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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

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) Q2 2012 Earnings Call August 2, 2012 10:00 AM ET

Operator

Good morning. My name is Heather, and I will be your conference operator today. At this time, I would like to welcome, everyone to Georgia Gulf's second quarter financial results conference call. [Operator Instructions] Thank you. I would now like to turn the call over to our host, Martin Jarosick. Sir, you may begin.

Martin Jarosick

Thank you, Heather, and good morning, everybody. Welcome to today's conference call to discuss Georgia Gulf's second quarter financial results. Joining me today in the call are Paul Carrico, President and CEO; and Greg Thompson, CFO.

There are presentation materials available for your reference on our website, and our press release issued last night with our second quarter financial results contains a forward-looking statement and certain other legends which are incorporated into and considered a part of this conference call. I will remind you that the discussion during the call will contain forward-looking statements reflecting Georgia Gulf's current view about future events. These statements involve risks and uncertainties that may cause actual results to differ. Georgia Gulf does not take any -- undertake any obligation to provide updates to these forward-looking statements. This presentation also contains certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are provided in the appendix of the presentation materials. For additional information, please refer to Georgia Gulf's filings with the SEC.

Now I'll turn the call over to Paul Carrico. Paul?

Paul D. Carrico

Thanks, Martin, and good morning, ladies and gentlemen. We appreciate you joining us this morning. I'll go through the details of the quarter in a few minutes but before that, I'd like to comment on our recently announced merger with PPG's commodity chemicals business. We were very pleased to announce this transaction. This is an exciting and unique opportunity to create an industry leader, while at the same time providing outstanding options for growth and enhanced shareholder value. The combination achieves one of our key strategic initiatives of increasing Chlorovinyls integration. At the same time, this will take the company to another level as we will have more diversity in our product portfolio.

All this was accomplished without negatively impacting our leverage ratios. The combination is projected to be accretive to both earnings and free cash flow from day 1.

As I stated before, I'm convinced that the development of shale gas has dramatically altered the global petrochemicals landscape for many years to come. Based on the favorable oil and natural gas ratio, as well as the abundance of natural gas liquids supply, North American ethylene and chlor-alkali producers have moved to the low end of the global cost curve. Our proposed merger will create the third largest chlor-alkali producer in North America, and the merged company will have about 70% integration to natural gas-fired cogeneration. We feel this position to combine the company is one of the most competitive chlor-alkali producers in the world.

So with those comments on our bright future, I'll turn to our reported results. For the first half of the year, we reported $129.8 million of adjusted EBITDA compared to $115.6 million in the first half of 2011. For the second quarter of 2012, adjusted EBITDA was reduced by about $35 million due to our planned outage at our chlor-alkali facility in Plaquemine, and an extended ramp up to full rates. We have no planned chlor-alkali outages the rest of the year and expect to run at near full rates.

Once the merger is complete, we expect future chlor-alkali outages to have less of an impact due to the operational flexibility gained from having multiple chlor-alkali facilities.

During the second quarter, we experienced softer sales and less adjusted EBITDA in Building Products compared to the same quarter last year. If you reflect back on the first 2 quarters of the year, there's no doubt that a large part of the sales improvement we saw on the first quarter was full forward demand due to the unseasonably warm weather. The Building Products division has grown sales 4% on a constant currency basis for the year-to-date period.

In the PVC end markets, the unexpected decline in ethylene prices in May and June sparked an inventory correction. As is typically the case, PVC customers reduce orders to minimize the potential for inventory holding losses in this type of market. Since that dramatic decline in pricing, ethylene now appears to have stabilized at a new lower level.

We believe PVC prices will also stabilize and orders will pick up as inventory levels need to be replenished. PVC prices in the export market have already started to move back up, which is a good sign that the inventory correction may be behind us.

In Aromatics, dropping propylene prices caused a sizable inventory holding loss that partially gave back the large inventory holding gain we recorded in the first quarter. If you adjust for both of the inventory holding impacts, we have generated about $28 million of adjusted EBITDA for the first half of 2012, well above the same period in 2011.

