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Executives

Martin Jarosick – IR

Paul Carrico – President and CEO

Greg Thompson – CFO

Analysts

Frank Mitsch – BB&T Capital Markets

Silke Kueck – JPMorgan

Adam Boyle – Bank of America

Andy Cash (ph) – UBS

Tarek Hamid – JPMorgan

Charles Nebrick (ph) – Dahlman Rose

Greg Goodnight – UBS

Laurence Salin (ph) – Credit Suisse

Georgia Gulf Corporation (GGC) Q3 2010 Earnings Conference Call November 3, 2010 10:00 AM ET

Operator

Good morning. My name is Janus and I will be your conference operator. At this time, I would like to welcome everyone to the Georgia Gulf third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session.

(Operator Instructions)

Thank you. Mr. Jarosick, you many begin your conference.

Martin Jarosick

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

Participants on today’s call are Paul Carrico, President and Chief Executive Officer; and Greg Thompson, Chief Financial Officer. During this call we will be making forward looking statements. As you 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 affect future results is included in our 2009, Form 10-K.

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

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

Paul Carrico

Thank you, Martin and good morning ladies and gentlemen. Before I get into the details of the third quarter, I want to share with you my thoughts about the North American petrochemicals industry. The industry has been under pressure for many years relative to global competition. While it has had excellent infrastructure and shipping capacity, the cost of energy in North America relative to other chemical producing regions periodically put our industry at a disadvantage. This in turn fostered an unpredictable competitive environment for North American producers.

Until recently the industry was hindered by these issues. Today the development of natural gas resources and subsequent improvement in the cost of natural gas based production compared to oil based production has dramatically improved the competitiveness of the North American assets.

Barring future regulatory limitations, we appear to be in a strong position on a global basis for the next several years at least. We at Georgia Gulf are seeking to take advantage of these developments and in particular to have this competitiveness serve as a bridge as the domestic economy in the housing market slowly recovers. Georgia Gulf has world scale manufacturing plant located in the Gulf Coast with excellent access to raw materials as well as transportation for domestic and export markets. This gives us a unique positioning within the industry. Additionally we expect our building products division to be in a good position to realize the upside from a more normal housing market in the coming years.

Having been in this industry for 30 years, I’d say this is one of those times where the industry dynamics are making a massive shift in the global balances to favor North America. It presents opportunities for Georgia Gulf to create value in the near term and the long term.

Turning back to the specifics of our most recent quarterly results; we delivered $77.6 million of adjusted EBITDA compared to $72.9 million of adjusted EBITDA in the third quarter of 2009. For the first nine months of 2010, we have generated $152.6 million of adjusted EBITDA compared to $143.1 million for the comparable period in 2009. Therefore, after just the first nine months of 2010, we have already hit the middle of our previous full year EBITDA guidance.

Consequently, at the end of the prepared remarks, I will walk you through our increased guidance for 2010.

For the third quarter, the Chlorovinyl segment generated $61.2 million of adjusted EBITDA compared to $41.7 million in the third quarter of 2009. The improved results for this quarter were driven by higher ECU values and modest improvement in PVC performance as operating rates were improved by a much higher level of export sales in the market. Our building products segment generated $14.2 million of adjusted EBITDA in the third quarter of 2010 compared to $28.6 million of adjusted EBITDA in the third quarter of 2009. This decline was a result of higher raw material costs, lower volumes and higher labor cost associated with employee performance based compensation expense. This increase was based on improved year-to-date results compared to last year and compared to our annual performance goals for building products and the total company and our increased guidance for 2010, as I will outline later.

While the third quarter was weaker than the third quarter of 2009 for this segment, we are pleased with our year-to-date performance. Our buildings products segment has reported $46.9 million of adjusted EBITDA well ahead of the $26.6 million of adjusted EBITDA in the first three quarters of 2009.

Our aromatics segment reported $12.4 million of adjusted EBITDA compared to $10.4 million for the same period in the third quarter of 2009. This improvement was driven by significantly higher volumes due in large part by increased export demand.

