Axiall Management Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 1.13 | About: Axiall Corporation (AXLL)

Axiall (NYSE:AXLL)

Q2 2013 Earnings Call

August 01, 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

P. J. Juvekar - Citigroup Inc, Research Division

Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division

Aleksey V. Yefremov - BofA Merrill Lynch, Research Division

Hassan I. Ahmed - Alembic Global Advisors

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

Bill Young

Bill Hoffman - RBC Capital Markets, LLC, Research Division

Charles N. Neivert - Cowen and Company, LLC, Research Division

Operator

Good morning. My name is Matthew, and I will be your conference operator today. At this time, I'd like to do welcome everyone to Axiall's Second Quarter Earnings Call. [Operator Instructions] Thank you. Martin Jarosick, you may begin your conference.

Martin Jarosick

Thank you, Matthew, and good morning, everyone. Welcome to today's conference call to discuss Axiall's second 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 our website, in our press release issued this morning with our second quarter -- I'm sorry, yesterday with our second 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 that may cause actual results to differ. Axiall does not undertake any obligation to provide updates to these forward-looking statements.

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

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

Paul D. Carrico

Thanks, Martin, and good morning, everyone. We thank you for joining us this morning. We are very pleased to provide comments today on our second quarter performance. We have now reached a new milestone in Axiall's history as the most recently completed quarter was the first full 3-month fiscal quarter that includes the merged assets in the combined organizations.

In the second quarter, we generated $197.9 million of adjusted EBITDA for the company compared to $54.3 million in the second quarter of last year. This $143.6 million increase was mainly driven by the contribution realized from the merged asset.

Looking at the Chlorovinyls segment and comparing this year's second quarter to the first quarter, we reported $177.6 million of adjusted EBITDA in the second quarter compared to $134.2 million in the first quarter of 2013.

This increase was driven by a number of factors. First, there was 3 months of the combined company results included in the second quarter compared to 2 months in the first quarter. Higher ECU volumes were generated as the operating rate synergy allowed us to optimize the assets across all our facilities. Another positive effect was ECU values that were slightly higher.

Resin prices and volumes were also slightly higher and synergies were positive along all 3 targeted areas in procurement & logistics, G&A reduction and operating rates. These positive factors were partially offset by maintenance costs and higher natural gas costs.

Our Building Products segment reported $28.2 million of adjusted EBITDA in the second quarter of 2013 compared to $24.5 million in the second quarter of 2012.

Volumes were flat and average price declined due to product mix and competitive price pressure.

The increase in adjusted EBITDA was driven by lower conversion costs and lower SG&A. Our Aromatics segment reported $4.6 million of adjusted EBITDA in the second quarter compared to a negative $2 million during the same period last year.

The second quarter of 2013 included a $5.1 million inventory holding loss compared to a $13 million inventory holding loss in the second quarter of 2012.

Adjusting for the inventory holding losses, the second quarter of 2013 was weaker than the same period last year due to lower domestic sales and reduced export opportunities for cumene.

Now I want to speak briefly about the merger, the synergies and the second quarter PVC industry conditions.

First, on the merger, the activities for the merger are proceeding as planned. Also, I am pleased to report that we are on track to meet or exceed the synergy targets.

As you recall when we announced the merger last summer, we outlined $115 million of synergies in 3 categories: $40 million in procurement & logistics, $40 million in G&A reduction and $35 million in operating rate improvements.

These synergy targets were based on a comparison of the combined business results for 2011 to those we expect to realize on a run-rate basis beginning or at the end of 2014.

The impact of achieving some of these synergies are reflected in our current financial performance. Some of these synergies are clearly and immediately visible.

For example, in the indirect procurement & logistics and G&A reduction, we achieved $13 million in the second quarter and $16 million since the merger closed in the first half of 2013 compared to the same period last year.

The impact of the other synergies is not as clearly and immediately visible. For example, we are confident that our combined purchasing power for energy and feedstocks has improved as compared to what it would have been if the businesses had been operating separately.

Quantifying those sorts of things for you on a quarter-to-quarter basis, however, between now and the end of 2014, is an exercise that involves a variety of assumptions regarding product prices, margins and supply portfolios that would have existed if we had remained as standalone businesses.

In addition, we can expect changes in the general market that would have impacted the individual companies if they had remained separate.

