Q3 2021 Westlake Chemical Corp Earnings Call
Welcome to the Westlake Chemical Corporation third quarter 2021 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 November 2nd 2021.
I would now like to turn the call over to your host, yes, Holly Westlake, Vice President and Treasurer, Sir you may begin.
Good morning, everyone and welcome to the Westlake Chemical Corporation third quarter 2021 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 and our current perspective on the industry.
Steve will then provide a more detailed look at our financial and operating results. Finally, Albert will add a few concluding comments and we'll open the call up to questions.
During this call we refer to ourselves as Westlake chemical any reference to Westlake partners is to the Master limited partnership.
Westlake Chemical partners LP.
And similar references to 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 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 avail.
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 production capacity in operating rates.
Impacts of extreme weather events.
<unk> demand balance for Westlake 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 webpage at Westlake Dot Com we.
We have also posted a presentation on our website to review the third quarter of <unk>.
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 855, 850 92056 International callers may access the replay at 404 537 3406, the access code for both numbers is 24955 800.
Sure.
Please note that information reported on this call speaks only as of today November <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.
We appreciate you joining us to discuss our record quarterly results.
In this mornings press release for the third quarter of 2021.
We reported another quarter of record net income of $607 million.
All $4 69.
<unk> sure.
As well as quarterly records for net sales operating income and EBITDA.
Net income for the quarter increased $550 million from.
From the third quarter of 2020.
Reflecting the continued strong demand for most of our products.
Driving a strong pricing environment.
I am very proud of the Westlake team.
For delivering these results.
Despite the impact from Hurricane Idaho.
On the operations in the third quarter.
As well as global supply chain constraints on our building products business.
Strong demand dynamics, and PVC caustic soda and polyethylene create.
Created a healthy pricing dynamic.
Which contributed to our expanding margins.
The strong and broad market momentum in global construction.
Driven by tight supply demand balances across our key products.
Rove higher pricing and strong margins year over year in both our vinyls and building products businesses.
Our olefins segment benefited from a continuation of strong margins and solid volume gains year over year.
As the polyethylene industry experienced robust global consumer packaging product demand.
And tight inventories.
This momentum margins also continued from the second quarter into the third quarter in spite of a planned maintenance outage.
The strong long term prospects of the U S housing market and favorable demographics.
Supporting continued housing growth.
Along with broad demand in U S repair and remodeling expenditures <unk>.
Provide for the compelling growth opportunities in our building products business.
Our recently completed acquisitions in building products greatly expense.
Offering with leading brands to meet these market opportunities.
In August.
We completed the acquisition of <unk> fittings.
A leading manufacturer of injection molded PVC pipe fittings.
<unk> brings additional markets.
The plumbing pool, and spa industrial irrigation and retail markets in North America and.
And is complementary to our existing product portfolio, our PVC pipe and larger diamonds are fittings.
In September we acquired <unk> dynamics.
We're the largest processor of post industrial recycled plastic material in the U S.
This acquisition further expense Westlake.
Portfolio.
To include a variety of consumer products.
<unk> processed post industrial recycled PVC polyethylene and.
<unk> plastics elastomer.
And sells these consumer products throughout the nation.
<unk> home improvement retailers and online through nationally known e-commerce platforms.
In October.
We completed the acquisition of Boral, North America building products business.
This acquisition places Westlake into industry, leading positions, serving the housing markets in concrete and clay roofing premium, citing trimmed and shut us.
Decorators stone and vinyl windows.
These transactions Charles form all existing building products business.
Into new strategic product platforms.
Which also a market innovative leading brands of exterior building products.
Designed to enhance customers' satisfaction.
These products improved energy efficiency durability and value.
Actual housing schools hospitals and other buildings.
We are pleased to welcome our new fellow employees from Boral, <unk> and let's go to Westlake.
These transactions are transformative.
And bring significant value benefits to Westlake.
Through the attractive financial attributes and.
And market leading product platforms.
Serving the housing markets.
The acquisition of <unk> introduces recycled plastic products.
The consumer markets.
Approximately 50% of our building products business is oriented to the repair and remodeling markets.
Which have proven to be more stable and predictable over the long term.
These newly acquired products and brands.
