Westlake Corp (WLK) 2016 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Chemical Corporation fourth-quarter and full-year 2016 earnings conference call.

(Operator Instructions)

As a reminder, ladies and gentlemen, this conference is being recorded today, February 21, 2017. I would now like to turn the call over to your host, Ben Ederington, Westlake's Vice President and Chief Administrative Officer. Sir, you may begin.

Thank you, Charlotte. Good morning, everyone, and welcome to the Westlake Chemical Corporation's fourth-quarter and full-year 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 fourth quarter and full year of 2018 (sic), 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; the 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 2016 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 PM Eastern time on February 28, 2017. 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 55-51-55-10.

Please note that information reported on this call speaks only as of today, February 21, 2017, 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 fourth-quarter and full-year 2016 results. In this morning's press release, we reported quarterly net income of $99 million or $0.76 per diluted share on net sales of $1.7 billion. We are pleased with our fourth-quarter results, despite the impact of the planned turnaround in our Lake Charles Vinyls facility, other planned outages, and several transaction- and integration-related items that impacted the quarter.

During the quarter, we achieved record quarterly ethylene production that was supported by higher polyethylene production, and which resulted in strong earnings in the olefin segment. We have made good progress in our Axiall 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 were 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 Axiall plant sites, and pursue our cost-related synergies. I will now like to turn our call over to Steve to provide more detail on the financial and operating results. Steve?

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 2016 of $99 million or $0.76 per diluted share on net sales of $1.7 billion.

As Albert mentioned, our fourth-quarter results were impacted by a number of special items. Our quarterly results were lower due to unabsorbed fixed manufacturing and other costs associated with the planned turnarounds and unplanned outages of approximately $39 million, and associated lost sales of approximately $24 million. We also incurred transaction- and integration-related expenses in the quarter of $13 million, and a one-time step up to fair market value up for the acquired Axiall inventory of approximately $14 million.

These items lowered our earnings by approximately $89 million pre-tax, or approximately $58 million after-tax. This was partially offset by a lower effective tax rate for the quarter, which benefited us by $29 million after-tax. Therefore, if we look at our quarter excluding these items, our after-tax earnings would have been higher by $29 million or $0.23 per share.

Fourth-quarter 2016 net sales of $1.7 billion were higher compared to the same period in 2015, mainly due to sales contributed by Axiall. Income from operations of $153 million for the fourth-quarter 2016 was lower than the prior-year period, resulting from transaction- and integration-related cost, the effect of selling higher-cost Axiall inventory, and the impact from planned turnarounds and unplanned outages. Sales revenue in the fourth quarter of 2016 of $1.7 billion was higher compared to the third quarter, and income from operations of $153 million were increased. The higher sales were largely due to sales contributed by Axiall, while the improvement in operating income was due to lower transaction and integration costs, and record ethylene production.

For the full-year 2016, net income of $399 million or $3.06 per diluted share on net sales of $5.1 billion was lower than the full-year 2015 net income of $646 million or $4.86 per diluted share on net sales of $4.5 billion. Full-year 2016 net income was impacted by unabsorbed fixed manufacturing and other costs associated with planned turnarounds, the Petro 1 expansion, and the unplanned outages of approximately $155 million, and lost sales of approximately $75 million associated with these events.

Full-year results were also lower due to transaction- and integration-related costs of approximately $104 million associated with the acquisition, partially offset by a realized gain of $49 million from the outstanding shares of Axiall that we owned prior to the acquisition. These pre-tax items were partially offset by $47 million 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 Axiall and higher PVC sales volumes, which were partially offset by lower sales prices and volumes for our Olefins products.

Income from operations was $581 million for 2016, a decrease from the prior year, resulting from lower olefin sales prices, transaction- and integration-related costs associated with the Axiall acquisition, and the lost sales, lower production rates, and costs associated with planned turnarounds, the Petro 1 expansion, and unplanned outages. This decrease was primarily offset by lower average feedstock and energy costs, 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 million pre-tax or $0.06 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 2016, the Olefins segment reported income from operations of $150 million on net sales of $471 million, an increase in operating income compared to the $139 million reported in the fourth quarter of 2015 on sales of $466 million. The fourth quarter of 2016 benefited from record ethylene production following the 250 million pound expansion of our Petro 1 ethylene unit.

Trading activity in the fourth quarter of 2016 improved by $19 million compared to the fourth quarter of 2015. Compared to the third quarter, fourth-quarter operating income increased $32 million, while sales were lower by $27 million. The fourth quarter benefited from record ethylene production, partially offset by lower integrated Olefins product margins, and trading activity improved by $20 million.

