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Executives

Martin Jarosick - Executive Director, IR

Paul Carrico - President, CEO

Greg Thompson - CFO

Doug Shannon - VP, Chemicals Group

Analyst

Sergey Vasnetsov - Lehman Brothers

Mark Connelly - Credit Suisse

P.J. Juvekar - Citigroup

Frank Mitsch - BB&T Capital Markets

Mike Judd - Greenwich Consultants

Bill Hoffman - UBS

David Troyer - Credit Suisse

Farooq Ahmed - JPMorgan

Charles Neivert - Morgan Stanley

Gregg Goodnight - UBS

Andrew Curtis - Sandelman Partners

Kristin McDuffy - Goldman Sachs

Mark Anderson - Axial Capital

Barrett Steinman - Brownstone Asset Management

Andrew Chan - Lehman Brothers

Christy Parsons - Claren Road Asset Management

Cheryl van Winkle - Independence United

Roger Smith - Merrill Lynch

Georgia Gulf Corporation (GGC) Q1 2008 Earnings Call May 7, 2008 10:00 AM ET

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Georgia Gulf first quarter Earnings Call. During the presentation all participants will be in a listen-only mode. After the speakers' remarks you will be invited to participate in a Question-and-Answer session.

(Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded today, May 7, 2008. I would now like to introduce today's speakers. Paul Carrico, President and CEO, Greg Thompson, CFO, and Martin Jarosick, Executive Director of Investor Relations. Mr. Jarosick, you may begin your conference.

Martin Jarosick

Thank you Darlene, and good morning ladies and gentlemen. Thank you for participating in today's conference call to discuss Georgia Gulf's 2008 first quarter financial results. At the outset of this call let me remind you that 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 as we go through the conference call. Participating on today's call are Paul Carrico, President and CEO, and Greg Thompson, CFO.

I will caution you that we will be making forward-looking statements during this call as you appreciate any business projections and assumptions about future events are subject to risks and actual results may differ from our current outlook. A listing of factors that could affect future results is included in our 2007 10-K. Any forward-looking statements made on this call should be considered in light of those factors. In addition during this conference call we may refer to certain non-GAAP financial measures. We have provided a reconciliation of these non-GAAP measures to the most directly comparable GAAP measure as an appendix in the slides and also on our website at www.ggc.com. I will now turn the call over to Paul to begin the review of the first quarter. Paul?

Paul Carrico

Thank you, Martin. Good morning, ladies and gentlemen. We are disappointed by our financial results for the first quarter, even as we made progress on some of our goals. For the first quarter we reported a loss of $69.5 million, or $2.02 per share, compared to a loss of $34.6 million or a $1.01 per share in the previous year. This quarter's net loss does include charges of $26.1 million or approximately $0.58 per share associated with our decision to shut down our Oklahoma City PVC resin plant and exit noncore businesses. By comparison there are approximately $600,000 in Georgia's in the same period in 2007.

Net sales in the first quarter were $712.5 million, down $1.2 million from the same quarter last year. Our sales performance for the quarter is masked by the stronger Canadian currency compared to the same period last year. Sales volumes declined in all four of our segments due to the difficult housing market in the United States. We also experienced more severe weather in Canada and the Northeastern U.S. compared to last year. The impact of lower volumes on sales was partially offset by price increases in vinyl resin, caustic, and aeromantic products and increased exports. During the first quarter energy price volatility created rapid increases in costs that could not be recovered by product price increases in a timely manner. For example, the 25% increase for the quarter for natural gas more than offset these product price increases resulting in compressed margins. Greg will cover our financial performance in more detail in just a moment. Now I would like to provide an update on some of the actions we have taken to achieve our goals in 2008.

In response to extremely poor market conditions and continued weak demand, we have closed our Oklahoma City PVC resin plant. This action removes ₤500 million of capacity from the market. In addition, we have also temporarily idled our Sarnia PVC resin plant which will be used as a swing plant to meet demands when market conditions improve. As previously announced our efficient and modernized PVC production line located at our Plaquemine site is now fully operational. With the closure of our Oklahoma City PVC resin plant and the Plaquemine PVC expansions our current PVC resin capacity is now ₤3.1 billion. We significantly increased our export sales volumes in the chlorovinyl segment as the weakness of the U.S. dollar has created sales opportunities in the export market. We also made progress towards our debt reduction targets by completing several asset sales and sale/lease-back transactions that generate proceeds of $24.9 million. That $24.9 million includes $12.3 million from the sale of the outdoor storage buildings business and $12.6 million for the sale lease-back on several buildings in Vaughan, Ontario.

We also sold a facility in Winnipeg, Manitoba, for $4.5 million, and consolidated this production into other existing facilities. However, the cash from this transaction was received after the closing of the first quarter. We are also pleased to announce that we have settled the disclosed Quebec trust tax assessment. The assessment was settled through a payment of $20.1 million resulting in additional availability on the company's revolving credit facility. At this time I will turn the call over to Greg to review our financial results in greater detail.

Greg Thompson

Thank you, Paul. Good morning, ladies and gentlemen. Now let's look at our performance from continuing operations during the first quarter. Georgia Gulf reported an operating loss of $44.8 million for the first quarter of 2008 compared to an operating loss of $8 million in the first quarter of 2007. As Paul mentioned, rising feedstock and energy costs, coupled with weak demand, challenged the results of each of our segments. In spite of these conditions, chlorovinyls and aeromatics taken together performed at nearly the same EBITDA level as Q1 2007. I would add, included in the $2.1 million operating loss for chlorovinyls in the first quarter is a $15.6 million charge related to the closure of the Oklahoma City facility. Sales and operating income in both the window and door profile segment and outdoor building segment were negatively impacted by the severe winter weather in Canada and Northeastern U.S. and continued weakness in the U.S. housing market. In contrast, I would say the Canadian housing market has been relatively stable. The FIFO impact for the first quarter was a negative impact of $4.8 million compared to a $6.8 million benefit in the same first quarter last year.

