Q3 2019 Earnings Call
Patient all participants will be in listen only mode.
The speakers remarks, you will be invited to participate in a question and answer session.
A reminder, ladies and gentlemen, this conference is being recorded today November 15 2019.
Now I'd like to turn the call over to todays host, Jeff wholly by Wesley Vice President Treasurer, Sir you may begin.
Thank you good morning, everyone and welcome to the Westlake Chemical Corporation third quarter 2019 conference call.
I'm joined joined today by Albert Chao, our President and CEO , Steve Bender, Our executive Vice President and Chief Financial Officer, and other members of our management team.
The conference call agenda will begin with Albert will open with a few comments regarding west Flex performance followed by a current perspective on the industry. Steve will then provide a more detailed look at her financial and operating results. Finally, Albert will add a few concluding comments and we'll open the call up two questions.
During this call we referred 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 referred to as our subsidiary Westlake Chemical Opco LP, who own certain olefins facilities.
Today management is going to discuss certain topics that will contain forward looking information.
That is based on management's beliefs as well as assumptions made by an information currently available to management.
These forward looking statements suggests predictions or expectations, and thus are subject to risks or uncertainties actual results could differ materially based upon many factors, including the cyclical nature of the industries in which we compete a bill bill the cost and volatility of raw materials energy and utilities governmental regulatory actions changes into.
Trade policy and political unrest global economic conditions industry operating rates the supply demand balance for west lakes products competitive products in pricing pressures access to capital markets technological developments and other risk factors discussed center FCC filings.
This morning, Westlake issued a press release, but details of our third quarter results. This document is available in the press release section of our web page at Westlake Dot Com. We have also posted a presentation on our website to assist in the discussion of results.
A replay of today's call will be available beginning today two hours. Following the conclusion of this call. The replay may be accessed by dialing the following numbers domestic callers should dial 8558 fivenine to 056.
International callers may access the replay at four zero for Fivethree seven three 406, the access code for both numbers is seven seven to 511 night.
Please note that information reported on this call speaks only as of today November 5th 2019, and therefore, you're advised that time sensitive information may no longer be accurate as at the time of any replay.
I would finally advise you that this conference call is being broadcast live through Internet webcast system that may be accessed on our web page at Westlake Dot 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 results.
In this mornings press release, we reported net income of $158 million for the third quarter of 2019 or $1.22 cents per diluted share.
In the third quarter, we benefited from lower feedstock and fuel costs and from the strong operational performance although plants.
Trend above industry averages.
Trade tensions and resulting market uncertainty.
Have caused customers to remain cautious and managed to inventories tightly.
Yes, we continue to see solid sales volumes in both segments.
And our downstream vinyl business has recovered volumes lost due to the cold and wet weather in the first half of the year.
Over the past year, we have remained focused on closely managing costs and being disciplined with our capital expenditures.
Despite the recent weakness in prices for major products.
Remain constructive indeed outlook for the call role by knows supply demand balance and believe our pvs expansions in the U.S. in Germany, which was started by year end along with the increased ownership.
Ethylene joint venture with allotted chemical will improve our competitive position by expanding our market present, PVC and lowering operating costs.
I would now like turn call over to Steve provide more detail on our financial and operating results.
Thank you Albert and good morning, everyone.
I will start with discussing our consolidated financial results followed by a detailed review of our vinyls and olefins segments.
Let me begin with our consolidated results for the third quarter of 2019, we reported net income of $158 million or $1.22 cents per share.
Compared to net income of $308 million for the third quarter of 2018.
Compared to our prior year results. Our results were primarily impacted by lower prices and margins for our major products, especially in the international export markets, while most of the North American ethylene producers use cost advantaged gas based feedstocks.
One of the Asian, and European ethylene producers use NAFTA and oil based feedstock.
The lower oil prices, we have experienced throughout 2019 have lowered the oil to gas ratio, reducing our cost advantage.
