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Westlake Chemical Corp  (NYSE:WLK)
Q4 2018 Earnings Conference Call
Feb. 19, 2019, 11:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Chemical Corporation Fourth Quarter and Full-Year 2018 Earnings Conference Call. 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, February 19, 2019.

I would now like to turn the call over to today's host, Jeff Holy, Westlake's Vice President and Treasurer. Sir, you may begin.

Jeff Holy -- Vice President and Treasurer

Thank you. Good morning, everyone, and welcome to the Westlake Chemical Corporation fourth quarter and full-year 2018 conference call. I'm joined today by Albert Chao, our President and CEO; Steve Bender, our Executive Vice President and Chief Financial Officer; and other members of our management team.

The conference call agenda will begin with Albert, who will open with a few comments regarding Westlake's performance, followed by a current perspective on the industry. Steve will then provide a more detailed look at our financial and operating results. Finally, Albert will add a few concluding comments, and 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 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; 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 fourth quarter and full-year results. This document is available in the Press Release section of our web page at westlake.com. We have also posted a presentation on our website to assist in the discussion of our results.

A replay of today's call will be available beginning today 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 7077616.

Please note that information reported on this call speaks only as of today, February 19, 2019, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay. I would finally advise you that this conference call is being broadcast live through an Internet webcast system that can be accessed on our web page at westlake.com.

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

Albert Chao -- President and Chief Executive Officer

Thank you, Jeff. Good morning, ladies and gentlemen, and thank you for joining us to discuss our fourth quarter 2018 and full-year results.

In this morning's press release, we reported net income of $123 million for the fourth quarter of 2018, or $0.95 per diluted share, and $996 million, or $7.62 per share for the full year of 2018. As we will discuss on the call, it was a record year for Westlake.

First, we delivered record operating income and EBITDA, driven by the capital investments we've made to strengthen the operating performance and thereby, capturing the value of our integration strategy. These investments led to higher production and sales volumes in both our Olefins and Vinyls segments, as we set records for annual production for polyethylene, PVC resin, chlor-alkali and ethylene.

The improvement in our operations is a direct result of the hard work of our employees and investments made in our reliability and performance improvement program since our acquisition of Axiall in 2016. Second, we have continued to invest for the future with VCM and PVC expansions in the US and Germany, our ethylene joint venture with Lotte Chemical in Lake Charles, Louisiana, and the acquisition of the NAKAN compounding business that we announced in 2018 and closed in January 2019. These investments will contribute to EBITDA in 2019.

Steve will go over our fourth quarter and full-year results in detail. But before I turn over the call to him, I will discuss a few items affecting our industry. First of all, international trade issues continue to weigh on global trade. In our Vinyls business, we saw some short-term global softening in caustic soda prices due to inventory buildup in the fourth quarter, as industry operating rates remained high and export markets were disrupted by new import licensing requirements in India, and ongoing issues at a major alumina refinery in Brazil.

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

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

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

M. Steven Bender -- Executive Vice President and Chief Financial Officer

Thank you, Albert, and good morning, everyone. I'll start with discussing our consolidated financial results followed by a detailed review of our Vinyls and Olefins segment results.

Let me begin with our consolidated results. For the full year of 2018, we reported net income of $996 million, or $7.62 per share, record income from operations of $1.4 billion and record EBITDA of $2.1 billion. This year's performance was driven by higher production and sales volumes, as we set numerous operating records in both our Vinyls and Olefins segments. The improvement in our operations is a direct result of the investments we made in reliability and performance improvement program over the past two years.

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

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

As Albert mentioned, polyethylene prices in the fourth quarter forward (ph) oil prices downward as Brent fell 40% from the end of the third quarter. PVC also declined due to lower construction demand and lower ethylene prices. The prices for both polymers were adversely impacted by global trade concerns. The fourth quarter also saw higher ethane feedstock and fuel costs due to increased demand, infrastructure constraints and colder weather.

