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Executives

Martin Jarosick - Executive Director of Investor Relations

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

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

Analysts

Brian Maguire - Goldman Sachs Group Inc., Research Division

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

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

Andrew W. Cash - UBS Investment Bank, Research Division

Roger N. Spitz - BofA Merrill Lynch, Research Division

Bill Hoffman - RBC Capital Markets, LLC, Research Division

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

Gregg A. Goodnight - UBS Investment Bank, Research Division

Christopher W. Butler - Sidoti & Company, LLC

Georgia Gulf (GGC) Q4 2011 Earnings Call February 16, 2012 11:00 AM ET

Operator

Good morning. My name is Christie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Georgia Gulf 2011 Financial Results Conference Call. [Operator Instructions] Thank you. Mr. Martin Jarosick, you may begin your conference.

Martin Jarosick

Thank you, Christie, and good morning, ladies and gentlemen. Thanks for participating in today's conference call to discuss Georgia Gulf's fourth quarter 2011 financial results. There are slides available to you on Georgia Gulf's website. These slides are for your reference, but we will not be speaking directly to each slide.

Participants on today's call are Paul Carrico, President and Chief Executive Officer; and Greg Thompson, Chief Financial Officer. During this call, we will be making forward-looking statements. As you'll 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 and subsequent SEC filings. Any forward-looking statements made on this call should be considered in light of those factors. In addition, during this conference call, we may refer to certain non-GAAP financial measures. We have provided a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure as an appendix in the slides on our website.

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

Paul D. Carrico

Thanks, Martin, and good morning, ladies and gentlemen. We appreciate you joining us this morning. For the full year 2011, we reported net sales of $3.2 billion and adjusted EBITDA of $230.3 million compared to net sales of $2.8 billion and adjusted EBITDA of $208.5 million in 2010. Adjusted EBITDA increased approximately 10% over 2010, but it did come in below our most recent guidance. And I'll comment on that later.

As Greg will go through in detail, we generated about $121 million of free cash flow in 2011, and this exceeded the top end of our guidance. As you know, during the last 4 years, we've experienced the most severe recession and depressed housing and construction market in the U.S. since World War II. During these times of slow growth and poor housing, the management team has focused on debt reduction and optimizing our cost structure to react to demand that was difficult to forecast. These are things that we can't control in a top market.

For the last couple of years, this focus allowed us to generate over $250 million of free cash flow. Generating such significant cash at the bottom of the cycle gives us confidence that we should produce substantially more free cash flow during the cycle upturn. This sets the foundation for us to be in a position to exceed the levels generated in past up cycles when looking at Georgia Gulf's history.

As I previously mentioned, our fourth quarter 2011 net sales and adjusted EBITDA came in below what we have projected. The largest impact here was a $16 million inventory holding loss in Aromatics caused by a 25% decline in benzene and a 40% decline in propylene prices during the quarter. And not surprisingly, these prices have substantially recovered in the first quarter. Additionally, the concerns in the global markets during the fourth quarter that have been well-publicized reduced demand for PVC and Aromatics as customers de-stocked and the uncertainty reduced overall demand. The volumes and pricing fell more than was expected for the normal seasonal drop-off.

In addition, these factors led to more aggressive PVC contracting positions for 2012. The net result was a significant downward pressure on PVC pricing in the fourth quarter, squeezing margins more than expected. These price drops played out in both the domestic and export markets. This $0.03 per pound price increase we have seen in January reflects PVC producers' desire to get some positive margin back in that business. In addition to the factors I have outlined, we did experience an unplanned outage in our Plaquemine site in late December that resulted in a loss of about 16,000 ECUs across the fourth quarter of 2011 and first quarter of 2012.

Reflecting back on the total year, the operational issues at Plaquemine and specifically our chloralkali unit are not acceptable in the future. Even though our chloralkali unit ran at higher operating rate than the industry in the fourth quarter of 2011, we target for those units to run more consistently than the results demonstrate for the past year.

During the year, we were approximately 11% below target for annual capacity operating rate. While some of these issues were the result of uncontrollable forces such as the Mississippi River flooding and other natural causes, others are correctable, and we intend to substantially improve the reliability of this plant for the controllable items.

Our chloralkali plant has regularly scheduled turnarounds every 3 years, and the next turnaround is scheduled for May of 2012. It will be one of the more substantial turnarounds we've taken in many years. I'll provide the expected financial impact of this turnaround when we discuss our outlook for 2012.

Turning to our segments. In the fourth quarter, we generated $33.5 million of adjusted EBITDA in Chlorovinyls compared to $56.3 million of adjusted EBITDA on the fourth quarter of 2010. The decline was driven by lower sales volumes and prices for PVC that was partially offset by higher caustic prices.

