Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Chemical Corporation second quarter 2020 earnings conference 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. As a reminder, ladies and gentlemen, this conference is being recorded today, August 6th, 2020. I would now like to turn the call over to today's host, Jeff Holy, Westlake's Vice President and Treasurer. Sir, you may begin.
Thank you. Good morning, everyone, and welcome to the Westlake Chemical Corporation second quarter 2020 conference call. I'm joined today by Albert Chao, our President and CEO, Steve Bender, our Executive Vice President and Chief Financial Officer, and other members of our management team. The conference call agenda will begin with Albert, who will open with a few comments regarding Westlake's performance, followed by a current perspective on the industry.
Steve will then provide a more detailed look at our financial and operating results. Finally, Albert will add a few concluding comments, and we will open the call up to questions. During this call, we refer to ourselves as Westlake Chemical. Any reference to Westlake Partners is to our master limited partnership, Westlake Chemical Partners LP, and similar references to OpCo refer to our subsidiary, Westlake Chemical OpCo LP, which owns certain olefins facilities.
Today, management is going to discuss certain topics that will contain forward-looking information that is based on management's beliefs, as well as assumptions made by and information currently available to management. These forward-looking statements suggest predictions or expectations, and thus are subject to risks or uncertainties. Actual results could differ materially based upon many factors, including the cyclical nature of the industries in which we compete, availability, cost, and volatility of raw materials, energy and utilities, governmental regulatory actions, changes in trade policy and political unrest, global economic conditions, including the impact of the COVID-19 pandemic, industry operating rates, the supply-demand balance for Westlake products, competitive products and pricing pressures, access to capital markets, technological developments, and other risk factors discussed in our SEC filings. This morning, Westlake issued a press release with details of our second quarter results.
This document is available in the press release section of our webpage at westlake.com. We have also posted a presentation on our website to assist in the discussion of our results. A replay of today's call will be available beginning today, two hours following the conclusion of this call. This replay may be accessed by dialing the following numbers. Domestic callers should dial 855-859-2056. International callers may access the replay at 404-537-3406. The access code for both numbers is 5145968. Please note that information reported on this call speaks only as of today, August 6th, 2020, and therefore, you're advised that time-sensitive information may no longer be accurate as of the time of any replay. I would finally advise you that this conference call is being broadcast live through an internet webcast system that can be accessed on our webpage at westlake.com.
Now, I would like to turn the call over to Albert Chao. Albert?
Thank you, Jeff. Good morning, ladies and gentlemen, and thank you for joining us to discuss our second quarter 2020 results. The COVID-19 pandemic has impacted people's lives and weighed heavily on global economic growth, resulting in a significant impact on Westlake's financial results. Our first priority in the quarter has been the health and safety of our employees. I'm very appreciative of our employees who continue to work day in and day out, particularly those in our plants and production facilities, which are a critical component of the infrastructure to provide key products to support the pandemic response and keep essential goods and services flowing in support of the economy. We remain focused on cost reductions, operational efficiencies, management of working capital, and CapEx spending. In this morning's press release, we reported net income of $50 million for the second quarter of 2020, or $0.11 per diluted share.
Before Steve goes through the second quarter results, let me provide some insight into our results for the quarter. In our polyethylene business, we saw strong demand in our differentiated applications, such as food packaging, as more individuals consume packaged food and everyday items from the grocery stores. The significant drop in oil prices early in the quarter led to sharply lower global polyethylene average sales prices.
We also experienced margin pressure due to increased ethane feedstock prices. Margins began to improve at the end of the quarter as oil prices rose from their lows early in the quarter and polyethylene prices start to strengthen. In our vinyl segment, our PVC and vinyl products businesses had a very strong start in the first quarter of 2020.
Early in the second quarter, we saw broad-based declines in PVC and downstream vinyl products demand due to the impact of the pandemic. Decreased demand and low oil prices led to lower average PVC sales prices. This broad-based decline reduced demand for chlorine, causing the caustic supply-demand balance to tighten, leading to a series of caustic price increases during the quarter.
Later in the second quarter, as we saw stay-at-home orders and business operation restrictions related to the pandemic relaxed, PVC and construction-related downstream Vinyl products demand significantly improved, and several of our non-integrated Vinyl plants that had been idled or operating at reduced output have resumed normal production. I would now like to turn our call over to Steve to provide more detail on our financial and operating results for the second quarter.
