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Executives

Rishi Varma - Vice President and General Counsel

Michael McDonnell - President and Chief Executive Officer

Miguel Desdin - Senior Vice President and Chief Financial Officer

Analysts

Edward Yang - Oppenheimer

Kevin Casey - Casey Capital

Wilson Jaeggli - Southwell Partners

Gregg Goodnight - UBS

Barry Haimes - Sage Asset Management

Ron Silverton - ALJ Capital

TPC Group Inc. (TPCG) Q3 2011 Earnings Call November 11, 2011 10:00 AM ET

Operator

Good day, ladies and gentleman, and welcome to your TPC Group Quarterly Earnings Conference Call for quarter ended September 30, 2011. At this time all participants are in a listen only mode, later we will conduct a question-and-answer session and instructions will follow at that time. (Operator instructions) As a reminder today's conference call is being recorded.

I would now like to introduce your host for today's conference call, Mr. Rishi Varma. You may begin.

Rishi Varma

Thank you, Kevin. Good morning, everyone, and welcome to today's conference call to discuss TPC Group’s third quarter 2011 earnings results. With me today is Mike McDonnell, President and Chief Executive Officer, along with Miguel Desdin, Senior Vice President and Chief Financial Officer.

While management will not be referencing slides today, we have posted a presentation online that includes supplemental financial information about the quarter. These slides along with other quarterly financial results can be found in the Investor Relations section on our website. Please note the slide in the presentation which refers to the forward looking statements and says that statements made during this call that refer to management’s expectations and/or future predictions are forward looking statements intended to be covered by the Safe Harbor provisions of the securities act, as there are many factors which could cause the results to defer from our expectations.

We also do not plan to update any forward-looking statements during the quarter. Please note that information recorded on this call speaks only as of today November 11, 2011, and therefore, you are advised that time sensitive information may no longer be accurate at the time of any replay. In addition, some of our comments may reference non-GAAP financial measures, and reconciliations to the most directly comparable GAAP financial measures and other associated disclosures are contained in our earnings release and on our website.

And with that, I will turn the call over to Mike.

Michael McDonnell

Thanks, Rishi. Good morning, everyone and thank you for joining the call this morning. I will provide a clear, transparent explanation of the profit drivers behind our third quarter results, the inherent underlying stability of our margins and results, and an update on current market conditions and guidance for the fourth quarter, including the recent abrupt, and we believe temporary changes in market dynamics for butadiene, and the direct and indirect impact we expect to see from these.

We achieved solid results in the third quarter, generating $34 million of EBITDA, including the impact of the lower of cost or market charge of $10 million, and the positive impact of the increase in butadiene price of $15 million. Now excluding these impacts from the butadiene price volatility that we experienced, that is if you take the $34 million reported, add the $10 million back, and subtract the $15 million from the price impact, the underlying result is $29 million. And this $29 million is largely generated from stable margins, consisting of contractually fixed percentage for per pound processing and service fees, and cost plus pricing contracts.

This underlying margin stability is a real strength of our business model and is completely independent of the absolute level of butadiene price. This $29 million is sensitive to volume, gasoline price level, and the execution of our initiatives and margin expansion, volume growth and operational excellence. I will discuss each of these factors in turn, starting with volume.

We receive crude C4 feedstock from ethylene crackers. We provide services to store, aggregate and process these streams, separate the components, purify them, and distribute them to our customers through our assets, infrastructure and logistics network. Our crude C4 feedstock volume in the quarter was relatively consistent with the prior year quarter. The U.S. ethylene cracker industry operating rate was strong in July and August, and then backed off a bit in September due to some planned turnarounds in several units.

Cracker feed slates continue to favor light cracking, driven by the cost advantage of ethane. On the demand side, strong demand butadiene and other finished C4 products continued for most of the quarter before beginning to soften in the late September. Our volume growth in the quarter was largely driven by stronger seasonal demand for our lower margin fuel products. This volume growth was partially offset by slower end market demand for fuel and lube additives, rubber chemicals and surfactants, and significant inventory destocking by our customers in or performance products businesses.

We think we have seen the majority of the impact of this destocking in performance products in Q3, but we have allowed for a bit more in our Q4 guidance. The hydro-unleaded regular gasoline price has a favorable impact on our margins in certain C4 products. Many of these products including Butene-1 and raffinates, have a cost basis as a fixed percentage of gasoline and a selling price basis as a higher fixed percentage of gasoline.

Earnings from our fuel products compared to the prior year quarter were enhanced by higher gasoline prices and substantially higher sales volumes due to a much stronger summer driving season. During the summer driving season, when demand and price for gasoline trend upward, we tend to sell more fuel products at higher prices and higher margins. Finally, we continue the high standard of execution in our overall manufacturing and supply chain activities, and in our initiatives to improve margins in our C4 processing segment by expanding our fees and enhancing our contracts.

