Westlake - Earnings Call - Q4 2016

Transcript

Speaker 0

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

As a reminder, and gentlemen, this conference is being recorded today, February 2137. I would now like to turn the call over to your host, Ben Edrington, Westlake's Vice President and Chief Administrative Officer. Sir, you may begin.

Speaker 1

Thank you, Charlotte. Good morning, everyone, and welcome to the Westlake Chemical Corporation's fourth quarter and full year twenty sixteen conference call. I'm joined today by Albert Chao, our President and CEO Steve Bender, our Senior Vice President and Chief Financial Officer and other members of our management team. The conference call agenda will begin with Albert, who will open with a few comments regarding Westlake's performance in the fourth quarter and full year of 2018, 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 will open the call up to questions. During this call, we refer to ourselves as Westlake Chemical. Any reference to Westlake Partners is to the master limited partnership, Westlake Chemical Partners LP, and references to OpCo refer to our subsidiary, Westlake Chemical OpCo LP, who owns certain olefin facilities. Today, 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 the availability, cost and volatility of raw materials, energy and utilities governmental regulatory actions and political unrest global economic conditions industry operating rates the supplydemand balance for Westlake's products competitive products and pricing pressures access to capital markets, technological developments and other risk factors discussed in our SEC filings. This morning, Westlake issued a press release with details of our fourth quarter and full year twenty sixteen 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 11:59 p. M.

Eastern Time on February 2837. The replay may be accessed by dialing the following numbers. Domestic callers should dial 505056. International callers may access the replay at (404) 537-3406. The access code for both numbers is 5000005515010.

Please note that information reported on this call speaks only as of today, February 2137, 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 webpage at westlake.com. Now I'd like to turn the call over to Albert Chao. Albert?

Speaker 2

Thank you, Ben. Good morning, ladies and gentlemen, and thank you for joining us on our earnings call to discuss our fourth quarter and full year twenty sixteen results. In this morning's press release, we reported quarterly net income of $99,000,000 or $0.76 per diluted share on net sales of $1,700,000,000 We are pleased with our fourth quarter results despite impact of the planned turnaround at our Lake Charles vinyls facility, other planned outages and several transaction and integration related items that impact the quarter. During the quarter, we achieved record quarterly ethylene production that was supported by higher polyethylene production and which result in strong earnings in our Olefins segment. We have made good progress in our Axo integration and appreciate the efforts of our employees.

We are on track to capture these synergies that we have previously communicated. During the fourth quarter, we're able to perform a deeper review and analysis of assets that we recently acquired and we've identified areas where we can improve operational performance and align best practices across the business. The fourth quarter marked the beginning of several planned investments to improve the performance of our plants, address the deferred maintenance issues at a number of Axial plant sites and pursue our cost related synergies. I would now like to turn our call over to Steve to provide more detail on the financial and operating results. Steve?

Speaker 3

Thank you, Albert, and good morning, everyone. I will start our discussion by discussing the 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 fourth quarter of twenty sixteen of $99,000,000 or $0.76 per diluted share on net sales of $1,700,000,000 As Albert mentioned, our fourth quarter results were impacted by a number of special items. Our fourth our quarterly results were lower due to unabsorbed fixed manufacturing and other costs associated with the planned turnarounds and unplanned outages of approximately $39,000,000 and associated lost sales of approximately $24,000,000 We also incurred transaction and integration related expenses in the quarter of $13,000,000 and a one time step up to fair market value for the acquired Axial inventory of approximately $14,000,000 These items lowered our earnings by approximately $89,000,000 pre tax or approximately $58,000,000 after tax.

This was partially offset by a lower effective tax rate for the quarter, which benefited us by $29,000,000 after tax. Therefore, if we look at our quarter excluding these items, our after tax earnings would have been higher by $29,000,000 or $0.23 per share. Fourth quarter twenty sixteen net sales of $1,700,000 were higher compared to the same period in 2015, mainly due to sales contributed by Axial. Income from operations of $153,000,000 for the fourth quarter twenty sixteen was lower than the prior year period resulting from transaction integration related costs, the effect of selling higher cost Axial inventory and the impact from planned turnarounds and unplanned outages. Sales revenue in the fourth quarter of twenty sixteen of $1,700,000,000 was higher compared to the third quarter and income from operations of 153,000,000 were increased.