Thank you, Albert, and good morning, everyone. Throughout Westlake, we took actions to address the rapidly changing demand picture in the quarter, always keeping our teams' well-being at the forefront while improving financial strength and flexibility. I will start with discussing our consolidated financial results, followed by a detailed review of our Vinyls and Olefins segment results. Let me begin with our consolidated results. For the second quarter of 2020, we reported net income of $15 million, or $0.11 per diluted share, compared to net income of $119 million for the second quarter 2019.
The $104 million decrease in net income from the prior period was primarily due to the global economic impact from COVID-19 and the significant drop in oil prices, which reduced our global feedstock competitiveness and associated margins.
The impact of reduced demand resulting from the pandemic drove lower sales volumes in our Vinyls segment, and lower oil prices led to lower global sales prices for many of our major products. Although we began to see the impacts to our business from COVID-19 in Asia in January and in our European Vinyls business in February, the fullest impact to our operations were felt in the second quarter of 2020 as the pandemic heavily impacted the Americas. Second quarter 2020 net income decreased by $130 million from the first quarter 2020 net income of $145 million.
The decrease in net income was primarily due to lower production and sales volumes for caustic soda and PVC resin, in addition to lower sales prices and margins for polyethylene and PVC resin, resulting from the impacts of COVID-19 and lower global demand.
Second quarter 2020 did benefit from lower operating and selling and general administrative expenses as a result of our cost-cutting initiatives. For the first six months of 2020, net income was $160 million, or $1.24 per share, a decrease of $31 million from the first six months of 2019. The decrease in net income was mostly attributable to lower global sales prices for our major products, driven by lower oil prices and lower sales volumes in our Vinyls segment, stemming from the impacts of COVID-19.
The first six months of 2020 benefitted from lower feedstock and fuel costs, reduced operating and SG&A expenses, as well as lower costs associated with planned turnarounds, restructuring, transaction, and integration-related activities. Net income further benefitted from a lower effective tax rate resulting from the CARES Act and a carryback of the federal net operating loss of $68 million.
Our utilization of the FIFO method of accounting resulted in a favorable pretax impact of approximately $6 million, or $0.05 per share, compared to what earnings would have been if we reported on the LIFO method. This is only an estimate and has not been audited. Let's move on to review the performance of our two segments, starting with the Vinyls segment.
In the second quarter of 2020, our Vinyls business experienced lower global sales prices and volumes for many of our major products as compared to the second quarter of 2019, driven by the sluggish global economic activity brought on by the impact of COVID-19.
Vinyls operating income of $20 million in the second quarter of 2020 decreased $109 million from the prior year period, primarily as a result of the lower global sales prices for our major products and lower sales volumes for caustic soda and downstream vinyl products. The decrease was primarily offset by lower ethane feedstock and fuel costs, reduced operating expense, and lower costs associated with planned turnarounds. In the middle of the second quarter, oil prices started to rise, which caused many of our global vinyl competitors that use naphtha-based ethylene to raise PVC prices.
The PVC and downstream vinyls product market began to improve later in the second quarter as demand in June improved over May's levels, resulting in an increase of $0.03 per pound for PVC in June.
Further increases of $0.03 per pound for July and $0.04 per pound in August have been announced. The improvement in Vinyls demand which began in the middle of the second quarter has continued as industry consultants reported operating rates in June at 84% versus rates in the mid-50s just a few months ago. Turning to our Olefins segment. For the second quarter 2020, Olefins operating income of $25 million decreased by $57 million, in the second quarter of 2019, as a result of lower sales prices and margins for polyethylene, which were primarily offset by higher polyethylene sales volumes.
The tight polyethylene supply-demand balances, combined with rising oil prices up from their lows in early second quarter, combined with higher feedstock costs, drove a $0.04 per pound increase in June, and industry consultants are projecting a $0.05 per pound increase in July.
