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Executives

Martin Jarosick - IR

Paul Carrico - President & CEO

Greg Thomson - CFO

Analysts

Silke Kueck - JPMorgan

Roger Spitz - Bank of America-Merrill Lynch

Bill Hoffmann - RBC Capital Markets

Sabina Chatterjee - BB&T Capital Markets

Tarek Hamid - JPMorgan

Georgia Gulf Corporation. (GGC) Q2 2010 Earnings Call August 6, 2010 10:00 AM ET

Operator

Good morning, my name is Brandy and I will be your conference operator today. At this time I would like to welcome everyone to the Georgia Gulf Second Quarter Financial Results Conference Call, (Operator Instructions).

Thank you. I would now like to turn the conference over to your host Mr. Martin Jarosick. Sir you many begin your conference.

Martin Jarosick

Thank you Brandy and good morning ladies and gentlemen. Thank you for participating in today's conference call to discuss Georgia Gulf's 2010 second quarter financial results. There are slides available to you on the Georgia Gulf website. These slides are for your reference but we will not be speaking directly to the bullets on each slide.

Participating on today call are Paul Carrico, President and CEO and Greg Thompson, CFO. During this call we will be making forward looking statements. As you appreciate any business projections and assumptions about future event are subject to risks and other factors that could cause actual results to differ materially from our current outlook. A listing of factors that could effect future results is included in our 2009, Form 10-K and subsequent filings.

Any forward looking statements made on this call should be considered in light of those factors. In addition, during this conference call we may refer to certain non-GAAP financial measures. We have provided a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures as an appendix in the slides on our Website.

I will now turn the call over to Paul to begin the review of the second quarter. Paul?

Paul Carrico

Thank you, Martin and good morning ladies and gentlemen. In reviewing the second quarter results on an adjusted EBITDA basis we delivered $62 million as compared to $59.4 million in the second quarter of 2009.

For the first six months of 2010 we have generated $74.9 million of adjusted EBITDA compared to $70.3 million for the comparable period in 2009. The Chlorovinyl segment in the second quarter generated $51.6 million of adjusted EBITDA compared to $40.7 million in the second quarter of 2009.

The improved results for this quarter were driven by first higher ECU values and second modest improvements in PVC margins due to Ethylene prices falling faster than PVC prices.

The positive effect of these two impacts was partially offset by the unplanned (inaudible) cooling tower outage in May of this year.

On an adjusted EBITDA basis our building products segment generated $27.4 million in the second quarter of 2010 compared to $19.5 million in the second quarter of 2009.

This large improvement was driven by the cost reductions and property building improvements implemented during the past two years and by increased volumes.

Year-to-date our building product segment has reported $35 million adjusted EBITDA than the same period last year. For the trailing four quarters the segment generated $71.1 million of adjusted EBITDA.

This represents a ratio of almost 9% adjusted EBITDA to sales when calculated based on the trailing four quarters. The results are a dramatic improvement when compared to the two previous calendar yea.

On an adjusted EBITDA basis as a percent of sales, calendar year 2008 was approximately 2% and calendar year 2009 was approximately 5%.

For the quarter our aromatics segment reported a negative $70.5 million of adjusted EBITDA compared to a positive $9 million of adjusted EBITDA in the second quarter of 2009.

This decline was driven by maintenance expenses and loss production related to a schedule turnaround in the phenol plant as well as an inventory holding loss created by decreasing benzene and propylene prices across the quarter.

For March 2010 to July 2010 benzene prices fell about 18% and propylene prices fell about 21%. At this time I will turn the call over to Greg to review our financial results in greater detail.

Greg Thomson

Thank you Paul. Good morning ladies and gentlemen, before we get into the numbers I would like to discuss the 8K we filed last night stating that our previously issued SEC filings could not be relied up due to the errors we discovered in calculations of our income tax expense for the years 2007 through 2009.

We are working very hard to prepare amended reports in the near future and this is the reason you see only selected financial data in the earnings press release instead of more complete unaudited GAAP balance sheet income statement and cash flow statements.

The main restatement issue is driven by income tax accounting for the financial restructuring actions we completed last year.

