Westlake Chemical (WLK) CEO Albert Chao to Acquire Axiall Corporation - Earnings Call Transcript

| About: Westlake Chemical (WLK)

Westlake Chemical Corp. (NYSE:WLK)

Acquire Axiall Corporation Conference Call

June 10, 2016, 11:00 AM ET

Executives

Ben Ederington – General Counsel, Chief Administrative Officer, Corporate Secretary

Albert Chao – President and Chief Executive Officer

Steven Bender – Senior Vice President and Chief Financial Officer

Analysts

Arun Viswanathan – RBC Capital Markets

Don Carson – Susquehanna Financial

David Begleiter – Deutsche Bank.

Roger Spitz – Bank of America Merrill Lynch.

Hassan Ahmed – Alembic Global.

Aleksey Yefremov – Nomura

Frank Mitsch – Wells Fargo Securities.

John Roberts – UBS

James Sheehan – SunTrust Robinson.

Ryan Berney – Goldman Sachs

Christopher Perrella – Bloomberg Intelligence.

David Wang – Morningstar

Sunil Sibal – Seaport Global Securities.

Jeff Gates – Gates Capital Markets.

Owen Douglas – Baird

Operator

Good morning and welcome to today's Conference Call to discuss Westlake Chemical Corporation's Acquisition of Axiall Corporation. All lines have been placed on mute and after the speakers remarks there will be question-and-answer session. [Operator Instructions]

It is now my pleasure to turn the conference over to Westlake Chemical's General Counsel, Chief Administrative Officer, and Corporate Secretary, Mr. Ben Ederington. Thank you. You may begin the conference.

Ben Ederington

Thank you, Kristen. Good morning, everyone, and welcome to our conference call to discuss our announced transaction with Axiall Corporation. I am joined today by Albert Chao, our President and CEO; Steve Bender, our Senior Vice President and Chief Financial Officer, and other members of our Management Team.

Today, management is going to discuss certain topics that will contain forward-looking information that is based on management's believes 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 chemical industry; availability, costs and volatility of raw materials, energy and utilities; governmental regulatory actions and political unrest; global economic conditions; industry operating rates; the supply/demand balance for Westlake's and Axiall's products; competitive products and pricing pressures; access to capital markets; technological developments and other risk factors discussed in our SEC filings.

Listeners are advised to review the forward-looking statements disclosure contained in the investor presentation for this conference call and in our other SEC filings. This morning, Westlake and Axiall issued a joint press release announcing our transaction. This document, along with the accompanying investor presentation is available in the press release section of our website at westlake.com.

A replay of today's call will be available beginning approximately two hours after completion of this call until 11:59 PM Eastern on July 10, 2016. The replay may be accessed by dialing the following numbers: Domestic callers should dial 800-585-8367. International callers may access the replay at 404-537-3406. The access code for both numbers is 31712145.

Please note that information reported on this call speaks only as of today, June 10, 2016, 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 website at westlake.com. No I'd like to turn the call over to Albert Chao. Albert?

Albert Chao

Thank you, Ben. Good morning, ladies and gentlemen, and thank you for joining this call this morning. Westlake announced the acquisition of Axiall this morning and we are very excited over this transaction. We also look forward to welcoming the Axiall employees into the Westlake family and look forward to meeting them all.

We strongly believe the industrial and strategic logic of this transaction and we believe it's compelling. The combined Company will be a leader in the North American olefins and vinyls business, and together, we'll create a larger, more integrated and diverse Company. We'll be the second largest North American producer of PVC and the third largest chlor-alkali producer in the North American markets.

This transaction is consistent with our history of vertical integration, which captures the margins across the chain and through the cycles. The acquisition greatly extends our manufacturing footprint and positions us for future growth. We believe we will achieve annual synergies of $100 million per year and the transaction will be accretive in the first year after close.

Axiall is a leader in the chlor-alkali, PVC and building products businesses. Its chlor-alkali and PVC businesses include seven chemical sites and four PVC compounding facilities, with over 20 billion pounds of chemical capacity per annum. Its PVC building products businesses include products such as sidings, deck, trim, molding and various pipe products. Axiall's 2016 first-quarter last 12 months revenue was $3.3 billion and EBITDA of $330 million.

