Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Chemical Corporation's Second Quarter 2019 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. After the speakers’ remarks, you will be invited to participate in the question-and-answer session.

As a reminder, ladies and gentlemen, this conference is being recorded today, August 6, 2019. I would now like to turn the call over to today's host Jeff Holy, Westlake's Vice President and Treasurer. Sir, you may begin..

Domestic callers should dial 855-859-2056. International callers may access the replay at 404-537-3406. The access code for both numbers is 3583409. Please note that information reported on this call speaks only as of today August 6, 2019.

And therefore you are advised that time-sensitive information may no longer be accurate as of the time of any replay. I would finally advise you that this conference call is being broadcast live through an Internet webcast system that can be accessed on our web page at westlake.com. Now I would like to turn the call over to Albert Chao.

Albert?.

Thank you, Jeff. Good morning, ladies and gentlemen, and thank you for joining us to discuss our second quarter results. In this morning's press release, we reported net income of $119 million for the second quarter of 2019 or $0.92 per diluted share.

The second quarter proved to be challenging as Westlake sales with slower global economic growth in the face of international trade uncertainties that weighed on prices and margins. In spite of this, sales volumes increased over the second quarter of 2018 and the first quarter of 2019 and our bottom line results improved from the first quarter.

We continue to benefit from the solid operational performance of plants and favorable trends in feedstock and natural gas costs.

We have remain focused on deploying capital in our vinyls expansion projects that will improve our chain integration and in acquisitions such as NAKAN, a specialty PVC compounding business and DaVinci, a specialty composite roofing manufacturer that extends our product reach into new markets.

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

Thank you, Albert, and good morning, everyone. I will start with discussing our consolidated financial results followed by a detailed review of our Vinyls and Olefins segment results. Let me begin with our consolidated results. For the second quarter of 2019, we reported net income of $119 million or $0.92 per share on sales of $2 billion.

Westlake's net income for the second quarter declined $159 million compared to the second quarter of 2018, net income of $278 million or $2.12 per share, while improving $47 million from first quarter 2019 net income of $72 million or $0.55 per share.

Compared to the second quarter of 2018, our results were impacted by lower prices and margins from major products primarily due to the ongoing international trade uncertainties and slower global economic growth.

However, we saw a continued strong operational performance of our facilities, which led to higher sales volumes in both our Olefins and Vinyls segments, which was aided by the addition of NAKAN a global PVC compounding business acquired early in the first quarter.

Compared with the first quarter of 2019 we saw higher sales volume and margins in our Olefins segment, due to stronger demand and lower feedstock and fuel costs.

In addition, we benefited from improved margins and volumes in our Vinyls downstream product businesses, even as extended winter weather delayed the start of the construction season in much of North America.

Our utilization of the FIFO method of accounting resulted in an unfavorable pre-tax impact of approximately $11 million, or $0.07 per share in the second quarter compared to what earnings would have been, if we reported on the LIFO method. This calculation is only an estimate and has not been audited.

Now, let's move on to review the performance of our two segments starting with our Vinyls segment. In the second quarter of 2019, our Vinyls segment saw lower sales prices for caustic soda, especially in the export market as the slower global growth and ongoing uncertainty in trade continue to pressure sales prices for caustic soda and PVC resin.

In addition, the Vinyl segment was further impacted by the late start of the North American building and construction season, I noted earlier. For the second quarter, 2019 Vinyls' operating income of $129 million, decreased $142 million from the second quarter 2018 operating income of $271 million.

This decrease is primarily due to the lower sales prices for caustic soda and PVC resin, partially offset by increased volumes from NAKAN and our other vinyls downstream products businesses. Vinyls' second quarter operating income of $129 million increased $28 million from the first quarter operating income of $101 million.

This increase is primarily due to improved results in our vinyls downstream product businesses, largely driven by seasonally higher volumes as the building and construction season got underway and with lower restructuring acquisition and integrated costs, partially offset by lower caustic soda sales prices. Turning to our Olefins segment.

