Westlake Corp

NYSE:WLK

Earnings Call Transcript 2020-Q1

[Operator]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Chemical Corporation First Quarter 2020 Earnings Conference Call. [Operator Instructions]. As a reminder, ladies and gentlemen, this conference is being recorded today, May 4, 2020.

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.

[Jeff Holy, VP & Treasurer]

Thank you. Good morning, everyone, and welcome to the Westlake Chemical Corporation First Quarter 2020 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 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, cost and volatility of raw materials, energy and utilities; governmental regulatory actions, changes in trade policy and political unrest; global economic conditions, including the impact of COVID-19; 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 to assist in the discussion of our results.

A replay of today's call will be available beginning today, two hours following the conclusion of this call. This 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 5672078. Please note that information reported on this call speaks only as of today, May 4, 2020, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay.

I would finally advise you that this conference call is being broadcast live through an Internet webcast system that can be accessed on our web page at westlake.com.

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

[Albert Chao, President, CEO & Director]

Thank you, Jeff. Good morning, ladies and gentlemen, and thank you for joining us to discuss our first quarter 2020 results. Before we talk about the quarter, I would like to recognize, this is a very challenging time, and our thoughts are with those affected by COVID-19.

I will highlight some of the ways we are responding to COVID-19 and thoughts on the current situation. Our operations were deemed essential by the Department of Homeland Security and various governmental authorities, which have permitted us to operate during the national state and local stay-at-home orders. In managing each of our facilities, we have followed the recommendations and instructions of those national, state and local health authorities. Safety of our employees have always been our #1 priority and in response to the threat posed by COVID-19, we have implemented a variety of initiatives and actions to protect our employees, including ensuring personal spacing and providing personal protective equipment, conducting temperature screenings at entrances to our plants, positioning -- postponing or canceling all noncritical business activities and travel, increased cleaning and disinfecting of all facilities, and having as many employees who can work remotely do so.

In addition to protecting our employees, we're supporting the communities where we operate. Westlake Chemical, in connection with the Ting Tsung and Wei Fong Chao Foundation, contributed a combined $1 million to the Greater Houston COVID-19 Recovery Fund. We've also made numerous donations in the local communities where we operate, including personal protective equipment to local hospitals and other medical facilities, and several of our vinyl product businesses have made plastic face shields. As a business team essential by the federal and state governments, Westlake makes products that benefit our everyday lives. Many of these products are supporting over half of the United Nations' sustainable development goals, but are particularly important in today's environment, including polyethylene that's used in medical applications in food packaging, PVC that's used in medical equipment and supplies as well as a variety of construction and infrastructure users, such as fresh and wastewater piping and chlorine and caustic soda used for water treatment, disinfectants, paper tissues and cardboard packaging manufacturing. Once again, I want to thank our employees who are producing and supporting the production of these products that are critical to society's needs and safety in today's environment.

Before Steve goes through the first quarter results in more detail, let me provide some perspectives for what we are seeing in the current environment and the impacts from COVID-19. In our polyethylene business, we are continuing to see good demand driven by our focus in specialty applications, particularly food packaging, as more individuals consume packaged food and everyday items from the grocery stores, and we expect such demand to remain generally resilient. However, while our ethane feedstock costs have decreased, our competitive advantage versus oil-based feedstock has been eroded by the 68% decline in oil price we have seen so far this year. Our NAKAN-based international competitors are benefiting from these reduced costs due to the significant decline in global oil prices. As a result of these lower global production costs, industry consultants expect to see polyethylene prices and gas-based polyethylene producers' margins decline, while oil remains at these depressed prices.

In our PVC and Vinyl products businesses, after a very good start to 2020 late in the first quarter, we saw a broad decline in demand. This decline was led by lower construction activity, housing starts, general manufacturing and industrial activity, resulting from the restrictions many governments around the world put in place to help reduce the number of people infected by COVID-19. Similar to our Olefins business, many of our global competitors that use naphtha-based ethylene have also seen their input cost decline with the reduction in global oil prices, reducing the cost advantage that North American PVC producers have enjoyed since the onset of the shale oil and gas revolution. However, industry consultants believe that at these potentially lower demand levels, nonintegrated Chinese coal and the acetylene-based PVC production may not be economical and are at risk or being shut down, which will benefit North American-based PVC production in the long term.

COVID-19 has caused reduced construction activities globally, weakening demand for PVC and associated chlorine feedstock. This slowing in demand for chlorine has reduced overall chlor-alkali production cutting the supply demand balances for caustic soda, the related chlorine co-products in chlor-alkali production. As a result, we are seeing improved prices in caustic soda as its demand has remained firm. Overall, the impact on our business will depend on the duration of the COVID-19 pandemic, the duration of various stay-at-home restrictions and the rate of economic recovery in the U.S. and abroad.

I would now like to turn our call over to Steve to go over our financial and operating results for the first quarter.

[Steven Bender, EVP & CFO]

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 2020, we reported net income of $145 million or $1.13 per diluted share compared to net income of $72 million for the first quarter of 2019. The $73 million increase in net income from the prior year period was partially due to income tax benefit of $62 million resulting from the provisions of the CARES Act enacted in March 2020 to address the economic fallout of the COVID-19 pandemic affecting businesses in the United States.

