Westlake Corp (WLK) 2018 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 2018 Earnings Conference Call. (Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded today, November 6, 2018.

I would now like to turn the call over to today's host, Jeff Holy, Westlake's Vice President and Treasurer. Sir, you may begin.

Thank you, Kevin. Good morning, everyone, and welcome to the Westlake Chemical Corporation Third Quarter 2018 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 the call up to questions.

During this call, we refer to ourselves as Westlake Chemical. Any reference to Westlake Partners is to our master limited partnership, Westlake Chemical Partners LP, and similar references to OpCo refer to our subsidiary, Westlake Chemical OpCo LP, which owns certain olefins 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 on many factors, including: the cyclical nature of the chemical industry; availability, cost and volatility of raw materials, energy and utilities; governmental regulatory actions, changes in trade policy 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 results. This document is available in the press release section of our web page at westlake.com. We have also posted a presentation on our website to assist in the discussion of our results. That presentation is available as well on our IR home web page or under the Presentations section of our Investor Relations web page.

A replay of today's call will be available beginning today, 2 hours following the conclusion of this call. The replay may be accessed by dialing the following numbers: domestic callers should dial (855) 859-2056. International callers may access the replay at (404) 537-3406. The access code for both numbers is 8883922.

Please note that information reported on this call speaks only as of today, November 6, 2018, and therefore, you're 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 at our web page at westlake.com.

Now I would like to turn the call over to Albert Chao. Albert?

Thank you, Jeff. Good morning, ladies and gentlemen, and thank you for joining us to discuss our third quarter 2018 results.

In this morning's press release, we reported quarterly net income to Westlake of $308 million for the third quarter of 2018 or $2.35 per diluted share. Third quarter 2018 income from operations was $396 million on record sales of $2.3 billion, and our quarterly EBITDA was a record $580 million. We grew year-over-year sales, volumes and EBITDA. This quarter's performance was the result of our team's focus on efficiency, disciplined execution and our integrated portfolio of businesses.

For the first 9 months of 2018, our EBITDA was a record $1.7 billion, with $1.2 billion or about 2/3 being earned in our Vinyls segment. We continue to experience very solid global demand for our products in both the Vinyls and Olefins segments. Our products are used across a wide spectrum of consumable and durable goods, and we are benefiting from the economic and industrial global growth in our markets.

In the third quarter, our Vinyls segment continued to benefit from the performance improvement plan we initiated following our acquisition of Axiall that has led to increased reliability, higher operating rates and lower production costs. In our Olefins segment, our continued focus on reliability and safe operations delivered the highest quarterly polyethylene production since 2007, and we saw strong starting production following the turnaround that was completed in May.

We are excited about the growth opportunities in front of us, the most recent being the announcement to acquire NAKAN, a global PVC compounding business, which we expect to close early in 2019. NAKAN is an excellent strategic fit with our existing business. We are the leading PVC compounder in North America, and NAKAN expands our compounding footprint into 8 new countries and bring new products, markets and know-how that NAKAN continue to leverage.

I would now like to turn our call over to Steve to provide more detail on the financial and operating results.

Thank you, Albert, and good morning, everyone. This morning, we reported record quarterly sales, record quarterly EBITDA and record quarterly cash flows driven by strong operations, strong year-over-year volumes, higher prices and solid demand.

I will start with discussing our consolidated financial results, followed by a detailed review of our Vinyls and Olefins segment results.

Let me begin with our consolidated results. Net income for the third quarter was $308 million or $2.35 per diluted share on record net sales of $2.3 billion. EBITDA for the third quarter was a record $580 million. Westlake's third quarter 2018 net income increased $97 million compared to the third quarter of 2017 net income of $211 million on sales of $2.1 billion. Compared to the prior year period, net income for the third quarter of 2018 benefited from higher prices for caustic soda and PVC resin, higher sales volumes for polyethylene, caustic soda and PVC resin, lower purchased ethylene cost, lower effective tax rate resulting from tax reform and a onetime gain of $14 million or $0.08 per share associated with annuitizing certain pension liabilities. Partially offsetting these benefits were lower margins in our Olefins segment driven by higher ethane feedstock cost.