For the full year, our Chlorovinyls segment generated $197.9 million of adjusted EBITDA compared to $173.5 million in 2010. The increase here was driven by higher ECU values partially offset by lower caustic sales volumes and lower PVC margins particularly in the fourth quarter.

Our Building Products segment generated $8.7 million of adjusted EBITDA in the fourth quarter of 2011 compared to $1.2 million of adjusted EBITDA for the same quarter last year. This meaningful increase was the result of improved conversion cost and the adjusted EBITDA contribution from the Exterior Portfolio acquisition. And these positives were partially offset by higher raw material costs. For the full year, Building Products generated $57.3 million of adjusted EBITDA compared to $48.1 million last year. This 19% increase was due to our acquisition of Exterior Portfolio.

As part of our efforts to continue to improve the financial performance of our Building Products segment, we've decided to further reduce our manufacturing footprint and exit the fence product line. We were a small player in that fence business, and we either needed to grow that product or exit. It had about $17 million in sales in 2011 and was not contributing to earnings. We've also consolidated 3 other facilities in Canada. These consolidations will reduce overhead costs but not materially reduce production capacity.

Our Aromatics segment reported negative adjusted EBITDA of $3.3 million in the fourth quarter of 2011 compared to $9.7 million of adjusted EBITDA in the fourth quarter of last year. This decline was driven by the inventory holding losses I mentioned earlier. Volumes were also down based on the global slowdown.

For the full year 2011, Aromatics generated $11.9 million of adjusted EBITDA compared to $24.7 million of adjusted EBITDA in 2010. This disappointing year-over-year performance was driven by inventory holding losses in the fourth quarter that more than offset the volume increases we achieved in the year. Some of this reduction was recovered in January as the prices increased substantially for benzene and propylene. Consistent with our previously stated focus on debt reduction, we redeemed $59.9 million of debt prior to maturity during the fourth quarter. This brought our total debt reduction in the year to approximately $82 million.

Additionally, in January we sold our Air Separation Unit to Air Liquide for $18 million and entered a long-term supply agreement. The new supply agreement provides access to a competitively priced reliable supply of industrial gases to our Plaquemine facility.

So 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. Before we get into the details of our quarterly performance, I wanted to make you aware of a change in presentation of long-term debt on our balance sheet. Historically, we have included our $110 million lease financing obligation as a component of long-term debt. We are now presenting it on a standalone basis in a separate line item on the balance sheet.

This lease financing obligation, which is not debt in a normal sense, includes operating leases for certain of our manufacturing facilities for which we pay rent. Part of these rent payments are collateralized by $5.9 million secured letter of credit. As a result of this $5.9 million secured letter of credit, U.S. GAAP treatment requires that this $110 million lease obligation and corresponding real estate remain on our balance sheet until the terms of the collateralized rent are satisfied.

We are only obligated for the payments of the rents for these operating leases, which are approximately $7 million per year for another 5 years. Due to the underlying accounting for this lease financing obligation, the operating lease rent payments are classified as interest expense in our statements of operations, and our current and historical presentation of adjusted EBITDA as a result has excluded these rent payments.

Beginning with our 2012 adjusted EBITDA guidance, we are changing our methodology to present adjusted EBITDA numbers that reflect the approximately $7 million of interest on the lease obligation as rent expense. The net result is a $7 million reduction in 2012 adjusted EBITDA compared to how we would have presented it using our old methodology. Starting with our first quarter earnings release, we will show the current periods and prior periods with this new methodology for adjusted EBITDA.

Now let's look at our operating performance during the fourth quarter and the full year. We reported an operating loss of $2 million for the fourth quarter of 2011 compared to operating income of $33.6 million during the same quarter the previous year. The decline in operating income was driven by a $10.6 million net restructuring and asset impairment charges.

SG&A expense for the fourth quarter of 2011 was $38.1 million compared to $41.8 million for the fourth quarter of last year. The decline was mainly due to lower compensation expense. Our net interest expense for the fourth quarter was $15.4 million compared to $16.9 million for the fourth quarter of 2010. For the fourth quarter of 2011, we reported a tax benefit of $17.7 million due to the release of $11.8 million of tax reserves that relate to Royal Group prior to its acquisition in 2006. For the full year, our tax rate was negative 7.9%, primarily due to the release of $22 million of these types of tax reserves. We paid $19.1 million in cash taxes in 2011. For 2012, we expect to make cash tax payments of approximately $40 million to $50 million and have an effective tax rate in the range of 25% to 35%.