Steven Bender

So turning to the transaction, let me provide you an overview of the transaction. Westlake and Axiall announced today that they've entered into the agreement to acquire Axiall stock for $33 in an all-cash transaction. The enterprise value is $3.8 billion, including the assumption of $1.4 billion of Axiall debt. This is a 6.1 times cycle average with synergies.

Westlake has in place a $1.8 billion bridge loan provided by Deutsche Bank and Goldman Sachs. And Westlake is committed to maintaining a strong investment-grade credit rating. This transaction will require Axiall shareholder vote which we expect to be dealt with very quickly as we go through the coming months. We do not expect any regulatory issues and thus expect to close by 4Q 2016.

So let's review a few of the key highlights of this transaction. As Albert noted, it creates a North American chlorovinyls leader with enhanced scale. Secondly, it highly integrates the chain in the US margin and brings margin stability for the combined Company. Thirdly, it creates the opportunity for us to capture value through the synergy opportunities that Albert just noted. Fourth, the combination combine of Axiall and Westlake builds a history built on Westlake's history of integration and strategic growth and, of course, importantly, it works off the strong financial profile that Westlake brings and our strong financial culture.

With that, I'll turn it back over to Albert to add some more detail to these particular issues. Albert?

Albert Chao

Thanks, Steve. The combined entity is a leader in the North American chlorovinyl markets. As we said earlier, the combination creates the number three North American chlor-alkali producer and the number two PVC producer in the North American markets. It also provides greater scale and synergies with Westlake's existing businesses, includes vinyls business and olefins business. It better positions us in this increasing global competition. We also have greater ability to serve customers with the combination and capitalizes on future investment opportunities.

The combined business will have a broader geographical footprint that will include Westlake's vinyls business in Europe, which is the global leader in specialty PVC resins. It is also worth highlighting that Westlake is also a leading North American olefins producer, being the largest integrated low density polyethylene to ethylene producer in North America. Finally, our sales will also see a significant increase by about 75% to $7.6 billion per annum and a combined Company will benefit from this improved scale.

Now let's look at the integration for the businesses. We are fully integrated in our olefins chain from ethylene to polyethylene and styrene as shown in the dark blue boxes. We are currently one of the most integrated vinyls producer in the US and possibly one of the lowest production cost locations globally as shown in the light blue boxes.

Our strategy is to continue to integrate our businesses throughout the olefins and vinyls chain. For example, our new qualified facility in Geismar, Louisiana, which completed our [chlorine] integration in 2013. We completed a ethylene de-stock conversion and expansion project in Calvert City, Kentucky in the first half of 2014 and have another expansion planned in the ethylene business in 2017. That, along with smaller improvements, will have added some additional 100 pounds ethylene capacity to Calvert City by 2017. We are also currently debottlenecking our Petro 1 unit in Lake Charles, Louisiana, which will add another 250 million pounds of ethylene capacity, which when combined with our Calvert City expansion, will give us total of 350 million pounds of new ethylene capacity by 2017.

On the downstream side, we will use a significant portion of our PVC to make PVC building products and this acquisition is exactly consistent with our strategy. The strategy allows us to not be completely dependent on one single commodity product and profits have been made at different places along the value chain throughout the cycle. Thus the acquisition of Axiall creates a stronger Company with significantly increased scale, greater product diversity, and integration throughout the value chain.

Steven Bender

Our synergy estimate that we mentioned earlier, $100 million, reflects the input from Westlake's operational and commercial teams based on due diligence that we performed and the synergies fall in four buckets: general and administrative, procurement and supply chain, manufacturing, and sales and marketing. The synergy opportunities we derived are all from identifiable cost synergies. The annual run rate of synergies is $100 million a year, comprised of these cost synergies and the opportunities that we see in front of us.

Westlake is a leading integrated plastics materials company in the olefins and vinyls chain, as Albert outlined. The four points that you see in our mission statement that we use are very important. We pursue profitable growth, and as a result, are always working to create and grow value for our shareholders. We are focused in businesses that we understand, we do business globally where we can gain a competitive edge, and we always act in a financially disciplined manner.

As I mentioned, we are focused in the olefins and vinyls business and our main products in our olefins business is polyethylene. Polyethylene is the largest plastic material used in the world and its ideal for choices of countless consumer nondurable products, largely used in food packaging. Our vinyls business makes PVC. PVC is known as the poor man's plastic because half of that raw material was made from relatively cheap, non-hydrocarbon-based chlorine. Its unique set of properties make it the plastic of choice in many consumer durable applications.