Now let's discuss some changes in working capital. Compared to last year, we reduced our accounts receivable days sales outstanding by 6 days. However, we did increase inventories compared to last year, primarily due to the softer than expected sales in window and door and outdoor segments and our normal seasonal build. Remember, this is our cash poor time of year and our cash flow typically improves as we get into the busier spring and summer selling season, but I would add that our overall inventory productivity in these two segments is a key area of opportunity for us in the remainder of 2008 and beyond.

Turning to the cash flow statement, we used $31.1 million of cash in operating activities as compared with $0.8 million for the first quarter of 2007, primarily due to the Quebec tax settlement payment of $20 million and higher inventory of $15 million. Capital expenditures for the first quarter were $17.2 million and we are on track to come in at the lower end of our 2008 target of 65 million to $75 million. With the proceeds from asset sales Paul mentioned earlier, cash flow from investing activities provided 7.7 million. As a result of the above, we drew down $30 million under the revolver which is slightly higher than last year's draw in the first quarter. Financing activities provided $26.1 million for a net change in cash of $2.9 million.

Let me provide you with some details surrounding the additional charges recorded in the first quarter. The decision to shut down the Oklahoma City resin plant triggered a $15.6 million asset write-down as mentioned previously. We also incurred a loss of $4.6 million on disposition of the outdoor storage buildings business, $3.3 million for real-estate write-downs and $2.6 million of other severance costs. Despite the challenges we faced in the quarter, we did meet our debt covenants. While we generated $24.9 million from asset sales and lease-backs, our Quebec tax settlement payment and the normal seasonal working capital investment increased our total debt outstanding by $29 million. Our accounts receivable securitization balance was $147 million at the end of the quarter, the same balance as of December 31, 2007.

It is important to note that the noncash charges recorded during the first quarter added back for the purposes of calculating EBITDA in the debt covenant calculations. The settlement of the Quebec trust issue resulted in a cash payment of $20.1 million during the quarter. It also caused a release of a $44 million letter of credit. This increased our revolver availability by $24 million and also significantly reduced our letters of credit from $111.2 million at the end of 2007 to $64.4 million at the end of the first quarter. These amounts are included as part of debt for purposes of the debt covenant calculations. This, along with the asset sales Paul mentioned previously, enabled to us maintain compliance with our debt covenants for the first quarter. The consolidated leverage ratio required in the covenants was a maximum of 6.25, and our actual ratio for the first quarter was 6.14. The consolidated interest coverage ratio required in our covenants with a minimum of 1.75. And our actual ratio for the first quarter was 1.79. These are obviously tighter than we would like but we continue to aggressively pursue plans that will improve these ratios and maintain compliance for the remainder of the year.

Before I turn the call back over to Paul I want to welcome Martin as our new Executive Director of Investor Relations. Martin started with us last week. Paul will now update you on our goals for 2008.

Paul Carrico

Thanks, Greg. Let me provide an update on our goals for 2008. First and most importantly we remained focused on our goal to repay over $125 million of term debt. This will be done by reducing working capital and generating cash from non-operating sources and operations. We expect these actions to lead no a higher level of EBITDA in 2008 versus 2007. Our plan projects modest declines in U.S. and Canadian housing starts from current levels through the rest of 2008. Based on the assumptions in our current operating plan we should remain in compliance with covenants through the year. Given our performance in the first quarter and the lowering projections for our markets for the rest of the year, our operating plan now includes more significant sales of noncore assets compared to the beginning of the year.

There's no doubt that the remainder of 2008 will be challenging, given difficult industry and economic conditions. We believe we have the right plans in place and the right team to execute those plans and overcome these challenges. I will now turn the call over to the operator so we can answer your questions.

Martin Jarosick

Darlene we're ready for questions now.

Questions-and-Answers Session

Operator

(Operator Instructions) And your first question comes from the line of Sergey

Vasnetsov with Lehman Brothers.

Sergey Vasnetsov - Lehman Brothers

Good morning. If you could comment with a little bit more details on your asset sales on the timing and maybe some indication what kind of assets are those?

Paul Carrico

Well, one of the asset sales we've talked about in the previous call was related to the sale of the land in Pasadena. That's certainly one of the items that we're including. The other items we are looking at we've not identified in terms of providing public information on those assets. We are in discussions with people about opportunities to look at those assets. And as I said in the statements, they're non-core from our point of view.

Greg Thompson

And in terms of timing, Sergey, I'd say its second or third quarter, the timing that we've focused on for the sales.

Sergey Vasnetsov - Lehman Brothers

Also, a question on the aeromatics. I realize it's a -- you have alluded further flights to prices and this business so far it's a breakeven EBITDA has been there for awhile. What are your medium to longer term thoughts on the aeromatics plant?

Paul Carrico

Well, our near term in the past couple of quarters has been to continue to stabilize the business and not record the losses that we incurred in previous years and we continue to focus on that and are also emphasizing the opportunities to improve that business going forward. As I have said in previous call though, we would consider the right value proposition for that business in terms of an asset sale.

Sergey Vasnetsov - Lehman Brothers

Okay. Thank you.

Operator

Your next question comes from the line of Mark Connelly with Credit Suisse.

Mark Connelly - Credit Suisse

Thank you. Just two things. With respect to the closure of Oklahoma City, are there additional environmental remediation issues that we will see later, or have those already been accounted for in the charge? And second question, I'm wondering, with respect to your customers in the window and door business, are they seeing any significant shift in the mix of business that is either helpful or hurtful for you towards their cheaper product lines, et cetera?

Paul Carrico

Maybe starting off with the Oklahoma City closure, we don't anticipate substantial environmental charges. I don't think at this point we've accrued for all of those, because they can be incurred at a later date, but they're relatively minor in the scope of the financing situation.

Mark Connelly - Credit Suisse

Okay.

Paul Carrico

Customers, and window and doors, I would say the start of the year has been so poor, in terms of the first quarter that we're just now seeing a pickup to say there's a dramatic change there. I would say it's not really the case at this point. We're more in the mode of waiting for the shift I bet, you will.