From an industry supply/demand perspective the new ethylene and polyethylene production capacity that has entered the market since 2018 and the ongoing trade uncertainty has pressured prices and margins in the second quarter of 2019, when compared to the second quarter of 2018.

In the second quarter of 2019, our Olefins segment operating income of $82 million decreased $76 million from the second quarter of 2018's operating income of $158 million, due to the lower margins resulting from lower polyethylene sales prices.

These lower prices were partially offset by higher polyethylene sales volumes, driven by strong operational performance of our plants and lower feedstock and fuel costs.

Second quarter 2019, Olefins' operating income increased $45 million from first quarter 2019 operating income of $37 million as we saw good demand for our products and benefited from lower feedstock and fuel costs. Next, let's turn our attention to the balance sheet and statement of cash flows.

At the end of the second quarter, we have cash and cash equivalents of $409 million and total debt of $2.7 billion. Second quarter 2019 cash flows from operating activities were $320 million, while capital expenditures were $208 million.

In the first half of 2019, we continued our strategic debottlenecking investments to further integrate our production chain in the U.S. and Germany, with our vinyls expansion in Geismar Louisiana expected to be operational in the fourth quarter of 2019.

Our ethylene joint venture with Lotte Chemical started up at the end of the second quarter and will add further ethylene integration into our vinyls chain.

We have also continued to invest in growth opportunities throughout this year with bolt-on acquisitions such as NAKAN specialty compounding and DaVinci roofing that have expanded our downstream products businesses.

In these current market conditions, we will seek to invest prudently in opportunities that acquire leading technologies and projects that will further enhance our chain integration in our business. And that will improve our cost position and capitalize on a globally advantaged feedstock position.

As always, we will continue to aggressively manage our costs given the current global economic outlook. Subsequent to the close of the second quarter, we issued €700 million of 10-year notes at an attractive coupon of 1.625%. These proceeds will be used to fund our future growth.

As we look forward, natural gas and ethane prices have continued to decline in the third quarter. New NGL pipelines and the accompanying fractionation capacity has increased supply in our industry, highlighting the beneficial cost position enjoyed by North American producers.

In our Vinyls segment, sales prices for caustic soda appeared to have stabilized and the easing of river levels in the United States has provided improved logistics as more normal trade patterns have been reestablished.

While the typical construction season in North America was delayed due to extended winter weather, we have benefited from the rebound in demand and believe it will carry through into the third quarter. For modeling purposes we expect our effective tax rate and cash tax rates for the full year of 2019 to be approximately 23% and 18% respectively.

Given the ongoing capital investments to reduce our cost position and further integrate our business, as I outlined we expect our full year capital – CapEx to be approximately $650 million. With that, I'll turn the call back over to Albert to make some closing comments.

Albert?.

Thank you, Steve. We delivered a solid second quarter result in spite of a challenging economic environment.

We will continue to be prudent while evaluating new bolt-on opportunities and investing in our business to drive costs lower, improve our chain integration, upgrade our plant efficiently, and grow our differentiated platforms in PVC and polyethylene.

This morning I wanted to mention that the heightened -- with a heightened awareness in the market about the environment Westlake has had a long-standing commitment to corporate social responsibility that is formed by our core values.

That commitment includes doing our part in supporting sustainability, which includes reducing greenhouse gas emissions and waste, improving energy efficiency and promoting the responsible reuse of packaging and recycling.

We are also actively facilitating in the industry's environment initiatives, including those of the Alliance to End Plastic Waste Materials Recovery for the Future and others. Thank you very much for listening to our earnings call this morning. Now I'll turn the call back over to Jeff..

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'll provide that number again at the end of the call. Jimmy, we will now take questions..

Thank you. [Operator Instructions] Our first question comes from Aleksey Yefremov with Nomura Instinet. Your line is now open..

Thank you. Good morning, everyone. You're expanding your vinyls capacity.

Will this increase chlorine and caustic soda production relative to your current system configuration?.