What I want to emphasize here is that for some of these synergies, we expect to realize is just not a simple mathematical exercise over one quarter.

The synergy that I'm most excited to report to you about today is the operating rate improvements we expect to realize.

For the year to-date 2013, since the closing of the merger, Axiall is above the industry chlor-alkali rates and above the prior year's performance for the total system at a level of 4% to 6.5% higher than 2011 and 2012 rates.

While it is still the early days in the merger to assess the operating rate impact, we believe we are headed in the direction and are on track to operate above the industry average and above our own historical rates for the period from the completion of the merger through December of this year.

This really positions us to meet or exceed our synergy targets when we come to the end of 2014, when we told you we would realize these synergies. This quarter has some of the financial impact of our increased operating rates, particularly as compared to the last couple of years, but the positive impact was partially offset by other aspects of our business.

For example, the PVC margins, energy and feedstock costs are the sort of puts and takes that we see now and we'll see in the future.

Regardless of these market uncertainties, we are very pleased with our early progress towards this key synergy we expected from the merger.

Turning towards PVC industry conditions. The industry operating rates have been below 90% for most of this year. This has been driven by a domestic demand increase of only about 2% and sluggish export demand in pricing.

As we have previously said, PVC margins have typically improved as industry operating rates start to exceed 90% in vinyl on a regular basis.

Under current market conditions, however, producers have struggled to maintain margin. This is clearly a different environment than we expected at the beginning of the year and this type of environment may continue for the remainder of the year.

Despite the year-to-date conditions that have proven somewhat less than forecasted, we continue to believe that we are well-positioned to take advantage of North America's natural gas cost advantage.

The combination of this energy advantage and the continuing recovery in housing offers clear opportunities for the company going forward.

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

Gregory C. Thompson

Thank you, Paul. Good morning, ladies and gentlemen.

Let's look at our operating performance during the second quarter to help understand all the items we have added reconciliations to our press release that reconcile net income attributable to Axiall to adjusted net income and adjusted earnings per share, as well as consolidated net income to adjusted EBITDA.

We reported net income attributable to Axiall of $72.8 million for the second quarter of 2013 and $1.03 per diluted share compared to net income attributable to Axiall of $13.6 million and $0.39 per diluted share during the same quarter of the previous year.

Results for the second quarter of 2013 were impacted by the following items: $3.2 million of step up of the fair value of inventory required by purchase accounting; $3.5 million of merger-related costs compared to $6.6 million in the second quarter of 2012; and $11.3 million of costs to attain synergies.

After adjusting for these items, we reported adjusted net income of $84 million and $1.19 per diluted share compared to adjusted net income of $17.7 million and $0.51 per diluted share in the second quarter last year.

Regarding synergies, as Paul mentioned, about $13 million of recurring cost synergy realization for procurement and logistics and G&A reduction is reflected in our second quarter numbers when compared to second quarter of 2012.

Additionally, our operating rate synergies are reflected in the higher operating rates.

The second quarter includes $11.3 million of costs incurred to attain synergies going forward. This includes $5.9 million of plant reliability improvement initiatives that are a key component of the operating rate synergies we have achieved to date and expect to achieve going forward.

As we have previously commented upon, going back to July 2012 when we announced the merger, we expect to spend approximately $55 million to achieve our synergy targets.

Also, as we have described previously, we expect synergy capture to ramp up toward the end of 2013 as we come off transition service agreements for various corporate services and also get into the fourth quarter -- going into the fourth quarter when the opportunity for operating rate synergies are largest.

By year-end, we are confident that the cost synergies for procurement & logistics and G&A reduction, plus the value created by higher operating rates will meet or exceed our synergy targets.

Moving to a few other items now. SG&A expense for the second quarter of 2013 was $97.7 million compared to $51.8 million for the second quarter of last year. The increase was mainly due to the inclusion of 3 months of the merged company in our results.

Our net interest expense for the second quarter was $19.4 million compared to $14.5 million for the second quarter of 2012.

For the second quarter of 2013, we reported a tax provision of $31.8 million and an effective tax rate of 31%.

During 2013, we expect to make cash tax payments of approximately $150 million and expect an effective tax rate of 30% to 35%.

The total FIFO impact for the second quarter of 2013 was a negative $9 million with about $4 million in Chlorovinyls, $3 million in Aromatics and the remainder in Building Products.