Partially offsetting these impacts were higher sales volumes for polyethylene, higher sales volumes and prices for caustic soda, and lower interest expense resulting from the retirement of $1.2 billion in debt in the first half of 2018. Fourth quarter 2018 net income of $123 million decreased $185 million from the third quarter 2018 net income of $308 million.

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

Now, let me move on to review the performance of our two segments, starting with the Vinyls segment. For the fourth quarter 2018, Vinyls operating income of $125 million decreased $89 million from fourth quarter 2017 operating income of $214 million, primarily due to lower margins on PVC resin, which results from lower sales prices in the international markets, higher ethane feedstock costs and higher fuel costs. In addition to the typically seasonally slowdown in the fourth quarter, which impacts our Vinyls business, caustic soda prices declined as compared to the third quarter, driven by the issues Albert just spoke to.

The fourth quarter also saw higher ethane feedstock costs related to the unfavorable FIFO impact, higher purchased ethylene costs and higher fuel prices due to the unusually cold weather, which all contributed to lower operating income for our Vinyls business.

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

In the fourth quarter of 2018, our Olefins segment operating income of $90 million decreased $76 million from fourth quarter 2017 operating income of $166 million. In the fourth quarter of 2017, our Olefins business did benefit as operations were not impacted by Hurricane Harvey. In comparison, income from operations for the fourth quarter 2018 decreased due to lower integrated margins, which were a result of lower polyethylene prices I just mentioned and higher ethane feedstock and fuel costs, which were partially offset by higher polyethylene sales volumes.

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

Now, let's turn our attention to the balance sheet and statement of cash flows. As of December 31, 2018, we had cash and cash equivalents of $753 million and total debt of $2.7 billion. Fourth quarter 2018 cash flows from operating activities were $254 million, and $1.4 billion for the full year of 2018. Throughout 2018, we invested to improve the reliability of our plants and in attractive opportunities to grow our business and expand the value that we capture in the integrated chain.

We have previously announced expansions in Geismar,Louisiana and Germany, and continuing to opportunistically debottleneck several other VCM and PVC plants in the US over the next several years, which brought our full-year capital expenditure investments to $702 million. In addition to these investments, we also expect to see the start-up of our 2.2 billion pound ethylene plant being built jointly with Lotte in the first half of 2019.

We have a 10% interest in the ethylene joint venture, with an option to increase our ownership to 50% over the next three years. All of these investments continue to further integrate our value chain. We continually evaluate additional acquisition opportunities to invest where we believe they will provide attractive returns and grow our earnings. And with our recent acquisition of NAKAN, a leading global PVC compound solutions business is an example of that philosophy.

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

Due to the use of our FIFO methodology, there is typically a four week to six-week lag between when feedstock is purchased and when those costs flow through finished goods and affect our income. As a reference, a $0.01 change per quarter in the price per gallon of ethane would have approximately $4 million impact on cost for the quarter.

As noted earlier, the run-up in natural gas prices in the fourth quarter will lead to a FIFO headwind in the first quarter 2019. If gas prices for the remainder of the first quarter remain at yesterday's forward curve price of $3.06, we estimate the FIFO impact resulting from our fuel costs to be approximately $19 million higher for the first quarter then if we reported on a LIFO basis. As a reference, a $0.10 change per quarter in the price per Mcf of gas would have approximately $2.5 million impact on cost for the quarter.

Before turning the call back over to Albert, I'd like to provide some guidance for your modeling purposes. We expect capital expenditures, maintenance and turnaround activity to be in line with 2018, as we continue to work on the expansion and debottleneck opportunities in our Vinyls segment.

The next turnaround of one of our ethylene facilities is scheduled for the first half of 2020, and we will provide more information regarding the duration and the impact on earnings later in the year as we complete our planning. We expect our effective tax rate to remain around 23%, and our cash tax to be around 18%.

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

Albert Chao -- President and Chief Executive Officer

Thank you, Steve. We are pleased with our record full-year 2018 performance. We are also optimistic that international trade issues will be resolved in the near term, and we are excited about what lies before us.

