Earnings Call: Q3 2018

Nov 6, 2018

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Chemical Corporation Third Quarter 2018 Earnings Conference Call. During the presentation, all participants will be in a listen only mode. As a reminder, ladies and gentlemen, this conference is being recorded today in November 6, 2018. I would now like to turn the call over to today's host, Jeff Holly, Westlake's Vice President, Treasurer. Sir, you may begin. Thank you, Kevin. Good morning, everyone, and welcome to the Westlake Chemical Corporation Third Quarter 2018 Conference Call. I'm joined today by Albert Chao, our President and CEO Steve Fender, 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 this call, we refer to ourselves as Westlake Chemical. Any reference to Westlake Partners is to our master limited partnership, Westlake Chemical Partners LP and similar references to OpCo refer to our subsidiary Leslie Chemical OpCo LP, which owns certain olefins facilities. Today, management is going to discuss certain topics that will contain forward looking information that is based on management's beliefs, as well as assumptions made by and information currently available to management. These forward looking statements suggest predictions or expectations and thus are subject to risk or uncertainties. Actual results could differ materially based on many factors, including the cyclical nature of the chemical industry, 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 supplydemand balance for Westlake's products, competitive products and pricing pressures, access to capital markets, technological developments and other risk factors discussed in our SEC filings. This morning, Westlake issued a press release with details of our third quarter results. This document is available in the press release section of our webpage at westlake.com. We have also posted a presentation on our website to assist in the discussion of our results. That presentation is available as well on our IR home webpage or under the presentation section of our Investor Relations webpage. A replay of today's call will be The replay may be accessed by dialing the following numbers. Domestic caller should dial 8558592056. International callers may access the replay at 4045373406 The access code for both numbers is 8883922. Please note that information reported on this call speaks only as of today, November 6, 2018, and therefore, you're advised that time sensitive information may no longer be accurate as of the time of any replay. I would finally advise you that this conference call is being broadcast live through an internet webcast system that could 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 third quarter 2018 results. In this morning's press release, we reported quarterly net income to Westlake of $308,000,000 for the third quarter of 2018, or $2.35 per diluted share. 3rd quarter 2018 income from operations was $396,000,000 on record sales of $2,300,000,000 and our quarterly EBITDA was a record $580,000,000. We grew year over year sales volumes and EBITDA. This quarter's performance was a result of our team's focus on efficiency, discipline execution and our integrated portfolio of businesses. For the 1st 9 months of 2018, our EBITDA was a record $1,700,000,000 with $1,200,000,000 or about twothree being earned in our vinyl segment. We continue to experience very solid global demand for our products in both the vinyls and olefins segments. Our products are used across the wide spectrum of consumable and durable goods, and we are benefiting from the economic and industrial global growth in our markets. In the third quarter, Our vinyl segment continued to benefit from the performance improvement plan we initiated following our acquisition of Axio that has led to increased reliability, higher operating rates and lower production costs. In our olefin segment, our continued focus on reliability and safe operations delivered the highest quarterly polyethylene productions since 2007. We saw a strong starting production following the turnaround that was completed in May. We are excited about the growth opportunities in front of us. The most recent being the announcement to acquire NAKAM, a global PVC compounding business, which we expect to close early in 2019. NACAL is an excellent strategic fit with our existing business. We are the leading PVC compounding in North America, an account expense and our compounding footprint into 8 new countries and bring new products, markets and know how that we can continue to leverage. I would now like to turn our call over to Steve to provide more detail on the financial and operating results. Thank you, Albert, and good morning, everyone. This morning, we reported record quarterly sales, record quarterly EBITDA and record quarterly cash flows driven by strong operations strong year over year volumes, higher prices and solid demand. 