Q2 2019 Earnings Call
So the Westlake Chemical Corporation's second quarter 2019 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 August six 2019.
I would now like to turn the call over today today's host, Jeff Holley, Vice President and Treasurer, Sir you may begin.
Thank you good morning, everyone and welcome to the Westlake Chemical Corporation second quarter 2019 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 look at our financial and operating results. Finally, Albert will add a few concluding comments and we will open the call up to questions.
During the call we refer to ourselves as Westlake chemical any reference to Westlake partners is to our Master limited partnership Westlake Chemical partners LP and similar references to Opco refer to our subsidiary Westlake Chemical Opco LP, who 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.
Availability cost and volatility of raw materials energy and utilities governmental regulatory actions changes in trade policy and political unrest.
Global economic conditions 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 discussed in our SEC filings.
This morning, Westlake issued a press release with details of our second quarter results. This document is available in the press release section of our web page at Westlake Dot Com.
We have also posted a presentation on our website to assist in the discussion of our second quarter results.
A replay of today's call will be available beginning today two hours. Following the conclusion of this call. The replay may be accessed by dialing the following numbers.
Domestic callers should dial eight fivefive 8592 056.
International callers may access the replay at 404.
5373, 406, the access code for both numbers is three Fiveeight three 409.
Please note that information reported on this call speaks only as of today August six 2019, and therefore, you are 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 under web page at Westlake Dot com.
Now I'd like to turn the call over to Albert Chao Albert.
Thank you, Jeff good morning, ladies and gentlemen.
And thank you for joining us to discuss our second quarter results.
In this mornings press release, we reported net income of $119 million for the second quarter of 2019.
Or 92 cents per diluted share.
The second quarter proved to be challenging.
As Wesley dealt with slower global economic growth.
In the face of international trade, uncertainties that weight on prices and margins.
In spite of this sales volumes increased over the second quarter of 2018.
And the first quarter of 2019.
And our bottom line results improved from the first quarter.
We continue to benefit from the solid operational performance of our plants and favorable trends in feedstock and natural gas costs.
We have remained focused on deploying capital and I'll buy those expansion projects that will improve our chain integration.
And in acquisitions, such as not come specialty PVC compounding business and davinci, especially with the composite roofing manufacturer that extend our product reach into new markets.
I would now like to turn our call over to Steve to provide more detail on our financial and operating results.
Thank you Albert and good morning, everyone.
I will start with discussing our consolidated financial results followed by a detailed review of our vinyls and olefins segment results.
Let me begin with our consolidated results.
For the second quarter of 2019, we reported net income of $119 million or 92 cents per share on sales of $2 billion.
Westlake net income for the second quarter declined $159 million compared to second quarter of 2018, net income of $278 million or $2.12 per share, while improving $47 million from first quarter 2019, net income of $72 million or 55 cents per share.
Compared to the second quarter 2018, our results were impacted by lower prices and margins for a major products, primarily due to the ongoing international trade uncertainties and slower global economic growth. However, we saw continued strong operational performance of our facilities, which led to higher sales volumes in both our olefins and vinyls segments, which was aided by the addition of an icon a global PVC compounding business acquired early in the first quarter.
Compared to the first quarter of 2019, we saw higher sales volumes and margins in our olefins segment due to stronger demand and lower feedstock and fuel cost.
In addition, we benefited from improved margins and volumes in our vinyls downstream products businesses, even as extended winter weather delayed the start of the construction season and much of North America.
Our utilization of the FIFO method of accounting resulted in an unfavorable pretax impact of approximately $11 million or seven cents per share in the second quarter compared to what earnings would have been if we reported on the LIFO method.
This calculation is only an estimate and has not been audited.
Now, let's move on to review the performance of our two segments, starting with our Vinyls segment.
In the second quarter of 2019, our vinyls segment saw lower sales prices for caustic soda, especially in the export market as a slower global growth and ongoing uncertainty in trades continue to pressure sales prices for caustic soda and PVC resin.
In addition, the vinyls segment was further impacted by the late start to the North American building and construction season I noted earlier.
For the second quarter of 2019, Vinyls operating income of $129 million decreased 142 million from the second quarter 2018 operating income of $271 million.
This decrease is primarily due to the lower sales prices for caustic soda and PVC resin.
Partially offset by increased volumes from the con and our other vinyls downstream products businesses.
Vinyl second quarter operating income of $129 million increased $28 million from first quarter operating income of $101 million.