As a reminder, these fees represent the value of our services including storage, aggregation, processing, logistics, and other infrastructure services for our customers. Our plants ran very well in the quarter and our operational excellence initiatives, including our high return capital project, continued to contribute to the bottom line through cost reductions, reliability and productivity improvements and additional logistics capabilities that bring greater value to our customers.

The solid third quarter performance of the business continues to validate TPC’s leadership position as a service based processor and provider of infrastructure and logistics for mission critical products. Now let’s discuss butadiene market conditions and the impact of changes in butadiene price on our earnings and on our cash flow. The structurally tight supply of butadiene due to light cracking, coupled with the growing demand for synthetic rubber, nylon, and other end products, drove increases in butadiene pricing during the quarter.

Now, as you may recall the underlying unit margins that we earn for butadiene are comprised of fixed processing fees per pound, paid by our suppliers, and fixed services fees per pound paid by our customers. We earn these fixed margins on every pound of butadiene that we move through our logistics and processing infrastructure, regardless of the price of butadiene. Now butadiene contract prices rose to an average of $1.71 per pound in the third quarter from a $1.53 per pound in June. In addition to the fixed per pound fees for processing and services that I just mentioned, this increase in butadiene price in the third quarter benefited our results by $15 million as we reported.

Here is an example of how the butadiene price impacts our overall earnings and cash flow. In June, we paid a $1.53 per pound to our suppliers, that is the ethylene crackers, for the butadiene component of the crude C4. We process the crude into finished BD and other products. A portion of the finished BD from the crude was also sold in June at $1.53. Remember we make the fixed margins on either side. However, a portion of that $1.53 material was also sold in July at $1.71, that is July’s price, generating favorable impact to EBITDA in that period.

At the same time, the higher cost butadiene increases the value of working capital and uses cash. Now conversely, downward movements in butadiene market price will unfavorably impact our overall earnings in that period, again due to the timing differences between purchase and sale. However, when the market prices decline, we also generate substantial cash flows as the lower butadiene prices have a positive impact on working capital and cash flow. All else being equal, over time, the cash flow offsets dollar for dollar the unfavorable impact to EBITDA.

Now when butadiene prices are stable month to month, our butadiene unit margin is equal to the sum of our fixed processing and servicing fees. It’s really important that our investors understand the cash impacts and the P&L accounting impacts from butadiene price changes, as well as the stable fixed per pound unit margin structure of the business that provides the majority of earnings.

Now, I would like to provide some color on the current market conditions. Global, economic uncertainty and demand softness are continuing into the fourth quarter and we have seen an abrupt decline in demand for butadiene and synthetic rubber. Tire demand for example, is weakening and tire companies are in addition working to reduce their inventories through year-end. In contrast to the tight supply constraint market conditions and the steep upward trend in pricing that we have seen over the past three quarters, we are now experiencing rapid and substantial declines in price.

Butadiene fell -- price fell from $1.71 in September to a $1.40 in October, which resulted in the third quarter $9.4 million LCM adjustment, the portion due to butadiene. Butadiene prices subsequently fallen to $1.15 in November, and the current spot pricing in North America is now at approximately $0.95 per pound, although there are very few transactions at that level. December pricing is expected to decline further as butadiene demand will likely remain weak for the rest of the year. However, we feel it is likely that the market will come back into balance in early 2012. Let me explain why.

First, there are a number of cracker outages that are planned for the first quarter of 2012, that will significantly reduce the supply of butadiene during that period. So when butadiene prices fall far enough, and while quantities are still plentiful, we expect buying interest increase before the market once again become supply constrained. Secondly, our customers are clearly reflecting this more optimistic sentiment as they remain positive about growth in the near term and long term.

For example, two leading tire companies recently announced investments of $1.2 billion and $725 million in new plants in the U.S. Another of our largest customers reported quarter three sales and earnings. A third factor here is as we look back at the last butadiene price decline during the very severe recession of 2009, the average price in 2008, of $0.84 per pound, which was a peak at that time, fell to $0.45 per pound in 2009 and then climbed back to an average of $0.84 per pound again in 2010. So it didn’t take long even then to recover.

And lastly, multiple industry sources are forecasting long term structural shortage in butadiene supply. So let me now address the current situation. We are currently managing a very unique and temporary situation. Ethylene crackers are running strong based on the economics of ethylene from ethane cracking. So they are generating C4s. Customer demands are temporarily down, very significantly. These factors have created a temporary price volume dislocation. We are working our plan to address this situation together with our suppliers and customers to manage through it and minimize this indirect impact from this price volume dislocation on our fourth quarter.

