Westlake - Earnings Call - Q2 2017
August 3, 2017
Transcript
Speaker 0
Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Westlake Chemical Corporation Second Quarter twenty seventeen Earnings Conference Call. During the presentation, all participants will be in a listen only mode. After the speakers' remarks, we will be invited to participate in the question and answer session.
As a reminder, ladies and gentlemen, this conference is being recorded today, 08/03/2017. I would now like to turn the call over to your host, Jeff Hawley, Westlake's Vice President and Treasurer. Sir, you may begin.
Speaker 1
Thank you. Good morning, everyone, and welcome to the Westlake Chemical Corporation Second Quarter twenty seventeen Conference Call. I'm joined today by Albert Chao, our President and CEO Steve Bender, our Executive Vice President and Chief Financial Officer and other members of our management team. The conference call agenda will begin with Albert, who will open with a few comments regarding Westlake's performance in the second quarter of twenty seventeen, followed by a current perspective on the industry. Steve will then provide a more detailed look at our financial and operating results.
Finally, Albert will add a few concluding comments, and we'll open the call up to questions. During this call, we refer to ourselves as Westlake Chemical. Any reference to Westlake Partners is to the master limited partnership Westlake Chemical Partners LP. And references to OpCo refer to our subsidiary Westlake Chemical OpCo LP who owns certain olefin facilities. Today management is going to discuss certain topics that will contain forward looking information that is based on management's beliefs as well as assumptions made by and information currently available to management.
These forward looking statements suggest predictions or expectations and thus are subject to risks or uncertainties. Actual results could differ materially based upon many factors including the cyclical nature of the chemical industry, availability, cost 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 and other risk factors discussed in our SEC filings. This morning, Westlake issued a press release with details of our second quarter results. This document is available in the Press Release section of our webpage at westlake.com. A replay of today's call will be available beginning two hours after completion of this call until 11:59PM Eastern Time on August 1037.
The replay may be accessed by dialing the following numbers. Domestic callers should dial (855) 859-2056. International callers may access the replay at (404) 537-3406. The access code for both numbers is 5772493. Please note that information reported on this call speaks only as of today, 08/03/2017, and therefore you are advised that time sensitive information may no longer be accurate as of its 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 webpage at westlake.com. Now I would like to turn the call over to Albert Chao. Albert?
Speaker 2
Thank you, Jeff. Good morning, and gentlemen, and thank you for joining us on our earnings call to discuss our second quarter results. In this morning's press release, reported quarterly net income of $153,000,000 or $1.17 per diluted share. Our results this quarter were impacted by $04 per share from integration costs associated with the acquisition of Axial. In addition, our earnings were also impacted by lost sales and costs associated with our operational improvement programs, which Steve will discuss in more detail.
Our second quarter results included net record sales of $2,000,000,000 and record EBITDA of $411,000,000 These results show the benefit of our acquisition of Axial and the strength of our businesses, which continue to benefit from improving economic conditions. The second quarter also saw higher sales prices and solid demand for all of our major products, which reflects the strengthening of global demand. This quarter, we completed the ethylene expansion in our Culver City, Kentucky facility, which added 100,000,000 pounds of capacity, utilizing low cost ethane out of the Marcellus shale. In addition to the ethylene expansion, we are continuing to perform extensive maintenance work on a number of our plants to improve their operational performance and ongoing reliability. Thanks to the dedication efforts of our employees.
We are making good progress in our actual integration and remain on track to capture the $120,000,000 of synergies and cost savings this year that we have previously communicated. In addition, our operational improvement program to review the actual assets and identify areas for improvement that was launched after we closed the transaction in August of twenty sixteen is well underway and we are benefiting from these efforts. Now I would like to turn our call over to Steve to provide more detail on the financial and operating results.
