Good morning. I think we should start. Thank you for coming this morning, ladies and gentlemen, and welcome to the Westlake Chemical presentation. You can see the first slide in the box. This is our 2Q 2017 year-to-date results with sales EBITDA. Westlake is a leading integrated international materials company focused in the olefins and the vinyls businesses. The four points in our mission statement is very important. We wish to pursue profitable growth, really bottom-line growth. We are not focused on top-line growth, and we want to create value for our shareholders. We are focused in business we understand, namely the olefins and the vinyls business. We do business globally where we can gain an edge. Most importantly, we act in a financially disciplined and optimistic manner. I mentioned we are focused in the two business, olefins and vinyls. By olefins, we mean ethylene manufacturing.
We have three ethylene crackers, two in Lake Charles, Louisiana, and one in Calvert City, Kentucky. We are all ethane based. We will discuss a bit more. Ethane crackers with capability to crack some propane. Also, we are in the downstream polyethylene business. As you may know, approximately 60% of all the ethylene in the world goes through polyethylene. Our olefin business is polyethylene. We will talk about our position in LDPE, linear low. We also have a small styrene plant in Lake Charles, which is the newest styrene plant in the U.S., also the smallest. Our vinyl business starts from ethylene, chlorine, all the way to PVC. VCM is a precursor of PVC. We make VCM, PVC, we also have a large position in the, we call it building products or fabricated product business.
We have, on a pro forma basis, look at we probably will have close to a $8 billion revenue, on pro forma basis, our building products business is over $1 billion in revenue. So it is a sizable player in this market. Our polyethylene business focus on the packaging business, food packaging, as well as other packaging, including some of you may see Amazon deliver a package to you, inside the box, paper, the box, open up, you have these plastic cushions, bubbles, those are also our products. So we are in the food packaging, all kind of packaging business. The vinyl business, the majority of the vinyl business goes to PVC, the majority of PVC goes to construction. So we are in the durable side of the economy.
Caustic soda, which is every pound of chlorine you produce, you produce 1.1 pound of caustic. Caustic soda is a big product now for Westlake. We are the number 3 chlor-alkali manufacturer in the world, number 3 in the U.S. as well. Caustic is a very widely used chemical, from refining to wood, pulp, paper, to general uses, including making soap. On August 31st, 2016, almost exactly a year ago, Westlake acquired Axiall Corporation. We are very excited on this acquisition, mainly because of the synergy that brings Westlake. As some of you, being long-term investors, Westlake was primarily olefin-centric company. With the acquisition of Axiall, we become a vinyl-centric company. Approximately as a pro forma, again, approximately 70%-75% our revenue today comes from the vinyl sector of the business.
You see earlier that EBITDA, usually three quarter goes from olefins, and I think the last quarter, second quarter of 2017, EBITDA in the vinyl business exceeded the olefin business. The synergy not only comes from the similarity we have in the vinyls business, but also from the ethylene side. As I said, the ethylene goes pound for pound with polyethylene and for PVC. Half a pound of PVC is ethylene, the other half, or 0.6 pound, is chlorine. Our olefin business crosses over into the vinyl side. We have a JV today with Lotte Corporation of South Korea, and ethylene plant is being constructed. We have a 10% ownership right now. We have option to acquire up to 50% of this joint venture, and the option expires three years after the plant start up.
The estimated plant will start up in the first half of 2019. The option we can exercise all the way to 2022, on buying up to 50% of this joint venture. Today, Westlake is the second-largest buyer of ethylene in the U.S. If ethylene price is weakened, it will benefit Westlake from able to purchase low-cost ethylene. European market price ethylene is double that of the U.S. Asian market price ethylene is almost double the U.S. U.S. has the cheapest ethylene today, so we are very competitive in terms of competing with European, Asian vinyls companies. We have a history of strong value creation and profitable growth. This chart shows capacities. The green bar shows capacity, olefins business, and the gold bar shows capacity of the vinyls business. We grew by both organic and inorganic means.
Inorganic is acquisition, organic is by building our own plants and debottlenecks. With the Axiall acquisition, for the last 30 years, the compounded average annual growth rate is 17.5%. This is not by design, we want to grow at this rate. We just show that happened to be history, this is what happened. We focus really on the bottom line growth, and this is what's important to us. I just mentioned, this shows the integration of our business. The green boxes shows olefins, ethylene, polyethylene, and styrene. We have the joint venture in the dashed box. The bottom shows our vinyls integration from chlorine, ethylene, caustic soda. We have a kind of purple box that shows the chlorinated products. The old legacy, Westlake, who are balanced in chlorine and ethylene with all the expansions we had. Chlorine goes to our PVC.
