Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Chemical Corporation third quarter 2019 earnings conference call. During the presentation, all participants will be in a listen-only mode. After the speaker's 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, November 5th, 2019. 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 third quarter 2019 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 provide a more detailed look at our financial and operating results. 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 our master limited partnership, Westlake Chemical Partners LP, and similar references to OpCo refer to our subsidiary, Westlake Chemical OpCo LP, who own 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, 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 third 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. The 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 7725119. Please note that information reported on this call speaks only as of today, November 5th, 2019. 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 may be accessed on our webpage at westlake.com. 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 third quarter results. In this morning's press release, we reported net income of $158 million for the third quarter of 2019, or $1.22 per diluted share. In the third quarter, we benefited from lower feedstock and fuel costs and from the strong operational performance of our plants, which ran above industry's averages. Trade tensions and the resulting market uncertainty have caused customers to remain cautious and manage their inventories tightly. Yet we continue to see solid sales volumes in both our segments, and our downstream vinyl businesses recovered volumes lost due to the cold and wet weather in the first half of the year. Over the past year, we have remained focused on closely managing our costs and being disciplined with our capital expenditures.
Despite the recent weakness in prices for our major products, we remain constructive in the outlook for the chloro vinyls supply/demand balance and believe our PVC expansions in the U.S. and Germany, which will start up by year-end, along with the increased ownership in our ethylene joint venture with Lotte Chemical, will improve our competitive position by expanding our market presence in PVC and lowering our operating costs. I will now like to turn the call over to Steve to provide more detail on our financial and operating results.
Thank you, Albert. Good morning, everyone. I will start with discussing our consolidated financial results, followed by a detailed review of our vinyls and olefins segments. Let me begin with our consolidated results. For the third quarter of 2019, we reported net income of $158 million, or $1.22 per share, compared to net income of $308 million for the third quarter of 2018. Compared to our prior results, our results were primarily impacted by lower prices and margins for our major products, especially in the international export markets. While most of the North American ethylene producers use cost-advantaged gas-based feedstocks, many of the Asian and European ethylene producers use naphtha and oil-based feedstock.
The lower oil prices we have experienced throughout 2019 have lowered the oil-to-gas ratio, reducing our cost advantage. Slowing global economic growth over the past year resulting from the international trade tension uncertainties, coupled with lower oil and gas ratio, have led to lower margins in both our Olefins and Vinyls segment when compared to the third quarter of 2018. Compared to the second quarter of 2019, we benefited from lower feedstock and fuel cost as higher operating rates in our Vinyls segment following the completion of our normal spring maintenance turnarounds. Our utilization of the FIFO method of accounting resulted in favorable pretax impact of approximately $4 million, or $0.03 per share, compared to what earnings would have been 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 third quarter of 2019, our Vinyls business continued to see lower sales prices for caustic soda, especially in the export market, as declining global industrial activity and slower economic growth resulting from the ongoing uncertainty in international trade pressured prices lower over the past year. Compared to the third quarter of 2018, Vinyls operating income of $153 million decreased $98 million, primarily as a result of the lower sales prices for caustic soda. Third quarter Vinyls operating income of $153 million increased $24 million from the second quarter 2019, as we benefited from lower ethane feedstock and fuel prices, and we ran at higher operating rates following the completion of our spring turnarounds. Now turning to our Olefins segment.
Since 2018, the industry supply-demand balance has seen significant new ethylene and polyethylene production capacity enter the market, which, coupled with the ongoing trade uncertainty and lower global oil prices, pushed sales prices and margins lower. For the third quarter of 2019, Olefins operating income of $92 million decreased $70 million from third quarter 2018 as a result of lower margins from lower polyethylene sales prices. Third quarter 2019 Olefins operating income of $92 million increased $10 million from the second quarter 2019, as we benefited from lower feedstock and fuel cost when compared to the prior quarter. Next, let's turn our attention to the balance sheet and statement of cash flows. At the end of the third quarter, we had cash and cash equivalents of $1.4 billion and total debt of $3.4 billion.
