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Edited Transcript of WLK earnings conference call or presentation 5-Nov-19 4:00pm GMT

Q3 2019 Westlake Chemical Corp Earnings Call

HOUSTON Nov 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Westlake Chemical Corp earnings conference call or presentation Tuesday, November 5, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Albert Yuan Chao

Westlake Chemical Corporation - President, CEO & Director

* Jeff Holy

Westlake Chemical Corporation - VP & Treasurer

* Steven Mark Bender

Westlake Chemical Corporation - Executive VP & CFO

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Conference Call Participants

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* Arun Shankar Viswanathan

RBC Capital Markets, Research Division - Analyst

* Bhavesh Mahesh Lodaya

BMO Capital Markets Equity Research - Senior Associate

* David L. Begleiter

Deutsche Bank AG, Research Division - MD and Senior Research Analyst

* Frank Joseph Mitsch

Fermium Research, LLC - Senior MD

* Hassan Ijaz Ahmed

Alembic Global Advisors - Partner & Head of Research

* James Michael Sheehan

SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst

* John Ezekiel E. Roberts

UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals

* Jonas I. Oxgaard

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

* Kevin William McCarthy

Vertical Research Partners, LLC - Partner

* Matthew Robert Lovseth Blair

Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Refining and Chemicals Research

* Michael James Leithead

Barclays Bank PLC, Research Division - Research Analyst

* Neel Kumar

Morgan Stanley, Research Division - Equity Analyst

* P.J. Juvekar

Citigroup Inc, Research Division - Global Head of Chemicals and Agriculture and MD

* Robert Andrew Koort

Goldman Sachs Group Inc., Research Division - MD

* Steve Byrne

BofA Merrill Lynch, Research Division - Director of Equity Research

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Chemical Corporation Third Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded today, November 5, 2019.

I would now like to turn the call over to today's host, Jeff Holy, Westlake's Vice President and Treasurer. Sir, you may begin.

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Jeff Holy, Westlake Chemical Corporation - VP & Treasurer [2]

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Thank you. Good morning, everyone, and welcome to the Westlake Chemical Corporation Third 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's performance, followed by a current perspective on the industry. Steve will then provide a more detailed look at our financial and operating results. Finally, Albert will add a few concluding comments, and we'll open the call up 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 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 Westlake'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 third quarter results. This document is available in the press release section of our webpage at westlake.com. We have also posted a presentation on our website to assist in the discussion of our results.

A replay of today's call will be available beginning today, 2 hours following the conclusion of this call. The replay may be accessed by dialing the following numbers. Domestic callers should dial (855) 859-2056. International callers may access the replay at (404) 537-3406. The access code for both numbers is 7725119. Please note that information reported on this call speaks only as of today, November 5, 2019, 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 may be accessed on our web page at westlake.com.

Now I would like to turn the call over to Albert Chao. Albert?

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Albert Yuan Chao, Westlake Chemical Corporation - President, CEO & Director [3]

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Thank you, Jeff. Good morning, ladies and gentlemen, and thank you for joining us to discuss our third quarter results. In this morning's press release, we reported net income of $158 million for the third quarter of 2019 or $1.22 per diluted share. In the third quarter, we benefited from lower feedstock and fuel costs and from the strong operational performance of our plants, which went above industry's averages. Trade tensions and the resulting market uncertainty have caused customers to remain cautious and manage their inventories tightly, yet we continue to see solid sales volumes in both our segments, and our downstream vinyl businesses recovered volumes lost due to the cold and wet weather in the first half of the year.

Over the past year, we have remained focused on closely managing our costs and being disciplined with our capital expenditures. Despite the recent weakness in prices for our major products, we remain constructive in the outlook for the chlorvinyls supply-demand balance and believe our PVC expansions in the U.S. and Germany, which will start up by year-end, along with the increased ownership in our ethylene joint venture with Lotte Chemical, will improve our competitive position by expanding our market presence in PVC and lowering our operating costs.

I would now like to turn the call over to Steve to provide more detail on our financial and operating results.

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Steven Mark Bender, Westlake Chemical Corporation - Executive VP & CFO [4]

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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 segments.

Let me begin with our consolidated results. For the third quarter of 2019, we reported net income of $158 million or $1.22 per share compared to net income of $308 million for the third quarter of 2018. Compared to our prior results, our results were primarily impacted by lower prices and margins for our major products, especially in the international export markets. While most of the North American ethylene producers use cost-advantaged, gas-based feedstocks, many of the Asian and European ethylene producers use naphtha, an oil-based feedstock. The lower oil prices we have experienced throughout 2019 have lowered the oil-to-gas ratio, reducing our cost advantage.

Slowing global economic growth over the past year resulting from the international trade tension uncertainties, coupled with lower oil and gas ratio, have led to lower margins in both our Olefins and Vinyls segment when compared to the third quarter of 2018. Compared to the second quarter of 2019, we benefited from lower feedstock and fuel cost and higher operating rates in our Vinyls segment following the completion of our normal spring maintenance turnarounds.

