Westlake Corp (WLK) 2015 Q4 法說會逐字稿

Good morning ladies and gentlemen, thank you for standing by. Welcome to the Westlake Chemical Partners fourth-quarter and full-year 2015 earnings conference call. During the presentation all participants will be in a listen-only mode. After the speakers' remarks you will be invited to participate in a question and answer session.

As a reminder, ladies and gentlemen, this conference is being recorded today February 23, 2016. I would now like to turn the call over to today's host David Hansen, Westlake Senior Vice President. You may begin.

Thank you very much. Good morning everyone, and welcome to the Westlake Chemical Partners fourth-quarter and full-year 2015 conference call. 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.

The conference call will begin with Albert who will open with a few comments regarding Westlake Chemical Partners' performance in the fourth quarter and the full year, as well as a current outlook on our performance and opportunities. Steve will then provide a more detailed look at our financial and operating results. Finally, Albert will add a few concluding comments and then we will open up the call for questions.

During this call we refer to ourselves as Westlake Chemical. Any reference to Westlake Partners is to the master limited partnership, Westlake Chemical Partners, LP. And references to OpCo refer to our subsidiary, Westlake Chemical OpCo LP, who owns certain olefins facilities.

Today Management is going to discuss certain topics that will contain forward-looking information that is based on Management's beliefs as well as assumptions made by and information currently available to Management. These forward-looking statements suggest predictions or expectations and thus are subject to risks or uncertainties.

Actual results could differ materially based upon many factors including the cyclical nature of the chemical industry, the availability costs and volatility of raw materials, energy and utilities, governmental regulatory actions and political unrest, global economic conditions, industry operating [rigs], supply demand volumes for Westlake products, competitive products and pricing pressures, access capital markets, technological developments, and other risk factors discussed in our SEC filings.

As I am sure everyone listening to this call is aware, on January 29 we announced that we had submitted a proposal to acquire all of the outstanding shares of Axiall for $20 per share in cash and stock. The proposal which was summarily rejected by Axiall represented a significant premium of 108% at Axiall's closing price of $9.60 on January 22, 2016, the last trading day before we made our proposal.

Given Axiall's response, we brought our proposal to the attention of Axiall's shareholders who have overwhelmingly expressed their desire for Axiall to engage in prompt negotiations with us on our proposal. Based on this response, we have nominated a slate of 10 independent and highly qualified individuals for consideration by Axiall shareholders for election to the Board of Directors at the 2016 Axiall annual meeting.

During our prepared remarks we will not comment further on the Axiall proposal. Additionally, we will not be able to respond to any callers questions regarding Axiall and will focus our question-and-answer period on Westlake's financial and operating results.

This morning Westlake issued a press release with details of our fourth quarter and full year 2015 results. This document is available in our press release section of our webpage at westlake.com.

A replay of today's call will be available beginning two hours after completion of this call until 11:59 PM Eastern time on March 1, 2016. The replay may be accessed by dialing the following numbers. Domestic callers should dial 1-855-859-2056. International callers may access the replay at 404-537-3406. The access code for both numbers is 42581110.

Please note that information reported on this call speaks only as of today, February 23, 2016, and therefore, you are advised the time sensitive information may no long 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 webpage at westlake.com.

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

Thank you Dave. Good morning ladies and gentlemen. And thank you for joining us on earnings call to discuss our fourth quarter and full year 2015 results.

In this morning's press release we reported quarterly net income of $111 million or $0.84 per diluted share, our net sales of $587 million. Our quarterly results reflect lower sales prices for our major products which followed a decrease in global crude oil prices.

Crude oil prices ended the year at below $40 per barrel, approximately 55% lower than a peak levels seen in 2014. However, we saw a higher sales volumes for our major products, including polyethylene, North American and European PVC resin, caustic and building products compared to the fourth quarter of 2014.

We are pleased with our annual results for 2015, which are the second highest in our history. We benefited from solid demand for our end products as global demand for polyethylene grew by more than 4% in 2015, and globally demand for PVC grew over 3%.

