Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Chemical Corporation second 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, August 6th, 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 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 on the industry. Steve will then provide a more detailed look at our financial and operating results. Finally, Albert will add a few concluding comments, and we'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 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 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 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 3583409. Please note that information reported on this call speaks only as of today, August 6th, 2019, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay. I would finally advise you that this conference call is being broadcast live through an internet webcast system that can be accessed on our webpage at westlake.com. Now, I would like to turn the call over to Albert Chao. Albert?
Thank you, Jeff. Good morning, ladies and gentlemen, and thank you for joining us to discuss our second quarter results. In this morning's press release, we reported net income of $119 million for the second quarter of 2019, or $0.92 per diluted share. The second 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 and the 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 our vinyls expansion projects that will improve our chain integration and in acquisitions such as NAKAN, a specialty PVC compoundings business, and DaVinci, a specialty composite roofing manufacturer that extends our product reach into new markets. I would now like to turn our call over to Steve to provide more detail on our financial and operating results.
Thank you, Albert, and good morning, everyone. I will start with discussing our consolidated financial results, followed by a detailed review of our vinyls and olefins segment results. Let me begin with our consolidated results. For the second quarter of 2019, we reported net income of $119 million, or $0.92 per share on sales of $2 billion. Westlake's net income for the second quarter declined $159 million compared to the second quarter 2018 net income of $278 million, or $2.12 per share, while improving $47 million from first quarter 2019 net income of $72 million, or $0.55 per share. Compared to the second quarter 2018, our results were impacted by lower prices and margins for our 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 Vinyls 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 extended winter weather delayed the start of the construction season in much of North America. Our utilization of the FIFO method of accounting resulted in an unfavorable pretax impact of approximately $11 million, 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 the slower global growth and ongoing uncertainty in trade continued to pressure sales prices for caustic soda and PVC resin. In addition, the Vinyls segment was further impacted by the late start of the North American building and construction season I noted earlier. For the second quarter 2019, Vinyls operating income of $129 million decreased $142 million from the second quarter 2018 operating income of $271 million. This decrease is primarily due to the lower sales prices for caustic soda and PVC resin, partially offset by increased volumes from Nakan and our other Vinyls downstream products businesses.
Vinyls' second quarter operating income of $129 million increased $28 million from first quarter operating income of $101 million. 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. Turning to our Olefins segment, from an industry 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 million decreased $76 million from the second quarter of 2018's operating income of $158 million due to the lower margins resulting from lower polyethylene sales prices.
These lower prices were partially offset by higher polyethylene sales volumes, driven by strong operational performance of our plants and lower feedstock and fuel cost. Second quarter 2019 Olefins operating income increased $45 million from first quarter 2019 operating income of $37 million as we saw good demand for our products and benefited from lower feedstock and fuel cost. Let's turn our attention to the balance sheet and the statement of cash flows. At the end of the second quarter, we had cash and cash equivalents of $409 million and total debt of $2.7 billion. Second quarter 2019 cash flows from operating activities were at $320 million, while capital expenditures were $208 million.
In the first half of 2019, we continued our strategic debottlenecking investments to further integrate our production chain in the U.S. and Germany, with our Vinyls expansion in Geismar, Louisiana, expected to be operational in the fourth quarter of 2019. Our ethylene joint venture with Lotte Chemical started up at the end of the second quarter and will add further ethylene integration into our Vinyls chain. We have also continued to invest in growth opportunities throughout this year with bolt-on acquisitions such as NAKAN Specialty Compounding and DaVinci Roofscapes 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 on our 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 EUR 700 million of 10-year notes at an attractive coupon of 1.625%. 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 accompanying fractionation capacity has increased supply in our industry, highlighting the beneficial cost position enjoyed by North American producers. In our Vinyls segment, sales prices for caustic soda appear to have stabilized, and the easing of river levels in the U.S. 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 have benefited from the rebound in demand and believe it will carry through into the third quarter. For modeling purposes, we expect our effective tax rate and cash tax rates for the full year of 2019 to be approximately 23% and 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 million. With that, I'll turn the call back over to Albert to make some closing comments. Albert?
Thank you, Steve. We delivered a solid second 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 with the heightened awareness in the market about the environment, Westlake has had a long-standing 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. I'll turn the call back over to Jeff.
