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Edited Transcript of WLK earnings conference call or presentation 6-Aug-19 3:00pm GMT

Q2 2019 Westlake Chemical Corp Earnings Call

HOUSTON Aug 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Westlake Chemical Corp earnings conference call or presentation Tuesday, August 6, 2019 at 3:00:00pm 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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* Aleksey V. Yefremov

Nomura Securities Co. Ltd., Research Division - Research Analyst

* Arun Shankar Viswanathan

RBC Capital Markets, LLC, Research Division - Analyst

* Bhavesh Mahesh Lodaya

BMO Capital Markets Equity Research - Senior Associate

* Dylan Scott Carter Campbell

Goldman Sachs Group Inc., Research Division - Research Analyst

* Eric B Petrie

Citigroup Inc, Research Division - Senior Associate

* 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

* Jeffrey John Zekauskas

JP Morgan Chase & Co, Research Division - Senior 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

* Steve Byrne

BofA Merrill Lynch, Research Division - Director of Equity Research

* Yifei Huang

Deutsche Bank AG, Research Division - Research Associate

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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's Second Quarter 2019 Earnings Conference Call. (Operator Instructions)

As a reminder, ladies and gentlemen, this conference is being recorded today, August 6, 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 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'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 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 referred 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 second quarter results. This document is available in the Press Release section of our web page at westlake.com. We have also posted a presentation in our website to assist in the discussion of our second quarter 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 3583409.

Please note that information reported on this call speaks only as of today, August 6, 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 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 second quarter results. In this morning's press release, we reported net income of $119 million for the second quarter of 2019 or $0.92 per diluted share.

The second quarter proved to be challenging as Westlake sales with slower global economic growth in the face of international trade uncertainties that weighed 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 plants and favorable trends in feedstock and natural gas costs. We have remained focused on deploying capital in our vinyls expansion projects that will improve our chain integration and in acquisitions such as NAKAN, a specialty PVC compounding business and DaVinci, a specialty composite roofing manufacturer that extends 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.

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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 segment results. Let me begin with our consolidated results.

For the second quarter of 2019, we reported net income of $119 million or $0.92 per share on sales of $2 billion. Westlake's net income for the second quarter declined $159 million compared to the 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 $0.55 per share. Compared to the second quarter of 2018, our results were impacted by lower prices and margins from 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 NAKAN, a global PVC compounding business acquired early in the first quarter.

Compared with the first quarter of 2019, we saw higher sales volume and margins in our Olefins segment due to stronger demand and lower feedstock and fuel costs. In addition, we benefited from improved margins and volumes in our Vinyls downstream product businesses even as extended winter weather delayed the start of the construction season in much of North America.

Our utilization of the FIFO method of accounting resulted in an unfavorable pretax impact of approximately $11 million or $0.07 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 2 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 the slower global growth and ongoing uncertainty in trade continue to pressure sales prices for caustic soda and PVC resin. In addition, the Vinyl segment was further impacted by the late start of the North American building and construction season I noted earlier.

For the second quarter 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 NAKAN and our other vinyls downstream products businesses. Vinyls' 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 product businesses 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 uncertainty has pressured prices and margins in the second quarter of 2019 when compared to the second quarter 2018. In the second quarter 2019, our Olefins segment operating income of $82 million decreased $76 million from the second quarter of 2018's 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 and fuel costs. 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 and fuel costs.

Next, let's turn our attention to the balance sheet and statement of cash flows. At the end of the second quarter, we have 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, while capital expenditures were $208 million. In the first half of 2019, we continued our strategic debottlenecking investments to further integrate our production chain in the U.S. and Germany, with our vinyls expansion in Geismar, Louisiana expected to be operational in the fourth quarter of 2019. Our ethylene joint venture with Lotte Chemical started up at the end of the second quarter and will add further ethylene integration into our vinyls chain.

