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Executives

Paul Carrico - Chief Executive Officer, President and Director

Gregory Thompson - Chief Financial Officer and Principal Accounting Officer

Martin Jarosick - Executive Director of Investor Relations

Analysts

Charles Neivert - Dahlman Rose & Company, LLC

Jeffrey Zekauskas - JP Morgan Chase & Co

Andrew Cash - Point Clearview Management

Frank Mitsch - BB&T Capital Markets

Laurence Jollon - Lehman Brothers

Roger Spitz - BofA Merrill Lynch

Gregg Goodnight - UBS

Georgia Gulf (GGC) Q4 2010 Earnings Call February 17, 2011 10:00 AM ET

Operator

Good morning. My name is Crystal, and I will be your conference operator today. At this time, I would like to welcome everyone to the Georgia Gulf Fourth Quarter Earnings Conference Call. [Operator Instructions] Mr. Martin Jarosick, you may begin your conference.

Martin Jarosick

Thank you, Crystal, and good morning, ladies and gentlemen. Thank you for participating in today's conference call to discuss Georgia Gulf's 2010 fourth quarter and full year financial results.

There are slides available to you on Georgia Gulf's website. These slides are for your reference, but we will not be speaking directly to the bullets on each slide. Participating on today's call are Paul Carrico, President and Chief Executive Officer; and Greg Thompson, Chief Financial Officer.

During this call, we will be making forward-looking statements. As you will appreciate, any business projections and assumptions about future events are subject to risks and other factors that can 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/A.

Any forward-looking statements made on this call should be considered in light of those factors. In addition, during this conference call, we will 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'll now turn the call over to Paul to begin the review of the fourth quarter. Paul?

Paul Carrico

Thanks, Martin, and good morning, ladies and gentlemen. We are pleased to report solid operating and financial results for all of our businesses in 2010. Sales increased 42% to $2.8 billion and adjusted EBITDA increased by 29% to $208.5 million. The main two drivers for our sales and earnings growth were: first, improved volumes in our two chemical businesses led by export volumes; and second, EBITDA growth in building products.

In particular, Aromatics volumes more than doubled and natural gas prices remained relatively flat. PVC margins were negative in the first quarter but improved through the year, as industry export volumes rose to historically high levels.

Our Building Products business experienced solid sales and EBITDA growth in the first half, fueled by tax changes and incentives in the U.S. and Canada. However, once the incentives expired in the second half of the year, the housing market cooled and this business began to experience some weakness.

In addition to our strong financial performance, 2010 was the safest year in Georgia Gulf's history. Safety and performance go hand-in-hand, and I want to personally thank and congratulate our employees for their achievements in 2010. We would not be where we are today without their dedication to our businesses and overriding commitment to safety.

I'd also like to take a moment to welcome the employees of Exterior Portfolio to the Georgia Gulf family. Last week, we announced the acquisition of Exterior Portfolio, a recognized leader in the premium insulated siding category based in Columbus, Ohio. They have a strong national network of U.S. distribution partners, and we have long admired Exterior Portfolio and their owners, the Crane family, and the way they grew the business through new product innovation, high quality and strong customer service.

This acquisition is a strong fit with our Royal Building Products business, and the combination will create the third largest vinyl siding manufacturer in North America. In 2010, this business had about $100 million of sales and $10.5 million of adjusted EBITDA. We funded the acquisition with cash on hand and expect the acquisition to be accretive in 2011.

Turning to the specifics of our most recent quarterly results. We delivered $55.9 million of adjusted EBITDA compared to $18.3 million of adjusted EBITDA in the fourth quarter of 2009. For the full year 2010, we generated $208.5 million of adjusted EBITDA compared to $161.5 million for the comparable period in 2009. This was well above our earlier expectations due to strong export volumes in Chlorovinyls and Aromatics.

For the fourth quarter, the Chlorovinyls segment generated $56.3 million of adjusted EBITDA compared to $18.9 million in the fourth quarter of 2009. The improved results for this quarter were driven by higher ECU values and improved PVC performance. Sales volumes improved and PVC price increases kept up with rising ethylene costs. This was a very sharp contrast to the fourth quarter of 2009, when PVC price increases did not keep up with ethylene increases and we experienced negative margins.

Our Building Products segment generated $1.2 million of adjusted EBITDA in the fourth quarter compared to $9.6 million of adjusted EBITDA in the fourth quarter of 2009. This decline was a result of higher raw material costs, which were difficult to pass along in a tough market, and flat volumes.