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

Greg Thompson

Thank you, Paul. Good morning ladies and gentlemen. Before we get into the numbers, I would like to discuss the 8-K we filed last night stating that certain previously issued financial statements could not be relied up on due to errors we discovered in calculations of our income tax provision for 2009. These are new issues in the same area of accounting for income taxes we discussed last quarter. We are working very hard to finalize the tax adjustments and prepare amended reports. This is the reason you see a select financial data table in the earnings press release instead of unaudited GAAP balance sheet and cash flow statements.

When we restated our financial statements in August 2010, we immediately began to implement a number of remediation steps in order to address the material weakness and internal control for income taxes. These remediation steps include requiring the involvement of two third party subject matter experts for material and complex tax transactions expanding the scope of work performed by third party tax professionals in increasing the level of review and validation of that work performed by management in the preparation of our provision for income taxes and developing and implementing additional procedures to increase the level of review, evaluation, and validation of underlying supporting data of our provision for income taxes and reconciliations of tax accounts.

We applied the remediation steps to the process to finalizing and filing our 2009 federal income tax return and our third quarter tax accounting. This included a review of complex analysis related to stock and partnership tax basis in certain of our subsidiaries and investments that is used in calculating the amount of cancellation of debt income, I will call it for short codi, which we recognized for tax purposes in 2009. During the process of reviewing that analysis, we, with the support of our tax advisors, reevaluated that portion of the calculation related to the value of paid up capital distributions in a royal entity in the company’s 2006 tax return.

That reevaluation led us to determine that an error in the calculation was made causing us to move from the position of having a net unrealized built-in gain to have net unrealized built-in loss from the codi impacts. We currently believe that due to this error our deferred tax assets were overstated by approximately $19 million on each balance sheet since the quarter ended September 2009.

We also determined that in 2009 there was a misapplication of Financial Accounting Standards Board Topic 740 dealing with accounting for income taxes that resulted in us incorrectly recording a deferred income tax liability in connection with the codi event arising from our financial restructuring activities for tax attribute reduction related again to a royal subsidiary.

We believe that this misapplication resulted in an overstatement of deferred tax liabilities of approximately $37 million on our balance sheet since the quarter ended September 2009. While all of our preliminary estimates remain subject to further analysis, we believe the net impact of the accounting corrections I just described will result in an overstatement of income tax expense of approximately $18 million on our consolidated statement of operations for the nine months ended September 30, 2009 and the year ended December 31, 2009 and a corresponding overstatement of the same, approximately $18 million to our net deferred tax liability accounts on our consolidated balance sheet as of each of the September 30, 2009, December 31, 2009, March 31, 2010 and June 30, 2010 balance sheets.

We continue the process of scrubbing our tax accounts with the help of our advisors to finalize these amounts and to determine that no other significant tax adjustments appear necessary, so that we may file our updated financial statements.

Additionally, I would like to reinforce a few important points. First, these errors were found as a result of the remediation steps we are undertaking to address our material weakness and tax accounting. These errors were found in some very complex and non-routine income tax issues. Both the issues are the result of erroneous interpretations and applications of the tax code as applied to our financial statements.

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

Now, back to the third quarter results. Net sales in the third quarter were $758 million, an increase of 36% over the same quarter last year. The sales increase is primarily due to increased sales prices in vinyl resins and caustic soda and higher volumes particularly in aromatics. We also had a favorable Canadian dollar currency impact in building products.

Let’s look at our operating performance during the third quarter. We reported operating income of $53.2 million for the third quarter of 2010, compared to operating income of $38.6 million during the same quarter in the previous year.

The operating income from the third quarter of 2009 included a net benefit of $1.8 million from restructuring activities. Adjusted EBITDA for the third quarter of 2010 was $77.6 million versus $72.9 million in the same quarter last year.

SG&A expense for the third quarter of 2010 was $43.4 million, $3.4 million less than the same period last year. The decrease is primarily due to the favorable impacts of decrease in equity compensation expense of $7.9 million, $2.8 million decrease in the discount on trade receivables related to the replacement of our former asset securitization program with our current ABL in December 2009, $1.5 million decrease in legal and professional fees largely driven by our financial and operational restructuring activities in 2009, offset by a $4.2 million increase in employee performance based compensation expenses and $1 million unfavorable currency impact resulting from a stronger Canadian dollar.

