Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Chemical Corporation Fourth Quarter and Full Year 2018 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. After the speakers' remarks, you'll be invited to participate in the question-and-answer session.

As a reminder, ladies and gentlemen, this conference is being recorded today, February 19, 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..

Domestic callers should dial 855-859-2056. International callers may access the replay at 404-537-3406. The access code for both numbers is 7077616.

Please note that information reported on this call speaks only as of today, February 19, 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 could be accessed on our webpage at westlake.com. Now, I would like to turn the call over to Albert Chao.

Albert?.

Thank you Jeff, good morning ladies and gentlemen and thank you for joining us to discuss our fourth quarter 2018 and full year results. In this morning's press release we reported net income of 123 million for the fourth quarter of 2018 or $0.95 per diluted share and $996 million or $7.62 per share for the full year of 2018.

As we will discuss on the call it was a record year for Westlake. First, we delivered record operating income and EBITDA driven by the capital investments we have made to strengthen operating performance and thereby capturing the value of our integration strategy.

These investments led to higher production and sales volumes in both our olefins and vinyl segments as we set records for any production for polyethylene, PVC resin, chlor-alkali and ethylene.

The improvement in our operations is a direct result of the hard work of our employees and investments made in our reliability and performance improvement program since our acquisition of Axiall in 2016. Second, we have continued to invest for the future for this year and PVC expansions in the U.S.

and Germany, our ethylene joint venture with Lotte Chemical in Lake Charles, Louisiana and the acquisition of the NAKANTM compounding business that we announced in 2018 and closed in January 2019. These investments will contribute to EBITDA in 2019.

Steve will go over our fourth quarter and full year results in detail but before I turn over the call to him I will discuss a few items affecting our industry. First of all international trade issues continue to weigh on global trade.

In our balance business we saw some short-term global softening in caustic soda prices due to inventory build-up in the fourth quarter as industry operating rates remained high and export markets were disrupted by new import licensing requirements in India and ongoing issues at a major alumina refinery in Brazil.

As a result of the inventory build up these issues will continue to negatively impact our results in the near-term. We believe that these issues will be resolved in the first half of 2019.

We also believe the global supply demand balance for caustic soda will improve in the second half of 2019 and their long-term outlook for the global supply demand balance remains favorable. Our olefins segment saw lower polyethylene prices following a steep drop in oil prices in the fourth quarter and new polyethylene capacity entering the market.

We continue to see strong global demand for polyethylene. However, we expect U.S. exports to increase as new capacity starts up. I would now like to turn our call over to Steve to provide more details on our financial and operating results. .

Thank you Albert and good morning everyone. I'll start with discussing our consolidated financial results followed by a detailed review of our vinyls and other segment results. Let me begin with our consolidated results.

For the full year of 2018 we reported net income of $996 million or $7.62 per share, record income from operations of $1.4 billion and record EBITDA of $2.1 billion. This year's performance was driven by higher production and sales volumes as we set numerous operating records in both our vinyls and olefins segments.

The improvement in our operations is a direct result of the investments we made in reliability and performance improvement program over the past two years.

In addition to the improvements in operations we've benefited from higher prices throughout our vinyls chain and especially for caustic soda as demand has continued to increase with global economic growth and limited global supply additions. Now let me turn to review the fourth quarter.

Net income for the fourth quarter was $123 million or $0.95 per diluted share on net sales of $2 billion. Westlake's net income for the fourth quarter 2018 decreased $88 million compared to the fourth quarter 2017 after adjusting for the $591 million income tax benefit associated with tax reform in December of 2017.

As Albert mentioned polyethylene prices in the fourth quarter followed oil prices downward as rent fell 40% from the end of the third quarter. PVC also declined due to lower construction demand and lower ethylene prices. The prices for both polymers were adversely impacted by global trade concerns.

The fourth quarter also saw higher ethane feedstock and fuel costs due to increased demand, infrastructure constraints, and colder weather.

Of course offsetting these impacts were higher sales volumes for polyethylene, higher sales volumes and prices for caustic soda, and lower interest expense resulting from the retirement of $1.2 billion in debt in the first half of 2018.

