Westlake Corp (WLK) 2016 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Chemical Corporation first-quarter 2016 earnings conference call. During the presentation, all participants will be in a listen-only mode. After the speakers' remarks, you'll be invited to participate in a question-and-answer session. As a reminder, ladies and gentlemen, this conference is being recorded today, May 3, 2016. I would now like to turn the call over to your host, Ben Ederington, Westlake's Vice President and Chief Administrative Officer. Sir, you may begin.

Thank you. Good morning, everyone and welcome to the Westlake Chemical Corporation first-quarter 2016 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 agenda will begin with Albert, who will open with a few comments regarding Westlake's performance in the first quarter of 2016, followed by a current perspective on the industry. Steve will then provide a more detailed look at our financial and operating results. Finally, Albert will add a few concluding comments, and we will open the call up to questions.

During this call, we refer to ourselves as Westlake Chemical. Any references 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 own certain olefin facilities. Today, management is going to discuss certain topics that will contain forward-looking information and 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; availability, cost 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 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 first-quarter 2016 results. This document is available in the 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 May 10, 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 90251315. Please note that information reported on this call speaks only as of today, May 3, 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 webpage at westlake.com. Now I'd like to turn the call over to Albert Chao. Albert.

Thank you, Ben. Good morning, ladies and gentlemen and thank you for joining us on our earnings call to discuss our first-quarter 2016 results. In this morning's press release, we reported quarterly net income of $123 million, or $0.94 per diluted share on net sales of $975 million. Our quarterly results reflect lower integrated margins for our major products, a sales price decrease following the continued decline of global crude oil prices, which are down by over 30% from the first quarter of 2015.

Crude oil prices have started to rebound from these low levels, which we expect will move product prices higher. We continue to benefit from strong global demand for our products as we saw higher sales volumes for polyethylene, PVC resin and building products, along with the benefit of lower-cost destock compared with the prior-year period. Overall, our segments performed well in the first quarter and investments that we have made over the past several years to integrate our product chains to lower our cost position have meaningfully contributed to our results.

Our vinyl segment delivered a good quarter as we saw improving demand and margins with our expanded and more integrated vinyls business in the US, which allowed our vinyl segment to capture a greater portion of the integrated vinyls margin. Additionally, our European operations benefited from higher product margins as a result of continued strong demand and lower ethylene destock costs.

In our olefins segment, we continue to see positive contribution from our investments in incremental ethylene capacity, which allows us to capture value from low-cost gas-based feedstocks and our growing specialty polyethylene product mix. I would now like to turn our call over to Steve to provide more detail on the financial and operating results for the first quarter 2016. 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 vinyl segment results. Let me begin with our consolidated results. In this morning's press release, Westlake reported net income for the first quarter of 2016 of $123 million, or $0.94 per diluted share, on net sales of $975 million compared to the first quarter of 2015 net income of $146 million, or $1.10 per diluted share on net sales of $1.1 billion. Net sales for the first quarter of 2016 decreased by $128 million compared to the first quarter of 2015 mainly due to lower sales prices for all of our major products, partially offset by higher sales volumes for polyethylene and most of our major vinyls products.

First-quarter 2016 income from operations was $202 million, which was $27 million lower than operating income in the first quarter of 2015, mainly due to lower North American integrated product margins primarily as a result of the decline in sales prices for all of our major products following the decline in crude oil prices. This was partially offset by lower feedstock and energy costs, higher product margins for our European operations and higher production rates at our chlor-alkali facilities as compared to the first quarter of 2015.

Compared to the fourth quarter of 2015, sales revenue in the first quarter of 2016 of $975 million decreased by $12 million while income from operations of $202 million increased by $21 million. The increase in operating income was mainly due to continued good demand and resulting higher sales volumes for polyethylene and PVC and higher operating rates for most of our facilities.

Our utilization of the FIFO method of accounting resulted in a favorable impact of $5 million pretax, or $0.03 per share in first quarter compared to what earnings would have been if we reported on the LIFO method. 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 olefins segment. In the first quarter of 2016, the olefins segment reported income from operations of $149 million on sales of $431 million compared to operating income of $191 million and sales of $583 million in the first quarter of 2015. The decrease in results was mostly due to lower olefins integrated product margins primarily as a result of reduced sales prices, partially offset by higher polyethylene sales volume and lower feedstock and energy cost.

Demand for polyethylene improved late in the first quarter of 2016 as crude oil prices began to rebound and the ethylene market tightened due to the upcoming turnaround season. As a result of this improved demand, the industry announced a $0.05 per pound polyethylene price increase in March and a second price increase of $0.04 per pound has been announced for April.