For the full year of 2016, the Olefins segment reported income from operations of $558 million, which was lower than the $747 million 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 Petro 1 ethylene unit, and the other planned turnarounds and unplanned outages. Additionally, trading activity improved by $31 million in 2016 when compared to 2015.

Now moving on to the Vinyls segment, the Vinyls segment reported operating income of $38 million in the fourth quarter of 2016 on net sales of $1.3 billion compared to operating income of $52 million on net sales of $519 million in the fourth quarter of 2015. 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 Axiall 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 Vinyls segment were higher as a result of the sales contributed by Axiall. When compared to the third quarter of 2016, operating income was higher by $15 million, while sales improved by $483 million. The fourth quarter benefited from higher caustic sales prices, higher sales volumes from most of our major products, and sales contributed by Axiall, 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 million, which compares to operating income of $254 million for 2015, a decrease of $80 million. 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 million from selling higher-cost Axiall inventory recorded at fair value. Full-year net sales for our Vinyls segment of $3.2 billion increased by approximately $1 billion, mainly due to sales contributed by Axiall.

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 $834 million, and we invested $628 million in capital expenditures. At the end of the fourth quarter, we had cash and cash equivalents of approximately $620 million, including restricted cash, and total debt was approximately $3.8 billion. 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 will 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 million to $600 million. This includes capital for our Calvert City ethylene unit 100 million pound 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 Vinyls complex.

Our efforts to address deferred turnaround and maintenance 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, along with the ethylene expansion project at our Calvert City site, we have turnarounds at our Plaquemine and Geismar Vinyl sites, along with other planned turnarounds, which will impact earnings by approximately $60 million.

The second quarter will see an equally busy turnaround schedule, and the impact on earnings will also be approximately $60 million. In the second half of 2017, we will continue to work on improving reliability, and we will see additional planned turnarounds impacting earnings by approximately $50 million. These estimates include the higher maintenance expense incurred and the lost sales associated with these events. And we will 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. 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 million, and our annual depreciation and amortization will be approximately $600 million. 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, which together total $200 million. For 2017, we are on track to capture approximately $120 million of these savings, while spending $25 million to achieve these savings. With that, I will turn 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 ethylene 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 plants 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 2017, 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 will turn the call back over to Ben. Ben?

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.

(Operator Instructions)

Robert Koort, Goldman Sachs.

Good morning. This is Ryan Berney on for Bob. Thanks for taking the question. I wanted to ask on the contracts that you have in place for the legacy Axiall assets on the caustic soda market.

I think, thinking back a couple of years, they had signed a few contracts that had price protections moving forward. And I was wondering if there is a big rollover or some sort of step-up kind of related to the timing of those contract negotiations as they are re-signed that we should expect in 2017?

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

Thank you. And 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 is all kind of kept to the vinyls side.

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.

John Roberts, UBS.

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?

As we understand, the project is still on time and is also complete mechanically by the end of 2018. So it should start up in the first half of 2019.

Are you looking for any additional acquisitions? I realize you just closed on Axiall but it seems like the M&A market remains quite robust in petrochemicals.

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

Thank you.

Arun Viswanathan, RBC Capital Markets.

This is [Dan DiCicco] on for Arun. Thanks for taking my question. The caustic units were up a lot in Q4. I know you mentioned the contract pricing is anywhere from a month to a quarter. Can we expect it -- were all the increases enacted -- is that going to show up in Q4 or could we see some of that carry over to Q1 results?

I think some of that will be a carryover 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.

Okay. Great. Thank you. Just for a follow-up, in regards to the new US Gulf Coast [ethane] 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?

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 startup.

Okay. Great. Thank you.

Hassan Ahmed, Alembic Global.

Good morning, Albert and Steve. Obviously, a bunch of pulls and tugs associated with the shape of the cycle. I would love to hear your views. 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.

It seems 2018, more and more capacity comes online. Thereafter, there seems to be quite a large vacuum in terms of capacity additions. I would love to just hear your broader near to medium-term views about the ethylene polyethylene cycle.

Certainly. I think that cycle really also depends on the global crude oil prices as well as global GDP growth. As we know, the US 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 the improvements in global economic growth, we will see demand increase with that and that will support US exports of the new capacities coming up.

Fair enough. Changing gears a bit. Again though, sticking to just the broader supply and demand side of things on the [nearer-term] side. Some debate about the operating rates on the CTO or MTO side of things between -- in light of the run-up we have 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. What is your take on that?

There is some discussion that the MTO is based on imported methanol will be the margin and cost producers for ethylene in China. China also has the government increased scrutiny on environmental protection.

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 could be quite competitive going forward.

Thanks so much, Albert.

