Q3 2020 Westlake Chemical Corp Earnings Call
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Good morning, ladies and gentlemen, thank you for standing by and welcome to the Westlake Chemical Corporation third quarter 2020 earnings conference call. During the presentation, all participants will be in a listen only mode. After the speakers surprising after the speakers remarks, you will be in.
Added to participate in a question and answer session. As a reminder, ladies and gentlemen. This conference is being recorded today November 3rd 2020, I would now like to turn the call over to today's host, Jeff Holly West Lake's Vice President Treasurer, Sir you may begin.
Thank you Justin good morning, everyone and welcome to the Westlake Chemical Corporation third 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 the conference call a jet agenda.
Well begin with Albert will open with a few comments regarding Westlake 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 then open the call up to 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 and information currently available to management. These.
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 in trade policy and political unrest global economic conditions, including the impact of the Corona virus.
Industry operating rates the supply demand balance for west lake's products competitive products and pricing pressures access to capital markets technological developments and other risk factors as discussed in our SEC filings. This morning, Westlake issued a press release with details of our third quarter results.
This document is available in the press release section of our web page at Westlake Dot Com we.
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 eight fivefive 8592 056.
International callers may access the replay at 4045373 406, the access code for both numbers is 1896958.
Please note that information reported on this call speaks only as of today November Threerd 2020, and therefore, you're advised that time sensitive information may no longer be accurate at the time of any replay I would.
Finally advise you that this conference call is being broadcast live through an internet webcast system that can be accessed on or web page at Westlake Dot Com now I would like to turn the call over to Albert Chao Albert. Thank you, Jeff Good morning, ladies and gentlemen, and thank you for joining us to discuss our third quarter.
2020 results.
In this mornings press release, we reported net income of $57 million for the third quarter of 2020 or 45 cents per diluted share.
Well, Steve goes through the third quarter results.
Let me provide some insights into our results for the quarter.
Throughout the third quarter, we saw solid demand for our products.
Global economic conditions, improving as many countries relax, let's stay at home mandates and business restrictions that have been put in place early in the second quarter due to the COVID-19 pandemic.
Westlake capture this demand growth in the first two months of the quarter.
Sales volumes in both the olefins and vinyls segments, which will either comparable with or higher than the prior year period.
As a result of this robust demand.
That accompany the recovery in global economic activity starting in June we started increasing price environment for many of our products.
Especially for polyethylene and PVC.
However in late August.
We can lower our made landfall installs were Louisiana, that's one of the most powerful storms to reach the us Gulf coast in the last 40 years.
Well plans weathered a storm well then we'll extensive damage to the electrical and utility infrastructure into Lake Charles area.
What is power and utilities were restored we were able to begin the process of restarting operations.
The extensive repairs the power and utility infrastructure cost many of our liquidity is in Lake Charles which is plus approximately one third of our global chemical production capacity to remain idle throughout September.
Resulting in lost production and sales volumes in the third quarter.
This catastrophic storm also severely impacted many of our employees I.
I would like to say special Thank you to our dedicated employees, who work tirelessly to restart all facilities.
Also dealing with the hurricane impact to their own homes.
In early October as we were completing the startup process following hurricane Laura.
Hurricane Delta made landfall in the same area further.
Further delaying us from restarting our plant.
I'm happy to report that opportunities have resumed operations.
I will now turn our call over to Steve.
More detail on our financial and operating results for the third quarter. Thanks.
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.
We begin with our consolidated results.
Westlake saw a solid rebound from the second quarter lows, resulting from the cobot endemic with strong demand and increasing prices for most of our major products as Albert just outlined the effects of hurricane Laura to the electrical and utility infrastructure in southwest, Louisiana as well as logistic constraints in the area hindered our ability.
30 to quickly risen operations, which led to lower production and sales volumes as well as increased maintenance spend and other costs associated with lost production.
We estimate the impact to our third quarter pre tax earnings from the lost sales and increased costs, resulting from the storm to be approximately $100 million or 66 cents per share.
Of this 100 million dollar estimate approximately 60% was related to our vinyls segment with the remainder affecting our olefins segment.
In September we announced the closure of a non integrated Standalone PVC facility in scope out of Germany.
In connection with this restructuring of our European operations, we incurred charges of $34 million or 19 cents per share in our vinyls segment related to the impairment of certain assets as well as other costs associated with the closure of this facility.
These two discrete events hurricane Lora and the closure of the scope Pal facility totaling $134 million.
Upset the results we otherwise would have recorded from these strong markets for our products that Albert mentioned in his opening comments.
