Q4 2020 Westlake Chemical Corp Earnings Call
Yes.
Good morning, ladies and gentlemen, thank you for standing by welcome to the Westlake Chemical Corporation fourth quarter 2020 earnings Conference call.
During the presentation, all participants will be in a listen only mode.
After the Speakers' remarks, you will be invited to participate in a question and answer session.
As a reminder, ladies and gentlemen, this conference is being recorded today February 'twenty three 2021.
I would now like to turn the call over to today's host, Jeff Holly Westlake, Vice President and Treasurer, Sir you may begin.
Joel Good morning, everyone and welcome to the Westlake Chemical Corporation fourth 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 agenda will begin with Albert who will open with a few comments regarding Westlake performance followed by a current perspective on the industry. Steve will then provide a more detailed book at our financial and operating results. Finally, Albert will add a few concluding comments and we'll open the call up to questions.
During this call we refer to ourselves as Westlake chemical any reference to Westlake partners is to our Master limited partnership Westlake Chemical partners L P and.
And similar references to Opco refer to our subsidiary Westlake Chemical Opco LP, which owns certain olefins facilities today.
Today management is going to discuss certain topics that will contain forward looking information.
It is based on management's beliefs as well as assumptions made by and 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.
The cyclical nature of the industries in which we compete.
Availability cost and volatility of 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.
Industry operating rates impacts of extreme weather events.
Apply demand balance for Westlake products.
<unk> 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 fourth quarter results. This document is available in the press release section of our webpage at Westlake Dot com.
We have also posted a presentation on.
On our website to review the fourth quarter and full year results as well as provide an outlook into 2021.
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 8558592 056.
International callers may access the replay at four zero for 5373 for zero six the access code for both numbers is 30897 to eight. Please note that information reported on this call speaks only as of today February 20.
<unk> 2021, and therefore, you're advised that time sensitive information may no longer be accurate as of 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 our webpage at Westlake Dot com.
Now I would like to turn the call over to Albert Chao Albert.
Thank you Jeff Good morning, everyone and thank you for joining us to discuss our fourth quarter and full year 'twenty 'twenty results.
Before we get into our results.
Let me provide some context as to how we approach dealing with the challenges in 2020.
2020 was clearly an unprecedented year in.
And one where our priorities were.
To protect the health and safety of our employees.
Deliver on our commercial commitments.
And strengthen the company.
I'm very appreciative of our employees.
We will continue to work day in day out.
Really those in our plants and production facilities.
All facilities on a crucial component of the infrastructure.
They provide key products to our customers, who assist independent make response, keeping essential goods and services flowing in support of our economy.
We have also made progress this year developing products and solutions for a more sustainable future.
While protecting and investing in our people.
We look forward to further discussing these parts with you later this year.
These initiatives reflect our commitment to being a responsible corporate citizen.
Let me now turn to review the results.
In this morning's press release, we reported net income for the fourth quarter of 2020.
$113 million or <unk> 87 cents per share.
And full year 2020, net income of $330 million or $2.56 per share.
Before Steve goes through the fourth quarter and full year results.
It may provide some insights into the year.
The effects of COVID-19 weighed heavily on the global economy early in 2020.
Starting at the end of the second quarter.
We saw the beginning of a strong global demand recovery for PVC polyethylene and on downstream building products.
What a strong rebound in demand, we were able to capitalize on the increasing price environment there.
That drove improving product margins for PBC polyethylene and our downstream building products.
In August and October.
Two major hurricanes made landfall in southwest Louisiana.
While our plans weathered the storms well.
There was extensive damage to the power and utility infrastructure in the Lake Charles area.
Once utilities were restored.
The work tirelessly to restart operations.
In spite of production constraints caused by the Hurricanes.
Diligently to serve our customers.
I'm, particularly thankful to our employees for their dedication.
Were also impacted by these hurricanes.
We're working to restore operations.
While we did experience production constraints in the second half of the year due to the hurricanes were able to benefit from the continuing growth in global demand.
This translated into strong sales volumes for most of our products.
Even by strong demand from pet packaging housing and automotive sectors.
This was especially true as new housing starts.
And remodeling activities generated robust demand our downstream building products business.
I would now like to turn our call over to Steve.
More detail on our financial and operating results for the fourth quarter and the full year.
Thank you Albert and good morning, everyone.