Third quarter 2019 cash flows from operating activities were $501 million, while capital expenditures were $193 million. These capital expenditures were focused in our strategic de-bottlenecking investments to further integrate our Vinyls businesses in the U.S. and Germany to capture the margin within our product chain, reduce our cost, and further leverage the footprint of existing Vinyls operations around the world. We expect to start up our previously announced VCM and PVC expansions in Louisiana and Germany by the end of the year, which will bring more than 750 million pounds of PVC production per year. As announced last week, we've exercised our option to acquire an additional interest in our ethylene joint venture with Lotte Chemical, which will further integrate our Vinyls chain and lower our cost.
We seek to invest prudently in opportunities to acquire leading technologies and in projects that will further enhance the chain integration of our business, which improves our cost position and capitalize on our global advantage feedstock position. As we look forward, new NGL pipelines and the accompanying fractionation capacity will be starting up in the fourth quarter. These infrastructure investments will increase the supply of feedstock and ethylene to our industry and highlight the beneficial long-term cost advantage position enjoyed by North American producers. For your planning purposes as we approach the end of 2019, we continue to expect our effective tax rate and cash tax rate for the full year to be approximately 23% and 18%, respectively, and our capital expenditures to be approximately $650 million. With that, I'll now turn the call back over to Albert to make some closing comments. Albert?
Thank you, Steve. We delivered a solid third quarter result in this challenging economic environment. Thanks to our advantage position on the global cost curve, driven by our gas-based feedstock and our scale, combined with a strong balance sheet, we are positioned to continue to create value for our shareholders. The current business environment demands cost discipline and prudent capital allocation. The start-up of our expanded Vinyls facilities in Louisiana and Germany, along with the increased interest in our ethylene joint venture with Lotte Chemical, are just a couple of examples of the many organic opportunities we have to further integration of our business, lower our production costs, and provide a compelling return to shareholders. Thank you very much for listening to our earnings call this morning. 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 teleconference will be available 2 hours after the call has ended. We'll provide that number again at the end of the call. Jimmy, we will now take questions.
Thank you. As a reminder, to ask a question, you will need to press *1 on your telephone. To withdraw your question, press the # key. Please stand by while we compile the Q&A roster. Our first question comes from John McNulty with BMO Capital Markets. Your line is now open
Hi, good morning. This is Bhavesh Sodha for John.
Good morning.
First of all, maybe on the Lotte JV, could you comment on your decision to go ahead and add to your stake now versus a bit later? Then if you could also comment on just how the cost of the entire project came versus your prior estimates, and just where do you see your returns on the project today, if you take into account the integration, and perhaps the lower cost of adding the option?
Well, the project came in on schedule and on budget. What I mean by that is about $2 billion for the 2.2 billion pounds of ethylene. Our decision to invest was because we believe it provides a good return on this investment. That's really the driving reason behind the decision to invest at this stage and increase our ownership.
Got it. It is a very solid quarter. Regarding your vinyl segment in particular, can you comment on the resiliency of just the earnings of EBITDA, which was up sequentially, even as, I believe, prices and volumes fell sequentially? If you could just discuss the moving pieces on what drive the sequential growth there.
Sure. Well, sequentially, quarter-over-quarter, of course, we were benefited from lower ethane feedstock. Fuel costs were also lower, about 18%, and fuel costs were also lower, about 11%. As we noted, we also completed our spring turnaround activity. We benefited with the plants running at better operating rates because we completed those turnarounds in earlier quarters. Sequentially, quarter-over-quarter, those were the big drivers behind the results.
Great. Thank you for your time.
You're welcome.
Thank you. Our next question goes from Neel Kumar with Morgan Stanley. Your line is now open.
Thank you. I was curious, when you look at the year-to-date underlying demand growth for the key end markets for caustic like alumina, paper and pulp, and inorganic and organic chemicals, where would you say growth has lagged the most versus expectations?
Well, I think because of the slowdown in the economic growth around the world, especially the manufacturing side, it has impacted on all the area, alumina, pulp and paper, and general manufacturing.
Okay. You mentioned in your comments that your focus on cost control in this challenging environment. Can you give some examples of this and whether you have any specific initiatives in place going forward?
Well, Neel, while we've not said public initiatives externally, I think you can see just in the most recent period that even our G&A was lower period-over-period. As we continue to focus on managing investments and managing our cost, we're going to continue to keep our eye very much in that area of focus. As I say, I point to just G&A as a clear example of that.
Okay, thanks. Just a last question. Can you just maybe also update us on how the integration of Nakan has been going, and what kind of contribution that had during the quarter?