In the second quarter of 2012, the FIFO impact was a negative $30 million, composed of a negative $10 million impact in Aromatics, a negative $14 million impact in chlorovinyls and the remaining in Building Products.

Now let's turn to working capital. We defined 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 $44.1 million from March 31, 2013 to June 30, 2013.

This sequential increase was driven primarily by the net working capital associated with normal seasonality.

For our working capital days perspective, we achieved a decrease of 2 days, sequentially, due to improvements in both receivables and our inventory levels.

Compared to the second quarter of last year, controllable working capital increased approximately $317 million, driven by the net working capital associated with the merged business.

On the cash flow statement, you will note that we generated $70 million of cash in operating activities for the second quarter of 2013 as compared with $70.5 million for the second quarter of 2012.

Capital expenditures were $39.2 million for the second quarter of 2013 compared to $27.1 million in the second quarter of 2012. For 2013, we expect to invest about $200 million in total CapEx.

Before we open up the call for Q&A, let me make a few comments on our third quarter outlook. We do have a large VCM turnaround and small PVC outage scheduled. So we expect our plant maintenance cost to be higher and operating rates to be slightly lower than the second quarter.

Additionally, we expect caustic prices, Building Products volumes and margins and Aromatics volumes to remain near second quarter levels.

Finally, as Paul described, current PVC industry conditions have restrained margins so far this year and we would expect that trend to continue in the near-term.

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 question comes from the line of Brian Maguire with Goldman Sachs.

Brian Maguire - Goldman Sachs Group Inc., Research Division

Paul, I'm just wondering if you could provide an outlook for the rest of the year on caustic soda, how you think that those prices are going to hold up? It sounds like the $40 increase that was in the market didn't really stick. Just wondering how you think the progression of that will fare into the fourth quarter when there's some new capacity to come in into the industry.

Paul D. Carrico

Yes, Brian, it's hard to say at this point. As you know, the overall profile for the year has been better than what a lot of people forecasted at the beginning of this year. And certainly, some of the delays aided in that process in terms of the start-up of new capacity. I guess, what I would expect is that chlorine and caustic, although it was always a global market, has truly become even more global in nature these days. And so that capacity coming on probably could have an effect for a period of time related particularly to contracts, new contracts, that sort of thing. But there's every opportunity for folks to move caustic and chlorine in other parts of the world. So I would expect that, that would be tempered and that the chlor-alkali producers would continue to maintain a percentage of their cost advantage associated with natural gas versus oil production areas.

Brian Maguire - Goldman Sachs Group Inc., Research Division

Okay. And I think you had a force majeure up in Atrium at some point in the summer. I was wondering if you could provide an operational update on that. And is that the outage that Greg was referring to in his comments?

Paul D. Carrico

Yes. We had a few different trips, I'll call them, and outages and also some turnaround more going on in the quarter and we did -- that did kind of push us into a force majeure for a period of time, but that's been lifted and that's history at this point.

Operator

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

P. J. Juvekar - Citigroup Inc, Research Division

Paul, you talked about the sluggish PVC market. Can you explain what changed from your expectations from January? And just give us an overview of the siding in the pipe market, sort of break it down between North America and Canada, which I think has been weak.

Paul D. Carrico

Yes, okay. Well, I guess, we, along with everyone else, expected a more or less robust PVC market on the domestic demand in the U.S., particularly as housing picked back up. What we've seen is, I don't know whether it's the speed of the housing or there's a delay factor, but that type of demand realization did not really play out this year. In fact, I think the current number is about 2% in terms of growth year-over-year, which is well below most forecasters in terms of their earlier projections at the beginning of this year. It would seem that we're still on track to continue growing versus before we had a number of years where there was a reduction in volumes as housing dropped down. So we think we're still headed in a positive direction, but the speed of that direction is the unclear point right now. In terms of Canada, Canada has been a little bit softer, and so that plays into being part of the equation. But I would say that for North America, the U.S. market overwhelms everything and they have a 2% number for year-to-date. It's clearly not what most people expected, but I would also say that it should get here sooner or later whenever housing does get to a little bit more momentum or houses get to the point where they start using our materials. I know there's been lot of cases that housing is still either doing foundations or framing and so they haven't got to our materials in a lot of cases. So we're still, I'll call it, a waiting pattern for a larger pickup in PVC.