We are early in the process. A lot can still happen, and consequently this indirect impact is still very uncertain. In our press release we stated that aside from the negative impact of substantial decline in butadiene pricing, we anticipate our fourth quarter 2011 adjusted EBITDA to be approximately 35% to 70% of our fourth quarter 2010 adjusted EBITDA of $19 million. We have provided you with a methodology to estimate the direct impact of changes in butadiene price on EBITDA using current published spot price for butadiene.

At the current spot price for butadiene, we would estimate that impact on fourth quarter EBITDA to approximately $30 million. In addition, we also provided you with a range for this indirect impact from the price volume dislocation. We estimate the impact to be in the range of 35% to 70% of our fourth quarter adjusted EBITDA of $19 million, or an impact of $6 million $7 million. This range related to the indirect BD impact from the price volume dislocation and a small portion of it covers also any further exposure we might have to destocking in performance products. So that range would capture everything else.

So with that, I will turn the call over to Miguel to discuss the financial results in the quarter.

Miguel Desdin

Thank you, Mike. I would like to spend a few minutes going through the financials for the quarter and then touch on the two reporting segments. As we reported in our press release, third quarter revenue was $835 million which was up 67% compared to third quarter of 2010. Volume was 818 million pounds, up 9% year-over-year but down 5% compared to the seasonally strong second quarter. Average sales prices overall rose 53% from a year ago, driven by the increase in commodity prices.

Gross profit was $87 million in the third quarter of 2011 compared to $71 million in the third quarter of 2010, which amounts to an improvement of $0.01 per pound. That improvement was aided by increases in butadiene prices which benefited gross margin by $15 million because of the timing differences between the crude C4 purchases and the sales of finished butadiene, higher absolute margins on contract that were also priced as a percentage of gasoline, and good execution on our corporate initiative.

Adjusted EBITDA for the quarter was $34 million, including the $15 million favorable impact from the increase in butadiene price, and a negative impact of $10 million from the lower of cost of market charge related to the decline in the price of butadiene in October. Adjusting for those two items results in underlying run rate of $29 million in the period versus $33 million in the prior year quarter. The primary drivers of the shortfall were lower volumes in performance products due to customer destocking and softer market conditions in the current year quarter.

Depreciation and amortization for the quarter was $10 million, consistent with levels both a year ago and the previous quarter. We continue to expect G&A to be $40 million for the full year. Interest expense in the quarter was $9 million compared to $3 million a year ago, the increase is directly related to the replacement of a long-term term loan in October of last year with $350 million of senior secured notes that are due in 2017.

As a result of these items I have mentioned, third quarter 2011 net income was $9 million or $0.58 per diluted share, compared to $13 million or $0.70 per diluted share in the third quarter of 2010. The higher interest expense had a negative impact of $0.19 per share which is partially offset by a $0.07 per share benefit from a lower share count as a result of the stock repurchases.

Turning to the balance sheet. Total debt at the end of the quarter was $348 million and the cash balance was $82 million, resulting in net debt of $256 million. At quarter end the company's net debt to capital ratio was approximately 46%, and net debt to trailing 12 months adjusted EBITDA was approximately 1.7 times. On the cash flow statement, the cash balance increased $16 million from the previous quarter, as cash provided by operating activities of $36 million reflected the good operating results.

That number includes a reduction in working capital of $14 million due to primarily to lower receivables. Capital expenditures for the quarter were $12 million and included $2 million for high return discretionary projects, $4 million for engineering on the strategic projects and $1 million for the new research lab which was completed in August. Out year-to-date capital expenditure is at $33 million and we continue to expect capital expenditures for the year to be between $45 million and $50 million.

From a liquidity perspective, in addition to the $82 million of cash, we also had full availability under our $175 million revolving credit facility at the end of September. We continue to assess various opportunities to maximize value creation with our cash, including purchasing our shares in the open market. During the quarter, we purchased approximately 352,000 shares at an average of $23.53 per share, as we believe that our stock at these values represent good value.

Turning to our operating segment. The C4 processing segment reported revenue, gross profit and EBITDA that were all better than a year ago, driven by both higher volumes and unit margins. Volume in the quarter was up 14%, due to higher sales into the fuels market. Gross profit was up 45% primarily due to higher volume and better unit margin, which include the $15 million benefit of higher butadiene prices. EBITDA was up $10 million, reflecting the higher gross profit, which was partially offset by the $10 million lower cost to market adjustment.

In the performance products segment, while revenues were higher versus the prior year quarter, sales volumes and gross margins were constrained. The higher revenue reflects the increase in commodity prices to which our selling prices are linked. The lower sales volume was due to customer inventory destocking to reduce inventory level in response to weakening end user demand. The lower unit margins reflect higher raw material costs as well as favorable market conditions in the prior year quarter which enabled opportunistic higher margin spot sales a year ago.

