Earnings Call: Q1 2020

May 4, 2020

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Chemical Corporation's 1st Quarter 2020 Earnings Conference Call. During the presentation all participants will be in a listen only mode. After the speakers' remarks, As a reminder, ladies and gentlemen, this conference is being recorded today, May 4th, 2020. I would now like to turn the call over to today's host, Jeff Holly, Westlake's Vice President and Treasurer. Sir, you may begin. Thank you. Good morning, everyone, and welcome to the Westlake Chemical Corporation first 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 work Finally, Albert will add a few concluding comments and we'll open the call up to questions. During this call, we refer to ourselves as Westlake Chemical. Any reference to Westlake Partners is to the 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 maintain 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 COVID-nineteen, industry operating rates, the supply demand balance for Westlake's 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 first 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 2 hours following the conclusion of this call. This replay may be accessed by dialing the following numbers. Domestic callers should dial 855 8592056. International callers may access the replay at 404 5373406. The access code for both numbers is 5672078. Please note that information reported on this call speaks only as of today, May 4, 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 first quarter 2020 results. Before we talk about the quarter I would like to recognize this is a very challenging time our thoughts are with those affected by COVID-nineteen. I will highlight some of the ways we are responding to COVID-nineteen and thoughts on the current situation. Our operations were deemed essential by the Department of Homeland Security and various governmental authorities which have permitted us to operate during the National State And Local State And Home Orders In managing each of our facilities, we have followed the recommendations and instructions of those national state and local health authorities Safety employees have always been our number one priority and response to the threat posed by COVID-nineteen We have implemented a variety of initiatives and actions to protect our employees including ensuring personal spacing and providing personal protective equipment, conducting temperature screenings and entrances to our plants, positioning, postponing or canceling all non critical business activities and travel increased cleaning and disinfecting of all facilities and having as many employees who can work remotely do so. In addition to protecting our employees, we're supporting the communities where we operate Westlake Chemical in connection with the Tington and Weifeng Chao Foundation contributed a combined $1,000,000 the Greater Houston COVID-nineteen Recovery Fund. We've also made numerous donations in the local communities where we operate including personal protective equipment to local hospitals and other medical facilities, and several of our vinyl product businesses have made plastic face shields. As a business team essential by the federal and state governments. Westlake makes products that benefit our everyday lives. Many of these products supporting over half of the United Nations' sustainable development goals but are particularly important in today's environment including polyethylene that's using medical applications and food packaging PBC that's used in medical equipment and supplies as well as a variety of construction and infrastructure uses such as fresh and wastewater piping and chlorine and caustic soda used for water treatment, disinfectants, paper to shoes and cardboard packaging manufacturing. Once again, I want to thank our employees for producing supporting the production of these Before Steve goes through the first quarter results in more detail, let me provide some perspectives for what we are seeing in the current environment and the impacts from COVID-nineteen. In our polyethylene business, we are continuing to see good demand driven by our focus in specialty applications, particularly food packaging as more individuals consume packaged food and everyday items from the grocery stores. And we expect such demand to remain generally resilient. However, while our ethane feedstock costs have decreased, our competitive advantage versus oil based feedstock has been eroded by the 68% decline in oil price we have seen so far this year. Our NALCA based international competitors are benefiting from these reduced costs. Due to the significant decline in global oil prices. As a result of these lower global production costs Industrial Consultants expect to see polishing prices and gas based polyethylene producers margins decline, while oil remains at these depressed prices. In our PVC and vinyl products businesses, after a very good start 2020 late in the first quarter, we saw a broad decline in demand. This decline was led by lower construction activity, housing starts, general manufacturing and industrial activity resulting from the to help reduce the number of people infected by COVID-nineteen. Similar to our olefins business, many of our global competitors that use NAFTA based ethylene have also seen the input costs decline with a reduction in global oil prices. Reducing the cost advantage that North American PVC producers have enjoyed since the onset of the shale oil and gas revolution. However, industry consultants believe that at these potentially lower demand levels, non integrated Chinese coal and the settling based PVC production may not be economical and are at risk of being shut down. Which will benefit activities globally weakening demand for PVC and associated accruing feedstock. This slowing a demand for chlorine has reduced overall chlor alkali production, tauteng the supply demand balances for caustic soda to related chlorine co products in chlor alkali production. As a result, we are seeing improved prices in caustic soda as its demand has remained firm. Overall, impact on our business will depend on the duration of the COVID-nineteen pandemic. The duration of various state and home restrictions and a rate of economic recovery in the US and abroad. I would now like to turn our call over to Steve a goal of financial and operating results for the first quarter. Thank you, Albert, and good morning, everyone. 