First-quarter operating income of $149 million increased by $10 million compared to the fourth quarter of 2015, while sales of $431 million decreased by $37 million. The rise in operating income was primarily attributable to higher polyethylene sales volumes and improved operating rates. Results for the fourth quarter of 2015 were negatively impacted by several polyethylene turnarounds.

Now moving on to the vinyl segment, the vinyl segment reported operating income of $62 million in the first quarter of 2016 on sales revenue of $544 million compared to operating income of $47 million on sales of $520 million in the first quarter of 2015. These improved results were mainly due to higher product margins at our European operations and higher US caustic soda sales volumes as compared to prior-year period. Vinyl segment operating income of $62 million in the first quarter of 2016 increased by $10 million over the fourth quarter of 2015, while sales of $544 million increased by $25 million. The improved results were due to higher PVC sales volumes and improved operating rates. As a result of solid demand, the industry implemented a PVC price increase of $0.04 per pound in March and a $0.04 per pound increase has been announced for April.

Now let's turn our attention to our balance sheet and cash flow. Cash generated from operating activities in the first quarter of 2016 was $129 million and we spent $136 million on capital expenditures. At the end of the first quarter, we had cash and marketable securities of approximately $1.1 billion, and long-term debt was approximately $758 million.

Now let me provide you some guidance for modeling purposes. Our estimate for 2016 capital expenditures is in the range of $500 million to $550 million, which we will fund from our cash balances. This includes spending for our expansion of our Petro 1 ethylene unit in Lake Charles, Louisiana, which will begin in mid-April and is expected to last for approximately 80 days. This also includes early engineering work and the purchase of long-lead items related to the expansion of our Calvert City, Kentucky ethylene unit that we announced in January and which is planned for the first half of 2017.

We estimate that our second-quarter 2016 income from operations will be impacted by lost production and associated costs from the Petro 1 planned maintenance turnaround and expansion project and other planned turnaround activity of approximately $65 million, which will primarily impact our olefins segment. Once completed, this project will add 250 million pounds of additional ethylene capacity to our Lake Charles site.

Looking to the third quarter, we expect our operating income to be additionally impacted by $15 million to $20 million due to planned turnaround activity in our other olefins and vinyls units. We estimate that our 2016 effective tax rate for the year will be approximately 35%. With that, I will turn the call back over to Albert to make some closing comments. Albert.

Thank you, Steve. We are pleased with our first-quarter results, which benefited from strong demand of polyethylene and PVC and from low-cost gas-based destock prices. We are actively engaged in the next phase of our integration strategy, as we began work on our Petro 1 ethylene expansion project a few weeks ago and are on track to complete our Calvert City ethylene expansion in the first half of 2017.

These two projects, along with other incremental expansion projects, will add 350 million pounds of additional ethylene capacity to our portfolio, lessening our product integration and allowing us to further capture the full olefins and vinyls chain value. We remain confident in our long-term outlook and believe underlying economic growth and demand for our products will continue to strengthen.

We are focused on creating value for our shareholders and we will remain disciplined as we look at opportunities to grow our businesses. We continue to maintain a strong balance sheet, which allows us to pursue both our expansion plans and other future growth opportunities as they arise.

I would like to make some brief comments regarding our proposal to acquire Axiall Corporation. As I am sure you are all aware, on April 4, we announced that we had increased our proposal to acquire all of the outstanding shares of Axiall for $23.35 per share in cash and stock after Axiall allowed us to conduct due diligence. The revised proposal, which reflects increased potential synergies of $90 million to $100 million per year, was summarily rejected by Axiall's Board of Directors without making a counterproposal or otherwise providing us with any meaningful feedback.

Instead, Axiall continues to pursue a sale of its building products business, which we are concerned could negatively impact Axiall's remaining business and reduce potential synergies. Based on Axiall's response and unwillingness to negotiate and the feedback we received from its shareholders in support of a combination of our two companies, we are proceeding with soliciting proxies to elect a new slate of nine independent and highly qualified candidates to Axiall's Board of Directors at Axiall's upcoming annual meeting. The nine independent nominees each have impressive track records with significant experience as public company directors and executives at major global corporations and will bring a fresh perspective to evaluating all of Axiall's options.

We believe that our proposal represents the best value-creation strategy for Axiall's shareholders and is far superior to its standalone plan. The combination of Westlake and Axiall will create all the leading North American olefins, vinyls and building products producers with increased scale in the growing global vinyls market and with additional growth opportunities for our combined company. By including Westlake's stock in our proposed consideration, both Axiall and Westlake shareholders will be able to enjoy the meaningful synergies from this combination.

That's all we have to say on our proposal today. We would like to focus our question-and-answer session on Westlake's financial and operational results and ask that you please keep your questions to the same topic. Thank you very much for listening to our earnings call this morning. Now I will turn the call back over to Ben.

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. Operator, we are now prepared to take questions.