The higher sales were largely due to sales contributed by Axial while the improvement in operating income was due to lower transaction integration cost and record ethylene production. For the full year 2016, net income of $399,000,000 or $3.6 per diluted share on net sales of $5,100,000,000 was lower than the full year 2015 net income of $646,000,000 or $4.86 per diluted share on net sales of $4,500,000,000 Full year 2016 net income was impacted by unabsorbed fixed manufacturing and other costs associated with planned turnarounds, the Petro one expansion and the unplanned outages of approximately $155,000,000 and lost sales of approximately $75,000,000 associated with these events. Full year results were also lower due to transaction integration related cost of approximately $104,000,000 associated with the acquisition, partially offset by a realized gain of $49,000,000 from the outstanding shares of Axial that we owned prior to the acquisition. These pretax items were partially offset by $47,000,000 of tax items, which lowered our annual tax rate for 2016. Net sales for 2016 increased year over year primarily due to sales contributed by Axial and higher PVC sales volumes, which were partially offset by lower sales prices and volumes for our olefins products.

Income from operations was $581,000,000 for 2016, a decrease from the prior year resulting from lower olefins sales prices, transaction and integration related costs associated with the Axial acquisition and the lost sales, lower production rates and costs associated with planned turnarounds, the Petro one expansion and unplanned outages. This decrease was primarily offset by lower average feedstock and energy cost as well as by higher product margins at our European operations as compared to the prior year. Our utilization of the FIFO method of accounting resulted in an unfavorable impact of $11,000,000 pretax or $06 per share in the fourth quarter compared to what earnings would have been reported on the LIFO method. This calculation is only an estimate and has not been audited. Now let's move to a review of the performance of our two segments starting with the Olefins segment.

In the fourth quarter of twenty sixteen, the Olefins segment reported income from operations of $150,000,000 on net sales of $471,000,000 an increase in operating income compared to the $139,000,000 reported in the fourth quarter of twenty fifteen on sales of $466,000,000 The fourth quarter of twenty sixteen benefited from record ethylene production following the £250,000,000 expansion of our Petro one ethylene unit. Trading activity in the fourth quarter of twenty sixteen improved by $19,000,000 compared to the fourth quarter of twenty fifteen. Compared to the third quarter, fourth quarter operating income increased $32,000,000 while sales were lower by $27,000,000 The fourth quarter benefited from record ethylene production, partially offset by lower integrated olefins product margins and trading activity improved by $20,000,000 For the full year 2016, the olefins segment reported income from operations of $558,000,000 which was lower than the $747,000,000 reported for full year 2015, mainly due to lower olefins integrated product margins as a result of the drop in global crude oil prices in 2016 and the lost sales, lower production rates and costs related to the planned turnaround and expansion of the PetroRun ethylene unit and the other planned turnarounds and unplanned outages. Additionally, trading activity improved by $31,000,000 in 2016 when compared to 2015.

Now moving on to the Vinyls segment. The Vinyls segment reported operating income of $38,000,000 in the fourth quarter of twenty sixteen on net sales of $1,300,000,000 compared to operating income of $52,000,000 on net sales of $519,000,000 in the fourth quarter of twenty fifteen. Operating income decreased from the same period last year due to lost sales, lower production rates and costs associated with our major planned turnaround at our Lake Charles vinyls facility and the impact of selling higher cost Axial inventory at fair value following the acquisition. This decrease was primarily offset by higher sales prices for most of our major vinyls products. Net sales for our vinyl segment were higher as a result of the sales contributed by Axial.

When compared to the third quarter of twenty sixteen, operating income was higher by $15,000,000 while sales improved by $483,000,000 The fourth quarter benefit from higher caustic sales prices, higher sales volumes from most of our major products and sales contributed by Axial partially offset by lost sales, lower production rates and costs associated with the planned turnaround at our Lake Charles Vinyls site. Operating income for the Vinyls segment for the full year 2016 was $174,000,000 which compares to operating income of $254,000,000 for 2015, a decrease of $80,000,000 This decrease was primarily driven by lost sales, lower production rates and costs associated with the unplanned outage at our Calvert City facility and the planned turnaround at our Lake Charles vinyls facility. Income from operations for the year was also impacted by lower sales prices for our major vinyls products, partially offset by higher product margins at our European operations. In addition, income from operations for 2016 included the negative impact of $27,000,000 from selling higher cost Axial inventory recorded at fair value. Full year net sales for our Vinyl segment of $3,200,000,000 increased by approximately $1,000,000,000 mainly due to sales contributed by Axial.