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 remind you of the change in the presentation of long-term debt on our balance sheet. Beginning with the 2012 adjusted EBITDA guidance we provided in February, we changed our methodology to present adjusted EBITDA numbers that reflect the approximately $7 million of annual interest on the lease financing obligation as rent expense. The net result is a $7 million annual reduction in 2012 adjusted EBITDA compared to how we would have presented it using our old methodology.

Now let's look at our operating performance during the second quarter. We reported operating income of $28.4 million for the second quarter of 2012 compared to operating income of $35.5 million during the same quarter the previous year. As you will recall, the second quarter of 2011 was impacted by an unplanned chlor-alkali outage and high water on the Mississippi River. The impact of the planned core chlor-alkali outage in the second quarter 2012 was slightly larger.

Additionally, operating income for the second quarter of 2012 was impacted by a $7.4 million increase in unallocated corporate expenses, mostly professional fees from both the previously announced and withdrawn unsolicited offer, as well as the proposed merger with PPG's commodity chemicals business.

SG&A expense for the second quarter of 2012 was $51.7 million compared to $48.2 million for the second quarter of last year. The increase was mainly due to $1.4 million of higher stock compensation expense and $1.4 million of benefit due to improved bad debt experience in the second quarter of 2011 that did not repeat in 2012.

Our net interest expense for the second quarter was $14.5 million compared to $16.9 million for the second quarter of 2011. For the second quarter of 2012, we reported a tax benefit of $17,000 for an effective tax rate of nearly 0, primarily due to the favorable resolution of uncertain tax positions that relate to Royal Group prior to its acquisition in 2006. Additionally, about half of our earnings before taxes in second quarter were generated in Canada where our effective tax rate is 0.

For 2012, we expect -- for the full year of 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%. However, as I've indicated previously, our effective tax rate remains highly sensitive to the geographic location where earnings are generated and the potential for adjustments to previously-establish reserves for uncertain tax positions.

Turning to our segments. In the second quarter, we generated $45.8 million of adjusted EBITDA in Chlorovinyls compared to $51.3 million in the second quarter of 2011. As I mentioned earlier, both periods include a large impact from chlor-alkali operating rates. The decline was driven by higher maintenance expense and loss production in the second quarter of 2012 compared to maintenance expense and loss production in the second half of 2011 -- excuse me, second quarter of 2011. This was partially offset in second quarter 2012 by lower chlorine and natural gas costs and higher PVC volumes.

Our Building Products segment generated $24.5 million of adjusted EBITDA in the second quarter of 2012 compared to $28.1 million for the same quarter last year. This decrease was the result of lower sales volumes and higher SG&A costs partially offset by lower distribution costs.

Our Aromatics segment reported adjusted EBITDA of negative $2 million in the second quarter of 2012 compared to negative $7.1 million in the second quarter last year. This change was driven by higher sales volume and the improved supply demand balance, partially offset by inventory holding losses. The inventory holding loss in the second quarter of 2012 was $13.7 million compared to a gain of $900,000 and the lower of cost, our market adjustment of $6.5 million in the same period last year.

The total FIFO impact for the second quarter of 2012 was a negative $30 million, with about 30% of that in Aromatics, 45% in Chlorovinyls and the rest in Building Products. In the second quarter of 2011, the FIFO impact was a benefit of $13.9 million [ph] with 45% from Aromatics, 30% from Chlorovinyls and Building Products contributing the remainder.

Now let's discuss working capital. We defined 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 $28.6 million from March 31, 2012, to June 30, 2012. This sequential decrease was driven by a decline in inventories and accounts receivable caused primarily by the turnaround and inventory destocking Paul described earlier.

Compared to the second quarter of last year, controllable working capital fell $97.2 million, driven by a continuing focus on working capital management and lower raw material and energy costs. Compared to second quarter last year, our net days of investment in working capital were reduced by about 7 days.

On the cash flow statement, you will note that we generated $70.5 million of cash in operating activities as compared with $4.2 million for the second quarter of 2011. As a result of this strong performance in our cash flows for the first half of the year, for the full year, we now expect to be at the upper end of our guidance of $50 million to $100 million of free cash flow.

Capital expenditures were $27.1 million for the second quarter of 2012 compared to $12.8 million in the second quarter of 2011. We now expect full year 2012 CapEx to be at the low end of our $80 million to $90 million range.