(Operator Instructions). Don Carson, Susquehanna Financial.

A question on your vinyls business, specifically caustic. You show benchmark pricing as down. Just wondering what your realizations were and also what you are expecting for caustic pricing in the second quarter with all of the price initiatives that you have?

And just as a follow-on, you did mention you had higher US caustic sales. Does that mean you are participating in exports, or was this all domestic business?

In the first quarter, our caustic prices went down in the US and now we have -- industry is down, so $75 a ton our price increase for the first and second quarter. The volume has improved for our caustics business and we have not participated in any amount for export market.

And then on the olefins side, with your outage at Petro 1, did you rebuild a sufficient inventory of polyethylene to see you through that in Q2, or are your inventories below normal levels as you come into the seasonally strong second quarter?

We have a reasonable inventory in polyethylene to satisfy our customer needs during (multiple speakers).

Thank you.

Frank Mitsch, Wells Fargo Securities.

Good morning. Albert, you were talking about polyethylene improving late in Q1. I was wondering if you could offer some commentary on what you are seeing here in Q2 and your expectations in terms of pricing.

Certainly. As Steve mentioned, there was a $0.05 a pound price increase went in effect in March and further for April, there's a $0.04 per pound increase. And the demand has been very strong. ACC came out for the polyethylene demand, also the domestic consumption export being quite strong, and we see continued strength going into May.

So you realized the $0.05 in March. You expect to realize the $0.04 in April. Is that fair for us to surmise?

Yes.

All right, great. And then can you offer the same sort of commentary on what you're seeing on the PVC side?

Certainly. PVC business, we also suffered price decrease in the first quarter, but as again Steve mentioned earlier, with the crude oil price turning around and with the building season coming in the springtime, there's been price increases of $0.04 in March and I think the industry announced $0.03 or $0.04 in April, which yet we will see the next few days.

My understanding is that some of the consultants out there are saying that it's up $0.02 in April. Does that seem realistic?

I think [CDI] reported $0.02. That's right.

Okay. All right. Thanks so much.

James Sheehan, SunTrust Robinson.

Thanks. Albert, could you comment on tightness in the PVC market? Are you seeing anything out there as a result of the accident down at Mexichem in either PVC or caustic soda chlor-alkali?

Yes, it's very unfortunate what happened in the Mexichem operation in Mexico. There has been increased demand and price movements on the export market, but we believe with the exports from the US and from Asia, the export demand in Latin America for Mexichem's products will be fulfilled.

Okay, thanks. And, Albert, just on the ethane price outlook for the second half of the year, we are seeing natural gas prices move up, possibly some more export activity. What do you think ethane prices are going to look like in the second half of the year relative to fuel value?

Right. IHS has forecasted the ethane price, which today is at $0.19 to $0.20 a gallon and is above the [steel] value, will move up the second half of the year to the mid or high $0.20 a gallon due to increased demand for ethane both from domestic expansions that we are seeing, as well as on the exports, whether through pipeline or through ship of ethane. But we still believe looking at the figures that US ethane-based ethylene cracker will still be cost-advantaged over the global naphtha-based ethylene crackers.

Thank you. And could you provide an update on the pipeline dispute with Eastman Chemical? When do you think that might be resolved?

Those issues are still being sorted out in the court system and so I expect that to be sometime. Hard to call at this stage in terms of time window, but still some time to work through the court system.

Thank you.

Aleksey Yefremov, Nomura Securities.

Good morning. Thank you. Could you discuss how you think about offer price for Axiall and how much of potential improvement in caustic soda and PVC was already in that number, or whether you might rethink that number if fundamentals in caustic soda and PVC improve further?

Well, we are not going into the details of the questions you propose. I would just say that our offer, the last offer is a very compelling offer with 143% premium over the unaffected price on January 22 of $9.60 a share of Axiall.

Thank you very much.

Hassan Ahmed, Ahmed Global.

Good morning, Albert and Steve. Across the board, it seems that the demand for polyethylene continues to be strong. Obviously, the backdrop is that we've seen energy prices go up, and we've also obviously seen a bunch of these polyethylene price hikes stick. So my question is are you continuing to see strong underlying demand growth, be it in North America or across the globe, or is a large chunk of this demand growth that you are seeing from an inventory rebuild in anticipation of further price hikes?

I think maybe a bit of both. I think the fundamental demand globally for polyethylene is there, but also I think that the increased oil prices in the last few months has helped to propel the higher prices as well.

But in terms of inventories, do you continue to see them at relatively normal or below-normal levels?

Definitely in the US I think our inventory is below normal. I think ACC number shows and people look at saying we are below average inventory for all polyethylenes in the US. I can't speak that for overseas.