P. J. Juvekar - Citigroup Inc, Research Division

And secondly, I know that your engineering teams were working on your ethylene investment and possible condo cracker. Can you give us an update on that, and what kind of building costs are you coming up with?

Paul D. Carrico

Yes. We certainly are mindful of all the different pathways that we can take to secure what we were targeting, it's 50% ethylene, cost base ethylene, and we're still working on all those paths. I don't have anything for you at this point to talk about in terms of cost or values. You can probably get more complete information from all the other folks. There's certainly a lot of building out there, so I would kind of look at their numbers to judge that. And in reality, it may be that we could combine with someone that's existing in a way of adding capacity or some new one or we could do something together with somebody. So there's so many different possibilities. I continue with the thought that, hopefully, towards the end of this year or the first half of next year, we'll have something more definitive in that area.

Operator

Your next question comes from the line of Frank Mitsch with Wells Fargo Securities.

Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division

I wanted to flush out the plant reliability initiatives that you got in the way. I think you said you spent about $6 million on that. Can you give a little more color on that? And to that end, Greg, you mentioned that you're going to see higher maintenance costs in Q3 relative to Q2. Anyway you could put that into some context? Is that $0.05 impact, $0.10, $0.25? Anything along those lines would be very helpful.

Gregory C. Thompson

So related to plant reliability, one of the things that's a key for our synergies going forward, is continuing to move operating rates up, and that was one of the key synergies that Paul talked about and so we have looked to make a number of different expenditures to secure that higher operating rate going forward, for things that where we've upgraded, upgraded equipment, and other things to improve the reliability that we expect to attain going forward into the next year. So it's a collection of a number of different things, no one big individual, major item of that $5.9 million that we broke out separately.

Paul D. Carrico

Maybe just to add on to that, too. As we did get higher operating rates as I alluded to in the comments earlier for this quarter, but we're looking for even higher rates as we go forward, so that's the target and that's the reason for some of these expenditures.

Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division

All right, great. And in terms of potential size?

Gregory C. Thompson

Yes. I don't have a specific number for you, Frank, related to the VCM turnaround and the smaller PVC outage that I mentioned. But overall, that's part of our view in the third quarter outlook that I was commenting upon.

Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division

All right. And then in terms of PVC, June demand was less than robust, I guess, is one way to term it. How's July? And if I think about your PVC margins, you have ethylene coming down. Are you guys seeing any expansion in that regard?

Paul D. Carrico

In terms of the expansion of the margins?

Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division

Correct. With ethylene coming off.

Paul D. Carrico

Well, as you know, there was a -- the pricing, the margins that were supposed to be realized based upon how PVC pricing is moved and even with the decrease in ethylene, that really hasn't helped the situation, as I also mentioned in my comments. The industry is just not seeking a level of margin that I would expect in this kind of environment, and, of course, it was tempered by lower operating rates for the quarter. But still, considering that we have a move in a positive direction, you think margins would be shifting up more than where they are right now. Related to the demand, June, July, is usually a somewhat tough to predict month and usually softer in some point in time, either June or July. Almost always driven by people taking outages for the July 4 holiday. So if you take a weekend off, you've literally reduced your demand by 10% or so for a month. So there's nothing out there right now that says that the pickup in June and July was substantive. August through September, you got a better chance of seeing that increase. For us, though, we managed to run pretty high rates to the extent we can without these turnarounds, because we do have an export rate that's a bit lower than others, so there's room to move some if we need to. But overall in the industry, it's tough to predict other than we're probably going to have some increases in September and October in terms of demand.

Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division

And then lastly, Greg, you mentioned that you're going to see working capital benefiting in the second half of the year, which begs the question, what are the priorities use of cash? What are you guys thinking about returning cash to shareholders, et cetera?

Gregory C. Thompson

Yes. There's no update there from what we have looked at previously. We continue to feel confident with -- that we'll generate substantial cash, free cash flows going forward, and so would expect that, that will have the ability to have both a mix of return to capital to shareholders, as well as future growth investments to drive further performance going forward. So we will continue to look at that and have that internal discussion relative to what and how and when related to the dividend rate going forward.

Operator

Your next question comes from the line of Alex Yefremov with Bank of America Merrill Lynch.

