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Executives

Martin Jarosick - Executive Director of Investor Relations

Gregory C. Thompson - Chief Financial Officer and Principal Accounting Officer

Paul D. Carrico - Chief Executive Officer, President and Director

Analysts

Gregg A. Goodnight - UBS Investment Bank, Research Division

Bill Hoffman - RBC Capital Markets, LLC, Research Division

Brian Maguire - Goldman Sachs Group Inc., Research Division

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

Christopher W. Butler - Sidoti & Company, LLC

Andrew W. Cash - UBS Investment Bank, Research Division

Charles N. Neivert - Dahlman Rose & Company, LLC, Research Division

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

Unknown Analyst -

Roger N. Spitz - BofA Merrill Lynch, Research Division

Georgia Gulf (GGC) Q3 2011 Earnings Call November 3, 2011 10:00 AM ET

Operator

Good morning. My name is Renée and I will be your conference operator. At this time, I would like to welcome everyone to the Georgia Gulf Third Quarter Financial Results Conference Call. [Operator Instructions] Mr. Martin Jarosick, Executive Director of Investor Relations, you may begin your conference.

Martin Jarosick

Thank you, Renee, and good morning, ladies and gentlemen. Thank you for participating in today's conference call to discuss Georgia Gulf's third quarter 2011 financial results. There are slides available to you on Georgia Gulf's website. These slides are for your reference. 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 could cause actual results to differ materially from our current outlook. A listing of factors that could affect future results is included in our 2010 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 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 a review of the third quarter. Paul?

Paul D. Carrico

Thanks, Martin, and good morning, ladies and gentlemen. We appreciate you joining us this morning. Our third quarter net sales increased by 23% and, adjusted EBITDA grew 3% to $80.1 million compared to $77.6 million for the same quarter last year. This is the highest adjusted EBITDA we have generated since the third quarter of 2007. We're encouraged that we are approaching record levels of adjusted EBITDA generation for Georgia Gulf in an environment that continues to be near a record low housing activity in the U.S. This low level of activity is combined, as you know, with significant uncertainty in global economic conditions. The results demonstrate just how we have been able to adjust our cost structure to market conditions.

Despite the challenges we faced during the first 3 quarters of this year, we still generated $46.9 million more adjusted EBITDA than we did in the first 3 quarters of 2010. This strong performance was led by our Chlorovinyls segment and supported by improvement in the Building Products segment. For the quarter, our Building Products segment improved its adjusted EBITDA substantially over the third quarter of 2010. And it is ahead of 2010 on a year-to-date basis even though North American building and construction markets are softer than last year. We continue to be focused on this segment on managing costs to help offset the unfavorable impact of poor set of conditions in housing, and to position our business for the eventual upturn by developing new and innovative products. An example is our double snap window systems, which recently earned a Crystal Achievement Award from Window & Door magazine as the Most Innovative Window Component of 2011. Similarly, as you might have seen in Tuesday's press release, we have rebranded Royal building products to emphasize our commitment to working with contractors and homeowners across North America to help them build neighborhoods of lasting value.

Turning to our Chlorovinyls segment, in the third quarter, we generated $61 million of adjusted EBITDA, in line with the third quarter of 2010. The flat results were achieved as higher ECU values offset lower sales volumes. During the third quarter, we experienced several operating interruptions in our chloralkali units that caused us to lose about 15,000 tons across the chlorine production. Our Building Products segment generated $24.7 million of adjusted EBITDA in the third quarter of 2011, compared to $14.2 million of adjusted EBITDA for the same quarter last year. This 74% increase was a result of improved conversion costs, the adjusted EBITDA contribution from Exterior Portfolio acquisition and lower SG&A. The results were partially offset by higher raw material costs.

Our Aromatics segment reported $2.1 million of adjusted EBITDA compared to $12.4 million of adjusted EBITDA in the third quarter of last year. This decline was driven by a $9.3 million inventory write-down due to sharply falling benzene and propylene prices. Volatile benzene and propylene prices created a large inventory holding gain in the first quarter, but inventory write-downs in the last 2 quarters have more than offset the initial gain of the first quarter. As Greg will go through in detail, our business generated about $72 million of free cash flow in the third quarter. We recently put some of that cash to use by redeeming $41.9 million of long-term debt ahead of schedule. And we also plan to pay off another $18.2 million of long-term debt by year end. This will bring our total long-term debt reduction in 2011 to over $82 million.