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. Net income for the third quarter was $308,000,000 or $2.35 per diluted share on record net sales of $2,300,000,000. EBITDA for the third quarter was a record $580,000,000. Westlake's third quarter 2018 net income increased $97,000,000 compared to the third quarter of 2017 net income of $211,000,000 on sales of $2,100,000,000. Compared to the prior year period, net income for the third quarter 2018 benefited from higher prices for caustic soda and PVC resin, higher sales volumes for polyethylene caustic soda and PVC resin, lower purchased ethylene cost, lower effective tax rate resulting from tax reform and a one time gain of $14,000,000 or $0.08 per share associated with annuitizing certain pension liabilities. Partially offsetting these benefits were lower margin in our Olefins segment, driven by higher ethane feedstock cost. Our utilization of the FIFO method of accounting provides a benefit in periods of rising production costs compared to what earnings would have been if we reported on the LIFO method. Due to the recent volatility in feedstock costs, especially the large increase in ethane costs that occurred in September, We have estimated a favorable pretax impact of approximately $48,000,000 or $0.28 per share in the third quarter compared to what earnings would have been reported on the LIFO method. Later in my comments, I'll provide earnings sensitivity to ethane prices as we expect feedstock pricing remain volatile as new ethane fractionation capacity additions continue to catch up with demand. 3rd quarter 2018 net income of $308,000,000 increased $30,000,000 from the second quarter of 2018. As compared to the prior quarter, the third quarter 2018 benefited from higher sales volumes for all of our major products, including polyethylene, caustic soda and PVC resin as demand in all of these markets remain solid and will reflect tax rate of approximately 19 percent and the one time gain of $14,000,000 associated with annuitizing certain pension liabilities that I just mentioned Partially offsetting these benefits were lower integrated margins on our major products resulting from higher feedstock and purchased ethylene cost. Now let's move on to review $251,000,000 increased $37,000,000 from third quarter 2017 operating income of $214,000,000. Increase in operating income in the third quarter of 2018 is primarily due to the higher sales volumes and prices for caustic soda higher sales volumes for PVC resin and lower purchased ethylene cost. Vinyl's operating income of $251,000,000 for the third quarter decreased $20,000,000 from second quarter 2018 operating income of $271,000,000. Compared to the second quarter of 3rd quarter saw higher sales volumes for both caustic soda and PVC resin. However, These increases were offset by lower sales volumes for our downstream vinyls products as well as higher ethane feedstock and purchased ethylene cost. Turning to our Olefins segment, the polyethylene industry ran at high operating rates in the third quarter. As reported by industry consultants, the industry saw record demand for both domestic and export markets in the third quarter, which supported these elevated operating rates, even as new capacity entered the market. Reported operating income of $162,000,000 compared to $166,000,000 for the third quarter of 2017 and $158,000,000 for the second quarter of 2018 when compared to both prior year and prior quarter periods, the third quarter 2018 saw higher polyethylene sales volumes over both of those periods. Though these were offset by higher ethane feedstock cost. Now let's turn our attention to the balance sheet and statement of cash flows. As of September 30, 2018, we had cash and cash equivalents of $788,000,000 and total debt of $2,700,000,000. 3rd quarter 2018 cash flows from operating activities were a record $606,000,000, and we invested $195,000,000 in capital expenditures. Was $1,200,000,000. For the full year 2018, we expect capital expenditures to be in line with our previous guidance of $600,000,000 to $650,000,000. Throughout 2018, we continue to invest in attractive opportunities to grow our vinyls business and expand the value that we capture in 200,000,000 found VCM expansions in Geismar, Louisiana and Germany. In addition to these, we will be debottlenecking several other VCM and PVC plants along the U. S. Gulf Coast over the next several years that will expand our chain integration. We also expect to see the startup of the £2,200,000,000 ethylene plant being jointly built with Lotte Chemical in the first half of twenty nineteen. We have a 10% interest in the ethylene joint venture with an option to increase Additionally, the pending acquisition of NAKAN PVC Compounding Solutions business that we announced in September represents an excellent strategic fit with our leading PVC compounding business. All of these investments continue to improve the integration of our vinyls business that provides for additional value capture. We continually evaluate additional opportunities to invest where we believe they provide attractive returns and grow our earnings in cash flows. With a record cash flow from operations, we have not only invested for the future, but have also returned shareholders over $136,000,000 this year through share buybacks and dividends having raised our dividend approximately 20% in August. Looking forward to the fourth quarter into 2019, we expect to see continued volatility in ethane prices as prices may reflect the effect of new demand from the startup of new ethylene production facilities, which will be partially offset by new ethane fractionation capacity. As we've seen over the past several months, prices in ethane have been volatile. And due to the use of our FIFO method of accounting, there is typically a 4 to week lag period between when feedstock is purchased in windows cost flow through finished goods and affect our net income. Our ethane price for the rest of the fourth quarter if ethane prices for the rest of the