The fourth quarter 2018 net income of $123 million decreased $185 million from the third quarter 2018 net income of $308 million.

As compared to the prior quarter the fourth quarter 2018 was impacted by lower sales prices for all of our major products due to the significant decline in oil prices from the end of September and the uncertainties in the international trade.

Seasonally lower sales volumes for PVC resin and in our downstream vinyls products business an approximately $38 million impact from higher ethane feedstock cost as the increases in ethane experienced in the third quarter impacted our fourth quarter earnings compared to what earnings would have been if we had reported on the LIFO method and higher natural gas cost driven by unusually cold weather patterns.

Now let me move on to review the performance of our two segments starting with the vinyl segment.

For the fourth quarter 2018 vinyls operating income of $125 million decreased $89 million from fourth quarter 2017 operating income of $214 million primarily due to lower margins on PVC resin which results from lower sales prices in the international markets, higher ethane feedstock cost, and higher fuel cost.

In addition to the typically seasonally slowdown in the fourth quarter which impacts our vinyls business, caustic soda prices declined as compared to the third quarter driven by the issues Albert just spoke to.

The fourth quarter also saw higher ethane feedstock cost related to the unfavorable FIFO impact, higher purchased ethylene costs and higher fuel prices due to the unusually cold weather which all contributed to lower operating income for our vinyls business.

Turning to our olefins segment we delivered strong volumes in the fourth quarter and industry consultants reported that the polyethylene industry also ran at high operating rates to meet increasing global demand.

In spite of this growing global demand the simplest decline in global oil prices impact polyethylene prices as customers destocked inventories as uncertainties in international trade weighed on the market.

In the fourth quarter 2018 our olefins segment operating income of $90 million decreased $76 million from fourth quarter 2017, operating income of $166 million. In the fourth quarter 2017 our olefins business did benefit as operations were not impacted by Hurricane Harvey.

In comparison income from operations for the fourth quarter 2018 decreased due to lower integrated margins which were a result of lower polyethylene prices I just mentioned and higher ethane feedstock and fuel cost which were partially offset by higher polyethylene sales volumes.

Olefins operating income for the fourth quarter 2018 declined $72 million from the third quarter 2018 income from operations of $162 million also due to the steep decline in crude oil prices resulting in lower polyethylene prices combined with the FIFO impact from the higher ethane feedstock cost.

Now let's turn our attention to the balance sheet and statement of cash flows. As of December 31, 2018 we had cash and cash equivalents of $753 million and total debt of $2.7 billion. Fourth quarter 2018 cash flows from operating activities were $254 million and $1.4 billion for the full year of 2018.

Throughout 2018 we invested to improve the reliability of our plans and in attractive opportunities to grow our business and expand the value that we captured in the integrated chain. We have previously announced expansions in Geismar, Louisiana and Germany and continuing to opportunistically debottleneck several other VCM and PVC plants in the U.S.

over the next several years which brought our full year capital expenditure investments to $702 million. In addition to these investments we also expect to see the start up of our £2.2 billion ethylene plant being built jointly with Lotte in the first half of 2019.

We have a 10% interest in the ethylene joint venture with an option to increase our ownership to 50% over the next three years. All of these investments continue to further integrate our value chain. We continually evaluate additional acquisition opportunities to invest where we believe they will provide attractive returns and grow our earnings.

And with our recent acquisition of NAKANTM, a leading global PVC compound solutions business is an example of that philosophy.

As we look forward into 2019 we expect to see continued volatility in crude oil and in ethane as prices will reflect the demand from the start up of new ethylene production facilities which will be partially offset by new ethane fractionation capacity.

Due to the use of our FIFO methodology there is typically a four to six week lag between when feedstock is purchased and when those costs flow through finished goods and affect our income. As a reference a $0.01 change per quarter in the price per gallon of ethane would have approximately $4 million impact on cost for the quarter.

As noted earlier the run up in natural gas prices in the fourth quarter will lead to a FIFO headwind in the first quarter of 2019.

If gas prices for the remainder of the first quarter to remain at yesterday's forward curve price of $3.06 we estimate the FIFO impact resulting from our fuel costs to be approximately $19 million higher for the first quarter than if we reported on a LIFO basis.