Industry producers also announced a $0.05 per pound increase in August due to continuing tight market conditions. Before concluding our Olefins review, I would note that we expect the turnaround for our Petro II Ethylene unit discussed in previous calls to be in the first half of 2021. Now let's turn our attention to the balance sheet and statement of cash flows. At the end of the second quarter 2020, we had cash and cash equivalents of $1.1 billion and total debt of $3.7 billion, or net debt of $2.6 billion. Net debt at the end of the first quarter of 2020 was $2.9 billion.
The $259 million reduction in net debt in cost reductions, management of our working capital, and reductions in CapEx. In line with our focus on cash generation, we improved our financial and operating strength and flexibility throughout the second quarter.
We generated cash flow from operations of $448 million in the second quarter and fully repaid our draw on our $1 billion revolving line of credit and issued $300 million of 10-year unsecured notes at a rate of 3.375% per annum. We used a portion of the $300 million of the newly issued 10-year note proceeds to retire $100 million of 6.5% notes on August 1st. We will also retire an additional $154 million of the 6.5% notes on November 1st.
This re-financing reduces our expected run rate of interest expense by about $6 million per year and maintains our long-dated and strategically staggered debt maturities, which now have an average life of approximately 14 years with an average interest rate of 3.5%. This solid liquidity position, coupled with a long-dated maturity schedule, allows us to operate confidently in today's environment.
We have taken actions to reduce our operating expenses and manage our operations to match current demand while being well-positioned to react to the changing market environment and meet the needs of our customers. As we previously announced on our last quarterly call, we have decreased our level of capital expenditures while continuing to safeguard our employees and our operations. We are maintaining our revised 2020 capital expenditure guidance of $500 million-$550 million.
With the previously mentioned tax benefit of the CARES Act, we now expect our 2020 effective tax rate to be approximately 11%. With that, I will now turn the call back to Albert to make some closing comments. Albert?
Thank you, Steve. The second quarter of 2020 was a difficult time for the global chemicals business. The outbreak of COVID-19 late the first quarter of this year, followed by the associated stay-at-home and business operation restrictions, reduced global demand. We first focused on the health and well-being of our employees worldwide while operating our facilities in a safe and reliable manner, kept our attentions on improving our financial strength and flexibility, while also staying close to our customers to manage through this challenging time.
We produce products that are essential to everyone's lives, from polyethylene for food packaging to PVC resins and compounds used in medical applications and equipment, construction infrastructure, and to chlor-alkali products used in the production of water treatment, disinfectants, paper tissues, and cardboard packaging.
Westlake team for its disciplined execution to deliver these essential products and will continue to work to grow our value chain. Let me close by sharing some views on our outlook. We are seeing continued demand improvements for all of our major products that began in May and continued through to the present. PVC demand as well as pricing for polyethylene, PVC, and caustic have continued to increase, and the oil and gas spread has more than doubled from the lows in the second quarter. With considerable ethane available for current and future use.
For polyethylene, operating rates continue to remain strong with many polyethylene producers announcing price increases in July and August totaling $0.10 per pound. We will continue to remain focused to operate safely, deliver superior operation performance to reduce costs while creating value over the business cycle.
The prudent management of our business through this pandemic, combined with the solid fundamentals of our business, will allow us to deliver long-term value to our shareholders. We are cautiously optimistic for improving business dynamics for the balance of 2020 as industry indications grow constructive. As always, we will continue to operate safely, along with being good stewards of the environment and the communities in which we live and work. Thank you very much for listening to our second quarter 2020 earnings call. Now I'll turn the call back over to Jeff.
Thank you, Albert. Before we begin taking questions, I would like to remind you that a replay of this tele-conference will be available two hours after the call has ended. We'll provide that number again at the end of the call. Josh, we'll now take questions.
Thank you. As a reminder to ask a question you will need to press star one on your telephone. To withdraw your question press star two. Please standby while we compile the Q&A roster. Our first question comes from Bhavesh Lodaya with BMO Capital Markets. You may proceed with your question.
Hey, Good morning to you. This is Bhavesh for John.
Good morning.
We are now hearing it from some of the peers about the sequential pricing increase for caustic soda in 3Q from the 2Q levels, which is a bit counterintuitive given the rising PVC demand and its impact on chlorine and caustic supplies as you have discussed. I understand there is always contracts and other discounts that come into play for the pricing, and demand probably is also strong. From Westlake's perspective, what's your outlook on your realized caustic soda prices for 3Q?