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 first quarter of 2020, we reported net income of $145,000,000 or $1.13 per diluted share compared to net income of 72,000,000 was partially due to income tax benefit of $62,000,000 resulting from the provisions of the Cares Act enacted in March 2020 to address the economic fallout of the COVID 19 pandemic affecting businesses in the United States. Compared to the first quarter of 2019, 2020 got off to a strong start and we saw increased sales volumes of both our olefins and vinyl segments especially in PVC and polyethylene. Although we began to see impacts resulting from COVID-nineteen in Asia in January and in our European vinyls business in February, these impacts were offset by strong demand for polyethylene, PVC resin and our downstream vinyl products. The contraction in global industrial demand driven by the international trade uncertainties that persisted in late 2018 throughout 2019 led to lower prices and margins for a major product for a major product especially in the international export markets. As we progressed through the first quarter of 2020, we began we were beginning to see momentum for price increases in both of our segments prior to COVID-nineteen becoming a global pandemic late in the first quarter. Which occurred at the same time we saw the significant decline in global oil prices. Our utilization of the FIFO method of accounting resulted in an unfavorable pretax impact of approximately $20,000,000 or $0.12 per share compared to what earnings would have been if reported on the LIFO method. This calculation is only an estimate and has not been audited. Now let's move on to review the performance of our two segments starting with our Vinyls segment. In the first quarter of 2020, first quarter of 2019 driven by sluggish global industrial manufacturing activity as well as the initial impact of COVID-nineteen in Asia and in Europe vinyl's operating income of $73,000,000 in the first quarter of 2020 decreased $28,000,000 from the prior year period primarily as a result of the lower sales prices for caustic soda, partially offset by higher sales volumes for PVC resin and our downstream products. Along with lower feedstock and fuel cost. Also the contribution from our interest reduced our total cost of ethylene by providing additional ethylene at cost thereby reducing the amount we purchase at higher market prices 1st quarter vinyls operating income of $73,000,000 increased by $5,000,000 from the fourth quarter of 2019 as we saw higher sales volumes and prices for PVC resin and lower feedstock and fuel cost. These increases were partially offset by lower global sales prices for caustic soda. Now turning to our olefins segment. For the first quarter 2020, olefins operating income of $62,000,000 increased by $25,000,000 from first quarter 2019 as a result of higher polyethylene sales volumes and lower feedstock and fuel cost, which were partially offset by lower polyethylene sales prices. First quarter 2020 Olefins operating income of $62,000,000 increased $13,000,000 from the fourth quarter 2019 primarily due to higher sales volumes prior quarter. Now let's turn our attention to the balance sheeting statement of cash flows. At the end of the first quarter 2020, we had cash and cash equivalents of $1,500,000,000 and total debt of $4,400,000,000. Cash flow from operating activities was $61,000,000 in the first quarter of 2020. Before moving forward with the items we typically discuss with respect to our forward looking guidance, I would like to talk about some of the actions we have taken to manage the economic impact resulting from COVID-nineteen and the corresponding restrictions put in place. We have a strong liquidity and balance sheet position at the end of March out of an abundance of caution we drew on our $1,000,000,000 revolving credit facility resulting in holding $1,500,000,000 strong liquidity position, we have strategically staggered debt maturities with an average life of approximately 15 years. The nearest debt maturity is $250,000,000 due in July of 2022. The solid liquidity position coupled with a long dated debt maturity schedule allows us to operate more confidently in today's uncertain environment. We are taking action to reduce our RFP operating expenses and manage our operations to manage current demand. We have reduced operating rates at our facilities and idled some small unintegrated facilities. We have decreased the level of capital expenditures while continuing to ensure the safety of our operations and employees. Given our current outlook, we anticipate reducing 2020 capital expenditures to $500,000,000 to $550,000,000 from our previously discussed guidance of $650,000,000 to $700,000,000. We expect to defer the turnaround of our Petro2 ethylene unit originally planned for the second half of twenty twenty to the first half of twenty twenty one. Given the current business environment, we are closely monitoring the changes in our operations and will adjust accordingly to meet market needs. With the previously discussed benefit of the CARES Act, we now expect our 2020 effective tax rate to be approximately 21%. With that, I'll turn the call back over to Albert to make some closing comments. Albert? Thank you, Steve. We produced solid results in the first quarter of 2020. However, as we began to feel the magnitude of impact resulting from the outbreak of the COVID-nineteen pandemic, late in the quarter. We have focused on managing the business through this challenging time. Foremost is to ensure the health and safety of our employees around the world. Next is to produce products that essential to our lives from polyethylene for food packaging, PVC resins and compounds using medical applications and equipment, food packaging, construction and infrastructure and graph like products for water treatment, disinfectant, paper tissues and cardboard packaging. Our teams