As a reference a $0.10 change per quarter in the price per Mcf of gas would have approximately $2.5 million impact on cost for the quarter. Before turning the call back over to Albert I would like to provide some guidance for your modeling purposes.

We expect capital expenditures, maintenance and turnaround activities to be in line with 2018 as we continue to work on the expansion and debottleneck opportunities in our vinyl segment.

The next turnaround of one of our ethylene facilities is scheduled for the first half of 2020 and we will provide more information regarding the duration and the impact on earnings later in the year as we complete our planning. We expect our effective tax rate to remain around 23% and our cash tax to be around 18%.

With that I will now turn the call back over to Albert to make some closing comments. Albert. .

Thank you Steve. We are pleased with our record full year 2018 performance. We are also optimistic that international trade issues will be resolved in the near term and we are excited about what lies before us. Our vinyls segment continue to benefit from solid global demand growth for caustic soda and PVC resin.

Being an integrated producer sitting at the low end of the global cost curve and having limited foreseeable global capacity additions we remain confident that the caustic soda supply demand balance will tighten through the year.

We see growing global demand for PVC resin as similar to the dynamics in chlor-alkali we believe the supply demand balance will also tighten.

As mentioned earlier we are actively investing in a number initiatives in the vinyls business, that are positioning us to continue to drive value creation including recent acquisition of NAKANTM, our joint venture ethylene facility with Lotte Chemical, and increasing our PVC and VCM capacities in the U.S. and Europe.

In our olefins segment we are better positioned with a concentration of our sales in higher margins specialty polyethylene products. The U.S. olefins industry will enjoy the cost advantage that we had been experiencing since the onset of this year's revolution.

We are continuing to explore additional expansion opportunities and acquisition initiatives that will deliver value to our shareholders. Thank you very much for listening to our earnings call this morning. Now I will turn the call back over to Jeff. .

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

[Operator Instructions]. And our first question is from Mike Leithead from Barclays. Your line is now open. .

Good morning guys. .

Good morning..

First question on vinyls pricing, if I look at the IHS data you provided in your release it looks like caustic, chlorine, and PVC were up on average of about 5% versus the prior year.

But your reported segment pricing is flat, so I am wondering what drove the discrepancy in pricing and if mix was a factor in that kind of deltas?.

Mike it was really driven by the price drivers here. As you can see volumes were seasonally inconsistent with year-over-year change in volumes but really what drove it was caustic pricing being down quarter-over-quarter and certainly year-over-year to a lesser degree. But obviously a big change of that was flowing through our FIFO.

Obviously we had gas flowing through as well as ethane flowing through in the quarter..

And also the extra price for cost in PVC were lower, that reflect in the IHS which is domestic U.S. pricing. .

Got it and Albert I guess just want to follow up on your outlook for cost for PVC, IHS recently came out with a fairly bullish analysis where current prices are versus reinvestment economics, so I was wondering kind of what your thoughts are there and maybe what get prices moving in the right direction short-term?.

Yes, certainly. PVC -- last year PVC price were very flat because of the strong demand globally and we are having a -- the industry announced a $0.04 price increase effective February and this is IHS and I think some other consortiums are seeing probably $0.02 in February and $0.02 in March.

And caustic wise and we mentioned about inventory buildup at year-end and the drop in international demand due to the inventory destocking.

So as per prices it has come down a lot in the fourth quarter but we are seeing prices recovering in Asia and even though IHS reporting a domestic price potentially of $20 a ton short-term drop in January which probably would flow in to February we do not see any more price declines in domestic U.S. this year.

And our IHS forecasting price go up starting April and May. .

Thank you. .

You are welcome. .

Thank you. Our next question is from John Roberts from UBS. Your line is now open. .

Thank you.

And Albert could you give us an update on your view of Chinese chlor-alkali vinyls capacity, do we have many closures still ahead of us and most of the capacity that is going to close are closed already and what's there over time will just maybe slowly go down?.

Yeah, that's a good question. I think with the winter season even though this year China did not have a central government EBIT of Northern Chinese plants, we are losing production or shutting down.