Compared to the first quarter of 2019, 2020 got off to a strong start, and we saw increased sales volumes of both our Olefins and Vinyls segments, especially in PVC and polyethylene. Although we began to see impacts resulting from COVID-19 in Asia in January and in our European Vinyls business in February, these impacts were offset by strong demand for polyethylene, PVC resin and our downstream vinyl products. The contraction in global industrial demand driven by the international trade uncertainties that persisted in late 2018 and throughout 2019 led to lower prices and margins for a major product -- for major products, especially in the international export markets. As we progress through the first quarter of 2020, we begun -- we were beginning to see momentum for price increases in both of our segments prior to COVID-19 becoming a global pandemic late in the first quarter, which occurred at the same time we saw the significant decline in global oil prices.

Our utilization of the FIFO method of accounting resulted in an unfavorable pretax impact of approximately $20 million or $0.12 per share compared to what earnings would have been if reported on the LIFO method. This calculation is only an estimate and has not been audited.

Now let's move on to review the performance of our 2 segments, starting with our Vinyls segment. In the first quarter of 2020, our Vinyls business saw lower sales prices for caustic soda as compared to the first quarter of 2019 driven by sluggish global industrial manufacturing activity as well as the initial impact of COVID-19 in Asia and in Europe. Vinyls operating income of $73 million in the first quarter of 2020 decreased $28 million from the prior year period primarily as a result of the lower sales prices for caustic soda, partially offset by higher sales volumes for PVC resin and our downstream products, along with lower feedstock and fuel cost. Also, the contribution from our interest in the LACC ethylene joint venture reduced our total cost of ethylene by providing additional ethylene at cost, thereby reducing the amount we purchased at higher market prices. First quarter Vinyls operating income of $73 million increased by $5 million from the fourth quarter of 2019 as we saw higher sales volumes and prices for PVC resin and lower feedstock and fuel cost. These increases were partially offset by lower global sales prices for caustic soda.

Now turning to our Olefins segment. For the first quarter 2020, Olefins operating income of $62 million increased by $25 million from first quarter 2019 as a result of higher polyethylene sales volumes and lower feedstock and fuel cost, which were partially offset by lower polyethylene sales prices. First quarter 2020 Olefins operating income of $62 million increased $13 million from the fourth quarter 2019 primarily due to higher sales volumes for polyethylene and lower feedstock and fuel cost when compared to the immediate prior quarter.

Now let's turn our attention to the balance sheet and statement of cash flows. At the end of the first quarter 2020, we have cash and cash equivalents of $1.5 billion and total debt of $4.4 billion. Cash flow from operating activities was $61 million in the first quarter of 2020.

Before moving forward with the items we typically discuss with respect to our forward-looking guidance, I'd like to talk about some of the actions we have taken to manage the economic impact resulting from COVID-19 and the corresponding restrictions put in place. We have a strong liquidity and balance sheet position at the end of March out of an abundance of caution we drew on our $1 billion revolving credit facility, resulting in holding $1.5 billion of cash on the balance sheet at the end of the first quarter. Alongside the strong liquidity position, we have strategically staggered debt maturities with an average life of approximately 15 years. The nearest debt maturity is $250 million due in July of 2022. This solid liquidity position, coupled with a long-dated debt maturity schedule, allows us to operate more confidently in today's uncertain environment.

We are taking action to reduce our operating expenses and manage our operations to manage current demand. We have reduced operating rates at our facilities and idled some small unintegrated facilities. We have decreased the level of capital expenditures while continuing to ensure the safety of our operations and employees. Given our current outlook, we anticipate reducing 2020 capital expenditures to $500 million to $550 million from our previously discussed guidance of $650 million to $700 million. We expect to defer the turnaround of our Petro II ethylene unit, originally planned for the second half of 2020 to the first half of 2021. Given the current business environment, we are closely monitoring the changes in our operations, and we'll adjust accordingly to meet market needs.

With the previously discussed benefit of the CARES Act, we now expect our 2020 effective tax rate to be approximately 21%.

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

[Albert Chao, President, CEO & Director]

Thank you, Steve. We produced solid results in the first quarter of 2020. However, as we began to feel the magnitude of impact resulting from the outbreak of the COVID-19 pandemic late in the quarter, we have focused on managing the business through this challenging time. Foremost is to ensure the health and safety of our employees around the world. Next is to produce products that are essential to our lives, from polyethylene for food packaging, PVC resins and compounds used in medical applications and equipment, food packaging, construction and infrastructure and chlor-alkali products for water treatment, disinfection, paper tissues and cardboard packaging. Our teams continue to perform exceptionally well in these challenging times, staying virtually close to our customers and continuing to produce the products needed in today's society. We expect the polyethylene production cost advantage from ethane versus naphtha will be reestablished, and we will continue to remain focused on taking actions to position ourselves in this environment to reduce costs, limited cash usage and create economic value over the business cycle. Our balance sheet, competitive position and actions will position us to weather the current environment.

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

[Jeff Holy, VP & Treasurer]

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. Twanda, we will now take questions.

[Operator]

[Operator Instructions]. Our first question comes from the line of PJ Juvekar with Citigroup.