continue to perform exceptionally well in these challenging times, staying virtually close to our customers and continuing produced the products needed in today's society. We expect the polyethylene production cost advantage from ethane versus naphtha will be re established and we will continue to remain focused on taking actions to position ourselves in this environment to reduce cost limited cash usage and create economic value over the business cycle. Our balance sheet, competitive position and actions will position us to weather the current environment. Thank you very much for listening to our earnings call this morning. Now, I will turn the call back over to Jeff. Thank you, Albert. Before I begin taking questions, I would like to remind you that a replay of this teleconference will be available 2 Our first question comes from the line of P. J. Juvekar with Citigroup. Yes. Hi. Good morning. Oliver, Steve and Jeff. Good morning. How are you? Good. Good. How are you? Great. A question on caustic demand fundamentals. I know caustic prices are going up due to decline in chlorine volumes. But is there anything in alumina or pulp and paper markets that warrant higher volumes? And do you think could higher caustic prices be staying if demand remains weak? That's a good question. Because of the as you said, a lower demand for chlorine and chlorine derivatives are this less production of caustic and caustic demand is still pretty strong in most of the segments especially for packaging, water treatment and disinfectant. So as the economic activity resumes from the stay at home orders. We believe that caustic demand will still be reasonably good going forward. And then just my second question is you mentioned Albert that you think as an advantage will be reestablished? Do you have any comments on that further comments on when do you think that will happen And would you at some point down the road spend CapEx to make your crackers more flexible? I'll answer the first part and I'll ask Steve to answer the second part. From the industry consultants and the future prices of oil, we believe that towards end of the year early next year that oil price will move up such that ethane based U. S, you think based ethylene production will be more cost competitive than alpha based ethylene production. And P. J, as it relates to looking at capital to have more flexibility, as you may recall, we do have flexibility with our Petro2 cracker. Has substantial flexibility with propane and naphtha flexibility and certainly as you will recall moving to a heavier feed slate reduces ethylene and as long as we're seeing reasonable demand in our downstream derivatives, we need to make sure that we're looking at the integrated economics So we'll study that but with Albert's comments about reestablishing that advantage will assess the return potential of putting more capital, giving more flexibility. And P. J, as you know, we are still a net bio ethylene and suddenly we'll like to improve our operating rates and debottleneck anywhere we can to make sense. But we're watching our capital investments. So make sure that we're not make any major investments until we know that the carbon cover is well on its way or has been on its way. Thank you. You're welcome. Take care. Thank you. Our next question comes from the line of Paul 4th with Goldman Sachs. Your line is open. Account on the same point from your competitors last week, flagged some physical limitations that switching to naphtha based production, which limits to kinda find a home, for some of the co products. So where where do you see current after cracking economics both in terms of, you know, what you can put on the spreadsheet in terms of pricing and then also in practicality, relative to ethane or propane? Yes. And right now, you're right. A lot of co product prices are fluctuating quite a lot. And one of the major issues is build a dying demand has come down sharply due to the lack of automotive construction as well as the lack of reduced driving So and every enough crackers produce a lot more bit of dyeing down ethane crackers. So even if you have cost advantage, but if you have no home for the bit of dying then it's an issue also. As Steve mentioned, if you go back if you are already at ethane cracker, go back to crack now after the volume comes down a lot, which will impact your costs as well. In terms of ethane, and kind of reduction cuts down at the wellhead. At what point or do you see a point where that actually creates some type of potential for a same prices despite once again? Certainly. Well, with the increase in natural gas prices from reduced or expected reduced associated gas production, ethane price has moved up but the projection is that ethane will still be tracking natural gas prices. There's still a lot of ethane being rejected. Thank you. You're welcome. Next question comes from the line of Kevin McCarthy with Vertical Research. Your line is open. Hope you're doing well. We are. How are you doing well too? Yes, thank you. I wanted to ask about the $150,000,000 reduction to the capital budget. Can you discuss what projects, if any, have been canceled and which may have been postponed, but you would still intend to complete? So Kevin, if you recall, we completed an expansion in Louisiana for PVC late last year. So, the predominance of the reductions are looking at some of the energy savings related projects and some of those smaller Gulf Coast based opportunities we discussed. So, we're pulling back really to what I would consider at this operating rate level kind of the normalized maintenance level and certainly we'll assess the markets as we go forward but no major no major pullbacks of major projects. Those were largely all completed last year. Okay. And then with regard to PVC resin, Can you talk a little bit about what you've seen so far in April in construction and other MDU market applications and what are your expectations moving through the quarter with regard to possible demand? Certainly as we mentioned that due to the local government restrictions are placed on stay at home orders a lot of construction has slowed down or stopped. That has impacted not only the