Thank you, Albert. Before we begin taking questions, I'd like to remind you that a replay of this teleconference will be available two 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, ladies and gentlemen, if you'd like to queue up to ask a question, you may hit star then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, you may do so by pressing the pound key. We ask that you please mute your line once you've asked your question to prevent any background noise from coming through. Again, that is star then one if you'd like to queue up to ask a question. Our first question comes from Aleksey Yefremov with Nomura Instinet. Your line is now open.
Thank you. Good morning, everyone.
Good morning.
You're expanding your vinyls capacity. Will this increase chlorine and caustic soda production relative to your current system configuration?
Aleksey, it will increase our PVC production, but we're not adding any caustic 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 North America. This is a PVC expansion.
Thank you, Steve. You've chosen to issue guidance for the full year recently. Could you explain the rationale for providing this guidance? Are you planning on keeping providing those 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 that we saw in the marketplace. I think you can expect that we will do this just one time only.
Thanks a lot.
Thank you. 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.
Morning, Kevin.
Could you speak to your vinyl segment volumes in the quarter. I think you reported them as being up 3.5% on a year-over-year basis, presumably, that includes some of the acquisition activity. Perhaps you could tell us what that might have been without acquisitions and speak to the weather impact that you experienced.
Kevin, you're right. The step up in volumes was largely driven by some of the acquisitions we made earlier this year. NAKAN certainly was a significant contributor to that. Absent that, our sales levels would have been similar to 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 tail end of the first quarter and into the second quarter. As we noted, we've seen a good recovery since the weather has been returning back to its normal weather patterns.
Okay. I guess I had a similar question on the olefin 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. Part of that was driven by maintenance activities in prior periods. We did see strong demand in this period, 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. Our next question comes from Neel 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 olefin margin improvement from the first quarter levels of 15% to second quarter levels of about 25%. It appears there was a modest step up in volumes and prices. Was most of this from lower feedstock cost? Should we expect a similar margin level in the second half of the year?
Neel, 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 purchased ethylene and fuel cost. Certainly, we also had some lower restructuring and transaction related cost also when you look at quarter one versus quarter two.
Okay, thanks.
You're welcome.
What's embedded in your outlook in terms of PVC prices in the second half of the year? Obviously, domestic PVC pricing go up $0.02 in June. Seems like it was flat in July. Any color in your outlook there would be helpful.
Sure. I think the industry consultant looking at prices will be relatively flat after the $0.02 a pound price increase we received in June. Our outlook for the rest of the year, its domestic price is relatively flat.
Thank you. Our next question comes from David Begleiter with Deutsche Bank. Your line is now open.
Hey, this is Dawang here for David. I guess first in caustic pricing, given the additional South American demand will take some time to significantly reduce the producer inventories here. When do you expect pricing to improve more meaningfully in the second half?
Well, I think that 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. They've been running at pretty elevated rates throughout the second quarter and continuing to step up those operating rates. We've seen that as improving demand on that front. We've seen some of the industry consultants elevate their forecast for or announce a change in the caustic index of $5 a ton. We've seen positive drivers there as it relates to specifically Brazil. 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. That seems to have then brought demand back into the market. We've seen, as I mentioned earlier in my prepared remarks, a stabilization of caustic prices, and you see an outlook of $5 a ton on the table.
On capital allocation, you had $200 million buybacks in the quarter, and you said you're interested in some bolt-on opportunities. What would be the priority of your capital allocation this year? I guess, what would be some areas of focus when you're evaluating potential M&A opportunities?
Well, certainly, in my comments, you can see that we're continuing the bottlenecking initiatives that we have underway, both in the U.S. 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, opportunistic share buybacks. As we look for opportunities to grow, that includes organic as well as acquisition-related opportunities. As I say, it's a function of getting the appropriate return and the appropriate investment of capital.
Thank you.
You're welcome.
Thank you. Our next question comes from Bob Koort with Goldman Sachs. Your line is now open.
Good morning. This is Dylan Campbell on for Bob.
Morning, Dylan.
You had morning, I think, commentary on demand trends. Can you give a little bit more granularity in terms of how your volumes have trended in July, maybe relative to June levels or, I guess, average second quarter volume trends?
Yes, I think demands are strong both in the olefin segment and in the vinyl segment with the seasonal strong period for building constructions that also help our downstream products. 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. I guess on that 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? I guess maybe what drove that improvement in North America export prices?
