Good morning. Thank you for standing by. Welcome to the Westlake Chemical Corporation Third Quarter 2019 Earnings Conference Call. [Operator Instructions] After the speaker's remarks, you will be invited to participate in a 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's third quarter 2019 conference call. I am joined today by Albert Chao, our President and CEO; Steve Bender, our Executive Vice President and Chief Financial Officer; and other members of our management team. The conference call agenda will begin with Albert, who will open with a few comments regarding Westlake's performance followed by a current perspective on the industry. Steve will then provide a more detailed look at our financial and operating results. Finally, Albert will add a few concluding comments, and we will open the call up to questions. During this call, we refer to ourselves as Westlake Chemical. Any reference to Westlake Partners is to 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 capital markets, technological developments, and other risk factors 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 Web site 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 772-51-19. Please note that information reported on this call speaks only as of today, November 5, 2019. And therefore, you're advised that time sensitive information may no longer be accurate as of the time of any replay. I would finally advise you that this conference call is being broadcast live through an Internet webcast system that may be accessed on our webpage at westlake.com. Now, I would like to turn the call over to Albert Chao. Albert?

Thank you, Jeff. Good morning, ladies and gentlemen, and thank you for joining us to discuss our third quarter 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 feedstock and fuel costs, and from the strong operational performance of our plants, which ran above industry's averages. Trade tensions and 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 volumes 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 a recent weakness in prices for major products, we remain constructive in the outlook for the chlor vinyls supply demand balance, and believe our PVC expansions in U.S. and Germany, which will start up by year-end, along with increased ownership in our ethylene joint venture with Lotte Chemical will improve our competitive position by expanding our marketplace [ph] in PVC and lowering our operating costs. I will 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 olefin segments. Let me begin with our consolidated results. For the third quarter of 2019, we reported net income of $158 million or $1.22 per share compared to net income of $308 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. While most of the North American ethylene producers use cost advantaged gas-based feedstock, mainly the Asian and European ethylene producers use naphtha and oil-based feedstock, the lower ore prices we have experienced throughout 2019 have lowered the oil to gas ratio reducing our cost advantage. 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 vinyl segment when compared to the third quarter of 2018. Compared to the second quarter of 2019, we benefited from lower feedstock and fuel cost as higher operating rates in our vinyl segment following the completion of our normal spring maintenance turnarounds. Our utilizations 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 few segments starting with our vinyl segment. In the third quarter of 2019, our vinyls business continued to lower sales prices for caustic soda, especially in the export market, as declining global industrial activity and slower economic growth…

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 extended vinyls facilities in Louisiana and Germany along with the increase 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'll turn the call back over to Jeff.

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

Thank you. [Operator instructions] Our first question comes from John McNulty with BMO Capital Markets. Your line is now open.

Hi, good morning. This is [indiscernible] for John.

Good morning.

Good morning.

First, for maybe on the Lotte JV, like, could you comment on your decision to go ahead and add to your stake now versus a bit later? And then, if you could also comment on just how the cost of the entire project came versus your prior estimates, and just where is your returns on the project to-date if you take into account the indication and perhaps the 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's really the driving reason behind the decision to invest at this stage and increase our ownership.

Got it. And then, it was a very solid quarter, regarding your vinyl segment in particular, can you comment on the resiliency of earnings and EBITDA, which was up sequentially, even as -- deep prices and volumes fell sequentially, if you could just discuss the moving pieces on what drive the sequential growth there?

Sure. Well, sequentially quarter-over-quarter, of course we 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've benefited with the plants running at better operating rates, because we've completed those turnarounds in earlier quarters. So, sequentially, quarter-over-quarter, those were the big drivers behind the results.

Great, thank you for your time.

You're welcome.

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 of caustic like alumina, paper and pulp, and inorganic and organic chemicals, where do you say growth has blagged [ph] 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 all the areas, alumina, pulp and paper, and general manufacturing.

Okay. And then, you mentioned in your comments that your focus on cost control in those challenging environment. Can you give some examples of this, and whether you have any specific initiatives in place going forward?

Well, Neel, while we've not said 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 costs, we're continuing to keep our eye very much in that area of focus, and as I say, I'd point to just G&A as a clear example of that.

Okay, thanks. And just last question, can you just maybe also update us on the -- how the integration of Nikon [ph] has been going, and what kind of contribution that had during the quarter?

Well, we've not broken out the individual earnings contributions from any of our acquisitions, but I would say the integration has gone very well. We're 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 gives us 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're very pleased with the transaction.

Thank you, appreciate it.