Our utilization of the FIFO method of accounting provides a benefit in periods of rising production costs compared to what earnings would have been if we reported on the LIFO method. Due to the recent volatility in feedstock cost, especially the large increase in ethane cost that occurred in September, we have estimated a favorable pretax impact of approximately $48 million or $0.28 per share in the third quarter compared to what earnings would have been reported on the LIFO method.

Later in my comments, I'll provide earnings sensitivity to ethane prices as we expect feedstock pricing to remain volatile as new ethane fractionation capacity additions continue to catch up with demand.

Third quarter 2018 net income of $308 million increased $30 million from the second quarter of 2018. As compared to the prior quarter, the third quarter 2018 benefited from: higher sales volumes for all of our major products, including polyethylene, caustic soda and PVC resin as demand in all of these markets remains solid; a lower effective tax rate of approximately 19%; and the onetime gain of $14 million associated with annuitizing certain pension liabilities that I just mentioned. Partially offsetting these benefits were lower integrated margins on our major products, resulting from higher feedstock and purchased ethylene cost.

Now let's move on to review the performance of our 2 segments, starting with our Vinyls segment. Third quarter 2018 Vinyls operating income of $251 million increased $37 million from third quarter 2017 operating income of $214 million. Increase in operating income in the third quarter of 2018 is primarily due to the higher sales volumes and prices for caustic soda, higher sales volumes for PVC resin and lower purchased ethylene cost.

Vinyls operating income of $251 million for the third quarter decreased $20 million from the second quarter 2018 operating income of $271 million. Compared to the second quarter, the third quarter saw higher sales volumes for both caustic soda and PVC resin. However, these increases were offset by lower sales volumes for our downstream vinyls products as well as higher ethane feedstock and purchased ethylene cost.

Turning to our Olefins segment. The polyethylene industry ran at high operating rates in the third quarter. As reported by industry consultants, the industry saw record demand for both domestic and export markets in the third quarter, which supported these elevated operating rates even as new capacity entered the market.

In the third quarter of 2018, our Olefins segment reported operating income of $162 million compared to $166 million for the third quarter of 2017 and $158 million for the second quarter of 2018. When compared to both prior year and prior quarter periods, the third quarter 2018 saw higher polyethylene sales volumes over both of those periods though these were offset by higher ethane feedstock cost.

Now let's turn our attention to the balance sheet and statement of cash flows. As of September 30, 2018, we had cash and cash equivalents of $788 million and total debt of $2.7 billion. Third quarter 2018 cash flows from operating activities were a record $606 million, and we invested $195 million in capital expenditures. For the first 9 months of 2018, cash flow from operations was $1.2 billion.

For the full year 2018, we expect capital expenditures to be in line with our previous guidance of $600 million to $650 million. Throughout 2018, we continue to invest in attractive opportunities to grow our Vinyls business and expand the value that we capture in the integrated chain.

In February, we announced our 750 million pound PVC and 200 million pound VCM expansions in Geismar, Louisiana and Germany. In addition to these, we will be debottlenecking several other VCM and PVC plants along the U.S. Gulf Coast over the next several years that will expand our chain integration.

We also expect to see the start-up of the 2.2 billion pound ethylene plant being jointly built with Lotte Chemical in the first half of 2019. We have a 10% interest in the ethylene joint venture with an option to increase our ownership to 50% at any time over the next 3 years.

Additionally, the pending acquisition of NAKAN PVC compounding solutions business that we announced in September represents an excellent strategic fit with our leading PVC compounding business.

All of these investments continue to improve the integration of our Vinyls business that provides for additional value capture. We continually evaluate additional opportunities to invest where we believe they provide attractive returns and grow our earnings and cash flows.

With a record cash flow from operations, we have not only invested for the future but have also returned to shareholders over $136 million this year through share buybacks and dividends, having raised our dividend approximately 20% in August.

Looking forward to the fourth quarter and into 2019, we expect to see continued volatility in ethane prices as prices may reflect the effect of new demand from the start-up of new ethylene production facilities, which will be partially offset by new ethane fractionation capacity.

As we've seen over the past several months, prices in ethane have been volatile. And due to the use of our FIFO method of accounting, there is typically a 4- to 6-week lag period between when feedstock is purchased and when those costs flow through finished goods and affect our net income. Our ethane prices for the rest of the fourth quarter -- if ethane prices for the rest of the fourth quarter were to remain at yesterday's average price of $0.35 per gallon, we estimate the adverse FIFO impact resulting from our ethane purchases to be approximately $25 million.