I will start with discussing our consolidated financial results and then go into a more detailed review of our vinyls and Olefins segment results. Let me begin with our consolidated results.
Westlake continue to benefit from the improving market dynamics for most of our products beginning late in the second quarter of 2020 with strong demand and increasing prices for most of our major products.
Thanks for the two hurricanes, including the idling of our facilities impacted our business beginning late in the third quarter due to lower production and sales volumes and increased maintenance expense as a result for the hurricanes for some units these out its stretched into November.
We have fully resumed operations following the hurricanes, we estimate the impact to our fourth quarter pre tax earnings from the lost sales increased cost and higher maintenance expense, resulting from the storms to be approximately $120 million or <unk> 96 per share.
Of this $120 million estimate approximately 75% was related to our vinyls segment with a balance affecting our olefins segment.
For full year impact of both storms on our results was approximately $220 million.
For the fourth quarter of 2020, we reported net income of $113 million or <unk> 87.
Per share compared to net income of $72 million for the fourth quarter of 2019.
These results are inclusive of the hurricane impact of approximately 96 per share from the Hurricanes I just mentioned the.
For $41 million fourth quarter year over year increase in net income is a result from higher sales prices and margins for polyethylene and PVC resin and higher earnings resulting from robust demand in our downstream building products business.
Partially offsetting these increases for loss sales and lower production volumes and other cost related to the two hurricanes, we previously mentioned as well as lower sales prices for caustic soda.
Fourth quarter 2020, net income increased by $56 million from third quarter 2020, net income of $57 million.
The increase in net income was largely attributable to higher prices and margins for polyethylene and PVC resin as low as well as lower restructuring charges.
Offsetting these increases for lower sales volumes, resulting from the impacts of the hurricanes lower caustic soda prices and higher fuel cost.
Our utilization on a FIFO method of accounting resulted in an unfavorable pretax impact of approximately $18 million or <unk> 11 per share compared to what earnings would've been if we reported on the LIFO method.
This is only an estimate and has not been audited.
Let me now move on to review the performance of our two segments, starting with our Vinyls segment.
Throughout the fourth quarter, we saw strong global demand for PVC anchored by increasing global construction activities.
Our downstream building products businesses continued to see strong consumer demand driven during the fourth quarter. This robust PVC demand was driven by global residential construction automotive medical and appliance industries.
While the effects of the Hurricanes impacted our production of PVC and limited our PBC sales, we benefited from strong margins during the quarter.
For the fourth quarter of 2020.
Vinyls operating income of $166 million increased $98 million from the prior year period, primarily as a result of higher sales.
And margins for PVC resin and higher earnings in our downstream building products business, which were partially offset by lower sales volumes and a mass production, resulting from hurricanes.
Our sales price for caustic soda and higher fuel cost.
For the fourth quarter of 2020, Vinyls operating income increased $124 million from the third quarter of 2020, primarily as a result of higher sales and margins for PVC resin and lower restructuring cost, partially offset by lower sales volumes, resulting from the hurricanes seasonally lower sales in.
Our downstream building products business and higher fuel cost.
Now, let me turn to our olefins segment.
In our olefins business robust global demand for packaging and non durable products expanded our margins in polyethylene.
As the effects for the Hurricanes limited our production and sales volumes for both ethylene and polyethylene our fourth quarter 2020 operating income of $22 million decreased $27 million from the fourth quarter of 2019.
For the fourth quarter of 2020, olefins operating income decreased $29 million from third quarter 2020, primarily due to lower sales volumes as a result for hurricanes.
Partially offset by higher sales prices and margins for polyethylene.
Next let's turn our attention to the balance sheet and statement of cash flows we.
We generated $1 $3 billion in 2020 in cash flows from operating operations, resulting in cash and cash equivalents of $1 3 billion with capital expenditures and other investments of $509 million in the business to strengthen the company for the future.
We completed the refinancing of that goes on in zone revenue bonds, lowering our debt cost and drove our average interest rate to three 5% extending our weighted average debt maturity to 14 years, while strengthening our strong investment grade balance sheet.
<unk> solid liquidity position, coupled with long dated debt maturity schedule allows us to operate confidently in today's environment.
Now, let me address some of your modeling questions.
Active tax rate for the full year of 2020, excluding the effects of the cares Act was approximately 20% and we expect 2021 to be approximately 22%.