Speaker 3
Thank you, Albert, and 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 second quarter of twenty seventeen of $153,000,000 or $1.17 per diluted share on net sales of $2,000,000,000 as compared to the second quarter of twenty sixteen net income of $111,000,000 or $0.85 per share on sales of $1,100,000,000 Our second quarter results were higher compared to the second quarter twenty sixteen due to earnings contributed from our acquisition of Axial, higher sales prices for our major products resulting in improved margins and the lower estimated annual tax rate when compared to the prior year. The second quarter twenty seventeen results were also impacted by lost sales and costs associated with turnaround and expansion of the Calvert City ethylene unit as well as other planned turnarounds and unplanned outages totaling $64,000,000 or $0.34 per share and pretax integration related cost of $8,000,000 or $04 per share associated with the acquisition.
Second quarter twenty seventeen net sales of $2,000,000,000 were driven by sales contributed by Axial and higher sales prices for all of our major products, partially offset by lower polyethylene sales volumes due to maintenance activities. Operating income of $267,000,000 for the second quarter of twenty seventeen also benefited from the earnings contributed by Axiol as well as higher sales prices for all of our major products, which resulted in higher integrated product margins. Sales in the second quarter of twenty seventeen of $2,000,000,000 and operating income of $267,000,000 both increased when compared to the first quarter of twenty seventeen sales of $1,900,000,000 and operating income of $235,000,000 Second quarter twenty seventeen sales benefited from higher sales prices for all of our major products, partially offset by lower polyethylene sales volumes. The improvement in operating income was due to increased vinyls operating margins, partially offset by lower polyethylene sales volumes. For the six months ended June 3037, we reported operating income of $5.00 $2,000,000 on net sales of $3,900,000,000 compared to operating income of $382,000,000 on net sales of $2,000,000,000 in the first half of twenty sixteen.
The increase in net sales for the first six months of twenty seventeen was due to sales contributed by Axial and higher sales prices for our major products, partially offset by lower polyethylene sales volumes when compared to the first six months of twenty sixteen. The increase in operating income was mainly attributable to earnings contributed by Axial as well as higher integrated margins and lower costs associated with turnarounds and outages. Our utilization of the FIFO method of accounting resulted in an unfavorable pretax impact of approximately $13,000,000 or $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 us move on to review the performance of our two segments, starting with the Olefins segment.
In the second quarter of twenty seventeen, the Olefins segment reported operating income of $143,000,000 on net sales of $489,000,000 as compared to second quarter twenty sixteen's operating income of $141,000,000 on sales of $494,000,000 Operating income increased $2,000,000 over the same period due to higher Olefins integrated product margins, resulting from higher sales prices of major products, partially offset by higher feedstock and energy cost. Second quarter twenty seventeen operating income of 143,000,000 was $37,000,000 lower than first quarter twenty seventeen income of $180,000,000 Operating income decreased due to lower polyethylene sales volumes and costs associated with planned turnarounds and unplanned outages. For the first six months of twenty seventeen, Olefins operating income of $323,000,000 increased $33,000,000 from the first six months of twenty sixteen. This increase in operating income was mainly due to higher Olefins integrated product margins, which were driven by higher prices for our major products and lower costs associated with turnarounds and outages when compared to the first six months of twenty sixteen. Now moving on to the Vinyls segment.
The Vinyls segment reported record operating income of $143,000,000 in the second quarter of twenty seventeen and net sales of 1,500,000,000 Net sales for the Vinyls segment increased $898,000,000 from second quarter twenty sixteen net sales. This increase is due to sales contributed by Axial and increased sales prices. Operating income increased $91,000,000 year over year to $143,000,000 primarily due to earnings contributed by Axial and higher sales prices for PVC resin and caustic soda, partially offset by higher feedstock and energy cost. Second quarter twenty seventeen operating income of $143,000,000 increased by $72,000,000 from first quarter twenty seventeen operating income of $71,000,000 The improved results were due to higher margins as a result of higher sales prices for all of our major products and lower feedstock and energy costs. The second quarter of twenty seventeen continued to be impacted by planned turnarounds and expansion of our Calvert City ethylene unit and other planned turnarounds and unplanned outages as we work to improve the operational effectiveness of all of our facilities.
