Westlake - Earnings Call - Q4 2017

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 seventeen 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, ladies and gentlemen, this conference is being recorded today, February 2038. I would now like to turn the call over to today's host, Mr. Jeff Holly, Westlake's Vice President and Treasurer. Sir, you may begin.

Speaker 1

Thank you, Christie. Good morning, everyone, and welcome to the Westlake Chemical Corporation fourth quarter and full year 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, 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 up the call 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 own certain olefins 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 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 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 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 2738. The replay may be accessed by dialing the following numbers. Domestic callers should dial (855) 859-2056. International callers may access the replay at 404773406. The access code for both numbers is 4879787.

Please note that information reported only as of today, February 2038, 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 would like to turn the call over to Albert Chao. Albert?

Speaker 2

Thank you, Jeff. Good morning, ladies and gentlemen, and thank you for joining us to discuss our fourth quarter and full year twenty seventeen results. In this morning's press release, we reported record quarterly net income of $8.00 $2,000,000 for the fourth quarter of $6.15 per diluted share. Net income for the quarter included a $591,000,000 one time benefit related to tax reform, which was enacted in December 2017. Excluding the benefit from tax reform, income of fourth quarter was a record $2.00 $8,000,000 or 1.62 per share, including the impacts from integration costs and additional interest from our refinancing activities.

For the full year 2017, net income was a record $1,300,000,000 or $10 per share. Excluding the benefit from tax reform, net income was a record $730,000,000 or $5.46 per share. In 2017, we achieved record productions in both our olefins and vinyl segments and have invested to improve our reliability and reduce operating costs. We also benefited from growing demand for all our major products, including polyethylene, caustic soda and PVC as a result of improving global economic growth. We continue to see improving margins in the chlor alkali chain as recent capacity reductions in Europe and reduced production and exports in China led to increased global price for caustic soda.

We remain focused on driving additional value from our Axial acquisition. In 2017, we realized $170,000,000 in cost reductions and cost related synergies versus the $120,000,000 that we have previously discussed. As a result, we've increased our target for cost reduction synergies from 200,000,000 to $250,000,000 We continue to pursue more value from this acquisition by improving operations and investing to further improve the competitiveness of these assets. The financial and operating operational records achieved in 2017 will not have been possible without the ongoing dedication and efforts of our all our employees around the globe. Whether they are working on the integration of Axial, improving the operations of the production facilities or working to maximize the benefits of our global organization in exceeding our customers' expectations, we thank them for their focus and commitment to achieving our goals.

I would now 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 record net income attributable to Westlake for the fourth quarter of twenty seventeen of $8.00 $2,000,000 or $6.15 per diluted share on net sales of $2,000,000,000 as compared to the fourth quarter twenty sixteen net income of $99,000,000 or $0.76 per share on sales of $1,700,000,000 As Albert mentioned, this quarter included a $591,000,000 one time benefit associated with the Tax Cuts and Jobs Act. Excluding this benefit, Westlake's net income for the quarter was a record $211,000,000 or $1.62 per share.

Our fourth quarter results were negatively impacted by $9,000,000 per share related to the integration cost and incremental interest associated with our debt refinancing. Excluding the impacts associated with tax reform, the fourth quarter twenty seventeen results increased from the fourth quarter of twenty sixteen due to increased margin and volumes for all of our major products, partially offset by a higher effective tax rate as compared to the prior year period. Operating income of $365,000,000 for the fourth quarter of twenty seventeen increased $212,000,000 compared to the fourth quarter of twenty sixteen. This increase in operating income was due to higher sales prices and volumes for our major products, lower costs associated with planned turnarounds and unplanned outages and lower transaction integration costs, partially offset by higher feedstock and energy costs. Fourth quarter twenty seventeen net income of $211,000,000 excluding the one time tax benefit of $591,000,000 was comparable to the third quarter twenty seventeen net income of $211,000,000 Fourth quarter twenty seventeen operating income of $365,000,000 was comparable to the third quarter twenty seventeen record operating income of $366,000,000 as seasonally lower sales volumes were offset by increased margins.

