Q1 2020 Earnings Call
Welcome to the Westlake Chemical Corporation first quarter 2020, <unk> earnings Conference call.
During the presentation, all participants will be any listen only mode.
After the speaker's remarks, you will be invited to participate Sydney question and answer session.
A reminder, ladies and gentlemen.
Conference is being recorded today may fall 2020.
I would now like to send the goal.
Good day hope jump Holly, what's like Vice President Treasurer, Sir you may begin.
Thank you good morning, everyone and welcome to the Westlake Chemical Corporation first quarter 2020 conference call.
I'm joined today by Albert Chao, our President and CEO, Steve Bender, Our executive Vice President and Chief Financial Officer, and other members of our management team.
Conference call agenda will begin with Albert will open with a few comments regarding is what west likes performance followed by a current perspective on the industry.
Steve will then provide a more detailed look at our financial and operating results. Finally, Albert will add a few concluding comments and we'll open the call up to questions.
During this call we refer to ourselves as Westlake chemical any reference to Westlake partners is to the Master limited partnership Westlake Chemical Partners LP.
And similar references to October to our subsidiary Westlake Chemical Opco LP, which owns certain olefins facilities.
Today management is going to discuss certain topics that will contain forward looking information that is based on management's beliefs as well the assumptions made by an information currently available to management.
These forward looking statements suggest predictions or expectations, and thus are subject to risks or uncertainties.
Actual results could differ materially based upon many factors, including the cyclical nature of the industries in which we compete.
Ill Dolby cost and volatility a raw materials energy and utilities.
The mental regulatory actions changes and trade policy and political unrest global economic conditions, including the impact of Cobot 19.
Industry operating rates, the supply demand balance for west likes products competitive products and pricing pressures access to capital markets.
Surgical developments and other risk factors discussed in or FCC filings.
This morning, Westlake issued a press release with details over first 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 our results.
A replay of today's call will be available beginning today two hours following the conclusion of this call.
This replay may be accessed by dialing the following numbers domestic callers should dial 8558, Fivenine to 056 International callers may access the replay at 4045373 406, the access code for both numbers.
As 5672 078.
Please note that information reported on this call speaks only as of today may 4th 2020, and therefore, you're advised that time sensitive information they don't no longer be accurate as of the time of any replay.
I would find we advise you that this conference call is being broadcast live through an internet webcast system that can be accessed honor web page at Westlake Dotcom 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 first quarter 2020 results.
Before we talk about a quarter.
I will like to recognize this is a very challenging time and our thoughts are with those affected by cold at 19.
I will highlight some of the ways, we are responding to call that 19.
And thoughts on the carbon situation.
Oh operations were deemed essential by the department of Homeland Security.
And that risk of until authorities.
Which have submitted to us to operate doing to national state and local state and home orders.
In managing each all facilities, we have followed the recommendations and infrastructure in cell dose national state and local health authorities.
Safety all employees have always being our number one priority.
In response to the threat posed by called the 19.
We have implemented a variety of initiatives and actions to protect our employees, including.
And showing personal spacing and providing personal protective equipment.
Conducting temperature screenings entries as to our plants.
Positioning postponing all canceling old known critical business activities and travel.
Increase cleaning and disinfecting old facilities.
And having as many employees, who can't works, we mostly do so.
In addition to protecting our employees.
While supporting the communities, where we operate.
Westlake chemical in connection with the team turned away from Cho Foundation.
Contributed a combined women in dollars to the greater Houston Colbert 19 copy of fund.
We've also made numerous donations local communities, where we operate.
Including personal protective equipment to local hospitals and other medical facilities.
And several of our vinyl product businesses have made classic say shields.
As a business steam essential by the federal and state cover governments.
Let's take mix point, it step benefit our everyday lives.
Many of these part is supporting.
All the half of the United Nations Sustainable development goals.
But up particularly important in today's environment, including.
Polyethylene thats using medical applications and food packaging.
PBC, that's using medical equipment and supplies.
As well as a variety of construction instructure uses such as fresh and wastewater piping.
And chlorine and caustic soda useful water treatment disinfectants paper tissues, and Cabo technology manufacturing.
Once again I want to thank all employees well producing supporting the production of these products that are critical to societies needs.
And safety in today's environment.
Before Steve goes through the first quarter results more detail.
Let me provide some perspectives for what we're seeing the covenant environment and the impacts from cobot lighting.
You know polyethylene business, we're continuing to see good demand.
Driven by our focus in specialty applications.
Particularly food packaging as more individuals consumer packaged food and everyday items from the grocery stores.
And we expect such demand to remain generally resilient.
However.
Well I think feedstock costs have decreased.
Competitive advantage versus oil based feedstock as being eroded by the 68% decline in oil price we have seen so far this year.
Oh, no stock based international competitors are benefiting from these reduced costs.
Due to this significant decline in global oil prices.
As a result, all these lower global production costs.
Industry consultants expect to see polishing prices and guest base policy produces margins decline.
Oh, we remain at these depressed prices.
In our PVC and vinyl products businesses.
After a very good start to Twentytwenty late in the first quarter, we saw a broad decline in demand.
This decline was led by lower construction at TPG housing starts general manufacturing and industrial activity.
