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Edited Transcript of WLK earnings conference call or presentation 2-May-17 3:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Westlake Chemical Corp Earnings Call

HOUSTON May 4, 2017 (Thomson StreetEvents) -- Edited Transcript of Westlake Chemical Corp earnings conference call or presentation Tuesday, May 2, 2017 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 - CEO, President and Director

* L. Benjamin Ederington

Westlake Chemical Corporation - Chief Administrative Officer, VP, General Counsel and Corporate Secretary

* M. Steven Bender

Westlake Chemical Corporation - CFO, SVP and Treasurer

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Conference Call Participants

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* Arun S. Viswanathan

RBC Capital Markets, LLC, Research Division - Analyst

* Christopher Perrella

* David L. Begleiter

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

* Donald Carson

Susquehanna Financial Group, LLLP, Research Division - Senior Analyst

* Frank J. Mitsch

Wells Fargo Securities, LLC, Research Division - MD and Senior Chemicals Analyst

* Hassan I. Ahmed

Alembic Global Advisors - Partner and 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

* Kevin William McCarthy

Vertical Research Partners, LLC - Partner

* Matthew Robert Lovseth Blair

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

* Matthew Skowronski

* P.J. Juvekar

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

* Ryan Louis Berney

Goldman Sachs Group Inc., Research Division - Research Analyst

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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 First Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded today, May 2, 2017.

I would now like to turn the call over to today's host, Mr. Ben Ederington, Westlake's Vice President and Chief Administrative Officer. Sir, you may begin.

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L. Benjamin Ederington, Westlake Chemical Corporation - Chief Administrative Officer, VP, General Counsel and Corporate Secretary [2]

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Thank you. Good morning, everyone, and welcome to the Westlake Chemical Corporation First Quarter 2017 Conference Call. I'm joined today by Albert Chao, our President and CEO; Steve Bender, our Senior 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 in the first quarter of 2017 followed by our current perspective on the industry. Steve will then provide a more detailed look at our financial and operating results. Finally, Albert will add a few concluding comments, and we will open the call up to questions.

During this call, we refer to ourselves as Westlake Chemical. Any reference to Westlake Partners is to the master limited partnership, Westlake Chemical Partners LP, and 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. 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 chemical industry; availability, costs and volatility of raw materials, energy and utilities; governmental regulatory actions 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 first quarter results. This document is available in the Press Release section of our web page at westlake.com. A replay of today's call will be available beginning 2 hours after completion of this call until 11:59 p.m. Eastern Time on May 9, 2017. The replay may be accessed by dialing the following numbers: domestic callers should dial 1 (855) 859-2056; international callers may access the replay at (404) 537-3406. The access code for both numbers is 6922861. Please note that information reported on this call speaks only as of today, May 2, 2017, 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'd like to turn the call over to Albert Chao. Albert?

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

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Thank you, Ben. Good morning, ladies and gentlemen, and thank you for joining us on our earnings call to discuss our first quarter results. In this morning's press release, we reported quarterly net income of $138 million or $1.06 per diluted share on net sales of $1.9 billion. Our first quarter results are a record for sales of $1.9 billion and EBITDA of $390 million, and reflect the strength of our business which benefited from improving economic conditions. The first quarter saw higher sales prices for our products, which follow improving demand that reflects the strengthening of global economies.

We are pleased with our first quarter results despite the impact of the planned turnaround at our Calvert City, Kentucky vinyls facility; the Geismar, Louisiana chloride plant; other planned outages and integration-related items.

During the quarter, we performed maintenance work on a number of our plants to improve operational performance and started expansion work in our Calvert City ethylene plant that, along with other incremental projects, added 100 million pounds of ethylene production capacity which we recently completed in April. This expansion utilizes low-cost ethane feedstock from the Marcellus shale basin.

Thanks to the ongoing dedication and efforts of our employees, we continued to make good progress in our Axiall integration and remain on track to capture the $120 million of synergies and cost savings this year that we have previously communicated. Our operational performance program that was launched after we closed the transaction in August of 2016 to review the Axiall assets and identify areas for operational improvements is well underway. We are already seeing the benefit from these efforts. We continued to focus on improving the safe and reliable performance of our assets and derived the value from these efforts.

