Earnings Call: Q2 2019

Aug 6, 2019

Good morning, ladies and gentlemen. Thank you for standing by. Second Quarter 2019 Earnings Conference Call. Reminder, ladies and gentlemen, this conference is being recorded today August 6, 2019. I would now like to turn the call over to today's host, Jeff Holly, Russ Lake's Vice President and Treasurer. Sir, you may begin. Thank you. Good morning, everyone, and welcome to the Westlake Chemical Corporation Second 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 Finally, Albert will add a few concluding comments and we'll open the call up to questions. During the 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 owns certain olefins facilities. Today, management is going to discuss certain topics that will taking 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 costs 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 second quarter results. This document is available in the press release section of our webpage at westlake.com. We have also posted a presentation on our website to assist in the discussion of our second quarter results. A replay of today's call will Domestic callers should dial 8558592056. International callers may access the replay at 4045373406. The access code for both numbers is 3 583409. Please note that information reported on this call speaks only as of today, time sensitive information may no longer be accurate as of the time of any replay. I would finally advise you that this conference call is being broadcast live through an internet webcast system that can be accessed on our webpage at westlake.com. Now I would like to turn the call over to Albert Chao. Albert? Thank you, Jeff. Good morning, ladies and gentlemen, and thank you for joining us to discuss our second quarter results. In this morning's press release, we reported net income of $119,000,000 for the second quarter of 2019. Or $0.92 per diluted share. The 2nd quarter proved to be challenging as Westlake dealt with slower global economic growth in the face of international trade uncertainties that weighed on prices and margins. In spite of this, sales volumes increased over the second quarter of 2018 first quarter of 2019 and our bottom line results improved from the first quarter. We continue to benefit from the solid operational performance of our plants and favorable trends in feedstock and natural gas costs. We have remained focused on deploying capital in Avanos expansion projects that will improve our chain integration and in acquisitions such as NACOM, a specialty PVC compounding business and da Vinci, a specialty composite roofing manufacturer that extends our product reach into new markets. I would now like to turn our call over to Steve provide more detail on discussing our consolidated financial results followed by a detailed review of our vinyls and olefin segment results. Let me begin with our consolidated results. For the second quarter of 2019, we reported net income of $119,000,000 or $0.92 per share on sales of $2,000,000,000. Westlake's net income for the 2nd quarter declined $159,000,000 compared to the second quarter of 2018 net income of $278,000,000 or $2.12 per share while improving $47,000,000 from first quarter 2019 teen net income of $72,000,000 or $0.55 per share. Compared to the second quarter of 2018, our results impacted by lower prices and margins from major products primarily due to the ongoing international trade uncertainties and slower global economic growth. However, we saw continued strong operational performance of our facilities which led to higher sales volumes in both our olefins and vinyl segments, which was aided by the addition of NAKAN, a global PVC compounding business acquired early in the first quarter. Compared to the first quarter of 2019, we saw higher sales volumes and margins in our Olefins segment due to stronger demand and lower feedstock and fuel cost. In addition, we benefited from improved margins and volumes in our vinyls downstream products businesses even as of the FIFO method of accounting resulted in an unfavorable pretax impact of approximately $11,000,000 or $0.07 per share in the second quarter compared to what earnings would have been if we 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 second quarter of 2019 our vinyls segment saw lower sales prices for caustic soda especially in the export market as a slower global growth and ongoing uncertainty in trade continue to pressure sales prices for caustic soda and PVC resin. In addition, the vinyl segment was further impacted by the late start of the North American building and construction season I noted earlier. For the second quarter of 2019 vinyls operating in of $129,000,000 decreased $142,000,000 from the second quarter 2018 operating income of 271,000,000 This decrease is primarily due to the lower sales prices for caustic soda and PVC resin, partially offset by increased volumes from NAKAN our other vinyls downstream products businesses. Vinyls 2nd quarter operating income of $129,000,000 increased 28,000,000 from first quarter operating income of $101,000,000. This increase is primarily due to improved results in our vinyls downstream products businesses largely driven by seasonally higher volumes as the building and construction season got underway and with lower restructuring acquisition and integrated costs partially offset by lower caustic soda sales prices. Supply demand perspective, the new ethylene and polyethylene production capacity that has entered the market since 2018 and the ongoing trade uncertainty has pressured prices and margins in the second quarter of 2019 when compared to the second quarter of 2018. In the second quarter of 2019, our Olefins segment operating income of $82,000,000 decreased $76,000,000 from the second quarter of 20 eighteen's operating income of $158,000,000 due to the lower margins resulting lower polyethylene sales prices. These lower prices were partially offset by higher polyethylene sales volumes driven by strong operational performance of our plants quarter 2019 olefins operating income increased $45,000,000 from first quarter 2019 operating income of 37,000,000 as we saw good demand for our products and benefited from more feedstock and fuel cost. Next let's turn our attention to the balance sheet and statement of cash flows. At the end of the second quarter, we had cash and cash equivalents of $409,000,000 and total debt of 2,700,000,000. Second quarter 2019 cash flows from operating activities were $320,000,000 while capital expenditures were 208,000,000 In the first half of twenty nineteen, we continued our strategic debottlenecking investments to further integrate our production chain in the U. S. And Germany whether vinyls expansion in Geismar, Louisiana expected