As a reference, a $0.01 change per quarter in the price per gallon of ethane would have approximately $4 million impact on cost for the quarter.

For the fourth quarter, we expect a normal seasonal slowdown for PVC and some of our other downstream Vinyls products. We expect domestic demand for caustic soda to remain strong in the fourth quarter. However, prices may trend lower as the market absorbs some excess inventory.

Our fourth quarter turnaround and maintenance activity should be in line with the third quarter, which includes the approximate $10 million impact from our outage at our Plaquemine facility in October.

In 2019, our planned turnaround activity will be similar with 2018. The turnaround of our Petro 2 ethylene facility in Lake Charles, Louisiana, which was previously scheduled for the second half of 2019, has been moved to the first half of 2020.

While we benefited from a lower effective tax rate in the third quarter, we continue to expect our effective tax rate for the fourth quarter of 2018 and the full year of 2019 to be approximately 23%, consistent with our previous guidance.

Before turning the call back over to Albert, I wanted to address the trade and tariff topics. So far, the tariffs have not had a material impact on our sales volumes. This is due to our product mix, markets that we serve and proactive mitigation actions that we have taken. However, these tariffs will have an impact on the industry and our business in 2019, if they continue on their current path. On the other hand, if we see trade tensions in tariffs ease, it will be broadly positive for global trade, our industry and our business.

With that, I'll turn the call back to Albert to make some closing comments. Albert?

Thank you, Steve. This quarter, we passed the second anniversary of our acquisition of Axiall. At its 2-year mark, we achieved cost reductions and synergies of approximately $275 million per year. Thanks to the hard work and dedication of our employees, we have improved reliability of our assets, reduced our costs and are running our plants at higher operating rates.

Our Vinyls segment continues to benefit from solid global demand growth for caustic soda and PVC resin. An integrated producer such as Westlake sit at the low end of the global cost curve with limited global capacity additions.

As Steve mentioned, we are actively investing in a number of initiatives in the Vinyls business that position us to continue to drive value creation, including the pending acquisition of NAKAN, our joint venture ethane facility with Lotte Chemical and increasing PVC production from debottlenecks in the U.S. and Europe.

In the Olefins segment, we are very well positioned with a concentration of our polyethylene sales in the higher-margin specialty polyethylene and the flexible food packaging segments. The cost-advantaged position we have been experiencing since the onset of the shale drilling revolution, still looks very durable to us.

While we have feedstock flexibility, we believe the volatility in ethane costs we've recently seen are temporary. We expect this recent volatility to continue as new ethane fractionation capacity comes online. However, as there remains an abundance of ethane supply, we see the U.S. continuing to enjoy a competitive cost advantage over the long term versus the producers using a higher-cost, oil-based feedstock.

We will continue to explore additional expansion opportunities and search for other acquisition initiatives that will deliver value to our shareholders.

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

Thank you, Albert. Before we begin taking questions, I would like to remind you that a replay of this teleconference will be available 2 hours after the call has ended. We will provide that number again at the end of the call.

Kevin, we'll now take questions.

(Operator Instructions) Our first question comes from Bob Koort with Goldman Sachs.

This Dylan Campbell, on for Bob. Can we talk a little bit about kind of your outlook for caustic soda pricing? I know you mentioned that we might see some declines going into the back half of this year. But I guess, in terms of Chinese impact to environmental initiatives, that really played a role in, right, putting upward pressure to caustic soda prices last year? Do you expect something similar this year? And then I guess, generally looking into 2019, how are supply-demand dynamics looking for 2019?

Sure. As far as the Chinese 2+26 initiative that was in place last winter, what we had heard is that the Chinese government -- central government are letting the provincial governments and cities decide how to implement the reduction in production to reduce air pollution in wintertime. So depending on the local government's act, as we understand, there was a conference in Shanghai for the export trade. And some of the companies or plants in the Greater Shanghai area was asked to reduce and stop production for many days to improve the air quality in Shanghai. So I think governments in China, central governments, are sensitive to environmental issues and want to improve the quality environment, but they also understand there are issues for employment, production and business. So it will be a balance going forward. But as I understand, this will not be a mandate from the central government but be more of the local governments. As far as the caustic is concerned, I think, usually, winter months is the slower months, so we will see, as Steve mentioned, some pricing pressures on caustic, both in domestic and export-wise. But as we're going forward, with continued economic growth, both in the U.S. and globally, and with lack of new capacity being built, we see future demand-supply balance very favorable to the caustic business and to our Vinyls segment.