Well, we've not broken out the individual earnings contributions from any of our acquisitions. I would say the integration has gone very well. We're very pleased with the acquisition. As you know, it expands both our product offerings in a wide range of applications, be it medical or auto or others, and gives us a much larger geographical positioning for our compounds position, which was largely focused in the Americas. This now takes us into Europe, into Asia, and strengthens our North American position. We're very pleased with the transaction.
Thank you. Appreciate it.
Thank you. Our next question comes from Steve Byrne with Bank of America. Your line is now open.
Hi, I wanted to ask you about the mid-year guidance that you provided for EBITDA. Here we are a quarter beyond that. Where would you say you're headed towards the lower or upper end of that range at this point?
Steve, as we said, and this was in the summer, the first time we provided guidance, and we indicated that it was an unusual event, and we weren't going to provide guidance on a going-forward basis. That's kind of where we stand.
Okay. Also wanted to ask you whether or not you're planning to do another drop-down into the MLP to raise capital for your share of the Lotte cracker?
Well, as you think about the partnership, we have a significant amount of inventory left. We have well in excess of 75% ownership of the operating company still to contribute. This exercise of this option adds ethylene at Westlake Chemical, which could be contributed down to OpCo at an appropriate valuation and time. We still have plenty of inventory of the operating company contributing to the partnership, and I would expect that we'd undertake a transaction in 2020. It needn't necessarily be that related to the Lotte cracker because we still have significant capacity left.
Okay, thank you.
Thank you. Our next question comes from Kevin McCarthy with Vertical Research Partners. Your line is now open.
Yes, good morning.
Morning.
-your ethylene long/short position. If I look through the Lotte option exercise as well as the PVC expansions that you referenced, it seems as though you'll still be short more than 1 billion pounds, perhaps 1.1 billion, 1.2 billion. My question is, are you content to remain short that amount of ethylene for the foreseeable future, or do you see any appealing options beyond the Lotte exercise to bridge that gap and rebalance the ethylene position?
Well, Kevin, as we think about the opportunity set here, we've been on both sides of that over time, both long and short. You're right, the balanced number that you mentioned is about the approximate position that we have today being short about 1.1.2 billion pounds with this new addition. Certainly, we will look at the new cracker that we have, and because it is a new unit, we'll have de-bottlenecking capacity, though we wouldn't want to do that immediately. Down the road, we'll have an ability to be de-bottleneck. We'd like to, over time, be more balanced, but one needn't necessarily be perfectly balanced.
Okay, a second question, if I may, relates to low-density polyethylene. It looks like we have a few startups among your competitors over the next three to six months. In the past, you've talked about the premium that low-density garners relative to other grades of polyethylene. Can you talk through your expectations for 2020 and beyond as it relates to supply, demand, and the magnitude of how that historical premium could fluctuate?
Yeah. Certainly, as you've heard us talk for a long period of time, that the autoclaves has certainly continued to garner a meaningful premium over time. With the new additions coming, there are really no meaningful additions at all in the autoclave technology. The additions are all coming in the tubular applications. Commodity based polyethylene in all manner, be it high density, linear low, or even low in the tubular technology. We continue to see benefits of having a position in the more specialty end of the LDPE space. Certainly, as we expect some of those margins to be under pressure as new total pounds come into the market, we think that premium continues to be important, and our customers certainly recognize that as well.
Very helpful. Thank you.
Thank you. Our next question comes from Bob Koort with Goldman Sachs. Your line is now open.
Thank you very much. Albert, I was hoping maybe you could opine on the path forward in the polyethylene world. I know that there had been quite a bit of angst about the startups in the U.S. It seems like those are kind of closed, and now maybe the anxiety for some investors has shifted to Asia and capacity ramps there. I guess when I look at some of the consultants' reports, it seems like they're still calling for a trough in the U.S., maybe $0.15 a pound on integrated polyethylene, which seems pretty good. How do you sort of see that path forward, and how do you think about the capacity outside the U.S. affecting your business?
Yeah. As Steve mentioned earlier, the capacity and supply demand for polyethylene really impacted by economic growth globally, as well as the oil and gas ratio possibility impacting the North American producers. I think IHS is looking at by the end of the year and looking forward to next year, PE prices is pretty much flat across 2020. I think people are assuming that the global GDP will not go into a recession in the U.S., and the GDP will be growing, albeit a bit slower rate, and hopefully the trade tensions between the U.S. and China would improve somewhat. I think people are looking at a more of a stable environment for commodities and polyeth in general. Just want to follow on what Steve said. I think all the expansions in U.S. are tubular LDPE.