For 2021, we expect cash interest expense to be approximately $130 million and our capital expenditures to be between 700 and $800 million.
We are planning for a turnaround for our Petro two ethylene unit to begin in September.
The turnaround and associated outage is expected to last approximately 60 days.
Last week extreme winter weather across much of Texas, and Louisiana caused widespread power outages and disrupt feedstocks raw materials and utilities too many plants in our industry, including some of our plants.
As a consequence several of our facilities experienced disruption to their operations.
We are still assessing the impact of the storm our estimate for lost margins from sales and repair expenses are approximately $120 million.
Approximately $100 million.
It will impact our first quarter 2021 results with the remainder falling into the second quarter.
With that I will now turn the call back to Albert to make some closing comments Albert.
Thank you Steve.
As we look ahead the strength in global demand in polyethylene and PVC that was prevalent in the second half of 2020 is continuing into 2021.
We're also seeing continued strength in our downstream building products business driven.
Driven by repair and remodeling spending as well as new housing starts to.
The highly integrated nature of Westlake, which extends from natural gas liquids and solids feedstocks through to consumer building products come.
Combined with our operations sitting on the lower end of the global cost curve and.
Enables us to drive long term value.
Throughout the business and investment cycles in our industry.
Our business fundamentals remain very strong at.
For the improving economy should also have a positive impact on our business into 2021.
In our vinyls segment, the PVC market continues to experience strong demand from our customers, especially in the residential construction automotive and appliance industries.
The robust residential construction market is also driving strong durable goods demand.
<unk> on a full product offering in our downstream building products business.
In our olefins business the chain margins reflect the significant benefit which has been driven by the rising polyethylene prices we have earlier discussed.
We foresee the solid demand for polyethylene they'll experience for the second half of 2020 to continue into 2021.
Is that driven by continued end use demand in the essential everyday products, such as consumer products packaging health care hygiene and foodservice markets.
During the last two years.
We expand our PVC capacity by approximately 800 million pounds.
<unk> positions us to meet this growing global PVC demand in 2021.
Westlake remains focused on the priorities, we value, namely to protect the health and safety of our employees.
Deliver on all commercial commitments.
Strengthen the company in all aspects.
We are confident that Westlake is well positioned to serve the growing needs of our customers.
While maintaining financial discipline.
Which combined with the strong fundamentals of our business.
Enable us to deliver long term value to our shareholders.
Thank you very much for listening to our fourth quarter 2020 earnings call.
I will now turn the call back over to Jeff.
Thank you Albert before we begin taking questions I would like to remind you that a replay of this teleconference will be available two hours. After the call has ended we.
We will provide that number again at the end of the call Joelle, we will now take questions.
Thank you to ask a question your need for press Star one on your telephone to withdraw your question pence per pound key please standby will be comparable the Q&A roster.
Our first question comes from Bob Court with Goldman Sachs. Your line is now open.
Yes, actually on Mike here sitting in for Bob.
I had a question around the PBC.
It looks as if the EBITDA margin.
In the fourth quarter.
Mid single digits, I mean low.
Alright.
Mid double digits I was just wondering how do you see that playing out for the first half of 'twenty one.
Yes.
According to IHS and you report since June of 2020.
The industry is able to increase prices in 2020 by 20 cents a pound in PVC.
And.
In 2021.
Industry pass through price increases on.
For <unk> upon in January and three cents per pound in February and.
Also price announcements made for.
March was a price increase of <unk> pone.
So this represents not only the growing domestic demand, but also export demand.
Actually export prices since June has increase even higher than domestic demand.
On today's export price netback is higher than domestic prices for some customers. So we see as a.
Really the globals.
Demand on strengths for PBC.
Okay. Thanks, and just as a follow up you mentioned the demand outlook is pretty tight right now for PVC.
Terms of outlook when do you see that perhaps no does that carried through the first half for.
Longer than the 2021.
Well.
So long as interest rates continue to stay low and so long as consumers have money.
On the housing demand housing 50.
<unk> average residential housing construction is about $1 5 million units a year.
And since the housing meltdown in 2007 2008.
We last year, we will close to climb back to one 4 million units a year and this year, we'll hope to average above $1 5 million and Thats, just the 50 year U S.
Residential.