Yes. Certainly that export market has been somewhat volatile. I think we have kind of stabilized in export pricing and some improvement in some areas. As Steve said earlier, demand for especially in South America has improved over the first half of this year and over last year. We are seeing the demand being reasonable, and we expect the price to improve gradually also.
Got it. Thank you.
You're welcome.
Thank you. Our next question comes from Arun Viswanathan with RBC Capital Markets. Your line is now open.
Great. Thanks. Good morning. Just going back to the caustic soda outlook. We've seen some positive developments. I guess, would you characterize the July uplift of $5 on the index consistent with your expectations, or was it maybe slightly weaker? If so, what are some catalysts you're looking for to improve the momentum in 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 break-even prices.
We think that so long there's improvement in economy around the globe, demand should improve and increase, and it would help on the pricing side. On the U.S. side as well, I think with, as Steve mentioned earlier, there were some issues with logistics, with high river water levels impeding shipments of caustic around the U.S., and that has issued and resolved. I think there's more movements, and prices are stabilizing. I think some of the industry consultants are forecasting not only the price increase in July, but further down the year, there'll be potential further price increases.
Okay. In 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 pull back a lot. 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.
Certainly as the reason I mentioned the additional capacity is certainly we continue to see new pounds come into the market, we've certainly, as we all have observed, seen an uncertain economic outlook in terms of growth. That has pressured prices over the month of June and July. 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 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. As you'd imagine, Lotte, our partner, is using that ethylene going into their MEG. Certainly, we're using that going into PVC and not polyethylene. 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 send into our respective derivatives.
I want to add also with today's ethane price, it is a reasonable margin in producing ethylene at those ethane prices.
Thanks.
Thank you. Our next question comes from Michael Leithead with Barclays. Your line is now open.
Thanks. Good morning, guys.
Good morning.
Good morning.
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 bounce in earnings, which I assume is mostly on the vinyl side. Can you just walk through maybe one or two 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 chloralkali front. Some of the issues that we dealt with late in 2018 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. We have a more constructive view going forward into the rest of this year.
Got it. That's helpful. Maybe could you just talk a little bit more about the improvement of the building products business within vinyls this quarter? 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 an attractive business, as you can see with the capital we put forth through the acquisitions of NAKAN and DaVinci Roofscapes.
Thank you. Our next question comes from John McNulty with BMO Capital Markets. Your line is now open.
Hi, good morning. This is Bhavesh Lodaya 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 domestic versus export demand? 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 sales volume for the industry. I think inventory values from a customer point of view are relatively reasonable to low side because with all the capacity coming up, customer expecting prices to trend lower. They are very careful in holding more inventory. I think the customer inventory level is average to the low side.
Okay. Then Albert, as we look at economic cycles on the chloralkali side, historically we have seen as economic cycles turn downwards, chlorine demand slows down first, caustic kind of follows. Sometimes leads to higher caustic prices given lower chloralkali production. 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? 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 is stronger, hence the demand for chlorine is stronger. As you go into the winter season, construction activity slows down. There's less demand for PVC, not only the U.S. but the Northern Hemisphere. Hence, there's less production of PVC, less chloralkali production, and hence, chloralkali price tends to move up. We still see the same seasonality from a business cycle point of view. Long there's continued demand growth for PVC and caustic around the globe, and with limited amount of capacity increase, I think the larger cycle point of view, I don't think there is a business cycle issue for the vinyls business. It's really more a seasonal issue.
Barring any global economic slowdown from the trade issues, we should see that the vinyl cycle should get tighter and tighter as we go forward.
Thank you for that.
You're welcome.
Thank you. Our next question comes from P.J. Juvekar with Citi. Your line is now open. Once again, P.J. Juvekar from Citi, your line is now open. You may state your question.
Yes. Hi, good morning. This is Eric Petry on for P.J.
Good morning.
I wanted to ask, what has your historical volume growth averaged for chlorine and derivatives second half over first half?
It's usually they are more or less the same. You have a weaker first quarter, stronger second and third quarter, and weaker fourth quarter. At times, depending on the demand, the fourth quarter could be surprisingly better or surprisingly worse, depending on the global economy. This year, because of 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. As Steve mentioned, it has improved the second quarter into the third quarter, and we expect a seasonal slowdown again in the fourth quarter.