U. S. But globally and has impacted PBC production and industry consultants, IHS market and the CDI are projecting PVC production rates in the U. S. To drop pretty much averaging first quarter from 86%, 83% to 2nd quarter of 72% to 66% rate. So we expect the PVC production and demand to drop pretty significantly in the second quarter. Okay, that's helpful. Thank you very much. Our next question comes from the line of Alex Yefremov from KeyBanc. Your line is open. Thank you. Good morning, everyone. Good morning, Alex. Good morning, Alex. As you look at the 2nd quarter, there is higher cost of soda price outlook, likely lower margin, in PVC and weaker volumes just mentioned. So how do you see those 3 factors playing out in terms of sequential EBITDA outlook for your vinyls segment? Well, certainly they'll have an impact and depending who you look at from a consulting projecting point of view, the PVC price is coming down I think April, people looking at between $0.02 to $0.05 a pound and certainly more decline in May are the spot price PVC overseas has improved somewhat from the very low bottom. We've seen caustic price industry has announced caustic price in March on February about $40 a turn caustic price and then in March this additional $60 to $70 a tonic price increase. And so all these will impact the financial results of our chlor alkali vinyls business and time will tell how much volume reduction will impact, but we expect a quite a negative impact on the financial results in second quarter. Understood. And is it too early to say whether your EBITDA on a net basis given all these factors will be higher, lower or about the same in the second quarter? Well, as we mentioned earlier, that the volume expected to drop from operating rates. So if you combine with lower volume and the reduction in prices in PVC, even though caustic has improved, but all the combination, we will have a negative impact on the 2nd quarter earnings Understood. Thank you, Albert. And then polyethylene, some players talked about either idling capacity or reducing utilization? Do you see the need to do so in your system? What are your expectations for polyethylene volumes in the 2nd quarter versus 1st quarter? Again, if you look at some of the industry consultants, IHS and CDI, For LDPE, the 1st quarter was 91% operating rate. 2nd quarter, they're looking at 84% to 77% operating rate. For India low, 1st quarter was 99% to 95% operating rates and 2nd quarter is 84% to 83% operating rate. So again, 2nd quarter operating rates are expected to come down sharply as well. Partially due to the lack of demand globally or reduced demand and 2 is the with the competitive nature of NAFSA based ethylene that overseas production costs are quite low. So combination of expected price declines in polyethylene as well as reduce volume, however, also negative impact on the financial results. Thank you, Albert. You're welcome. Thank you. Our next question comes from the line Frank Lynch with Fermium Research. Your line is open. Yes, good morning and glad to hear you gentlemen are doing well. Good morning. Hope you're doing well. Same to you. Doing fine. Thank you. And thank you for providing some of the industry operating rates on the polyethylene side low and linear or low. Where are you seeing industry operating rates on the vinyl side on the chlor alkali side? Albert, you'd mentioned that you're running at reduced operating rates and you've idled some facilities. Can you give us some order of magnitude of what percent of capacity would be offline, etcetera, any way to try and size that up for us? Well, as I mentioned earlier, that industry consult looking at for 2nd quarter PVC operating rates between 72% 66%. Dropped from 86% to 83% in the first quarter. And for caustic IHS looking at 87 operating rates in the 1st quarter and dropped to 72% operating rate 2nd quarter. So they are looking reflecting the dropping PVC demand that as you know that PVC or crowing demand drives the chlor alkali production. So with the reduced chlorine demand that caustic production has come down as well. And hence we mentioned about a lower volume for car production and we're seeing higher prices for caustic as a result. Got you. Got you. And Steve, you had mentioned the company is managing its costs, etcetera. I noticed corporate expenses came down. How should we think about corporate expenses for Westlake for the second quarter and beyond? So, Frank, we'll continue to be very focused in corporate expenses and I gave you the lower guidance on the capital numbers. And so you'll expect that we'll continue to be very focused in keeping our cost flow throughout not only the quarter, but going forward into the year. Next question comes from the line of Neil Kumar with Morgan Stanley. Given the tighter supply cost like in the near term, are you considering making any significant changes in terms of your allocation the domestic market versus the 20 percent to 25 percent of production, I believe you typically export, especially given the higher relative prices in the domestic market? Well, suddenly the export demand has been impacted by the coronavirus globally and as we see demand for PVC coming down domestically as well as the export and it will impact certainly on the caustic supply domestic exports well. And as mentioned earlier, that ox export price has moved up commeasurably with domestic price actually some places are even more. So it'll depending on the volume demand as well as pricing that will impact the allocation between domestic export sales. Okay, that's helpful. And then just a follow-up on the corporate cost question. So the corporate other segment had EBITDA coming in around $7,000,000 per quarter versus I think negative $10,000,000 to $15,000,000 in recent quarters. Was there anything one time in that or or was that just kind of the focus on cost reductions? And how should we think about level going forward? Is 1Q levels a decent run rate for the rest of the year. And Sonja, we will be keeping a close lid on operating expenses. And so Well, I don't expect any there wasn't any unique item per se and so you'll expect we'll keep a very close lid on operating