Resulting from the restrictions many governments around the world put in place to help reduce the number of people infected by corporate 19.
Similar to our olefins business many of our global competitors that use NAFTA based ethylene have also seeing the input cost decline with the reduction global oil prices.
Reducing the cost advantage, that's north American PVC producers have enjoyed things to own said, all the shale oil and gas Revolution.
Oh, the industry consultants believe that at these potentially lower demand levels.
No integrate a Chinese coal and this ethylene base PBC production.
May not be economical and our at risk of being shut down.
Which would benefit North American base Pvs production in the long term.
Coordinating has cost reduced construction activities globally.
Weakening demand for PBC and associated pulling feedstock.
This slowing demand for chlorine has reduced overall chlor alkali production.
Targeting the supply demand balances for caustic soda to related throwing co process in chlor alkali production.
As a result, we are seeing improved prices in caustic soda.
Yes, it's demand has remained firm.
Overall impact on our business will depend on the duration of the call at 19 pandemic the duration of various state at home restrictions and available they still makes recovery the U.S. and abroad.
I'll now like to turn I'll call, but as Steve to go up a potential and operating results for the first quarter.
Thank you Albert and good morning, everyone.
I will start with discussing our consolidated financial results followed by a detailed review of our vinyls and olefins segment results.
Let me begin with our consolidated results.
For the first quarter of 2020, we reported net income of $145 million or $1.13 cents per diluted share compared to net income of 72 million for the first quarter of 2019.
The 73 million dollar increase net income from the prior year period was partially due to income tax benefit of $62 million, resulting from the provisions of the carriers AG enacted in March 2020 to address the economic fall out of the cobot 19 pandemic affecting businesses in the United States.
Compared to the first quarter of 2019 2020 got off to the strong start and we saw increased sales volumes of both our olefins and vinyls segments, especially in PBC in polyethylene.
Although we began to see impacts, resulting from cobot 19 in Asia in January and in our European Vinyls business. In February these impacts were offset by strong demand for polyethylene PVC resin and our downstream vinyl products.
The contraction in global industrial demand driven by the international trade uncertainties that persisted in late 2018 and throughout 2019 led to a lower prices and margins for a major product for a major products, especially in the international export markets.
As we progressed through the first quarter 2020. It again, we were beginning to see momentum for price increases in both of our segments. Prior to covert 19, becoming a global pandemic late in the first quarter.
Which occurred at the same time, we saw the significant decline in global oil prices.
Our utilization on the FIFO method of accounting resulted in an unfavorable pre tax impact of approximately $20 million or 12 cents per share.
Compared with earnings would have been if reported on the LIFO method.
This calculation is only investment and has not been audited.
Now, let's move on to review the performance of our two segments, starting with our vinyl segment.
In the first quarter of 2020 or vinyls business saw lower sales prices for caustic soda as compared to the first quarter of 2019, driven by sluggish global industrial manufacturing activity as well as the initial impact of Cobot 19 in Asia and in Europe.
Vinyls operating income of 73 million in the first quarter of 2020 decreased $28 million from the prior year period, primarily as a result of the lower sales prices for caustic soda, partially offset by higher sales volumes for PVC resin and our downstream products, along with lower feedstock in fuel costs.
Cost.
Also the contribution from our interest in the LTCC ethylene joint venture reduced our total cost of ethylene by providing additional ethylene at cost.
Thereby reducing the amount we purchase at higher market prices.
First quarter Vinyls operating income of $73 million increased by 5 million from the fourth quarter 2019, as we saw higher sales volumes and prices are PVC resin and lower feedstock in fuel cost.
These increases were partially offset by lower global sales prices for caustic soda.
Now turning to our olefins segment.
For the first quarter 2020, olefins operating income of $62 million increased by $25 million from first quarter 2019, as a result of higher polyethylene sales volumes and lower feedstock and fuel cost.
Which were partially offset by lower polyethylene sales prices.
First quarter 2020, olefins operating income of $62 million increased 13 million from the fourth quarter 2019, primarily due to higher sales volumes for polyethylene and lower feedstock and fuel cost when compared to the immediate prior quarter.
Now, let's turn our attention to the balance sheeting statement of cash flows.
End of the first quarter 2020, we cash and cash equivalents, a $1.5 billion and total debt of 4.4 billion.
Cash flow from operating activities was $61 million in the first quarter of 2020.
Before moving forward with the items, we typically discuss with respect to our forward looking guidance I'd walk you talked about some of the actions we have taken to manage the economic impact, resulting from cobot 19, and a corresponding restrictions put in place.
We have a strong liquidity and balance sheet position at the end of March out of an abundance of caution redrew on our $1 billion revolving credit facility, resulting in holding 1.5 billion of cash on the balance sheet at the end of the first quarter.
Alongside this strong liquidity position, we have the strategically staggered debt maturities with an average life of approximately 15 years.
The nearest debt maturity is $250 million due in July 2022.
The solid liquidity position, coupled with a long dated debt maturity schedule allows us to operate more confidently in today's uncertain environment.
We are taking action to reduce our RFP, Nick operating expenses and manager operations to match current demand.
We have reduced operating rates at our facilities and vital and idled some small on integrated facilities.
We have decreased the level of capital expenditures were continuing to ensure the safety upper operations and employees.
