Q2 2020 Westlake Chemical Corp Earnings Call
Second quarter 2020 earnings conference call.
Isn't station all participants will be in listen only mode. After the speaker's remarks, you will be invited to participate in a question answer session. As a reminder, ladies and gentlemen. This conference is being recorded today August six 2020, I would now like to turn the call over to today's host just called Wesley Vice President Treasurer, Sir you may begin.
Thank you good morning, everyone and welcome to the Westlake Chemical Corporation second quarter 2020 conference call I'm joined today by Albert Chao, Our President and CEO, Steve Becker, Our executive Vice President and Chief Financial Officer, and other members Upper management team.
The conference call agenda will begin with Albert who 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 our 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 refer to ourselves as Westlake chemical.
Any reference to Westlake partners as to our Master Limited partnership Westlake Chemical partners LP and similar references to Opco refer 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 as assumptions made by 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 availability cost and volatility your raw materials energy and utilities.
Governmental regulatory actions changes and trade policy and political unrest global economic conditions, including the impact or the cobot 19 pandemic industry operating rates the supply demand balance for Westlake products competitive products and pricing pressures access to capital markets tighten watch.
Trickle developments and other risk factors discussed in our SEC filings.
This morning, Westlake issued a press release with details of our second 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.
Mr. Callers should dial 8558592, 056 international callers may access the replay.
4045373, 406, the access code for both numbers as five one for Fivenine Sixeight.
Please note that information reported on this call speaks only as of today August six 2020, and therefore, you're advised that time sensitive information may no longer be accurate as 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 on our web page at Westlake Dot Com now I'd 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 second quarter Twentytwenty results.
The cobot 19 pandemic has impacted People's lives and weighed heavily on global economic growth.
Resulting in a significant impact on Westlake financial results.
Our first priority in the quarter.
Has been the health and safety about employees.
I'm very appreciative of our employees.
We will continue to work day in day out.
Particularly those in our plans and production facilities.
Which is critical component of the infrastructure to go by key products.
To support the pandemic response.
And keep essential goods and services flowing in support of the economy.
We remain focused on cost reductions operational efficiencies.
Management of working capital and Capex spending.
In this mornings press release.
Reported net income of $50 million, what a second quarter of Twentytwenty.
Oh 11 cents per diluted share.
Before Steve goes through the second quarter results, let me provide some insight into our results for the quarter.
In our polyethylene business, we saw strong demand in our differentiated applications, such as food packaging as more individuals consumer packaged food and everyday items from the grocery stores.
The significant dropping oil price. This early in the quarter led to the sharply lower global polyethylene average sales prices.
We also experienced a margin pressure due to increased ethane feedstock prices.
Margins begin to improve at the end of the quarter as oil prices prices rose from the lows early in the quarter and polyethylene prices start to strengthen.
You know vital segment.
PVC and vinyl products businesses.
A very strong start in the first quarter of Twentytwenty.
Early in the second quarter.
We saw broad base declines in PBC and downstream vinyl products demand.
Due to the impact of the pandemic.
Decreased demand and low oil prices led to lower average PBC sales prices.
These broad based decline reduced demand for growing.
Hosting the caustic supply demand balance to tighten.
Leading to a series of caustic price increases during the quarter.
These are in the second quarter.
As we saw stay at home orders and business operation restrictions related to the pandemic relaxed.
PVC and construction related downstream vinyl products demand significantly improved.
And several of our non integrated bundle plans that are being idled or operating and reduced output have resumed normal production.
I would now like to turn I'll call would have Steve to provide more detail on our financial and operating results for the second quarter.
Thank you Albert and good morning, everyone.
Throughout Western clearly, we took actions to address to rapidly changing demand picture in the quarter always keeping our teams wellbeing at the forefront, while improving financial strength and flexibility.
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 second quarter of 2020, we reported net income a $15 million or 11 cents per diluted share.
Compared to net income of $119 million for the second quarter 2019.
The $104 million decrease net income from the prior period was primarily due to the global economic impact from Cobot 19, and the significant drop in oil prices, which reduced our global feedstock competitiveness and associated margins.