For the first six months of twenty seventeen, Vinyl's operating income of $215,000,000 increased from $114,000,000 for the first six months of twenty sixteen. This increase of $101,000,000 was mainly due to earnings contributed by Axial and higher sales prices for PVC resin and caustic soda. These increases partially offset by unabsorbed fixed manufacturing costs and other costs associated with planned turnaround and expansion of our Calvert City facility and other planned turnarounds and outages during the first six months of twenty seventeen. Now let's turn our attention to our balance sheet and statement of cash flows. For the first six months of twenty seventeen, cash generated from operating activities was $480,000,000 and we invested $281,000,000 in capital expenditures.
At the end of the second quarter, we had cash and cash equivalents, including restricted cash of $4.00 $4,000,000 and our total debt was approximately $3,500,000,000 We will continue to prudently manage our balance sheet while continuing our planned investments to address deferred maintenance. Now let me provide 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 in the remainder of the year that will impact our earnings by approximately $25,000,000 in each of the third and fourth quarters. This number reflects the higher maintenance expenses that will be incurred for these outages along with the associated lost sales as we continue our maintenance efforts to improve reliability and performance.
Moving on to capital spending. Our current estimate for 2017 capital expenditures ranges from $550,000,000 to $600,000,000 These capital and maintenance investments will improve the reliability and competitiveness of our plants. We estimate that our 2017 effective annual tax rate for the year will be approximately 30% to 33% and our cash tax rate will be approximately 25%. We are on track to capture the full synergies and cost savings of $200,000,000 that we previously announced by 2018 and we expect to capture approximately $120,000,000 of these savings this year while expensing integration related costs around $25,000,000 in 2017. With that, I will now turn the call back to Albert to make some closing comments.
Albert?
Speaker 2
Thank you, Steve. This quarter's results demonstrate the benefits of the combination with Axial. We're able to benefit from solid demand, higher prices and integrated margins and improved our ability, which delivers record EBITDA for the quarter. We continue to focus on capturing synergies related to our Axial acquisition and are investing to improve the operational reliability and competitiveness of our assets. Looking forward, 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 U.
S. Shale based oil and gas production. We also see favorable underlying demand trends continuing forward for all of our major products. We have seen some chlor alkali capacity reductions in North America and having no new plans announced. Additionally, European regulatory authorities have mandated the mercury based chlorine production must shut down or convert to another technology by the end of this year, which led to capacity reductions in the region.
We believe that Westlake is very well positioned to benefit from these market developments. Thank you very much for listening to earnings call this morning. Now I'll turn the call back over to Jeff.
Speaker 1
Thank you, Albert. Before we begin taking questions, I would like to remind you that a replay of this teleconference will be available starting two hours after we conclude the call. We will provide that number again at the end of the call. Operator, we will now begin to take questions.
Speaker 0
Thank you. Our first question comes from Dawn Carson of Susquehanna. Your question please.
Speaker 4
Good morning. This is Emily Wagner on for Dawn. I just wanted to clarify the maintenance spending in second quarter. I think you guided to $60,000,000 What was that actual number? And can you give us the split between the segments?
And then you're still guiding to $50,000,000 in second half twenty seventeen, but there were some unplanned outages. Did some planned maintenance get moved to 2018? What was the shift there? Thank you.
Speaker 3
Good morning, Emily. The impact in the second quarter, guided to 60,000,000 The actual number was $64,000,000 And yes, I'm guiding for the second half to be a total of $50,000,000 split between the two quarters, third quarter and fourth quarter, to be $25,000,000 each. The allocation of the impact in the second quarter is still very heavily oriented in the Vinyls segment. Though there certainly was some maintenance activity in the Olefins segment. I mentioned that we had some maintenance activity related to our polyethylene businesses.