Given our current outlook, we anticipate reducing 2020 capital expenditures to $500 million to $550 million from our previous we just discussed guidance of 650 to 700 million.
We expect to defer the turnaround of our Petro to ethylene unit originally planned for the second half of 2022, the first half of 2021.
Given the current business environment, we're closely monitoring the changes in our operations will adjust accordingly to meet market needs.
With the previously discussed benefit discuss benefit of the Cures Act. We now expect our 2020 effective tax rate to be approximately 21%.
With that ill turn the call back over to Albert to make some closing comments Albert thank.
Thank you Steve.
We produced solid results in the first quartile twentytwenty.
However, as we began to feel the magnitude of impact resulting from the outbreak of the culprit 19 pandemic late in the quarter, we have focused on managing the business through this challenge in time.
Almost is in show the health and safety of employees around the world.
Next is to produce positive stuff essential to our lives from polyethylene food packaging.
If you resins and compounds using medical applications and equipment food packaging construction and infrastructure.
And qualified candidates for water treatment disinfectant, Pippa tissues and couple of packaging.
Our teams continued to perform exceptionally well in this challenging times.
Thing virtually close to our customers.
And continuing to put produced apart as needed in today's society.
We expect the polyethylene production cost advantage from ethane versus NAFTA will be reestablished and we will continue to remain focused on taking actions to position ourselves in this environment to reduce costs limited cash usage and create economic value over the business cycle.
Our balance sheet competitive position and actions, we will position us to whether the current environment.
Thank you very much for listening to our earnings call. This morning, No I will 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 ended the call Twanda, we'll now take questions.
Q.
Ladies and gentlemen.
And we need to press Star then one when your telephone.
Joining your question first Keith.
So I was asked the question.
Please standby Bobby compiled the today.
Our first question comes from the line of PJ Juvekar Citigroup. Your line is open.
Yes, hi, good morning, Oliver just wanted to Jay.
Good morning, all you good good how are you good well thank you.
Great.
A question on caustic demand fundamentals I know caustic prices are going up.
Due to decline in floating volumes, but is there anything in aluminum or pulp and paper markets at Warner on higher volumes.
And do you think good good hired for caustic prices be sustained.
Demand remains weak.
That's a that's a good question.
The call solve the as you said, a lower demand pull forming and calling derivatives.
Lets production of caustic and caustic demand is still pretty strong.
In most other segments, especially for packaging water treatment and disinfected.
So and as the economics.
Activity resumes from these stay at home orders.
We believe that caustic demand will still be reasonably good going forward.
And then just my second question is you mentioned outwards.
You think it's an advantage will be reestablished.
Do you have any comments on that further comments on when do you think that will happen and would you at some point down the road to spend capex to make your crackers more flexible. Thank you.
I'll answer the first pod lost Steve answer the second part.
From the industry consultants and the future prices of oil we believed that towards end of the early next year debt oil price move up such that you, saying based.
US you think based ethylene production will be more cost competitive to enough that based ethylene production.
In PJ as it relates to looking at capital to have more flexibility as you may recall, we do have flexibility with our petro to cracker has substantial flexibility with propane and knapik flexibility and certainly as you will recall moving to a heavier feed slate reduces ethylene and as long as we're seeing.
Reasonable demand in our downstream derivatives, we need to make sure that we're looking at the integrated economics. So we'll study that but it with average comments about re establishing that advantage will assess the return potential putting more capital giving more flexibility.
MPG as you know, we're still a net bio ethylene and suddenly will like to improve our operating rates and de bottleneck anywhere we can make sense, but we are watching our capital investments so make sure that will not make any.
Major investments until we know that to the carbon coverage as well in this way testing on its way.
Great. Thank you.
You're welcome thank you.
Thank you.
Question comes from the line of Bob.
Goldman Sachs. Your line is open.
Good morning Gamble on for Bob.
Good morning, Devon on that point.
Same point.
Last week.
Correct.
Limitation.
In NAFTA base production.
Women that kind of buying a home.
For some of the co products.
So where do you see.
After cracking economics over in terms of.
To put on a spreadsheet in terms of bracing and then also practicality.
Yes.
And our propane.
Yes.
Right now.
Right a lot of co product prices of fluctuating while quite a lot.
And.
All the major issues as Buda dying.
Demand has come down.
Sharply due to the last couple Ulta automotive construction as well as Atlantic Gulf.
We do still driving.
So and we naphtha crackers produce a lot more buda dying down ethane crackers.
So even if you have.
Cost advantage, but if you have no home for the.
Due to dying down as the issue also and as Steve mentioned.
If you go back if you already it ethane cracker go back to crack.
NAFTA fuel volume comes down a lot, which will impact your cost as well.
Thanks.
Ethane.
Induction.
Well.
I will point or do you see your point where is that actually create.
Okay potential.
Thanks again.
Certainly well with the increasing.
We will gas prices from.
Reduced all expected reduced associated gas production.
Ethane price has moved up.
But the projection is that ethane will still be tracking our natural gas prices as still low ethane being rejected.
Okay. Thank you.
You're welcome.
Thank you.
Your next question comes from the line, Kevin Mccarthy with vertical research your line is open.
Yes, good morning, Albert and Steve.
What we're doing Wally.
We are probably are doing well.