fourth quarter were to remain at yesterday's average price of $0.35 per gallon, we estimate the adverse FIFO impact resulting from our ethane purchases to be approximately $25,000,000. As a reference, a $0.01 change per quarter in the price per gallon of ethane would have approximately $4,000,000 impact on cost for the quarter. For the fourth quarter, we expect a normal seasonal slowdown for PVC and some of our other downstream vinyls products. We expect domestic demand for caustic soda to remain strong in the fourth quarter. However, prices may trend lower as the market absorbs some excess inventory. Our 4th quarter turnaround and maintenance activity should be in line with the 3rd quarter, which includes the approximate $10,000,000 impact from our outage at our Plaquemines Facility in October. In 2019, our planned turnaround activity will be similar with 2018. The turnaround of our Petro2 ethylene facility in Lake Charles, Louisiana, which was previously scheduled for the second half of twenty nineteen has been moved to the first half of twenty twenty. While we benefited from a lower effective tax rate in the third quarter, continue to expect our effective tax consistent with our previous guidance. Before turning so far, the tariffs have not had a material impact on our sales volumes. This is due to our product mix, marks that we serve and proactive mitigation actions that we have taken. However, these tariffs will have an impact on the industry and our business in 2019 that they continue on their current path. On the other hand, if we see trade tensions and tariffs ease, it will be broadly positive for global trade, our industry our business. With that, I'll turn the call back to Albert to make some closing comments. Albert? Thank you, Steve. This quarter, we passed the 2nd anniversary of our acquisition of Axio. At its 2 year mark, we achieved cost reductions and synergies of approximately $275,000,000 per year. Thanks to the hard work and dedication of employees, we have improved reliability of our assets, reduced our costs, and are running our plants at higher operating rates. Our vinyl segment continues to benefit from solid global demand growth for caustic soda and PVC resin and integrated producers such as Westlake sit at the low end of the global cost curve. With limited global capacity additions. As Steve mentioned, we are actively investing a number of initiatives in Evinil's business. That positions us to continue to drive value creation, including the pending acquisition of NAKAN, our joint venture ethane facility with Lotte Chemical and increasing PVC production from debottlenecks in the U. S. And Europe. In our Olefins segment, we are very well positioned with the concentration of our polyethylene sales in the higher margin specialty polyethylene and flexible food packaging segments. The cost advantage position we have been experiencing seems the onset of the shale drilling revolution still looks very durable to us. While we have feedstock flexibility, We believe the volatility ethane costs we've recently seen are temporary. We expect this recent volatility to continue as new ethane fractionation capacity comes online. However, as there remains an abundance of ethane supply We see the U S continuing to enjoy a competitive cost advantage over the long term versus the producers using a higher cost oil based feedstock. We will continue to explore additional expansion opportunities and search for other acquisition initiatives that will deliver value to our shareholders. Thank you very much for listening to our earnings call this morning. Now, I'll turn the call back over to Jeff. Thank you, Albert. Before we begin taking questions, would like to remind you We will provide that number again at the end of the call. You. Our first question comes from Bob Pruit with Goldman Sachs. Good morning. This is Dylan Campbell on for Bob. We talk a little bit about kind of your outlook for caustic soda pricing? I know you mentioned that we might see some declines going into the back half of this year. But I guess in terms of Chinese environmental initiatives that really played a role in, right, putting upward pressure to caustic soda prices last year, Do you expect something similar this year? And then I guess generally looking into 2019, how are supply demand dynamics looking? For 2019? Sure. As far as the Chinese 2 26 initiatives, that was in place last winter. What we heard is that the Chinese government, central government are letting provincial governments and cities decide how to implement the reduction in production to reduce air pollution window time. So depending on the local governments act, as we understand, there was a conference in Shanghai for the export trade and some of the companies or plants in the Greater Shanghai area was asked to reduce the stop production for many days to improve air quality in Shanghai. So I think governments in China, Central Or governments are sensitive to environmental issues and want to improve the quality environment. But we also understand their issues for employment, production and business. So it will be a balance going forward. But as I understand, this will not be a mandate from the central government, but be more of the local governments. As far as the caustic is concerned, I think usually winter months is a slower month. So we will see as Steve mentioned, some pricing pressures on caustic, both in domestic and export wise. But as we're going forward