Slow slowing global economic growth over the past year, resulting from the international trade tension uncertainties, coupled with lower oil and gas ratio have led to lower margins in both our olefins and vinyls segment when compared to the third quarter 2018.
Compared to the second quarter 2019, we benefited from lower feedstock and fuel cost.
As higher operating rates and our vinyl segment following the completion of our normal spring maintenance turnarounds.
Our utilization of the FIFO method of accounting resulted in favorable pretax impact of approximately $4 million for three cents per share compared to what earnings would have been reported.
On the LIFO method. This calculation has only investment has not been audited.
Now, let's move on to review the performance of our two segments, starting with our vinyl segment.
In the third quarter 2019, our vinyls business continued to see lower sales prices for caustic soda, especially on the export market as declining global industrial activity and slower economic growth, resulting from the ongoing uncertainty in international trade pressured prices lower over the past year.
Compared to third quarter 2018, vinyls operating income of $153 million decreased $98 million, primarily as result of the lower sales prices for caustic soda.
Third quarter Vinyls operating income of $153 million increased 24 million from the second quarter 2019, as we benefited from lower ethane feedstock and fuel prices and we ran at higher operating rates. Following the completion of our spring turnarounds.
Now turning to our olefins segment.
Since 2018, the industry supply balance supply demand balance has seen significant new ethylene and polyethylene production capacity enter the market.
Which coupled with the ongoing trade uncertainty and lower global oil prices push sales prices and margins lower.
For the third quarter 2019, olefins operating income of $92 million decreased $70 million.
Third quarter 2018, as result of lower margins from lower polyethylene sales prices.
Third quarter 2019, olefins operating income of 92 million increase $10 million from the second quarter 2019, as we benefited from lower feedstock in fuel cost when compared to the prior quarter.
Next lets turn our attention to the balance sheet and statement of cash flows at the end of the third quarter, we had cash and cash equivalents, a $1.4 billion and total debt of 3.4 billion.
Third quarter 2019 cash flows from operating activities were 501 million, while capital expenditures were 193 million.
These capital expenditures were focused in our strategic de bottlenecking investments to further integrate our vinyls businesses in the United States and Germany to capture the margin within our product chain reduce our cost and further leverage the footprint of existing vinyls operations around the world.
We expect to start up our previously announced VCM in PBC expansions in Louisiana, and Germany by the end of the year, which will bring more than 750 million pounds of PVC production per year.
As announced last late last week, we've exercised our option to acquire an additional interest in our ethylene joint venture with Lottie chemical which will further integrate or vinyls chain and lower our cost.
We seek to invest prudently and opportunities to acquire leading technologies and projects that will further enhance the chain integration of our business, which improves our cost position and capitalize on our global advantaged feedstock position.
As we look forward, new NGL pipelines and the accompanying fractionation capacity will be starting up in the fourth quarter.
These infrastructure investments will increase the supply of feedstock in ethylene to our industry and highlight the beneficial long term cost advantaged position enjoyed by North American producers.
For your planning purposes, as we approach the end of 2019, we continue to expect our effective tax rate in cash tax rate for the full year to be approximately 23% and 18% respectively.
And our capital expenditures to be approximately $650 million with that ill now turn the call back over to Albert to make some closing comments Albert Thank you Steve.
We delivered a solid third quarter results in this challenging economic environment.
Thanks to our advantage position on the global cost curve.
Given by our gas based feedstock and our scale.
Combined with a strong balance sheet.
We have positioned to continue to create value for shareholders.
The current business environment demands cost discipline and prudent capital allocation.
The startup, although expended vinyls facilities in Louisiana, and Germany, along with increased interest in our ethylene joint venture with multi chemical.
Just a couple of examples of the many organic opportunities we have.
To further integration although business.
No up production costs and provide a compelling return to 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 I would like to remind you that a replay of this teleconference will be available two hours after the call as ended.
We will provide that number again at the end of the call Jimmy we will now take questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone withdraw your question press the pound Keith Please standby will be compiled acumen any roster.
Our first question comes from John Mcnulty with BMO capital markets. Your line is now open.