The impact of reduced demand, resulting from the pandemic drove lower sales volumes and our vinyl segment and lower oil prices led to lower global sales prices for many of our major products.
Although we began to see the impacts to our business from Cobot 19 in Asia in January.
And in our European Vinyls business in February the full impact to our operations were felt in the second quarter 2020, as a pandemic heavily impacted the Americas.
Second quarter 2020, net income decreased by $130 million.
First quarter 2020, net income of $145 million.
The decrease net income was primarily due to lower production and sales volumes for caustic soda and PVC resin. In addition to lower sales prices and margins for polyethylene and PVC resin.
Resulting from the impacts of Cobot 19.
And lower global demand.
Second quarter 2020 did benefit from lower operating in selling and general administrative expenses as a result of our cost cutting initiatives.
For the first six months of 2020, net income was $160 million or one dollar and 24 cents per share.
Decrease of $31 million from the first six months of 2019.
The decrease net income was mostly attributable to lower global sales prices or a major products driven by lower oil prices and lower sales volumes and our vinyl segment stemming from the impacts of cobot 19.
The first six months of 2020 benefited from lower feedstock and fuel cost reduced operating and SGN eight expenses as well as lower cost associated with planned turnarounds restructuring transaction and integration related activities.
Net income further benefited from a lower effective tax rate, resulting from the cares Act and a carry back of the federal net operating loss of $68 million.
Our utilization of the FIFO method of accounting resulted in a favorable pre tax impact of approximately $6 million or five cents per share compared what earnings would have Dan. If we reported on the LIFO method. This is only investment and has not been audited.
Now, let's move on to review the performance of our two segments, starting with the Vinyls segment.
In the second quarter of 2020, or vinyls business experienced lower global sales prices and volumes for many of our major products as compared to the second quarter 2019, driven by the sluggish global economic activity brought on by the impact covered 19.
Vinyls operating income of $20 million in the second quarter 2020.
Decreased $109 million from the prior year period, primarily as a result, the lower global sales prices for a major products and lower sales volumes for caustic soda and downstream vinyl products.
The decrease was primarily offset by lower ethane feed stock in fuel costs reduced operating expense and lower costs associated with planned turnarounds.
In the middle of the second quarter oil prices, starting to rise, which caused many of our global vinyl competitors that use naphtha based ethylene to raise PVC prices.
Yes, the PVC and downstream vinyls product market began to improve later in the second quarter as demand in June improved.
Over amazed levels, resulting in an increase of three cents per pound for PBC in June.
Further increases of three cents per pound.
For July and four cents per pound in August have been announced.
Improvement in finals demand has begun which began in the middle of the second quarter has continued as industry consultants reported operating rates in June at 84% versus rates in the mid Fiftys, just a few months ago.
Now turning to our olefins segment.
For the second quarter 2020, olefins operating income of $25 million decreased by $57 million. The second quarter 2019, as a result of lower sales prices and margins for polyethylene.
Which were primarily offset by higher polyethylene sales volumes.
The tight polyethylene supply demand balances combined with rising oil prices up from their lows in early second quarter combined with higher feedstock costs drove a four cents per pound increase in June and industry consultants are projecting a five cent per pound increase in July.
Industry producers also announced a five cents per pound increase in August due to continuing type market conditions.
Before concluding our olefins review I would note that we expect the turnaround for a petru to ethylene unit discussed in previous calls to be in the first half in 2021.
Now, let's turn our attention to the balance sheet and statement of cash flows.
At the end of the second quarter 2020, we had cash and cash equivalence of $1.1 billion in total debt of 3.7 billion or net debt of 2.6 billion.
Net debt at the end of the first quarter 2020 was $2.9 billion. The 259 million dollar reduction in net debt through cost reductions management of our working capital and reductions in Capex.
In line with our focus on cash generation, we improved our financial and operating strength and flexibility throughout the second quarter.
We generated cash flow from operations of $448 million in the second quarter and fully repaid or draw on our 1 billion dollar revolving line of credit and issued $300 million of 10 year unsecured notes at a rate of 3.375% per annum.