Yes. Thank you wanted to ask about the $150 million reduction to the capital budget can you discuss what projects if any have been canceled.
And which may have been close home, but you would still intend to complete.
So Kevin if you recall, we completed an expansion in Louisiana for PBC late last year. So the predominance of the reductions are looking at some of the energy savings related projects and some of those smaller Gulf coast based opportunities we discussed.
So we're pulling back really too and I, we consider it this operating rate level kind of the normalized.
Maintenance level and certainly we'll assess the markets as we go forward, but no major.
No major pullback that major projects those were largely all completed last year.
Okay, and then with regard to PVC resin.
You talk a little bit about what you've seen so far in April and.
Construction and other end use market applications and what are your expectations moving through the quarter.
With regard to possible demand.
Certainly as we mentioned that.
Through the local governments.
Good trends.
Next I'll stay at home orders allow construction has sold dolls stopped.
It does impact not only the U.S. platteville globally.
And as impact that PBC production and.
Industry consultants as I chess market and the cdti.
Projecting PVC production rates and use to drop pretty.
Pretty much.
Average in first quarter from 80, 683%.
The second quarter of 72% to 66% rate.
So we expect PVC production and demand to drop.
Yes.
Pretty significantly in the second quarter.
Okay. That's helpful. Thank you very much.
You're welcome.
Thank you.
Our next question comes from Milan, Alex.
Keybanc your line.
Thank you good morning, everyone.
Morning, Alex wondering Alex.
As you look at the second quarter, there is a higher caustic soda price outlook likely lower margin in PVC and weaker volumes just mentioned so how do you see those three factors playing out in terms of sequential EBITDA outlook for for you for your vinyl siding.
Well certainly.
They all have an impact and depending where you look at from a consulting projecting point of view that PVC price is coming down.
I think April people looking at between two to five cents a pound.
And suddenly more decline may.
The spot price PVC overseas has improved somewhat from the day alone bottom what we've seen.
Caustic price.
Industry has now passed.
Caustic price in March.
On February about $40, a turn so on caustic price and then in March this additional 60 to $70 a tiny price increase.
So all these will.
Impact the potential results all Bob.
Hello offline vinyls business and time will tell.
[music].
How much volume reduction will impact, but we expect a part of negative impact on the financial results in second quarter.
Understood and is it too early to say whether your EBITDA.
On a net basis given all these factors will be higher or lower or about the same in the second quarter.
As we mentioned earlier that the volume expect to drop of bumpy operating rates. So if you combine with.
Lower volume and the.
Reduction in prices.
In PBC, even though caustic has improved but.
The combination.
We will have a negative impact on the second quarter earnings.
Understood. Thank you Albert and then polyethylene some players talked about either idling capacity or or reducing utilization do you see the need to do so in your system. What are your expectations for polyethylene volumes in the second quarter versus first quarter.
Again, if you look at some of the industry consultants I Hs and cdti.
For LDP first quarter was 91% operating rate.
Second quarter, they're looking at 80, 477% operating rate.
Fall into a low first quarter was 99.2, 35% operating rates and second quarter, it's 84% to 83% operating rate. So again second quarter operating base I expect to come down sharply as well.
Partially due to the lack of demand globally, we do see Ben and two is the with the competitive nature of naphtha based ethylene that overseas production cost quite low.
So the combination of price expected price declines in polyethylene.
Well as reduced volume weather also negative impact on the financial results.
Thank you Albert.
You're welcome.
Thank you.
Our next question comes from the line.
Right.
For me on research.
Okay.
Yes, good morning, and glad to hear you gentlemen are are doing well.
Good morning, Hope you're doing well same to you doing doing fine. Thank you and thanks for providing some of the industry operating rates on the polyethylene side low in linear low where where are you seeing a industry operating rates on a on the vinyl side.
On the Chlor alkali side, and Albert you'd mentioned that you're running at reduced operating rates and Youve idled some facilities.
Can you give us some order of magnitude of what percent of capacity would be offline et cetera, any way to to try and size that up for us.
Paul as I mentioned earlier.
At the industry comes also looking at total second quarter, PVC operating rates, averaging 72 and 66%.
Dropped from 80, 683% into first quarter.
And for coffee I guess looking at.
87 operating rates in the first quarter and dropped to 72% operating rate second quarter. So they are looking reflecting the dropping PVC demand.
As you know that PVC I'll, probably demand drives the qualify production.
So with the reduced chlorine demand a caustic production has come down as well.
And hence we mentioned about a lower volume well cost reduction and.
We're seeing higher prices for caustic as a result.
Gotcha Gotcha.
Got you and Steve you'd mentioned.
The company is managing its costs et cetera, I noticed corporate expenses came down how should we think about corporate expenses.
Westlake for the second quarter and beyond.
So Frank will continue to be very focused and corporate expenses and I gave you the lower guidance on the capital numbers and so you'll you'll expect that we'll continue to be very focused in keeping our cost flow throughout not only the quarter, but going forward into the year.
Thank you so much you're welcome.
Thank you.
Question comes from Milan, Neel Kumar with Morgan Stanley. Your line is open.
Hi, good morning, Albert and Steve.
Good morning, you.
Given the tighter supply caustic in the near term are you considering make any significant changes in terms of your allocation domestic market versus 2025% production I believe you typically exports, especially given the high relative prices in domestic market.
