Good afternoon. My name is Dave Begleiter. I cover Deutsche Bank's U.S. Chemicals Equity Research team. I am very pleased to have our next company presenting, Westlake Chemical. With us today is President CEO, Albert Chao, and CFO, Steve Bender. Back in 1985, Albert assisted his father and his brother in founding Westlake Chemical. He became President in 1996, and CEO in 2004. Steve joined Westlake in 2005 and was named CFO in 2007. With that, well Albert will make a few brief comments and some slides. We will go into the Q&A portion of the presentation. With that, Albert, it is all yours.
Okay. Thank you. Good afternoon, ladies and gentlemen, and thank you for spending time with us here today. Westlake is a leading global integrated materials company focused in the olefins and vinyls business. You can see on the box here that net sales for LTM, the first quarter of this year, is $6 billion. At the end of August last year, we merged with one of our industry vinyl business company called Axiall. The pro forma of based on last year's revenue that for next 12 months will have about $8 billion of revenue. I mentioned that we are focused in olefins and vinyls business. By olefins, we mean ethylene, polyethylene. We also have a small position in styrene. Ethylene also is a major feedstock for our vinyls business. As you may know, 50% of PVC vinyl is ethylene.
Ethylene cross over in both olefins and vinyls business. In the polyethylene business, which takes a pound of ethylene to make a pound of polyethylene, we are the largest LDPE manufacturer in the Americas, both North and South Americas. We are a leading position in this business, and we are focused the packaging business side of the polyethylene business. Both for food and non-food packaging. As you may know that if Amazon ever takes over the whole retail business, everything Amazon ships is in boxes. If you open the box, everything is packed in plastic bubbles for stability rather than the peanuts you see. All that is polyethylene. Inside a box, outside a box of paper is a large user of caustic and chlorine for bleaching and softening the fibers. We are in both internet business and as well as the materials business.
We are focused on the consumer non-durable side with our packaging business in polyethylene. In the vinyl side, that comes with producing chlorine, producing ethylene that is used for PVC. We also sell the byproduct of chlorine manufacturing that is caustic. Today we are the third-largest PVC and chlor-alkali manufacturer in the world. I will talk a little more about it later on. We focus on the largest part of PVC. The usage is for construction, whether infrastructure for water and sewer pipelines or for housing, building, whether it is conduits, electricity, sidings, non-deal or the delivery pipes. Excuse me. As housing market recovers in the U.S., as infrastructure construction goes on in the U.S. and overseas, we will be beneficiaries of that side. We are focused on the consumer durable side of the business.
Important also we said in our mission statement is that we are focused on profitable growth. We're not really focused on revenue, even I talk about our revenue. The revenue shows the ability to grow the business and to capture margins, but we are focused on bottom line growth. That's most important to us. Two, we are focused in business we understand, namely olefins and vinyls business. Three, we do business globally. We are the largest manufacturer of specialty PVC in the world, and that's based on acquisition we done in 2014 in Germany. The vinyls business we bought, then the combination of Wacker's vinyl business and Hoechst vinyl business. They are really the founder of the PVC business back in the 1930s. After many generations, they spun out the business into private equity, and we bought them private equity.
Today, we're the largest specialty PVC manufacturer in the world. We also have position in China, position in India and Taiwan, likewise in Canada. We are very global in our vinyls business. What most importantly also, we act in a financially disciplined and optimistic manner. We are incentivized by EVA, economic value added. We've been using the system by Stern Stewart for over 25 years. That pay us dividends going forward. As I mentioned, we acquired the Axiall business in the end of August 2016 last year. We are very much in the chlor-alkali PVC business. Combined together, I mentioned we are number three in PVC globally. We are number two, actually, in the U.S., and we are number three globally in chlor-alkali. Mentioned, we are still the number one LDPE manufacturer in North America.
Just having position of number one, number three is not that great. What's important, we are fully integrated in the olefins business. We are almost integrated in our vinyls business. On the chlorine side, actually, we are low in chlorine, which means we have potential to further downstream integrate. We are short in ethylene. As I mentioned to you, it takes half a pound of ethylene to make a pound of PVC. We do have a joint venture with Lotte Chemical Corporation that's building a new ethylene plant right in Lake Charles next to our plant, and we own 10% today, and we have the option to acquire up to 50% of that three years after the plant starts up. The estimate of the plant starting up is the first half of 2019. Within two years, we were able to reduce our purchase.