We used a portion of the $300 million of the newly issued 10 year note proceeds to reach walk to retire $100 million, 6.5% notes on August Onest.
And we will also retire an additional $154 million of the 6.5% notes on November Onest.
This refinancing reduces our expected run rate of interest expense by about $6 million per year and maintains our long dated in strategically staggered staggered debt maturities, which now have an average life of approximately 14 years with an average interest rate of 3.5%.
This solid liquidity position, coupled with a long dated maturity schedule allows us to operate confidently in today's environment.
We've taken actions to reduce our operating expenses and manage our operations to match current demand, while being well positioned to react to the changing market environment and meet the needs of our customers.
As we previously announced on our last quarterly call. We have decreased our level of capital expenditures, while continuing to safeguard our employees and our operations. We are maintaining our revised 2020 capital expenditure guidance of $500 million to $550 million.
With that.
With the previously mentioned tax benefit of the carriers Act. We now expect our 2020 effective tax rate to be approximately 11%.
With that I will now turn the call back to Albert to make some closing comments Albert thank.
Thank you Steve.
The second quarter 2020 was a difficult time for the global chemicals business.
The outbreak of Cold and 19 late first quarter of this year, followed by the associated stay at home and business offerings operation restrictions reduce global demand.
Your first focus on the health and wellbeing of employees worldwide.
Operating on facilities in a safe and reliable men.
And kept all tensions all improving our financial strength and flexibility.
Well also staying close to our customers to manage through this challenging time.
We reduced product stood are you, saying show to everyone's lives from polyethylene fulfil packaging to PVC resin compounds using medical applications and equipment construction infrastructure.
And two clinical ipod, it's using the production of water treatment disinfectant paper tissues and Cabo packaging.
I'm proud of Westlake team voice disciplined execution.
To deliver these essential products and we'll continue to work to grow our value chain.
Let me close by shifting some views on the outlook.
We have seen continued demand improvements for all of our major products. So beginning may and continued through to the present.
PBC demand as well as pricing for polyethylene PVC and caustic have continue to increase and the oil to gas spread has more than doubled from the lows in the second quarter.
With considerable thing available for current and future use.
For polyethylene operating rates continue to remain strong with many polyethylene producers announcing price increases in July and August totaling 10 cents per pound.
We will continue to remain focused to operate safely deliver superior operation performance.
Reduce costs, while creating value over the business cycle.
The prudent management of our business through this pedantic.
Combined with a solid fundamentals of our business.
We will allow us to deliver long term value to our shareholders.
We are cautiously optimistic for improving business dynamics for the balance of 2020 as industry indications fill constructive.
As always we will continue to operate safely alone with being good stewards of the environment and the communities in which we live and work.
Thank you very much for listening to our second quarter 2020 earnings call now I'll turn the call back over to Jeff. Thank you Albert before we begin taking questions I'd 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 Josh we will now take questions.
Thank you as a reminder to ask a question you'll need to press star one on your telephone to withdraw your question press the pound Keith Please standby.
Tuning roster.
Our first question comes from possess the deal with BMO capital markets. You May proceed with your question.
Hey, good morning team. This is I'll ask John.
Morning.
Alright.
I'm also appears about in conventional lighting increase for caustic soda in Threeq you from the two Q level, which is a big counterintuitive given the rising PBC demand any impact on building and caustic supply as there will be Scott.
I understand that is all their contract and other discussions that come into play for realizing.
And demand probably thought the strong so fault on best mix perspective, what's your outlook on your realized caustic soda prices for or PQ.
As we speak about the strengthen the vinyls business, we continue to see strength in vinyls, but it's been really in the PBC space as I noted in my prepared remarks, we've seen continued strength in price nominations in PBC for Juniper.
Through June into July and now we've got to nominations ended in August so.
So certainly as we have more pull on chlorine that will certainly put more cost in the market. So as we look into the third quarter a lot of your as the answer to your question is highly dependent upon how we see the manufacturing our industrial markets begin to kind of recover I.
I think we've seen strength in certain segments of that space, whether it's been in some of the paper in containerboard, but clearly areas might cut sheet paper have been weaker some of the aluminum markets have been weaker but other markets in the detergents and disinfectants have been stronger. So it's really a function of how we see the industrial strength recover later this quarter.
