Westlake Chemical Corp (WLK) Q2 2019 Earnings Call Transcript

WLK earnings call for the period ending June 30, 2019.

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Westlake Chemical Corp (NYSE:WLK)
Q2 2019 Earnings Call
Aug 6, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Chemical Corporation's Second Quarter 2019 Earnings Conference Call. [Operator Instructions] 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, August 6, 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's second quarter 2019 conference call. I'm joined today by Albert Chao, our President and CEO; Steve Bender, our Executive Vice President and Chief Financial Officer; and other members of our management team. The conference call agenda will begin with Albert, who will open with a few comments regarding Westlake's performance followed by a current perspective on the industry. Steve will then provide a more detailed look at our financial and operating results. Finally, Albert will add a few concluding comments and we will open the call up to questions.

During the call, we refer to ourselves as Westlake Chemical. Any reference to Westlake Partners is to our master limited partnership Westlake Chemical Partners LP and similar references to OpCo referred to our subsidiary, Westlake Chemical OpCo LP who owns certain olefins facilities. Today, management is going to discuss certain topics that will contain forward-looking information that is based on management's beliefs as well as assumptions made by and information currently available to management. These forward-looking statements suggest predictions or expectations and thus are subject to risks or uncertainties. Actual results could differ materially based upon many factors, including the cyclical nature of the industries in which we compete, availability cost and volatility of raw materials, energy and utilities, governmental regulatory actions, changes in trade policy and political unrest, global economic conditions, industry operating rates, the supply demand balance for Westlake's products, competitive products and pricing pressures, access to capital markets, technological developments, and other risk factors discussed in our SEC filings.

This morning, Westlake issued a press release with details of our second quarter results. This document is available in the press release section of our webpage at westlake.com. We have also posted a presentation in our website to assist in the discussion of our second quarter 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 3583409. Please note that information reported on this call speaks only as of today, August 6, 2019 and therefore you are advised that time-sensitive information may no longer be accurate as at 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 webpage 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 second quarter results. In this morning's press release, we reported net income of $119 million for the second quarter of 2019 or $0.92 per diluted share. The second quarter proved to be challenging as Westlake dealt with slower global economic growth in the face of international trade uncertainties that weighed on prices and margins. In spite of this, sales volumes increased over the second quarter of 2018 and the first quarter of 2019, and our bottom line results improved from the first quarter. We continue to benefit from the solid operational performance of our plants and favorable trends in feedstock and natural gas costs. We have remained focused on deploying capital in our Vinyls expansion projects that will improve our chain integration and in acquisitions such as NAKAN, a specialty PVC compounding business and DaVinci, a specialty composite roofing manufacturer that extends our product reach into new markets.

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 will start with discussing our consolidated financial results, followed by a detailed review of our Vinyls and Olefins segment results. Let me begin with our consolidated results. For the second quarter of 2019, we reported net income of $119 million or $0.92 per share on sales of $2 billion. Westlake's net income for the second quarter declined $159 million compared to the second quarter of 2018, net income of $278 million or $2.12 per share while improving $47 million from first quarter 2019 net income of $72 million or $0.55 per share.

Compared to the second quarter of 2018, our results were impacted by lower prices and margins from major products primarily due to the ongoing international trade uncertainties and slower global economic growth. However, we saw continued strong operational performance of our facilities, which led to higher sales volumes in both our Olefins and Vinyls segments, which was aided by the addition of NAKAN, a global PVC compounding business acquired early in the first quarter. Compared to the first quarter of 2019, we saw higher sales volumes and margins in our Olefins segment due to stronger demand and lower feedstock in fuel cost. In addition, we benefited from improved margins and volumes in our Vinyls downstream products businesses, even as extended winter weather delayed the start of the construction season in much of North America.

Our utilization of the FIFO method of accounting resulted in an unfavorable pre-tax impact of approximately $11 million or $0.07 per share in the second quarter compared to what earnings would have been if we 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 two segments, starting with our Vinyls segment. In the second quarter of 2019, our Vinyls segment saw lower sales prices for caustic soda, especially in the export market as a slower global growth and ongoing uncertainty and trade continue to pressure sales prices for caustic soda and PVC resin. In addition, the Vinyls segment was further impacted by the late start of the North American building and construction season I noted earlier.

For the second quarter of 2019, Vinyls operating income of $129 million decreased $142 million from the second quarter of 2018 operating income of $271 million. This decrease was primarily due to the lower sales prices for caustic soda and PVC resin, partially offset by increased volumes from NAKAN and our other Vinyls downstream products businesses. Vinyls second quarter operating income of $129 million increased $28 million from the first quarter operating income of $101 million. This increase was primarily due to improved results in our Vinyls downstream products businesses, largely driven by seasonally higher volumes as the building and construction season got under way and with lower restructuring, acquisition and integrated costs, partially offset by lower caustic soda sales prices.