[Prashant Juvekar, Citigroup]

A question on caustic demand fundamentals. I know caustic prices are going up due to decline in chlorine volumes, but is there anything in alumina or pulp and paper markets that warrant higher volumes? And do you think -- could higher caustic prices be sustained if demand remains weak?

[Albert Chao, President, CEO & Director]

That's a good question. Because of the, as you said, the lower demand for chlorine and chlorine derivatives, there's less production of caustic. And caustic demand is still pretty strong in most of the segments, especially for packaging, water treatment and disinfectant. So as the economic activity resumes from the stay-at-home orders, we believe that caustic demand will still be reasonably good going forward.

[Prashant Juvekar, Citigroup]

And then just my second question is you mentioned, Albert, that you think as an advantage will be reestablished. Do you have any comments on that -- further comments on when do you think that will happen? And would you, at some point down the road, spend CapEx to make your crackers more flexible?

[Albert Chao, President, CEO & Director]

I'll answer the first part, and I'll ask Steve to answer the second part. From the industry consultants and the future prices of oil, we believe that towards end of the year, early next year, that oil price will move up such that ethane-based -- U.S. ethane-based ethylene production will be more cost competitive than naphtha-based ethylene production.

[Steven Bender, EVP & CFO]

And PJ, as it relates to looking at capital to have more flexibility, as you may recall, we do have flexibility with our Petro II cracker, has substantial flexibility with propane and naphthic flexibility. And certainly, as you will recall, moving to a heavier feed slate reduces ethylene. And as long as we're seeing reasonable demand in our downstream derivatives, we need to make sure that we're looking at the integrated economics. So we'll study that. But with Albert's comments about reestablishing that advantage, we'll assess the return potential of putting more capital, giving more flexibility.

[Albert Chao, President, CEO & Director]

And PJ, as you know, we are still a net bioethylene. And certainly, we'll like to improve our operating rates and debottleneck anywhere we can that makes sense. But we are watching our capital investments. So make sure that we'll not make any major investments until we know that the economic recovery is well on its way or has been on its way.

[Operator]

Our next question comes from the line of Bob Koort from Goldman Sachs.

[Dylan Campbell, Goldman Sachs Group]

This is Dylan Campbell on for Bob. On that same point -- kind of on that same point, some of your competitors last week flagged some physical limitations to switching to naphtha-based production that limits to kind of find a home for some of the co-products. So where do you see current naphtha cracking economics both in terms of what you can put on the spreadsheet in terms of pricing and then also on practicality relative to ethane or propane?

[Albert Chao, President, CEO & Director]

Yes. Right now, you're right, a lot of co-product prices are fluctuating quite a lot. And one of the major issues is butadiene demand has come down sharply due to the lack of automotive construction as well as a lack of -- reduced driving. So -- and the naphtha crackers produce a lot more butadiene than ethane crackers. So even if you have cost advantage, but if you have no home for the butadiene then it's an issue also. And as Steve mentioned, as you go back, if you're already on ethane cracker, go back to crack naphtha, your volume comes down a lot, which will impact your cost as well.

[Dylan Campbell, Goldman Sachs Group]

That's helpful. In terms of ethane and kind of production cuts down at the well head, at what point -- or do you see a point where that actually creates some type of potential for ethane prices to spike once again?

[Albert Chao, President, CEO & Director]

Certainly. Well, with the increase in natural gas prices from reduced -- or expected reduced associated gas production, ethane price has moved up. But the projection is that ethane will still be tracking natural gas prices. There's still a lot of ethane being rejected.

[Operator]

Our next question comes from the line of Kevin McCarthy with Vertical Research.

[Kevin McCarthy, Vertical Research Partners]

I wanted to ask about the $150 million reductions to the capital budget. Can you discuss what projects, if any, have been canceled and which may have been postponed, but you would still intend to complete?

[Steven Bender, EVP & CFO]

So Kevin, if you recall, we completed an expansion in Louisiana for PVC late last year. So the predominance of the reductions are looking at some of the energy savings-related projects and some of those smaller Gulf Coast-based opportunities we discussed. So we're pulling back, really, to what I would consider at this operating rate level kind of the normalized maintenance level. And certainly, we'll assess the markets as we go forward. But no major pullbacks of major projects. Those were largely all completed last year.

[Kevin McCarthy, Vertical Research Partners]

Okay. And then with regard to PVC resin, can you talk a little bit about what you've seen so far in April in construction and other end-use market applications? And what are your expectations moving through the quarter with regard to possible demand?

[Albert Chao, President, CEO & Director]

Certainly. As we mentioned that due to the global government's restrictions placed on stay-at-home orders, a lot of construction has slowed down or stopped. That has impacted not only the U.S. but globally and has impacted PVC production. And industry consultants, such as IHS market and the CDI, are projecting PVC production rates in the U.S. to drop, pretty much averaging first quarter from 86% to 83%, to second quarter of 72% to 66% range. So we expect the PVC production and demand to drop first -- pretty significantly in the second quarter.

[Operator]

Our next question comes from the line of Alex Yefremov from KeyBanc.

[Aleksey Yefremov, KeyBanc Capital Markets]

As you look at the second quarter, there is a higher caustic soda price outlook, likely lower margin in PVC and weaker volumes, as you just mentioned. So how do you see those three factors playing out in terms of sequential EBITDA outlook for your Vinyls side?