Our Vinyls segment continued to benefit from solid global demand growth for caustic soda and PVC resin. Being an integrated producer, sitting at the low end of the global cost curve and having limited foreseeable global capacity additions, we remain confident that the caustic soda supply demand balances will tighten through the year. We see a growing global demand for PVC resin and similar to the dynamics in chlor-alkali, we believe the supply demand balance will also tighten.

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

In our Olefins segment, we are better positioned with a concentration of our sales in the higher-margin specialty polyethylene products. The US Olefin industry will enjoy the cost advantage that we have been experiencing since the onset of the Shale Revolution. We are continuing to explore additional expansion opportunities and acquisition initiatives that will deliver value to our shareholders.

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

Jeff Holy -- Vice President and Treasurer

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.

Jiji, we will now take questions.

Questions and Answers:

Operator

(Operator Instructions) And our first question is from Mike Leithead from Barclays. Your line is now open.

Michael Leithead -- Barclays -- Analyst

Good morning, guys.

Albert Chao -- President and Chief Executive Officer

Good morning.

M. Steven Bender -- Executive Vice President and Chief Financial Officer

Good morning.

Michael Leithead -- Barclays -- Analyst

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

M. Steven Bender -- Executive Vice President and Chief Financial Officer

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

Albert Chao -- President and Chief Executive Officer

And also the export price for caustic and PVC were lower, that reflected in the IHS, which is domestic US prices.

Michael Leithead -- Barclays -- Analyst

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

Albert Chao -- President and Chief Executive Officer

Yes, certainly. As PVC -- last year PVC price were relatively flat because of the strong demand globally. And we are having a five -- the industry announced a $0.04 a pound price increase effective February and this is IHS. And I think some other consultants are seeing probably $0.02 in February and $0.02 in March.

And caustic wise -- and we mentioned about inventory buildup at year-end and the drop in international demand due to the inventory destocking. So, export price has come down a lot in the fourth quarter, but we are seeing prices recovery in Asia. And even though IHS reporting the domestic price, potentially at $20 a ton, short-term drop in January would probably flow into February, we do not see any more price declines in domestic US this year and IHS is forecasting price go up starting April and May.

Michael Leithead -- Barclays -- Analyst

Got it. Thank you.

Albert Chao -- President and Chief Executive Officer

You're welcome.

Operator

Thank you. Our next question is from John Roberts from UBS. Your line is now open.

John Roberts -- UBS -- Analyst

Thank you. Albert, could you give us an update on your view of Chinese Chlor Alkali vinyls capacity here? So, we have many closures still ahead of us, most of the capacity is closed already and what's there over time will just maybe slowly go down.

Albert Chao -- President and Chief Executive Officer

Yeah. That's a good question. I think with the winter season, even though this year, China did not have a central government edict of Northern Chinese plants reducing production or shutting down, but depending on the location regions, we have seen local government asking plants to reduce production to reduce the air pollution they're suffering in China, which has been quite bad.

As to Chlor Alkali plant shutdowns, I think the smaller plants, if they're not competitive and using purchased power, then they cannot compete. I think caustic price has come down quite a lot in the -- not so much in China but in Asia's spot market. And chlorine price also has been low with lower PVC price. So the smaller, especially the caustic companies that are related to carbide process PVC, the demand for carbide production PVC has been impacted due to the pollution issues so -- and higher purchased price for power, China has very high power costs, they are uncompetitive (ph).

But the bigger integrated, to call, Chlor-Alkali companies and PVC companies, they can be quite competitive and they are situated in the hinterland, but really no new caustic chlor-alkali plant, PVC plant being announced due to the environmental issues in China, as well as the not so good returns compared with coal to olefins. So, we don't see a lot -- a much capacities being announced, all coming up in China for chlor-alkali or PVC.

John Roberts -- UBS -- Analyst

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

Albert Chao -- President and Chief Executive Officer

Well, I think inventory has been building up during the year-end. And I think some destocking is going on, but now there is a price increase being announced by industry for polyethylene, $0.03 in February. But time will tell whether that $0.03 increase will pass through, but we believe the inventory has been destocked. As crude oil prices has moved up the last month or so, international price for polyethylene is moving up.

