Westlake Corp (WLK) 2018 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 2018 Earnings Conference Call. (Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded today, February 19, 2019. 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. Good morning, everyone, and welcome to the Westlake Chemical Corporation Fourth Quarter and Full Year 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 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 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 upon many factors, including the cyclical nature of the industries in which we compete; availability, costs and volatility of raw material, 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 product and pricing pressures; access to capital markets; technological developments; and other risk factors discussed in our SEC filings.

This morning, Westlake issued a press release with details of our fourth quarter and full year results. This document is available in the press release section of our web page at westlake.com. We have also posted a presentation on our website to assist in the discussion of our results.

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 7077616. Please note that information reported on this call speaks only as of today, February 19, 2019, 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 on 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 fourth quarter 2018 and full year results. In this morning's press release, we reported net income of $123 million for the fourth quarter of 2018 or $0.95 per diluted share and $996 million or $7.62 per share for the full year of 2018.

As we'll discuss on the call, it was a record year for Westlake. First, we delivered record operating income and EBITDA driven by the capital investments we've made to strengthen operating performance and thereby capturing the value of our integration strategy. These investments led to higher production and sales volumes in both our Olefins and Vinyls segments as we set records for any production for polyethylene, PVC resin, chlor-alkali and ethylene. The improvement in our operations is a direct result of the hard work of our employees and investments made in our reliability and performance improvement program since our acquisition of Axiall in 2016.

Second, we have continued to invest for the future with our VCM and PVC expansions in the U.S. and Germany, our ethylene joint venture with Lotte Chemical in Lake Charles, Louisiana; and the acquisition of the NAKAN compounding business that we announced in 2018 and closed in January 2019. These investments will contribute to EBITDA in 2019. Steve will go over our fourth quarter and full year results in detail. But before I turn over the call to him, I will discuss a few items affecting our industry.

First of all, international trade issues continue to weigh on global trade. In our Vinyls business, we saw some short-term global softening in caustic soda prices due to inventory buildup in the fourth quarter as industry operating rates remained high and export markets were disrupted by new import licensing requirements in India and ongoing issues at a major aluminum refinery in Brazil.

As a result of the inventory buildup, these issues will continue to negatively impact our results in the near term. We believe that these issues will be resolved in the first half of 2019. We also believe the global supply-demand balance of caustic soda will improve in the second half of 2019 and that long-term outlook for the global supply-demand balance remains favorable.

Our Olefins segment saw lower polyethylene prices following a steep drop in oil prices in the fourth quarter and new polyethylene capacity entering the market. We continue to see strong global demand for polyethylene. However, we expect U.S. exports to increase as new capacity starts up.

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

Thank you, Albert, and good morning, everyone. I'll 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. For the full year of 2018, we reported net income of $996 million or $7.62 per share, record income from operations of $1.4 billion and record EBITDA of $2.1 billion. This year's performance was driven by higher production and sales volumes as we set numerous operating records in both our Vinyls and Olefins segments. The improvement in our operations is a direct result of the investments we made in reliability and performance improvement program over the past 2 years.

In addition to the improvements in operations, we benefited from higher prices throughout our vinyls chain and especially for caustic soda as demand has continued to increase with global economic growth and limited global supply additions.

Now, let me turn to review the fourth quarter. Net income for the fourth quarter was $123 million or $0.95 per diluted share on net sales of $2 billion. Westlake's net income for the fourth quarter 2018 decreased $88 million compared to the fourth quarter 2017 after adjusting for the $591 million income tax benefit associated with tax reform in December of 2017.

As Albert mentioned, polyethylene prices in the fourth quarter followed oil prices downward as Brent fell 40% from the end of the third quarter. PVC also declined due to lower construction demand and lower ethylene prices. The prices for both polymers were adversely impacted by global trade concerns. The fourth quarter also saw higher ethane feedstock and fuel costs due to increased demand, infrastructure constraints and colder weather. Partially offsetting these impacts were higher sales volumes for polyethylene, higher sales volumes and prices for caustic soda and lower interest expense resulting from the retirement of $1.2 billion in debt in the first half of 2018.