But certainly we think that we're very well positioned as we see the markets begin to rebound.
Yes, I know that the industry from February to April analysis here as a price increases totaling between 160 295.
Dollars per short ton.
And I think I chose recognize about 75 of those.
Price increases per ton has being in effect and as you know some of the contracts our quarterly base. So this price increase will carry over in third quarter. Although they had some other contracts on a monthly basis will reflect monthly pricing.
As Steve said earlier, it really depends on.
The sub industrial.
One of the end demand pull apart as not only us but globally.
We saw a price increase during the second quarter, both domestic domestically us and export.
But as each country, if we exit from lead to accommodating.
Their demand and needs will be different so as I said earlier.
That some of the quarterly pricing that price increase will come into third quarter, Butlins repricing with depending on the supply demand pull that months.
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Got it that's that's good color and then income so in terms of cash flows. So we obviously saw great lakes, Saudis being passed but didnt leasing in the second quarter.
You've gone from lower working capital is can you shed some color. How you think the nationally yogurt shapes up fall pre cash flow and working capital in particular thanks.
Certainly so as you've seen we've seen nominations of price increases both in PBC nominations for caustic and nominations for polyethylene. So with the demand picture that we're seeing today across the space and improved pricing dynamics that will certainly translate into earnings and therefore in the cash flows but search.
We have not taken our foot off the gas im trying to keep our cost low and our operating cost and expenses slow as well so as always we keep a very close eye on our operating costs, but also we see a very.
Improved market relative to earlier in the second quarter through into the now the third quarter.
Demand and we've seen a series of price nominations across all of our major products, so that should improve into improved earnings and improve cash flows.
Great. Thank you.
You're welcome.
Thank you. Our next question comes from Hassan Ahmed with Alembic Global you May proceed with your question.
Wanting Albert and Steve.
Good morning, good morning.
Question around.
The capacity side of things you know.
One of your sort of large competitors talked about how on the ethylene side.
As much as 11% off.
Both capacity, maybe vulnerable because it's sort of relatively weak economics right. Now. So my question to you guys is that.
Are you guys seeing similar sort of things and if you are I mean, what are your expectations incomes or sort of curtailments or maybe even permanent closures going forward.
Yes, that's a good question.
As you know a westlake net viable of ethylene by about a billion pounds, all depending on supply demand all about derivative products.
So.
So I'll ethylene plants running.
As we said at normal operating rates and supply our downstream and we buy additional ethylene now.
Ethylene produces down more merchant ethylene then depending on their downstream customers. The demand they may or may not have older food nisa all the ethylene requirements.
So depending on the produces.
Okay.
And moving on to the feedstock side of things two part question. One is obviously we saw.
But if a rally in 10 pricing through the course, the quota and there was.
Some choppiness in this off.
NGL pricing as well so you know on on the near term site. If it in terms of cute do what did your feedstock mix look like and on the slightly longer term side of things.
What are you guys his views into this off.
At 10 pricing and attend supply demand balances.
Yes, as you know.
Thing has.
By a large being below the low fee skillful.
Ethylene into us and I know when oil prices went negative and suddenly.
Naphtha based ethylene cracker ahead of a better economics for little while.
But as you know to NAFTA type capability to us is very limited, 80% or the U.S. ethylene capacities are all ethane based so.
It's ethane price has has come up for the low but a stabilizing the 2022 cents a gallon range.
And outlook, even though oil production went down with though lower oil prices.
And some of the oil wells shutting, but as oil prices move back again, we're seeing more production, especially the Permian area. So the associated gas, which are rich in.
Thank you guess liquids.
In Bakken production, so we see more of a stable.
Ethane prices from now through the end of the year.
And even longer term at least a future prices still seeing a reasonable stable anything price going forward.
Very helpful. Robert Thank you so much.
Ill.
Thank you. Our next question comes from Kevin Mccarthy with vertical research you May proceed with your question.
It's good morning question good morning on capital deployment for you.