Hi, good morning.
This is promoting Trafford John .
Morning.
Maybe on the Doctor JV could you comment on a decision to go ahead and add to your stake now versus a big data and then if you could comment on just.
The cost of antibiotic team.
We feel proud estimates and.
Tons on the project today.
You can do on the indication.
And perhaps a lower cost of adding off.
Well the project came in on schedule and on budget and.
What I mean by that is about $2 billion for the 2.2 billion pounds of ethylene.
So our decision to invest was because we believe it provides a good return on this investment. So that's really the driving reason behind the decision to invest at this stage and increase our ownership.
Got it and then.
Regarding the old whitening segment in particular can you comment.
The only that EBITDA, which was up.
Maybe brightness in volumes fell sequentially.
Let's see if you could discuss because the moving pieces on what drives.
Yes.
Sure well sequentially quarter over quarter of course, we benefited from lower ethane feedstock. It was lower over the second quarter by about 18% and fuel cost were also lower about 11% and as we noted we also completed our spring turnaround activity and so we benefited wood plants running.
At better operating rates, because we completed those turnarounds in earlier quarters, so sequentially quarter over quarter, those where the big drivers behind the results.
Great. Thank you.
You're welcome.
Thank you. Our next question comes from Neel Kumar with Morgan Stanley . Your line is now open.
Thank you.
I was curious when you look at your to the underlying demand growth for the key end markets for caustic like alumina, given pulping inorganic and organic chemicals, where would you say growth has lagged the most versus expectations.
Well I think.
The call the slowdown in economic growth.
Around the world, especially the manufacturing side it does impact at home.
On all the area under the NOL on pulp and paper.
And general manufacturing.
Okay.
Okay, and then you mentioned in your comments that you are focused on cost control and as challenging environment.
Can you use to some examples of this and whether you have any specific initiatives in place going forward.
Well Neal while we've not set public initiatives externally I think you can see just on the most recent periods that are even our DNA was lower period over period. So as we continue to focus on managing investments in managing our cost we're getting continue to keep our I very much in that area of focus in as I say a point to just DNA as it cleared.
Ample of that.
Okay. Thanks, and just last question can you just maybe also update us on the integration of an icon has been going.
And what kind of contribution that had during the quarter.
Well, we've not broken out the individual earnings contributions from any of our acquisitions, but I would say the integration has gone very well, we're very pleased with the the acquisition and as you know it expands both our product offerings in.
A wide range of applications be at medical or auto or others and gives us a much larger geographical positioning for our compounds position, which was largely focused in the Americas. This now takes us into Europe , and Asia and strengthens our North American position. So we're very pleased with the with the transaction.
Thank you appreciate it.
Thank you. Our next question comes from Stephen Berman with Bank of America. Your line is now open.
Hi, I wanted to ask you about.
The mid year guidance that you provided for EBITDA.
Here, we are a quarter beyond where would you say you're you're headed towards the lower upper end of that range at this point.
Steve as we said in this was in this summer. The first time, we provided guidance and we we indicated that it was an unusual event and we weren't going to provide guidance on a going forward basis, and that's kind of where we stand.
Okay.
Also wanted to ask your whether or not.
You are planning to another dropdown into the MLP to raise capital for the.
Your share of the low take cracker.
Well as you think about the the partnership we have significant amount of inventory left we have well in excess of 75% ownership of the operating companies still to contribute this exercise this option as ethylene at Westlake chemical which could be controlled it down to opco at at an appropriate valuation.
In time, so we still have plenty of inventory of the operating company contribute into the partnership and I would expect that we've undertaken transaction in 20, but at need necessarily be that related to the loyalty cracker because we still have significant capacity left.
Okay. Thank you.
Thank you. Our next question comes from Kevin Mccarthy with vertical Research partners. Your line is now open.
Yes. Good morning, a question relates to your your ethylene long short position if I look through the.
I would say option exercise as well as the PVC expansions that you referenced.
It seems as though you're still be short.