But depending on the location regions we have seen local government asking plants to reduce production, to reduce the air pollution they are suffering in China which is being quite bad. As to chlor-alkali plant shutdowns, I think the smaller plants which are not competitive and using purchased power they cannot compete.

I think caustic price has come down quite a lot. Not so much in China but in Asia spot market and chlorine price also has been low with lower PVC price. So the smaller especially the caustic companies that related to carbide process PVC, the demand for carbide production PVC has been impacted due to the pollution issues.

And higher purchased price for power, China has very high power cost in comparative. But the bigger integrated chlor-alkali company and PVC companies tend to be quite competitive and they are situated in the hinterland.

But really no new caustic, chlor-alkali PVC plant being announced due to the environmental issues in China as well as the not so good returns compared with olefins. So we don’t see it impact capacities being announced or coming up in China in chlor-alkali or PVC. .

And then have you seen any destocking effects in your business downstream in polyethylene or PVC in January?.

Well I think inventory has been goading up during the year and I think some destocking is going on. But now this price increase announced by the industry for polyethylene of $0.03 in February well time will tell whether that $0.03 increase will pass through.

But we believe the inventory has been destocked and -- prices has moved up in the last month or so, international price of polyethylene is moving up.

So I think the disparity between international polyethylene domestic price is coming close and we believe that again IHS and other consultants are seeing that polyethylene prices are pretty much flat during this year despite a new capacity coming up. .

Thank you. .

You are welcome..

Thank you. Our next question is from Steve Byrne from Bank of America. Your line is now open. .

Yeah, thank you.

This newly acquired PVC compounding business NAKANTM will that open up any additional end market opportunities for you to move more molecules and if so might you consider other Brownfield expansions in chlor-alkali?.

So Steve, the NAKANTM acquisition opens up a lot of new markets for us. It operates in a lot of jurisdictions that we were not previously in and certainly kind of adds further concentration to our existing European business since it's headquartered in France. So there are clearly some operational synergies that we do expect to capture.

Some of those will be on the resin front but certainly as we think about expanding the opportunities in our compounding business it's very much our focus here with the NAKANTM acquisition. So it's a very nice tuck in with the existing compound business that we had and we certainly look forward to having it make good contributions in 2019..

Can you comment Steve on what other debottlenecking capacity projects you're considering?.

Well, the ones that we've talked about and have announced Geismar and those in Germany certainly around our way and certainly where we see opportunities, where it's cost effective to do so and I mentioned in my prepared remarks that if we see some on the U.S. Gulf Coast where we have opportunities to expand we certainly will.

But those are things that we'll look at and they have the right returns and they are relatively capitalized we will pursue. .

Okay, thank you..

You are welcome. .

Thank you our next question is from Don Carson from Susquehanna. Your line is now open. .

Yes, a question on your natural gas exposure.

Steve, you gave us the operating leverage there but do you hedge any of your natural gas exposure and what sort of the percentage breakdown in consumption between vinyls and olefin segments?.

Don, we don't hedge a lot of that but we do hedge some of that but it's relatively small and the greater use of the gas is really on the vinyl side of the business..

And then question on PVC, Albert you mentioned that obviously the industry has put out a price increase, are you seeing any pre-buying by customers ahead of that price increase or did you see pre-buying in January ahead of the February price increase?.

Yes there's always some pre-buying and our industry do allow our customers to pre-buy some. And also you know that we are turning into the building season coming up so on a seasonal factor the demand also increases..

Okay, thank you. .

You're welcome..

Thank you. Our next question comes from David Begleiter from Deutsche Bank. Your line is now open. .

Hi, this is David Honier [ph] for David.

I guess first, how do you think ethane prices were progressing during the course of the year and also what's your view on the likelihood of the [indiscernible] pricing principal February and March for polyethylene?.

Sure, I think ethane prices last year we saw a high of close to $0.60 a gallon and within a week or two weeks it has dropped back and they are down today. I think we are in the high 20s, $0.30 a gallon. It is very volatile, I think Steve mentioned we will see crude oil and ethane prices being volatile.

There is increased demand for ethane as new ethylene capacity come on. But also there are new capacity coming up this year and next year in pipeline. So and they are still ethane that is being rejected.