Due to the highly complex nature of our financial restructuring actions ad the related tax implications we engaged nationally recognized third-party tax professionals to assist us in determining the U.S. federal income tax consequences of these transactions.

During the preparation of our 2009, U.S. federal income tax returns which is in process now, we along with an additional firm of third-party tax professionals and our tax advisors on the financial restructuring actions discovered that a manual input error was made with respect to calculating the reported amount of cancellation of debt income for the year ended December 31, 2009, which in turn had a direct impact on the amount of tax expense and deferred tax liability we reported for that year.

In reviewing the analysis and calculations related to the cancellation of debt income, we determined that the original calculations understated the amount of income tax expense for the company attributable to the Cody related to the debt exchange. As a result of these erroneous calculations, our financial statements for the year ended December 31, 2009, reflect a lower income tax expense and therefore higher net income.

The effect of correcting this error is an increase to our provision for income taxes for 2009. This adjustment does not however result in any additional tax liability payable by us to tax authorities in respect of 2009 or earlier periods.

We have not completed all calculations and analysis necessary for us to issue our restated financial results for the impact of this issue. However, we believe that the adjustments to our 2009 year-end tax expense for this item are likely result in a net increase in the income tax expense for 2009 of approximately 36 million and a corresponding reduction in net income for 2009 of 36 million.

In addition, we have determined that in 2007, there was an incorrect application of accounting for uncertain tax positions related to free acquisition, Royal tax matters. We are in the process of completing the calculations and analysis necessary for us to finalize the impact of this incorrect application of accounting to our consolidated financial statements for the interim and annual periods from 2007 through 2009.

However, we believe there may be a cumulative decrease in our tax provision expense for those years that we preliminarily have estimated to be approximately $20 million. This preliminary estimate remains subject to further analysis, evaluation review and verification by the company and its professional advisors.

Additionally, I would like to reinforce a few important points. First, the errors were found in some very complex and non-routine income tax issues. It was a simple human error, a manual input error and the rest were erroneous interpretations and application of the code and related new accounting literature in 2007 related to Royal pre-acquisition tax matters.

Second, this issue has no impact on previously report adjusted EBITDA, nor will it have an impact in 2010 adjusted EBITDA. Third, there is no expected change to cash taxes for prior periods and we expect 2010 cash taxes to be in line with our original guidance of 8 to 10 million.

Now, back to second quarter results. Net sales in the second quarter were 735.7 million, an increase of 40% over the same quarter last year. The sales increase is primarily due to increased sale prices in vinyl resins and aromatics products and higher volumes particularly in aromatics as well as a favorable Canadian dollar currency impact.

Now let's look at our performance from continuing operations during the second quarter. We reported net operating income of 37.9 million for the second quarter of 2010, compared to net operating income of 5.1 million during the same quarter in the previous year.

The net operating income from the second quarter of 2009 included 20 million of asset impairment and restructuring charges while the second quarter of 2010 included 0.4 million of asset impairment and restructuring charges. Adjusted EBITDA for the second quarter of 2010 was 62 million versus 59.4 million in the same quarter last year.

SG&A expense for the second quarter of 2010 was 37 million, 13.2 million lower than the same period last year. The decrease is primarily due to the favorable impacts of 7.5 million decrease in advisory expenses largely driven by our financial and operational restructuring activities in 2009, 5.5 million decrease in bad debt expense, 2.7 million decrease in the discount on trade receivables related to the replacement of our former asset securitization program in December 2009 and offset by a 2.7 million increase in incentive compensation expenses along with 1.7 million unfavorable currency impact resulting from a stronger Canadian dollar. Our net interest expense for the second quarter was 17.4 million compared to 41.3 million for the second quarter last year.

In the core vinyl segment, second quarter 2010 sales increased 30% to 300.8 million from 232 million during the second quarter of 2009, driven by higher PVC prices and slightly higher volumes, partially offset by lower caustic prices.

This segment posted operating income of 36.2 million, compared to operating income of 24.4 million during the same quarter in the prior year. The second quarter of 2009 includes 1.9 million of pretax asset impairment and restructuring charges while the second quarter of 2010 includes 0.5 million of pretax restructuring charges.

The increase in operating income was primarily due to improved PVC margins due to ethylene cost decreases, outpacing PVC price decreases and higher ECU values in the current period, partially offset by an unplanned outage.

