Westlake Corp (WLK) 2016 Q3 法說會逐字稿

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Westlake Chemical Corporation third-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, ladies and gentlemen, this conference is being recorded today, November 8, 2016. I would now like to turn the conference over to your host, Ben Ederington, Westlake's Vice President and Chief Administrative Officer. Please begin, sir.

Thank you. Good morning, everyone, and welcome to the Westlake Chemical Corporation third-quarter 2016 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 third quarter of 2016, 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 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 developments; and other risk factors discussed in our SEC filings.

This morning, Westlake issued a press release with details of our third-quarter 2016 results, along with a schedule of transaction-related and nonrecurring items that we will be discussing in more detail. These documents are 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 PM Eastern time on November 15, 2016. The replay may be accessed by dialing the following numbers. Domestic callers should dial 1-855-859-2056. International callers may access the replay at 404-537-3406. The access code for both numbers is 96221252.

Please note that information reported on this call speaks only as of today, November 8, 2016 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?

Thank you, Ben. Good morning, ladies and gentlemen, and thank you for joining us on our earnings call to discuss our third-quarter 2016 results. In this morning's press release, we've reported quarterly net income of $66 million or $0.51 per diluted share on net sales of $1.3 billion.

We are pleased to have closed our strategic acquisition of Axiall during the quarter which marks a significant milestone for our Company this year, in which we celebrate our 30th anniversary of operations. We welcomed many talented colleagues from Axiall into the Westlake family with the completion of the acquisition of August 31.

We are now more than two months into the integration of our businesses and I'm pleased to see that we are collaboratively working together to identify process improvement and cost savings opportunities in all areas of the combined Company. As a result of the acquisition, Westlake is now the third-largest PVC producer and third-largest chlor-alkali producer in the world. We remain the world's largest specialty PVC producer and the largest LDPE producer in North America. We believe this positions us well to meet increasing global consumer demand for these products.

Our third-quarter earnings reflect a number of transaction-related expenses and nonrecurring events, many of which are related to activities pertaining to our acquisition of Axiall. Posted on our website this morning is a schedule of these expenses and nonrecurring items, which Steve will touch upon in more detail.

If you look beyond these one-time items, you will see that underlying fundamentals for olefins and vinyls segments show continued strength since the beginning of the year, following the decline in global crude oil prices which are lower by approximately 9% of the third quarter from levels seen in the same period last year.

As global crude oil prices have recovered from the recent low levels seen earlier in the year, the global pricing for our major products have also risen. During the quarter, we continued to benefit from good demand for our olefins and vinyls products that have benefited from improving consumer spending and also from increasing construction activity.

Now, I would like to turn the call over to Steve to provide more detail on the financial operating results for the quarter. Steve?

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 third quarter of 2016 of $66 million or $0.51 per diluted share on net sales of $1.3 billion for the quarter ended September 30, 2016. As Albert mentioned, our third-quarter results were impacted by a number of one-time items related to the Axiall acquisition and planned turnarounds and unplanned outages. Referring to the schedule we posted on our website this morning, the impact of these events that occurred in the third quarter totaled approximately $54 million after-tax or $0.41 per share.

Let me briefly explain these items. The first category of expenses is related to the Axiall acquisition. Earnings for the quarter were impacted by transaction and integrated and related costs for approximately $83 million, financing associated cost for the acquisition totaling $14 million and $16 million related to the purchase accounting adjustment required to mark up the acquired Axiall inventory to market value.

Second, our results reflect the non-taxable benefit we received on the Axiall shares we purchased prior to the acquisition which we recorded as income of $49 million. Third, as I noted in our prior-quarter earnings call, our third-quarter results also reflected unabsorbed costs associated with the planned Petro 1 turnaround and expansion, the unplanned outage in Calvert City and other planned turnarounds totaling approximately $36 million. These planned turnarounds and unplanned outages also result from lost sales of approximately $21 million, bringing the combined impact to $57 million.

Fourth, we recorded other nonrecurring charges in the vinyls segment of approximately $6 million. Finally, in addition to the non-recognition of tax on the gain of the Axiall shares that we previously owned, we benefited from an $11 million in various tax adjustments. Therefore, if we looked at our quarter excluding these items, our earnings would have been $0.40 higher or $0.92 per share.