Turning to our Olefins segment, from an industry supply demand perspective, the new ethylene and polyethylene production capacity that has entered the market since 2018 and the ongoing trade uncertainty has pressured prices and margins in the second quarter of 2019 when compared to the second quarter of 2018. In the second quarter of 2019, our Olefins segment operating income of $82 million decreased $76 million from the second quarter of 2018's operating income of $158 million due to the lower margins resulting from lower polyethylene sales prices. These lower prices were partially offset by higher polyethylene sales volumes, driven by strong operational performance of our plants and lower feedstock and fuel cost. Second quarter 2019 Olefins operating income increased $45 million from first quarter 2019 operating income of $37 million, as we saw a good demand for our products and benefited from lower feedstock and fuel costs.

Next, let's turn our attention to the balance sheet and statement of cash flows. At the end of the second quarter, we had cash and cash equivalents of $409 million and total debt of $2.7 billion. Second quarter 2019 cash flows from operating activities were $320 million, while capital expenditures were $208 million. In the first half of 2019, we continued our strategic debottlenecking investments to further integrate our production chain in the US and Germany, where the Vinyls expansion in Geismar, Louisiana expected to be operational in the fourth quarter of 2019.

Our ethylene joint venture with Lotte Chemical started up at the end of the second quarter and we will add further ethylene integration into our Vinyls chain. We have also continued to invest in growth opportunities throughout this year with bolt-on acquisitions such as NAKAN's specialty compounding and DaVinci roofing that has expanded our downstream products businesses. In these current market conditions, we will seek to invest prudently in opportunities that require leading technologies and in projects that will further enhance our chain integration in our business and that will improve our cost position and capitalize on our globally advantaged feedstock position. As always, we will continue to aggressively manage our cost given the current global economic outlook. Subsequent to the close of the second quarter, we issued EUR700 million of 10-year notes at an attractive coupon of 1.625%. These proceeds will be used to fund our future growth.

As we look forward, natural gas and ethane prices have continued to decline in the third quarter. New NGL pipelines and accompanying fractionation capacity has increased supply in our industry, highlighting the beneficial cost position enjoyed by North American producers. In our Vinyls segment, sales prices for caustic soda appear to have stabilized and the easing of river levels in the United States has provided improved logistics as more normal trade patterns have been reestablished. While the typical construction season in North America was delayed due to extended winter weather, we benefited from the rebound in demand and believe it will carry through into the third quarter.

For modeling purposes, we expect our effective tax rate and cash tax rates for the full year of 2019 to be approximately 23% and 18% respectively. Given the ongoing capital investments to reduce our cost position and further integrate our business as I outlined, we expect our full-year capital capex to be approximately $650 million.

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

Albert Chao -- President and Chief Executive Officer

Thank you, Steve. We delivered a solid second quarter result in spite of a challenging economic environment. We will continue to be prudent while evaluating new bolt-on opportunities and investing in our business to drive costs lower, improve our chain integration, operate our plants efficiently and grow our differentiated platforms in PVC and polyethylene. This morning, I wanted to mention that with a heightened awareness in the market about the environment, Westlake has had a long-standing commitment to corporate social responsibility that is formed by our core values. That commitment includes doing our part and supporting sustainability, which includes reducing Greenhouse gas emissions and waste, improving energy efficiency and promoting the responsible reuse of hydrogen and recycling. We are also actively participating in the industry's environmental initiatives, including those of the alliance to end plastic waste, materials recovery for the future and others.

Thank you very much for listening to our earnings call this morning. Now, I will 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, Jimmy, we will now take questions.


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Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Aleksey Yefremov with Nomura Instinet. Your line is now open.

Aleksey Yefremov -- Instinet, LLC Equity Research -- Analyst

Thank you. Good morning, everyone.

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

Good morning.

Aleksey Yefremov -- Instinet, LLC Equity Research -- Analyst

You're expecting your Vinyls capacity, will this increase chlorine and caustic soda production relative to your current system configuration?

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

Aleksey, it will increase our PVC production, but we're not adding any caustic production in North America. There is a small amount that we're adding in Europe that will start later in the following years, but none in the current -- none in North America. This is a PVC expansion.

Aleksey Yefremov -- Instinet, LLC Equity Research -- Analyst

Thank you, Steve. And you've chosen to issue guidance for the full year recently. For the full year recently. Could you explain the rationale for providing this guidance? And are you planning on keeping -- providing those guidance in future years?

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

This was a one-time guidance and we felt we needed to do something, because we did see that the guidance seemed to have gotten stale relative to the dynamics that we saw in the marketplace. So I think you can expect that we will do this just one-time only.

Aleksey Yefremov -- Instinet, LLC Equity Research -- Analyst

Thanks a lot.

Operator

Thank you. And our next question comes from Kevin McCarthy with Vertical Research Partners. Your line is now open.

Kevin McCarthy -- Vertical Research Partners -- Analyst

Yes. Good morning. I was wondering if you could --

Albert Chao -- President and Chief Executive Officer

Good morning, Kevin.

Kevin McCarthy -- Vertical Research Partners -- Analyst

In your Vinyls segment, volumes in the quarter. I think you reported them as being up 3.5% on a year-over-year basis, but presumably that includes some of the acquisition activity. So perhaps, you could tell us what that might have been without acquisitions and speak to the weather impact that you experienced?

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

So, Kevin, you're right. The step-up in volumes was largely driven by some of the acquisitions we made earlier this year. NAKAN certainly was a significant contributor to that. Absent that, our sales levels would have been similar to -- for the same quarter of 2018. The impact as a result of the winter weather was certainly delaying the impact to our ability to sell products at the normalized level during the course of the tail end of the first quarter and into the second quarter. But as we noted, we've seen a good recovery since the weather has been returning backwards from weather patterns.