The price of butane, one of the primary contract markers for both selling prices and raw material costs for this segment, was up 36% versus the prior year quarter. Gasoline prices were up 54%, which increased raw material cost and compressed margins for this segment. However, the negative impact was more than offset by the positive impact on fuels product margins in the C4 processing segment.

I would now like to provide some perspective on what we believe is likely to be the butadiene price impact on adjusted EBITDA and free cash flow in the fourth quarter. As an example of the magnitude of the potential EBITDA impact, in our press release we lay out the calculation which shows the effect that dramatic change in price would have in the quarter. Assuming a $0.45 price drop, we would expect EBITDA to be negatively impacted by $30 million. Of course the ultimate price change there remains to be seen as December price is still unknown.

On the other hand, as the butadiene price falls, a significant amount of cash is freed up from working capital, and so we would expect to see an increase in free cash flow of between $18 million and $27 million. Finally, I would like to mention that we are progressing through our annual operating plan process, and it is our intention to update 2012 guidance in early next year.

I will now turn the call back to Mike.

Michael McDonnell

Thank, Miguel. So we believe the market should come back into balance in the near term and the strong market fundamentals that support the value of our business should return in the earlier part of 2012. We also making good progress in developing our strategies for longer term sustainable earnings growth. We will continue the path to leverage our idled assets, namely our dehydrogenation units and the associated infrastructure, as well as our proprietary technologies including the Oxo-D process, and decades of operating experience operating these processes in the past.

Our strategies capitalize on three key industry dynamics that in our favor over the long term. Attractive long term fundamentals in our core markets. They are driven by the global mega-trend of mobility. Structural tightness in crude C4s as a result of the shift to lighter cracking, resulting in increasing value of mission critical products, and the anticipated favorable economics of natural gas liquids, providing cost advantaged feedstock options for us.

And we are making good progress in the development of these two, our previously announced strategic game changing projects to drive our strategies. First, the restart of one of our idled dehydrogenation units to produce isobutylene from cost advantaged natural gas liquids. To be used as an additional source of feedstock for our growing performance products and fuel products business. The second project is the restart of our other idled dehydrogenation asset, and with the use of our proprietary Oxo-D technology and decades of operating experience, to produce butadiene on purpose from cost advantaged natural gas liquids. And this project will allow us to enhance our operating model as we would be able to capture the NGL to butadiene margin on the butadiene we produce from this project.

The project will provide long term security of supply for a mission critical product to our customers and their feedback continues to be very positive. In August, we initiated primary engineering on this project which should be complete by the end of Q1 of 2012. The project is expected to produce up to 600 million pounds of butadiene with the capability to expand as needed through additional phases as the market grows. So when we complete that primary engineering by the end of Q1 or perhaps in Q2, we will come back and frame that project out a little bit better for everyone.

So in closing, overall our inherently stable margin structure, composed of fixed fees and cost plus pricing, combined with our near term operating plans and compelling longer term opportunities, provide a very strong foundation for sustainable earnings growth, consistent cash flows and increasing returns on invested capital.

And now we are happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Edward Yang with Oppenheimer.

Edward Yang - Oppenheimer

Good morning. Looks like you are going to get hit with the kitchen sink in the fourth quarter but that’s basically the bottom. Is that kind of the fair way to put guidance?

Michael McDonnell

That’s the way we are seeing it right now. And as we describe the much -- most of this is really related to this unique situation that we have, with respect to this imbalance, supply versus demand and processing and dealing with that. So there are costs in dealing with that. And then the butadiene direct price impact, just a fall in price which is negative on earnings but positive on cash. Those two things related to the price volume volatility in this particular period, we think are very temporary. Certainly the situation, this dislocation issue. I would be surprised if we are dealing with this even a month or two from now.

Edward Yang - Oppenheimer

Okay. And then, Mike, you mentioned some sign optimism that this whoosh down you are seeing will be, again, pretty short lived, the cracker outages, conversation with tire companies etcetera. Coming off the bottom, how should the recovery look? This market has been pretty volatile but it’s tended to move in Vs. And may be separately, could you make a comment on what you believe is what the appropriate long term equilibrium price for BD should be?