Housing construction average for 50 years, so so long as I said economy is strong.
Interest is low I think that email continues to increase.
Okay. Thanks for the color.
Youre welcome.
Thank you. Our next question comes from Steve Byrne with Bank of America. Your line is now open.
Revenue that's approaching.
The olefins segment are you considering splitting that out as a new segment.
And war.
Bolting on some some more.
Businesses into that.
That in the building product services business.
Yeah, Steve we've been very pleased with the performance on the strength that you've seen on the overall market and as I've mentioned, our strong performance by that downstream products building products business and we'll continue to assess the opportunities to give more clarity in that space, but you are right. It has performed very very well and.
As you can see from our prepared remarks, we expect to continue to see it continue well and will continue to assess the ability to give more clarity to everyone about it.
Abilities, but it is certainly an area that we want to continue to growth.
And would you consider bolting on some downstream products that are sourced from polyethylene.
Such as tax.
The reason I bring it up.
As PVC pipe and home depot sells for about one dollar.
Not too much different than resin, but those two settings for as much as $10, a pound and I don't know, whether you're capturing on a margin or home depot capex, capturing that margin, but it's it's really healthy.
Yes, Steve it's not been an area that we've looked at and our continued area of focus has really been on the downstream vinyls side as you see us continue to add businesses that have been very constructive to the strength of that business and we continue to see the ability to add bolt on opportunities as opportunities present themselves and we.
And that an interesting area of focus.
Yes features one is volatile.
Just want to also add that we all know that few companies in North America that sell pipe and fittings together.
So we have a big well known brand and operating business is doing quite well as you said.
And any plans to do more debottlenecking in.
In your Chlor alkali business.
Well, we always look at opportunities to grow in all our businesses and as we mentioned we had the last two years about 800 million pounds on PVC capacity and with that also suddenly we need them all.
On flooring and colorful eye and in our downstream business thinks business is so strong in construction with.
We are also looking at Debottlenecking, our capacities to serve the needs of our customers.
Thank you.
Welcome.
Thank you.
And our next question comes from Jeff Zekauskas with Jpmorgan. Your line is now open.
Thanks very much.
You disclosed the trend.
Chlorine prices through the year or you quoted IHS on it.
It seems that they kicked up in the fourth quarter.
What do you make of that.
There are trends there.
Suddenly.
As you know.
Half of PVC is feedstock is crawling the other half is ethylene so as PVC demand is strong globally.
The draw on chlorine is very high.
And.
Hence.
Flooring price.
<unk> also go to others.
Finished call it it's not necessarily a PBC, but in water treatment.
In <unk> two in Europe, and many other applications.
So flooring because of the high value of chlorine into PVC Corium price also increased to reflect the strong demand for the product.
Okay and your your operating cash flow as a percentage of EBIT EBITDA.
With more than 100%.
2020, and maybe it was above 90% for 2019.
Okay.
It used to be as a percentage in the high sixty's seventy's or low eighty's.
Why is the percentage so much higher now.
How do you see that going forward do you have on.
Target for.
Operating cash flow as a percentage of EBITDA.
Well, Jeff, it's certainly operating leverage which is really leverage that that growth in cash flows and certainly as we look at opportunities to continue to build on the business will continue to look for opportunities that provide that kind of operating leverage.
Noted, we'll look at opportunities across the spectrum.
But we don't have a particular target per se, but you can certainly imagine we're focused on opportunities that provide a high degree of operating leverage.
That allow us to do so with minimal investment of capital.
Should you have a positive.
What's your estimation of the deferred tax benefit.
Good morning.
The deferred tax I'm sorry.
What's your estimate.
On a fit from deferred taxes to your cash flows from 2021.
Yes, im not going to quote for a number but certainly there'll be some significant benefits as we see moving forward and certainly we had as you may recall on I made reference to this throughout 2020. We did also have some benefits because of the cares act and because of our large investment in <unk>. We also were able to benefit from the.
<unk> net operating loss, so a variety of opportunities to leverage our tax positions be they the nols or the deferred taxes.
Okay, great. Thank you so much youre welcome.
Thank you.
And our next question comes from John Mcnulty with BMO capital markets. Your line is now open.
Hi, Good morning. This is <unk> for that by John Good morning, with regarding <unk> regarding the disruptions caused by the Texas.