Our utilization of the FIFO method of accounting resulted in favorable pretax impact of approximately $4 million or $0.03 per share compared to what earnings would have been 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 2 segments, starting with our Vinyls segment. In the third quarter of 2019, our Vinyls business continued to see lower sales prices for caustic soda, especially in the export market, as declining global industrial activity and slower economic growth resulting from the ongoing uncertainty in international trade pressured prices lower over the past year. Compared to the third quarter of 2018, Vinyls operating income of $153 million decreased $98 million primarily as a result of the lower sales prices for caustic soda.

Third quarter Vinyls operating income of $153 million increased $24 million from the second quarter 2019 as we benefited from lower ethane feedstock and fuel prices and we ran at higher operating rates following the completion of our spring turnarounds.

Now turning to our Olefins segment. Since 2018, the industry supply balance -- supply-demand balance has seen significant new ethylene and polyethylene production capacity enter the market, which, coupled with the ongoing trade uncertainty and the lower global oil prices, pushed sales prices and margins lower.

For the third quarter of 2019, Olefins operating income of $92 million decreased $70 million from third quarter 2018 as a result of lower margins from lower polyethylene sales prices. Third quarter 2019 Olefins operating income of $92 million increased $10 million from the second quarter 2019 as we benefited from lower feedstock and fuel costs when compared to the prior quarter.

Next, let's turn our attention to the balance sheet and statement of cash flows. At the end of the third quarter, we had cash and cash equivalents of $1.4 billion and total debt of $3.4 billion. Third quarter 2019 cash flows from operating activities were $501 million, while capital expenditures were $193 million. These capital expenditures were focused in our strategic debottlenecking investments to further integrate our Vinyls businesses in the United States and Germany, to capture the margin within our product chain, reduce our cost and further leverage the footprint of existing Vinyls operations around the world. We expect to start up our previously announced VCM and PVC expansions in Louisiana and Germany by the end of the year, which will bring more than 750 million pounds of PVC production per year.

As announced last week, we have exercised our option to acquire an additional interest in our ethylene joint venture with Lotte Chemical, which will further integrate our Vinyls chain and lower our cost. We seek to invest prudently in opportunities to acquire leading technologies and in projects that will further enhance the chain integration of our business, which improves our cost position and capitalize on our global advantaged feedstock position.

As we look forward, new NGL pipelines and the accompanying fractionation capacity will be starting up in the fourth quarter. These infrastructure investments will increase the supply of feedstock and ethylene to our industry and highlight the beneficial long-term cost-advantaged position enjoyed by North American producers.

For your planning purposes, as we approach the end of 2019, we continue to expect our effective tax rate and cash tax rate for the full year to be approximately 23% and 18%, respectively, and our capital expenditures to be approximately $650 million.

With that, I'll now turn the call back over to Albert to make some closing comments. Albert?

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Albert Yuan Chao, Westlake Chemical Corporation - President, CEO & Director [5]

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Thank you, Steve. We delivered a solid third quarter result in this challenging economic environment. Thanks to our advantaged position on the global cost curve driven by our gas-based feedstock and our scale, combined with a strong balance sheet, we are positioned to continue to create value for our shareholders.

The current business environment demands cost discipline and prudent capital allocation. The start-up of our expanded Vinyls facilities in Louisiana and Germany, along with the increased interest in our ethylene joint venture with Lotte Chemical, are just a couple of examples of the many organic opportunities we have to further integration of our business, lower production costs and provide a compelling return to shareholders.

Thank you very much for listening to our earnings call this morning. Now I'll turn the call back over to Jeff.

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Jeff Holy, Westlake Chemical Corporation - VP & Treasurer [6]

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Thank you, Albert. Before we begin taking questions, I would like to remind you that a replay of this teleconference will be available 2 hours after the call has ended. We will provide that number again at the end of the call.

Jimmy, we will now take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from John McNulty with BMO Capital Markets.

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Bhavesh Mahesh Lodaya, BMO Capital Markets Equity Research - Senior Associate [2]

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This is Bhavesh Lodaya for John. First, maybe on the Lotte JV. Like, could you comment on your decision to go ahead and add to your stake now versus a bit later? And then if you could also comment on just how the cost of the entire project came versus your prior estimates? And just where do you see your returns on the project today if you take into account the indication and perhaps the lower cost of adding the option?

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Steven Mark Bender, Westlake Chemical Corporation - Executive VP & CFO [3]

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Well, the project came in on schedule and on budget. And what I mean by that is about $2 billion for the 2.2 billion pounds of ethylene. So our decision to invest was because we believe it provides a good return on this investment. So that's really the driving reason behind the decision to invest at this stage and increase our ownership.