You noted that you took out 259 million from your net debt balance during the quarter and I guess, depending on where EBITDA settles out perhaps your ratio of net debt to EBITDA will be two turns or perhaps slightly higher.
My question is do you foresee.
Point in time, when you are cash flow will be dedicated more toward some combination of M&A or share repurchases.
Relative to de leveraging.
And when might that be.
And so Kevin when we think of the waterfall of use of cash and we think of the.
Ability to use those funds of course to maintain and run the plants reliably and safely you can see that we've got.
I think a reasonable level of capital expenditures plan for 20 and as we get ended later in the year, we'll talk about our plans for 21 is we finish our capital budgeting, but our focus really is to make sure. The plants are running reliably and consistently we have no current large expansions announced and so the opportunity.
The to deploy that capital into value added opportunities all leases. There. If you look at how the business has grown over time, it's been to organic growth, it's been through de bottlenecks and in some cases, new plant expansions as well as through acquisitions. So we're constantly on the horizon looking for value added opportunities in deploying the capital that way as part.
To use that capital, but certainly looking at rewarding investors with dividends as well as share buybacks is also part of that profile of cash flows as well. So we think it's a very important avenue to reward shareholders, but at the same time grow those of grow the value stream for those shareholders by investing cap.
Well it grows the underlying value the business. So it has a balanced effort.
Great. Thank you for that Steve and then secondly, it's obviously been an unusual season for construction activity can you talk about where PVC industry operating rates were into Q.
How you would expect them to trend into threeq to and how your own rates might have compared to the industry.
Yes, I think I Hs reported.
Matt to Q industry opening rate PV seem to us is 73%.
And then looking at 78% for third quarter.
But from what we have seen both now PBC demand in the U.S. and globally as well as our downstream building products demand.
PVC demand and putting product really strong.
Hence we have the price increases announced the three cents ended the second three cents became a two cents we entity and then as a four cents out there for August.
And you told the have price increases like this and excellent export price when from the low five hundreds.
April to know the mid seven hundreds or even going higher so.
So both domestic and export PVC price being going up and you can't have price increase like this with our strong demand.
As we understand inventory levels are producing us quite low and some of our impacted by.
Planned problems some producers.
So we should see stronger operating rates in PBC in the third quarter.
Excellent. Thank you very much you if I welcome.
Thank you our next question comes from.
David Begleiter with Deutsche Bank You May proceed with your question.
Thank you good morning.
Ali.
But some of the reason polyethylene prices string hasn't due to strong U.S. exports.
Back to us exports of trend in the back half the year as we are going to see some new capacity come on line China.
Thats good question witnessed in Chinese demand is quite strong for polyethylene.
And some other reasons that Iranian used to export fair amount of polyethylene, especially LDP to China and pick up the sanctions.
The Iranian exports has so Don will stop hence, China as being importing more products.
So.
Ill leave the hand.
We read at the us demand industry eventful polyethylene domestic demand has grown pretty sharply, especially LDP for the first six months of this year, we'll report.
Indicated that domestic demand for LDP went up 7.4%.
Which is unusual usually LDP demand increase putting one 2% a year so.
So it shows that because all the covered 19 and consumers are buying more packaged.
Good and packaged food demand, especially LDP has really strengthened.
And same time.
Put LDP declined because there's only so much LDP to supply and we have this increased domestic demand you had reduced exports, but having said that I think linear low and high density export has also gone up a lot, reflecting the new capacities that the AD is in in the us as well as Steve.
You asked recovering competitive.
He stopped advantage that today I think as the lowest cost feedstock in the us to produce.
Finally, as helped July 30 as report from Aegis.
Given that strains how you're feeling about the August five cents increase Apollo.
We think is quite strong, but let's just beginning the August all things happening between now and in August but.
I think I Hs indicated the five cents a go through whereas I.
I think CD eisais it won't go through so.
We don't know maybe somewhere in between.
Thank you very much tighter youre very welcome.
Thank you. Our next question comes from my two then we will Wells Fargo. You May proceed with your question.
Hey, good morning.
Good morning, the just curious on the outlook on the polyethylene price increases.
Well those all flow through to the bottom line.