We have also continued to invest in growth opportunities throughout this year with bolt-on acquisitions such as NAKAN specialty compounding and DaVinci roofing that have expanded our downstream products businesses. In these current market conditions, we will seek to invest prudently in opportunities that acquire leading technologies and in projects that will further enhance our chain integration in 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 current global economic outlook.

Subsequent to the close of the second quarter, we issued EUR 700 million 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 the accompanying fractionation capacity has increased supply in our industry, highlighting the beneficial cost position enjoyed by North American producers.

In 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 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?

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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 second quarter result in spite of a 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, update 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 long-standing commitment to corporate social responsibility that is formed by our core values. That commitment includes doing our part in supporting sustainability, which includes reducing greenhouse gas emissions and waste, improving energy efficiency and promoting the responsible reuse of packaging and recycling. We are also actively facilitating in the industry's environment initiatives, including those of the Alliance to End 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.

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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'll 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 Aleksey Yefremov with Nomura Instinet.

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Aleksey V. Yefremov, Nomura Securities Co. Ltd., Research Division - Research Analyst [2]

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You're expanding your vinyls capacity. Will this increase chlorine and caustic soda production relative to your current system configuration?

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

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Alex, it will increase our PVC production, but we're not adding any caustic production in North America. There's 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.

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Aleksey V. Yefremov, Nomura Securities Co. Ltd., Research Division - Research Analyst [4]

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And you've chosen to issue guidance for the full year recently. Could you explain the rationale for providing those guidance? And are you planning on keeping -- providing those guidance in future years?

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

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This was a one-time 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.

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Operator [6]

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And our next question comes from Kevin McCarthy with Vertical Research Partners.

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Kevin William McCarthy, Vertical Research Partners, LLC - Partner [7]

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I was wondering if you could speak to 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 activities. So perhaps you could tell us what that might have been without acquisitions and speak to the weather impact that you experienced?

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Steven Mark Bender, Westlake Chemical Corporation - Executive VP & CFO [8]

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So Kevin, you're right. The step-up in volumes was largely driven by some of the acquisitions we made earlier this year. NAKAN certainly was a significant contributor to that. Absent that, our sales levels would have been similar to 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 into the second quarter. But as we noted, we've seen a good recovery since the weather has been returning back to its normal weather patterns.

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Kevin William McCarthy, Vertical Research Partners, LLC - Partner [9]

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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?

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

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Well, certainly our production hasn't increased. So part of that was driven by maintenance activities in prior periods. We didn't see strong demand in this period, but the sales was largely driven by operating issues and turnaround issues in prior periods.

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Operator [11]

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And our next question comes from Neel Kumar with Morgan Stanley.

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Neel Kumar, Morgan Stanley, Research Division - Equity Analyst [12]

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I was wondering if you could just help bridge the olefin margin improvement from the first quarter levels of 15% to second quarter levels of about 25%. It appears there is a modest step-up in volumes and prices. So are both of these from lower feedstock cost? And should we expect a similar margin level in the second half of the year?

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Steven Mark Bender, Westlake Chemical Corporation - Executive VP & CFO [13]

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So Neel, it was largely driven by a couple of things. 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 1 versus quarter 2.

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Neel Kumar, Morgan Stanley, Research Division - Equity Analyst [14]

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And then what's embedded in your outlook in terms of PVC prices in the second half of the year? [I saw the] domestic PVC prices go up $0.02 in June [another $0.05] in July. So any color on your outlook there would be helpful.

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Albert Yuan Chao, Westlake Chemical Corporation - President, CEO & Director [15]

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Sure. I think the industry consultants are looking at prices to be relatively flat after the $0.02 a pound price increase where we see it in June. So our outlook for the rest of the year is domestic price is relatively flat.

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Operator [16]

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And our next question comes from David Begleiter with Deutsche Bank.

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Yifei Huang, Deutsche Bank AG, Research Division - Research Associate [17]

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This is David Huang 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 improve more meaningfully in the second half?