As we speak about the strength in the Vinyls business, we continue to see strength in Vinyls, but it's been really in the PVC space. As I noted in my prepared remarks, we've seen continued strength in price nominations in PVC through June into July, and now we've got nominations into August. Certainly as we have more pull on chlorine, that will certainly put more caustic in the market. As we look into the third quarter, a lot of the answer to your question is highly dependent upon how we see the manufacturing and industrial markets begin to kind of recover.
I think we've seen strength in certain segments of that space, whether it's been in some of the paper and container board, but clearly areas like cut-sheet paper have been weaker.
Some of the aluminum markets have been weaker, but other markets in the detergents and disinfectants have been stronger. It's really a function of how we see the industrial strength recover later this quarter. Certainly we think that we're very well positioned as we see the markets begin to rebound.
Yes. I know that the industry from February to April announced a series of price increases totaling between $160-$195 per short ton. I think IHS recognized about $75 of those price increases per ton has been in effect. As you know, some of the contracts are quarterly based, so this price increase will carry over in the third quarter. On the other hand, some other contracts are on a monthly basis, reflect monthly pricing. As Steve said earlier, it really depends on the industrial economy and demand for our products, not only U.S. but globally.
We saw a price increase during the second quarter, both domestically U.S. and export. As each country reacts differently to COVID-19, their demands and needs will be different.
As I said earlier, that some of the quarterly pricing that price increase will carry in the third quarter, but monthly pricing will depend on the supply demand for that month.
Got it. That's great color. Then in terms of cash flows, we obviously saw great, solid free cash flow generation in the second quarter, seemingly from lower working capital. Can you share some thoughts how you think the rest of the year shapes up for free cash flow and working capital in particular? Thanks.
Certainly. As you've seen, we've seen nominations of price increases both in PVC nominations for caustic and nominations for polyethylene. With the demand picture that we're seeing today across the space and improved pricing dynamics, that will certainly translate into earnings and therefore into cash flows. Certainly we've not taken our foot off the gas in trying to keep our cost low and our operating cost and expenses low as well.
As always, we keep a very close eye on our operating costs, but also we see a very improved market relative to earlier in the second quarter through into the now the third quarter of demand. We've seen a series of price nominations across all of our major products. That should improve earnings and improve cash flows.
Great. Thank you.
You're welcome.
Thank you. Our next question comes from Hassan Ahmed with Alembic Global. You may proceed with your question.
Morning, Albert and Steve.
Morning.
Good morning.
Question around the capacity side of things. One of your sort of large competitors talked about how on the ethylene side as much as 11% of capacity may be vulnerable because of sort of relatively weak economics right now. My question to you guys is that are you guys seeing similar sort of things? If you are, what are your expectations in terms of sort of curtailments or maybe even permanent closures going forward?
Yes, that's a good question. As you know, at Westlake, we are a net buyer of ethylene by about 1 billion pounds or depending on supply demand of our derivative products. Our ethylene plants are running, as we said, at normal operating rates and supply our downstream, and we buy additional ethylene. Now, if there are ethylene producers, there are more merchant ethylene, then depending on their downstream customers, the demand, they may or may not have all the full needs of their ethylene requirements. Depending on the producers.
Very fair. Okay. Moving on to the feedstock side of things, a two-part question. One is obviously we saw a bit of a rally in ethane pricing through the course of the quarter, and there was some choppiness in terms of NGL pricing as well. On the nearer term side of it, in terms of Q2, what did your feedstock mix look like? On the slightly longer term side of things, what are you guys' views in terms of ethane pricing and ethane supply-demand balances?
Yes. As you know, ethane has by and large been the lower feedstock for ethylene in the U.S., and when oil price went negative, then suddenly, naphtha-based ethylene cracker had a better economics for a little while. As you know, the naphtha cracker activity in the U.S. is very limited. About 80% of U.S. ethylene capacities are all ethane-based. Ethane price has come up from the low, but it stabilized in the $0.20-$0.22 a gallon range. The outlook, even though oil production went down with lower oil prices and some of the oil well shutting.
As oil prices move back again, we are seeing more production, especially Permian area. The associated gas, which are rich in natural gas liquids, are back in production. We are seeing more of a stable ethane prices from now to the end of the year.