Kevin McCarthy -- Vertical Research Partners -- Analyst

Okay. And then I guess I had a similar question on the Olefins side, your volume there was up 20% or so on a year-over-year basis. What drove that level of increase?

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

Well, certainly our production hasn't increased, So part of that was driven by maintenance activities in prior periods. We did see strong demand in this period, but the sales was largely driven by operating issues and turnaround issues in prior periods.

Kevin McCarthy -- Vertical Research Partners -- Analyst

I see. Thank you very much.

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

You're welcome.

Operator

Thank you. And our next question comes from Neel Kumar with Morgan Stanley. Your line is now open.

Neel Kumar -- Morgan Stanley & Co LLC -- Analyst

Great, thanks for taking my question. I was wondering if you could just help bridge the Olefins margin improvement from the first quarter levels of 15% to second quarter levels of about 25%? It appears there is a modest step-up in volumes and prices. It was, most of it is from lower feedstock costs and to be expected to more margin level in the second half of the year?

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

So, Neel, it was largely driven by a couple of things, certainly the seasonally higher earnings in our downstream products businesses was an important piece of that, as well as lower purchased ethylene and fuel cost. And certainly we also had some lower restructuring and transaction related cost also when you look at quarter one versus quarter two.

Neel Kumar -- Morgan Stanley & Co LLC -- Analyst

Okay. Thanks. What's embedded in your outlook in terms of PVC prices in the second half of the year? I would say domestic PVC prices go up $0.02 in June, it was flat in July. So any color on outlook there would be helpful.

Albert Chao -- President and Chief Executive Officer

Sure. I think industry -- looking at prices, it would be relatively flat after the $0.02 [Indecipherable] price increase we received in June. So our outlook for the rest of the year, domestic prices better be flat.

Operator

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

David Huang -- Deutsche Bank -- Analyst

Hey, it's David Huang here for David. I guess first on caustic pricing given the additional South American demand will take some time to significantly reduce the producer inventories here. So when do you expect pricing to improve more meaningfully in the second half?

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

Well, I think we certainly have seen a lot of the issues that were surrounding the caustic issues in Brazil addressed specifically Alunorte has begun to ramp up to more normalized rates, have been running at pretty elevated rates throughout the second quarter and continuing to step up those operating rates. So we've seen that as improving demand on that front. We've seen some of the industry consultants elevate their forecast for or announced a change in the caustic index of $5 a ton. So we've seen positive drivers there and as it relates to specifically Brazil, and of course, I should note that we've also seen a competitor have some operating issues also in Brazil.

Of course, in India, we've also seen the Bureau of Indian Standards, those issues that they raised last year seem to have been addressed. They are now issuing import permits to importers and traders and that seems to have been brought demand back into the market. So we've seen, as I mentioned earlier in my prepared remarks, stabilization of cost and prices and you see an outlook of $5 a ton on the table.

David Huang -- Deutsche Bank -- Analyst

And then on capital allocation, you have to [Indecipherable] buybacks in the quarter and you said you're interested in some bolt-on opportunities. So what would be the priority of your capital allocation this year? And then I guess, what would be some areas of focus we are evaluating potential M&A opportunities?

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

Well certainly, in my comments, you can see that we're continuing the debottlenecking initiatives that we have under way, both in the United States as well as in Europe. Those will continue to their conclusion. We certainly look for opportunities such as the DaVinci acquisition and the NAKAN acquisition. We are also aware that investors need and deserve a return. So we continue to look to get that return in the form of dividends and from time to time opportunistic share buybacks. As we look for opportunities to grow, that includes organic results acquisition-related opportunities. And as I say, it's a function of getting the appropriate return and the appropriate investment of capital.

David Huang -- Deutsche Bank -- Analyst

Thank you.

Albert Chao -- President and Chief Executive Officer

You're welcome.

Operator

Thank you. And our next question comes from Bob Koort with Goldman Sachs. Your line is now open.

Don Campbell -- Goldman Sachs -- Analyst

Good morning. This is Don Campbell on for Bob.

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

Yeah, good morning.

Don Campbell -- Goldman Sachs -- Analyst

Commentary on demand trends, can you give a little bit more granularity in terms of how your volumes have trended in July, maybe relative to June levels, or I guess average second-quarter volume trends?

Albert Chao -- President and Chief Executive Officer

Yes, I think demand are strong, both in the Olefins segment and in the Vinyls segment with the seasonal strong period for building construction. That also helps downstream products -- so barring any major disruption on the world from further trade disruptions, I think the second half demand and also exposed by industry consultants, it seem to be reasonable.

Don Campbell -- Goldman Sachs -- Analyst

Got it, thanks. And I guess on that export caustic soda price, it seems like North American price, this shows some positive improvement by the end of the second quarter. It seems like it stepped up maybe above export prices in other regions. How sustainable is that spread and I guess maybe what drove that improvement in North America export prices?