to be operational in the fourth quarter of 2019. Our ethylene joint venture with Voci Chemical started up at the end of the second quarter and will add further ethylene integration into our vinyls chain. Have also continued to invest in growth opportunities throughout this year with bolt on acquisitions such as Mecan Specialty Compounding and da Vinci roofing that has expanded our downstream products businesses. In these current market conditions, we will seek to invest prudently in opportunities that acquire leading technologies and in projects that will further enhance our chain integration in our business and that will improve our cost position and capitalize a globally advantaged feedstock position. As always, we will continue to aggressively manage our cost given the current global economic outlook. Subsequent to the close of the second quarter, we issued 1,000,000 of 10 year note at an attractive coupon of 1.625 percent. These proceeds will be used to fund our future growth. As we look forward natural gas and ethane prices have continued to decline in the third quarter. New NGL pipelines and a accompanying fractionation capacity has increased supply in our industry, highlighting the beneficial cost position enjoyed by North American producers. In our vinyl segment, sales prices for caustic soda appear to have stabilized and the easing of river levels in the United States has provided improved logistics. As more normal trade patterns have been reestablished. While the typical construction season in North America was delayed due to extended winter weather, We've benefited from the rebound we expect our effective tax rate and cash tax rates for the full year of 2019 to be approximately 23% 18% respectively. Given the ongoing capital investments to reduce our cost position and further integrate our business. As I outlined, we expect our full year capital CapEx to be approximately $650,000,000. With that, I'll turn the call back over to Albert to make some closing comments. Albert? Thank you, Steve. We delivered a solid 2nd quarter result in spite of a challenging economic environment We will continue to be prudent while evaluating new bolt on opportunities and investing in our business to drive costs lower, improve our chain integration, operate our plants efficiently, and grow our differentiated platforms in PVC and polyethylene. This morning I wanted to mention that the heightened with the heightened awareness in the market about the environment Westlake has had a longstanding commitment to corporate social responsibility that is formed by our core values. That commitment includes doing our part in supporting Sustainability which includes reducing greenhouse gas emissions and waste improving energy efficiency and promoting the responsible reuse of packaging and recycling. We are also actively participating in the industry's environmental initiatives, including those of the alliance to end plastic waste, materials recovery for the future and others 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 is ended. We'll provide that number again you. Our first question comes from Aleksey Yefremov with Nomura Instinet. Good morning. You're expecting your vinyl capacity. Will this increase chlorine and caustic soda production relative to your car and system configuration? Alex, it will increase our PVC production, but we're not adding any cost production in North America. There's a small amount that we're adding in Europe that will start later in the following years, but none in current none in North America. This is a PVC expansion. Thank you, Steve. And you've chosen to issue guidance for the full year recently, could you explain the rationale for providing this guidance and are you planning on keeping providing this guidance in future years? This was a one time guidance and we felt we needed to do something because we did see that the guidance seemed to have gotten stale relative to the dynamics saw in the marketplace. So I think you can expect that we will do this just one time only. Thank you. And our next question comes from Kevin McCarthy with Vertical Research Partners. Your line is now open. Yes, good morning. I was wondering if you could speak to your vinyl segment volumes in the quarter. I think you reported them as being up 3.5% on a year year basis, but presumably that includes some of the acquisition activity. So perhaps you could tell us what that might have been, without acquisitions and speak to the weather impact that you experienced So Kevin, you're right. The step up in volumes was largely driven by some of the acquisitions we made earlier this year in the con of certainly was a significant contributor that absent that our sales levels would have been similar to 20 for the same quarter 2018. The impact as a result of the winter weather was certainly delaying the impact to our ability to sell products at the normalized level during the course of the tailwind of the first quarter and into the second quarter. But as we noted, we've seen a good recovery since the weather has been retrain back to its normal weather patterns. Okay. And then I guess I had a similar on the olefins side, your volume there was up 20% or so on a year over year basis. What drove that level of increase? Well, certainly our production hasn't increased. So part of that was driven by maintenance activities in prior periods. We did see strong demand in this period but the sales was largely driven by operating issues and turnaround issues in prior periods. I see. Thank you very much. You're welcome. Thank you. And our next question comes from Neil Kumar with Morgan Stanley. Your line is now open. Great. Thanks for taking my question. I was wondering if you could just help bridge the ultimate margin improvement on the 1st quarter levels of 15%, the 2nd quarter levels of about 25%. It appears there is a modest step up in volumes and prices was most of this from lower feedstock costs and should we expect it to more margin level in the second half of the year? So, Neil, it was largely driven by a couple of things. Certainly the seasonally higher earnings in our downstream products businesses was an important piece of that as well as lower purchase ethylene and fuel cost. And certainly we also had some lower restructuring and transaction related costs also when you look at quarter 1 versus quarter 2. Thanks. And then what's embedded in your outlook in terms of a PVC price second half of the year. I would say domestic DC prices go up $0.02 in June. It looks like it was flat in July. So any color or outlook there would be force? Sure. I think industry consults and looking at prices to be relatively flat after the $0.02 of pound price increase we received in June. So our outlook for the rest of