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

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M. Steven Bender, Westlake Chemical Corporation - CFO, SVP and Treasurer [4]

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Good morning, everyone. I will start with discussing our consolidated financial results, followed by a detailed review of our Olefins and Vinyls segment results. Let me begin with our consolidated results. This morning, Westlake reported net income for the first quarter of 2017 of $138 million or $1.06 per diluted share on net sales of $1.9 billion. Our first quarter results were higher compared to the first quarter 2016 due to higher sales prices for our major products resulting in improved margins and from earnings contributed from Axiall. First quarter results benefited from a lower quarterly effective tax rate that was primarily due to a nonrecurring adjustment of $4 million or $0.03 per diluted share and lower estimated annual tax rate for 2017 as compared to the prior year. The first quarter results also included pretax unabsorbed fixed manufacturing and other costs associated with the turnaround and expansion of the Calvert City ethylene unit and other planned turnarounds and unplanned outages totaling approximately $36 million or $0.19 per diluted share, the lost sales associated with these turnarounds of approximately $33 million pretax or $0.18 per diluted share and pretax transaction and integrated-related costs of approximately $8 million or $0.04 per diluted share associated with the acquisition.

First quarter 2017 net sales of $1.9 billion were driven by sales contributed by Axiall and higher sales prices for all of our major products. Operating income of $235 million for the first quarter of 2017 also benefited from higher sales prices for all of our major products, which resulted in higher integrated product margins and from the earnings contributed following the Axiall acquisition. This is primarily offset by unabsorbed fixed manufacturing and other costs, and lost sales associated with the turnaround and expansion of our Calvert City ethylene unit and other planned turnaround and unplanned outages that took place in the first quarter of 2017, which totaled to the $69 million that I previously mentioned. Compared to the same period last year, we saw improved operating performance in the first quarter from our acquired assets, as our recent investment to address previously deferred maintenance are already delivering higher operating rates and improved reliability.

Compared to the fourth quarter of 2016, sales revenue in the first quarter of 2017 of $1.9 billion and income from operations of $235 million both increased. First quarter 2017 sales benefited from higher sales volumes for all of our major products and higher sales prices for caustic and North American PVC resin. The improvement in operating income was due to increased sales volumes for all of our major products, higher Olefins and Vinyls integrated margins and lower integration costs as compared to the prior quarter.

Our utilization of the FIFO method of accounting resulted in a favorable impact of approximately $24 million pretax or $0.13 per share in the first quarter 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 Olefins segment. In the first quarter of 2017, the Olefins segment reported operating income of $180 million on net sales of $543 million. Net sales increased from the first quarter 2016 as we saw sales prices for our major products improve along with sales volumes for polyethylene and ethylene. Operating income also increased over the same period, driven by higher olefins integrated product margins following the increase in sales prices for our major products and higher polyethylene and ethylene sales volumes, partially offset by higher feedstock and energy prices. Compared to the fourth quarter, first quarter net sales and income from operations both increased. The improved results followed the increase in average sales prices and from higher polyethylene and styrene sales volumes, partially offset by higher feedstock and energy cost.

Now moving on to the Vinyls segment. The Vinyls segment reported operating income of $71 million in their first quarter of 2017 and net sales of $1.4 billion, both of which improved as compared to the first quarter of 2016. Net sales increased due to sales contributed by Axiall, higher sales prices for PVC resin, higher caustic and building products, sales volumes and higher European sales prices for PVC resin and caustic soda. The improvement in operating income was a result of higher PVC sales prices and earnings contributed by Axiall. These increases were partially offset by the lower production rates and costs associated with the Calvert City planned turnaround and expansion and other planned turnarounds, and by higher feedstock and energy prices during the current quarter.

When compared to the fourth quarter of 2016, operating income improved by $33 million while sales improved by $130 million. The improved results were driven by higher sales price -- higher sales volumes for all of our major products and higher caustic and PVC sales prices, partially offset by higher energy cost. The first quarter of 2017 was negatively impacted by the planned turnarounds and expansions of our Calvert City ethylene unit and other planned turnarounds, while the fourth quarter of 2016 was negatively impacted by the planned turnaround of our Lake Charles vinyls chlor-alkali unit and other planned turnarounds and unplanned outages. The first quarter 2017 also benefited from lower integration-related expenses compared to the prior quarter.