Albert Chao -- President and Chief Executive Officer

Yes, certainly that export market has been somewhat volatile. I think we have kind of stabilized in export pricing in some improvement in some areas. And as Steve said earlier, demand for especially in South America has improved over the first half of this year and over last year. So we are seeing the demand being reasonable and we expect the price to improve gradually also.

Don Campbell -- Goldman Sachs -- Analyst

Got it. Thank you.

Albert Chao -- President and Chief Executive Officer

You're welcome.

Operator

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

Arun Viswanathan -- RBC Capital Markets -- Analyst

Great, thanks, good morning. Just going back to the caustic soda outlook, we've seen some positive developments. But I guess would you characterize the July uplift of $5 on the index consistent with your expectations or was it maybe slightly weaker? And if so, what are some catalyst you're looking for to improve the momentum in caustic soda price? Thanks.

Albert Chao -- President and Chief Executive Officer

Well, as I said earlier, the export price has stabilized. And I think some of the high cost producing regions, those prices are breakeven prices. So we think that this improvement in economy around the globe demand should improve and increase and would help on the pricing side. And on the US side as well, I think with -- as Steve mentioned earlier, there were some issues with logistics, was high water levels, impeding shipments of caustic around the US and that has issue being resolved. So I think there is more movement, and prices and prices are stabilizing. And I think some of the industry consultants are forecasting not only the price increase in July, but down, further down the year, there would be further potential for the price increases.

Arun Viswanathan -- RBC Capital Markets -- Analyst

Great. And in olefins markets, you referenced the supply that's come on, Steve, over the last couple of years, pressure in pricing and margins. We've also seen feedstock cost pull back a lot. What's your outlook for polyethylene pricing and margins? Would you expect that we continue to decline from here or is there any potential for improvement? Thanks.

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

Well, certainly as -- the reason I mentioned the additional capacity is certainly we continue to see new pounds come in to the market. And we've certainly as we all have observed, seen an uncertain economic outlook in terms of growth. And so that has pressured prices over the month of June and July and certainly the further downside of pricing is certainly there. If you look at some of the consultants in there, their guidance in terms of forecast, they do show some trend lower later in the year. If you look at IHS, they do show some risk of further prices declining later this year.

Arun Viswanathan -- RBC Capital Markets -- Analyst

Just lastly, when you think about the Lotte cracker start-up, is there a potential that you could potentially throttle back on the production there and improve the markets and supply, or is it more advantageous to run full? Thanks.

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

It's a very cost effective cracker, and as you'd imagine, Lotte, our partner is using that ethylene going into their MEG. And certainly we're using that going into PVC and not polyethylene. And so certainly I think the expectation is that we will ramp up the operating rate of that plant to full rates, and both we and our partner would like to see full rates to send into our respective derivatives.

Albert Chao -- President and Chief Executive Officer

And to add also with today's ethylene price, there is reasonable margin in producing ethylene at those ethylene prices.

Arun Viswanathan -- RBC Capital Markets -- Analyst

Thanks.

Operator

Thank you. And our next question comes from Mike Leithead with Barclays. Your line is now open.

Michael Leithead -- Barclays -- Analyst

Thanks, good morning guys.

Albert Chao -- President and Chief Executive Officer

Good morning.

Michael Leithead -- Barclays -- Analyst

I appreciate that the July guidance was just a one-time occurrence, but even when you gave the range, I guess it implied a bit of a second half balance and earnings, which I assume is mostly on the Vinyls side. So can you just walk through maybe one or two of the factors that you consider to get you to that second half improvement over what we've seen so far in the first half?

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

Mike, I think if you heard us speak to earlier, we see positive trends both on the Vinyls and [Indecipherable] Some of the issues that we dealt with late in '18 and early in 2019 related to demand in Brazil and issues related to regulators in India. Weighed I think on the market and we see those behind us at this stage. So we have a more constructive view going forward into the rest of this year.

Michael Leithead -- Barclays -- Analyst

Got it. That's helpful. And then maybe could you just talk a little bit more about the improvement of the building products business within Vinyls this quarter? And is this an area you might look to give more financial disclosures about going forward, given the increasing size of this business in your portfolio?

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

Certainly, Mike. As we look at the business, we'll give that further consideration. It is a business that has continued to grow through these acquisitions and it is an attractive business, as you can see with the capital we put forth through the acquisitions of NAKAN and DaVinci.

Operator

Thank you. And our next question comes from John McNulty with BMO Capital Markets. Your line is now open.

Bhavesh Lodaya -- BMO Capital Markets -- Analyst

Hi, good morning. This is Bhavesh Lodaya for John.

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

Good morning.

Bhavesh Lodaya -- BMO Capital Markets -- Analyst

First of all, just a quick follow-up on the discussion around the strong volumes, particularly in polyethylene. Can you touch on how much of that was domestic versus export demand and then generally, how are you seeing polyethylene inventory levels right now?

Albert Chao -- President and Chief Executive Officer

Yeah I think domestic demand in the US is relatively flat. I think export demand has really helped in the total volume, sales volume for the industry. And I think inventory values from a customer point of view are relatively reasonable to low size because with all of the capacity coming up, customer is expecting prices to trend lower. So they are very careful in holding more inventory. So I think the customer inventory level is average to the low side.