The fourth quarter 2018 net income of $123 million decreased $185 million from the third quarter 2018 net income of $308 million. As compared to the prior quarter, the fourth quarter 2018 was impacted by lower sales prices for all of our major products due to the significant decline in oil prices from the end of September and the uncertainties in international trade, seasonally lower sales volumes for PVC resin and in our downstream vinyls products business, an approximate $38 million impact from higher ethane feedstock costs as the increase in ethane experienced in the third quarter impacted our fourth quarter earnings compared to what earnings would have been if we have reported on the LIFO method and higher natural gas costs driven by unusually cold weather patterns.

Now, let me move on to review the performance of our 2 segments, starting with the Vinyls segment.

For the fourth quarter 2018, Vinyls operating income of $125 million decreased $89 million from fourth quarter 2017 operating income of $214 million, primarily due to lower margins on PVC resin, which resulted from lower sales prices in the international markets, higher ethane feedstock costs and higher fuel costs. In addition to the typically seasonally slowdown in the fourth quarter, which impacts our Vinyls business, caustic soda prices declined as compared to the third quarter, driven by the issues Albert just spoke to. The fourth quarter also saw higher ethane feedstock costs related to the unfavorable FIFO impact, higher purchased ethylene costs and higher fuel prices due to the unusually cold weather, which all contributed to lower operating income for our Vinyls business.

Turning to our Olefins segment. We delivered strong volumes in the fourth quarter, and industry consultants reported that the polyethylene industry also ran at high operating rates to meet increasing global demand. In spite of this growing global demand, precipitous decline in global oil prices impact polyethylene prices as customers destocked inventories as uncertainties in international trade weighed on the market.

In the fourth quarter 2018, our Olefins segment operating income of $90 million decreased $76 million from fourth quarter 2017 operating income of $166 million. In the fourth quarter 2017, our Olefins business did benefit as operations were not impacted by Hurricane Harvey.

In comparison, income from operations for the fourth quarter 2018 decreased due to lower integrated margins, which were a result of lower polyethylene prices I just mentioned; and higher ethane feedstock and fuel costs, which were partially offset by higher polyethylene sales volumes.

Olefins operating income for the fourth quarter 2018 declined $72 million from the third quarter 2018 income from operations of $162 million, also due to the steep decline in crude oil prices resulting in lower polyethylene prices combined with the FIFO impact from the higher ethane feedstock cost.

Now, let's turn our attention to the balance sheet and statement of cash flows. As of December 31, 2018, we had cash and cash equivalents of $753 million and total debt of $2.7 billion. Fourth quarter 2018 cash flows from operating activities were $254 million and $1.4 billion for the full year of 2018.

Throughout 2018, we invested to improve the reliability of our plants and in attractive opportunities to grow our business and expand the value that we capture in the integrated chain. We have previously announced expansions in Geismar, Louisiana and Germany and continuing to opportunistically debottleneck several other VCM and PVC plants in the U.S. over the next several years, which brought our full year capital expenditure investments to $702 million.

In addition to these investments, we also expect to see the start-up of our 2.2 billion pound ethylene plant being built jointly with Lotte 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% over the next 3 years. All of these investments continue to further integrate our value chain. We continually evaluate additional acquisition opportunities to invest where we believe it will provide attractive returns and grow our earnings. And with our recent acquisition of NAKAN, a leading global PVC compound solutions business, is an example of that philosophy.

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

Due to the use of our FIFO methodology, there is typically a 4- to 6-week lag between when feedstock is purchased and when those costs flow through finished goods and affect our income. 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. As noted earlier, the run-up in natural gas prices in the fourth quarter will lead to a FIFO headwind in the first quarter 2019. If gas prices for the remainder of the first quarter to remain at yesterday's forward curve price of $3.06, we estimate that FIFO impact resulting from our fuel cost to be approximately $19 million higher for the first quarter than if we reported on a LIFO basis.