We are the second-largest ethylene buyer in the U.S. today. If people are concerned about ethylene price coming down with the new expansions, on the vinyl side, we're very happy about it. On the olefin side, we don't sell ethylene, so we don't care. We sell polyethylene. That's more important, polyethylene price and not ethylene price. In the short term, if ethylene prices go down, we are happy because we are buyers of ethylene. As mentioned, it really helps our integration strategy, and we believe that we are one of the most cost-competitive vinyl producers in the world. We have our own salt dome that we produce the salts brine ourselves, and we have over about 900 megawatts of cogen plants around the U.S., which supplies our power. We buy natural gas. It's very cheap in the U.S.
We have ethylene, whether it's our own production from our ethane crackers. We have three in the U.S., 3.7 billion pounds. We purchase ethylene. U.S. today, even though the ethylene expansion is not really up and booming yet, U.S. ethylene price is the lowest price in the world. Today's spot price ethylene in the U.S. is the mid-high 20s. Ethylene price in Europe is in the mid-low 50s, almost double the U.S. price. We know it because we are there. We are buying ethylene. Asian ethylene price is in the high 40s. The U.S. today still has the lowest ethylene price in the world. We are very cost competitive. As I said earlier, that we plan to further downstream integrate to the value-added products from chlorine down. We are diversified geographically.
As I mentioned, we are not only U.S., Canada, and Germany, as well as in Asia, in China, in India. Our goal is to realize the cost down and the synergy that we told the Street. We're looking at a $200 million combined cost down synergy. We're well on its way. We said in the last quarter conference call that we will realize $120 million of cost down synergy this year. We are on schedule to complete the $200 million synergy by sometime next year. Our goal is not to stop there. We continue to look for other synergies. Those synergies are purely from cost position. Those numbers does not include if we operate the plants better, that we are doing a lot of work in maintaining the plants. Also does not include margin improvements.
I want just to highlight that unlike the olefins business, we all know that the capacity coming up from Asia, olefin comes in the U.S. In chlor-alkali vinyl business, globally, we don't know any new plant being built in chlorine or PVC around the world. Maybe some debottlenecks, expansions, and no grassroots plants. As demand for polyethylene and PVC still grows globally, our GDP one to one and a half times GDP rate. If global demand GDP growth at 3% a year for foreseeable future, you could have 3%-5% growth in demand for PVC. Caustic also, demand is growing globally. Caustic typically follows GDP rate. We have demand growing and naturally capacity in caustic is being reduced in Europe because of the mercury cell problems they have by regulation, as well as the reduction capacity in the U.S.
I think we're in a very good position going forward in the vinyl business. This is just a pictorial of the history of Westlake from a capacity point of view. We don't want to list revenue because revenue includes inflation as well. Westlake, it was founded, I think David said 1985. The actual sales was started in 1986. Through the last 30 years, our capacity expansion grew both by organic, which means building our own plants. We built two of the three ethylene plants ourselves, styrene plants, chlor-alkali plants, and linear low plants. Most of the growth has been through inorganic acquisitions. We bought a [inaudible] in 1990, started the vinyl business. Suddenly, we bought CertainTeed specialty pipe plants. We bought the Eastman Chemical Texas polyethylene business. We've actually bought Axiall business.
We are prudent investors in that sense, we acquire plants that we spend a lot of resources, time to improve the operations and doubling, tripling capacity after acquisition. If you look at the compound annual growth rate after 30 years being 17.5% per annum for the last 30 years. It doesn't guarantee we will grow at this rate going forward. Again, we're not focused on top-line growth. We're focused on bottom-line growth. Let's talk about the polyethylene. Today, globally, it's about 200 billion pounds of capacity. LDPE, the dark blue, is about 22% of global capacity if you take the other high-density and linear low. Westlake, about 69% of capacity is LDPE. Why is it important?