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Bhavesh Mahesh Lodaya, BMO Capital Markets Equity Research - Senior Associate [4]

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Got it. And then it was a very solid quarter, regarding your Vinyls segment in particular. Can you comment on the resiliency of this -- the earnings or EBITDA, which was up sequentially even as I believe prices and volumes fell sequentially? If you could just discuss the moving pieces on what drives the sequential growth there.

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Steven Mark Bender, Westlake Chemical Corporation - Executive VP & CFO [5]

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Sure. Well, sequentially, quarter-over-quarter, of course, we were benefited from lower ethane feedstock. It was lower over the second quarter by about 18%, and fuel costs were also lower about 11%. And as we noted, we also completed our spring turnaround activity, and so we benefited with the plants running at better operating rates because we completed those turnarounds in earlier quarters.

So sequentially, quarter-over-quarter, those were the big drivers behind the results.

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Operator [6]

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Our next question comes from Neel Kumar with Morgan Stanley.

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Neel Kumar, Morgan Stanley, Research Division - Equity Analyst [7]

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I was curious, when you look at the year-to-date underlying demand growth for the key end markets for caustic, like alumina, paper and pulp and inorganic and organic chemicals, where would you say growth has lagged the most versus expectations?

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Albert Yuan Chao, Westlake Chemical Corporation - President, CEO & Director [8]

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Well, I think because of the slowdown in the economic growth around the world, especially in the manufacturing side, it has impacted on the -- on all the area, alumina, pulp and paper and general manufacturing.

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Neel Kumar, Morgan Stanley, Research Division - Equity Analyst [9]

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Okay. And then you mentioned in your comments that you're focused on cost control in this challenging environment. Can you give some us examples of this? And whether you have any specific initiatives in place going forward?

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Steven Mark Bender, Westlake Chemical Corporation - Executive VP & CFO [10]

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Well, Neel, while we've not set public initiatives externally, I think you can see just in the most recent period that even our G&A was lower period-over-period. So as we continue to focus on managing investments and managing our cost, we're going to continue to keep our eye very much in that area of focus. And as I say, I'd point to just G&A as a clear example of that.

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Neel Kumar, Morgan Stanley, Research Division - Equity Analyst [11]

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And just last question. Can you just maybe also update us on the -- how the integration of NAKAN has been going? And what kind of contribution that had during the quarter?

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Steven Mark Bender, Westlake Chemical Corporation - Executive VP & CFO [12]

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Well, we've not broken out the individual earnings contributions from any of our acquisitions. But I would say the integration has gone very well. We're very pleased with the acquisition. And as you know, it expands both our product offerings in a wide range of applications, be it medical or auto or others, and gives us a much larger geographical positioning for our compounds position, which was largely focused in the Americas. This now takes us into Europe, into Asia, and strengthens our North American position. So we're very pleased with the transaction.

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Operator [13]

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Our next question comes from Stephen Byrne with Bank of America.

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Steve Byrne, BofA Merrill Lynch, Research Division - Director of Equity Research [14]

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I wanted to ask you about the midyear guidance that you provided for EBITDA. Here we are a quarter beyond that, where would you say you're headed towards, the lower or upper end of that range at this point?

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Steven Mark Bender, Westlake Chemical Corporation - Executive VP & CFO [15]

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Steve, as we said, and this was in the summer, the first time we provided guidance, and we indicated that it was an unusual event, and we weren't going to provide guidance on a going-forward basis. So that's kind of where we stand.

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Steve Byrne, BofA Merrill Lynch, Research Division - Director of Equity Research [16]

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Okay. I also wanted to ask you whether or not you're planning to do another drop down into the MLP to raise capital for the -- your share of the Lotte cracker?

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Steven Mark Bender, Westlake Chemical Corporation - Executive VP & CFO [17]

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Well, as you think about the partnership, we have a significant amount of inventory left. We have well in excess of 75% ownership of the operating company still to contribute. This exercise or this option adds ethylene at Westlake Chemical, which could be contributed down to OpCo at an appropriate valuation in time. So we still have plenty of inventory of the operating company contributed into the partnership. And I would expect that we'd undertake a transaction in '20, but it needn't necessarily be that related to the Lotte cracker because we still have significant capacity left.

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Operator [18]

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Our next question comes from Kevin McCarthy with Vertical Research Partners.

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Kevin William McCarthy, Vertical Research Partners, LLC - Partner [19]

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Question relates to your ethylene long/short position. If I look through the Lotte option exercise as well as the PVC expansions that you referenced, it seems as though you'll still be short more than 1 billion pounds, perhaps 1.1 billion to 1.2 billion. And so my question is, are you content to remain short that amount of ethylene for the foreseeable future? Or do you see any appealing options beyond the Lotte exercise to bridge that gap and rebalance the ethylene position?

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Steven Mark Bender, Westlake Chemical Corporation - Executive VP & CFO [20]

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Well, Kevin, as we think about the opportunity set here, we've been on both sides of that, over time, both long and short, and you're right, the balanced number that you mentioned is about the approximate position that we have today, being short about 1.1 billion pounds, 1.2 billion pounds with this new addition.