The third quarter of 2020, we reported net income of $55 million or 45 cents per share compared to net income of $158 million for the third quarter of 2019.
$101 million a decrease in net income as a result of the impacts of hurricane Laura and the restructuring charges, just discussed as well as higher ethane and ethylene feedstock cost in both our vinyls and olefins segment.
Partially offsetting these effects were higher earnings and our vinyl.
Building products businesses and lower fuel costs.
Third quarter 2020, net income increased by $42 million from second quarter 2020, net income of $15 million.
The increase in net income was largely attributable to higher prices for major products, especially with the strength in PBC in polyethylene prices as well as higher sales volumes for caustic soda and increased earnings and our downstream vinyl products businesses.
Offsetting these increases were impact from hurricane Mora and the higher restructuring cost associated with our European Vinyls business.
Our utilization of the FIFO method of accounting provides a benefit in periods of rising production costs compared to what earnings would have been reported on the LIFO method.
As discussed the impact of hurricane more in the Gulf Coast led to a large amount of industry ethylene capacity be offline. During September as a result ethylene at the end of the third quarter more than doubled in price when compared to the end of the second quarter.
The effect of this increase in ethylene prices led to a favorable pre tax impact of approximately $46 million or 30 cents per share compared to what earnings would've been reported on the LIFO method.
This is only an estimate and hasn't been audited.
Now, let's move on to review the performance of our two segments, starting with the Vinyls segment.
Throughout the third quarter, we saw strong global demand for PVC with industry consultants reporting domestic contract pricing, increasing over 10 cents per pound and export pricing in the us increasing over 17 cents per pound from the end of the second quarter.
We also saw strong demand in our downstream vinyl products businesses from especially robust demand related to home construction repair and remodeling improving demand related to the automotive and appliance industries.
However, the effects from hurricane or impacted our production of PVC late in the quarter, which limited our ability to fully capitalize on this increasing price environment.
For the third quarter 2020, vinyls operating income of $42 million decreased $111 million from the prior year period, primarily as a result of impacts resulting from hurricane Laura and the restructuring cost in our European operations, which were partially offset by increased earnings in our downstream vinyl products.
Businesses and lower fuel costs.
Now turning to our olefins segment, our olefins business continued to see strong global demand for polyethylene, which when combined with low industry inventory levels.
To reported domestic price increased to 50 15 cents per pound from the end of the second quarter as well as strength in export prices.
As the effects of Hurricane more limited our quarterly production and sales volumes for both ethylene and polyethylene our third quarter 2020 operating.
$51 million decreased $41 million in the third quarter of 2019 due to the hurricane.
Next let's turn our attention to the balance sheet and statement of cash flows at the end of the third quarter of 2020, we had cash and cash equivalent to $1.2 billion and total debt of $3.7 billion. In June of this year, we issued $300 million of 10 year unsecured notes at a rate of three and three eights and used a portion of these proceeds.
As to refinance $254 million, 6.5%, Gozone and zone revenue bonds.
$100 million the refinancing took place in August with the remaining $154 million being completed yesterday.
With this refinancing we now the debt maturity profile with a weighted average life of 14 years and an average interest rate of 3.5%.
This solid liquidity position, coupled with a long dated debt maturity schedule allows us to operate confidently in today's environment.
Looking forward to the rest of 2020 as Albert mentioned in his opening comments the effects of hurricane more stretched through September and early October.
As we were beginning to resume operations, we had to idle our facilities in Lake Charles is second time due to the approach of Hurricane Delta in the same area.
While hurricane Delta causes minimal damage it delayed a recovery a few weeks, while we have now resumed operations. We estimate the effect of the two storms impact the fourth quarter results by approximately $120 million given the current price environment due to the lost production sales as well as higher maintenance costs, we incurred.
We expect 2020 full year capex spending to be approximately $550 million, we expect our effective tax rate for full year 2020, excluding the effects of the cures act to be approximately 15%.
With that ill now turn the call back over to Albert make some closing comments Albert.
Thank you Steve.
2020 sites being a challenging time for not only westlake, but for all of us.
Outbreak of probably 19 late in the first quarter, which was quickly followed by the associated stayed at home orders and business restrictions.
Significantly coattails global economic activity.
As we progress from the spring Lockdowns.
We're seeing a broad based economic recovery.
All this strong increasing demand for many of our products.
Actually those more directly tied to the end consumer.
While these economic recovery may continue to be uneven among the industries we serve.
We remain optimistic outlook.
