Westlake Corp (WLK) 2019 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Chemical Corporation First Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded today, May 2, 2019. I would 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 First Quarter 2019 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'll 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, who 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 industries in which we compete; 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 first 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 under our IR home page 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 124-8758.

Please note that information reported on this call speaks only as of today, May 2, 2019, 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 in 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 first quarter results. In this morning's press release, we reported net income of $72 million for the first quarter of 2019 or $0.55 per diluted share. As we'll discuss on the call, we faced a difficult pricing environment this quarter for all of our major products. Continued international trade concerns resulting from trade tensions between the United States and China contributed to slower global economic growth and industrial activity, especially in Asia and Europe in the fourth quarter of 2018; and these impacts carried over into the first quarter of 2019. As these concerns and slower growth impacted global prices, they affected export prices for our major chemical products, which filtered into domestic prices as well.

In our Olefins segment, polyethylene prices fell in the fourth quarter of 2018, following a 40% decline in global oil prices and from the increased supply from the new olefin industry production capacity that started up in the second half of 2018. In our Vinyls segment, the slowing global growth and industrial activity led sales prices for caustic soda to decline in the early fall of 2018 and continued into the first quarter. Weakening manufacturing activity over the past 2 quarters, along with high global [carbide] operating rates have led to excess inventories, which had been weighing on global prices.

In spite of these pricing challenges, we saw good demand for all our major products in both the domestic and export markets in the first quarter, delivering increased sales volumes compared to both the first quarter and fourth quarter of 2018. While the international trade tensions that weighed global economic activity and the pricing of our products for the past few quarters are continuing, we are cautiously optimistic that higher crude oil prices and a resolution to trade tensions between the U.S. and China will lead to improved industry fundamentals in the second half of 2019.

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

Thank you, Albert, and good morning, everyone. 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. For the first quarter of 2019, we reported net income of $72 million or $0.55 per share on sales of $2 billion. Westlake's net income for the first quarter declined $215 million compared to the first quarter 2018 primarily due to lower prices and margins for our major products. As Albert noted, polyethylene prices dropped in late 2018 as global oil prices fell by 40%.

This steep drop in oil prices occurred at the same time new capacity was coming into the market and global demand was softening in light of the escalating tensions -- trade tensions between the United States and China. These factors all played into the precipitous drop in polyethylene prices in the fourth quarter, resetting the price level, which carried through the first quarter of 2019, resulting in lower average sales prices compared to the fourth quarter.

In our Vinyls segment, export prices for caustic soda began to decline in the summer of 2018 as international trade tensions escalated. This decline in export prices accelerated in the fourth quarter as global economic and industrial activity softened, along with the unexpected dislocations caused by new licensing requirements, cutting off all exports into India beginning in October. These events led to the sharp drop of export prices for caustic soda, which impacted domestic sales prices in the fourth quarter that continued into the first quarter 2019.

Despite the global macroeconomic headwinds, we were able to increase volumes as we still saw strong global demand for polyethylene and styrene, although integrated olefins margins were pressured by the lower sales prices and higher ethane feedstock cost as compared to the prior year period.

Our utilization of the FIFO method of accounting resulted in an unfavorable pretax impact of approximately $19 million or $0.15 per share in the first quarter compared with what earnings would have been under the LIFO method. This calculation is only an estimate and has not been audited.

In our Vinyls segment, volumes for our major products were comparable with the prior year period, even as severe winter weather in much of the United States combined with flooding in the Midwest delayed shipments of caustic soda and the start of the spring construction season, which slowed our sales in vinyl building products in the first quarter.

In summary, as compared to the first quarter 2018, our results for the first quarter 2019 resulted from lower margins for all of our major products due to lower sales prices and higher ethane feedstock cost. Partially offsetting the declines in margins were lower purchased ethylene costs and higher polyethylene sales volumes.

The first quarter of 2019 also saw higher cost attributable to about $22 million restructuring, acquisition and integration-related charges as we completed our acquisition of the NAKAN compounding solutions business and optimized our global vinyls operations.