With the mid-year expiration of tax incentives, we expected the weak fourth quarter. For the full year, we are pleased with our performance. Our Building Products segment reported $48.1 million of adjusted EBITDA during 2010, which is 33% higher than the $36.3 million of adjusted EBITDA in 2009. Just as important, Building Products achieved net increase with a growth in volume of just 4%.

Finally, our Aromatics segment reported $9.7 million of adjusted EBITDA compared to $300,000 of adjusted EBITDA in the fourth quarter of 2009. This improvement was driven by significantly higher volumes, due in large part to increased export demand.

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

Gregory Thompson

Thank you, Paul. Good morning, ladies and gentlemen. Net sales in the fourth quarter were $692.8 million, an increase of 38% over the same quarter last year. The increase is primarily due to higher sales prices in vinyl resins and caustic soda and higher volumes, particularly in Aromatics.

Let's look at our operating performance during the fourth quarter. We reported operating income of $33.6 million for the fourth quarter of 2010 compared to an operating loss of $18.6 million during the same quarter the previous year. The operating income from the fourth quarter of 2009 included a net loss of $2.4 million from restructuring activities.

Adjusted EBITDA for the fourth quarter of 2010 was $55.9 million versus $18.3 million in the same quarter last year. SG&A expense for the fourth quarter of 2010 was $42.1 million, $11.1 million less than the same period last year. The decrease is primarily due to the favorable impact of $7.4 million decrease in legal and professional fees, largely driven by our financial and operational restructuring activities in 2009; decrease in equity compensation expense of $6.4 million; and $2.9 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.

These favorable impacts to SG&A were offset by $4.1 million increase in employee performance-based compensation expenses and $0.6 million unfavorable currency impact resulting from a stronger Canadian dollar.

Our interest expense for the fourth quarter was $16.9 million compared to $23.3 million for the fourth quarter last year. Cash interest for the fourth quarter was $15.7 million compared to $16.3 million in the fourth quarter of 2009.

For the full year, we paid cash interest of approximately $68 million compared to the same amount in 2009. For the fourth quarter and the full year 2010, we reported tax expense of $1.2 million and $1.3 million, respectively. The effective tax rate for fourth quarter and the full year 2010 were 7.2% and 2.9%, respectively.

The low rates for the quarter and the year were largely driven by the resolution of various pre-acquisition Royal tax uncertainties and the release of a $5.6 million valuation allowance against certain Canadian deferred tax assets. Since we generated pretax income in Canada during 2010, we utilized deferred tax assets to offset the tax provision expense.

As we continue to improve our Canadian results, we will have available about $100 million more of these deferred tax assets. So going forward, we will continue to utilize these deferred tax benefits to offset a substantial portion of our Canadian income tax expense.

In the Chlorovinyls segment, fourth quarter 2010 sales increased 34% to $319.5 million from $237.7 million during the fourth quarter of 2009. These increases were driven by higher PVC prices and volumes, as well as higher caustic prices. This segment posted operating income of $41.5 million compared to operating income of $4 million during the same quarter in the prior year. The increase in operating income was primarily due to higher ECU values and higher PVC sales volumes in the current period.

In the Building Product segment, sales were $174.4 million for the fourth quarter of 2010 compared to $171 million during the same quarter in the prior year. Sales on a constant currency basis were flat. The segment's operating loss was $6.1 million for the fourth quarter of 2010 compared to a loss of $1.5 million during the same quarter in the prior year. The decrease in operating income is primarily the result of higher raw materials along with conversion and selling costs.

In the Aromatics segment, sales increased to $199 million for the fourth quarter of 2010 from $93.3 million during the fourth quarter of 2009. The significant increase was due to much higher volumes driven by exports. During the fourth quarter of 2010, the segment recorded operating income of $9.4 million compared to an operating loss of $825,000 during the same quarter in 2009. The increase in operating income was driven by a significant increase in sales volumes for all Aromatics products.

The total FIFO impact for the fourth quarter was positive $11 million compared to positive $7.9 million in the same quarter last year. For the full year, the FIFO impact was positive $5.1 million compared to positive $27.6 million in 2009.

Now let's discuss working capital. We define controllable working capital as on balance sheet and off balance sheet accounts receivable plus inventory, less accounts payable. As you know, we invest in working capital in the first half of the year and recover working capital in the second half due to the seasonality of our businesses.