For the full year 2017, after adjusting for the impact of tax reform, net income was $713,000,000 or $5.46 per share on net sales of $8,000,000,000 as compared to net income of $399,000,000 or $3.6 per share on sales of $5,100,000,000 for 2016. This increase in net income of $314,000,000 or $2.4 per share compared to 2016 was primarily due to earnings contributed by Axial, which was acquired on August 3136, higher sales prices for our major products resulting in higher margins and lower transaction and integration costs related to Axial's acquisition. These increases were partially offset by higher interest expense due to the increased debt assumed as a result of the acquisition, higher costs associated with planned turnarounds and unplanned outages and the realized gain in 2016 of $49,000,000 from the previously held common stock of Axial. Net sales for 2017 increased $3,000,000,000 compared to 2016, mainly due to sales contributed by Axial and higher sales prices and volumes for all of our major products. Full year 2017 income from operations was a record $1,200,000,000 as compared to $581,000,000 for 2016.

This increase of $652,000,000 in 2017 income from operations was largely a result of earnings contributed by Axial, higher margins for our major products and lower transaction and integration related costs, partially offset by higher costs associated with planned turnarounds and unplanned outages. Pretax transaction and integration costs for 2017 were $29,000,000 or $0.16 per diluted share as compared to $104,000,000 in 2016. Our utilization of the FIFO method of accounting resulted in an unfavorable pretax impact of approximately $12,000,000 or $06 per share in the fourth quarter 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 me move on to review the performance of our two segments, starting with the Olefins segment.

In the fourth quarter of twenty seventeen, the Olefins segment reported operating income $166,000,000 on net sales of $517,000,000 as compared to fourth quarter twenty sixteen operating income of $149,000,000 on sales of $471,000,000 This increase in operating income of $17,000,000 is mainly attributable to higher sales prices and lower costs associated with planned turnarounds and unplanned outages, partially offset by higher feedstock and energy cost. Fourth quarter twenty seventeen operating income of $166,000,000 on net sales of $517,000,000 was comparable to third quarter twenty seventeen operating income of $165,000,000 on net sales of $5.00 $2,000,000 Higher prices and margins in the fourth quarter were offset by lower styrene sales volumes. Olefin segment income from operations of $655,000,000 in 2017 increased $107,000,000 compared to operating income of $558,000,000 in 2016. This increase in operating income was primarily due to higher sales sales prices for our major products, higher operating rates and lower costs associated with planned turnarounds and unplanned outages as compared to the prior year. These increases were partially offset by higher feedstock and energy cost.

Olefins income from operations for 2016 was negatively impacted by planned turnaround and the £250,000,000 expansion of our Lake Charles Petra one ethylene unit, which was completed in the third quarter of twenty sixteen. Now let's move on to the Vinyls segment. Fourth quarter Vinyls income from operations of $216,000,000 increased $178,000,000 from fourth quarter twenty sixteen income from operations of 38,000,000 This increase is primarily attributable to higher sales volumes as a result of higher operating rates, higher integrated margins due to higher sales prices and lower costs associated with planned turnarounds and unplanned outages, partially offset by higher feedstock and energy costs when compared to the prior year period. Fourth quarter twenty seventeen operating income of $216,000,000 was comparable to third quarter twenty seventeen operating income of $217,000,000 with seasonally lower sales volumes offset by increased margins due to higher sales prices and lower energy cost. Full year 2017 vinyls income from operations of $647,000,000 increased $473,000,000 from 2016 income from operations of $174,000,000 The $473,000,000 increase was primarily due to earnings contributed by Axial, higher sales prices and volumes for our major products.

These increases were partially offset by higher cost associated with planned turnarounds and unplanned outages, including the 100,000,000 pound ethylene expansion completed in second quarter twenty seventeen in the Calvert City, Kentucky facility and higher feedstock and energy cost in 2017 as compared to 2016. Now let's turn our attention to the balance sheet and statement of cash flows. Full year 2017 cash flows from operating activities were a record $1,500,000,000 and we invested $577,000,000 in capital expenditures. At the end of twenty seventeen, we had cash and cash equivalents of $1,500,000,000 and total debt of 3,800,000,000.0 Both cash and debt balances included $745,000,000 of proceeds from the issuance of the fifteen thirty year bonds in November 2017. Last week, we used the proceeds a portion of those proceeds to redeem $688,000,000 in long term bonds assumed with the acquisition of Axial.