Net sales for the third quarter of 2016 were $1.3 billion higher compared to the third quarter of 2015, mainly due to sales contributed by Axiall in September, partially offset by lower sales prices and volumes for most of our major products.

Income from operations of $47 million for the third quarter of 2016 were lower than in the third quarter of 2015, resulting from lower sales prices for most of our major olefins products, transaction integrated-related expenses and the effects of selling higher-cost Axiall inventory recorded at market value. Income from operations from third quarter of 2016 were also impacted by lost sales, lower production rates and unabsorbed costs associated with the planned Petro 1 turnaround and expansion and other unplanned and planned outages.

Sales revenue in the third quarter of 2016 of $1.3 billion increased compared to the second quarter of 2016 while income from operations of $47 million was lower. The net increase in net sales was largely due to one month of sales contributed by Axiall in September and higher sales prices for most of our major products, partially offset by lower sales volumes. Lower operating income was a result of action and integrated-related costs associated with the acquisition that I previously mentioned and the effect of selling higher-cost Axiall inventory recorded at market value.

Third-quarter results were also affected by lower integrated olefins margins that were due to higher feedstock and inventory costs and a $19 million swing in trading activity in the third quarter of 2016 as compared to the second quarter of 2016. For the nine months ended September 30, 2016 net income was $300 million or $2.29 per diluted share, on net sales of $3.3 billion, both of which were lower compared to the nine months ended September 30, 2015.

Net income for the nine months ended September 30, 2016 was impacted by pretax transaction and integration-related cost of approximately $91 million associated with the acquisition; financing and associated costs for the acquisition totaling $15 million; and $16 million related to the purchase accounting adjustment that I mentioned. The results also reflected the pretax unabsorbed costs associated with the Petro 1 turnaround and expansion, unplanned outages and other planned turnarounds totaling approximately $116 million. And while sales associated with these planned turnarounds and unplanned outages of $23 million.

This decrease was partially offset by a realized gain of approximately $49 million and a lower effective tax rate that was a result of one-time items totaling $29 million. Net sales for the nine months ended September 30, 2016 were lower than reported in the prior-year period as a result of lower sales prices for all major products and lower sales volumes for ethylene, polyethylene, ethylene co-products, partially offset by higher sales volumes for PVC resin and sales contributed by Axiall and Huasu, our Chinese PVC joint venture.

Income from operations was $429 million for the nine months ended September 30, 2016, a decrease from the prior-year period resulting from lower sales prices for all of our major products, transaction and integration-related costs and lost sales, lower production rates and unabsorbed costs associated with planned turnarounds and unplanned outages I previously mentioned. These decreases were partially offset by lower average feedstock and energy costs and higher product margins in our European operations.

Our utilization of the FIFO method of accounting resulted in an unfavorable impact of $19 million pretax or $0.10 per share in the third quarter compared to what earnings would have been reported on the LIFO method. This calculation is only an estimate and has not been audited.

Before we move on to review the performance of our two segments, I would like to point out that following the acquisition, the assets acquired, liabilities assumed and the results of operations of the Axiall business, are now included in our vinyls segment.

Now let's start by discussing our olefins segment. In the third quarter of 2016, olefins segment reported income from operations of $118 million on net sales of $497 million. These results were impacted by lost sales, lower production rates and unabsorbed costs related to the Petro 1 ethylene unit turnaround and expansion, as well as other planned turnarounds during the quarter. Third-quarter 2016 net sales were lower than in the third quarter of 2015, also due to lower sales prices.

Compared to the second quarter, third-quarter results saw a decrease of $22 million in operating income while sales increased by $3 million. The decline in operating income was partially due to lower integrated olefins margins, primarily due to higher feedstock and inventory costs.

Additionally, trading activity in the third quarter of 2016 resulted in a $7.8 million loss compared to a gain of $11.5 million in the second quarter of 2016. These decreases were partially offset by higher production rates and lower unabsorbed costs related to Petro 1 turnaround and expansion as compared to the prior period.