Now let's turn our attention to our balance sheet and cash flow. For the first quarter of 2017, cash generated from operating activities was $157 million, and we invested $134 million in capital expenditures. At the end of the first quarter, we had cash and cash equivalents of approximately $382 million, and our total debt was approximately $3.6 billion. We will continue to prudently manage our balance sheet and continue our planned investments to address deferred maintenance.

Now allow me to provide some updated guidance for modeling purposes. We will continue our efforts that began last year to improve our operational performance. Our current maintenance plan includes several planned outages that will impact our second quarter earnings by approximately $60 million. This number reflects the higher maintenance expenses that will be incurred for these outages along with the associated lost sales. Also note that the second quarter guidance includes the impact from a recently completed Calvert City ethylene unit expansion and turnaround. In the second half of the year, we expect an impact of $50 million as we continue our maintenance effort to improve reliability and performance. We will continue to assess our planned turnarounds and maintenance activity and we will provide more guidance on our next earnings call.

Moving on to capital spending, our current estimate for 2017 capital expenditures remains in the range of $550 million to $600 million. This includes capital for our Calvert City ethylene unit expansion that we recently completed and also includes our investment in the Lotte ethylene joint venture. These capital and maintenance investments will improve our reliability and competitiveness of our plants.

We estimate that our 2017 effective annual tax rate for the year will be approximately 30% and our cash tax rate will be approximately 25%. We are on track to capture the synergies and cost savings of $200 million that we've previously announced and remain on track to capture approximately $125 million of these savings this year, while expensing around $25 million to achieve these savings.

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 - CEO, President and Director [5]

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Thank you, Steve. We saw improving fundamentals in the first quarter as we benefited from higher sales prices and integrated product margins, along with solid demand for our end products. We continue to focus on capturing synergies related to our Axiall acquisition and are investing to improve the operational reliability and competitiveness of our assets. Looking further into 2017, we expect to see greater ethylene availability as new ethylene plants start up and capacity expansions are completed to take advantage of the low-cost North American shale-based oil and gas production. We also see favorable underlying demand trends continuing through 2017 for all of our major products, including chlor-alkali. We are seeing some chlor-alkali capacity reductions in North America, and there have been no new plants announced. Additionally, the European regulatory authorities have mandated that mercury-based chlorine production must shut down or convert to another technology by the end of the year, which will lead to capacity reduction in the region. We believe that Westlake is well positioned to benefit from these market developments.

The first quarter marked an important milestone in our efforts to improve the plant reliability, performance and competitiveness of our recently acquired assets. We still have work ahead of us in 2017, and we have a strong management team in place to deliver the improvements to our operations that will drive growth in our bottom line. Thank you very much for listening to our earnings call this morning.

Now I will turn the call back over to Ben.

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L. Benjamin Ederington, Westlake Chemical Corporation - Chief Administrative Officer, VP, General Counsel and Corporate Secretary [6]

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

Operator, we will now take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Aleksey Yefremov from Nomura Instinet.

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Matthew Skowronski, [2]

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This is Matt Skowronski on for Aleksey. Was your planned 3-week shutdown of Calvert City completed in the first quarter? Or did this extend at all into the second quarter?

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

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It's moved to the middle of second of April.

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Matthew Skowronski, [4]

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Okay, all right. And then, can you describe what your expectations are for styrene pricing for the rest of the year?

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

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Well, as you know, the styrene price has benefited from some of the strong demands and supply issues around the world. And since then, benzene prices have come down and styrene prices have also dropped from its high. If you're looking at CDI's forecast that they are looking at styrene prices to remain in this range for the rest of the year, maybe a little bit higher than the April price. But I think the rest of the year looks like pretty much flat in the area.

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Operator [6]

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Our next question is from the line of Don Carson from Susquehanna Financial.