As a reference, a $0.10 change per quarter in the price per Mcf of gas would have approximately $2.5 million impact on cost for the quarter.

Before turning the call back over to Albert, I'd like to provide some guidance for your modeling purposes. We expect capital expenditures, maintenance and turnaround activity to be in line with 2018 as we continue to work on the expansion and debottleneck opportunities in our Vinyls segment. The next turnaround of one of our ethylene facilities is scheduled for the first half of 2020, and we will provide more information regarding the duration and the impact on earnings later in the year as we complete our planning. We expect our effective tax rate to remain around 23% and our cash tax to be around 18%.

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

Thank you, Steve. We are pleased with our record full year 2018 performance. We are also optimistic that the international trade issues would be resolved in the near term, and we are excited about what lies before us. Our Vinyls segment continue to benefit from solid global demand growth for caustic soda and PVC resin, being an integrated producer sitting at the low end of the global cost curve and having limited foreseeable global capacity additions. We remain confident that the caustic soda supply-demand balance will tighten through the year. We see growing global demand for PVC resin. Similar to the dynamics in chlor-alkali, we believe the supply-demand balance will also tighten.

As mentioned earlier, we're actively investing in a number of initiatives in the Vinyls business that position us to continue to drive value creation, including the recent acquisition of NAKAN, our joint venture ethylene facility with Lotte Chemical and increasing our PVC and VCM capacities in the U.S. and Europe.

In our Olefins segment, we are better positioned with the concentration of our sales in the higher-margin specialty polyethylene products.

The U.S. olefins industry will enjoy the cost advantage that we have been experiencing since the onset of the shale revolution. We are continuing to explore additional expansion opportunities and 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'll provide that number again at the end of the call. Gigi, we'll now take questions.

(Operator Instructions) And our first question's from Mike Leithead from Barclays.

First question on Vinyls pricing. If I look at the IHS data you provided in the release, it looks like cost of chlorine and PVC were up on average about 5% versus the prior year, but your reported segment pricing was flat. So I'm wondering, what drove the discrepancy in pricing and if mix was a factor in that kind of delta.

Mike, it was really driven by the price drivers here. As you can see, volumes were seasonally consistent with year-over-year change in volumes, but really what drove it was caustic pricing being down quarter-over-quarter and certainly year-over-year to a lesser degree. But obviously, a big change of that was flowing through our FIFO. Obviously, we had gas flowing through as well as ethane flowing through in the quarter.

And also, the export price for cost in PVC were lower. That's reflected in the IHS window, which is domestic U.S. price.

Got it. And Albert, I guess, just wanted to follow up on your outlook for caustic and PVC prices. IHS recently came out with a fairly bullish analysis of where current prices are versus reinvest in economics. So I was wondering kind of what your thoughts are there and maybe what gets pricing moving in the right direction short term.

Yes, certainly. PVC -- last year, PVC price were very flat because of the strong demand globally, and we are having a -- industry announced a $0.04 a pound price increase effective February, and this is IHS. And I think some other consultants are seeing probably $0.02 in February and $0.02 in March. And caustic-wise, we mentioned about inventory buildup in the year-end and the drop in international demand due to the inventory destocking. So export prices come down a lot in the fourth quarter, but we are seeing prices recovering in Asia. And even though IHS reporting a domestic price, potentially a $20 per ton short-term drop in January, which will probably flow into February, we will not see anymore price declines in domestic U.S. this year. And IHS is forecasting price to go up starting April and May.

Our next question's from John Roberts from UBS.

Albert, could you give as an update on your view of Chinese chlor-alkali vinyls capacity? Do we have many closures still ahead of us? Most of the capacity that's going to close closed already, and what's there over time will just maybe slowly go down.