Mark Connelly - Credit Suisse

You haven't seen enough volume to really know if there has been any big shift.

Paul Carrico

That's right.

Mark Connelly - Credit Suisse

Helpful. Thank you.

Operator

Your next question comes from the line of P.J. Juvekar with Citigroup.

P.J. Juvekar - Citigroup

Yeah hi. Good morning. I have a question on Canadian housing. The Canadian housing sort of held up despite the U.S. slowdown last year, but now there are signs of cracks in Canadian housing. Can you just tell us what are you seeing there today? Have you seen any spring rebound and what is your outlook?

Paul Carrico

Well, I think we would agree that Canadian housing is probably going to be tempered a bit from where it's been, but that doesn't mean it's anywhere close to what we've seen in the U.S., nor do we expect that at this point that that will be a repeat of the U.S. type of drop-off. In terms of the first quarter, the weather was very much uncooperative up there relative to snowfalls and such, and so it was difficult to see when that would pick up or to the level it would pick up. I would say we're in the mode right now where it has started to increase a bit, and that we're seeing some volume increase. The question at this point remains how far up that will go up the curve.

P.J. Juvekar - Citigroup

Okay. And then secondly, on your sale of noncore assets, can you just talk about what kind of valuations are you getting? I'm just concerned that in this market if you try to sell some of these assets, you might be forced to sell them at prior sale prices.

Paul Carrico

Now, if we have to sell assets at prior sale prices, it probably doesn't work towards resolving our issue and so at this point in time we're not looking at it in that mode and we expect some valuations that are representative of more normal conditions than what we're seeing right now on the economy front. We clearly are further down in the economy than most people would expect. I would thank for the normal future, once we get past these crisis in the finance markets.

P.J. Juvekar - Citigroup

And then one quick question on financials. You mentioned, Greg that working capital was a draw on cash. Can you just quantify how much of a draw was in that the quarter?

Greg Thompson

Well, in terms of -- well, the big draw is, P.J., is the $20 million payment related to the Quebec tax settlement, and if -- so excluding that, it's actually the remainder of working capital is relatively unchanged. We did increased inventories by around $15 million as I mentioned, but we did improve some. For example, our DSO was improved by six days. So overall no big change in working capital other than the 20 million payment.

P.J. Juvekar - Citigroup

So, if you go into the selling season for the spring, do you need to increase the working capital to get ready for the selling season?

Greg Thompson

No, no we actually ended the quarter with higher levels of inventory than we should have -- than we would have like to have had, and that was just because of our expectation for sales weren't met, but I would expect that from here through the second and third quarter that you would see some of that -- that would turn into cash, and our working capital levels would -- or receivables and inventory should be -- receivables will go up, but the inventories will certainly come down, the and we remained focused on accounts receivable on a DSO basis.

P.J. Juvekar - Citigroup

So you're saying that you have enough inventory to sell in the spring season?

Greg Thompson

Yes.

Paul Carrico

Just a further comment on that, we expected some more pickup than what we saw in March, and it just didn't develop, and even into early April. So it's not totally unusual that you see a delayed spring activity, and this is one of those years where we have.

P.J. Juvekar - Citigroup

Okay. Thank you.

Operator

Your next question comes from the line of Frank Mitsch with BB&T Capital Markets.

Frank Mitsch - BB&T Capital Markets

Hi good morning folks. I think you just mentioned that because of the delayed spring you might not be seeing the level of activity. Is that suggesting that perhaps April was not a typical April for Georgia Gulf?

Paul Carrico

I would say it was certainly a bit slower in the beginning of the month. It started picking up towards the end of the month, and its still -- the question still remains is what level you get to when we get into the full spring activity.

Frank Mitsch - BB&T Capital Markets

Okay, great. And in the release and on the call you mentioned that using the anticipated gains from additional asset sales the company will have higher level of EBITDA in '08 than in '07. Two questions. One is what number are you using for your adjusted EBITDA in '07, and then looking at 2008 what percent of EBITDA would be -- do you project to come from the asset sales?

Greg Thompson

The '07 EBITDA number, kind of the baseline that most people look to is around $222 million, Frank, so that's really what we've looked at for the baseline for 2007. And we haven't, though, I think, given our language, it's clear that we're not talking about insignificant amounts for gains on sale of assets, but we haven't put a specific number on that -- on the EBITDA gains that we would expect to get from asset sales. As you might appreciate, we've got processes underway, and we're negotiating, and we've got good interest, and we're negotiating with people right now. So, we don't want to go any further and put specific numbers out there.

Frank Mitsch - BB&T Capital Markets

Thank you. I mean, the way I'm reading that sentence suggests that without those asset sales you would not have EBITDA '08 higher than '07; is that the way I should be reading that?

Greg Thompson

That is correct.

Frank Mitsch - BB&T Capital Markets

Alright. Terrific and in terms of the dividend what is the company's policy with respect to the dividend?

Greg Thompson

We evaluate the dividend every quarter. The board evaluates that, and we'll do that again at the -- at our upcoming Board meeting in a few weeks.

Frank Mitsch - BB&T Capital Markets

Terrific. Thank you.

Operator

Next question comes from the line of Mike Judd with Greenwich Consultants.

Mike Judd - Greenwich Consultants

Yes, good morning. During the last conference call you indicated that there may be an opportunity to increase your sales into the export market and I was just wondering if you'd actually seen that, or an update on that and whether there's been any pickup in that area perhaps in the second quarter?

Paul Carrico

Well, for Georgia Gulf historical operations have not really included a significant amount of exports and so if you compare Q1 of '08 to Q1 of '07 there was a definitively significant increase in our exports. And so yes, we accomplished what our mission was during the first quarter. We expect to continue during the second quarter at the higher level and depending upon market circumstances that could grow as the dollar and the price of oil and gas fluctuate in the marketplace.

Mike Judd - Greenwich Consultants

Okay. And, then just secondly on the tax rate, do you have a forecast that we should use going forward on a quarterly basis?