We also intend to redeem another $450,000,000 of debt that becomes callable this May. Funds to redeem this debt will come from cash on hand as well as borrowings under our revolving credit facility. Following our redemption of the $450,000,000 in debt this May, we will have retired over $1,200,000,000 in debt since our acquisition of Axial in August 2016. Now let me provide updated guidance for modeling purposes. For 2018, we expect capital expenditures to range from $600,000,000 to $650,000,000 This includes our normal maintenance capital expenditures and value enhancing investments as well as a portion of the recently announced expansions in our Vinyls segment yesterday.

These include seven fifty million pounds of PVC capacity at our facilities in Geismar, Louisiana and Berghausen, Germany 200,000,000 pounds of VCM capacity at our facilities in Geismar and Gendorf, Germany, pounds 55,000,000 of chlorine and 60,000,000 pounds of membrane caustic soda at our facility in Gendorf, Germany, in addition to the joint venture investment of the 2,200,000,000.0 pound ethylene facility in Lake Charles, Louisiana currently under construction with Lotte Chemical. We expect 2018 interest expense to be approximately $30,000,000 lower or $130,000,000 for the year as we continue to delever the balance sheet throughout the first half of twenty eighteen. We estimate that our 2018 effective annual tax rate will be approximately 23% and our cash tax rate will be approximately 16%. As Alfred mentioned, we have increased our target for cost reduction initiatives for the Axial acquisition from $200,000,000 to $250,000,000 of which we realized $170,000,000 in 2017, while expensing integration related cost of $29,000,000 With that, I will now turn the call back over to Albert to make some closing comments. Albert?

Speaker 2

Thank you, Steve. This year's record results demonstrated the value of improving the operational reliability and organic expansions of our facilities, while we continue to experience solid global demand for polyethylene caustic soda and PVC. In addition to working diligently on the newly announced expansions in our Vinyls segment, we continue to focus on capturing additional value related to our Axial acquisition and investing to improve the competitiveness of all of our assets. Looking forward, we believe we will continue to benefit from low cost ethane and natural gas in The U. S.

As a result of expanded oil and gas drilling activity driven by higher oil prices. We also expect continued benefit from the favorable chlor alkali cycle driven by strong global demand, European capacity reductions, limited Chinese production and exports due to environmental regulations and with no significant capacity additions on the horizon. Our delevered balance sheet and lower tax rate will boost Westlake's cash flows and allow us to pursue growth initiatives, which will increase our capacity and reduce our operating costs, including projects such as the £2,200,000,000 ethylene joint venture in Lake Charles, which is expected to start up in 2019. Thank you very much for listening to our earnings call this morning. Now I will 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 this call. Christie, we will now take questions.

Speaker 0

Thank you. Our first Juvekar:] question comes from the line of P. J. Juvekar of Citi. Your line is open.

Speaker 4

Good morning. Albert, Westlake is known to invest when the cycle is down, like your ECU expansions a few years ago and then the actual purchase. But now that you're expanding vinyls capacity again, can you explain the logic on the timing? And do you see an extended vinyl cycle going forward?

Speaker 2

Yes. We do believe the vinyl cycle, both from the chlor alkali side and PVC VCM side to be on the upstream upswing in the cycle. And hence, we are debottlenecking, expanding our capacities.

Speaker 4

And any rationale on expansion in Europe? Do you see particularly any strength in Europe that you think you should invest in Europe now?

Speaker 2

Certainly, European economy has turned around and for the first time in many years is growing. And so European demand is strong, its cost is pretty competitive. And we believe that expansion will help us to reduce our cost and increase our bottom line.

Speaker 5

You.

Speaker 2

You're welcome.

Speaker 0

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

Speaker 6

Thank you. Good morning. Alan, Good just on polyethylene price increases, can you comment on what you expect for February, which looks like it will go through and March as well?

Speaker 2

Yes. Certainly, we believe that the announced $04 of pump price increase for February and $03 in April will have a good chance of getting through because inventories, at least especially in our side, has been quite low and customers' inventory has been low as well because of the winter storms and all that. So we believe that there's a strong push for the price to be implemented.

Speaker 6

Very good. And just on your VCM and PVC expansions in The U. S, are you now balanced between VCM and PVC in this country?

Speaker 2

Yes. Depending on locations, we are we have more capacity in VCM than PVC. Hence, we do sell VCM to third parties.

Speaker 6

Thank you very much.

Speaker 2

You're welcome.

Speaker 0

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

Speaker 5

Hi, good morning.