This increase is primarily due to improved results in our vinyls downstream products business is largely driven by seasonally higher volumes as the building and construction season got underway and with lower restructuring acquisition and integrated costs, partially offset by lower caustic soda sales prices.
Turning to our olefins segment.
From an industry supply demand perspective, the new ethylene and polyethylene production capacity that has entered the market since 2018, and the ongoing trade and certainly certainty has pressured prices and margins in the second quarter of 2019, when compared to the second quarter 2018.
In the second quarter of 2019, or Olefins segment operating income of $82 million decreased $76 million from the second quarter of 2000, eighteens operating income of $158 million due to the lower margins, resulting from lower polyethylene sales prices.
These lower prices were partially offset by higher polyethylene sales volumes driven by strong operational performance of our plants and lower feedstock in fuel cost.
Second quarter 2019, olefins operating income increased $45 million from first quarter 2019 operating income of $37 million as we saw good demand for our products and benefited from lower feedstock in fuel cost.
Next let's turn our attention to the balance sheet and statement of cash flows at the end of the second quarter with cash and cash equivalents of $409 million and total debt of $2.7 billion.
Second quarter 2019 cash flows from operating activities were $320 million, our capital expenditures were $208 million.
In the first half of 2019, we continued our strategic de bottleneck de bottlenecking investments to further integrate our production chain in the U.S. in Germany, where their vinyls expansion in Geismar, Louisiana expected to be operational in the fourth quarter of 2019.
Our ethylene joint venture with Flotek, Kim will started up at the end of the second quarter.
Ed further ethylene integration into our vinyls chain.
We have also continued to invest in growth opportunities out this year with bolt on acquisitions, such as MOCON specialty compounding.
And da Vinci roofing that has expanded our downstream products businesses.
India's current market conditions, we will seek to invest prudently in opportunities that acquire leading technologies and projects that will further enhance our chain integration and our business and that will improve our cost position and capitalize on our globally advantaged feedstock position.
As always we will continue to aggressively manage our costs given the curtain current global economic outlook.
Subsequent to the close of the second quarter, we issued 700 million euros of 10 year notes at an attractive coupon of 1.625%.
These proceeds will be used to fund our future growth.
As we look forward natural gas and ethane prices have continued to decline in the third quarter.
New NGL pipelines and an accompanying fractionation capacity has increased supply in our industry highlighting the beneficial cost position enjoyed by North American producers.
And our vinyls segment sales prices for caustic soda appeared to have stabilized and the easing of river levels in the United States has provided improved logistics as more normal trade patterns have been reestablished.
While the typical construction season in North America was delayed due to extended winter weather, we have benefited from the rebound in demand and believe it will carry through into the third quarter.
For modeling purposes, we expect our effective tax rate and cash tax rates for the full year of 2019 to be approximately 23 and 18% respectively.
Given the ongoing capital investments to reduce our cost position and further integrate our business site as I outlined we expect our full year capital capex to be approximately $650 million with that I'll turn the call back over to Albert to make some closing comments Albert.
Thank you Steve.
We delivered a solid second quarter results in spite of the challenging economic environment.
We will continue to be prudent while evaluating new bolt on opportunities.
And investing in our business to drive costs lower.
Improve our chain integration.
Operate our plants efficiently.
And grow our differentiated platforms in PVC and polyethylene.
This morning.
I wanted to mention that the heightened with a heightened awareness in the market about the environment Westlake has had a longstanding commitment to corporate social responsibility.
That is formed by our core values.
That commitment includes doing all part.
Supporting Sis and ability.
Which includes reducing greenhouse gas emissions and waste.
Improving energy efficiency.
And promoting the responsible reuse pathogen and recycling.
We are also actively participating in the industries and driving to initiatives.
Including those of the alliance and plastic waste.
Materials recovery for the future and others.
Thank you very much for listening to our earnings call. This morning.
Now I'll 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 will provide that number again at the end of the call Jimmy we will now take questions.
Thank you as a reminder, ladies and gentlemen, if you'd like to queue up to ask a question you May hit Star then the number one key on your Touchtone telephone.
If your question has been answered or you wish to remove yourself from the queue. You may do so by pressing the pound key.
We ask that you. Please your line once you've asked your question to prevent any background noise from coming from again that is star then one if you'd like to queue up to ask a question. Our first question comes from Aleksey Yefremov with Nomura Instinet. Your line is now open.
Thank you good morning, everyone.
Good morning, you are you expecting your vinyls capacity will this increase chlorine and caustic soda production relative to your current system configuration.
Alex we will increase our PBC production, but we're not adding any caustic production in North America. There is a small amount that we're adding in.