More than 1 billion pounds, perhaps 1.1 1.2 billion and so my question is.
You can tend to remain short that amount of ethylene for the foreseeable future or do you see any appealing options beyond the low to exercise.
To bridge that gap and rebalance the ethylene position.
Well, Kevin as we think about the opportunity set here we've been on both sides of that over time, both long and short and you're right. The balanced number that you mentioned is about the approximate position that we have today being short about 1.1 1.2 billion pounds with this new addition.
Certainly we look we'll look at the new cracker that we have and that has because it is a new unit will have de bottlenecking capacity that we wouldn't want to do that immediately but it.
Down the road will have an ability to be de bottleneck and we'd like we'd like to over time be more balanced, but one need necessarily be perfectly balanced.
Okay, and then second question, if I may relates to low density polyethylene it looks like we have.
Few startups among your competitors over the next three to six months in the past you've you've talked about the premium.
Low density garners relative to other grades of polyethylene.
Can you talk through your expectations for 2020 and beyond as it relates to supply demand and the magnitude of.
How that historical premium could fluctuate.
Yes, certainly as you've heard us talk for a long period of time that the the Autoclaves has certainly continue to garner a meaningful premium over time and with the new additions coming there really no meaningful additions at all in the autoclave technology the additions.
We're all coming in the tubular applications.
Commodity based polyethylene in all manner be at high density linear low or even low in the tubular technology. So we continue to see benefits of having a position in the more specialty end of the LDP space.
And certainly as we expect some of those margins to be under pressure is new total pounds come into the market. We think that that premium continues to be important.
And our customers certainly recognize that as well.
Very helpful. Thank you.
Thank you. Our next question comes on Bob Court with Goldman Sachs. Your line is now open.
Thank you very much.
Okay. So maybe you could opine on the the path forward in the polyethylene oral they know that.
It had been quite a bit of banks about the startups in the U.S. It seems like those are.
Closed and now maybe they anxiety for some investors has shifted the Asian capacity ramps there but.
I guess when I look at some of the consultants reports.
Seems like there's still calling for a trough in the US maybe 15 cents a pound integrated polyethylene, which.
Seems pretty good how do you sort of see that path forward and how do you think about the capacity outside the U.S. affecting your business.
As Steve mentioned earlier.
The capacity and supply demand for polyethylene really.
Impacted by economic growth globally as long as the oil gas ratio profitability impacting both American producers. So I think Hs is looking at.
By the end of the.
Looking forward to next June PE prices is pretty much flat across 2020 and I think.
Well, assuming that the global GDP.
Not to go into a recession in the U.S. and as GDP will be growing, albeit a bit slower rate.
Hopefully.
Hey, tensions between us and China would improve somewhat so I think people are looking at a more of a stable.
Bob and fall for commodities and Paul holidays in general.
And just wanted to follow what Steve said, I think OTI extension to us on tubular LDP.
Ill focus on commodity grades and all 80% of our LDP is autoclave and will focus more on the specialty side.
So I think the spread between.
LDL no continue and between autoclave tumor there's also continue.
And can I ask on the Latte cracker.
What you guys figured be economics were on a return on capital basis for that investment.
So Bob when you think about the potential contribution if we had owned the entire unit for the quarter third quarter, we saw probably between ownership and market ethylene about a roughly 10% delta between those two and owning their 4 billion pounds.
Would bring EBITDA of about 100 million a year.
So that's the kind of contribution that you could think about at that kind of a margin.
As we experienced in the third quarter.
Okay.
As Steve has gone and also as Steve mentioned.
Ill take a crack cocaine on on time on budget I think on a per ton basis.
Even though it's not the biggest ethylene plants.
As you build arena that took basis as waterless investment costs.
Ill cleanse.
And as I know it at all.
Major international oil companies building grassroots new claims in us based helping correct.
So if we have cost advantage position well listen point of view and have started early start to.
That should be advantage position for us so a nice accretive transaction I guess, what I would say in summary, Bob.
Thanks.