Let me provide just a bit more details on the employee performance based compensation expense increase. As part of our total compensation plan, we provide an annual performance based bonus opportunity to the vast majority of our employees. Eligible employees must meet challenging targets set at the beginning of the year to earn the bonus. In 2009, variable compensation was low about $2.2 million as we did not meet many of our performance objectives.

Also in a moment, Paul will walk through our higher guidance for the full year, which also causes third quarter compensation expense to be much larger than third quarter 2009.

Our interest expense for the third quarter was $17.3 million compared to $30.7 million for the third quarter last year.

In the core vinyl segment, third quarter 2010 sales increased 38% to $316.7 million from $229.1 million during the third quarter of 2009 driven by higher PVC prices and volumes as well as higher caustic prices.

This segment posted operating income of $46.1 million, compared to operating income of $30.6 million during the same quarter in the prior year. The third quarter of 2009 includes $3.5 million of pretax restructuring benefits.

The increase in operating income was primarily due to higher ECU values and higher PVC operating rates in the current period.

In the building product segment, sales were $222.9 million for the third quarter of 2010, compared to $226.7 million during the same quarter in the prior year. Sales on a constant currency basis decreased 5%. The decrease in sales reflects softening conditions in the North American Housing and construction markets in the second half of 2010, especially in the US. The segment’s operating income was $5.6 million for the third quarter of 2010, compared to $16.7 million during the same quarter in the prior year.

The third quarter of 2009 includes $2.4 million of pretax asset impairment and restructuring charges. The decrease in operating income is primarily the result of higher raw material costs and lower sales volumes.

Additionally, employee performance based compensation expense was higher in the third quarter of 2010, compared to the third quarter of 2009. This increase was based on significantly improved year-to-date results compared to the same period last year, as well as compared to 2010 performance targets for the building product segment and total company performance.

In the aromatics segment, sales increased to $218.4 million for the third quarter of 2010 from $100.5 million during the third quarter of 2009. The significant increase was due to much higher volumes. During the third quarter of 2010, the segment recorded an operating income of $12.1 million, compared to operating income of $9.3 million during the same quarter in 2009.

The increase in operating income was driven by a significant increase in export volumes partially offset by lower margins compared to the third quarter of 2009.

The total company FIFO impact for the third quarter was a negative $1.1 million, compared to a positive $14.2 million FIFO impact in the same quarter last year.

Now let’s discuss working capital. As you know we invest working capital in the first half of the year and recover working capital in the second half due to the seasonality of our business. If you compare our balance sheets from the third quarter of 2010 and 2009, you will see the increase in accounts receivable over last year.

This is mainly due to our refinancing of the old asset securitization agreement, which was off balance sheet with an asset based loan, which is on balance sheet financing. To accurately compare accounts receivable before and after this change, the AR securitized of $97.1 million as of September 30, 2009, should be added back to controllable working capital.

Controllable working capital, defined as on balance sheet and off balance sheet accounts receivable plus inventory less accounts payable increased by about $72 million compared to September 30, 2009. This year-over-year increase reflects the impact of higher raw materials, costs, higher sales volumes and higher pricing in 2010, partially offset by the improved vendor terms on our accounts payable.

Compared sequentially, controllable working capital increased by about $38 million. This sequential increase again is driven by the large increases in sales mainly in aromatics.

On the cash flow statement, you will notice that we generated cash from operating activities of $32.5 million as compared with $68.8 million for the third quarter of 2009, mostly as a result of working capital investments driven by the higher sales in the third quarter of 2010 I just described compared to a working capital investment of $14 million in the third quarter of 2009.

Capital expenditures were $11 million for the third quarter of 2010 compared $6.6 million in the third quarter of 2009. This results in free cash flow of $21.6 million for the third quarter compared to free cash flow of $63.4 million in the third quarter of 2009. For the full year we are planning capital expenditures of approximately $45 million.

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

Paul Carrico

Thanks Greg. As I mentioned earlier, we are pleased with the third quarter results and the fact that year-to-date performance is ahead of our target. The building product segment has made a significant improvement over last year’s results even as we are experiencing some softness compared to the strong second half of 2009. Over the last couple of years we have restructured the operations and brought in a new management team with significant building products experience. This has established our ability to deliver solid results and respond to market conditions. Once we return to a more normal housing and construction market, we should see additional and consistent improvements in volumes and building products.