expenses. Both across the two segments as well as corporately. You're welcome. Thank you. Our next question comes from the line of David Begleiter with Citrobein. Your line is open. Thank you. Good morning, Albert and Steve. Good morning, David. Good morning, David. Just on polyethylene, the consultancy price fell $0.04 in April. Do you agree with that assessment? And they're also calling for about a combined $0.10 decline in Q2. What's your view on the potential decline overall in Q2? Yes, we are seeing $0.04 decline in April and CDI is looking at $0.10 decline across the 2nd quarter and IH is looking at only $0.07 decline across 2nd quarter. And the reason for that mainly is due to the lower oil price, lower ethylene cost overseas as well as the lower demand for polyethylene overseas as well as globally. Got it. And Steve, as a working capital, how much relief of cash would you expect us to see from working capital this year? So, David, I think you'll see given the lower kind of reset of all these prices that Albert just spoke to. I think you'll see most of that release in April May. So most of the working capital release over the 1st 2 months of second quarter And while I haven't given specific guidance, it's a it'll be a fairly measurable amount of working capital that should release in 1st 2 months of the quarter. Our next question comes from the next line of Mike Metzheb with Barclays. Your line is open. I guess first question for Steve, kind of housekeeping on the cash flow statement, just talk about the $420,000,000 $421,000,000 use of cash and other balance sheet items? Is that primarily work capital or is there anything else worth noting there? So, we had, as I mentioned, we had changes in our tax position and so a big piece of that of course are going to be the NOL carryback that we were able to benefit from as a result of cares act. So that's a big portion of that net change. Got it. That's helpful. And then second, more bigger picture question, there's been a number of ethylene and choro vinyl assets reportedly on the market in the past few months I know obviously maintaining your balance sheet strength is the first priority in the current downturn, but Westlake has had a fairly successful long term track record of buying assets at opportune moments in the cycle? Obviously valuation is always the key, but I guess would you consider looking at assets right now or is the focus all internal this morning? Yeah. So, Mike, we look at opportunities all the time and you're you're right. We'll be making sure that we manage this circumstance we're all dealing with well and making sure that we maintain a position in both the balance sheet position and liquidity position that allows us to come through this very strong and very capable. But at the same time, we'll also look at all the opportunities out there. And if we think there's a value added opportunity we'll assess it. But as you can imagine, we'll want to make sure that the first quarter business is making sure the business is well footed. You're welcome. Thank you. Our next question comes from the line of Jim Sheehan with SunTrust. Your line is open. You. Good morning. Good morning, Jim. Good morning. You mentioned some, you were idling some plants that are not integrated. Could you talked about how what portion of your capacity is not integrated and is that all in vinyl? These were vinyl assets but it's a very small piece. These were small small facilities, Jim. And on caustic soda, the prices in the export market have gone up a lot. Are you starting to see increased competition in the export market, especially in Latin America, from Asian competitors that are attracted by these higher prices? Well, again, Asian competitors also have to look into their growing dilutive demand. And so it's a balancing And as you know, we know that some of the U. S. Producers are under allocation for the caustic sales. Thank you. You're welcome. Our next question comes from the line of Hassan Matt with Allenbeck Global. Your line is open. Good morning, Albert and Steve. Good morning, Hassan. We're doing well. Doing well. Thank you. Same to you guys. Look, a near term question and a slightly sort of medium term on some of the activities we're seeing on the ethylene side of things. One of your peers during their Q1 earnings call talked about how they feel with some of these movements we've seen in sort of product pricing pricing and just generally got curve movements that around 20,000,000 tons of ethylene capacity is economically vulnerable. So you know do you agree with that notion and if you do how do you think the industry will react to that in the near term? Obviously, we're seeing some sort of temporary idling, but at what stage does that in your view become permanent. So that's the near term side of it. And on the medium term side of it, what happens to the second wave of capacity I mean, obviously, you know, if you were to mark to market current raw material pricing, the marginal guys that used to be naphtha are not that marginal right now, you know, the coal based, you know, the CTO, MTO guys are looking quite marginal, but all of a sudden the crude oil to chemicals side of it may actually start looking a little more attractive. So would love to hear your views on on the near term curtailment side and the medium term new project side? Certainly. Paul, as you know, the ethylene operating rates really dependent on 3 factors. 