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Westlake Corp
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Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Chemical Corporation's Third Quarter 2019 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. After the speakers’ remarks, you will be invited to participate in the question-and-answer session. As a reminder, ladies and gentlemen, this conference is being recorded today, November 5, 2019.
I would now like to turn the call over to today's host Jeff Holy, Westlake's Vice President and Treasurer. Sir, you may begin.
Thank you. Good morning everyone and welcome to the Westlake Chemical Corporation Third 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 on Westlake's performance followed by a current perspective on the industry. Steve will then provide a more detailed look at our financial and operating results. Finally Albert will add a few concluding comments and we will open the call up to questions.
During this call we refer to ourselves as Westlake Chemical. Any reference to Westlake Partners is to our Master Limited Partnership Westlake Chemical Partners LP and similar references to OpCo refer to our subsidiary Westlake Chemical OpCo LP 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 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; industry operating rates; the supply demand balance for Westlake's products; competitive products and pricing pressures; access to capital markets technological developments and other risk factors discussed in our SEC filings.
This morning Westlake issued a press release with details of our third quarter results. This document is available in the press release section of our webpage 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. 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 7725119.
Please note that inflation reported on this call speaks only as of today November, 5, 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 may be accessed on our web page at westlake.com.
Now I would like to turn the call over to Albert Chao. Albert.
Thank you Jeff. Good morning ladies and gentlemen and thank you for joining U.S. to discuss our third quarter results. In this morning's press release we reported net income of $158 million for the third quarter of 2019 or $1.22 per diluted share.
In the third quarter, we benefited from lower fee stock and fuel costs and from the strong operational performance of our plans which went above industry average tensions in the resulting market uncertainty have caused customers to remain cautious and manage the inventories tightly.
Yet we continue to see solid sales volumes in both our segments and our downstream vinyl businesses recovered by was lost due to the cold and wet weather in the first half of the year. Over the past year, we have remained focused on closely managing our costs and being disciplined with our capital expenditures.
Despite the recent weakness in prices for major products remain constructed in the outlook for the global binary supply, demand balance and believe our previous expansions in the U.S. and Germany, which will start up a year and along with increased ownership in our ethylene joint venture with logic chemical will improve our competitive position by extending our market presence etc. and lowering operating costs.
I would now like to turn the call over to Steve to provide more detail on our financial and operating 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 segments. Let me begin with our consolidated results.
For the third quarter of 2019. We reported net income of $158,000 or $1 and 22 cents per share, compared to net income of 300 and $8 million for the third quarter of 2018. Compared to our prior results, our results were primarily impacted by lower prices and margins for our major products, especially in the international export markets.
So most of the North American f1 producers U.S. classes as gas based feedstocks, the Asian and European as Producers use Napa and obeys feedstock for all prices we have experienced throughout 2019 have lower the gas ratio reducing our cost advantage.
So slowing global economic growth over the past year resulting from the international trade tension uncertainties, coupled with lower oil and gas ratio have led to lower margins in both our olefins and violence segment was compared to the third quarter 2018.
Compared to the second quarter of 2019 we benefited from lower feedstock and fuel cost as higher operating rates in our Vinyls segment following the completion of our normal spring maintenance turnarounds.
Our utilization of the FIFO method of accounting resulted in favorable pre-tax impact of approximately $4 million or $0.03 per share compared to what earnings would have been reported on the LIFO method. This calculation is only an estimate and has not been audited.
Now let's move on to review the performance of our 2 segments starting with our Vinyls segment. In the third quarter of 2019 our Vinyls business continued to be lower sales prices for caustic soda especially in the export market as declining global industrial activity and slower economic growth resulting from the ongoing uncertainty in international trade pressured prices lower over the past year.
Compared to the third quarter of 2018 Vinyls operating income of $153 million decreased $98 million primarily as a result of the lower sales prices for caustic soda. Third quarter Vinyls operating income of $153 million increased $24 million from the second quarter 2019 as we benefited from lower ethane feedstock and fuel prices and we ran at higher operating rates following the completion of our spring turnaround.
Now turning to our Olefins segment. Since 2018 the industry supply balance supply demand balance has seen significant new ethylene and polyethylene production capacity enter the market which coupled with the ongoing trade uncertainty and the lower global oil prices pushed sales prices and margins lower.