That's helpful. And then on PVC prices, I know a lot of consultants' data shows flat, sequential pricing movements in the third quarter -- from second quarter '18 versus third quarter '18. I'm a little confused because you noted that there's lower prices versus second quarter 2018 in your variance commentary in the release. Can you help us understand the dislocation between those 2 items? I understand that there might be some tempering or declines for export prices so maybe that can explain the difference but I was a little confused by kind of your comments here on the release.

Are you asking about year-over-year or quarter-over-quarter, Dylan?

Sequentially, quarter-over-quarter.

Yes. And so when you think about it, we've had -- the biggest driver here is the higher ethylene cost, the purchased ethylene cost here that pressured the results. We had higher caustic soda volumes, as I noted, but we also had higher purchased ethylene cost in the quarter. That's -- those were the key drivers in the Vinyls segment.

Our next question comes from Stephen Byrne Bank of America.

This is Ian, on for Steve. In the Olefins segment, volume has been declining for the past 2 years or so, and this third quarter was the first quarter with kind of a larger volume increase. Can you explain a little bit about what's been driving the volume declines and the volume increase this quarter and then what you expect for volume growth or decline moving forward?

Ian, I would say that the volume declines were more related to normal maintenance turnaround and product wheel changes as we were swinging our product from one grade to another. Nothing systemic, whatsoever. And I think you picked up the comment that I made that we had higher polyethylene volumes in this quarter over second quarter as well as year-over-year. So nothing I would say systemic at all related to that, really, just a product wheel change and timing of certain maintenance activities at the sites.

Yes. We built up some inventory early on in preparation for our polyethylene plant's turnaround. So when the turnaround is over and we have inventories to supply -- and demand was strong, usually, the third quarter usually is the highest demand quarter for polyethylene. So we had inventory and demand is strong, so we had good sales.

Okay. And for a follow-up, in the Vinyls segment, if caustic soda and PVC prices were to stay where they are today, would the Vinyls segment have higher or lower EBITDA next year?

Well, we are gradually extending our capacity. Some will be coming on next year and some coming on following year. So if the margin and prices -- assuming our ethane and ethylene feedstock cost remain the same, our sales price remain the same, then our EBITDA will improve with the increased production sales volume.

Our next question comes from John McNulty with BMO Capital Markets.

This is Bhavesh Lodaya for John. Thanks for the color on the accounting around ethane. Just outside of that, I'm curious if you did something differently in terms of changing feedstocks or sourcing or maybe contracting ethane, ethylene in the past quarter and if there any plans in the near future just given that you expect volatility and ethane prices to continue.

Okay. I need to make sure I understand what you're saying. I'll leave it this way. Certainly the industry has limited feedstock flexibility. 70% to 80% of the industry are ethane-based, purity ethane-based. So that some can crack propane or butane and naphtha and gas oil. So when the ethane price went up, industry players got more flexible, especially at the older plants, they will switch to other products. But many of the plants and new plants are all ethane-based, so the flexibility to switch feedstock is not available. Ethane in the last quarter has been -- and into October has been quite volatile. It went up almost 3x from $0.20-odd to $0.60-odd. And then as quickly it went up, it came down to $0.30-something. So we don't quite understand the volatility. But also, there are mechanism in place that would switch people's way of operating in feedstocks, so the price came down. And as Steve mentioned that we expect volatility to continue going forward. We don't know what to expect, how wide the swings will be. But since we don't know what impact of [settlement] will be, that we just want to have caution that this could be a quite volatile cost going forward.

Got it. But you don't expect to do something differently for your assets just in the near term?

Well, our assets primarily are ethane-based. We do have some flexibility to switch or swing but it's limited. But also, even with -- you can crack propane or some butane, propane costs are still higher than ethane cost.

Got it, got it. And on a separate topic, like can you discuss your views on just the U.S. housing market today? Are you seeing any kind of slowdown or any difference in terms of what demand you expected for your products versus just your expectations? And then if you could share just your base case outlook for this end market.