Certainly, we look -- we'll look at the new cracker that we have. And that has -- because it is a new unit, we'll have debottlenecking capacity, though we wouldn't want to do that immediately. But it -- down the road, we'll have an ability to debottleneck. And we'd like to, over time, be more balanced, but one needn't necessarily be perfectly balanced.

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Kevin William McCarthy, Vertical Research Partners, LLC - Partner [21]

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Okay. And then second question, if I may, relates to low-density polyethylene. It looks like we have a few startups among your competitors over the next 3 to 6 months. In the past, you've talked about the premium that low density garners relative to other grades of polyethylene. Can you talk through your expectations for 2020 and beyond as it relates to supply-demand and the magnitude of how that historical premium could fluctuate?

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Steven Mark Bender, Westlake Chemical Corporation - Executive VP & CFO [22]

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Yes. Certainly, as you've heard us talk for a long period of time, that the autoclaves has certainly continued to garner a meaningful premium over time. And with the new additions coming, there are really no meaningful additions at all in the autoclave technology. The additions are all coming in the tubular applications, commodity-based polyethylene in all manner, be it high density, linear low or even low in the tubular technology. So we continue to see benefits of having a position in the more specialty end of the LDPE space. And certainly, as we expect some of those margins to be under pressure as new total pounds come into the market, we think that, that premium continues to be important, and our customers certainly recognize that as well.

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Operator [23]

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Our next question comes from Bob Koort with Goldman Sachs.

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Robert Andrew Koort, Goldman Sachs Group Inc., Research Division - MD [24]

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Albert, I thought maybe you could opine on the path forward in the polyethylene world. I know that there had been quite a bit of angst about the startups in the U.S. It seems like those are coming to a close, and now maybe the anxiety for some investors has shifted to Asian capacity ramps there. But I guess, when I look at some of the consultants' reports, it seems like they're still calling for a trough in the U.S., maybe $0.15 a pound on integrated polyethylene, which seems pretty good. How do you sort of see that path forward? And how do you think about the capacity outside the U.S. affecting your business?

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Albert Yuan Chao, Westlake Chemical Corporation - President, CEO & Director [25]

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Yes. As Steve mentioned earlier, the capacity and supply-demand for polyethylene really impacted by economic growth globally as well as the oil and gas ratio probability of impacting the North American producers.

So I think IHS is looking at, by the end of the year and looking forward to next year, PE prices is pretty much flat across 2020. And I think people are assuming that the global GDP, we're not going into a recession in the U.S. and GDP will be growing, albeit at a slower rate. And hopefully, the trade tensions between U.S. and China will improve somewhat. So I think people are looking at more of a stable environment for commodities and polyethylene, in general.

And I just want to follow-on what Steve said. I think all the expansion in the U.S. are tubular LDPE. They are more focused on commodity grades. And our -- 80% of our LDPE is autoclave. And we are focused more on the specialty side. So I think the spread between [LDP and low] continue and between autoclave and tubular will also continue.

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Robert Andrew Koort, Goldman Sachs Group Inc., Research Division - MD [26]

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And could I ask on the Lotte cracker, what you guys figured the economics were on a return-on-capital basis for that investment?

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Steven Mark Bender, Westlake Chemical Corporation - Executive VP & CFO [27]

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So Bob, when you think about the potential contribution, if we had owned the entire unit for the quarter, third quarter, we saw probably, between ownership and market ethylene, about roughly a $0.10 delta between those 2. And owning, therefore, 1 billion pounds would bring EBITDA of about $100 million a year. So that's the kind of contribution that you could think about at that kind of a margin as we experienced in the third quarter.

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Albert Yuan Chao, Westlake Chemical Corporation - President, CEO & Director [28]

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And Steve, I just want to add also, as Steve mentioned, the Lotte cracker came on time, on budget. And I think on a per-ton basis, even though it's not the biggest ethylene plant in this newbuild arena, the per-ton basis is one of the lowest investment cost at our plants. And as you know, there are more major international oil companies building grassroots, new claims in the U.S. based on ethane cracking. So if we have a cost-advantaged position from investment point of view and have a startup -- early startup, that should be advantaged position for us.

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Steven Mark Bender, Westlake Chemical Corporation - Executive VP & CFO [29]

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So a nice accretive transaction, I guess, what I would say in the summary, Bob.

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Operator [30]

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Our next question comes from Mike Leithead with Barclays.

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Michael James Leithead, Barclays Bank PLC, Research Division - Research Analyst [31]

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I guess, first, can you just talk through what drove the earnings improvement sequentially in your Olefins segment? Because my understanding was IHS integrated margins were, call it, flat to lower with polyethylene prices down. That should kind of offset the benefit of falling ethane and styrene was weak. So I guess, just any additional color you could provide there would be helpful.

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Steven Mark Bender, Westlake Chemical Corporation - Executive VP & CFO [32]

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So Mike, when you think about year-over-year, were you speaking year-over-year or quarter-over-quarter?