For the third quarter of 2019 Olefins operating income of $92 million decreased $70 million from third quarter 2018 as a result of lower margins from lower polyethylene sales prices. Third quarter 2019 Olefins operating income of $92 million increased $10 million from the second quarter 2019 as we benefited from lower feedstock and fuel costs when compared to the prior quarter.
Next let's turn our attention to the balance sheet and statement of cash flows. At the end of the third quarter we had cash and cash equivalents of $1.4 billion and total debt of $3.4 billion. Third quarter 2019 cash flows from operating activities were $501 million while capital expenditures were $193 million.
These capital expenditures were focused in our strategic debottlenecking investments to further integrate our vinyls businesses in the United States and Germany to capture the margin within our product chain reduce our cost and further leverage the footprint of existing vinyls operations around the world.
We expect to start up our previously announced VCM and PVC expansions in Louisiana and Germany by the end of the year which will bring more than 750 million pounds of PVC production per year. As announced last week we have exercised our option to acquire an additional interest in our ethylene joint venture with Lotte Chemical which will further integrate our vinyls chain and lower our cost.
We seek to invest prudently and opportunities to acquire leading technologies and projects that will further enhance the chain integration of our business, which improves our cost position. and capitalize on our global advantage the stock position. As we look forward, new India pipelines and the accompanying practice nation capacity will be starting up in the fourth quarter.
These infrastructure investments will increase the supply of feedstock definitely into our industry, and highlights beneficial long term cost advantage position enjoyed by North American producers. For your planning purposes as we approach the end of 2019 we continue to expect our effective tax rate and cash tax rate for the full year to be approximately 23% and 18% respectively and our capital expenditures to be approximately $650 million.
With that I will now turn the call back over to Albert to make some closing comments. Albert.
Thank you, Steve. We delivered a solid third quarter result in this challenging economic environment. Thanks to our advantage position on the global cost curve driven by our gas-based feedstock and our scale combined with a strong balance sheet we are positioned to continue to create value for our shareholders. The current business environment demands cost discipline and prudent capital allocation.
The start-up of our expanded vinyls facilities in Louisiana and Germany along with the increased interest in our ethylene joint venture with Lotte Chemical are just a couple of examples of the many organic opportunities we have to further integration of our business lower production costs and provide a compelling return to shareholders. Thank you very much for listening to our earnings call this morning.
Now I will 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 two hours after the call has ended. We will provide that number again at the end of the call.
Jimmy we will now take questions.
[Operator Instructions] Our first question comes from John McNulty with BMO Capital Markets. your line is open.
This is Bhavesh Lodaya for John. First maybe on the Lotte JV. Like could you comment on a decision to go ahead and add your take now versus a bit later? And then if you could also comment on just how the cost of the entire product came versus your prior estimates? And just where do you see your returns on the product today? Have you take into account the indication and perhaps a lower cost of adding the option?
Well the project came in on schedule and on budget. And what I mean by that is about $2 billion for the 2.2 billion pounds of ethylene. So our decision to invest was because we believe it provides a good return on this investment. So that is really the driving reason behind the decision to invest at this stage and increase our ownership.
Got it. And then with a very solid quarter regarding your Vinyls segment in particular can you comment on the resiliency of this - on the EBITDA which was up sequentially even as the deep prices and volumes fell sequentially? If you could just discuss the moving pieces on what drives the sequential growth there.
Sure. Well sequentially quarter-over-quarter of course we were benefited from lower ethane feedstock. It was lower over the second quarter by about 18% and fuel costs were also lower about 11%. And as we noted we also completed our spring turnaround activity and so we benefited with the plant running at better operating rates because we completed those turnarounds in earlier quarters. So sequentially quarter-over-quarter those were the big drivers behind the results.
Thank you. Our next question comes from Neel Kumar with Morgan Stanley. Your line is now open.
Thank you. I was curious when you look at the year-to-date underlying demand growth for the key end markets for caustic like Illumina paper and pulp and inorganic and organic chemicals where would you say growth has lagged the most versus expectations?
Well I think because of the slowdown in the economic growth around the world especially in the manufacturing side it has impacted on the - on all the area alumina pulp and paper and general manufacturing.
Okay. And then you mentioned in your comments that you are focused on cost control in this challenging environment. Can you give some us examples of this? And whether you have any specific initiatives in place going forward?