Aleksey V. Yefremov - BofA Merrill Lynch, Research Division

Paul, could you comment if you have any interest in adding PVC capacity in North America, maybe, in particular, integrating your net long position in EDC/VCM?

Paul D. Carrico

Yes, I think that's one of the areas we said we would seriously look at, having all the chlorine EDC/VCM we need to produce more PVC is a very nice step forward and looking at a project like that. So we're in the midst of studying that, if you will.

Aleksey V. Yefremov - BofA Merrill Lynch, Research Division

All right. I had a question on ethylene contract negotiations next year. Was Williams plant being down still, it looks like it's not going to start up until April. I know you don't buy directly from Williams, but do you think this could be a potential -- this could mean potentially tighter ethylene market for the annual contracts?

Paul D. Carrico

It's hard to say. I think most of the tightness occurred in this past year or 2 and that going forward, there's always been the assumption that rates were going to operate pretty strongly on ethylene. There is some additional expansion work coming up and plus people have probably modified their plans a bit on the export side. So net-net, I'm not sure that, that's a really huge factor in the process going forward. It's already a situation where ethylene producers are enjoying a great margin, so...

Aleksey V. Yefremov - BofA Merrill Lynch, Research Division

Great. And final question, if I may. On the Building Products side, could you comment on the level of price competition. Is it getting any better or it continues to be pretty strong competition?

Paul D. Carrico

Yes. I think our comments on the growth of PVC being a 2% pretty well sets the tone. At that level, people are a little bit more modest in their expectations, but there's still a level of competition that's not getting us back to the days when the returns on Building Products were at a higher level. We need that demand to go a little bit stronger domestically.

Operator

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

Hassan I. Ahmed - Alembic Global Advisors

One of the things, Paul, you talked about obviously was, on the synergy side of things, improving operating rates. And if I heard correctly, I believe you talked about first half sort of 4% to 6% improvement in operating rates. I just wanted to get a better sense of what that uptick looked like from Q1 to Q2, be it on the chlor-alkali side, as well as the PVC side of things.

Paul D. Carrico

Yes. Well, I don't have the exact numbers, but it's challenging just to pick 2 months versus 3 months in a particular quarter, because it's kind of something that builds over time when you account for all the outages. I think my recollection was that we were higher right off the bat in the first quarter and continued to be that way all the way through. But then you put in turnarounds and moving things here and there, so, I guess, the key point I was trying to make when I was commenting on that is we pretty clearly think at this point that when you look at a full 11 months for us this year, since we didn't have assets in January, but when you look at those first 11 months of the company, we think we're going to be above our averages for that same time period versus '11 or versus '12. So we're demonstrating over a period of time that we have the sustainability to have higher rates across the chain.

Hassan I. Ahmed - Alembic Global Advisors

Fair enough. And a follow-up, if I may. On the ethylene side of things, obviously, a fair bit of activity on the Greenfield side of things. Can you just tell us where you stand with regards to the build versus buy decision? Are there any assets out there that may be looking interesting rather than sort of thinking about the Greenfield side of things?

Paul D. Carrico

Well, it's kind of what I alluded to earlier. There's certainly some assets out there that people are looking at, but in the past, they've always asked quite a price for them that they might sell, as an example, there's other assets that people are building on greenfield, there's other places where people are adding to capacity and I honestly don't have any, I'll call it, decision or conclusion on all that, but there's so many different pathways that we're just looking at everything at this point, and we'll continue to do that during the coming months.

Operator

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

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

So to go back to your outages in the quarter, what was the cost of the 2 outages or the outage plus the force majeure in the second quarter to the income statement?

Paul D. Carrico

Yes. The force majeure net wise, when it was all said and done, was more driven by case of multiple trips and then not knowing whether or not we could provide the volumes at the level we were trying to achieve. So the net total effect of that was not that significant in terms of financial impact. Relative to the outages, it was the normal turnarounds that we have in different areas and we don't typically put out those numbers. But more often than not in the second quarter and the third quarter, in particular, you're going to have turnarounds, and that's been the case in the past and probably continue to be the case in the future.

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

Okay. Did your PVC margins change very much sequentially? And how did they change?

Paul D. Carrico

PVC margins, you're talking about Q1 to Q2?

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

I am, yes.

Paul D. Carrico

It was very modest. There was a price decrease and it mystifies me how we get to the levels we're getting to in terms of pricing out there, but very modest changes.