For the nine months ending September 30, 2016, olefins segment reported income from operations of $408 million which was lower than income from operations reported for the nine months ended September 30, 2015, mainly due to reduced integrated olefins margins resulting from lower sales prices and the impact from the planned and unplanned outages.

Now moving on to the vinyls segment. The vinyls segment reported income from operations of $22 million in the third quarter of 2016 on net sales of $782 million. Our vinyls segment third-quarter operating income decreased from the same period last year but they were impacted by lost sales, lower production, unabsorbed costs associated with the unplanned outages at the Calvert City facility and other planned maintenance turnarounds that took place at our European facilities in the quarter.

As a result of purchase accounting, we marked up the inventory that we acquired from Axiall to market value. And the third-quarter results were negatively impacted by the effect of selling the higher-cost Axiall inventory that was previously recorded at cost.

The net sales for the third quarter of 2016 benefited from the one month of sales contributed by Axiall in September. When compared to the second quarter of 2016, operating income was lower as a result of the selling higher-cost Axiall inventory at market value and also lower building products margins, partially offset by higher cost of sales prices.

Operating income for the vinyls segment for the nine months ended September 30, 2016 was $137 million which was lower compared to the nine months ended September 30, 2015. The decrease in operating income was a result of planned turnarounds and unplanned outages that I previously described, and also the result of lower sales prices for our major products, partially offset by our product margins in our European operations as compared to the first nine months of 2015.

Now let's turn our attention to our balance sheet and cash flow. For the first nine months of 2016, cash generated from operating activities was $544 million and we invested $467 million in capital expenditures. At the end of the third quarter we had cash of approximately $381 million and long-term debt was approximately $3.7 billion. We will focus on prudently managing our balance sheet and maintaining investment-grade ratings.

Now, allow me to provide some guidance following our acquisition for modeling purposes for the remainder of 2016 and into 2017. Our estimate for 2016 capital expenditures, including Axiall's capital expenditures from August 31 onward, is expected to be in the range of $600 million to $650 million.

Our 2016 capital forecast includes spending for the acquisition of our Petro 1 ethylene unit which we completed in July, and our investment in the Lotte ethylene joint venture which is located adjacent to our Lake Charles complex. It also includes early engineering work in the purchase of long-lead items related to the expansion of our Calvert City ethylene unit that we announced in January.

We expect to see transaction and integration-related expenditures of approximately $5 million to $10 million in the fourth quarter related to the Axiall acquisition. We estimate that our 2016 effective annual tax rate for the year will be approximately 31% and our cash tax rate will be approximately 10%. We also have a major turnaround at our Lake Charles vinyls facility planned in the fourth quarter that will impact earnings by approximately $30 million.

Looking forward into 2017, we are evaluating our capital expenditure budget for next year and we will discuss this when we announce our full-year 2016 results. We have scheduled our Calvert City ethylene unit turnaround and expansion for the first quarter of 2017 and we expect the unit to be down for approximately three weeks. We're also are planning for major turnarounds in our (technical difficulty) chlor-alkali unit in the first quarter, lasting approximately 24 days.

Our annual interest expense is expected to be approximately $160 million. And our annual depreciation and amortization will be approximately $545 million.

As we continue to integrate our newly-acquired business, we are focusing on capturing synergies in the $100 million cost savings initiatives that Axiall previously announced. We believe we will be able to capture approximately $100 million in annual synergies within the next two years. For 2017, we anticipate will be able to capture approximately $70 million in synergies while spending $20 million to achieve these synergies.

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

Thank you, Steve. Overall, our third-quarter results were good, although the results were impacted by several items related to the acquisition and the other one-time events, including planned and unplanned outages. We saw improving fundamentals from the beginning of the year, as we benefited from higher integrated product prices and margins and good demand for olefins and vinyl products.

We continue to see improving future demand growth for our chlor-alkali and PVC products, with consumer demand forecast to increase over the next several years as construction spending and global economies continue to recover. As a global leader in the chlor-alkali and vinyls markets, we believe that we're well-positioned to benefit from this recovery and to continue to benefit from our low-cost position compared to the rest of the world.