Speaker 4

Good morning. What

Speaker 5

is the breakdown of this 150,000,000 pounds of new PVC capacity in Germany and Geismar? And then can you help us get a sense of what your merchant quarrying position will be post the expansions?

Speaker 3

Neil, as we get further into the completion of these projects, we'll give more details at that stage. And certainly, as we think about the initiatives that we're undertaking, it certainly will use some of that merchant chlorine. But we'll give more details as we get further into these initiatives.

Speaker 5

Okay. And then I guess, given the incremental ethylene needs with the PVC expansions, does this mean you're more likely to exercise the additional 40% interest in Lotte? And have you had any additional thoughts of securing ethylene beyond Lotte? Or are you comfortable participating in spot market?

Speaker 3

Well, as we continue to complete that project, and you heard Albert's comments that, that plant will be in start up in 2019, we'll assess the opportunity that we have with that option. And once we make the decision, we'll let everyone know.

Speaker 5

All right. Thanks.

Speaker 3

You're welcome.

Speaker 0

Thank you, Mark. Our next question is from Jim Sheehan of SunTrust. Your line is open.

Speaker 5

Thanks. Good morning. Alma, can you comment on your outlook for PVC prices in February and March? I think you're seeing fair core values. What do you expect for the realization of the announced price increases?

Speaker 2

Certainly. Again, the industry players have announced price increases of $03 upon price increase for February 1, additional $04 upon price increase for March 1. And inventory positions both at producers and customer levels are on the low side. And as you know, this is the spring start of the spring season for construction. So we think that this price increase will be well supported.

Speaker 5

Great. And can you also comment on the impact you're seeing on the closures of acetylene based PVC capacity in China? What impact that might be having on international PVC prices?

Speaker 2

Certainly. China in the past has been a large producer and exporter of settling based PVC and because of the highly polluting nature and energy intensive nature of using the carbide process to produce PVC that has been production has been curtailed and export has been curtailed also. And we believe hence that U. S. Will be in good position to export PVC around the world.

Speaker 5

What does your turnaround schedule look like for 2018?

Speaker 3

Jim, our normal schedule that we've been working toward all of last year to get these cycles back into the normal cycle will be commenced in 2018. And so we don't have any turnaround schedule beyond the normal plan in 2018. So I think you can expect that our normal cycles will then be implemented in 2018. I don't have anything specifically to call out today. You.

You're welcome.

Speaker 0

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

Speaker 5

Good morning. You raised your synergy target by $50,000,000 to $250,000,000

Speaker 7

from 200,000,000 can you

Speaker 5

comment on the source of the incremental $50,000,000 and the timing within which you expect it might be achieved?

Speaker 3

And so Kevin, this is Steve. We had targeted for 2017 to achieve $120,000,000 and you could see from our remarks that we achieved $170,000,000 in 2017 and continue to work toward that number of $250,000,000 And those synergies were cost related and spread really across the business, but all of those really contributed into reducing our cost. And so that's very much where we continue to be focused.

Speaker 5

Okay. And then, Steve, in the Building Products segment, how would you characterize your operating margin for Building Products relative to vinyls at this point in the cycle?

Speaker 3

I think we've seen good continued demand as we 've seen construction numbers begin to look more solid. And certainly, that's a segment of business that is making a very good contribution to the bottom line. It does we do see it as a very important contributor to the bottom line results. But with the improvement in starts and in permits, we've certainly seen that as a very value added business. But we don't break out specifically margins in that segment of the business.

Speaker 5

Thank you very much.

Speaker 3

You're welcome.

Speaker 0

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

Speaker 8

Yes, thank you. That £55,000,000 chlorine expansion at Gendorf, do you consider that a debottleneck project? What are the capital costs involved in that? And is there a reason to be looking potentially at greenfield expansion in chlor alkali? Economics at all attractive at this point?

Speaker 3

Steve, it is a debottleneck. And certainly, as we get further into completing these projects, we can certainly give more color on those. But certainly, when you think about investing at one end of the chain, you have to recognize you have to have demand across the chain. So as we think about the chain today, you can see we're investing in segments of that, but we don't see the need to really make further investments at that end of the chain. But you can see us certainly using some of the merchant chlorine that we're using in VCM and further PVC expansions.