Additionally, our results reflect the benefits of the investments we made over the past several years in which we have increased our vertical product integration by expanding our ethylene and [chloride] capacity broaden our product portfolio into specialty PVC resin and pipe. To our strategic acquisitions of [Innolit] in North American specialty products.

I would now like to turn our call over to Steve to has more detail on the financial and operating results for the fourth quarter and full year 2015. Steve.

Thank you, Albert, and good morning everyone. I will start with discussing our consolidated financial results, followed by a detailed review of our olefins and vinyls segment results.

Let me begin with our consolidated results. In this morning's press release Westlake reported net income for the fourth quarter of 2015 of $111 million or $0.84 per diluted share. On net sales of $987 million, compared to the fourth quarter 2014 net income of $183 million or $1.37 per diluted share on net sales of $1.1 billion.

Fourth quarter 2015 net sales decreased over the same period in 2014 primarily due to the decline in sales prices for all of our major products partially offset by the higher sales volumes that Albert just described. Fourth quarter 2015 net income from operations was $181 million, a decrease of $121 million from the fourth quarter 2014.

The declining result was due to lower sales prices for major products, partially offset by lower feedstock and energy cost and higher sales volumes. Income from operations for the fourth quarter of 2015 was impacted by approximately $19 million due to lower production rates, unabsorbed manufacturing cost and other costs associated with several planned and unplanned polyethylene [additives] that took place in the quarter which we gave guidance to in our prior quarter earnings call.

Sales revenue in the fourth quarter 2015 of $987 million increased by $201 million compared to the third quarter 2015, while income from operations of $181 million decreased by $73 million. The decrease in operating income was primarily due to lower sales prices for major products, partially offset by lower feedstock and energy costs.

Fourth quarter 2015 results were also impacted by typical seasonal demand declines. For the full year 2015 sales revenue was $4.5 billion, an increase of $48 million over sales revenue reported for the full year 2014. This increase was driven by sales contributed by Vinnolit our specialty PVC resin business that we acquired on July 31, 2014 and higher sales volumes for most of our major products, partially offset by lower sales prices.

Income from operations was $960 million for the year ended December 31, 2015, compared to the $1.1 billion in the prior year. This decrease was largely resulted from lower sales prices and cost related to several turnarounds and was in part offset by contributions from Vinnolit the full year 2015. Increased production at our Calvert City, Kentucky facility following the completion of feedstock conversion ethylene expansion project, higher production rates at our Geismar, LA core output plant and lower feedstock and energy cost.

Our utilization of the FIFO net accounting resulted in an unfavorable impact of $16 million pre-tax or $0.08 per share in the fourth quarter compared to what earnings would've been if we'd reported on the LIFO method primarily due to lower energy and feedstock costs. Please bear in mind that this calculation is only an estimate and has not been audited.

Let's move on to review the performance of our two segments starting with the Olefin segment. In the fourth quarter 2015 the Olefins segment reported income from operations of $139 million from sales of $468 million compared to operating income of $244 million and sales of $599 million in the fourth quarter of 2014.

The lower results were mostly due to lower sales prices partially offset by reduced feedstock and energy cost and from higher polyethylene and styrene sales volume. In addition, income from operations in the fourth quarter of 2015 was negatively impacted by approximately $19 million related to several planned and unplanned polyethylene additives that I previously mentioned.

In comparison to the third quarter of 2015, fourth quarter operating income of $139 million decreased by $58 million while sales of $468 million decreased by $120 million. The fourth quarter results were impacted by lower olefins integrated product margins driven by lower sales prices and lower seasonal sales volumes which were partially offset by reduced feedstock and energy cost.

Fourth quarter 2015 results were also impacted by the planned and unplanned polyethylene additives. For the full year 2015 sales revenue of $2.3 billion for the olefins segment decreased by approximately $400 million from the $2.7 billion reported for 2014, while operating income of $747 million decreased by $267 million in the same period. Operating income decreased due to lower sales prices, partially offset by higher sales volumes and lower feedstock and energy costs.

Now moving onto the vinyls segment. The vinyls segment reported operating income of $52 million in the fourth quarter 2015 on sales revenue of $519 million compared to operating income of $66 million on sales of $537 million in the fourth quarter of 2014.