As we integrate Axiall into Westlake, we remain focused on efforts to align our business operations and to identify areas of best practice and cost reduction. We are working toward implementing synergy opportunities that will improve the financial performance of the combined organizations that make up the new Westlake. To date, we have identified $100 million in annual run rate synergies that we expect to be able to achieve within the next two years. We will continue to look for even more value.

We are currently evaluating opportunities to improve the operational and financial performances of these acquired assets, which will require incremental investments into maintenance and reliability of our operations which we believe will lead to bottom-line improvement in the financial performance of our business in the future. We are very pleased with efforts over the last two months to drive the value of putting these two businesses together. We look forward to reporting our future results.

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

Thank you, Albert. Before 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. Christie, we are now compared to take questions.

(Operator Instructions)

Jim Sheehan, SunTrust Robinson.

Good morning, thanks for taking my question. When you think about the synergy opportunity that you've got with Axiall, you were talking about $100 million run rate over two years. As you've had an opportunity to look at the Axiall operations this past quarter, do you see any scope for upside there? Could you also talk about -- could you try to quantify what type of investment you might make in Axiall's facilities in order to upgrade them?

Jim, good question. As I mentioned in my prepared remarks, we've already started our work to achieve these synergies. And I noted we've spent about $20 million that we expect and achieved $70 million of synergy. And I expect that number to continue to improve toward that $100 million target that you mentioned. And as Albert noted, we will also look for additional value in the synergies. As you can imagine, we won't just stop at the $100 million number.

As it relates to future expenditures, we're assessing those today. Certainly as we work through our 2017 capital budgeting plan, we'll be looking for those kind of opportunities and be able to speak more clearly to those after we've approved the 2017 budget. And we'll talk about that when we get to our fourth-quarter results in February. I don't have a number for you today.

Great. And in terms of your building products business, you talked about a little margin pressure there. Could you talk about what is causing that margin pressure and what's your outlook for building products margins going forward?

Certainly. As you know, we have increased our PVC price by $0.02 a pound in October. And we are heading into the winter season where demand typically are lower for building products and we have to pass through the price increase, our PVC as an increase. But as you may know, the export price of PVC has improved a great deal, especially in Asia. So we see a reasonable chance for the price increase to improve, as well as for the building products.

Great. And last question, if I may. Could you talk about the expansions of capacity in polyethylene? I think most of them are in different grades than you are directly exposed to, but how do you see your relative position in the industry as those expansions unfold?

Certainly. It takes one pound of ethylene to make one pound of polyethylene. And with the ethylene expansions, the amount of polyethylene capacity is being added in the US. Primarily the new capacity are in high-density linear low. There is some in LDPE.

And as well as these are very large plants. We anticipate that these plants will focus more on the large volume commodity grades and for Westlake, 60% of our polyethylene is LDPE, which has a higher margin than typical linear low, high density. And we also -- 80% of LDPE are auto phase. So the auto phase tend to have a higher margin because of the specialty products they make, than the tubular LDPE. So we'll be focusing on more on the specialty area of the polyethylene business.

Thank you very much.

You're welcome.

Don Carson, Susquehanna,

Yes, thank you. Wondering whether you scaled back the Axiall facilities on the BCM side in September, or whether you're planning to do so in Q4, given the squeeze from running those units on purchased ethylene? A can you also talk about your caustic realizations? How much they were up in the quarter and what your typical lag is in terms of achieving caustic price increases?

Certainly. According to reporting IHS, there's probably $40 a pound, a short turn of caustic price that was effective in the third quarter of 2016. And as some of our pricings are monthly, some are quarterly, and as turns of the country allows, we'll be getting these price increases.

And can you comment on your BCM operations, how you're running those? And then, as you look out over the next few years, to the extent you're not able to get cost of service ethylene, will you be continuing to run those at reduced rates?

Well actually, ethylene price as we speak, has come down from the high we've seen in the third quarter. And today's $0.24 a pound of [sauce], quite competitive. Is much lower than the ethylene prices in Europe and Asia. So I think US will be well positioned to have a low-cost position to supply BCM in the US or overseas.