Even longer term, at least the future prices still seem reasonable, stable ethane price going forward.
Very helpful, Albert. Thank you so much.
You're welcome.
Thank you. Our next question comes from Kevin McCarthy with Vertical Research. You may proceed with your question.
Yes, Good morning.
Good morning.
A question on capital deployment for you. You noted that you took out $259 million from your net debt balance during the quarter. I guess depending on where EBITDA settles out, perhaps your ratio of net debt to EBITDA will be two turns or perhaps slightly higher. My question is, do you foresee a point in time when your cash flow will be dedicated more toward some combination of M&A or share repurchases relative to de-leveraging? When might that be?
Kevin, when we think of the waterfall of use of cash, we think of the ability to use those funds, of course, to maintain and run the plants reliably and safely. You can see that we've got, I think, a reasonable level of capital expenditures planned for 2020. As we get into later in the year, we'll talk about our plans for 2021 as we finish our capital budgeting. Our focus really is to make sure the plants are running reliably and consistently. We have no current large expansions announced, and so the opportunity to deploy that capital into value-added opportunities always is there.
If you look at how the business has grown over time, it's been through organic growth. It's been through debottlenecks and, in some cases, new plant expansions as well as through acquisitions.
We're constantly on the horizon looking for value-added opportunities and deploying the capital that way as part of use of that capital. Certainly looking at rewarding investors with dividends as well as share buybacks is also part of that profile of cash flows as well. We think it's a very important avenue to reward shareholders, but at the same time, grow the value stream for those shareholders by investing capital that grows the underlying value of the business. There's a balanced effort.
Great. Thank you for that, Steve. Secondly, It's obviously been an unusual season for construction activity. Can you talk about where PVC industry operating rates were in 2Q, How you would expect them to trend into 3 Q, and how your own rates might have compared to the industry?
Yes. I think IHS reported that Q2 industry operating rate PVC in the U.S. is 73%. They're looking at 78% for third quarter. From what we have seen, both in our PVC demand in the U.S. and globally, as well as our downstream building products demand, PVC demand and building product really strong. Hence we have the price increases announced, the $0.03 and it's the second $0.03 became a $0.02 reality, and then there's a $0.04 out there for August. You can't have price increases like this and export price went from the low $500s in April to now the mid-$700s and even going higher.
Both domestic and export PVC price have been going up, and you can't have price increase like this without strong demand.
As we understand, inventory levels of producers in the U.S. are quite low, and some are impacted by plant problems in some producers. We should see stronger operating rate in PVC in the third quarter.
Excellent. Thank you very much.
You're very welcome.
Thank you. Our next question comes from David Begleiter with Deutsche Bank. You may proceed with your question.
Thank you. Good morning.
Good morning.
Some of the recent polyethylene price strength has induced strong U.S. exports. How do you expect U.S. exports to trend in the back half of the year, as we are going to see some new capacity come online from China?
That's a good question. We understand Chinese demand is quite strong for polyethylene. Some of the reasons are that Iranians used to export their amounts of polyethylene, especially LDPE to China. Because of the sanctions, the Iranian export has slowed down or stopped, hence China has been importing more products. On the other hand, we read that the U.S. industry demand for polyethylene, domestic demand, has grown pretty sharply, especially LDPE. For the first six months of this year, one report indicated that domestic demand for LDPE went up 7.4%, which is unusual.
Usually, LDPE demand increase between 1% and 2% a year. It shows that because of the COVID-19 and consumers are buying more packaged goods and packaged food, the demand, especially LDPE, has really strengthened. Same time, export LDPE declined because there's only so much LDPE to supply.
We had this increased domestic demand, we had to reduce exports. Having said that, I think linear low and high-density export has also gone up a lot, reflecting the new capacities that we added in the U.S., as well as the U.S. recovering competitive feedstock advantage that today, ethane is the lowest cost feedstock in the U.S. to produce ethylene as of July 30th report from IHS.
Albert, given that strength, how are you feeling about the August $0.05 increase for polyethylene?
We think it's quite strong. It's just the beginning of August. A lot of things happen between now and end of August. I think IHS indicated the $0.05 will go through, whereas I think CDI says it won't go through. We don't know. Maybe somewhere in between.
Thank you very much. Take care.
You're very welcome.
