

Yes. In addition to that, you've -- there are a lot of fees and other costs that went out in the first quarter. That certainly was unusual for the first quarter. That's in the kind of $30 million or so range. I think that won't happen going forward.

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

Okay. So there's $100 million working capital you'd expect to reverse. And then there's another $70 million or $80 million that you'd expect to reverse and just exclude the $30 million has been spent, and it's never coming back.

Gregory C. Thompson

Yes, and I think that sounds in the range. I'm not exactly sure of how I understand how you're doing your math, but it's something like that.

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

I'm just trying to understand the $211 million, how much of that is going to reverse over the course of the next 3 quarters.

Gregory C. Thompson

Yes. Think of the -- other than the fees that, that will reverse by the end of the year.

Operator

And sir, we have no further questions in the queue at this time. Are there any closing remarks?

Martin Jarosick

Thank you, everyone, for joining us and I would look forward to seeing you in conferences and speaking next quarter.

Operator

Thank you. This concludes today's conference call. You may now disconnect.

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