So I think on the long term basis we are very optimistic on a competitive price of ethane with the rest of the world are oil based as feedstock for making ethylene. But who knows about the futures market for ethane which is a thin market looking at this year in the low $0.30 a gallon..

Thanks. And then just in terms of capital allocation what would be your priorities now that leverage has come down.

And if you can also talk about the relative cadence for buybacks?.

Well, you saw that we've continued to deploy capital on a variety of manners and so obviously we've gone through the last couple of years with improving the reliability and the investments in the plants and we provide reliable and consistent performing plants and you've seen that in the record productions that Albert noted earlier in his comments.

We also continue to look for opportunities to debottleneck and I made reference to some of those that we've announced and those that we will look at that are incremental where it makes this really a very good return.

That leaves plenty of capital for us to continue to invest and to complete the Lotte cracker which is expected to start up later this year and of course it provides capital still to either return it to the shareholder in the form of dividends or through share buybacks and we were active in the fourth quarter buying back over $50 million of shares last quarter.

And so I think at a waterfall whether it would be providing revival and maintenance activities for the plants to provide elevated rates so we can run the business as reliably. Investment for new capital be it the vinyl side that we have announced or even in the ethylene cracker.

And then returning capital to investors in those two forms dividends as well as share buybacks. We see we've got plenty of capital to do all of those..

Thanks. .

Thank you. Our next question is from Jeff Zekauskas from J.P. Morgan. Your line is now open. .

Thanks very much.

I think you said the FIFO change was 38 million, how would you divide that between vinyls and olefins?.

Jeff most of that, about two thirds of that was in the olefin side and the remaining portion are vinyls business. That was quarter-over-quarter number I gave you. .

Yes, exactly right, okay. So the puzzle I have is your -- I don't understand the large change sequentially in your vinyls operating income where you're down by roughly $125 million. My guess looking at caustic soda price changes is maybe that cost you $25 million, something like that sequentially.

So in trying to understand the change is it something like I don't know 25 million or 30 million in caustic, 30 million in domestic PVC margins, 30 million in European PVC margins, can you do some sort of bridge to get us from the 251 to the 125?.

Yeah, so Jeff when you think about it and we kind of outlined some of these. Obviously we spoke about the ethane but obviously a big contributor also was the run up in natural gas and the great majority of that impact in the quarter was natural gas as well.

And remember we're buying purchased ethylene for the vinyls business and so that was all attributable to the vinyls business and that was in the neighborhood of about $15 million impact.

The other drivers here was really caustic as you noted and that was also a significant contributor and of course seasonally the volumes sequentially quarter-over-quarter were down which is normal seasonality in resin and the building product areas. .

And we also have high ethylene purchase price. .

So weren’t ethane prices lower in the fourth quarter versus the third quarter?.

And so ethane came in lower which means a higher impact on a FIFO basis. So, if you recall I gave some guidance and said if we thought we have an average price at the time we made our last call of $0.35 per gallon that we would have a $25 million impact. The issue is that ethane actually came down.

The average price for ethane was in the mid 30's and if you would use my number it would have been in the high 30's. And so that's where the impact was 38 million and not the 25 that I guided to because ethane came down. So it is a good news bad news story. The bad news is it was a higher impact, the good news is ethane is lower..

And just as a last question, so average prices for caustic will be lower in the first quarter because prices fell through the quarter. And you still have a -- and polyethylene prices dropped $0.06 pound in November and December. And you still have a FIFO hit though not as large as it was in the first quarter.

So all things being equal should the first quarter sort of more or less look like the fourth quarter that you just reported in terms of your EBITDA?.

Well Jeff as you know we don't give formal guidance but what I think you're talking to -- so what you're talking to are really some of the headwinds that we see so clearly.

I gave an indication of the impact of natural gas flowing through our results in Q1 and certainly as they say most of that I think has flowed through that was embedded in our cost of sales. But I think you noted that ethane, excuse me that caustic prices and Albert commented on caustic prices and polyethylene prices period-to-period.

We've got a price increase in EE that we have announced but we've also got a decrease in caustic for the index..

Okay, great, thank you so much. .