with continued economic growth both in the U. S. And globally and with the lack of new capacity being built, we see a future demand supply balance very favorable to the coffee business and to our vinyl segment. That's helpful. And then on PVC prices, I know a lot of consultant data shows flat sequential pricing movements from third quarter from second quarter 'eighteen versus third quarter 'eighteen. I'm a little confused because you noted that there's lower prices versus second quarter of 2018 in your variance, commentary on the release. Can you help me if I understand the dislocation between those two items? I understand that, you know, there might be some tempering or declines export rate. So maybe that can explain a difference, but I was a little confused by kind of your commentary on the release. Are you asking about year over year or quarter over quarter, don't? Sequentially quarter over quarter? Yes. And so when you think about it, we've had the biggest driver here is the higher ethylene cost, the purchased ethylene cost here that pressured the results We had higher cost of soda volumes, as I noted, but we also had higher purchase ethylene cost in the quarter. That's those were the key drivers in the vinyl segment. Thank you. Okay. You're welcome. Our next question comes from Stephen Wright with Bank of America. Hi, thanks. This is Ian on for Steve. Hi. In the Olefins segment, volume has been declining for the past 2 years or so. And this third quarter was the 1st quarter with kind of a larger volume increase Can you explain a little bit about what's been driving the volume declines and the volume increase this quarter? And then what do you expect for volume growth or decline moving forward? And I would say that the volume declines were more related to normal maintenance turnaround and product wheel changes as we are swinging our product from one grade to another nothing systemic whatsoever. And I think you you picked up the comment that I made that we had higher polyethylene volumes in this quarter over second quarter. As well as year over year. So nothing I would say systemic at all related to that, really just a product wheel change and timing of certain maintenance activities at the sites? Yes. We've built up some inventory early on preparation for our polyethylene plants turnaround. So when the turn on is over and we have inventories to supply and demand was strong. Usually the third quarter usually is highest demand quarter for polyethylene. So we had inventory and demand strong, so we had good sales. Okay. Thank you. And for a follow-up, in the vinyl segment, if cost soda and PVC prices were to stay where they are today, would the vinyl segment have higher or lower EBITDA next year? Well, we are gradually expanding our capacity. Some will be coming on next year and some coming on following year. So if the margin and prices assuming our ethane ethylene feedstock costs remain the same, our sales price remain the same, then our EBITDA will improve with increased production sales volume. Thank you very much. You're welcome. Our next question comes from John McNulty with BMO Capital Markets. Hi, thank you. This is Pavesh Laddaiya for for Sean. I asked for the color on morning Thanks for the color on the accounting around ATA. Just outside of that, I'm curious if you did something differently in terms of changing feedstocks or sourcing, maybe contracting ethaneethylene in the past quarter and if there are any such plans to do in the near future is given that you expect volatility in the interest to continue? Okay. Let me make sure I understand what you're saying, as of this way. So, the industry has a limited feedstock flexibility. 70 to 80% of the industry ethane based purity ethane base so that some can crack propane or butane and naphtha and the gas oil. So when the ethane price went up, industry players are more flexible, especially the older plants, they'll switch to other product but many of the plans and new plans are all ethane based. So that flexibility to switch fee stock is not available. Ethane last quarter has been into October has been quite volatile it went up almost three times from $0.20 to $0.68. And then as quickly when that came down to $0.30 something. So we don't quite understand the volatility, but also there are mechanisms in place that would switch people's way of operating and feedstocks so the price came down. And as Steve mentioned that we expect volatility to continue going forward. We don't know what expect how wide the swings would be, but since we don't know what impact or certainty will be that we just want to have caution that this could be a quite volatile cost going forward. Got it. But you don't expect to do something differently for your assets just in the near term? Well, as a primarily Atsame base, we do have some flexibility to switch or swing plus limited but also even with, you can crack propane or some building propane costs are still higher than ethane costs. Got it. Got it. And on a separate topic, like, can we discuss your views on just the U. S. Housing market today? Are you seeing any kind of slowdown or any difference in terms of what demand you expected for your products versus just your expectations? And if you could share just to base this outlook for this end market? Well, as we think about housing today, we're certainly entering a period seasonally where construction begins slow, but we have noted certainly some labor increases and