The pricing outlook remains favorable with industry consultants, noting that demand continues to remain strong while inventories of PBC and polyethylene remained low supporting the momentum we have seen as we enter the fourth quarter.
In our vinyls segment supply constrained for PBC continue also.
Strong demand from our customers, especially in the construction auto and appliance indices has created tight market conditions.
As industrial production has slowly begun to recover demand for caustic soda in the third quarter improved from the low seeing the second quarter.
In the olefins business, we expect the front the mental polyethylene said, we have seen throughout the year to continue this.
This demand is driven by high end use demand in the consumer part of the package in healthcare hygiene and food service markets.
Similar with PBC supply constrains have created tight supply demand balances with low industry inventory levels.
We will continue to remain focused on operating safely delivering superior operational performance and reducing our costs.
While we are monitoring the increasing cases of COVID-19 around the world.
We are cautiously optimistic and improving business dynamics for the balance of Twentytwenty and into 2021.
As in the C indications look constructive.
We are confident that Westlake is well positioned to serve the needs of our customers, while maintaining financial discipline.
Combined with the strong fundamentals of our business will enable us to deliver long term value to our shareholders.
Thank you very much for listening to our third quarter 2020 earnings call.
I'll now turn the call back over to Jeff. Thanks.
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 has ended.
We will provide that number again at the end of the call Justin will now take questions.
Thank you Sir as a reminder to ask a question you need to press star one on your telephone to withdraw your question press. The pound key please stand by what we could file the Q and a roster and once again that is star one if youd like to ask the question and our first question comes from Bob Koort from Goldman Sachs. Your line is now open.
Thank you had two questions. If I could first I think you mentioned, maybe the supply chain seems a little bit lean could you give us some quantification and whether you think that could maybe.
Provide some resistance to typical.
Slowing in the fourth quarter and then secondly, I was just curious what your latest thoughts are on regionalized defenses in ethane costs as we head into the first quarter. Thank you.
Suddenly.
Because of the plan, although reduce we've seen in the polyethylene and PVC industries.
People are now coming back in operation and building up inventory back again, so we believe that the inventories among producers on quite low I think inventories among the consumers are know to average.
And.
Until the codes that produces buildup adequate inventory, we will not see oversupply of polyethylene PVC even.
Even into the fourth quarter and demand for polyethylene and PVC globally remains strong so the demand.
We'll continue we believe as a global economic economies recover and demand will remain strong into 2021.
As far as things concern.
As Paul suddenly that.
With less oil production associated gas production, that's ethane available and also with.
You ethane terminal is coming back operations that export demand will be larger but time will tell the cost of the oil and gas balance may or may not have ethane export.
Demand, we as we've seen in April may of this year when oil price drop them all the ethane export has dried up.
If you look at the.
The future prices for ethane, that's still hovering indeed.
No.
22, maybe.
No thirties for next year. So we are confident that they will be saying available.
Now to supply the us domestic demand for years to come.
Very helpful. Thank you.
You're welcome.
Thank you and our next question comes from Frank Mitsch.
Permiam Research your line is now open.
Hey, good morning, gentlemen.
I wanted to kind of yeah.
Good morning, I wanted to get a little more.
Clarification.
For some more color I believe Steve you mentioned that the fourth quarter would be negatively impacted by a 120 million.
Due to storms could you break that down a little bit further I mean.
In terms of where and how you're seeing that.
And so Frank Yes, that's right $120 million is our guidance for the impact from the fourth quarter related to the storm and of course.
Excuse me and of course that relates really to both combination of loss margin in some repair expenses, obviously in a higher price environment that we've seen continued from September into October obviously, the impact of Luke into production sales impact that to a greater degree than I did in third quarter, which again as I said the guidance.
It's $100 million in third quarter.
All right. So your words, so basically what you're saying is that the fact that our margins have picked up prices. Obviously, our ending ended the third quarter higher than they started at least on polyethylene certainly in PBC.
That's why you're going to see that greater impact in Fourq. You. Then you Didnt Threeq correct. That's right and you do have some costs that flow through into cost of sales in third quarter flowing into fourth quarter. So thats also part of the contribution of the impact in Q4.
Okay, all right very helpful and then.
You, obviously took the step to shut down one of the facilities in Germany on PBC.
You took the $34 million charge.
How do we think about all else being equal the fact that you're running the those other assets there because you're not losing any volume right you're going to run your other assets there at higher levels, how should we think about the financial impact.
After.
Next year and beyond all else being equal.