In the Chlorovinyl segment, fourth quarter 2011 net sales increased slightly to $321.5 million from $319.5 million during the fourth quarter of 2010. The segment posted operating income of $21.5 million in the fourth quarter of 2011 compared to operating income of $41.5 million during the same quarter in the prior year. The decrease in operating income was primarily due to lower sales volumes for PVC and caustic soda and higher raw material costs partially offset by higher caustic soda sales prices compared to the fourth quarter of 2010.

In the Aromatics segment, net sales decreased to $162.4 million for the fourth quarter of 2011 from $199 million during the fourth quarter of 2010. The decrease was primarily due to lower sales volumes.

During the fourth quarter of 2011, the segment recorded an operating loss of $3.7 million compared to operating income of $9.4 million during the same quarter in 2010. This decrease in operating income was due to inventory holding losses as, Paul mentioned, driven by a sharp decline in benzene and propylene prices during the fourth quarter of 2011.

In the Building Products segment, net sales were $189.7 million for the fourth quarter of 2011 compared to $174.4 million during the same quarter in the prior year. The sales increase was driven by the acquisition of Exterior Portfolio in February 2011. The segment operating loss was $11.6 million for the fourth quarter of 2011 compared to a $6.1 million operating loss during the same quarter the prior year. The decrease in operating income was due to $10.7 million of restructuring and asset impairment charges related to the facility consolidations, which Paul described earlier.

The total FIFO impact for the fourth quarter of 2011 was negative $9.6 million, almost all in Aromatics due to its inventory holding losses. In the fourth quarter of 2010, the FIFO impact was positive $12.2 million with half in Aromatics and the rest split between Chlorovinyls and 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 $131 million since September 30, 2011.

This sequential decrease was driven by seasonal decreases in accounts receivable and inventory. Compared to the fourth quarter of last year, controllable working capital decreased by $20.1 million, driven by continuing working capital management activities, partially offset by the addition of Exterior Portfolio and sizable increases in raw material costs.

On the cash flow statement, you will note that we generated $163.1 million of cash from operating activities as compared with $145.3 million for the fourth quarter of 2010, mostly as a result of the higher working capital reduction in the current period. Capital expenditures were $22.1 million for the fourth quarter of 2011 compared to $14.5 million in the fourth quarter of 2010.

For the full year, we invested $66.4 million in capital expenditures. This all results in cash -- in free cash flow excluding acquisitions of $121.1 million for 2011, compared to $138.1 million of free cash flow in 2010. These 2011 results exceeded our free cash flow guidance of $60 million to $120 million we issued at the beginning of 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 10.75% senior subordinated notes. We also repaid an $18 million secured note in December for a total debt reduction of $82.1 million during 2011.

As a result of this further debt reduction effort, we ended the year with net debt to EBITDA of 1.8x. Similarly, our interest coverage has continued to improve and is now 4.5x 2012 projected interest expense. These metrics have improved significantly over the last 4 years, and we are now within the capital structure guardrails we used to ensure we have a durable capital structure that supports our strategic plan throughout the cycle.

Now I will turn the call back over to Paul for our 2012 outlook.

Paul D. Carrico

Thanks, Greg. Before we begin the question-and-answer portion of the call, I'd like to give you a high-level perspective of our view of 2012.

We based our plans this year on the following macro assumptions: first, a slight recovery in U.S. and Canadian housing starts; second, a modest improvement in North American PVC operating rates; third, a continuation of strong PVC exports based on a favorable oil-to-natural gas ratio; and finally, natural gas costs averaging below $3.50 per million BTUs.

We're targeting to invest $80 million to $90 million of CapEx back into our business during the coming year. In chemicals, we will be making investments required to improve our reliability during our large chloralkali turnaround in the second quarter of the year. This turnaround will impact chloralkali operating rates by about 6 percentage points, and if we estimate, it will have a total one-time negative EBITDA impact of about $30 million to $35 million due to the increased expenses and the lost production.

Additionally, our ethylene supply portfolio will change as over half of our big cracker contract volumes rolls off and our average contract price moves closer to current market pricing.

The impact of this change is dependent on a number of unknown factors in the -- coming up during the year. But based on our current expectations, we believe the net impact of this shift in our ethylene supply portfolio will increase our annual ethylene costs by about $15 million to $20 million. Exactly how much of this cost increase gets passed on through price increases will be driven by the industry operating rates and the interplay between export and domestic demand.

Given these macro and operating assumptions, we're projecting that our adjusted EBITDA will be between $240 million and $270 million in the year. As Greg described earlier, this guidance includes the $7 million downward adjustment associated with the lease financing obligation interest expense going forward.