the year is domestic prices, but it was flat. Thank you. And our next question comes from David Begleiter with Deutsche Your line is now open. Hey, this is David Huang here for David. I guess first on caustic pricing given the additional sub American demand will take some time to significantly reduce the producer inventories here. So when do you expect pricing to improve more meaningfully in the second Well, I think we certainly have seen a lot of the issues that were surrounding the caustic issues in Brazil addressed specifically Alunorte has begun to ramp up to more normalized rates have been running at pretty elevated rates throughout the second quarter. And continuing to step up those operating rates. So we've seen that as improving demand on that front. We've seen some of the industry consultants elevate their forecast for or announced a change in the caustic index of $5 a ton. So we've seen positive drivers there as it relates to specifically Brazil. And of course, I should note that we've also seen a competitor have some operating issues also in Brazil. Of course in India, we've also seen the Bureau of Indian Standards. Those issues that they raised last year seem to have been addressed. They're now issuing import permits to importers and traders and that seems to have been brought demand back into the market. So we've seen as I mentioned earlier in my prepared remarks, a stabilization of cost of prices and you see an outlook of ton on the table. And then on capital allocation, you had $20,000,000 buybacks in the quarter and you said you're interested in some bolt on opportunities. So what would be the priority of your capital allocation this year? And then I guess what would be some areas of focus when you're evaluating potential MA opportunities? Well, certainly in my comments, you can see that we're continuing the debottlenecking initiatives that we have underway both in the United States as well as in Europe. Those will continue to their conclusion. We certainly look for opportunities such as the DaVinci acquisition and the NAKAN acquisition we also are aware that investors need and deserve a return. So we continue to look to give that return in the form of dividends and from time to time our domestic share buybacks. As we look for opportunities to grow that includes organic wholesale acquisition related opportunities. And as I say, it's it's a function of getting the appropriate return and the appropriate investment of capital. You're welcome. Thank you. And our next question comes from Bob Koort with Goldman Sachs. Your line is now open. Good morning. This is Dylan Campbell on for Bob. You had some commentary on kind of demand trends. Can you give a little bit more granularity in terms of how your volumes trended in July, maybe relative to June levels or I guess average second quarter volume trends? Yes, so I think demand are strong both in the olefins segment and in the vinyl segment with the seasonal strong period for building constructions that also help our downstream product So, so long barring any major disruption around the world from further trade disruptions. I think the second half demand and also espoused by industry consultants seem to be reasonable. Got it. Thanks. And I guess on the export caustic soda price, it seems like the North America price did show some positive improvement by the end of the second quarter. It seems like it stepped up maybe above export prices in other regions. How sustainable is that spread? And I guess maybe drove that that improvement in North America export prices? Yes. So I believe that export a market as being somewhat volatile. I think we have kind of stabilized in export pricing and some improvement, some areas. And as Steve said earlier, demand for especially in South America has improved over the over the first half of this year and over last year. So we are seeing the demand being reasonable and we expect the price to be improved gradually also. Got it. Thank you. You're welcome. Thank you. And our next question comes from Arun Viswanathan with RBC Capital Markets. Your line is now open. Thanks. Good morning. Just going back to the caustic soda outlook, we've seen some positive developments But I guess, would you characterize the July uplift of $5 on the index you know, consistent with your expectations, or was it maybe slightly weaker? And if so, what are some catalysts you're looking for to improve the momentum and caustic soda pricing? Thanks. Well, as I said earlier, the export price has stabilized and I think some of the high cost producing regions, those prices are breakeven prices. So we think that so long this improvement economy around the globe demand should improve and increase and would help on the pricing side. And on the U. S. Side as well, I think with as Steve mentioned earlier, there were some issues with logistics with high water river water levels, impeding shipments of caustic around the U. S. And that has issued being resolved. So I think there's more movements and prices are stabilizing and I think some of the industrial consultants are forecasting not only the price increase in July, but down further down the year to be further potentially for the price increases. In the Olefins markets, you referenced the supply that's come on Steve over the last couple of years. Pressuring pricing and margins. We've also seen feedstock costs pulled back a lot. And what's your outlook for polyethylene pricing and margins. Would you expect that we continue to decline from here or is there any potential for improvement? Thanks. Well, certainly as the reason I mentioned the additional capacity is certainly we've continued to see new pounds come into the market and we've certainly is as we all observed seen an uncertain economic outlook in terms of growth. And so that has pressured prices over the month of June July. And certainly the further downside of pricing is certainly there. If you look at some of the consultants and their guidance in terms of forecast, they they do show some trend lower later in the year. If you look at IHS, they do show some risk of further prices declining later this year. Just lastly, when you think about, the Lotte cracker at startup, is there a potential that you could potentially throttle back on the production there and improve the markets and supply or is it more advantageous to run full? Thanks. It's a very cost effective cracker and as you'd imagine, low TR partner is using that ethylene going into their MEG and certainly we're using that going into not PVC but going into PVC and not polyethylene. And so certainly I think that the expectation is that we'll ramp up the operating rate of that plant to full rates and both we and our partner would like to see full rates to fit to