Well, you're right as you may recall, we did expand facilities in Germany, and so we can accommodate this reduction of production in scope out and so there is no change in our ability to service the customers. So no change in volume capability as a result of this shutdown of this patent scope out so as we think going forward, we think we're very well.
Position now running more integrated assets at higher rates with certainly has a very constructive way to run the business, so being able to really pull that on integrated facility out of the portfolio will be additive to the overall business. We expect that given the strength that we've seen so far we hope that we see that continue into 21.
Got you. Thanks, so much.
Yes.
Thank you and our next question comes from Mike Lee said from Barclays. Your line is now open.
Great. Thanks, and good morning, guys I wanted my morning, I guess first can you give us a bit more color on the strength of the building products businesses in the quarter and how you think how sustainable this demand is and Relatedly do you intend to at some point so do the financial community more details around this business given the level of growth.
Scene and differentiation for maybe the more commodity core alkali assets.
We'll take that into consideration as we think about this business and you're right. We did see and I spoke to the strength that we've seen in the business. It was across the board in our compounds business and our pipe business and our exterior siding businesses. So although more very nice.
Tributaries two to the overall EBITDA of the quarter.
And as I say, we don't give specific break out guidance, but all three were nice very solid contributors and we continue to see that repair remodel and new construction markets continue. So we're very very excited about the robust strength, we've seen in all three of those pieces of the business.
Great. That's helpful. And then question on natural gas.
Finally prices moved higher in October and I assume because of your flight for accounting, you'll still be rolling through some of the lower cost September gas in your Fourq results. So could you maybe just give us an early framework how to think about that for Q playful benefit or maybe just an overall sensitivity how we should think about natural gas prices.
Well you have seen its not only the five goes not only natural gas of course, its feedstock, so ethane and ethylene and you've seen an increase in pricing of ethylene.
From Twoq to Threeq.
And so certainly it's a combination of gas ethane and ethylene coming into the coming into the FIFO calculation and carried through those higher cost will flow through into fourth quarter, and so certainly will be some headwinds as we see it it was a.
Headwind as I noted in my in my comments in third quarter, and a pretty significant headwind both in price and volume for those those feedstocks, but they will continue to be a headwind if prices continue and it's a function of really ending Q3 into Q4 price at the end of the year will really be that way to.
The benchmark what that impact is.
Great. Thank you.
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Thank you and our next question comes from outlets year from Rose from Keybanc.
Your line is now open.
Thank you good morning, everyone.
Good morning, good morning.
Could you tell us where pricing is for building products relative to PC in the third quarter or maybe year to date.
Is there an opportunity for building products to enhance margins further in Q4 or maybe next year by raising prices.
Yes building codes.
Have been increasing prices to reflect the PVC raw material price increases and with a strong.
Demand even into the winter season.
We will see that.
This will be maintained at this level and depending on again the economic conditions in the springtime typically springtime, it's a strong building season.
But as people are building inventory no.
When the season, depending on the economic condition will see when what price levels will be at a time.
Thank you Albert and you recently announced.
The price increase in chlorine fairly significant one.
At the same time Hs market index.
Increased over the last few months, but much more modestly can you maybe tell us.
How youre merchant chlorine pricing words to what extent, it's tied to I guess.
Versus free negotiated and also maybe explain this.
Seemingly large difference between the nominations for commercial flooring, they're out there and.
At HSN the pricing action.
Suddenly suddenly we have to reflect market conditions, we sell a merchant forming.
We said.
We are vertically integrated to our PVC business and the Pvs demands very tight so we want to make sure that all PVC.
Productions impact that.
Cost of Hurricane Laura Delta.
Part of our PVC our vinyls.
Thanks, Phil.
Lake Charles.
At the impacted so we're now building that inventory flow.
Well I know, most NPDC and DTC so.
Any contractual sales on.
Four we laid upon its we had to reflect market prices.
And thank you.
And the next question comes from sort of modest from Alvin Global.
Your line is now open.
Good morning, Albert and Steve.
Good morning, good morning.
Just wanted to revisit the chlorine price hike side of things obviously.
Obviously for the last.
Couple of years chlorine pricing has been fairly steady and.
Despite the fact that we've seen some outages are they here, we've seen some outages out in Brazil as well, but.
But it seems you know that capacity is slowly coming back on line. So the question I have is how sustainable do you feel.
This recent sort of chlorine price hike is going to be eight as one sort of goes into Q4, and then 2020. One is whether with obviously the backdrop of what seems to be.
Pretty tight sort of BDC market as well as.
Relatively sort of hilti.
I was in market.