The chart that you may have seen on our presentation illustrates Westlake's growth from inception in 1986 through our planned 2006 (sic - see slide 10, "2016") capacity expansions in Calvert City that Albert just mentioned, and of course, the acquisition of Axiall. Please note that as we have achieved this growth, both through acquisition as well as through organic growth opportunities. At Westlake, we are not just looking for ways to grow the Company, but to strategically grow the Company through the prudent use of our strong balance sheet.

Now as we turn to our financial profile, we importantly want to maintain a strong financial profile and generate and we continue to see generation of strong cash flows from the combined companies. And we expect this transaction will be accretive in the first year following our close. Westlake is committed to maintain an investment grade credit rating, and the transaction is supported by Westlake's large cash balance. Now I'd like to turn the call back over to Albert for some comments. Albert?

Albert Chao

Thank you, Steve. In summary, we strongly believe the industrial and strategic logic of this transaction and is very compelling. The combined Company will be a leader in the North American olefins and vinyls businesses.

We'll be the second largest North American producer of PVC and the third largest chlor-alkali producer in the North American markets, as well as we are the largest North American producer of LDPE integrated with ethylene. And this transaction is consistent with our history of vertical integration which captures the margins across the chain and through the cycles and on a global basis, which will create value for our shareholders. Thank you very much for listening today.

Ben Ederington

I would like to turn the call over to the operator to see if there are any questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Arun Viswanathan with RBC Capital Markets.

Arun Viswanathan

Good morning. Congratulations on the deal.

Albert Chao

Good morning, Arun.

Steven Bender

Thank you.

Arun Viswanathan

I guess my question is just on the point of integration, post close, you'll be a little but more levered to be in chlorine and caustic. I guess how do you expect to kind of bridge the gap on the ethylene side as far as backward integration?

Albert Chao

Well we mentioned earlier we are going through extensions in two of our ethylene plants, so we have more ethylene to be used in the integration, and secondly, we will always look for other opportunities to strengthen our ethylene positions.

Arun Viswanathan

And there are a couple other options out there, I guess, as far as crackers available as well as the Lotte proposed cracker. Would those also be on the table as potential increases in ethylene capacity?

Albert Chao

Yes. We look forward to working with Lotte and its management in the new ethylene joint venture in Lake Charles.

Arun Viswanathan

The next question I had was just on the synergies and the overall capacity footprint. It looks like there could be some overlap in the Gulf Coast on some of your facilities and you have the new Geismar facility, which theoretically is lower cost than some of the facilities that you're acquiring. Would footprint optimization or actualization be also a consideration that you would consider down the line?

Albert Chao

I think both Axiall and Westlake have very good plans along the Gulf Coast and a very good people and we plan to build upon the strength of each of these plants and grow our Westlake's business on a global basis.

Arun Viswanathan

And then the last question I just had was just, strategically, many of the acquisitions that you've pursued in the past, Albert, have been a little bit specialty in nature. I mean, how would you characterize the value proposition here? Many of Axiall's products could be construed as relatively commodity in nature. Thanks.

Albert Chao

Yes. We are a commodity company with segments of business in specialty. We find the Axiall business is very compelling and will be a good match with Westlake's businesses and integrate very well going forward.

Arun Viswanathan

Okay, thanks.

Albert Chao

You're welcome.

Operator

Our next question comes from Don Carson with Susquehanna Financial.

Don Carson

A couple of modeling questions. Steve, what kind of purchase accounting step-up do you expect in the first year as you do your accretion analysis? And then can you expand on the timing of the synergies? When do you hit that $100 million and break those synergies out by each of the four buckets that you've outlined.

Steven Bender

Don, the $100 million synergy that we outlined we have not yet given any further detail in how they break out into the four buckets, but you would imagine some of the public company cost would disappear as a result of this combination. As it relates to doing the work as it relates to the valuation of work, obviously, we'll get started on that and I don't yet have any guidance for you, but we'll look and be communicating that as we go forward. But again, we've just completed this transaction and so we'll give some better help on that as we go forward.

Don Carson

And then how about on debt levels and interest rate? How much of that $1.8 billion facility will you be drawing down? What would you expect your average financing rate to be as you fund this acquisition?