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Steven Mark Bender, Westlake Chemical Corporation - Executive VP & CFO [18]

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Well, I think that we certainly have seen a lot of the issues that were surrounding the caustic issues in Brazil addressed. Specifically, Alunorte has begun to ramp up to more normalized rates. They've 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 forecasts for earnouts change in the caustic index of $5 a ton. So we've seen positive drivers there as it relates to specifically Brazil.

And of course, 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. They're 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.

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Yifei Huang, Deutsche Bank AG, Research Division - Research Associate [19]

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And then on capital allocation, you had [$10 million] buybacks in the quarter. And you said you're interested in some bolt-on opportunities. So what would be the priority of your capital allocation this year? And then I guess what would be some areas of focus when you're evaluating potential M&A opportunities?

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

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Well, certainly in my comments, you can see that we're continuing the debottlenecking initiatives that we have underway both in United States as well as in Europe. Those will continue to their conclusion. We certainly look for opportunities such as the DaVinci acquisition and the NAKAN 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 as well as acquisition-related opportunities. And I'll say it's a function of getting the appropriate return and the appropriate investment of capital.

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Operator [21]

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And our next question comes from Bob Koort with Goldman Sachs.

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Dylan Scott Carter Campbell, Goldman Sachs Group Inc., Research Division - Research Analyst [22]

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This is Don Campbell on for Bob. You had a more interesting commentary on kind of demand trends. Can you give a little more granularity in terms of how your volumes have trended in July maybe relative to June levels, or I guess, average second quarter volume trends?

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Albert Yuan Chao, Westlake Chemical Corporation - President, CEO & Director [23]

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Yes. I think demands are strong both in the Olefins segment and in the Vinyls segment with the seasonal strong period for building construction that also help downstream products. So now barring any major disruption around the world from the further trade disruptions, I think the second half demand and also espoused by industry consultants seem to be reasonable.

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Dylan Scott Carter Campbell, Goldman Sachs Group Inc., Research Division - Research Analyst [24]

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Got it. And I guess on the export caustic soda price, it seems like North America price did show some positive improvement by the end of the second quarter. It feels like it stepped up maybe above export prices in other regions. How sustainable is that spread? And I guess maybe what drove that improvement in North America export prices?

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

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Yes. Certainly, that export market has been 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 first half of this year and over last year. So we are seeing the demand being reasonable. And we expect the price to be improved gradually also.

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Operator [26]

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And the next question comes from Arun Viswanathan with RBC Capital Markets.

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Arun Shankar Viswanathan, RBC Capital Markets, LLC, Research Division - Analyst [27]

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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, what are some catalysts that you're looking for to improve the momentum in caustic soda pricing?

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

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Well, as I said earlier, the export price has stabilized. And I think some of the high cost producing regions, those prices are breakeven prices. So we think that so long as there's improvement in the economy around the globe, demand should improve and increase and would help on the pricing side.

And on the U.S. side as well, I think what Steve mentioned earlier, there were some issues with logistics, with the high water -- river water levels impeding shipment of caustic around the U.S. And that issue has been resolved. So I think there's more movements, and prices are stabilizing. And I think some of the industry consultants are forecasting not only the price increase in July but down -- further down the year, there'll be further -- potential further price increases.

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Arun Shankar Viswanathan, RBC Capital Markets, LLC, Research Division - Analyst [29]

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In 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. What's your outlook for polyethylene pricing and margins there? Would you expect that we continue to decline from here? Or is there any potential for improvement?

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Steven Mark Bender, Westlake Chemical Corporation - Executive VP & CFO [30]

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Well, certainly as the reason I mentioned, the additional capacity is certainly we continue to see new pounds come into the market. And we've certainly, as we all observed, seen 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 pricing is certainly there. If you look at some of the consultants there, their guidance in terms of forecasts, they do show some trend lower late in the year. If you look at IHS, they do show some risk of further prices declining later this year.

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Arun Shankar Viswanathan, RBC Capital Markets, LLC, Research Division - Analyst [31]

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Just lastly, when you think about the Lotte cracker startup, is there a potential that you could potentially throttle back on the production there and improve the market supply? Or is it more advantageous to run full?