These lower results were mainly due to the declines in sales price for major vinyl products which were in part offset by higher sales volumes and more feedstock and energy costs. The vinyls segment operating income of $52 million in the fourth quarter 2015 decreased by $16 million over the third quarter 2015 while sales of $519 million decreased by $81 million.

The decrease in results was due to lower seasonal sales volumes, and lower prices for all of our major products, partially offset by reduced feedstock and energy costs. For the full year 2015 sales revenue of $2.2 billion for the vinyls segment increased by approximately $500 million over 2014 while operating income of $254 million increased by $111 million.

The year-over-year to increase was primarily driven by higher vinyls, integrated product margins for the year ended December 31, 2015, mainly due to the contribution from Vinnolit. Lower feedstock costs and increased production at our Calvert City facility, following the completion of our feedstock conversion and ethylene expansion project, and higher cost sales volumes resulted from higher production rates at our Geismar core plant.

The increase in income from operations for 2015 was partially offset by a lost sales, lower production rates, and other costs associated with maintenance turnarounds at our various North American and European vinyls facilities. Lower sales prices for major products reduce sales volumes in Europe related to an ethylene shortage.

Income from operations for 2014 was negatively impacted by the lost sales, lower production rates, and other costs associated with maintenance turnaround at our Calvert City facilities. Next let's turn our attention to our full-year results and look at our balance sheet and cash flow.

Cash generated from operating activities in 2015 was $1.1 billion, and we spent $491 million in capital expenditures. In 2015 we returned almost $270 million to our stakeholders through share repurchases, dividends and unit distributions to our unit holders of Westlake partners.

As of the end of 2015, we had cash and marketable securities of approximately $1.2 billion, and long-term debt remained at approximately [$764] million. Since this is the beginning of the year, let me provide you some guidance for modeling purposes.

Our guidance for 2016 capital expenditures is in the range of $475 million to $525 million, which will we find from our cash balances and includes spending to the expansion of our Petro one ethylene unit in Lake Charles, Louisiana, which is expected to begin in the second quarter of 2016. But it also includes early engineering work in the purchase of long lead items related to the expansion of our Calvert City ethylene unit that we announced in January.

This expansion along with other incremental capacity increases will add approximately 100 million pounds of annual ethylene capacity at our Calvert City facility in the first half of 2017. The Petro one expansion project will be completed in conjunction with a planned maintenance turnaround that will last for approximately 80 days, adding approximately 250 million pounds of annual ethylene capacity.

We estimate that a second quarter 2016 income from operations will be impacted by loss production associated costs from this project another turnaround activity of approximately $35 million. In the third quarter you see an additional approximately $20 million related to other plan derivative unit turnarounds.

A portion of interest expense will be capitalize for these two large projects which will lower our interest expense to approximately $40 million for 2016, and we expect an effective tax rate of approximately 33.5%. With that, I will now turn the call back over to Albert to make some closing comments.

Thank you Steve. As we discussed earlier, we delivered our second highest annual results in 2015, supported by higher demand for polyethylene and PVC products.

Our financial results reflect the benefits from our integration investments to expand our ethylene and (inaudible) capacity which lowers our cost position and our strategic acquisition of Vinnolit and North American Specialty Products, which broaden our portfolio into specialty PVC resin and pipe. These acquisitions which were successfully integrated into our business and contributed to our 2015 results expand our ecological and product development capacity and give Westlake the global PVC presence with facilities in North America, Europe and Asia.

As we plan for 2016 and beyond, we are positioned to benefit from improving demand for our end products as global demand forecasts improve over 2015 levels. We're executing on our ethylene expansion project and are on scheduled to begin our Petro one expansion in the second quarter of this year to add 250 million pounds of ethylene capacity, allowing us to further capitalize in a growing supply of feedstocks.

The second ethylene expansion project will be in our Calvert City facility to add another 100 million pounds of annual ethylene capacity in the first half of 2017. We believe that this investments we have made to fully integrate our product chain along with our recent strategic acquisitions to expand our vinyls footprint for company grow EBITDA.

Our focus remains on delivering value to our shareholders. We continue to look for investments that provide returns higher than our cost of capital that will drive earnings growth and to operate our business with a bottom line focus of keeping costs low.