1 is the feedstock costs advantage and 2 is the operating cost, if you are smaller and older ethylene plants that you have a cost pressure and thirdly poly equally important is your derivative demand. If you are a merchant ethylene seller today's market, that'd be very difficult. Even with the U. S. Potential export of ethylene we've mentioned in previous course of U. S. Terminal ethylene export, if your ethylene costs are not competitive, demand will come down. So it's really a combination all three that matters in which plants runs and not run. Luckily, Westlake, we are net bio ethylene So the lower ethylene prices would benefit Westlake on the whole. But going forward, we mentioned earlier that industry consulted in the future prices of oil things by the end of the year or some early next year, the oil price will go back to the position where U. S. Ethane based ethylene crackers will be competitive again. So time will tell whether that will be the case or not. Understood. Understood. Very helpful. And as a follow on, as you take a look at your sort of broadly speaking plastics portfolio, polyethylene side, maybe even a bit in the PVC side, this a big delta right now is or the huge divergence I guess we are seeing right now is in the demand for durables versus non durables. Could you give us a sense of from your portfolio perspective, how much exposure you have to the non durable side of end markets versus the durable side? Certainly. As you know that polyethylene we produce low density, low density and almost all that goes into a packaging applications where mostly it's a food packaging and some to garbage bags and these kind of applications. So they are not durable but are very much needed in today's environment and I think the the expectation is that they may continue to grow. On the PVC side, majority is construction. And as we know that many of the governments are having stay at home restrictions on constructions, but we believe that as the economy recovers, there's two areas: one that government may putting infrastructure investments stimulate the economy and constructions area that that government can help. And second part is that we heard or read that many people are looking at single family homes rather than staying at multi family homes. So in the future demand as you know, single family homes typically use more PVC than the multi family homes, whether it's in windows, piping, cidings and many other applications. So we expect a longer term PVC demand will grow more than the past few years. But again, time will tell and when those demand will come back depending on the economic recoveries. Very helpful. Thank you so much, Albert. You're very welcome. Thank you. Our next question comes from the line of Arun Ms. Womason with RBC Capital Markets. Your line is open. Yes, everything is 2. Thank you. Just wanted to get back on the trajectory potential of caustic soda pricing. So we've seen a little bit of momentum in the recent near term as offering rates have come down and demand for foreign derivatives has come down. How do you think this evolves over the next three quarters IHS actually has a pretty steep drop in caustic soda pricing forecasted for the fall. Is that related to potential pre selling of volumes as the Shintech plant starts up How do you see this caustic price evolving? I mean, or do you think the second quarter announcements really have some support for persistence beyond the 2nd quarter. Thanks. Yes, that's a good question. I think maybe IHS is projecting that PVC demand or return after the stay at home orders received it and hence there's more production for caustic and hence caustic price will calm down. Again, time will tell whether that will be the case. And any thoughts on supply and demand? Do you expect new supply to enter the market, I guess, later this year or early next year? There's some new supplies, as you mentioned, the Xintechs plan, but unlike polyethylene, globally there's very limited amount of new capacity coming on stream and as well new PVC capacity. And despite the fact PVC demand inherent demand is still growing. People are looking at potentially investment in the future. But I think most of the investors today have stopped and waiting for the market to return. So there's less of a supply pressure compared with other some other products. Okay, thanks. And on that point, you guys had completed a couple of acquisitions in the last couple of years. On the PVC side and compounding side. I mean, is that presumably more of those assets would become available, I guess, in the next year and presumably some smaller competitors who are potentially facing some of that lower demand may be struggling right So, should we expect, I guess, some heightened deal activity from Westlake pursuing those types of assets? Thanks. Well, Arun as I mentioned earlier, we're going to we're going to continue to look at opportunities as they come into the market place and assess how they fit into the business and the return potential there, you know, as I think that you're as you will see, I think there will be some expansion as we've accomplished in 2019 of integrating further across the chain and those additions in roofing materials and in compounding materials in 2019 are an example of that. We'll look to see if those opportunities present themselves in 20 20 or 21, but it's hard to know what will come, but we'll certainly stay tuned. And then just lastly, Given the somewhat different feedstock environment, do you think there is, I mean, is your strategy still to maintain your integration level as much as possible or would you be willing to potentially change that around. Just again, just given the reduction in naphtha based cash cost for ethylene production. Thanks. Well, as Albert noted, we still are a pretty significant buyer of ethylene in the marketplace. And so as demand moves as demand moves, we have an ability to adjust our purchase ethylene as well. So we can adjust given the level of integration we have a variety of levers and one of those levers is the purchase ethylene component within our profile. So I guess just to clarify would you be willing to lower your integration levels in the near term? Or is that something that is possible? Or is it that's more of a longer term to say that you wouldn't really make for near term moves like this? Well, I think the answer is really a function of what kind of long term benefit do we have on those. So certainly when we think of the short term near term opportunities, it's adjusting the business to deal with current demand circumstance as we look more broadly more longer term, it's more of a strategic question. Okay, thanks. You're welcome. Thank you. Our next question comes from the line of Mike Sison with Wells Fargo. Your line is open. Hey, good morning. I'm glad to hear you all sound healthy. About a year ago, you guys gave a range for kind of EBITDA 1.4to1.6 and I'm just curious if