Thank you.
Speaker 4
Great. As a follow-up, could you provide an update on your ethylene sourcing options for the $1,800,000,000 net short position?
Speaker 3
Well, think you know that we're working in partnership with LOTY with of a cracker and certainly that will certainly with a 10% ownership of that venture give us access to additional ethylene. We also have an option that gives us access to ethylene should we elect it that would step up that interest from 10% up to a maximum of 50%. We'll assess that opportunity as we go forward with the initiative. But we'll continue to compare any other alternatives for ethylene against that one because that one's the obvious one to compare it to. But we'll continue to assess opportunities in ethylene to further integration as the market continues to develop.
Speaker 4
Thank you.
Speaker 0
You're welcome. Thank you. Our next question comes from Steve Byrne of Bank of America.
Speaker 5
Thank you. This is Ian Bennett on for Steve. In the Vinyls segment, there was a positive 8.9% price in the quarter. Can you comment a little bit about how that price year over year compared in the different product lines and the expectation for the remainder of the year?
Speaker 2
Certainly. In the Vinyl business in the chlor alkali, we had good price improvements in the quarter along with chlor alkali improvements in the first quarter. And IHS is projecting that
Speaker 6
for
Speaker 2
the whole year we'll have $90 per dry metric by short term of price increase over last year. And in PVC as well, we are seeing price improvements This year first quarter we had $0.06 a pound price improvement. And so far there's no decrease and we expect demand to be strong both domestically and internationally for PVC.
Speaker 5
Okay. Thanks. And as a follow-up on vinyls, do you expect vinyls earnings in 3Q to be above or below 2Q levels?
Speaker 3
Well, as you know, we don't give specific guidance. But I think that you can see from the comments that Albert made that we're continuing to see strong price performance in awe across the product chain.
Speaker 5
Thank you very much.
Speaker 6
You're welcome.
Speaker 0
Thank you. Our next question comes from David Begleiter of Deutsche Bank.
Speaker 7
Thank you. Good morning.
Speaker 3
Good morning, David.
Speaker 8
It looks like we'll see some new polyethylene capacity coming on stream in Q3 here. Do you think that precludes any potential price gains from the announced price increases in August and September?
Speaker 2
You're talking about the August price increase the industry announced, dollars $0.03 a pound polyethylene? Correct.
Speaker 3
I believe somebody has also announced an
Speaker 8
increase for September as well.
Speaker 2
Yes. Well, we are in August so we will see how the $03 a pound price increase comes into effect and then we'll talk about the September price increase. I don't think the September price increase is industry wide. I think it's a very selected announcement. But demand for our products both domestically and internationally for polyethylene is still quite strong.
Speaker 8
Very good. And lastly, there's been a lot of discussion on the China recycle scrap issue. Where do you come out on that debate in terms of its impact on the market?
Speaker 2
Certainly. I think from a demand for polyethylene that will be very positive. China is the largest PE market in the world and they have been importing various types of plastic scraps from all over the world primarily from The US and if they reduce the imports of scrap the consumption of virgin polyethylene will increase. That's a positive for our industry.
Speaker 8
Thank you very much.
Speaker 2
You're welcome.
Speaker 0
Thank you. Our next question comes from P. J. Juveka of Citi.
Speaker 9
J. Yes, hi, good morning. Good morning. Good morning, P. That Caliber City expansion is complete, can you just tell us how does the cost of ethane or ethylene at COE at Caliber City compared with your Gulf Coast crackers?
Can just give us ballpark numbers so that we can understand the Marcellus ethane advantage?
Speaker 2
Yes, I think we have said in the past that CoverCity's ethane purchase is market related pricing. So with expansion suddenly it would be even more competitive from a cost point of view. And
Speaker 0
is one of the most integrated from ethylene chlorine to PVC complex in The U. S. So it's quite competitive and it's doing quite well.