Finally, I'd like to point out that our employees continue to perform at a very high level in the area of safety. This is important because we believe that safety is an indicator of overall business performance. In August, our U.S. chemical plants and North American compounding facilities reached the one-year mark without a recordable injury. Leading the way was our Lake Charles facility, which has gone more than 5 years without a recordable injury. Just as impressive is our Building Products division, which continues to drive down its total recordable injury rate. In the 5 years since Royal Group was acquired, the injury rate improved nearly 80%. These are significant achievements in this area, and I'm extremely proud of all of our employees for their ongoing commitment to safety. At this time, I'll turn the call over to Greg to review our financial results in greater detail.

Gregory C. Thompson

Thank you, Paul. Good morning, ladies and gentlemen. Net sales in the third quarter were $929.6 million, an increase of 23% over the same quarter last year. The increase is primarily due to higher sales prices and the Exterior Portfolio acquisition, partially offset by lower sales volumes in Chlorovinyls. Let's look at our operating performance during the quarter. We reported operating income of $54.4 million for the third quarter of 2011, compared to operating income of $53.2 million during the same quarter the previous year. SG&A expense for the third quarter of 2011 was flat compared to the third quarter of last year at $43.4 million. Our net interest expense for the third quarter was $16.7 million compared to $17.3 million for the third quarter last year. For the third quarter, we reported tax expense of $3.5 million and an effective tax rate of 9%. The low effective tax rate for the quarter is primarily due to the release of $8.1 million of tax reserves that relate to Royal Group prior to its acquisition in 2006. For the full year, we are revising our tax rate guidance from approximately 30% to approximately 20%. We have lowered our full year tax rate guidance because we have resolved tax issues more favorably than we had originally forecast. Please be aware that this estimate is highly sensitive to how much of our projected taxable income is earned in Canada versus the U.S. and to certain other tax assumptions, in particular assumptions related to the resolution of tax issues dealing with Royal Group prior to its acquisition by Georgia Gulf in 2006.

In the Chlorovinyls segment, third quarter 2011 net sales increased to $347.2 million from $316.7 million during the third quarter of 2010. The segment posted operating income of $46.3 million compared to operating income of $46.1 million during the same quarter in the prior year. The increase in net sales and operating income was primarily due to higher caustic soda and resin sales prices compared to the third quarter of 2010, mostly offset by lower sales volumes, particularly the caustic chlorine volume lost due to the production interruptions Paul mentioned recently.

In the Aromatics segment, net sales increased to $319.9 million for the third quarter of 2011 from $218.4 million during the third quarter of 2010. The increase was primarily due to higher sales volumes and higher sales prices. During the third quarter of 2011, the segment recorded operating income of $1.7 million compared to operating income of $12.1 million during the same quarter in 2010. As Paul mentioned earlier, the market price for benzene dropped about 17% and propylene declined approximately 28% from mid-September to early October, resulting in a $9.3 million lower of cost to our market write-down of inventory held at the end of the quarter.

In the Building Products segment, net sales were $262.5 million for the third quarter of 2011 compared to $222.9 million during the same quarter in the prior year. The sales increase was driven by the acquisition of Exterior Portfolio. The segment's operating income was $14.3 million for the third quarter of 2011 compared to $5.6 million during the same quarter the prior year. The increase in operating income was primarily due to improved conversion costs, the addition of Exterior Portfolio and lower selling, general and administrative costs, offset in part, by higher material costs and a less favorable geographic product sales mix.

The total FIFO impact for the company for the third quarter of 2011 was negative $10.9 million, almost all in Aromatics due to the lower of cost to our market inventory write-down I mentioned earlier. In the third quarter of 2010, the FIFO impact was negative $600,000, with most in Building Products.

Now, let's discuss working capital. We define controllable working capital as accounts receivable plus inventory, less accounts payable. As you know, we historically invest working capital in the first half of the year and recover most of that working capital in the second half due to the seasonality of our business. Compared sequentially, controllable working capital decreased by about $53.1 million since June 30, 2011. This sequential decrease was driven by an increase in accounts payable, with seasonal decreases in both accounts receivable and inventory. Compared to the third quarter of last year, controllable working capital increased by $48.3 million, driven by the 23% increase in net sales, the addition of Exterior Portfolio and sizable increases in raw material costs, especially propylene, benzene and ethylene. Our cash conversion cycle improved by 2 days compared to third quarter last year, mostly due to some improvement in building products, cash conversion cycle and Aromatics payables.