Well Neel while we have not set public initiatives externally I think you can see just in the most recent period that even our G&A was lower period-over-period. So as we continue to focus on managing investments and managing our cost we are going to continue to keep our eye very much in that area of focus. And as I say a point to just G&A is a clear example of that.
And just last question. Can you just maybe also update us on the - how the integration of NAKAN has been going? And what kind of contribution that had during the quarter?
Well we have not broken out the individual earnings contributions from any of our acquisitions. But I would say the integration has gone very well. We are very pleased with the acquisition. And as you know it expands both our product offerings in a wide range of applications be it medical or auto or others. And it is a much larger geographical positioning for our compounds position which was largely focused in the Americas this now takes us into Europe into Asia and strengthens our North American position. So we are very pleased with the transaction.
Thank you. Our next question comes from Stephen Byrne with Bank of America. Your line is now open.
I wanted to ask you about the midyear guidance that you provided for EBITDA. Here we are a quarter beyond that where would you see you are headed toward the lower or upper end of that range at this point?
Steve as we said and this was in the summer the first time we provided guidance and we indicated that it was an unusual event and we weren't going to provide guidance on a going-forward basis. So that is kind of where we stand.
Okay. I also wanted to ask you whether or not you are planning to do another drop down into the MLP to raise capital for the - your share of the Lotte cracker?
Well as you think about the partnership we have a significant amount of inventory left. We have well in excess of 75% ownership of the operating companies still to contribute. This exercise or this option adds ethylene at Westlake Chemical which could be contributed down to OpCo at an appropriate valuation in time. So we still have plenty of inventory of the operating company contributed into the partnership. And I would expect that we'd undertake a transaction in '20 but it needn't necessarily be that related to the Lotte cracker because we still have significant capacity left.
Okay, thank you.
Thank you. Our next question comes from Kevin McCarthy with Vertical Research Partners. Your line is now open.
Yes, good morning. Question relates to your ethylene long short position. If I look through the Lotte option exercise as well as the PVC expansions that you referenced it seems as though you will still be short more than 1 billion pounds perhaps 1.1 billion to 1.2 billion. And so my question is are you content to remain with that amount of ethylene for the foreseeable future? Or do you see any appealing options beyond the Lotte exercise to bridge that gap and rebalance the ethylene position?
Well Kevin as we think about the opportunity set here we have been on both sides of that over time both long and short and you are right the number that you mentioned is about the approximate position that we have today being short about 1.1 billion pounds 1.2 billion pounds with this new addition. Certainly we look - we will look at the new cracker that we have. And that has because it is a new unit we will have debottlenecking capacity though we wouldn't want to do that immediately. But it - down the road we will have an ability to debottleneck. And we'd like to over time be more balanced but one needn't necessarily we'd be perfectly balanced.
Okay. And then second question if I may relates to low density polyethylene. It looks like we have a few start-ups among your competitors over the next three to six months. In the past you've talked about the premium that low-density garners relative to other grades of polyethylene. Can you talk through your expectations for 2020 and beyond as it relates to supply demand and the magnitude of how that historical premium could fluctuate?
Yes. Certainly as you've heard us talk for a long period of time that the autoclaves has certainly continued to garner a meaningful premium over time. And with the new additions coming there are really no meaningful additions at all in the autoclave technology.
The additions are all coming in the tubular applications. Commodity-based polyethylene in all manner be it high density linear low or even lower than the tubular technology. So we continue to see benefits of having a position in the more specialty end of the LDPE space.
And certainly as we expect some of those margins to be under pressure as new total pounds come into the market we think that that premium continues to be important and our customers certainly recognize that as well.
Very helpful. Thank you.
Thank you. Our next question comes from Bob Koort with Goldman Sachs. Your line is now open.
Thank you very much. Albert I thought maybe you could opine on the path forward in the polyethylene world. I know that there had been quite a bit of angst about the start-ups in the U.S. it seems like those are composed and now maybe the anxiety for some investors has shifted to Asian capacity ramps there. But I guess when I look at some of the consultants' reports it seems like you are still calling for a trough in the U.S. maybe $0.15 a pound on integrated polyethylene which seems pretty good. How do you sort of see that path forward? And how do you think about the capacity outside the U.S. affecting your business?
Yes. As Steve mentioned earlier the capacity and supply demand for polyethylene really impacted by economic growth globally as well as the oil and gas ratio have probability of impacting the North American producers.