We also expect to generate free cash flow in the range of $50 million to $100 million. This guidance is based on assumptions that we are -- that are now somewhat conservative compared to the latest consensus macro estimates. Our current customer feedback also supports some improving conditions. While it's early in the year to call it trend so far in 2012, we've seen a solid uptick in our Building Products sales volumes compared to last year.

If conditions are sustained into the spring and continued to improve faster than we project, then we're prepared to react to the uplift. The 2-pronged opportunity in both chemicals supported by globally advantaged shale gas in North America and the potential for improving housing and remodeling places us in an ideal position for the future. Increasing demands from emerging regions should continue to drive strong export opportunities.

In North America, housing demand and remodeling will recover off historical lows and drive domestic demand higher. These dynamics should translate into substantial incremental earnings and cash flow for Georgia Gulf.

Before I open the call to questions, I'd like to briefly touch on recent announcements we made pertaining to Westlake's unsolicited proposal to acquire Georgia Gulf.

As previously disclosed, the Georgia Gulf Board of Directors reviewed Westlake's 2 indications of interest and determined they are far from compelling and do not reflect the intrinsic value of the company. We're confident about the opportunities ahead for Georgia Gulf and our prospects for delivering significant value to our stockholders. Our press releases and filings on this matter are available in the public domain and speak for themselves. As such, we'll not be providing additional information about this matter during the Q&A session, so we ask that you please limit your questions to our financial results and business outlook.

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

Question-and-Answer Session

Operator

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

Brian Maguire - Goldman Sachs Group Inc., Research Division

I just had a question on the ethylene supply contract rolling off. You said that about half of it was rolling off in 2012. I believe you said the net impact will be an increase in cost of maybe $15 million to $20 million. So I was just wondering when in the year that would take effect if that $15 million to $20 million is a fully annualized number, or if there's a greater impact if it was a full year change? And then when do you expect the other half of that contract to roll off?

Paul D. Carrico

Yes, the impact we mentioned, that reduction actually occurred at the end of last year. So you do see an annualized number there. And the remaining portions roll off in the next couple of years.

Brian Maguire - Goldman Sachs Group Inc., Research Division

Okay, got it. So this 2012 would be the most significant single-year impact from it though?

Paul D. Carrico

Yes. Based on the current pricing and dynamics of all the things that impact that. There's a lot of moving parts there, but if everything stayed the same, it would be, yes.

Brian Maguire - Goldman Sachs Group Inc., Research Division

Got it. And then for the inventory charge in the Aromatics segment given that we've already seen benzene and propylene prices rise pretty significantly in the first quarter, would you expect a lot of the -- a lot of that hit in the fourth quarter to reverse itself in the 2012 time period?

Paul D. Carrico

Yes, it was a rather dramatic switch around on the prices. And so with the benzene and propylene back up to those levels they were prior to the drop, we're seeing a lot of that come back.

Brian Maguire - Goldman Sachs Group Inc., Research Division

Okay. And Paul, I think about last year, at the Investor Day, you outlined kind of a longer-term normalized EBITDA. You thought the company might achieve something like $350 million. I was wondering if you could provide an update given the current natural gas prices and your kind of newfound ethylene cost profile with those contracts rolling off?

Paul D. Carrico

Yes. I think there's a lot of moving parts with not only with the Chlorovinyls, but Aromatics and Building Products. As a general comment though, we would think that projection is higher in today's market with where things have gotten to at this point. We have not worked up a specific number to give you, but we think it's above that level at this point.

Operator

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

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

Just a comment. Typically, when companies are in the midst of a hostile takeover bid or whatever, they would restate their EBITDA numbers so that they would look higher optically than rather than the way you're doing it, so you should be applauded for your honesty here in making that change. But it sounded like as you're looking at the guidance for 2012 that there were some things on a macro basis that were actually running better than when you put this together, I don't know, a week or so ago. Can you give us some specific numbers in terms of -- for example, on the housing starts, what your expectation is in the U.S. and Canada that you're predicating this 240 to 270 range?

Gregory C. Thompson

In the -- Frank, this is Greg. In the U.S., we actually -- we built our budget off of 640,000 U.S. housing starts. And in Canada, I think we're about 190,000 starts is what we have assumed. Actually, I saw this morning, I guess in the U.S., it's a little bit higher than that based upon this morning's announcement. And so we feel pretty good about that, but I would caution you is the underneath of that, there is the breakdown between single-family and multi-family, and we're more concentrated in single-family. So you just have to look at where our products predominantly go. So that is -- I think it's related to your specific question on housing starts. That's what we built our guidance off of.

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

All right, terrific. And then as you look at -- can you provide what your operating rates were in the Chlorovinyls sector in the fourth quarter and what sort of expectations you have for the first quarter there?