Yes, that's a good question. I think with the winter season, even though this year, China did not have the central government edict of northern Chinese plants reducing production or shutting down, but depending on the location/regions, we have seen local government asking plants to reduce production to reduce the air pollution they are suffering in China, which has been quite bad. As to chlor-alkali plant shutdowns, I think the smaller plants, if they're not competitive and they're using purchased power, then they cannot compete. I think caustic prices come down quite a lot in the -- not so much in China but in Asia's stock market, and chlorine price also has been low as with lower PVC price. So the smaller -- especially the caustic companies related to carbide process, PVC, the demand for carbide production PVC has been impacted due to the pollution issues. So -- and higher purchase price for power, China has very high power cost -- competitive. But the bigger integrated to coal -- Chlor-alkali companies and PVC companies, they can be quite competitive and they are situated in the hinterlands. But, really, no new caustic chlor-alkali plant and PVC plant being announced due to the environmental issues in China, as well as the not-so-good returns compared with coal to olefins. So we don't see a lot -- much capacities being announced or coming up in China for chlor-alkali or PVC.

And then have you seen any destocking effects in your business downstream in polyethylene or PVC in January?

Well, I think inventory has been building up during the year-end, and I think some destocking's going on. But now, there's a price increase announced by the industry for polyethylene, $0.03 in February. Well, time will tell whether that $0.03 increase will pass through. But we believe the inventory has been destocked. And as crude oil price has moved up in the last month or so, international price of polyethylene is building up. So I think that the disparity between the international polyethylene price, domestic price is coming close. And we believe that -- again, IHS and other consultants are seeing that polyethylene price is pretty much flat during this year, despite the new capacity coming up.

Our next question's from Steve Byrne from Bank of America.

This newly acquired PVC compounding business, NAKAN, will that open up any additional end-market opportunities for you to move more molecules? And if so, might you consider other brownfield expansions in chlor-alkali?

So Steve, the NAKAN acquisition opens up a lot of new markets for us that operates in a lot of jurisdictions that we were not previously in and certainly kind of adds further concentration to our existing European business since it's headquartered in France. So there are clearly some operational synergies that we do expect to capture, some of those will be on the resin front. But certainly, as we think about expanding the opportunities in our compounding business, it's very much our focus here with the NAKAN acquisition. So it's a very nice tuck-in with the existing compound business that we have, and we certainly look forward to having it make good contributions in '19.

And can you comment, Steve, on what other debottlenecking capacity projects you're considering?

Well, the ones that we've talked about and have announced, Geismar and those in Germany, certainly were underway. And certainly, where we see opportunities, where it's cost effective to do so, and I mentioned in my prepared remarks that if we see some on the U.S. Gulf Coast where we have opportunities to expand, we certainly will. But those are things that we'll look at. And if they have the right returns and they're relatively capital light, we'll pursue.

Our next question's from Don Carson from Susquehanna.

Yes, a question on your national gas exposure. Steve, you gave us the operating leverage there. But have you hedged any of your national gas exposure? And what's sort of percentage breakdown in consumption between Vinyls and Olefins segments?

Don, we don't hedge a lot of that, but we do hedge some of that, but it's relatively small. And the greater use of the gas is really on the vinyl side of the business.

And then a question on PVC. Albert, you mentioned that obviously the industry's put out a price increase. Are you seeing any prebuying by customers ahead of that price increase? Or did you see prebuying in January ahead of the February price increase?

Yes. There's always some prebuying in our industry. We do allow our customers to prebuy some. And also, you know that we're heading into the building season coming up. So on a seasonal factor, the demand also increases.

Our next question is from David Begleiter from Deutsche Bank.

This is David Huang here for David. I guess, first, how do you think about ethylene prices, how do you think ethylene prices will progress during the course of the year? And I guess, what's your view on the likelihood of the $0.03 price increase for February and March for polyethylene?

Sure. I think ethane prices last year, we saw a high of close to $0.60 a gallon. And within a week or 2 weeks, a drop back. And they're down today, I think we're in the high 20s, $0.30 a gallon. It's very volatile, as I think Steve mentioned. We'll see crude oil and ethane prices be volatile. There's increased demand for ethane as a new ethane capacity come on. But also, there are new pricing -- capacity coming up this year and next year in the pipeline. So -- and there are still ethane that's being rejected. So I think on a long-term basis, we are very optimistic on the competitive price of ethane with the rest of the world are oil based as a feedstock making ethylene. But who knows? But the futures market for ethane, which is a thin market, are looking at this year in the low $0.30 a gallon.