Thank you very much for listening to our earnings call this morning. Now I will turn the call back over to Dave Hansen.

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

As a reminder, we are limited in what we can say about our current proposal and would ask that you kindly limit your questions to those pertaining to our financial and operational results. Operator, we're now prepared to take questions.

(Operator Instructions)

Jim Sheehan, SunTrust.

Hi, this is Jason Freuchtel sitting in for Jim today.

Good morning.

Just curious, what is your expectation for the amount of capacity that could be shut down in Europe to comply with the [Berger re-sell] regulation?

There is some discussions of approximately close to 1 [million] tons of capacity could be reduced, but as you know, people are still doing plans, so we do not know until near the end of the year how much capacity will be shut down in Europe.

Okay thanks. And it sounds like you're going to have some planned maintenance outages for your olefins segment. Are you going to have any planned maintenance outages occurring in 2016 for your vinyls segment?

We have those sprinkled all throughout the year, and none that I would call out specifically. But as you know, we have a number of plants in Europe and the Americas, and so none that I would call out and unusual.

Okay great, thank you.

You're welcome.

Frank Mitsch, Wells Fargo Securities.

Good morning, gentlemen.

Good morning.

The discussion of the planned turnarounds and unplanned turnarounds impacting Q4. I know that you had guided back in Q3 for $25 million worth of impact, what did that actually come out to be?

$19 million impact.

All right, terrific. And I am looking here at the screen and I am looking at Westlake stock trading back at levels where it was three years ago. How do you think about, Albert, weighing the balances of buying back your own stock at these levels versus M&A?

Well, certainly we look at all the options to create value for shareholders and through the expansion organic and inorganic means of great value.

And would the shares trading back down at these levels, does that start to make the buying back a more attractive proposition than M&A?

We're looking at both. As you know, we have authorized US dollars to buy back our shares as well as looking at expanding our business footprint.

Okay great. And then lastly, where do we stand with respect to the pipeline dispute with Eastman? When would you expect a resolution for that to occur?

Frank, we have issues that are still in the court system and it's impossible to know when we will get a resolution, so there's really no way for me to give you specific guidance on that.

I wasn't looking for the day of the week, Steve, I was looking for the quarter or the half year, but you are saying that it's --

It's hard for me to give a specific even quarter guidance, Frank. And so I would just say it could possibly be later this year, but with that degree of certainty, I couldn't even say. It's really in the hands of the courts.

All right, thank you so much.

You're welcome.

Aleksey Yefremov, Nomura.

Good morning, thank you. I had a question on US polyethylene market. If we look at the premium versus Asian polyethylene market, this premium seems to have been [erased] in recent months. Do you think there are -- what do you think of the reasons for that, and how do you see this premium or discount evolving over the rest of 2016?

Well, certainly with the volatility in crude oil prices, it has affected global polyethylene, including the US polyethylene prices. And depending on what oil price will do in the coming months, it could change as well.

I guess as a follow up, do you think there was anything specific to the US market that caused prices to fall more than in Asia in the last few months or this is a temporary phenomenon?

Well, as you know, people do purchase less products when they see oil price coming down and feedstock coming down, and they will buy more products when oil prices are moving up. The demand, as we said earlier, is still quite good in the US and the US economy is still growing, probably one of the best economy in the world.

And we continue to see demand growing in 2016. Though demand -- inventory supply changes, as well as the oil dynamics.

Thank you, Albert. And final question, if I may, can you tell us your view of the short-term outlook for polyethylene pricing February, March and maybe the next few months?

Well, if you read the industry consultants, they see some weakness in the first [month or two], but also there is an industry downspend of [$0.05 a pound] price increase which is now for March 1. And again, depending on the price of oil volatility at that time, it will have an impact on the price increases.

Thank you very much.

You're welcome.

Don Carson, Susquehanna Financial.

Thank you. Albert, question on the chlor-alkali outlook. We've seen some sloppiness in caustic, but a couple of producers, I don't know if you joined in, have announced price increases. How do you see the chlor-alkali market playing out? And not to ask you about consolidation, but do you think that -- are you looking at taking any capacity out of the marketplace going forward?