Paul D. Carrico

Yes. We've got that if you'd give us just a second. Fourth quarter was in the high 80s and first quarter, we had some reduction at the beginning of the quarter for -- as a carryover from the fourth quarter shutdown I mentioned. But we expect it to be fairly on the high end of the range based upon where we are today. Of course, we've got another 1.5 months left, but we don't see anything that's planned for the rest of the quarter.

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

All right. So on average, February and March should run higher than that high 80s type of operating rates in Chlorovinyls. And I guess we saw that one of the caustic producers is out there with another price increase in the first quarter. Can you comment on directionally where you see chlorine and -- well where do you see caustic prices running right now?

Paul D. Carrico

Yes. There's a caustic increase out there, and I think some portion has been recognized in the market, or is about to be recognized in the market. But it's really too early to call that. Kind of like the rest of the industry, it's -- we're in the start-up mode for the year. When you look at the January and February business and you kind of project what's going to happen, but it's really not necessarily clear how strong March and April will be. And I think that's going to be the key as to how much of that price increase gets implemented.

Operator

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

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

You said that your CapEx for this year might be $80 million to $90 million, I guess up from about $65 million. What accounts were the increase from the 2011 level?

Paul D. Carrico

There is kind of a combination of factors. Some is a little bit more expenditures particularly associated with the chemicals side with the chloralkali and such with the turnaround. The other is some more opportunistic things that we'll do in the context that we think that we're in a transition year to where projections being out there with different levels of optimism going forward. But we feel pretty good about the coming years, and so we'll be trying to put ourselves in position to take advantage of those in a stronger way.

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

So if I understand what you're saying, that is -- there's some spending on working on expanding your capacity in various areas, is that right?

Paul D. Carrico

That's correct, yes. Particularly we have things like innovation that we're doing in Building Products and some other, I'll call small debottlenecks and different things, but those kinds of things.

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

So the Aromatics results, despite the $16 million holding loss were still pretty good considering the size of the loss. Why was that? What went right in Aromatics this quarter?

Paul D. Carrico

Well, I think we've been trying to make the case for some time now that, that industry is in a state of transition from a period of relatively poor profitability in the 2000 to 2010 period to where it's progressively got some dynamics that are moving in the right direction these days. You get a situation where cumene instead of being an excess for North America is becoming more imbalanced, might actually be short for some period of time as people take additional capacity off, but that's partially speculation. And then the international market is still there at some level. We kind of expect that to have taken a bit of a drop-off in the fourth quarter, but also come back as we get into this coming year. So you have a dynamic where the operating rates in general, both cumene and phenol, are projected to be higher in the coming year and perhaps even better than that if the supply-demand balance, particularly on the demand side changes -- or excuse me, on the supply side changes, perhaps some capacity is shutdown.

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

And for your turnaround a little bit later in 2012, how much capacity is going offline and for what period of time?

Paul D. Carrico

It's the chloralkali unit in total. And you can just use that number. I think we said 6% roughly of the capacity is what you'll lose, something like that, so.

Operator

Your next question comes from the line of Andy Cash with UBS.

Andrew W. Cash - UBS Investment Bank, Research Division

Just a couple of things. Number one, if you look at gas at $2.50 versus last year when they were around $4, you got a $1.50 swing, and then you've got -- these PVC shipments must be getting ready to just take off with a really warm winter. People are starting to build houses even up in Minnesota. I was up there yesterday, I mean, they're breaking ground. So I mean, you...

Paul D. Carrico

We're glad to hear that.

Andrew W. Cash - UBS Investment Bank, Research Division

I mean, you had $0.30 roughly adjusted earnings last year. I mean, why couldn't you guys make $0.80 to $1 in the first quarter?

Paul D. Carrico

Well...

Gregory C. Thompson

You will be one of the first to know if we do. We...

Andrew W. Cash - UBS Investment Bank, Research Division

Probably I'm the first to forecast it correctly but...

Paul D. Carrico

No, I think what we've try to do is lay out a situation here where what you're talking about breaking ground, building and all, the customers are talking that up a little bit these days. And so we have a good feeling about that right at the moment, but we've had these good feelings before, and so we temper that with we got to see it to believe it. And so the real time to see it and to believe it is the March-April timeframe as the economy really gets into gear on housing or construction or whatever. And likewise, with that uptick, there's going to be the push on the export market because the supply availability for North American producers will drop as we get into that seasonal uptick. And so that will pressure -- and it already is pressuring exports pricing so.

Andrew W. Cash - UBS Investment Bank, Research Division

I know, but if you just look at gas, I mean, you guys buy about 65 million BTUs a year, is that right?

Gregory C. Thompson

No, 28 million.