Bhavesh Lodaya -- BMO Capital Markets -- Analyst

Okay. And then as we look at economic cycles on the alkali side, historically we have seen as economic cycles turn downwards, chlorine demand slows down, first, caustic kind of flex follows sometimes leads to higher caustic prices given lower alkali production. So it does appear we are seeing some weakness in chlorine. The question is, is this temporary or are you seeing any structural signs of the phenomena and curious to know where you feel we are in this cycle?

Albert Chao -- President and Chief Executive Officer

Sure. I think some of the chlorine caustic are more seasonal generally in the second and third quarter with building season in the Northern Hemisphere. Our demand for PVC is stronger, hence the demand for chlorine is stronger. And as you go to into winter season, construction activity slows down. There is less demand for PVC, not only in the US but in the Northern Hemisphere. And hence it's less production of PVC less cost chlorophyll production and hence chlorophyll price tends to move up and we still see the same seasonality. From a business cycle point of view, so long there is continued demand growth for PVC and caustic around the globe and with limited amount of capacity increase, I think they made up, the largest cycle point of view, I don't think there is a business cycle issue for the Vinyls business. It is really more a seasonal issue. Now barring any global economic slowdown from the trade issues, we should see that the bundle cycle should get tighter and tighter as we go forward.

Bhavesh Lodaya -- BMO Capital Markets -- Analyst

Thank you.

Albert Chao -- President and Chief Executive Officer

You're welcome.

Operator

Thank you. And our next question comes from P.J. Juvekar with Citi. Your line is now open. Once again, P.J. Juvekar from Citi, your line is now open. You may state your question.

Eric B. Petrie -- Citi -- Analyst

Yes, hi, good morning. This is Eric Petrie out for P.J.

Albert Chao -- President and Chief Executive Officer

Good morning.

Eric B. Petrie -- Citi -- Analyst

I wanted to ask what has your historical volume growth averaged for chlorine and derivatives, second half over first half?

Albert Chao -- President and Chief Executive Officer

It's usually they are more or less the same. You have a weaker first quarter, stronger second and third quarter and weaker fourth quarter. And at times depending on demand, the fourth quarter could be surprisingly better or surprisingly worse, depending on the global economy. This year, because of the longer winter and wetter weather in the US, the home construction season did not start until much later and hence it was weaker in the first quarter. And as Steve mentioned, it has improved second quarter into the third quarter and we expect a seasonal slowdown again in the fourth quarter.

Eric B. Petrie -- Citi -- Analyst

Okay, thank you. Secondly, can you talk about the economics of integrated PVC producers in China with the impact that has been on supply for ECU?

Albert Chao -- President and Chief Executive Officer

Certainly. Well, as you may know because of the heightened environmental awareness in China, some of the polluting high-cost plants were asked to either shut down or reduce production. So it has limited productions in both Vinyls and chlor-alkali side. And depending on which -- whether you are integrated or not integrated, that don't integrated producers economics has not been well and I think we mentioned earlier, the ECU returns probably at breaking level, breaking even levels for the coastal plants, the one who are integrated from coal all the way to PVC watch mostly in the Imperial China has a better economics than the coastal plants.

Eric B. Petrie -- Citi -- Analyst

Great, thank you. Albert.

Albert Chao -- President and Chief Executive Officer

You're welcome.

Operator

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

John Roberts -- UBS -- Analyst

Thank you. But just to get a sense of the weather impact in the quarter, how much more volumes off from what your expectations were at the first -- at the beginning of the quarter in the Vinyls segment?

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

Well, I think if you look at just quarter-over-quarter, we had a stronger quarter in the second half than we did in the first half. But certainly it's hard to gauge because, John, as you know, the weather, the seasonal weather changes year-on-year, but as Albert noted, we typically have a stronger season in the first quarter than we did this past year. But we were able to pick up very good volume in the second quarter, as I said, we had an 8% increase in volume quarter-over-quarter.

John Roberts -- UBS -- Analyst

Good. And will the Lotte cracker have any material impact on your economics until you exercise the option, if the current equity interest level, is it relatively small and the market based ethylene that you'll be purchasing really won't have much different economics that what you're already doing in the market?

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

Well, we are beginning -- the plan has just started up and so it's not running at full rates at this stage. And so the relative volume that we're taking in the second quarter and into the third quarter, still just ramping up to full rates. But we will be getting the benefit of producer economics, which is certainly better than any purchased ethylene in the marketplace as we take our ownership interest in the plant.

John Roberts -- UBS -- Analyst

Thank you.

Operator

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

James Sheehan -- SunTrust Robinson Humphrey -- Analyst

Thank you. Good morning.

Albert Chao -- President and Chief Executive Officer

Good morning.

James Sheehan -- SunTrust Robinson Humphrey -- Analyst

Could you talk about what you expect for plant turnaround costs in the third quarter and fourth quarter, please?

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

So Jim, since we have so many plants across the business, we've decided not to kind of give quarter-by-quarter turnaround costs and impacts because frankly we schedule these and they do move based on planning throughout the course of the quarter, throughout the course of the year. But as we look forward into the second half of the year, the turnaround activity will be lighter than it has been in the first half of the year. So we tend to give, so the guidance we gave earlier was reflective of a wider turnaround schedule of course.