On the second quarter conference call I provided you with EBITDA guidance that incorporated a conservative view of PVC results in the fourth quarter of 2010. At that time, we expected the combination of the normal seasonal domestic demand to climb and industry capacity additions coming online to negatively affect operating rates.

Over the last several months, these concerns have been mitigated by the strength in the export markets and the positive effect on operating rates. There appears to be some near-term challenges with raw materials cost and this could temper the level of profitability. However, as operating rights remain reasonably strong for this time of the year, we expect pricing to compensate for the raw material increases. We would also see the export opportunities to continue to be available into 2011 further supporting the health of the industry.

Based on the results we have achieved year-to-date and our expectations for the fourth quarter, we expect our 2010 adjusted EBITDA to exceed $180 million. With this updated guidance, continued positive cash generation and complete paydown of our ABL, we expect our year-end net debt to adjusted EBITDA ratio to be near our goal of 3.5 times well ahead of our prior expectations.

I’ll now turn the call over to the operator, so we can take your questions.

Operator

(Operator Instructions) Your first question comes from the line of Frank Mitsch of BB&T Capital Markets.

Frank Mitsch – BB&T Capital Markets

The area that I guess was most surprising relative to our expectations was in the aromatics side and I guess our sense was that acetone was kind of on the weak side and phenol did better. But can you go into more details as to where specifically you’re seeing the strengths in the aromatics area and what’s the likelihood that this isn’t a one-time event and it might be sustainable?

Paul Carrico

Yes Frank, this is Paul. We definitely have seen some weakness in the acetone side of the equation; however, in addition to that what we’ve seen is overall demand in a couple of areas substantially step up not so much in the resins for the building product side but the other areas, and that’s been both domestically and internationally compared to some prior forecast that were out there. So generally speaking operating rates are up a bit. And in addition to that, I’d say margins particularly on the export side, have improved somewhat from prior expectations.

In terms of how that moves forward, I guess visibility is always limited in these areas particularly with the international equation going on here but what we see right now is there is a reasonable fair amount of outages in the next, I’ll call it six to nine months and we see demand staying reasonable. So there’ll be the vagaries of the uncertainty about propylene and benzene pricing, which always adds a different aspect to the equation. But short of that, the conditions appear to be fairly reasonable for the next six to nine months.

Frank Mitsch – BB&T Capital Markets

All right, great. You did talk about the strong export demand. What percent of your sales in aromatics in the third quarter were domestic versus exports and where does that stack up versus what you typically do?

Paul Carrico

We definitely had a lot more exports when you look at this year versus last year. In terms of the volume, I would say it was in the range of a third something like that as a percentage.

Frank Mitsch – BB&T Capital Markets

That’s generally which geography?

Paul Carrico

A couple of areas.

Greg Thompson

It’s spread around.

Paul Carrico

Yes.

Frank Mitsch – BB&T Capital Markets

Latin America, Asia?

Paul Carrico

Asia, Europe and various different areas.

Frank Mitsch – BB&T Capital Markets

All right terrific but you see this as a sustainable business for the next two-three quarters?

Paul Carrico

The conditions out there are reasonable, yes, at this time.

Frank Mitsch – BB&T Capital Markets

All right terrific, thank you.

Operator

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

Silke Kueck – JPMorgan

Good morning, this is Silke Kueck for Jeff. How are you?

Paul Carrico

Hi Silke, good morning.

Greg Thompson

Morning.

Silke Kueck – JPMorgan

In the Chlorovinyl side, normally at this time of the year it seems that’s when annual contract discussions begin to renew your contracts for next year. What percentage of your contracts are already settled for next year or what percentage of your business I should say?

Paul Carrico

Yes, I don’t think we have any numbers on that. Those contracts are still in discussion; it’s a little bit early although some of them are getting close but until you have contract signed, you really don’t know how they’re going to shake out. I’d say that the positive aspect of all this right now is that exports continue to remain strong and so that provides an alternative which is always a good dynamic in terms of the industry discussions.

Silke Kueck – JPMorgan

In Chlorovinyl, what percentage of the business this quarter was exports versus what was domestic?