And just curious I think July maybe some of that cost went up and and what do you think how much is a five cents could flow through if you get that achieve.
So Mike as you know the increase is typically for some of the larger volume buyers typically have some delay before they actually hit the bottom line, but nevertheless, if you look at where ethane is we think is effort earlier noted it's in the low Twentys 20 to 23 21 in that range and so having a having some of these increases as we did.
Announced in July and August.
Will translate into improved results in the bottom line, but obviously on a biddable one month lag basis in some cases.
Got it and then.
In terms of the.
In terms I know you mentioned demand for PBC look strong on a sequential basis. How strong do you think you're PVC business will be on the top line basis versus second quarter.
Well you certainly saw a pull back because of the stay at home orders in the second quarter in so operating rates were quite low as you've seen published in some of the industry consultants publications and so as Robert noted.
And I noted, we've seen operating rates get get much more elevated and remain very strong as we see demand today, we've got price announcements to say in July there was implemented the to send increase in July three cents was announced today to when implemented and we've got an announcement for August as well of four cents, we'll see.
What.
It gets implemented is.
We all know it's early August but demand looks very very firm.
So with with that said operating rates remain elevated and it looks like a good market.
Great. Thank you you're welcome Mike.
Thank you. Our next question comes from Alex from off with Keybanc. You May proceed with your question.
Thank you good morning, everyone warning ammonia.
Thanks.
Opportunities for for bolt on acquisitions, any or building products business.
Good tied to accelerate Norte Rollup strategy.
Well, Alex I think as you know we've looked at a number of opportunities in the last year took the opportunity to invest in net Connie PBC compounding business as well as mid year Davinci roofing business.
So we do look for value added opportunities downstream and our business and to the extent that we find those.
Those and they make sense. They are nice additions both the performed very nicely since the transaction and certainly we look forward to finding opportunities, but it is always a balance of trying to find a balance between value.
And just bolting on for for bolt on site, which we do not do so the answer is we'll look and if there is some value added opportunities as we found last year will act on those.
Thank you Steve and.
You mentioned you realize some solid price increases in the PVC resin you are building products.
Should we think about how should we think about pricing there relative to two PC.
Demand as soon as you might imagine in the DIY why or repair and remodeling space has been very firm and we've also seen and you probably haven't seen this from some of the homebuilders that they have also seen strong results and so on our pipes are fittings or sidings businesses of all seems solid demand and we.
Certainly see pricing capability and all of those downstream products and certainly we're acting on that everywhere, we see an opportunity to act.
Thanks, a lot.
Welcome.
Thank you. Our next question comes from Jim Sheehan with True Securities. You May proceed with your question.
Good morning, Thank you.
John.
So can you comment on how the pandemic was affected your thinking about doing dropdowns into Westlake chemical partners.
So Jim as you know there are four levers that we have available to us one of the dropdown that you mentioned and we still have a very significant portion that can be dropped we have also acquisitions and as you know we acquired a portion of the.
I see ethylene cracker last year and our partner of OTI has the other half and so that could be an acquisition target. We've got an ability to think about de bottlenecking overtime and certainly that new cracker at an appropriate time could be considered and of course margin expansion. So those four levers are the ones. We contemplate it's really look.
Really looking at the kind of risk reward, we get and so as we take on the opportunity to look at growing the capabilities of the partnership to a dropdown or the other three levers. It's all about is the is unit price, reflecting that growth in earnings and cash flows we've demonstrated over the last six years. The partnership is in.
Incredibly predictable in terms of its earnings and distributable cash flow. The issue is if we're getting the appropriate reward. We can act on any one of those four levers.
Thank you and it looks like there are some ethylene assets in the us Gulf coast that may be changing hands.
Are you an acquirer.
Selling assets and if not how do you see the competitive landscape changing as a result, so those asset sales.
Well I can never obviously comment on anything that we might be looking at or might be looking at but what I would say is is that.
The competitive landscape is one that is by definition competitive and so as we look across the spectrum. We always are willing to work with the market and our customers and should there be new entrance into the market.
So be it we think we're very well positioned with our portfolio and think we are very competitive with the products that we produce and some support we provide our customers.