labor availability for starts come into the marketplace. And certainly it's had some drag on the ability to start homes at the level people would expect And I've had as I noted in my comments, it has had some impact on our vinyl products volumes during the course of the third quarter as well. But as we look forward, we continue to see a good market, but certainly some of the drags on labor availability has had some impact on the level of starts. Great. Thank you. You're welcome. You're welcome. Our next question comes from Mike Liza with please. Good morning guys. Good morning. This is Albert. Could you maybe expand a bit about what NAKAN adds to your PVC this? And if the compounding business is a targeted area of growth going forward for you guys? Yes. Nicole, as one of the leading players in their markets in automotive, medical in the world. And they are in places in Vietnam, in China and Europe that we are not operating. So I think not only brings new products, technology to us, but also brings new markets and they have a large R And D department. So we will look forward to working our new colleagues and grow our total compounded business on a global basis. Great. That's helpful. And then maybe one Steve, if we think about 2019 versus this year, could you maybe frame for us the incremental volume we should expect from new projects or debottlenecks starting up versus what you have in the system today? Well, as you may recall, we announced the expansions of our facilities in Geismar as well as in Germany. And as Albert noted, some of those begin to start up in the latter half of twenty nineteen. We also expect the startup in the first half twenty nineteen of the Voati ethylene unit. And so you'll see both those two assets come into our volumes as we go into 2019. Our next question comes from Neil Kumar with Morgan Stanley. Hi. So just had a follow-up on your recently announced acquisition of NAKANTM Can you just help quantify the expected EBITDA contribution and margins on that business? And do you expect any synergies in the transaction? You know, when we when we think about the we've given some revenue, estimates for that, Neil, but we've not given specific guidance. I think as you look at compounding industry, you can get a sense of the kind of low double digit range of margins associated with that, that compounding business. And certainly, when you heard Albert's comments related to the NAKANTM acquisition, it brings us new markets and new products and we do think there'll be and ability to leverage that with our existing compoundings business. We haven't quantified the synergies per se though. I'd like to get the close and then we can delve into that further. Okay. That's helpful. And then, you also announced that you expanded this stock repurchase program Can you give us a sense of how you how we should think about the cadence of your buyback in the near term, given some reason we get in the stock price? Certainly, Neil, the and you see in the Q that we have acquired some shares through the share repurchase program. The program is an opportunistic style program. And certainly we think that we'll be active during the course of the coming quarters, but certainly it's an opportunistic program. But we certainly will move when we think the opportunity permits itself to act accordingly, but we don't have a particular mandated cadence on a quarter by quarter month by month basis from the board. Great. Thanks. You're welcome. Our next question comes from PJ Juvekar with Citi. Good morning. This is Eric Petrie on for PJ. Good morning, Eric. In vinyls, your volume growth flow to 0.7%, down from 9.1% year over year growth last quarter. Is that would you qualify as normal seasonality? Are you seeing advanced de stocking downstream in your vinyls due to higher ethylene costs? No, that's actually very consistent with what we've seen. In prior periods. And so when you're looking at the year over year results, we did have both higher volumes in caustic and higher volumes PBC resin. And so we certainly saw those year over year. But certainly when you think about quarter over quarter, 2nd quarter over 3rd quarter really just higher caustic. And certainly you begin to see some slowdown late third quarter, which is seasonally the tariffs and tax this year. Could you give us some examples of what you were doing? And then are those repeatable into 2019? Well, it mostly comes from looking at sourcing of materials and products that we use in our business. And certainly that's going to be an ongoing effort as you would imagine as we look and see the effects and sizes of the tariff that might be imposed. But that's I'm sure it will be an effort that we and many of the others in the industry will take to look to mitigate the impact of these by changing sourcing as need be. Our next question comes from Alexia Yrumov with Nomura Instinet. Morning. This is Matt Skowronski on for Aleksey. Could you just describe what your caustic outlook is medium and longer term? And then are you seeing any specific areas of weakness in the near term Well, if you look at the IHS forecast, domestic caustic, they are looking at potentially a $20 a turn drop in prices from the third quarter. And then next year, they are seeing a $30 a ton price increase in the 2nd quarter and that's it for all next year. So, at least from their point of view, there could be seasonality, weakness in the winter months, but next year looks quite robust. Thank