When compared with Westlake existing leading positions and PVC, citing treatment loading compounds PVC pipe and fittings.
Now I'll provide our residential customers.
With a comprehensive portfolio of products and solutions.
Which enhance the everyday lives of countless individuals.
We.
We need to look for opportunities to expand our business.
While driving value for our shareholders.
Westlake has made significant progress in Australia growth plans this year.
And with a strong demand picture and leading positions in building products PVC caustic soda and polyethylene.
We believe our businesses are very well positioned going forward.
I would now like to turn our call over to Steve provide more detail on our financial and operating results for the third quarter.
Thank you Albert and good morning, everyone.
In the third quarter Westlake benefited from the continuing global economic expansion, resulting in healthy demand with leading market positions for our products, resulting in a record performance.
This quarter, we reported quarterly net income of $607 million, which is a record for Westlake and.
In addition for the third quarter of 2021, we reported record income from operations of $861 million and record EBITDA of $1 1 billion.
Third quarter's year over year $550 million increase in net income as a result of significantly higher sales prices and margins for most of our major products.
Third quarter 2021, net income increased by $85 million from second quarter 2021, net income of $522 million.
The increase in net income was largely attributable to higher sales prices and higher margins in PVC and polyethylene as well as improving caustic pricing.
Our building products business, we continue to experience strong results as North American housing demand remain robust while the supply of building products inventories remain tight.
Sales volumes in our vinyls and olefins segments in the third quarter were lower reflecting weather related impacts planned maintenance and logistics constraints.
Our utilization of the FIFO method of accounting resulted in a $30 million benefit compared to what earnings would have been if reported on the LIFO method.
This is only an estimate and has not been audited.
Let me provide some details on our segments, starting with our vinyls segment.
As the second largest global producer of PVC in the second largest global producer of caustic soda when combined Westlake is the world leader in Chlor Vinyls markets.
Our leading position with strong market fundamentals in PVC and caustic soda enabled us to deliver strong results in the quarter.
The solid demand for PVC was anchored by robust year over year global demand growth and solid strong PVC end markets, using including construction and home remodeling.
Our building products business continued to benefit from healthy North American residential construction and repair and remodeling demand.
These factors drove higher PVC sales prices in this segment and we benefited from a strong integrated margins during the quarter.
For the third quarter of 2021 Vinyls segment operating income was a record $601 million.
Increasing $559 million from the prior year period, due to significantly higher sales prices and margins as well as increased earnings in our building products business.
Driven by higher sales prices across our major products.
Vinyls operating income in the third quarter increased $166 million over our second quarter 2021 results.
These increases were partially offset by lower volumes, resulting from weather related outages.
In our orphan business to continue robust global demand for consumer product packaging drove polyethylene prices higher in the third quarter and expanded our margins.
<unk> third quarter 2021, operating income of $281 million increased $230 million in the third quarter of 2020, as a result of strong pricing and expansion of margins.
For the third quarter of 2021, olefins operating income increased $4 million from the second quarter of 2021, primarily due to higher sales prices and margins while volumes were impacted by planned maintenance events.
Next let's turn our attention to the balance sheet and statement of cash flows we generated $755 million in cash flows from operations in the third quarter of 2021 third quarter 2021 capital expenditures were $144 million.
Our solid balance sheet, and our commitment to keeping our strong investment grade financial metrics provided us the ability to raise $1 $7 billion in the third quarter at an average maturity of 26 years with an average coupon of two 7%.
A portion of these proceeds were used to fund our acquisitions in the second half of this year.
We continue to maintain our long dated debt maturity profile with a weighted average debt maturity of 17 years, while keeping strong credit metrics anchoring our investment grade balance sheet.
Now to address some of our some of your modeling questions. We entered the third quarter experiencing higher raw material and energy cost, which could persist through the fourth quarter. We expect our effective tax rate for the full year of 2021 to be approximately 23%.
Cash tax rate of 21%.
Our capital expenditures forecast for the year is now expected to be between 600 $650 million.
The turnaround of our Petro two ethylene unit is currently underway and expected to be completed in December with that ill now turn the call back over to Albert to make some closing comments Albert.
Thank you Steve.