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Michael James Leithead, Barclays Bank PLC, Research Division - Research Analyst [33]

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Sorry. I'm talking 2Q to 3Q.

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Steven Mark Bender, Westlake Chemical Corporation - Executive VP & CFO [34]

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Okay. So when you think about quarter-over-quarter, while you did have lower polyethylene prices in the neighborhood of, say, 6-or-so percent, you had also meaningfully lower feedstock costs and fuel costs. So feedstock costs were lower by about 18%, and fuel costs, nat gas, was lower by 11%. And so that had a significant up -- significant benefit helping to offset a lot of the lower polyethylene prices period-over-period.

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Michael James Leithead, Barclays Bank PLC, Research Division - Research Analyst [35]

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Got it. Okay. And then in the release, you pointed to the impact of the slower macroeconomic environment. So I was hoping maybe you could give a bit more color on your downstream PVC compounding and building products businesses because that's one of the few areas in your portfolio that's hard to track from the outside.

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Steven Mark Bender, Westlake Chemical Corporation - Executive VP & CFO [36]

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The business tends to be more stable. It is, of course, seasonal in nature because a lot of the building products go into construction materials, but tends to be more stable. The compounding materials goes into more than just construction-related materials, it goes into wire and cabling. But as I mentioned earlier, our NAKAN businesses also go into auto and lots of medical applications. So it has a broader footprint than just the construction markets, but the construction markets are where our pipes and siding applications do go. But it tends to be less cyclical deeply than some of the chemicals-related businesses. And as we noted, we did pick up some of the recovery of volumes that we lost earlier in the year due to cold and wet weather.

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Operator [37]

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Our next question comes from Arun Viswanathan with RBC Capital Markets.

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Arun Shankar Viswanathan, RBC Capital Markets, Research Division - Analyst [38]

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First question I had was on caustic. We've seen another downtick of $15 here in October, after the down $10 in September. I guess how would you characterize the business out there from your perspective? And what are -- what's the main driver you think that would help improve the caustic environment? And then -- given that inventories are quite low. Is it industrial production demand? Supply disruptions? Or anything else you'd point to?

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Albert Yuan Chao, Westlake Chemical Corporation - President, CEO & Director [39]

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I think as we said earlier, the industrial demand globally has been weakening. But we are seeing a bottoming of prices in Asia. And some of the Asian and Chinese producers, I think it's probably at or below their cash cost. So if the industrial demand globally improves next year, we think we see signs of that in Asia, that should help improving caustic prices.

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Arun Shankar Viswanathan, RBC Capital Markets, Research Division - Analyst [40]

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And if I could ask a similar question. With PVC, maybe you can just give us your outlook there and tie in what's going on in the ethylene markets. Do you think lower feedstock would result in -- and supply, would result in lower ethylene pricing and make it difficult to get margin in PVC? Or how are you thinking about the outlook for PVC from here?

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Albert Yuan Chao, Westlake Chemical Corporation - President, CEO & Director [41]

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Yes. PVC prices, I think, IHS looking next year, a price increase domestic in the U.S., and also for export price is pretty stable. [PPG], there's very -- unlike polyethylene globally, there's very little capacity, new additions, capacity in PVC. So as the demand is still growing globally, that will help to tighten up the market and help the pricing. So I think IHS looking at prices going up next year domestically in the U.S.

As you know, also, that the housing construction is still -- even though we're around 1.2 million units a year rate, it's still below the 50-year average of 1.5 million units of residential construction. So as the U.S. residential construction market returns, it'll also help domestic demand for PVC.

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Arun Shankar Viswanathan, RBC Capital Markets, Research Division - Analyst [42]

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And then lastly, if I may. Just wanted to get your thoughts and, if any, reaction. There's been a competitor of yours, Formosa, who is thinking about adding some capacity in chlor-alkali. You guys added some at Geismar several years ago. That's probably the most recent market investment. So can you just help me understand what's potentially going through their heads as far as returning what you would look for in a new facility, if at all possible?

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Albert Yuan Chao, Westlake Chemical Corporation - President, CEO & Director [43]

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Sure. And I think from what we read, looking at 5 year out, global demand will far exceed capacity additions. And they're looking at spending approximately USD 3 billion for building a plant in chlor-alkali, VC and PVC plant. So if you are looking at -- replacement cost economics support investment, which further supports the thesis that chlor-alkali and vinyl business will improve globally, and U.S. is the best place in this.

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Operator [44]

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And our next question comes from Jim Sheehan with SunTrust.

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James Michael Sheehan, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [45]

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Could you talk about any plant turnarounds that you expect to have in the fourth quarter? And what the impact might be on earnings?