Next, let's turn our attention to the balance sheet and cash flow. For the full year of 2016, cash generated from operating activities was eight thirty four million dollars and we invested $628,000,000 in capital expenditures. At the end of the fourth quarter, we had cash and cash equivalents of approximately $620,000,000 including restricted cash and total debt was approximately $3,800,000,000 We continue to be focused on investing to improve the plant reliability and performance by addressing deferred maintenance at some of our recently acquired plant sites, prudently managing our balance sheet and maintaining investment grade ratings. Now allow me to provide some guidance for modeling purposes for 2017. As we mentioned earlier in the call, this year we'll continue to focus on improving operations by investing in reliability improvements and catching up on deferred maintenance activity of our acquired assets.

Our estimate for 2017 capital expenditures is expected to be in the range of $550,000,000 to $600,000,000 This includes capital for our Calvert City ethylene unit £100,000,000 expansion that is planned to begin at the end of the first quarter, which will bring the unit down for approximately three weeks. Our 2017 capital expenditure plan also includes our investment in the Lotte ethylene joint venture, which is located adjacent to our Lake Charles Finals Complex. Our efforts to address deferred turnaround and maintenance work of our recently acquired assets began in 2016, and we will continue in these efforts in 2017 as we will have a busy turnaround schedule for the first three quarters, above our normal run rate as we perform turnarounds, which had previously been deferred on our acquired assets. In the first quarter of this year, with the ethylene expansion project at our Calvert City site, we have turnarounds at our Plaquemines and Geismarin vinyl sites, along with other planned turnarounds, which will impact earnings by approximately $60,000,000 The second quarter will see an equally busy turnaround schedule and the impact on earnings will also be approximately $60,000,000 In the second half of twenty seventeen, we will continue to work on improving reliability and we will see additional planned turnarounds impacting earnings by approximately $50,000,000 These estimates include the higher maintenance expense incurred and the lost sales associated with these events.

And we'll give more guidance on these activities as we finalize our turnaround plans. We expect that these incremental capital and maintenance expenses and the higher number of planned turnarounds that we have this year are necessary to improve the reliability and the competitiveness of our operations. And we expect to return to normal operating and maintenance levels by 2018. For the full year 2017, we estimate that our annual interest expense will be approximately $160,000,000 and our annual depreciation and amortization will be approximately $600,000,000 We estimate that our 2017 effective annual tax rate for the year will be approximately 33% and our cash tax rate will be approximately 20% to 25%. We continue to focus on integrating our newly acquired businesses and capturing synergies and the cost savings previously announced, together total $200,000,000 For 2017, we are on track to capture approximately $120,000,000 of these savings, while spending $25,000,000 to achieve these savings.

With that, I'll turn

Speaker 2

the call back over to Albert to make some closing comments. Albert? Thank you, Steve. We will continue to focus our efforts on the integration of our newly acquired Vinyls businesses and to improve the reliability of our assets and lower our costs. We have identified the steps we need to take and have a strong management team in place to deliver the improvements to our operations that will show up in our bottom line results.

Looking forward into 2017, we expect to see greater ethane availability from shale based oil and gas production along with continued recovery in global crude oil prices, which will increase the crude to gas ratio that underlies our position as a low cost producer of olefins and vinyls products. We also see favorable demand trends continuing into 2017 for all of our major products including chlor alkali. We have seen some chlor alkali capacity reductions in North America and there have been no new plans announced in North America. Additionally, the European regulatory authorities have mandated that mercury based chlorine production must shut down or convert by the end of twenty seventeen, which will lead to capacity reduction. We continue to believe that Westlake is very well positioned to benefit from these market developments.

Thank you very much for listening to our earnings call this morning. Now I'll turn the call back over to Ben. Ben?

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. Charlotte, we are now prepared to start taking questions.

Speaker 0

Certainly. Our first question comes from the line of Robert Quart from Goldman Sachs. Your line is now open.