So, I think the disparity between the international polyethylene price, domestic price is coming close. And we believe that, again IHS and other consultants are seeing that polyethylene price is pretty much flat during this year despite new capacity coming up.

John Roberts -- UBS -- Analyst

Thank you.

Albert Chao -- President and Chief Executive Officer

You're welcome.

Operator

Thank you. Our next question is from Steve Byrne from Bank of America. Your line is now open.

Stephen Byrne -- Bank of America Merrill Lynch -- Analyst

Yes. Thank you. This newly acquired PVC compounding business, NAKAN, will that open up any additional end market opportunities for you to move more molecules and if so, might you consider other brownfield expansions in Chlor-Alkali?

M. Steven Bender -- Executive Vice President and Chief Financial Officer

So, Steve, the NAKAN acquisition opens up a lot of new markets for us. It operates in a lot of jurisdictions that we were not previously in, and certainly kind of adds further concentration to our existing European business since it's headquartered in France. So, there are clearly some operational synergies that we do expect to capture.

Some of those will be on the resin front. But certainly as we think about expanding the opportunities in our compounding business, it's very much our focus here with the NAKAN acquisition. So, it's a very nice tuck-in with the existing compound business that we had, and we certainly look forward to having that make good contributions in '19.

Stephen Byrne -- Bank of America Merrill Lynch -- Analyst

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

M. Steven Bender -- Executive Vice President and Chief Financial Officer

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

Stephen Byrne -- Bank of America Merrill Lynch -- Analyst

Okay. Thank you.

M. Steven Bender -- Executive Vice President and Chief Financial Officer

You're welcome.

Operator

Thank you. Our next question is from Don Carson from Susquehanna. Your line is now open.

Don Carson -- Susquehanna Financial Group -- Analyst

Yes. A question on your natural gas exposure. Steve, you gave us the operating leverage there. But do you hedge any of your natural gas exposure and what sort of the percentage breakdown in consumption between Vinyls and Olefins segments?

M. Steven Bender -- Executive Vice President and Chief Financial Officer

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

Don Carson -- Susquehanna Financial Group -- Analyst

Okay. And then question on PVC. Albert, you mentioned that, obviously, the industries put out a price increase. Are you seeing any pre-buying by customers ahead of that price increase, or did you see pre-buying in January ahead of the February price increase?

Albert Chao -- President and Chief Executive Officer

Yes, there's always some pre-buying and our industry do allow our customers to pre-buy some. And also, we are heading into the building season, coming up. So, on the seasonal factor, the demand also increases.

Don Carson -- Susquehanna Financial Group -- Analyst

Okay. Thank you.

Albert Chao -- President and Chief Executive Officer

You're welcome.

Operator

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

David Huang -- Deutsche Bank -- Analyst

Hi. This is David Huang here for David. I guess, first, how do you think about ethane prices? How do you think ethane prices will progress during the course of the year? And I guess, what's your view on the likelihood of the dip (ph) in price increase for February and March for polyethylene?

Albert Chao -- President and Chief Executive Officer

Sure. I think, ethane prices last year, we saw a high or close to $0.60 a gallon and within a week or two weeks, there is a drop back. And in the gallon today, I think we're in the high 20s, $0.30 a gallon. It's very volatile, as I think, Steve mentioned. We'll see crude oil and ethane prices being volatile. There is increased demand for ethane as new ethylene capacity comes on.

But also, there are new fresh capacity coming up this year, next year in pipeline. So -- and there are still ethane that's been rejected. So, I think, long-term basis, we are very optimistic on the competitive price of ethane, with rest of world are oil-based as a feedstock of making (ph) ethylene, but who knows. But the futures market for ethane, which is a thing market, looking at this year in the low $0.30 a gallon.

David Huang -- Deutsche Bank -- Analyst

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

M. Steven Bender -- Executive Vice President and Chief Financial Officer

Well, you saw that we've continued to deploy capital in a variety of manners. And so, obviously, we've gone through the last couple of years with improving the reliability and the investments in the plants to provide reliable and consistent performing plants. And you've seen that in the record productions that Albert noted earlier in his comments.