In the building product segment, sales were 243.2 million for the second quarter of 2010, compared to 216.3 million during the same quarter in prior year. Sales on a constant currency basis increased 5%. The increase in building product sales reflects improvement in the North American Housing and the construction markets, especially in Canada. The segment's operating income was 18.7 million for the second quarter of 2010, compared to an operating loss in building products of 7.6 million during the same quarter in the prior year.

The second quarter of 2010 includes 18.1 million of pretax asset impairment and restructuring charges while the second quarter of 2010 includes 0.1 million of net pretax restructuring income. The increase in operating income is primarily the result of higher sales volumes and the benefit in building products of numerous cost reductions and profit improvement actions we have implemented over the last two years.

In the aromatics segment, sales increased to 191.6 million for the second quarter of 2010 from 76 million during the second quarter of 2009. The significant increase was due to much higher volumes and higher prices. During the second quarter of 2010, the segment recorded an operating loss of 7.8 million, compared to operating income of 7.9 million during the same quarter in 2009.

The decrease in operating income was driven by a turn-around in the phenol plant as well as an inventory holding loss created by decreasing benzene and propylene prices across the quarter compared to inventory holding gains we experienced in the second quarter of 2009.

The total FIFO impact for the second quarter was a negative 27.6 million, compared to a positive 7.1 million FIFO impact in the same quarter last year. Now let's discuss working capital. As you know we invest working capital into the business in the first half of the year and recover working capital in the second half due to the normal seasonality of our business. If you compare our balance sheets from the second quarter of 2010 and 2009, you will see the increase in account receivable over last year.

This mainly due to our refinancing of the old asset securitization agreement, which was off balance sheet with an asset base loan, which is on balance sheet. To accurately compare accounts receivable before and after this change, the AR securitized of 87.8 million as of June 30, 2009, should be added back to controllable working capital.

So controllable working capital, defined as on balance sheet and off balance sheet accounts receivable plus inventory less accounts payable increased by about 48 million compared to June 30, 2009. This year-over-year increase reflects the impact of higher sales volume and pricing in 2010, partially offset by improved vendor terms on our accounts payable.

Compared sequentially, controllable working capital increased by about 22 million compared to March 31, 2010. This sequential increase reflects our normal seasonal investment in working capital. Since completing the debt exchange and long term refinancing last year, we have steadily improved our vendor terms, including longer payment terms and reduced letters of credit.

On the cash flow statement you will note that in the second quarter we generated cash from operating activities of 48 million as compared with 18 million for the second quarter of 2009, mostly as a result of improved working capital efficiency.

Capital expenditures were 10 million for the second quarter. This results in free cash flow of $38 million for the second quarter compared to free cash flow of 12 million in the second quarter of 2009. For the full year we are planning capital expenditures of 45 to $50 million.

Now I will turn the call back over to Paul for the 2010 outlook.

Paul Carrico

Thanks Greg. As I mentioned earlier, we are pleased with the second quarter results and our performance so far this year. When we reflect back to our original view at the beginning of the year versus today, there are a number of factors that have affected our reported results. Canadian housing starts are ahead of what we expected in the first half, while U.S. starts are generally in-line with our expectations.

The cost of natural gas continues to beat the earlier forecast to the low side. This has supported an improved cost position and made the PVC export opportunities available to us. Year-to-date PVC margins have been well below our expectations and ECU values have moved up steadily through the first half of the year.

For the last six months of the year we expect U.S. and Canadian housing starts to remain inline with our original expectations for the full year. This does imply some sequential weakness in the second half of 2010 particularly in Canada. Natural gas should remain lower than our original guidance and PVC export opportunities should be available if desired.

Ethylene prices are now off their peaks and expected to stay in range closer to the current levels and PVC will continue to be challenged by soft volumes and margins. Based on our second quarter results and our outlook for the rest of the year and on adjusted EBITDA basis we believe we will be near the top of our 140 million to $160 million range that we communicated earlier in the year.

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

Question-and-Answer Session

Operator

(Operator Instructions). And your first question comes from the line of Jeff Zekauskas with JPMorgan.

Paul Carrico

Good morning, Jeff.