Michael McDonnell

I think I’ll stab at the first one, the second one is anybody’s guess, I think. But let me try to tackle the first question first and provide you with some sense of where things stand right now. With respect to our customers, they are feeling very positive about, both the near term and the long term demand for their products. The tire companies etcetera, are, even at this stage pretty optimistic. And a lot of the suppression in demand right now is just coming from -- in anticipation of softness, there is some softness down in their market. And their typical annual decline in inventory at the end of the year. So that is temporary. And they view it as such. But they are very bullish and very optimistic about the investments that they are planning. And that’s the majority of our demand, a bit piece of where butadiene goes. So, I think we just have to get through this short term dislocation. I don’t think it’s going to be long. The other thing that is looming out here is that we have got a number of cracker outages in the first quarter that, as I look at the math, we have our models that run and continuously update on this as we talk to customers and suppliers. A significant chunk of capacity is going to be out of the market for various months in the first and second quarter for planned turnarounds. And so if you are in a position where you are driving your inventories down and BD is currently very abundant, we are looking for places for it. And it’s relatively inexpensive, you are not going to let that situation go for too long and potentially risk getting caught short in a market that becomes very quickly more supply constrained. And so I think that, that dynamic is certainly going to help too. Nobody can predict exactly when that is going to happen, we certainly can't, but we can point to the trends that we know and the historical experience and give a judgment on it, which is the best that we see right now.

Edward Yang - Oppenheimer

And this was a market that was quite tight just two or three months ago, so...?

Michael McDonnell

Remember we hit a peak, a historical peak in August.

Edward Yang - Oppenheimer

Yeah, right.

Michael McDonnell

And there was not enough BD around. So I mean that situation is the norm. This is not the norm. we have got a few more months of this until it rebalances and then I think we are going to see something closer to the historic norm than where we are now.

Edward Yang - Oppenheimer

Okay. Understood. How is this effecting your discussions with customers on service fees? Are you slowing down talks until the BD market normalizes, as you mentioned again the softness you are seeing is probably atypical of the long term trend for BD given the supply constraints there? And, for example, is there a drop dead date before your current contracts expire at the end of next year? You know, I would think that it would behoove you to kind of may be hold stuff off until the summer which would probably be a seasonally stronger timer for BD anyway.

Michael McDonnell

Obviously, we are being real intelligent about it and so forth, but frankly, even now -- I mean everybody realizes that this is a very temporary situation so haven’t missed a beat in terms of our discussions regarding contracts on both sides, supply and demand.

Edward Yang - Oppenheimer

Okay. And may be move, finally, just on the long term outlook again. You put out the long term EBITDA guidance, about a month ago it was around $300 million to $450 million or so. Is that still a number that you have confidence in? I know, I realize that it’s probably five years out?

Miguel Desdin

Yeah, it certainly is Ed. We stand by that number.

Operator

Our next question comes from Kevin Casey with Casey Capital.

Kevin Casey - Casey Capital

Hi, guys. You did a good job going through how the contracts work. I just want to understand a little more detail. Like you mentioned in June, the price is $1.53 and I guess you sold it for $1.53 plus the service fees you get from both sides, plus some sort of margin. Is that correct?

Miguel Desdin

That’s right.

Kevin Casey - Casey Capital

And then can you talk about the potential improvements in those three sources of revenues or earnings?

Miguel Desdin

Which being the three, you mean the fees on either side?

Kevin Casey - Casey Capital

Fees on either side, and is there any way to extract an extra unit margin, especially, given the fact that the unit price is probably materially higher then it was when you originally went into that contract?

Miguel Desdin

Right. So that was what Ed was alluding to a minute an ago, in our contract renegotiations when those contracts expire. We are actively working those margins where possible, obviously, we have to show the customers some kind of value for the fees that we charge. But we constantly work on both sides of the equation to try and improve our profitability with suppliers and customers.

Kevin Casey - Casey Capital

Okay. And then....

Michael McDonnell

I just would that too. That as we continue to bring into use the value of our infrastructure, which historically we really haven’t gotten full value for that. These are legitimate services that customers are willing to pay for. So it’s not just taking advantage of a market situation that might happen to be tight and leveraging that, it’s really -- it has to do with now understanding our cost to serve our customers, for example, and making those very apparent in our dialogues with customers so that we can monetize that value that we have been previously under-valuing in the company.

Kevin Casey - Casey Capital

Okay. And then can you talk about the -- so I guess the volatility really comes from the changeover from month to month.

Michael McDonnell

Correct.

Kevin Casey - Casey Capital

What percent on average, typically gets hit with this changeover?

Miguel Desdin

I am not sure I understand the question, Kevin. Can you repeat it?

Michael McDonnell

Our (inaudible) inventory...

Kevin Casey - Casey Capital

Your inventory -- you obviously have something in inventory right?

Miguel Desdin

Yeah. Okay.

Kevin Casey - Casey Capital

So, from June to July, yeah, it was great to have a lot of inventory, but from September to November it’s a terrible month to have inventory. So I was wondering what the average inventory is to help gauge the volatility (inaudible) good times and the bad times.