Greg Thompson

For the full year, it should be -- and it bounces around, it's very sensitive given our level of pretax results. So, it should be around -- based upon our projections it should be around the 4% U.S. and probably close to 0 for the Canadian rate. But, as I said, I caution you with that, as it can move around quite significantly given the amount of permanent differences and that relative to our pretax results can cause the rate to change quite a lot.

Mike Judd - Greenwich Consultants

Okay. Just lastly, for those of us who are not fixed income analysts and perhaps not as accustomed to looking at some of these various ratios, EBITDA ratios, I'm just wondering, obviously you were in compliance in the first quarter. Can you just briefly explain how this works? Are these on trailing 12-month basis? How do these covenants work, please?

Paul Carrico

They are all on a trailing 12-month basis, the way they work, and there are numerous adjustments to the trailing 12 month numbers. For example, the shed business that we sold in the first quarter, which I would add was a money losing business on an EBITDA basis, that's excluded, for example, from the calculation, as our other non-cash charges and things like stock compensation expense. Now, the numerator of the calculation is debt as defined under the agreements as of the end of the quarter. And which, while the actual balance sheet debt went up just a little bit as we spoke about debt as defined under the agreements includes letters of credit. And, as I mentioned in my comments that came down by 45 million to $50 million.

Mike Judd - Greenwich Consultants

Okay. And then, the comments you have or which I believe Frank asked about in terms of the sales of assets as it applies to EBITDA that sounded more like it was sort of just a forecast for the year. In terms of your covenants, though, if you sell something, it contributes to EBITDA, how does that impact those ratios?

Paul Carrico

The EBITDA gains from asset sales does count as EBITDA for purposes of the covenants.

Mike Judd - Greenwich Consultants

Okay. Thanks for the help.

Operator

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

Bill Hoffman - UBS

Good morning.

Paul Carrico

Good morning, Bill.

Bill Hoffman - UBS

I just wonder Paul, if you could chat a little bit about the windows and buildings business at this point in time? It would seem to me that for you to meet covenant compliance in the second quarter you got to have a pretty substantial turn around in your EBITDA generation in that business, and I think last year you did probably in the combination of the two, close to $24 million. So, I just wondered if could walk us through how you expect to get the margin recovery there. And then I've got another follow-up after that.

Paul Carrico

Not just in windows, in across all of our businesses the downturn in the economy for the first quarter was really almost unprecedented when you look back at the last four or five years. So, it's just not that one component. In terms of the second quarter, what we really need to see is a pickup there and the other areas to offset some of the cost. In retrospect, some of our cost probably should have been tempered just a little bit at the lower level of operating rates we saw. So, as we go forward we just need to adjust those costs to match what the demand is. A continuation of the first quarter type of volumes would be problematic for the rest of the year. And, we don't expect that, though. That's not what we're seeing at that time moment.

Bill Hoffman - UBS

Right may be just given your indications that even April was a slower pickup, I just wonder, what do you do? Can you close converting assets and -- to pull the cost structure down quickly?

Paul Carrico

Well, we can make adjustments to our cost structure that have a positive impact on the situation. In the beginning, though, the April, the start of the month was a bit slow. It has picked up, so at this point you would not be going to that mode that you're talking about until we see more weeks develop into the quarter.

Bill Hoffman - UBS

Okay. Thank you. And then, the other question just has to do with the closure of Oklahoma and the Plaquemine expansion, can you just talk about what your operating rates are in your PVC plants?

Paul Carrico

The operating rates are, I would say, a bit below the industry operating rates. We're not exporting quite as much as the industry rate and probably down a little bit on the domestic side, but it's really a tough situation to gaze what reality is and all that because there's such a swing in volumes for the first quarter. I think, a lot of people expected some pickup in the latter part of March or April, and it was a bit tempered from what the expectations were.

Bill Hoffman - UBS

The assumption there I guess is then your cost absorption is still can squeeze margins here substantially in the second quarter?

Paul Carrico

Well, the second quarter will be a pickup, for sure, and then we are going to have reduced costs because of the OK City closure, and then Sarnia idling is actually a reduction of cost too. So between the two of them, it will be more oriented towards the operating rates that we see.

Bill Hoffman - UBS

Can you help us quantify those costs from Oklahoma and Sarnia?

Paul Carrico

I would say it's a bit preliminary at this point. So, I think I'll defer that to some future conversation. It's a reasonable impact of giving value to us. We can essentially make what we need with two less plants operating and the incremental costs that are lower for those versus the other plants.

Bill Hoffman - UBS

Okay. Thank you.

Operator

Your next question comes from the line of David Troyer with Credit Suisse.

David Troyer - Credit Suisse

Hi good morning. Couple of questions. Greg, what is the revolver availability? You kind of talked about the changes, but at quarter end what was the total revolver availability?

Greg Thompson

Let's say our borrowing was, it looked, let me come back to that in a minute, David. I just don't have that number in my head. Did you have another question?

David Troyer - Credit Suisse

Sure. I thought I heard you mention that there was a negative impact from FIFO in the quarter, $4.8 million. Is that accurate?

Greg Thompson

That is correct.

David Troyer - Credit Suisse

I guess in a rising raw material environment, I would have thought FIFO might have helped?

Greg Thompson

We actually -- their natural gas obviously did -- is rising, but it was -- the way we go through

that it was actually more than offset by ethylene and caustic that we buy, chlorine that we buy externally, and that's why it actually was a negative impact.

David Troyer - Credit Suisse

Okay. So I could allocate the substantial portion of that to the chlorovinyl segment?

Greg Thompson

That's correct.

David Troyer - Credit Suisse

Can you talk a little about your caustic soda realizations in the first quarter relative to both the fourth quarter and the first quarter a year ago? And maybe, what we might expect in the second quarter and beyond?