Clearly unprecedented event, so when you compare that to typical weather events.
Could you help us with how different is the process to bring the plant back online and what is the risk of negative surprises, which could end up kind of extending the downtime for the industry.
Well.
Hurricane sometimes cause more damage to equipment and buildings tend to freeze for you.
This use of the instrumentation boiler that can be more readily fix.
Fixed the risk is when plants go down some time half cash Hurricane you know is coming you prepare you shut down orderly, but the free sometimes youll caught off guard your boiler.
The tripped and Youre out of steam and our plans question Dow and some of those.
Plans will have suffer equipment damage from the hot crash and she only know more about it.
You restart the plant to find out some things are working properly that's the risk also of unknowns out there.
Got it got it and then your estimate for the $120 million hit from lost sales does that assume price it for the commodity stay at current levels.
And if so roughly how much of that will be offset the industrial gets nominated 14 price hikes over the next couple of months.
Sure.
And so it does contemplate the price the price environment that we're in and it also includes not only loss margin on sales, but also some repair repair cost as well and so we'll just have to see if we're successful in some of the price nominations, we made for February and for March and how that how that sustains itself through the <unk>.
So the rest of the quarter you can see that a big portion of this will impact the first quarter and we said.
$100 million for an impact first quarter and the rest of it will impact Q2.
Alright, thank you.
Welcome to telecom.
Thank you. Our next question comes from David Begleiter with Deutsche Bank.
Your line is now open.
Good morning, Albert and Steve.
David.
On polyethylene it looks like February will likely go through or is going through on the <unk>.
How are you thinking about the March increase and the prospect for that increase.
Well several of the polyethylene producers announced seven price increase with a tight this but not all the producers have.
Announced price increases so time will tell whether that's <unk>.
It will be pushed through.
But.
The issue, though it was all the.
The freezes, 100% of Texas as of yesterday, 100% of Texas ethylene plants offline and 75% on total U S ethylene plants offline.
The availability of ethylene as well as I mentioned earlier, the risk always starting may impact, our availability and price of ethylene, which will impact prices of polyethylene as well.
So we don't know yet.
To what extent.
Ethylene.
Cut down and that will impact prices for polyethylene going forward.
Very good and just on the $100 million forecast for them.
Weather impact in Q1, how many.
On production losses does that assume on how much production.
Does that assume as well.
So David we expect that we will have those operations up here over the course for the next several weeks I'm not going to quote a number of pounds, but over the next several weeks, we expect to have ourselves more fully restored.
Thank you very much.
You're welcome.
Thank you and our next question comes from Mike <unk> with Barclays. Your line is now open.
Great. Thank you good morning, Albert and Steve Good morning.
I guess I did want to follow up on that last point about restarting and I just wanted to get a better sense of maybe where you are on the restart is it largely just on.
Right now the Westlake, we started to get some facilities are you still kind of waiting either for suppliers or logistics.
Are there any kind of gating items that are preventing you from starting up at this point.
I think depending on the plans for locations. Some plants are running we have not declared force majeure for polyethylene as some other industry.
Companies have and just depending on location.
Site.
And how much inventory you have to serve your customers.
Got it okay.
I did want to change topic I wanted to ask on caustic soda.
Obviously, that's been weak for a couple of quarters now I wanted to get it done.
We feel like we're at or near a bottom here on what your outlook for caustic soda would be over the next day.
Couple of quarters here.
That's a good question usually PVC.
The cost of it.
Boss.
Connection with construction industry with low interest rate. So PVC, usually is a leading economic indicator on a cycle coming back unusually caustic as are the conclusions until a little bit lagging indicator so as the economy improves.
Corporate demand will increase more.
And hence the price will improve and looking at both domestic and international prices we.
We see that.
The caustic prices, a stumble being up from the bottom. We saw early end of last year early this year.
So we believe that we've seen the bottom of caustic prices.
Great. Thank you.
You're welcome.
Thank you.
Question comes from Mike Sison with Wells Fargo. Your line is now open.
Hey, good morning, guys, sorry, I'm only Cleveland weather made it sandy.
Mainland rather made it down to Houston, but.
When I take a look at the vinyls EBITDA margin in the fourth quarter, 21%.
Pretty close to what you guys are seeing in in 17 and 18, if you think about the price increases that IHS is forecasting and then.