[Albert Chao, President, CEO & Director]

Well, certainly, they'll have an impact. And depending who you look at from a consulting projecting point of view, the PVC price is coming down. I think April, people looking at between $0.02 to $0.05 a pound and certainly more decline in May. The spot price PVC overseas has improved somewhat from the very low bottom we've seen. Caustic price -- industry has announced caustic price in March -- on February, about $40 a ton -- sorry, caustic price. And then in March, there's additional $60 to $70 a ton in price increase. And so all of these will impact the financial results of our chlor-alkali and Vinyls business. And time will tell how much volume reduction will impact, but we expect quite a negative impact on the financial results in second quarter.

[Aleksey Yefremov, KeyBanc Capital Markets]

Understood. And is it too early to say whether your EBITDA on a net basis, given all these factors, will be higher, lower or about the same in the second quarter?

[Albert Chao, President, CEO & Director]

Well, as we mentioned earlier that the volume expect to drop from operating rates. So if you combine with lower volume and reduction in prices in PVC, even though caustic has improved, but all the combination, it will have a negative impact on the second quarter earnings.

[Aleksey Yefremov, KeyBanc Capital Markets]

Understood. And then polyethylene, some players have talked about either idling capacity or reducing utilization. Do you see the need to do so in your system? What are your expectations for polyethylene volumes in the second quarter versus first quarter?

[Albert Chao, President, CEO & Director]

Again, if you look at some of the industry consultants, IHS and CDI, for LDPE, the first quarter was 90%, 91% operating rate. Second quarter, they're looking at 84% to 77% operating rate. For linear low, first quarter was 99% to 95% operating rate, and second quarter is 84% to 83% operating rate. So again, second quarter operating rates are expected to come down sharply as well, partially due to the lack of demand globally or reduced demand. And two is with the competitive nature of naphtha-based ethylene that overseas production costs are quite low. So a combination of price -- expected price declines in polyethylene as well as reduced volume will have also a negative impact on the financial results.

[Operator]

Our next question comes from the line of Frank Mitsch with Fermium Research.

[Frank Mitsch, Fermium Research]

Thank you for providing some of the industry operating rates on the polyethylene side, low and linear low. Where are you seeing industry operating rates on the Vinyls side? On the chlor-alkali side? And Albert, you had mentioned that you're running at reduced operating rates and you've idled some facilities. Can you give us some order of magnitude of what percent of capacity would be off-line, et cetera? Any way to try and size that up for us?

[Albert Chao, President, CEO & Director]

Well, as I mentioned earlier, that industry consultants looking at, for second quarter, PVC operating rates between 72% and 66%, dropped from 86% to 83% in the first quarter. And for caustic, IHS looking at 87% operating rates in the first quarter and dropped to 72% operating rate, second quarter. So they are looking -- reflecting the drop in PVC demand that, as you know, that PVC -- or chlorine demand drives the chlor-alkali production. So with the reduced chlorine demand, the caustic production has come down as well. And hence, we mentioned about a lower volume for chlorine production, and we're seeing higher prices for caustic as a result.

[Frank Mitsch, Fermium Research]

Got you. Got you. And Steve, you had mentioned the company is managing its costs, et cetera. I noticed corporate expenses came down. How should we think about corporate expenses for Westlake for the second quarter and beyond?

[Steven Bender, EVP & CFO]

So Frank, we'll continue to be very focused in corporate expenses, and I gave you the lower guidance on the capital numbers. And so you'll expect that we'll continue to be very focused on keeping our costs low throughout not only the quarter but going forward into the year.

[Operator]

Our next question comes from the line of Neel Kumar with Morgan Stanley.

[Neel Kumar, Morgan Stanley]

Given the tighter supply of caustic in the near term, are you considering making any significant changes in terms of your allocation to the domestic market versus the 20% to 25% production, I believe, you typically export, especially given the higher relative prices in the domestic market?

[Albert Chao, President, CEO & Director]

Well, certainly, the export demand has been impacted by the coronavirus globally. And as we see demand for PVC coming down domestically as well as export. And it will impact certainly on the caustic supply domestic export as well. And as mentioned earlier that export price has moved up commeasurably with domestic price, actually some places are even more. So it will depending on the volume demand as well as pricing that will impact the allocation between domestic export sales.

[Neel Kumar, Morgan Stanley]

Okay. That's helpful. And then just a follow up on the corporate cost question. So the corporate other segment had EBITDA coming in around $7 million for the quarter versus, I think, like negative $10 million to $15 million in recent quarters. Was there anything onetime in that? Or was that just kind of the focus on cost reductions? And how should we think about levels going forward? Is 1Q level a decent run rate for the rest of the year?

[Steven Bender, EVP & CFO]

And so, Neel, we will be keeping a close lid on operating expenses. And so, while I don't expect any -- there wasn't any unique item per se, and so you'll expect we'll keep a very close lid on operating expenses, both across the 2 segments as well as corporately.

[Operator]

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

[David Begleiter, Deutsche Bank]

Just on polyethylene, the consultancy, price of about $0.04 in April, do you agree with that assessment? And they're also calling for about a combined $0.10 decline in Q2. What's your view on the potential decline overall in Q2?