Well suddenly the export demand has to impacted by the Codell virus.
Globally and as we see.
And then fall PVC coming down.
Domestically as well as.
Export.
And it'll impact certainly on the cost six supply.
Domestic export as well.
As mentioned earlier that export price has moved up.
Our measurably with domestic price actually some places I even more.
So it'll depending on.
The the volume demand as well as pricing that will impacting.
Location between domestic export sales.
Okay. That's helpful. And then just a follow up on the on the corporate cost question.
The corporate other segment EBITDA coming in around $7 million quarter versus I think like negative $10 million to $15 million in recent quarters.
Anything one time in that are but that just kind of focus on cost reduction.
Should we think about level going forward.
One Q levels, a decent run rate for the rest of year.
And so Neal we will be keeping a close lid on operating on operating expenses. So why don't I don't expect any there wasn't any unique item per se and so you'll you'll expect will keep a very close lid on operating expenses.
Both across the two segments as well as Corporately.
Thank you.
You're welcome.
Thank you.
Our next question comes from a lot of David Begleiter with Deutsche Bank.
Your line is open. Thank you good morning, Albert and Steve.
And David date.
From polyethylene the consultants they price fell four cents in April.
Do you agree with that assessment and there wasn't long for about.
Fine 10 cents decline in Q2.
What's your view on the potential decline overall in Q2.
Yes, we're seeing a four cents a decline in April and.
Cdti is looking at 10 cents decline across the.
Second quarter and I'm, just looking at only seven cents decline across the second quarter and the reason for that mainly due to the low oil price no exiting cost overseas as well as the lower demand for polyethylene overseas as well as globally.
Got it and see just on working capital how much relief for the cash would you expect us to see from working capital for the year.
So.
David I think you will see given the lower kind of reset of all these prices that just spoke too I think you'll see most of that release in April and May So most of the working capital release over the.
First two months of the second quarter, and well I Havent given specific guidance, it's a it'll be a fairly measurable amount of working capital that should release in the first two months of the quarter.
Thank you.
Thank you.
Our next question comes from the next.
Mike.
With Barclays your.
Your line.
Thanks, Good morning Albert.
Morning mining.
I guess.
First question first kind of housekeeping on the cash flow statement.
Talking about the 420 months $421 million use of cash and other balance sheet items is that primarily working capital or is there anything else it's worth noting there.
So we had is as I mentioned, we had changes in our.
Tax position and so a big piece of that of course are going to be the inner well carry back that we were able to benefit from as result of cares Act. So thats a big portion of that net change.
That's helpful and then second more bigger picture question.
There's been a number of ethylene.
Final assets reportedly on the market in the fast.
John I know, obviously, maintaining your balance sheet strength as the first priority in the current downturn, but Westlake has had a fairly successful long term track record of buying assets that off a few moments in the cycle.
Obviously valuations always the key but I guess would you consider looking at assets right now is the focus all internally.
Yes, so Mike we look at opportunities all the time and you're you're right, we'll be making sure that we manage this a circumstance where all dealing with a well and making sure that we maintain a position in both the balance sheet position on liquidity position that allows us to come through this very strong and.
He capable but at the same time, we'll also look at all the opportunities out there and if we think there's a value added opportunity, we'll assess it but as you can imagine will want to make sure that the first quarter business is making sure the businesses well footed.
Great. Thanks.
You're welcome.
Thank you.
Our next question comes from the line of Jim Sheehan with Suntrust. Your line is open.
Thank you good morning.
Morning Amgen.
Good morning, you mentioned Youre idling some plants that are not integrated.
Could you.
Talking about how.
Your capacity is not integrated and is that all in vinyl.
These were vinyl assets, but it's a very small piece these were small small facilities Jim.
And on caustic soda prices in the export market has gone up a lot.
Are you starting to see increased competition in the export market, especially in Latin America from Asian competitors that are attracted by these higher prices.
Well, okay. The Asian competitors. They also have too.
Looking to that growing the dilutive demand.
And so it's a tough balancing.
And as you know they know that some of the U.S. producers.
Location for the caustic sales.
Thank you.
You're welcome.
Thank you.
Income from Atlanta.
Global your line.
Good morning, I was the conceive calling us when are we doing well.
Doing well thank you.
And for you guys.
Look a a near term question in a slightly sort of medium term question on.
Some of the activities, we are seeing on the ethylene side of things you know one of your peers.
During the Q1 earnings call, we've talked about how they feel.
You know some of these movements, we've seen in sort of brought up pricing raw material pricing and just generally costco movements that around 20 million tons of both of ethylene capacity is economically quote unquote vulnerable.
So you know do you agree with that notion and if you do.
How would you think the industry would react to that in that Nick I'm. Obviously, you know, we're seeing or we're seeing some sort of temporary idling, but you know at what stage does that denbury actually in your view become permanent so that's that's a near term side to fit and on the medium <unk> I'm sorry to fit you know what happens to this second wave of capacity.
I mean, obviously you know if you would a mark to market current raw material pricing.
The marginal guys that used to be NAFTA are not looking back marginal right. Now you know the coal based you know the CTO MTO guys are looking quite marginal but one of us on the a cutaways chemicals side of state you know may actually start looking a little more attractive. So you know would love to hear your views on on the near term curtailment.