So I think IHS is looking at by the end of the year and looking forward to next year PE prices is pretty much flat across 2020. And I think people are assuming that the global GDP we are not going to a recession in the U.S. And as GDP will be growing albeit at a slower rate. And hopefully the trade tensions between U.S. and China will improve somewhat.
So I think people are looking at more of a stable environment for commodities and polyethylene in general. And I just want to follow-on what Steve said. I think all the expansion in the U.S. Our Tubular LDPE.
They are more focused on commodity grades. And our - 80% of LDPE is autoclave. And we are focused more on the specialty side. So I think the spread between Algeria will continue and between autoclave and tubular will also continue.
And could I ask on the Lotte cracker what you guys figured the economics were on a return on capital basis for that investment?
So Bob when you think about the potential contribution if we had owned the entire unit for the quarter third quarter we saw probably between ownership and market ethylene about roughly a $0.10 delta between those two. And owning therefore 1 billion pounds would bring EBITDA of about $100 million a year. So that is the kind of contribution that you could think about at that kind of a margin as we experienced in the third quarter.
And Steve I just want to add also as Steve mentioned the Lotte cracker came on time on budget. And I think on a per ton basis even though it is our biggest ethylene plants in this newbuild arena the per ton basis is one of the lowest investment cost at our plants. And as you know there are more major international oil companies building grassroots new claims in the U.S. based on ethane cracking. So if we have a cost advantage position from investment point of view and have a start-up - early start-up that should be a vantage position for us.
So a nice accretive transaction I guess what I would say in the summary Bob.
Thank you. Our next question comes from Mike Leithead with Barclays. Your line is now open.
Thanks. Good morning, guys. I guess first can you just talk through what drove the earnings improvement sequentially in your Olefins segment? Because my understanding was IHS integrated margins were call it flat to lower with polyethylene prices down that should kind of offset the benefit of falling ethane and styrene was weak. So I guess just any additional color you could provide there would be helpful.
So Mike when you think about year-over-year were you speaking year-over-year or quarter?
Sorry. I'm talking 2Q to 3Q.
Okay. So when you think about quarter-over-quarter while you did have lower polyethylene prices in the neighborhood of say 6 or so percent you had also meaningfully lower feedstock costs and fuel costs. So feedstock costs were lower by about 18% and fuel costs natural gas was lower by 11%. And so that had a significant up - significant benefit helping to offset a lot of the lower polyethylene prices period-over-period.
Got it. Okay. And then in the release you pointed to the impact of the slower macroeconomic environment. So I was hoping maybe you could give a bit more color on your downstream PVC compounding and building products businesses because that is one of the few areas in your portfolio it is hard to track from the outside?
The business tends to be more stable. It is of course seasonal in nature because a lot of the building products go into construction materials but tends to be more stable. The compounding materials goes into more than just construction-related materials it goes into wire and cable. But as I mentioned earlier our NAKAN businesses also go into auto and lots of medical applications.
So it has a broader footprint than just the construction markets but the construction markets are where our pipes and siding applications do go. But it tends to be less cyclical deeply than some of the chemicals-related businesses. And as we noted we did pick up some of the recovery of volumes that we lost over the year due to cold and wet weather.
Thank you. Our next question comes from Arun Viswanathan with RBC Capital Markets. Your line is open.
Thanks, Good morning, guys. First question I had was on caustic. We have seen another downtick of $15 here in October after the down $10 in September. I guess how would you characterize the business out there from your perspective? And what are - what is the main driver you think that would help improve the caustic environment? And then given that inventories are quite low is it industrial production demand? Supply descriptions? Or anything else you'd point to?
I think as we said earlier the industrial demand globally has been weakening. But we are seeing a bottoming of prices in Asia and some of the Asian and Chinese producers I think it is probably quite below the cash cost. So if the industrial demand globally improves next year we think some of that in Asia that should help improving caustic prices.
And if I could ask a similar question. With PC maybe you can just give us your outlook there and buy in what is going on in the ethylene markets you think lower feedstock would result in - and supply would result in lower ethylene pricing and make it difficult to get margin in PVC? Or how are you thinking about the outlook for PVC from here?