On the cash flow statement, you will note that we generated $92.6 million of cash from operating activities as compared with $32.5 million for the third quarter of 2010, mostly as a result of the higher working capital reduction in the current period. Capital expenditures were $20.4 million for the third quarter of 2011 compared to $11 million in the third quarter of 2010. For the full year, we have reduced our CapEx target to approximately $70 million from the $75 million to $85 million range earlier. This will result in free cash flow from operations of $72.2 million for the third quarter of 2011 compared to $21.5 million of free cash flow in the third quarter of 2010. At the beginning of the year, we established free cash flow guidance of $60 million up to $120 million, excluding the Exterior Portfolio acquisition. We now expect at least $100 million of free cash flow for the year. As we have mentioned previously, our primary uses for excess cash flow are to pay down debt and fund accretive growth. On October 20, we redeemed all $41.9 million of our outstanding 2016, 10 3/4% senior subordinated notes. This is in addition to the $22.2 million balance of our 2013 and 2014 senior notes we redeemed in early April. We also expect to repay an $18.2 million secured note by the end of the year for a total long-term debt reduction of $82.3 million in 2011. Based on this debt paydown and our projected adjusted EBITDA and free cash flow, we expect to end the year with only the $500 million, 2017 secured notes remaining in our debt structure, no cash drawn on the $300 million ABL facility and somewhere around $75 million of cash on the balance sheet. Now, I will turn the call back over to Paul for our 2011 outlook.

Paul D. Carrico

Thanks, Greg. Before we begin the question-and-answer session for this call, I want to comment on our 2011 guidance. We started the year with adjusted EBITDA guidance of $245 million to $265 million based on the expectation of a modest improvement in macroeconomic conditions, including a 10% increase in U.S. housing starts. On our first quarter call in May, we increased our 2011 adjusted EBITDA guidance to a range of $275 million to $295 million based on a more positive outlook, primarily for caustic prices, PVC margins and export prices and volumes. However, we have seen a steady decline in PVC export prices and PVC margins due to destocking and reduced demand late in the third quarter, and so far, into the fourth quarter. As many others have noted, the current uncertainty in global markets has negatively affected our customers, and they are very cautious about their buying patterns and inventory levels. Based on current data, housing starts in the U.S. and Canada will likely be less than 2010. Natural gas prices and caustic prices continue to be favorable through our initial guidance, but PVC export and domestic prices and volumes are not. Additionally, the propylene and benzene price declines have exceeded our expectations and created significant inventory write-downs in the last 2 quarters. Based on our current view, we are revising our guidance to $245 million to $255 million of 2011 adjusted EBITDA, which is the lower half of our initial 2011 guidance. We are also revising our free cash flow guidance to about $100 million, which is on the top half of our initial 2011 free cash flow guidance of $60 million to $120 million. I'll now turn the call over to the operator so we can take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Brian Maguire of Goldman Sachs.

Brian Maguire - Goldman Sachs Group Inc., Research Division

I just wanted to spend a minute on the production outage issue. I just wanted to confirm that this is separate from the second quarter outages you had. And then also, were you able to source chlorine from other providers such that your PVC sales weren't impacted by it?

Paul D. Carrico

Yes, it was separate from the second quarter and I'd say generally speaking, we got what our needs were but the volumes in general were down a little bit on PVC for the quarter.

Brian Maguire - Goldman Sachs Group Inc., Research Division

That volume decline had little to do with the outage and it was more due to just market conditions?

Paul D. Carrico

Maybe a mix of both.

Brian Maguire - Goldman Sachs Group Inc., Research Division

Okay. Do you kind of have a size for the decline? I mean was it down single-digit percentages or double-digit percentages? And within the quarter, did it kind of accelerate towards the end of it or was there much of a difference in trend in the 3 months in the quarter?

Paul D. Carrico

In terms of the operating rates, we continued to be above the industry rates. So it was just the opportunistic sales we might have done in different circumstances.

Brian Maguire - Goldman Sachs Group Inc., Research Division

Okay, great. And then when you're talking to customers, is it your sense that a lot of the volume declines are being driven by destocking? And do you have a sense in talking to them, when they might have to change their buying patterns?

Paul D. Carrico

General comment is, and we're fortunate because we can see Building Products going out the door in terms of that variation from week to week, but the patterns had more or less remained seasonally the same. And I'm a big believer in watching that. So I think it has been a fair amount of destocking going on because of the uncertainty in the market and some dropping prices. And my expectation is that could possibly continue on through November and December until we start to getting into the new year where they start to pick back up.