send into our respective derivatives. And so I want to add also with today's ethane price, there's a reasonable margin in producing ethylene at those ethane prices. Mike Lighthead with Barclays. Your line is now open. Thanks. Good morning, guys. I appreciate that the July guidance was just a one time occurrence. But even when you gave the range, I guess it implied a bit of a second half balance in earnings, which I assume is mostly on the vinyl side. So can you just walk through maybe 1 or 2 of the factors that you consider to get you to that second half improvement over what we've seen so far in the first half? Well, Mike, I think as you heard us speak to earlier, we see positive trends both on the vinyls and chlor alkali front. Some of the issues that we dealt with late in a and early in 2019 related to demand in Brazil and issues related to regulators in India. Weighed, I think, on the market and we see those behind us at this stage. So we have a more constructive view going forward into the rest of this year. Got it. That's helpful. And then maybe could you just talk a little bit more about the improvement of the Building Products business within vinyls this quarter. And is this an area you might look to give more financial disclosures about going forward given the increasing size of this business in your portfolio? Certainly, Mike, as we look at the business, we'll give that further consideration. It is a business that has continued to grow through these acquisitions and it is a is it an attractive business as you can see with the capital we put forth through the acquisitions of NAKAN and da Vinci. And our next question comes from John McNulty with BMO Capital Markets. Your line is now open. Hi, good morning. This is Abhishedayar for John. Good morning. First of all, just a quick follow-up on the discussion around the strong volumes, particularly in polyethylene. Can you touch on how much of that was the stick versus export demand? And then generally, how are you seeing, polyethylene inventory levels right now? Yeah, I think domestic demand in the U. S. Is relatively flat. I think the export demand has really helped in the total volume, sales volume for the industry. And I think, inventory values from a customer point of view relatively reasonable to low side because with all the capacity coming up, customer expecting prices to trend lower. So they are very careful in holding more inventory. So I think the customer inventory level is average to the low side. Okay. And then as we look at economic cycles on the chlor alkali side, historically, we have seen as economic cycles turn downwards, blurring demand slows down first, caustic kind of like follows, sometimes leads to higher caustic prices, even lower chloroquine production. So it does appear we are seeing some weakness in chlorine. The question is, is this temporary or are you seeing any structural signs of the phenomena and curious to know where you feel we are in this cycle? Sure. I think some of the chlorine caustic are more seasonal generally in the second and third quarter with building season in the northern hemisphere demand for PVC stronger, hence the demand for growing stronger. And as you go into winter season, construction activity slows down, does led demand for PVC not only the US but Northern Hemisphere and hence it's less production or PVC less cost chloroc life production and hence chlor alkali price tends to move up and we still see the same seasonality from a business cycle point of view, so long there's a continued demand growth for PVC and caustic around the globe. And with limited amount of capacity increased. I think the major cycle point of view, I don't think there is a business cycle issue for the vinyls business is really more a seasonal issue. Now barring any global economic slowdown from the trade issues, we should see that the final cycle should to get tightened as we go forward. You. And our next question comes from P. J. Juvekar with Citi. Once again, P. J. Juveker from Citi. Your line is now open. You may state your question. Yes, hi, good morning. This is Eric Petrie on for P. J. Good morning. I wanted to ask, what has your historical volume growth average for chlorine and derivatives second half over first half? It's usually there are more or less the same. You have a weaker 1st quarter, stronger second and third quarter and weaker 4th quarter and at times depending on demand, the fourth quarter could be surprisingly better or surprisingly worse. Depending on the global economy. This year because the longer winter and wetter weather in the U. S. The home construction season did not start until much later and hence it was weaker in the first quarter And as Steve mentioned, it has improved the 2nd quarter into the 3rd quarter and we expect a seasonal slowdown gain in the 4th quarter. Okay. Secondly, can you talk about the economics of integrated PVC producers in China and what the impact has been on supply? For ECU? Certainly. Well, as you may know, because of the heightened environmental awareness in China. Some of the polluting high cost plants were asked to either shut down or reduce production. So there has limited productions in both vinyl and chlor alkoxide. And depending on which whether you are integrated or not integrated, the non integrated producers and economics has not been well and I think we mentioned earlier, the the ECU returns are probably at breaking level, breaking even levels for the coastal plans. The ones who are integrated from coal all the way to PVC watch mostly in the interior of China has a better economic and the coastal plans. Great. Thank you, Albert. You're welcome. Thank you. And our next question comes from John Roberts with UBS. Your line is now open. Thank you. Just to get a sense of the weather impact in the quarter, how much were volumes off from what your expectations were at first to the beginning of the quarter in the vinyls segment? Well, I think if you look at just quarter over quarter, we had a a stronger quarter in the second half than we did in the first half, but certainly it's hard to gauge because John, as you know, whether the seasonal weather changes year on year. But as Eric noted, we typically have a stronger season in the first quarter than we do than we did this past year. But we were able to pick up very good volume in the second quarter. As I say, we had an 8% increase in volume quarter over quarter. Okay. Will the Lotte cracker have any material impact on your economics, until you exercise the option, the current equity interest level, is it relatively small and the market based ethylene that you'll be purchasing, you really won't have much different economics than what you're already doing in the market. Well, we're beginning