Thank you. Our next question comes in my head with Barclays. Your line is now open.
Thanks, Good morning, guys. Good morning, good morning.
I guess first can you just talk through what drove the earnings improvement sequentially in your olefins segment, because my understanding was I just integrated margins were caught flat to lower with polyethylene prices down that should kind of offset the benefit of falling ethane inspiring was weak. So I guess just any additional color you could provide there would be helpful.
Yes.
So Mike when you think about year over year re speaking year over year, our quarter over quarter I'm talking Twoq to Threeq you. Okay. So when you think about quarter over quarter. While you did have lower polyethylene prices in the neighborhood of say six or so percent you had also meaningfully lower feedstock cost and fuel costs.
Yes, so feedstock costs were lower by about 18% and fuel cost Nat gas was lower by 11% and so that had a significant ups, Steve a benefit of helping to offset a lot of the lower polyethylene prices period over period.
Got it Okay and then in the release you pointed to the impact of the slower macro occur and economic environment. So I was hoping maybe you could give a bit more color on your downstream PVC compounding and building products businesses, because that's one of the few areas and your portfolio, it's harder to track from the outside.
The business tends to be.
More stable it as a core seasonal in nature, because a lot of the building products go into construction materials, but tends to be more stable to compound the materials goes into more than just construction related materials. It goes into wiring cable in but as I mentioned earlier in the Con businesses also go into auto and lots of medical applications.
So it has a broader footprint than just the construction markets, but the construction markets are where our pipes insight into applications do go but it tends to be less cyclical tends to be less cyclical.
Deeply than some of the chemicals related businesses and as we noted we did pick up some of the recovery of volumes.
That we lost earlier the year due to cold and wet weather.
Got it thank you.
Welcome.
Thank you. Our next question comes as a room vis vis went on with RBC capital markets. Your line is now open.
Thanks, Good morning, guys, I'm wondering or anyone else.
I had was on caustic.
We've seen another down tick up $15 here in October after the downtown in September .
I guess, how would you characterize.
The business out there from your perspective.
And wonder what's the main driver you think that would help.
Then caustic environment and then given that inventories are quite low visit as it industrial production demand.
Supply disruptions or anything else you point to thanks.
Yes, I think as we said earlier the industrial demand globally has been weakening, but we are seeing aborting the oil prices in Asia, and some of the Asian Chinese producers I.
I think it's pulping titles, we know that cash cost.
So.
If the industrial demand globally improves next year.
We're seeing some of that in Asia.
That should help improving caustic prices.
And.
My question.
PVC.
Maybe you can just give us your outlook there.
And tie in what's going on in the ethylene market.
You think lower feedstock would result in and supply would result in lower ethylene pricing and make it difficult to get.
You know margin in PBC or are you thinking about the outlook for PBC from here. Thanks.
Yes.
See prices I think it's just looking next year, all price increase domestic into us and also for export prices pretty stable.
PCD. This is the unlike polyethylene globally sustainable capacity, new additions capacity PVC, so as to demand still growing globally.
That will help to tighten up the market and help the pricing. So I think I just looking at prices going up next year domestically us.
As you know also that the housing.
Construction is still even dose.
1.2 million units a year rate is still below the 50 averaged 1.5 million units all residential construction so thats the us.
Residential collision market returns. It also helped domestic demand for PVC.
And then lastly, if I may just.
Good to get your thoughts.
Any reaction.
There's been a competitor of yours promotions is thinking about adding capacity and chlor alkali.
You guys added some geismar several years ago.
Probably the most recent mark investments, so and just help me understand.
Potentially going through their heads as far as returning.
What you would look for.
You delineate that all possible.
Sure I think from what we read that looking at a five year old.
Global demand will fall exceed.
Capacity additions and then looking at spending approximately $3 billion us.
All building.
Plant in the Chlor alkali Bcm PVC plant. So if you are looking at.
Thanks, and cost economics support investment, which further supports the.
The thesis that thoughtful and vinyl business.