Steven Bender

Well you know, we have a very conservative financial policy and that remains very much the bedrock of Westlake. And so as we think about the structure that we look to structure of the transaction around, we're going to be targeting to maintain that strong investment-grade balance sheet that we've had and enjoy and expect to continue to enjoy.

So as we think about how we'll finance this transaction, we'll be interacting with the agencies and looking back at how we've operated the business historically to make sure that we've done so and we've not given specific guidance yet in terms of how we'll be financing this or how we'll be layering in the tranches. But certainly, we'll be certainly better communicating that as we go forward. But at this stage, we wanted to really focus on the business combination and the opportunities that we see.

Don Carson

Thank you.

Operator

Our next question comes from David Begleiter with Deutsche Bank.

David Begleiter

Thank you. Good morning. Albert, maybe you could just talk about why you find chlor-alkali and PVC attractive at this point in the cycle.

Albert Chao

Well, as Steve mentioned, PVC is a poor man's plastics and they use chlorine as half of the feedstock and it was just relatively cheap and low-cost, solid to low-cost power with that low-cost natural gas price in the US. So I think US is one of the lowest-cost producer to produce ethylene and chlorine and as well as PVC and there's a large growth of demand for PVC going forward, especially in the developing nations. So I think the US will be a great place to supply the world's needs going forward.

David Begleiter

Very good. And just lastly maybe for Steve as well as you, just on synergies, what's the potential to exceed that $100 million target you've laid out today?

Steven Bender

Well, certainly, I think the $100 million is a number that we believe we can achieve and certainly as we get into the business, we'll be looking to achieve more if we can find it, but certainly, I think the $100 million is the number you should be working with and the number that we will work aggressively to achieve as quickly as practical.

David Begleiter

Thank you.

Albert Chao

You're welcome.

Operator

Our next question comes from Roger Spitz with Bank of America Merrill Lynch.

Roger Spitz

Thank you. Good morning.

Albert Chao

Good morning.

Roger Spitz

Can you tell us if Westlake will provide a downstream guaranteed to Axiall's debt and what are your plans regarding Axiall's bonds and credit facility? Thank you.

Steven Bender

What we will do, what our expectation is we'll obviously assume those bonds and we'll be providing either a guarantee or providing an exchange offer there, Roger.

Roger Spitz

Either guarantee or exchange offer. Thank you very much.

Albert Chao

You're welcome.

Operator

Our next question comes from Hassan Ahmed with Alembic Global.

Hassan Ahmed

Good morning, Albert and Steve.

Albert Chao

Good morning, Hassan.

Hassan Ahmed

I just wanted to revisit the whole synergy side of things. So if I take a look at what Axiall was run-rating in terms of EBITDA back in 2013, the number was close to $670 million. Now, you compare that to 2015, and the number had fallen down to $330 million, right? Then if I do a compare and contrast, I look at PVC prices, $13 versus $15, I look at your alkali prices. Prices for all of Axiall's products are flat to up, $13 versus $15.

Their raw material costs, be it nat gas, be it ethylene, are down significantly. So to me, correct me if I'm wrong, they had a series of sort of planned and unplanned outages, through the course of this time period, so I would imagine operational synergies could run north of $300 million. What am I missing over here?

Steven Bender

Well, I think, Hassan, when you think about the synergies that we've outlined, I think the $100 million, I think, as I mentioned earlier, is the number that we believe is deliverable. If there's additional opportunity that requires additional capital, to improve the business and operate the business, those are separate from this transaction.

But certainly, we would certainly look to improve the business and grow the business opportunity set, and certainly, as you can well imagine, we'll be looking to do what we can to find additional value here, but the value of $100 million a year that we've identified in synergies I believe are deliverable and realistic for this transaction.

Hassan Ahmed

Very fair. So if I were to take a look at some of the sort of earlier presentations from the Axiall side of things, they would consistently point to a mid-cycle number which was around $950 million. I'm sure you guys have run your own numbers. Is that roughly sort of ballpark what you're coming up with for the mid-cycle earnings power?

Steven Bender

Hassan, as you know, we don't give earnings guidance and I wouldn't want to use another company's guidance for our business. And so I think, as you know us well, we say what we do and we do what we say, and I think what you see is we've not historically given guidance for our business and that has not changed. But I wouldn't want to suggest that we should be using someone else's guidance attributable to our business.