Look at the chart on the right, that over the last 15 years, the left has two bars, that LDPE has higher margin than the other linear low high density. The last five years, those margin differential continues. The reason why it has a higher margin is, again, because LDPE is made under 40,000 PSI, a lot of steel goes into making polyethylene. Hence, the investment machineries are much more expensive than linear low high density, which are made at very low pressure. When people have low feedstock costs like Middle East has, like the U.S. has today, they want to build the biggest, cheapest ethylene plant, which is ethane cracker. They want to build the biggest, cheapest investment cost, which is linear low high density. They can get the profits back from what? From the cheap ethane. That's from making polyethylene.
LDPE becomes more expensive to build. People didn't spend the time, they think the cheap linear low high density will take market share away from applications where it cross over. They did. Linear low took some of the packaging, the liner bags, and the lower cost market away from LDPEs. LDPE has found niche markets where its property is more special, hence the margin is better and less supply. On the vinyl side, mentioned that globally, we are the number 3 PVC manufacturer in the world, but number 2 in the U.S. The chlor-alkali wise, we are number 3 globally. Mentioned that the Vinnolit that we bought in 2014 is a combination of the vinyl business of Hoechst and Wacker, and we are the largest specialty PVC manufacturer in the world. They're all based in Europe, five plants in Germany and one plant in England.
Because of specialty nature, they enjoy a higher margin than the commodity suspension grade. Globally, it's about 10% of the PVC are specialty PVC, and we're the leader on that. Not only that, Vinnolit also is the world leader in technology for making vinyls from PVC, VCM, and the emulsion PVC, which they are very large at, as well as suspension. We're able to use technology to help out Axiall's and Westlake's vinyl business. It's a double win for us. With that, I'll hand over to Steve to give you a summary of our activities the last few years.
Thank you, Albert. One of the important elements that you've seen from some of the charts and the comments that Albert made is really making strategic investments at the right time and obviously at the right price. We're very focused in driving value at the bottom line, not growing the top line, but growing the bottom line. The EBITDA business is really the focus that we're in. As you think about making the right investments to get the right ROI, I wanted to highlight a few of these that you've seen us make over the last few years. You can see we've made strategic investments to expand and integrate the chain across the space. You can see we've invested most recently in the large acquisition last year with Axiall. That brought significant volume to our vinyl business, grew it substantially.
We've also expanded the two Lake Charles ethylene plants that really help us integrate the business and bring a significant amount of upstream capacity, ethylene in this case, into our business. You can see we've also made a variety of investments. Most recently, Albert highlighted the Vinnolit investment we made in 2014, one of the largest player in flexible specialty PVC. You can see we've also added PVC capacity in our businesses as well. This most recent year, in 2017, we expanded our facilities in Calvert City, adding 100 million pounds of ethylene in the business. You can see over a period of time, the focus has been growing the integration of our chemical chain, in this case, driving value for the bottom line, and that's really been our focus, driving EBITDA.
In the current year, as we continue to invest, we're investing this year to bring reliability and predictability to those businesses we acquired of Axiall. As we continue to focus, you can see that we focused at improving the overall value of the business that we bought. With that, what I'll do is I'll turn it back over to Dave and let you spend the rest of the time for questions.
Thank you, Steve. Thank you, Albert. Albert, Steve, you've invested, I think, about $6 billion in chlor-alkali between Axiall and your own investments. You highlighted the reasons why, good growth, no new supply. How long does this positive backdrop persist for chlor-alkali?
That's a good question. Can you hear me? Okay.
Hello?
Yeah.
Sorry. Yeah.
That's a good question. As you know that PVC business, I'll talk PVC first. The industry doing quite well, exporting only 10% of our production all the way to 2007, when the housing construction new start was averaging about 2.3 million units, both single family homes, multi-family homes. With the housing meltdown in 2008, housing dropped 80% to only 400,000 units new start. As a result, which is a big housing market, a big user of PVC, our industry had to export 30% of the 35% of its production. Luckily, because of the low cost position the U.S. enjoys with shale based ethylene and petrochemical feedstock, we're able to do that at a lower price margin than otherwise. Chlor-alkali, my cycle did not peak in 2007 and 2006. It peaked in 2010.