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Steven Mark Bender, Westlake Chemical Corporation - Executive VP & CFO [46]

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Jim, we obviously do. With the large number of facilities we have worldwide, we do turnarounds on a regular basis. But there are none that are going to be meaningfully impactful in the fourth quarter. As we look into 2020, we will have an ethylene turnaround. And I'll give more guidance to that ethylene turnaround as we finish our planning, but the other units that we have, nothing that I would have -- would be a call-out that would be meaningful in the fourth quarter.

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James Michael Sheehan, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [47]

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And what's your outlook for ethane prices going forward?

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Albert Yuan Chao, Westlake Chemical Corporation - President, CEO & Director [48]

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I think ethane prices is pretty much in the $0.20 a gallon range. And I think the future prices support that.

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Operator [49]

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And our next question comes from Hassan Ahmed with Alembic Global.

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Hassan Ijaz Ahmed, Alembic Global Advisors - Partner & Head of Research [50]

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Albert and Steve, just wanted to go back to the timing of exercising the Lotte option. Obviously, ethylene pricing has been fairly volatile over the last couple of quarters. And we've obviously seen incremental supply come online, primarily in the U.S. Now you guys were kind enough to break out what the economics would have looked like had you owned the cracker in Q3. But obviously, there's always a fear that as the capacity is digested, those economics deteriorate quite rapidly.

So now my question is that you guys exercising the option now rather than later, should that be taken as a signal that you're actually incrementally positive now on the ethylene market? Or said differently, do you think the worst is behind us as we move forward from Q3 and beyond?

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Steven Mark Bender, Westlake Chemical Corporation - Executive VP & CFO [51]

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Well, as you said, Hassan, we believe that the return for this investment was, I think, a pretty good compelling return, very accretive when you think about the investment that we've made for the incremental pounds.

I agree with you that the margins over a short period of time can be volatile, but we believe that over the cycle that this investment will prove to be a very attractive one for us and further integrate our business chain in the Vinyls segment even more so. And so we think it's going to be a very nice investment over the cycle, but you're right. In -- from period to period, there can be a high degree of volatility in ethylene prices and margins.

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Hassan Ijaz Ahmed, Alembic Global Advisors - Partner & Head of Research [52]

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Understood. Now as a follow-up, if we were to go back to the start of the year, I think, broadly, the perception was a lot of ethylene, polyethylene capacity coming online in the back half of the year. And again, the perception was, hey, look, pricing would crack and crack pretty hard. And it was the exact opposite for the chlor-alkali side of things, where the assumption was back half price increases, hardly any capacity coming online. So would love to hear your views on what really changed, right? Because, obviously, polyethylene has been quite resilient, chlor-alkali, not as much. I mean is it as simple as the consumer being stronger than the industrial economy? And has it -- is it primarily demand related, I guess?

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Albert Yuan Chao, Westlake Chemical Corporation - President, CEO & Director [53]

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Well, I think a bit of both. The chlor-alkali, as you know, is a very generally used chemical in many, many industries. And as world manufacturing industries slowing down, and some people say it's a recession with PMI going below 50 for manufacturing, that has impacted demand for chlor-alkali. And even though the supply is limited, it's just in the short term supply-demand wise. It has impacted [lighting], other commodity metals, for example. But we believe the inventory adjustments and demand will go over. Economies, so long as the global economy still grows, people still use things and inventory cycle be over and people will start producing again.

So as Steve said, short term could be fluctuations. But on a longer-term basis, we are very optimistic on the chlorvinyl chain going forward.

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Operator [54]

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And our next question comes from P.J. Juvekar with Citi.

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P.J. Juvekar, Citigroup Inc, Research Division - Global Head of Chemicals and Agriculture and MD [55]

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Today, most of the money in ECU is made in caustic, with very little money in chlorine. So I guess you just make PVC and then export it. But given the importance of caustic fundamentals, with Alunorte having ramped up, export prices have still come down really hard, and the delta between domestic and export prices have really opened up. So how do you see that situation resolving? And do you think that maybe there is some risk to domestic pricing?

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Albert Yuan Chao, Westlake Chemical Corporation - President, CEO & Director [56]

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Well, actually, the chlorine side is pretty stable and chlorine demand is pretty stable. Obviously, the seasonality that the water treatment, the pool chemicals, bleach, are slowing down in the winter months, but caustic and PVC demand globally is still strong. On the petroleum side, EDC, VCM, demand is strong. So I think -- and even though chlorine goes to [euro] things and other products, TiO2, even though they're impacted. But net-net, chlorine demand is still pretty good. I think caustic today, because of the commodity nature, it's much more volatile than in the past. And as I said, hopefully, with the industrial inventory cycles, [although] people still need products, and they will come back and the production improves. But I think the chlorine chain is doing pretty well now.

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P.J. Juvekar, Citigroup Inc, Research Division - Global Head of Chemicals and Agriculture and MD [57]

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Okay. And then secondly, what are you seeing in China in sort of recent data points in terms of industrial activity as well as construction activity based on your business there?