Now I will turn the call back over to Paul for some comments on our outlook for the remainder of the year.

Paul D. Carrico

Thanks, Greg. Before we begin the question-and-answer portion of the call, I'll comment on our current view of 2012. In the second quarter, sharply-falling ethylene prices triggered an inventory destocking cycle. This caused volumes to decline and PVC prices to seek a lower level. We believe PVC prices have now bottomed out and, in fact, are likely to see price recovery in both export and domestic markets. This is already the case in the export market segment.

Natural gas has moved out of the $2 range into the $3 range but still remains significantly advantaged oil. This will continue to put North American producers in a good position to supply vinyl to world markets.

We believe housing starts and the remodel activity will remain on track for a modest improvement over full year 2011 levels. So given these expectations and our year-to-date performance, we are maintaining our 2012 adjusted EBITDA guidance of $255 million to $285 million. As Greg described earlier, this guidance includes the $7 million downward adjustment associated with the annual lease financing obligation.

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Ryan (sic) [Brian] Maguire.

Brian Maguire - Goldman Sachs Group Inc., Research Division

I was wondering if there was a meaningful change in mix of PVC sales between domestic channels and exports in the quarter and whether that might have had a positive impact on your margins.

Paul D. Carrico

Versus which time period?

Brian Maguire - Goldman Sachs Group Inc., Research Division

Versus the same quarter a year ago.

Paul D. Carrico

Okay. I'd say just generally speaking, both were up from last year. Let me qualify that. It looks like volumes were about flat on the domestic side and up a bit on the export side.

Brian Maguire - Goldman Sachs Group Inc., Research Division

Okay, great. And then I know a year ago, you had maybe an easy compare when you had the issues of the Mississippi River flooding, but it was still impressive to see the volumes of PVC up year-over-year despite the turnaround at Plaquemine. So were you able to source chlorine from the third party? Or had you built enough inventory before the turnaround that you were able to kind of achieve that?

Paul D. Carrico

Yes, we went throughout planning process where we knew for a long time ahead of time that, that was going to -- the outage was planned, and so we did a combination of both. We got some chlorine on the outside, but we also had some inventory in light of that outage being so long, so.

Brian Maguire - Goldman Sachs Group Inc., Research Division

Okay, great. Just one last one, if I could. Could you just update us on your nat gas hedging position through the rest of 2012?

Paul D. Carrico

At this point, we're very limited, almost 0 for that matter. But we may change that as we get into the hurricane season. Although there is much less of an impact these days on the Gulf of Mexico natural gas outages. So we'll be evaluating that as we go forward.

Operator

Your next question comes from the line of Frank Mitsch.

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

So now that there's been so much period of time since you announced the deal with PPG. Have you heard anything with respect to the regulatory agencies? Or have you gotten any feedback from the customer base? Can you give us any update on that side of the equation and, therefore, your confidence in terms of this transaction closing by year-end or so?

Gregory C. Thompson

Well, all that will be coming out when we file the proxy, Frank, related to all the details of the transaction. I think as we've said before, we've -- the structure is one that has been done before, and so we're still in the same timetable that we previously communicated that should close by the end of 2012 or early 2013.

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

All right. So no comments at this point in terms of any friction from the customer base?

Gregory C. Thompson

Yes, that's right. We can't really go into that.

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

All right, terrific. And I know you expected a slight improvement on the housing front. Can you throw a number out in terms of what you're basing it on? And then furthermore, what, if anything, did you see in terms of a pull forward from Q2 into Q1? How did that actually play out for your Building Products unit?

Paul D. Carrico

Yes. On a pull forward, a large percentage of the Q1 improvement was associated with the warm weather, and so it transferred over into Q2. And so when you look at the total of the year, which is kind of the way we started reflecting back on it now, we're up a bit and it does seem like housing's bottomed and moving up in terms of, I'll say, the attitude in the customer base out there. But still remains to be seen if that strength holds in the rest of the year and in the next. We, at this point, feel pretty good about it though.

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

All right. So mid-600,000, 700,000 units something like that this year?

Paul D. Carrico

Yes, something like that, yes.