Yes, that's.
Thats a big question as I said earlier, we are letting integrated PVC and PVC is the best margin for all of the following dilutive markets and merchant slowing sales probably is among the lowest.
Margin for the qualified business.
So we are trying to maximize our.
Following assets and hence that we have announced a pretty.
Pretty large price increase will probably as I said earlier that we had to reflect the market conditions.
And the other producers they have different needs for their chlorine pricing and so have contractual.
Yes that we had reflect marketplace.
Understood understood.
And now sort of moving on from certain product areas, just just as I take a look.
Our balance sheet.
It seems pretty healthy.
It seems that.
The worst of the demand side of things and pricing side of things is behind US you know Q2 seems to.
Look like a trough and it seems that market conditions have improved quite nicely that off to now and as that happened. It seems M&A seems to have picked up again.
And onto chloro vinyl side, you know there is an asset that's available.
So how are you guys thinking about the near term side of things as it pertains to M&A, particularly on the Chlorovinyl side of things.
So it's on we always are interested in looking at opportunities in our space and so I would say that as we assess opportunities, we'll look and see do they fit or their compelling synergies and other value propositions compelling there.
When we look at our balance sheet, we think that we have a very strong balance sheet that of course, we never want to overstress the balance sheet. So we'll also take those those issues into consideration.
So that when you made the acquisition back in 2016, we quickly pared down the debt. So our focus is maintaining strength financially as well as being able to build on the business and grow the business. So we'll assess all the opportunities that are in our space and if there are compelling have good synergies and I didnt fit that they become increasingly more interested and then its a function of 10.
We run those assets effectively and integrate them into our business and provide the synergy that we think we can so it's really about value creation at the end of the day.
Very helpful. Thank you so much.
You're welcome.
And thank you and our next question comes from Steve Byrne from Bank of America. Your line is now open.
Hi, it's Matt on for Steve.
Volumes were down 18% in olefins and only about 2% in bottles.
Yes, okay. Despite the maybe 60% headwind from the storm also being on the vinyl side. So why was the vinyls business seemingly less gain on the volume side that just a function of building products can you kind of fill fill in blank Sir.
So certainly as.
Certainly the Lake Charles facility is certainly have both both vinyl and olefins assets of course, but to your point, we had a strong contribution by our downstream building products businesses. Those businesses continue to work very well you may recall that we also declared.
You know a force majeure in many of those products to make sure that our customers were sure we dealt with and that affected or downstream products as well.
Certainly as we saw the strength in our downstream products business and you've seen that both in housing starts and housing permits and I spoke earlier about the strength, we've seen both in compounds pipe and fittings and exterior is really spoke to the strength we've seen in our vinyls businesses.
Thank you it's funny I want to add also that the end of last year 2019, we added well capacity not PVC business. So we had more production we had more inventory. So this is a sales and not production. So we sold the inventory levels and hence we spoke earlier about rebuilding that inventory back as well.
Okay and.
And then the $120 million and outages in Fourq is that kind of being the same 60 40 mix across.
Across segments that we saw in Threeq or does it change for some reason I would expect that same mix to be appropriate would be approximately correct.
Thank you.
Yes.
And thank you.
And our next question comes from Kevin Mccarthy from vertical research. Your line is now open.
Good morning, I was wondering if you could comment on supply demand dynamics in caustic soda you mentioned that you saw some sequential improvement in the third quarter, where do you think demand is currently relative to normal.
And then related to that on the supply side. We saw one of your major us competitors declare force measure at two different locations.
Over the past three or four business days, what is your read on on the supply side of caustic and how how tight or not thats become real.
Recently.
Suddenly.
As we speak even below the global economy has recovered from the low in the second quarter.
We are by no means we turn back to pre cold in 19 levels better.
Manufacturing quantities of steel.
Recovering and GDP, so many countries and still negative for this year, so until GDP recovers caustic demand will not return to his health before COVID-19.
And same time as we mentioned.
Although construction and especially to us.
Building remodeling repairs are going very strong people are staying home and health.
Disposable income and spending traveling and detaining vacation.
So they want to fix their homes and also they want to move to single family homes in the suburbs. So demand for PVC is very strong we've been performing very strong as you know every pound of pulling produce who produced 1.1 pounds of caustic.
So this apply esta plans coming back from operations and falls new shows.
Function problems, you will see more supply cost so thats the balance between PVC and caustic.
And hopefully next year when defend anaemic subside so behind us.
Global economy will return.
Some of the position and caustic demand will return to its healthy.
Condition as in the past.