Hassan Ahmed

Fair enough. And one final one, if I may. Tim Mann had basically stated that he would, in the second half of the year, sort of consider some chlor-alkali rationalization. What are your thoughts about that? Would you carry on with that or would that be sold?

Steven Bender

Well, as Albert mentioned, we clearly have a strong desire to really understand the operations of Axiall and understand the business as well, and so certainly, there is no plan at this stage to do anything of that sort.

Hassan Ahmed

Perfect. Thank you so much, guys.

Albert Chao

You're welcome.

Operator

Our next question comes from Aleksey Yefremov with Nomura.

Aleksey Yefremov

Good morning, everyone. Thank you. Could you address any potential tax benefits of the deal? Axiall does have some NOLs. Do you think Westlake could use some of that and any thoughts on the tax aspect?

Steven Bender

Certainly as we look at the tax NOLs, a large part of those are certainly in Canada. But we'll certainly, Alex, be looking to optimize the tax structure. As you know, we have operations in Canada as well.

But I think for your modeling purposes, I would, given the scale of our business and the scale of their of Axiall's business, I think still the run rate of 35% is probably the right rate to use, at least for the time being.

Aleksey Yefremov

And going back to the question of the cycle, you address some of that, but is it fair to assume that you're at least somewhat bullish on chlor-alkali cycle here on the caustics and the chlorine prices?

Albert Chao

Well, as Hassan mentioned, three full years ago, the ECU value was higher, margin was higher. And what happened was there were expansions going on in the US chlor-alkali industry and there's still some going on this year. But after this year, we have not heard any new capacity expansions.

So when the global demand for chlor-alkali improves and absorbs this extra capacity, then we believe supply and demand will improve going forward. That's not a lot of capacity added in the world and Europe with the mercury cell conversion, people are estimating between 800,000 to 1 million ton reduction in chlor-alkali capacity in Europe. So that could help our future global chlor-alkali businesses.

Aleksey Yefremov

And a final question, if I may. Did considerations for putting chlor-alkali assets into MLD enter into your evaluation and what are your current thoughts on that?

Steven Bender

Alex, we've never seen anybody do such a thing and, as you know, there's a regulation being written now by the IRS and Treasury that would define what does and doesn't qualified. So I think it's clear to say that, from what we've seen of their writings, not much qualifies until they define that it does. So I think we all have to look back at what worked and what didn't at this stage and say we'll see what goes forward.

Aleksey Yefremov

Okay. Thank you very much.

Albert Chao

You're welcome.

Operator

Our next question comes from Frank Mitsch with Wells Fargo Securities.

Frank Mitsch

Good morning, gentlemen. A deal four years in the making, Albert. I guess good things do come to those who wait. Axiall made a big point a few weeks ago about a public announcement that they reopened their data room for you to have another look at all their financials, et cetera.

And then obviously, we just see a bump, a 40% bump in the price that you're willing to pay. I assume that also during that time period and during this whole process, that you've been studying the $270 million synergy number that Axiall believes could be achieved from this transaction and yet today you're still talking about this $100 million deliverable.

What about that, what in the $270 million synergy number that Axiall has thrown out there do not quite agree with? Or perhaps is there some conservatism going on here?

Steven Bender

Well, Frank, it's Steve. I think when you think about the number that we put forth, as you can imagine, we've had this discussion with Axiall's management team and had a chance to understand it and I think that we still were very comfortable with the number that we put forth and that's really where I think we are. So we've had that conversation, we've had an opportunity to understand those numbers, and I think the $100 million synergy is the number that I believe we can deliver and we will deliver. I think some of the numbers that might be above and beyond that may require additional capital and we'll see, but that's separate from this transaction.

Frank Mitsch

All right, that's helpful. Steve, in the press release, you talked about the transaction being accretive year one. What sort of assumptions were you using in terms of the underlying Axiall EBITDA and the realization of synergies to make that statement?

Steven Bender

Well as you know, we don't give EBITDA forecasts, but I think it's fair to assume that the synergies would be achieved over a couple year time period. Of course, there are going to be costs associated with achieving those synergies at the same time, but I think it's fair to assume that we'll achieve those over a couple-year time period.

Frank Mitsch

Thank you.

Albert Chao

You're welcome.

Operator

Our next question comes from John Roberts with UBS.