Well, we have two of the newest membrane chlor-alkali plants in the US industry, so we are very efficient. As you know, we are moving into the building season, so the small demand for chlorine or PVC has resulted in more production of the chlor-alkali. Which means there's more supply coming onto the market. Depending on the global economy, the demand for chlor-alkali may or may not be meeting the supply. So time will tell.

And then you've got a good view into the Asian market. What's your view on how much operating rates have come down there? I know that's opened up some caustic export opportunities for US producers. Traditionally you have not participated that much in caustic exports, is that something you're starting to do now?

We do not export much caustics at all, but I think the Asian economy is still weak, in China especially. So there is potential for lower production of PVC and chlorine and could be low production of caustic.

Okay, thank you.

You're welcome.

Arun Viswanathan, RBC Capital Markets.

Hi. This is Dan DiCicco on for Arun, thank you for taking my question. Do you guys just give us your thoughts on ethylene and polyethylene prices for the second half of the year following the heavy turnaround for here in the US? Basically, will there be enough demand to sustain any sort of price increase once the season comes to a close?

Well, as you know, there is a big turnaround coming up March, April, May [time of year] and the people's view of polyethylene -- ethylene price will go up. And however, on the polyethylene side it's more of a function of oil price and the [volatility] of oil will determine which direction the polyethylene price will go.

Okay. Thank you. That was helpful.

You're welcome.

David Begleiter, Deutsche bank.

Thank you, good morning.

Good morning.

Good morning. Albert, ethane prices keep on drifting lower. When do you think the reduced ruling activity, increased exports back half of this year and the new ethylene crackers in 2017 and 2018 materially impact ethane prices going forward?

That's a good question. I think it's about 500,000 barrels of rejection ethane today. So at least for the immediate future, even with the increase in ethane exposed for the terminals as well as the bottlenecks coming up, there should be ample supply of ethane. But going forward to 2017, 2018, 2019, it depends how the oil price and gas drilling as well as some of the view of demand on the ethylene plants.

Very good and just lastly, post the current expansions in Calvert City and Petro 1, what's the next two, three, four year plan for your ethylene capacity going forward?

Well, our engineers are very smart. They always find little creep here and there. I will think the major expansions should be finished by then.

Thank you very much.

You're welcome.

Hassan Ahmed, Alembic Global.

Good morning, Albert and Steve.

Good morning.

Obviously there are these lingering fears in the marketplace about China, particularly on the currency side of things. So if we were to paint a picture where indeed the PVOC went out and devalued currency, keeping in mind that obviously naphtha is dollar denominated as would natural gas be out there.

But obviously Chinese coal is local currency denominated. What are your thoughts regarding -- if such a devaluation were to happen, I would imagine that would have a pretty dire impact on PVC prices in particular, keeping in mind how much exposure they have to the whole carbide process. I would love to hear your thoughts about that.

Well, I think you're right. I think the higher US dollar currency compared with other currencies, especially China, would put headwind against the US export of chemical products. And we have to have a more competitive position in order to compete in China.

Sure, but I would imagine it would be a disproportionate impact on PVC versus, call it ethylene polyethylene.

You're absolutely right. While 80% of Chinese production of PVC still comes from coal and coal prices have been dropping a lot in China, (inaudible), so from that sense they are more competitive.

Very helpful.

Dollars stays high with the crude oil prices.

Thanks so much.

You're welcome.

(Operator Instructions)

Brian Maguire, Goldman Sachs.

Good morning, thanks for taking my questions.

Good morning.

Albert, I was wondering if you could tell us how much of the caustic soda price increase that was announced earlier in the quarter was realized in 4Q and how much you expect to get realized in 1Q?

There is various industry players announced caustic price increase between $35 and $70 a year very short-term and as the conditions warrant. So we believe they'll be some additions coming up probably February or March period. But as I said earlier, there's also more demand for PVC during the building season. There is more [flow in] production, there's more caustic production. And depending on the global economy, there may or may not be help caustic price to stay high.

Okay, and we've heard some chatter in the industry about some increased discounting going on in the PVC and polyethylene markets to start the year in the order of $0.02 to $0.03 a pound. Can you confirm if you participated in some of those discounts that have made their way into the market for 2016? And do you see increased discounting out there being a material driver of pricing downward in 2016?