Alex, it will increase our PVC production but we're not adding any caustic production in North America. There's a small amount that we're adding in Europe that will start later in the following years, but none in the current -- none in North America. This is a PVC expansion..

Thank you, Steve. And you've chosen to issue guidance for the full year recently.

Could you explain the rationale for providing those guidance? And are you planning on keeping -- providing those guidance in future years?.

This was a one-time guidance. And we felt, we needed to do something because we did see that the guidance seemed to have gotten stale relative to the dynamics that we saw in the marketplace. So, I think you can expect that we will do this just one-time only..

Thanks a lot..

Thank you. And our next question comes from Kevin McCarthy with Vertical Research Partners. Your line is now open..

Yes, good morning. I was wondering if you could -- your Vinyls segment volumes in the quarter. I think you reported them as being up 3.5% on a year-over-year basis. But presumably that includes some of the acquisition activities.

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

So Kevin you're right. The step-up in volumes was largely driven by some of the acquisitions we made earlier this year. NAKAN certainly was a significant contributor to that. Absent that our sales levels would have been similar to the same quarter 2018.

The impact as a result of the winter weather was certainly delaying the impact to our ability to sell products at the normalized level during the course of the tail end of the first quarter and into the second quarter. But as we noted, we've seen a good recovery since the weather has been returning back to its normal weather patterns..

Okay. And then I guess I had a similar question on the olefin side. Your volume there was up 20% or so on a year-over-year basis.

What drove that level of increase?.

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

I see. Thank you very much..

You're welcome..

Thank you. And our next question comes from Neel Kumar with Morgan Stanley. Your line is now open..

Great. Thanks for taking my question. I was wondering if you could just help bridge the olefin margin improvement from the first quarter levels of 15% to second quarter levels of about 25%. It appears there is a modest step-up in volumes and prices.

So are both of these from lower feedstock cost? And should we expect a similar margin level in the second half of the year?.

So Neel it was largely driven by a couple of things. Certainly the seasonally higher earnings in our downstream products businesses was an important piece of that, as well as lower purchased ethylene and fuel costs. And certainly we also had some lower restructuring and transaction-related costs also when you look at quarter one versus quarter two..

Thanks..

You are welcome..

And then what's embedded in your outlook in terms of PVC prices in the second half of the year? I would say domestic PVC prices go up $0.02 in June, it was flat in July. So any color on your outlook there would be helpful..

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

Thank you. And our next question comes from David Begleiter with Deutsche Bank. Your line is open..

Hey, this is David Huang here for David. I guess first on caustic pricing.

Given the additional South American demand will take some time to significantly reduce the producer inventories here so when do you expect pricing to improve more meaningfully in the second half?.

Well, I think we certainly have seen a lot of the issues that were surrounding the caustic issues in Brazil addressed. Specifically Alunorte has begun to ramp up to more normalized rates. They've been running at pretty elevated rates throughout the second quarter and continuing to step up those operating rates.

So we've seen that as improving demand on that front. We've seen some of the industry consultants elevate their forecasts for earn-outs change in the caustic index of $5 a ton. So we've seen positive drivers there as it relates to specifically Brazil.

And, of course, I should note that we've also seen a competitor have some operating issues also in Brazil. Of course, in India, we've also seen the Bureau of Indian Standards. Those issues that they raised last year seem to have been addressed. They're now issuing import permits to importers and traders.

And that seems to have then brought demand back into the market. So we've seen as I mentioned earlier in my prepared remarks stabilization of caustic prices. And you see an outlook of $5 a ton on the table..

And then on capital allocation you had $10 million buybacks in the quarter. And you said you're interested in some bolt-on opportunities.

So what would be the priority of your capital allocation this year? And then I guess what would be some areas of focus when you're evaluating potential M&A opportunities?.

Well, certainly in my comments, you can see that we're continuing the debottlenecking initiatives that we have underway both in United States as well as in Europe. Those will continue to their conclusion. We certainly look for opportunities such as the DaVinci acquisition and the NAKAN acquisition.