Kevin McCarthy, Vertical Research Partners.

Yes. Good morning. To follow up, Albert, it looks like prices of PVC are continuing to rise regionally and Asia 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 is continuing to drive export prices higher.

I think it's a combination of what you said, including planned turnaround is going on in Asia right now, the higher cost of coal, and also the government scrutiny on environmental emissions from these coal-based plants. Some of our plants are running in 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.

Does that dynamic in Asia help US domestic PVC prices or is the gap still too wide to lend any meaningful support to your domestic efforts to raise prices by $0.04 a pound, for example, in February?

Yes. I think that because the higher export price, the $0.04 a pound price increase in February, we believe is highly confident that will go through. And addition to that, there is a further industry announced price increase of $0.03 a pound, price increase for the month of March.

We also believe that has a good position to go through. Ethylene price in Asia has also gone up. So that will also help support further the price increase going through from the US and for export.

Okay. That's good to hear. 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. I was wondering if you could elaborate on what those were and the extent to which any of them spillover into 1Q?

No, Kevin. We had a number, as I mentioned, we had a number of planned outages. You mentioned one that we specifically mentioned, but of course, we have a number of other normally planned maintenance activities that are in that planned arena.

So none of them have carried over into 1Q. The ones that we have talked about in the guidance of the $60 million really are underway now. And as I say are really planned to address reliability issues that we've found and look forward to really bringing these assets online and delivering.

Understood. Thank you.

Frank Mitsch, Wells Fargo.

Hi, guys. It's Aziza Gazieva on for Frank. Thanks for taking my question. 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?

Our rates follow the industry. As we mentioned earlier, there was some planned and unplanned downtime. We are trying to improve the operability of our plants and to increase above the industry. The trend is going well.

This is the season where 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.

Great. Thank you, and one follow-up. What are your latest thoughts relative to filling the ethylene hole you acquired with Axiall? Would you rather lever up to take advantage of opportunities to buy ethylene assets or could this be done through the MLP?

As I think you are well aware, we have got a variety of opportunities. I think Albert mentioned that Lotte is moving forward, and we have that opportunity with a 10% ownership today. 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. We, as I mentioned earlier, are looking at opportunities all the time on ethylene as well as other opportunities across the spectrum.

Perfect. Thanks, guys.

David Begleiter, Deutsche Bank.

Thank you. Albert, on polyethylene, it looks like the $0.05 for February is pretty much done. You do have a $0.06 increase announced for March. What are the prospects in your confidence in realizing that $0.06 increase for March?

Yes, Dave, I think the $0.06 would depending on the domestic export price differential. It depends on crude prices as ethylene cash costs increased in Asia and ethylene price has improved, there would also differentiate between the delta opportunity in the US polyethylene price and export. So I think if export price stays high overseas, you will see that all or part of the $0.06 that goes through in the US.

Very good. Just on styrene, Albert, you have seen a number of outages in styrene result in surging prices in styrene in the last few weeks, what is your longer-term view on styrene post the outages come back on stream here?

I think styrene, 60%, 70% of the cost is benzene. Benzene prices came up a lot recently so they have a cost push for styrene. This could also increase the price of styrene going forward.

Thank you.

Don Carson, Susquehanna.

Thank you. Albert, a question that is related to some of the Chinese environmental initiatives and outages. We saw a calcium carbide PVC plant recently go down and there has 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 US Gulf PVC producers?

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

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

Steve, a follow-up on your comment about doing a deeper review on the acquired Axiall 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? As you look at these assets, are you looking at any capacity closures of the acquired capacity?

Don, the CapEx number of $550 million to $600 million I mentioned, is really going to be spent really on a variety of areas, and certainly a lot of what you see us undertaking throughout 2017 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 are Calvert City expansion and the Lotte investment as we move forward. We're also dealing with just a lot of maintenance related -- this is deferred maintenance. As we march forward, I do expect that, that CapEx number will come down. It is elevated at the moment.

Thank you.

Jim Sheehan, SunTrust Robinson.

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

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

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

We are assessing opportunities as we go, but what we are addressing right now were really deferred maintenance and deferred turnaround activities.

Great. Can you address where we are in the Eastman pipeline dispute?

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

Great. Thank you.

PJ Juvekar, Citi.

Hi. Good morning, Albert and Steve. I want to go back to China. I think IHS is just talking about supplying in terms of PVC capacity shutdowns in China. I'm sure some of that -- a large part of that is highly polluting carbide-based capacity, but as PVC prices go up, do think any of that shutdown capacity can start back?

In China, anything is possible.

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

We don't have a good feel.