James Sheehan -- SunTrust Robinson Humphrey -- Analyst

Okay, thank you. And on the DaVinci acquisition, could you give us a sense for the scale of this business and what that EBITDA contribution might be?

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

Jim, it was very small. So it's not going to be material to the numbers that you're looking at in your model.

James Sheehan -- SunTrust Robinson Humphrey -- Analyst

And in terms of your FIFO impact, how would you break that out by business segment?

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

It's mostly Vinyls segment impact.

James Sheehan -- SunTrust Robinson Humphrey -- Analyst

Thank you very much.

Operator

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

Frank Mitsch -- Fermium Research -- Analyst

Thank you, good morning. Just following up on that turnarounds, the second half being lighter than the first half. What's the order of magnitude if you compare the halves?

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

As I say, Frank, we haven't gotten into the quantification of those turnarounds. So they do vary quarter-by-quarter and year-over-year. And so all I would say is, is that they will be lighter than they have been in the first half of the year, for the second half of the year.

Frank Mitsch -- Fermium Research -- Analyst

Okay. And obviously, your volumes were better in both businesses, both year-over-year and sequentially, some of that M&A related. Can you talk about the operating rates for your facilities, roughly where they were during the second quarter and what are you seeing so far here in as July has completed?

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

Certainly.

Albert Chao -- President and Chief Executive Officer

Yeah, our operating rates are generally better than our industry information that we see. We had some -- Steve mentioned, some turnaround in the first half. But after taking with its first half, the turnaround activities were doing much better industry operating rates.

Frank Mitsch -- Fermium Research -- Analyst

All right, thank you so much.

Albert Chao -- President and Chief Executive Officer

You're welcome.

Operator

Thank you. And our next question comes from Steve Byrne with Bank of America. Your line is now open.

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

Yes, thank you. How would you rank your downstream building products business, as among all of the products that you can move the chlorine molecule into, how would you rank those downstream products in terms of EBITDA contribution and margin? And what volume does that represent out of the chlorine capacity that you have?

Albert Chao -- President and Chief Executive Officer

Well, downstream products are over $1 billion in revenue and they are an important offtake of our polymers, but our downstream products also with the purchase of NAKAN is spread all over the world. In building products, we are primarily serving the North American markets like pipe and sightings, trims and window profiles. And those tend to not be for export market, more of a domestic North American market. But whereas the NAKAN's compound products, really a global business, and sold all over the world.

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

And do you see any new opportunities to move into more Vinyls downstream products and just whether you would ever consider separating that out as a separate segment?

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

So, Steve, you can see the last couple of transactions this year with NAKAN and DaVinci are in that Vinyls products business. And certainly it's attractive in that we can provide I think further integration in our business for select acquisitions. And so to the extent that we can find opportunities there, we will, that doesn't suggest that we've not continued our focus on the upstream side of the business. We of course do, and as I mentioned we are debottlenecking our chemical assets in the Vinyls chain now. So it is a balance of looking at that and it's an important business. It generally tends to be more stable in EBITDA over time. And so when we get start to breaking that, it is something that will give and consider more thought about how we can provide more transparency to that business, because as Albert noted, it is a growing size business of ours.

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

Thank you.

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

You're welcome.

Operator

Thank you. And our next question comes from Hassan Ahmed with 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.

Hassan Ahmed -- Alembic Global Advisors -- Analyst

Albert, a question around near-to-medium term supply additions. Like you rightly said, the sort of JV you guys have with Lotte makes complete sense. It's cost advantage for it to come on stream. But I'm just a bit sort of surprised with naphtha based economics, the way they are globally, with MTO economics the way they are, that we recently saw two MTO plants come online in China. Another two seem to be in the pipeline in the near term. So what's your view, if current economics and global uncertainty persists, what's your near-to-medium term view about these non-North American facilities?

Albert Chao -- President and Chief Executive Officer

That's a very good question. As you mentioned that China, outside of North America, China is really the country that seems to be in a process adding more olefins capacity, some MTO and building some of the coal-based methanol plants to feed the MTO plants, whereas those MTO plants on the coastal region based on import methanol, they have been doing well because of the higher methanol price. But methanol price has also, seemed to be trending lower. China is building ethane-based crackers based on import of ethane and some propane primarily from the US. So that will be -- to be seen how good an investment those are. And there are some crude oil to chemicals plants being planned primarily looking at producing more paraxylene, the aromatics side or the chemical side and not so much the olefins even though there are some olefins coming up. So China, I think capacity just even normal naphtha cracking, just produce ethylene. They want to be more self-sufficient and time will tell how competitive it will be based on the oil [Phonetic].

Hassan Ahmed -- Alembic Global Advisors -- Analyst

Understood. Very helpful. Now, as a follow-up more on the domestic in Westlake side of things, again one of the trends we've seen over the last couple of quarters is a fair bit of volatility in terms of NGL pricing, right, and the associated margins. You've seen at times ethane-based margins being advantage at times, butane-based margins being advantaged. So could you remind me again the level of flexibility you guys have? I mean I know you can run ethane flat out, but if ethane gets disadvantaged, what's the lowest level that you can take ethane down to?