We also continue to look for opportunities to debottleneck. And I made reference to some of those that we've announced, and those that we'll look at that are incremental, where it makes us really a very good return. That leaves plenty of capital for us to continue to invest and to complete the Lotte cracker, which is expected to start up later this year. And of course, it provides capital still to either in -- either return it to the shareholders in the form of dividends or through share buybacks. And we were active in the fourth quarter, buying back over $50 million of shares last quarter.

And so, I think in -- think of the waterfall, whether it be providing reliable and maintenance activities for the plants to provide elevated rates, so we can run the businesses reliably, investment for new capital, be it the Vinyls side that we've announced or even in the ethylene cracker, and then returning capital to investors in those two forms, dividends, as well as share buybacks. We see we've got plenty capital to do all of those.

David Huang -- Deutsche Bank -- Analyst

Thanks.

Operator

Thank you. Our next question is from Jeff Zekauskas from J.P. Morgan. Your line is now open.

Jeffery Zekauskas -- J.P. Morgan -- Analyst

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

M. Steven Bender -- Executive Vice President and Chief Financial Officer

Jeff, most of that, about two-thirds of that was in the Olefins side and the remaining portion are Vinyls business. That was quarter-over-quarter number I gave you.

Jeffery Zekauskas -- J.P. Morgan -- Analyst

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

M. Steven Bender -- Executive Vice President and Chief Financial Officer

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

Albert Chao -- President and Chief Executive Officer

And we also had higher ethylene purchased price in the Vinyls side

M. Steven Bender -- Executive Vice President and Chief Financial Officer

Right.

Jeffery Zekauskas -- J.P. Morgan -- Analyst

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

M. Steven Bender -- Executive Vice President and Chief Financial Officer

And so, ethane came in lower, which means a higher impact on a FIFO basis. If you recall, I gave some guidance and said, if we thought we'd have an average price at the time we made our last call of $0.35 per gallon, that we would have a $25 million impact. The issue is, is that ethane actually came down. The average price for ethane was in the mid '30s.

And if you'd use my number, it would have been in the high 30s. And so that's why the impact was $38 million and not the $25 million that I guided to because ethane came down. So, it's a good news, bad news story. The bad news is that it was the higher impact. The good news is ethane is lower.

Jeffery Zekauskas -- J.P. Morgan -- Analyst

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

M. Steven Bender -- Executive Vice President and Chief Financial Officer

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

Jeffery Zekauskas -- J.P. Morgan -- Analyst

Yeah. Okay. Great. Thank you so much.

Albert Chao -- President and Chief Executive Officer

You're welcome.

Operator

Thank you. Our next question is from Neel Kumar from Morgan Stanley. Your line is now open.

Neel Kumar -- Morgan Stanley -- Analyst

Hi. Thanks for taking my question.

M. Steven Bender -- Executive Vice President and Chief Financial Officer

Good Morning, Neel.

Albert Chao -- President and Chief Executive Officer

Welcome.

Neel Kumar -- Morgan Stanley -- Analyst

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

Albert Chao -- President and Chief Executive Officer

Well, no different from the 2018. Some caustic prices are negotiated yearly, some are, I think two years or three years and some are negotiated monthly. So, there is no major difference compared with prior year.

Neel Kumar -- Morgan Stanley -- Analyst

Okay. And then what type of impact you expect the maintenance to have on 1Q industry by operating rates relative to the fourth quarter? And then in terms of your own turnaround schedule, is there anything that we should be watching out for in terms of major turnarounds either in Olefins or Vinyls for '19?

M. Steven Bender -- Executive Vice President and Chief Financial Officer

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

Neel Kumar -- Morgan Stanley -- Analyst

Thank you.

Albert Chao -- President and Chief Executive Officer

You are welcome.

Operator

Our next question is from Aleksey Yefremov with Nomura Instinet. Your line is now open.