Well, as we think about housing today, we're certainly entering a period seasonally where construction begins to slow, but we have noted certainly some labor increases and labor availability for starts to come into the marketplace. And certainly, it's had some drag on the ability to start homes at the level people would expect and have had -- as I noted in my comments, it has had some impact on our vinyl products volumes during the course of the third quarter as well. But as we look forward, we continue to see a good market, but certainly, some of the drags on labor availability has had some impact on the level of starts.

Our next question comes from Mike Leithead with Barclays.

So Albert, could you maybe expand a bit about what NAKAN adds to your PVC business and if the compounding business is a targeted area of growth going forward for you guys?

Yes. NAKAN is one of the leading players in the markets in automotive, medical in the world. And they are in places in Vietnam, in China and Europe that we are not operating. So I think not only brings new products, technology to us, but also, it brings new markets, and they have a large R&D department. So we will look forward to working our new colleagues and grow our total compounding business on a global basis.

Great. That's helpful. And then maybe one for Steve. If we think about 2019 versus this year, could you maybe frame for us the incremental volumes we should expect from new projects or debottlenecks starting up versus what you have in the system today?

Well, as you may recall, we announced the expansions of our facilities in Geismar as well as in Germany. And as Albert noted, some of those begin to start up in the latter half of 2019. We also expect a startup in the first half of 2019 of the Lotte ethylene unit. And so you'll see both -- those 2 assets come into our volumes as we go into '19.

Our next question comes from Neel Kumar with Morgan Stanley.

So I just had a follow-up on your recently announced acquisition of NAKAN. Can you just help quantify the expected EBITDA contribution and the margins on that business? And do you expect any synergies in the transaction?

When we think about -- we've given some revenue estimates for that, Neel, but we've not given specific guidance. I think, as you look at the compounding industry, you can get a sense of the kind of low double-digit range of margins associated with that compounding business. And certainly, when you heard Albert's comments related to the NAKAN acquisition, it brings us new markets and new products. And we do think there'll be an ability to leverage that with our existing compoundings business. We haven't quantified the synergies per se, though. I'd like to get to the close, and then we can delve into that further.

Okay, that's helpful. And then you also announced that you've expanded the stock repurchase program. Can you give us a sense on how you -- how we should think about the cadence of your buybacks in the near term given some recent [depress] in the stock price?

Certainly, Neel. The -- and you see in the Q that we have acquired some shares through the share repurchase program. The program is an opportunistic style program. And certainly, we think that we'll be active during the course of the coming quarters. But certainly, it's an opportunistic program. But we certainly will move when we think the opportunity permits itself to act accordingly, but we don't have a particular mandated cadence on a quarter-by-quarter, month-by-month basis from the board.

Our next question comes from P.J. Juvekar with Citi.

This is Eric Petrie, on for P.J. In Vinyls, your volume growth slowed to 0.7% down from 9.1% year-over-year growth last quarter. Is that what you qualify as normal seasonality? Or are you seeing advanced destocking downstream in your Vinyls due to higher ethylene costs?

No, that's actually very consistent with what we've seen in prior periods. And so when you're looking at the year-over-year results, we did have both higher volumes in caustic and higher volumes in PVC resin. And so we certainly saw those year-over-year. But certainly, when you think about the quarter-over-quarter, second quarter over third quarter, really, just higher caustic, and certainly, you begin to see some slowdown in late third quarter, which is seasonally driven in PVC.

And secondly, Steve, you noted mitigating actions to minimize the tariff impacts this year. Could you give us some examples of what you are doing? And then are those repeatable into 2019?

Well, it mostly comes from looking at sourcing of materials and products that we use in our business. And certainly, that's going to be an ongoing effort, as you would imagine, as we look and see the effects and sizes of the tariffs that might be imposed. But that's -- I'm sure it will be an effort that we and many of the others in the industry will take to look to mitigate the impact of these by changing sourcing as need be.

Our next question comes from Aleksey Yefremov with Nomura Instinet.

This is Matt Skowronski, on for Aleksey. Could you just describe what your caustic outlook is, medium and longer term? And then are you seeing any specific areas of weakness in the near term?

Well, if you look at IHS forecast, the domestic caustic, they are looking at potentially a $20 a ton drop in prices from the third quarter. And then, next year, they are seeing a $30 a ton price increase in the second quarter. And that's it for all of next year. So at least from their point of view, there could be seasonality weakness in the winter months, but next year's looks quite robust.