Then final question, as you've reviewed the Axiall assets and integrate them into Westlake, are there any potential capacity rationalizations you would perceive to carry on, on the chlor-alkali side?

Certainly we will evaluate all our businesses and performances. But as of now, we do not have any plan to curtail our capacities of our chlor-alkali efforts.

Thank you.

You're welcome.

Kevin McCarthy, Vertical Research Partners.

Hi, this is Matthew DeYoe on for Kevin.

Hi, Matthew.

Hi, Albert. Just a quick one for you. In regards to the 1 billion pounds short ethylene position you have post the completion in the new Lotte JV and the option exercise, how quickly will you look to close the shortfall? And how do you balance out, given your natural given your natural inclination to be 100% vertically integrated? With the expectation that over-supply is common in the ethylene industry over the next few years?

That's a good question. In the past, we have had acquisitions we're long ethylene or short ethylene. Sometimes better to be short ethylene than long, depending on the market conditions. And certainly we will be evaluating various synergies whether to de-bottleneck further, increasing ethylene plant or the new joint venture plant. Typically new plants can also be de-bottlenecked. And we will look at other types of joint venture, potential acquisitions or just plain purchase, whether it's on a formula basis or market price basis.

Okay. As a follow up, do you have any comments on your willingness to pursue other M&A opportunities at this juncture? Especially as it relates to my first question, given the assets we have on the bar?

Yes, this is Steve. I think the answer is that as we see valued opportunities, we'll certainly look at those very closely. Again, it boils down to what the particulars are of that particular opportunity. But I would say that anything that looks of real value to us where we can find incremental value, we certainly will pursue that with interest.

Okay. But within the construct of your investment-grade credit rating, we shouldn't see you as constrained, I guess?

Well, back to my earlier comments. I think you're going to see us look at keeping that investment-grade rating. But as I mentioned earlier, we have a variety of levers that we can work with and still pursue opportunities and still keep that investment-grade set of metrics.

Perfect. Thank you.

Hassan Ahmed, Alembic Global.

Good morning, Albert and Steve.

Good morning.

Guys, you know on the PVC side of things, obviously you guys talked about some near-term pricing momentum building. Broadly speaking, in terms of some of the trends that you have seen, particularly as they relate to the cost curve, obviously we've seen coal prices rising, carbides. And ethylene prices aren't as high as they used to be. So could you give me a sense of what to expect from a pricing perspective in this new Asian coal price regime that we are seeing? Is it supportive of further price hikes, correlate through the course of 2016 into 2017?

That's a good question. As we are seeing, since the G-20 meetings in Shanghai in China, recently, that the Chinese government and the Chinese markets have been trending down on high-CO2 emission areas such as coal-fired power plants. So we're seeing a higher increase in coal prices, a reduction in production of PVC and caustic.

I think we will be benefiting both from a higher PVC price in Asia, in China, and possibly in the US, as well as higher caustic prices and less imports from Asia to the West Coast of the US, where we have a chlor-alkali plant. So we don't know how long the Chinese government will enforce these reducing carbon emissions, but if they continue to do so, which we hope that will be the case, then our industry and Westlake should benefit from those actions.

Very good. Now as a follow up, on the olefin side of things, obviously much debate about the future of NGL pricing, particularly as more and more of this North American ethane capacity comes online. One of the often-cited arguments that I hear is that regardless of how tight ethane may get, there is a very natural relief valve on the propane side of things. So a lot of capacity may switch over from ethane to propane.

My question really is, as I take a look at a lot of the new greenfield capacity that is expected to come online in the US, a lot of it seems to be ethane only. So the question is, is there enough capacity out there in the US market overall, for it to be able to switch over to propane if that is the more attractive feedstock for there to be a reason to consider propane as a relief valve in that an environment?

That's a good question also. I think that today, US is running about 70% of it's ethylene production from ethane. And I think propane is about 15% and the rest is butane right after. I think they are, because of some of the older existing practice, there has been heavy practice of naphtha as well as propane.