This quarters record highlights the earnings power of our products and our high level of integration, which extends through the value chain from natural gas liquids and other feedstocks through to consumer beauty products.
We are very excited about our new products and brands that borrow last <unk> and <unk> bring to Westlake.
This leading products and brands, we will continue to drive our earnings power.
As we look forward.
With global supply chains and manufacturing.
Beginning to normalize.
We are well situated to continue to meet the global strong demand for consumer and industrial products.
As the U S continues to have globally advantaged feedstock and energy positions.
Ethane natural gas versus high price high.
High priced oil based feedstock Utah.
Utilized by all falling competitors.
We see PVC supply demand dynamics remain favorable.
With a strong growth in demand more than offsetting the limited global capacity additions.
We see continued strength in our PVC and Chlor alkali business with.
With healthy demand in caustic soda and clothing.
The strength in global construction and manufacturing outlook.
Should also be supportive of strengths in the downstream building products business.
In our olefins business.
Domain demand remains favorable.
Initial everyday products.
Consumer packaging and health care drive polyethylene volumes.
However, they are global capacity additions in coming quarters.
The strategic acquisitions of both North America.
<unk> and <unk>.
<unk> expands our building product platform.
To significantly leverage our participation and a strong housing and repair and remodeling markets.
The proposed U S infrastructure spending bill.
So can you basically benefit our other building products business.
And drive construction demand for many years.
Our ongoing growth initiatives and chemicals and building products.
Our driving new and complementary products to our existing portfolio.
Which when coupled with strong market growth.
We will deliver long term value for our shareholders.
We will continue to look at opportunities.
That both further our strategy of adding complementary products.
As well as increasing.
Vertical product and sales channel capabilities.
In all of our business segments to deliver strong financial performance.
Our continued focus on ESG activities.
Led us to make significant improvements in our operation and supply chain process.
For the betterment of our communities.
And where our products serve vital and valuable purposes.
We are also developing products.
To build a more sustainable future.
As part of our Green initiatives.
Including the introduction of a green caustic soda no S Green bean.
In Canada, we have commercialized and now selling <unk>.
PVC oriented pipe.
Referred to as <unk>.
Which allows us to create a PVC pipe that uses less material, while delivering the enhanced strength.
And the capabilities of our current PVC pipes.
In addition to these new products and dose of IMAX.
Which are derived from post industrial recycled plastic.
We expect to continue to bring buck to bring to market products that will further our sustainability goals.
While meeting the needs of our customers.
And delivering value to our shareholders.
In September we published our 2020 sustainability report.
It among many accomplishments we noted.
We have achieved meaningful annual improvements in our carbon footprint over the past five years.
This is being accomplished through applying technology.
And optimizing operations.
Resulting in a C O two emissions.
Falling by eight 7%.
From 2016 to 2020.
And have ongoing efforts to continue to decrease our ambitions.
We are confident that Westlake is well positioned.
To serve the growing worldwide needs of our customers.
While maintaining financial discipline.
Which combined with the strong fundamentals of our business.
<unk> enables us to deliver long term value to our shareholders.
Before I conclude.
I want to make a moment.
To take a moment to mention that in September we.
We celebrate.
35 year anniversary.
We have grown significantly since 1986.
And I want to thank all of the Westlake employees, who made this possible.
Thank you very much for listening to our third quarter earnings call.
I'll 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'll provide that number again at the end of the call Tomorrow, we will now take questions.
Thank you.
Ask a question you will need to press star one on your telephone.
Withdraw your question press the pound key.
Please standby, while we compile the Q&A roster.
Your first response is from Mike Sison of Wells Fargo. Please go ahead.
Hey, good morning, guys. Congrats on 35 years Albert Thank.
Thank you good morning in terms of vinyl.
It seems like every quarter, you got a new record EBITDA margin any thoughts on.
The sustainability of that when you look to the fourth quarter and the first half of 'twenty two it looks like most of the consultants see pretty favorable.
Margins for the industry over the next couple of quarters. So, it's just kind of any thoughts on that.
The next year or so in terms of profitability for vinyls.
Thank you.
The basic fundamentals for the vinyl business very strong as we mentioned.
Limited capacity additions coming on the world.
And actually being reductions in supply now lymphoma weather related but some capacity reductions.