Inside in the medium done your project site.
Certainly well as you know the the ethylene.
Operating rates would it depended on three factors one is the feedstock costs.
Advantage and two is operating cost if you are smaller and hoda ethylene plants that you have the cost pressure and thirdly poly equally important is fuel derivative demand.
If your merchant ethylene sela todays market.
I'd be very difficult.
Even with the U.S. potential export of ethylene mentioned.
In previous.
Core solved U.S. terminal I setting export if youre ethylene costs are not competitive demand will come down. So it's really commendation, all three that matters in which plants runs at a run.
Actually Westlake net buyer of ethylene so the lower ethylene prices will benefit Westlake.
On the whole.
Oh.
Going forward.
We mentioned earlier that industry consultants in the future prices of oil things by the end of the year. Some early next year to oil price will go back to the physician where us ethane based ethylene.
Ethylene crackers will be competitive again.
So time will tell.
Whether that will be the case or not.
Understood understood very helpful.
And as a follow on as you take a look if you will sort of broadly speaking plastics portfolio, you know polyethylene side maybe.
Even if it in the BBC site. The this sort of big Delta right now is or is a huge divergence I guess, we've seen right now is in into demand for durables versus non durables.
Could you get it give us a sense or from your portfolio perspective, you know how much exposure you have to the non durables side of end markets. This is a durable site.
Certainly.
As you know that.
Polyethylene, we produce low density and he will then Steve and almost all of that goes into packaging.
Applications, mostly to food packaging and some too.
Garbage backs and these kind of applications. So yes, they are not durable, but very much needed to danced around and and I think to the expectation is that that the amount continue to grow on the PVC side majorities quota construction and as we know that any on a government.
Having stay at home restrictions on constructions, but we believe that.
As the economy recovers those two areas one that government may putting infrastructure investments stimulated colony and constructions area that thats government can help.
And second part is that.
We heard or read that many people are looking at single family homes, Rod and staying at multifamily homes. So the future demand as you know single family homes typically use mall PVC then multifamily homes.
Whether thing Windows piping.
Sightings and many other applications.
So we expect love to PVC men.
It will grow more than the past few years.
Again time will tell and when those demand will come back depending on the economic recoveries.
Very helpful. Thank you so much Albert.
The other outcome.
Thank you.
Our next question comes from the line.
With RBC capital markets your line.
Great. Thanks, good morning.
Good morning parallel.
Yes, I guess it too.
Thank you just wanted to get back on the trajectory potential of caustic soda pricing. So we've seen.
A little bit of momentum in the recent near term as operating rates have come down and demand before and derivatives has come down.
You know how do you think this evolves over the next three quarters.
It's actually has a pretty steep drop in caustic soda pricing.
Forecasted for the fall.
Is that related to potential free selling of.
Volumes as this impact certain plant start up.
How do you how do you see this.
Caustic prices are evolving I mean, or do you think that the second quarter announcements really have some support for persistence beyond this second quarter. Thanks.
Thats a good question.
I think maybe I CIS is projecting that.
PVC demand will return after these stay at home orders.
We seem to and Haynes is more production for caustic and has caustic price with condo.
Again.
Time will tell whether that will be the case.
And any thoughts on supply and demand.
Do you expect a new supply to enter the market I guess later this year early next year.
Oh, there's some.
Some new supplies as I mentioned Gentex plant.
But unlike polyethylene globally. It is very limited amount of new capacity, probably all string.
And as long as you PVC capacity.
Despite the fact PVC man.
Having demand is still growing people.
Looking at potentially investment into future I think most I think vessel today have stopped and waiting for the Bakken to return.
So there's less although supply pressure.
Compared with other or some other products.
Okay. Thanks, and on that point you guys had.
Completed a couple of acquisitions in the last couple of years.
On the PVC side, and compounding side I mean is that.
Presumably more of those assets would would become available I guess in the next year.
And presumably some smaller competitors, who were a potentially facing some of that lower demand maybe struggling right now so.
Should we expect I guess, some heightened deal activity from from from from Westlake pursuing those types of assets.
Well run as I mentioned earlier, we'll get to we're going to continue to look at opportunities as they come into the marketplace and assess how they fit into the business and the return potential there.
As I think that your.
As you will see I think it will be some.
Expansion is weve.
Compost in 2019 of integrating further across the chain in those additions in roofing materials and in compounding materials in 2019, or an example of that.
Well look to see if those opportunities present themselves in 2020 or 21.
But.
It's hard to know what will come but we'll certainly stay tuned.
And then just lastly, given that.
Somewhat.
Different feedstock environment.
Do you think there and so I mean is your strategy still to maintain your integration level.
As as much as possible or would you be willing to.
Potentially change that around just again just given they are these the reduction in NAFTA based cash cost for ethylene production.
Well as Albert noted, we still are a pretty significant buyer of ethylene in the marketplace and so as demand moves as demand moves we have an ability to adjust our purchase ethylene as well. So we can adjust given the level of integration, we have a variety of levers and one of those levers is the purchased ethylene component.
In our profile.
So I guess just to clarify would you be willing to lower integration levels and the near term or is that something that.
It's possible or is it.