As a result, before it peaked, a company like Dow joint ventured with Mitsui to put in 80,000 tons of new chlor-alkali plant. We added 350,000 tons of new chlor-alkali capacity starting in 2013, and obviously put 200,000 tons. Hence, the chlor-alkali market also became oversupplied. I said earlier, chlor-alkali business grows with GDP growth. From 2013 onwards, GDP growth was slow in the U.S. It took quite a while until now. Finally, the U.S. operating with chlor-alkali is running at mid to high 80%. In our industry, you need about 90% over to have real pricing power. Even then, the industry is having price announcement every quarter of this year so far. We are able to enjoy pricing margin improvements.
What's happening now, unlike the polyolefins business, you have all the major, six, seven of them, adding new ethylene plants and polyethylene capacities as we speak. In the vinyls business, as I said earlier, there are no new announced plants in the world for both chlor-alkali or for PVC. As demand for PVC grows and caustic grows with GDP rate, it's a matter of years, whether it's a year, two or three years, we'll be over 90% in the U.S. especially. That will really help the margin to improve. We talk about mid-cycle average earnings. We're not in the vinyl business to the mid-cycle yet. We're climbing out of the trough, and we are on the upstream side of the trough.
Whereas in the polyolefins, I think we are in the down cycle, and the question is how long the cycle will be and how deep it will be. There's different comments I'll make afterwards.
Very good. Just also on capacity closures in both Europe and potentially China, what are you seeing? What are you hearing? What's your expectation?
Yes. As mentioned earlier, Europe has a regulation to shut down mercury cell plants, chlor-alkali plants. There are three processes to make chlor-alkali. Mercury is the oldest, highest cost. There's diaphragm, which is primarily in the U.S., and then membrane for lowest energy cost in the newer technology, and that's what the rest of world is using, membrane, and U.S. also has membrane capacity. The mercury process is being outlawed in Europe at end of this year. As a result, some mercury cell plants are planned to shut down end of this year, or some of them being converted to membrane at an investment cost. Those people can justify investment, or the government's paying for it, they will do it. If not, then they shut it down.
Industry consultant estimates between 850,000 tons to 1 million metric tons of capacity be taken out of the mercury cell in Europe. In China is a different animal. Much of the vinyl business is coal-based. They use coal to make calcium carbide, which react with water to make acetylene, which is the 1950s technology in the world that PVC was made through acetylene and hydrochloric acid, HCl, and not with ethylene and chlorine. It's highly polluting, high energy intensive. On the other hand, because of China's abundance in coal and their lack of enforcement on environmental issues, those coal-based carbide plants proliferated. Today, China is much more conscious of environmental problems because of citizens demanding it. Hence, during the last winter, some of the coal-based PVC plant and coal-based power plants are forced to run at lower rates or shut down.
As a result, capacity got down, prices gone up, global polymer price went up during the winter months.
Very good. Albert, on Axiall, the potential seems quite large, not just the cost potential, but really maybe more in the reliability and predictability to get higher operating rates. How do you frame out the potential upside from Axiall over the next two, three years post your investments to really improve this business?
We talk about the $200 million cost down, that's ongoing. We're on target. We should achieve it within two years after acquisition. We talk with Steve Bender once that ongoing maintenance we're working, we are bringing earlier the maintenance turnaround cycles to fix all the problems those plants have. Hopefully, when those are done, we'll be able to improve the operability of those plants, which means we'll increase the output. Thirdly, as the market tightens, demand increases, some of the plants shut down, the margins are improving. We are seeing three prongs of improvement operations, lower cost, higher output, higher margin. When Georgia Gulf bought PPG's assets in the beginning of 2013, they talk about the combined vinyl business, chemical business, having a $850 million cycle average EBITDA earnings and a cycle bottom of $550 EBITDA.
Unfortunately, they did not take into account all the overcapacity in the chlor-alkali business. In 2015, the adjusted EBITDA was $320 million, way below the $550 million they talked about. I think if cost down, as I would say, the three-prong approach works, it's foreseeable that the EBITDA could go to the cycle average. I said earlier, we're not near the cycle average earnings yet. There's potential to improve the operations.
Sounds good. Maybe lastly on chlor-alkali, caustic now that you're a player in that field. What's your view on caustic over the near medium term?