You're welcome Thank you our next question is from Neil Kumar from Morgan Stanley Your line is now..

Thank you. Our next question is from Neel Kumar from Morgan Stanley. Your line is now open. .

Hi, thanks for taking my question. .

Good morning, Neel, welcome. .

I was wondering if you can give us an update on your caustic soda negotiations, do you expect any benefit in 2019 from cost of contracts for your pricing in more favorable terms?.

Well, no difference from 2018, and some caustic price are negotiated early, some two or three years, and some are negotiated monthly. So there is no major difference compared with prior year..

Okay, and what kind of impact do you expect maintenance to have on 1Q industry "operating rates" throughout the fourth quarter? And then in terms of your own turnaround schedule is there anything that we should be watching out for in terms of major turnarounds either in olefins or vinyl for 2019?.

No Neel, you know our plan for turnaround activity in 2019 is similar to 2018 and so I don't expect anything out of the ordinary. I didn't call out anything for 2019 and it will be very consistent with the kind of turnaround pattern we had in 2018 which is a more normalized turnaround pattern..

Thank you..

Thank you. Our next question is from Aleksey Yefremov from Nomura Instinet. Your line is now open..

Thank you and good morning everyone. What should we assume for the option exercise for loaded JV.

Should we assume that you stay at 10% ownership or maybe how likely or not are you to increase that ownership this year?.

Well Alek we are still obviously looking at the completion of looking forward to that in the first half of 2019. And so until we've made any election and certainly if we choose to do so we will certainly make that done publicly. But I think for modeling purposes until there's a change you should continue to assume it is that 10% ownership.

And we'll continue to do our work and assess how we think about that option and if we choose to make a decision. We have certainly announced that accordingly..

Thank you Steven.

And assuming that 10% ownership can you help us derive a rough financial impact is relatively neutral meaningfully positive or negative this year?.

You know I think a lot of it is functionality in terms of how you think ethylene is going to play out during the course of 2019. So it is really a function of how you view ethylene during the course of the year..

Understood, and then final question if I may, was there anything unusual about 2018 cash flow from operations for the full year?.

No, there wasn’t. I saw in your note here that real change between year-over-year between 2017 and 2018 in your note was really just change in working capital which was not unusual in terms of nature for the full year. Remember we had a run up in ethane during the course of late in the year in 2018..

Thank you Steve. .

You are welcome. .

Thank you. Our next question is from Kevin McCarthy from Vertical Research. Your line is now open. .

Good morning. Wondered if you could comment on the percentage of your U.S.

caustic soda production that was exported in 2018 and how that might compare to a normal level?.

Yeah, I think U.S. industries exports are about 20% odd of its production and we have a tradition of Axiall pretty much exploiting this similar ratio to what the U.S. industry is doing. .

Okay, that's helpful and then now that you've closed the NAKANTM are there any particular costs energy synergy targets or a sales synergy targets that you would care to put forth recognizing that it expands your global footprint?.

You know Kevin we've not announced anything publicly but certainly as you could imagine it was a nice bolt on to our business. It takes us into some new geographies but obviously it's headquartered in Europe and so certainly the opportunity is to capture synergies or existing European footprint is something we are focused.

We will not publicly quantified those for you. .

Okay, and lastly if I may I think you took in the fourth quarter or indicated on the income statement anyway expense associated with integration related in transaction costs for the Axiall deal.

What are those costs at this juncture, I think you're coming up on the two and half year anniversary of the deal in a month or two, how long would you expect those to persist?.

And Kevin a lot of those were combination of not only NAKANTM but also Axiall and so as you can imagine there were cost incurred as we got towards the end of the year rationalizing the business. And of course some of those costs were also related to the acquisition work that was done just prior to the close of the NAKANTM deal in the fourth quarter. .

I see, thank you for that..

Thank you. Our next question is from Hassan Ahmed from Alembic Global. Your line is now open. .

Good morning Albert and Steve. .

Good morning Hassan. .

You know just wanted to revisit the Q4 2018 bridge analysis, more on a year-over-year basis. So, I looked at the pricing stack that you guys gave for the different products, chlorine, ethane, etc.