John Roberts

Thanks. Congratulations on the deal. Maybe you can answer my questions.

Steven Bender

I'll try, John.

John Roberts

Steve, you mentioned layering tranches of debt here, but you didn't mention equity. Westlake was willing to issue stock in its initial bid here. So, post-closing, if your stock is at or above current levels, should we expect you to accelerate that reduction by issuing stock or having a convertible component of your debt or something like that?

Steven Bender

Well John, as you know, we have always had a historically strong and very consistent financial strategy. And our policies, our financial policies have been very consistent on that front. And so there's nothing contemplated at this stage as it relates to an equity component of that.

But I think it's quite clear that we've maintained a strong and very consistently position on maintaining an investment-grade stance and that remains here. So we'll continue to work to make sure that we always have a strong balance sheet and an investment-grade rating from the agencies.

John Roberts

Okay and then maybe to get to the cycle questions you were being asked earlier, on slide 8, where you have the pie chart showing chlor-alkali as a larger contributor than ethylene, to the vinyls margins over the last cycle. Obviously in recent years, it's been more ethylene than it's been chlorine or chlor-alkali to the vinyls market.

As you modeled the future here or justifying the price that you're paying, what kind of ratio were you considering as you kind of model this out? Do you consider that normal going forward or do you consider something else normal?

Steven Bender

Well as you know, we don't give forward projections at all. So, but what I think is instructive here is when you look back in time, whether it be this time period, which is a fairly lengthy period over the cycle or you look at any other say shorter period of time, what is clear is the mix of chlor-alkali and ethylene will move, as you noted, back and forth.

But what is important, and very much so, is the integration. And I think it's that integration strategy that Albert spoke to that we think is so very important in this industry and in this business. And I think that hallmark of integration is very much how we built our business and how you see us continuing to be focused in building this business.

John Roberts

Okay, thank you.

Albert Chao

You're welcome.

Operator

Our next question comes from James Sheehan with SunTrust Robinson.

James Sheehan

Thank you for taking my question. On the integration strategy, Albert, do you see your ethylene position as being balanced with this transaction and what the Lotte JV or do you need other ethylene sources in order to achieve that integration?

Albert Chao

Yes. As we understand, with the supply of ethylene from the Lotte JV is only for half of the plant. So the Axiall business still will be short of ethylene, even taking in half of the JVs ethylene.

James Sheehan

So what would your strategy be? Would you be purchasing ethylene at that point or would you consider further expansions in your own system?

Albert Chao

We will look at all the above. As of now, Axiall is buying ethylene and so, eventually we will be balanced or excess for short-term. In the long-term, we look at debottlenecking, purchasing ethylene, potential JV purchasing assets, many other alternatives. We're looking for ways to increase value for our assets.

James Sheehan

Great and can you comment on where you think chlor-alkali operating rates will be in North America in 2017?

Albert Chao

I hope it's better.

James Sheehan

Great, thank you very much.

Albert Chao

You're welcome.

Operator

Our next question comes from Bob Koort with Goldman Sachs.

Ryan Berney

Good morning. This is Ryan Berney on for Bob.

Steven Bender

Good morning, Ryan.

Ryan Berney

Were there any change of control provisions between the Axiall Lotte JV that would've changed that agreement at all post this deal?

Steven Bender

No. There's nothing that impacts that venture as it relates to our transaction with Axiall.

Ryan Berney

Thanks. And then secondarily, given some of the operating issues that Axiall had over the last couple of years, would you expect a period of kind of elevated maintenance CapEx out of the gate?

Steven Bender

Well certainly, what we'll do is we'll spend time assessing operations as we would do with any asset and do, as we have done with our business over time, is to make sure that the businesses operate at their peak operability. And so, as you know, we pride ourselves in running operations at consistently good operating rates because of the integration. Certainly we'll assess the opportunities to see if these plans can be improved and we know we've got very good people on-site and we look to work with them hand-in-glove in that process.

Ryan Berney

Great. Thank you very much.

Steven Bender

You're welcome.

Operator

Our next question comes from Christopher Perrella with Bloomberg Intelligence.

Christopher Perrella

Good morning. Thank you for taking my call. What conversations have you had with the rating agencies so far? And is there a longer-term leverage ratio, Steve, that you would like to get back to down to overtime?