[Albert Chao, President, CEO & Director]

Yes. We are seeing a $0.04 decline in April. And CDI is looking at $0.10 decline across second quarter, and IHS looking at only $0.07 decline across the second quarter. And the reason for that mainly is due to the lower oil price, lower ethylene cost overseas as well as the lower demand for polyethylene overseas as well as globally.

[David Begleiter, Deutsche Bank]

Got it. And Steve is the working capital -- how much release for the cash would you expect us to see from working capital this year?

[Steven Bender, EVP & CFO]

So David, I think you'll see, given the lower kind of reset of all these prices that Albert just spoke to, I think you'll see most of that release in April and May. So most of the working capital release over the first 2 months of the second quarter, and while I haven't given specific guidance, it's -- it'll be a fairly measurable amount of working capital that should release in the first 2 months of the quarter.

[Operator]

Our next question comes from the next -- line of Mike Leithead with Barclays.

[Michael Leithead, Barclays Bank]

I guess first question for Steve, kind of housekeeping. On the cash flow statement, can you just talk about the $421 million use of cash and other balance sheet items? Is that primarily working capital? Or is there anything else worth noting there?

[Steven Bender, EVP & CFO]

So as I mentioned, we had changes in our tax position. And so a big piece of that, of course, are going to be the NOL carryback that we were able to benefit from as a result of CARES Act. So that's a big portion of that change.

[Michael Leithead, Barclays Bank]

Got it. That's helpful. And then second, more bigger picture question, there's been a number of ethylene and chlor-vinyl assets reportedly on the market in the past few months. I know, obviously, maintaining your balance sheet strength is the first priority in the current downturn. But Westlake has had a fairly successful long-term track record of buying assets at opportune moments in the cycle. Obviously, valuation is always the key. But I guess would you consider looking at assets right now? Or is the focus all internal at this point?

[Steven Bender, EVP & CFO]

Yes. So Mike, we look at opportunities all the time, and you're right. We'll be making sure that we manage this circumstance. We're all dealing with well and making sure that we maintain a position, both a balance sheet position and liquidity position that allows us to come through this very strong and very capable. But at the same time, we'll also look at all the opportunities out there. And if we think there's a value-added opportunity, we'll assess it. But as you can imagine, we want to make sure that the first order of business is making sure the business is well footed.

[Operator]

Our next question comes from the line of Jim Sheehan with SunTrust.

[James Sheehan, SunTrust Robinson Humphrey]

You mentioned some -- you're idling some plants that are not integrated. Could you talk about how -- what portion of your capacity is not integrated? And is that all in Vinyl?

[Steven Bender, EVP & CFO]

These were Vinyl assets, but it's a very small piece. These were small facilities, Jim.

[James Sheehan, SunTrust Robinson Humphrey]

And on caustic soda, the prices in the export market have gone up a lot. Are you starting to see increased competition in the export market, especially in Latin America, from Asian competitors that are attracted by these higher prices?

[Albert Chao, President, CEO & Director]

Well, again, the Asian competitor also have to look into their chlorine derivative demand. And so it's a balancing -- and as you know, we may know that some of the U.S. producers are under allocation for the caustic sales.

[Operator]

Our next question comes from the line Hassan Ahmed with Alembic Global.

[Hassan Ahmed, Alembic Global Advisors]

Look, a near-term question and a slightly sort of medium-term question on some of the activities we are seeing on the ethylene side of things. One of your peers, during their Q1 earnings call, talked about how they feel with some of these movements we've seen in sort of product pricing, raw material pricing and just generally cost curve movements, that around 20 million tons of ethylene capacity is economically "vulnerable." So do you agree with that notion? And if you do, how do you think the industry will react to that in the near term? Obviously, we're seeing some sort of temporary idling, but at what stage does that temporary, actually, in your view become permanent? So that's the near-term side of it.

And on the medium-term side of it, what happens to the second wave of capacity adds? I mean, obviously, if you were to mark-to-market current raw material pricing, the marginal guys that used to be naphtha are not looking that marginal right now. The coal-based, the CTO, MTO guys are looking quite marginal, but all of a sudden, the crude oil -- the chemical side of it may actually start looking a little more attractive. So I would love to hear your views on the near-term curtailment side and the medium-term new project side.

[Albert Chao, President, CEO & Director]

Certainly. Well, as you know, the ethylene operating rate is really dependent 3 factors. One is the feedstock cost advantage; and two is operating cost, if you are smaller and older ethylene plants that you have a cost pressure; and thirdly, probably equally important is your derivative demand. If you are a merchant ethylene seller in today's market, that would be very difficult. Even with the U.S. potential export of ethylene, we mentioned in previous cost of U.S. terminal ethylene export, if your ethylene costs are not competitive, the demand will come down. So it's really a combination of all 3 that matters and which plants will enter that run. Luckily, Westlake, we are a net buyer of ethylene. So the lower ethylene prices would benefit Westlake on the whole.

But going forward, we mentioned earlier that the industry consultant in future prices of oil thinks by the end of the year or some early next year, the oil price will go back to the position where U.S. ethane-based ethylene crackers will be competitive again. So time will tell whether that will be the case or not.