Speaker 4

Good morning. This is Ryan Boerne on for Bob. Thanks for taking the question.

Speaker 5

Good morning. I

Speaker 4

wanted to ask on kind of the contracts that you have in place for the legacy axial assets on the caustic soda market. I think thinking back a couple of years, they'd signed a few contracts that had kind of price protections moving forward. And I was wondering if there's a big rollover or some sort of step up kind of related to the timing of those contract negotiations as they're re signed that we should expect in 2017?

Speaker 2

Most of our contracts we have are based on whether it's monthly or quarterly based pricing. So as we increase our pricing and there's announced industry increase for second quarter about $60 a ton. So given that, I think within months or the quarter, we should see the benefits.

Speaker 4

You. Then a quick question around the turnaround expense. I know you called out several things, Steve, but I was curious if any of that is going to hit any of your olefins assets or if that's all kind of kept to the vinyl side?

Speaker 3

Embedded, Ryan, in that number, of course, is the outage as we expand our Calvert City facility there that starts at the end of the first quarter. So that number does include the three week outage for our Calvert City facility. Thank you very much.

Speaker 0

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

Speaker 6

Thank you. It seems like Lotte Corp has a lot of distractions going on. How do you view the timeline for the new cracker that they have underway with you as a partner?

Speaker 2

As we understand the project is still on time and is supposed to complete mechanically by the end of twenty eighteen. So it should start up in the first half of twenty nineteen.

Speaker 6

And then are you looking for any additional acquisitions? Realize you just closed on Axial, but it seems like the M and A market remains quite robust in petrochemicals.

Speaker 3

Well, I think it's fair to say that we're always in the opportunity mode of looking at ways to grow the business. And so having completed this transaction last year doesn't mean that we're not continuing to look for good opportunities that bring value to the table.

Speaker 6

Okay. Thank you.

Speaker 5

You're welcome.

Speaker 0

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

Speaker 7

Hi, this is David Chico on for Arun. Thanks for taking my question. The cost of indexes were up a lot in Q4. I know you mentioned the contract pricing is anywhere from a month to a quarter. Can we expect this was all that or were all the increases impacted?

Is that going show up in Q4 or could we see some of that carry over to Q1 results?

Speaker 2

I think some of that will be carried over to Q1. And even though the price announcements were made during last year, some of those price announcements were not fully realized and some of them will carry over to the following quarter.

Speaker 5

Okay, great. Thank you.

Speaker 7

Then just for a follow-up, for the in regards to the new U. S. Gulf Coast capacity, with potential startup delays and uncertainties surrounding some of the timing of ethylene monomer, Has this impacted your view on ethane prices at all this year? Has it changed?

Speaker 2

Ethane price is expected to increase somewhat from today's $0.25 a gallon due to the demand both from export as well as from expected demand increase second half of this year with the new plant starts

Speaker 5

up. Okay, great. Thank you. You're welcome.

Speaker 0

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

Speaker 7

Good morning, Albert and Steve.

Speaker 8

Morning, Hassan. You know, obviously a bunch of pulls and tugs associated with the shape of the cycle. Would love to hear your views. Know, I mean, obviously some delays, it seems, not only the consultants, but a bunch of your competitors are talking about some near term delays in the influx of ethylene capacity. Then it seems twenty eighteen more and more capacity comes online, but thereafter there seems to be quite a large vacuum in terms of capacity additions.

So would love to just hear your broader near to medium term views about the ethylene polyethylene cycle.

Speaker 2

Certainly. I think that cycle really also depends on the global crude oil prices as well as global GDP growth. As we know The U. S. Petrochemical industry is based primarily on gas based ethane feedstock.

And as we speak today that ethane is still a preferred feedstock compared with the global crude oil based ethylene manufacturers. And the forward look is that as crude oil steadily increases that US ethane based producers will be even more competitive going forward. The second part is demand with improvements in global economic growth, we'll see demand increase with that and that will support U. S. Exports of the new capacities coming up.

Speaker 8

Fair enough. Now changing gears a bit, again, sticking to just the broader supply demand side of things on the near term side, some debate about the operating rates on the CTO, MTO side of things, obviously in light of the run up we've seen in coal prices. Some folks contend that demand is so strong that regardless of the economics of the CTO and MTO facilities, they keep running at relatively sort of elevated levels. So what's your take on that?