Steven Bender

We have an ongoing dialogue with the agencies. Of course, we've spoken to them recently about this transaction, but we also have a very good ongoing dialogue with the agencies and our consistent strong financial policy has been very much the hallmark of that dialogue.

And so as we think about the transaction in front of us, what we've said very consistently, and they hear us, is that we intend to maintain that investment-grade rating that we enjoy today and that continues to be where we expect to be with the end of this transaction completed. So as we go forward, that is very much what we see in front of us, and as I say, we have a very good relationship with them and an ongoing dialogue.

Christopher Perrella

All right. Thank you. And is there anything that could cause the transaction to slip into 2017?

Steven Bender

We don't contemplate it at this stage. As I mentioned earlier, we have regulatory filings that will be made in just a couple of countries and we've already given an outline timeframe that we expect these filings to be completed in the transaction close being toward the end of the third quarter, early fourth quarter.

Christopher Perrella

Thank you very much.

Operator

Our next question comes from David Wang with Morningstar.

David Wang

Thank you for taking my question. I had a follow-up question on the synergy. So within the sales and marketing bucket of that, would you consider that a cost or a revenue synergy?

Steven Bender

Well, the sales and marketing, it's actually a -- it can be a, as I see it, it is a cost opportunity, not a revenue synergy. So when we think about it, we're looking at ways in which we can operate in our business much more effectively in the sales and marketing arena, not necessarily looking at it as a revenue opportunity, but managing the cost associated with that opportunity.

David Wang

Okay. Great. And then for the ethylene cracker with the JV that Axiall has, I guess, do you still value creation from it with the current ethylene margins where they are and considering that it's essentially going to be a Greenfield expansion as opposed to the brown fields that you've been pursuing?

Albert Chao

Certainly, today, ethane cracking still enjoy the lowest costs among the various feedstocks and going forward, that forecast is that ethane still will be the preferred feedstock in the US and in the world as well. So we look forward to understand more about the joint venture and structure and we like to being the shareholder to make this joint venture a very successful joint venture.

David Wang

All right. Great. Thank you.

Albert Chao

You're welcome.

Operator

Our next question comes from Jeff Zekauskas with JPMorgan.

Q –Unidentified Analyst

Good morning. It's Delta Cook for Jeff.

Albert Chao

Good morning.

Q –Unidentified Analyst

Do think the cash costs for the $100 million synergies will also be $100 million?

Steven Bender

We've not given specific guidance, but generally, rules of thumb tend to be in that order of magnitude.

Q –Unidentified Analyst

Okay. And in terms of the combined DNA, do you think is going to be something that is bigger than $550 million? I guess if you have to take a first guess. I know not all the variables are known, but do you think it would be in that range or it would be significantly higher or lower than that?

Steven Bender

Once we've completed our evaluation analysis, we will have an opportunity to have a more broad discussion of what the DNA tends to be. But once -- what we need obviously to complete, is our evaluation analysis, and then we will have a better opportunity to have a more complete and robust discussion about depreciation.

Q –Unidentified Analyst

Okay. Thanks very much.

Albert Chao

You're welcome.

Operator

Our next question comes from Simi Sea [ph] with FNY Capital

Q –Unidentified Analyst

Hello. Sorry, my question has been answered. Thank you. Congrats.

Operator

Our next question comes from Sunil Sibal with Seaport Global Securities.

Sunil Sibal

Hello, good morning, guys, and congratulations on the transaction.

Albert Chao

Good morning. Thank you.

Sunil Sibal

Most of my questions have been address, but I was kind of curious, with regard to your start of the year on the MLP side. You clearly have taken a very fluent approach so far in terms of [job balancing] with MLP and I wondering as you kind of think of deleveraging the pay rate post the transaction, how do you think about using the MLP currency?

Steven Bender

Well certainly, as we've said from the beginning of the launch of the partnership that we see this as a opportunity to use it as a very cost effective form of capital. It is relatively small relative to the parent and so it's opportunities itself have to be taken into consideration, but we certainly see it as an opportunity to use it as a form of currency for opportunities. So certainly, as we look forward into the future, we continue to expect the partnership to be part of that overall mix.

Sunil Sibal

Got it. And then in terms of the latter JV timeline of building the new cracker, any changes do you anticipate other than that this transaction, I think, previously Axiall had talked about a lead 2019 as kind of a start up for that.