Our next question comes from Arun Viswanathan with RBC Capital Markets.

Just want to continue on that last line of questioning, I don't think -- know if you guys have addressed this, but there's been a large bifurcation in the export markets in caustic soda as well. I think we're down back to below prehurricane levels on export pricing. Could you just discuss that? I mean, what's your outlook? And has that kind of, really influenced domestic caustic prices? Is there any chance for caustic to kind of recover? And then, yes, then I have one more on polyethylene as well.

Certainly. Well, as you know, one of our larger caustic buyer in the aluminum refinery business is Norsk Hydro's Alunorte. And they have some political issues. And as we understand, they were operating at half rates or less during the year. But as we also heard, they are trying to get back to more of a full production sometime next year. So the demand for caustic, we expect, will improve over next year. And hence, the excess inventory in the system, they are one of the largest buyer of U.S. Gulf Coast-based caustic exports. So with the excess capacity will be used up. China, we see some slowing down in Asia because -- partially because of the tariff dispute they have with the U.S. So hence, Steve mentioned that if the dispute continues in the current path, then economy slowdown could affect general commodity price and demand in Asia. On the other hand, if the disputes gets resolved or improved, that will help demand growth in Asia and China and, hence, most commodity products.

And then on polyethylene, just wanted to get your thoughts over the next, say, 12 months or so. It looks like inventories are relatively manageable, maybe 40, 42 days, development's been strong, [with 5] 6% this year. With some cost push next year, do you expect ethylene prices to be up and then similarly, polyethylene prices to be up next year?

Well, if you look at IHS's dist projection, they are looking at prices next year to be up in March and then come down in October, November. So it's relatively flat for polyethylene price next year. And I think depend -- a lot depending on the forecast for crude oil prices, as you know, rest of the world, outside of U.S. and Middle East are mostly in naphtha oil-based ethylene cracking, which feeds the polyethylene business. So if crude oil prices remains high or higher, then there's more chance for a polyethylene price increase in the U.S. and export market. And if oil -- crude oil price goes down, then it will go the other way.

Our next question comes from Hassan Ahmed with Alembic Global.

I just wanted to go back to the comment that you just made about the cost curve and the like for ethylene and polyethylene. As we take a look at the last couple of quarters, obviously, the marginal guys continued to be the naphtha-based producers overseas. And the high end of the cost curve went up, pushed up by higher crude and naphtha prices, right? Now over the last couple of weeks, we've seen a bit of an interesting dynamic where slowing order sales, slowing tire sales, so butedine prices have come down and have come down pretty hard. So on one side, you have the cost curve going up. On the naphtha side of things, because of higher naphtha prices, now it seems the core product credit that the naphtha-based guys were getting from butadiene seems to be coming down. So would this not mean that above and beyond the push from higher naphtha, the core product credits dwindling will push the cost curve even higher, making the sort of ethane base advantage even more advantage?

You're actually right. I think maybe it's partly China and Asian demand for many of the commodity process are slowing and people are going through inventory adjustments. And certainly, the last, recently oil price, last few weeks or months, oil price has come down from the recent highs. So we're entering into the fourth quarter and slower months. So supply-demand balances leading towards more commodity price been coming down. I think the tariff -- sentiment of the tariff also has an impact on that. So you're absolutely right. And in that case, so long ethane price does not go up back into the high range again, I think the ethane-based feedstock in the U.S. will be more competitive with oil-based feedstock overseas.

Understood. And as a follow-up, Albert, coming back to the NAKAN acquisition, obviously, you guys seem to be getting deeper into the compounding business. So a couple of things. One is, what do you guys see in terms of compounding-based valuations out there? Because it seems, obviously, those companies tend to trade at a higher multiple than a typical commodity chemical business, so that's one. Associated with that, it seems other commodity chemicals users are also looking for acquisitions in that stage. So how should we be thinking about the valuation side of things within the sort of compounding business? And as you get larger over there, again, coming back to the multiple side of things, is there a thought process that maybe you break out your compounding business as a separate segment to maybe potentially garner a positive valuation rerating?