We also are aware that investors need and deserve a return. So we continue to look to give that return in the form of dividends and from time to time opportunistic share buybacks. As we look for opportunities to grow that includes organic as well as acquisition-related opportunities.

And I'll say it's a function of getting the appropriate return and the appropriate investment of capital..

Thank you..

You are welcome..

Thank you. And our next question comes from Bob Koort with Goldman Sachs. Your line is now open..

Good morning. This is Don Campbell on for Bob. You had a more interesting commentary on kind of demand trends.

Can you give a little more granularity in terms of how your volumes have trended in July, maybe relative to June levels or I guess average second quarter volume trends?.

Yes. I think demands are strong both in the Olefins segment and in the Vinyls segment with the seasonal strong period for building construction that also help downstream products.

So now barring any major disruption on the world from the further trade disruptions, I think the second half demand and also espoused by industry consultants seem to be reasonable..

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

How sustainable is that spread? And I guess maybe what drove that improvement in North America export prices?.

Yes. Certainly that export market has been somewhat volatile. I think we have kind of stabilized in export pricing and some improvement in some areas. And as Steve said earlier demand for especially in South America improved, over the first half of this year and over last year. So we are seeing the demand being reasonable.

And we expect the price to be improved gradually also..

Got it. Thank you..

You’re welcome..

Thank you. And our next question comes from Arun Viswanathan with RBC Capital Markets. Your line is now open..

Hey, thanks. Good morning. Just going back to the caustic soda outlook, we've seen some positive developments.

But I guess would you characterize the July uplift of $5 on the index consistent with your expectations, or was it maybe slightly weaker? And if so what are some catalysts that you're looking for to improve the momentum in caustic soda pricing? Thanks..

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

side as well, I think what Steve mentioned earlier there were some issues with logistics with the high water – river water levels impeding shipment of caustic around the U.S. And that has – issue being resolved. So I think there's more movements, and prices are stabilizing.

And I think some of the industry consultants are forecasting not only the price increase in July, but down – further down in the year, there'll be further potential further price increases..

In olefins markets you referenced the supply that's come on Steve over the last couple of year's pressuring pricing and margins. We've also seen feedstock costs pull back a lot. What's your outlook for polyethylene pricing and margins there? Would you expect that we continue to decline from here, or is there any potential for improvement? Thanks..

Well, certainly as the reason, I mentioned the additional capacity is certainly, we continue to see new pounds come into the market. And we've certainly as we all observed seen an uncertain economic outlook in terms of growth. And so that has pressured prices over the month of June and July.

And certainly, the further downside pricing is certainly there. If you look at some of the consultants there their guidance in terms of forecasts they do show some trend lower rate in the year. If you look at IHS, they do show some risk of further prices declining later this year..

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

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

And both we and our partner would like to see full rates to send into our respective derivatives..

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

Thanks..

Thank you. And our next question comes from Mike Leithead with Barclays. Your line is now open..

Thanks. Good morning, guys..

Good morning..

Good morning..

I appreciate that the July guidance was just a one-time occurrence. But even when you gave the range I guess it implied a bit of a second half bounce in earnings which I assume is mostly on the vinyls side.

So can you just walk through maybe one or two of the factors that you considered to get you to that second half improvement over what we've seen so far in the first half?.

Well, Mike I think as you heard us speak to earlier, we see positive trends both on the vinyls and chlor-alkali front. Some of the issues that we dealt with late in 2018 and early in 2019 related to demand in Brazil and issues related to regulators in India weighed I think on the market. We see those behind us at this stage.

So we have a more constructive view going forward into the rest of this year..

Got it. That's helpful.

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

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

Thank you. And our next question comes from John McNulty with BMO Capital Markets. Your line is now open..

Hi. Good morning. This is Bhavesh Lodaya for John..

Good morning..

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

Yeah. I think domestic demand in the U.S. is relatively flat. I think the export demand has really helped in the total volume – sales volume for the industry. And I think inventory values from a customer point of view are relatively reasonable to low side.