That's more of a longer term decision that you wouldn't really make for for near term moves like this well I think the answer is really a function of what kind of long term benefit do we have on those so certainly when we think of the short term near term opportunities. It's adjusting the business to deal with current demand circumstances, as we look more broadly more longer term.
It's more of a strategic question.
Okay. Thanks.
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Thank you next question comes from the line.
Fargo.
Your line.
Hey, good morning.
Glad to hear you all sound healthy.
You know about a year ago, you guys gave a range from kind of EBITDA, one four to one six and I'm just curious if.
Demand started gets back to that level over time.
How does that change or that range or started that range change with oil prices.
Depressed at these levels and as you know what it might take a little bit of time to two to regain the north American advantage.
Well, Mike as you heard from from Allbritten, our prepared remarks, we do we do see that advantage that ethane advantage reestablishing itself and don't believe that these depressed oil prices will be long term sustaining so as we think going forward. We think the opportunity to continue to benefit from that is going.
To be there, we do have the ability flexibility wise to use the feedstock flexibility within our businesses today in our crackers and so certainly as we continue to grow we look for opportunities to do so but the guidance that we gave for 2019 was reflective of the demand conditions at that time and obvious.
As we the environment's changed a lot and so as we look forward, we're going to continue to be mindful that.
We'll take the advantages that we see and we think the advantages in ethane will re establish themselves because we think these prices for for oil aren't going to be long term sustaining.
Got it and then a quick follow up on to kill for Olefins, you gave us the industry operating rates that you think.
Yeah. The consultants have noted will you be running.
At those levels little bit higher little bit lower when do you. How do you think your plants on welfare.
Well.
But generally we will run somewhat little higher than industry operating rates.
But this is a different challenge different time challenging time, we'll do our best to run better, but as wind hole that the tide is going down it's difficult to a.
To stay a much higher.
Understood. Thank you.
You're welcome.
Thank you.
Your next question comes from the non of Jeff.
JP Morgan your line.
Thanks very much.
Why is that your postponing youre ethylene cracker turnaround into the first half of 21.
So Jeff.
You you might expect that the plan is run well and also there is some cost associated with us and of course during the turnaround you bring a large number of employees and contractors on site and or maintain the safety of.
Third party contractors and our own employees, we felt it was a prudent to not provide that density of footprint on site plant is running well and so when you think about the combination of those factors. We thought it made sense to to move that back to first half of 2021.
Thank you for that that's clear.
So during the cold there's been a discussion of polyethylene operating rates really moving down in the second quarter.
Is that because theres much less export demand.
Or is it because spreads to ship to the export market or unfavorable incident is the depression and operating rates and export driven.
Depression.
I guess, it's a combination of both of the causality lower GDP to lower economic activities globally that global demand is coming down LP, even though that.
The full package in demand is still good and expect to be resilient going forward, but the total polyethylene as you know that includes high density.
As well that you'll note high density goes to other than the.
Consumer.
Disposable.
Locations.
Two is the.
The lower.
Feedstock costs, our competitor overseas that also impacted.
Excellent market.
So we believe that.
I think economic activities would be the main driver for the know what you did.
And it's it's the case that spreads to export have become more unfavorable.
False suddenly was lower prices from.
Lower feedstock cost ethylene overseas the prices dropped.
And.
So the prices coming down.
Export prices and also impact domestic prices well.
But I think that's still margins.
Paul producers as wide as still selling into the export market.
And then lastly.
70 vision into the.
Cadence of the recovery in the domestic APC market.
That is when you think about.
Coming quarters Theres, so much quarantine activity in the second quarter.
In the third quarter, there should last do you have a vision of what the third quarter looks like relative to the second or story.
Yes, if up based on the.
Chess and Cpis forecast.
The third quarter operating rates are still pretty low at 73 to 68 cents.
And fourth quarter looking bit higher.
At 81, and 76% assuming no that typically fourth quarter is a slow demand months for PBC due to.
The weather, but the expecting the fourth quarter to improve our third quarter. So really second third quarter on a lower operating rates quotas and fourth quarter, some improvement, but still below the fourth quarter of 2019.
Thank you Sir thank you very much be well.
You're welcome you to take care.
Thank you.
Next question comes from the line of Jonas.
Thank you good morning.
Good morning will join us.
You talked a little bit.
The demand changes you've seen in the.
The low density plastics can you can you give a sense for.
Future looks like here.
Don.
Being a genuinely increased use of low density plastics.
That's good question.
It people still.
I'll eat more at home and go to less the restaurants than.
Our packaged.
Groceries in various forms still be higher demand during the past, but I presume that as people go out and do all shopping and eating.
There'll be less demand for fall.
Home Consumptions off packaged food, but we don't think will be we turned back to.
While pre quite pre called indicting level until.
A vaccine all therapeutic trucks.
Yeah, that's being developed.
What kind of impact us that have on the on the overall would use market.
As a good question why has mentioned that the consultants are looking at.
Pretty steep drop in operating rates and production of supply to meet that demand expects demand both domestically and export.
As you know the U.S. industry for polyethylene as a whole exporting between 35% to 40% those production due to increased capacities.
In the us build up the last few years.
Yeah, I was getting through or is that a lot of.