Well, Hassan, as we think about the Vinyls segment that we have today, you're right, it includes not only our compounding businesses but also the other vinyls products businesses, which are the siding, the trim, the fittings and our pipes business. So as we think about that and getting bigger with the addition of NAKAN, it would be my expectation that we'll think about segmentation of that in the 2019 time period to get more visibility to that because I think it is a very solid business with higher valuations associated with it. And I'd like to get more visibility to that business.

Our next question comes from Kevin McCarthy with Vertical Research.

Would you comment on the cost associated with your 3-year option to increase your ownership stake in the Lotte cracker?

So Kevin, our cost is rather straightforward. It is the total installed cost of the facility for that asset and then a single-digit rate of interest, a carry cost, if you will, for the reimbursement of them -- of Lotte while they constructed and financed that facility. So it's really just the total installed cost plus a single-digit rate of interest on the construction cost.

And then just to clarify, at one time, I think that cracker was expected to cost about $1.9 billion. Is that still a reasonably accurate number? Or has it changed?

Lotte has said publicly that it was about a $2 billion investment.

Very good. And then secondly, you've made a lot of progress deleveraging the balance sheet over the last 6 quarters, including taking out $305 million in the third quarter of 2018. Obviously, we saw the $265 million investment in PVC compounding. How would you characterize the M&A pipeline looking beyond that deal? And do you intend to deploy the balance sheet for additional compounding acquisitions or perhaps in other areas?

We continue to look at opportunities kind of across all of our various businesses, and it's been always a fairly active effort here at the company. And so we don't necessarily focus on only areas such as compounds but look at all segments of our business. I'd say the market still is active. Valuations still remain elevated, so we're certainly selective in terms of where we think our capital could be deployed to generate a return that is going to be commensurate with the risk adjustment that we put on that capital. So certainly, we're selective where we can find opportunities, synergies and value going forward. But I would say that we continue to look, and we always have. You can see our history has grown both through acquisitions as well as organic growth opportunities.

Understood. And then last one, if I may. Do you have any outages foreseeable in the fourth quarter, aside from the $10 million you referenced at Plaquemine in October?

Our turnaround schedule, Kevin, will be similar to what we saw -- for the fourth quarter, similar to what we saw in third quarter. So that $10 million is just reflective of the unplanned outage we had in Plaquemine. But if you weave that into the fourth quarter, our numbers for the fourth quarter would be very similar to those normal activities in the third quarter.

Our next question comes from Jonas Oxgaard with Bernstein.

So with the NAKAN acquisition, I'm glad to see you're finally getting into the yoga mat market. But on the TPE side of this, is that something that you guys have done before? Or is that an opportunity you're excited about? Or is that just sort of something that came along for the ride? And then as a follow-up, Capital Gate (sic) [OpenGate Capital], they had a bunch of other PVC in their portfolio, architectural plaster, something like that. But that was not included in the acquisition. What made you pick and choose just NAKAN and not these others?

Well, back to your earlier question about TPE, certainly, it was part of the group of assets that OpenGate was in the process of divesting. And certainly, it's an opportunity. We mentioned, it brings us into new markets and new channels, and this is a new channel for us. And as we think about opportunities, whether it be through sellers such as OpenGate or others, we'll look at opportunities that fit our portfolio and bring value that we think we have synergy associated with. And we think this NAKAN acquisition is a very good fit with our compounding business. As you noted, it brings us into a new product mix, with the TPEs added in but also into new geographies.

Okay. And also then, when OpenGate acquired it, if I understood it correctly, the logic was that it was going to be integrated with some upstream PVC production that they had bought earlier. Now they're selling it within -- without any of that integration. How should I think about that? I mean, was that just a failed idea from their part? Or was it unnecessary? And how will you source your upstream material?

So Jonas, I can't speak to what OpenGate's strategy might have been at that time, but I can tell you that we certainly see opportunities to continue the value proposition that we see with NAKAN. And certainly, the -- as you know well, we have a footprint in Europe with our Vinnolit business and certainly other commercial arrangements with others. So I certainly see a continued value proposition that NAKAN will continue to bring.

Our next question comes from Matthew Blair with Tudor, Pickering, Holt.

Steve, I believe you said CapEx of $600 million to $650 million for 2018. Any early thoughts on CapEx for 2019, excluding what you may pay for the Lotte investment? And also, is maintenance CapEx for the total business still in the range of about $300 million to $400 million annually?