the plan has just started up and so it's not running at full rates at this stage. And so the relative volume that we're taking in the 2nd quarter and into 3rd quarter still just ramping up to full rates. But we will be getting the benefit of producer economics which is certainly better than any purchase ethylene in the marketplace as we take our ownership interest in the plant. Thank you. And our next question comes from Jim Sheehan with SunTrust. Your line is now open. Thank you. Good morning. Could you talk about what you expect for plant turnaround costs in the third quarter 4th quarter, please? So, Jim, since we have so many plants across the business, we've decided not kind of give quarter by quarter turnaround costs and impacts because frankly we schedule these and they do move based on planning throughout the course of the quarter, throughout the course of the year. But as we look forward into the second half of the year, the turnaround activity will be lighter than it has been in the first half of the year. So we tend to give so the guidance we gave earlier was reflective of a lighter turnaround schedule, of course. Okay. Thank you. Could you give us a sense for the scale of this business and what the EBITDA contribution might be? Jim, it was very small. So it's it's not going to be material to the numbers that you're looking at in your model. And in terms of your FIFO impact, how would you break that out by business segment? It's mostly a vinyl segment impact. Thank you very much. Thank you. And our next question comes from Frank Mitsch with Permian Research. Your line is now open. Thank you. Good morning. Just following up on turnarounds the second half being lighter than the first half. What's the order of magnitude, if you compare the halves? As I say Frank, we haven't gotten into the quantification of those turnarounds because they do vary quarter by quarter year over year. And so all I would say is that they will be lighter than they have been in the first half of the year for the second half of the year. Okay. And obviously your volumes were better in both businesses, both year over year and sequentially some of that M and A related. Can you talk about the operating rates for your facilities roughly where they were during the second quarter? And what are you seeing so far here in as July has completed? Certainly. Yeah. Operating rates generally better than our industry information that we received. We had some had Steve mentioned some turnaround in the have. So but after taking away the first half, as they turn around the activities, we are doing much better industry operating rates. Alright. Thank you so much. You're welcome. You. And our next question comes from Steve Byrne with Bank of America. Your line is now open. How would you rank your downstream Building Products business as among all of the products that you can move the chlorine molecule into, how would you rank those downstream products in terms of EBITDA contribution and margin and what volume does that represent out of your the chlorine capacity that you have? Well, our downstream products are over $1,000,000,000 in revenue and there are an important off take of our polymers. But our downstream product also with the purchase of the account is spread over the world. In the building products, we have primarily serving the North American markets like pipe and sightings, trends and window profiles. And those tend to not be for export market more than domestic North American market. But whereas the accounts compound products really a global business and sold over the world. And do you see any new opportunities to move into more vinyls downstream products and, just whether you would ever consider separating that out as a separate segment? So, Steve, you can see the last couple of transactions year with Nikon and the VINCI in that vinyls products business and certainly it's it's attractive in that we can provide, I think, further integration in our business for select acquisition So to the extent that we can find opportunities there, we will that doesn't suggest that we've not continued our focus on the upstream side of the business. We of course do And as I mentioned, we're debottlenecking our chemical assets in the vinyls chain now. So, it is a balance of looking at that and it's an important it generally tends to be more stable in EBITDA over time. And so when we give, when we give thought to break it out, it is something that will give and consider more thought about how we can provide more transparency to that business because Albert noted is a growing size business of our Thank you. You're welcome. Thank you. And our next question comes from Hassan Ahmed with Alembic Global. Your line is now open. Good morning, Albert and Steve. Good morning, Hassan. I've got a question around near to medium term supply additions. Like you rightly said, the sort of JV you guys have with Lucky makes complete sense. It's cost advantage for it to come on stream. But I'm just a bit sort of surprised with Napster based economics the way they are globally with MTO Economics the way they are. That we recently saw 2 MTO plants come online in China. Another 2 seem to be in the pipeline in the near term. So what's your view? If current economics and global uncertainty persists, what's your near to medium term view about these non North American facilities? That's a very good question. As you have mentioned that China, outside of the North America, China is a little country that seems to be in the process of adding more olefins capacity some MTO and building some of the co based methanol plants to feed the MTO plants whereas those MTO plants on the coastal region based on import methanol, they have not been doing well because of the higher methanol price. But less no price has also seemed to be trending lower. China is building ethane based crackers based on import ethane and some propane primarily from the U. S. So that will be to be seen how good investment those are. And there are some crude oil to chemicals, plants being planned, primarily looking at producing more paraxylene, the aromatic side or the chemical side and not so much the olefins, even though there are some olefins coming up So China's adding capacity just even normal Naphtha cracking just put ethylene. They want to be more self sufficient. And time will tell how competitive they will be based on the oil. Understood. Very helpful. Now as a follow-up, more on the domestic and Westlake side of things, again, one of the trends we've seen over the last couple of quarters is a favorite volatility in terms of NGL pricing, right, and the associated margins. You've seen at times ethane based margins being advantaged at times butane based margins being advantaged. So could you remind me again the level of flexibility you guys have? I mean, I know you can run ethane flat out, but if ethane gets disadvantaged, what's the lowest level that you can take ethane down to? Well, we are primarily ethane based crackers in the cover city, was propane cracker. We can revert back to propane, but it will reduce ethylene production. We have 2 ethylene plants in Lake Charles. 