Paul Carrico

Okay. On caustic pricing, there was an increase in the fourth quarter of last year, and I'm just going to speak to general industry numbers, not to the appropriate discounts that might apply in certain cases, but there was about a $30 increase in the fourth quarter, about a $50 increase in the first quarter. There is an $80 increase in the second quarter, and at least some announcements out there for the third quarter of $50 to $60.

David Troyer - Credit Suisse

Okay. If I assume that -- I recognize that there are discounts, but if the discounts remain constant should the change in your realizations have been somewhat similar to the changes in kind of the posted pricing? I'm just, that the -- I guess though -- the mood of the --

Paul Carrico

I don't think the math works on that. I believe you'd have to do some discounting to get those calculations, but I guess I don't want to go there in terms of the actual prices.

David Troyer - Credit Suisse

Okay. Is it fair to say that the caustic contribution -- since caustic has been rising and continues to rise, and there are additional initiatives on the table, is it fair to say the caustic contribution for you will be higher in the second quarter than it has been previously?

Paul Carrico

Yeah. That's fair. It's also fair to say that chlorine has dropped a bit, and the gas prices have increased. So, you have to put all those together to get to a net change.

David Troyer - Credit Suisse

Okay.

Greg Thompson

David this is Greg. Just, your question about the revolver availability at the end of the quarter was $260 million.

David Troyer - Credit Suisse

Okay. Thank you. And, then I appreciate the additional color on the covenants and the covenant calculations. Can you tell us what the LTM EBITDA was used in the numerator for coverage and the denominator for leverage test, please?

Greg Thompson

That turns into an endless conversation, I fear, so we're not going to -- we've given a lot more detail just so you understand the calculation, but I don't have that LTM number handy as to the EBITDA trailing 12-month number.

David Troyer - Credit Suisse

Okay. Final question. Part of the $125 million in debt reduction stems from tax rebate, I believe you said. Can you quantify that please, and when you expect to receive it?

Greg Thompson

Yeah, it's one of the smaller pieces of the debt reduction. We've already gotten the $5 million in, in the first quarter of -- on the tax refund, and we expect another $10 million to $15 million probably that would come probably not before the third quarter.

David Troyer - Credit Suisse

Okay. That's all I had. Thank you.

Operator

Your next question comes from the line of Farooq Ahmed with JPMorgan.

Farooq Ahmed - JPMorgan

Good morning. During the rise in energy costs could you help us understand your sensitivity to other natural gas, crude, any sort of benchmark you internally look at?

Doug Shannon

This is Doug Shannon. Can you be a little bit more specific? I think in some of our supplemental information that we've posted in the past, basically for every $1 change in natural gas, our annual EPS impact is about $0.58.

Farooq Ahmed - JPMorgan

Okay.

Doug Shannon

And, you have to be careful with including the word crude oil in a natural gas impact, because the ratios between the two continually change, but overall there is an impact on our costs as crude oil goes up.

Farooq Ahmed - JPMorgan

And, just on, in terms of bunker fuel-- you probably catch up or?

Doug Shannon

No. Our aeromantic feedstock's with regard to propylene and benzene, ethylene costs as that pertains to natural gas and those feedstock's that go into ethylene production.

David Troyer - Credit Suisse

Okay. And then secondly, I think just given the normal uncertainty around the timing closure of asset sales, any thoughts about going back to the banks proactively for covenant relief, just to avoid the issue altogether?

Greg Thompson

We have, I would describe it as ongoing dialogue with the banks relative to looking at the current status of covenant achievement, the risks that we have. As I said earlier, we made it in first quarter but it wasn't a lot of cushion. And so, as part of that ongoing dialogue we continue to evaluate the need for possible covenant relief as well as looking at other avenues and other possibilities for a financing structure that doesn't have some of the same pressures of covenant -- of the covenants that we currently have.

David Troyer - Credit Suisse

Okay, great. Thank you very much.

Operator

Your next question comes from Charles Neivert with Morgan Stanley.

Charles Neivert - Morgan Stanley

Hi good morning. Quick question, on interest payments, is it right that bond payments are due in 2Q and 4Q, so I mean, you accrued some interest charges this quarter but the cash is actually going to go out in 2Q, and how much will that be? How much is the cash payment in the second quarter?

Greg Thompson

Yeah, that’s correct. It was -- we paid $35 million, approximately, and that was actually early in the second quarter in April.

Charles Neivert - Morgan Stanley

Okay. So that will hit cash flow. Have there been any new competition -- in terms of the Canadian issues with the new -- with the Royal businesses, have you seen any additional competition coming up from some of the new players that people have talked about coming into the marketplace, and is that hurting your business at all, or has that really not been an impact?

Paul Carrico

I think the market is so far across the board and there's always going to be the increased level of competition. I can't imagine anybody is totally happy with the business out there right now. So, to say that that's the factor that's of significance I would say no. We'll just have to deal with those issues as we go forward, but what this business really needs is a step-up in the economy and improvement in demand.

Charles Neivert - Morgan Stanley

Okay. A couple other quick questions. Has the price hike that was I guess supposed to go in, in March of $0.02 has that been settled yet? Has any of it gotten in and to at least to larger customers or smaller customers? I mean, could you quantify where that stands at this point?

Paul Carrico

From our perspective the $0.02 increase in March was implemented.

Charles Neivert - Morgan Stanley

Okay. And then, the 3.1 billion in PVC capacity you've talked about, that includes Sarnia in the 3.1 but doesn't include OK City?

Paul Carrico

That's correct.

Charles Neivert - Morgan Stanley

And then now you've, but with Sarnia closed you've still got that’s about the same 3.1 billion in VCM does that mean now your VCM, well your VCM has been turned down, and which of them has been turned down? Is it the joint venture or your own wholly owned operations?

Paul Carrico

No, our Lake Charles plant remains down from last year, so that continues to be shut down at this point.

Charles Neivert - Morgan Stanley

Okay. I guess that just about covers it. Oh, is there any way -- can you give us any range on what the land sale might be bringing, even if it's a pretty broad range, but is there any way that we can bracket that a bit?

Paul Carrico

That would really be inappropriate at this time, so, no, I don't think we can help you on that one.