you. Our next question comes from Arun Viswanathan with RBC Capital Markets. Great, thanks. Good morning. Good morning. Good morning. Good morning. Good morning. Good morning. Good morning. I don't know if you guys have addressed this, but there's been a large bifurcation in export markets in caustic soda as well. I think we're down back to below pre hurricane levels on export pricing. Could you just discuss that? I mean, what's your outlook? And has that kind of really influenced domestic caustic prices Is there any chance for cost to kind of recover? And then, yes, then I have one more on polyethylene as well. Thank you. Certainly. Well, as you know, one of our large caustic buyer in the aluminum refinery business is North, the Hydro's, Alunorte. They have some political issues. And as we understand, they were operating at half rates or less during the year. But as we also heard, they are planning to get back to more of a full production sometime next year. So the demand for caustic, we expect would improve over next year and hence the excess inventory in the system they are one of the largest bio of U. S. Gulf Coast based caustic exports. So where the excess capacity will be used up China, we see some slowing down Asia, because partially because of the tariff dispute they have with the U. S. So hence, Steve mentioned that its dispute continues in the current path then the economy slowdown could affect general commodity price and demand in Asia. On the other hand, if the disputes gets resolved or improved, that will help demand growth in Asia and China, enhance most commodity products. Thank you. And then on polyethylene, I guess just wanted to get your thoughts over the next, say, 12 months or so it looks like inventories are relatively manageable, maybe 40, 42 days. Demand has been strong by 6% this year. With some cost push next year, do you expect ethylene prices to be up and then similarly polyethylene price to be up this year? Well, if you look at IHS's just a projection, they're looking at prices next year to be up in the March and then come down in October, November. So it's relatively flat for polyethylene price next year. And I think it depends a lot depending on forecast for crude oil prices, as you know, rest of the world outside of U. S. And Middle East mostly naphtha oil based ethylene cracking, which feeds their polyethylene business. So crude oil prices remains high or higher than with more chance for polygon price increase in the U. S. And export market. If all full quarter price goes down, then it'll go the other way. Our next question comes from Asana Med with Allynbee Global. Good morning, Al. This is Steve. Good morning, Don. Good morning. I just wanted to go back to comment that you just made about the cost curves and the like for ethylene and polyethylene, as we take a look at the last couple of quarters, obviously, the marginal guys continue to be the naphtha based producers overseas. And the high end of the cost curve linked up pushed up by higher crude and natural prices, right? Now over the last couple of weeks, we've seen a bit of an interesting dynamic where slowing auto sales, slowing tire sales. So due to dining prices have come down and have come down pretty hard. So on one side, you had the cost curve going up, on the NAFTA side of things because of higher NAFTA prices. Now it seems the co product credit that the Napster based guys we're getting from butadiene seems to be coming down. So what does not mean that above and beyond the push from higher naphtha, the core product credits dwindling will push the cost curve even higher making the sort of ATM based advantage even more advantaged? You're absolutely right. I think maybe it's partly China Asian demand for many of the commodity products are slowing and people are going through inventory adjustments And, certainly, the last recently oil price last few weeks or months oil price come down from the recent highs. So we're entering into the fourth quarter and slower months So supply demand balances lean towards more commodity price being coming down. I think the tariffs a settlement of the tariff also has an impact on that. So you're absolutely right. In that case, so long ethane price does not go up back into the high range again. I think the SM based feedstock of the U. S. Be more competitive with oil based feedstock overseas. Understood. And as a follow-up, Albert, coming back to the NAKAN acquisition, obviously you guys seem to be getting deeper into compounding business. So a couple of things. One is, what do you guys see in terms of compounding based valuations that because it seems obviously those companies tend to trade at a higher multiple than a typical commodity chemical business. So that's one. Associated with that, it seems other commodity chemicals producers are also looking for acquisitions in that space. So, how should we be thinking about the valuation side of things within the sort of compounding business And as you get larger over there, again coming back to the multiple side of things, is there a thought process to maybe you break out your compounding business as a separate segment to maybe potentially garner a positive valuation relating? Well, Hassane, as we think about the vinyls segment that we have today, you are right. It includes not only our compounding businesses, but also the other vinyls products businesses, which are deciding the trim, the fittings in our pipes business. And so as