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Donald Carson, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [7]

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Question on your deferred maintenance and other spending. So Steve, it looks like it's not up that much. It sort of totals up to $179 million despite -- I would've thought that your lost volumes would've cost you more with the increase in prices that we've seen in the marketplace.

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M. Steven Bender, Westlake Chemical Corporation - CFO, SVP and Treasurer [8]

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Well, Don, we attempted to give as good an estimate as we could, and you're right. The increase was close to our estimate of $60 million. For the first quarter, it came in at $69 million.

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Donald Carson, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [9]

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Okay. And a question on pricing realization. So we saw the March caustic index up 10, April up 45. Two questions. How long does it take you to realize those index increases? And how much of your business is tied to indexes now versus how much is nonindex?

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Albert Yuan Chao, Westlake Chemical Corporation - CEO, President and Director [10]

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Index is a small portion of our business, even though it plays an important position in the industry.

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Donald Carson, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [11]

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So you should see some fairly meaningful caustic increases in Q2 then?

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Albert Yuan Chao, Westlake Chemical Corporation - CEO, President and Director [12]

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Yes, we expect to have. Yes.

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M. Steven Bender, Westlake Chemical Corporation - CFO, SVP and Treasurer [13]

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That's right.

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Operator [14]

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And our next question comes from the line of Kevin McCarthy from Vertical Research.

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Kevin William McCarthy, Vertical Research Partners, LLC - Partner [15]

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Yes. We've seen lumber prices increase quite a bit in response to the tariff increase proposals. Do you expect that to have any impact on PVC resin or building materials, either in the U.S. or Canada moving forward?

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Albert Yuan Chao, Westlake Chemical Corporation - CEO, President and Director [16]

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Certainly, they will have some advantage. As you know, most of the PVC goes into the pipe area, which lumber would not have impact. But on PVC sidings, they do compete with lumber. And I think now is the season that building construction going into high gear -- higher gear with improving weather. So we see -- we will see that some of the resin price increases in PVC will pass through more easily into the sidings area.

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Kevin William McCarthy, Vertical Research Partners, LLC - Partner [17]

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I see. And then second question, if I may, we saw the Williams cracker trade since your last conference call. What are your thoughts on that particular deal as well as your own short position in ethylene monomer and any options that you see ahead to bridge that gap?

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Albert Yuan Chao, Westlake Chemical Corporation - CEO, President and Director [18]

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Sure. I think the fact that foreign investors are investing in U.S. ethylene plants at a reasonable price indicates that people's confidence the U.S. feedstock supply will be adequate and at a good competitive price compared the rest of world. So I think it's very positive for the U.S. ethylene industry.

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Operator [19]

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And our next question comes from the line of P.J. Juvekar from Citi.

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P.J. Juvekar, Citigroup Inc, Research Division - Global Head of Chemicals and Agriculture and MD [20]

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Over the last few years, Axiall and other industry players never made money on caustic. We've been dumping the export market. So as the industry consolidates, do you think North American players are looking at caustic differently, and they can make money on both either the molecule, namely chlorine, and caustic?

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Albert Yuan Chao, Westlake Chemical Corporation - CEO, President and Director [21]

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Yes. That's a good question, P.J. I think, in the past with the slow global economy growth and with excess capacity in the world, the caustics business has not been doing well. But since then, economy globally has improved, there's been capacity reductions in Europe and in U.S. And I think with no new additional capacity being announced in the U.S. or most of the world and with the Chinese environment or enforcement, I think that dampens supply and demands are growing. So we believe the margin will improve into coming years.

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P.J. Juvekar, Citigroup Inc, Research Division - Global Head of Chemicals and Agriculture and MD [22]

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And as you analyze Axiall assets and look at their profitability plant by plant, are there any assets that you think you can shut down such as the Natrium plant, which, as we know, has been a high-cost plant?

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

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Certainly, we are review -- as we said and mentioned earlier, we have been reviewing all our assets that we acquired, and we're -- the #1 goal is to see whether we can improve the facilities. And if the investment is not justified, then we'll look at alternatives. We did shut down a PVC pipe plant that we acquired from Axiall that was not economical to run. So we are looking at all the assets very carefully but our primary goal is to see whether we can improve the operations of the plants.