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

Well, I mean the price decrease in May was much smaller than the price increase in, I guess, February and March, so why didn't that net out more positively?

Paul D. Carrico

Well, I think that the people forecasting those numbers are more or less missing what's the reality in the market in a lot of cases. And so, we think we were very competitive with the market and we understand it very well. You can look at those published bits of information and it's challenging to translate that to an income statement.

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

Okay. I think you spent $60 million in the first half and your idea -- in CapEx, and your ideas that you're going to spend $200 million for the full year. Is that possible? Can you spend $70 million -- can you get all the way there in 2013?

Gregory C. Thompson

We got a number of projects in the pipeline, Jeff. And so, yes, I think it's possible. We think that's a reasonable range that we think makes sense for this year and also going forward. But there is a lot -- granted, there is certainly a lot that has to happen in the second half of the year. But also remember too, we didn't close the transaction and merged the 2 companies until the end of January. And so putting all that together now would naturally guide you toward more what's going to happen in the second half of the year than what happened up through June 30.

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

And then lastly, you talked about your working capital use in the quarter, which I think was $45 million. And do you expect that to entirely reverse in the second half?

Gregory C. Thompson

Yes, I would. I mean, that always depends on volumes and so while volumes -- if volumes moved up materially, that could offset some of that or pricing moved up. But based upon, kind of my general comments about the third quarter and the business conditions that we see, I would certainly expect that would all reverse.

Operator

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

Bill Young

It looks like housing starts, they're a little sluggish recently, should be up over 10% this year. And you said your Building Products volume was flat. Have you been losing market share or do you have maybe not the optimal mix or how would you explain this apparent difference?

Gregory C. Thompson

Yes, I think most of that, Bill, is related to -- we've actually increased a small amount in the U.S., the offset to that has really been Canada. The Canadian market has been soft, and we have some significant business that we do in Canada. But also even in the U.S., you have to look at the individual pockets and regions as to where PVC is heavy in the mix of Building Products. So we're, overall, I guess, we were hoping for more this year, but we think that we're somewhere in the range of in those markets where we participate with what the market is, the modest increases that we're seeing in the U.S.

Bill Young

Okay. Are there any products within this sector that are stronger and some that aren't keeping up with the others?

Paul D. Carrico

Well, for the particular segments, if you look at the U.S., probably areas like pipe is a little stronger, maybe a couple of areas, but other small areas. But, no, in general, there's nothing that overwhelms the total, and for us, in particular, we're involved in a number of different types of products, so it's kind of -- we kind of wind up with a blend of what the increase is.

Operator

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

Bill Hoffman - RBC Capital Markets, LLC, Research Division

Paul, I was just wondering, just on the last question, if you sort of look at the month-to-month trends, one of the things that we've heard on the guidance, held back on the construction and we're headed to late building season in the spring here. On a month-to-month basis, are you seeing any meaningful pickup in trend or is it still the same thing? And I guess more towards the domestic commentary, but I was also curious about what's the, sort of the trends are in Canada?

Paul D. Carrico

Yes. We haven't seen, I'll call it, meaningful pickup. But remember the current period is masked by the fact you have the summer outages and people taking plans down for a little bit and then you don't know exactly how that's flowing through to the homebuilders. We still think it's a forward momentum, but it's not a point in time when we could judge what the impact is going to be about housing, is it really stepping to a better level? Like I said earlier, August and September, you start getting a little bit more flavor for that, and so we'll see what happens there.

Bill Hoffman - RBC Capital Markets, LLC, Research Division

Got it. And then the Canadian market?

Paul D. Carrico

Canadian market is still just kind of, I'll say, drifting along in a slightly lower level. There's nothing that's stepped up in a big way there either.

Bill Hoffman - RBC Capital Markets, LLC, Research Division

Okay. And then just with regards to the fact that these markets are a little bit more sluggish. What are you guys thinking about potential acquisition candidates in the Building Products and sort of downstream conversion. Are there opportunities there that are starting to become more attractive?

Paul D. Carrico

I think we'll always look if there's a particular entity that fits into our strategy and similar to what we did a couple of years ago, when we had something that worked well with our siding strategy. But I'd say the emphasis for the moment is still more on the growing with our existing assets. We have plenty of plant sites, we have plenty of products and we've got opportunity. So that's where were putting a bit more of the emphasis these days.