Both in North America, and in Asia, and Southern Europe.
The demand. However has continued to be very strong vinyls, one of the best products for construction related.
Applications, whether it's.
In the infrastructure piping.
Fittings for water and sewer all around the house inside or outside the house.
And with the strong U S feedstock advantage through a low cost power compared with power cost in Europe, and Asia, low cost energy and a low cost ethane based ethylene feedstock, we have one of the lowest cost position to supply the growing demand for the vinyl business that.
Including caustic soda as well as lowered economy recovers caustic soda demand is increasing and as again limited capacity available to supply and hence we have a strong.
Pricing power now I just wanted to mention that as we head into the fourth quarter that is typically a seasonally weaker quarter because of winter season that construction typically slows down however, since this year, that's a lot of.
Disruption was weather related or capacity reductions.
Inventories were low throughout the industry both on the produce produce site and customer site. So there could be industry inventory building.
During the fourth quarter, So, we'll see but we believe the near term and the longer term going forward our vinyl business.
<unk> is very positive.
And then a quick follow up with your new building products portfolio altogether now what do you think that growth rate should look like next year.
So Mike, it's Steve and Sarah as we think about.
Giving more transparency will be spending more time discussing that we've just closed these three transactions just over the period of several months and certainly we want to give more transparency to that business in terms of its financial performance and give me more specific understanding of how that business is expected to perform so.
Hang with me a little bit we do expect to give more transparency to that in the very near term.
Great. Thank you Youre welcome.
Thank you. Your next response is from.
This will happen with RBC capital markets.
Alright, Thanks for taking my question.
Congrats on a great quarter and good outlook here so.
I'm just curious.
You just noted first off on caustic soda there has been some improvement.
You've also seen some closures within the industry.
Where do you stand on kind of replacement costs, if you could help us with that.
Do you think that.
Just given the increases in chlorine as well that we're anywhere near.
Investment coming into the industry or are we still quite a ways away from that.
Well as you know caustic soda.
Using the electrolysis process.
Lower copper and materials are used for construction.
And as we've seen in recent months all year that commodity price such as copper has really increased the pre deal. So replacement cost has also increased for building caustic soda plants.
In our opinion.
Okay, and I guess on offense.
Have seen some.
Pullback in polyethylene pricing over the last.
<unk> polyethylene pricing in the last month or so.
Is that because inventories are now normalized or how would you kind of rate.
Supply demand and inventory picture in the olefins chain.
Yes.
<unk>.
Weather related issues.
Turning back to normal some of the plans that were impacted by the weather has come back to operation as we mentioned also the additional capacity that's coming online in the next few quarters.
I think the inventory balance.
Become much better than doing the in the past year. When there was a lot of tightness in inventory for the polyethylene business.
And then lastly, I'm sorry, if I may just real quickly on your balance sheet, obviously still very healthy.
Are you still in a position where you are pursuing further M&A or how are you thinking about you.
Using the cash that you generate from here on.
So Arun, it's Steve and so the answer is we're always looking for opportunities certainly those that provide real bottom line value and as you know we have we always have had a very active corporate development team looking at opportunities, both internal growth opportunities and acquisition growth opportunities and so as we think about putting.
The capital we have to work that's really where we're focused is really kind of the bottom line cycle or average returns that we're looking for so yes, theres always an opportunity to put that capital to work, but we're always looking to make sure. It provides that real long term sustainable risk adjusted returns. So there is an active role both now but always has been and putting that cash.
To work so we will as.
As I say as we move forward stay tuned, but we certainly have not changed our focus of driving long term sustainable bottom line value.
Thanks.
Youre welcome.
Thank you. Your next response is from Kevin Mccarthy with vertical research.
Good morning, Albert and coal coal prices rise appreciably in China and of course. The government. There is also implementing its so called dual control environmental goals I'd be curious to hear your thoughts as to what impact that is having on PVC production.
<unk> in the PVC market.
Regionally and globally, if you think it's significant.
Suddenly.
As you May know that China is associated with a market share of PVC capacity in the world of close to about 50% about 80% of our debt is coal based and what's happening with not only the high price of coal, but a lack of coal has impacted production.
Our capability of these plants.