Speaker 9
How much lower the cost of ethylene at Calvert Calvert City would be compared to your Louisiana crackers?
Speaker 2
I would just say it's quite competitive.
Speaker 9
Okay. And then on caustic soda, exports have remained strong here. Can you comment on what you're seeing in the caustic export market? And is that strength mainly coming from China?
Speaker 2
Certainly. I think the global demand for coffee is quite strong, especially industrial demand is quite strong as well as alumina demand for coffee is very strong globally. And we are seeing very strong volume and price improvements globally. And I think the Chinese operating rates is quite high already and expect price to stay up for the foreseeable future. So as you know China is the largest caustic capacity country in the world.
So if they are running at a high rate and demand continue to be strong, that's a good sign for global caustic business.
Speaker 9
Okay. Thank you very much.
Speaker 2
You're very welcome.
Speaker 0
Thank you. Our next question comes from Hassan Ahmed of Alembic Global.
Speaker 6
Good morning, Albert and Steve.
Speaker 2
Good morning,
Speaker 6
My first question is around volumes within the Olefin segment. As I took a look at your Q1 numbers, volumes were up decently quarter on quarter. Sequentially, volumes were up 8%. And obviously, Q1 was a quarter where you had a variety of the same turnarounds that you had in Q2, be it Calvert City, Platinum and the like. Now as one looks at Q2, the volumes dipped down by around 7%.
And you guys also talked about lower polyethylene sort of sales of volumes within Q2. Just trying to understand what was going on there. Was there something about the underlying demand? Was it some sort of an unplanned outage? I mean what caused that dip in volumes on a quarter on quarter basis?
Speaker 3
Hassane, it's Steve. As I mentioned in my prepared remarks, we noted that we had some maintenance issues which have been addressed with one of our polyethylene lines. And that speaks to one of the maintenance issues that we had in olefins. It's been addressed and moving forward. Demand remains very strong though.
Speaker 6
So I mean, so in theory, had that not happened, volumes would have been flattish, up? I mean how should we think about that?
Speaker 3
That's correct. Demand remains strong and should and had we not been performing maintenance on the unit, we would have been able to produce and sell those pounds.
Speaker 6
Understood, understood. Now as a follow-up, I guess a two part follow-up. It just seems that 2017 obviously is a bit of a transitional year for you guys, heavy turnaround schedule, sprucing up some of the sort of acquired assets and the like. So the first part of the question is that as we look at 2018, is it fair to assume that the bulk of your turnarounds are behind you? So that's part one.
Then part two is, if that truly is the case, it just seems that the underlying earnings power thus far has been masked by all of these turnarounds. So as I sit there, take a look at your Q2 numbers, call it around $420,000,000 in recurring EBITDA adjusting for the sort of axial deal related costs and the like. And then on top of that, one can add around $60,000,000 call it 64,000,000 as you said in terms of lost EBITDA because of the turnarounds. So very simplistically, if I just annualize those numbers, I mean, I come up with an earnings power of north of $1,900,000,000 and that's not even fully factoring in the full impact of the Axial synergies. So I mean, barring a complete meltdown, I mean, it seems chlor alkali fundamentals are fine and improving.
So barring a complete meltdown in olefins, I mean isn't that the right way we should think about sort of the go forward earnings power of the company post all of these turnarounds?
Speaker 3
So Hassan, as you think about the work that we've been undertaking, we certainly addressed deferred maintenance issues starting after the acquisition of Axial and addressing some even within the legacy Westlake. And we hope to get the majority of those done this year. And you can see that the guidance that we've been giving that the volume has been higher in the first half of the year, tapers in the second half of the year. So we do hope that we can complete the majority of this work and get it all largely behind us this year and get to a more normalized operating situation in 2018 and allow us to get to more normalized activities going forward.