Miguel Desdin

Sure. We, on average, will turn inventory once every 20 days. So one and half times a month we are turning through that inventory. That gives you a pretty good idea of how quickly we can move those prices along but at the end of any given period we will have inventory on the book.

Kevin Casey - Casey Capital

Okay. And then, any of your suppliers are the ones having the outages for next year? Un-correct?

Michael McDonnell

Yeah. We are supplied in our C4 processing business by ethylene crackers and the C4 stream is a stream that comes of that ethylene cracker and our supplies rely on us to take that, to store it, to process it, etcetera, as we’ve talked about. So that’s where that’s coming from.

Kevin Casey - Casey Capital

No. I mean you mentioned, and it’s known that there are certain guys that are having outages next year for maintenance. I was wondering if it was any of your suppliers.

Michael McDonnell

Yeah. That’s where I was going with your question.

Kevin Casey - Casey Capital

Okay.

Michael McDonnell

Yeah. So basically then we have got -- these ethylene crackers have to go down periodically for maintenance and at certain times of a year, because I mean it’s planned but it’s necessary, you know we will market conditions that have a substantial amount of the assets out. And by substantial it could be 10% to 15% in any given month of ethylene cracker capacity could be offline, which is very significant. And up to 20% of extraction capacity could be offline, that’s what our models are showing. And so anybody who is looking at that situation at a time when they are trying to restock in anticipation of normalizing their inventories after pushing them down at the end of the year, is going to be challenged, I think, to find today's economics in the future for butadiene.

Michael McDonnell

Okay. Great. Thanks.

Michael McDonnell

You’re welcome. I appreciate too the comment on transparency. We as a management team are really focused and dedicated on trying to be as transparent as we can with our investors. And I think you saw us begin that early this year with our first quarter release when we started to break out this direct impact on our P&L and on our cash flow from butadiene price changes, month to month. And hopefully you see it -- we are continuing to move in that direction, are trying to be very very transparent. The model when you look at it and really understand it, it is very unique. It is a very stable underlying model in terms of these fees, fee structures, fixed fees per pound and the cost plus pricing contracts. And we want to really be sure that our investors understand that.

Kevin Casey - Casey Capital

Yeah. I think you guys did a great job on this call explaining that, and also I think your more recent presentations go in more detail about it too.

Operator

Our next question comes from Wilson Jaeggli with Southwell.

Wilson Jaeggli - Southwell Partners

Thank you and good morning. Also add my congratulations too for the transparency. You have a lot of dynamics here and it helps us shareholders to understand a lot better. Basically, you split off and it looks like, as I understand it, $29 million in EBITDA would have been the EBITDA generated in the third quarter assuming no price changes. Is that correct?

Miguel Desdin

That’s right.

Wilson Jaeggli - Southwell Partners

Okay. So that’s the basic way to look at your basic service fee business and processing business?

Miguel Desdin

Yeah.

Wilson Jaeggli - Southwell Partners

Okay. Secondly, the market that went from a tight market here to an imbalanced market in just a period of months in here -- and you talked about a change in demand for BD here, and destocking. Do you have a feel for what caused the destocking? In other words, was there a change in demand for your customers products here that caused it or is it just a change in psychology?

Michael McDonnell

I think it’s a little bit of both. You know certainly, as we think back, the first half of the year, people were feeling pretty positive. The economies were growing. There weren’t as many troubles as there are today. People were pretty optimistic about how the year was progressing and so they built stock to cover that. Then if you remember, kind of mid-year, we started to hear some signs of caution and so forth coming out of Asia. And the Europe situation was compressing the demand there a bit and freeing up some supply, which made the system a little bit more oversupplied. And more recently, the U.S., we have had our difficulties. So I think a part of it is demand and part of it is the anticipation of that demand slowness that drives everyone into this destocking position. I mean it wasn’t so long ago that in the recession people learned how to destock and the importance of that. And so now when we see that slowness and that sluggishness and start to feel it, we are pretty much quicker now as an industry to get the inventories down. So I think it’s a little bit of both sentiments, slowing demand and destocking.

Wilson Jaeggli - Southwell Partners

Okay. You mentioned in the C4, the vision here that volume was up 14%. What was the volume change from the third quarter a year ago for BD alone?

Miguel Desdin

Hang on a second, Wilson, we will look that up for you.

Wilson Jaeggli - Southwell Partners

Okay. I appreciate that. And while you are looking at that, talking about refinery outages here in the first and second quarter. Did I understand you to say you think it will decline, there will be a decline in C4 availability of somewhere around 15% to 20% for both quarters, or is that--?