They are more focused on commodity grades, and 80% of our LDPE is autoclave, and we are focused more on the specialty side. I think the spread between LD and LL continue, and between the autoclave and tubular will also continue.
Could I ask on the Lotte cracker what you guys figured the economics were on a return of capital basis for that investment?
Bob, when you think about the potential contribution, if we had owned the entire unit for the third quarter, we saw probably between ownership and market ethylene, about roughly a $0.10 delta between those two. Owning therefore a billion pounds would bring EBITDA of about $100 million a year. That's the kind of contribution that you could think about at that kind of a margin as we experienced in the third quarter.
Thank you.
Also as Steve mentioned, the Lotte cracker came on time, on budget. I think on a per ton basis, even though it's not the biggest ethylene plant in this new build arena, that per ton basis is one of the lowest investment costs of plants. As you know, there are more major international oil companies are building grassroots new plants in U.S. based on ethane cracking. If we have a cost advantage position from investment point of view and have an early startup, that should be advantage position for us.
A nice accretive transaction, I guess, what I would say in summary, Bob.
Thanks.
Thank you. Our next question comes from Michael Leithead with Barclays. Your line is now open.
Thanks. Good morning, guys.
Good morning.
I guess first, can you just talk through what drove the earnings improvement sequentially in your olefins segment? My understanding was IHS integrated margins were caught flat to lower with polyethylene prices down. That should kind of offset the benefit of falling ethane, and styrene was weak. I guess just any additional color you could provide there would be helpful.
Mike, when you think about year-over-year, were you speaking year-over-year or quarter-over-quarter?
Sorry, I'm talking 2Q to 3Q.
Okay. When you think about quarter-over-quarter, while you did have lower polyethylene prices in the neighborhood of say, 6% or so, you had also meaningfully lower feedstock costs and fuel costs. Feedstock costs were lower by about 18%, and fuel costs, nat gas, was lower by 11%. That had a significant benefit helping to offset a lot of the lower polyethylene prices period-over-period.
Got it. Okay. In the release, you pointed to the impact of the slower macroeconomic environment. I was hoping maybe you could give a bit more color on your downstream PVC compounding and building products businesses, because that's one of the few areas in your portfolio that's harder to track from the outside.
That business tends to be more stable. It is, of course, seasonal in nature because a lot of the building products go into construction materials, but tends to be more stable. The compounding materials goes into more than just construction related materials. It goes into wiring cabling, but as I mentioned earlier, our Nakan businesses also go into auto and lots of medical applications. It has a broader footprint than just the construction markets, but the construction markets are where our pipes and sidings applications do go. It tends to be less cyclical deeply than some of the chemicals related businesses. As we noted, we did pick up some of the recovery of volumes that we lost earlier the year due to cold and wet weather.
Got it. Thank you.
You're welcome.
Thank you. Our next question comes with Arun Viswanathan with RBC Capital Markets. Your line is now open.
Thanks. Good morning, guys.
Morning, Arun.
Morning.
First question I had was on caustic. We've seen another downtick of $15 here in October after the down $10 in September. I guess, how would you characterize the business out there from your perspective? What's the main driver you think that would help improve the caustic environment and then given that inventories are quite low? Is it industrial production demand, supply disruptions, or anything else you'd point to? Thanks.
Yeah. I think, as we said earlier, the industrial demand globally has been weakening, but we are seeing a bottoming of prices in Asia and some of the Asian and Chinese producers, I think it's probably either below their cash costs. If the industrial demand globally improves next year, we're seeing some sign of that in Asia. That should help improving caustic prices.
If I could ask a similar question with PVC. Maybe you can just give us your outlook there, and tie in what's going on in the ethylene markets. Do you think lower feedstock and supply would result in lower ethylene pricing and make it difficult to get margin in PVC? Or how are you thinking about the outlook for PVC from here? Thanks.
Yeah. PVC prices, I think IHS looking next year of price increase domestic in the U.S., and also for export prices pretty stable. PVC, unlike polyethylene globally, there's very little capacity, new additions capacity in PVC. As the demand is still growing globally, that will help to tighten up the market and help the pricing. I think IHS looking at prices going up next year domestically in the U.S. As you know also that the housing construction is still, even though we are around 1.2 million units a year rate, it's still below the 50 year average of 1.5 million units of residential construction. As the U.S. residential commercial market returns, it'll also help domestic demand for PVC.