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

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It's a very cost-effective cracker. And as you'd imagine, Lotte, our partner, is using that ethylene going into their MEG. Certainly, we're using that going into not PVC -- but going into PVC and not polyethylene. And so certainly I think that the expectation is that we'll ramp up the operating rate of that plant to full rates. And both we and our partner would like to see full rates to send into our respective derivatives.

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Albert Yuan Chao, Westlake Chemical Corporation - President, CEO & Director [33]

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And I want to add also with today's ethylene price, there's a reasonable margin in producing ethylene at those ethylene prices.

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Operator [34]

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And our next question comes from Mike Leithead with Barclays.

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

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I appreciate that the July guidance was just a onetime occurrence. But even when you gave the range, I guess it implied a bit of a second half bounce in earnings, which I assume is mostly on the vinyls side. So can you just walk through maybe 1 or 2 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?

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

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Well, Mike, I think as you heard us speak to earlier, we see positive trends both on the vinyls and chlor-alkali front. Some of the issues that we dealt with late in '18 and early in 2019 related to demand in Brazil and issues related to regulators in India weighed I think on the market. We see those behind us at this stage. So we have a more constructive view going forward into the rest of this year.

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Michael James Leithead, Barclays Bank PLC, Research Division - Research Analyst [37]

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Got it. That's helpful. And then maybe can you just talk a little more about the improvement of the building products business within vinyls this quarter? And is this an area you might look to give more financial exposures about going forward given the increasing size of this business in your portfolio?

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Steven Mark Bender, Westlake Chemical Corporation - Executive VP & CFO [38]

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Certainly, Mike. As we look at the business, we'll give that further consideration. It is a business that has continued to grow through these acquisitions. And it is an attractive business as you can see with the capital we put forth to the acquisitions of NAKAN and DaVinci.

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Operator [39]

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And our next question comes from John McNulty with BMO Capital Markets.

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Bhavesh Mahesh Lodaya, BMO Capital Markets Equity Research - Senior Associate [40]

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This is Bhavesh Lodaya for John. First of all, just a quick follow-up on the discussion around the strong volumes particularly in polyethylene. Can you touch on how much of that was domestic versus export demand? And then generally, how are you seeing polyethylene inventory levels right now?

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

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Yes. I think domestic demand in the U.S. is relatively flat. I think the export demand has really helped in the total volume -- sales volume for the industry. And I think inventory values from a customer point of view are relatively reasonable to low side. Thus with all the capacity coming up, customer expecting prices to trend lower so they are very careful in holding more inventory. So I think the customer inventory level is average to the low side.

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Bhavesh Mahesh Lodaya, BMO Capital Markets Equity Research - Senior Associate [42]

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Okay. And then if you look at economic cycles on the chlor-alkali side, historically we have seen as economic cycles turn downwards, chlorine demand slows down first. Caustic kind of follows. It sometimes leads to higher caustic prices, even lower chlor-alkali production. So it does appear we are seeing some weakness in chlorine. The question is, is this temporary? Or are you seeing any structured signs of the phenomenon? I'm curious to know where you feel we are in this cycle.

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

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Sure. I think some of the chlorine caustic are more seasonal generally in the second and third quarter. With building season in the Northern Hemisphere, our demand for PVC is stronger. Hence, the demand for chlorine is stronger. And as we go in the winter season, construction activity slows down. There's less demand for PVC not only in the U.S. but the Northern Hemisphere, and hence with less production of PVC, less chlor-alkali production and hence, chlor-alkali price tends to move up.

And we still see the same seasonality from a business cycle point of view so long as the continued demand growth for PVC and caustic along the growth. And with limited amount of capacity increase, I think the largest cycle point of view, I don't think there is a business cycle issue for the Vinyls business. It's really a more seasonal issue. Now barring any global economic slowdown from the trade issues, we should see that the vinyls cycle should get tighter and tighter as we go forward.