A lot of the demand for shortfall is from the harder plastics, particularly in automotive and those application.
Trying to understand there's just the.
The low density versus high density.
Dynamics, maybe seen in the past that they've grown at different rates.
Trying to figure out is it if there's an acceleration of that trend.
Well I know that's a good question I think they don't know operating rates also as partially.
Related to the increase capacity, we have seen in the U.S. polyethylene industry as mentioned earlier this less silk new capacity increase globally for PV she'll. All will also add production, but is still quite a lot of capacity Inc.
In the U.S. and overseas for increased the polyethylene.
Investments.
Okay. If your line I also different question all together, we've talked a couple of times in this call about.
Strategic options and looking at opportunities, but if we take us back into just thinking about something bigger.
Westlake, the interested and something like an RMT or larger equity raised.
To the point, where the child family would be minority owners in the new Westlake that even on the table.
Jonathan I, we try not to get into structuring of hypothetical transactions and I think it just doesn't add any real value to talk about restructuring of a hypothetical.
So I think instead, we take a look at really what makes sense economically and those are the kinds of ways in which we think about a business rather than the structuring of a hypothetical.
Okay.
Thank you thank you much.
Well.
Our next question comes from the line of Matthew.
[music].
Yeah.
Hey, good morning, Albert and Steve glad to hear your safe and sound.
Thank you very much hope you all.
Thanks. Thanks.
Do you view on why ethane has been moving up over just the past couple of weeks here I think it's now about a five cents premium to natural gas does that imply some sort of constraint on the frac side.
Yes, we believe that.
It's a it's more of a.
Action to the higher prices that we've seen recently.
And.
Time will tell whether the reduced to production oil.
Effecting associated gas production offset by lower demand for.
All gas, whether it's from industrial activities, all less LNG exports and all that.
And the also the thing as we understand is still a lot of ethane being rejected.
So.
Maybe it's a it's a.
Market reaction to the Dutch shop jump in gas prices.
And then with with the high ethane price. It will also have impact all the ethane exports.
Two overseas Bye bye bye ship as well.
Indeed the.
Then Steve.
Do you have a split on the FIFO impact that 20 million between olefins and vinyls and I guess as we sit in Q2 would you expect an even larger impact for the second quarter.
Matthew it's largely in the vinyls segment that $20 million pretax number is largely in the vinyl segment and it's it's hard to gauge what the FIFO number might be for this for the next quarter because it's very much an endpoint the end of the second quarter to the into the first quarter. So it's hard to gauge here in early may.
We're really where June thirtyth numbers will be so I can't really guide you much because I've got so much more up to full months largely in front of me in terms of where that likely to be but its endpoint endpoint quarter over quarter.
The first quarter numbers were largely vinyls segment.
Makes sense. Thank you.
Yeah.
Thank you.
Income from the line of Steve Byrne with Bank of America Your line.
Yes. Thank you good morning.
Morning.
You sell vinyl products into a variety of end markets.
Some quite durable like you were mentioning construction products with summer on the consumer goods and do you see any of these where there's meaning for opportunity to grow share or or to develop new applications, where you would be interested in expanding further downstream.
And maybe just the conversations that do you see any potential for.
Product substitution of some of these.
End markets.
Two polymer that is.
Centrally lower price now under a lower oil price environment.
Yes.
Some of the fueled in part its a.
Business have been doing quite well and actually even into the.
Second quarter.
Especially repair and remodeling people staying home and days you probably go to home depot indecent places and do their own.
Modeling.
So but also.
But as a whole the volumes impacted by.
The stay at home.
Orders that many local governments have put out.
And as we as we know that starting in May some of the government's who governments are lifting.
Construction.
Restrictions, so we will cease I'll return all construction activities.
Hello, because a lower income.
Levels, we expect Spendings all.
Oh home repair all building new homes will be coming down as evidenced by those we do a reduction in you hold permits we've seen.
Bosch in April.
Well in your building products businesses do you you have increased inventories versus year ago levels.
If you're going to inventories seem flat, but anything that you're seeing in building products in are you able to moving more of that chlorine.
Into other end markets other than building products.
We've been managing inventories.
Early all that we see the public 19 impact so I think inventories are reasonable.
For the for the demand going forward.
Thank you.
Welcome.
Thank you. Our next question comes from the line of Donna Rob.
Hello.
Thank you and also flat you're all some pretty well today.
Thank you John Popeo too.
Albert do you know what percent of global PBT capacity as coal based production that is not integrated to the mine and have you seen any signs of for tillman shift by those producers.
Well certainly.
Oh, the coal based production in China, and 80% of the Chinese PVC production coal based.
I will think that.
Putting I won't say majority, but a pretty large patil debt.
As Doug integrated.
And Im sure operating at a lower operating base.
What a 70, 80% operating rates.
Today, and depending on economic activity recoveries in China.
Debt raise can fluctuate up odell.
Okay. Thank you Stacy.
Now I'll call you too.
Thank you.
At this time Mcewen extensions have now.
There any closing.
Thank you again for participating in today's call. We hope you'll join US again for our next conference call to discuss our second quarter results.
Thank you for participating today, Westlake Chemical Corporation first quarter.
Conference call.
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Paul will be available for replay beginning.
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Kevin.
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Participation you may now disconnect everyone have a day.
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