Speaker 8

And on the Axial facilities that you see a greater opportunity for cost synergies, what about debottlenecking at those facilities? You're operating them now long enough that do you see opportunities to debottleneck some of those facilities?

Speaker 3

Well, certainly, as we think more about the opportunity set that we see with the acquired assets, we're spending a lot of time looking at where it makes sense to debottleneck and capture the additional value there. And so certainly as we make more progress there, we'll certainly communicate that publicly.

Speaker 8

And just lastly, were your third quarter results that seem to be roughly flat with fourth quarter. Did you pull volumes into the third quarter as a result of some of that hurricane driven outages by some of your competitors?

Speaker 3

Certainly, in selected markets, because we were not impacted, we did have some benefit in that respect. And you can see also the seasonally lower businesses in our businesses were picked were lifted by higher margins across both the olefins and the vinyl segment.

Speaker 8

Very good. Thank you.

Speaker 3

You're welcome.

Speaker 0

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

Speaker 9

Good morning, Albert and Steve.

Speaker 2

Good morning.

Speaker 3

Good

Speaker 9

morning. Guys, as I take a look at these sort of growth projects that you've announced, you were very clear in talking about your positive view of the chlorovinyl cycle. Now historically, obviously, you guys have run a pretty fully integrated model, back integrated, be it into chlorine, fully back integrated into chlorine as well as ethylene. But now it seems that in this 2019 through 2021 period, what was a short position in ethylene becomes a larger short position in ethylene. So I mean, you've been clear about your views or bullishness on the chlorovinyl side, but does this signal a relative bearishness on the ethylene cycle in the twenty nineteen through twenty twenty one time period?

Or should we assume that similar to the legacy sort of Westlake model, where you ran sort of this fully integrated shop, you sort of consider greenfield ethylene capacity additions as well in the near to medium term?

Speaker 2

Yes. Certainly, we would like to be integrated and historically with either did it organically by building plans or expansions or inorganic through acquisitions. And we'll explore both ways of increasing our ethylene production to be more fully integrated.

Speaker 9

But just to be clear, these announcements that you've made, which obviously raised your short position in ethylene, I mean, are you bearish in the twenty nineteen to twenty twenty one time period on the ethylene cycle? Or do you think that utilization rates will tighten once this imminent capacity that's expected to come online comes online?

Speaker 2

No, we're not bearish. I think if you look at a global demand for polyethylene, which 60% of all the ethylene in the world goes to polyethylene, The world demand for polyethylene growth and capacity expansion pretty matches each other over the next five, six years. So I think it's really hindered on the global economy growth. And as you know, typically polyethylene demand follows between one and one point five times global GDP growth rate.

Speaker 9

Understood. Understood. And as a follow-up, sequentially, olefins segment volumes were down 4%, Vinyl segment volumes 9%. You were very clear in talking about, obviously, Q4 being a seasonally weak quarter demand wise. So I'd imagine a large part of those volume declines were for seasonal reasons.

But you also highlighted some planned and unplanned outages in Q4. So just wanted to get a sense of how much of those volume declines were from these planned and unplanned outages and what sort of EBITDA impact they had in Q4?

Speaker 3

Hassan, the outages that occurred in Q4 were those that we had earlier had indicated and gave guidance to the impact of. And then, of course, you did mention my comments as it relates to the seasonal impact of volumes. And of course, that was offset by higher margins both in olefins and in vinyls.

Speaker 9

And Steve, can you just remind me what the guidance was for the Q4 impact?

Speaker 3

The guidance was $25,000,000

Speaker 9

And it was in line with that?

Speaker 3

Yes.

Speaker 9

Perfect. Thanks so much.

Speaker 3

You're welcome. Thank you.

Speaker 0

Thank you. Our next question is from Bob Koort of Goldman Sachs. Your line is open.

Speaker 10

Thanks very much. Albert, was wondering if you could talk about as you've optimized these Axial assets, sort of where you are on that path and maybe some metrics that you can give us so we can calibrate the success that you've had there?

Speaker 2

Well, certainly, as we said, we captured good synergies in cost reduction and in operational improvements in volume growth, and we are continuing doing that. The expansions are part of that activities. And as Steve said, we'll look at the bottlenecks, expansion in all our plants. And with the acquisition of Ekso, I think we have one of the largest producer of ECM PVC in the world and chlor alkali. So we have 10 or 11 plants around the world where we can expand rather than doing more greenfield plants.