Compared sequentially, controllable working capital decreased by about $63 million since September 30, 2010. This sequential decrease was driven by the normal seasonality in our business, combined with our close attention to working capital efficiency.

For the full year, controllable working capital increased by about $61 million compared to December 31, 2009. This year-over-year increase reflects the impact of an additional $800 million of sales in 2010, offset by a large improvement in our working capital efficiency.

For the year, our cash conversion cycle measured by controllable working capital days improved by 13 days. This improvement was driven by a sharp focus on inventory levels and better accounts receivable terms.

On the cash flow statement, you will note that we generated cash from operating activities of $145.3 million as compared with a use of cash of $48.1 million for the fourth quarter of 2009, mostly as a result of the refinancing of the asset securitization program in 2009. Excluding the old AR securitization, $49 million of cash from operations was generated in the fourth quarter of 2009. For the full year, we generated cash from operating activities of $183.8 million as compared with $111.7 million in 2009, excluding the old AR securitization.

Capital expenditures were $14.5 million for the fourth quarter of 2010 and $45.7 million for the year compared to $5.1 million in the fourth quarter of 2009 and $30.1 million for full year 2009. This results in free cash flow of $130.8 million for the fourth quarter compared to $43.8 million of free cash flow in the fourth quarter of 2009 excluding the old AR securitization.

For the full year, we generated free cash flow of $138.1 million compared to free cash flow of $81.6 million in 2009, again, excluding the old AR securitization. The $86.9 million improvement in free cash flow in the fourth quarter and $56 million improvement for the full year 2010 was driven by EBITDA, higher, a focus on working capital efficiency and $20.2 million federal income tax refund received in the fourth quarter of 2010.

Our previous cash tax guidance was that we would pay less than $10 million of cash taxes in 2010. We actually generated a $16 million cash benefit from taxes, driven mainly by this large refund in the fourth quarter. We had previously forecast that we would receive this tax refund in 2011.

As we have mentioned previously, our primary uses for excess cash flow were to pay down debt and fund accretive growth. During 2010, we paid down the entire $56.4 million balance of our ABL. Based on our confidence in our business, yesterday, we announced that we intend to redeem the remaining $22.1 million balance of our 2013 and 2014 senior notes. And as Paul mentioned, last week, we acquired Exterior Portfolio with $72 million of cash on hand.

For 2011, we expect to follow our normal seasonal pattern and build working capital ahead of the spring construction season and then end the year with a zero balance on the ABL and substantial cash on the balance sheet, as we reduce working capital in the second half of the year.

During 2010, we reduced our net leverage from 4.3x EBITDA to 2.7x, due to both EBITDA expansion and substantial cash generation. In 2011, we expect further improvement in net leverage due to both EBITDA growth and debt reduction.

Now I will turn the call back over to Paul for our 2011 outlook.

Paul Carrico

Thanks, Greg. Before we begin the question-and-answer portion of the call, I'd like to give you a high-level perspective on our view of 2011. The early feedback we are receiving from our North American customers is that 2011 domestic activity will be a modest improvement over 2010.

On the other hand, our global customers expect more growth, and therefore, we expect continued strong exports to these faster growing markets.

We’ve developed our plans based on the following macro assumptions: a slight recovery in U.S. housing starts and a slight weakening in Canadian housing starts; growth in U.S. and Canadian GDP of greater than 2%; and a continuation of strong PVC export demand based on a favorable oil-to-natural-gas ratio.

Given these macro assumptions, we are projecting adjusted EBITDA will grow 18% to 27% in 2011 to a range of $245 million to $265 million. We will invest $75 million to $85 million of CapEx back into our businesses in 2011. In Chemicals, we will make the productivity and reliability investments that are required to run the higher operating rates we expect in the coming years.

In building products, we are investing in productivity improvements, as well as accelerating our new product development efforts ahead of the eventual recovery in these markets.

Finally, I would like to remind everyone that we are having our Investor Day on February 24 in New York City, where we will cover our 2011 guidance, as well as our longer-term view in greater detail. We look forward to speaking with you then.

Now I'll turn the call over to the operator so we can take your questions.

Question-and-Answer Session

Operator

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

Frank Mitsch - BB&T Capital Markets

I will start asking about the one blemish, I guess, on the Building Product side. You mentioned that it was down year-over-year in terms of EBITDA, given higher raw material costs and higher conversion costs. So the question is where do you see that impacting you here in the early part of 2011?