Speaker 0
And
Speaker 6
what are your thoughts about the earnings power? I mean, am I competing off on that?
Speaker 2
Hassan, if you look at IHS forecast, I'm not saying that they're always correct. They're looking at a pretty looking at the whole year 2017 and 2018, polyethylene price more or less flat, caustic prices up about $40 a ton and PVC is up on the average year over year is about $05 $04 to $05 a pound. So at least I just looking at the vinyl business price still going up in 2018 and we are seeing demand continue to be strong and polyethylene price being flat is what they are saying.
Speaker 6
Very helpful guys. Thank you.
Speaker 0
You're welcome. Thank you. Our next question comes from Arun Viswanathan of RBC Capital.
Speaker 10
Great, thanks. Just a question on Good morning. Morning. PVC, good morning. To begin with, ethylene prices have come down over the summer.
And I understand PE is holding up. But PVC, what gives you the confidence that you can actually start making a lot more margin in that business and sustain it?
Speaker 2
Certainly. You're right. Ethylene spot prices come down so PVC margin has improved somewhat from a cost point of view. But ethylene price hasn't changed that much overseas and overseas PVC prices quite strong. And as you know, U.
S. Is a large exporter of PVC around the world. So that export price also stabilizes the domestic price And domestic demand for construction now that is doing quite well, especially during the second and third quarter. So we are seeing continued good demand domestically and strong demand overseas.
Speaker 10
Okay, thanks. And similarly on caustic, you've gone through several months of increases here. There's another $55 or so on the table for Q3 and then some of that may be pushed into Q4. And then you just noted that IHS is possibly calling for another $40 in 'eighteen. At what point do you start getting worried that you could see some announcements of new capacity?
And are you not worried about that because there's no place for the chlorine? Thanks.
Speaker 2
Certainly. We are certainly aware of competitiveness of our products versus these are the alternatives. But there's no new capacity announced in The U. S. And generally takes about three years or up to five years to get permit and build a new plant.
And overseas wise again, Europe is actually reducing capacity due to the shutting down of the mercury cell capacities in Europe. We're talking about potentially eight fifty to 1,000,000,000 ton of metric tons of reduction capacity. Again overseas, even in Asia, we have not heard any major announcements of new capacity expansion. So global GDP is growing 3% a year and typically caustic demand follows between half to one time GDP growth rate. And demand is growing, only capacity added and takes time for capacity to come in place.
So we are seeing very positive signs.
Speaker 10
And then just lastly on the maintenance, you've had an elevated year of expenses here. What's the kind of level of negative EBIT impact or EBITDA impact you expect from maintenance in a more typical year? Thanks.
Speaker 3
Sorry. You said in a more typical year? Arun, what I've tried to do is call out that that is outside of the norm. And so certainly when you think of the impact we had in the first quarter, the 64% in the second quarter, and I've given guidance of 25,000,000 in quarter three and four million those numbers are the numbers that we think are outside the norm. And so we haven't really gotten to calling out the normal activity because frankly that's been embedded in our normal run rate of earnings.
So what I've been doing is calling out debt that is outside of the normal run rate.
Speaker 8
Got you. Okay, thanks.
Speaker 0
You're welcome. Thank you. Our next question comes from John Roberts of UBS.
Speaker 11
Good morning.
Speaker 3
Good morning Some
Speaker 11
of the paint companies that have reported already have talked about wet weather significantly depressing June exterior paint sales. Did your building products experience the same sort of effect?
Speaker 2
Well certainly there's a variable month to month or week to week. But we're seeing quite strong demand for our building products throughout the spring and into the summer.
Speaker 11
Okay. And Albert, made a comment earlier on Asia caustic. And I know you don't have a lot of export business there. But I had thought the Australian alumina production was having problems with electricity availability so that maybe caustic consumption was weakening in Asia? You actually think it's strong there?