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

And lastly, can you talk about your operating rate, your expected operating rate in your chlor-alkali unit here in the third quarter and actually in your Chlorovinyls units? In general, do you plan on running flat out? How do you envision your operations going?

Paul D. Carrico

Chlor-alkali, I don't have a number for you, but I think at this point, we expect to be somewhat above the industry rate as it's forecasted at this point. But that doesn't really necessarily impact whatever that is. Our vinyl chain, we still expect to run pretty good on the vinyl chain. We see that strength still continuing in export. And so to the extent that domestic demand doesn't pick up to higher levels, I believe there'll be volumes available internationally to make up that difference.

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

All right, and the $60 per ton increase on caustic, how is that trending?

Paul D. Carrico

Looking positive at this point. We see some of it's already been booked and we expect more to be booked. So we think that's headed in a good direction at this moment at this point in time.

Operator

Your next question comes from the line of Jeff Zekauskas.

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

When I look over your Building Products revenues for the first half, they're up a little bit versus the first half last year. Given the strength in housing starts, are you surprised that they're not up more?

Paul D. Carrico

Well, since we're based a fair amount in Canada, as well as U.S., plus geographically, we're a little different than where some of the housing starts are occurring, no, I can't say that at this kind of a low level of recovery that we're surprised one way or another. I think it's in the infancy, if you will, of this move up and we're coming off the bottom. So we still feel strongly that we have strength with our customer base, and that it will come as the housing gets a little bit more firm and its uptake.

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

Were your volume growth rates for the first half very different in the U.S. versus Canada?

Paul D. Carrico

I don't have that number handy. They were -- housing and volumes in Canada have been up a bit. And so I would say if you looked at across the whole 6 months, we're probably trending in the same general direction in both areas.

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

Okay. And just a couple more quick questions. When I look at your Chlorovinyls returns, it looks to me like you made some money selling caustic soda, but you didn't really make much money selling PVC. Is that right, or did you lose money selling PVC?

Paul D. Carrico

I think margins on PVC are a contributor. Certainly not to where we hope they get to as the demand levels progress later this year and into the next couple of years. If you look at the forecast, there's a lot of room for some improved operating rates in the industry, and that will tend to firm the margins. But no, would say that everything's contributing at this point.

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

Do you have any major turnarounds next year in 2013, or did PPG plan to have any major turnarounds?

Paul D. Carrico

I can't really comment on PPG. As far as we're concerned, we don't have something to the order of magnitude that we've got in the chlor-alkali. We might take a short outage, but not anything like we took this year. And then there's almost always some amount of outages associated with the BCM plans or something like that, but again, nothing along the magnitude of what we've seen this year.

Operator

Your next question comes from the line of Bill Hoffmann.

Bill Hoffman - RBC Capital Markets, LLC, Research Division

Paul, I wonder if you could just talk a little bit about sort of the monthly flows just on the Building Products side? I mean, we know there was some pull forward in the first quarter, but I'm just sort of curious as you went through the summer, whether the demand was still there running relatively consistently? And then maybe just as you look into the fall building season, some thoughts on that whether you think it's going to be better or weaker than last year?

Paul D. Carrico

Yes, it's really a little tough to call right now. You look at June and July, the volume started turning over a bit if you look at kind of a weekly graph of what the sales are, which, that's not necessarily atypical, because a lot of people take reduced or outages in the June or July period, so it's to be expected to a certain extent. But it's nothing dramatic in terms of the turnover. I guess my expectation right now is that I would say that the same way we were talking about PVC customers in the Building Product side, there has been some management of their inventories. So when you look all the way through the chain, that there's probably a little bit more strength to be had in getting in August and September, but that is tempered by the fact that a lot of people still have this concern about where the global world economy's going and what's going to happen in this and that. So it's kind of a month-to-month evaluation at this point.

Bill Hoffman - RBC Capital Markets, LLC, Research Division

So you mean do you think like in the third quarter, you're going to be able to hold margins in that business?

Paul D. Carrico

On Building Products?

Bill Hoffman - RBC Capital Markets, LLC, Research Division

Yes.

Paul D. Carrico

I don't know why there would be significant changes. The jury remains to be seen here, but there'll be some PVC price increases which will cause it to be a bit different, but it's going to come, one place or another.