Charles Neivert - Morgan Stanley

Okay. Alright that's all the questions. Thank you.

Operator

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

Gregg Goodnight - UBS

Good morning gentlemen. You talked about the cash flow affected this Quebec tax trust settlement. How much of that $20.1 million flowed through your income statement and was a negative impact on your GAAP reported net income or EPS?

Greg Thompson

I mean, the settlement was previously accrued but, still on a pretax basis it had no impact. I believe it was actually a positive impact on the income tax line. I could give you a little more specific answer maybe in a minute.

Gregg Goodnight - UBS

Okay. That's great.

Greg Thompson

Double-check that.

Gregg Goodnight - UBS

You mentioned that -- that your vinyl production operating rate was perhaps slightly below what the industry was. Is there some reports that the industry was 80%, and using that number would imply about ₤620 million of PVC sales. So the implication is, is that you are somewhat below that figure, is that correct?

Paul Carrico

I'm not sure -- you were doing the math on the 3.1 billion, is that?

Gregg Goodnight - UBS

Yes.

Paul Carrico

Yes, it would be somewhat below that, yes.

Gregg Goodnight - UBS

Okay. And, what percentage of your sales were in the export market, approximately?

Paul Carrico

Approximately slightly into the double digit category.

Gregg Goodnight - UBS

Okay. Alright. Now, looking ahead to second quarter, in terms of export, it's commonly been reported that there are logistical constraints and shipping constraints and the like. So, even though the international market would be strong and the potential for exports are there, do you see your quarter over quarter exports staying up or increasing, or perhaps even decreasing?

Paul Carrico

Well, I certainly agree with you relative to the challenges on the logistics in the market. I think, at this time our expectations are we would be flat to up though and not be impaired, if you will, by that kind of a constraint. We're starting from a lower base than the rest of the world out there in the North American market. So, what we're needing to do is a little bit lower scale, and I think we should be able to sustain that. It is certainly subject to whatever changes there might be in the market from this point on, but at this time we think we'd be in the same range.

Gregg Goodnight - UBS

That is flat up to versus the first quarter, not versus last year?

Paul Carrico

Yes.

Gregg Goodnight - UBS

Very good. In terms of the Woodbridge facility, there was some consolidation of operations, if I recall, in Canada, and there was a annual savings number, I believe, of $27 million per year that was originally targeted. Have you -- could you give us the status of your consolidation and have you seen some of that savings? I'm trying to understand why the windows and door segment was down so drastically?

Paul Carrico

We've done the consolidations and the improvements associated with the business during the past year. It's difficult to relate back to those numbers that were talked about last year because the market is so far down on operating rates, and our business is the same way. So I don't think I can make that bridge for you.

Gregg Goodnight - UBS

Okay. And last question, if I could, this Vision Extrusion operation I hear is up and running. Do you have a sense for what their operating rates or how hard they're running or what the impact is to your market up in Canada?

Paul Carrico

I don't have a sense for their operating rates or what they're doing. You will have to go ask them.

Gregg Goodnight - UBS

Okay. But is it an impact in the market?

Paul Carrico

Well, any new competitors are a change to the market. To say that's changing the whole spectrum of the market would be a bit difficult. It's a relatively small addition at this point, is my understanding. So, I think all of that remains to be seen as we go through the year and hopefully a pick up in the business.

Gregg Goodnight - UBS

Okay. Thanks for your help.

Greg Thompson

Gregg, just following up on the question you asked about the -- about Quebec trust, the tax line includes a benefit of $5.8 million in the current quarter related to the settlement of Quebec trust.

Gregg Goodnight - UBS

Okay. Thank you.

Operator

Your next question comes from the line of [Andrew Curtis] with Sandelman Partners.

Andrew Curtis - Sandelman Partners

Hi. I just had two quick questions. Could you tell us what your term loan balance is pro forma for the pay downs from the recent asset sales? And then, can you give us a sense of what the current revolver balance is? I'm just trying to understand if you're further borrowed under that, if -- assuming, I think it was probably around $50 million at the end of the quarter. Thank you.

Greg Thompson

Yeah, I mean, we don't -- at the end of the quarter, the balance -- the revolver balance was around $50 million of outstanding. The term loan B was approximately $425 million outstanding at it the end of the quarter. We did make a -- we did make an additional pay down of that in early April.

Andrew Curtis - Sandelman Partners

Okay. So -- I mean, is it safe to assume that it's somewhere around $25 million paid down from that as far as the term loan goes?

Greg Thompson

Yes.

Andrew Curtis - Sandelman Partners

Just based on your disclosure of the asset sales.

Greg Thompson

Yeah that's.

Andrew Curtis - Sandelman Partners

And then, what can you say about the revolver funding?

Greg Thompson

The revolver bounces around throughout the quarter, and that's always the case, just based upon when our cash flows come in for customer payments as well as the timing for payments of vendors, it's very lumpy. So, we're -- wouldn't want to go there on a blow by blow update on the revolver balance.

Andrew Curtis - Sandelman Partners

Okay. Thank you.

Operator

Your next question comes from the line of Kristin McDuffy with Goldman Sachs.

Kristin McDuffy - Goldman Sachs

Yeah, I know you discussed caustic pricing. I was wondering if you could give us a more general idea of how your chlorine caustic business performed this quarter relative to the prior year quarter?

Paul Carrico

You're talking about operationally or?

Kristin McDuffy - Goldman Sachs

Yes, from an operating income perspective.

Paul Carrico

In terms of the operating rates, if you will, we were probably slightly down, although I don't have those numbers right handy here. We were probably slightly down. We did have some short outages during the quarter. I'd say in general we expect the second quarter to continue at the same rates that we had in the first quarter.

Kristin McDuffy - Goldman Sachs

Whether that - the outages have a meaningful impact on your EBITDA for the quarter?

Paul Carrico

For which quarter?

Kristin McDuffy - Goldman Sachs

You said you had some short outages during this first quarter '08. Do you have the impact on EBITDA of those outages?