Europe that will start later in the following years, but none in the current.
None in North America. This is a PVC expansion.
Thank you, Steve and you have chosen to issue guidance for the full year recently could you explain the rationale for providing this guidance and are you planning on keeping providing this guidance in future years.
This was a onetime guidance and we felt we needed to do something because we did see that the guidance seemed to have gotten stale relative to the dynamics that we saw in the marketplace.
So I think you can expect that we will do this just one time only.
Thanks, a lot.
Thank you and our next question comes from Kevin Mccarthy with vertical Research partners. Your line is now open.
Yes. Good morning, I was wondering if you could quantify one of your vinyls segment volumes in the quarter I think you reported.
Them as being up 3.5% on a year over year basis, but presumably that.
Includes some of the acquisition activity, so perhaps you could.
Tell us what that might have been without acquisitions and speak to the the weather impact that you experienced.
So Kevin you're right. The the step up in volumes was largely driven by some of the acquisitions. We made earlier this year and then con certainly it was a significant contributor that absent that our web are.
Sales levels would have been similar to 2000 for the same quarter 2018.
The.
Impact as a result of the winter weather was certainly delaying the impact to our ability to sell products at the normalized level. During the course of the tail end of the first quarter and ended the second quarter, but as we noted we've seen a good recovery since the weather has been.
Retrain banquets from a weather patterns.
Okay, and then I guess I had a similar question on the olefin side. Your volume there was up 20% or so on a year over year basis.
What drove that level of increase.
Well certainly our production hasn't increase a part of that was driven by maintenance activities in prior periods.
We did see strong strong demand in this period, but the sales was largely driven by operating issues and turnaround issues.
In prior periods.
I see thank you very much you're welcome.
Thank you and our next question comes from Neel Kumar with Morgan Stanley . Your line is now open.
Great. Thanks for taking my question.
I was wondering if you could just help bridge the ultimate margin improvement on the first quarter levels of 16% to second quarter levels of about 25%.
It appears there was a modest step up in volumes and prices. It was mostly just from lower feedstock costs and should we expect similar margin level in the second half of the year.
So so neal it was largely driven by a couple of things. So certainly the seasonally higher earnings in our downstream products businesses was an important piece of that as well as lower purchased ethylene and fuel costs and certainly we also had some.
Lower restructuring and transaction related costs also when you look at quarter one versus quarter two.
Thanks.
Well, then what what's embedded in your outlook in terms of PVC price in the second half of the year I would say domestic PC pricing go up to June .
Slide in July so any color there would be helpful.
Sure.
I think the industry coal sets consultant looking at prices to be relatively flat. After the two cents of home price increase we received in June .
So the outlook for the rest of the year as domestic prices relatively flat.
Thank you and our next question comes from David Begleiter with Deutsche Bank.
Your line is now open.
Hey, this is David on here for David I guess first on caustic pricing given the additional south American demand will take some time to significantly reduce the producer inventories here. So when do you expect pricing to.
More meaningfully in the second half.
Thanks.
Well I think we certainly have seen a lot of the issues that were surrounding the cost issues in Brazil addressed.
Specifically Eleanor today has.
Begun to ramp up to more normalized rates had been running at pretty elevated rates throughout the second quarter and continuing to step up those operating rates. So we've seen that as improving demand on that front.
We've seen some of the industry consultants elevate their forecast for our announcement.
A change in the caustic index of $5 a ton.
So we've seen positive drivers there and as it relates to specifically, Brazil and of course.
I'd I should note that we've also seen a competitor have some operating issues also in Brazil.
Of course in India. We've also seen the bureau of Indian standards.
Those issues that they raised last year seem to have been addressed there now issuing import permits to importers and traders and that seems to have then brought demand back into the market. So we've seen as I mentioned earlier in my prepared remarks.
Stabilization of caustic prices and you see an outlook of $5 a ton on the table.
And then on capital allocation you had 10 am in buybacks in the quarter and you said you are interested in both.
Opportunities so what would be the priority of your capital allocation. This year, and then I guess what would be some.
Areas of focus we are evaluating potential M&A opportunities.
Well certainly it in my comments you can see that we are continuing the.
Debottlenecking initiatives that we have underway both in the United States as well as in Europe .
Those will continue to their their conclusion, we certainly look for opportunities such as the de Vinci acquisition in the nickel an acquisition. We also are aware that investors need and deserve a return so we continue to look.
To give that return in the form of dividends and from time to time opportunistic share buybacks.