That's helpful.
Then secondly, Alberta I wanted to ask about your recent experience and polyethylene pricing a couple of the consultants have marked the price in October as flat versus September has that been your experience and how would you compare and contrast, the outlook for low density versus linear low at this point.
Point.
Suddenly loading.
Low density demand has been very strong I think year to date reported that.
Coatings demand has increased over 4% compared with year to date 2019, and usually oldest demand growing at most 1% to 2% a year and.
This is domestic demand so.
So tell how strong the domestic demand full LDP.
But youre right I think the industry consultants and the moffitt reflect that that we had.
Any sense on the price increase that things do.
In October now prices held flat.
By the market.
Thank you very much.
You're welcome.
Thank you and our next question comes from David Begleiter from Deutsche Bank. Your line is now open.
Thank you good morning, Albert on the same good morning same questioning.
How much price erosion do you expect to see over the next few months and both polyethylene and PVC given you've gotten.
20 licensor of price increases since since about may in both product.
Yes, I misspoke RVP was a 19 cents 20 cents.
If you look at HMS.
Just looking at prices to reduce in November and December and as well as January but Danny March increases again.
The outlook for Hs that.
Next year 2021 average price is higher than this year 2000, Twentys average price.
So they are seeing improvements in.
Demand as well as.
Prices for polyethylene.
PVC, that's the 20 cents.
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Price, increasing stream and dose all the way to October.
And then.
Looking at.
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Four cents decrease.
In December and starting increasing pricing in February again.
So time will tell but we believe that with the low interest rate.
And we believe there will be continued monetary and fiscal stimulus to the economy for the employed and we'll see over time with all the work being done on vaccine development and therapeutic drug development.
We will get a handle on COVID-19, and the economy recover.
Hence, we believe and I think generally people consensus, believing that next year GDP will bounce back from the middle of this year.
Very good and just lastly, what's your outlook on styrene as there is some capacity coming on stream in China over the next period.
The period of time.
Yes timing.
It's interesting.
Business as you know we have a small starting business is doing have been going quite well.
Newest and smallest.
Sign plant is in the us.
Starting in the 19 nineties Intel there is no news on capacity to use and because as you mentioned the capacity and in China. I think it's a sign business is really combination of ethylene side and bending benzene goes up and down with oil and us has enjoyed.
Low cost ethylene price till we can export ethylene and that such that if it's a china, but through the rest of the world.
And you had has been doing quite well I think you would continue to have this cost advantage, but as you said with new capacity in China. The the.
Export markets will be reduced.
Thank you.
You're welcome.
Thank you and our next question comes from a room size one on song from RBC capital markets.
Your line is now open.
Great. Thanks, good morning.
Good morning.
I guess I just wanted to go back to caustic soda and the outlook there it sounded like you know.
You are a sense.
Making the point that construction looks pretty strong and should look to to to remain that way for a little while.
And potentially outpace industrial production.
I guess with that backdrop.
Maybe you can just give us your thoughts on caustic soda.
On the price evolution over the next little while you know we will go into a period of of maintenance here and maybe lower operating rate. So do you expect caustic soda that kind of start moving back up over the next couple of months.
Especially just given the recent outages and we've gone through a period of price declines here. So do you think that will will reverse in the next.
A couple of periods.
While industry consultant.
It is projecting caustic soda.
Too because of the strength of the PVC and coring.
And also going to the winter months caustic soda will continue to slowly weaken and then recovering prices in April of next year. This is their projection.
That's helpful and then.
I guess I just also wanted to get your thoughts.
On the olefins side I mean, you really grown your your.
Vinyls business over the last several years through acquisition and otherwise.
Do you have any thoughts on potentially growing the olefins side of the business as well there's been a couple of recent transactions. There there may be some others that become available is that an area of.
Potentially inorganic growth for Westlake.
Yes, and we've spent a fair amount of capital last year and investing in the olefins, we spent cigna.
A significant capital investing in the LTAC joint venture to bring more ethylene into the equation. So.
So again, it's always about really where are the opportunities reside and if we can see and youve seen that our portfolio has performed well with the large contribution from the low density in especially the specialty end of that low density portfolio. So we certainly are interested in investing where we think we can make great.
Our use and we think the investment in the Cracker, we made with our partner last year is one of those very low cost opportunity bring up additional ethylene in the portfolio and.
And so we think that investment in olefins was a very smart one and a nice timely one from an investment basis perspective, and certainly as we think about other investments in the olefins business. It really is about opportunity to add and grow value. So our interest there is to do so and if there's opportunities to do so as you've seen last year and.