Speaker 10

Ask another question. You had mentioned the outlook on the polyethylene markets. Your small competitor here in Houston in their recent slide deck looked differently at HDBP, LLDPE and LDPE and you gave a pretty bullish forecast on HDPE where there's not enough capacity to meet the demand growth of the next three years, but maybe it was a little more damning on the LDPE side. So I'm just curious if you have any reservations about maybe incremental capacity in the LDPE markets creating a little more pressure there than the other polyethylene?

Speaker 2

Well, as you know that The U. S. Polyethylene industry today already exports about 20% of its production. So all the capacity added with LD, linear low or high density, a large part of that will be exported. And domestic demand growth of polyethylene is between 1.5 times GDP in The U.

S. So it's not enough to absorb all the expansions. So we think that most of the new capacity added when it comes on stream will be exported.

Speaker 3

Got it. Thank you, Albert.

Speaker 2

You're welcome.

Speaker 0

Thank you. Our next question is from Frank Mitsch of Wells Fargo Securities. Your line is open.

Speaker 11

Good morning, gentlemen.

Speaker 3

Good morning.

Speaker 11

As I look at the industry operating rates in chlor alkali in January, they were depressed largely due to weather issues. And I was wondering how is Westlake relative to industry operating rates in the month of January in the chlor alkali side of things?

Speaker 3

Yes. Frank, we were fortunate that we had no issues as it relates to the weather issues that you made reference to.

Speaker 11

All right. Terrific. So you're able to take advantage of some of the volumes than quarter to date, I would anticipate. And then Steve, if I could follow-up, there are a lot of talk about a follow-up on a question of turnarounds. For 2018, you said, I think you're expecting a normal schedule of turnarounds.

How would you compare that to twenty seventeen's actual higher, lower, the same, bigger than a breadbasket?

Speaker 3

As you recall, we gave guidance of what I would call the catch up deferred maintenance work that we were doing all throughout 2017 and gave guidance inclusive of not only the maintenance expense, but the lost sales that aggregated roughly $180,000,000 throughout 2017 to get us back to a more normalized level of work. That's where we are today. So there isn't any turnaround work that I would call out in 2018. We're really back to that normalized level. So the numbers that we spoke of as it related to 2017 were that those expenditures are lost sales that were above the normalized kind of run rate for turnaround activity.

Speaker 11

Very helpful. Thank you.

Speaker 3

You're welcome.

Speaker 0

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

Speaker 12

Thank you. On your option to possibly increase your interest in the Lotte cracker, how much advance notice do you have to give and could you just remind us how long does that option stay alive for? How long does it last?

Speaker 3

So John, the option is three years post startup of the facility. The facility is expected to start up in 2019. And so we have the ability to notify LOTI of any interest we choose up to three years post that startup period. And the notices are relatively short.

Speaker 12

Okay. And then could you update us on your balance sheet targets beyond the current debt reductions that you've already outlined?

Speaker 3

Our focus always is to maintain a balance sheet that permits us the optionality to continue to fund the business and be opportunistic as investment opportunities come along. We want to remain strongly positioned so that our investment grade balance sheet is there, But we don't set finite targets. As you may recall, the rating agencies move their ratios around over time. And so our objective is to meet the objectives that they set for investment strong investment grade status so that we can be in that position throughout the cycle. Great.

Thank you. You're welcome.

Speaker 0

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

Speaker 13

Great. Thanks. Good morning.

Speaker 2

Good morning. Morning.

Speaker 13

So a couple of questions here. I guess, first off, on the CapEx side, what's a normal level of CapEx? And I guess, how much do you expect to spend on these new projects? And if you could break out the normal CapEx kind of maintenance versus growth, that will be great? Thanks.

Speaker 3

Arun, our number this year of 600,000,000 to $650,000,000 is inclusive of all these projects we talked about, inclusive of the investment in the Lotte project as we near completion in 2019. Our normalized capital expenditure numbers for maintenance and maintaining the plants and running them safely and reliably is in the $400 or so million range. So the numbers that you see in our elevated number is inclusive of all those projects and the low T investments going forward.

Speaker 13

Okay. That's helpful, Steve. Thanks. And yes, just a question another question on the projects. Could you help us understand kind of the return hurdles that were employed there?