We don't sell chlorine to the merchant market. Whereas Axiall, through its acquisition of PPG was one of the largest merchant sellers of chlorine and its derivative products, non-vinyl, non-PVC. We are a large player in that. Chlorine not only goes water treatment or into the TiO2 market or urethane market, also goes into chlorinated solvents and feedstock for refrigerants, precursors, and as well as water purifications and water treatments. On this slide, we just want to show that the feedstock for the olefins business, which is mainly NGL, some ethane, propane, are supplied from the various shale regions over the U.S. and North America, whether it's from Permian, which is the hottest area today in Texas, or from the Marcellus area, northeast of the U.S., or from the Bakken areas.
Various pipelines has been constructed and under construction to bring the feedstock down to the Gulf Coast, where the demands are. The circle shows that two-thirds of global ethylene feedstock are now ethane-based. On the middle circle, the pie chart shows for Westlake capability, we have about 25%-30% capability to use non-ethane-based propane or butane. Right now, because ethane is the best feedstock in the U.S., we are 100% based on ethane. The bottom pie chart shows in Europe, we are a buyer of ethylene, and ethylene in Europe primarily is Naphtha-based. We have mentioned advantage of polyethylene position. On the pie chart on the left shows globally, about 200 billion pounds or so of 2016. LDPE only represent 22% of the global polyethylene capacity.
There are 3 types of polyethylene: high density, which is the green, the largest of the polyethylene, and then your linear low, which is the gray area, and dark blue is LDPE. For Westlake, 58% of our capacity is LDPE, the rest is linear low density. Why we like that position? You can see the bar charts on the right, that from 2002 to 2016, 15 years average in the U.S., LDPE has a $0.077 a pound higher margin than linear low and $0.05 a pound higher margin than high density. In the last 5 years, that has even moved up to $0.084 a pound and [$0.0610] a pound. LDPE, it's made typically under much higher pressure from 20,000 to 40,000 PSI. It's expensive to build these heavy steel plants containing the pressure. Also with heavy steel walls, heat transfer is less efficient.
It's expensive to produce a pound of LDPE and the investment cost is also expensive. High dense, linear low, have taken over a lot of the low commodity or low price markets of LDPE. LDPE has to find its way into specialty copolymer, specialty applications. As the economy grows, the demands still grows, but very little capacity has been added in the LDPE, hence the margins improve in the LDPE. In this slide, we just shows the Westlake 50 odd % of our polyethylene LDPE, where you can see the other competitors. The LDPE is at 20% or less. The chart on the right shows that globally, there's 2 types of technology to make LDPE, the autoclave process and tubular. The forecast by 2020, the bottom line shows by in 2020, only 33% of world's capacity is autoclaves, whereas Westlake is 80%.
The difference is the autoclave, again, makes more specialty among the LDPE. It makes more specialty LDPE, whereas the tubular makes more the commodity grade of LDPE. In this slide, it shows the capacity increases around the world. This is not just the U.S. Again, the blue bar is LD, gray is linear low, and high density is green. You can see historically very little capacity added, but since 2016 and 2017 to 2021, there's more LDPE capacity added because the demand for LDPE is strong and the margin's good. Almost all this LDPE capacity added is the tubular, the more commodity grade. If you can see those 2 lines, one line is a one-time GDP forecast for historical and forecast for the global GDP growth. The purple line is one and a half time GDP growth, and this is the forecast, the OECD's forecast.
You can see that even with the new capacity added in LDPE between 2017 to 2021, if GDP demand growth is more than one time GDP, again, LDPE capacity is not sufficient to satisfy the demand. This chart shows the global footprint for Westlake, and the light blue stars is the Axiall's position. They are in the U.S., also have two joint ventures, one in Taiwan, chlor-alkali, and the other one is India, a joint venture in PVC compound business. The dark blue stars is the legacy Westlake position, both in the U.S. and our position in Europe, is the Vinnolit business that we acquired about three years ago, and they're the leading, largest global player in the specialty PVC business. Certainly, we have another PVC plant in Shanghai, in China.
We've been there for 20 years, and we are one of the high-quality PVC downstream film and PVC manufacturer in China. This chart shows the material flows for the vinyl business that is discussed a bit earlier. You have caustic and chlorine and manufacturing, and chlor-alkali manufacturing, and the chlorine, along with ethylene, goes to EDC, the first step, and then VCM, second step, and to make PVC. For Westlake, also the chlorine goes into chlorinated products we talked earlier, as well as PVC and the building products that we produce. What's interesting is the two pie charts on the right. The top pie chart shows over the last cycle, probably about 10 years, that if you look at tons of pricing in the U.S. on market price basis, the majority of the vinyls chain margin resides in the raw material side, in ethylene and chlorine side.