Silke Kueck - JPMorgan

It's Silke, I am sorry, how are you?

Paul Carrico

Hi Silke, good.

Silke Kueck - JPMorgan

Couple of questions, so volumes in the building product side seem to be healthier up 5% year-over-year and in Chlorovinyl the volumes are lacking, why is that? Why providers, purchases of PVC resident holding back but demand for finished product is been so much better.

Paul Carrico

On the volume side some of our volumes were driven by the Canadian housing market been a bit better than U.S. so you can't necessarily apply that ratio to the total North American production.

In general though, the volumes are increasing but there is a substantial change as we move through the year related to exports and the types of volumes that have gone out in the end market.

Silke Kueck - JPMorgan

So, what you are saying is that you expect the export demand for the remainder of the year to improve?

Paul Carrico

Yeah I would say so, the likelihood is that this is normally going to be the time where domestic demand falls off a bit more as we go through the next six months and ultimately the export side seems to be available to the U.S. particularly with our cost position on the energy side.

Silke Kueck - JPMorgan

And secondly was the 27.6 million I mean FIFO inventory holding loss, was it all in aromatics or was it split among the divisions?

Greg Thompson

Silke about a third of it was in aromatics because of the benzene and propylene costs declines, the remainder is in Chlorovinyls.

Silke Kueck - JPMorgan

I know normally you don't like to talk about these facts over the outages but it's still like a ball park figure that how much income was lost in Chlorovinyl because of the outage of the cooling tower and what was that had one on the aromatic side because of the phenol plant shut down.

Paul Carrico

Chlorovinyls was more or less in line with what we had previously communicated which I think was in the range of 6 to $8 million for the cooling tower outage. Chlorovinyls, yeah, we typically we don't give numbers out on that but you can infer based on the inventory effect that we would have been positive in that if we had not the -- both the charges associated with the maintenance for the turnaround and then the loss production associated with the outage.

Silke Kueck - JPMorgan

Okay. And a last question on taxes if I may. So if I understood it right, there are no -- the tax adjustments will have no effect on EBITDA this year and it will have no effect on cash outlays for the previous years. But is there any effect on net income for 2010 or are there any tax payments that may be triggered for this year because of the adjustments?

Greg Thompson

Let me take the second part first. In terms of tax payments going forward, there's no immediate or significant cash tax payment going forward that will be needed. The $36 million that I mentioned related to the cancellation of debt income error actually will result in changes in the tax bases of assets going forward.

So in effect not to get into such a complex area but the tax -- because the tax basis of some assets will change, then the benefit that we would otherwise get from tax depreciation will also decline and so it really depends -- but it will be over many years, related to what assets are.

So if the assets are say 10 years for useful life and it was all related to 10 year useful life assets it would be 36 million divided by 10. So 3.6 million per year of additional tax expense. We haven't honestly been through all of that yet to know how that attributes but it will be spread over many, many years going forward.

Silke Kueck - JPMorgan

That's helpful and thanks very much, I'll get back into queue.

Greg Thompson

Okay, sure Silke.

Operator

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

Roger Spitz - Bank of America-Merrill Lynch

Thanks and good morning.

Greg Thompson

Good morning, Rog.

Paul Carrico

Good morning.

Roger Spitz - Bank of America-Merrill Lynch

Hey, the industry consultants had that the U.S. PVC industry operating at around a 88% operating rate. Were about that rate or at a different level?

Paul Carrico

I'm sorry. What number did you say? I couldn't hear that.

Roger Spitz - Bank of America-Merrill Lynch

88.

Paul Carrico

88, yeah. We were a bit about that in general. So typically we're going to be slightly above it just based on the fact that we rationalized so much capacity in the past year or two and you would expect that based upon that rationalization.

Roger Spitz - Bank of America-Merrill Lynch

Got it. And can you speak to the U.S. industry PVC exports and your own PVC exports?

Paul Carrico

To speak to them in terms of what's going on right now?

Roger Spitz - Bank of America-Merrill Lynch

What's going on in the industry and how much of your PVC, if any or you exporting.