Margins for the year should share the rest of 'twenty, one be kind of in that level or higher excluding the impact of the first quarter.
Winter Storm you already hit.
Well, if somebody would like to see those margins at those levels.
As he noted the vinyl business has been packed pretty severely with the COVID-19 downturn earlier.
2020, and we mentioned also.
Our index integrated nature into building products and with the strength in building products that has really helped to also our vinyls margin improving.
The weakness as Steve mentioned in his remarks is that all improvements in earnings offset by the weakness in caustic and as I mentioned earlier, we believe we hit the bottom in caustic and hope the question Dennis.
How fast how soon caustic will improve so that will be another.
Tailwind and helping the business recovery.
Okay, and then one just quick follow up on vinyls.
Once you once your facilities are up and running.
Given what you've mentioned in terms of demand do you think youll be running.
Effectively full out for the remainder of the year.
Yes, we were running full out before until we had problems.
But.
Everything we see today that only USD men as Jamba global demand is strong as I said export price is higher than domestic prices.
Oh, so long that they will.
<unk> 19 is the worst is over hopefully for the world's economy and with the <unk>.
Increased vaccination rates around the world.
We believe the economy should improve and waste of Covid government stimulus package.
Would help construction infrastructure and definitely will help PVC business and related business.
Great. Thank you Youre.
Youre welcome.
Thank you. Our next question comes from Frank Mitsch with Fermium Research. Your line is now open.
Thank you so much and good morning, gentlemen.
Good morning, Frank.
I wanted to follow up on deep freeze your impact of 100 million in Q1 $20 million in Q2, how does it how are you thinking about that between the.
The two segments and the 20 million negative for two Q.
I am assuming that you guys are fully back up and running by April one is that not a right assumption is it loss sales from not being able to build inventory. If you could just explain a little bit more about how you know how you came up with those numbers, yes, Frank I.
I would expect it will be up well before for that and from a from an impact perspective, I would say that in the impact.
<unk> is on.
On a vinyls basis, its about 80% of that impact is in the vinyls segment and 20% of that is on the olefins segment.
Both for Q1 on for Q2 in terms of how they split out between the two segments for the 100 and for the remaining 20.
The second quarter.
And the 20 million for the second quarter is that.
On an ability to build inventory how do we how do we think about that.
As I say the second quarter.
Let me just clarify that when I said, 80% vinyls thats in total the impact on the second quarter will be all vinyls, it's really the flow through of PVC resin and further downstream into our.
Vinyls building products businesses.
Alright, very helpful and thanks for calling out the Petro two turnaround in September.
Can we can we can we infer that you know that.
There is no significant turnarounds that youre anticipating to hit the second quarter.
Yes, that's right we call out those that are more impactful and so certainly with all the many units we have both in PVC caustic chlorine and polyethylene.
Those are spread throughout the course of the year. So I only call out those that are really more impactful which of the ethylene units.
And so that's the only reason for calling that specific one out.
Alright terrific.
Thanks, so much.
Youre welcome.
Thank you. Our next question comes from Arun Viswanathan with RBC capital markets. Your line is now open.
Great. Thanks for taking my question.
You're doing well.
I just wanted to get your thoughts on the disruptions that are coming down in Texas.
How do you see that kind of impacting the industry longer term I know that you know operations are now starting back up but you see inventories kind of where they already at low levels and said this is going to exacerbate the.
Production, a little bit more or maybe you can just talk for your thoughts on.
The evolution here for the next couple of months.
Yes.
Most of the planned Saddam in Texas.
Inventory will be coming down and produce inventory quite low now so when the plants come back still had replenished inventory first.
And so they will curtail sales, whether it's export domestic in order to.
A build of inventory back to a reasonable level.
And then as far as feedstocks.
He'd stocks go.
Do you see any pressure in the next day.
Thanks for 12 months.
From potentially higher ethane costs or do.
Do you see ethane is remaining relatively plentiful.
Well.
It depends on who you look at if you look at.
IHS forecast for ethane.
Got it.
2021 in the mid to high 20 cents per gallon.
But then if you look at the.
For future prices.
And 2021 small on.
Of a low to mid 20 cents a gallon range for mid Twenty's tends to get in range. So they do not forecast a.
The ramp up in ethane prices.
And then if I can just ask one more follow up.