Albert Chao -- President and Chief Executive Officer

Well, we are primarily ethane-based crackers in Calvert City, was propane cracker. We can revert back to propane, but it will reduce ethylene production. We have two ethylene plants in Lake Charles. One of them could crack up to 50% propane and even some of naphtha. Again, if we went to propane or even naphtha, we would reduce ethylene production. So net-net, we are looking at total benefit to the company even though you may save some feedstock costs by producing much less ethylene. And depending on the margins for all the different feedstocks, we try to maximize that. And we have been using some propane in the recent months when propane was much more attractive. But today, ethane is still I think, barring the butane price, which is a summer low price for butane, ethane is still the most attractive, raw materials, and as Steve said, there are more pipelines and fractionators coming up this year and next year, we will produce, supply more ethane to the US market.

Hassan Ahmed -- Alembic Global Advisors -- Analyst

Very helpful, Albert. Thanks so much.

Albert Chao -- President and Chief Executive Officer

You're very welcome.

Operator

Thank you. And our next question comes from Jonas Oxgaard with Bernstein. Your line is now open.

Jonas Oxgaard -- Bernstein -- Analyst

Good morning, guys.

Albert Chao -- President and Chief Executive Officer

Good morning.

Jonas Oxgaard -- Bernstein -- Analyst

Two questions if you don't mind. One of them is, you touched on Chinese PVC economics. The margins for naphtha crackers going into PVC is now at, I believe it's a four-year high. Clearly doesn't look that bad as coal prices keep falling. Are you seeing increased rates in China because of economics or is this just -- can't they flex even though the economics suggest otherwise?

Albert Chao -- President and Chief Executive Officer

No, we are seeing some high cost plants being reduced production or shut down. They have been unfortunately some explosions in certain part of China and those plant capacity taking over the market. So even though stock PVC price has moved up, it's not really on the reinvestment economics yet. And as you know, China has a moratorium right now on coal-based PVC VCM plant because of Mercury catalyst and until this is resolved, it is not permitting any new chlor-alkali VCM plans on this coal-based.

Jonas Oxgaard -- Bernstein -- Analyst

Okay. A completely different question. So the big debate right now seems to be whether the US polyethylene prices are sustainable or not. So, Asia is down. When I look at US, it's set by Europe and it just moves the question over to European polyethylene prices if they are sustainable. Do you have a perspective on the European pricing and how it has been so high related to Asia margins or Asian prices for so long and of course, is that sustainable as well?

Albert Chao -- President and Chief Executive Officer

That's a good question. As US polyethylene plants adding 50% to 60% capacity over the last several years into the next few years, especially with the trade tensions we have with China, South America and Europe will be the two areas that US producers will be targeting. So you do have some impact on the European market. However, we don't know what trade barriers will Europe have especially if US putting trade tariffs on European auto imports. So, time will tell.

Jonas Oxgaard -- Bernstein -- Analyst

Okay, thank you.

Albert Chao -- President and Chief Executive Officer

You're welcome.

Operator

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

Matthew Blair -- Tudor, Pickering, Holt & Co. -- Analyst

Hey, good morning, Albert and Steve.

Albert Chao -- President and Chief Executive Officer

Good morning .

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

Good morning.

Matthew Blair -- Tudor, Pickering, Holt & Co. -- Analyst

So, Asia spot caustic prices have fallen off about 15% in just the past month or two, I think they are roughly around January levels. Does this concern you? Do you think it's likely to weigh on US contracts in the back half of the year?

Albert Chao -- President and Chief Executive Officer

Well, certainly stock prices could have some impact, but I think because they are spot prices and the volumes are not that big and lot of the exports to other parts on long-term contract basis so which are less impacted by spot price. And so all the economy around the world improves or is not going to further reduction, we see demand for caustic should improve. As I mentioned earlier, with the Alunorte and other South American plant issues, the demand on import has increased. So the prices have improved, but every now and then prices could go up and down in specific regions. But that will not be determined of the global pricing dynamics.

Matthew Blair -- Tudor, Pickering, Holt & Co. -- Analyst

Sounds good. And then in the first quarter, you mentioned that building products about a $20 million to $30 million year-over-year headwind. Do you have a similar number for Q2?

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

Yes, as we said, Matthew, because of the delay in the winter season impacting the start of the construction season, we saw the pickup in beginning in the second quarter. So we're not breaking out specifics as it relates to the downstream building products portion of our business, but I would say that with the return of the construction season, that business has improved and you can see the volumes that we've seen from the con have been additive to that over the course of the first half of the year and certainly working a meaningful contributor in the second quarter. So I would say that products business has performed very well.

Matthew Blair -- Tudor, Pickering, Holt & Co. -- Analyst

Great, thank you.

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

You're welcome.

Operator

Thank you. And our next question comes from Jeff Zekauskas with JPMorgan. Your line is now open.

Jeffery Zekauskas -- JP Morgan -- Analyst

Thanks very much. Can you remind me how much of volume of the Lotte cracker you're contractually obligated to accept?

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

So, Jeff, we're obligated to take 50% of the production we owned -- we own 10% of the ownership at this stage of the plant.

Jeffery Zekauskas -- JP Morgan -- Analyst

And how does that exactly work as the plant is ramping up? Do you have to take 50% of the volume as it ramps up or it has to get to a certain scale before you take the volume?