The chlor-alkali margin, that including the caustic value as well, is 52% of the pie. 39% is ethylene, only 9% is making PVC, both on EDC, the VCM, the PVC. The last five years, on the bottom pie chart, shows a change somewhat. Ethylene had higher market share, pie chart share of the pie of profits, 47%, and chlor-alkali is 43%. Again, the VCM PVC is only 9%. Well, this is the cycle average, but I think last year even the PVC chain was at best neutral, maybe some even negative, if you transfer price at market prices. We are seeing the margin recovery with no new plans announced in the world for chlorine or for PVC, that we see that demand is still growing on GDP basis for PVC, one and a half times.
The supply is limited, unlike the polyethylene business, where as you know, a fair amount of 30%-40% of U.S. polyethylene capacity added in the next five years. Whereas in the vinyls, as far as we know, there's zero capacity announced. It takes typically three, maybe four years to build a new vinyls chlor-alkali plant and PVC plant. We have, for the next three, four years, a pretty good run rate in terms of margins going forward. This is not just the U.S., it's global. Global demand is pretty big. If there's no new capacity added, the global demand would also increase global margin, which would affect the U.S. as well. This chart just shows position that I mentioned earlier, that our PVC in North America is number 2 ranking capacity-wise, and we're number 3 on a global basis.
In chlor-alkali, we are number three in North America, and along with our European, Asian capacity, we are number three also globally. I mentioned earlier our Vinnolit acquisition that we made three years ago. They are the world leader in specialty PVC manufacturer, and we have six plants in Europe, and many PhDs, doctors. And specialty PVC does not focus solely on the construction. They are in the wall covering or vinyl flooring type, but it also goes into medical things such as blood bag and medical tubings, artificial leathers for car interiors, textile coatings for example, tarpaulins for trucks. The roofs of the London Olympic Stadium, some of you may have seen it, that roofs where the lights come through is PVC-coated fabric. And also in automotive coating, underbody rust-proofing, most of them are PVC-based for cars.
It's a very broad application, both consumer, and not focused solely on the construction side. This slide shows the global PVC demand. You can see that before the housing meltdown, the U.S. global PVC demand, the blue bars, are going up in a nice fashion. And then 2008, it dipped. The dip mainly is because of U.S. housing meltdown. The housing meltdown impact primarily in the U.S., I don't think had much impact on other parts of the world. You can see since 2010, global demand has come back to the pre-meltdown and continue to grow. The red line shows the export. U.S. before 2008, U.S. export around 10% of its production because most of the rest is of internal demand. As you may recall that the all-time high for residential units construction, both single-family and multifamily, they reached 2.3 million units, I think 2006 and 2007.
It dropped 80%, dropped to 400,000 units, 2008. And today, we're talking about 1.1, 1.2 million units. The 50-year average in the U.S. of residential construction is 1.5 million units. We're not back at the 50-year average yet, and if you grow by 100,000 units, it takes another three years to get 1.5. Meanwhile, the U.S. vinyls capacity, because of low cost ethylene and low cost power, we are able to compete global basis. About 30% or more of the U.S. PVC is exported, and the forecast by IHS is still staying that range. The U.S. become a big supplier to the global vinyls demand. And if the residential construction does come back, we should see more consumption in the U.S. With that, I'd like to turn over to Steve to go through some of our financial information.
Thank you very much, Albert. Let me just say that over the next few slides, we'll talk a lot about our financial discipline approach to the business. You'll hear me talk a lot about the balance sheet, certainly the benchmarks that we look at as we move our business down the path, EBITDA margin, return on capital, and return on assets. Of course, I want to also highlight the fact that we've gotten final clearance from the IRS for our master limited partnership and moving forward on that front. A key element of our philosophy is prudent reinvestment of capital and the realization of an efficient return on that capital. In just a few minutes, I'll spend a bit more time on some of those metrics. The chart that you see here shows that we prudently invested capital through the addition of new expansion of assets.
You can see here through the green bars I've highlighted our olefins expansions and ethylene. The yellow bars reflect investments in our vinyl segment and gives you just a sense of the commitment that we have to continue to grow this business, but always with a focus on bottom-line value growth, whether it be through acquisitions, through debottlenecks, or other opportunities to bring value to our shareholders. Moving on to the balance sheet, you can see the chart here shows debt to cap for the last 10 years. You can see that Westlake has consistently been less leveraged than our peer group, yet during the same period, we've continued to deploy a very significant amount of capital, over $6 billion, in our business, and profitably grow the business. We didn't overextend ourselves as some did during that same time period.