Okay. Thank you. 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 and high-cost plants were asked to either shut down or reduce production. They have limited productions in both vinyl and chloralkali site. Depending on whether you are integrated or not integrated, the non-integrated producers' economics has not been well, and I think we mentioned earlier, the ECU returns are probably at breaking even levels for the coastal plants. The ones who are integrated from coal all the way to PVC, which mostly in the interior of China, has a better economics than the coastal plants.
Great. Thank you, Albert.
You're welcome.
Thank you. 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 the beginning of the quarter in the vinyls segment?
Well, I think if you look at just a quarter-over-quarter, we had a stronger quarter in the second half than we did in the first half. Certainly, it's hard to gauge because, John, as you know, the seasonal weather changes year-on-year. As Albert noted, we typically have a stronger season in the first quarter than we did this past year. 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 at the current equity interest level? Is it relatively small, and the market-based ethylene that you'll be purchasing really won't have much different economics than what you're already doing in the market?
Well, the plant has just started up, so it's not running at full rates at this stage. The relative volume that we're taking in the second quarter and into the third quarter are still just ramping up to full rates. We will be getting the benefit of producer economics, which is certainly better than any purchased ethylene in the marketplace as we take our ownership interest in the plant.
Thank you.
Thank you. Our next question comes from James Sheehan with SunTrust. Your line is now open.
Thank you. Good morning.
Good morning.
Could you talk about what you expect for plant turnaround costs in the third quarter and fourth quarter, please?
James, since we have so many plants across the business, we've decided not to 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. 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. The guidance we gave earlier was reflective of a lighter turnaround schedule, of course.
Okay, thank you. On the DaVinci Roofscapes acquisition, 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 not going to be material to the numbers that you're looking at in your model.
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. Our next question comes from Frank Mitsch with Fermium Research. Your line is now open.
Thank you. Good morning. Just following up on the 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. 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. Obviously, your volumes were better in both businesses, both year-over-year and sequentially, some of that M&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 as July has completed?
Certainly.
Operating rates are generally better than our industry information that we receive. Steve mentioned some turnaround in the first half. After taking away that first half, the turnaround activities, we are doing much better industry operating rates.
All right. Thank you so much.
You're welcome.
Thank you. Our next question comes from Steve Byrne with Bank of America. Your line is now open.
Yes, thank you. 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? What volume does that represent out of the chlorine capacity that you have?
Well, our downstream products are over $1 billion in revenue. They are an important off-take of our polymers. Our downstream product also, with the purchase of NAKAN, is spread all over the world. In the building products, we have primarily serving the North American markets, like pipe and sidings, trims, and window profiles. Those tend to not be for export market, more of a domestic North American market. Whereas the NAKAN's compound products are really a global business, and they are sold all over the world.
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?
Steve, you can see the last couple of transactions this year with NAKAN and DaVinci Roofscapes are in that vinyls products business. Certainly it's attractive in that we can provide, I think, further integration in our business for select acquisitions. 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. As I mentioned, we're debottlenecking our chemical assets in the vinyls chain now. It is a balance of looking at that, and it's an important business. It generally tends to be more stable in EBITDA over time.
When we give thought to breaking it out, it is something that we'll give and consider more thought about how we can provide more transparency to that business, because as Albert noted, it is a growing size business of ours.
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.
Good morning, Hassan.
Albert, a question around near to medium term supply additions. Like you rightly said, the sort of JV you guys have with Lotte makes complete sense. It's cost advantage for it to come on stream. I'm just a bit sort of surprised, with naphtha based economics the way they are globally, with MTO economics the way they are, that we recently saw two MTO plants come online in China. Another two seem to be in the pipeline in the near term. What's your view? If current economics and global uncertainty persist, what's your near to medium term view about these non-North American facilities?
That's a very good question. As you have mentioned, outside of North America, China is a leading country that seems to be in the process of adding more olefins capacity. Some are MTO. They're building some of the coal-based methanol plants to feed the MTO plants. Whereas those MTO plants on the coastal region based on import methanols, they have not been doing well because of the higher methanol price. Methanol price has also seemed to be trending lower. China is building ethane-based crackers based on imported ethane and some propane, primarily from the U.S. That will be to be seen how good of investments those are. There are some crude oil to chemicals plants being planned. They are primarily looking at producing more para-xylene, the aromatic side or the chemical side, and not so much the olefins, even though there are some olefins coming up.