I think it's very positive, as mentioned, that the industry is able to increase price every quarter, not without getting the full amount, we're getting part of the amount, export price has improved. Usually export caustic is the worst market for that. Actually early this year, export price caustic almost parity with domestic spot price. Global demand has said earlier, there's no new capacity added chlor-alkali globally anywhere. As global demand increases, the aluminum plant coming back, pulp and paper consumption is increasing. For container packaging, caustic demand is increasing. It follows GDP growth. GDP is growing globally at 3% rate, caustic demand will increase.
Very good. Albert, on building products, which is now, I believe, over $1 billion of sales, why is that an attractive business for you longer term?
I think, David, what it provides us is an ability to have a full integration of the chain. When you think about that business, it takes, at today's operating rates, probably over 1 billion pounds of resin. When you think about where the large investment we have in the business is, it is really upstream. To run that valued business downstream, we want to have that full integration. It actually provides good stability of earnings. That building products business is a very stable business. It provides very stable earnings and provides us a really great platform to take that resin into that building products business and provide stability.
When I think of the value chain everywhere, all the way from the beginning of the process to the end of the process, it provides us an opportunity to catch the margin from one end of the spectrum to the other. Importantly, it's a lot more stable earnings stream than some of the other commodity ends of the business further upstream.
On Vinnolit, how is that specialty business benefiting your U.S. operation now or where going forward?
That Vinnolit business is a very important business. As stated, it's the global largest player that we have in the specialty PVC space. Today, it is about 10% of the U.S. market, but it provides us an opportunity to really have very high margins in that specialty business, as you would guess. Certainly as a global leading player, it is deeply into the technology. We have a huge R&D facility there in Europe that allows us to really work with our customers to co-develop products, to really continue to expand its offerings.
Very good. Albert, switching to ethylene, I'll go through this pretty quickly. Your view on the U.S. ethylene cycle, where we are today. What will be the depth and duration of this downturn we're likely going to see over the next 12 to 18 months?
Yeah. As you know that the new plants are being built. U.S. today exports 20% of the polyethylene that we produce today. With all the additional capacity added on, we're not going to absorb by the U.S. the internal demand growth. All the players are planning to export those products. They have terminals set up, packaging set up, also exploring using terminals outside of Houston. Houston is the historical export area for petrochemical polymers. Now they're going to New Orleans, going to Charleston, going to Dallas, and other ports able to export. They avoid congestion. Furthermore, all these capacity coming up are from existing players, the Exxon, the Dow, the Lyondell, CP Chem, Nova, Formosa. They're all in polyethylene. The addition is a fraction of the existing capacity.
I presume that these majors who are very knowledgeable, very good business people, they shouldn't shoot their own foot. Having said, I've seen them done before. People are saying that there will be so much capacity, the sky is falling. I think that goes back to the fundamentals. U.S. ethylene today based on ethane still have over $0.10 a pound cost advantage over naphtha crackers overseas. Even with the low oil price we have today, if the oil price improves, those cost advantage will increase. Usually export price are lower, netback price, FOB U.S. Coast, are lower than domestic price. Earlier this year, because the demand for polyethylene increased around Asia, actually export price increased over U.S. price. As a result, we're able to get $0.08 a pound price increase over two months, February and March.
Even though we are giving back $0.03 in May, we did enjoy those price increases, which means that the high cost producers are in Asia and Europe, their price really sets the floor, not the U.S. competition capacity sets the floor. If price polyethylene gets too low here, we just export it. So long we are cost competitive with the world, we can compete. There is a floor how much margin the price will drop in the U.S. Some people are estimating by 2021, globally we'll be short of polyethylene capacity again, there'll be new demands. As you may have heard, Exxon-Sabic has talked about putting another over $10 billion of a new plant near Corpus Christi. Shell is planning to start its own project in Marcellus in West Virginia or Pennsylvania.