Yes. PVC prices I think IHS looking next year our price increase domestic in the U.S. and also for export price is pretty stable. Physically doesn't like polyethylene globally this capacity new additions capacity in PVC. So as the demand is still growing globally that will help to tighten up the market and help the pricing.
So I think IHS looking at prices going up next year domestically in the U.S. As you know also that the housing construction is still - even those were around 1.2 million units a year rate it is still below the 50 average of 1.5 million units of residential construction. So as the U.S. residential conversion market returns it'll also help domestic demand for PVC.
And then lastly if I may. Just wanted to get your thoughts and if any reaction. There is been a competitor of yours for most - is thinking about adding capacity in chlor-alkali. You guys added some at Geismar several years ago that is probably the most recent margin investment. So can you just help me understand what is potentially going through their heads as far as returning what you would look for in a new facility if at all possible?
Sure. And I think from what we read looking at five year out global demand will far exceed capacity additions. And they are looking at spending approximately USD 3 billion for building a plant in chlor-alkali VC and PVC plant. So if you are looking at replaced cost economics support investment which further supports the thesis that chlor-alkali and vinyl business will improve globally and U.S. is the best place in this.
Okay, perfect.
Thank you. And our next question comes from Jim Sheehan with SunTrust. Your line is now open.
Marty, thank you. Could you talk about any planned turnarounds that you expect to have in the fourth quarter? And what the impact might be on earnings?
Jim we obviously do with a large number of facilities we have worldwide we do turnarounds on a regular basis. But there are none that are going to be meaningfully impactful in the fourth quarter. As we look into 2020 we will have an ethylene turnaround. And I'll give more guidance to that ethylene turnaround as we finish our planning but the other units that we have nothing that I would have would be a call out was meaningful in the fourth quarter.
And what is your outlook for ethane prices going forward?
I think ethane prices is pretty much in the $0.20 a gallon range. And I think the future prices support that.
Thank you.
You are welcome.
Thank you. And our next question comes from Hassan Ahmed with Alembic Global. Your line is open.
Morning, Steve. Albert and Steve just wanted to go back to the timing of exercising the large option. Obviously ethylene pricing has been fairly volatile over the last couple of quarters. And we have obviously seen incremental supply come online primarily in the U.S. Now you guys were kind enough to break out what the economics would have looked like had you owned the cracker in Q3. But obviously there is always a fear that as the capacity is digested those economics deteriorate quite rapidly. So now my question is that you guys exercising the option now rather than later should that be taken as a signal that you are actually incrementally positive now on the ethylene market? Or said differently do you think the worst is behind us as we move forward from Q3 and beyond?
Well as you said Hassan we believe that the return for this investment was I think a pretty good compelling return very accretive when you think about the investment that we have made for the incremental pounds.
I agree with you that the margins over a short period of time can be volatile but we believe over the cycle that this investment will prove to be a very attractive one for us and further integrate our business chain in the vinyl segment even more so. And so we think it is going to be a very nice investment over the cycle but you are right. And from period to period there can be a high degree of volatility in ethylene prices and margins.
Understood. Now as a follow-up if we were to go back to the start of the year I think broadly the perception was a lot of ethylene polyethylene capacity coming online in the back half of the year. And again the perception was hey look pricing would crack and crack pretty hard. And it was the exact opposite for the chlor-alkali side of things where the assumption was back half price increases hardly any capacity coming online. So would love to hear your views on what really changed right? Because obviously polyethylene has been quite resilient chlor-alkali not as much. I mean is it as simple as the consumer being stronger than the industrial economy? And has it - is it primarily demand related I guess?
Well I think a bit of both. The chlor-alkali as you know is a very generally used chemical in many industries. And as world manufacturing industries slowing down and some people say it is a recession of the PMI going below 50 for manufacturing that has impacted demand for chlor-alkali. And even though the supply is limited it is just in the short term supply demand wise it has impacted lighting other commodity metals for example.
But we believe the inventory adjustments and demand will go over. Economies so long as the global economy still grows people still use things and inventory cycle be over and people will start producing again. So as Steve said short-term could be fluctuations. But on a longer-term basis we are very optimistic on the core vinyl chain going forward.
Very helpful. Thanks.
Thank you. And our next question comes from Peter Juvekar with Citi. Your line is now open.