Thank you. Our next question comes from Steven Berman with Bank of America. Your line is now open.

Hi. I wanted to ask you about the midyear guidance that you provided for EBITDA, here we are a quarter beyond that, where would you say you're headed towards 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, and that's kind of where we stand.

Okay. Also wanted to ask you whether or not you're planning to do another drop-down into the MLP to raise capital for your share of the Lotte cracker?

Well, as you think about the partnership, we have the significant amount of inventory left. We have well in excess 75% ownership of the operating companies still to contribute. This exercise to this option as ethylene at Westlake Chemical, which could be contributed down to OpCo at an inappropriate 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.

Good morning.

Good morning.

A question related 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're still be short, more than a billion pounds, perhaps $1.1 billion to $1.2 billion. And so, my question is, are you content to remain short 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 opportunities set here, we've been on both sides of that over time, both long and short, and you're right, the balanced number that you mentioned is about the approximate position that we have today being short about at 1.1 billion and 1.2 billion pounds with this new addition. Certainly we look at the new cracker that we have, and that has, because it is a new unit, we'll have the bottlenecking capacity that we wouldn't want to do that immediately, but down the road, we'll have an ability to de-bottleneck, and we'd like to over time be more balanced, but [indiscernible] necessarily will be perfectly balanced.

Okay. And then, a 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're really no meaningful additions at all in the autoclave technology that the additions are all coming in the tubular applications. Commodity-based polyethylene in all manner be at high density, linear low, or even low 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 was hoping 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 closed, and now maybe they anxiety for some investors it shifted to Asia and capacity ramps there, but I guess when I look at some of the consultants reports, it seems like they're 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. And so, Steve mentioned earlier, the capacity and supply demand of polyethylene is really impacted by economic growth globally as well as the oil and gas ratio probability impacting both American producers. So, I think -- I trust as looking at -- by the end of the year and looking forward to next year, the prices is pretty much flat across 2020, and I think [indiscernible] 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 the U.S. and China would improve somewhat. So, I think people are looking at a more of a stable environment for commodities, polyethylene general. And just want to follow on what Steve said, I think all the extensions the U.S are tubular LDPE, they're more focused on commodity grades, and 80% of our LDPE is autoclave, and we'll focus more on the specialty side. So, I think the spread between LD and ELO continue, and between autoclave and tubular also continue.

And can I ask on the Lotte cracker, what you guys figured the economics were on a return of capital basis for that investment?

So, Bob, when you think about the potential contribution, if we had owned the entire unit for the third quarter, we saw probably between ownership and market ethylene about a -- roughly a $0.10 delta between those two, and owning therefore a billion pound would bring EBITDA of about a $100 million a year. So, that's the kind of contribution that you could think about at that kind of a margin as we experienced in the third quarter.

I want to add also, as Steve mentioned, the Lotte cracker came on time, on budget, but I think on a per ton basis even though it's not the biggest ethylene plants in this new built arena that per ton basis it's one of the lowest investment cost at our plant, and as you know, there are more major international oil companies are building grassroots new clients in U.S. based on ethylene cracking. So, we have a cost advantage position, from ethylene point of view, and have a start-up, early start-up that should be advantage position for us.

So, a nice creative transaction, I guess, what I would say in summary, Bob.

Thanks.

Thank you. Our next question comes from Mike Whitehead with Barclays. Your line is now open.

Thanks. Good morning guys.

Good morning.

Good morning Mike.

I guess, first, can you just talk through what drove the earnings improvement sequentially in your olefin segment, because my understanding was IHS integrated margins were caught flat to lower with polyethylene prices down. That should kind of offset the benefit of polyethylene, inspiring 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-over-quarter?

I'm talking 2Q to 3Q.

Okay. So, when you think about quarter-over-quarter, you know, while you did have lower polyethylene prices in the neighborhood of say, 6% or so, you had also meaningfully lower feedstock cost and fuel costs. So feedstock costs were lower by about 18% and fuel costs, now gas, was lower by 11%. And so, that had a significant benefit offsetting 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's one of the few areas in your portfolio that harder to attract from the outside?

That 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 material goes into more than just construction-related materials. It goes into water and cabling, but as I mentioned earlier, our Nikon 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 citing the applications do go, but it tends to be less, 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 earlier in the year due to cold and wet weather.

Got it, thank you.

You're welcome.

Thank you. Our next question comes from Arun Viswanathan with RBC Capital Markets. Your line is now open.

Thanks. Good morning, guys.

Good morning, Arun.

Good morning, Arun.