Brian Maguire - Goldman Sachs Group Inc., Research Division

And just one last question on the Aromatics chain. Your strong volumes and sales there, any sense why that's holding up so much better than the other kind of commodity markets? And also, you shipped in more of your pricing to shorter term and more market-based rates.

Paul D. Carrico

We've gradually moved a little bit in that direction, but also the structure of the industry is still in the process of changing, in the North American market in particularly, and for us, cumene is a big part of our opportunity out there in the market now. And so that continues to be more in balance with phenol capacity in the U.S. and would expect that to more or less continue into the next year.

Operator

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

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

I just wanted to ask a question, too, on Building Products. Obviously, very nice results here. Can you talk about the pricing that you're seeing in that business and the competitive dynamics? Because we had heard from some other corners that, that business had become even more competitive, if that's possible. So could you spend a few moments expanding upon that?

Paul D. Carrico

Yes. I think the challenge has been with the progressively increasing prices in things such as resin and particularly additives that go into making all those products. It's been a catch-up mode all year long to get some decent margins there. And results are nice, as you said, in the terms of where we've gotten to, but still less than satisfying when you look at the long term. So we're trusting that the market will adjust to whatever type of price levels we get to and to those margins will get more stabilized as we go into the new year. But as long as there's a demand level that is down, it does make it challenging. What you've got this quarter is kind of a double whammy in the sense that there is the normal seasonal slowdown through November and December as people take outages for holidays and such. And then you got all of this uncertainty in the world about what's that going to bring for next year. So it's probably a bit of an overreaction to buying patterns, which then pressures the margins on prices.

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

As you're looking at the fourth quarter in particular, correct?

Paul D. Carrico

Yes.

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

And then just looking at the third quarter, how much did -- was it Exterior Portfolio? How additive was that to your efforts there? How should we think about that in terms of the year-over-year change?

Paul D. Carrico

I'd probably steer you back to what we originally had in the way of projections when we acquired the business. And it's been down a bit, but not dramatically.

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

Okay, all right. And then lastly, obviously, sales up significantly. A lot of that is raw materials in terms of year-over-year. But SG&A held flat. What was the secret there?

Gregory C. Thompson

Yes, it's -- we continue to focus on kind of minimizing our cost structure, Frank. So I mean the big -- in terms of the comparison between third quarter this year and third quarter last year, it was really overall compensation, labor cost-related. And part of it, too, is in terms of it being flat this third quarter versus third quarter last year, is the fact that we brought down our guidance. And so with that, we reduced some of our incentive compensation, bonus accruals in the third quarter. And sooner, it was several million dollars of benefit in SG&A in the current quarter related to that, too.

Operator

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

Bill Hoffman - RBC Capital Markets, LLC, Research Division

Paul, I wonder if you could talk a little bit about to the export market. You mentioned some of the softness you're seeing now, and obviously, were expected this time of year. But as you look into next year, any thoughts on where they may be headed?

Paul D. Carrico

Yes. Typically, what happens is you see the export market react to what's going on both domestically and internationally. And clearly, there was a sentiment out there added on, as I mentioned earlier, to the fact that there was a seasonal decline. So it just fed the fire in terms of lowering the prices and the margins. I think generally speaking, North America can still compete just as well in the export market. It's just that the prices are not as nearly as attractive and you start asking yourself whether it's worth doing at some point. So that's kind of where we are. I would say, generally speaking, it looks like it's bottomed out at this point. As we go into the next year, I don't see anything just yet that would change the outlook in terms of the normal buying patterns into 2012 that we typically see, which is a pickup in the spring. First quarter starts to move up and then spring picks up. And once that happens domestically, that will again push some pricing back into the export market.

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

And historically, you guys have been under sort of industry averages on the percentage of exports. Are you still sort of tracking below the industry averages or are you looking at that to expand that next year?

Paul D. Carrico

I would say as a general comment, we're probably not going to expand that unless the domestic demand would fall off dramatically. And I don't expect that, so my guess is we'll be in the same general range next year as this year.

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

Okay. And then just shifting to the Building Products business, I just wonder if you could comment, you talked a little bit about this sort of increasing competitiveness there. As you look at sort of potential or additional bolt-on acquisitions, what does the pipeline look at or evaluations coming down? Can you just give us some color there?