And some of the.
Cope PVC based plant that enough integrated back to coal.
Also shut down further with a do control some of the provinces that has exceeded.
The deal control the green.
Greenhouse gas emissions to GDP ratio.
They were forced to shut down the industries to reduce emissions and we have planting in.
In China, and we have been impacted also.
Those provinces and they said the U S shutdown for several weeks.
To reduce emissions, so even though the government has.
Put a cap on coal prices and coal prices come down for the lofty heights is still quite expensive and going forward.
Energy demand in China is still growing so we will see how China wood.
We control the industries and whether the KOL based industry will allow us to.
We continue to grow or they will be.
Frozen and our capacities will even though.
Shutdown and some of the.
Polluting highly polluting plants older plants.
Thank you for that and then as a follow up I guess I'd be curious to hear your near term outlook for PVC resin prices, we've seen U S export prices rise in recent weeks and months.
I'm curious as to your views there for the fourth quarter and also on U S. Domestic contract pricing do you have any.
Posed increases on the table for November.
Certainly.
As we said we're heading into the fourth quarter in the northern Hemisphere, typically is a weaker cyclical quarter with construction slowing down.
However.
<unk>.
It's the largest exporter of PVC around the world and the world demand for <unk> still growing as the economies recover from the pandemic.
But because of the high energy cost in China and Europe.
Some of their production either curtailed or very high cost position.
So U S by far is the most advantageous.
Location to supply the rest of the world's need for PVC.
So we see continued strong demand for PVC and hence the profit.
Ability now you mentioned pricing.
The industry IHS has announced that the industry announced a <unk> of home price increase for November.
And even though we are heading into the fourth quarter window season, We believe there is a strong.
Demand and such price increase we'll be able to pass through.
In the U S, especially when U S prices are below the export price industry has seen in other countries around the world.
Perfect. Thank you so much.
Youre welcome.
Thank you. Your next response is from Mike <unk> of Barclays. Please go ahead.
Great. Thanks, Good morning, guys good morning.
Question on polyethylene I think IHS is calling for a sizable polyethylene margin going into Q2 of your main public competitors have offered a more upbeat less barrett recommendation for <unk>. So I guess you guys fallen here.
Well as you know polyethylene prices has moved a lot since June of last year.
And.
With new oil capacity as we discussed coming up and more plans for returning the inventory balance is much better.
And hence this the discussion all prices dropping starting the month of October and.
Through December and possibly into early part of next year.
The degree of drop really depends on the supply demand and also it depends on our foreign competitor, who will use primarily.
Oil based feedstock naphtha, that's come from oil refining.
As a feedstock as you know oil price is quite high now and depending on.
The winter in temperature.
Talk of our oil price, even going even higher depending how the cold winter will be and how high natural gas will be in overseas markets.
So that would put.
A floor as to how low the U S price will come down so I think it's the.
The trend is that the prices coming down from the highest we have achieved but as to how much of a drop it depends on several things as I mentioned.
One is based on oil price.
Got it fair enough and then I wanted to circle back to capital deployment I guess, one of your upstream peers. Besides the volume their MLP last week their logic for that was trading at a 9% yield and I just felt in the market.
Willing to appropriately value the kind of dropdown growth story that is historically and I look at Westlake partners.
It's operationally performed very well, but it's trading at seven 8% yield fairly similar EBITDA multiple to Westlake I guess would you contemplate buying back in your MLP are you still committed to keeping this public for the long term.
Market I think Youll continue to see that the performance of the partnership and you saw the results. This morning continue to be very robust and very strong in the face of a number of.
Challenging weather related challenges over the course of the last year or so and so I think the the model that we have performed well, it's something that I think the market has appreciated and the prices stayed right in there and I think if you look at the cycle average.
Trading value of Westlake chemical and the cycle of average trading value of the partnership it has traded at a premium valuation it is clear that being able to exercise that arbitrage in size has been challenged over the last couple of years, but I still remain optimistic that the underlying value proposition remains and thats.
Something that we will continue to assess on an ongoing basis.
So we are pragmatic we will look at this on an ongoing basis, but the value proposition still remains.
Got it thanks guys.
Youre welcome.
Thank you. Your next response is from Brian Mitch.