First quarter 2019 net income of $72 million decreased $51 million from fourth quarter 2018 net income of $123 million. This decrease in first quarter 2019 income is primarily due to the lower sales prices for our major products and higher restructuring acquisition and integration-related cost. Partially offsetting the lower sales prices for our major products were lower feedstock and fuel costs and higher sales volumes for PVC resin.

Now let me move on to review the performance of our 2 segments, starting with our Vinyls segment. For the first quarter 2019, Vinyls' operating income of $101 million decreased $165 million from first quarter 2018 operating income of $266 million. The decrease in income and operations in our Vinyls segment is primarily due to the lower sales prices for caustic soda and PVC resin, higher ethane feedstock costs and higher restructuring, acquisition and integration-related cost while benefiting from lower purchased ethylene cost.

Vinyls' first quarter operating income of $101 million decreased $24 million from fourth quarter 2018 operating income of $125 million. The decrease in operating income from the prior quarter was due to lower sales prices for caustic soda and PVC resin and higher restructuring, acquisition and integration-related cost. Partially offsetting these effects were lower ethane feedstock and purchased ethylene cost and higher PVC sales volumes.

Turning to our Olefins segment, as we discussed, we saw strong demand for our products in the first quarter. In spite of the strong global demand, the precipitous decline in global oil prices in late 2018 pulled global polyethylene prices down as customers destocked inventories and uncertainties in international trade weighed on the market. This reset of the global price level in the fourth quarter of 2018 carried through into the first quarter 2019.

In the first quarter 2019, our Olefins segment operating income of $37 million decreased $126 million from first quarter 2018 operating income of $163 million as margins were squeezed by lower sales prices and higher ethane feedstock cost. First quarter 2019 operating income decreased $53 million from fourth quarter 2018 operating income of $90 million due to lower sales prices and higher costs associated with planned turnaround activity, partially offset by lower ethane feedstock cost.

Next let's turn our attention to the balance sheet and statement of cash flows. As of March 31, 2019, we had cash and cash equivalents of $445 million and total debt of $2.7 billion. First quarter 2019 cash flows from operating activities were $147 million while capital expenditures were $203 million.

In the first quarter, we completed our acquisition of NAKAN and continued to invest in our portion of the construction cost of the EUR 2.2 billion pound ethylene joint venture with Lotte Chemical, which is expected to start-up in the second quarter of 2019. We have an option to increase our ownership to 50% at any time over the next 3 years, and we will continue to assess this option.

We continue to invest to improve the reliability of our plants and in attractive opportunities to grow our business. We have previously announced VCM and PVC expansions in Geismar, Louisiana and in Germany, and are continuing to opportunistically debottleneck several other VCM and PVC plants in the U.S. All of these investments continue to further integrate our vinyls chain.

We continually evaluate acquisition opportunities to invest where we believe they will provide attractive returns, grow our earnings and leverage our existing operations. The acquisition of NAKAN, a leading global PVC compound solutions business, is an example of that investment philosophy.

As we look forward into the rest of the year, ethane prices have declined through the start of 2019 as new NGL pipeline capacity, along with the accompanying fractionation capacity, has increased supply while global oil prices have rebounded from their December lows, highlighting the beneficial cost position enjoyed by North American olefins producers.

In our Vinyls segment, we are entering the start of the construction season in most of the country, which we expect to increase demand for PVC resin and our downstream vinyls products. We have also improved -- seen improvements in some of the areas restricting demand that affected our industry. In March, the Bureau of Indian Standards resumed issuing licenses, allowing imports of caustic soda back into India.

We also believe the largest aluminum refinery in the world, which had their production curtailed since spring 2018 due to environmental concerns, could resume full operations in the second half of 2019. This refinery is a large consumer of caustic soda and therefore, we believe this resumption of full operations will benefit U.S. caustic soda producers.

As always, we also continue to aggressively execute on cost management while running a productive organization, and we have increased our cost reduction actions given these short-term macroeconomic challenges.