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Operator [24]

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And our next question comes from the line of Arun Viswanathan from RBC Capital Markets.

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Arun S. Viswanathan, RBC Capital Markets, LLC, Research Division - Analyst [25]

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Great. Just want to understand some of your expectations on price realization. So in PVC, what do you guys expect, I guess, as far as price and margin for Q2 and the rest of '17?

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Albert Yuan Chao, Westlake Chemical Corporation - CEO, President and Director [26]

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Certainly. PVC, as you know, price went up $0.04 in February, additional $0.02 in March. And on the table, there's another $0.03 for April price increase. So sometimes, large buyers have 30-day price protection, so we didn't get the full benefit in the first quarter. And the price increases will carry over into the second quarter to get a full benefit. And looking forward, at least for the next few months, at least the industry analysts are not seeing any price reductions in the next few months.

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

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Okay, great. That's helpful. And then similarly in polyethylene, there was a $0.05 increase in February, $0.03 in March. It looks like the $0.03 for April has been pushed to May. We're also seeing some declines in the spot market. Are you seeing those as well? And how do you expect polyethylene pricing and margin to play out for the rest of this year?

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

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Yes, certainly. That -- yes, we did implement the $0.05 a pound in February and $0.03 a pound in March. And the $0.03 -- additional $0.03 for April has been pushed to May. We are getting the price increase, as I said, other than contractual 30-day price protection. So I think, second quarter, we'll see the benefit -- full benefit of the price increases. The export market price is very high, sometimes higher than the domestic market. But as the export market has adjusted, it has come down so the spot prices will reflect some reductions. But again, looking forward, people don't expect the next several months of any price reductions.

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

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And then just lastly on the actual integration. You called out some expenses to get the savings. Would you characterize the integration going kind of in line with your expectations or better? And do you ultimately see any upside to your synergy expectations?

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Albert Yuan Chao, Westlake Chemical Corporation - CEO, President and Director [30]

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Yes. The integration is moving as planned, and certainly, we are looking at more synergies and cost-downs than we had announced before. And our management team as well as the whole Westlake company team are looking at all the ways to find further improvements. So we will inform investors as we progress, but it's going quite smoothly.

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Operator [31]

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And your next question comes from the line of Robert Koort from Goldman Sachs.

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Ryan Louis Berney, Goldman Sachs Group Inc., Research Division - Research Analyst [32]

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This is Ryan Berney on for Bob. I just wanted to ask around the margins in the Olefins segment. It seems like they were quite strong this quarter, especially relative to the top line number you put up, which came up but not quite as much. So I was hoping you could give us a sense for if there were any special items in there. I know you called out a few things, but within that Olefin piece, that you could put some clarity around, especially relative to some of your competitors who are part of the cycle, those margins seemed pretty strong.

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M. Steven Bender, Westlake Chemical Corporation - CFO, SVP and Treasurer [33]

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No. There isn't anything that I would call out, Ryan, that was unusual in that Olefins segment as a special item at all. I think, as Albert outlined earlier, the price increases that were announced and put in will get the full benefit of that in Q2, but there was nothing unusual that I would call out in our Olefins or polyolefins pieces of the business.

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Ryan Louis Berney, Goldman Sachs Group Inc., Research Division - Research Analyst [34]

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Great. And then I was hoping you could provide an update on kind of the Axiall cost side, and whether or not you've taken the opportunity to update your guidance around the combined cost savings and the synergies there.

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M. Steven Bender, Westlake Chemical Corporation - CFO, SVP and Treasurer [35]

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The synergy number that we expect to achieve this year still remains on track at $120 million that we believe it will achieve this year. And I gave some guidance in terms of how much we thought we'd spend this year. We think the expenditure will be about $25 million to achieve that $120 million, so we're still very much on track to achieve the total of $200 million a year. And of course, as Albert said, we're looking for opportunities to find synergies beyond that and once we find those and achieve those, we'll talk about those and explain where those are coming from.

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Unidentified Participant, [36]

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You didn't see my note to you earlier?