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

No. As it reaches commercialization during that ramp up, we're taking our pro rata share.

Jeffery Zekauskas -- JP Morgan -- Analyst

In taking your pro rata share, does that positively affect your sequential EBITDA, all things being equal?

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

Well, certainly Jeff, because of the producer economics on that portion that we own will have benefits, because we've been merchant buying those pounds in the market sequentially. So that will be an additive, as we go forward, that will be additive to the EBITDA.

Jeffery Zekauskas -- JP Morgan -- Analyst

Can you quantify that?

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

We haven't yet.

Jeffery Zekauskas -- JP Morgan -- Analyst

Okay. Also in looking at your income statement, year-over-year your cost of goods sold went from a little bit less than $1.7 billion, a little bit more than $1.8 billion. Why was that, what did your cost of goods sold go up?

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

Well, I think the mix of businesses that we have, Jeff, and when we think about the change in the mix of businesses, part of that of course is the addition to our Vinyls downstream products?

Jeffery Zekauskas -- JP Morgan -- Analyst

So in other words, it was acquisition effects?

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

Part of it is and certainly part of it is also purchase materials for all of the businesses as well.

Jeffery Zekauskas -- JP Morgan -- Analyst

Because really maybe purchased ethylene price, I mean maybe ethylene prices are a little bit higher, but everything else is really lower now?

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

Remember, we've also had higher volumes, sales volumes.

Jeffery Zekauskas -- JP Morgan -- Analyst

Yes. Right.

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

So when you have higher sales volumes, your cost of sales purchase materials go up as well. And remember, if you're looking year-over-year, quarter-over-quarter, volumes have been up.

Jeffery Zekauskas -- JP Morgan -- Analyst

How much polyethylene do you export of your total?

Albert Chao -- President and Chief Executive Officer

Yeah, we export less than the industry average and industry, I think we're up to, in the low mid '30s and we are below that.

Jeffery Zekauskas -- JP Morgan -- Analyst

Pretty above 20?

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

About 20, yes.

Jeffery Zekauskas -- JP Morgan -- Analyst

Yeah. And can you talk about the looseness of polyethylene in the Asian market? Do you see it as particularly loose or tight or snug, or how do you view that?

Albert Chao -- President and Chief Executive Officer

Well, Asia outside of China is still a big market, but there are many producers in the Asian market and also the Middle East. So the price has moved pretty volatile month to month, but it is a huge market.

Jeffery Zekauskas -- JP Morgan -- Analyst

How about China? Is China loose?

Albert Chao -- President and Chief Executive Officer

Yeah. China now with the tariff added on for US producers, I think US producers, they are trying to avoid shipping to China, and less debt will be exporters and those tariffs can be refunded but by and large US is trying to sell this to China.

Jeffery Zekauskas -- JP Morgan -- Analyst

Right. I understand the US is trying to sell us to China. But the China polyethylene market domestically a looser place. There seems to be some decrease in China.

Albert Chao -- President and Chief Executive Officer

Yes. I think that was the slowing down Chinese economy and industrial manufacturing. The demand has been volatile and has been reducing as well for many plastics not only polyethylene.

Jeffery Zekauskas -- JP Morgan -- Analyst

I guess lastly people talk about the polyethylene market is growing at 4% to 5% globally. Do you think it's growing at that rate this year or do you think this year? I don't know, one --.

Albert Chao -- President and Chief Executive Officer

I think they saw the tariffs barriers and trade issues and I think will be probably less than these global GDP rate. But in our only halfway through the year, we don't know what the rest of the year is going to grow.

Jeffery Zekauskas -- JP Morgan -- Analyst

Okay, great. Thank you so much.

Albert Chao -- President and Chief Executive Officer

You're welcome.

Operator

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

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

Thank you again for participating in today's call. We hope you'll join us again for our next conference call to discuss our third quarter results.

Operator

Thank you for participating in today's Westlake Chemical Corporation Second Quarter Earnings Conference Call. As a reminder, this call will be available for replay beginning two hours after the call has ended and may be accessed until 11:59 PM Eastern Time, on Tuesday, August 13, 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 area code, 404-537-3406. The access code for both numbers is 3583409. You may disconnect. Everyone have a great day.

Duration: 57 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

Aleksey Yefremov -- Instinet, LLC Equity Research -- Analyst

Kevin McCarthy -- Vertical Research Partners -- Analyst

Neel Kumar -- Morgan Stanley & Co LLC -- Analyst

David Huang -- Deutsche Bank -- Analyst

Don Campbell -- Goldman Sachs -- Analyst

Arun Viswanathan -- RBC Capital Markets -- Analyst

Michael Leithead -- Barclays -- Analyst

Bhavesh Lodaya -- BMO Capital Markets -- Analyst

Eric B. Petrie -- Citi -- Analyst

John Roberts -- UBS -- Analyst

James Sheehan -- SunTrust Robinson Humphrey -- Analyst

Frank Mitsch -- Fermium Research -- Analyst

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

Hassan Ahmed -- Alembic Global Advisors -- Analyst

Jonas Oxgaard -- Bernstein -- Analyst

Matthew Blair -- Tudor, Pickering, Holt & Co. -- Analyst

Jeffery Zekauskas -- JP Morgan -- Analyst

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