Paul Carrico

I believe our number was about a little bit below the industry number not dramatically but a little bit below.

Silke Kueck – JPMorgan

What was the industry number?

Paul Carrico

I want to say it was in the low 30s.

Greg Thompson

Yes 30%. Yes, we were right about 30%.

Paul Carrico

About 30% yes.

Silke Kueck – JPMorgan

Okay helpful. Of the – if you take – you realized caustic soda price for the quarter. Of that base, what amount of announced price increases are still left to be implemented?

Paul Carrico

Well, the starting point is always challenging to talk about that but there was a $45 increase and a $50 increase and maybe the last two hanging out there and I think the $45 is working its way through the system. The $50 probably still remains to be worked through the system and that varies depending upon contract agreements and how people implement it going forward.

Silke Kueck – JPMorgan

So, of the $45, none of that was part of the third quarter, I guess that is something that has worked on for the fourth quarter?

Paul Carrico

I’d say more of it came into the fourth quarter than in the third.

Silke Kueck – JPMorgan

That’s helpful and if I can ask one question on building products. So, on a year-over-year basis, the sales were down $4 million but the EBITDA was down, I don’t know like $14 million. So can you just talk about like what was due to raw materials, what was due to compensation, what was due to volumes? Because it seems like a big step-down.

Greg Thompson

I mean materials and compensation because of our increased guidance were both pretty significant in the quarter. So they obviously consume a lot of PVC resin. And so materials as well as additives costs were up as well. So, both of those amounts for about I would say of equal significance to them.

Silke Kueck – JPMorgan

And they made the majority of that $14 million?

Paul Carrico

Yes.

Greg Thompson

Yes.

Silke Kueck – JPMorgan

Thanks. I’ll get back into queue.

Greg Thompson

Okay thanks Silke.

Operator

Your next question comes from the line of Roger Spitz of Bank of America.

Adam Boyle – Bank of America

Good morning, it’s Adam Boyle for Roger.

Greg Thompson

Morning Adam.

Paul Carrico

Morning.

Adam Boyle – Bank of America

It looks like industry publications have Q4 phenol prices rising faster than benzene costs. Have you seen that in October so far?

Paul Carrico

I would say that generally speaking the contractual arrangements on the domestic side follow more, I’d call it, standard pricing mechanisms and so I can’t relate to what the industry publications are showing, maybe that they’re assuming benzene and subsequently some additional increases on the export side. But no, I really can’t explain what that variation might be.

Adam Boyle – Bank of America

Okay. How much was drawn on the revolver at the end of the quarter?

Paul Carrico

The revolver draw at the end of the quarter was, let’s see, $47 million.

Adam Boyle – Bank of America

Okay. SG&A bumped up a little bit sequentially. Was there anything non-recurring in there?

Paul Carrico

I went through some of that in my remarks but I think the big anomaly in there is because of our increased guidance for the year; we had to increase our performance based incentive accruals, where, I said, you know, that’s, you know, just about all the employees that the company participate in that. And so on a year-to-date basis, it’s all there. But there’s a little bit disproportionate amount, I guess, following into the third quarter.

Question

Got it. And lastly, how was the negative $1.1 million FIFO impact, how is that split between Chlorovinyls and Aromatics?

Greg Thompson

Yes, it’s pretty somewhere half and half, about half Aromatics and half Chlorovinyls.

Question

Great. Thank you very much.

Greg Thompson

Sure, Adam.

Operator

Your next question comes from the line of Andy Cash (ph) of UBS.

Andy Cash – UBS

Hey, good morning, gentlemen.

Greg Thompson

Good morning, Andy.

Andy Cash – UBS

All right, frankly, we’re interested in that booming Aromatics business. I’m just wondering if you could talk about, you know, merchant sales of cumene. Did they play a role, perhaps, you can talk about the percentage of total? How big were they? Were they up year-over-year? We’re they up quarter-versus-quarter, you know, on a sequential basis?

Paul Carrico

I’m not sure we characterize that as booming.

Andy Cash – UBS

Getting better.