19, when we made that investment will continue to do so.
Great. Thanks, Steve and then lastly, if I may could you just give us a rough estimate of maybe how much of your portfolios geared towards infrastructure and if there is a sizable benefit if we see an infrastructure bill.
Passed in the next year or so.
Dependable do you mean by infrastructure, we are not in the country to steel business.
Bob.
Water pipe lost.
US water supply.
All data recruiting as youve seen many up into capacities. So what is so with the second largest PVC pipe manufacturer.
Yes, and we have special technology can replace.
Underground pipes without picking up on the top begins to toting dollar jeez. So if you.
US municipalities will replace outdated and promoting.
Our water and sewer pipes will be a big supply into that market.
And second part is.
Yes.
The.
Hi, Hi voltage.
Transmission systems, you can see the.
The Fi as costs by shortening of high voltage tension why as well.
While currency was buyers.
If those will be coated with PDC to insulated, though should be at or the infrastructure investments that could benefit from.
Some of the initiatives.
Thanks.
You're welcome.
Thank you and our next question comes from PJ Juvekar from Citi.
Your line is now open.
Hey, good morning, Albert and Steve, It's Eric Petrie on for loans.
And Eric.
On your comment on lean inventory levels typically in cycles, you see converters building inventory ahead of price increases so what's the difference. This go around is it just a producer.
Not being able to produce that level of demand or could you help size industry outages for both PE MPV see this year and do you expect more normal mid single digit outages in 2021.
Well.
Nobody wants to have unplanned outages and then then turnaround.
And usually the associated more with upstream like ethylene.
And VCM and dose activities.
And also if you tend to be longer than polyethylene and PVC outages tend to be much shorter in time.
And well.
With all the price increases.
So that converges are very careful how much inventory you will keep.
Which also sell into the tightness.
Wendy.
We're seeing a healthy just it'll make reduce inventory tight and converges inventory even tighter.
Okay and for my follow up question.
Granted both PC and TV see chains have been impacted by the pandemic and Hurricanes are you more bullish on sequential earnings growth in PE or PVC.
Well I think we've seen an incredibly strong rebound in the construction and repair and remodeling side of our business sets.
Certainly, yes, it's been many many years since getting back to the housing starts and permits that weve seen in in that space and certainly our investments that we have both in resin as well as in our downstream products really lend themselves to being able to leverage off that strong robust demand growth. I think also when you think of and so thats obviously.
As you know the largest component of our business. When you also think about what was the packaging demand that we've seen in over this pandemic over the last many months then very very strong demand both in hygiene and consumer product packaging as well so the performance that we've seen especially in our low density polyethylene packaging.
And applications have been I think very.
Highlight really the importance of that business and the specialty nature of that business. So I'm actually.
I look forward to really been able to continue to serve the construction and repair and remodeling business and as long as the packaging industry continue to see the strength I think the olefins business continue to participate well in that demand growth.
Thanks, Dave.
Thank you.
And our next question comes from Mike Tyson from Wells Fargo Your line.
Line is now open.
Hey, guys how are you doing.
Hey.
The 100 million in the third quarter and 120 in the fourth quarter as those negative impacts come back in total and 2021 assuming.
No you don't have any.
Hurricane issue next year.
Well, certainly and Thats lost sales and production and some repair cost and so certainly we hope that we are spared hurricanes as we think about 21, so certainly with the demand strength that we were spoken to both in the olefins and vinyls space.
The ability to get traction and see that should be part of the outlook that we certainly have.
Got it and then if I add back that 100 million and EBITDA in the third quarter EBITDA margin would have been 20% roughly so.
Is that sort of the run rate.
Type of profitability.
Stability, you're seeing now and that.
Technically go up excluding the 120 in the fourth quarter, given you've got more pricing and maybe volumes return.
Well of course, you know certainly the the strength, we're seeing in both segments of the business continue to be be from of course, there is some seasonality in various segments of the business as well, but as we look forward, we've seen and you've heard us speak to this today.
Pretty good backdrop and demand both in the vinyls as well as the opens business, it's hard to speak to any particular guidance. We give we don't as you know give guidance, but I would say the backdrop that you've seen in strength in demand is supportive of what you've seen in pricing and certainly as we look forward that strength and demand continues to be.
Very very good as we look forward into the rest of this year and into 21.
Got it thank you Robert.
Welcome Mike.
And thank you and our next question comes from John Roberts from U.S. Your line is now open.