Michael McDonnell

Yeah, let me explain that again, because it’s important everybody understands that. There are periodic -- periodically an ethylene cracker has to come down for plant maintenance. And these are scheduled typically throughout the year. Those schedules are published and they do change as business conditions need change. But we stay in very close touch with those schedules because obviously we are very close to our suppliers, and we plan around them. They are an important part of our planning. In any given month, you know there could be one, two three, four major crackers out and that could have an impact of a percentage reduction in supply during that period due to the fact that that crackers are offline. As we look at the balance across the North American cracker industry and compute our models, we are showing that over the first quarter and second quarter there could be some months where as much as ten or more percent of ethylene cracker capacity is offline. And that’s higher than we would typically see in the normal course of the year with plant downturns. In other words, they are a little bit more concentrated here in Q4 -- Q1 coming up, Q1, Q2, then the norm. So we see that in our -- and we are telling our customers that as plan and so forth. So the market has digested that and that’s why I think I am pretty optimistic that we are going to see a rebound.

Wilson Jaeggli - Southwell Partners

Rebound in pricing.

Michael McDonnell

As you are going (inaudible)

Wilson Jaeggli - Southwell Partners

So if you see 10% of crackers down that would basically equate to a 10% reduction in your availability of C4?

Michael McDonnell

In the market’s availability of C4.

Wilson Jaeggli - Southwell Partners

Market’s. Right. Okay. And that depends on who you have your contracts with?

Michael McDonnell

That’s right.

Wilson Jaeggli - Southwell Partners

Obviously, it does affect the overall pricing.

Michael McDonnell

That’s all in our plan. And you know we maintain a very good stability in our C4 supplies and so forth. So that -- it doesn’t concern us. I mean it’s sort of comeback.

Miguel Desdin

Wilson, the answer to your previous question. The butadiene volume change, less than 0.5%.

Wilson Jaeggli - Southwell Partners

Okay. So we are basically flat on butadiene absolute volume?

Miguel Desdin

Yeah.

Michael McDonnell

Our crude C4 supply year-over-year was pretty much flat as I said in my remarks.

Wilson Jaeggli - Southwell Partners

Right. Okay. The restart of Hydro no. 1, that’s a go forward project, right?

Michael McDonnell

Well, it’s in our stage-gate process. And right now we are doing detailed engineering and we completed some preliminary construction that’s kind of get ready construction. But the next stage is full approval of that project. So that’s.

Wilson Jaeggli - Southwell Partners

What would be the cost of that project? Rough. I know you don’t have it set up exactly but some range you might be able to give us?

Miguel Desdin

We will give a lot more guidance on that at the end of the first quarter when we have the engineering work done, Wilson. We will come back with a lot more on that.

Wilson Jaeggli - Southwell Partners

Okay.

Michael McDonnell

Let’s be clear for everybody on the call here that -- Wilson, were you talking about our isobutylene project?

Wilson Jaeggli - Southwell Partners

Yes.

Miguel Desdin

I am sorry. Yeah, so...

Wilson Jaeggli - Southwell Partners

Yeah, I was calling it dehydro No. 1. Maybe that’s a wrong term.

Miguel Desdin

No, no, that’s fine. We talked about the total capital cost being $15 million, plus or minus about 15%.

Wilson Jaeggli - Southwell Partners

$15 million, plus or minus 15%.

Miguel Desdin

$150 million, plus or minus 15%.

Michael McDonnell

150.

Wilson Jaeggli - Southwell Partners

All right. Okay. And that would again give how much capacity?

Miguel Desdin

650 million pounds of isobutylene capacity.

Wilson Jaeggli - Southwell Partners

Okay. Great. Thank you very much and appreciate the ability to really dig into the numbers here. Thanks.

Operator

Our next question comes from Gregg Goodnight with UBS.

Gregg Goodnight - UBS

Good morning, gentlemen. Just one question. I went to a presentation this week that suggested that ABS was in particularly bad shape, perhaps a big inventory correction going on there, may be demand quite a bit also. But my question to you is, is ABS demand for butadiene really big enough to move the needle and what -- if you guys have an outlook for ABS in terms of some sort of demand snap back next year, would you please share that with us.

Michael McDonnell

Gregg, it’s a very small part of our portfolio, I am sure some of our butadiene finds its way in there. But for the most part we are in the other synthetic rubber markets that are primarily tires, nylon etcetera. So I am aware that the demand there as softened and the outlook might be a little bit weaker going forward but it’s really not going to have measurable impact on our business.

Gregg Goodnight - UBS

Okay. So you are looking for tire demand to basically drive this recovery that you guys are anticipating, say early next year, may be second quarter or whatever?

Michael McDonnell

That’s going to be the main driver, yes. There’ll be other drivers but that’s the key.

Operator

Our next question comes from [Jeffery Jacks with Besson Capital].