Aleksey Yefremov -- Nomura Instinet -- Analyst

Thank you. Good morning, everyone.

M. Steven Bender -- Executive Vice President and Chief Financial Officer

Good morning, Alex.

Albert Chao -- President and Chief Executive Officer

Good morning.

Aleksey Yefremov -- Nomura Instinet -- Analyst

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

M. Steven Bender -- Executive Vice President and Chief Financial Officer

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

Aleksey Yefremov -- Nomura Instinet -- Analyst

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

M. Steven Bender -- Executive Vice President and Chief Financial Officer

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

Aleksey Yefremov -- Nomura Instinet -- Analyst

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

M. Steven Bender -- Executive Vice President and Chief Financial Officer

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

Aleksey Yefremov -- Nomura Instinet -- Analyst

Thank you, Steve.

M. Steven Bender -- Executive Vice President and Chief Financial Officer

You're welcome.

Operator

Thank you. Our next question is from Kevin McCarthy from Vertical Research. Your line is now open.

Kevin McCarthy -- Vertical Research Partners -- Analyst

Good morning.

M. Steven Bender -- Executive Vice President and Chief Financial Officer

Good morning, Kevin.

Kevin McCarthy -- Vertical Research Partners -- Analyst

Wonder if you could comment on the percentage of your US caustic soda production that was exported in 2018, and how that might compare to a normal level?

Albert Chao -- President and Chief Executive Officer

Yeah, I think US industry exports, about 20 odd percent of its production and with our acquisition of Axiall, we are pretty much exporting this similar ratio to what the US industry is doing.

Kevin McCarthy -- Vertical Research Partners -- Analyst

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

M. Steven Bender -- Executive Vice President and Chief Financial Officer

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

Kevin McCarthy -- Vertical Research Partners -- Analyst

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

M. Steven Bender -- Executive Vice President and Chief Financial Officer

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

Kevin McCarthy -- Vertical Research Partners -- Analyst

I see. Thank you for that.

Albert Chao -- President and Chief Executive Officer

You're welcome.

Operator

Thank you. Our next question is from Hassan Ahmed from Alembic Global. Your line is now open.

Hassan Ahmed -- Alembic Global Advisors -- Analyst

Good morning, Albert and Steve.

Albert Chao -- President and Chief Executive Officer

Good morning, Hassan.

M. Steven Bender -- Executive Vice President and Chief Financial Officer

Good morning, Hassan.

Hassan Ahmed -- Alembic Global Advisors -- Analyst

I just wanted to revisit the Q4 2018 bridge analysis more on a year-over-year basis. So, I looked at the pricing stack that you guys gave for the different products, chlorine, ethane, et cetera. And looking at your capacities and the like, tried to reconcile using IHS pricing, which is obviously what you listed, where your EBITDA should turn out?

And obviously, factored in the FIFO impact and the like that you mentioned as well, and I still come up with flattish EBITDA. So, I'm just trying to reconcile on a year-over-year basis, what am I missing? I mean, were realized product pricing, was it lower than what IHS is quoting? Was realized feedstock costs, were they higher than, again, what IHS is quoting and the like? Because, based on this analysis, I come up with flattish EBITDA versus the $140 million swing that was reported. So, just want to reconcile that.

M. Steven Bender -- Executive Vice President and Chief Financial Officer

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

Hassan Ahmed -- Alembic Global Advisors -- Analyst

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

M. Steven Bender -- Executive Vice President and Chief Financial Officer

Yes.

Hassan Ahmed -- Alembic Global Advisors -- Analyst

Okay. Fair enough. Now, moving on more about market conditions near-term and longer term. 2018, obviously a funny year for the ethylene market. We saw oil doing what it was doing. And then beyond that, there was this whole notion that ethylene capacity came online ahead of derivative capacity. So, you saw this huge gyration. It seems in 2019, there will be a balance between ethylene and derivative capacity coming online.