Lastly, if I may just wanted to get your thoughts, if any reaction. There's been a competitor of yours, Formosa, who's thinking about adding some capacity in chlor-alkali. You guys added some at Geismar several years ago. That's probably the most recent large investment. Can you just help me understand what's potentially going through their heads as far as returns, what you would look for in a new facility, if at all possible? Thanks.
Sure. I think from what we read, looking at five year out, global demand will far exceed capacity additions. They're looking at spending approximately $3 billion for building a plant in chlor-alkali, VC, and PVC plant. If you are looking at replacement cost economics, support investment, which further supports the thesis that chlor-alkali and vinyl business will improve globally and U.S. is the best place to invest.
Okay, thanks.
You're welcome.
Thank you. Our next question comes from James Sheehan with SunTrust. Your line is now open.
Morning. Thank you. Could you talk about any planned turnarounds that you expect to have in the fourth quarter and what the impact might be on earnings?
Jim, we obviously do, with the large number of facilities we have worldwide, we do turnarounds on a regular basis, but there are none that are going to be meaningfully impactful in the fourth quarter. As we look into 2020, we will have an ethylene turnaround, and I'll give more guidance to that ethylene turnaround as we finish our planning. The other units that we have, nothing that I would have would be a call-out that would be meaningful in the fourth quarter.
What's your outlook for ethane prices going forward?
I think ethane prices is pretty much in this $0.20 a gallon range. I think the future prices supports that.
Thank you.
You're welcome.
Thank you. Our next question comes from Hassan Ahmed with Alembic Global. Your line is now open.
Morning, Albert and Steve.
Morning, Hassan.
Morning.
Albert and Steve, just wanted to go back to the timing of exercising the Lotte option. Obviously, ethylene pricing has been fairly volatile over the last couple of quarters. We've obviously seen incremental supply come online primarily in the U.S. Now, you guys were kind enough to break out what the economics would have looked like had you owned the cracker in Q3. Obviously, there's always a fear that, as the capacity is digested, those economics deteriorate quite rapidly. Now my question is that you guys exercising the option now rather than later, should that be taken as a signal that you're actually incrementally positive now on the ethylene market? Said differently, do you think the worst is behind us as we move forward from Q3 and beyond?
As you said, Hassan, we believe that the return for this investment was, I think, a pretty good compelling return, very accretive when you think about the investment that we've made for the incremental pounds. I agree with you that the margins over a short period of time can be volatile, but we believe that over the cycle, that this investment will prove to be a very attractive one for us and further integrate our business chain in the vinyl segment even more so. We think it's going to be a very nice investment over the cycle. You're right, from period to period, there can be a high degree of volatility in ethylene prices and margins.
Understood. As a follow-up, if we were to go back to the start of the year, I think broadly the perception was a lot of ethylene, polyethylene capacity coming online in the back half of the year. Again, the perception was, hey, look, pricing would crack, and crack pretty hard. It was the exact opposite for the chlor-alkali side of things, where the assumption was back half price increases, hardly any capacity coming online. Would love to hear your views on what really changed, right? Because obviously, polyethylene has been quite resilient, chlor-alkali not as much. Is it as simple as the consumer being stronger than the industrial economy? Is it primarily demand related, I guess?
Well, I think a bit of both. The chlor-alkali, as you know, is a very generally used chemical in many industries. As world manufacturing industry is slowing down, and some people say it's a recessionary with PMI going below 50 for manufacturing, that has impacted demand for chlor-alkali. Even though the supply is limited, it's just in the short term supply demand wise, it has impacted lighting other commodity metals, for example. We believe the inventory adjustments and demand will go over. So long as the global economy still grows, people still use things, and the inventory cycle will be over, and people will start producing again. As Steve said, short term could be fluctuations, but on longer term basis, we are very optimistic on the chlorovinyl chain going forward.
Very helpful. Thanks so much, guys.
You're welcome.
Thank you. Our next question comes from P.J. Juvekar with Citi. Your line is now open.
Yes. Hi, good morning.
Hi, P.J.
Good morning, P.J.