Yes, Hi, good morning. Today most of the money in ECU is made in caustic with very little money in chlorine. So I guess you just make PVC and then export it. But given the importance of caustic fundamentals with Alunorte having ramped up export prices have still come down really hard and the delta between domestic and export prices have really opened up. So how do you see that situation resolving? And do you think that maybe there is some risk to domestic pricing?
Well actually the chlorine side is pretty stable and chlorine demand is pretty stable. Obviously the seasonality that the water treatment pool chemical bleach slowing down in the winter months but caustic and PVC demand globally is still strong the trailing side EDC VCM demand is strong.
So I think - and even though chlorine goes to euro things and other products - even though they are impacted. But net-net chlorine demand is still pretty good. I think caustic today because of the commodity nature it is much more volatile than in the past.
And as I said hopefully with the industrial inventory cycles over people still need products and they will come back and the production improves. But I think the chlorine chain is doing pretty well now.
Okay. And then secondly what are you seeing in China in sort of recent data points in terms of industrial activity as well as construction activity based on your business there?
What we see that China's industrial manufacturing has recovered from the low in the first or second quarter. And hopefully this will continue. And as well you may know that the PVC antidumping duty in China has been dropped coming from the U.S. So I think there will be a big boost up for U.S. producers selling PVC in China and globally.
Thank you.
You are welcome.
Thank you. And our next question comes from Frank Mitsch with Fermium Research. Your line is open.
Good morning, gentlemen. I was struck by the assertion that your operating rates were better than the industry average. And listening to the commentary it sounded like that was more on the vinyl side than on the Olefin side. A is that true? And b how much better where the operations? And it was interesting because your inventories actually ticked down. So it looks like you sold pretty much everything that you are producing. Is that how we should think about it?
So Frank when you think about our integrated chain being integrated as we are it does allow us to run at those elevated operating rates relative to many of our peers in the vinyls chain. And so as I mentioned earlier we had some spring turnarounds that took place during the course of prior quarters. And so we obviously built inventory and then sold that while the plants were undertaking their normal maintenance activities.
And in the Olefins chain certainly almost all the producers are highly integrated in that space. So I would say that relative to our peer set the strength of that integrated chain plays well in this kind of cycle where we are and the high degree of integration is very beneficial in spreading that fixed cost of our pounds of production. Keeps our cost low.
That is very helpful. And Steve I guess more of a curiosity than anything else. But you issued 700 million in euros during the quarter and I believe you are probably making a payment I guess this quarter of $815 million or so for the Lotte JV? Why issue in euros and pay dollars? How should we think about that?
So Frank it was an approach to finance in an attractive rate-wise market it was 1.58% coupon for a 10-year period. And we designated that a hedge against our European investments. So there is no mark-to-market that flows through the P&L. I can then use those proceeds to fund growth opportunities either here or elsewhere. So it allowed us to really go into attractively priced markets with good terms conditions not have a mark-to-market on the euro base of that borrowing base and be able to deploy those dollars wherever we saw an opportunity to make a good return.
Interesting that you said deploy those dollars and not deploy those euros.
Thank you, Steve.
You are welcome.
Thank you. Our next question comes from David Begleiter with Deutsche Bank. Your line is open.
Thank you. Good morning, Albert how was your starting business in the quarter? And what is your outlook for 2020 given some new capacity in styrene coming online in China next year?
I think as Steve said our operations are doing very well. Venturing well. You are right there will be more capacity coming up next year. And the dynamic of benzene price and styrene price, that’s the spread that comes, and a lot of volatility depending price starting price right now.
So we will see how things settle and as you know we are also other technology like [indiscernible] so we don't know how those plans will run whether they will keep running for styrene or not. So a lot of these things are - could impact the future operability of the global styrene business.
And Steve just comment on the income in the quarter. We were up sequentially what drove that sequential increase?
So David the primary components were some interest income some insurance recoveries and some higher income and some small joint ventures that we have.
Thank you. And our next question comes from John Roberts with UBS. Your line is now open.
Thank you, Does any of the earnings contribution from the Lotte cracker come in as equity income? Or does it all come in as a reduction in cost of goods.
It will come to a reduction of cost of sales.
Okay. And then I assume the building products business grew faster than the Vinyl segments overall. Do we have to wait for the 10-Q to come out later? Or can you give us either the sales or kind of what the growth rate was for building products?
We will have that Q filed tomorrow.