Paul D. Carrico

In terms of bolt-on acquisitions for us, I think at this point, we -- perhaps there's something very small out there, but this kind of market environment doesn't really encourage you to go do something that's expensive, which most of them are. And then we still really have a lot of opportunity internally, both with our capacity that we have in the existing plants as well as we're really focused on innovation and trying to add new products which bring more sales revenue in different areas that we've participated in, in the past.

Operator

Your next question will come from the line of Andrew Cash with UBS.

Andrew W. Cash - UBS Investment Bank, Research Division

So I think you gave some guidance there for free cash flow for the year. If we add back roughly $7 million in CapEx to that number, I guess you're looking for cash from operations around $170 million. Is that a fair number for the year?

Gregory C. Thompson

Yes. Yes, somewhere in that range.

Andrew W. Cash - UBS Investment Bank, Research Division

So that would mean you're still looking for -- I guess you're looking for a fourth quarter cash from operations similar to last year's $150 million number?

Gregory C. Thompson

Yes. That's right, Andy.

Andrew W. Cash - UBS Investment Bank, Research Division

Okay. So, I mean, working capital has been a big hurdle for you guys this year. I mean as far as working capital per unit, is working capital per unit about the same as last year or are there some opportunities to work that down? Are your customers not paying as fast as they were a year ago? And how's that whole working capital outlook?

Gregory C. Thompson

Well, yes. I think overall, the quality, I would say, and the way we measure that is in terms of number of days, net days of working capital is the best way to look at it, it actually improved 2 days this year versus 2 days last year even though the dollars were significantly more working capital that we had, probably, what is it, $50 million or so more networking capital at the end of Q3 this year than Q3 last year. But that's really all because of the top line growth in the business with a lot more volume going through. And so, I think the quality is good. It's just that additional top line volume that causes us to carry a bit more working capital. And so as we get to the fourth quarter now and the top line volumes of the business decline, we have that seasonal unwind, as we call it, generating the substantial cash flow in the fourth quarter.

Andrew W. Cash - UBS Investment Bank, Research Division

Okay. Now, one other thought here, and this relates to the, your working capital going forward in CapEx. Ethane prices have been stubbornly high here and you know the different opinions out there, but assuming they stay relatively high over the course of the next 6 to 12 months, have you -- are you making any plans? Are you trying to work working capital lower, maybe CapEx a little bit lower next year just in anticipation that your cost structure may be a little bit higher relative to some of your competitors outside the U.S?

Paul D. Carrico

You're talking about ethane or ethylene?

Andrew W. Cash - UBS Investment Bank, Research Division

Right. Well, ethane feeding through the ethylene, which means that your costs may be a little bit higher. You may be a little less advantaged next year as you perhaps were, especially earlier this year when ethane was a lot cheaper.

Paul D. Carrico

Yes. I'm thinking that it's too early to call all of that, but certainly, what we've done as we've gotten towards the end of this year, is we're managing to what the business gives us. And my guess is if that is a factor next year and causes us to pull back a little bit, it's going to be on those really marginal sales that don't generate so much cash income anyway. So I don't think that's going to be a major factor in our operating plans for next year.

Andrew W. Cash - UBS Investment Bank, Research Division

So do you -- just finally, do you have an outlook for your CapEx for next year?

Paul D. Carrico

No, we're still working on our budgeting process and we also kind of like to know what the outlook is from the economy and housing, and we're still debating that, so don't have that firmed up yet. But again, what we're focused on is either making opportunistic investments or managing cash. If the market's down, then we'll react accordingly.

Operator

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

Roger N. Spitz - BofA Merrill Lynch, Research Division

How did you finance the October 20 redemption? How do you plan to advance the, I guess it's a fraction of your PIK notes. Is that free cash flow from ops, cash, revolver borrowing that you will subsequently repay?

Gregory C. Thompson

Our cash within the month, it can bounce around to fair amounts, so it kind of depends on where we are. But on balance, we'll wind up the end of the year with a substantial amount of cash on the balance sheet and the ABL completely paid off. So the recent notes that we've paid off, there was -- that was mostly cash available that we had. But within the month, we might have been borrowing some.

Roger N. Spitz - BofA Merrill Lynch, Research Division

Okay. And with chlorine and housing demand down, it looks so much in Q4, do you think that -- I know there's some caustic price increases on the table, but do you think we could see more of that, something akin to what was happening in Q4 '08 as chlorine demand just sort of dries up here?