Before turning the call back over to Albert, I would like to provide some guidance for your modeling purposes. For the full year of 2019, we expect CapEx to be between $600 million and $650 million. As I mentioned earlier, the next turnaround of one of our ethylene facilities is scheduled for the first half of 2020, and we'll provide more information on the duration and impact on earnings later in the year as we complete our turnaround planning. We continue to expect our effective tax rate this year to remain around 24% and cash tax rate to be around 18%.

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

Thank you, Steve. While we faced a difficult pricing environment in the first quarter, we've recently seen some improvement in the global business environment. We are cautiously optimistic that there will be a resolution to the trade dispute between the U.S. and China, which will reduce trade uncertainties and spur global economic activity.

Caustic soda consumption closely tied to global industrial activity, and the lack of industry investments sufficient to keep pace with demand in chlor-alkali is expected to tighten the global caustic soda supply/demand balance as we look forward.

As Steve discussed earlier, rebounding oil prices combined with competitively priced North American, ethane highlights the low-cost position we enjoy in the U.S. We are also well positioned in the Olefins segment with a concentration of our sales in higher margin specialty and differentiated polyethylene products. In both our vinyls and olefins businesses, we are well positioned on the lower end of the global cost curve as our industry continues to enjoy cost advantages.

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. We'll now take questions.

(Operator Instructions) Our first question comes from the line of Stephen Byrne of Bank of America.

When you compare your olefins and vinyls results in the quarter, say, against your pure-play peers, your income from operations seems disproportionately lower. Is there anything that you can call out that's differentiated about your results? Any one-offs? Anything that would highlight a differential result?

Steve, I think when you look at the direct peers that we have, certainly not all of them are integrated all the way into building products. So as we said, we had a late start to the construction season. So certainly, the impact to our downstream building products was, year-over-year, a portion of that. And of course, we had the restructuring charges, that I mentioned, of $22 million that are part of those results as well.

And our polyethylene business are really U.S. North American-based, while some of our competitors who are publishing results are more global, and they have a different dynamics in the local polyethylene pricing.

Okay. And just one more for me, please. How would you rank the 2019 pricing outlook for 3 key commodities you produce: polyethylene, caustic and PVC?

Well, in polyethylene, in April, we announced and we have a $0.03 a pound price increase coming to effect. Now the impact of that will be -- usually large customer has some price protection over months, so we'll see that coming in from that in the coming months.

On the PVC side, there is a $0.02 price decrease we are seeing in April. And then the forecast by industry consultants looking at prices to improve in the third quarter of this year. And in caustic soda, I think IHS, one of the industry consultants, announced there's a $5 dollars for short-term decrease in April. And then expect in the fourth quarter, for caustic soda prices to increase. And we've seen a large part of that impact in the first quarter is from a sharp decline in the global export prices, which we participate in both polyethylene PVC and caustic.

And the global tensions and trade issues have caused international price to decline sharply. And the U.S. chemical producers are large players in the export market, and that also differentiates our U.S. local producers from other regional producers. So as trade tensions ease and we're seeing prices in many of these areas improving, especially in Asia, in PVC and caustic, so we believe that prices should improve on the export price, which have an impact on the U.S. prices as well. And higher crude oil prices also make the U.S. ethane-based producers in polyethylene much more competitive.

Our next question comes from Robert Koort of Goldman Sachs.

I was wondering if you can talk a little bit -- it didn't seem like the weather issues affected your sales in the Vinyls segment. Is that because you exported more? Is it filling the inventory channels? Did it not actually, any of the weather issues, cause you challenges? Can you give us some clarity there?

Yes, Bob. The impact of the colder weather and wetter weather that we saw in the Midwest, back to the earlier question, was really impacting some of our building products businesses. And so certainly, as we see the onset now of spring and the construction season, we continue to pick up -- have an expectation of picking up of volume. But volume was actually, year-over-year, a good result but it did impact some of our downstream building products and vinyls products businesses.