Fermium research. Please go ahead.
Good morning, and congrats on a record results in 35 years.
You had faced some negative impacts from hurricane either in the third quarter or can you can you size, what the financial impact was.
Yes, so Frank you're right, it's been a challenging.
Challenging period of time between the various events that we've had over the course of time, whether it's Ben.
Hurricane Ida or even some unplanned outages and so on.
Order of magnitude in the third quarter. It was between 80 and $90 million between the unplanned outages and Ida.
Between the unplanned outages in either a total of $80 million to $90 million EBITDA impact correct.
Great.
You guys had been on force majeure on.
Bcm in PBC, where does that stand what when do you think youll be back up if youre not already backup.
We are coming out of the fourth module and we try to apply.
Two regular.
Supply to our customers needs.
Okay. So that's that.
The force Majeure has been ended correct.
Yes by way of trying to come back as much as they can still building inventory back as well as the balance.
Gotcha.
Thank you so much.
Youre welcome Frank.
Thank you. Your next response is from Andrew.
With Morgan Stanley. Please go ahead.
Hi, good morning, and thanks for taking my question.
Just curious.
Curious on.
Are there any good business you are able to look at the entire process from qualified vinyls Im curious how youre seeing the profitability in the March end market.
Kind of the upstream side versus downstream and how that has evolved over the last few over the last six to 12 months.
We've seen rationalizations and also just strong demand downstream.
So how you compare to those.
Suddenly.
With the recovery of the economy, typically probably related which is PVC would lead to recover.
Economic recovery and we are seeing that caustic soda price was lagging behind for quite a while as PVC prices and margins start improve as demand for PVC products what is infrastructure.
Our housing related activities.
<unk> has really grown very fast, but now as the global economy recovering and expected to recover even into 2022 demand for caustic, which lags behind the GDP now is picking up and we are seeing price increases in coffee as well.
So I think we're.
We're seeing all time high for <unk> values.
But.
Among the chlorine derivatives.
Even given the high <unk> price.
<unk> Valley for clothing still goes to PVC.
So we are fortunate that as Steve mentioned, we are number two globally in PBC.
And capacities and also number two in caustic.
So combined I think we are the leading chlor vinyl with PVC.
I know a business in the world. So we're enjoying the benefit.
And going forward, we see this continue as a limited capacities, adding on is expensive to add all these integrated capacities.
And we are fortunate that we are in good position.
To capitalize on the up cycle on this segment of the business.
Got it that's helpful. And then maybe it's a bit early but on the Boro acquisition.
As you think about.
We're getting a closer look at the business now that you've completed that.
Any sense for positive surprises and negative surprises and how youre thinking about that $35 million and synergies and potential for.
Potentially higher or better synergies in that.
I'll talk to our operations and Steve can talk about the financial synergies.
We're very <unk>.
Happy after one month of ownership of the barrel business.
They have very good product leading positions very good technologies and also the potential for growth and.
Some of the planned equipment because of the sales process.
Starved of capital and hiring.
So the plans were not running at full capacity.
Now that we have stabilized and we're looking opportunities to increase our production and demand is very strong in housing materials as youll Mito and also too.
To reduce some of the operating cost.
Further.
Capital investments increased production, so very happy with that.
So when you think of the run rate the $35 million of annual cost related synergies is really where we are still guiding people today and as Albert noted there.
Gives me a number of opportunities.
The opportunities that we see here is you've heard us speak to.
The issue that significant.
Economies of scale and diversification of our leading building products business that he outlined earlier.
And really we think that enhances our opportunity to really look for improvements above just at $35 million of cost related synergies and so when you think of opportunities beyond that we'll look for those of course, but they're going to be opportunities. Both in the revenue line as well as in the cost line and as we see those and get comfortable with those will certainly taper.
Grab those to you.
Very helpful. Thank you Youre welcome.
Thank you. Your next response is from David Begleiter with Deutsche Bank. Please go ahead.
Thanks, Good morning, and Albert Congratulations as well. Thank you David every five years.
Just on ethane how do you view, how do you expect supply.
And price it to evolve over the course of 2022.
Yes, certainly the.
The future prices for ethane for 2022 actually is dropping from the highest in the first quarter, which are close to this quarter's price.