Bill Hoffman - RBC Capital Markets, LLC, Research Division

And then just as you look at your network of the Building Products assets, you mentioned that you weren't in some of the higher building regions going forward. Is that something that sort of, I know you guys are busy with the PVC thing but, what about your network on the Building Product side?

Paul D. Carrico

Yes. We're mindful of where those areas are, but those are also the areas that dropped the fastest at the time that there was a decline. So we continually evaluate those things. I think as we make investments in building products, it'll be measured, so we want to see firmness in whatever area we're looking at. And right now, while we feel good that we're off the bottom, we don't see that curve ticking up as fast as we'd like to say, okay, we're going to do some more investing here or there. So at this point, we'll sit and watch a little bit.

Bill Hoffman - RBC Capital Markets, LLC, Research Division

Okay. And then just moving to the Chlorovinyls side, just wondering if you could just talk a bit about your vinyls exports, whether that demand in the second quarter was holding relatively firm and maybe where you see the demand in the back half of the year in the export markets?

Paul D. Carrico

Well, the export market volume was, I'll say, characterized mostly by the price changes, particularly the last month or 2 of the quarter. As those prices on ethylene dropped and then sort of impacted PVC, there was kind of a stalemate between the buyers and the sellers, so everybody was looking at each other, waiting to see what the price level was going to sell out to be. So that, I think, necessarily impacted volumes a bit. I believe we're past that at this point and things are moving in a direction where people that were thinking that there were deals to be had on probably polyethylene or PVC have gotten past that now and said, okay, we're back into the buying mode. And so my guess is that the volumes for the industry in general will be a little bit more robust now.

Operator

Your next question comes from the line of Charles Neivert.

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

A couple quick questions. On the Aromatics side, what was -- what were operating rates like and do you expect them to continue with that level into the third quarter? How's the export market, things that might bring it back up? And then sort of connected to that, if pricing -- if costs, propylene benzene costs, stay about where they ended the second quarter, how would you expect -- would you expect the FIFO impact in third quarter to be positive or negative? I'm not trying to quantify the number, but just is it a positive number or a negative number if we sort of holdings flat from the end of the quarter forward?

Paul D. Carrico

So Aromatics. I guess as a general comment, rates were a bit, I'll say, softened by the export disconnect it's there now. We really don't have a huge market for phenol from North America to other parts of the world. So that's tempered it, if you look at say earlier this year or last year in some periods. But relative to cumene, it's a bit higher in general just because of the size of our plant as much as anything else here in the U.S. So kind of a mixed bag. We don't see a robust projection related to phenol and cumene, I mean, in the way of significant change that the operating rate's probably going to stay in the same kind of zone they've been for the last year, 1.5 years, as a general comment.

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

Okay. And then in terms of the cost structure with propylene and benzene. If again, assuming they stayed about where they were at the end of the quarter, is there an expectation one way or the other as to what the FIFO adjustment would be, just positive, negative as opposed to an absolute value?

Gregory C. Thompson

Well, I think if they stays at same level it was at the end of the quarter, then kind of by definition, they would have no impact in the third quarter. The third quarter was -- or excuse me, it would have no impact going forward in the third quarter. In the second quarter, it was really the propylene that had a significant dropoff compared back to the first quarter. That was big driver resulting in significant inventory holding loss.

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

Okay. So if it goes flat at the low level versus -- okay...

Gregory C. Thompson

Yes, then it would just have no impact in the third quarter.

Paul D. Carrico

Yes. And benzene, on the benzene side, I think most of that run off occurred after the first quarter and second quarter. So assuming it, which it already has started turning back down, that's what tempers that.

Operator

Your next question is from Gregg Goodnight.

Gregg A. Goodnight - UBS Investment Bank, Research Division

A lot of my questions have been asked, but I wanted to explore a little bit in terms of your view for ECU margins going on out in the future. I guess a lot of this depends upon the oil to gas price ratio. But I mean, what is your view? Do you think U.S. ECU margins will stay elevated from here on out? Or are they eventually going to normalize back as oil to gas perhaps normalizes back in the distant future?