we think about that and getting bigger with the addition of NAKAN, it would be my expectation that we'll think about segmentation of that in the 2019 time period to give more visibility to that because I think it is a very solid business with higher valuations associated with it and I would like to give more visibility to that business. Well, thanks so much, Steve. Okay. You're welcome. Thank you, Hassan. Our next question comes from Kevin McCarthy with Vertical Research. Good morning, Albert and Steve. Good morning, Kevin. Good morning, Kevin. Would you comment on the cost associated with your 3 year option So Kevin, our cost is, rather straightforward. It is the total installed cost of the facility for that asset. And then a single digit rate of interest to carry cost, if you will, for the reimbursement of them, of Lotte, while they constructed and financed that facility. So it's really just this total installed cost plus a single digit rate of interest on the construction cost. Just to clarify at one time, I think that cracker was expected to cost about $1,900,000,000 is that still a reasonably accurate number or has it changed? Lotte has said publicly that it was about a $2,000,000,000 investment. Very good. And then secondly, you've made a lot of progress deleveraging the balance sheet over the last six quarters, including taken out $305,000,000 in the third quarter of 2018. Obviously, we saw the $265,000,000 investment PBC see compounding. How would you characterize the M and A pipeline looking beyond that deal? And do you intend to deploy the balance sheet for additional compounding acquisitions or perhaps in other areas? We continue to look at opportunities kind of across all of our various businesses and it's been always a fairly active effort, here at the company. And so we don't necessarily focus on only areas such as compounds, but look at all segments of our business I'd say the market still is active. Valuation still remain elevated. So we're certainly selective in terms of where we think our capital can be deployed to generate a return that is going to be commensurate with the risk adjustment that we put on that So certainly we're selective where we can find opportunities, synergies and value, going forward. But I would say that we continue to look and we always have. You can see our history has grown both through acquisitions as well as organic growth opportunities. Understood. And then last one, if I may, do you have any outages foreseeable in the fourth quarter, aside from the $10,000,000 you referenced at Plaquemines in October? Our turnaround schedule, Kevin, will be similar to what we saw for the fourth quarter, similar to what we saw in third quarter, so that $10,000,000 is just reflective of the unplanned outage we had in Quackerman. But if you leave that into the 4th quarter, our numbers for the fourth quarter would be very similar to those normal activities in the third quarter. Our next question comes from Jonas Oxgaard with Bernstein. So with the knock on acquisition, I'm glad to say you're finally getting into the yoga mass market. But on the TPE side of this, is that something that you guys have done before or is that an opportunity you're excited about or is that just sort of something that came along for the ride? And then as a follow-up, capital, cattlegate, they had a bunch of other PVC in their portfolio of alpha cluster, something like that. But that was not including the acquisition. What made you pick and choose Yastnakan and not these others? Well, back to your earlier question about TPEs, certainly it was part of the group of assets that Opengate was in the process of divesting. And certainly it's an opportunity we mentioned it brings us into new markets and new channels and this is a new channel for us. And as we think about opportunities, whether it be through sellers such as Open Gate or others, we'll look at opportunities that fit our portfolio and bring value that we think we have synergy associated with. And we think this NAKANTM acquisition is a very good fit with our compounding business. As you noted, it brings us into a new product mix with TPEs added in, but also into new geographies. Okay. And also then when OpenKit acquired it, if I understood it correctly, the logic was it was going to be integrated with some upstream PVC production that they had bought earlier. Now they're selling it within without any of that integration, How should I think about that? I mean, was that just a failed idea from their part or was it unnecessary and how will you source your upstream material? So Jonas, I can't speak to what Open Gate strategy might have been at that time, but I can tell you that we certainly see opportunities to continue the value proposition that we see with NAKAN and certainly the as you know well, we have a footprint in Europe with our XENALLET business. And certainly other commercial arrangements with others. So I certainly see a continued value proposition that NAKAN will continue to bring. Okay that makes sense. Thank you. You're welcome. Our next question comes from Matthew Blair with Tudor, Pickering, Holt. Hey, good morning Steve and Albert. Steve, I believe you said CapEx of $600,000,000 to $650,000,000 for 2018. Any early thoughts on CapEx for 2019, excluding what you may pay for the Lotte investment? And also, is maintenance CapEx for the total business still in the range of about $300,000,000 to $400,000,000 annually? So our CapEx