And dropping down to the.
The mid low thirties.
On pricing.
I presume, that's what they call us up.
The high oil price and gas price.
As more rigs going into.
Oil and gas fields and more production.
The only people are completing wells.
DUC wells, but also a new drillings.
We are watching the rig counts, which is moving up so with oil production Dolby voice I think available.
Very good and then just back on China do you expect that at a very high level.
Capacity add in China.
Chemical landscape given the government's enhanced focus on few commission going forward.
Yes, I think that we are watching China very carefully they are the largest consumer in country for many other chemicals and plastics.
And also a producer.
Mainly imported about an exporter of chemicals and plastics and so.
So their appetite will be very important.
Affecting the global prices for chemicals and plastics.
Thank you.
Youre welcome.
Thank you. Your next response is from Hassan Ahmed of Alembic Capital. Please go ahead good morning.
I was looking Steve Good morning, I, just wanted to go back to Florida.
Sure alkali and net pricing dynamics, obviously, a bunch of moving parts in the Chlor alkali market.
<unk> seen rationalizations off late.
Obviously see in the coal price escalation in China, the natural gas situation in Europe and.
The commentary that I'm hearing from you bought on the chlorine demand in caustic demand side sounds very positive as you look into Q4 and 2022 now with all of that as a backdrop IC pricing where it is.
Cost stake according to your pricing stock at 825, a ton chlorine at $4 43, a tonne.
House and.
Obviously this is backward looking for Q3, when Nat gas averaged $4 a million btu. So how are you thinking about the.
The sustainability of these pricing levels or maybe even sort of as you look into 2022.
From the commentary it sounds like there's potentially more upside in pricing.
Yes, I was just looking at IHS industry consulting firm forecast.
Looking.
December and January download $10 $10, a ton for caustic, but April may theyre going up $10 a ton caustic. So I think people are forecasting that caustic prices will stay at this level.
Throughout next year and chlorine prices still looking at.
Another $150 ton price increase in January of 2022.
So.
I think people are pretty positive so low in the U S economy. The global economy continues to recover from the pandemic.
Demand for caustic and clothing be strong.
And the derivative products also demand will be strong.
And hence the pricing.
We'll remain favorable going forward.
Very helpful Albert and as a follow up just wanted to go back to some of your commentary about China.
Celanese on its Q3 calls actually made some very interesting comment about how they feel the capital cost advantage that the Chinese used to enjoy has waned away how permitting has gotten much harder and obviously then we.
ESG concerns all over the world and.
And we all know obviously one of the culprits of capacity addition over the last decade was China.
No.
Can you dig a bit deeper into what your expectations for capacity growth or does that.
<unk> is in China over the next five to 10 years.
That's a very good question I think the Chinese government.
Five year plans wish to upgrade the industrial values.
Going forward and they won't investments in high tech areas in high value areas and not the polluting.
Basic industries.
Even though they may have labor advantage of building.
But the labor cost is going up a high of the year.
<unk> increase going up double digit for many years now so.
<unk> they cannot compete with.
Vietnam or other countries with.
Pretty good.
Favorable.
Workforce, but at lower rates than in China. So I think the Chinese government are also very conscious of the global warming.
We here, even with a club 26 going on there.
There are various plans and we heard India now also.
Wish to to have it.
<unk> 2017 target off net.
Net zero emissions. So I think the whole world are working towards area and.
As our industry. Our goal also is to reduce as you mentioned.
Comment reducing greenhouse gas emissions in our productions as well so I think.
This will have impact on new additions on the basic industries in China around the world.
Very helpful. Thank you. So much you are welcome. Thank you.
Thank you. Your next response is.
It's from Alex.
With Keybanc. Please go ahead.
Thank you good morning, everyone.
Albert and good morning.
Emphasized.
Return on capital.
But in Europe and building products.
Would you like to be.
Significantly larger over the next few years.
<unk> acquisitions do you have aspirations to be a bigger building products player.
So Alex when you think about the focus that we havent deploying capital its not size that really is important it's the return opportunities that we see and you can see with the investments that we've made this year. The investments, we're focused and really putting capital in end markets that gave us scale in sales channel, but also.