Paul D. Carrico

If you're looking about the longer term, I don't know when that normalization will occur. I guess, the expectation is we have a pretty good run of time here where oil and gas favors natural gas, the ratio anyway. So if you believe that expectation and those forecasts that are out there, then my thinking would be that, that would provide some firmness to the ECUs relative to some times in the past. Certainly, if you look at the near term, there was some expectations that the ECU by the forecasters was going to drop off a bit here later this year and maybe into next year. So where the numbers are going right now, it's kind of counter to that for the rest this year. I don't know that anybody has really studied the next year effect. But I think in general, and this is one of the things that we feel good about is ECUs should be pretty firm with this oil and gas ratio where it is.

Gregg A. Goodnight - UBS Investment Bank, Research Division

Okay. Would you have a number for what you consider normalized ECU margins?

Paul D. Carrico

I wish I knew that exactly. But, no, I think we're into a zone where it's kind of like the ethylene situation. The ethylene margins are different these days because of where the competitive situation is with the rest of the world and it's hard to peg what normalizes there. I think the same thing applies to chlor-alkali, although it's probably a different level, a better level than where we've been years ago.

Gregg A. Goodnight - UBS Investment Bank, Research Division

Okay. In terms of 2013 ECU margins with the new capacity, do you think they'll be somewhat down from 2012? Or do you think there's a good chance that they might be flat?

Paul D. Carrico

It's a little early to call. The traditional thinking is that those kind of capacity additions do negatively impact some margins as the contracts are signed and they put it into the market in various locations. But there is a fairly decent-sized global opportunity versus the cost of other producing parts of the world. When you look at costing being based on natural gas too. So it depends upon how that's approached by those players and it's hard for me to predict that at this point in time. I think it could go either way.

Gregg A. Goodnight - UBS Investment Bank, Research Division

Okay. Could I sneak in one last question please?

Paul D. Carrico

Sure.

Gregg A. Goodnight - UBS Investment Bank, Research Division

In terms of your value, your timing on the PPG commodity, it seems like some of that would be tied to opportunities, downstream opportunities, perhaps partnering up with other folks. Could you just describe your inclination to take advantage of this, of the potential demand for ethylene and your thoughts in terms of partnering up in terms of downstream opportunities?

Paul D. Carrico

You're talking about ethylene in particular or...

Gregg A. Goodnight - UBS Investment Bank, Research Division

Yes.

Paul D. Carrico

We really haven't changed our philosophy from the way we've described it before. We certainly will be a larger supplier -- I mean, excuse me, a larger consumer as we join the 2 companies. And from our position, that looks like a good opportunity for someone in the ethylene industry to join up with us because we bring the vinyl market, plus we have the large demand of which we expect our operating rights to be pretty strong in the coming years. So as all of these crackers, as you know, there's lots of crackers out there announced, we'll see how that plays out. But that's our objective is to partner at least for a percentage. I think half-and-half would be okay, half being some sort of relationship and half, market, because I believe there's going to be plenty ethylene out there in a few years down the road.

Operator

Your next question is from the line of Christopher Butler.

Christopher W. Butler - Sidoti & Company, LLC

The maintenance outage that you experienced in the second quarter, you sort of held to your forecast of about $35 million. Can you quantify what the outage in the second quarter 2011 was? You said it was close. Can you give us a number there?

Gregory C. Thompson

Yes. It was -- I think it was nearly $30 million. I don't have that number right before me, but it was definitely a bit less than the outage in the second quarter of 2012, Chris. I think it was upper 20s, close to $30 million as I recall.

Christopher W. Butler - Sidoti & Company, LLC

Now if we're looking at your first half results in Chlorovinyls and adding back the losses from the outages, we're looking at operating income that's pretty flat year-over-year, and I understanding you had ethylene contracts that stepped up, but you should also be benefiting from caustic soda price increases and some better demand. Could you give us a sense on what's occurring or not occurring that you're not seeing better growth in the first half of the year?

Paul D. Carrico

Yes. I guess my point of view, there's so many moving parts with the outages and the different things we did to work our way through those. It's tough to say what the key impact there. We certainly had more maintenance costs this year than last year. So if you put that into the equation, I mean, maybe that explains some of it. But as you look at the ECUs, it would seem that we, if you're looking at the second quarter to second quarter comparison, maybe -- I'm not sure they're totally up. They might be even a bit down, all things considered from last year. So I'd have to go back and do a more clear-cut analysis of what you're looking at there for the year.