Paul D. Carrico

You mean should the volume should drop off if the [indiscernible]. Are you asking if the volumes were to drop off even more substantially? Is that what you're...

Roger N. Spitz - BofA Merrill Lynch, Research Division

Yes.

Paul D. Carrico

What we see, and I mentioned this earlier in the pattern of week-to-week sales, is that it's kind of following a normal pattern despite all the press out there about things slowing down so dramatically. So the pattern is kind of staying the same, which means that yes, there's going to be reduction from the normal demand, which occurs as people take outages in Thanksgiving and Christmas, and that's typical. What's not necessarily always the case is what seems to be this destocking. So I think we sort of baked in right now some amount of all that, and to think that it would be majorly different, I guess I would be surprised at this point.

Roger N. Spitz - BofA Merrill Lynch, Research Division

Okay. And what -- has your timing on the various initiatives to build or participate in chloralkali ethylene, other things, has that changed in your mind, or been pushed back as you wait to see how the economy unfolds here?

Paul D. Carrico

Not really. The things that we're doing with investments takes a fair amount of time to do planning and engineering and such. And so there would still seem to be that opportunity to generate cash such that we could take advantage of those opportunities. And at this point, we're still working on them at the same pace that we had earlier this year. There's nothing that we're seeing right now that causes us to change our thinking about that.

Operator

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

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

Can you elaborate a little bit on what the nature of the chloralkali outage was? That is what the source of it was and what do you think about your future operating rates from a mechanical point of view from here?

Paul D. Carrico

I would -- they were brief failures of electrical things and I'll say at other mechanical areas. So it's an area that we were disappointed with this year for sure, and we are currently planning a turnaround for next year. And so, we're trying to be very thorough in going through that process and getting that back to our normal expectations.

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

Okay. And in terms of your capital plans over the next 3 years, do you believe that likely, that you'll have a larger capital project, either connected with integration into ethylene or integration into, further integration into chloralkali?

Paul D. Carrico

If you look at several years, yes, we would expect some amount. But as I mentioned just before earlier here, that engineering and prep work, it all takes a fair amount of time. And then you've got the start of construction. And so during a 3-year period, it's not massive amounts, in my opinion, right at the moment.

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

And do you think that the integration would come first in ethylene or in chloralkali?

Paul D. Carrico

Still working on all of those options, so I haven't got an answer for you on that so.

Operator

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

Gregg A. Goodnight - UBS Investment Bank, Research Division

Just for clarity, you mentioned the FIFO impact to $10.9 million in a $9.3 million right now. I assume that the $9.3 million is within the $10.9 million?

Gregory C. Thompson

It is. Yes, it is. And it's all related to -- both of those are all related to Aromatics.

Gregg A. Goodnight - UBS Investment Bank, Research Division

Okay. And I wonder why you called that out differently. Is it something different in your handling of what you normally have reported as a FIFO impact or?

Gregory C. Thompson

Well, I think in the past, maybe we haven't been crystal clear on the lower cost to our market and exactly how that's included in FIFO. So we have made some refinements to the FIFO calculation just in terms of the way we do it, but it hasn't really changed the amount that we report all that significantly.

Gregg A. Goodnight - UBS Investment Bank, Research Division

Okay, great. For the fourth quarter, could you comment on how much FIFO impact is baked into your $245 million to $255 million annual EBITDA estimate?

Gregory C. Thompson

Yes. I would say we don't have, I mean for -- I guess the big swing factor has been Aromatics for us throughout the year. And right now, in our forecast, we don't have a big plus or minus either way in Aromatics for the year, for the fourth quarter related to FIFO impact.

Gregg A. Goodnight - UBS Investment Bank, Research Division

Okay, excellent. Second question, if I could. The export prices for PVC have dropped, but the good news is they've leveled off, the bad news is they've leveled off at a fairly low level. Platts is reporting about $0.35. I thought I had heard you comment that your expectations for exports in 2011 or -- excuse me, 2012 are similar to 2011. My question is can you be confident, this with ethylene over $0.50 a pound, ethane over $0.93 a gallon, of -- do you have a high level of confidence that your exports are going to hold up through 2012?

Paul D. Carrico

It's certainly too early to predict that. It all gets back to a supply demand balance. What I do have confidence in is that the demand, domestically, will improve as we go into the early spring and spring of next year. And then the remaining portion of that demand, which is the export side of the equation, kind of depends upon the global outlooks. And to say what that's going to be absolutely, I can't predict that at this point.