As we look for opportunities to grow that includes organic wholesales acquisition related opportunities and as I say, it's it's a function of getting the appropriate return and the appropriate.
Investment of capital.
Thank you.
You're welcome.
Thank you and our next question comes from Bob Koort with Goldman Sachs. Your line is now open.
Good morning. This is Don Campbell on for Bob Good morning, Jonathan.
Commentary on demand trends give a little bit more granularity in terms of how your volumes have trended in July maybe relative to June level is or I guess average second quarter volume trends.
Yes, I think demands are strong both in the olefins segment and in the Vinyls segment.
With the seasonal.
Strong period full building constructions that also help all downstream.
Products.
So.
So long barring any.
Major disruption around the world from the further trade disruptions.
I think the second half.
Demand and also espoused by in this call so consultants seem to be.
Reasonable.
Got it thanks, and I guess on that export caustic soda price.
It seems like North American price does show some positive improvement.
By the end of the second quarter.
It seems like it stepped up maybe above export prices and other regions, how how sustainable is that spread and I guess, maybe what drove.
On that day improvement in North America.
Export prices.
Yes suddenly that.
Export market as being.
Somewhat volatile I think we have.
Kind of stabilized in export pricing and some improvement in some areas and as Steve said earlier demand for.
Especially in South America improved.
Over the.
Over the first half of this year and over last year. So we are seeing the demand being reasonable and.
We expect price to be improve gradually also.
Got it thank you.
Youre welcome.
Thank you and our next question comes from this one up on with RBC capital markets. Your line is now open.
Great. Thanks, good morning.
Just going back to the caustic soda outlook.
We've seen some positive developments.
But I guess would you characterize the July uplift of $5 on the index.
Consistent with your expectations or was it maybe slightly weaker and if so.
You know what are some catalysts, you're looking forward to.
This improve the momentum in caustic soda pricing. Thanks.
Well as I said earlier, the export price has stabilized and I think.
Some of the high cost of producing regions those prices breakeven prices.
So we think that.
So alone this improvement in call me around the globe demand should.
Improve and increase and it helped on the pricing side.
And on the us side as well.
I think was as Steve mentioned earlier, there were some issues with logistics was the high water.
We have a water levels impeding shipments of caustic bone to us and that has.
Issue being resolved, so I think thats more movements.
And prices.
Stabilizing and I think.
Some of the industry consultants are forecasting not only the price increase in July but.
Down.
Further down the year before the potential for the price increases.
Please and olefins markets.
You referenced the supply that's come on Steve over the last couple of years.
Pressuring pricing and margins.
We've also seen.
Feedstock costs pull back a lot.
And what's your outlook for for polyethylene pricing and margins.
Would you expect that we we continue to decline from here or is there any potential for improvement. Thanks.
Well certainly as the reason I mentioned the additional capacity is certainly we continue to see new lbs come into the market and we've certainly is as we all.
Curved sina an uncertain economic.
Outlook in terms of growth and so that has pressured prices over the month of June and July and certainly the further downside to pricing is certainly there. If you look at some of the consultants and their their guidance in terms of forecasts a they do show some trend lower later in the year. If you look at Hs. They do show some risk of further prices declining later this year.
Just lastly, when you think about.
The lock take cracker at startup.
Is there is there potential that you could potentially throttle back on the on the production there and.
Improve the markets and supply or is that.
More more advantageous to run full thanks.
It's it's a very cost effective cracker and as you'd imagine low to your partner is using that ethylene going into their imagery and certainly we're using that going into not PBC, but.
Going into PVC, and not polyethylene and so certainly I think that the expectation is that will ramp up the operating rate of that plant to full rates and both we and our partner would like to see full rights to to send into our respective derivatives.
And so I want to add also with today's ethane price it is.
Reasonable margin in producing ethylene.
Dose ethane prices.
Thats correct.
Thank you and our next question comes from Mike might have with Barclays. Your line is now open.
Thanks, Good morning, guys. Good morning, good morning.
I appreciate the July guidance was just a one time occurrence, but even when you gave the range I guess it implied a bit of a second half balance and earnings which I assume is mostly on the vinyl side. So can you just walk through maybe one or two of the factors that you considered to get you to that second half improvement over what we've seen so far in the first half.
Well, Mike I think as you heard us speak to earlier, we see positive trends both on the vinyls and core alkali front.
Some of the issues that we dealt with weight in 18, an early in 2019 related to demand in Brazil and issues related to regulators in India.
Wait I think on the market and we see those behind us at this stage. So we have a more constructive view going forward into the rest of this year.