And looking at your capacities and the like trying to reconcile using IHS pricing which is obviously what you listed where your EBITDA should turn out? And you know obviously factored in the FIFO impact and the like you mentioned as well and I still come up with sluggish EBITDA.

So I'm just trying to reconcile on a year-over-year basis what am I missing, I mean where realized product pricing was it lower than what IHS is quoting was realized feedstock cost would be higher than again what IHS is quoting and the like.

Because based on this analysis I come up with flattish EBITDA versus the $140 million swing that was reported, so just want to reconcile that?.

So Hassan probably the biggest piece that I would note that probably wouldn't be captured in your analysis would be the FIFO impact on ethane on a year-over-year basis. That would probably be the biggest piece of the puzzle that you are missing and that would be a probably nearly half of that number..

Understood, okay, so as much as 70 million..

Yes. .

Okay, fair enough. Now moving on more about market conditions, near-term and longer-term, you know, 2018 obviously a funny year for the ethylene market. We saw oil doing what it was doing. And then beyond that there was this whole notion that ethylene capacity came online ahead of derivative capacities, so you saw this huge gyration.

It seems in 2019 there will be a balance between ethylene and derivative capacity coming online.

So, assuming oil doesn't gyrate too much is it fair to assume that we won't see too much volatility within the ethylene, polyethylene side, that's on the nearer term side and then on the longer term side again if you could just give us your views of how you're thinking about the olefins and polyolefins market, particularly keeping in mind some of these crude to ethylene projects that are being announced in Saudi, a lot of naphtha based projects being announced in China?.

Yeah, that's a good question. I think for the olefins business it is really a ratio of crude oil to ethane price. And crude oil stays low, ethane price stays high and it will be a squeeze on margins for U.S. part of the producers and crude oil move up as we have seen in the last few weeks or months. So, we helped U.S.

polyethylene producer integrate producers. And you have all these biggest to smartest company running our business, investing, continuing to invest in U.S. that was obviously they believed that U.S. still is one of the best place to invest on a cost position. Granted U.S. demand growth is not like China and so much of the U.S.

capacity, increased capacity will be destined for export markets..

Understood, understood, much appreciated. Thank you..

You are welcome. .

Thank you. Our next question is from Arun Viswanathan from RBC Capital Markets. Your line is now open. .

Good morning, thanks guys. Hope you are well. Just a couple of questions on the outlook a little bit as it relates to your Q4 report. So it appears that Q1 is probably going to see some of the headwinds that you saw in Q4, i.e. lower oil lingering and some of the feedstock issues, and we still haven't seen the pricing come through in either segment.

So assuming that holds, how do you look at Q2, I mean, is there a possibility that you won't have as much of a FIFO impact? And then do you expect any improvement on the Q2 caustic side given the announced price increases? And then maybe you can also touch on olefins and if there's a possibility of pricing coming through in Q2 in Olefins? Thanks. .

Well, Arun as it relates to the FIFO number I certainly will and I gave guidance in terms of how much will flow through in Q1 for gas and I also mentioned that most of that ethane has flowed through because we've seen more ethane now relative to what we saw in the fourth quarter.

So that will alleviate as we get later into the year but we will have that 1Q impact that I gave guidance to..

Yeah, as to the prices, again on polyethylene prices this price announcements for February and IHS looking at no price change until sometime in October-November of this year. So the issue is still oil versus gas. If oil price move up then international polyethylene price with the cost pressure would move up and U.S. price move up at the same time.

And as far as PVC and caustic I think for caustic slices that IHS is forecasting a $20 a ton drop in January and after that the price goes up in April, May, and July. So I think as we said that with the inventory buildup during the last quarter was The Bureau of Indian Standards the issue is importing permits.

And we think that the result of at least the first half if not the early part of the second quarter so that that will endure the big markets in caustic. And with the Brazilian, one of the largest alumina refineries in Brazil that we believe are also probably be resolved sometime this year and which would also permit more imports of caustic.

So we think that that's eventually being used up in these export markets that come back. Surprising then balance improves and pricing improves. And some of the price in Asia, export price are probably low or no margin for some of the Asian caustic producers. Remember they have high cost of service.