So, assuming oil doesn't gyrate too much, is it fair to assume that we won't see too much volatility within the ethylene polyethylene side, that's on the nearer-term side? And then on the longer-term side, again, if you could just give us your views of how you're thinking about the Olefins and polyolefins market, particularly keeping in mind some of these crude to ethylene projects that have been announced in Saudi, a lot of naphtha-based projects being announced in China.

Albert Chao -- President and Chief Executive Officer

Yeah, that's a good question. I think for Olefins business, it's really a ratio of crude oil to ethane price. And if crude oil stays low, ethane price stays high, then there will be a squeeze on margins for US polyethylene producers. If crude oil move up, as we have seen in the last few weeks or months, so that will help US polyethylene producers, integrated producers.

And you have all these figures of the smallest companies in the world, in our business, investing, continuing to invest in the US that was -- obviously, they believe that US still is the one of the best place to invest on the cost position. Grounded US demand growth is not like China and so much of the US capacity, increased capacity will be destined for export market.

Hassan Ahmed -- Alembic Global Advisors -- Analyst

Understood. Understood. Much appreciated. Thank you.

Albert Chao -- President and Chief Executive Officer

You're welcome.

Operator

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

Arun Viswanathan -- RBC Capital Markets -- Analyst

Good morning. Thanks, guys. Hope you're well.

Albert Chao -- President and Chief Executive Officer

Good morning.

Arun Viswanathan -- RBC Capital Markets -- Analyst

Just a couple of questions on the outlook a little bit as it relates to your Q4 report. So, it appears that Q1 is probably going to see some of the headwinds that you saw in Q4, i.e. lower oil lingering and some of the feedstock issues. And we still haven't seen the pricing come through in either segments. So, assuming that holds, how do you look at Q2? I mean, is there a possibility that you won't have as much of a FIFO impact?

And then, do you expect any improvement on the Q2 caustic side given the announced price increases? And then maybe you can also touch on Olefins and if there is a possibility of pricing coming through in Q2 in Olefins. Thanks.

M. Steven Bender -- Executive Vice President and Chief Financial Officer

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

Albert Chao -- President and Chief Executive Officer

Yeah. As to the prices, again, on polyethylene prices, there is a $0.03 of price announcements for February and IHS looking at no price change until sometime in October, November of this year. So the issue is still oil versus gas. If oil prices move up then international polyethylene price with the cost pressure will move up and the US price will move up at the same time.

And as far as PVC and caustic, I think for caustic prices that IHS is forecasting a $20 of ton drop in January, and after that the price goes up in April, May and July. So, I think as we said with the inventory buildup during the last quarter with the Indian Bureau of Indian Standards issues on importing products, we think they'll be resolved, at least, in the first half if not early part of the second quarter. So, that will -- India is a big market for caustic. And with the Brazilian, one of the largest alumina refineries in Brazil that we believe should also probably be resolved sometime this year, which would also permit more imports of caustic. So, we think that as the inventory are being used up and these export markets comeback, global supply demand balance improves and pricing improves.

And some of the price in Asia, export price probably are low or no margin for some of the Asian caustic producers. Remember, they have high cost of power and high cost of solar as well. So, on a long-term basis, caustic demand, I think IHS came out with this report, they are growing between 1% and 2% a year and PVC, about 3% a year for the next 10 years or so. And with a lack of capacity increase and the capacity increase is less that 1% a year globally. So the supply demand balance will tighten in the coming years.

Arun Viswanathan -- RBC Capital Markets -- Analyst

Okay. Great. Thanks.

Albert Chao -- President and Chief Executive Officer

Welcome.

Arun Viswanathan -- RBC Capital Markets -- Analyst

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

Albert Chao -- President and Chief Executive Officer

Yeah. I think, as we mentioned that the caustic inventory was high at end of last year because of all these trade issues. And I think they've been running down gradually over the first quarter and maybe into the second quarter. But also the seasonality -- caustic is less seasonal than PVC. But I think demand also improved. So, we believe that the inventory will get more normal conditions in the second quarter and after the mid-year area.