And then just in terms of capital allocation, what would be your priorities now that leverage has come down? And if you can also talk about the relative cadence for buybacks.

Well, you saw that we've continued to deploy capital on a variety of matters. And so obviously, we've gone through the last couple of years with improving the reliability and the investments in the plants to provide reliable and consistent performing plants, and you've seen that in the record productions that Albert noted earlier in his comments. We also continue to look for opportunities to debottleneck, and I made reference to some of those that we've announced and those that we'll look at that are incremental where it makes really a very good return. That leaves plenty of capital for us to continue to invest and to complete the Lotte cracker, which is expected to start up later this year. And of course, it provides capital still to either return it to the shareholder in the form of dividends or through share buybacks. And we were active in the fourth quarter buying back over $50 million of shares last quarter. And so I think -- and think of the waterfall, whether it be providing reliable and maintenance activities for the plants to provide elevated rates so we can run the businesses reliably; investment for new capital, be it the vinyl side that we've announced or even in the ethylene cracker; and then returning capital to investors in those 2 forms, dividends as well as share buybacks. We see we've got plenty of capital to do all of those.

Our next question's from Jeff Zekauskas from JPMorgan.

I think you said the FIFO change was 38 million. How would you divide that between Vinyls and Olefins?

Jeff, most of that -- about 2/3 of that was in the Olefins side; and the remaining portion, our Vinyls business. That was quarter-over-quarter number I gave you.

Yes, exactly right. Okay. So the puzzle I have is your -- I don't understand the large change sequentially in your Vinyls operating income, where you're down by roughly $125 million. My guess, looking at caustic soda price changes, is maybe that cost you $25 million, something like that, sequentially. So in trying to understand the change, is it something like, I don't know, $25 million or $30 million in caustic, $30 million in domestic PVC margins, $30 million in European PVC margins. Can you do some sort of bridge to get us from the $251 million to the $125 million.

Yes. So Jeff, when you think about it, and we kind of outlined some of these. Obviously, we spoke about the ethane, but obviously a big contributor also was the run-up in natural gas. And a great majority of that impact in the quarter was natural gas as well. And remember, we're buying purchased ethylene for the Vinyls business. And so that was all attributable to the Vinyls business, and that was in the neighborhood of about $15 million impact. The other drivers here was really caustic, as you noted, and that was also a significant contributor. And of course, seasonally, the volumes sequentially quarter-over-quarter were down, which is normal seasonality in resin and the building products areas.

And we also had higher ethylene purchase price on the vinyls side.

Right.

So weren't ethane prices lower in the fourth quarter versus the third quarter?

And so ethane came in lower, which means a higher impact on a FIFO basis. If you recall, I gave some guidance and said if we felt we'd have an average price at the time we made our last call of $0.35 per gallon, that we would have a $25 million impact. The issue is, is that ethane actually came down. The average price for ethane was in the mid-30s. And if I view -- if you'd use my number, it would have been in the high 30s. And so that's why the impact was $38 million and not the $25 million that I guided to because ethane came down. So it's a good news, bad news story. The bad news is, is that there's a higher impact. The good news is, ethane's lower.

Just as a last question, so average prices for caustic will be lower in the first quarter because prices fell through the quarter. And do you still have a -- and polyethylene prices dropped $0.06 a pound in November and December. And you still have a FIFO hit, though not as large as it was in the first quarter. So all things being equal, should the first quarter sort of more or less look like the fourth quarter that you just reported in terms of your EBITDA?

Well, Jeff, as you know, we don't give formal guidance. But what I think you're -- what you're talking to -- yes, so what you're talking to are really some of the headwinds that we see. So clearly, I gave an indication of the impact of natural gas flowing through our results in Q1. And certainly, as I say, most of that ethane has flowed through, that was embedded in our cost of sales. But I think you noted that ethane -- excuse me, that caustic prices, and Albert commented on caustic prices and polyethylene prices period to period, we've got a price increase in PE announced, but we've also got a decrease in caustic for the index.