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Albert Yuan Chao, Westlake Chemical Corporation - President, CEO & Director [58]

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What we see, that China's industrial manufacturing has recovered from the low in the first or second quarter. And hopefully, this will continue. And as well, you may know that the PVC antidumping duty in China has been dropped coming from the U.S. So I think there'll be a boost for U.S. producers selling PVC to China and globally.

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Operator [59]

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And our next question comes from Frank Mitsch with Fermium Research.

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Frank Joseph Mitsch, Fermium Research, LLC - Senior MD [60]

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I was struck by the assertion that your operating rates were better than the industry average. And listening to the commentary, it sounded like that was more on the Vinyls side than on the Olefin side. A, is that true? And b, how much better were the operations? And it was interesting because your inventories actually ticked down. So it looks like you sold pretty much everything that you're producing. Is that how we should think about it?

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Steven Mark Bender, Westlake Chemical Corporation - Executive VP & CFO [61]

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So Frank, when you think about our integrated chain being integrated as we are, it does allow us to run at those elevated operating rates relative to many of our peers in the Vinyls chain. And so, as I mentioned earlier, we had some spring turnarounds that took place during the course of prior quarters. And so we obviously built inventory and then sold that while the plants were undertaking their normal maintenance activities. And in the Olefins chain, certainly, almost all the producers are highly integrated in that space.

So I'd say that relative to our peer set, the strength of that integrated chain plays well in this kind of cycle, where we are, and the high degree of integration is very beneficial in spreading that fixed cost over pounds of production. Keeps our cost low.

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Frank Joseph Mitsch, Fermium Research, LLC - Senior MD [62]

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That's very helpful. And Steve, I guess, more of a curiosity than anything else. But you issued 700 million in euros during the quarter, and I believe you're probably making a payment, I guess, this quarter of $815 million or so for the Lotte JV? Why issue in euros and pay dollars? How should we think about that?

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Steven Mark Bender, Westlake Chemical Corporation - Executive VP & CFO [63]

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So Frank, it was an approach to finance in an attractive rate-wise market. It was a 1 5/8% coupon for a 10-year period. And we designated that a hedge against our European investments. So there is no mark-to-market that flows through the P&L.

I can then use those proceeds to fund growth opportunities, either here or elsewhere. So it allowed us to really go into attractively priced markets with good terms and conditions, not have a mark-to-market on the euro base of that borrowing base, and be able to deploy those dollars wherever we saw an opportunity to make a good return.

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Frank Joseph Mitsch, Fermium Research, LLC - Senior MD [64]

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Interesting that you said deploy those dollars and not deploy those euros.

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Operator [65]

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Our next question comes from David Begleiter with Deutsche Bank.

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David L. Begleiter, Deutsche Bank AG, Research Division - MD and Senior Research Analyst [66]

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Albert, how was your styrene business in the quarter? And what's your outlook for 2020, given some new capacity in styrene coming online in China next year?

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Albert Yuan Chao, Westlake Chemical Corporation - President, CEO & Director [67]

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I think, as Steve said, our operations are doing very well. Our plants are doing well. You're right, there'll be more capacity coming up next year. And the dynamics of benzene price and styrene price, that's the spread [that comes], and a lot of volatility in benzene price and styrene price right now. So we'll see how things settle. And as you know, there are also other technology like [possum] plants, so we don't know how those plants will run, whether they'll keep running for styrene or not.

So a lot of these things are -- could impact the future operability of the global styrene business.

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David L. Begleiter, Deutsche Bank AG, Research Division - MD and Senior Research Analyst [68]

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And Steve, just comment on other income in the quarter. It was up sequentially. What drove that sequential increase?

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Steven Mark Bender, Westlake Chemical Corporation - Executive VP & CFO [69]

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So David, the primary components were some interest income, some insurance recoveries and some higher income in some small joint ventures that we have.

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Operator [70]

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And our next question comes from John Roberts with UBS.

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John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [71]

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Does any of the earnings contribution from the Lotte cracker come in as equity income? Or does it all come in as a reduction in cost of goods?

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Steven Mark Bender, Westlake Chemical Corporation - Executive VP & CFO [72]

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It will come through a reduction in cost of sales.

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John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [73]

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Okay. And then I assume the building products business grew faster than the Vinyls segment overall. Do we have to wait for the 10-Q to come out later? Or can you give us either the sales or kind of what the growth rate was for building products?

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Steven Mark Bender, Westlake Chemical Corporation - Executive VP & CFO [74]

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We'll have that Q filed tomorrow.

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Operator [75]

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And our next question comes from Jonas Oxgaard with Bernstein.

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Jonas I. Oxgaard, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [76]

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Over the last year, we've seen the oil majors announce billions after billions after billions of CapEx in petrochemicals. None of it seems to be going to chlor-alkali, but a lot in polyethylene.

Can you give us some thoughts on how are you seeing and how worried are you about the oil CapEx? And does that change your strategic outlook on chlor-alkali versus polyethylene?