Can you talk a little bit about your business in Asia and China, specifically? Have you've seen any intensified environmental inspections? And then on the competitive base, do you expect there might be some facility closures there in the wake of these plant problems that have happened over there? And what do you sort of see for the outlook for the incremental supply in the industry over there?

Yes, we have a PVC and downstream compounding and film production facility in China. And we are seeing a much more heightened awareness by local government and central governments, not only on the environment, but also on safety as the recent past few weeks and months there have been various explosions in the chemical industry; and one recent last week, a major explosion in Mongolia in PVC. And we are seeing reactions from local governments of potentially shutting down unsafe and old chemical plants, so that would take capacity away.

But it still takes time to understand whether those initiatives will be effective quickly or just a warning to the industry. So I think China is becoming more environmentally conscious and safety conscious, which is good for the industry and for the local communities.

Our next question comes from the line of David Begleiter of Deutsche Bank.

Albert, back to the olefins decline in the quarter, I know you have styrene in that segment, and that's probably down by about 15%. Any other items that could cause the divergence versus maybe a [Lidel] who had EBITDA decline roughly half of yours? Polystyrene would be one of them perhaps?

Well, certainly, I think the polypropylene business, with the drop in propylene price probably and also less capacity in polypropylene as, right now, it has less impact than the polyethylene, which we saw over the 40% capacity increase in the last few years. And also, companies have positions in Europe and Asia, there are much less European polyethylene producers not participating in the export market much, unlike the U.S. so not affected by lower export international prices. So I think, as I said earlier, the impact is more on North American companies, which exports international markets.

Very helpful. And just on the Lotte cracker. How do you expect that cracker to ramp-up over the next few months or couple quarters?

Well, I think as all -- any new plant startup, people are probably more cautious until the plant's -- the management team, operating team feel comfortable in ramping up. So I'm sure they will do it on a gradual basis.

Our next question comes from Mike Leithead of Barclays.

First, I know you don't give earnings guidance, but can maybe you just talk broadly about your expectations for margin trends in your 3 main products: integrated polyethylene, caustic and PVC; and any other incremental earnings contributions we should get as we go through the year? I guess I'm just trying to understand what we should layer in on top of this quarter's run rate as we move through the back half of this year.

So as Albert noted earlier, we certainly have seen a price increase in polyethylene. We achieved a $0.03 price increase in April, but the large volume buyers of course, will have some price protection for typically a month. And that will be constructive if we see that carry through into May and into June. As Albert also noted, we saw a price decrease in PVC as well as in caustic. And so while we remain -- as we remain very optimistic for the second half of the year, I think we'll continue to see some of the -- some of these trade issues continue to weigh on overall global demand.

Got it.

And also, if I may add, we are coming to the building season so our building products' volume should be improving for the second and third quarter. That's usually the 2 busy seasons, and the first and the fourth are usually the weaker seasons.

We've certainly seen ethane remain relatively contained, and ethylene has trended down, and we're a buyer in both feedstocks. So we're hopeful that, that remains also constructive to the bottom line.

And one more thing. Crude oil prices has a large impact on polyethylene prices. So if crude oil prices stays high where we are or higher, some industry analysts are projecting even higher prices towards the end of the year, that will help the U.S. polyethylene business.

Okay. That's helpful. And then a follow-up for Steve on the cash flow statement. Can you first break out how much of the CapEx spent in the quarter was related to the Lotte project? And second, can you just parse apart the $160 million use of cash in operating cash on other balance sheet items? I assume most of it is working capital, but most product prices declined sequentially. So any color there would be helpful.

Yes. So on the cash flow statement, you can see that the PP&E was $203 million, the $42 million that you see is really attributable to the Lotte investment in the quarter.

And the $160 million use of cash on other balance sheet items?

Remember, we had the acquisition of NAKAN in the first quarter and then the bigger piece of that was working capital as we continue to build working capital for the quarter.

Our next question comes from the line of P.J. Juvekar of Citi.

This is Eric Petrie for P.J. Caustic producers have announced pricing increases of $50 to $80 per ton. Do you see that more achievable in third quarter ahead of what IHS projects as a fourth quarter implementation? And what variables would affect that?