Thank you. Our next question comes from Mike Sisson with Wells Fargo. You may proceed with your question.
Hey, Good morning.
Good morning.
Just curious on the polyethylene price increases. Will those all flow through to the bottom line? I'm just curious because I think July, maybe some of the costs went up and what do you think, how much of the $0.05 could flow through if you get that achieved?
Mike, as you know, the increases typically for some of the larger volume buyers typically have some delay before they actually hit the bottom line. Nevertheless, if you look at where ethane is, we think as Albert earlier noted, it's in the low 20s, 22, 23, 21, in that range. Having some of these increases as we did announced in July and August will translate into improved results in the bottom line, but obviously on a bit of a one month lag basis in some cases.
Got it. I know you mentioned demand for PVC looks strong. On a sequential basis, how strong do you think your PVC business will be on a top line basis versus second quarter?
Well, you certainly saw a pullback because of the stay at home orders in the second quarter, operating rates were quite low as you've seen published in some of the industry consultants' publications. As Albert noted, and I noted, we've seen operating rates get much more elevated and remain very strong as we see demand today. We've got price announcements. We say in July, there was implemented a $0.02 increase in July, $0.03 was announced to when implemented. We got an announcement for August as well of $0.04. We'll see what gets implemented as we all know it's early August, demand looks very firm.
With that said, operating rates remain elevated, it looks like a good market.
Great. Thank you.
You're welcome, Mike.
Thank you. Our next question comes from Alex Gertsburg with KeyBanc. You may proceed with your question.
Thank you. Good morning, everyone.
Good morning, Alex.
Thanks. Do you see opportunities for bolt-on acquisitions in your building products business? Is this a good time to accelerate your roll-up strategy?
Well, Alex, I think as you know, we've looked at a number of opportunities in the last year. Took the opportunity to invest in NAKAN, a PVC compounding business, as well as mid-year DaVinci Roofscapes business. We do look for value-added opportunities downstream in our business, and to the extent that we find those, and they make sense, they're nice additions. Both have performed very nicely since the transaction, and certainly we look forward to finding opportunities, but it is always a balance of trying to find a balance between value and just bolting on for bolt-on sake, which we do not do.
The answer is we'll look, and if there are some value-added opportunities as we found last year, we'll act on those.
Thank you, Steve. You mentioned you realized some solid price increases in the PVC resin in your building products. How should we think about pricing there relative to PVC?
Demand as you might imagine in the DIY or repair and remodeling space has been very firm. We've also seen, and you probably have even seen this from some of the home builders, that they've also seen strong results. In our pipes, our fittings, our sidings businesses have all seen solid demand, and we certainly see pricing capability in all of those downstream products. Certainly, we're acting on that everywhere we see an opportunity to act.
Thanks a lot.
You're welcome.
Thank you. Our next question comes from Jim Sheehan with Truist Securities. You may proceed with your question.
Morning. Thank you.
Morning, Jim.
Could you comment on how the pandemic has affected your thinking about doing drop-downs into Westlake Chemical Partners?
Jim, as you know, there are four levers that we have available to us. One is the drop-down that you mentioned, and we still have a very significant portion that can be dropped. We have also acquisitions, and as you know, we acquired a portion of the LACC Olefin cracker last year, and our partner, Lotte, has the other half. That could be an acquisition target. We've got an ability to think about debottlenecking over time, and certainly that new cracker at an appropriate time could be considered. Of course, margin expansion.
Those four levers are the ones that we contemplate. It's really looking at the kind of risk-reward we get.
As we take on the opportunity to look at growing the capabilities of the Partnership through a drop-down or the other three levers, it's all about, is the unit price reflecting that growth in earnings and cash flows? We've demonstrated over the last six years the Partnership is incredibly predictable in terms of its earnings and distributable cash flow. The issue is, if we're getting the appropriate reward, we can act on any one of those four levers.
Thank you. It looks like there are some ethylene assets in the U.S. Gulf Coast that may be changing hands. Are you an acquirer of ethylene assets? If not, how do you see the competitive landscape changing as a result of those asset sales?
Well, I can never obviously comment on anything that we might be looking at or might not be looking at. What I would say is that the competitive landscape is one that is by definition competitive. As we look across the spectrum, we always are willing to work with the market and our customers, and should there be new entrants in the market, so be it. We think we're very well-positioned with our portfolio and think we're very competitive with the products that we produce and support we provide our customers.