1 of them could crack up to 50% propane and even naphtha. Again, if we went to propane or even naphtha, we would reduce ethylene production. So net net, we're looking at total benefit to the company even though you may save some fee stock costs but you produce much less ethylene And depending on the margins for all the different fixed stocks, we're trying to maximize that. And we have been using some propane in the recent months when propane was much more attractive. I think today ethane is still I think barring the butane price which is a really a summer low price for butane. I think it's still the most attractive raw materials. And as Steve said, there are more pipelines and fractionators coming up this year next year. Will produce supply more ethane to the US market. Very helpful, Albert. Thanks so much. You're very welcome. Thank you. And our next question comes from Jonas Oxgaard with Bernstein. Your line is now open. Good morning guys. Good morning. Two questions, if you don't mind. One of them is, you touched on Chinese PVC Economics. Are they the margins for naphtha crackers going into PVC is now at a I believe it's a 4 year high. Then coal doesn't look that bad as coal prices keep falling, right? Are you seeing increased rates in China because of economics or is this just can't they flex even though the economics suggest otherwise? We have seen some low high cost plans and being reduced production or shutdown. There have been unfortunately some explosions seeing certain part of China and those plant capacity taking over the market. So even though spot PVC price has moved up, it's not really on the reinvestment economics yet. And as you know, China has a moratorium right now on coal based PVC, BCM plant, because of mercury catalyst, And until that's resolved, they're not permitting any new qualify VCM plan. That's coal based. Okay. A completely different question. So the big debate right now seems to be whether the U. S polyethylene prices are sustainable or not. So the Asia is down. But it looks like U. S. Is set by Europe, and it just moves the question over to European polyethylene prices if they are sustainable. Do you have a perspective on the European pricing and how it has been so high related to Asia margins or Asia prices for so long? And of course, is that sustainable as well? That's a good question. As U S polyethylene plants adding 50 percent, 60 percent capacity over the last several years into next few years. Especially with the trade tensions we have with China, South America and Europe will be to two areas that U. S. Producers will be targeting. So it will have some impact on on the European market. However, we don't know what trade barriers will Europe have especially if US putting trade tariffs on European auto imports. So time will tell And our next comes from Matthew Blair with Tudor, Pickering So Asia spot caustic prices have fallen off about 15% in just the past month or 2. Think they're roughly around January levels. Does this concern you? Do you think it's likely to weigh on U. S. Contracts in the back half of the year? Well, certainly spot prices would could have some impact, but I think it's because there are spot prices and the volumes are not that big and a lot of the exports to other parts on long term contract basis, so which are less impacted by spot price. And So on the economy around the world improves or is not going to further reduction, we see demand for cost should improve. And as I mentioned earlier, with the, Alunorte and other South American issues, plant issues, demand or import has increased. So the prices have helped improve. But every now and then prices could go up and down in specific regions, but that will not be determined of the global pricing dynamics. Sounds good. And then in the first quarter, you mentioned that building products saw about a $20,000,000 to $30,000,000 year over year headwind. Do you have a similar number for Q2? As we said, Matthew, because of the delay in winter season impacting the start of the construction season, we saw the pickup in beginning in second quarter. So we were not breaking out specifics as it relates to the downstream building products portion of our business. But I would say that with the return of the construction season that business has improved and you can see the volumes that we've seen from NAKAN have been additive to that over the course of the first So I would say that that products business has performed very well. Thank you. And our next question comes from Jeff Zekauskas with JP Morgan. Your line is now open. Much. Can you remind me how much of the volume of the Lotte cracker you're contractually obligated to accept. So, Jeff, we're obligated to take 50% of the production. We own 10% of the ownership at this stage of plan. And how does that exactly work as the plant is ramping up? Do you have to take percent of the volume as it ramps up or it has to get to a certain scale before you take the volume? No, as it reaches commercialization during that ramp up, we're taking our pro rata share. In taking your pro rata share, does that positively affect your sequential EBITDA, all things being equal? Well, certainly Jeff, because Yeah, certainly because of the produce economics on that portion that we own, we'll have benefits because we've been merchant buying those pounds in the market sequentially. So that'll be an additive as we go forward that that'll be additive to the EBITDA. Can you quantify that? We haven't yet. Also in looking at your income statement, year over year your cost of goods sold went from a little bit less than $1,700,000,000 to a little bit more than $1,800,000,000. Why was that? Why did your cost of goods sold go up Well, it's I think the mix of businesses that we have, Jeff. And when we think about the change in the mix of businesses, Part of that of course is the addition to our vinyl downstream products. Okay. So in other words, it was acquisition effects? Part of it is and certainly part of it is also purchased materials all of the businesses as well. Because really maybe purchased ethylene price, I mean, maybe ethylene prices are a little bit higher, but everything else is really lower, no? Well, but remember, we've also had higher volumes, sales volume. So when you have higher sales volumes, your cost sales purchase materials go up as well. And remember