Just one point.
Steve mentioned last quarter fourth quarter last year at 29 team we acquired all.
30%, 30% of.
LTCC.
Full $8 million. So we did this a quiet.
Thank you.
Okay.
Thank you. Our next question comes from PJ Juvekar with City you May proceed with your question.
Hi, good morning, apparently tree on for PJ good.
Good morning.
Earnings on your olefins and vinyls decline with your peers. So wondering if you have to give some color on that is it better cost position better fixed cost absorption or product mix various.
Well, Eric I think when you look at our space and I think Albert mentioned this we're very well positioned in the low density space and some of our differentiated products and so certainly in applications, such as food packaging and coating materials.
With everyone going to the grocery stores and buying package materials I think we're very well positioned with the autoclave technology that we have an I think the specialization that specialty end of that products.
We'll has has demonstrated strength in this in this setting.
In our vinyl space, we have the ability to really be.
Well position not only in PVC resin, but also further downstream into.
Vinyl products pipes fittings, citing a wide variety of of downstream products as well as servicing others with our resin in that market and so I think the integration strategy that you hear US talk about has served as well and being able to service the export market with resin the domestic market with resin and of course, the construction and repair and remodel.
Growing markets with our downstream products I think that has helped us with the ability in this very dynamic market.
Thank you. Our next question comes from Goldman Sachs start with Bernstein. You May proceed with your question.
Thank you.
I was wondering to in the last couple of months, that's been a lot of.
The new southern hydrogen.
Given that you guys are one of the largest operators of Electrolyzers in the world is this an opportunity you're looking into.
Either as a producer where yes, the operator of hydrogen assets for others.
Well, there will be very interesting, we'd be reading a lot about it right.
It's electrolysis was power and with water Rod and Salt and Brian. So, we Oh, yes, and anybody into talk to US we'll be pleased to talk with them.
But if that's something you are looking into directly.
Well, we don't have widened the hydrogen economy is what's happening I think is made from natural gas so as not quite the green hydrogen I think because it was a great hydrogen or whatever and true to be truly encouraging call to the union fee.
Greenwich, using renewable power from solar and wind and so there's no seal to.
Production from that and you tie down too.
Hydrogen pipeline also either.
Consumer and building hydrogen fueling stations, which are very few much less than the electrical charging stations, which are people are building mall bills. So I think we're still.
Several years away from it but we are very interested looking into it and deficit anybody will talk to us will be please talk with them.
Okay. Thank you.
Youre welcome.
Thank you. Our next question comes from Ben Isaacson with Scotiabank. You May proceed with your question.
Thank you very much just.
Just one question actually on alkali can you talk about where you think we are in the cycle.
Given.
How demand has changed as a result hold that.
Subsequent cancellations or deferrals of new projects.
Do you see tightness in the market getting pushed back one year three years et cetera, just talk about where where we on the site.
Well as Steve said Chlor alkali demand really follows industrial production.
And as you know that.
Starting around 2018.
With that trade, what putting us in China, China led with declining in industrial production, which kind of impacted the rest of the industrial world.
And even I think by the end of the Austria, we saw some signs of improvement with the the phase one.
Terrorists reduction was us in China, but then we are Colby 19.
And as you also.
No that unlike the olefins business that little new capacity at around the world in Chlor alkali and for US is the best place to call saw the the low power.
He has also sold domestically and you have a big caustic market. So.
Youre right. The comment I think has pushed back probably the peak off.
Caustic, but then how file.
Peak will be away from us, we don't know depending on the video global GDP recovery.
Fossett cover.
Pasta coffee the mill increase.
Thank you. Our next question comes from Frank Mitsch with Permian Research you May proceed with your question.
Good morning, gentlemen.
Well if I.
I was struck by some of the.
Some of the cost actions that you took in the second quarter CSG Nay came down and that was something that you highlighted in terms of delivering the results that you did I was just curious.
If you might be able to size, what our expectation should be in the second half of of 2020.
And would you describe these cost actions is being structural that would continue into the future 21.
Or really more reactionary to.