Total, a joint venture with NOVA Chemicals Corporation, to put a new plant in Houston. These are world-class companies. They are in everywhere. They are in Asia, they're in Middle East, they're in the U.S. If they believe the U.S. is the best place to put an ethane cracker, I'm sure they're looking at projects not for next two years or next five years, but for next 20 years. This is the best place they think in the world to put a new project. From an industry player, again, we don't Unlike you, ladies and gentlemen, looking probably at quarter-to-quarter performance. As industry producer, we're looking at five decades of performance. We're a very long-term risk adjust investor. We believe that the long-term future for olefins and polyethylene is still very good in U.S. Maybe hiccup along the way.
Very good. I want to touch on Westlake Chemical Partners, Westlake Chemical Partners had a bit of a stabilized position to the IRS ruling. Are we back in business with Westlake Chemical Partners? Should we expect further drop-downs, and how do they play potentially in that business?
We clearly are. We're forming that partnership as we did in 2014. We had a variety of levers, four key levers, to be able to grow the earnings of the partnership. Today, we only have 13% of the operating company in the partnership, which leaves 87% yet to drop in. A significant opportunity to really continue to drop in capacity. I don't think people have focused on how large an inventory of drop-down capacity we have. We also have an opportunity to expand and add assets into that partnership, and you mentioned Lotte Chemical. Today, we have a 10% interest in that ethylene business with an opportunity through an option to expand that up to 50%, up to three years post-completion, which should be in 2019.
We can also take that ethylene investment, drop it into our operating company, then drop it into the partnership, as well as other ethylene opportunities down the road. We can certainly expand those ethylene businesses, so we've been in the process of expanding ethylene capacity over the last several years, and that cracker of Lotte Chemical's could also be expanded. That's the third lever. Of course, the fourth lever is taking that margin that we've constructed for the partnership to have a $0.10 per pound margin in that business, certainly, that can be increased over time. Those four levers are very important, and you would expect that with the drop-down capacity that we have, we'd certainly be thinking of doing a drop-down somewhat sooner than later, because as you mentioned, the IRS has now given us a green light to move forward.
the partnership is, if you will, back in business.
Okay.
I just want to add that, I don't know whether you all are able to buy MLPs or not, but in our Westlake Partners, we are yielding 6% on distributions, higher than some of the high yield fixed income chemical guys. We're growing the distribution by low double digit rate every year going forward. It may not be tax sensitive, but 80% of it is tax sheltered. If you hold high yield fixed income, much cheaper, better return to own the MLP than even the high yield fixed income because it's growing.
Are there any questions in the audience for Albert or Steve? I'll keep on going. One other option are acquisitions, perhaps. Obviously, there's a cracker sold recently. There are more crackers for sale today. How do you look at and analyze the attractiveness of acquired assets in the ethylene side?
Well, the acquisition team is always looking at opportunities. You mentioned the Williams transaction that occurred with Nova. Certainly, as we think about ethylene is core to everything that we make. It goes into our polyethylene and styrene and PVC businesses. As I mentioned earlier in my comments, we're very focused on the return at the end of the day. Everything that we look at has got to have that risk adjusted return. When we think of putting investments into ethylene or investments into any other chain of our business, it has to be at the right time in the cycle and at the right value proposition to give us the return profile that we're looking for. We assess all those opportunities, but I'm always focused on ROI or an ROA focus.
My last question, Albert, is on ethane. How do you foresee ethane trading relative to fuel value going forward? It seems, given recent discoveries in Permian, there is a lot more liquids available going forward, maybe not the premium people thought could exist a year ago.
Certainly, there's a lot more production, oil, gas, and hence the associated gas, which is very rich in NGLs are coming up. Today, I think ethane trades about $0.25 a gallon. Projection by IHS, by the end of the year, may go to $0.30. Whether in a year or two years, when older plants come up, they go as high as $0.40. I think we just heard the presentation from Enterprise. They all foresee that by 2021, with all the new expansions in oil and gas production, that ethane will be low again, hence the new wave of expansions on new ethane plants, as we discussed. Even at $0.30, between $0.25, you're talking about $0.06 a pound price increase. At $0.40, ethylene is still at $0.16, $0.17 a pound cash cost, still much lower than after cracking.
As we expect that oil price, I don't know you guys feel about oil price, that would stay like $40, $45 range for the indefinite future. I think people are believing that five years from now, oil will be a lot higher than where we are today.
Very good with that. We're out of time. Thank you very much, Albert and Steve. Thank you as well.