Paul Carrico

Yeah, we're exporting at a bit lower than the industry rate. I think the industry rate is somewhere in the 25% range or so. As a general comment I would say exports continue to be available and out there for people to do if they want. It's just that with our planned operations and the various things we had going on operationally we reduced our number a bit this past quarter.

Roger Spitz - Bank of America-Merrill Lynch

Okay. And lastly on aromatics, you said your margins compressed on falling raw material cost which implies your prices were falling faster than raw materials or was this really the FIFO impact of matching the falling product price levels with your older and higher cost of raw materials.

Greg Thompson

I guess it was a sum of both but the big impact would have been FIFO. As I said about almost a third of our 27 million negative FIFO impact in the quarter. So 7 - 8 million was attributable to aromatics.

Paul Carrico

The challenge in the aromatics business is that the mechanisms used in the U.S are primarily based on benzene plus which is not really a desirable way to do it when you got inventory in the system, both in your plans and in tanks that might vary from month from month but that's what you get into on a variation in price between particularly the benzene and the propylene.

Roger Spitz - Bank of America-Merrill Lynch

That's because you buy the benzene one month and next month when your pricing it on the formula in a volatile price environment it can really mess you around.

Paul Carrico

Yes, right. Right. Exactly right.

Roger Spitz - Bank of America-Merrill Lynch

Thank you very much.

Operator

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

Paul Carrico

Good morning Bill.

Bill Hoffmann - RBC Capital Markets

Good morning. Paul, I wonder if you could talk a little bit about the building products business, just a little bit more granularity of the sales, Canada versus the U.S. You talked about kind of hitting your target. Your original targets for the year would still imply some incremental softness in the Canadian side of the market and I just want to get a better sense of what you're seeing out there?

Paul Carrico

Yeah, as a general comment, we saw improvements from the beginning of the year all the way through the six months but then the improvement was more dramatic in the first three or four months and has started to close in on last year's numbers as we get into the current summer timeframe. The expectation is that it will soften a bit before cash for the year would suggest that it has to soften if we're going to hit that number.

And that's kind of what we're seeing right now. It's also though a bit distorted because this is the time of the year where you might normally get some vacations and outages that reduced the volumes. But as a general comment we think housing, both in Canada and the U.S will be less robust I guess is the way I would call it, as it's been the first six months.

Bill Hoffmann - RBC Capital Markets

Some of the things that we're hearing from our building product guidance is like, they almost felt like they hit an air pocket in the May - June timeframe and hadn't really seen any change in July. At least, that's more sort of the U.S. commentary. Just wondered if they were seeing the same kind of impacts in Canada as well.

Paul Carrico

Yeah, we clearly heard that with incentives and things changing and to judge whether the extent of that is the same as what might be in the U.S is really difficult. I'm guessing it will probably be like the housing recovery. It won't be quite as dramatic as the U.S. just because it's a different market in terms of the supply demand balance versus the U.S. housing market and the renovation continues to be fairly good we think. So that's helps the situation a bit.

Bill Hoffmann - RBC Capital Markets

Right, and just given, it was obviously a good quarter for you in that business. As you look at your asset base that you spent obviously the last couple of years tying to recalibrate to the markets, how are you feeling about the current state of your systems and is there more to go there as far as either consolidating at a good growth point from here.

Paul Carrico

Yeah we're clearly in the mode of growing from here; we don't intend to make major consolidations at this point. We think we are getting our facilities in-line. As we mentioned in the past we have quiet a few management changes in that group and we have uphold a considerably better control over the operations in the businesses and so our mode is to grow from this point forward and to do that we certainly don't want to reduce our footprint much in the future.

Bill Hoffmann - RBC Capital Markets

Okay and then just the final questions, vectors were chlorovinyl side of the equation, just talk about in the export markets, you kind of indicated that those markets are available for -- because of the cost competitiveness today. I was just wondering of you can talk about the realizations you see out there, are you going to be pushing more into the export markets in the second half.

Paul Carrico

I think it greatly depends upon whether that situation sustains itself for the full six months, but my expectations would be that we would -- although at this point, our domestic demand we talked about the -- I think you mentioned there pockets in the housing and whatever, we don't see an air pocket in terms of domestic demand in such a significant way that it would dramatically increase the export. It would be more about opportunistic changes that we might make to add to our operating rate and that's why I think the industry on the PVC side will maintain a fairly good operating rates for the last six months of the year.