Our next question is from Neel Kumar from Morgan Stanley.

I was wondering if you can give us an update on your caustic soda contract renegotiations. Do you expect any benefit in 2019 from caustic contracts repricing in more favorable terms?

Well, there's no difference from 2018. Some caustic price are negotiated yearly, some are maybe 2 or 3 years and some are negotiated monthly. So there's no major difference compared with prior year.

Okay. And what type of impact do you expect maintenance to have on 1Q industry growth by operating rates relative to the fourth quarter? And then in terms of your own turnaround schedule, is there anything that we should be watching out for in terms of major turnarounds either in olefins or vinyls in 2019?

No, Neel. Our plan for turnaround activity in '19 is similar to '18, and so I don't expect anything out of the ordinary. I didn't call out anything for '19, and it'll be very consistent with the kind of turnaround pattern we had in '18, which is a more normalized turnaround pattern.

Our next question is from Aleksey Yefremov from Nomura Instinet.

What should we assume for the option exercise for Lotte JV? Should we assume that you stay at 10% ownership? Or maybe how likely or not are you to increase that ownership this year?

Alex, we're still obviously looking at the completion and looking forward to that in the first half of 2019. And so until we've made any election and certainly if we choose to do so, we'll certainly make that known publicly. But I think for modeling purposes, until there's a change, you should continue to assume it's that same 10% ownership. And we'll continue to do our work and assess how we think about that option. And if we choose to make a decision, we'll certainly announce that accordingly.

And assuming that 10% ownership, could you help us -- do you have a rough financial impact? Is that relatively neutral, meaningfully positive or negative this year?

I think a lot of it is a function, Alex, in terms of how you think ethylene is going to play out during the course of 2019, so it's really a function of how you view ethylene during the course of the year.

Understood. And final question, if I may. Was there anything unusual about 2018 cash flow from operations for the full year?

No, there wasn't. I saw on your note here, the real change between year-over-year, between '17 and '18 in your note was really just change in working capital, which was not unusual in terms of nature for the full year. Remember, we had a run-up in ethane during the course of -- late in the year in '18.

Our next question's from Kevin McCarthy from Vertical Research.

I was wondering if you could comment on the percentage of your U.S. caustic soda production that was exported in 2018 and how that might compare to a normal level.

Yes. I think the U.S. industry exports about 20-odd percent of its production. And with our acquisition of Axiall, we're pretty much exporting a similar ratio to what the U.S. industry is doing.

Okay, that's helpful. And then, now that you've closed the NAKAN deal, are there any particular cost synergy targets or sale synergy targets that you would care to put forth, recognizing that it expands your global footprint?

Kevin, we've not announced anything publicly. But certainly, as you could imagine, it was a nice bolt-on to our business. Axiall gives us some new geographies. But obviously, it's headquartered in Europe, and so certainly the opportunities to capture synergies with their existing European footprint is something we're focused on. But we've not publicly quantified those for you.

Okay. And lastly, if I may. I think you took in the fourth quarter, or indicated on the income statement, anyway, expense associated with integration related and transaction costs for the Axiall deal. What are those costs at this juncture? I think you're coming up on the 2.5-year anniversary of the deal in a month or 2. How long would you expect those to persist?

And Kevin, a lot of those were combination of not only NAKAN, but also Axiall. And so as you can imagine, there were costs incurred as we got toward the end of the year rationalizing the business. And of course, some of those costs were also related to the acquisition work that was done just prior to the close of the NAKAN deal in the fourth quarter.

Our next question's from Hassan Ahmed from Alembic Global.