Christopher W. Butler - Sidoti & Company, LLC

Okay. And just looking at the corporate expense line, if we adjusted out the $7 million there, a little bit higher than where you've been in the previous quarters. But pretty similar to the second quarter last year, is there anything else in that second quarter number that is not necessarily unusual but pushing it up that shouldn't occur in the back half of the year?

Gregory C. Thompson

Well, the -- I mean, the stock compensation expense item that I mentioned; not all that's in corporate, but a fair chunk of that is in the corporate area.

Operator

Your next question comes from the line of Bill Young [ph].

Unknown Analyst

Could you give us a little bit of experience [ph] here. PVC prices, how much did it actually drop in the commodity grace in the first half? And what do you look for in the second half? I think you're looking for some increase? This is just domestic.

Paul D. Carrico

Yes. On the PVC prices, I think there was a $0.05 drop and then a $0.02 drop and we had some pretty severe moves there in the second quarter. In terms of what we're expecting for the rest of the year though, I expect a percentage of that to be recovered. There's increased -- a significant percent, I guess, is the way I'll put it. There was increases out there of at least $0.03 to $0.05. I think that the jury is still out on how that shakes out for a couple of months. But it's one of those situations where we quickly ramp down and we're quickly ramping back up, and I attribute that partially to the fact that we're in the middle of the year and there's really not an opportunity to correct inventories for an extended period of time.

Unknown Analyst

Okay. And given the rise in natural gas, what does this mean for your margin trends, say first quarter, and then looking in the second half? I realize second quarter was impacted a little bit here.

Paul D. Carrico

Yes. The rise in natural gas, we've mentioned this before, but $1 is roughly $25 million to $28 million in total. However, I would say that there's probably going to be a push to recover a chunk of that either via chlor-alkali or PVC. And so somewhere in that chain, a pretty significant percentage gets recovered.

Operator

[Operator Instructions] And your next question is a follow-up from the line of Ryan (sic) [Brian] Maguire.

Brian Maguire - Goldman Sachs Group Inc., Research Division

Just in the Aromatics business in the third quarter, with the spike in the benzene prices, spot benzene prices in July and August, we've heard some cumene producers have been taking their benzene allocation, actually just reselling it into the spot market. Do your contracts give you any flexibility to do that or are you already pretty full out on your obligations there? You wouldn't really be able to take advantage of that?

Paul D. Carrico

Yes. We don't play that much in the phenol Aromatics market just because it is so quickly moving from one direction to the other. So we try to have our volumes lined up with customer contracts, either via cumene and phenol. So we just don't play that much in that area.

Brian Maguire - Goldman Sachs Group Inc., Research Division

Okay. And then just any update on the expected interest rate you might pay on the debt that the PPG commodity chemical business might be taking on to pay PPG?

Gregory C. Thompson

No. I don't think so at this point, Brian. I mean, we do have -- you've seen the rating agency reports I'm sure related to an upgrade from where we are. Our current bonds that are outstanding, the 500 million bonds we're trading very well at 110 or whatever it is. So we would expect it to be a pretty good rate given market conditions right now. But we'll just have to wait and see when we're out in the market which would be -- it's dependent on the timing for the closing of the transaction.

Operator

Your next question is from the line of Richard O'Reilly [ph] .

Unknown Analyst

A question on the Aromatics business longer term. Do you view that as part of your core businesses post the PPG transaction?

Paul D. Carrico

Well, we've always stated that, that's certainly a smaller percentage of our business when you look at the total company, and it makes this transaction that we're going to pursue here with PPG, makes it an even smaller percentage. So it's an area where we'll just continue being opportunistic. The value of that business has increased over the last couple of years and we think there's room to run there. So we'll just evaluate that from quarter-to-quarter, year-to-year.

Operator

And at this time, we have no further questions in queue.

Martin Jarosick

Thanks, everyone, for joining us today, and we look forward to seeing you at various conferences and meetings and speaking again in November.

Operator

Thank you for participating on today's conference call. You may now disconnect.

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