Got it Thats helpful. And then maybe could you just talk a little bit more about the improvement of the building products business within vinyls. This Cory quarter and is this an area you might look to give more financial disclosures about going forward given the increasing size of this business in your portfolio.
Certainly Mike as we looked at the business, we'll give that further consideration. It is a business that has continued to grow through these acquisitions and it is a.
Is it is an attractive business as you can see with the capital we put forth through the acquisitions of MOCON and da Vinci.
Thank you and our next question comes from John Mcnulty with BMO capital markets. Your line is now open.
Hi, Good morning. This is obvious from the diet, but John .
Good morning first of all just a quick follow up on the discussion that on the strong volumes, particularly in polyethylene.
Can you touch on how much of that gross domestic versus export demand and then generally how are you seeing polyethylene inventory levels right now.
Yes, I think.
Domestic demand in the US is relatively flat ethane export demand as really helped in the total volume sales volume for the industry.
And I think.
Inventory value from a customer point of view.
Relatively reasonable.
To low side, because with all the capacity coming up customer expecting.
Prices to trend lower so they are very careful in holding more inventory. So we think the customer inventory level is average to the low side.
Okay and then.
As we look at economic cycle on the door.
Historically, we have seen as an economic cycle has done downward.
Including demand slows down.
Cost it kind of follows.
Sometimes leads to higher caustic.
Even lower production.
We are seeing some weakness including.
The question is.
Is this temporary or are you seeing any structurally signs of the phenomenon in Q2.
Thanks.
Sure.
I think some of the chlorine caustic more seasonal.
Generally in the second and third quarter with building season in the northern Hemisphere.
Demand for PVC stronger and study menzel growing stronger and as you go to into Windows season, construction activity slows, though there's less demand for PVC, not only us, but not the northern hemisphere.
And then there's less production of PVC less the cost of Chlor alkali production and hence chlor alkali price tends to.
Well.
We still see the same seasonality from a business cycle point of view so alone. This.
Continue to demand grows for PVC and caustic along the glow.
And with limited amount of capacity increased I think that the that the made to the arduous cycle point of view I don't think there is a.
Business cycle issue for the vinyls business.
Is it really more a seasonal issue no barring any.
Global economic slowdown from the trade issues.
We should see that.
The bundles cycle should.
To get tighter and tighter as we go forward.
Thank you for that.
You're welcome.
Thank you and our next question comes from PJ Juvekar with Citi. Your line is now open.
Once again PJ Juvekar from Citi. Your line is now open you May state your question.
Yes, hi, good morning, this is Erik Petri on for PJ.
Good morning.
I wanted to ask what has your historical volume growth average for chlorine derivative second half over first half.
It's usually more or less the same.
You have a weaker first quarter stronger second and third quarter and the weaker fourth quarter.
At times, depending on demand the fourth quarter.
And did not start until much later.
And hence it was weaker in the first quarter.
As Steve mentioned.
It has improved the second quarter into the third quarter.
And we expect a seasonal slowdown gain in the fourth quarter.
Okay. Thank you secondly, can you talk about the economics of integrated PVC producers in China, and what the impact has been on supply for you see you.
Suddenly well.
As you may know because of the.
Heightened.
And the amount of awareness in China.
Some of the polluting in high cost plans for us to either shut down will reduce production.
So that has limited.
Productions in both vinyl and clarify site.
And.
Depending on which.
Whether you are integrated with our integrated that known integrated producers.
Economics has not doing well and I think.
We mentioned earlier.
The.
The easy you returns.
Probably at breaking level, breaking even levels for the coastal plants are the ones who are integrated from coal all the way to PVC watch mostly in the.
Interior, China has a better economics than the coastal plants.
Great. Thank you Albert.
You're welcome.
Thank you and our next question comes from John Roberts with EUV, Yes. Your line is now open.
Thank you just to get a sense of the weather impact in the quarter.
How much were volumes off from what your expectations were the first to the beginning of the quarter and the vinyls segment.
Well I think if you look at just the quarter over quarter, we had a.
A stronger quarter in the second half than we did in the first half, but certainly it so it's hard to gauge because John as you know whether the seasonal weather changes year on year, but as Albert noted, we typically have a stronger season in the first quarter than we do when we did this past year, but we were able to pick up very good volume in the second quarter as I say, we had an 8% increase in volume quarter over quarter.
Okay and will the low take crack or have any material impact on your economics until you exercise the option at the current equity interest level is it relatively small and the market based.