We believe certainly to improve the propane position above 15% maybe to 20% or even higher. If there is a need, smart engineers will find a way to work. But as of now, I think the ethane is still preferred feedstock and we expect that to continue to be so for several years going forward, over propane.

Thank you so much, guys.

You're welcome.

Arun Viswanathan, RBC Capital Markets.

Good morning, thanks. I guess the first question is on the chlor-alkali side. I just wanted to understand the earnings sensitivity now.

Would it be proper to assume that now with potentially over 3 million tons of capacity, there's been over $50, or so, a ton achieved on the caustic side that you'd see a potential $150 million improvement in EBITDA next year if we were to hold onto all these increases?

No, I think, Arun, the math is right and I think the issue is as we march forward you've seen, I think, a better-balanced market, both in the Americas as well as in Europe, where you seen ourselves and others speak to the regulation that is really bringing more rationalization of mercury-based production of chlorine there. I think what you're seeing really in the northern hemisphere, as Albert noted, and Hassan just a moment ago, about what's happening in Asia, a better-balanced overall market in the entire northern hemisphere, Asia, Europe and the Americas.

Right. I guess my concern is that there have been a lot of increases announced and there are reflected in the index. But very little of that is actually being reflected in results. So I'm trying to understand why that is the case and if you've seen an increase in either discounting or lags on your sales.

Yes, as I said earlier, some contracts for us are short term, monthly, some are quarterly. So some thing takes me longer to achieve. But I think that the trend is that, other than the announced expansion of finishing this year, early next year, there is no more new capacity added in the US for chlorine.

And Steve mentioned about the reduction in mercury chlor-alkali production in Europe end of next year, plus the reduction in Asia, and China primarily, that we'll see the operating rates for US chloride cost productions improve from the low mid-80%s to the high 80%s or even 90% over the next several years. And that should help the US chloride industry going forward. The global demand for caustic is still increasing between half to one times GDP. And with the lack of new capacity, it should help out the US in chlor-alkali production.

Okay, thanks. And then on the olefins side, you do have a couple nominations for price declines over the next couple months. How do you see the polyethylene pricing shaping up, picture shaping up over the next quarter or two? Especially as some of the capacity that's been off-line earlier in the year restarts and then more capacity is added next year?

Certainly. As you know, the industry had a $0.05 a pound price increase in September. And [safe lagging] October and there's industry consultants saying that potentially it could be a reduction November, December in polyethylene prices. But if you're looking at the demand domestically, it's quite strong. And export demand is quite strong, the pricing export are also good.

So we see a very strong global demand for polyethylene and if prices do go down because of the year-end inventory adjustments so that we don't see that as a long-term basis. Next year, some of the new capacity could be coming out the second half of next year, which may have an impact on prices in the US. However, it will depending on the crude oil prices, if crude oil prices does improve further next year, it will make US ethane-based integrated polyethylene manufacturers much more competitive, and may or may not have an impact in the US market.

And the last question, if I may. You spoke earlier about the advantages of being long or short ethylene at different times. What is your preference over the next couple of years? Would you be willing to lock in volumes at cost-based prices? Or how do you think you're going to be approaching the ethylene side of your supply? Thanks.

Certainly. Right now until the Lotte joint venture start up in 2019, Westlake will be buying probably 1.8 billion pounds of ethylene. And almost all that goes into our Axiall vinyls business. So if ethylene is over-supplied in the US without capacity for ethylene exports, then ethylene price could stay low, which would be beneficial to Westlake and the vinyl industry which purchased their amount of ethylene in the emerging market to be more competitive compared to the rest of the world.

Great, thanks.

You're welcome.

Robert Koort, Goldman Sachs.

Thanks for taking our questions. This is Chris on for Bob. Could you give us the impact Axiall had on volumes in the vinyl segment and EBITDA during the third quarter?

As it relates to how we're going to be reporting our business, as I mentioned earlier, we're going to have our two segments, the olefins and vinyls segment. And we don't expect to be breaking out subdivisions of those segments on a go-forward basis.

So as we go forward, we're not going to be reporting the Axiall results or any other acquisitions that are embedded in that vinyls segment. As you can imagine, we only had one month of contribution of Axiall, so it was a relatively small contribution in that third quarter.