China is adding capacity, just even normal naphtha cracking. Just to produce ethylene, they want to be more self-sufficient. Time will tell how competitive they will be based on the oil.
Understood. Very helpful. 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 fair bit of volatility in terms of NGL pricing, right? The associated margins. You've seen at times ethane-based margins being advantaged, at times butane-based margins being advantaged. Could you remind me again the level of flexibility you guys have? 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 Calvert City w as propane cracker. We can revert back to propane, but it will reduce ethylene production. We have two 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 would reduce ethylene production. Net-net, we're looking at total benefit to the company. Even though you may save some feedstock costs, but you produce much less ethylene. Depending on the margins for all the different feedstocks, we try to maximize that. 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 really a summer low price for butane, ethane is still the most attractive of materials.
As Steve said, there are more pipelines and fractionators coming up this year, next year, will supply more ethane to the U.S. market.
Very helpful, Albert. Thanks so much.
You're very welcome.
Thank you. Our next question comes from Jonas Oxgaard with Bernstein. Your line is now open.
Good morning, guys.
Good morning.
Good morning.
Two questions, if you don't mind. One of them is, you touched on Chinese PVC economics. The margins for naphtha crackers going into PVC is now at a, I believe it's a four-year high. Maybe coal doesn't look that bad since coal prices keep falling. Are you seeing increased rates in China because of economics, or can't they flex even though the economics suggest otherwise?
No. We have seen some high-cost plants and being reduced production or shut down. There have been unfortunately some explosions in certain parts of China, and those plants capacity taking out of the market. Even though spot PVC price has moved up, it's not really on the reinvestment economics yet. As you know, China has a moratorium right now on coal-based PVC VCM plant because of mercury catalyst. Until that's resolved, they're not permitting any new chlorine VCM plants that's coal-based.
Okay. A completely different question. The big debate right now seems to be whether the U.S. polyethylene prices are sustainable or not. Today Asia is down. It looks like the U.S. is set by Europe, and which 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? Of course, is that sustainable as well?
That's a good question. As U.S. polyethylene plants are adding 50%-60% capacity over the last several years into the next few years, especially with the trade tensions we have with China, South America and Europe will be the two areas that U.S. producers will be targeting. It will have some impact on the European market. However, we don't know what trade barriers will Europe have, especially if U.S. putting tariffs on European auto imports. Time will tell.
Okay. Thank you.
You're welcome.
Thank you. Our next question comes from Matthew Blair with Tudor, Pickering, Holt. Your line is now open.
Hey, good morning, Albert and Steve.
Good morning.
Good morning.
Asia spot caustic prices have fallen off about 15% in just the past month or two. I 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?
Certainly spot prices could have some impact, but I think because they are spot prices and the volumes are not that big, and a lot of the exports, some to other parts on long-term contract basis, so which are less impacted by spot price. So long the economy around the world improves or is not going to further reduction, we see demand for caustic should improve. As I mentioned earlier, with the Alunorte and other South American plant issues, the demand or import has increased, so the prices have helped improve. Every now and then, prices could go up and down in specific regions. That will not be determined of the global pricing dynamics.
Sounds good. In the first quarter, you mentioned that building products saw about a $20 million-$30 million year-over-year headwind. Do you have a similar number for Q2?
As we said, Matthew, because of the delay in the winter season impacting the start of the construction season, we saw the pickup beginning in the second quarter. We're not breaking out specifics as it relates to the downstream building products portion of our business. 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. I would say that products business has performed very well.
Great. Thank you.
You're welcome.
Thank you. Our next question comes from Jeffrey Zekauskas with J.P. Morgan. Your line is now open.
Thanks very much. Can you remind me how much of the volume of the Lotte cracker you're contractually obligated to accept?
Jeff, we're obligated to take 50% of the production. We own 10% of the ownership at this stage of the plant.
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, Geoff. Certainly because of the producer economics on that portion that we own, we'll have benefits because we've been merchant buying those pounds in the market sequentially. That'll be an additive as we go forward. That'll be additive to the EBITDA.
Can you quantify that?
We haven't yet.
Okay. Also, in looking at your income statement, year-over-year, your cost of goods sold went from a little bit less than $1.7 billion to a little bit more than $1.8 billion. Why was that? Why did your cost of goods sold go up?