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Operator [44]

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

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Eric B Petrie, Citigroup Inc, Research Division - Senior Associate [45]

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This is Eric Petrie on for P.J. I wanted to ask what has your historical volume growth averaged for chlorine and derivatives second half over first half.

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Albert Yuan Chao, Westlake Chemical Corporation - President, CEO & Director [46]

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It's usually they are more or less the same. We have a weaker first quarter, stronger second and third quarter and a weaker fourth quarter. At times, depending on the demand, the fourth quarter could be surprisingly better or surprisingly worse, depending on the global economy.

This year, because of the longer winter and wetter weather in the U.S, the home construction season did not start until much later. And hence, it was weaker in the first quarter. And as Steve mentioned, it has improved the second quarter into the third quarter. And we expect a seasonal slowdown again in the fourth quarter.

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Eric B Petrie, Citigroup Inc, Research Division - Senior Associate [47]

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Okay. Secondly, can you talk about the economics of the integrated PVC producers in China and what the impact has been on supply for ECU?

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

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Certainly. Well, as you may know, because of the heightened environmental awareness in China, some of the polluting and high-cost plants were asked to either shut down or reduce production. So they have limited productions in both vinyl and chlor-alkali side. And depending on which -- whether you are integrated or not integrated, the nonintegrated producers' economics has not been well. And I think we mentioned earlier the ECU returns probably at breaking level -- breaking-even levels for the coastal plants. The ones who are integrated from coal all the way to PVC were mostly in the interior China has a better economics than the coastal plants.

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Operator [49]

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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 [50]

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Just to get a sense of the weather impact in the quarter. How much were volumes off from what your expectations were at the first -- the beginning of the quarter in the Vinyls segment?

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

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Well, I think if you look at just the quarter-over-quarter, we had a stronger quarter in the second half than we did in the first half. But certainly, it's hard to gauge because John, as you know, the weather -- the seasonal weather changes year-on-year. But as Albert noted, we typically have a stronger season in the first quarter than we do -- than we did this past year. But we were able to pick up very good volume in the second quarter to say we had an 8% increase in volume quarter-over-quarter.

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John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [52]

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Will the Lotte cracker have any material impact on your economics until you exercise the option at the current equity interest levels? Is it relatively small and the market-based ethylene that you'll be purchasing really won't have much different economics than what you're already doing in the market?

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Steven Mark Bender, Westlake Chemical Corporation - Executive VP & CFO [53]

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Well, we're beginning -- the plant has just started up. And so it's not running at full rate at this stage. And so the relative volume that we're taking in the second quarter and into the third quarter is 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.

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Operator [54]

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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 [55]

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Could you talk about what you expect for plant turnaround cost in the third quarter and fourth quarter, please?

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Steven Mark Bender, Westlake Chemical Corporation - Executive VP & CFO [56]

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So Jim, since we have so many plants across the business, we've decided not to kind of give quarter-by-quarter turnaround costs and impacts 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 was reflective of a lighter turnaround schedule of course.

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James Michael Sheehan, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [57]

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Okay. And on the DaVinci acquisition, could you give us a sense for the scale of this business and what the EBITDA contribution might be?

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Steven Mark Bender, Westlake Chemical Corporation - Executive VP & CFO [58]

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Jim, it was very small. So it's not going to be material to the numbers that you're looking at in your model.

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James Michael Sheehan, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [59]

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And in terms of your FICO impact, how would you break that out by business segment?

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Albert Yuan Chao, Westlake Chemical Corporation - President, CEO & Director [60]

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It's mostly a Vinyls segment impact.

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Operator [61]

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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 [62]

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Just following up on the turnaround to the second half being lighter than the first half. What's the order of magnitude if you compare the halves?

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

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This is Steve, Frank. We haven't got 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.

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

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Okay. And obviously, your volumes were better in both businesses both year-over-year and sequentially some of that M&A related. Can you think about the operating rates for your facilities, roughly where they were during the second quarter? And what are you seeing so far here as July has completed?