Speaker 2
Yes, what we are seeing is not just the caustic alumina for pulp and paper for general industrial usage is quite strong and certainly for TiO2 also is quite strong overseas.
Speaker 0
Okay, thank you.
Speaker 2
You're welcome.
Speaker 0
Thank you. Our next question comes from Jim Sheehan of SunTrust.
Speaker 8
Thanks. Question on the PBC market. It looks like it's fairly tight of late. There's a competitor outage that may be contributing to that. Just wondering how does your demand pattern has it been shaping up in July and early August here?
Have you seen any slowdown in your PVC order patterns in August?
Speaker 2
No, we're seeing pretty general demand that we're seeing in this year. Demand is strong both domestically and export export.
Speaker 8
How do you see the PVC inventory situation right now?
Speaker 2
As you said earlier, there were industry offsets in the PVC or VCN markets. So PVC inventory is quite tight.
Speaker 8
And in terms of PVC prices for exports, how are your netbacks comparing to domestic pricing?
Speaker 2
Netback has been quite good. At times, netback earlier in the year has been higher than domestic in certain sectors, but I think it's quite attractive and we expect the export market continue to support domestic market prices.
Speaker 0
Thank you. You're welcome. Thank you. Our next question comes from Alexey Yefremov of Nomura Instinet.
Speaker 12
Good morning. Thank you. Good morning. Have you realized all of the price increases reflected in the index in the second quarter? Are all of them reflected in your second quarter EBITDA run rate or you may still have more in the third quarter?
Speaker 2
Well, depending on what products. So the PVC, we announced we have received industry has implemented $06 a pound in the first quarter, which we got in the second quarter. As I said earlier, with lower ethylene prices, they help improve the margin for PVC business. But right now there's no additional price announcement being made PVC. Likewise in polyethylene, we had about $08 a pound price increase implemented and there was first quarter the $03 a pound reduction in May.
And right now people are talking about another $03 a pound price increase in August that will time will tell whether we can implement that. Whereas in caustic soda, there's price announcements in the first quarter and second quarter and then moving to third quarter. So there's still continuing to have price improvements in the caustic soda area and chlorine as well.
Speaker 12
I guess more question about lags in the caustic soda market. Have you realized does your EBITDA reflect all the caustic soda increases that were in the index during second quarter?
Speaker 2
Oh, thought so that generally industry lags, whatever the announcement that historically we're not able to achieve 100% of the announced price increases and depending on supply demand, it will carry over into next quarter. And we also added further price announcements for the third quarter. So these price increases are kind of mixed together between the first announcement and second announcement.
Speaker 12
Thank you, Albert. And to stay on caustic soda, can you tell us about contracts that you have been renegotiating this year? Were you able to reduce the discounts versus index in your longer term contracts?
Speaker 2
Well, certainly we're trying to improve the net margin we receive and with a tight market as contract to you comes usually the contract pricing improves.
Speaker 12
Thank you very much.
Speaker 2
You're very welcome.
Speaker 0
Thank you. Our next question comes from Kevin McCarthy of Vertical Research.
Speaker 13
Yes, good morning. Good morning, Kevin. Good morning, sorry. How would you characterize the margin trend among your downstream products that are fabricated from PVC?
Speaker 2
Well, since most of that goes into the building sector when the economy improves and the housing market improves that would carry over to our building product business. And we have a mixture of more commodity grades like water and sewer pipe. We have specialty pipe with sidings and trim and moldings. And so some are much more specialty markets, some are more commodity. But generally speaking we are seeing improvements in all sectors.
Speaker 13
Okay, that's helpful. And then shifting over to Europe, I believe one of your competitors has suffered an outage in The Netherlands. Is there any benefit to Vinylate's specialty PVC business from that? And also I realize Europe is not a large region for you but with the currency moving as it is, is there any material tailwind that you would anticipate in the back half of the year related to your European operations?