[Hassan Ahmed, Alembic Global Advisors]

Understood. Understood. Very helpful. And as a follow-on, as you take a look at your sort of, broadly speaking, caustics portfolio, polyethylene side, maybe even a bit in the PVC side, the sort of big delta right now is -- or the huge divergence, I guess, we are seeing right now is in the demand for durables versus nondurables. Could you just give us a sense of, from your portfolio perspective, how much exposure you have to the nondurable side of end markets versus the durable side?

[Albert Chao, President, CEO & Director]

Certainly. As you know, that polyethylene we produce are low density and linear low density, and almost all that goes into packaging applications, mostly to food packaging and some to garbage bags and these kind of applications. So they are not durable but very much needed in today's environment. And I think the expectation is that the demand will continue to grow. On the PVC side, majorities go to construction. And as we know, that many of the governments are having stay-at-home restrictions on constructions. But we believe that as the economy recovers, there's two areas: one that government may put in infrastructure investments to stimulate economy, and construction is the area that the government can help. And second part is that we heard already that many people are looking at single-family homes rather than staying at multifamily homes. So the future demand -- as you know, single-family homes typically use more PVC than the multifamily homes, whether it's in windows, piping, sidings and many other applications. So we expect, in the longer term, PVC demand will grow more than in the past few years. But again, time will tell and when those demand will come back, depending on the economic recoveries.

[Operator]

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

[Arun Viswanathan, RBC Capital Markets]

Just wanted to get back on the trajectory potential of caustic soda pricing. So we've seen a little bit of momentum in the recent near term as operating rates have come down and demand for chlorine derivatives has come down. How do you think this evolves over the next 3 quarters? IHS actually has a pretty steep drop in caustic soda pricing forecasted for the fall. Is that related to your potential preselling of volumes as the Shintech plant starts up? How do you see this caustic price evolving? I mean -- or do you think the second quarter announcements really have some support for persistence beyond the second quarter?

[Albert Chao, President, CEO & Director]

Yes. That's a good question. I think maybe IHS is projecting that PVC demand will return after the stay-at-home orders are rescinded. And hence, there's more production for caustic, and hence, caustic price will come down. Again, time will tell whether that will be the case.

[Arun Viswanathan, RBC Capital Markets]

And any thoughts on supply and demand? Do you expect new supply to enter the market, I guess, later this year or early next year?

[Albert Chao, President, CEO & Director]

There's some new supplies, as you mentioned, the Shintech plant. But unlike polyethylene, globally, there's very limited amount of new capacity coming on stream as well as new PVC capacity. And despite the fact that PVC demand -- inherent demand is still growing, people looking at potentially investment in the future. But I think most of the investments today have stopped and waiting for the market to return. So there's less of the supply pressure compared with other -- some other products.

[Arun Viswanathan, RBC Capital Markets]

Okay. And on that point, you guys had completed a couple of acquisitions in the last couple of years on the PVC side and compounding side. I mean is that presumably more of those assets would become available, I guess, in the next year? And presumably some smaller competitors who are potentially facing some of that lower demand maybe struggling right now. So should we expect, I guess, some heightened deal activity from Westlake pursuing those types of assets?

[Steven Bender, EVP & CFO]

Well, Arun, as I mentioned earlier, we're going to continue to look at opportunities as they come into the marketplace and assess how they fit into the business. And the return potential there, I think that you -- as you will see, I think there will be some expansion as we've accomplished in 2019 of integrating further across the chain and those additions in roofing materials and in compounding materials in 2019 are an example of that. We'll look to see if those opportunities present themselves in 2020 or '21, but it's hard to know what will come, but we'll certainly stay attuned.

[Arun Viswanathan, RBC Capital Markets]

And then just lastly, given the somewhat different feedstock environment, do you think there is -- I mean is your strategy still to maintain your integration level as much as possible? Or would you be willing to potentially change that around just, again, just given the reduction in naphtha-based cash cost for ethylene production?

[Steven Bender, EVP & CFO]

Well, as Albert noted, we still are a pretty significant buyer of ethylene in the marketplace. And so as demand moves, we have an ability to adjust our purchase ethylene as well. So we can adjust, given the level of integration we have, a variety of levers, and one of those levers is the purchased ethylene component within our profile.

[Arun Viswanathan, RBC Capital Markets]

So I guess just to clarify, would you be willing to lower your integration levels in the near term? Or is that something that is possible? Or is it that's more of a longer-term decision that you wouldn't really make for near-term moves like this?

[Steven Bender, EVP & CFO]

Well, I think the answer is really a function of what kind of long-term benefit do we have on those. So certainly, when we think of those short-term, near-term opportunities, it's adjusting the business to deal with current demand circumstances. As we look more broadly, more longer term, it's more of a strategic question.

[Operator]

Our next question comes from the line of Mike Sison with Wells Fargo.

[Michael Sison, Wells Fargo Securities]

About a year ago, you guys gave a range for kind of EBITDA $1.4 billion to $1.6 billion. And I'm just curious if -- let's hope demand sort of gets back to that level over time. How does that change -- or that range or sort of that range change with oil prices depressed at these levels? And as you noted, it might take a little bit of time to regain the North American advantage?