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M. Steven Bender, Westlake Chemical Corporation - CFO, SVP and Treasurer [37]

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I'm sorry, Ryan?

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Operator [38]

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And our next question comes from the line of David Begleiter from Deutsche Bank.

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David L. Begleiter, Deutsche Bank AG, Research Division - MD and Senior Research Analyst [39]

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Albert, could you discuss how you see new polyethylene supply coming in to market this year, and how it might impact your business? And any impact at all, do you think, on your LDPE business over the course of the next year or so?

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Albert Yuan Chao, Westlake Chemical Corporation - CEO, President and Director [40]

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Certainly, yes. Certainly, these plants coming on stream, LDPE, linear low or high density, they are large-scale, world-scale plants. They're probably making more quality grades and probably targeting more of the export market, since U.S. is exporting already about 20% of its polyethylene production. Westlake is trying to focus more on the specialty side of the polyethylene businesses. And as you know, our LDPE, 80% is autoclave, and U.S. capacity being added are all tubular LDPE prop technology, which is somewhat different from autoclave process. So we'll see -- go ahead, please.

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David L. Begleiter, Deutsche Bank AG, Research Division - MD and Senior Research Analyst [41]

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Sorry. And just out of curiosity, in Calvert City, what do you pay for ethane? How much of a discount versus Gulf Coast prices?

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Albert Yuan Chao, Westlake Chemical Corporation - CEO, President and Director [42]

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Certainly, ethane we purchase comes from the Marcellus, Utica area, and our price is market-related.

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Operator [43]

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And our next question comes from the line of John Roberts from UBS.

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John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [44]

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While ethane has been the more competitive feed, more often than not propane has actually become competitive on occasion, especially because of propylene coproduct credit. Did you retain flexibility to go back towards more propane at Calvert City? And would you even ever consider that, given you're now short ethylene because of the Axiall transaction?

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Albert Yuan Chao, Westlake Chemical Corporation - CEO, President and Director [45]

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Certainly, yes. Calvert City still has ability to go back to propane, and so is our Lake Charles Petro 2. But if we went back to propane, we'll have to produce less ethylene. And as you said, we are ethylene short. So net-net, even though as maybe propane crackings are maybe at times a few cents better, but the fact that the ethylene volume penalty would not justify running propane for us.

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John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [46]

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Great. And just a follow-up question. As you review the Axiall assets, and I know you're looking to improve there, they were noncore assets for PPG, at least part of them were. And then Axiall was capital-constrained. So I would guess that there's some unexploited debottleneck opportunities at either PPG, and then Axiall, as a subsequent owner, just didn't want to put capital towards or couldn't put capital towards. Do you -- have you come across any yet, or is it still too early to think about debottlenecks?

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Albert Yuan Chao, Westlake Chemical Corporation - CEO, President and Director [47]

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Certainly, with our improvement programs at all the plants, we are identifying areas for debottlenecks as well as just reliability improvements that will also increase production. So we're evaluating all of the above. And as you said, the more work we do, we identify more opportunities.

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Operator [48]

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And your next question comes from the line of Hassan Ahmed from Alembic Global.

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Hassan I. Ahmed, Alembic Global Advisors - Partner and Head of Research [49]

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Albert, you've talked about curtailment on capacity closures and the like on the chlor-alkali side of things, partly in North America, obviously driven by regulation out in Europe. Question is that on the [narrow gen] side of things, because obviously, you flagged these regulations kicking in by end '17. So my question is around the pace of these closures. Are you seeing a deceleration over the next couple of quarters in terms of the pace of these capacity shutdowns or is it the opposite?

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Albert Yuan Chao, Westlake Chemical Corporation - CEO, President and Director [50]

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Yes. In the European side, I think people who are converting are already in progress of converting. Those people who plan to shut down, they will run their plants through the end of the year before they have to shut down. And those people who are shutting down, either they shut down their derivative plants, or they are in process of lining up feedstock supplies for the derivative plants from other sources. So all these activities are going on.