Well, it's, I think, the mix of businesses that we have, Geoff. 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. In other words, it was acquisition effects.
Part of it is, certainly part of it is also purchased materials for all of the businesses as well.
Because really, maybe purchased ethylene price, maybe ethylene prices are a little bit higher, but everything else is really lower, no?
Well, Remember, we've also had higher volumes, sales volumes.
Yeah. Right.
When you have higher sales volumes, your cost of sales purchase materials go up as well. Remember, if you're looking year-over-year, quarter-over-quarter, volumes have been up.
Yeah. How much polyethylene do you export of your total?
Yeah, we export less than the industry average. Industry, I think, move up to in the low, mid-30s, and we are below that.
Are you above 20?
Oh, above 20. Yes.
Yeah. 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, there are many producers in the Asian market and also the Middle East. The price has moved pretty volatile month to month. It's a huge market.
How about China? Is China loose?
Yeah, China now with the tariff headed down for U.S. producers, I think U.S. producers are trying to avoid shipping to China unless they will be exporters, then those tariffs can be refunded. By and large, U.S. is trying to sell less to China.
Right. I understand the U.S. is trying to sell less to China, but is the China polyethylene market domestically a looser place? There seems to be some decrease in China polyethylene.
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 as growing at 4%-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 with all the tariffs, barriers, and trade issues, and I would think it will be probably less than the global GDP rate. We're only halfway through the year. We don't know what the rest of the year going to do.
Okay, great. Thank you so much.
You're welcome.
At this time, the Q&A session has now ended. Are there any closing remarks?
Thank you again for participating in today's call. We hope you'll join us again for our next conference call to discuss our third quarter results.
Thank you for participating in today's Westlake Chemical Corporation second quarter earnings conference call. As a reminder, this call will be available for replay beginning 2 hours after the call has ended and may be accessed until 11:59 P.M. Eastern Time on Tuesday, August 13, 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 area code 404-537-3406. The access code for both numbers is 3583409. You may now disconnect. Everyone have a great day.
The sort of JV you guys have with Lotte makes complete sense. It's cost advantage for it to come on stream. I'm just a bit sort of surprised, with naphtha-based economics the way they are globally, with MTO economics the way they are, that we recently saw two MTO plants come online in China. Another two seem to be in the pipeline in the near term. 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 outside of North America, China is a country that seems to be in the process of adding more olefins capacity. Some are MTO, and they are building some of the coal-based methanol plants to feed the MTO plants, whereas those MTO plants on the coastal region based on import methanols, they have not been doing well because of the higher methanol price. Methanol price has also seemed to be trending lower. China is building ethane-based crackers based on imported ethane and some propane primarily from the U.S., so that will be to be seen how good of investment those are. There are some crude oil to chemicals plants that are being planned.
They are 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. China is adding capacity, just even normal naphtha cracking, just to produce ethylene. They want to be more self-sufficient. Time will tell how competitive they will be based on the oil.
Understood. Very helpful. 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 fair bit of volatility in terms of NGL pricing, right? The associated margins. You've seen at times ethane-based margins being advantaged, at times butane-based margins being advantaged. Could you remind me again the level of flexibility you guys have? 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 Calvert City, was a propane cracker. We can revert back to propane, but it will reduce ethylene production. We have two ethylene plants in Lake Charles. One of them could crack up to 50% propane and even some naphtha. If we went to propane or even naphtha, we would reduce ethylene production. Net-net, we're looking at total benefit to the company, even though you may save some feedstock cost, but you produce much less ethylene. Depending on the margins for all the different feedstocks, we would try to maximize that. We have been using some propane in the recent months when propane was much more attractive. I think today, ethane is still, barring the butane price, which is really a summer low price for butane, ethane is still the most attractive raw materials.
As Steve said, there are more pipelines and fractionators coming up this year, next year, will supply more ethane to the U.S. market.
Very helpful, Albert. Thanks so much.
You're very welcome.
Thank you. Our next question comes from Jonas Oxgaard with Bernstein. Your line is now open.
Well, morning, guys.
Good morning.
Good morning.
Two questions, if you don't mind. One of them is, you touched on Chinese PVC economics. The margins for naphtha crackers going into PVC is now at a, I believe it's a four-year high. Maybe coal doesn't look that bad since coal prices keep falling. Wait, 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 high-cost plans and being reduced production or shut down. There have been, unfortunately, some explosions in certain part of China, those plants capacity taking over the market. Even though spot PVC price has moved up, it's not really on the reinvestment economics yet. As you know, China has a moratorium right now on coal-based PVC VCM plant because of mercury catalyst. Until that's resolved, they're not permitting any new chlor-alkali VCM plants that's coal-based.