Well so on a long-term basis caustic demand I think IHS came out with a recent report that growing to between 1% to 2% a year and PVC about 3% a year for the next 10 years or so. And with a lack of capacity increase and the capacity increase of less than 1% a year globally. So, the supply demand balance will tighten in the coming years. .

Okay, great, thanks. And then quickly comment on your inventory levels in both businesses.

Were you able to -- do you think that they were brought down sufficiently in Q4, that it does relatively indicate that there is a quite tighter market going forward? And maybe also on the spot export side, any look on caustic spot export inventories?.

Yeah, I think as we mentioned that the caustic inventory was high at the end of last year because of all these trade issues. And I think they're being winding down gradually over the first quarter and maybe into the second quarter.

But also the seasonality, caustic's life is in PVC but I think demand also improves so we believe that eventually we will get more normal conditions in the second quarter and out to the midyear area. Polyethylene wise same thing.

I think, IHS and other consultants has reported higher polyethylene inventory in the region high density and less so in LDPE. And I guess again depending on the trade issues as well as crude oil and I think differentials that will eventually we believe because with our low cost issue U.S. has this inventory will be coming down as well.

And PVC I think eventually it’s a very normal area and there were some later lower demand seasonal. But now with the building season start again in Northern Hemisphere things will go back to normal very quickly..

And then lastly, if I may, just could you give us a couple of quick minutes on your building products business, what the outlook is, if you're seeing any diminished activity or increased activity on the construction side? Thanks. .

Yeah, certainly. As we said the seasonality really affects the building part as well and partially fourth quarter is very, very normal seasonal slowdown and we're seeing the signs of picking up in the building season.

Yes, the housing market has I think it's kind of jumping up a bit, slowed down a bit I think this November-December last year and now with interest rate stabilizing, long-term interest rate we believe -- and with economy still strong we believe the housing market will not be going through high growth but will go back to this normal trajectory of getting back to the 1.5 million building units per year.

That's a 58 average for the U.S. I think gradually climbing to well set target. It will take longer to get to this stage with the high interest rate..

Okay, thanks. .

Thank you. Our next question is from Bob Koort from Goldman Sachs, your line is now open. .

Thanks very much.

Albert, I was curious, you guys probably looked at this but if you were to build -- so you decide you want to build a new cracker in Lake Charles on your property, what kind of returns on capital would you get doing that today do you think?.

Well it's not today's return, it is really though what your outlook for the future is. And the future is still the differential between crude and ethane in the U.S. The global crude price in ethane in U.S. and some of the biggest companies in the world putting billions and billions going ahead with the new project.

So some are already halfway through and some are yet to break ground. So I think those big company's decision is a telltale sign of what industry experts are feeling for them. .

I guess Albert some might argue some of those big companies can absorb more challenging returns than maybe companies that -- of your size and your focus.

So that's why I was curious what kind of numbers you would put on that looking at the futures curves and cost curves that are out there?.

Well we are going ahead with our Lotte joint venture and I think when we make the decision to acquire additional percentage of the joint venture that will express our view of the future as well..

And I'm curious how would you look at, you mentioned that you know more and more product is getting exported and the demand growth here can't -- isn't sufficient to absorb all the supply.

If you were to think about investment how much more would you have to discount your return dynamics to account for the volatility that is created by that greater influence of the export markets and your sales?.

Well we know that from get go five, six, seven years ago that new capacity in U.S. addition were all tied in for the export market. So I think nothing has changed. I think people are making investments with eyes wide open..

Got it, thank you very much..

You are welcome. .

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

Thank you again for participating in today's call. We've ended the hour for the time allotted. So if there are any additional questions feel free to reach out to management after the call. And we hope you'll join us again for our next conference call to discuss our first quarter results..

Thank you for participating in today's Westlake Chemical Corporation fourth quarter and full year earnings conference call. As a reminder this call will be available for replay beginning two hours after the call has ended and maybe accessed until 11:59 PM Eastern Time on Tuesday, February 26, 2019.

The replay can be accessed by calling the following numbers; domestic callers should dial 855-859-2056, international callers may access the replay at 404-537-3406. The access code for both numbers is 7077616..