I hope demand sort of gets back to that level over time. How does that change or that range or sort of that range change with oil prices, you know, depressed at these levels and as you know, it might take a little bit of time to to regain the North American advantage? Well, Mike, as you heard it from Albertnar prepared remarks, we do see that advantage that ethane advantage reestablished itself and don't believe that these depressed oil prices will be long term staining. So as we think going forward, we think the opportunity to continue to benefit from that is going to be there. We do have the ability flexibility wise to use the feedstock flexibility within our businesses today in our crackers. And so certainly as we continue to grow, we look for opportunities to do so but you know the guidance that we gave for 2019 was reflective of the demand conditions at that time and obviously the environments changed a lot. And so as we look forward, we're going to continue to be mindful that we'll take the advantages that we see and we think the advantages of ethane will reestablish themselves because we think these prices for oil aren't going to be long term sustaining. Got it. And then a quick follow-up on 2Q for olefins you gave us the industry operating rates that you think you know the consultants have noted will you be running at those levels, a little bit higher, a little bit lower, what do you how do you think your plans will fare Well, we would generally we will run somewhat lower than industry operating rates but this is a different time, challenging time. We'll do our best to run better but as when the whole the tide is going down. It's difficult to stay a much higher. You're welcome. Thank you. Our next question comes from the line of Jeff McCarthy with JP Morgan. Your line is open. Thanks very much. Why is it that you're postponing your ethylene cracker turnaround into the first half of twenty twenty one? So, Jeff, you might expect that the plan is run well and also there is costs associated with us and of course during the turnaround you bring a large number of employees and contractors on-site. And or maintain the safety of 3rd party contractors and our own employees, we felt it was prudent to not provide that density of footprint on-site. Plant is running well. And so when you think about the combination of those factors, we thought it made sense to move that back to first half of twenty twenty one. Thank you for that. That's clear. So during the call, there's been a discussion of polyethylene operating rates really moving down in the second quarter. Is that because there's much less export demand or is it because the spreads to ship to the export market or unfavorable? Is it an is the depression and operating rates an export driven depression? I guess it's a combination of both. The cost of the lower GDP, the lower economic activities globally that global demand is coming down albeit even though that the food packaging demand is still good and we expect to be resilient going forward. But the total polyethylene as you know that includes high density as well that your load high density goes to other than the consumer disposable applications. 2 is the lower feedstock costs are compatible overseas that also impacted the export market. So we believe that I think economic activities would be the main driver for the lower demand And is it the case that spreads to export have become more unfavorable? But certainly with the lower prices from lower feedstock costs for ethylene overseas, the prices dropped And so the prices coming down in export prices and also impact domestic prices as well. But I think that's still margins for producers. That's why they are still selling into the export market. And then lastly, you have any vision into the cadence of the recovery in the domestic PVC market? That is when you think about coming quarters, there's so much quarantine activity in the 2nd quarter in the third quarter, there should be less. Do you have a vision of what the third quarter looks like relative to the second or history? Yes. Based on the IHS and CDIs forecast, their 3rd quarter operating rates are still pretty low at 73% to 68% and 4th quarter looking a bit higher at 81 76%. As you may know that typically 4th quarter is a slow demand months for PVC due to the weather, but they're expecting the 4th quarter to improve over 3rd quarter. So really second and third quarter on a lower operating rates quarters and 4th quarter some improvement, but still below the fourth quarter of 2019. Thank you very much. Be well. You're welcome. You too. Take care. Thank you. Our next question comes from the line of Jonas Oxgaard with Bernstein. Your line is open. All join us. So you talked a little bit about the demand changes you've seen in the the low density plastics. Can you do you have a sense for what the future looks like here after the lockdowns are done and are are we seeing a genuinely increased use of no density plastics? And that's a good question. If people still eat more at home and go to Lester restaurants, then packaged groceries in various forms still be higher demand than in the past. But I presume that as people go out and do more shopping and eating, there'll be less demand for home consumption of packaged food, but we don't think we'll be returning back to pre COVID-nineteen level until vaccine or therapeutic drugs that's been developed. What kind of impact does have on the overall U. S. Market? That's a good question. Well, I mentioned that consultants are looking at pretty steep drop in operating rates and production of supply to meet the demand expect demand both domestically and export. As you know, the U. S. Industry for polyethylene as a whole 14 between 35% to 40% ounce production due to the increased capacities in the U. S. Build up the last few years. What I was getting to is that a lot of the it seems a lot of the demand shortfall is from the harder plastics, particularly automotive and those applications. So I'm trying to understand here is just the low density versus high density dynamics? Or have you seen in the past that they've grown at different rates? And trying to figure out if there's an