Gregory Thompson

I mean, year-over-year, Frankie, was actually, on the full year, it was up 33%. Quarter-over-quarter, you're right, it was down. And as Paul mentioned in his remarks, a lot of that was the pull-forward in the first half of 2010 of some business due to the tax incentives. We still feel good about into 2011, continuing to expand our EBITDA margins in building products, but we don't expect a lot of help in the U.S. with housing starts and also Canada has softened a bit as well. But we expect EBITDA to grow and EBITDA margins to expand.

Frank Mitsch - BB&T Capital Markets

Now the Exterior Portfolio had it looked like better EBITDA margins. Can you talk a little bit about the integration efforts with that business and what we should expect?

Paul Carrico

We're full bore into those integration efforts. We have teams of people working with the site, as well as the management of that organization for the most part stayed with the group. And of course, all the employees and the plant operations are there. So we're looking forward to moving in a positive way in 2011. And we had, as you know, the information out there of the $10.5 million of EBITDA from last year. And we're planning on improving that in the coming year with all the resources we can bring to bear going forward.

Frank Mitsch - BB&T Capital Markets

So the blended margins for the entity by simple math move up and then you are anticipating a little bit better improvement as you said in domestic housing, not U.S. housing, not crazy but still modest improvement there, so that’ll fall into that business as well?

Paul Carrico

Yes. We think generally speaking, we're going to be still fighting some tough winds out there in terms of the housing market but remodeling should continue to be positive, and we'll continue looking to get into market share improvements by innovation, if nothing else.

Operator

Your next question comes from the line of Andrew Cash from UBS.

Andrew Cash - Point Clearview Management

A question on pricing and then a strategic question. PVC prices, there’s been some -- there's nominations to raise about $0.03 a pound in January, February. But it doesn’t seem to be getting a whole lot of traction. It’s getting pushed off. Several U.S. producers seem to be supporting this. But some others don't seem to be going along. Could you give sort of an outlook for PVC, given some of the poor downstream margins at the pipe converters? Still seems to be some sluggish demand in the pipe market.

Paul Carrico

Yes, I think that generally speaking, the demand domestically is fairly slow for this time of the year, but it's also driven a lot by the poor weather conditions that we've seen over the last month or so, and some of that is to be expected. Normally, when you get into January and February, you're going to lose some amount of operating rate because of the slow starts you get coming back from the holidays, and then the weather’s added on top of that. So that all pushed the demand down. I think people, though, will get past that as we get into the latter part of February and March. You are correct that the price increases have not been fully supported out there. We seem to hear our customers talking about the possibility of some of those people that aren't supporting it moving in that direction. And from our point of view, with operating rates clearly headed to a higher level both because of the spring activity in the market, as well as the export demand continuing to be robust, it should drive the margins higher as we go forward.

Andrew Cash - Point Clearview Management

Strategically, with U.S. home prices still – you got U.S. home prices still sliding, so homeowners may still have kind of a difficult time to remodel their homes and put in some more vinyl sidings. So that just kind of begs the question why now, with the Cranes, Vinyl Siding business? How much of that is repair, replacement, remodeling? Are there some cost redundancies between Royal and Crane? Just help us understand some of the numbers around this.

Paul Carrico

Relative to the sliding house prices, I guess everybody’s got an opinion about that. I think a lot of folks feel like we're either getting there or near there in terms of bottoming out on those prices. It seems obvious to me that in a lot of cases, you can't go out and build a house for some of the prices that are out there now. So sooner or later that's going to catch up with the situation. And in terms of remodeling, you're right. People are a little bit more conservative about where they spend their money. But it's much easier to think about spending money for siding or windows or something like that than a new house at this point. And I think my perspective is that the further we go into this market where we’re not getting into new houses, that remodeling will just continue. People will find some money for doing that. And it's more built around the confidence, I would say, that they would have in their jobs than anything else versus a year or two ago. People can start moving towards the idea of upgrading what they've got.

Gregory Thompson

And, Andy, I would add to that. We think now was the right time to make an acquisition like this given the trough levels in the U.S. And some of the benefits we see of their approach to also use that to drive some of the existing building products initiatives that we have that are more focused in Canada, we can accelerate our growth in the U.S.