Paul Carrico

No, I don't have that number available.

Kristin McDuffy - Goldman Sachs

Okay. And then, just one clarification. You mentioned that gains on sales of asset benefit EBITDA. Is this because you're selling negative EBITDA assets or you're planning to sell negative EBITDA assets?

Greg Thompson

Well, it's both. When we, as I mentioned earlier, Kristin, when we sold the shed business that actually was a negative EBITDA generator on a trailing 12-month basis. So, selling that business improves the trailing 12-month EBITDA for debt covenant purposes. But, we also have additional assets that we're looking to sell which would generate EBITDA gains as a result of those transactions, which is includable in the EBITDA debt covenants.

Kristin McDuffy - Goldman Sachs

Do you at some point in the future plan to provide a bridge to your bank adjusted EBITDA to make it more easy to kind of track your compliance with covenants?

Greg Thompson

We have -- I think you can appreciate. We've given a lot of information, a lot of additional and new information as part of this call and this release related to that. So, I don't plan to provide any more detail at this point.

Kristin McDuffy - Goldman Sachs

Okay. Thank you.

Operator

Your next question comes from the line of Mark Anderson with Axial Capital.

Mark Anderson - Axial Capital

My question is regarding deferred income taxes on your balance sheet and how to think about those in terms of potential cash liability going forward?

Greg Thompson

So, what's your specific question, Mark?

Mark Anderson - Axial Capital

Will there be a -- I noticed that there was a cash use associated with, I guess, the amortization of the deferred income tax liability. I'm wondering what we should think about that going forward?

Greg Thompson

I mean, there is a -- we are still a net cash taxpayer in the U.S. It's not -- it's not a huge amount of money, but we do continue to pay some cash taxes in the U.S. But none in Canada, obviously given the results that we've talked about here related to Canada. Now, we do have, on a book basis, we do have valuation allowances against the deferred tax assets and those are significant valuation reserves that we have that we made some big adjustments at the end of the year on that. So, what that also means is that, excuse me, when the business turns around, that there would be significant reversal in EPS benefit from reversing those valuation allowances. Does that help?

Mark Anderson - Axial Capital

Yes, it does. Just to clarify, if I look it on your cash flow statement, there's a line item called deferred income tax benefit and use of cash.

Greg Thompson

Yes, I mean, what that is that's just the deferred income tax benefit is included in the net loss, and we're just adding it back because it has no cash impact. So, it's really just zeroing out from a cash flow standpoint the fact that that had no cash impact.

Mark Anderson - Axial Capital

Okay. I got it. Thank you.

Operator

Your next question comes from [Barrett Steinman] with Brownstone Asset Management.

Barrett Steinman - Brownstone Asset Management

Hi. Can you talk about the covenants in your AR facility, what they are exactly?

Greg Thompson

With the securitization facility, there are -- it picks up the same covenants that exist in the bank debt. So there are no really separate or unique covenants that exist in the securitization facility. Now there are -- but the securitization facility as is typical there are certain limitations for customer concentration and terms granted to certain customers and it is all just U.S. related receivables that we currently have in the securitization facility.

Barrett Steinman - Brownstone Asset Management

So you have the same leveraging coverage test to meet for that as well.

Greg Thompson

That's correct. It's all tied together.

Barrett Steinman - Brownstone Asset Management

Okay. And, sort of talking more on the -- I guess the bank facility, I mean, I guess obviously you're in discussion with your banks, but are you all concerned that if you do breach your covenants, you don’t get the assets sell down which you would like to get, which you would obviously you need at this stage complying according to your guidance. Are you worried about that you're going to cut that revolver line off that would hurt your liquidity some more?

Greg Thompson

Well, it's something we're very focused on. We've talked about the asset sales and managing the business and cutting costs and continuing to maintain compliance and we keep the banks up to date as to where we are and have it ongoing dialogue. So, no, we think that we're doing all the right things and exploring all the various range of possibilities that might occur.

Barrett Steinman - Brownstone Asset Management

Okay. Then there is question about your caustic pricing. How does that work with your contract? Is it tied to an index? Is there a lag in terms of when you see a price increase in the market and you guys actually recognize it? How does that work exactly? Is it an immediate flow-through as soon as you see a $50, $75 caustic increase, do you automatically recognize that?

Paul Carrico

No, it does vary according to when it's published and what the agreements are with various market segments. So, it would be cumbersome to describe all of those arrangements.

Barrett Steinman - Brownstone Asset Management

Okay. So, there is some kind of a lag then, I guess.

Paul Carrico

Yes.

Barrett Steinman - Brownstone Asset Management

Okay. Thanks.

Operator

Your next question comes from the line of Andrew Chan with Lehman Brothers.

Andrew Chan - Lehman Brothers

Thank you. Most of my questions have been answered, but I just wanted to confirm, in the leverage ratio, the total debt number, that includes balance sheet debt and off-balance sheet debt and LCs issued on outstanding?

Greg Thompson

That's correct.

Andrew Chan - Lehman Brothers

And then, secondly, just wanted to confirm that the leverage ratio, the maximum leverage ratio comes down to -- is it 5.25 by year end, and interest coverage max -- or minimum interest coverage is 2.25 by year end? 2.25 times?

Greg Thompson

Yes, leverage ratio at the end of the year is, you are correct, down to 5.25, and interest coverage steps up to 2.25.

Andrew Chan - Lehman Brothers

Great. Thank you.

Operator

Your next question comes from the line of Christy Parsons with [Claren Road Asset

Management].

Christy Parsons - Claren Road Asset Management

Thank you. Could you provide the balance of the AR facility that was outstanding?

Greg Thompson

$147 million at the end of the quarter which is the same balance that was outstanding at the end of the year.

Christy Parsons - Claren Road Asset Management

Okay, thank you. And also, the negative LTM EBITDA that we should take out for the outdoor building product business that was sold, I know in the slides we've got the most recent two quarters. Do you have an LTM number for that?

Greg Thompson

No, we're not providing that as a separate number.