Speaker 2
Yes, certainly European economy generally speaking is doing better than people expected. I think you mentioned about a competitor's problem that's more in caustic area. We also had our own problems of the caustic area, but we have recovering from those. So the caustic business is balanced too tight. And I think the price increase announced potentially for the third quarter, time will tell whether those price increases would come into fruition or not.
But generally speaking, business is quite good in the vinyl business in Europe and we're seeing good results.
Speaker 13
Okay. And then last one if I may. Steve, I think you mentioned a FIFO impact of negative $13,000,000 how might that split between your two segments?
Speaker 3
It's largely attributable to our Olefins segment.
Speaker 13
Thank you very much.
Speaker 2
You're very welcome.
Speaker 0
Thank you. Our next question comes from Frank Mitsch of Wells Fargo.
Speaker 4
Hi good morning. This is on for Frank.
Speaker 3
Good morning. Morning.
Speaker 4
I wanted to follow-up on Hassan's question to better understand the volume declines noted in olefins. You mentioned maintenance issues but could you maybe provide more details perhaps about the amount of capacity affected or how long the issues lasted? Thanks.
Speaker 3
Well the outages certainly were more of an extended outage than we had certainly planned. And as I gave an indication our guidance for the quarter was $60,000,000 of impact. And as you can see, it turned out to be a $64,000,000 impact. So that gives you some sense of the relative impact that we had there.
Speaker 4
Okay, thanks.
Speaker 0
You're welcome. Thank you. Our next question comes from Matthew Blair of Tudor, Pickering, Holt.
Speaker 7
Hey, good morning, Albert and Steve. Good morning.
Speaker 2
Good morning, Matt.
Speaker 7
I just had one question. In vinyls, we've seen electricity prices spike up here in Q3. Natural gas prices have been, let's call it, roughly flat. How is that going to impact your costs going forward in vinyls and on the ECU margin? Are you more exposed to raw electricity prices?
Or are you more exposed to natural gas prices? Thanks.
Speaker 2
That's a good question. We are exposed to both. We do have a large cogeneration capacities in our vinyls business. So natural gas is a big component in our cost of generating electricity. And having natural gas in the recent months being stabilized and coming down a bit will be helpful for our cost of making ECU.
Speaker 7
Are you willing to give a split on maybe like 60% exposed to electricity, 40 net gas?
Speaker 2
Without making those comments.
Speaker 7
Okay. Thank you.
Speaker 0
You're welcome. Thank you. We have time for one more question. Our question comes from Aleksey Yefremov of Nomura Instinet.
Speaker 12
Thank you again. Just wanted to follow-up on maintenance. I think Steve you mentioned earlier that your outage costs of $25,000,000 each in the third and the fourth quarter are only excess represent only excess maintenance for the Vinyls segment. Could you give us an idea of what we should expect from the Olefins segment on a sequential basis from the second to third quarter? How much could maintenance costs change either higher or lower?
Speaker 3
Yes. You may have misheard me. The $25,000,000 is both segments, vinyls and olefins for each quarter. And so as I said, it's largely attributable to the vinyls businesses. But it does cover both olefins and vinyls for each of those two quarters.
Speaker 12
But I guess just to clarify, in total you have incurred between the two segments $64,000,000 in the second and will incur 25,000,000 both planned and excess maintenance. So sequentially between the two segments, this should represent the decrease in maintenance costs?
Speaker 3
Yes. There'll be $25,000,000 in Q3 and the guidance for Q4 is 25,000,000 And so as I say, that 25,000,000 is the planned work that we have for both segments in each of those respective quarters.
Speaker 0
Thank you. You're welcome.
Speaker 2
You're welcome.
Speaker 0
Thank you. At this time the Q and A session has now ended. Are there any closing remarks?
Speaker 1
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 twenty seventeen results.
Speaker 0
Thank you for participating in today's Westlake Chemical Corporation's 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 Thursday, August 1037. 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 57772493. Thank you for attending.