[Steven Bender, EVP & CFO]

Well, Mike, as you heard it from Albert in our prepared remarks, we do see that advantage -- that ethane advantage reestablish itself. And don't believe that these depressed oil prices will be long-term sustaining. So as we think going forward, we think the opportunity to continue to benefit from that is going to be there. We do have the ability, flexibility-wise, to use the feedstock flexibility within our businesses today in our crackers. And so certainly, as we continue to grow, we look for opportunities to do so. But the guidance that we gave for 2019 was reflective of the demand conditions at that time. And obviously, the environment has changed a lot. And so as we look forward, we're going to continue to be mindful that we'll take the advantages that we see. And we think the advantages of ethane will reestablish themselves because we think these prices for oil aren't going to be long-term sustaining.

[Michael Sison, Wells Fargo Securities]

Got it. And then a quick follow-up on 2Q for Olefins. You gave us the industry operating rates that you think the consultants have noted. Will you be running at those levels? A little bit higher? A little bit lower? What do you -- how do you think your plans will fare?

[Albert Chao, President, CEO & Director]

Well, we would -- generally, we will run somewhat a little higher than industry operating rates, but this is a different time, challenge in time. We will do our best to run better. But it's -- when the whole -- the tide is going down, it's difficult to stay much higher.

[Operator]

Our next question comes from the line of Jeff Zekauskas with JPMorgan.

[Jeffrey Zekauskas, JPMorgan Chase & Co.]

Why is it that you're postponing your ethylene cracker turnaround into the first half of '21?

[Steven Bender, EVP & CFO]

So Jeff, you might expect that the plant has run well. And also, there is some costs associated with this. And of course, during the turnaround, you bring a large number of employees and contractors on site. And to maintain the safety of third-party contractors and our own employees, we felt it was prudent to not provide that density of footprint on site. The plant is running well. And so when you think about the combination of those factors, we thought it made sense to move that back to first half of 2021.

[Jeffrey Zekauskas, JPMorgan Chase & Co.]

That's clear. So during the call, there has been a discussion of polyethylene operating rates really moving down in the second quarter. Is that because there is much less export demand? Or is it because the spreads to shift to the export market are unfavorable? Is it an -- is the depression in operating rates an export-driven depression?

[Albert Chao, President, CEO & Director]

I guess it's the combination of both. Because of the lower GDP, the lower economic activities globally, that global demand is coming down, albeit even though that the food packaging demand is still good, and we expect to be resilient going forward. But the total polyethylene, as you know, that includes high density as well as the -- low and high density goes to other than the consumer disposable applications. Two is the lower feedstock costs are competitive overseas that also impacted the export market. So we believe that -- I think economic activities would be the main driver for the lower demand.

[Jeffrey Zekauskas, JPMorgan Chase & Co.]

And is it the case that spreads to export have become more unfavorable?

[Albert Chao, President, CEO & Director]

Well, certainly, with lower prices from lower feedstock cost for ethylene overseas, the prices dropped. And so the price is coming down in export prices and also impact domestic prices as well. But I think there's still margins for producers, that's why they are still selling into the export market.

[Jeffrey Zekauskas, JPMorgan Chase & Co.]

And then lastly, do you have any vision into the cadence of the recovery in the domestic PVC market? That is when you think about the coming quarters, there's so much quarantine activity in the second quarter. In the third quarter, there should be less. Do you have a vision of what the third quarter looks like relative to the second or it's a mystery?

[Albert Chao, President, CEO & Director]

Yes. If based on the IHS and CDI's forecast, their third quarter operating rates are still pretty low at 73% to 68%, and fourth quarter looking a bit higher at 81% and 76%. As you may know, that typically fourth quarter is a slow demand months for PVC due to the weather, but they're expecting the fourth quarter to improve over third quarter. So really, second and third quarter on a lower operating rate quarters and fourth quarter some improvement, but still below the fourth quarter of 2019.

[Operator]

Our next question comes from the line of Jonas Oxgaard with Bernstein.

[Jonas Oxgaard, Sanford C. Bernstein & Co.]

So you talked a little bit about the demand changes you've seen in the low-density plastics. Can you -- do you have a sense for what this future looks like here after the lockdowns are done? And are we seeing a genuinely increased use of low-density plastics?

[Albert Chao, President, CEO & Director]

That's a good question. If people still eat more at home and go to -- less to restaurants, then packaged groceries in various forms will still be higher demand than in the past. But I presume that as people go out and do more shopping and eating, there'll be less demand for home consumption of packaged food. But we don't think we will return back to pre-COVID-19 level until a vaccine or therapeutic drugs that's been developed.

[Jonas Oxgaard, Sanford C. Bernstein & Co.]

And what kind of impact does that have on the overall U.S. market?

[Albert Chao, President, CEO & Director]

That's a good question. Well, I mentioned that consultants are looking at a pretty steep drop in operating rates and production of supply to meet the demand -- expected demand, both domestically and export. As you know, the U.S. industry for polyethylene as a whole exporting between 35% to 40% of its production due to the increased capacities in the U.S. build up the last few years.

[Jonas Oxgaard, Sanford C. Bernstein & Co.]

Yes. What I was getting to is a lot of the -- it seems a lot of the demand for shortfall is from the harder plastics, particularly in automotive and those applications. So I'm trying to understand there's just the low-density versus high-density dynamics where we've seen in the past that they have grown at different rates and trying to figure out if there's an acceleration of that trend.