Unidentified Analyst

Thanks for taking my question. Just want to make sure I have the math right. So on the fourth quarter guidance you said, it will be anywhere between, call it 35% and 70% of 4Q 2010. Is the $30 million of the -- call it the inventory charge, is that then additionally tacked on to that or is the 35% to 70% sort of after the inventory charge with butadiene being at about $0.95 or with the current level?

Miguel Desdin

No, the change in the butadiene price ultimately will be tacked on to it.

Unidentified Analyst

Will be tacked on to it. Okay. So we start with just what would the run rate be and then we will take this inventory charge?

Miguel Desdin

That’s right.

Operator

Our next question comes from Barry Haimes with Sage Asset Management.

Barry Haimes - Sage Asset Management

Hi, thanks. I had two questions I guess. One is, you know talked about the turnaround schedule and the 10% in some months and that sort of being ahead of normal. Any rough feel for how the turnaround is in the first quarter compared to the first quarter a year ago. And then the second question, you also talked about the destocking and geographically where some of that was coming from. How do you get a feel for whether you are in the third inning or the fifth inning or the eighth inning of that destocking process and where do you think we are? Thanks.

Michael McDonnell

I’ll deal with the destocking question first and then Miguel can take the other one. We are in very close touch with our customers particularly in performance products where we saw a lot of this destocking over the last few months . And I am just citing what they are telling us is that, provided their demand stabilizes and so forth, their destocking is winding its course. So as I said in my remarks, I think from a performance product standpoint there may be a little bit more of destocking impact in the fourth quarter but by and large I think we are at the point now where their inventories are aligned with market conditions. I think there is still destocking in the chain in the C4 processing segment. As I mentioned the tire inventory and so forth is coming down. I know tire companies are actively working as they always do to bring that down by the end of the year and so that is going to run its course but I think we can pin that to year end as well.

Miguel Desdin

To answer your other question, we anticipate about 5 turnarounds in the first quarter versus 9 in the first quarter of last year for those plants.

Operator

Our next question comes from Ron Silverton with ALJ Capital.

Ron Silverton - ALJ Capital

Good morning, gentlemen. A couple of quick questions for you. One, just wanted to go back on the guidance for fourth quarter, again. If we take the midpoint of (inaudible) say that roughly half of what you did in the fourth quarter last year, call it 10 plus pricing, based on what pricing is right now as you indicated in guidance. It’s about another $30 million mark-to-market charge, is that right?

Miguel Desdin

No, it’s not really mark-to-market charge, it’s just the effect of -- in the example that Mike gave during his opening comments, it’s really just holding inventory that we had paid a different amount for that in the next period we are going to have to sell at a lower price. It’s a timing impact from a change in the butadiene market price because contractually we pay our suppliers whatever that contract price is in the current period. And less the obviously the fees that we charge, the processing fees that we get from them. And we turnaround and we sell to our customers at that same market price in addition to fees that we charge on that side. So the only impact is carrying inventory that we paid a different price for last month into this month and being able to sell either at a higher or a lower price.

Ron Silverton - ALJ Capital

Understood. And again, obviously, as you indicated it’s a timing issue but if we just take the numbers you gave in there we could see kind of a negative 20 type print in the fourth quarter?

Miguel Desdin

Right.

Ron Silverton - ALJ Capital

And again, you guys have talked about extensively and very clearly indicating why you believe that -- well it’s likely will be the trough for a series of technical series. Where are you by the way with union negotiations, I know the bunch of the contracts come up in February of ’12?

Miguel Desdin

We only have one union negotiation at our Port Neches facility and we don’t expect that those negotiations wouldn’t go off smoothly.

Ron Silverton - ALJ Capital

Great. What about for your own turnarounds. Anything to look -- when would you expect to do those, I know in the past you had a small impact?

Miguel Desdin

Yeah, we don’t expect, we aren’t planning on any turnarounds next year so far.

Ron Silverton - ALJ Capital

Great. And when do you plan to file the Q?

Miguel Desdin

Monday.

Ron Silverton - ALJ Capital

Thanks and congratulations with a solid quarter and clearly a bright future ahead.

Operator

And I am actually not showing any further questions at this time.

Michael McDonnell

Great. So let me just wrap up then. While our fourth quarter results will be affected by the decline in butadiene pricing as well as the market softness, everyone should understand that the butadiene price volatility doesn’t impact our underlying inherently stable margins. We remain very focused on disciplined execution of our plans. Those plans include our margin expansion efforts, our volume growth and our operational excellence. We are very committed to the long term growth and development of TPC Group and we are very excited about many opportunities we have ahead.

And in closing I would like to recognize and thank our dedicated employees for their ingenuity and hard work in delivering a solid quarter and thank you all for joining the call this morning.

Operator

Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect, and have a wonderful weekend.

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