Even now, even after the acquisition, you can still see that we still have below an average level of debt versus our peer set. The implications, I think, are really quite clear. We have the ability to fund our growth on a continued basis. We have the patience and the discipline to continue to invest where the risk-reward trade-off is there. The chart you see at the bottom shows that we've consistently maintained investment-grade ratings and continue to be very focused to make sure that those remain in place to allow us to continue to grow the business as we see the opportunities arise. Earlier, I mentioned some of the metrics that we use in our business, and here I'm showing three of those, showing return on assets, return on capital employed, and the EBITDA margin.
You can see the left chart shows that we're putting those assets to work much more efficiently than our peer group and generating returns above our peer set. Some of those peers are not commodity peers as we. The middle bar shows that we're achieving those margins with much less capital employed, and the bar on the right shows our average EBITDA margin is better than our peer set. I'd attribute those really to our focus in growth, expanding our chain margin, the advantage feedstock that Albert just mentioned, and of course, the product mix that we have, which includes a variety of specialty products in our autoclave low density space, our Vinnolit product mix, which has the emulsion paste-based business, and of course, through the acquisition of Axiall, the building products business, which has a nice, stable business in its building products businesses.
I thought what I'd also do is highlight that in January of this year, the IRS released their final regulations, which reaffirmed Westlake's originally issued private letter ruling and shows that our businesses are in fact qualified to continue and, of course, as we march down this path, continue to grow our business opportunities through the use of the master limited partnership. This chart, which you see on the left, is a bit more complex than a typical C corp structure, but it shows that we created a company called OpCo, which we contributed our ethylene assets into. That operating company, OpCo, has an ethylene sales agreement with Westlake Chemical, which provides a very stable fee-based cash flow stream to OpCo. It provides a $0.10 per pound margin for every pound produced. Of course, the master limited partnership bought a slice of the ownership of OpCo.
Provides, therefore, for the master limited partnership, a very stable fee-based income stream to allow it to make distributions on a regular and growing basis. You can see that we've got still 87% of the OpCo company still to drop in, so provides a very long runway of capacity. Of course, through the structure we've created, Westlake Chemical still owns 52% of the partnership. You can see to the far right here in the lower right-hand corner, I've got the four levers of continued growth. Organic growth opportunities, we, as I mentioned, have expanded our ethylene crackers steadily over the last several years, completing one of those just recently in Calvert City this year by adding 100 million pounds of ethylene capacity. We completed an expansion last year as well in Petro 1 by adding 250 million pounds of ethylene capacity, we'll continue to assess opportunities.
You can see that the second opportunity to grow is through periodic drop-downs. As I mentioned, we still have 87% of the operating company yet to drop in. To continue the growth of the earnings stream of the partnership and to continue to grow the partnership's distributions, a drop-down would certainly be a nice way to make that happen. The third bullet point you see is acquisition opportunities. Albert noted we have a joint venture with Lotte, who's building an ethylene plant in Lake Charles. We have a 10% current ownership of that facility with an option to buy up to 40% more at our choosing up to three years post-completion, which would be in 2019.
That would be a perfect type of asset that could be acquired by the operating company, OpCo, that would allow us to then sell a portion of that ownership of OpCo again into the partnership to grow its distributions. Lastly, you can see that through that ethylene agreement, as I mentioned earlier, where it's getting $0.10 a pound for every pound of production at OpCo, certainly through mutual negotiations, that margin could be expanded over time. It's a 12-year contract, still with a lot of runway to it. You can see we have four important levers to be able to grow this, and it's the perfect vehicle to provide us a means to continue to fund the ethylene requirements that Westlake has or any other future needs that Westlake Chemical might have.
You can see through the significant investments that we've made to expand and integrate our platform, it's continued to bring enhanced margins. That chain integration that Albert spoke to. You can see the items that we've previously talked about have really continued to drive the EBITDA. What I've shown here is the EBITDA base in 2013 and the series of either investments or debottleneck opportunities that we've taken over the last several years to continue to grow our business and the EBITDA. Having just recently completed one of those steps just this year with the expansion of our Calvert City facility, adding additional ethylene. These are just a few of the important integration projects that have continued to propel our EBITDA, again, you can continue to see that as we see opportunities, we'll certainly pursue those, but only those that really provide ongoing value.