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Steven Mark Bender, Westlake Chemical Corporation - Executive VP & CFO [77]

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So Jonas, the -- when you think about the capital intensity of the vinyls chain, it's very capital-intensive. And so one has to build both power, chlor-alkali, the intermediates of EDC VCM to get to PVC. And so it's very capital-intensive. And so when you think about the capital intensity to build olefins and polyolefins, it's much more -- it's much less cost-intensive in that sense.

And given some have said the integration they have back into the upstream side of the business, that's where they've chosen to make their investments. And so certainly, as we think about the approach they've taken in terms of investing in this business, they've been in this business for many years.

On the vinyl side of the chain, all the majors exited this space about 1.5 generations ago, and it is a business that requires real focus since your handling hazardous materials, chlorine specifically. So we remain very comfortable that the investments that we've made continue to provide good value, and we think that the supply-demand balance, we think, remains constructive over time.

And as you heard Albert say earlier, we believe that the value long-term in the supply-demand balance will benefit us with the investments that we have made.

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Albert Yuan Chao, Westlake Chemical Corporation - President, CEO & Director [78]

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Jonas, if I may add also that much of the investments in the vinyl chlor-alkali side was made through acquisition and below replacement costs. So when you hear major competitors are building grassroots chlor-alkali vinyl plants, which is a real vote of confidence that even at replacement cost economics, there will be a good return. But most of our acquisitions, if not all, are based on acquisition that are below replacement cost.

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Jonas I. Oxgaard, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [79]

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Okay. So I find the -- that you immediately go to chlor-alkali looks a lot better to be a telling part of the answer, but how do you square them -- that against buying out the share in the Lotte cracker if you seemingly don't believe in the polyethylene side that much?

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Steven Mark Bender, Westlake Chemical Corporation - Executive VP & CFO [80]

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When you think about the investment that we've made in the ethylene recently, recognize that if you look at the -- where the margin sits within the Vinyls chain, a very significant portion of that margin sits in chlor-alkali, but also a very large component of that sits in ethylene.

So over time, be it 5 years or 10 years or even longer, the great majority of the value has been upstream either in caustic or in ethylene. And so this investment allows us to further integrate our business in that ethylene chain to make, ultimately, PVC out of that chlorine and ethylene.

So what this investment allows us do is further integrate that Vinyls chain and capture the ethylene margin that would've been left to others, to be able to capture not just one side, but both sides, the chlor-alkali as well as the ethylene margin in that Vinyls chain.

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Operator [81]

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And our next question comes from Matthew Blair with Tudor, Pickering, Holt.

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Matthew Robert Lovseth Blair, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Refining and Chemicals Research [82]

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Albert and Steve, circling back to the strong Olefins results, were you able to switch to propane cracking? And if so, can you provide any sort of numbers around how much propane you cracked in Q2 versus Q3?

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Steven Mark Bender, Westlake Chemical Corporation - Executive VP & CFO [83]

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So Matthew, our plants certainly have the ability to switch feedstocks, but we still believe that the ethane feedstock is the most advantaged. Because when we go to a heavier feedstock, such as propane, you have to de-rate production of ethylene. And when you think about the facility we have in Kentucky or the facilities we have down in Louisiana, our interest is really running those derivatives as well as we can and as high [in operating] as we can.

And so while at times, one looks at the ethylene margin only, we're looking at the integrated margin across the chain. And so to use a heavier feedstock and therefore de-rate the amount of ethylene we produce would offset -- would not offset the benefits that we receive downstream. So it's better to really run the ethane feedstock to get the ethylene to be able to run the downstream units with that ethylene at higher operating rates.

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Matthew Robert Lovseth Blair, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Refining and Chemicals Research [84]

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Makes sense. And then, Steve, your net leverage has been creeping up a little bit here. Are you comfortable with current levels? Or should we expect some debt reduction in the coming year?

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Steven Mark Bender, Westlake Chemical Corporation - Executive VP & CFO [85]

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And so Matthew, we always focus on keeping a very strong balance sheet. And we'll do what we need to do to keep a very strong balance sheet. We do have optionality in some of our notes next year and in following years to be able to manage that. And certainly, that's always an area of focus.

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Operator [86]

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Thank you. At this time, the Q&A session has now ended. Are there any closing remarks?

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Jeff Holy, Westlake Chemical Corporation - VP & Treasurer [87]

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Thank you again for participating in today's call. We hope you'll join us again for our next conference call to discuss our fourth quarter and full year results.

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Operator [88]

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Thank you for participating in today's Westlake Chemical Corporation third quarter earnings conference call. As a reminder, this call will be available for replay beginning 2 hours after the call has ended, and may be accessed until 11:59 p.m. Eastern Time on Tuesday, November 12, 2019.

The replay can be accessed by calling the following numbers: Domestic callers should dial (855) 859-2056. International callers may access the replay at (404) 537-3406. The access code for both numbers is 7725119. Thank you for participating. You may now disconnect.