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Albert Yuan Chao, Westlake Chemical Corporation - President, CEO & Director [65]

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Certainly. Yes, operating rates are generally better than our industry information that we see. We had some -- as Steve mentioned, some turnaround in the first half. So -- but after taking away the first half, the turnaround activities, we are doing much better than industry operating mix.

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Operator [66]

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And our next question comes from Steve Byrne with Bank of America.

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Steve Byrne, BofA Merrill Lynch, Research Division - Director of Equity Research [67]

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How would you rank your downstream building products business as -- among all of the products that you can move the chlorine molecule into, how would you rank the -- those downstream products in terms of EBITDA contribution and margin? And what volume does that represent out of your -- the chlorine capacity that you have?

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Albert Yuan Chao, Westlake Chemical Corporation - President, CEO & Director [68]

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Well, our downstream products are over $1 billion in revenue, and they are an important uptake of our polymers. But our downstream product also with the [pressures that come] is spread all over the world. And the building products we have are primarily serving the North American markets like pipe and sidings, trims and window profiles. And those tend to not be for export market, more the domestic North American market, but -- whereas NAKAN's compound products are really a global business and sold all over the world.

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Steve Byrne, BofA Merrill Lynch, Research Division - Director of Equity Research [69]

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And do you see any new opportunities to move into more vinyls downstream products and -- just whether you would ever consider separating that out as a separate segment?

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Steven Mark Bender, Westlake Chemical Corporation - Executive VP & CFO [70]

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So Steve, you can see the last couple of transactions this year with NAKAN and DaVinci are in that vinyls product business. And certainly, it's attractive in 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're debottlenecking our chemicals assets in the vinyls chain now.

So it is a balance of looking at that. And it's an important business. It generally tends to be more stable in EBITDA over time. And so when we give thought to breaking 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, it's a growing size of business of ours.

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Operator [71]

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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 [72]

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Albert, a question around near- to medium-term supply additions. Like you likely said, the sort of JV you guys have with Lotte makes complete sense. It's cost advantage for it to come onstream. But I'm just a bit sort of surprised with naphtha-based economics the way they are globally, with MTO economics the way they are, that we recently saw 2 MTO plants come online on China. Another 2 seem to be in the pipeline in the midterm.

So what's your view? If current economics and global uncertainty fits, what's your near- to medium-term view about this non-North American facility?

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Albert Yuan Chao, Westlake Chemical Corporation - President, CEO & Director [73]

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It's a very good question. As you have mentioned that China -- outside of North America, China is a country that seems to be in the process of adding more olefins capacity. Some are MTO and building some of the coal-based methanol plants to feed the MTO plants, whereas those MTO plants on the coastal region base are import methanols. They have not been doing well because of the higher methanol price. But methanol price, that has also seemed to be trending lower.

China is building ethane-based crackers based on import ethane and some propane primarily from the U.S. So that will be -- to be seen how good an investment those are. And there are some crude oil to chemicals plants being planned. They are primarily looking at producing more paraxylene, the aromatic side of the chemical side, and not so much the olefins even though there are some olefins coming up. So China's, I think capacity just given normal naphtha cracking, just put ethylene. They want to be more self-sufficient. And time will tell how competitive they will be based on the oil.

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Hassan Ijaz Ahmed, Alembic Global Advisors - Partner & Head of Research [74]

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Understood. Understood. Very helpful. Now as a follow-up more on the domestic and Westlake side of things. Again, one of the trends we've seen over the last couple of quarters is of favorability in terms of NGL pricing, right, and the associated margins. You've seen at times ethane-based margins being advantaged, at times butane-based margins being advantaged.

So could you remind me again the level of flexibility you guys have? I mean I know you can run ethane flat out. But if ethane gets disadvantaged, what's the lowest level that you can take ethane down to?