Let me pause here, and I see we've got about five or six minutes for questions, and take any that might be from the audience. We've got a mic here, so if just raise your hand, and he'll hand you the mic for questions.
Can you go over the maintenance schedule for the back half of the year?
I'm sorry, go ahead and repeat that. Sure. Just the maintenance schedule and the outages in the back half of the year. Just to kind of level set everyone, as a result of the acquisition of Axiall in August of last year, there was a lot of deferred maintenance on those assets that we knew we'd have to undertake. We started last year, and I've given guidance for the year in terms of the kind of beyond normal maintenance activities. The question was really the continued above normal maintenance activities for the remainder of the year. What we've said is it'll be a total for the second half of the year of $50 million of non-normal maintenance activities, split 25 in the third quarter and 25 in the fourth quarter. In the second quarter, we had about a $64 million effect of that.
Again, that's maintenance expense and lost sales as a result of that activity. In the first quarter, about $69 million of, again, lost sales and maintenance expense result of trying to bring these assets up to the Westlake operating standard.
That number could be lost sales and?
That number is maintenance expense and lost sales while we undertake the maintenance work.
Based on margins as of the end of the quarter?
Based on margins as we expect them to occur. Further questions? I know it's early. We've got one right up front.
Yes. What's your thought on your capacities on polyethylene in the next year or two?
Go ahead. Well, I think you saw that from some of the slides, in fact, Albert spoke to this just a few minutes ago. You can see that while we have a number of capacity additions, this is a global chart showing polyethylene capacities globally. I've broken this chart down by grade of polyethylene, the blue being the low density linear and high density. You can see that with this is OECD's forecast of global growth. You can see that orange line is one times GDP, and that magenta or purple line is one and a half times. We're seeing polyethylene growth globally Between one and a quarter to one and a half times GDP.
Certainly, some of the industry forecasters like ChemData or IHS are expecting that a lot of these new plants start up late this year or early into 2018, 2019, and with that could come a margin compression if it all comes as planned. You can see from this chart that actually in the period here from 2017 to 2021, the industry on a global basis has not been oversupplied. What you really see here is really just a timing issue of when that capacity comes into the market, and that's an uncertain call versus global growth. I think the expectation that we've seen in demand growth that you can see here, that we're really not, on a global basis, oversupplying the market whatsoever. There's another question? Oh, okay.
Could you speak to the ability of substitution within the polyethylene market, the tubular for autoclave or HDPE for low density, should you get too much capacity that comes on all at once?
Yes, certainly. HDPE is a very different product. It's opaque, it's stiff. It fits its own market. Whereas linear low, over the years, I think Union Carbide invented the gas phase linear low back in the '70s. Through the '70, '80, '90, and so on and so forth, has taken a lot of the growth of LDPE. It's stronger. It's also more opaque, less transparent than the LDPE. Yes, there's a metallocene catalyst-based linear low that could take some of the business away. By and large, it finds its own niche. Between the tubular and autoclave, there's different technologies. They really make different products. Tubular, again, is somewhere between linear low and low density. It's stronger in terms of tensile. It has other problems, and the clarity, again, is not so good.
We talk about coating grades that people have tried for blends and different grades of tubular, whether they can replace autoclave coating grades. So far, they have not been successful on a big scale. Maybe some areas, some lower quality areas. This is what we expect going forward.
Could you talk a little about the operational improvement initiatives you have at Axiall? Maybe you described the synergies relative to, I think, just the core performance improvement initiatives you have. When we could actually start to see those benefits accrete to your P&L.
Yeah. There are really several buckets of opportunities here. We've indicated that both combination of cost savings and synergies, that in 2017 we'd achieve a $120 million of the total targeted $200 million of synergies that we think we'll achieve by 2018. Those are separate and distinct from the operational improvements that I believe we're going to achieve by improving the reliability and operability of the assets that you see us undertaking today. That initiative started actually last year as we started doing a lot of catch up on some of this deferred maintenance.
Those are two separate buckets. As you see, the maintenance expense and the lost sales while we're performing that maintenance, those are opportunities to really improve reliability and performance of the assets that improve operating rates over time as we do this work throughout 2016, 2017, and there could be some spillover into 2018. Separate from the cost reductions and the synergies that we are achieving now for the 2017, as I said, $120 million this year, an additional $80 million to achieve that total $200 million savings by 2018. Yeah. I see the clock has run out on us. Thank you very much. Should you have any further questions, as always, please feel free to reach out to us. Thank you very much for your interest.
Thank you.