Today, most of the money in ECU is made in caustic, with very little money in chlorine. I guess you just make PVC and then export it. Given the importance of caustic fundamentals, with Alunorte having ramped up, export prices have still come down really hard, and the delta between domestic and export prices have really opened up. How do you see that situation resolving, and do you think that maybe there is some risk to domestic pricing? Thank you.
Well, actually, the chlorine side is pretty stable, and chlorine demand is pretty stable. Obviously, there's seasonality that the water treatment, the pool chemical bleach are slowing down in the winter months. Caustic in PVC demand globally is still strong in the chlorine side, and EDC VCM demand are strong. I think even though chlorine goes to urea things and other products, TiO2, even though they're impacted, but net-net chlorine demand is still pretty good. I think caustic today, because of the commodity nature, it's much more volatile than in the past. As I said, hopefully with the industrials inventory cycles over, people still need products, and they will come back, and the production will improve. I think the chlorine chain is doing pretty well now.
Okay. Thank you. Secondly-
What are you-
What are you seeing in China in sort of recent data points in terms of industrial activity?
As well as construction activity based on your business there.
From what we see that China's industrial manufacturing has recovered from the low in the first or second quarter, hopefully this will continue. As well, you may know that the PVC anti-dumping duty in China has been dropped coming from the U.S. I think that'll be a boost for U.S. producers selling PVC to China and globally.
Thank you.
You're welcome.
Thank you. Our next question comes from Frank Mitsch with Fermium Research. Your line is now open.
Hey, good morning, gentlemen.
Good morning, Frank.
I was struck by the assertion that your operating rates were better than the industry average. Listening to the commentary, it sounded like that was more on the vinyl side than on the olefin side. A, is that true, and B, how much better were the operations? It was interesting because your inventory is actually ticked down. It looks like you sold pretty much everything that you were producing. Is that how we should think about it?
Frank, when you think about our integrated chain being integrated as we are, that does allow us to run at those elevated operating rates relative to many of our peers in the vinyls chain. As I mentioned earlier, we had some spring turnarounds that took place during the course of prior quarters, and so we obviously built inventory and then sold that while the plants were undertaking their normal maintenance activities. In the olefins chain, certainly almost all the producers are highly integrated in that space. I'd say that relative to our peer set, the strength of that integrated chain plays well in this kind of cycle where we are, and the high degree of integration is very beneficial in spreading that fixed cost of our pounds of production. Keeps our costs low.
That's very helpful. Steve, I guess more of a curiosity than anything else, you issued EUR 700 million in euros during the quarter, and I believe you're probably making a payment this quarter of $815 million or so for the Lotte JV. Why issue in euros and pay dollars? How should we think about that?
Frank, it was an approach to finance in an attractive rate wise market where it was a one in five-eighth percent coupon for a 10 year period. We designated that a hedge against our European investments. There is no mark to market that flows through the P&L. I could use those proceeds to fund growth opportunities either here or elsewhere. It allowed us to really go into attractively priced markets with good terms and conditions, not have a mark to market on the Euro base of that borrowing base, and be able to deploy those dollars wherever we saw an opportunity to make a good return.
Interesting that you said deploy those dollars and not deploy those euros. Thank you, Steve.
You're welcome.
Thank you. Our next question comes from David Begleiter with Deutsche Bank. Your line is now open.
Thank you. Good morning. Albert.
Morning.
How was your styrene business in the quarter, and what's your outlook for 2020 given some new capacity in styrene coming online in China next year?
Yeah. I think as Steve said, our operations are doing very well, our plant's doing well. You're right, there'll be more capacity coming up next year, and the dynamics of benzene price and styrene price, that's the spread that counts, and there's a lot of volatility in the benzene price and styrene price right now. We'll see how things settle. As you know, there are also other technology like PO/SM plants. We don't know how those plants will run, whether they will keep running for styrene or not. A lot of these things could impact the future operability of the global styrene business.
Steve, could you just comment on other income in the quarter? It was up sequentially. What drove that sequential increase? Thank you.
David, the primary components were some interest income, some insurance recoveries, and some higher income in some small joint ventures that we have.
Thank you.
You're welcome.
Thank you. Our next question comes from John Roberts with UBS. Your line is now open.
Thank you. Does any of the earnings contribution from the Lotte cracker come in as equity income, or does it all come in as reduction in cost of goods?
