Georgia Gulf Management Discusses Q2 2012 Results - Earnings Call Transcript

Georgia Gulf (GGC)

Q2 2012 Earnings Call

August 02, 2012 10:00 am ET

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

Presentation

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. So 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 reduced 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 maybe 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.

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