Thus, with all the capacity coming up, customer expecting prices to trend lower, so they are very careful in holding more inventory. So I think the customer inventory level is average to the low side..

Okay. And then if you look at economic cycles on the chlor-alkali side, historically, we have seen as economic cycles turn downwards chlorine demand slows down first. Caustic kind of follows. It sometimes leads to higher caustic prices even lower chlor-alkali production. So it does appear we are seeing some weakness in chlorine.

The question is, is this temporary, or are you seeing any structured signs of the phenomenon? I'm curious to know where you feel we are in this cycle..

Sure. I think some of the chlorine caustic are more seasonal, generally in the second and third quarter. With building season in the Northern Hemisphere, our demand for PVC is stronger. Hence the demand for chlorine is stronger. And as we go in the winter season, construction activity slows down.

There's less demand for PVC not only in the U.S., but the Northern Hemisphere and hence with less production of PVC less chlor-alkali production, and hence chlor-alkali price tends to move up.

And we still see the same seasonality from a business cycle point of view, so long as the continued demand growth for PVC and caustic along the growth, and with limited amount of capacity increase, I think the largest cycle point of view, I don't think there is a business cycle issue for the vinyls business. It's really a more seasonal issue.

Now barring any global economic slowdown from the trade issues, we should see that the vinyls cycle should get tighter and tighter as we go forward..

Thank you for the time..

You’re welcome..

Thank you. And our next question comes from P.J. Juvekar with Citi. Your line is now open..

Yes. Hi, good morning. This is Eric Petrie on for P.J..

Good morning..

I wanted to ask what has your historical volume growth averaged for chlorine and derivatives second half over first half..

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

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

Okay. Thank you.

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

Certainly. Well, as you may know because of the heightened environmental awareness in China, some of the polluting and high-cost plants were asked to either shut down or reduce production.

So they have limited productions in both vinyl and chlor-alkali side and depending on which -- whether you are integrated or non-integrated, the non-integrated producers' economics has not been well. And I think we mentioned earlier the ECU returns probably at breaking level -- breaking-even levels for the coastal plants.

The ones who are integrated from coal all the way to PVC were mostly in the interior China has a better economics than the coastal plants..

Great. Thank you, Albert..

You’re welcome..

Thank you. And our next question comes from John Roberts with UBS. Your line is now open..

Thank you. Just to get a sense of the weather impact in the quarter.

How much were volumes off from what your expectations were at the first -- the beginning of the quarter in the Vinyls segment?.

Well, I think if you look at just the quarter-over-quarter, we had a stronger quarter in the second half than we did in the first half. But certainly, it's hard to gauge because John as you know the weather -- the seasonal weather changes year-on-year.

But as Albert noted, we typically have a stronger season in the first quarter than we do -- than we did this past year. But we were able to pick up very good volume in the second quarter to say, we had an 8% increase in volume quarter-over-quarter..

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

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

But we will be getting the benefit of producer economics, which is certainly better than any purchased ethylene in the marketplace as we take our ownership interest in the plant..

Thank you..

Thank you. And our next question comes from Jim Sheehan with SunTrust. Your line is now open..

Thank you. Good morning..

Good morning..

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

So, Jim, since we have so many plants across the business, we've decided not to kind of give quarter-by-quarter turnaround costs and impacts because frankly we schedule these. And they do move based on planning throughout the course of the quarter throughout the course of the year.

But as we look forward into the second half of the year the turnaround activity will be lighter than it has been in the first half of the year. So we tend to give -- so the guidance we gave earlier was reflective of a lighter turnaround schedule of course..

Okay. Thank you.

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

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

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

It's mostly a Vinyls segment impact..

Thank you very much..

Thank you. And our next question comes from Frank Mitsch with Fermium Research. Your line is now open..

Thank you. Good morning.

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

This is Steve, Frank. We haven't got into the quantification of those turnarounds because they do vary quarter-by-quarter year-over-year. And so all I would say is that they will be lighter than they have been in the first half of the year for the second half of the year..

Okay. And, obviously, your volumes were better in both businesses both year-over-year and sequentially some of that M&A related.