The the unusual circumstances, we have with the pandemic.
Yes, Frank I would I would guide that the first six months run rate of SGN. A is something that you could realistically think that might be deliverable than the second half of 20.
Many of the actions that we took will will be sticky, but I think at the same time remember we've got commissions built into that SGN. A line. So that as business continues to improve as we continue to see volume there certainly be some elevation of that but I think directionally that that kind of run rate number for the first half of the year.
Should be reasonable to consider for the second half of the year.
I know that the Westlake salespeople are appreciative of that Commission line.
And.
July already in the books I was wondering if there might be possible. The size. The volumes that you saw in July versus June or versus the second quarter hour, we want to.
Permit or at least give us an idea when you olefins and vinyls business.
Well certainly in the olefins business with the stay at home orders and so much.
A food being sold off grocery store shelves.
Operating rates were consistently pretty elevated all throughout the second quarter.
And so that was I think kind of a hallmark all throughout the quarter in everybody that.
It's been living through the spend to make knows that as you get into the vinyls business a lot of this went into certain construction industries and so certainly some markets.
Here in the North American market did not designate.
The construction industry as a critical portion of infrastructure.
And some export markets in Asia, India shut down and so export for resin in some cases were greatly reduced because of the export markets backing up and some construction markets not being allowed to operate.
During some portion of the quarter, so operating rates as I mentioned got quite low, but we certainly have seen a big strong rebound is many states and provinces in North America opened up and of course, those export markets opened up as well.
So operating rates have come come back I mentioned at the end of June they were about 84%.
For the industry.
Thank you so much you're welcome.
Thank you. Our next question comes from Matt you blame with Tudor Pickering Holt you May proceed with your question.
Hey, good morning, Albert and Steve.
Okay.
So it looks like benchmark natural gas prices in Europe have come down quite a bit is that something that you've been able to take advantage of in your European.
Do you plan.
And then also that lowered the I guess flatten the cost curve is that affected us caustic either I guess, some profitability or volumes on the expert side.
Well, we're up obviously buyer so net natural gas in markets in Europe and in North America. So certainly as we see prices move we've been able to take advantage of Adam So when you think of the.
Quarter over quarter results.
We've seen lower lower fuel costs, which are natural gas costs and so that has been at advantage and that's very true also year over year and so as prospectively, we look at markets in North America and Europe, we've seen some recent uptick in natural gas here in the last few weeks.
But I think with the comments that Albert made you heard him talk about higher oil prices and we've seen producers come back into those fields and begin to produce and so we'll take a look.
At gas and see if see how things play out, but certainly we believe there's ample gas, but we can certainly see where gas has been moving a little bit very recently.
Thanks, I'll leave it there.
Thank you.
Thank you. Our next question comes from John Roberts.
You May proceed with your question.
Good morning, guys.
Okay.
That's one glycol was pretty weak during the quarter does that have any bearing on the operating rate at ELCC or the allocation of ethylene.
No no in fact, it does not.
So to say, we invested as Robert noted we invested in the.
In the venture to really get nearly 50% ownership of the end of the fourth quarter and was certainly we're pulling on.
Our pro rata share of the ethylene and that did not have an effect on operating rates.
Okay, and then earlier, Steve you mentioned to all the different options you have for the MLP.
It's price is doubled off the low that it had earlier in the quarter. There does it need to go higher before you exercise any of those options.
It's certainly it's still yielding in the 10% range and so certainly I think investors would like to see it.
Appreciate greater than that we think the underlying strength of the cash flows demonstrate the ability to ride through all kinds of challenges and this pandemic is probably the biggest challenge we have all faced so I think that the stability here as an illustration that valuations still need to be be higher than where it sits today I certainly think that it.
It is a very well performing partnership.
Thank you.
You're welcome.
Thank you.
At this time Accuen extension is now and 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 third quarter results.
Thank you participating today's Westlake Chemical Corporation second quarter earnings Conference call.
As a reminder, this call will be available for replay beginning two hours after the call.
Maybe accessed until 11 59 PM Eastern time on Thursday August 13, 2020, the replay can be accessed by calling following numbers domestic callers should dial.
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