Thank you. And our next question comes from Jonas Oxgaard with Bernstein. Your line is now open.
Good morning. Over the last year we have seen the oil majors announced billions after billions after billions of capex in petrochemicals. None of it seems to be going to chlor-alkali but a lot in polyethylene. Can you give us some thoughts on how are you seeing is how worried are you about the oil capex? And does that change your strategic outlook on chlor-alkali versus polyethylene.
So Jonas the - when you think about the capital intensity of the vinyls chain it is very capital-intensive. And so one has to build both power chlor-alkali the intermediates of EDC VCM to get to PVC. And so it is very capital-intensive.
And so when you think about the capital intensity to build olefins and polyolefins it is much more - it is much less cost-intensive in that sense. And given some have said the ration they have back into the upstream side of the business that is what they have chosen to make their investments.
And so certainly as we think about the approach they have taken in terms of investing in this business they have been in this business for many years. On the vinyl side of the chain all the majors exited this space about a generation and a half ago and it is a business that requires real focus since your handling half of these materials chlorine specifically.
So we remain very comfortable that the investments that we have made continue to provide good value and we think that the supply demand balance we think remains constructive over time And as you heard Albert say earlier we believe that the value long-term in the supply demand balance will benefit us with the investments that we have made.
Jonathan if I may add also that much of the investments in the vinyl chlor-alkali side was made through acquisition and below replacement costs. So when you hear major competitors are building grassroots for our vinyl plants which is vote of confidence that even at a replacement cost economics there will be a good return. But most of our acquisitions if not all are based on acquisition that are below the place cost.
Okay. So I find the - that you immediately go to chlor-alkali looks a lot better to be a telling part of the answer but how do you square them that against buying out the share in the Lotte cracker if you seemingly don't believe in the polyethylene side that much?
When you think about the investment that we have made in the ethylene recently recognized that if you look at the - where the margin sits within the vinyls chain a very significant portion of that margin sits in chlor-alkali but also a very large component of that sits in ethylene. So over time be it five years or 10 years or even longer the great majority of the value has been upstream either in caustic or in ethylene.
And so this investment allows us to further integrate our business in that ethylene chain to make ultimately PVC out of that chlorine and ethylene. So what this investment allows us do is further integrate that vinyl chain and capture the ethylene margin that would have been left to others. To be able to capture not just one side but both sides the chlor-alkali as well as the ethylene margin in that vinyls chain.
Thank you. And our next question comes from Matthew Blair with Tudor Pickering Holt. Your line is now open.
Hey, good morning albertan Steve, circling back to the strong olefins results were you able to switch to propane cracking? And if so can you provide any sort of numbers around how much propane you cracked in Q2 versus Q3.
So Matthew our plants certainly have the ability to switch feedstocks but we still believe that the ethane feedstock is the most advantaged. Because when we go to a heavier feedstock such as propane you have to de-rate production of ethylene.
And when you think about the facility we have in Kentucky or the facilities we have down in Louisiana our interest is really running those derivatives as well as we can and as high and operate as we can. And so while at times one looks at the ethylene margin only we are looking at the integrated margin across the chain.
And so to use a heavier feedstock and therefore de-rate the amount of ethylene we produce would offset - would not offset the benefits that we receive downstream. So it is better to really run the ethane feedstock to get the ethylene to be able to run the downstream units with that ethylene had higher operating rates.
Makes sense. And then Steve your net leverage has been creeping up a little bit here. Are you comfortable with current levels? Or should we expect some debt reduction in the coming year?
And so Matthew we always focus on keeping a very strong balance sheet. And we will do what we need to do to keep a very strong balance sheet. We do have optionality in some of our notes next year and in following years to be able to manage that. And certainly that is always an area of focus.
Thank you. At this time the Q&A session has now ended. Are there any closing remarks?
Thank you again for participating in today's call. We hope you will join us again for next conference call to discuss our fourth quarter and full year results.
Thank you for participating in today's Westlake Chemical Corporation Third Quarter Earnings Conference Call. As a reminder this call will be available for replay beginning 2 hours after call has ended and may be accessed until 11:59 p.m. Eastern Time on Tuesday November 12 2019. The replay can be accessed by calling the following numbers. Domestic call should dial 855-859-2056. International callers may access the replay at 404-537-3406. The access code for both numbers is 7725119. Thank you for participating. You may now disconnect.