Speaker 2

Well, there's some discussion that the MTO is based on import of methanol will be the marginal cost producers for ethylene in China. China also has the government increased scrutiny on environmental protection. And as we speak, I think some of those coal based plants are impacted by the amount of greenhouse gas emissions they can emit as well as the cost of coal is rising in China as well. So I think The US based ethane based ethylene producers be quite competitive going forward.

Speaker 8

Thanks so much Albert. You're welcome.

Speaker 0

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

Speaker 9

Yes. Good morning. To follow-up, Albert, it looks like prices of PVC are continuing to rise regionally in Asia. It looks like Formosa was out with higher prices into China for the month of March. What is driving that?

Is it simply the input costs that you referred to or supply constraints or a combination of that perhaps you could provide a little bit more color as to what's continuing to drive export prices higher?

Speaker 2

I think as a combination of what you said, including plant turnaround that's going on in Asia right now, the higher cost of coal and also the government scrutiny on environmental emissions from these coal based plants. And some of the plants are running at low rates or shut down, especially the coastal plants. So we believe that supply demand situation for coal would further improve as we go into this year and next year.

Speaker 9

And does that dynamic in Asia help U. S. Domestic PVC prices or is the gap still too wide to lend any meaningful support to your domestic efforts to raise prices by $04 a pound for example in February?

Speaker 2

Yes, I think that because the higher export price, the $04 a pound price increase in February, we believe it's highly confident that will go through. And addition to that, there's a further industry announced price increase of $03 a pound price increase for the month of March. And we also believe that has a good position to go through. Ethylene price in Asia has also gone up. So that would also help support further the price increase going through from The U.

S. And for export.

Speaker 9

Okay. That's good to hear. And then a final one if I may, just really a clarification. Your press release references in addition to the Lake Charles outage other planned turnarounds and unplanned outages. Just wondering if you could elaborate on what those were and the extent to which any of them spill over into 1Q?

Speaker 3

No Kevin we had a number of as I mentioned we had a number of planned outages. You mentioned the one that we specifically mentioned. But of course we have a number of other normally planned maintenance activities that are in that planned arena. And so none of them have carried over into 1Q. And so the ones that we've talked about in the guidance of the $60,000,000 really are underway now and as I say are really planned to address reliability issues that we found and look forward to really bringing these assets online and delivering.

Speaker 9

Understood. Thank you.

Speaker 0

Thank you. Next question comes from the line of Frank Mitsch from Wells Fargo. Your line is now open.

Speaker 10

Hi guys. It's Aziza Gazzieva on for Frank. Thanks for taking my question.

Speaker 3

Good morning. Good morning.

Speaker 10

Quick question on your chlor alkali operating rates. How are they trending relative to the industry as a whole? And what do you guys see for Q1 so far?

Speaker 2

Well, our rates follows industry and as we mentioned earlier, there was some planned unplanned downtime and we are trying to improve the operability of our plants and to increase above industry. The trend is going well. This is the season where the demand for PVC, which is a major consumer of chlorine is going well as well as the increases in caustic prices. So we expect operating rates to improve further in this quarter.

Speaker 10

Great. Thank you. And one follow-up. What are your latest thoughts relative to filling the ethylene hole you acquired with Axial? Would you rather lever up to take advantage of opportunities to buy ethylene assets?

Or could this be done through the MLP?

Speaker 3

Well, I think you're well aware, we've got a variety of opportunities. I think Albert mentioned that OT is moving forward and we have that opportunity with a 10% ownership today and that starts up in 2019. We have an ability to with our option to increase our ownership. But I think there are also opportunities in the marketplace that, from time to time present themselves to acquire ethylene. And we, as I mentioned earlier, looking at opportunities all the time on ethylene as well as other opportunities across the spectrum.

Speaker 10

Perfect. Thanks, guys.

Speaker 8

You're welcome.

Speaker 0

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

Speaker 11

Thank you. Albert on polyethylene it looks like the $05 for February is pretty much done. You do have a $06 increase announced for March. What are the prospects and your confidence in realizing that $06 increase for March?

Speaker 2

Yes, Dave. I think the $06 will depending on the domestic export price differential as it depend on crude oil prices as ethylene cash costs increased in Asia and ethylene price has improved. That would also differentiate between the delta between The US polyethylene price and export. So I think if the export price stays high overseas, you will see that all part of these $06 they go through in The U. S.