Got you. And looking into the next year, what's the maintenance schedule looking like in 2017? And what's your best guess at what the impact might be?

I gave a -- yes, in my prepared remarks I gave you an outline of what we saw as major planned events as we get into 2017. And as we look at our turnaround schedule, we'll call out major turnarounds or major outages as we march forward. But I did mention that we'd have [Plackman] down, as I noted, for 24 days, in my prepared remarks.

But as we get forward into 2017, we'll give some guidance on those more-than-normal run rate of outages for the major events. Obviously, given the number of units we have, there's always something going through maintenance on a regular basis these days.

Appreciate it. Thanks.

John Roberts, UBS.

Think you. Steve, you gave full-year amortization and depreciation estimates of $545 million. Does that include the full step-up from Axiall?

It does, it does.

And then, secondly, I don't know if you want to answer it on this call or later, but where are you with the IRS on WLKP right now?

The answer is we're all waiting for the IRS to come out with their final regulations. As I think has been well discussed in the marketplace, Kirk Wilson who is the Associate General Counsel of the Service, said there's be something out prior to Labor Day. And obviously he did not make that timeline.

He since said subsequently that he hopes to, this is a comment he made at the MLP Association meeting in DC about a month and a half ago, he said he hoped to see something issued prior to the end of the year. And I think he's still hoping to be on that track and that's still our expectation. But we have no other news other than what he's made public in his public comments. So we hope there is something coming quite soon.

Okay, thank you.

Jeffrey Zekauskas, JPMorgan.

Hi, good morning.

Good morning, Jeff.

You spoke of reducing the Axiall costs by $100 million. Did you also speak of a separate cost reduction program that Axiall had that was also $100 million? Or is $100 million the number you are shooting for?

Jeff, what we referred to are two buckets that are both happen to be $100 million. One is the synergy number, which is a cost reduction-related synergy number that comes from combining the two businesses. The second is a profit improvement plan that Axiall had initiated prior to our acquisition of the Company which is $100 million. And certainly, we expect, as I noted, to achieve those savings in 2017 while we work toward the synergy number which, as we said, would be probably a two-year run rate to achieve those.

So you are trying to achieve roughly $170 million next year if you combined the two programs?

That would be right.

What's the status of the Eastman Pipeline dispute? Is that all over with? Or is it still carrying on?

The tariff has been, I think, resolved and was publicly discussed and we still remain in a court setting, really, for the directional flow of the (technical difficulty) ethylene in the pipeline.

Okay. When you look at the elevation in Asian PVC prices, what do you attribute it to?

Talking about which products?

You were speaking of PVC prices moving up in Asia and I was wondering why you thought they were moving up.

We've seen, certainly as you heard us speaker earlier, about thermal coal has moved up. And what we've seen there is it's moving a cost structure higher. And certainly, as Albert noted earlier, we've also seen a sustained level of both growing demand, global demand. And so I think those two have coupled together to provide both a higher cost structure and a continued growth in demand. I don't know, Albert, if you want to add?

We also see a less of production of carbide-based PVC in China, hence the demand for imported PVC has increased.

Okay, thank you so much.

You're welcome.

(Operator Instructions)

Frank Mitsch, Wells Fargo Securities.

Good morning, gentlemen. Steve, I wanted to come back with the comment regarding targeting investment-grade rating. And you said you had multiple levers to pull.

How should we think about the goals on reducing the leverage that you have? Or conversely, how high of an amount for the right property would you be able to spend and still maintain that investment-grade rating? How should we think about Westlake's targeting of that investment-grade rating on both raising it or lowering it?

Yes, Frank, when you think of the investment-grade rating, don't think only of leverage per se. Really, also think in terms of free cash flow. So when you think in terms of the various metrics of the agencies, Moody's, Fitch and S&P all speak of, obviously leverage is one of those. But there are a variety of other metrics of free cash flow. So as we think about our efforts to keep an investment-grade rating, that's certainly our focus to delever and that's a focus that we'll have as we move forward.