The question I had was on caustic, we have seen another downtick of $15 here in October after the downtick in September. I guess how would you characterize the business out there from your perspective, and what's 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 disruptions or anything else you'd point to? Thanks.

Yeah, I think as we said earlier, the industrial demand globally has been weakening, but we have seen a [indiscernible] of prices in Asia, and some of the Asian and Chinese producers, I think it's probably either below their cash costs. So, if industrial demand globally improves next year, we're seeing [indiscernible] in Asia that should help improving caustic prices.

And if I could ask a similar question with PVC, maybe you can just give us your outlook there, and tie in what's 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? Thanks.

Yes, PVC prices, I think IHS looking next year of price increase domestic in the U.S. and also for export price is pretty stable. PVC, this is very -- unlike polyethylene globally there is just very little capacity, new additions capacity in PVC. So as the demand still growing globally that will help to tighten up the market and help the pricing. So I think IHS is looking at prices going up next year domestically in U.S.

As you know also that the housing construction is still -- even though we're around 1.2 million units a year rate is still below the 50 year average of 1.5 million units of residential construction. So, as the U.S. residential commercial market returns it will also help domestic demand for PVC.

And then lastly, if I may, just want to get your thoughts, and your reaction, there's been a competitor of yours, for most of us is thinking about adding capacity in chlor-alkali, you guys added some [indiscernible] several years ago, probably the most recent market investment. So, maybe just help me understand what was potentially going through there as far as returning what you would look for in your new facility if at all possible? Sure.

Sure. I think from what we read looking at five-year out global demand with five feet capacity additions, and looking at spending approximately $3 billion U.S. for building a plant in chlor-alkali VC and PVC plant. So, if you are looking at replacement cost economics, support investments, which further supports the thesis that chlor-alkali and vinyl business will improve globally and U.S. is the best place to invest.

Okay, thanks.

You're welcome.

Thank you. And our next question comes from Jim Sheehan with SunTrust. Your line is now open.

Good morning. Thank you. Could you talk about any plant turnarounds that you expect to have in the fourth quarter, and what the impact might be on earnings?

Jim, we obviously do with the 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 that would be meaningful in the fourth quarter.

And what's your outlook for ethane prices going forward?

I think ethane price is pretty much in this $0.20 a gallon range, and I think the future prices supports that.

Thank you.

You're welcome.

Thank you. And our next question comes from Hassan Ahmed with Alembic Global. Your line is now open.

Good morning, Albert and Steve.

Good morning, Hassan.

Good morning, Hassan.

Albert and Steve, I just wanted to go back to the dining or exercising the Lotte option. Obviously, ethylene pricing has been fairly volatile over the last couple of quarters, and we've 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 as you own the cracker in Q3, but obviously, there's 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 SD market, or said differently, 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've made for the incremental pounds. I agree with you that the margins over a short period of time can be volatile, but we believe that 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's going to be a very nice investment over this cycle, but you're right, 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, I 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?

I think a bit of both. The chlor-alkali as you know is a very generally used chemical in many, many industries, and as well as manufacturing industry slowing down, and some people say it's a recession of PMI going below 50 for manufacturing, that would impact the demand for chlor-alkali. And even though the supply is limited, it's just a short-term supply demand wise, it has impacted other commodity metals, for example, but we believe the inventory adjustments and demand will grow older, the economy is so long as the global economy still grows, people start to use things and inventory cycle will 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 chlor vinyl chain going forward.

Very helpful, thanks so much guys.

You're welcome.

Thank you. And our next question comes from PJ Juvekar with Citi. Your line is now open.

Yes, hi, good morning.

Hi, PJ.

Good morning, PJ.

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 [indiscernible] 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 of domestic pricing? Thank you.

Well, actually, the chlorine side is pretty stable, and chlorine demand is pretty stable, obviously the seasonality that the water treatment, pool chemical bleach are slowing down in the winter months, but caustic and PVC demand globally is still strong. In the chlorine side, VCM demand is strong. So I think -- and even though chlorine goes to things and other products TL2, even though the impact, but net-net, chlorine demand is still pretty good. I think caustic today because of the commodity in Asia it's much more volatile than in the past. And as I said, hopefully with the industrials inventory cycles, people still need products, and they will come back and production improve, but I think the chlorine chain is doing pretty well now.

Okay, thank you. 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 is that China's industrial manufacturing test recovered from the low in the first or second quarter, and hopefully this will continue, and as well you may know that the PVC anti-dumping duty in China has been dropped coming from the U.S. So, I think that will be a boost for U.S. producers selling PVC to China and globally.

Thank you.

You're welcome.

Thank you. And our next question comes from Frank Mitsch with Fermium Research. Your line is now open.