So our CapEx budget for '18 is in that $600 million to $650 million range, and we have not yet fully developed and approved with the board our 2019 capital guidance. So we'll give that once we've done that. And our maintenance run rate of CapEx is more elevated than what you noted just a moment ago. It's probably in the $500 million kind of range.

Got it. And then circling back to the comment on the Axiall synergies. I think you said $275 million. At one point, I believe you were thinking more like $100 million. Could you walk through the moving parts and just how you were able to realize additional synergies compared to your original estimate?

Yes. Our original estimate was really 2 pieces. It was $200 million in total, $100 million of synergies and $100 million of cost reductions. And so as we've continued to think about and delve into the opportunities to drive additional cost reductions and synergies, that number has grown from $200 million, $100 million in each of those 2 buckets, to $275 million. And so we've been very pleased. And certainly, we'll continue to see if there are other additional opportunities for synergy or cost reduction, but we think that 2 years now post the transaction that this is a pretty good run rate that you can expect.

Our next question comes from John Roberts with UBS.

With Eastman switching away from ethylene at Longview, is importing over the pipeline a viable long-term solution for you? Or do you need to look into other alternatives?

Well, John, certainly, as you know well, the pipeline that we have from the Gulf Coast up to those assets in East Texas is an ethylene pipeline. And we can certainly either use ethylene on site and buy it at agreed prices or we can move it up the pipeline that exists, and service that polyethylene asset. So we don't see any action that Eastman may take that is impactful to our business.

And then secondly, I think IHS has shown some data that ethane could be added to [absolute] tightness as the Lotte cracker is starting up. Is there any chance that cracker would be pushed out a little bit in the event that the market was very, very tight at that point?

Well, I think there's a lot that goes into the decision process, and there's a lot of uncertainty around when existing fractionation and existing start-ups of assets occur. And so everybody is taking their best guess. But certainly, we tend to invest for a longer horizon than any particular moment, so we'll assess the opportunities. But frankly, as you can imagine, it's been an important investment that the joint venture has made, and we're looking for the long-term value creation. And the timing of fractionation start-ups and the demands from additional crackers is uncertain until those plants run -- and start up and run at elevated rates.

Our next question comes from David Begleiter with Westlake Corp. (sic) [Deutsche Bank].

Albert, you've seen styrene margins come under some pressure of recent. What's your view on styrene heading into Q4 and 2019 year?

Yes. Styrene is a smaller part of our business. We've enjoyed very good margins and some discussion of new capacity coming up in Asia, next year or year after. But in the meantime, I think the U.S. is still an exporting country, in Asia, primarily it's an importing country. So I think the benefits from lower cost ethylene in the U.S. show benefit as a producer of styrene for the global market.

And Albert, just looking at polyethylene for next year, there's been some discussion of some prices diverging amongst the 3 grades. What's your view on that given the various capacity coming on stream over the next 12 to 18 months?

Well, as you know, there's capacity coming on stream in the U.S. and some in Asia for ethylene and polyethylene, and we are focused more on the LDPE, the specialty side of the 3 types of polyethylene. So we -- I think we will be hopefully less impacted by the new capacity additions. But in the end, the global economic roles would absorb the new capacities going forward, we believe.

Our next question comes from Frank Mitsch with Fermium Research.

It's Aziza, on for Frank. Regarding your pace of business through October compared to the third quarter, could you comment on your volumes through the month and maybe explain any hurricane-related implications for your competitors?

Well, we've seen consistent -- continued strong demand, really, in both the polyethylene space as well as in our vinyls space, both in caustic. And of course, as we enter November and December, PVC demand begins to seasonally slow because of construction, but caustic does not have that same degree of seasonality. So caustic has remained good and volumes have been reflective of that. And polyethylene continues demand -- demand-wise continues to be very good even in, as I mentioned in my prepared remarks, even in the face of new capacity additions.

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

Thank you again for participating in today's call. We hope you'll join us again for our next conference call to discuss our fourth quarter and full year results.

Thank you for participating in today's Westlake Chemical Corporation third quarter earnings conference call. As a reminder, this call will be available for replay beginning 2 hours after the call has ended and may be accessed until 11:59 p.m. Eastern Standard Time on Tuesday, November 13, 2018. The replay can be accessed by dialing the following numbers: domestic callers should dial (855) 859-2056; international callers may access the replay at (404) 537-3406. The access code for both numbers is 8883922.