Okay. A completely different question. The big debate right now seems to be whether the U.S. polyethylene prices are sustainable or not. Asia is down. It looks like U.S. is set by Europe, which 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? Of course, is that sustainable as well?
That's a good question. As U.S. polyethylene plants are adding 50%, 60% capacity over the last several years into the next few years, especially with the trade tensions we have with China, South America and Europe will be the two areas that U.S. producers will be targeting. It will have some impact on the European market. However, we don't know what trade barriers will Europe have, especially if U.S. putting tariffs on European auto imports. Time will tell.
Okay. Thank you.
You're welcome.
Thank you. Our next question comes from Matthew Blair with Tudor, Pickering Holt. Your line is now open.
Hey, good morning, Albert and Steve.
Good morning.
Good morning.
Asia spot caustic prices have fallen off about 15% in just the past month or two. I 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?
Certainly spot prices could have some impact, but I think because they are spot prices and the volumes are not that big, and a lot of the exports, some to other parts on long-term contract basis, so which are less impacted by spot price. So long the economy around the world improves or is not going to further reduction, we see demand for caustic should improve. As I mentioned earlier, with the Alunorte and other South American plant issues, the demand or import has increased, so the prices have helped improve. 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. In the first quarter, you mentioned that building products saw about a $20 million-$30 million year-over-year headwind. Do you have a similar number for Q2?
As we said, Matthew, because of the delay in the winter season impacting the start of the construction season, we saw the pickup beginning in the second quarter. We're not breaking out specifics as it relates to the downstream building products portion of our business. 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. I would say that products business has performed very well.
Great. Thank you.
You're welcome.
Thank you. Our next question comes from Jeff Zekauskas with J.P. Morgan. Your line is now open.
Thanks very much. Can you remind me how much of the volume of the Lotte cracker you're contractually obligated to accept?
Jeff, we're obligated to take 50% of the production. We own 10% of the ownership at this stage of the plant.
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, because of the producer economics on that portion that we own, we'll have benefits because we've been merchant buying those pounds in the market sequentially. That'll be an additive as we go forward. That'll be additive to the EBITDA.
Can you quantify that?
We haven't yet.
Okay. In looking at your income statement, year-over-year, your cost of goods sold went from a little bit less than $1.7 billion to a little bit more than $1.8 billion. 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. 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. 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.
Really, maybe ethylene prices are a little bit higher, but everything else is really lower, no?
Well, Remember, we've also had higher volumes, sales volumes.
Yeah. Right.
When you have higher sales volumes, your cost of sales purchase materials go up as well. Remember, if you're looking year-over-year, quarter-over-quarter, volumes have been up.
Yeah. How much polyethylene do you export of your total?
Yeah, we export less than the industry average. Industry, I think, move up to in the low, mid-30s, and we are below that.
Are you above 20?
Oh, above 20? Yes.
Yeah. 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. The price has moved pretty volatile month to month. It's a huge market.
How about China? Is China loose?
Yeah, China now with the tariff headed down for U.S. producers, I think U.S. producers is trying to avoid shipping to China. Less therefore we export this, then those tariffs can be refunded. By and large, U.S. is trying to sell less to China.
Right. I understand the U.S. is trying to sell less to China, but is the China polyethylene market domestically a looser place? There seems to be some decrease in China polyethylene.
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%-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 with all the tariffs barriers and trade issues, I would think will be probably less than the global GDP rate. We're only halfway through the year. We don't know what the rest of the year going to do.
Okay, great. Thank you so much.
You're welcome.
At this time, the Q&A session has now ended. Are there any closing remarks?
Thank you again for participating in today's call. We hope you'll join us again for our next conference call to discuss our third quarter results.
Thank you for participating in today's Westlake Chemical Corporation second quarter earnings conference call. As a reminder, this call will be available for replay beginning two hours after the call has ended and may be accessed until 11:59 P.M. Eastern Time on Tuesday, August 13th, 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 area code 404-537-3406. The access code for both numbers is 3583409. You may now disconnect. Everyone, have a great day.