Can you think about the operating rates for your facilities roughly where they were during the second quarter and what are you seeing so far here as July has completed?.

Certainly..

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

All right. Thank you so much..

You are welcome..

Thank you. And our next question comes from Steve Byrne with Bank of America. Your line is now open..

Yes, thank you.

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

Well, our downstream products are over $1 billion in revenue and they are an important uptake of our polymers. But our downstream product also with the pressure that comes is spread all over the world. In the building products, we have primarily are serving the North American markets like pipe and sidings, trims and window profiles.

And those tend to not be for export market more the domestic North American market but whereas NAKAN's compound products are really a global business and sold all over the world..

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

So, Steve, you can see the last couple of transactions this year with NAKAN and DaVinci are in that vinyls product business. And certainly it's attractive in that we can provide I think further integration in our business for select acquisitions. And so to the extent that we can find opportunities there we will.

That doesn't suggest that we've not continued our focus on the upstream side of the business. We, of course, do. And as I mentioned, we're debottlenecking our chemicals assets in the vinyls chain now. So it is a balance of looking at that. And it's an important business. It generally tends to be more stable in EBITDA over time.

And so when we give thought to breaking that it is something that we'll give and consider more thought about how we can provide more transparency to that business because, as Albert noted, it's a growing size of business of ours..

Thank you..

You are welcome..

Thank you. And our next question comes from Hassan Ahmed with Alembic Global. Your line is now open..

Good morning, Albert and Steve..

Good morning, Hassan..

Good morning, Hassan..

Albert, a question around near to medium-term supply additions. Like you rightly said, the sort of JV you guys have with Lotte, makes complete sense. It's cost advantage for it to come on-stream.

But I'm just a bit sort of surprised with naphtha-based economics, the way they are globally with MTO economics the way they are that we recently saw two MTO plants come online on China. Another two seem to be in the pipeline in the near term.

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

It's a very good question. As you have mentioned that China -- outside of North America, China is a country that seems to be in the process of adding more olefins capacity. Some are MTO and building some of the coal-based methanol plants to feed the MTO plants whereas those MTO plants on the coastal region base are import methanols.

They have not been doing well because of the higher methanol price, but methanol price that has also seemed to be trending lower. China is building ethane-based crackers based on import ethane and some propane, primarily from the U.S. So that will be -- to be seen how good investment those are.

And there are some crude oil to chemicals plants being planned. They are primarily looking at producing more paraxylene, the aromatic side of the chemical side and not so much the olefins even though there are some olefins coming up. So China's I think capacity just given normal naphtha cracking just put ethylene. They want to be more self-sufficient.

And time will tell how competitive they will be based on the oil..

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

You've seen at times ethane-based margins being advantaged, at times butane-based margins being advantaged. So could you remind me again the level of flexibility you guys have? I mean I know you can run ethane flat out.

But if ethane gets disadvantaged, what's the lowest level that you can take ethane down to?.

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

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

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

Very helpful, Albert. Thanks so much..

You are very welcome..

Thank you. And our next question comes from Jonas Oxgaard with Bernstein. Your line is now open..

Morning guys..

Good morning..

Good morning..

Two questions if you don't mind. One of them is you touched on Chinese PVC economics. The margins for naphtha crackers going into PVC is now at a -- I believe it's a four-year high. Maybe coal doesn't look that bad because coal prices keep falling.

But are you seeing increased rates in China because of economics, or is this just -- can't they flex even though the economics suggests otherwise?.

No. We have seen some low -- high-cost plants being reduced production or shut down. There have been unfortunately some explosions in certain parts of China and those plants didn't take the capacity taking off the market. So even though spot PVC price has moved up it's not really on a reinvestment economics yet.

And as you know China has a moratorium right now on coal-based PVC/VCM plant because of mercury catalyst. And until that's resolved they're not permitting any new carbide VCM plants that's coal based..