Yeah. Just one point, as Steve mentioned, fourth quarter last year, 2019, we acquired 38% of LACC for $800 million. We did just acquire it.
Thank you.
You're welcome.
Thank you. Our next question comes from P.J. Juvekar with Citi. You may proceed with your question.
Hi. Good morning. It's Eric Petrie of P.J.
Good morning.
Your earnings on your Olefins and Vinyls declined less than your peers. Wondering if you could give some color on that? Is it better cost position, better fixed cost absorption, or product mix variance?
Eric, I think when you look at our space, I think Albert mentioned this, we're very well-positioned in the low-density space in some of our differentiated products. Certainly in an application such as food packaging and coating materials, with everyone going to the grocery stores and buying packaged materials, I think we're very well-positioned with the autoclave technology that we have. I think the specialization, that specialty end of that product wheel has demonstrated strength in this setting.
In our Vinyl space, we have the ability to really be well-positioned not only in PVC resin, but also further downstream into vinyl products, pipes, fittings, siding, a wide variety of downstream products, as well as servicing others with our resin in that market.
I think the integration strategy that you hear us talk about has served us well in being able to service the export market with resin, the domestic market with resin, and of course, the construction and repair and remodeling markets with our downstream products. I think that has helped us with the ability in this very dynamic market.
Thank you. Our next question comes from Jonas Oxgaard with Bernstein. You may proceed with your question.
Thank you. I was wondering, in the last couple of months, there's been a lot of news around hydrogen. Given that you guys are one of the largest operators of electrolyzers in the world, is this an opportunity you're looking into, either as a producer or as an operator of hydrogen assets for others?
Well, it'll be very interesting. We've been reading a lot about it. You're right. With the electrolysis, with power, and with water rather than salt and brine. We are all ears, and anybody interested to talk to us, we'll be pleased to talk with them.
It's not something you're looking into directly?
Well, right now the hydrogen economy, most hydrogen I think is made from natural gas, so it's not quite the green hydrogen. I think they call it the gray hydrogen or whatever. To be truly in hydrogen economy, you need the green, which using renewable power from solar and wind, and so there's no CO2 production from that. You need tie down to a hydrogen pipeline. You also need a consumer end and building hydrogen filling stations, which are very few, much less than the electrical charging stations, which people are building more of those.
I think we're still several years away from it, but we are very interested looking into it. As I said, anybody want to talk to us, we'll be pleased to talk with them.
Okay. Thank you.
You're welcome.
Thank you. Our next question comes from Ben Isaacson with Scotiabank.
Thank you very much. Just one question, actually, on chlor-alkali. Can you just talk about where you think we are in the cycle, given how demand has changed as a result of COVID and subsequent cancellations or deferrals of new projects? Do you see tightness in the market getting pushed back one year, three years, etc ? Can you talk about where we are in the cycle? Thank you.
Well, as Steve Bender said, chlor-alkali demand really follows industrial production. As you know that starting around 2018, with the trade war between U.S. and China led with a decline in industrial production, and which kind of impacted the rest of the industrial world. I think by the end of last year, we saw some signs of improvement with the Phase I tariff reduction with U.S. and China. By then we had COVID-19.
As you also know that, unlike the Olefins business, very little new capacity added around the world in chlor-alkali. U.S. is the best place because of the low power, you have a lot of salt domestically, and you have a big caustic market. You're right, the COVID-19 has pushed back probably the peak of caustic.
How far the peak will be away from us, we don't know, depending on the really the global GDP recovery. The faster the recovery, the faster the caustic demand will increase.
Thank you. Our next question comes from Frank Mitsh with Fermium Research. You may proceed with your question.
Good morning, Gentlemen.
Morning, Frank.
Morning, Frank.
I was struck by some of the cost actions that you took in the second quarter. Obviously, SG&A came down, and that was something that you highlighted in terms of delivering the results that you did. I was just curious if you might be able to size what our expectation should be in the second half of 2020. Would you describe these cost actions as being structural that would continue into the future, i.e., 2021, or really more reactionary to the unusual circumstances we have with the pandemic?