Okay. When you talked about this European capacity shutdown due to the regulations. That it 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 the end of this year?

PJ, it is Steve. I think what you saw was regulation that required those facilities to either be converted or shut by the end of 2017 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 million metric tons.

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

Okay. Thank you.

Jeffrey Zekauskas, JPMorgan.

Hello. Good morning. You talked about producing record ethylene volumes in this quarter, but your olefins volumes year over year, if I read it correctly, are down 3.5%. Can you reconcile the down volumes from the record production?

Jeff, it was a -- the record production was for the quarter and not for the year. So as we think about what we did as we undertook a debottleneck in the Petro 1 unit and added 250 million pounds. But you may recall, we did have an unplanned outage in our Calvert City facility earlier this year that did affect production. The record production is for the quarter.

Okay. Secondly, you sort of grouped these three larger charges, the $38.9 million, the $13.8 million and the $13.1 million. Can you allocate those to your different segments to your olefins and vinyls and corporate segments?

Yes. When you think about the fixed manufacturing costs related to our Lake Charles Vinyls segment, obviously, that was vinyls impacting. 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 Vinyls segment. As you know, we of course undertake normal polyethylene maintenance as well during the course of the year.

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. Of course, the integration, or what I would call integrating the Axiall business. Some of those are allocated into the Vinyls segment and some of those are corporate related.

So you can't precisely provide an exact allocation?

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

Okay. The next issue is, you are talking about higher maintenance expense and higher deferred payments. Over the past few years, Axiall had a number of fires and they had outages. 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 Axiall or what a normal level of maintenance would be and what level of maintenance you are spending now? And where should the number go back to over time?

Jeff, what you saw was, I think, a number of years of deferred maintenance activity. That is 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 plans would expect. That is really what we are addressing in 2017.

We actually started addressing some of those late in 2016. We will 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. 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.

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

Jeff, what we said is there were really two programs underway. One was a cost reduction initiative that Axiall had announced actually prior to our acquisition. That was $100 million of cost reduction initiative. We also so we would achieve $100 million of cost related synergies as well.

As you can see from our planned remarks, we believe in 2017 that we'll achieve $120 million of that, and of course in 2016, we believe we achieved between $10 million and $15 million over weighted synergies in 2016. So you can see that we are well on our way of accomplishing the combined $200 million if you let me total those two initiatives, the cost reduction initiative and the synergy initiative together.

You are kind enough to provide IHS's historical information having to do with different chemical prices. So for example, the caustic price looks like it is up about $130 per ton over the past 12 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?

That is a good question. I wish we can have higher numbers than IHS reports. As you can imagine that IHS and other publications, they have no market adjustment every now and then so 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 analysis, they do give a direction on the price movements, but the exact dollar usually is not priced the same.

What about the trajectory of your capital expenditures over the next few years, that is 2017, 2018, and 2019? Under normal circumstances or in best case, do they decline each year?

Jeff, you see that in reference to 2016 and the number -- the guidance number I gave for 2017 of $550 million to $600 million, 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 Axiall assets.

That number shall come down as we move forward with some of this work getting behind us. We still have the Lotte investment to complete, and that won't be complete until 2019.

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

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

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

Jeff, once we finish our review, I will do so but we haven't finished our review of what we're going to be doing work-wise. Then I will give you a better sense of what that amount is going to be coming to expense, maintenance expense, and what will be capitalized in the number.

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

Matthew Blair, Tudor Pickering.

Thanks for taking my questions. Just one question from me here. On the autoclave PE market, we have been tracking a few projects that I think have either started up recently or are about to start up, and these are in places like Thailand, China, Saudi Arabia. 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 are seeing this new supply coming to the market. And then also on the demand side, are you seeing autoclave PE grow faster or slower than overall PE? Thanks.

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.

I think some of those new plants are now targeting at more of the high end copolymers and maybe the EVA copolymers which goes in 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.

Okay. Thank you.

David Wang, MorningStar.

Thanks for taking my question. I just had one question on what you are 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 what your expectation for the way the crackers that have been previously announced, the likelihood of those coming online?

I'm sorry. Can I get you to repeat your question?

Yes. I was just wondering what you are 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.

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

Yes. That is right.

Definitely, brownfield tends to be cheaper investment cost per pound-wise than greenfield because greenfield you have all of these off-site battery limits and utility supplies. And the US Gulf Coast experiencing skilled labor shortages and both at higher cost as a result and as well as less skilled laborers will delay the completion of the project.

So you're seeing increased capital costs as well as delay in project startup. So those things are occurring, and we expect to continue.

Okay. Thank you.

At this time, the Q&A session has now ended. Are there any closing remarks?

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 2017 results.

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