Polyethylene wise, same thing. I think IHS and other consultants has reported a higher polyethylene inventory in linear low and high density and less so in LDPE. And I guess, again, depending on the trade issues, as well as crude oil and ethane differentials that those inventory we believe, I guess, (ph} with low cost which US has, those inventory will be coming down as well. And PVC, I think inventory, it's very normal area. There were some winter, lower demand seasonal, but now with the building season start again in the Northern Hemisphere, those PVC inventory will get back to normal very quickly.

Arun Viswanathan -- RBC Capital Markets -- Analyst

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

Albert Chao -- President and Chief Executive Officer

Yes, certainly. As we said, the seasonality really affects the building part as well and partially fourth quarter, it's very normal seasonal slowdown. And we are seeing signs of picking up in the building season. Yes, the housing market has, I think, it's kind of jumping up and down a little bit, has slowed down a bit.

I think this November, December last year, and now with interest rate stabilizing, long-term interest rate and the economy is still strong, we believe the housing market will not be going to high growth but will go back to this normal trajectory of getting back to the 1.5 million building units per year. That's a 50-year average for the US. So, I think, we are gradually climbing toward that target, but it will take longer to get to that stage with high interest rate.

Arun Viswanathan -- RBC Capital Markets -- Analyst

Okay. Thanks.

Albert Chao -- President and Chief Executive Officer

You're welcome.

Operator

Thank you. Our next question is from Bob Koort from Goldman Sachs. Your line is now open.

Robert Koort -- Goldman Sachs -- Analyst

Thanks very much. Albert, I was curious, you guys probably look at this, but if you were to build, say, you decide that you wanted to build a new cracker in Lake Charles on your property. What kind of returns on capital would you get doing that today do you think?

Albert Chao -- President and Chief Executive Officer

Well, it's not today's return. It's really what's your outlook for the future is. And the future is still -- yeah, the future is still the differential between crude and ethane in the US. The global crude price of ethane in US and some of the biggest companies in the world are putting billions of billions, going ahead with new projects. Some are already halfway through and some are yet to break ground. So, I think those big companies decision is a telltale sign of what industry experts are feeling for that.

Robert Koort -- Goldman Sachs -- Analyst

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

Albert Chao -- President and Chief Executive Officer

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

Robert Koort -- Goldman Sachs -- Analyst

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

Albert Chao -- President and Chief Executive Officer

Well, we know that from get-go, five, six, seven years ago that new capacity in US addition will all target for the export market. So, I think nothing has changed. I think people are making investments with eyes wide open.

Robert Koort -- Goldman Sachs -- Analyst

Got it. Thank you very much.

Albert Chao -- President and Chief Executive Officer

You're welcome.

Operator

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

Jeff Holy -- Vice President and Treasurer

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

Operator

Thank you for participating in today's Westlake Chemical Corporation fourth Quarter and full-year earnings conference call. As a reminder, this call will be available for replay beginning two hours after the call has ended and maybe accessed until 11:59 p.m. Eastern Time on Tuesday, February 26, 2019.

The replay can be accessed by calling the following numbers. Domestic callers should dial 855-859-2056 International callers may access the replay at 404-537-3406. The access code for both numbers is 7077616.

Duration: 54 minutes

Call participants:

Jeff Holy -- Vice President and Treasurer

Albert Chao -- President and Chief Executive Officer

M. Steven Bender -- Executive Vice President and Chief Financial Officer

Michael Leithead -- Barclays -- Analyst

John Roberts -- UBS -- Analyst

Stephen Byrne -- Bank of America Merrill Lynch -- Analyst

Don Carson -- Susquehanna Financial Group -- Analyst

David Huang -- Deutsche Bank -- Analyst

Jeffery Zekauskas -- J.P. Morgan -- Analyst

Neel Kumar -- Morgan Stanley -- Analyst

Aleksey Yefremov -- Nomura Instinet -- Analyst

Kevin McCarthy -- Vertical Research Partners -- Analyst

Hassan Ahmed -- Alembic Global Advisors -- Analyst

Arun Viswanathan -- RBC Capital Markets -- Analyst

Robert Koort -- Goldman Sachs -- Analyst

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