Okay. A completely different question. So the big debate right now seems to be whether the U.S. polyethylene prices are sustainable or not because Asia is down. Well it looks like U.S. is set by Europe, which just moves the question over to European polyethylene prices if they are sustainable.

Do you have a perspective on the European pricing and how it has been so high related to Asia margins or Asia prices for so long? And of course, is that sustainable as well?.

That's a good question. As U.S. polyethylene plants are adding 50%, 60% capacity over the last several years into next three years, especially with the trade tensions we have with China, South America and Europe will be the two areas that U.S. producers will be targeting. So it will have some impact on the European market.

However, we don't know what trade barriers will Europe have especially if U.S. is putting trade tariffs on the European auto imports. So time will tell..

Okay. Thank you..

You’re welcome..

Thank you. And our next question comes from Matthew Blair with Tudor Pickering Holt. Your line is now open,.

Hey, good morning, Albert and Steve..

Good morning, Matthew..

Good morning, Matthew..

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

contracts in the back half of the year?.

Well, certainly it's a – spot prices would – could have some impact. But I think because they are spot prices and the volumes are not that big and a lot of the exports some to other parts on long-term contract basis, so which are less impacted by spot price.

And so long the economy around the world improves or is not going through further reduction we see demand for caustic fuel improve. As we mentioned earlier with the Alunorte and other South American issues, plant issues the demand on import has increased. So the prices have helped improve.

But every now and then prices could go up and down in specific regions, but they will not be determined of the global pricing dynamics..

Sounds good. And then in the first quarter you mentioned the building products saw about a $20 million to $30 million year-over-year headwind.

Do you have a similar number for Q2?.

As we said Matthew, because of the delay in winter season impacting the start of the construction season we saw the pickup in – beginning in the second quarter. So we're not breaking out specifics as it relates to the downstream building products portion of our business.

But I would say that, with the return of the construction season that business has improved. And you can see the volumes that we've seen from NAKAN have been additive to that over the course of the first half of the year and certainly were a meaningful contributor in the second quarter.

So I would say that, that products business has performed very well..

Great. Thank you..

You’re welcome..

Thank you. And our next question comes from Jeff Zekauskas with JPMorgan. Your line is now open..

Thanks very much.

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

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

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

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

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

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

Can you quantify that?.

We haven't yet..

Okay. Also in looking at your income statement year-over-year your cost of goods sold went from a little bit less than $1.7 billion to a little bit more than $1.8 billion.

Why was that? Why did your cost of goods sold go up?.

Well, it's I think the mix of businesses that we have Jeff. And when we think about the change in the mix of businesses part of that of course is the addition to our vinyl final downstream products..

So in other words it was acquisition effects?.

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

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

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

Yeah. Right..

So when you have higher sales volumes your cost of sales purchase materials go up as well. And remember, if you're looking year-over-year quarter-over-quarter volumes have been up..

How much polyethylene do you export of your total?.

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

Pre-or above 20?.

We're above 20 yes..

Yes.

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

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

How about China? Is China loose?.

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

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

Yes. Yes. I think that with the slowing down Chinese economy and industrial manufacturing, the demand has been volatile and has been reducing as well for many plastics not only polyethylene..

I guess, lastly people talk about the polyethylene market is growing at 4% to 5% globally.

Do you think it's growing at that rate this year, or do you think this year is I don't know 1% like what?.

Well, I think with all the tariffs barriers and trade issues and I think it will be probably less than the global GDP rate. But we're only halfway through the year. We don't know what the rest of the year going to do..

Okay, great. Thank you so much..

You're welcome..

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 hope you'll join us again for our next conference call to discuss our third quarter results..

Thank you for participating in today's Westlake Chemical Corporation second quarter earnings conference call. As a reminder this call will be available for replay beginning two hours after the call has ended and may be accessed until 11:59 p.m. Eastern time on Tuesday August 13, 2019. The replay can be accessed by calling the following numbers.

Domestic callers should dial 855-859-2056. International callers may access the replay at area code 404 537-3406. The access code for both numbers is 358-3409. You may now disconnect. Everyone have a great day..