I just wanted to revisit the Q4 2018 bridge analysis more on a year-over-year basis. So I'd looked at the pricing stack that you guys gave for the different products, chlorine, ethane, et cetera, and looking at your capacities and the like, tried to reconcile using IHS pricing, which is obviously what you listed, where your EBITDA should turn out. And I guess you factored in the FIFO impact and the like that you mentioned as well, and I still come up with flattish EBITDA. So I'm just trying to reconcile on a year-over-year basis what am I missing. I mean, were realized product pricing, was it lower than what IHS is quoting? Was realized feedstock costs, were they higher than, again, what IHS is quoting and the like? Because based on this analysis, I come up with flattish EBITDA versus the $140 million swing that was reported, so just want to reconcile that.

So Hassan, probably the biggest piece that I would note that probably wouldn't be captured in your analysis would be the FIFO impact on ethane on a year-over-year basis. That'd probably be the biggest piece of the puzzle that you're missing, and that would be probably nearly half of that number.

Understood, okay. So as much as $70 million?

Yes.

Okay, fair enough. Now, moving on, more about market conditions, near term and longer term. 2018, obviously, a funny year for the ethylene market. We saw oil doing what it was doing. And then beyond that, there was this whole notion that ethylene capacity came online ahead of derivative capacity, so you saw this huge gyration. It seems in 2019, there will be a balance between ethylene and derivative capacity coming online. So assuming oil doesn't gyrate too much, is it fair to assume that we won't see too much volatility within the ethylene, polyethylene side, that's on the nearer-term side? And then on the longer-term side, again, if you could just give us your views of how you're thinking about the olefins and polyolefins market, particularly keeping in mind some of these crude to ethylene projects that are being announced in Saudi, a lot of naphtha-based projects being announced in China.

Yes, that's a good question. I think for the Olefins business, it's really a ratio of crude oil to ethane price. And if crude oil stays low, ethane price stays high, there will be a squeeze on margins for our U.S. polyethylene producers. If crude oil move up as we had seen over the last few weeks or months, so that will help the U.S. polyethylene producer -- integrated producers. And you have all these biggest, smartest companies in the world in our business investing -- continuing to invest in the U.S. That will -- obviously, they believe that U.S. still is one of the best place to invest on a cost position. Granted, U.S. demand growth is not like China, and so much of the U.S. capacity -- increased capacity will be destined for export market.

Our next question's from Arun Viswanathan from RBC Capital Markets.

Just a couple of questions on the outlook a little bit as it relates to your Q4 report. So it appears that Q1 is probably going to see some of the headwinds that you saw in Q4, i.e. lower oil lingering and some of the feedstock issues, and we still haven't seen the pricing come through in either segment. So assuming that holds, how do you look at Q2? I mean, is there a possibility that you won't have as much of a FIFO impact? And then do you expect any improvement on the Q2 caustic side given the announced price increases? And then maybe you can also touch on olefins and if there's a possibility of pricing coming through in Q2 in olefins.

Well, Arun, as it relates to the FIFO number, certainly, we'll -- and I gave guidance in terms of how much will flow through in Q1 for gas. And I also mentioned that most of the ethane has flowed through because we've seen lower ethane now relative to what we saw in the fourth quarter. So that will alleviate as we get later into the year, but we will have that 1Q impact that I gave guidance to.

As to the prices, again, on polyethylene prices, there's 2 things: price announcements for February and IHS looking at no price change until sometime in October, November of this year. So if you still oil versus gas -- if oil prices move up and the international polyethylene price with a cost pressure will move up and U.S. price move up at the same time. And as far as PVC and caustic, I think for caustic prices, that the IHS is forecasting a $20 a ton drop in January. And after that, the price goes up in April, May and July. So I think as we've said, there will be inventory buildup during the last quarter with the Indian -- review of Indian standards issues on importing permits, we think that will be resolved at least the first half, if not the early part of the second quarter. So that will -- India is a big market for caustic. And with the Brazilian -- one of the largest aluminum refineries in Brazil that we believe also probably will be resolved sometime this year, which will also permit more imports of caustic. So we think that as inventory are being used up and these export markets come back, global supply-demand balance improves and pricing improves. And some of the price in Asia, export price, are probably at lower -- low margin for some of the Asian caustic producers. Remember, they have high cost of power and high cost of soda as well. So on a long-term basis, caustic demand -- I think IHS came out with this report, they're growing between 1% and 2% a year; and PVC, about 3% a year for the next 10 years or so. And with the lack of capacity increase -- I think capacity increase less than 1% a year globally, so the supply-demand balance will tighten in the coming years.