But obviously, should there be opportunities that come forward that look interesting to us, those opportunities bring cash flow associated with them, and so some incremental ability to leverage that cash flow. So you needn't only look at the existing cash flows of Westlake but the cash flows of the combined Westlake and whatever opportunity that might be. So you have to look at the additive effect of what that opportunity is and therefore the leverage ability of the combined transaction.

All right. So delevering is the first priority, however you'd be willing to enter into another transaction and factoring in the cash flows that's going to be coming from whatever unit you acquire to maintain that investment-grade rating. And it's tough to define a metric in terms of how large you could stretch to maintain that, because you don't know the free cash flow of the properties. Is that basically the answer here?

Yes, I think when you look at Moody's, S&P and Fitch, they all have slightly different criteria in terms of how they define leverage. So I look to those metrics as really the guideposts rather than us setting a particular measure. Because those, as you know, over time have evolved and changed.

So I look to Moody's, S&P and Fitch in terms of their metrics, and those are the ones we look toward in terms of achieving and demonstrating to them that we are investment-grade today, and continue to work toward keeping a strong investment-grade set of metrics. But as I say, any opportunity that present itself likely will bring cash flows and certainly we would add those to ours in terms of how we think about the overall leverage ability.

All right, great. Thank you.

Matthew Blair, Tudor, Pickering, Holt.

Good morning, Albert and Steve.

Good morning.

I had a question on your JV cracker project with Lotte. Is the 2019 start date and the $1.9 billion cost, are those still good assumptions? And then, in general, how excited are you about this project? Would you expect at this point to take down the 50% stake? Or would you expect to stay at the 10% stake?

As it relates to the project costs, the project is a project that does not have a -- it's not a lump sum turnkey-type structure. So while we have commitment at 10% with a cap on our commitment, as you noted, we do have an option to step our interest from a 10% to a higher percent, all the way up to 50% of our choosing, depending on what we see the capital cost eventually to be.

And that option is available to us up to three years post completion of the unit. So up to 2022, I guess, with a completion of 2019. So we'll assess the opportunities set that creates for us. And as Albert noted, look and see how we think about ethylene and the price to acquire ethylene over the time period.

Okay, sounds good. And then for the European chlor-alkali market, I think there's some news today, a couple more plants are converting over to membrane before the 2017 deadline. So now it looks like about half the plants are going to be switching over. Is this all in line with your thinking with what you would have expected a couple of years ago? Is it better, is it worse? Has anything changed on caustic for you going forward?

Yes, I think some analysts are saying it's between 800,000 tons to 1 million tons of net capacity could be taken out. And time is short because commercial takes some time and it's the end of 2017. People needs to shut down the mercury-grade chlor-alkali.

Okay, thank you very much

You're welcome.

Kevin McCarthy, Vertical Research Partners.

Hi, guys, it's Matt. Just a follow up or just another question, if I could squeeze one in. We were interested in your long-term strategy for the building products business. As it currently stands, given the size of the business versus the overall Company, seems like either you use it as a platform for growth or you monetize it. Just wondering how you think about it?

As this business has integrated to the vinyls business, and the legacy Westlake has a pretty strong building part of business and now combined with the Axiall legacy building products business, that we are one of the major players in the US market. So we'll evaluate all the businesses within the building products business and we will see what the value was to Westlake versus the market.

I know that Axiall went through an exercise to try to sell the business so we are aware of the other people's interest and we will be evaluating, like I said, the value to Westlake versus other people's valuation. But I think right now, we are quite comfortable with the business going forward, being an integrated business with our vinyls business.

Okay. Thank you, Albert.

You're welcome.

Thank you. That concludes our Q&A session for today. I'd like to turn the call back over to Mr Ben Ederington for any further remarks.

Great, thank you. Thank you for participating in today's call. We hope you'll join us for our next conference call to discuss our fourth-quarter and full-year 2016 results. Have a good day.

Thank you for participating in today's Westlake Chemical Corporation third-quarter 2016 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 PM Eastern Time on Thursday, August 4, 2016. The replay can be accessed by the following phone numbers. Domestic callers should dial 1-855-859-2056. International callers may access the replay by dialing phone number 404-537-3406. The access code for both numbers is 96221252.