Well, it's possible if the trade tension eases, the industry activities globally improves and with the Indian licensing issues behind us, and -- that's it's possible that -- and with Alunorte refinery coming back to full operation and consuming more caustic, that could hasten the price increase.

Okay. And how many months of raw material inventory do you keep? Ethane prices have trended lower in the second quarter, do you expect to see any benefit from that?

Because we're a FIFO reporter, there is typically a 4 to 6-week lag between a FIFO reporter and those in the industry that are reporting on a LIFO basis. And so those costs that you see that have flown through, as I reported in my prepared remarks, we had a $19 million headwind. And certainly as prices trend further down in ethylene as we have seen in April and ethane has been relatively contained, we'll continue to benefit from those lower cost, but we'll be carrying some of those higher costs into the second quarter that we incurred in the first quarter.

Our next question comes from Hassan Ahmed of Alembic Global.

A quick question on the turnaround. You guys, in the press release, talked about opportunistically turning around several VCM and PVC facilities. And you also sort of talked about higher turnarounds within the Olefins segment. So could you just sort of parse out what sort of EBITDA impact that had in the quarter? I'm just sort of trying to get a sense of what the earnings probably look like in the quarter.

Yes, so Hassan, the turnaround was really just a polyethylene turnaround that was normally taken. And the impact of that was between $5 million and $10 million in the quarter.

And what about the VCM and PVC side of it?

Very small.

Very small, okay. So less impact. Now as a follow-up, slightly longer term, it seems there's a lot of newbuild activity, at least, announced out in Asia. How does that factor into your thought process about the cycle, call it, medium-term?

Well, the newbuild is based on naphtha cracker, they're much oil-based. Certain newbuilds are based on imports of U.S. ethane, which has potentially a $0.30, $0.40 a gallon extra cost of shipping costs and all that. And then I think there' very few, but a few are coal-based, which are much more competitive with the cheap price of coal in China, however the capital costs are very high.

Our next question comes from Kevin McCarthy of Vertical Research.

With regard to your building products business, a number of other companies across the chemicals industry have pointed to some weakness in housing and construction. As you think about the business and how to manage it for 2019, do you think that the weakness evident in the first quarter was more in the category of weather-related and timing-related pressure? Or do you think we're going to see a more durable macro impact on that business? I guess the second part of it would be, if you could comment on any differentials in terms of what you're seeing in the U.S. versus the Canadian market?

Yes. So Kevin, I think what we've seen with the longer winter weather this year and the wetter weather that we've seen, I do believe a great majority of that is driven by just the delays in the start of the construction season. The Canadian market certainly is also a little bit more sluggish than the U.S. market and of course, it also experienced the delays in the construction market because of the strong winter weather there. But it is, no doubt, a little bit weaker than the U.S. construction markets. But I think the big portion of that is really weather-driven.

And in April, we are seeing the pick-up in demand for all our building products already.

Okay. That's helpful. And secondly, I think you indicated a capital budget of $600 million to $650 million. Last quarter, my impression was that you were looking for that number to trend flat versus last year, which I think was around $700 million. And so wondering what changed there and whether or not you're finding savings or deferring any projects at this point.

Kevin, naturally we're looking at making sure all these projects have got the return potentials that we believe they should have and looking to also make sure that as we have seen some choppy markets over the past quarter or 2, that we're making sure that we're doing -- putting capital to work in a constructive, productive manner. And that's really what's really driving that.

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

Just curious on your reaction to polyethylene price increases. Do you expect -- it looks like the industry was able to get $0.03 in April. I mean do you expect another $0.03 in May? And if so, what's the mechanism for that? Is it low inventories? Strong demand? Or a combination of everything? Restocking? How do you see kind of the polyethylene markets right now?

Yes. I think the inventories for polyethylene in the U.S. are between average to average to a little on the high side for producer and about average or average-low side for consumers. And I think it's really a crude oil-driven international price-driven. And prices -- the margin for oil-based naphtha producers overseas producing polyethylene, the prices are almost -- there's no margin. So as crude oil prices stays higher or goes higher, there's more pressure for international price to go up. And I think the U.S. is reflecting the increased price overseas.