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Albert Yuan Chao, Westlake Chemical Corporation - President, CEO & Director [75]

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Well, we are primarily ethane-based crackers. Calvert City was a propane cracker. We can revert back to propane, but it will reduce ethylene production. We have 2 ethylene plants in Lake Charles. One of them could crack up to 50% propane and even some naphtha. Again, if we went to propane or even naphtha, we will reduce ethylene production.

So net-net, we're looking at total benefit to the company even though you may save some feedstock cost but you produce much less ethylene. And depending on the margins for all the different feedstocks, we will try to maximize that. And we had been using some propane in the recent months when propane was [much] attractive.

I think today ethane is still -- I think barring the butane price, which is [where your summer] low price for butane, ethane is still the most attractive raw material. And as Steve said, there are more pipelines and fractionators coming up this year or next year. We'll produce -- or we'll supply more ethane to the U.S. market.

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Operator [76]

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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 [77]

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Two questions, if you don't mind. One of them is you touched on Chinese PVC economics. The margins for naphtha crackers going into PVC is now at a -- I believe it's a 4-year high. Maybe coal doesn't look that bad because coal prices keep falling. But are you seeing increased rates in China because of economics? Or is this just -- can't they flex even though the economics suggests otherwise?

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

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No. We have seen some low -- high-cost plants being reduced production or shut down. There have been unfortunately some explosions in certain parts of China, and those plants didn't take the capacity off the market. So even though spot PVC price has moved up, it's not really on a reinvestment economics yet. And as you know, China has a moratorium right now on coal-based PVC/VCM plant because of mercury catalyst. And until that's resolved, they're not permitting any new carbide VCM plants that's coal based.

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

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Okay. A completely different question. So the big debate right now seems to be whether the U.S. polyethylene prices are sustainable or not because Asia is down. Well, it looks like U.S. is beset by Europe, which 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 related to Asia margins or Asia prices for so long? And of course, is that sustainable as well?

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Albert Yuan Chao, Westlake Chemical Corporation - President, CEO & Director [80]

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That's a good question. As U.S. polyethylene plants are adding 50%, 60% capacity over the last several years into next 3 years, especially with the trade tensions we have with China, South America and Europe will be the 2 areas that U.S. producers will be targeting. So it will have some impact on the European market. However, we don't know what trade barriers will Europe have especially if U.S. is putting trade tariffs on the European auto imports. So time will tell.

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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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So Asia spot caustic prices have fallen off about 15% in just the past month or 2. I think they're roughly around January levels. Does this concern you? Do you think it's likely to weigh on U.S. contracts in the back half of the year?

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Albert Yuan Chao, Westlake Chemical Corporation - President, CEO & Director [83]

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Well, certainly, it -- spot prices would -- could have some impact. But I think because they are spot prices and the volumes are not that big and a lot of the exports, some to other parts on long-term contract basis, so which are less impacted by spot price. And so long the economy around the world improves or is not going through further reduction, we see demand for caustic fuel improve. As I mentioned earlier, with the Alunorte and other South American issues, plant issues, the demand on import has increased. So the prices have helped improve. But every now and then, prices could go up and down in specific regions, but they will not be determined of the global pricing dynamics.

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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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Sounds good. And then in the first quarter, you mentioned the building products saw about a $20 million to $30 million year-over-year headwind. Do you have a similar number for Q2?

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

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As we said, Matthew, because of the delay in winter season impacting the start of the construction season, we saw the pickup in -- beginning in the second quarter. So we're 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 NAKAN have been additive to that over the course of the first half of the year and certainly were a meaningful contributor in the second quarter. So I would say that, that products business has performed very well.

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Operator [86]

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And our next question comes from Jeff Zekauskas with JPMorgan.

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Jeffrey John Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [87]

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Can you remind me how much of the volume of the Lotte cracker you're contractually obligated to accept?

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Steven Mark Bender, Westlake Chemical Corporation - Executive VP & CFO [88]

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So Jeff, we're obligated to take 50% of the production. We own 10% of the ownership at this stage of the plant.