Paul Carrico

Yes, both the phenol and the cumene were some exports involved there, a bit more percentage-wise on the phenol side. And externally, certainly because we have, I would say, probably, one of the largest, if not the largest, cumene plant in the world and one of the best cumene plants in the world that certainly was an opportunity for us to take advantage of that when operating rates picked up.

Andy Cash – UBS

But you don’t care to characterize it as a percentage of segment sales, the cumene part, just very roughly speaking?

Paul Carrico

I’ll tell you what, let me come back to that. I have the number but it’s not right in front of me.

Andy Cash – UBS

Okay. And then do you have it, whether it was up year-over-year and was it up sequentially?

Paul Carrico

On exports?

Andy Cash – UBS

No, just the merchant sales with cumene. Maybe they were all on export, I don’t know.

Greg Thompson

Yes.

Paul Carrico

The merchant sales year-over-year were up substantially. And the domestic side, well, we just have it as outside categorized here. In total, outside, I don’t have a split on the export side, was certainly up substantially.

Andy Cash – UBS

Okay, I’ll take that to mean, you know, good strong double digit. Is that okay?

Paul Carrico

Yes.

Andy Cash – UBS

Okay, and then finally, could you peg the opening rate for phenol, just kind of how it ran into the quarter?

Paul Carrico

Yes, you know, I struggled to figured out what people publishes in terms of their estimates of the operating rates because it doesn’t typically seem to quite match up with what reality is. Our sense was that the effective operating rate was fairly strong. There were certainly some adages in different places.

But short of that, for most folks, it was up there a fairly strong level.

Andy Cash – UBS

Somewhere it’s between $80 and $90? Will that work?

Paul Carrico

Yes, yes. I would say so for sure.

Andy Cash – UBS

That’s – you’re consistent with that?

Paul Carrico

And yes, we’re certainly in that range.

Andy Cash – UBS

Okay, thank you very much.

Greg Thompson

Thanks, Andy.

Operator

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

Tarek Hamid – JPMorgan

Good morning, guys.

Greg Thompson

Close enough, Tarek.

Tarek Hamid – JPMorgan

I guess on the export side of PVC, is there a kind of a percentage cap on how much of your volume you can ship over at this point, just given the geography of your sites?

Paul Carrico

I think it’s not so much geography as trying to be in balance with what we want to do domestically. So you know, as a general rule of thumb, I would say a third is about our comfort level. We may choose to run that to higher levels at some point in the future, we could. But at this point, it’s kind of in the third range.

Tarek Hamid – JPMorgan

Just kind of think of that as sort of open to run rate at this sort of economics?

Paul Carrico

Yes.

Tarek Hamid – JPMorgan

And then, I guess, just bigger picture, given that your, you know, the EBITDA range, you’re sort of looking at being and you monitor balance sheet target to the end of this year, kind of any thoughts towards at, you know, at that point becoming a little bit more acquisitive and/or looking at sort of, you know, trying to grow the business again?

Paul Carrico

We’re actually trying to enjoy a little bit the current position before we go too far in that direction. But certainly, we want to grow our business relative to our capabilities internally. As you might recall, we have capacity still available on our building product side.

And we also want to continue upgrading our facilities there. And we would think that as the housing market ticks up over the next year or two, we should have plenty of opportunities in that area.

Tarek Hamid – JPMorgan

Okay, great. That’s all I have. Thank you.

Operator

Your next question comes from the line of Charles Nebrick (ph) of Dahlman Rose.

Charles Nebrick – Dahlman Rose

Good morning, guys.

Paul Carrico

Good morning, Charlie.

Charles Nebrick – Dahlman Rose

A couple of quick questions. Can you talk a little bit on just sort of generally on the exports but looking at, you know, both vinyls and then on the Aromatic side, specifically where, you know, what countries seem to be taking on the big chunk of it, not necessarily yours or if you want to talk about yours as well, but just where the exports are header?

Paul Carrico

Well, with the balances out there on the Aromatics side, and I guess, probably the majority is either going to Europe or Asia probably, in general. And I suspect that’s kind of true for most folks to extend their participating in those markets.

On the vinyl side, it’s a more broad categorization, I would say. You’ve got South America. You’ve got some in Europe, some in India, some in Asia. So we, in particular, you know, see to make sure we’re kind of diversified there.