Is that if you think about PVC margins right now at around $0.10 a pound, I mean, like this could be adding $100,000,000 of EBITDA on an annual basis. Is that anywhere in the ballpark? And or what kind of after tax return metrics are you looking at on this?

Speaker 3

Well, we assess a return hurdle and then risk adjust all these projects as we assess any AFE. And so certainly, it's a moving target depending on what the particular project is and the risk assessment that we assign to that. But these all have good returns and well above that risk adjusted cost of capital. I'm not going to speak to any individual project, but these all have good returns and well above that risk adjusted cost of capital number I mentioned.

Speaker 13

Okay. And on your own capacity, I guess, post this debottlenecking, would you have other opportunities to continue to expand vinyls capacity? And maybe you can also speak to the olefin side or would you have to kind of construct greenfield? Is there are there further brownfield opportunities within your own system or would require greater investment?

Speaker 3

Across the platform of Westlake, there are opportunities to debottleneck, and we talked earlier about some of those related to the Axial asset that one of the questioners asked. And certainly, we'll continue to assess those. And somewhat the investment thesis to invest in debottleneck even on the Elephant side is somewhat a function of the capital cost and the margins that one has. And so certainly as we see capital cost rise and fall, it does change the economics and the opportunity set. But we still see plenty of opportunity across the platform of Westlake to very cost effectively debottleneck.

Speaker 13

And just lastly, just maybe you can speak to your view on caustic prices. We've had a couple other announcements recently. Do you expect to realize full amount of that? And why, if so, would it be exports continuing to be tight or domestic demand or everything above or?

Speaker 2

Certainly, cost of demand has continued to grow. And certainly, the export prices depending on the seasonality and as well as regulations such as the regulation in China. So we are seeing the export demand and price to has recovered and industry now has made announcements of price increases for the first quarter and also we Westlake has also made further price increases starting for February about $40 dry short term. So and export prices, some of them had higher margin than domestic prices. So we believe with the increasing demand, higher export prices that these announced price increase should be able to go through completely.

Speaker 13

Thanks.

Speaker 0

Thank you. Our next question is from Don Carson of Susquehanna Financial. Your line is open.

Speaker 14

Yes. A question on what your plans are I noticed that in Q3, you dropped down some additional ethylene assets into the MLP. What are your plans for any further actions like that in 2018? And what part will the WKLP play in the Lotte venture if you do in fact exercise your option to go up to £1,100,000,000

Speaker 3

Don, certainly as we think about the growth trajectory that we've been on that low double digit growth rate, we continue to believe that as long as we're paid for those kinds of growth rates that we'll continue on that pace. And so certainly, you'll recall, we have four levers with which to act on that. That is a dropdown, as you mentioned, we accomplished in the third quarter. We can think about the margin opportunities. It's certainly set at $0.10 a margin per pound, But certainly, that could also be elevated over time.

You mentioned acquisitions, and Lotte could be a natural acquisition target for the OpCo entity to create a same kind of tolling mechanic around that production as it has around the existing three crackers and of course debottlenecking opportunities. So we see significant opportunity with those four levers to continue to grow so long as there's a fair return in valuation to make that happen. We certainly see the as you mentioned the Voeti asset, we certainly see that as a very interesting and potentially attractive opportunity for OpCo in the future once that plant is completed.

Speaker 7

Thank you.

Speaker 3

You're welcome.

Speaker 0

Thank you. Our next question is from Jeff Zekauskas of JPMorgan. Your line is open.

Speaker 7

Thanks very much. What was your cash tax rate in 2017?

Speaker 3

Cash tax rate was running right around 25% cash tax rate in 2017, Jeff.

Speaker 7

And the 16% number you quoted for 2018, is that a representative number for the future or is there something unusual about 2018?

Speaker 3

Well, you recall under this new tax bill that tax law that we have that we can certainly take kind of what I would call bonus depreciation immediate depreciation of any new asset deployed. So as we deploy new assets into the business, we're able to fully depreciate those. And so certainly, as long as we continue a spending program along these lines, our cash tax rate should be in the mid teens or so. So I expect that $16,000,000 for $2,018,000,000 is a reasonable target. And that's somewhat a function of over time as we deploy additional capital and put them into service.

Speaker 7

You raised your cost cutting targets. Is that because you're completing your cost cuts faster than expected so that maybe you'll be done by the end of twenty eighteen?