Operator

Your next question comes from the line of Jonathan Chung.

Unknown Analyst

I had a question. I know everyone is kind of focused kind of near-term, short-term, PVC fundamentals and obviously, the building season is pretty much over. Can you guys kind of -- may be kind of longer-term, is there an opportunity for PVC margins to widen out a little more, because I thought there wasn't as much PVC capacity in the world in terms of growth, as kind of demand comes back in the U.S., as things stabilize globally, et cetera. Can you kind of address that? I have a few other questions too.

Paul D. Carrico

Well, in terms of the PVC margin, I'm not sure what will dictate how that evolves over the coming months. There's certainly not going to be a major increase in construction activity because we have lower PVC prices. So we'll have to see how that plays out. Relative to next year, the forecast continues to be that the operating rates... What I do know is based on history for 20 years, when operating rates get to that 90% or higher level that you get a push that's stronger-than-normal on margins then. So that still continues to be the forecast for the next couple of years. There's not any, to my knowledge, any major capacity coming on this year, next year or even into '15. So yes, that should -- as domestic demand kicks in to a better gear, that should help certainly. On the export side, it continues to be a case there's material available to be sold. While there's opportunity to sell material, that continues to be the case, so that hasn't been a limitation. As to the pricing, that, for various reasons, tends to move a little bit stronger with domestic pricing, too. So kind of need to get that domestic pricing kicked into gear first, I think.

Unknown Analyst

Got you. So basically we're hoping for housing to come through next year and then maybe that firms things up. In terms of caustic, I know -- I think Brian had asked the question about kind of the Dow capacity later on this year, who knows what Dow's going to do ultimately, but it sounds like this is really kind of a shorter-term conversation, and as we kind of step back, unless we believe nat gas prices aren't going to be here anymore around that 3.50 and it's going to go to $6 [ph] where the strip is. Is there a reason -- is there a flaw in terms of the thesis of exporting caustic, because I think even CMAI has a view that we're going to be doing that, right? So is there a flaw In that argument?

Paul D. Carrico

No, we would continue -- as I mentioned earlier that it is more and more global market everyday, particularly when you look at caustic and the drivers between chlorine and caustic. And the issue gets to be is certainly nobody can predict the future for these other folks that have the capacity. But sooner or later, that capacity more likely than not, if there's any additional capacity, has to result in the industry doing a bit more exporting rather than domestic consumption, because domestic consumption is only going to take a certain amount. So that being the case, this move of North America being a supplier to the rest of the world, the other continents, is something that sort of phases in overtime. I don't think it's something that just turns on in the quarter. So as we get more and more capacity or as we get more and more sites, people are going to look to North America for that supply of both molecules, like the chlorine and the caustic, and I think that'll continue to happen.

Unknown Analyst

Great. And I just have one more question. Maybe, I'll see you guys at a conference. So on the ethylene side, I think, past few weeks, I've actually seen a few pieces in general that talked about kind of, was it condensate splitters or something like that, in kind of Asia? And potentially more naphtha going to kind of places like China and wherever the high cost curve is for ethylene. Have you guys kind of thought about the cost curve shifting a little in general where ethylene prices may actually come off a little because the cost curve was coming down a little? Because I think most people assumed the cost curve is going to stay where it is right now. How do you guys think about that?

Paul D. Carrico

Well, just based on history, nothing stays the same over a long period of time, particularly in the ethylene market. However, I think if some other part of the world developed a lower cost ethylene, that would clearly impact the domestic side because when you look at the capacity coming on, a lot of it has to go export. So you make the assumption that the other parts of the world are really setting a price level in ethylene. But I don't have any specific knowledge related to what you're talking about, that there's enough additional or lower-cost ethylene volume being generated in other parts of the world.

Operator

Your next question comes from the line of Michael Shrekgast.

Unknown Analyst

Could you guys talk about the CapEx of $200 million this year and how the -- when you'll start to realize the benefits of that? Is it over the next year, 2 years, 3 years?

Gregory C. Thompson

It's a mix, Michael. It's -- I mean, there's -- a big amount of that is just maintenance CapEx, I'd say, kind of 2/3 or sort of range is maintenance CapEx. And then after that, some of the productivity improvement and growth CapEx, that's typically -- those kind of projects will have a few year kind of payback or longer to them. And so, you'll start to see some of it, probably more than a year or so after you spend the capital.