Charles Nebrick – Dahlman Rose

Okay, so you’re as broadly spaced or in the area of where the industry is since you’re about in the area of the industry in terms of the total numbers as well?

Paul Carrico

Yes, that’s what we were targeting.

Charles Nebrick – Dahlman Rose

Okay, and when we look at the building products, and in trying to get a little bit more granular, is there any place in that country or in areas of Canada that’s , you know, a little bit stronger than the other areas or that seems to be, you know, maybe, I hesitate to use the word recovery in this situation but you know, a little bit further along in getting back towards numbers and others that are, you know, perhaps lagging any sort of recovery?

Or was it just generally ugly all over?

Paul Carrico

I would love to give you some encouragement there. But the general comment, people are not that optimistic right now for the end of the year. It’s kind of drifted back into a status quo sort of situation. I wouldn’t say it’s no doubt any more differently than it has in other years relative to the November, December time frame.

But the optimism is muted. And people are kind of waiting to see what develops over the next couple of months.

Charles Nebrick – Dahlman Rose

But I mean, up to this point in the year, was there any region that seemed to be a little bit better than the others?

Paul Carrico

Just the Canadian market from the beginning of the year.

Charles Nebrick – Dahlman Rose

Okay.

Paul Carrico

You know, the first six months were definitely stronger in Canada. But short of that, it’s tough for us to see real bright spots out there.

Charles Nebrick – Dahlman Rose

Okay. And one last question. You’ve noted that in the past that you’ve been sort of moving up in terms of your margins in the building products business versus those of peers where you’ve been well behind. And now you’re sort of closing that gap up a bit.

And some of it is certainly attributable to the new people you’ve brought in. But can you sort of – is there also any change in the product slate or there has been a change in the product slate, would that be also a reason for some of that gap closure in terms of the returns there.

Paul Carrico

Yes, to date, there hasn’t been a dramatic shift in the product slate. It’s been more about getting our costs aligned and managing our pricing and trying to be sure we were getting a positive margin with the equation. We also want to make sure we’re respectful of where the market conditions are.

We’re not seeking to grow the business substantially with no margins. So we’re watching all those things and waiting for the market to come back. And that’s what we really need, this additional volume coming back in. But in the future, we clearly have an emphasis on new products innovation in that area and seeking to take advantage of growth to, that’s generated a substantial portion of our growth by those areas.

Charles Nebrick – Dahlman Rose

Okay. So if you were to classify it up until now, the closing of the gap against peers has been more management and, you know, internal management. And the hope is going forward that that will turn to more product orientation that will drive the closure or exceeding peers?

Paul Carrico

Yes, and to do…

Charles Nebrick – Dahlman Rose

Is that what we should be looking for?

Paul Carrico

To do this sports analogy, it’s more the blocking and tackling around the business that we’ve been doing for the last year, too. And after this, we think we can take advantage of growth after in the market.

Charles Nebrick – Dahlman Rose

Okay, great. Thanks very much, guys.

Greg Thompson

Thanks, Charles.

Operator

Your next question comes from the line of Greg Goodnight of UBS.

Greg Goodnight – UBS

Good morning all.

Paul Carrico

Good morning, Greg.

Greg Thompson

Good morning, Greg.

Greg Goodnight – UBS

Would you size the total effect of the compensation increase in the third quarter across the company force?

Greg Thompson

Well, as far as the increase that…

Greg Goodnight – UBS

Yes, the specific dollars.

Greg Thompson

Yes, and actually, in my script, you know, SG&A was up $4 million in the third quarter, $4.2 million third quarter of this year as compared to third quarter of last year. And I don’t have the exact number in front of me but we also have bonuses that because there are a lot of manufacturing personnel that are in cost of goods sold in those numbers as well. But it’s probably a similar kind of range for that in that’s also in cost of goods sold.

Greg Goodnight – UBS

Very good, that gives us a good idea then.

Greg Thompson

Okay.

Greg Goodnight – UBS

The second question, I was interested in Paul’s characterization of the market conditions next year or the relatively cheap ethylene based on feed stocks. Since you guys purchase the majority of your ethylene, I would assume that the biggest tailwind from this effect would be in terms of having reasonably priced domestic PVC, so that your exports would be pretty healthy next year, could you take a swipe at estimating, what your operating rates might be next year? Would you think they would be over 85% in total for PVC?