We will improve globally and you asked is the best placing this.
Okay. Thanks.
You're welcome.
Thank you and our next question comes Jim Sheehan with Suntrust. Your line is now open.
Good morning. Thank you could you talk about any plant turnarounds that you expect to have in the fourth quarter and what.
Impact might be on earnings.
Jim We obviously do with a large number of facilities. We have worldwide. We do turnarounds on a regular basis, but there are none that are going to be meaningfully impactful in the fourth quarter. As we look into 2020, we will have an ethylene turnaround and I'll give more guidance to that ethylene turnaround as we finish our planning.
The other units that we have nothing that I would have would be a call out that would be meaningful in the in the fourth quarter.
And what's your outlook for ethane prices going forward.
I think if ethane prices is pretty much in this 20 cents a gallon range and I think the future prices supports that.
Thank you.
You're welcome.
Thank you and our next question comes from Hassan Ahmed with Alembic Global Your line is now open.
I'm wondering how the conceived morningstar.
Albert and Steve just wanted to go back to the timing of.
Exercising the lucky option.
You know, obviously ethylene pricing has been fairly volatiles over the last couple of quarters.
And we've obviously seen incremental supply come online right. Now did you can be let US now you guys kind enough to break out what the economics would have looked like.
Have you own the cracker in Q3, but obviously, there's always a fed that utilize the capacity is digested.
Those economics did you did you read quite rapidly. So now my question is deck you guys exercising the option now rather than later should that be taken as a signal that you would actually incrementally positive now on on the ethylene market or said differently you think the west is behind.
Yes.
As we move forward from Q3 and beyond.
Well as you said Hassan we believed that the return for this investment was I think a pretty good compelling return very accretive when you think about the investment that we've made for the incremental pounds.
I agree with you that the margins over a short period of time can be volatile, but we believe that over the cycle that this investment will prove to be a very attractive one for us and further integrate our business chain in the vinyl segment, even more so and so we think it's going to be a very nice investment over the cycle, but you're right.
From period to period, there can be a high degree of volatility in ethylene.
Prices and margins.
Understood I was a follow up if we were to go back to the started the year.
I think broadly the perception was.
Thats lean body ethylene capacity coming online in the back half of the.
And again the perception was hey look you know pricing would crack and crack pretty hard and it was the exact all position for the Chlor alkali side of things, where you know the assumption was back off price increases hardly any capacity coming online so would love to hear your views on what really changed right.
Because obviously polyethylene has been quite resilient go lives July not as much I mean is it as simple as the consumer being stronger than the that's pretty economy and has it yeah.
Is it is it Brian Natalee demand related I guess.
Well I think a bit of both.
The close ally as you know is a very generally.
Use of chemicals in many many industries and as well as manufacturing industry slowing down and some people say into recession away with key am I going below 50 for manufacturing.
Impacted demand for cross alike.
And even though that the supplies limited as just the short term.
Supply demand wise it has impacted lighting, although commodity metal example, but we believe.
The inventory adjustments and demand will go over.
Quarterly so so long as the global economy still grows people's Joe that use things and even to recycle the over and people start producing again.
So.
As Steve said short term cooking fluctuations, but longer term basis were very optimistic on the call by no change going forward.
Very helpful. Thank so much good.
You're welcome.
Thank you and our next question comes on PJ Juvekar with Citi. Your line is now open.
Yes, hi, good morning, I page anymore to can you.
During most of the money see you made in caustic ready little money, including.
So I guess, you just make BBCN that exported.
But given the importance of caustic fundamentals.
Good morning, having grant.
What prices of still come down really hard.
That would go must take an expert prices have really opened up.
How do you see that to Georgia that is ongoing.
I think maybe there's some risk of domestic pricing. Thank you.
Well.
Actually the calling size is pretty stable chlorine demand fitting stable obviously the seasonality.
The water treatment pool chemicals leach.
Slowing down the lives of meds.
But costing PVC demand globally is still strong falling side.
Absent the man those strong so I think.
And.