In the Vinyls business you know one of your main competitors has changed strategy a little bit.
It's potentially moving off index for for caustic pricing.
Has that had any effect on overall industry dynamics and the way that you think about.
You know maximizing value for your vinyls business. Thanks.
Yes.
The coffee business is very competitive quite a few large and small producers and because solved a big demand for chlorine.
Upon the protein and produce you produce 1.1 pound of caustic.
So the demand when demand for clothing strongly produced all on caustic that economy is not.
Picking up the demand for coffee at the same pace as PVC all as chlorine day, you have excess caustic and.
It shows the weakness in price as I mentioned earlier.
As the economy improves that weakness will be absorbed.
So.
It's a very competitive business.
Thanks.
Youre welcome.
Thank you. Our next question comes from Hassan Ahmed with Alembic Global Your line is now open.
Good morning, Albert and Steve.
Good morning.
Question around polyethylene sort of supply demand fundamentals and pricing I mean, obviously you know we were all pleasantly surprised by the strength of utilization rates in 2020, they continue to be strong.
And there are obviously a variety of moving parts. There you know the sort of.
And from the non durables side of things and then you know oil obviously pleasantly surprised on now.
You have maybe some impact from the weather related outages and we're going into a pretty heavy.
Around season as well.
My question is how are you guys.
It pertains for 2021.
What are you guys seeing in terms of the sustainability of this tightness in terms of the sustainability of these high levels of pricing.
The question really is that would it be a tale of two halves, where we see extreme strength in H, one and maybe we see potential cracks in pricing in the second half of the year as a lot of these turnarounds are behind us.
Well one thing we are doing those that logic, we don't mill with.
The freeze we didn't predict the two hurricanes that we spent two months.
So a lot of things could happen, but I think the fundamental supply demand global supply demand.
Suddenly there is a fair amount of polyethylene capacity added globally.
But the pandemic with his great demand for Internet sales and packaging and with PPE.
And also with <unk>.
The increased demand for solar panels, so a lot of the.
Polyethylene ODP plants has shift to making EBITDA.
For solar panels.
So then the rest of the packaging ODP demand supply is being reduced so all these changing dynamics is impacting demand site on the PVC side very low capacity added around the world for the last few years. We have as mentioned we have added about 800 million pounds of capacity last two years and now.
Some of our competitors announcing new capacity expansions in facing the global demand increase and get globally very few capacity in PBC has been added all being announced so if you see the global.
Demand dynamics, and then with the supply day, you can conclude where prices will go now amongst the months sure it'll gyrates, depending on inventory supply demand whether on many other things it'll go up on DAU, but I think when people up spending billions of dollars building new plants.
So both the confidence that our business long term should be better.
Fair enough that's very helpful.
And as a follow up.
On M&A, how are you guys thinking about M&A.
M&A in this market I mean, obviously you know there is some color behind those assets up for sale.
And.
What are your broader thoughts about M&A and alongside that how are you thinking about prioritizing.
Between the two segments I mean would you have a preference.
If you were to indulge in M&A on the Florida, Vinyls side overall defense or vice versa.
So as soon as you well know we've grown the business both organically and through acquisition over time, and we'll continue to look at opportunities on.
On the acquisition side, we look at opportunities obviously directly in our space, but we'll also look at Adjacencies, you've seen us continue to expand in our downstream building products businesses, and we will look even beyond those that makes sense to us and so we'll look at those but it's always about finding the right fit the right synergistic opportunity as the kind of thing that.
We're always looking for.
Perfect. Thank you so much youre welcome. Thank you.
Thank you. Our next question comes from Jonas <unk> with Bernstein. Your line is now open.
Thank you.
Looking at your downstream PVC business.
Kind of wondering how much of the benefit you got.
It was driven by margin enhancement from the from the outages from the shortage I should say.
And how much was volume gain from the economy restarting et cetera.
I was hoping you could you could help me deconvolute that business a little bit.
Suddenly.
As we mentioned earlier.
Early part of last year, when it depend emmick hit many of the municipalities shut down construction.
So we had to shut down production of our products. So both the vinyl business some of the plant impact it as well as building products, but as soon as the municipality opens up and as you know most of the constructions of outdoors.
Then the demand came back and as well there is a movement from urban to suburban areas and constructions. So single family homes for construction demand start to increase and also bill our repair and remodeling people at home with.