Speaker 11

Very good. And just on styrene, Albert, you've seen a number of outages of styrene result in surging prices in styrene in the last few weeks. What's your longer term view on styrene post the adres come back on stream here?

Speaker 2

I think styrene, 6070% of the cost is benzene. And benzene prices come up a lot recently. So they a cost push for styrene and that could also increase the price of styrene going forward.

Speaker 5

Thank you. You're welcome.

Speaker 0

Thank you. Our next question comes from the line of Don Carson from Susquehanna. Your line is now open.

Speaker 12

You. Albert, a question that's related to some of the Chinese environmental initiatives and outages. We saw a calcium carbide PVC plant recently go down and there's been some inspections going on over there. Do you see the Chinese government restricting carbide based PVC production going forward? And if so, is that a potential export opportunity for U.

S. Gulf PVC producers?

Speaker 2

Yes. I think this momentum things build up in the fourth quarter last year is carrying to the first quarter. And we believe that the Chinese government are serious about environmental issues in China. You read and hear about all the problems with air pollution in many of the major cities in China. And I think coal based chemicals and including carbide is one of the worst sources of those pollutions.

So we hope to continue enforcing the laws they have in place and if that's the case, it definitely will help more ethylene based PVC to be imported to China as you know, 80 odd percent of Chinese production are coal based. And so they need import to fill those capacity reduction in coal based PVC. And US will be a good competitive position to fill that need in China.

Speaker 12

And Steve, a follow-up on your comment about doing a deeper review on the acquired Axial assets. How much of this year's CapEx is related to covering some of the impacts of the deferred maintenance issues that you referred to? And as you look at these assets are you looking at any capacity closures of the acquired capacity?

Speaker 3

Well Don the CapEx number of $550,000,000 to 600,000,000 I mentioned is really kind of going to be spent really on a variety of areas. And certainly a lot of the work you see us undertaking throughout 'seventeen will be really maintenance related and not heavy CapEx per se. Certainly CapEx is at an elevated level as we address a variety of issues including the CapEx number is captures our Calvert City expansion and the low T investment as we move forward. But we're also dealing with just a lot of maintenance related this is deferred maintenance. You know, and so as we march forward I do expect that CapEx number will come down.

It is elevated at the moment.

Speaker 5

Okay. Thank you. You're welcome.

Speaker 0

You. Our next question comes from the line of Jim Sheehan from SunTrust Robinson. Your line is now open.

Speaker 13

Thanks guys. On the CapEx and the deferred maintenance work you're doing for Axial, do you think that all the work you need to do upgrading the Axial facilities will be finished in the first nine months of this year?

Speaker 3

Yes Jim, what I was suggesting is we have a heavy 'seventeen. As I mentioned, we have work underway in Q1 and Q2. It really is largely complete by the end of 'seventeen. We get back to a normal run rate and normal kind of maintenance and turnaround schedule as we get into 2018. So the 'seventeen is heavily front half loaded but we don't finish that until we complete the year 2017.

Speaker 13

Will any of that Axial capacity be debottlenecked during this process?

Speaker 3

Well, we're assessing opportunities as we go. But what we're addressing right now are really a deferred maintenance and deferred turnaround activities.

Speaker 13

Great. And can you address where we are in the Eastman Pipeline dispute?

Speaker 3

I think the issues as I see it have all been resolved.

Speaker 5

Great. Thank you.

Speaker 0

Thank you. Our next question comes from the line of P. J. Juzkar from Citi. Your line is now open.

Speaker 14

Yes, hi. Good morning, Albert and Steve.

Speaker 3

Good morning. P. J.

Speaker 14

You know, I want to go back to China. And I think IHS is talking about 5,000,000 tons of PVC capacity shutdowns in China. And I'm sure some of that a large part of that is highly polluting carbide based capacity. But as PVC prices go up, do you think any of that shutdown capacity can start back?

Speaker 2

Well, in China, anything is possible.

Speaker 14

Any any guess, Albert, on how much capacity can come back?

Speaker 2

We don't have a good feel.

Speaker 14

Okay. And then you talked about this European capacity shutdown due to the regulations. That has been talked about in the past. Do you think there could be any slippage in that timeline or is that a firm timeline by end of this year?