Paul Carrico

It fits the portfolio of what we're looking for going forward in terms of a geographic presence. And we do think that you have some demonstrated results from last year, which was certainly not the greatest of years. And we can bring, as I said earlier, resources to bear to improve that performance in certain areas.

Operator

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

Jeffrey Zekauskas - JP Morgan Chase & Co

Can you talk about your utilization rates in Chlorovinyls in the fourth quarter? And whether you expect your utilization rates in the first quarter of 2011 to be higher or lower? Or is that level of business the same?

Paul Carrico

In the fourth quarter, as is typically the case, Chlor-alkali, in particular, we operated at typically higher than the industry rates just because of our integration level there. And so we expect that to continue into the first quarter. And related to the operating rates on the PVC side, in particular, we're much more closely aligned with industry operating rates as a general comment. But going forward, we would expect to be a little bit higher as a general average for the year, just because we've rationalized our business over the last couple of years, and therefore, we would expect to be a little bit higher than what the industry is. We continue, in the early part of the year, to see fairly robust demand as people are replenishing their inventory stock. I think the majority of people lowered them quite low at the end of last year. So you've got that dynamic plus exports don't seem to be slowing down at all at the moment and gives us an opportunity to continue operating at fairly good rates.

Jeffrey Zekauskas - JP Morgan Chase & Co

In your guidance of improved EBITDA for next year, do you assume that Aromatics EBITDA improves?

Paul Carrico

As a general comment, I would say it's in the flat type of range from what we did in 2010.

Jeffrey Zekauskas - JP Morgan Chase & Co

How much of your Chlorovinyls volume did you export in the fourth quarter and in the year? And what are your expectations for next year?

Paul Carrico

On the exports for the year, I would say we were in that 25% type range as a general number. And we kind of expect that to continue in 2011. In terms of the fourth quarter, it was probably a little bit higher than that, just because of the normal seasonal slowdown. First quarter, it kind of depends upon what it takes to replenish everybody's inventory. As I said earlier we're getting a little bit of a good demand domestically just because people need to build their incoming resin back up.

Operator

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

Roger Spitz - BofA Merrill Lynch

We understood that Cumene and Phenol contracts had sort of a contractual lag on those benzene and propylene prices, and tell me if I'm incorrect about that. But we've been hearing from some other parties that sort of Cumene and Phenol pricing is moving more in concert on a near-term basis with the raw material costs somehow. I was wondering what you've been seeing along those lines.

Paul Carrico

In that market, Aromatics in general, as you probably know the market is operating at fairly good effective rates these days both in Cumene and Phenol, and that's as much as anything driven by operating outages particularly on the Cumene side, and you also have the pull from the export side that's stronger, continues to be strong from last year. Relative to the pricing, I think, with the tightness, you get a little bit of a pull there to be closely aligned with the cost. That business has always suffered as much as anything from the movement of benzene and propylene, particularly when it’s more dramatic and is not fairly level. And to the extent it stays in a level mode, the pricing should not be a problem when it moves substantially is where you get into issues. And there, it’s more of an inventory question than anything else, what inventory do you have and how the prices are moving.

Roger Spitz - BofA Merrill Lynch

In January, prices, the raw materials, propylene particular and I guess some extent benzene, have moved quite dramatically. So I'm wondering whether now that January’s come and gone, whether we should expect to see some real margin compression in that business? Or were you able to pass it through?

Paul Carrico

In a rising market, you're going to see a benefit as a general comment, and in a declining market, you start to lose that. So if you go with the current projections, which I think propylene is showing the drop off, I don't remember the numbers on benzene. But you're going to get a benefit as it goes up and you'll get a penalty as it goes down.

Operator

Your next question comes from the line of Charles Neivert with Dahlman Rose.

Charles Neivert - Dahlman Rose & Company, LLC

A question on the acquisition side. Did this company buy PVC from you or from somebody else? Is there going to be a benefit from, in effect, selling them PVC or moving PVC to them? And sort of what other sort of synergies are you guys going to get aside from the usual duplication of headcount, et cetera? And then, sort of on the follow up is about how long do you think it'll take to make the integration before the EBITDA from the company starts to move through into your books, offset the integration costs?

Paul Carrico

I guess on the Resin side, they were supplied by another or maybe a couple of other producers, and so for us although we’ve supplied them in the past, it's relatively new for us at this point in time. In terms of the synergies, we would expect to start generating those as we go into the early period of the move into our businesses. And we're going to have a slow quarter as all building products are going to be slow quarter because of weather, and it's just the history of the business. But second quarter, we would expect to see a contribution from that business that would overcome, certainly, any of our cost for doing the integration.