Okay. And I guess on the Vinyl side, PVC looks like it was flat [in the month]. Do you expect increases in PVC to stick over the next couple of months, given some seasonal strength? And how would you kind of characterize the supply-demand (inaudible)?

Yes. I think the demand, as Steve said, would largely go to building products. As building products demand increases, the PVC demand will increase as well. But U.S. industry exports around the 30-odd-percent of the PVC production overseas. So really it's overseas impact on pricings, and we are seeing, in Asia, PVC price already start going gradually up from the bottom.

So as the economies and trade tension eases in Asia and Europe, then the demand for PVC will increase, and that will have a price impact -- international price, and they'll come back to the U.S. price. I think partly, our PVC price decline was due to the drop in spot ethylene price in U.S. As you know, half of PVC's cost is on ethylene, so if ethylene price goes down -- consumers are saying that as your cost goes down, you should pass the savings onto us.

Right. And then lastly, on caustic as well. What would you consider to be the main kind of metrics you guys are watching for, for an improvement in the market? I mean is it resumption of production -- full production in Alunorte? And if so, I guess, when would you expect markets to improve in caustic?

Yes. Again, caustic is very much industrial activity-driven on a global basis. And as we said earlier, that if we believe that global economy improves, the second half with less trade tensions and with all the stimulus policies that the Chinese government has implemented recently, it will take some time to see the effect, that we believe that global demand for caustic will improve, especially with the Indian licensing issue behind us.

And if Alunorte returns to full production some time in the second half of this year, then demand for caustic globally would increase, and that will benefit the pricing. As we said earlier, on a global basis, not much capacity added. Unlike polyethylene, there's little capacity added. And so look forward the next 2 years, we believe that vinyls and caustic market supply/demand will improve and will help prices going forward.

Our next question comes from Aleksey Yefremov of Nomura Instinet.

This is Matt Skowronski on for Aleksey. You mentioned M&A possibilities. Are there any areas in particular that you're kind of looking at for bolt-ons?

We look across the spectrum of our businesses on a regular basis as well as things that could be adjacent to the segments that we're in. So there's no particular focus in one particular segment or the other, but to the extent that we see opportunities where we think we can add incremental meaningful value, that I think that have a good return associated with them on a risk-adjusted basis, we'll deploy capital. And so it's a pretty regular process that we've undertaken and have been for many years.

Understood. And have you noticed any uptick in export prices for caustic in April so far?

Yes. Export prices, I think -- international price in Asia has gradually moved up. Slowly, but it's moving up. So we believe that if the trend continues, it will help bridge the gap.

Our next question comes from Josh Spector of UBS.

This is Lucas Beaumont on for Josh. So just on vinyl. So you noted that your pricing was down about 2.5% sequentially. But that was versus the benchmark, which was up 2% in the quarter. What was the difference there?

You were talking about prices sequentially year-over-year or quarter-over-quarter?

Sequentially, quarter-over-quarter.

So as I mentioned earlier, the biggest change that we saw quarter-over-quarter in the Vinyls segment was really all driven by both PVC and caustic pricing drivers. The other driver, of course, was the restructuring charge that we took in the first quarter. But those were the only headwinds that we had in the period, quarter-over-quarter, in the Vinyls segment. As we noted in our prepared remarks, we had improvements both in feedstocks and volume was very good.

Okay. Great. And on -- so you mentioned that you'd seen the demand improve a little sequentially into April, so how would you categorize those levels now versus, say, last year or a normal year? Is it in line, higher or lower?

It's moving higher because we, certainly, are getting into the, what I would call, the catch-up season because we didn't have the start of the normal construction season due to the cooler weather and wetter weather. So we're beginning to see good order intake and shipments in the month of April to catch up for that later start that would've otherwise occurred in March or late February.

Our next question comes from Jonas Oxgaard of Bernstein.