Gregg A. Goodnight - UBS Investment Bank, Research Division

On a relative basis, are you looking for up, down, flat? Or is it just too hard to call at this point?

Paul D. Carrico

That's -- I guess the basic expectation is North America still will be able to compete. So it comes down to whether there is margin that's more attractive than where we are right now. And that's too hard to call at the moment.

Gregg A. Goodnight - UBS Investment Bank, Research Division

Okay. Another question, if I could. I thought you had mentioned that your impact for your chlorine outage was 15,000 tons?

Paul D. Carrico

That's right.

Gregg A. Goodnight - UBS Investment Bank, Research Division

And that seems to be a reasonably big outage, maybe 12% of your capacity, equivalent to maybe 11 days. Do I have that sized properly?

Paul D. Carrico

Capacity-wise percentage, yes, it's in the range.

Gregg A. Goodnight - UBS Investment Bank, Research Division

Okay. Last question, cumene, merchant cumene sales, could you typify your level in the third quarter? Was it negligible, minor, high?

Paul D. Carrico

I'm not sure I'm following the question.

Gregg A. Goodnight - UBS Investment Bank, Research Division

The cumene merchant market sales to your third parties, not the internal use of the cumene.

Paul D. Carrico

I think it's been consistently up. I don't -- it's been consistent that it was still fairly strong during that period. And if I can speak to it maybe as industry operating rates, we were about in the same range as the industry. And as you know, we've got a fairly sizable cumene operation so that gives you an idea.

Operator

Your next question will come from the line of Christopher Butler with Sidoti and Company.

Christopher W. Butler - Sidoti & Company, LLC

Sorry if this was answered right at the beginning because I had disconnected momentarily, but expected maintenance outages for you in the fourth quarter or any direct customers, and what the impact there would be?

Paul D. Carrico

Well, with demand being down, impact to customers related to volumes is not an issue. And in terms of outages, we do have one in Lake Charles. That's the majority of it.

Christopher W. Butler - Sidoti & Company, LLC

And as we look at your CapEx and having brought the expectation down a little bit this year, should we look at that different or something that gets applied next year? And what was it that didn't take place that you were originally expecting to?

Paul D. Carrico

Well, it's just a recognition that the economy didn't give us what we were hoping for earlier in the year. And we said to ourselves, it's time to react a little bit on the cash side, and so, we dropped that a bit. It's projects that we can come back to and play out into next year. And as to how that influences next year, it really depends upon when we get past the early part of the year, when see where the economies are going, both domestically and globally. It's certainly a full global market these days, and you got to see how both of those pieces play out.

Christopher W. Butler - Sidoti & Company, LLC

And as you look to next year with the 2017 notes, any initial thoughts on how you plan to handle those with cash here over the next couple of years?

Gregory C. Thompson

I mean we'll continue to look at that, Chris, as we always have relative to what makes the most sense relative to our cash generation between debt paydown versus funding accretive growth. And so this year, after the Exterior Portfolio acquisition, really all that other cash flow, we've utilized to continue to pay down debt of a substantial amount this year. And so I think as Paul said, we want to look next year to striking that right balance between how we can best drive shareholder value with that balance between further debt reduction, if that makes sense, or if we see some high return, high impact projects funding, making further investments for growth.

Operator

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

Charles N. Neivert - Dahlman Rose & Company, LLC, Research Division

Just a couple of quick things, a little cleanup. You've talked about the tax rate for '11, is that going to continue on into 2012 as well, the lower rate? Should we use that going forward or as we'll go back to where we were?

Gregory C. Thompson

Yes, a part of that will be dependent on our budget, budget that we haven't really locked down internally. But I was -- the 20% guidance that I said we're now using for 2011, I would expect it will be higher than that. We do have this mix issue between how much profitability we generate in Canada because in Canada, with the net operating losses and tax attributes, we are effectively paying a 0% rate versus in the U.S., we're more up around the statutory rates. So that mix can make a big difference going forward, but the big benefits that we've gotten is releasing some of those tax reserves that we had related to pre-acquisition Royal. And those tend to be pretty, pretty lumpy, so I certainly wouldn't bake those into any of our expectations for 2012 and the tax rate for 2012.

Charles N. Neivert - Dahlman Rose & Company, LLC, Research Division

So we should bring the tax rate for 2012 back to where we were normally, which is in the 30s?