During year end, as you know, there are a lot of contracts renewed and negotiations going on, and there were pressures of prices with the way that the oil prices come down during the end of the year. So there has been a [known] market adjusted discount going on in the industry.

Okay, great and can you just lastly just talk about your own inventory levels? I know you talked about some of the production outages and then the upcoming turnarounds. Where does that leave you on the inventory front, and do you expect to be running a little bit higher inventory for the next couple of months until you get through the turnarounds?

It's all about polyethylene or PVC?

More polyethylene.

Polyethylene, I think inventories [known] from producer side is somewhat on the low side of converters. And you are right, that people are building inventory for the upcoming turnarounds on the ethylene side, so I think supply demand was pretty good at least in the first quarter-ish.

Okay, thanks very much.

You're welcome.

Jeffrey Zekauskas, JPMorgan.

Thanks very much. Are you putting your share repurchases on hold now that you're contemplating the Axiall transaction?

Well, Jeff, of course as we think about this, we always have to assess what information we have in the marketplace. So we always have to balance what knowledge we have of any transaction or any market knowledge that the broader market doesn't, so we have to assess that on an ongoing basis.

So you don't feel financially constrained, then; that is, there is no cash flow dynamic that you feel restricts your purchase of your own shares?

No, I think you can see with the cash balances that we have as we ended the year, the liquidity that we have with our other facilities, there is no liquidity issue here. It's just making sure that we are very transparent in the marketplace as always is the case in any transaction we undertake with the securities.

Can you talk about price changes in the domestic PVC market or what you might expect in the coming months?

Yes, there is potential weakness in January of PVC, probably potentially down $0.01 a pound, but after the price increase announced February, March. And as I said earlier, with the building season starting, there's a good chance that the price -- some of the price increases will go through.

If I can try one question which is not exactly on the mechanics of the Axiall transaction, can you talk at least in general terms about how putting together Westlake and Axiall would change or improve your PVC chlorine caustic building products envelope in a -- can you talk in a little bit more detail about the strategic motivation of the transaction?

Jeff, for this call we would like to keep the questions and the answers in this call really focused to the earnings. And certainly, if you would like to have that discussion at another time, we can do that. But for this call, we really want to focus on just the earnings for the quarter and for the year.

Okay, great, thank you so much.

You're welcome.

David Wang, Morningstar.

Hi, good morning. Thank you for taking my question. I was wondering if you can discuss the project economics of how a greenfield ethylene cracker will look at this point? I think you guys are probably doing the right thing with just going with the brownfield expansions, but a lot of your competitors seem to still have a lot of greenfield projects set to come online over the next couple of years. And I'm wondering if you have a view of returns or of the likelihood that these will come to fruition?

Certainly. The fact that we are doing the debottleneck for brownfield which we can get returned back much faster than the greenfield -- the typical greenfield from initial idea to fruition takes approximately 4 to 5 years. So a lot of things could happen in 4 to 5 years in the investment, but only the ISBL [or the] OSBL working capital is quite substantial. So we elected to have a lower risk debottlenecks and get returns [much faster].

And with the new capacity adds that you guys had come online, what would be your sustaining capital going forward after these projects get wrapped up?

We will get back to -- once these debottlenecks occur in 2016 in 2017, we will get back to more normal maintenance capital levels. And so let's just say that's a couple hundred million dollars typical run rate. And so once we get back to that level absent any energy savings related projects or such, we will get back to that kind of range.

Great, thank you.

You're welcome.

(Operator Instructions)

Okay. Operator, sounds like we have concluded the call. We are very appreciative of you joining us today for our call. We hope that you will be able to join us again for our next conference call to discuss our first quarter 2016 results. We bid you all a good day. Thank you.

Thank you for participating in today's Westlake Chemical Corporation fourth-quarter and full-year 2015 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, March 1, 2016.

The replay can be accessed by calling the following numbers. Domestic callers should dial 1-855-859-2056. International callers may access the replay at 404-537-3406. The access code at both numbers is 42581110. Thank you.