acceleration of that trend? Well, that's a good question. I think the lower operating rates also is partially related to the increased capacities we have seen in the U. S. Polyethylene industry. As mentioned earlier, there's less so new capacity increase globally for PVC or chlor alkali production, but it's still quite a lot of capacity in in the U. S. And overseas for increased polyethylene investments. Okay. If you don't mind, I also have a the question altogether. We've talked a couple of times on this call about strategic options and looking at opportunities. But if we take a step back into thinking about something bigger, would Westlake be interested in something like an R tea or a larger equity raise that to the point where the child family would be minority owners in a new Westlake? Is that even on the table You know Jonas, you know, I we try not to get into structuring of hypothetical transact And I think it just doesn't add any real value to talk about a structuring of hypothetical. And so I think instead we take a look at really what makes sense economically and those are the kinds of ways in which we think about a business rather than the structuring of a hypothetical. Our next question comes from the line of Matthew Blair with Tudor, Pickering Holt. Your line is open. Hey, good morning, Albert and Steve. Glad to hear your safe and sound. Thank you very much. Do you have a view on why ethane has been moving up over just the past couple of weeks here? I think it's now about a $0.05 premium to natural gas. Does that imply some sort of constraint on the frac side? We believe that it's more of a reaction to the higher prices that we've seen recently. And time will tell whether the reduced production or oil affecting associated gas production offset by lower demand for gas whether it's from industrial activities or less LNG exports. All that. And also the ethane as we understand, there's still a lot of ethane being rejected. So maybe it's a market reaction to the shop jump in gas prices. With the high ethane price, it will also have an impact on the ethane sports, to overseas by ship as well. Indeed, indeed. And then Steve, do you have a split on the FIFO impact that $20,000,000 between olefins and vinyls? And I guess as we sit in Q2, would you expect an even larger impact for the second quarter? Matthew, it's largely in the vinyls segment that $20,000,000 pretax numbers largely in the Vinyls segment and it's hard to gauge what the FIFO number might be for the for the next quarter because it's very much an endpoint the end of the second quarter to the end of the first quarter. So it's hard to gauge here in early May really where June 30 numbers will be. So, I can't really guide you much because I've got so much more. I've got 2 full months largely in front of me in terms of where that likely to be, but it's endpoint to endpoint quarter over quarter. But the first quarter numbers were largely vinyls segment. Our next question comes from the line of Steve Byrne with Bank of America. Your line is open. Good morning. You sell vinyl products into a variety of end markets some quite durable like you were mentioning construction products, but some are on the consumer goods and do you see any of these where there's meaningful opportunity to grow share or to develop new applications where you would be interested in expanding further downstream? And maybe just the converse of that, do you see any potential for product substitution of some of these end markets to a polymer that is potentially lower price now under a lower oil price environment? Some of our building products business have been doing quite well and actually even into the second quarter, especially repair, remodeling. People are staying home and they probably go to Home Depot and decent places and do their own repair modeling. So but also, but as a whole, the volume is impacted by the stay at home orders that many local governments have put out. And as we know that starting May, some of the governments who governments are lifting, construction restrictions. So we will see some return on structural activities. But as a whole, because of lower income levels, we expect spendings on on home repair or building new homes will be coming down as evidenced by the reduction in the new home permits we've seen in Bausch in April. Well, in your building products businesses, do you have increased inventories versus year ago levels, your balance sheet inventories seem flat, but anything that you're seeing in building products? And are you able to move any more of that chlorine into other end markets other than building We've been managing our inventories about earning off when we see the COVID-nineteen impact. So, I think our inventory is reasonable for the demand going forward. Thank you. Thank you. Our next question comes from the line of Don Roberts with UBS. Sound pretty well today. Thank you, Jeff. Hope you are too. Albert, do you know what percent of global PBT capacity is coal based production that is not integrated to the mine? And have you seen any signs of curtailment yet by those producers? Well, certainly all the coal based production are in China and 80% of the Chinese PVC production co based. And I don't think that, pretty I won't say majority, but a pretty large part of that is not integrated. And I'm sure they are operating at lower operating rates, whether 70%, 80% operating rates today and depending on the economic activity recoveries in China, that rates can fluctuate up or down. Thank you. Stay safe. At this time, the Q And 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 second quarter results. Thank you for participating in today's Westlake Chemical Corporation's 1st Quarter 2020 Earnings Conference Call. As a reminder, This call will be available for replay beginning 2 hours after the call has ended and may be accessed until 11:59 PM System Standard Time on Monday, May 11 2020. The replay can be accessed by calling the following numbers. Domestic callers should dial 8558592056. International callers may just to replay by calling 4045373406. The access code for both numbers is 5672078. Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.