Speaker 3

P. J, it's Steve. I think what you saw was regulation that required those facilities to either be converted or shut by the end of twenty seventeen by regulation. There have been activities underway in prior years already bringing some of that capacity down. Our best knowledge at this stage is it would ultimately impact capacity between 800,000 to 1,000,000 metric tons.

But some of that activity has already been taken in prior years. There'll be some residual activity that has not yet been fully announced by some of the operators in 2017 and so some remaining capacity will be dealt with in 2017. Some of that's already been dealt with in 2015 and 2016.

Speaker 5

Okay, thank you.

Speaker 0

You. Our next question comes from the line of Jeff Zekauskas from JPMorgan. Your line is now open.

Speaker 15

Hi, good morning.

Speaker 3

Morning Jeff. You

Speaker 15

talked about producing record ethylene volumes this quarter but your olefins volumes year over year if I read it correctly are down 3.5%. Can you reconcile the down volumes and the record production?

Speaker 3

You know, Jeff it was a the record production was for the quarter not for the year. So as we think about what we did is we undertook a debottleneck in the Petro one unit and added £250,000,000. But you may recall we did have an unplanned outage in our Calvert City facility earlier this year that did affect production. So the record production is for the quarter.

Speaker 5

Okay.

Speaker 15

Secondly, you sort of grouped these three larger charges, the $38,900,000 the 13,800,000.0 and the 13,100,000.0 Can you allocate those to your different segments to your olefins and vinyls and corporate segments?

Speaker 3

Yes. So when you think about the fixed manufacturing cost related to our Lake Charles Vinyls segment, obviously that was vinyls impacting. And so certainly when you think of that, the majority of that was in the vinyls segment. Not all of the planned turnarounds were in the vinyl segment. As you know, we of course undertake normal polyethylene maintenance as well during the course of the year.

And so some of that was also in some of that unit. So when you think about the higher cost of inventory, that was obviously a vinyls impact during the quarter. And of course the integration or what I would call integrating the Axial business. And so those some of those are allocated into the vinyl segment. Some of those are corporate related.

Speaker 15

So you can't precisely provide an exact allocation?

Speaker 3

No, Jeff. It's hard to precisely tell you how much goes into the Vinyls and Corporate segment because in some cases while there is an allocation, it's hard to precisely give you that number on the call. Okay.

Speaker 15

The next issue is you're talking about higher maintenance expense and higher deferred maintenance. And you know, over the past few years Axial had a number of fires and they had outages. And I think their maintenance expenses were elevated though it may be that, the maintenance expense that they had was not optimally directed. Can you give us an idea of what maintenance expenditures there were at Axial or what a normal level of maintenance would be and what level of maintenance you're spending now? And where should the number go back to over time?

Speaker 3

So Jeff what you saw was I think a number of years of deferred maintenance activity and that's really why you had some of the operating issues that were visible in the business. There were a number of also planned turnarounds that were pushed out beyond the normal cycle that those plants would expect and that's really what we're addressing in 2017. And we actually started addressing some of those late in 2016. And so we'll be able to give you a better guidance as we finish our work in terms of what the normal run rate should be for maintenance expense as we finish our analysis and planning. But let us finish that and then we can give you some better guidance in the upcoming year in terms of what that normalized maintenance expense ought to be.

Speaker 15

I think you said that you're going to knock out roughly 180,000,000 or $200,000,000 in costs and some of those are your own programs and some of those are the old Axial programs. How much have you accomplished so far? Where are we in getting to that goal?

Speaker 3

Yes. So Jeff, what we said is there were really two programs underway. One was a cost reduction initiative that Axial had announced actually prior to our acquisition and that was $100,000,000 of cost reduction initiatives. We also said we'd achieve 100,000,000 of cost related synergies as well. As you can see from our planned remarks, we believe in 2017 that we'll achieve $120,000,000 of that.

And of course in 2016, we believe we achieved between 10,000,000 and $15,000,000 of related synergies in 2016. So you can see that we're well on our way of accomplishing the combined $200,000,000 if you let me total those two initiatives, the cost reduction initiative and the synergy initiative together.