They only challenge would be, is whether margins gets squeezed because people try to start positioning themselves for next year and if that doesn't happen, then we got to have some good operating rates and some good results as we go forward.

Bill Hoffmann - RBC Capital Markets

Great, thank you very much.

Operator

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

Sabina Chatterjee - BB&T Capital Markets

Good morning this is Sabina Chatterjee in for Frank. Just to delve a little into the Canadian housing and constructions markets, now I understand that there were probably some tax and energy incentives that could have pulled forward earnings for building products. Briefly you talked about second half weakness, does this mean that results for building products could actually get back into the red in Q4.

Paul Carrico

No we don't think it's going to get back into the red, we just think that in -- I guess it's important to note that, we think, we have control over our cost related to the demand, so if demand were to dramatically fall off, we would adjust our cost structure accordingly. But what I'm talking about is the sluggishness that does not -- I'll say encoring as it was the first six months, the last six months we don't expect to be terrible, but just not as good as it was the first six months.

Sabina Chatterjee - BB&T Capital Markets

Okay and what's your internal forecast on housing starts from North America that's based into this EBIDTA guidance of 140 to 160.

Paul Carrico

For U.S. housing we were assuming something around 612,000 starts, basically 50,000 starts more than last year.

Sabina Chatterjee - BB&T Capital Markets

And then, Canada?

Paul Carrico

It is at 170.

Sabina Chatterjee - BB&T Capital Markets

Okay great and then on the PVC side, we've heard about PVC producers maybe building inventory in June, ahead of hurricane season and did you expand this as well?

Paul Carrico

I think probably most folks did, I suspect that half from the little bit on the producers side as well as on the customer side, so I don't have absolute information around all that, but I think some of that happened.

Sabina Chatterjee - BB&T Capital Markets

Okay and then we have appeline pricing looking like it's about to dip lower and with PVC holdings stable, are you expecting some -- perhaps some further margin expansion through Q3?

Paul Carrico

Well that's all relative the margins as we have alluded to in our commentary have been really less than expected for the year and the first quarter was just unbelievably low to non-existent.

So, when we look at margin improvements it might get back a little bit more towards normal. We hope that but that kind of depends on the domestic market reacts. I think the fact that there is exports out there available will probably help to support the margins to stay up there but it's difficult for us to predict how the competitive forces in the market will work.

Sabina Chatterjee - BB&T Capital Markets

Okay great and then just finally can you just tell us what the FX impact of the Canadian dollar was on operating income for the building product segment.

Greg Thomson

Sabina yeah actually I don't have that number handy it was pretty small, it is typically for us it doesn't have a -- it didn't have a significant impact.

Sabina Chatterjee - BB&T Capital Markets

Okay great. Thank you very much.

Operator

Your next question comes from the line of Tarek Hamid with JPMorgan.

Tarek Hamid - JPMorgan

Good morning gentlemen.

Greg Thomson

Good morning.

Paul Carrico

Good morning.

Tarek Hamid - JPMorgan

Just going back to the building product side one last time can you sort of contrast order patterns sort of May, June, July in backlog sort of what you have now to kind of historical norms. Is there any differences that are jumping out to you?

Paul Carrico

Well what we saw if you looked at our monthly charge as an example from the beginning of the year to now is that the first three or four months we were a step change above what last year's numbers were and then normally you get to a little bit of hump in the middle of the year as you get to the larger portion of your business in the second and third quarter's and what happened in the last couple of months is being that gap has closed substantially to where we were more or less on top of last years numbers.

Still not bad from an operating point of view because you are in the middle more robust part of the year and the question is what kind of curve do we get in the last six months of this year?

Tarek Hamid - JPMorgan

Any differences in backlog in July?

Paul Carrico

I would say I haven't received just real recent update but I have to believe the backlogs will just drop a little bit but again I mentioned earlier that's typically not that unusual in that June, July timeframe because people have vacations and outages and things like that so you expect that to happen a little bit.

Tarek Hamid - JPMorgan

And then one last for me, on the accounts payable side I guess you also made a ton of progress this quarter, where do you think you are you are in terms of get backing to a sort of fully normalized accounts payable on normal terms versus where you started six months ago.