Fair enough. Now moving onto the chlor-alkali side of things, obviously, we've heard of some capacity closure announcements in the US in the near term and then thereafter sort of as we look towards 2017, there's expectations for capacity closures in Europe. So what are your near to medium-term views on supply/demand fundamentals; or asked differently, do you think these closures near to medium term will be enough to create snugness in the market?

That's a good question. I think this year there are three or four chlor-alkali new plants and expansions totaling about 400,000 tons coming up, so that pretty much offsets the 400,000 tons that was discussed on closures this year. And Europe is between 800,000 or so tons, potential closures due to the mercury cell closures in Europe I think up to 2017. So I think any reduction in excess capacity will be good for the industry on a global basis, as those numbers are still quite small compared to global capacity. I think in Asia and China, the chlor-alkali plants are running between 50% or 60% operating rates.

Got it. Very helpful, Albert. Thank you.

John Roberts, UBS.

Morning. I think your internal capital spending outlook after the current expansion is relatively low. Should we expect you to maintain a low capital spending outlook until you finish with the Axiall situation?

John, the guidance I gave for this year of $500 million to $550 million is obviously for the Petro 1 and the Calvert project. Those are the only two projects that we have of significant size that have been announced, so I would expect our capital spending to decline as we complete these projects back to normal levels.

And then a small idled Gulf Coast ethylene plant was sold during the quarter. Did you bid on that?

We don't ever speak to the activities we have on the corporate development front.

Okay, thank you.

(Operator Instructions). Arun Viswanathan, RBC Capital Markets.

Good morning, Albert and Steve. So I guess you mentioned that following the Petro 1 expansion you'll be balanced on ethylene. Do you foresee any other further debottlenecking opportunities, or what are your internal organic plans for growth over the next couple years?

We always assess those as we go forward, and we have a team of engineers that do that work on an ongoing basis, but there's nothing that we've announced or are working on actively at this stage. But if we have something then we will certainly come forward with that. Just the Petro 1 and the Calvert facility is the only ones that we are moving forward on, but we, of course, always assess our plants and opportunities as they present themselves.

Okay, great. And then I guess maybe you can just comment on pricing in both [LDTE] and PVC. Are you seeing any greater uptick in some of your specialty products versus commodity grade, or are those following the basic indices? Thanks.

Yes, I think specialty products, certainly their prices are much higher than commodity grades, and their prices always are more supply/demand-oriented, not so much commodity price-oriented.

And then last question I guess is just on near-term construction. Have you noticed any improvement I guess, or how would you characterize the building products side of your business? Is it I guess strong and then maybe you can just differentiate that between residential and nonresidential construction? Thanks.

Yes, I think that building products, certainly we are into the building season, has improved all prior quarters and over prior years. But as you can see that in March the new home starts have dropped, so I think the improvement is slow, but we are seeing signs of improvement.

Sorry, I just had one more quick question. On caustic, there's been a number of price increase announcements. The index appears to have moved up $15 to $20 for April. I guess maybe you can just give us your characterization on the probability that you'd realize further increases in May and June? Thanks.

Yes. Well, we believe that some portion of the price increase will be accepted by the industry over the next few months. But as you know, now is also the building season, as I said earlier. There's more demand for [growing] for PVC. As a result, the production of caustic also increases.

Right. Okay, thanks.

David Begleiter, Deutsche Bank.

Thank you. Albert, on styrene, can you give us your updated thoughts on the styrene chain in terms of any potential for reinvestment do you think in the chain either by you or other people?

That's a good question. I think, in the US, our styrene plant, which was built in 1991, is still the newest styrene plant in the US. So with the increase in crude oil prices, which styrene mainly is from benzene, it has affected the competitiveness of styrene. And then with the fall, crude oil prices have benefited styrene, so the global demand for styrene is quite good now. But depending on which direction oil goes, it is very volatile in terms of the supply/demand [profitability]. So I don't know in the US -- I think in Asia there are styrene plants being built, but in the US we do not see any announcement for new styrene plants.

Understood. And just lastly on ethane, Albert, longer term, should ethane trade at or very near its fuel value, or do you think there should be a premium given potential supply/demand tightness?

When you say fuel value, you mean gas value, right?

Yes, gas value, yes.

Yes, we think that historically ethane should trade above gas value to have a return investment for the cost of extracting and fractionating out ethane, so we believe on a long term it should have some premium over gas BTU value.

Can you clarify that premium at all?

Depending on the gas price in the market.

Understood. Thank you.

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

Thank you again for participating in today's call. We hope you will join us for our next conference call to discuss our second-quarter 2016 results.

Thank you for participating in today's Westlake Chemical Corporation first-quarter 2016 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, May 10, 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 for both numbers is 90251315. Thank you for participating in today's conference. That does conclude today's program. You may all disconnect. Have a great day, everyone.