A two-part question. Since the Lotte cracker is in startup mode, does that mean you're contributing to the startup costs as well?

So we're an owner of, proportionately, of the cracker. So those items that are our proportional share, we do contribute, that are capital-related items.

Okay. And thinking about this cracker longer term. I guess if I'm looking at current ethylene margins come, it doesn't look like buying out the remaining 40%, at this moment in time, would get you a 10% return. Now if I'm looking 3 years from now when your option expires and it still looks like you're not getting a 10% return, how would you think about that option then?

Well, I think the benefit of the option is that we can assess the market during the time period of that option. And so, as I mentioned earlier, we're continuing to assess the benefits of making incremental investments. We're still in the process of making those assessments and because of the nature and the structure of the option we have, the opportunity to do that analysis over, if we choose to, over the entire 3-year period. But it will be an assessment that we're doing on an ongoing basis, looking at both current and future expectations.

Our next question comes from Don Carson of Susquehanna.

Steve, could you quantify the year-over-year negative impact from lower building products' EBITDA? And would you expect to make that up in the balance of the year? And then you talked about $20 million in restructuring charges. You mentioned optimization of the global Vinyls business, what exactly does that mean? And then finally, I see the EPAs, once again, looking at asbestos use in diaphragms, are you feeling any pressure or do you have any plans to accelerate conversion to membrane capacity?

So Don, as we think about the building products, it was between $20 million and $30 million impact on the building products business year-over-year because of the cooler and wetter weather that we had. And certainly in terms of the restructuring charges, we always do, we look at how we are optimizing our businesses across the vinyls chain. And so the charge that we took in the first quarter is really a combination of charges related to the acquisition of NAKAN as well as some optimization related to the entire vinyls chain that we look at now that we're really continuing to expand our footprint in VCM and PVC, these expansions that I made reference to. As it relates to the environmental issues, the answer really is, is that we'll just continue to assess. There is no specific time line that this new focus brings to the table.

Yes, the diaphragm plans are pretty competitive if you have low power cost that we have.

Our next question comes from Jim Sheehan of SunTrust.

For NAKAN, could you elaborate on any cost synergy targets you have for that acquisition?

Jim, we haven't given any public guidance to synergies but certainly, as you would expect, we're going to look to strive to backward integrate into resins and certainly, kind of also pull-through the intellectual property capabilities because we're obviously a compounder here in the North American market. And to the extent that NAKAN's capabilities and know-how allow us to expand that IP, if you will, into other markets that we are already serving, that's something we'll be very much focused on. But we've not given any specific numbers on synergies.

Okay. And Albert, could you give us your outlook on ethane prices for the rest of the year?

Yes. I think if you look at the future of prices, ethane prices will be staying, more or less, in this range, maybe move up a little bit as new plants start up. But we believe that, with the pipelines and the capacity being built, there will be a lot more ethane coming from the Permian Basin.

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

Steve, do have an estimate of potential FIFO impact for Q2 '19 if pricing stays at current levels? And if it's material, do you have a split between Vinyls and Olefins segments?

Yes. It isn't going to be overly material, but I would say in the range of less than half of what we experienced in the first quarter. And so it's not a really material driver, assuming that ethane and ethylene stay in this kind of range going forward in the month of May and June.

Okay. And then are there any turnarounds in Q2 that we should be aware of?

Matthew, we undertake turnarounds in all of our plants on a regular basis but none that are significant in the individual nature, except those on the ethylene side. As you know, we do expect to do at the turnaround in 2020 of one of our ethylene units. And as we finish our planning, we'll give some better guidance in terms of exact timing and length of outage. But the other derivative units we undertake aren't individually material enough. So we've not gotten into specific guidance because there are, frankly, a number of plants.

At this time, the Q&A session has now ended. And I'd like to turn the call over to Jeff Holy for 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 second quarter 2019 results.

Thank you for participating in today's Westlake Chemical Corporation First 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 time on Thursday, May 9th 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) 527-3406. The access code for both numbers is 124-8758. You may disconnect your lines at this time.