The money that are spending.
Traveling all vacationing and spending money that home sales building construction products demand has increased so our building products.
We are practically sold out on.
It away when demand starts to improve.
And as Steve mentioned fourth quarter, typically seasonally because of the cold temperature and snow.
Sales into construction, especially outdoors will slowdown that's normal.
And we build up inventory during that time period ready for the spring and now is screened bags coming back and the demand is very strong.
Okay, well I guess the questions on what's how much of the of the Boon in Q4, what's temporary versus.
Staying on the boom boom actually continues starting from let's say may or June is keep on every months is improving actually Q4 demand sales seen the building part is slowed down because the seasonal weather issues typically for the construction business and then the first quarter second quarter.
<unk> is a strong season for the the building business and but he was saying on long term basis as mentioned the U S. Residential construction 50 year average about one 5 billion units. We went from the high Alpha 2007 or six.
With the housing meltdown in 2008, it dropped from $2 3 million units are sold to 400000.
From 400000, we climbed back to about $1 4 million units average.
Last year in 2020, and 50 year U S. Residential construction average 50 on average $1 5 billion units. So we just got back close to the 50 year average.
And if you believe that with low interest rate of demand continuing to be strong population of U S. Suddenly has increased over the 50 year average.
And the long term trend of demand for construction will continue to increase.
Okay. Thank you.
I'm wondering.
The losses that you got from the Hurricane and the projected losses here from the deep freeze.
Large in relation to your overall EBITDA.
Will any of this be recouped by insurance.
Well.
Suddenly some of the.
Our damages can be recouped, but.
Well I'll, let Steve.
Thank you for the question, Yes, we certainly do have insurance and so certainly as we work through those claims will be able to recover a majority of that of that damage claim from the hurricanes and so certainly those are the big big issues on the freeze we're still be assessing that and see if there is an opportunity for insurance claims on the freeze.
Okay is it like a magnitude of how much you expect to open in time.
Yes.
On the freeze its obviously lost margin. So it's very little property damage on the Hurricanes. It was more property damage than it was necessarily lost lost margin. So.
Current kinds of claimed provisions here so on the freeze I expect less recovery on the Hurricanes I do expect substantial recovery.
Wonderful thank you.
The oil cum.
Thank you. Our next question comes from <unk> <unk> with Citi. Your line is now open.
Hi, Good morning, Eric Petrie on for P. J.
Morning.
Could you just talk about.
About how demand in China following Chinese new year has held up it looks like PVC prices are above $200 per ton.
Do that going forward.
Caustic soda has been pretty range bound so any thoughts on those two molecules.
Suddenly, yes, I think after the Chinese new year.
You may have heard the government discourage people will travel.
<unk> at home.
Just put a guest workers.
Doing Chinese new year.
And so demand has been very strong and since Chinese new year demand has come business a big comeback demand has returned and actually I think polyethylene prices going up by about seven cents per pound.
One week after the return of Chinese new year holiday.
So it was quite strong on the caustic soda price as mentioned, we believe has bottomed and we see some signs of improvement.
Even though by a small.
Spool margin increases, but at least is improving in Asia as well.
Okay helpful. And then secondly on ESG. Many chemical companies are investing in recycling technologies are utilizing green or low carbon electricity could you just talk.
A little bit about what.
Like is doing in that area.
Suddenly we are very much.
Concerned with ESG issues, and we are part of the two alliance and plastic waste and other industry.
Sustainability.
Associations and activities and as we mentioned earlier.
Hopefully later on this year, we will.
Discuss more on the initiatives, we're taking on areas that will support ESG.
Thank you.
Youre welcome.
Thank you at this time for Q&A session has now ended are there any closing remarks.
Sure.
Yes. Thank you joelle the management team needs to switch over to the Westlake Chemical partners LP call. So we encourage anyone who has not had time to ask a question on this call to call us afterwards, and we'll be happy to address their questions.
Thank you again for your time, and we hope you'll join US again for our next conference call to discuss our first quarter 2021 results.
Thank you for participating in today's Westlake Chemical Corporation fourth quarter earnings Conference call. As a reminder, this call will be available for replay beginning two hours. After the call has ended and may be accessed until 11 59 P. M. Eastern time on Tuesday on March 2nd 2020, and replay can be accessed.
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