[Albert Chao, President, CEO & Director]

Well, that's a good question. I think the lower operating rate also is partially related to the increased capacities we have seen in the U.S. polyethylene industry. As I mentioned earlier, there's less of new capacity increase globally for PVC or chlor-alkali production, but it's still quite a lot of capacity in the U.S. and overseas for increased polyethylene investments.

[Jonas Oxgaard, Sanford C. Bernstein & Co.]

Okay. If you don't mind, I also have a different question altogether. We've talked a couple of times in this call about strategic options and looking at opportunities. But if we take a step back into thinking about something bigger, would Westlake be interested in something like an RMT or larger equity raise that -- to the point where the Chao family would be minority owners in the new Westlake? Is that even on the table?

[Steven Bender, EVP & CFO]

Jonas, we try not to get into structuring of hypothetical transactions. And I think it just doesn't add any real value to talk about a structuring of a hypothetical. And so I think, instead, we'd take a look at really what makes sense economically. And those are the kinds of ways in which we think about a business rather than the structuring of a hypothetical.

[Operator]

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

[Matthew Blair, Tudor, Pickering, Holt & Co.]

Do you have a view on why ethane has been moving up over just the past couple of weeks here? I think it's now about a $0.05 premium to natural gas. Does that imply some sort of constraint on the frac side?

[Albert Chao, President, CEO & Director]

Yes. We believe that it's more of a reaction to the higher prices that we've seen recently. And time will tell whether the reduced production of oil affecting associated gas production, offset by lower demand for gas, whether it's from industrial activities or less LNG exports and all that. And the -- also the ethane. As we understand, there's still a lot of ethane being rejected. So maybe it's a market reaction to the sharp jump in gas prices. Also, with high ethane price, it'll also have an impact on the ethane exports to overseas by ship as well.

[Matthew Blair, Tudor, Pickering, Holt & Co.]

Indeed. Indeed. And then, Steve, do you have a split on the FIFO impact, that $20 million between Olefins and Vinyls? And I guess as we sit in Q2, do you expect an even larger impact for the second quarter?

[Steven Bender, EVP & CFO]

Matthew, it's largely in the Vinyls segment. That $20 million pretax number is largely in the Vinyls segment. And it's hard to gauge what the FIFO number might be for the next quarter because it's very much an endpoint, the end of the second quarter to the end of the first quarter. So it's hard to gauge here in early May really where June 30 numbers will be. So I can't really guide you much because I've got so much more -- I've got two full months largely in front of me in terms of where that likely to be, but it's endpoint-to-endpoint, quarter-over-quarter. But the first quarter numbers were largely Vinyls segment.

[Operator]

Our next question comes from the line of Steve Byrne with Bank of America.

[Steve Byrne, Bank of America Merrill Lynch]

You sell vinyl products into a variety of end markets, some quite durable, like you were mentioning, construction products, but some are on the consumer goods. And do you see any of these where there's meaningful opportunity to grow share or to develop new applications where you would be interested in expanding further downstream? And maybe just the converse of that, do you see any potential for product substitution of some of these end markets to a polymer that is potentially lower price now under a lower oil price environment?

[Albert Chao, President, CEO & Director]

Yes. Some of our building products business have been doing quite well. And actually, even into the second quarter, especially repair and remodeling. People are staying home and they probably go to Home Depot and decent places and do their own repair and remodeling. So -- but also -- but as a whole, the volume is impacted by the stay-at-home orders that many local governments have put out. And as we know that starting May, some of the governments -- local governments are lifting construction restrictions. So we will see some return on construction activities. But as a whole, because of lower income levels, we expect spendings on home repair or building new homes will be coming down as evidenced by the reduction in new home permits we've seen in March and April.

[Steve Byrne, Bank of America Merrill Lynch]

Within your building products business, do you have increased inventories versus year ago levels? And your balance sheet inventory seemed flat, but anything that you're seeing in building products? And are you able to move into more of that chlorine into other end markets other than building products?

[Albert Chao, President, CEO & Director]

We've been managing our inventories early on when we see the COVID-19 impact. So I think our inventories are reasonable for the demand going forward.

[Operator]

Our next question comes from the line of John Roberts with UBS.

[John Roberts, UBS Investment Bank]

Albert, do you know what percent of global PVC capacity is coal-based production that is not integrated to the mine? And have you seen any signs of curtailment yet by those producers?

[Albert Chao, President, CEO & Director]

Well, certainly, all the coal-based production in China, and 80% of the Chinese PVC production are coal-based. And I won't think that pretty -- I won't say majority, but a pretty large part of that is not integrated. And I'm sure they are operating at lower operating rates, whether 70%, 80% operating rates today. And depending on the economic activity recoveries in China, that rates can fluctuate up or down.

[Operator]

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

[Jeff Holy, VP & Treasurer]

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 results.

[Operator]

Thank you for participating in today's Westlake Chemical Corporation First Quarter 2020 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 Monday, May 11, 2020. The replay can be accessed by calling the following numbers: Domestic callers should dial 855-859-2056, international callers may access the replay by calling 404-537-3406. The access code for both numbers is 5672078.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.