Andrew W. Cash - UBS Investment Bank, Research Division

28 million? Per year, it's 28 million?

Paul D. Carrico

Yes.

Gregory C. Thompson

Yes.

Andrew W. Cash - UBS Investment Bank, Research Division

Okay. So I was off on that one. I -- just finally though, if you generate between $50 million and $100 million in free cash flow this year, bondholders, would you guys pay a dividend?

Gregory C. Thompson

Yes, I mean we have some -- there are some baskets and limitations that we have, but we've consistently said we'll look at paying a dividend at the right time as one way to return some additional cash to shareholders. And we'll certainly look at doing that. We do have some flexibility under our baskets to pay some level of cash dividend.

Operator

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

Roger N. Spitz - BofA Merrill Lynch, Research Division

You may have said this at the beginning of the call, but I didn't hear it. PVC sales volumes, how much were they down? And were they coming more out of exports or domestic volumes?

Paul D. Carrico

Yes, in terms of the end of the -- you're talking about the fourth quarter now?

Roger N. Spitz - BofA Merrill Lynch, Research Division

Yes.

Paul D. Carrico

Yes. On the fourth quarter, they were down both domestically and export. I guess there were some availability on the export side out there, but the pricing got to be fairly ugly towards the end of the year. And the industry -- what I've got is the fourth quarter operated at about 76%.

Roger N. Spitz - BofA Merrill Lynch, Research Division

76% operating rate?

Paul D. Carrico

Yes.

Roger N. Spitz - BofA Merrill Lynch, Research Division

Okay. And what do you expect 2012 CapEx to be?

Paul D. Carrico

$80 million to $90 million was what we have in the comments we had here so.

Roger N. Spitz - BofA Merrill Lynch, Research Division

And you've sold the Air Separation plant for $18 million in January to Air Liquide, I think I heard.

Gregory C. Thompson

That's right.

Roger N. Spitz - BofA Merrill Lynch, Research Division

Will you be now adding the $18 million back your debt because it's sort of now like a capital lease, or will this be an expense? Or is that what the 7 million a year leasing payments you were referring to in your comments?

Gregory C. Thompson

Yes -- no, that -- my comments about the lease financing obligation is totally unrelated to the Air Separation sale. So the Air Separation sale, which we got cash of $18 million, that will just be part of our kind of cash levels that we look at for -- to offset some of that seasonal working capital build that we always experience in the first half of the year. And actually, that will result -- that $18 million of cash proceeds, that asset had a pretty minimal book value because it goes back many, many years. And so we'll actually have a gain that we'll recognize for that in the first quarter. That's outside of the adjusted EBITDA guidance that Paul provided.

Roger N. Spitz - BofA Merrill Lynch, Research Division

So then it sounds like you'll expense the cost from -- that you're going to have to pay Air Liquide. Do you have a number for that?

Gregory C. Thompson

Yes, that's right. We will going forward. It will just be rather than us operating the plant and those costs going through in our operating results as they have up until January when we sold the plant. Going forward, we will be paying Air Liquide for those operations, and the 2 are really, really offset. No impact on operating results.

Operator

Your next question comes from the line of Bill Hoffman with RBC.

Bill Hoffman - RBC Capital Markets, LLC, Research Division

Paul, just a little bit further on this sort of export picture. What percentage of your sales in Q4 were under the export markets and -- because I know that obviously, those export markets got weak. And where do you see that percentage being capable of going this year?

Paul D. Carrico

We've tended to be a bit below the industry. I think they were about 1/3 for the fourth quarter. And as we look into this coming year, it really greatly depends on the domestic demand and where that level gets to. We would expect the industry probably to stay at the same level or increase a bit from where it's been. Our volumes probably will stay closer to flat or down based on domestic demand.

Bill Hoffman - RBC Capital Markets, LLC, Research Division

Okay. And then just when you look at the Building Products segment, I just wondered if you could help us -- compare it maybe today versus where you were a couple of years ago because you guys have done a lot of restructuring, a lot of consolidation, et cetera, and as we start to see some improvement in the volumes of the housing starts, any thoughts on sort of where the potential EBITDA generation in that business are today versus what it was 4 or 5 years ago?

Paul D. Carrico

Yes, we've frequently said in the past that that's got a range of 10% to 15% EBITDA in better times. That's what was demonstrated by other people in this business over the years. And so I guess I would just refer you back to that kind of metric. Certainly, from an industry structure point of view, the last several years have really taken its toll on the weaker producers out there, and you've seen a lot of consolidation, rationalization of industry capacity that wasn't needed. So to the extent there is this pickup and we get back to some norm in housing and construction, it's got the potential -- I see no reason that it wouldn't have the potential to get back into a zone that was more typical of the past. People in this kind of a market still tend to be protective of market share. And pricing and margins have been tough. You can see that in all the public information out there on other companies. But as a directional comment, as soon as this housing thing turns around a bit stronger, you would expect those margins to widen because basically, people can't continue at the current rate with the margins they've got and particularly those that have higher debt or higher interest expenses than we do.