Unknown Analyst

And then on the PVC side, to what extent do you think a delay in the rebounding commercial construction is having on the PVC market?

Paul D. Carrico

It's a factor for sure, because commercial construction asked, the PVC demand, us to quantify that. Pipe is up. It's one of those areas that is up year-over-year. So it's not like it's lagging the other market segments. So I don't know that -- what will happen is if that picks up too, there just going to be a stronger overall and that'll help carry some of the other areas.

Operator

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

Charles N. Neivert - Cowen and Company, LLC, Research Division

Just a quick question. I mean, gas has come off pretty sharply over the last few months. We're now down floating around $3.50. Can you remind us how much gas you buy on a quarterly basis and what it looks like the quarter-over-quarter, second into third quarter impact. Looks like assuming gas was to stay pretty much where it is for the third quarter, and then where do you see, do you see it sort of staying around this level or moving up? I mean, obviously move up on a seasonal basis, but where do you think it might end the year? Or when can you forecast?

Gregory C. Thompson

Yes, so we consume in the range of 75 million MMBtu per year of natural gas. And so, you're right. I mean, we don't have any hedges in place, Charlie, we didn't in the second quarter and we don't for the third quarter. So you're right, there's a meaningful improvement there in the natural gas cost that will help in the third quarter, all else being equal.

Charles N. Neivert - Cowen and Company, LLC, Research Division

Okay. And anything you guys have set up -- I mean in terms of not necessarily hedging, but you guys have any idea about or feeling any ideas about or what's in your forecast around gas for Q4? I mean, I'm assuming giving the guidance you're giving and sort of leading that you had some idea about what numbers you're using, where are they right now?

Paul D. Carrico

I think Greg's comment earlier were a bit more focused on the third quarter, so fourth quarter is a little bit still yet to be determined, if you will. Natural gas has clearly turned a little bit down, so that's a pleasant surprise for us. I think the key is whether or not the PVC producer or caustic producer somehow gives some of that up. We'd like to think that a fair percentage of that stays with the margins, but yet to be seen how that plays out.

Operator

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

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

I was hoping you can clarify a point for me. I thought in the first quarter conference call we had a discussion about elevated ethylene costs having to do with contract expirations and maybe on an annual basis, they were $60 million. And so I was wondering how you can be ahead of schedule in terms of your cost reduction if $40 million of the cost reduction is to come from raw materials and you have such a -- and you have this $60 million elevation?

Paul D. Carrico

Well, what we outlined specifically in the comments related to procurement and supply chain, as well as what was the other...

Gregory C. Thompson

Logistics, yes, and G&A.

Paul D. Carrico

So those areas did not directly speak to the ethylene side of the equation. I also made some comments around ethylene is all tied up in terms of looking at ethylene, natural gas and margins on PVC in terms of you can't just isolate one of those components. You got to look at the whole group of them. And what we said is in the areas that we have control over, we've made some changes and we can put those down on paper and say, all right, those are different than where we were before. In the market areas, particular in the area where you look at, PVC margin, ethylene cost, chlorine cost and the dynamics of the market, when you roll all that together, what we've seen, and that was more the point than anything else right now is those costs and those prices are not reflecting the margins that we would think that you'd get or that we expected to get at the beginning of the year, certainly. And even today, they're a bit soft compared to what we would normally expect. So you can't just take the ethylene discussion in isolation, you have to roll it all together. And basically, the conclusion there at the moment is that PVC margins are not reflecting the cost of those materials to the extent that we would have expected them to reflect that.

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

So is it fair to say that if your original target was 115 and maybe your ethylene cost order of magnitude have risen 60, the net benefit to the company over a 2-year period is $55 million if you achieve your cost synergies?

Paul D. Carrico

No, absolutely not. There's no reason to think that the market dynamics I'm talking about aren't realized -- that every reason to think that PVC margins are going to get to a better level, and that housing and the demand, supply-demand balance, is going to drive those up. And so, yes, we're going to see those synergy levels that we talked about. We're comfortable with that still.

Operator

We have no further questions at this time. I'll turn the call back over to our presenters for any closing remarks.

Martin Jarosick

Thanks everyone for joining us and we look forward to speaking with you at conferences and on our next earnings call.

Operator

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

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