Speaker 15

You're kind enough to provide IHS's historical information having to do with different chemical prices. So for example, the caustic price looks like it's up about $130 a short ton over the past twelve months. In very rough terms, does that mirror your own experience? Is your experience higher or lower or roughly the same? Are these good numbers for us to use or not so good?

Speaker 2

I think it's a good question. I wish we can have higher numbers than our IHS reports. As you can imagine that IHS and other publications, they have no market adjustments every now and then to make sure their prices are more in line with market, which means their price announcements are not always fully accurate. So I think they do the price announcements, they do give a direction on the price movements, but exact dollar usually is not quite the same.

Speaker 15

What about the trajectory of your capital expenditures over the next few years that is seventeen, eighteen, nineteen? Under normal circumstances or as a base case should they decline each year?

Speaker 3

Well, think Jeff you see that in reference to 2016 and the number the guidance number I gave for 2017 of five fifty dollars to $600 you can see that number is beginning to come down, still elevated because of the capital initiatives we have related to the Lotte investment, the Calvert City expansion and a number of the initiatives that we've talked about earlier related to the Axial assets. That number shall come down as we move forward with some of this work getting behind us. But we still have the LOTI investment to complete and that won't be completed until 2019.

Speaker 15

Are any maintenance capital expenditures capitalized or does all of the maintenance flow through the P and L?

Speaker 3

No. Those items that are related to kind of more turnaround related, do capitalize some of those capital items, Jeff.

Speaker 15

Can you give us an idea of how much is being expensed in 2017 and how much is being capitalized?

Speaker 3

Geoff, once we finish our review I'll do so. But we haven't finished our review of what we're going to be doing work wise. And then I'll give you a better sense of what that amount is going to be coming through maintenance expense and what will be capitalized in that number.

Speaker 15

Okay. I very much appreciate it. Thanks so much.

Speaker 2

Thank you.

Speaker 0

Thank you. Our next question comes from the line of Matthew Blair from Tudor Pickering. Your line is now open.

Speaker 5

Hey, thanks for taking my question. Just one question for me here. On the autoclave PE market, we've been tracking a few projects that I think have either started up recently or about to start up and these are in places like Thailand, China, Saudi Arabia. And it looks like they would add about 8% of capacity to the autoclave PE market. So Albert, I was hoping you could maybe just comment on if you're seeing this new supply come into the market.

And then also on the demand side, are you seeing autoclave PE grow faster or slower than overall PE? Thanks.

Speaker 2

Generally speaking, LDPE, which is autoclave and tubular tend to grow slower than linear low high density, mainly because linear low high density are selling at lower prices and capturing more the commodity segments of the polyethylene markets. And I think some of those new plants are targeting at more the high end co polymers and maybe the EVA co polymers, which goes into solar cells. As you know, the solar cell demand is growing very fast and some of the copolymers are used in this solar cell applications.

Speaker 5

Okay, thank you. You're welcome.

Speaker 0

Thank you. Our next question comes from the line of David Wang from Morningstar. Your line is now open.

Speaker 5

Hi, good morning.

Speaker 16

Thanks for taking my question. I just had one question what you're seeing in terms of the unit economics for upcoming projects for ethylene crackers. I guess what are you seeing in terms of the viability of brownfield versus greenfield expansions? And I guess what your expectation for wafers crackers that have been previously announced, the likelihood of those coming online?

Speaker 3

I'm sorry, I get you to repeat your question?

Speaker 16

Yes. Just wondering what you're seeing in terms of unit economics for the brownfield and greenfield expansions that we're seeing in The Gulf Coast and what your thoughts are on the likelihood of those projects coming online?

Speaker 2

Okay. Are you talking about the ethylene expansions and the integrated downstream plants that's being under construction, correct?

Speaker 5

Yes, that's right.

Speaker 2

Yes. Definitely brownfield tends to be cheaper investment cost per pound wise than greenfield because greenfield you have all these outside battery limits and utility supplies. And The US Gulf Coast experiencing skilled labor shortages and both higher cost as a result and as well as less skilled labors will delay the completion of projects. So you're seeing increased capital costs as well as delay in project startup. So those things are occurring and we expect to continue.

Speaker 5

Okay. Thank you. 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 for participating in today's call. We hope you'll join us again for our next conference call to discuss our first quarter twenty seventeen results.

Speaker 0

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.