Greg Thomson

Yeah I think we are pretty close to being back to normal payment terms. I am not totally satisfied as to where we are but I don't see any huge additional working capital dollars that we will unlock going forward Tarek.

Tarek Hamid - JPMorgan

Thank you very much.

Operator

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

Silke Kueck - JPMorgan

Yes thank still one more time, can you talk about the supply and demand sectors on the Caustic Soda side A, how the price increase are moving through and what's leading to -- what sort of like leading to the improved demand that allows you to pass on prices.

Paul Carrico

I would say that generally speaking the price increases that have been put out there and are out there moving throughout the market. They move at different rates depending up on what the circumstances are people have in the way of a contractual supply basis. There's no in our minds immediate around the corner issue with people importing cost that came to the U.S. and alternately we see exports available out there so the overall supply demand balance both because of the export being available and some of factors staying firm is creating a pretty good supply demand balance and we kind of expect that to continue right now.

Silke Kueck - JPMorgan

Okay. And I guess on PVC prices given that I guess the expectation is that ethylene prices will remain where they are, the expected PVC prices to hold in.

Paul Carrico

Yeah, I think there's a broadcast that they were at least hold, there are some people out there predicting some drifted up in the ethylene prices later in the year and that would tend to drive it back up and that very well may happen as we get into our call, the October-November timeframe and you can't depend upon with what that ethylene situation is.

Silke Kueck - JPMorgan

So why then if you have commentary so pessimistic about specific areas people have asked in various ways. What do you expect PVC margins to widen and so like if you put the various pieces together it seems so that, that could be the case. So when you're asking -- the answer seems to be no.

Paul Carrico

Well, you just have to look back to this past year and you see a significant issue with PVC margins and I couldn't explain that so I think if I had to look forward, I don't know whether the industry will repeat that but if the industry repeat that kind of an event then you know all of the thing that we're hoping for wouldn't come to pass and we'd be in the mode of the range we're talking about so in considering the fact that there's PVC capacity coming on in various other things driving probably perceptions of next year's demand, it's a significant uncertainly at this point.

Silke Kueck - JPMorgan

Okay, so this you could be that if there's oversupply that may be not all suppliers are willing keep the price stable and that could -- that would be a scenario in which PVC margins then wouldn't widen?

Paul Carrico

Absolutely, as I said, we demonstrate that in this past year. The first quarter like last year it was just -- made no sense from my perspective, but that's what happened so --

Silke Kueck - JPMorgan

Thanks very much. I appreciate the insight.

Paul Carrico

Okay.

Greg Thomson

Thanks Silke.

Operator

(Operators Instruction). Your next question is a follow-up question from the line of Roger Spitz with Bank of America-Merrill Lynch.

Roger Spitz - Bank of America-Merrill Lynch

Thank you On your caustic sales contracts, are there any limitations on the amount that you can raise prices or the price protection closes or did it turn out every quarter or could you describe that please?

Paul Carrico

Yeah. Typically we don't talk about our contractual agreements out there. It varies across the Board with a lot of different producers and we rather not speak to how we approach it to.

Roger Spitz - Bank of America-Merrill Lynch

Okay. Thank you.

Operator

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

Silke Kueck - JPMorgan

Thank you. I have a very last question. Are there any planned outages either on the chlorovinyls side or in the aromatic side that we should be aware for the remainder of the year?

Paul Carrico

Yeah on aromatics we have outage but not an extensive one. I'll call it like we were earlier in the year and related to the chlorovinyls, we have a bit of downtime associated with some other connections we have within our complexes but not outages that will be dramatic changes in terms of expense associated with maintenance and such. It will eventually as an example control some of the operating rights a little bit for us to maybe a slightly lower level but we would still be able to expect to be consistent with the industry rates are a little bit higher based upon our flexibility we have in the process.

Silke Kueck - JPMorgan

And that's something that will take effect in the third quarter?

Paul Carrico

No, more in the fourth quarter.

Silke Kueck - JPMorgan

Thanks very much.

Operator

There are no further questions at this time.

Greg Thompson

Well thanks everyone for participating and we look forward to speaking with you again in November.

Operator

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

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