Ethylene that you'll be purchasing really won't have much different economics than when you're already doing in the market.
Well, we'll be getting.
The plant has has just started up and so its not running at full rates at this stage and so the relative volume that we're taking in the second.
Second quarter and into the third quarter still.
Just ramping up to full rates.
But we will be getting the benefit of producer economics, which is certainly better than any purchased ethylene in the marketplace.
As we take our ownership interest in the plant.
Thank you.
Thank you and our next question comes from Jim Sheehan with Suntrust. Your line is now open.
Thank you good morning.
Good morning.
Could you talk about what you expect for plant turnaround cost in the third quarter and fourth quarter. Please.
So Jim since we have so many plants across the across the business, we decided not to kind of give quarter by quarter turnaround cost and impact because frankly, we schedule. These and they do move based on planning throughout the course of the quarter throughout the course of the year.
But as we look forward into the second half of the year the turnaround activity will be lighter than it has been in the first half of the year.
So we tend to give so the guidance we gave earlier.
It was reflective of of a wider turnaround schedule of course.
Okay. Thank you and on the Davinci acquisition could you give us a sense for the scale of this business and what.
EBITDA contribution might be.
Jim It was very small so it's it's not going to be material to the numbers that you're looking at in your model.
And in terms of your FIFO impact how would you how would you break that out by business segment.
It's mostly a vinyl segment impact.
Thank you very much.
Thank you and our next question comes from Frank Mitsch with premium Research. Your line is now open.
Thank you and good morning, just following up on that turnarounds in the second half being lighter than the first half wondering what's the order of magnitude.
If you compare the half.
As I say, Frank we haven't gotten into the quantification of those turnarounds because they do vary quarter by quarter year over year, and so all I would say is that they will be lighter than they have been in the first half of the year for the second half of the year.
Okay and.
Obviously your volumes were better in both businesses both year over year and sequentially. Some of that M&A related can you talk about the operating rates.
For your facilities, roughly where they were during during the second quarter and what are you seeing so far here in as of July has completed.
Certainly.
Yes operating rates of.
Generally.
Better than our industry information to receive.
We have something to add.
Steve mentioned some turnaround in the first half.
So, but after taking a weighted first half a day turnaround activities.
Doing much better industry operating rates.
All right. Thanks, Thank you so much.
Welcome.
Thank you and our next question comes from Steve Byrne with Bank of America. Your line is now open.
Yes. Thank you.
How would you.
Rank your.
Downstream building products business says among all of the.
Products, you can move the chlorine molecule into how would you rank.
Those downstream products in terms of.
EBITDA contribution margin and what what what volume does that represent out of your.
Chlorine capacity that you have.
Well downstream products over a billion dollars in revenue.
And.
Important offtake of Allah polymers.
But our downstream part of also with the purchase of Dot Com is spread over the world in the building products, we have primarily serving the north American markets like pipe in sidings.
Trends and window profiles and note those.
Tend to not be for export market and all the domestic north American market.
But with the new accounts a compound part, it's really a global business and sold all over the world.
And do you see any new opportunities to move into more vinyls downstream products and.
Just just whether you would ever consider separating that out as a separate segment.
So Steve you can see the last couple of transactions this year with Nick on in Davinci are in that down in that vinyls.
Yes products business and certainly it's it's attractive and that we can provide I think further integration in our business for select acquisitions and so to the extent that we can find opportunities. There. We will that doesn't suggest that we've not continued our focus on the upstream side of the business. We of course do and as I mentioned, we are de bottlenecking, our chemical assets in the vinyls chain now so it is a balance of looking at that and it's an important business. It gen generally tends to be more stable in EBITDA over time.
And so when we give when we give thought to bringing that it is something that we'll give and consider more thought about how we can provide more transparency to that business because as Albert noted is a growing size business of ours.
Thank you.
You're welcome.
Thank you and our next question comes from Hassan Ahmed with Alembic Global Your line is now open.
Good morning out there Steve good morning.
Oh, but a question around near to medium term supply additions.
Like you rightly said the sort of JV you guys have with lucky.
Makes complete sense its cost advantage rate to come on stream.
But I'm just you know a bit sort of surprised you know with NAFTA based economics. The way they are globally with MTO economics. The way. They are that we recently saw two MTO plants come on line in China are not there do seem to be in the pipeline in the near term. So what's what's your view you know if regarding economics and global uncertainty fits.
You know what your near to medium term view about these non north American facilities.
Oh, that's a very good question.
As you have mentioned that.
China outside North America, China is really the country does things be process, adding more olefins capacity.