It'll come through reduction of cost of sales.
Okay. I assume the building products business grew faster than the vinyl segments overall. Do we have to wait for the 10-Q to come out later, or can you give us either the sales or kind of what the growth rate was for building products?
We'll have that Q filed tomorrow.
Okay, thanks.
Thank you. Our next question comes from Jonas Oxgaard with Bernstein. Your line is now open.
Hi, good morning.
Good morning.
Good morning.
Over the last, I would say year, we've seen the oil majors announce billions after billions after billions of CapEx in petrochemicals. None of it seems to go into chlor-alkali, but a lot in polyethylene. Can you give us some thoughts on how are you seeing this? How worried are you about the oil CapEx? Does that change your strategic outlook on chlor-alkali versus polyethylene?
Jonas, when you think about the capital intensity of the vinyls chain, it's very capital intensive. One has to build both power chlor-alkali, the intermediates of EDC VCM to get to PVC. It's very capital intensive. When you think about the capital intensity to build olefins and polyolefins, it's much less cost intensive in that sense. Given some of the integration they have back into the upstream side of the business, that's where they've chosen to make their investments. Certainly as we think about the approach they've taken in terms of investing in this business, they've been in this business for many years. On the vinyl side of the chain, all the majors exited this space about a generation and a half ago, and it is a business that requires a real focus since you're handling hazardous materials, chlorine specifically.
We remain very comfortable that the investments that we've made continue to provide good value, and we think that the supply-demand balance, we think remains constructive over time. As you heard Albert say earlier, we believe that the value long term in the supply-demand balance will benefit us with the investments that we have made.
Jonas, if I may add also that much of the investments in the vinyl chlor-alkali side was made through acquisition at below replacement costs. When you hear major competitors are building grassroots chlor-alkali vinyl plants, which is a vote of confidence that even at a replacement cost economics, there will be a good return. Most of our acquisitions, if not all, are based on acquisition at below replacement costs.
I find that you immediately go to chlor-alkali looks a lot better to be a telling part of the answer. How do you square then that against buying out the share in the Olefin cracker if you seemingly don't believe in the polyethylene side that much?
Well, when you think about the investment that we've made in the ethylene recently recognized that if you look at where the margin sits within the vinyls chain, a very significant portion of that margin sits in chlor-alkali, also a very large component of that sits in ethylene. Over time, be it five years or 10 years or even longer, the great majority of the value has been upstream, either in caustic or in ethylene. This investment allows us to further integrate our business in that ethylene chain to make ultimately PVC out of that chlorine and ethylene.
What this investment allows us to do is further integrate that vinyls chain and capture the ethylene margin that would've been left to others to be able to capture not just one side, but both sides, the chlor-alkali as well as the ethylene margin in that vinyls chain.
Okay, thank you.
You're welcome.
Thank you. Our next question comes from Matthew Blair with Tudor, Pickering, Holt & Co. Your line is now open.
Hey, good morning, Albert and Steve.
Hi, Matthew.
Circling back to the strong olefins result, were you able to switch to propane cracking? If so, can you provide any sort of numbers around how much propane you cracked in Q2 versus Q3?
Matthew, our plants certainly have the ability to switch feedstocks, but we still believe that the ethane feedstock is the most advantaged because when we go to a heavier feedstock such as propane, you have to de-rate production of ethylene. When you think about the facility we have in Kentucky or the facilities we have down in Louisiana, our interest is really running those derivatives as well as we can and as high an operating as we can. While at times one looks at the ethylene margin only, we're looking at the integrated margin across the chain. To use a heavier feedstock and therefore de-rate the amount of ethylene we produce would not offset the benefits that we receive downstream.
It's better to really run the ethane feedstock to get the ethylene to be able to run the downstream units with that ethylene at higher operating rates.
Makes sense. Steve, your net leverage has been creeping up a little bit here. Are you comfortable with current levels, or should we expect some debt reduction in the coming year?
Matthew, we always focus on keeping a very strong balance sheet, and we'll do what we need to do to keep a very strong balance sheet. We do have optionality in some of our notes next year and in following years to be able to manage that, and certainly that's always an area of focus.
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 fourth quarter and full year results.
Thank you for participating in today's Westlake Chemical Corporation third 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 Tuesday, November 12th, 2019. The replay can be accessed by calling 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 7725119. Thank you for participating. You may now disconnect.