Thank you Sarah fourth quarter force majeure affected the partnership as well or.
Or is all of the impact to Westlake repair costs and downstream operations.
So John the this is the benefit of the ethylene sales agreement that we have in the offtake arrangement for 95% of the production really provides strength to the partnership and so we've been very fortunate to really see the strength.
And the robustness of that ethylene sales agreement.
Im not going to give projections again for the partnership but I think it speaks volumes and very clearly about how well structured that ethylene sales agreement is for the partnership and the degree of.
Protection that that cash flow and earnings stream has in the operating company and therefore the partnership.
Thank you.
And our next question comes from Matthew Blair from Tudor Pickering Holt. Your line is now open.
Hey, good morning, Albert and Steve.
Good morning, Matt.
Maybe just to stay on that point, so right for Westlake LP reported that 40 $41 million essentially like a take or pay.
Benefit.
How should we think about that from Westlake C Corp's perspective.
As is the case, where you paid in Q3, but you'll recapture some of those volumes later down the road.
Well certainly as we think about the the demand that.
The partnership's saw implicitly through the ethylene really is an illustration of the strength that you've heard us talk about today.
And so while we didnt produce because of some of the hurricane related outages and we certainly see that that demand strength in our ethylene derivatives, both PE as well as PVC.
And so that integrated result that you saw US report today for Westlake chemical is inclusive of course of that $41 million buyer deficiency payment you saw in the partnership.
And so as we think forward about the strength that we've seen in the ethylene derivatives.
It speaks again volumes to the expected demand pull that you'll see from Ed Westlake from the operating company Opco. So as we said earlier the ethylene sales agreement that Opco has is quite strong in terms of its protections of cash flow and earnings and I think that integrated relationship.
Between the partnership Westlake partners in Westlake chemical remains robust and strong.
Okay sounds good and then.
It's kind of surprised to see that your inventory levels actually held pretty steady in Q3, I mean, only down a little bit is there an opportunity or were you able to perhaps sell down a little bit of your inventory in October to potentially mitigate some of that.
Some of the some of the downtime headwinds.
Well certainly as you would imagine weve sold and met as much of that bought as much of our customer needs. While we do have force matures for many of our products out we have been able to meet most of the demand that we've seen from our customers both domestically.
Certainly there have been some some impact in some of our customers and some of the export markets, but certainly as we tried very hard to really meet all of the customer demand.
And as you comp you saw from my comments earlier, we weren't able to meet all of it because there was some lost sales as a result of the outages both in third quarter and the guidance I gave for fourth quarter.
Great. Thank you you're welcome.
And ladies and gentlemen, if you have a question that is star one again, if youd like to ask a question that is star one and our next question comes from John Mcnulty from BMO.
Hi, Good morning. This is bill that's the John.
Hi, good morning, Submenu money, so if you're looking at setting in.
Going back into into Lockdowns.
Are you seeing any early signs of demand impact to your export market on the other hand, you in fact seeing higher demand from customers potentially de stocking higher.
Yes, we see that generally speaking Asia is doing quite well and the demand for Paul.
Polymers are quite strong and.
So the demand globally excellent pipe introduce been going up, especially with PBC going up quite a quite a lot tougher the shortage.
Unlike polyethylene PVC capex capacity added in the world tremendous to a very strong us has been the main export PVC to global market and with us.
Supply situations reduce it this would drive up PVC export prices around the world.
Got it and then as you go through some of these repairs assets.
Related to the Hurricane are there any changes steel act on it on timing on costs for next year and and how should we think about just generally capex for next year.
Yes, as we finished the budgeting plan for 2021, we'll give more guidance in terms of our capital spending the only.
Turnaround we had scheduled for.
Major unit was our ethylene cracker.
And at this stage there is no change in guidance, but as we finish our 21, but.
Getting plan, we'll talk about that later.
We finished that process and that will really be into early 21. Once the board approves that and we can then speak about the approved plan for capital spending and major maintenance.
Thank you for your time.
Thank you.
At this time this Q and a session has now ended are there any closing remark.
Thank you again for participating in todays call. We hope you will join US again for our next conference call to discuss our fourth quarter and full year results.
Thank you for participating in today's Westlake Chemical Corporation third quarter earnings Conference call. As a reminder, this call will be available for replay beginning two hours. After this call has ended and may be accessed until 11 59 eastern time on Tuesday November 10th.
2020, the replay can be accessed by calling the following numbers domestic callers should dial 5559, 2056 international callers may access the replay at 4045373 406.
The access code for both numbers is 186958 this concludes the call.
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