Bill Hoffman - RBC Capital Markets, LLC, Research Division

And just to remind me, the percentage of sales there in Canada at this point, Building Products?

Gregory C. Thompson

It's about half and half actually right now.

Operator

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

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

Quick one question. On the Aromatics side, as you said, there's been a fairly significant change in the overall structure on the industry. And that is -- that whole area is sort of typified by one of those A+, D+, C-type of contracts with C being the margin. Given the changes that you're talking about and the possibility that if Sunoco chooses to close a refinery and feel you could take out another big chunk of cumene, and that's what would probably turn the market cumene short. What do you think C goes to in terms of like percentage gains or -- and I don't remember exactly what C is, it was a $0.02 or a $0.03 number, but has it got the possibility of 50% or even -- maybe even 100% higher than it is as that market gets short, especially if housing starts to come back since phenol goes into that market as well.

Paul D. Carrico

Well Charlie, if you have a number for C, I don't think I gave it to you. But I would say that as a general comment, the speculation about perhaps that cumene operation being shut down is certainly still out there, and I guess we'll get the answer to that by mid-year based upon the published information. That will make the industry, as you say, really very snug to maybe even short. I suspect people will come up with ways to modestly improve their capacity and make up a lot of that or at least a fair amount of that. But in general, that's way different than the last 10, 15 years where there was a substantial excess. So the marker for that additional uptick, I'll say, has got to improve somewhat measurably because the profitability has been so poor in that business for such a long period of time. So we expect it to be of substance, and we'll just have to play that out as we go forward. It won't reduce the periodic swings like we had in the fourth quarter where, okay, for 3 months you have a rather significant drop-off in values of benzene and propylene. You get a big hit and then directionally, it should come back with recovering prices in the next quarter or 2 so.

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

And then as a follow-on, you're getting out of the sense business, that gives you a little bit of capacity, so to speak, to work with. Is that going to go to any other specific Building Product? I mean the tonnage that you were consuming in terms of PVC, is that going to go somewhere else within your Building Products, or is it just going to become PVC that you might ultimately sell? Or how do you look at that?

Paul D. Carrico

Yes, it's not material in the context of the amount of the volume, and we fully expect that the Building Products business in total will consume a lot more then that as the markets come back and we see the recovery in housing that we've talked about. So it's not going to be a big factor in that.

Operator

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

Gregg A. Goodnight - UBS Investment Bank, Research Division

The way the first quarter is shaping up, you could potentially have a pretty positive FIFO tailwind in your earnings. Could you guys help us size that a little, that's always very difficult for us to do.

Gregory C. Thompson

Yes. I guess based upon some of the volatility we have that occurs in the input costs, it's kind of difficult for us to do that as well. But I would think -- Paul talked about the -- we both have talked about the inventory holding loss in Aromatics for the fourth quarter of $16 million. Based upon -- as the current trends continue, I would expect to get an awful lot, if not all of that back in the first quarter, just related to the Aromatics first quarter. And then after that, there might be -- there could be some further -- I wouldn't put it at that kind of level, but there certainly could be some further FIFO benefits resulting from other input cost increases that would be somewhat additive to that. But I guess -- so that's about the best color I could give you on it, Greg.

Gregg A. Goodnight - UBS Investment Bank, Research Division

Okay. No, I appreciate it. Any help on that area's definitely appreciated. Ethylene prices, as been pointed out, ethylene prices have gone down substantially, but the margins -- spot margins for ethylene are way up. And some people are predicting despite prices -- spot prices of ethylene being up that perhaps contract prices could ease off in February. Do you guys have a view for what contract the ethylene is likely to do the remainder of the first quarter?

Paul D. Carrico

Yes. It's pretty limited. It's tough to predict that industry since it's maintained fairly strong margins despite the fact the ethane has dropped off. Sooner or later, I guess, I would expect that to catch up and show some reflection in the market pricing. But to say that we've got a view other than what's already published by the folks out there that forecast this is probably not any more informed than they are so.

Gregg A. Goodnight - UBS Investment Bank, Research Division

Okay. Now that's a hard one to call also. But you've mentioned your pick-up in CapEx. I was wondering about your announced chlorine addition project. Is any of the CapEx that you're projecting for this year going into that project, say pre-engineering, or could you just generally update us on the status of that project?