Some MTO and building some of the coal based.
Yes, no plans to feed the MTO plants, whereas those MTO plants on the coastal region based on input method those they have nothing doing well because of the higher methanol price.
But that's the price that has also seem to be trending lower.
China is building.
Anything based crackers based on imported you say some propane primarily from the us so.
That will be.
To be seeing how good investment those are and there are some.
Crude oil to chemicals.
Plants being planned primary looking at bill at producing more para xylene aromatics side of the chemical side.
Not so much the olefins, even though to some olefins coming up.
So.
China's adding capacity just even normal naphtha cracking.
Just selling do you want to be more self sufficient.
And time will tell how competitive it will be based on the oil.
I understood I understood very helpful. Now as a follow up more on the domestic and Westlake side of things.
You know again, one of the trend we've seen over the last couple of quarters is up.
A fair bit of volatility and.
Off or NGL pricing right and the associated margins.
You know you've seen at times ethane based margins being the gone days at times butane based margin in advantaged. So could you remind me again the level of flexibility you guys have I mean, I know you can run at 10 flat out, but it didn't get to disadvantaged what's the lowest level that you can take that 10 down to.
Well, we are primarily ethane based.
Crackers in Calvert City, Wassa propane cracker, we can revert back to propane, but it will reduce ethylene production.
We have two ethylene plants in lake Charles one of them could crack.
Up to 50% propping and even some.
NAFTA again, if we went to propane or even naphtha, we would reduce ethylene production. So net net we are looking at total benefit to the company, even though you may save some feedstock costs, but you you produce much less ethylene.
And depending on the the margins for older.
All the different feedstocks, we would try to maximize that and we have being.
Using some propane in the recent months when propane was much more attractive.
But I think in today ethane still I think barring the the butane price, which is or what are your summer low price for butane.
I think still the most attractive.
Raw materials and as Steve said, they are more pipelines and fractionators.
Coming up this year next year, we'll produce supply more ethane to the U.S. market.
Very helpful. Thanks, so much.
Very welcome.
Thank you and our next question comes from Jonas Oxgaard with Bernstein. Your line is now open.
Hi, good morning, guys.
Good morning.
Two questions if you don't mind.
One of them is you touched on Chinese PVC economic survey the margins for NAFTA crackers going into PVC is now at a company with a four year high.
David Cole doesn't look that bad with coal prices keep falling but are you seeing increased rates in China because of economics or is this just.
Can't they flex or even though the economics suggest otherwise.
No we have seeing some low a high cost blends and.
Being being reduced production or shutdown or they have thing. Unfortunately, some explosion seeing southern part of China and those plant into capacity taking over the market.
So even though a spot PVC price has moved up.
It is not really on the reinvestment economics, yet and as you know.
China has a moratorium right, though on coal based.
PVC VCM plan because of Mercury catalyst.
And until that's resolved at it up.
Permitting any new.
Qualify.
VCM plays.
That's coal based.
Okay.
A completely different question so the.
The big debate right now seems to be whether the U.S. polyethylene prices are sustainable or not to the Asia is down.
But it looks like you Wes is set by Europe , and Mitch just moves the question over to European polyethylene prices if they are sustainable.
Do you have a perspective of the European pricing and.
How it has been so high rate related to Asia margins or Asian prices for so long I think of course is that sustainable as well.
That's a good question.
As the euro as us.
Polyethylene plans, adding.
50, 60% capacity over the last several years into next few years.
Especially with the trade tensions we have with China.
South America and Europe , It will be the two areas that U.S. producers will be targeting.
So it will have some impact.
On.
On the European market. However, we don't know what.
Trade barriers will Europe half, especially if us putting trade there.
Tariffs on European Auto auto imports.
So time will tell.
Okay. Thank you.
You're welcome.
Thank you and our next question comes from Matthew Blair with Tudor Pickering Holt. Your line is now open.
Hey, good morning, Albert and Steve.
Good morning.
HM.
Spot caustic prices have fallen off about 15% in just the past month or two I think they are roughly around January levels.
Does this concern you.
Do you think it's likely to weigh on us contracts in the back half of the year.
Well.
Suddenly it a spot prices would.
Could have some impact, but I think it's because they are spot prices and.
The volumes are not that big and all of the export some two other parts on long term contract basis. So wish.
Less impacted by spot price and.
So lonely economy around the world improves or is not.
Going to further reduction we see demand for caustic should improve.
As I mentioned earlier with the.
Automotive and other south American issues plant issues that demand import has increased.