if you're looking year over year quarter over quarter volumes have been up. How much polyethylene do you export of your total? Yes, we export less than the industry average and industry. I think we were up to in the low mid-30s and we are below that. Are you above 20? Oh, above 20. Yes. And can you talk about the looseness of polyethylene in the Asian market? Do you see it as particularly loose or tight or snug or How do you view that? Well, Asia outside of China is still a big market, but there are many producers in the Asian market and also the Middle East. So the price has moved pretty volatile months to months, but it is a huge market. How about China? Is China Loose Yeah, China now with the tariff added down for U. S. Producers, think U. S. Producers are trying to avoid shipping to China unless therefore we export this than then those tariffs can be refunded. But by and large, U. S. Is trying to sell this to China. Right. I am the U. S. Is trying to sell us to China, but is the China polyethylene market domestically a looser place? There seems to be some decrease in China? Yes. Yes. I think that with the slowing down Chinese economy and industrial manufacturing, the demand has been volatile and has been reducing as well for many plastics, not only polyethylene. I guess lastly, people talk about the polyethylene market is growing at 4% to 5% globally. Do you think it's growing at that rate this year or do you think this year, it's I don't know 1%? I think there's all the tariffs, barriers and trade issues. And I would think we'll be probably less than the global GDP rate. But you know, we're only halfway through the year. We don't know what the rest of the year is going to do. You're welcome. Session has now ended. Are there any closing remarks? Thank you again for participating in today's call. We hope you'll join again for our next conference Corporation Second Quarter 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 Eastern Time on Tuesday, August 13, 2019. The replay can be accessed by calling the following numbers. Domestic callers should dial 8558592056. International callers may access the replay at area code 4045373406 The access code for both numbers is 3,583,409. You may now disconnect. Everyone, have a great day. The sort of JV you guys have with largely makes complete sense. It's cost advantage for it to come on stream. But I'm just a bit sort of surprised with Napster based economic the way they are globally with MTO Economics the way they are that we recently saw 2 MTO plants come online in China another tool seem to be in the pipeline in the near term. So what's your view? If current economics and global uncertainty persists, what's your near to medium term view about these non North American facilities? That's a very good question. As you have mentioned that China outside of North America, China is a little country that's seems to be in the process adding more olefins capacity. Some are MTO and building some of the co based methanol plants to feed the MTO plants whereas those MTO plants on the coastal region based on import methanol, they have not been doing well because of the higher methanol price, but methanol price has also seem to be trending lower. China is building ethane based crackers based on imported ethane and some propane primarily from the U. S. So, that to be seeing how good investment those are. And there are some crude oil to chemicals plants being planned, primarily looking at producing more paraaxylene, the aromatic side or the chemical side. And not so much the olefins even though there are some olefins coming up. So China is adding capacity just even normal Naphtha cracking just put it ethylene. They want to be more self sufficient. And time will tell how competitive they will be based on the oil. Understood. Understood. Very helpful. Now as a follow-up, more on the domestic and Westlake side, things. Again, one of the trends we've seen over the last couple of quarters is a fair bit of volatility in terms of NGL pricing, right, and the associated margins. You've seen at times ethane based margins being advantage at times, butane based margins being advantaged. So could you remind me again the level of flexibility you guys have? I mean, I know you can run ethane flat out But if ethane gets disadvantaged, what's the lowest level that you can take ethane down to? Well, we are primarily ethane based crackers in the cover city, was propane cracker. We can reverse back to propane, but it will reduce ethylene production. We have 2 ethylene plants in Lake Charles one of them could crack up to 50% propane and even some naphtha. Again, if we went to propane or even naphtha, we will reduce ethylene production. So net net we're looking at total benefits to the company even though you may save some feedstock costs, but you produce much less ethylene and depending on the margins for older all the different fixed stocks, we're trying to maximize that. And we have been using some propane in the recent months when propane was much more attractive. But I think today ethane is still I think barring the butane price is a really a summer low price for butane. I think still the most attractive raw materials And as Steve said, there are more pipelines and fractionators coming up this year and next year. We'll produce supply more ethane the U. S. Market. Very helpful, Albert. Thanks so much. You're very welcome. Thank you. And our next question comes from Jonas Oxgaard with Bernstein. Your line is now open. Good morning guys. Two questions, if you don't mind. One of them is you touched on Chinese PVC Economics. So the margins for Nasta crackers going into PVC is now at a, I believe it's a 4 year high. Maybe coal doesn't look that bad as coal prices keep falling. Are you seeing increased rates in China because of economics or is this just can't they flex even though the economics suggest otherwise? No, we have seen some low high cost plans and being reduced production or shutdown. There have been unfortunately some explosions in certain part of China and those plant capacity taking over the market. So even though spot PVC price has moved up, it's not really on the reinvestment economics yet. And as you know, China has a moratorium right now on coal based uh-uh PVC, BCM plant because of mercury catalyst. And until that's resolved, they're not permitting any new qualify VCM plans that's co based. Okay. A completely different question. So the big debates right now, seems to be whether the U. S polyethylene prices are sustainable or not. So the Asia is down. But it looks like U. S. Is set by Europe and just moves the question over to European polyethylene prices if they are sustainable. Do you have a perspective on the European pricing and how it has been