Gregory C. Thompson

Yes, I'd say maybe -- yes, I would say somewhere in that 30% or so range, I would think just based upon what our mix of business has been so far between U.S. versus Canada.

Charles N. Neivert - Dahlman Rose & Company, LLC, Research Division

Okay. And as you talked about the chloralkali operation not really meeting expectation in terms of operations and you've got a turnaround that you're talking about for next year, between now and the turnaround, are you guys generally going to be able to, again assuming no other issues pop up, but based on what's now running, can you guys run at full rates? Are you going to be -- are you going to have to run at a somewhat lower than ideal rate going into the turnaround because of what's going on there? Or what's the situation going forward into the next turnaround?

Paul D. Carrico

Yes, we don't know of anything at this point that would cause us to be anything more than typical operating rates. It's more about just being sure we've covered all the bases and reviewing the operations and making sure that future limitations don't pop up. But between now and the turnaround, there's nothing known that's inhibiting our rates.

Charles N. Neivert - Dahlman Rose & Company, LLC, Research Division

And are you guys still buying all the gas for the cogent on the spot or has there been any opportunities to hedge some of it going forward? There have been some low points in gas, did you take any opportunities to deal with it then or you're just still spot?

Paul D. Carrico

We always do a little bit here and there. But as you know, the price of gas has kind of dropped to some pretty nice levels at this point. So I'd say in the current market, the majority of it is in a spot-contract basis pricing.

Charles N. Neivert - Dahlman Rose & Company, LLC, Research Division

And lastly, after you do the last sort of bit of cleanup on the current, on the debt that you're working on, you leave yourself in a position with just that $500 million, you've got cash on the balance sheet. Do you look at this as sort of in relationship to all the other metrics you would use against this, where you want to be in terms of numbers? Or is this a little high, a little low? I mean given your chudders going forward, where would you like to be on this?

Gregory C. Thompson

I think it puts us at a good point, Charlie. So I mean if you just -- so based upon those numbers, then if you leave off to the side, that lease obligation, which is capitalized, actually puts us at less than 2x net debt as of the end of the year, which I think is a pretty good place to be and gives us a lot of flexibility to make what we think are the right ways to drive shareholder value going into next year. And so it's all based upon those kinds of accretive growth opportunities, short-term and long-term and how robust returns are versus further continued paydown of debt.

Operator

Your next question will come from the line of Bill Young [ph] with Ken Spink [ph] .

Unknown Analyst -

Back on the forward integration issue, how much talk or interest has there been in general on the Gulf Coast about putting a consortium together to build an ethylene plant with several partners? Have you seen much of that? And if you decide to go into the forward integration, how much interest would this mean for you?

Paul D. Carrico

There's just all sorts of conversations going on about ethylene because everybody seems to want to build now. To say that there's consortiums or whatever, I can't really comment on all that. I think there's going to be clearly a higher ethylene build and domestic demand based upon current projections that the forecasters have out there. But to say how that plays out, we're kind of in the early stages of that right now.

Operator

Your final question is a follow-up from the line of Roger Spitz with Bank of America.

Roger N. Spitz - BofA Merrill Lynch, Research Division

With the announced shutdown of Sunoco's refineries and the, I guess, expected shutdown of the associated cumene capacity there, do you think this will change margins on cumene? And can you speak to what your cumene contracts, how they work in terms of the terms of their formulated terms and when they might be renegotiated?

Paul D. Carrico

Yes, typically, those kind of contracts go on an annual basis. And with what Sunoco's doing, it does, as I've mentioned in the past, more balance out the cumene phenol capacities in the United States. So you could suggest that maybe the market should improve some on both sides of the equation on the phenol and cumene. We got to see how those dynamics play out into next year. Certainly, the business is in a better operating rate overall for North America, and that typically, as in most commodities, helps the margins a bit.

Roger N. Spitz - BofA Merrill Lynch, Research Division

And are your cumene contracts published for the merchant, yourself? Are they basically set on a percent of propylene, benzene plus a margin or are they set in some other fashion?

Paul D. Carrico

They vary from contract to contract, so I really don't have a, say, summary or synopsis for you on that. It's just different arrangements with different people.

Operator

There are no further questions at this time. Do you have any closing remarks?

Martin Jarosick

Yes. I just want to thank everyone for joining us on the call, and we look forward to speaking to you at various industry conferences coming up and also in February. Thank you.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

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