Yeah, Frank, I would guide that the first six months run rate of SG&A is something that you could realistically think that might be deliverable in the second half of 2020. Many of the actions that we took will be sticky. I think at the same time, remember, we've got commissions built into that SG&A line, so that as business continues to improve, as we continue to see volume, there'll certainly be some elevation of that. I think directionally, that kind of run rate number for the first half of the year should be reasonable to consider for the second half of the year.
I know that the Westlake salespeople are appreciative of that commission line. With July already in the books, I was wondering if it might be possible to size the volumes that you saw in July versus June or versus the second quarter. However you want to term it, or at least give us an idea, in the Olefins and the Vinyls business.
Well, certainly in the Olefins business with the stay-at-home orders and so much food being sold off grocery store shelves, operating rates were consistently pretty elevated all throughout the second quarter. That was, I think, kind of a hallmark all throughout the quarter. Everybody that has been living through this pandemic knows that. As you get into the Vinyls business, a lot of this went into certain construction industries. Some markets here in the North American market did not designate the construction industry as a critical portion of infrastructure.
Some export markets in Asia, India shut down. Export for resin, in some cases, were greatly reduced because of the export markets backing up and some construction markets not being allowed to operate during some portion of the quarter. Operating rates, as I mentioned, got quite low.
We certainly have seen a strong rebound as many states and provinces in North America opened up, and of course, those export markets opened up as well. Operating rates have come back. I mentioned at the end of June, they were about 84% for the industry.
Thank you so much.
You're welcome.
Thank you. Our next question comes from Matthew Blair with Tudor, Pickering, Holt. You may proceed with your question.
Hey, Good morning, Albert and Steve.
Hey, Matthew.
Hello, Matthew.
It looks like benchmark natural gas prices in Europe have come down quite a bit. Is that something that you've been able to take advantage of in your European ECU plants? Also, has that flattened the cost curve? Has that affected your U.S. caustic, either, I guess, profitability or volumes on the export side?
Well, we're obviously buyers of natural gas in markets in Europe and in North America. Certainly as we see prices move, we've been able to take advantage of that. When you think of the quarter-over-quarter results, we've seen lower fuel costs, which are natural gas costs. That has been an advantage, and that's very true also year-over-year. As prospectively we look at markets in North America and in Europe, we've seen some recent uptick in natural gas here in the last few weeks.
I think with the comments that Albert made, you heard him talk about higher oil prices, and we've seen producers come back into those fields and begin to produce. We'll take a look at gas and see how things play out.
Certainly, we believe there's ample gas, but we can certainly see where gas has been moving a little bit very recently.
Thanks. I'll leave it there.
Thank you.
Thank you. Our next question comes from John Roberts with UBS. You may proceed with your question.
Good morning, guys.
Good morning.
Ethylene glycol was pretty weak during the quarter. Does that have any bearing on the operating rate at LACC or the allocation of ethylene?
No. In fact, it does not. As I say, as Albert noted, we invested in the venture to really get nearly 50% ownership at the end of the fourth quarter, and certainly, we're pulling on our pro rata share of the ethylene, and that did not have an effect on operating rates at LACC.
Okay. Earlier, Steve, you mentioned all the different options you have for the MLP. Its price has doubled off the low that it had earlier in the quarter there. Does it need to go higher before you exercise any of those options?
It's still yielding in the 10% range, and so certainly, I think investors would like to see it appreciate greater than that. We think the underlying strength of the cash flows demonstrate the ability to ride through all kinds of challenges, and this pandemic is probably the biggest challenge we've all faced. I think that the stability here is an illustration that valuations still need to be higher than where it sits today. I certainly think that it is a very well-performing partnership.
Thank you.
You're welcome.
Thank you. At this time, the Q&A session has now ended. Are there any closing remarks?
Thank you again for participating in today's call. We hope you'll join us again for our next conference call to discuss our third quarter results.
Thank you for participating in today's Westlake Chemical Corporation second quarter earnings conference call. As a reminder, this call will be available for replay beginning two hours after the call has ended and may be accessed until 11:59 P.M. Eastern Time on Thursday, August 13, 2020. The replay can be accessed by calling the following numbers. Domestic callers should dial 855-859-2056. International callers may access the replay at 40.