Okay, great. And then can you quickly comment on your inventory levels in both businesses? Were you able to -- do you think that they were brought down sufficiently in Q4, that it does relatively indicate that there is a quite tighter market going forward? And maybe also on the spot export side, any look on caustics products towards inventories?

Yes. I think, as we mentioned, that the caustic inventory was high at the end of last year because of all these trade issues, and I think they've been winding down gradually over the first quarter and moving into the second quarter. But also the seasonality, caustic is less seasonal than PVC. But I think demand also improved. So we believe that the inventory will get more normal conditions in the second quarter and onto the midyear area. Polyethylene-wise, same thing. I think IHS and other consultants have reported a higher polyethylene inventory in the linear low and high density and less so in the LDPE. And I guess, again, depending on the trade issues as well as the crude oil and ethane differentials, that those inventory, we believe -- I guess, with the low cost that the U.S. has, those inventory will be coming down as well. And PVC, I think, eventually, it's a very normal area. There are some winter -- lower demand, seasonal. But now with the building season start again in the Northern Hemisphere, we'll see inventory go back to normal very quickly.

And then lastly, if I may, just could you give us a couple quick minutes on your building products business, what the outlook is? If you're seeing any diminished activity or increased activity on the construction side?

Yes, certainly. As we said, the seasonality really affects the building part as well and partially fourth quarter. It's a very, very normal seasonal slowdown, and we are seeing signs of picking up in the building season. Yes, the housing market has -- I think it's kind of jumping up and down a bit. So it's slowed down a bit, I think, in November, December last year. And now with interest rates stabilizing, long-term interest rate, we believe -- and the economy is still strong, we believe the housing market will not be going to high growth but will go back to this normal trajectory of getting back to the 1.5 million building units per year. That's a 50-year average for the U.S. So I think we're gradually coming towards that target, but it will take longer to get to that stage with a high interest rate.

Our next question's from Bob Koort from Goldman Sachs.

Albert, I was curious -- you guys probably look at this. But if you were to build -- say, you decided you wanted to build a new cracker in Lake Charles on your property, what kind of returns on capital would you get doing that today, do you think?

Well, it's not today's return. It's really about what your outlook for the future is. And the future is still -- yes, the future is still -- the differential between crude and ethane in the U.S., the global crude price and ethane in the U.S. and some of the biggest companies in the world are putting billions of billions going ahead with their new projects. So some are already half way through and some are yet to build one. So I think most of the big companies' decision is a telltale sign of what industry experts are feeling today.

I guess, Albert, some might argue some of those big companies can absorb more challenging returns than maybe companies that's your size and your focus. So that's why I was curious what kind of numbers you would put on that looking at the futures curves and cost curves that are out there.

Well, we are going ahead with our Lotte joint venture. And I think when we make the decision to acquire additional percentage of the joint venture, that will express our view of the future as well.

And how about -- I'm curious, how would you look at -- you mentioned that more and more product is getting exported, but the demand growth here can't -- isn't sufficient to absorb all the supply. If you were to think about investment, how much more would you have to discount your return dynamics to account for the volatility that is created by that greater influence in the export markets in your sales?

Well, we know that from the get go, 5, 6, 7 years ago, that new capacity, U.S. addition, were all targeted for the export market. So, I think, nothing has changed. I think people are making investments with their eyes wide open.

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've ended the hour for the time allotted. So if there are any additional questions, feel free to reach out to management after the call. And we hope you'll join us again for our next conference call to discuss our first quarter results.

Thank you for participating in today's Westlake Chemical Corporation Fourth Quarter and Full Year 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 Time on Tuesday, February 26, 2019. The replay can be accessed by calling the following numbers: domestic callers should dial (855) 859-2056. International callers may access the replay at (404) 537-3406. The access code for both numbers is 7077616.