Paul Carrico

Yes, I was looking earlier at what was being forecasted out there and I think it was maybe a modest improvement that people were looking at for next year, if not flat. My expectation is that a little bit understated based upon the export market, not getting caught up with a super run up in ethylene again to where it restricts the opportunities. But my guess, is its going to be in the mid-80s to maybe slightly above.

Greg Goodnight – UBS

Okay, great. The other potential positive for your company is, I know you do have some amount of producer based ethylene but I don’t know if you’ve ever disclosed, relatively the size of that versus your purchased ethylene. So, am I correct in that that you’ve never disclosed that or?

Paul Carrico

Yes, that’s correct. There is a bit of information I think in the historical files out there and some of the reporting, but we don’t really go through that total perspective. And ultimately we do get caught up a bit in the same issue other folks do if ethylene goes up too high, you just can’t justify it on the export side. Earlier this year when we had that, you’re really back down on your expectations of exports when you have those run-ups.

Greg Goodnight – UBS

Okay, well thank you for that.

Greg Thompson

Thanks Greg.

Operator

Your next question comes from the line of Laurence Salin (ph) of Credit Suisse.

Laurence Salin – Credit Suisse

Hi good morning.

Paul Carrico

Good morning.

Laurence Salin – Credit Suisse

Your 2010 EBITDA guidance implies by my calculation greater than $28 million for the fourth quarter. Is it fair, to assume that the vast majority of that EBITDA would come from the Chlorovinyl segment and we should guide towards roughly breakeven for the building products and aromatic segments?

Paul Carrico

Yes, if you went down the list building products is going to be challenged, generating too much there would be difficult.

Greg Thompson

But positive still.

Paul Carrico

But positive. Aromatics, we’ve had an outage there that we’ve needed to handle this month – this past month and so that’s going to be tempered a little bit and Chlorovinyl is going to be more of the driving force in this quarter.

Laurence Salin – Credit Suisse

All right, great. And then I believe you mentioned fully paying down the ABL by year-end. If that’s the case and I heard that correctly, would that be.

Greg Thompson

Yes, it is.

Laurence Salin – Credit Suisse

Purely. Okay, great. Is that purely free cash flow in the fourth quarter or might you use some of the existing cash balance?

Greg Thompson

No, that’s all. I would expect that all to be purely free cash flow that we generate in the fourth quarter with the normal seasonality of our business.

Laurence Salin – Credit Suisse

All right, great. And then lastly, Tarek asked about, as you move toward the 3.5 turns leverage goal, he asked about acquisitions. But could you also comment around dividends?

Greg Thompson

That’s not something that we’re prepared to get to yet, I think that’s certainly something as we get to a kind of net debt to leverage ratio in our target like this 3.5 times all those areas of where we think the best way to reward the shareholders for the business performance will be on the table relative to including dividends, acquisitions, investment for growth like Paul mentioned earlier in building products. And so that’s focused on driving additional shareholder value that we’ll use to analyze what we think makes the most sense.

Laurence Salin – Credit Suisse

Okay, thanks for taking my questions.

Operator

(Operator Instructions) Your next question comes from the line Jeff Zekauskas of JPMorgan.

Silke Kueck – JPMorgan

Yes hi, this is Silke again. So with everything that you know today, so with the Chlorovinyl exports market being a little bit stronger and maybe some cost of prices still going through but building products being somewhat weaker and maybe there is a little bit of help on the aromatic side with export demand. Do you expect your EBITDA to grow next year?

Paul Carrico

Yes, we would expect that would be the case right now. We haven’t really firmed that up. We’re looking into our budget process right now and trying to work up the numbers and the expectations. But generally speaking, the overall market as well as the cost structures out there would suggest that it should be.

Silke Kueck – JPMorgan

Even of these higher levels that you expect for 2010?

Greg Thompson

Yes.

Silke Kueck – JPMorgan

Okay, thanks.

Operator

At this time, there are no further questions.

Martin Jarosick

Well thanks everybody for joining us today and we look forward to speaking with you to talk about our fourth quarter results.

Operator

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

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