Paul D. Carrico

Yes. There's some small monies in pre-engineering right now as you pointed out, but it's not big-ticket dollars at this point.

Gregg A. Goodnight - UBS Investment Bank, Research Division

Okay. So what is your current best thinking in terms of the timing of an execution of that project?

Paul D. Carrico

I think I'll hold that until either next quarter's call or mid-year, we should be able to update you. We're doing that pre-engineering, so we really get our arms around timing and costs and all that. And we got another couple of month or 2 before we get all that information so.

Operator

Your next question comes from the line of Christopher Butler with Sidoti.

Christopher W. Butler - Sidoti & Company, LLC

And just sticking with the CapEx question, are there any other maintenance outages that are planned for this year that you're pushing up or would otherwise have been in other years in preparation for an improving demand environment?

Paul D. Carrico

Not really. They're all -- what's in the plan production schedule for this year are more or less along the traditional planning process we've had. So we're not doing anything ahead of schedule. And whatever we're doing has been included in that number that we gave you.

Christopher W. Butler - Sidoti & Company, LLC

And as you exit the fence business and closed some of these sites, what kind of savings are you expecting from that and the timing on when we might start to see that in the numbers?

Gregory C. Thompson

Yes. In 2012, Chris, we don't expect much of the savings to come through because it's going to take us a little more time to exit all of those locations. And there are some costs just from -- because we'll use some of the equipment in other locations and those kinds of things and some inefficiencies related to moving around that doesn't go through the restructuring charge. And so I would expect it to be neutral to 2012. In 2013, I guess we've kind of -- our forecasts, therefore, just related to this, everything else being constant for maybe a mid-single digit million kind of -- so somewhere in the $4 million, $5 million sort of range of annual savings going forward as a result of the actions.

Christopher W. Butler - Sidoti & Company, LLC

And shifting gears to Aromatics with the rebound in propylene. Have we seen a shift from customers from delaying to restocking that may add an extra benefit to the first quarter?

Paul D. Carrico

Absolutely. Everybody really cut back in November and December. And we really saw a turnaround in January. Of course, that helped to drive the prices where they got to. But it seemed like everybody had the same idea in November and December and then everybody had the same idea going the other way in January and February.

Operator

[Operator Instructions] And your next question is a follow-up from Brian Maguire with Goldman Sachs.

Brian Maguire - Goldman Sachs Group Inc., Research Division

Now that your ethylene contracts and prices are shifting a little bit more towards market prices, it seems like going forward, there could potentially be a big opportunity if you were to try and backward integrate into that molecule, I know it's not an easy task considering you don't have any existing assets there of your own. But how are you kind of thinking about that opportunity maybe longer term, 4 or 5 years down the road? And how would you like to solve for your ethylene needs?

Paul D. Carrico

Well, even though I have a fondness for ethylene crackers, I have to be clear that we're not going to build another cracker. There seems to be plenty of them coming down the pipe for ethylene volumes in future years. And so we would look to strategically align ourselves with 1 or 2 of those folks that are coming up with all those additional capacity in pounds going out there. And it's an opportunity, which I think will be there for us to look at and to make a constructive decision on. But it's not something where we feel like we need to go out and build it to solve that problem. In reality, with ethylene, where it is right now, PVC should be at a marker and margin above that ethylene price because if people have excess ethylene, they ought to be selling it into the ethylene market rather than going into PVC. So you would think that the PVC margins going forward reflect the mark-up that we've seen in past years over and above what your ethylene cost are.

Brian Maguire - Goldman Sachs Group Inc., Research Division

And is it -- have any of those conversations around condo crackers started to take place, or is it still too early for you?

Paul D. Carrico

There's been a lot of people speculating and talking about what ifs. I think it's way too early to talk about anything definitive. But certainly, I would be really surprised if there's not some desire to do that type of thing. If you think about us, we effectively at full rates consume 1.5 billion pounds of ethylene. That's a pretty nice domestic volume to place with somebody that wants to keep their plants operating at higher rates. So we think that will be attractive to people in the coming years.

Brian Maguire - Goldman Sachs Group Inc., Research Division

And I saw some comments from Sunoco about some softening aluminum production and demand for caustic there. Are you guys anticipating some drop off in caustic demand and some softening in the caustic prices?

Paul D. Carrico

I think the softening has occurred in the sense that the price increases are not flowing through as much as was anticipated. To make a call on that, that was kind of like the other things we've talked about. It's nice to speculate about where things are headed in this January, February timeframe, but the real proof comes when we get a little further down the road into the spring.

Operator

And there are no further questions at this time. Are there any closing remarks?

Martin Jarosick

Yes. I just want to thank everyone for participating. We look forward to giving you another update in May.

Operator

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

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