Charles Neivert - Dahlman Rose & Company, LLC

I guess is some of the integration -- bringing in the company, is there going to be some improvement in their sort of overall buying and cost structure that you guys can bring being that much larger?

Paul Carrico

Yes, there are. There are modest improvements here and there on different things. And I guess the other comment I'd make about the integration this is a business that is well managed as we start off here and so we have capable managers that have been running the business that’ll continue to run the business. And now they have the advantage of learning from us, as well as us learning from them to take advantage of things that we might do as an example more effectively on the operations side. So all of that should move along fairly quickly.

Operator

[Operator Instructions] Your next question comes from the line of Gregg Goodnight from UBS.

Gregg Goodnight - UBS

Would you comment on the traction you're seeing on the announced caustic price increase of $35 to $40 in the first quarter? Is some of that getting through? Or...

Paul Carrico

There was a couple of folks out there that put those $35 and $40 numbers out there. We didn't see that across the board, and so I would say at this point in time, it doesn't feel like that's going to be a factor in the first quarter, kind of see whether or not that plays out to be in the March or April time frame type of realization.

Gregg Goodnight - UBS

We've been watching the trade numbers, PVC export numbers from the International Trade Commission, and they're sort of amazing numbers. In terms of year-over-year, it's indicating that U.S. PVC exports have doubled in the absolute value as, say, 30% to 40% of all domestic PVC productions. So we were wondering if you'd comment on the numbers. Do you believe that exports have actually doubled? Is that what Georgia Gulf has seen? Have your exports doubled on a year-over-year basis? So if you could, just comment on the relative values and the absolute values of those published numbers.

Paul Carrico

If you look at the ACC [ph] type of numbers, you would see something along the lines of what you're talking about. I don't know if it's quite doubled, but it's way up there in terms of a percentage. So that's our experience is that exports are substantially up. We kind of expect them to continue to be substantially up. Georgia Gulf really jumped ahead of the curve about over a year ago, and so we ramped up our sales quite a bit in 2009. 2010 we're fairly flat. So we did not increase, but we already started from a much smaller base in the previous year. 2011, we kind of expect to continue in the same general range. We have kind of a balance between exports, domestic demand external and then domestic demand internal when you look at the building products and compound businesses.

Operator

Your next question comes from the line of Andrew Cash from UBS.

Andrew Cash - Point Clearview Management

Just a little follow-up on the Vinyl Siding business that you've acquired. Roughly what percentage of that business is kind of ongoing; repair, replacement, remodeling?

Gregory Thompson

The majority of it is repair and replacement. I'd say it's probably on the order of 80% or so.

Andrew Cash - Point Clearview Management

And then, if you think about the EBITDA power of the Royal and the Vinyl sidings, if you put it together, maybe you could give us some sort of sales power in the context of the infrastructure that you now have in place. I mean, that way you don't get involved with projecting earnings or something. Maybe you could give us some idea of could you double the volume? What kind of operating rate of the facilities running at and we can put our own kind of EBITDA estimate on that.

Paul Carrico

I would say that as we rationalized our plants, we tried to do it in and leave a reasonable room to take advantage of the market when it recovers. And so as a really broad general comment, I would say the plants are in that 65% to 75% range of operating for 2010. So as you move forward, you've got the opportunity to revisit that and say, "All right, what's going to happen in '11 and '12?" And so a certain amount of that you can recover just based upon the existing facilities. And then as we spend our capital in this year and next, we're going to look for advantages and opportunities to upgrade different extrusion equipment in the various operations, so we can actually increase above that without going to a greenfield site. So at a minimum, you'd like to think that we're in that 20%, 25% range that we can increase with existing facilities.

Andrew Cash - Point Clearview Management

Is there any export business I mean out of North America, from this Vinyl siding? Or is it strictly kind of a domestic business?

Paul Carrico

Well, ironically, we do sell a little bit export-wise on siding with our existing previous business. But it's not of any significance.

Operator

Your next question comes from the line of Laurence Jollon from Crédit Suisse.