He's until closing goes to your things and other taught us TL to even though the impact, but net net calling debenture feel pretty good I think costing today, because all the commodity nature, it's much more volatile than in the past and as I said.
Hopefully with the.
Industrial inventory cycles over People's joining products and do come back and production improve.
Turning to the closing chain is doing pretty well, though.
Okay. Thank you and then secondly.
What are you seeing in China.
Good data points.
Industrial activity.
Construction activity based on your business.
Paul what we've seen that China industrial manufacturing has recovered from the low end.
Okay.
And hopefully this will continue.
And as well you may know that.
The PTC.
Dumping duty.
In China as being dropped a coming from the us So I think that view.
Well, you guys producers setting PVC to China globally.
Thank you.
You're welcome.
Thank you and our next question comes from Frank Mitsch with premium Research. Your line is now open.
Hi, Good morning, gentlemen morning morning, Greg.
I was struck by the the assertion that you're operating rates were better than the then industry average and listening to the commentary it sounded like that was more.
On the vinyl side.
Then.
Then on the olefin side, a is that true and b, how much better were the operations and it was interesting because that your inventories actually ticked down so it looks like you sold.
The much everything that you are producing is that is that how we should think about it.
So so Frank when you think about our integrated chain being integrated as we are at a does allow us to run at those elevated operator operating rates relative to many of our appears in the vinyls chain.
And so as I mentioned earlier, we had some spring turnarounds that took place during the course of prior quarters and so we obviously built inventory and then sold that while the plants are undertaking their normal maintenance activities.
And then the olefins chain of certainly almost all the producers are highly integrated in that space. So I'd say that.
Relative to our peer set the strength of that integrated chain plays well in this kind of cycle.
Where we are in the high degree of integration is very beneficial and spreading that fixed cost of or pound to production keeps our cost above.
That's very helpful and Steve I guess more of a curiosity than anything else, but she issued 700 million in euros.
During the quarter and I believe you're probably making a payment I guess this quarter of 815 million or so.
For the Latte JV why why issue in euros and pay dollar is how should how should we think about that so Frank it was.
An approach to.
Finance in a and attractive rate wise market. We it was one in five 8% coupon for a 10 year period, and we designated that a hedge against our European investment. So there is no mark to market that flows through the PNM. All I could then use those proceeds to fund growth opportunities either here or else.
Were sort of allowed us to really go into attractively priced markets with good terms conditions not have a mark to market on the euro base of that borrowing base and be able to deploy those dollars.
Wherever we saw an opportunity to make a good return.
Interesting that you said the play those dollars are not deploy those euros. Thank you Steve.
Welcome.
Thank you weren't next question comes from David Begleiter with Deutsche Bank. Your line is now open.
Thank you good morning.
Albert.
As you how was your starting business in the quarter and what's your outlook for 2020, given some new capacity and styling coming online in China next year.
Yes, I think Steve said, our operations are doing very well transferring all youre right that the more capacity coming up next year.
And.
The dynamic cellphone.
Ill benzene prices, starting probably missed the spread that's kols and then all volatilities advancing breitenstein price right now so we'll see halting sale and.
Also.
Technology like Possum plants.
So we don't know how those plans will run whether they will keep running full full starring or not so all these things.
Could impact the future Operability off the global story.
Business.
And Steve just comment on other income in the quarter. It was up sequentially what drove that sequential increase.
So so David the components primary components for some interest income some insurance recoveries and some higher income in some small.
Joint ventures that we have.
Okay.
Thank you welcome.
Thank you and our next question comes from John Roberts with GBS. Your line is now open.
Thank you does any of the earnings contribution from the low to the cracker come in its equity income understood. All come in is reduction in cost of goods.
It'll come to reduction in cost of sales.
Okay, and then I assume that building products business grew faster than the vinyl segments. Overall do we have to wait for the 10-Q to come out later or can you give us the sales are kind of what the growth rate was for building products, we'll have that Q filed tomorrow.
Okay. Thanks.