Albert Chao

We don't know anything more than what's known to the public so far.

Sunil Sibal

Got it. Okay. Thanks, guys. Congrats to you.

Albert Chao

You're welcome. Thank you.

Operator

Our next question comes form Bill Cambilair [ph] with Seaport Group

Unidentified Analyst

My questions have been answered. Thank you very much.

Operator

Our next question comes from Jeff Gates with Gates Capital Markets.

Jeff Gates

I have a couple questions. You referenced a 6.1 times cycle average. I believe that was an EBITDA number, and I'm wondering, is that a number that includes synergy?

Steven Bender

Yes, that does.

Jeff Gates

So that would be, if I did the math right, about $620 million, which that would include the $100 million of synergies so you're saying --

Steven Bender

Yes, it's in that neighborhood, that's correct.

Jeff Gates

But do you think the mid-cycle average for Axiall is about $520 million.

Steven Bender

Yes, and we are talking about a period of probably five or six years.

Jeff Gates

Okay. And then the second question is what do you think the ongoing capital required to be competitive at Axiall is? Sort of a normalized CapEx number.

Steven Bender

Well, it's a good question. And as I mentioned earlier, we'll come in and assess all the capital projects, not only in Axiall, but in Westlake at this time. We want to maintain a very disciplined way in which we are spending capital, but where we see opportunities, we'll certainly avail ourselves of those opportunities. And so you would imagine that we'll take a fresh look at the newly combined businesses and look at all those opportunities. So I think I'm going to have to hold an answer until we've had a chance to do that assessment.

Jeff Gates

But you did diligence and you came up with a price that you're paying for it, so what was your base case assumption in getting to the price that you were willing to pay for the asset?

Steven Bender

Well certainly that was an exercise in doing the modeling work for evaluation purposes, but to be more specific, what I'd like to do is give you a more refined answer after we've had a chance to meet with the people that are running the businesses and give you a better, clearer answer.

Jeff Gates

Okay, thank you.

Steven Bender

You're welcome.

Operator

Our next question comes from Lawrence Stalin [ph] with Sinkling Capital.

Q – Unidentified Analyst

Steve, I had a bond specific questions, if you don't mind. Earlier on the call in response to Roger Spitz' question, you said your current expectation is to assume the bonds and likely provide either a downstream guarantee or execute an exchange offer. I'm not sure I understand what an exchange offer would be in this situation.

Steven Bender

Well, in this situation, in a classic exchange offer, it's exchanging the Axiall bonds for Westlake bonds at the same terms and conditions.

Q – Unidentified Analyst

Okay and, as you know, most of onerous covenants under the Axiall indentures would be stripped upon IG, but the financial reporting covenant would not be?

Steven Bender

That is correct.

Q – Unidentified Analyst

Is that enough of a nuisance, time and expense, to encourage you to seek to take those bonds out? And I guess that might be related to the exchange rate offer as well.

Steven Bender

Well, if you do an exchange offer, then you don't have a separate audit to perform.

Q – Unidentified Analyst

Okay. Thanks, Steve.

Steven Bender

Thank you.

Operator

Our next question comes from Owen Douglas with Baird.

Owen Douglas

Thanks for taking the questions here. Got a lot of good ones been asked already, but I just curious. So Axiall is marketing the building product segment. Is there any sort of standstill while this transaction's waiting to be closed on that?

Steven Bender

I'm sorry, you're asking whether there will be a standstill on that transaction?

Owen Douglas

Yes. While your transaction acquire Axiall's pending, will there be any standstill on the marketing of Axiall's building products business? And if that were to be marketed -- oh, sorry. You answered?

Steven Bender

Yes, there will not be a transaction on that front.

Owen Douglas

Okay, I see. And how do you guys view the building products segment of Axiall with regards to the portfolio? Is that non-core or is that something which you guys want to continue to own?

Steven Bender

Well, you may know that we have our own building products division and certainly, we'll be assessing that in terms of how it does fit into, in terms of how it fits into our overall business. And so as I mentioned, we see that as a valued business and we'll assess it in terms of how it fits into the overall view of our building products divisions.

Owen Douglas

Okay, thank you.

Albert Chao

You're welcome.

Operator

Ladies and gentlemen, this concludes our presentation for today. We ask that you please disconnect your lines and have a wonderful day. Thank you.

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