So the prices have helped improve.
But you know every day every now and then prices could go up and down in especially in specific regions, but that will not be determine of the global pricing.
Dynamics.
Sounds good and then in the first quarter, you mentioned that building products saw.
About a $20 million to $30 million year over year headwind do you have a similar number for Q2.
No as we said Matthew because of the.
Because of the delay in.
The winter season impacting the start of the construction season.
We saw the pickup in beginning in the second quarter. So we are not breaking out specifics as it relates to the.
Downstream building products.
Portion of our business, but I would say that with the.
Return of the construction season that business has improved and you can see the volumes that we've seen from the con have been additive to that over the course of the first half of the year and certainly working a meaningful contributor in the second quarter.
So I would say that that products businesses performed very well.
Great. Thank you.
You're welcome.
Thank you and our next question comes from Jeff Zekauskas with Jpmorgan. Your line is now open.
Thanks very much.
Can you remind me how much of.
Volume for low take cracker your contractually obligated to accept.
So Jeff we're obligated to take 50% of the production we own we own 10% of the ownership. It at this stage of the plant.
And.
How does that exactly work as the plant is ramping up.
Do you have to take 50% of the volume must ramps up or it has to get to a certain scale before you take the volume.
No as it as it reaches commercialization during that ramp up we're taking our pro rata share.
In taking your pro rata share.
The stat positively.
Affect your sequential EBITDA, all things being equal.
Well certainly Jeff Big.
Yes, certainly because of the producer economics on that portion that we own will have benefits because we've been merchant buying those pounds in the market sequentially. So that'll be an additive.
As we go forward that that will be additive to to the EBITDA.
Okay can you quantify that.
We havent yet.
Okay.
Also in looking at your income statement year over year your cost of goods sold.
Went from a little bit less than 1.7 billion to a little bit more than $1.8 billion. Why was that why did your cost of goods sold go up.
Well, it's I think the mix of businesses that we have Jeff and.
When we think about the change in the mix of businesses part of that of course is the addition to our.
Vinyls downstream products.
Okay. So in other words it was acquisition.
Part of it is and certainly part of it is also purchased materials for all of the businesses as well.
'cause it because really may be purchased ethylene price I mean, maybe ethylene prices are a little bit higher but everything else is really lower now well remember we've also had higher volumes sales volume, yes. So you're right. So when you have higher sales volumes your cost of sales purchase materials go up as well and remember if you're looking year over year quarter over quarter volumes have been up.
Yes.
How much polyethylene to export of your total.
Yeah, we export less than the industry average industry I think move up to in the low to mid Thirtys and we are below that.
Pretty well above 20.
Above 20, yes, yes.
Can you talk about the looseness of polyethylene in the Asian market do you see it as particularly loose or tight or snobby guar.
How do you view that.
Well Asia outside of China is still a big market, but.
Many producers.
In the Asia market and also the middle East So.
This the price this move pretty volatile.
Months to months.
But it is a it's a huge market.
How about China is China loose.
Yeah, China now is the terrorists added on for US producers I think us producers.
Just trying to avoid shipping to China less than what we export just and then those terrorists can be.
Refund, but by and large this is trying to sell it as to China.
Right I understand the U.S. is trying to sell less to China, but is the China polyethylene market domestically, a loose loose or placed it doesn't there seems to be some decrease in China.
Yes.
Yes, I think that.
With the slowing down Chinese economy, and industrial manufacturing.
The demand has been volatile and has been reducing as well for many of plastics now those not only polyethylene.
I guess lastly people talk about the polyethylene market is growing at 4% to 5% globally do you think it's growing at that rate. This year or do you think this year and I don't know one per se.
Well I think we saw the terrorists barriers and trade issues and I will think will be probably less than the global GDP rate, but we're only halfway through the year, we don't know what the rest of the year dilutive.
Okay, great. Thank you so much.
You're welcome.
At this time the QNX session has now ended are there any closing remarks.
Thank you again for participating in today's call. We hope you will join US again for our next conference call to discuss our third quarter results.
Thank you for participating in today's Westlake Chemical Corporation's second quarter earnings Conference call. As a reminder, this call will be available for replay beginning to after hours. After the call has ended and maybe accessed until 11 59 P.M. Eastern time on Tuesday August 13th 2019.
The replay can be accessed by calling the following numbers.
Domestic callers should dial 8558592 056.
International callers may access the replay at area code 4045373 406.
The access code for both numbers is 3583 409.
You may now disconnect everyone have a great day.
[noise].
[noise].
[noise].