budget for 'eighteen is in that $6,000,000 to $650,000,000 range and we have not yet fully developed and approved with the board our 2019 capital guidance. So we'll give that once we've done that. And our maintenance run rate of CapEx is more elevated than what you noted just a moment ago. It's probably in the $500,000,000 kind of range. Got it. Thanks. And then circling back to the comment on the axial synergies, I think you said $275,000,000. At one point, I believe you're thinking more like $100,000,000. Could you walk through the moving and just how you were able to realize, additional synergies compared to your original estimate? Yeah, our regional estimate was really two pieces. It was $200,000,000 in total, $100,000,000 of synergies and $100,000,000 of cost reductions. And so as we've continued to think about and delve into the opportunities to drive additional cost reductions and synergies, that number has grown from $200,000,000 to $100,000,000 in each of those two buckets to $275,000,000. And so we've been very pleased and certainly we'll continue to see if there are other additional opportunities for synergy or cost reduction, but we think that 2 years now post the transaction that this is a pretty good run rate that you expect. Our next question comes from John Roberts with UBS. Thank you. With Eastman switching away from ethylene at Longview, Is importing over the pipeline of viable long term solution for you, or do you need to look into other alternatives? Well, John, certainly as you know, well, the pipeline that we have from the Gulf Coast up to those assets in East Texas is an ethylene pipeline and we can certainly either use ethylene on-site and buy it at agreed prices or we can move it up the pipeline that, that exist and service that polyethylene asset. So we don't see any actions that Eastman may take is impactful to our business. And then secondly, I think IHS has shown some data that ethane could be added to absolute tightness as the loading cracker is starting up. Is there any chance that cracker would be pushed out a little bit in the event that the market was very, very tight at that point? Well, I think there's a lot that goes into the decision process and there's a lot of certainly around when existing and for a longer horizon than any particular moment. So we'll assess the opportunities. But frankly, as you can imagine, it's been an important investment that the joint venture has made and we're looking for the long term value creation and the timing of fractionation startups and demand from additional crackers is uncertain until those plants run-in startup and run at elevated rates. Okay. Thank you. You're welcome. Our next question comes from David Begleiter with Westlake Corp. Thank you very much. Albert, you've seen styrene margins come under some pressure of recent What's the view on styrene heading into Q4 2019 year? Yes. Styrene is a smaller part of our business. We've enjoyed very good margins. And some discussion of new capacity coming up in Asia next year or year after. But in the meantime, I think the U. S. Is still exporting country in Asia, primarily is importing country. So I think the the benefits from lower cost ethylene the U. S. Yield benefit, as the producer of starting for the global market. And Albert, just looking at polyethylene for next year, there's been some discussion of some prices diverging amongst the 3 grades. What's your view on that given various capacity coming on stream over the next 12 to 18 months? Well, as you know, there's a capacity coming on stream in the U. S. And some in Asia for ethylene and polyethylene. And we are focused more on the LDPE, the specialty side of of the 3 types of polyethylene. So I think we will be hopefully less impacted by the new capacity additions But in the end, the global economic growth would absorb the new capacities going forward, we believe. Welcome. Our next question comes from Frank Mitsch with Premium Research. Hi guys. This is Lisa on for Frank. Good morning. Hi. Regarding your pace of business through October compared to the third quarter, you comment on your volumes through the months and maybe, explain any hurricane related implications for you or competitors? Thanks. Well, we've seen consistent continued strong demand really in both the polyethylene space as well as in our vinyl space. Caustic. And of course, as we enter November December, PVC demand begins to seasonally slow because of construction. But caustic does not have that same degree of seasonality. So caustic has remained good and volumes have been reflective of that. And polyethylene continues demand wise continues to be very good, even in the mentioned in my prepared remarks, even in the face of new capacity At this time, the Q And A session has now ended. Are there any closing remarks? Thank you again for participating in today's call. We hope you'll join us again for our next conference call to discuss our 4th quarter and full year results. Thank you for participating in today's Westlake Chemical Corporation Third Quarter Earnings conference call. As a reminder, this call will be available for replay beginning 2 hours after the call has ended and may be accessed until 115 PM Eastern Standard Time on Tuesday, November 13, 2018. The replay can be accessed by dialing the following numbers. Domestic callers should dial 855 8592056. International callers may access the replay at 4045373406. The access code for both numbers is 8883922.