so high related to Asia margins or Asia prices for so long? And of course, is that sustainable as well? That's a good question. As US polyethylene plants are adding 50 percent, 60 percent capacity over the last several years into next few years. Especially with the trade tensions we have with China, South America and Europe will be to two areas that U. S. Producers will be targeting. So it will have some impact on the European market However, we don't know what trade barriers will Europe have especially if US putting trade tariffs on European auto imports. So time will tell. Okay. Thank you. You're welcome. Thank you. And our next question comes from Matthew Blair with Tudor Pickering, Holt. Your line is now open. Hey, good morning, Albert and Steve. So Asia spot caustic prices have fallen off about 18% in just the past month or 2. I think they're roughly around January levels. Does this concern you? You think it's likely to weigh on U. S. Contracts in the back half of the year? Certainly it spot prices would could have some impact, but I think it's because there are spot prices and the volumes are not that big and a lot of the exports to other parts on a long term contract basis. So which are less impacted by spot price. And so around the economy around the world improves or is not going to further reduction, we see demand for cost should improve. And as I mentioned earlier, with the Auto Norte and other South American issues, plant issues. The demand or import has increased. So the prices have helped improve but every now and then prices could go up and down in specific regions, but that will not be determined of the global pricing dynamics. Sounds good. And then in the first quarter, you mentioned that building product saw about a $20,000,000 to $30,000,000 year over year headwind. Do you have a similar number for Q2 As we said, Matthew, because of the delay in winter season impacting the start of the construction season, we saw the pickup in beginning in the second quarter. So we were not breaking out specifics as it relates to the downstream building products portion of our business. But I would say that with the return of the construction season that business has improved and you can see the volumes that we've seen from NAKAN have been additive to that over the course of the first half of the year and certainly were a meaningful contributor in the second quarter. So I would say that that products business has performed very well. Great. Thank you. You're welcome. Thank you. And our next question comes from Jeff Zekauskas with JPMorgan. Your line is now open. Thanks very much. Can you remind me how much of volume of the low take cracker you're contractually obligated to accept? So, Jeff, we're obligated to take 50 percent of the production. We own 10% of the ownership at this stage of the plant. And how does that exactly work as the plant is ramping up? Do you have to take 50% of the volume as it ramps up or it has to get to a certain scale before you take the volume? No, as it reaches commercialization during that ramp up, we're taking our pro rata share. In taking your pro rata share, does that positively affect your sequential EBITDA all things being equal? Well, certainly, Jeff, yes, certainly because of the producer economics on that portion that we own will have benefits because we've been merchant buying those pounds in the market sequentially. So that'll be an additive as we go forward that that'll be additive to the EBITDA. Can you quantify that? We haven't yet. Also in looking at your income statement, year over year your cost of goods sold went from a little bit less than $1,700,000,000 to a little bit more than $1,800,000,000. Why was that? Why did your cost of goods sold go up? Well, it's I think the mix of businesses that we have Jeff. And when we think about the change in the mix of businesses, part of that of course is the addition to our vinyls downstream products. Okay. So in other words, it was acquisition effects. Part of it is and certainly part of it is also purchased materials for all of the businesses as well. Because really maybe purchased ethylene price, I mean, maybe ethylene prices are a little bit higher, but everything else is really lower. No? Well, but remember, we've also had higher volumes, sales volumes. So when you have higher sales volumes, your cost sales purchase materials go up as well. And remember if you're looking year over year quarter over quarter volumes have been up. How much polyethylene do you export of your total? Yes, we export less than the industry average and industry I think move up to in the low mid-30s and we are below that. Are you above 20? All above 20 years. Yes. And can you talk about the looseness of polyethylene in the Asian market do you see it as particularly loose or tight or snug or how do you view that? Well, Asia outside of China is still a big market, but there are many producers in the Asian market also the Middle East. So, this the price that has moved pretty volatile months to months. But it is a it's a huge market. How about China? Is China Loose Yeah, China now with the tariff added down for U. S. Producers, I think U. S. Producers trying to avoid shipping to China unless therefore we export us then those tariffs can be refunded, but by and large U. S. Is trying to sell this to China. Right. I understand the U. S. Trying to sell us to China, but is the China polyethylene market domestically a looser place? There seems to be some decrease China? Yes. Yes. I think that with the slowing down Chinese economy and industrial manufacturing, the demand has been volatile and has been reducing as well for many plastics, not only polyethylene. I guess lastly, people talk about polyethylene market is growing at 4% to 5% globally. Do you think it's growing at that rate this year or do you think this year it's I don't know one percent? I think with all the tariffs, barriers and trade issues and I will think will be probably less than the global GDP rate. But you know, we're only halfway through the year. We don't know what the rest of the year is going to do. You're welcome. Has now ended. Are there any closing remarks? Call to discuss our 3rd quarter results. Thank you for participating in today's Westlake Chemical Corporation Second Quarter Earnings Conference Call. As a reminder, this call will be available for replay beginning 2 hours after the call has ended and may be accessed until 11:59 pm Eastern Time. On Tuesday, August 13, 2019. The replay can be accessed by calling the following numbers. Domestic callers should dial 855 8592056. International callers may access the replay at area code 404 5373406. The access code for both numbers is 35834 09. You may now disconnect. Everyone, have a great day.