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Hassan I. Ahmed, Alembic Global Advisors - Partner and Head of Research [51]

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Got it, got it. And as a follow-up, revisiting one of the questions that was asked earlier about the Williams-NOVA transaction. As I sort of ran my numbers on a replacement value basis, it seems that those assets were sold at over $1 a pound. So with, I would imagine, the engineering and construction of the [NC] market sort of slackening now, obviously, you guys are sort of building out your cracker with Lotte as well, how does that valuation stack up to a new greenfield build in a slackening NC market in your mind?

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Albert Yuan Chao, Westlake Chemical Corporation - CEO, President and Director [52]

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No, that's a good question. As you know that some company have announced completion of the plants of new ethylene plant like Oxy. I think it's well over $1 a pound. And suddenly, in the Lotte joint venture, they have publicly announced this $2 billion project for a 2.2 billion pound plant. Now it's yet to be finished, so we don't know what the final cost will be. And you have suddenly Exxon, Chevron, Dow's and Sasol's plants. And so they are all over the place. So but those are new plants, world scale. And the Williams plants, the other plants, it's still pretty big. Close to world-scale plants. So it's hard to say, this price to high or low. But the fact that NOVA and suddenly its parents, IPIC, is investing sizable money in the U.S., which, again, reconfirms the competitiveness of U.S. ethylene facility and manufacturing for the long term into the future.

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Operator [53]

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And our next question comes from the line of James Sheehan from SunTrust Robinson Humphrey.

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James Michael Sheehan, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [54]

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You mentioned some of your Axiall facilities, you were able to increase the operating rates that the legacy Axiall had run at. Can you comment on where you see the Axiall operating rates today?

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Albert Yuan Chao, Westlake Chemical Corporation - CEO, President and Director [55]

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Yes. As we mentioned earlier that the production improvement program has been going on. Some started before we acquired the assets, and some started after we acquired the assets. And we are seeing those efforts have been bearing fruit. And we do have turnarounds going on in the first quarter and in the second quarter, but by and large, I think our plants are performing better than in the past.

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James Michael Sheehan, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [56]

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Are the Axiall facilities running at the same utilization as legacy Westlake facilities?

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Albert Yuan Chao, Westlake Chemical Corporation - CEO, President and Director [57]

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Yes. Some have done well, and some are still ongoing under the performance improvement programs. So depending on the plants. But by and large, things are doing better than the past.

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Operator [58]

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And our next question comes from the line of Frank Mitsch from Wells Fargo Securities.

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Frank J. Mitsch, Wells Fargo Securities, LLC, Research Division - MD and Senior Chemicals Analyst [59]

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If I could just follow up on that one question. Hey, Albert, if I could just follow up on that last question. Is it -- are you seeing a better performance out of chlor-alkali or is it more in the VC and PVC side of things with the Axiall assets?

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

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It's throughout all of assets.

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Frank J. Mitsch, Wells Fargo Securities, LLC, Research Division - MD and Senior Chemicals Analyst [61]

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Across the board, you're -- you've seen improving in terms of operating rates and reliability?

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Albert Yuan Chao, Westlake Chemical Corporation - CEO, President and Director [62]

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Yes, Frank.

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Frank J. Mitsch, Wells Fargo Securities, LLC, Research Division - MD and Senior Chemicals Analyst [63]

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Awesome. And Albert, you mentioned earlier on that some of the environmental actions taken by the Chinese has had an impact on the PVC area. Can you provide a little more color on what you're seeing there and how long term you think that may be? Is this -- are we looking at permanent shutdowns or are we just looking at short-term shutdowns? And how should we think about what's going on in that part of the world?

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Albert Yuan Chao, Westlake Chemical Corporation - CEO, President and Director [64]

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Okay. Well, I don't have all the details, but what I understand is that the enforcement of environmental rules are more strict than in the past, and applies not only to the chemical plants but also apply to derivative fabrication plants. So it has impact throughout the Chinese industries. And the biggest impact have been on the coastal region where the populations are, and as well as during the colder months when much coal is burned. So I think they may have been less strict in the summer months when there's less coal burning going on. But I think, by and large, on the average, the Chinese authorities are more strict on environmental compliance in all industries going forward. Second part is the trucking overloading has been, again, enforcing these rules. So the cost of transporting finished goods or carbide has increased as well. So all these have increased costs for the plants, and coastal plants are more affected than inland plants.