Christy Parsons - Claren Road Asset Management

Okay. That's all. Thank you.

Operator

Your next question comes from the line of [Eva Yen] with Independence United.

Cheryl van Winkle - Independence United

It's [Cheryl van Winkle]. A couple of things. First of all, with respect to caustic, I know that in general in the business a lot of people have contracts where the price is capped for a multiyear period or can only go up a certain amount during the period of a multiyear contract. About what proportion of your business you have contracts of that type?

Paul Carrico

Yeah, I don't think we want to get into the mix of our customers and the pricing mechanism. So, I don't think I can answer that question for you.

Cheryl van Winkle - Independence United

Okay. Second question, I know you made a particular point about volume being very poor in the siding, the door and siding -- sorry, not siding, the door and window business. But you didn't particularly mention the outdoor business. Is that volume any less bad than the doors and windows business?

Paul Carrico

No, I think you can cut across all the markets for the windows, doors siding, outdoor. It's just in general things were poor across the board.

Cheryl van Winkle - Independence United

And, are you seeing any downward pricing pressure in any of those businesses as a result of those poor volumes?

Paul Carrico

Let's clear, there's been competitive margin squeeze as much as anything driven by the increased costs that we've talked about, so that's the problematic part of this. You have poor volumes and you have costs that are increasing faster than you can recruit those costs.

Cheryl van Winkle - Independence United

Okay. So the impact is more from the cost side?

Paul Carrico

Well, that and the lower volumes.

Cheryl van Winkle - Independence United

Right, right. And, now the primary costs you're referring to is that the PVC, or are there other things?

Paul Carrico

Mostly the resin side.

Cheryl van Winkle - Independence United

Okay. And then finally, on your accounts receivable, is there any additional accounts receivable availability you have that you would be able to draw at your current level of accounts receivable?

Greg Thompson

I mean, there are some additional portions of account receivable, like I mentioned, Canada. We don't currently have that in the securitization facility, and I think there are one or two of the royal operation that we just haven't put them into the securitization facility currently, so that could be an opportunity for us.

Cheryl van Winkle - Independence United

Okay. So you're using what you've got set up pretty fully, but there are a couple of other pieces you could add.

Greg Thompson

That's correct.

Cheryl van Winkle - Independence United

Okay. Thank you.

Greg Thompson

Cheryl that was all I was answering there. I think, it was Mark that asked the question, I just wanted to be clear on the debt that's included for covenant purposes. Now that you didn't ask about lease financing obligations, but lease financing obligations which precisely from an accounting standpoint is debt on the balance sheet, that does not count as debt for purposes of the debt covenants, just to be clear.

Cheryl van Winkle - Independence United

Okay. Thank you.

Operator

The next question comes from the line of Roger Smith with Merrill Lynch.

Roger Smith - Merrill Lynch

Thank you very much. I think historically you used to run your Plaquemine chloralkali plant flat-

out other than outages plant or otherwise. I know that with past few quarters you've been moving PVC production among your plants for various reasons. Have you been, other than outages, trying to run your Plaquemine chloralkali essentially flat-out?

Paul Carrico

Absolutely.

Roger Smith - Merrill Lynch

And, secondly, just so I understand the AR, the current facility in the U.S., are you essentially maxing out all that you can on that facility, or does that the difference between the 165 and the 147 represent some slight additional source of liquidity?

Greg Thompson

There is a bit of additional eligible receivables that we haven't -- where we haven't maxed out. Not a lot, and as I said, there are some other opportunities we have for things that we could put into that facility for some additional draws that we just haven't completed yet.

Roger Smith - Merrill Lynch

Got it. So while there's some little bit, generally speaking, we should roughly assume that unused -- apparently unused portions of AR up to the 165 say, shouldn't be a source of additional material liquidity historically.

Greg Thompson

Well, it would be, as receivables increase, which is what you would expect in the second and third quarter, with the normal seasonality of our business, yes, it would increase up to that 165.

Roger Smith - Merrill Lynch

Okay, thank you very much.

Operator

Your next question comes from the line of Mike Judd with Greenwich Consultants.

Mike Judd - Greenwich Consultants

Yes. I realize the lease financing obligations aren't included in the calculation, but were they -- where were they at the end of the quarter? I guess they were 112.6 at the end of December quarter and should we expect that to be relatively stable in terms of that number, or does that fluctuate?

Greg Thompson

We don't have any new long-term leases at the end of the first quarter. It's down a little bit, 4 million or so, but it's show, it's relatively stable.

Mike Judd - Greenwich Consultants

Thanks for the help.

Martin Jarosick

Darlene, I think we have time for one more question.

Operator

Your next question is from David Troyer with Credit Suisse.

David Troyer - Credit Suisse

So, lease financing obligations have increased relative to the beginning of 2007. I know they're flat here. How do you treat lease expense and what is the magnitude of it, say in the first quarter of '08?

Greg Thompson

I don't have that number handy. I would have to get back to you on that.

David Troyer - Credit Suisse

But is it, would it be fair to take, say the $112 million, or however it changes, and put a cap rate on it of 6 or 7 or 8%? And then, does that run through interest expense or is it in SG&A or where would it show up on the income statement?

Greg Thompson

The interest component of the long-term capitalized lease would flow through interest expense. That is the way it would work.

David Troyer - Credit Suisse

Okay. That's all I have. Thank you.

Greg Thompson

Okay.

Operator

And do you have any closing remarks?

Martin Jarosick

That concludes our call. We want to thank everyone for participating and look forward to speaking with you on the second quarter call.

Operator

Thank you for participating in today's Georgia Gulf first quarter earnings conference call. This call will be available for replay beginning at 11:00 a.m. Eastern time today through 11:59 p.m. Eastern time on Wednesday, May 15, 2008. The conference ID number for the replay is 46109686. Again, the conference ID number for the replay is 46109686. The number to dial for the replay is 1-800-642-1687, or 706-645-9291. This concludes today's conference call. You may now disconnect.

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