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Jeffrey John Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [89]

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And how does that exactly work as the plant is ramping up? Do you have to take 50% of the volume as it ramps up? Or it has to get to a certain scale before you take the volume?

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Steven Mark Bender, Westlake Chemical Corporation - Executive VP & CFO [90]

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No. As it reaches commercialization during that ramp-up, we're taking our pro rata share.

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Jeffrey John Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [91]

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In taking your pro rata share, does that positively affect your sequential EBITDA, all things being equal?

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Steven Mark Bender, Westlake Chemical Corporation - Executive VP & CFO [92]

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Well, certainly, Jeff. Yes, certainly because of the producer economics on that portion that we own, we'll have benefits because we've been merchant-buying those pounds in the market sequentially. So that will be an additive as we go forward. That will be additive to the EBITDA.

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Jeffrey John Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [93]

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Can you quantify that?

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Steven Mark Bender, Westlake Chemical Corporation - Executive VP & CFO [94]

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We haven't yet.

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Jeffrey John Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [95]

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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?

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Steven Mark Bender, Westlake Chemical Corporation - Executive VP & CFO [96]

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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 vinyl final downstream products.

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Jeffrey John Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [97]

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So in other words, it was acquisition effects?

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Steven Mark Bender, Westlake Chemical Corporation - Executive VP & CFO [98]

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Part of it is. And certainly, part of it is also purchased materials for all of the businesses as well.

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Jeffrey John Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [99]

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Because really maybe purchased ethylene price -- I mean maybe ethylene prices are a little bit higher, but everything else is a little lower now.

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Steven Mark Bender, Westlake Chemical Corporation - Executive VP & CFO [100]

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Well, but remember we've also had higher volumes, sales volumes. 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.

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Jeffrey John Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [101]

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How much polyethylene do you export of your total?

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Albert Yuan Chao, Westlake Chemical Corporation - President, CEO & Director [102]

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Yes. We export less than the industry average. The industry I think moved up to -- in the low mid-30s, and we are below that.

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Jeffrey John Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [103]

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Are you above 20?

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Albert Yuan Chao, Westlake Chemical Corporation - President, CEO & Director [104]

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We're above 20, yes.

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Jeffrey John Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [105]

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And can you talk about the looseness of polyethylene in the Asian market? Do you see this particularly loose or tight or snug? Or how do you view that?

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Albert Yuan Chao, Westlake Chemical Corporation - President, CEO & Director [106]

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Well, Asia outside of China is still a big market. But there are many producers in the Asia market and also in the Middle East. So the price does move pretty volatile month to month. But it's a huge market.

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Jeffrey John Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [107]

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How about China? Is China loose?

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Albert Yuan Chao, Westlake Chemical Corporation - President, CEO & Director [108]

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Yes. China now with the carriers are headed down for U.S. producers. I think U.S. producers, they're trying to avoid shipping to China. Unless they're for the exporters, then those tariffs can be refunded. But by and large, U.S. is trying to sell this to China.

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Jeffrey John Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [109]

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Right. I understand the U.S. China -- sell less to China. But is the China polyethylene market domestically a looser place? There doesn't -- there seems to be some decrease in China…

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Albert Yuan Chao, Westlake Chemical Corporation - President, CEO & Director [110]

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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 plastics, not only polyethylene.

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Jeffrey John Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [111]

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I guess lastly, people talk about the polyethylene market as growing at 4% to 5% globally. Do you think it's growing at that rate this year? Or do you think this year is, I don't know, 1% [or less]?

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Albert Yuan Chao, Westlake Chemical Corporation - President, CEO & Director [112]

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Well, I think with all the tariffs, barriers and trade issues, and I think it 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 going to do.

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Operator [113]

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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 [114]

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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 third quarter results.

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Operator [115]

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Thank you for participating in today's Westlake Chemical Corporation second 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, August 13, 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 area code (404) 537-3406. The access code for both numbers is 358-3409. You may now disconnect. Everyone, have a great day.