Abroad real compelling value both in our Alaska acquisition, the <unk> acquisition and the Diamond acquisition. So these were all focused it really making sure that we not only had scale, but value being driven of course with that scale.
It's important to estimate share that as we grow the businesses, we're doing it with always a value focus. So that's our focus the answer is over time, certainly there'll be additions to both the building products businesses in the various chemical businesses, but its really focused it making sure. They are all contributing in the appropriate kind of returns given the risk adjustment to.
First in those businesses.
Thank you Steve.
Follow up anyway.
<unk> for us.
Cost increase for your business in Europe, due to higher energy prices.
The fourth quarter.
So as you think about it you've got of course higher energy costs and higher natural gas cost and so without kind of segmenting out which is applicable in Europe and in North America that you.
That are.
Our sensitivity to higher cost of.
Gas as an example is a dollar and mmm Btu is about $100 million of EBITDA, but we haven't broken that out necessarily in terms of the contribution or the impact that has on our European versus our north American businesses, but of course, it's more heavily focused on the north American business, because that's where the biggest footprint we have is.
Sorry, just to clarify Steve the $100 million includes Europe.
It does.
Alright, thank you.
Youre welcome.
Thank you. Your next response is.
It's from John Roberts of UBS.
Thanks, Switzerland. Please go ahead.
Good morning, This is Matt <unk> on for John.
Given the recent acquisition to the website portfolio should we be expecting in desktop and capital expenditures in future years.
And so when you think about our 'twenty two capital program will be giving that a good hard look this year and as we think about finalizing our 2022 budget will talk about the capital spending budget.
In our fourth quarter earnings call, which will be in February and we'll give guidance for that capital number then but of course that business has opportunities to grow and develop the business that we've acquired both <unk> and <unk> and so certainly you would expect there'd be some capital deployed but let me wait until we finished our capital budgeting for 'twenty two to size.
It for you.
Thank you.
Youre welcome.
Thank you. Your next response is from P. J <unk> of Citi. Please go ahead.
Hi, Eric Petrie on for P. J, good morning, Albert and Steve.
Good morning.
What is your order backlog look like in building products versus more typical or.
Historical levels.
Boral has a similar backlog.
Yes, I think for most of the building products business.
Inventory is very low and remains very high.
But as I said earlier, we are heading into the fourth quarter the winter season and typically.
Order slowdown and people put manufacturers.
Producing inventory for the spring season, but because of the shortage of products.
They may not be much of a slowdown as typical season.
We would expect so time will tell we will see whether we have.
The dramatic slowdown a little bit of a slowdown.
Okay.
Anything specifically on days inventory of that.
Eight weeks versus more normalized Florida or Howard.
Much less much less than eight weeks much less than eight weeks today, most putting part of inventories are quite low.
Okay.
And then secondly on your green and low carbon caustic soda.
How do you see the scale up of tons and what kind of end.
Markets are adopting this burst of alumina or other inorganic or organic end market.
We're still seeing the industry adapting to it I think last dose of the consumer products as you know caustic.
To use a lot.
Opened other consumer products. So I think those are probably the easiest to.
To get consumer to be attracted to the green being but however.
As we see other industries want to reduce their greenhouse gas emissions.
Scope, one scope two and go suite.
Also help.
Helpful. Thank you.
Okay.
Thank you your next response.
Yeah.
Bank of America. Please go ahead.
Hi, Yes. This is Matt on for Steve.
Albert.
So you had been under force majeure and finals for a good chunk of <unk>, which kind of presume, presumably hurt your PVC and caustic export tonnage in particular so.
If we think about the transition to <unk>.
What do you expect to see from a quarter over quarter increase in available volumes given these FMC have lifted and then what.
What markets would guess additional tonnage find itself.
Yes, as we mentioned that.
We're getting over the impact of Ida and other unplanned outages and so forth.
Both of the Shaw has been removed by we're still moving towards building inventory and provide.
Squash, we tend to our customers' needs domestically we have been.
Not being exporting much at all.
Even though the export prices has been better than local U S prices, but we wanted to make sure our domestic contract customers get.
Benefit first so asset.
Availability improves we'll enter the export market.
Okay.
Is there any indication on what the.