Speaker 3

So Jeff, the guidance we've given for 2017 was 120 and you can see from our comments, we achieved 170. And so we did achieve more this past year in 2017. And certainly, we continue to make efforts to achieve all opportunities to pocket some of those synergies. And so that's why the guidance of $250,000,000 in total. And certainly, we'll continue to work diligently to achieve those and more extent that we can find them.

Speaker 7

Are you ahead of schedule? Or did you find different costs to pull out? What do you make of the difference between what you expected and what you achieved?

Speaker 3

Well, we certainly as you may recall, we certainly will make every effort to look. And as we know more about the opportunities to reduce our cost, we'll certainly pursue those. And so that earlier estimate was a function of what we knew at the time. And as we gain better insight into the opportunities, we'll pursue those.

Speaker 7

Okay. Can you comment on non integrated PVC margins in The United States in 2017? For when you look at PVC on a non integrated basis, were those margins very much different than they were in 2016?

Speaker 3

So you're assuming buying merchant chlorine to and merchant ethylene to make PVC?

Speaker 7

Yes, and not getting a cost of credit.

Speaker 3

Yes. And so if in fact, if you see those if you're buying merchant ethylene and merchant chlorine and not getting the cost of credit, you are going to find those margins to be kind of in the very low, typically in kind of single digit range.

Speaker 7

Right. And so not very much different from 16% on a non integrated basis?

Speaker 3

Yes. Yes. Okay.

Speaker 7

So when you look at China caustic soda prices, they seem to have come down quite a lot from where they were in October, November whereas domestic prices seem to have risen. Can you comment on the differences between the two markets and whether they affect each other?

Speaker 2

Yes. Certainly, the Chinese market has come down due to environmental regulations curtailing some of the demand and also because of the Chinese New Year time. But I think that has changed. I think the regulations supposed to end March 15 and the Chinese New is over. I think the Chinese economy is doing quite well.

So we are seeing that prices already going up in not only in China, but in Southeast Asia as well. And so hence support the export demand from U. S. Overseas as well as the higher prices in export.

Speaker 7

And then lastly, you talked about your CapEx being 600,000,000 to $650,000,000 for 2018, but these are multi year projects. So as a base case, and I know you often forecast 2019 numbers, but should they be similar in 2019 as a base case?

Speaker 3

I'm sorry, Jeff, can you repeat that?

Speaker 7

Your CapEx, I think, for 2018 is 600,000,000 to $650,000,000 And projects you're working on are multiyear projects. So I know that you haven't forecasted 2019 CapEx, but as a base case, would it be relatively similar to 2018 given that you still have to spend on these projects?

Speaker 3

We'll certainly recall that we will we expect to be completing the Lotte investment in Lake Charles in 2019. So those expenditures that we incur in 2018 will begin to will cease as we finish the project in 2019. So absent other opportunities, those capital numbers should begin to kind of drift down.

Speaker 7

Okay, great. Thank you so much.

Speaker 2

Thank you.

Speaker 0

Thank you. Our last question is from P. J. Juvekar of Citi. Your line is open.

Speaker 4

Yes. Hi, good morning. Had a question And on Albert, maybe you can discuss your outlook on ethane, both for the Gulf Coast as well as for your Calvert City operations where you get ethane from the Marcellus? Thank you.

Speaker 2

Certainly, as I said in my earlier discussions that with the increased U. S. Production oil and gas that we have more production of ethane and hence the ethane price has been kept quite attractive. And if you look at the future prices, ethane is still staying in the $0.20 to $0.30 range and the future price gets to $0.30 range only

Speaker 4

Any comments on your Caliber City ethane input?

Speaker 2

No, I think Caliber City, we are getting ethane from the ATEX pipeline, which brings Marsala, Utica ethane via Culver City to the Gulf Coast. So we are having ample supply of ethane.

Speaker 4

Is Talbot City advantage relative to the Gulf Coast?

Speaker 2

We are paying market related prices.

Speaker 11

Okay. Thank you.

Speaker 2

You're welcome.

Speaker 0

Thank you. And that does conclude our Q and A session for today. I'd like to turn the call back over to Mr. Jeff Holley for any further 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 first quarter twenty eighteen results.

Speaker 0

Thank you for participating in today's Westlake Chemical Corporation fourth quarter full year 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, February 2738. 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.