Thank you in our next question comes from Jonas Oxgaard with Bernstein. Your line is now open.
Hi, Good morning, good morning, good morning.
Over the last out a year we've seen.
Oil majors and down billions after billions and billions of Capex in petrochemicals.
None of it seems to go into pillar I'll call early but a lot in polyethylene.
Can you give us some thoughts on how how are you seeing as how worried are you about the the oil capex.
And does that change your strategic outlook on what I'll call it versus polyethylene.
So John as you know the when you think about the capital intensity of the vinyls chain, it's very capital intensive and so one has to build both power core alkali the intermediate to LDC VCM to get to PVC.
And so it's very capital intensive and so when you think about the capital intensity to build olefins and Polyolefins, it's much more it's much less cost.
Intensive in that sense.
And given some of said the integration they have back into the upstream side of the business, that's where they've chosen to maker investments and so certainly as we think about the approach they've taken in terms of investing in this business they've been in this business for many years on the on the vinyl side of the chain all the majors X.
Into this space.
That a generation and a half ago and it is a business that requires real focus since you're handling hazardous materials chlorine specifically, so we remain very comfortable that the investments that we've made continue to provide good value and we think that the in the supply demand balance we think remains.
Constructive overtime and as you heard Albert say earlier, we believe that the value long term in the supply demand balance will benefit us with the investments that we have made.
Jonathan if I may add also that much all the investments in the vital chlor alkali side I was made through acquisition as a plate below replacement cost.
Yeah.
Major competitors building grassroots qualified idle plants, which is a vote of confidence that even that.
Placement cost economics will be a good return.
But most of our acquisition.
If not hole.
Based on acquisition that we don't think some costs.
Okay I find the.
You immediately go to floor I call it looks a lot better to be telling part of the answer but how do you square then.
Dod again buying out the share and a lot to cracker.
If you would seemingly don't believe into polyethylene side that much.
When you think about the investment that we've made in the ethylene recently recognized that if you look at the where the margin sits within the vinyls chain.
A very significant portion of that margin sits in core alkali, but also very large component of that sits in ethylene. So over time be at five years or 10 years or even a longer the great majority of the value has been upstream either in caustic or in ethylene and so this investment allows us to further.
Integrate our business in that ethylene chain to make ultimately PVC out of that coring and ethylene so what the US investment allows us to us further integrate that vinyls chain and capture the ethylene margin that would flip in left to others to be able captured not just one side, but both sides the core OCC why.
As well as the ethylene margin in that vinyls chain.
Okay. Thank you welcome.
Thank you and our next question comes from Matthew Blair with Tudor Pickering Holt. Your line is now open.
Hey, good morning, Albert and Steve.
Circling back to the strong olefins results were you able to switch to propane cracking and if so can you provide any sort of numbers around how much propane you cracked in Q2 versus Q3.
So so Matthew our you know our plan certainly have the ability to to switch feedstocks, but we still believe that the ethane feedstock is the most advantaged because when we go to a heavier feedstock such as propane you have to de rate production of ethylene.
And when you think about the facility we have in Kentucky Earth facilities, we have down Louisiana. Our interest is really running those derivatives is as well as we can and as high and operate is we can and so while at times one it looks at the ethylene margin only we're looking at the integrated margin across the chain.
And so to to use a heavier feedstock and therefore de rate the amount of ethylene we produce would offset would not offset the benefits that we receive downstream. So it's better to really run the ethane feedstock to get the ethylene to be able to run the downstream units with that ethylene at higher higher operating rates.
Makes sense and then Steve.
Your your net leverage has been creeping up a little bit here are you comfortable with current levels or should we expect some debt reduction in the coming year.
And so Matthew we always focus on keeping a very strong balance sheet and we'll do what we need to do to keep a very strong balance sheet. We do have optionality in some of our notes next year and in following years to be able to manage that and certainly that's always an area of focus.
Thank you.
Yeah.
Thank you at this time the QNX 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 next conference call to discuss our fourth quarter and full year results.
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