Laurence Jollon - Lehman Brothers

In terms of your EBITDA guidance, if I assume that the incremental EBITDA year-over-year assuming Aromatics is relatively flat, I would assume that it's driven by a combination of factors: one, the Crane acquisition; two a slight improvement in building products; and more importantly, year-over-year improvement in PVC. And if that's the case, I'm just wondering if you could comment or reconcile versus CMAI. And I know CMAI is just one estimate out there. But they're actually looking for ECU margins to moderate slightly as caustic moderates and then integrated PVC margins to remain relatively stable. So I'm just trying to get a sense for where that year-over-year PVC EBITDA improvement could come from.

Paul Carrico

I don't have all the specifics of their numbers. But as a general comment, I do know that there's the expectation of the potential to soften the ECU value as we get later into the year, and we’ve certainly baked a little bit of that into our process. But in terms of PVC in particular, last year the first quarter was more or less a disaster. If you recall, in late 2009 and early 2010, ethylene had that big spike up, with allergies [ph] and various other things going on, and we really couldn't keep the margins to any positive territory whatsoever. So we don't expect a repeat of that. We expect the operating rates to be I’ll say okay to good depending on how the export side of the equation goes. And the slowness of the price increases this year kind of attest to that. It's still a little bit uncertain as to where that all lines up. We did not get the price increases that were announced for January and February. So it still remains to be seen, but it's still going to be clear that it'll be better than the early part of last year.

Laurence Jollon - Lehman Brothers

As you all are well aware, some equity investors may not, but you have an ability to call 10% of your most sizable bond issue per year at a price of $1.03 [ph]. So I just wanted to get your comments on whether you're willing to utilize that feature. And if so, would it be sort of summer or fall after you get through your working capital seasonality?

Gregory Thompson

Yes, I mean, that's something we continue to look at. As you know we did announce the buyback on the 2013 and 2014 bonds last night when we released earnings. And so we continue to look at that relative to the 2017 bonds as well. And it will all be a view as to what's the best way to drive shareholder value, including investing in the business and growing the business. We do have some additional CapEx that we think makes a lot of sense for us this year to continue to invest in the business. So we will definitely continue to evaluate that. So might conclude it makes more sense later in the year to, in fact, buy them in. But no plan right now to do that.

Operator

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

Jeffrey Zekauskas - JP Morgan Chase & Co

On the SG&A side, excluding the acquisition effects, do you expect your SG&A costs to grow next year, in 2011?

Gregory Thompson

Yes, I do, Jeff, for a couple of reasons. We had held the line on any salary increases and also 401(k) matching and those kinds of things. And we restored some of that to second half of 2010. So we'll see the full year cost of that coming through, as well as we're making some investments to grow in the Building Product side, as well, for new products and sales growth particularly in the U.S. And so there is some SG&A growth expected there. Including the acquisition, I would say -- kind of including the Exterior Portfolio acquisition, I would say, I'm kind of looking for a quarterly range of SG&A from $45 million to maybe $50 million a quarter for SG&A going forward in 2011.

Jeffrey Zekauskas - JP Morgan Chase & Co

And then lastly, in terms of your, I guess, cost of credits or however one wants to conceptualize that, I take it that you expect them to be larger in 2011 than they were in 2010, notwithstanding a possible diminishment of the margin at the end of the year.

Paul Carrico

You're talking about the ECU value?

Jeffrey Zekauskas - JP Morgan Chase & Co

The ECU contribution.

Gregory Thompson

That's right.

Paul Carrico

As a general comment, yes.

Operator

And your next question comes from the line of Laurence Jollon from Crédit Suisse.

Laurence Jollon - Lehman Brothers

Are you hedged in any part for natural gas next year or for this year, I should say?

Gregory Thompson

We do some short-term hedging, Laurence, really to kind of take the peaks out of natural gas during the winter time when it can spike up some, depending upon winter weather and cold weather and also we do have some in the summertime, related to hurricane season. But we have some hedges in the first quarter and small amount into the second quarter. But nothing all that significant, and usually well less than 50% or so of our natural gas needs do we have any hedges.

Laurence Jollon - Lehman Brothers

I think you said in the past that every dollar change in natural gas is roughly a $20 million impact, positive or negative, on EBITDA. Is it still roughly the same?

Gregory Thompson

Yes, it's actually more like about $25 million or so.

Operator

There are no further questions in the queue at this time.

Martin Jarosick

Thanks, everybody, for joining us on the call. And we look forward to speaking with you at Investor Day next week.

Gregory Thompson

Thank you.

Operator

This does conclude today's conference call. You may now disconnect.

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