Hey, good morning, gentlemen.

Good morning, Frank.

Good morning, Frank.

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 were the operations? And it was interesting because your inventories actually ticked down. So, it looks like you sold pretty much everything that you were producing, is that how we should think about it?

So Frank, when you think about our integrated chain being integrated as we are, that 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 sell that at while the plants were undertaking their normal maintenance activities. And then the olefins chain, certainly, almost all the producers are highly integrated in that space. So, I'd say that relative to our peers at 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 costs above.

That's very helpful. And Steve, I guess more of a curiosity than anything else, but the issue is €700 million during the quarter, and I believe you're probably making a payment, well, 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 attractive rate wise market, it was a one in 5%, 8% 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 with the P&L. I could then use those proceeds to find 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're welcome.

Thank you. Our next question comes from David Begleiter with Deutsche Bank. Your line is now open.

Thank you. Good morning. Albert, how was your starting business in the quarter, and what's your outlook for 2020 given some new capacity and timing coming online in China next year?

Yes, I think as Steve said, our operations are doing very well [indiscernible] well, you are right, there will be more capacity coming up next year, and the dynamics of [indiscernible] price and starting price, that's the spread that counts, and a lot of volatility [indiscernible] price right now. So, we'll see how things settle. And as you know, there are also other technology like possum plants, so we don't know how those plants will run, whether they will keep running prospering or not. So, all these things are -- could impact the future operability of the global staring business.

And Steve, just comment on other income in the quarter, it was up sequentially, what drove that sequential increase? Thank you.

So, David, the components -- primary components for some interest, income, some insurance recoveries, and some higher income, and some small joint ventures that we have.

Thank you.

You're welcome.

Thank you. And our next question comes from John Roberts with UBS. Your line is now.

Thank you. Does any of the earnings contribution from the Lotte cracker come in as equity income, or does it all come in as reduction in cost of goods?

It'll come to a reduction in 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.

Okay. Thanks.

Thank you. And our next question comes from Jonas Oxgaard with Bernstein. Your line is not open.

Hi, good morning.

Good morning.

Good morning.

Over the last -- I would say, year, we've seen the oil majors announce billions after billions after billions of CapEx in petrochemicals. None of it seems to go into chlor-alkali, but a lot in polyethylene. Can you give us some thoughts on how are you seeing this, how worried are you about the oil CapEx, and does that change your strategic outlook on chlor-alkali versus polyethylene?

So, Jonas, when you think about the capital intensity of the vinyl's chain, it's very capital-intensive, and so, one has to build both power chlor-alkali, the intermediate to EDC VCM to get to PVC, and so, it's very capital-intensive. And so, when you think about the capital intensity to build olefins and polyolefins, it's much more -- it's much less cost-intensive in that sense. And given some of the integration they have back into the upstream side of the business, that's where they've chosen to make their investments. And so, certainly as we think about the approach they've taken in terms of investing in this business, they've been in this business for many years. On the vinyl side of the chain, all the majors exited this space better generation and a half ago, and it is a business that requires real focus into handling hazardous materials, chlorine specifically. So, we remain very comfortable that the investments that we've 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 investment that we have made.

Jonas, 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 building grassroots chlor-alkali vinyl plants, which is -- build confidence that even that replacement costs economics there will be a good return, but most of our acquisitions, it's not all based on acquisition that belong to replacement costs.

Okay. So, I find 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?

Well, when you think about the investments that we've made and the ethylene, recently recognize 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 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 the ethylene chain to make ultimately PVC out of that chlorine and ethylene. So, what this investment allows us to do is further integrate that vinyls chain and capture the ethylene margin that will flip and left to others to be able to capture not just one side but both sides for chlor-alkali as well as the ethylene margin in that vinyls chain.

Okay, thank you.

You are welcome.

Thank you. And our next question comes from Matthew Blair with Tudor, Pickering, Holt. Your line is now open.

Hey. Good morning, Albert, and Steve.

Hi, Matthew.

Hi, Mattew.

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 feedstock, but we still believe that the ethylene 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 facilities we have down in Louisiana, our interest is really running those derivatives as well as we can, and as high in operating as we can. And so, while at times when we look at the ethylene margin only, we're 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 not offset the benefits that we receive downstream. So, it's better to really run the ethylene feedstock to get the ethylene to be able to run the downstream units with that ethylene at higher operating rates.

It 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?

So Matthew, we always focus on keeping a very strong balance sheet, and we'll 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's always an area of focus.

Thank you.

You are welcome.

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

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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 two hours after the call is 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 callers 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.