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Frank J. Mitsch, Wells Fargo Securities, LLC, Research Division - MD and Senior Chemicals Analyst [65]

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And so the way that we should see this manifest itself is through higher exports of VC and PVC, EDC and caustic is -- out of North America? Is that the thought process here?

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Albert Yuan Chao, Westlake Chemical Corporation - CEO, President and Director [66]

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Certainly, North American costs are more competitive with our low-cost ethylene and low-cost power and low-cost chlor-alkali manufacturing costs. So we are more competitive. However, the Chinese

(technical difficulty)

[money] is not their only goal. And went caustic prices gone up, they are more -- they can allow them to export PVC. Even the cost has gone up because higher, caustic price, they can afford some of them to export PVC. So we are seeing

(technical difficulty)

Chinese prices have come down from high we saw in early spring. But this is also construction season, not only in the U.S. and North America, but also in China and the rest of the world. So second and the third quarter usually are stronger months for the Vinyls business, and hence, the price increase we have in the North America as well.

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Operator [67]

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(Operator Instructions) And our next question comes from the line of Matthew Blair from Tudor, Pickering, Holt.

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Matthew Robert Lovseth Blair, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director, Chemicals and Refining Research [68]

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Maybe turning back to the feedstock question at Calvert City. So some of the Marcellus E&Ps are reporting ethane pricing about $0.08 or $0.09 below Gulf Coast pricing. But there's also some new pipelines coming out of the Marcellus, both going east and west, over the next year or 2. So how do you see that basis shaping up? Do you still expect to realize a pretty significant discount to Gulf Coast ethane pricing at Calvert City going forward? Or do you think that basis is going to narrow due to the new pipeline capacity?

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Albert Yuan Chao, Westlake Chemical Corporation - CEO, President and Director [69]

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Yes. As I mentioned earlier, that our purchase for ethane at Calvert City is market price-related.

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Matthew Robert Lovseth Blair, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director, Chemicals and Refining Research [70]

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Okay, okay. And then I guess a question for Steve. We saw a little bit of debt repaid in the first quarter. How much more should we expect for the rest of 2017? And can you remind us of your long-term targets in this area?

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M. Steven Bender, Westlake Chemical Corporation - CFO, SVP and Treasurer [71]

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Yes, certainly. You can expect that we'll continue to look to delever the balance sheet. So there's opportunity to retire additional debt through the course of this year and even into early next, as opportunities permit. So our focus really is to keep that strong balance sheet and to remain strongly in the investment-grade spaces we are today. And so that remains our focus. And you can see with the focus on debt retirement and the focus on spending capital on the deferred maintenance actions, that's really how we're going to target the use of our capital in the next year or 2.

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Operator [72]

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And our last question comes from the line of Christopher Perrella from Bloomberg Intelligence.

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Christopher Perrella, [73]

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After the completion of Calvert City, could you just remind us what the net ethylene -- your net ethylene position would be?

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M. Steven Bender, Westlake Chemical Corporation - CFO, SVP and Treasurer [74]

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We're at -- production capacity annualized is 3.7 billion pounds.

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Christopher Perrella, [75]

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All right. And with the Lotte, what's the timing of the capital spending for the cracker -- JV cracker?

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M. Steven Bender, Westlake Chemical Corporation - CFO, SVP and Treasurer [76]

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We'll be spending the capital over the next few years with a start-up expected in 2019. Our total capital commitment is expected to be $225 million, and so you'd expect we'll be spending that as we move forward with an expected start-up in 2019.

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Operator [77]

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

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L. Benjamin Ederington, Westlake Chemical Corporation - Chief Administrative Officer, VP, General Counsel and Corporate Secretary [78]

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Yes. Thank you for participating in today's call. We hope you will join us for our next conference call to discuss our 2017 results.

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Operator [79]

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Thank you for participating in today's Westlake Chemical Corporation first 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, May 9, 2017. The replay can be accessed by calling the following numbers: domestic callers should dial 1 (855) 859-2056; international callers may access the replay at (404) 537-3406. The access code for both numbers is 6922861. Thank you.