Westlake Corp (WLK) 2005 Q1 法說會逐字稿

Good morning ladies and gentlemen, thank you for standing by. Welcome to the Westlake Chemical Corporation's first quarter 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, May 4, 2005. I would now like to turn the conference over to Dave Hanson, Westlake's Senior Vice President of Administration. Sir, you may begin.

Thank you very much and good morning everyone. Thank you for joining us for the Westlake Chemical first quarter conference call. I am joined today by our President and CEO Albert Chao and our Senior Vice President and Chief Financial Officer Ruth Dreesen.

The agenda for today will be as follows. Albert will first make a few comments regarding Westlake's performance during the first quarter; Ruth will then provide you with a more detailed look at our financial and operating results. After that, we will open the call up to questions.

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 factors including the cyclical nature of the chemical industry, availability, cost and volatility of raw materials and the 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.

Westlake had issued earlier this morning a press release with details of our quarterly financial and operating results. This document is available in the press release section of our webpage at www.westlakechemical.com. A replay of today's call will be available beginning one hour after completion of this call until 11:59 PM Eastern Time on May 11.

The replay may be accessed by calling the following numbers. Domestic callers should call 1-888-286-8010. International callers may access the replay at 617-801-6888. The access code at both numbers is 75355019. Please note that information reported on this call speaks only as of today, May 4th, 2005 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 web cast system.

Now, I'd like to turn the call over to Albert Chao for a few comments, Albert?

Thank you Dave. Good morning, ladies and gentlemen and thank you for joining us. I'm pleased to say that early this morning before the market opened, we reported a strong first quarter with record revenues, record earnings and expending margins. Despite some inventory build in certain sectors of the industry, we still believe that a cyclical recovery that began in 2003 will continue because the fundamental supply demands balance and the chemical industry remains favorable.

The operating rates for both the Olefins and Vinyls industries remained high during the first quarter, as has been the case over the last several years in most product lines; Westlake's operating rates exceeded those of the industry. In Polyethylene, we believe industry has seen some build up in inventories at the producer level due in part to lower domestic and export demand and through preparation for seasonal turnaround activity planned in the second quarter.

Overall, across the products we make and sell, we are comfortable with Westlake's inventory situation. On a consolidated basis, Westlake has continued to make steady gains with sequential quarter over quarter improvements in operating income since the fourth quarter of 2003.

Our quarterly operating income was up 35% from fourth quarter 2004 and up 278% from first quarter of 2004. Now many of you may be wondering about the second quarter and we had to say that where we stand today, the second quarter performance is difficult to project.

The recent drop in fee stock prices we have experienced is a clear benefit, which should cushion a decline in polyethylene prices that we may face during the second quarter. Our Vinyls business remains strong and poised for a normal seasonal improvement and could help balance any Olefin weakness. Beyond the near term, I reiterate that we're still confident in the industry’s cyclical recovery.

Now I would like to turn the call over to our chief financial officer, Ruth Dreessen, for a review of our first quarter results, Ruth?

Thanks Albert, and good morning everyone. As we reported in this morning’s press release, Westlake's sales increased 54% to $619 million in the first quarter compared to $401 million in the first quarter of the previous year due to higher volumes and prices. First quarter sales were 10% higher compared to the $563 million reported in the fourth quarter of last year.

We remain very focused on our cost structure and our SG&A expenses as a percentage of revenue were below 3% in the quarter. Net income improved to $61 million or $0.94 per diluted share in the first quarter compared to net income of $11 million or $0.22 per diluted share in the first quarter of 2004 and $47 million or $0.73 per diluted share in the fourth quarter of 2004 driven by volume and margin improvements.

Included in the 2005 first quarter results is a $400,000 after tax charge related to the early retirement of debt which negatively impacted earnings per share by $0.01. Also included in our first quarter results is a negative impact from FIFO accounting.

As you know our utilization of FIFO inventory accounting sometimes helps us and sometimes hurts us. In the fourth quarter of 2004, FIFO was a benefit to income. In this quarter, it had a negative impact compared with the LIFO methodology, hurting us by approximately $15 million on a pre tax basis or about $0.14 per share.

Please bear in mind that the FIFO calculation is only an estimate, is not audited and is not a GAAP calculation. EBITDA for the first quarter increased from $48 million in the first quarter of 2004 to $123 million in the first quarter of this year.

In addition to volume and margin improvements, the year on year comparison benefited from the negative impact last year of an unplanned outage at our Calvert City plant which reduced quarter one EBITDA by approximately $13 million. Compared to Q4 '04 EBTIDA was up about 22%.

You can find the reconciliation of EBITDA to reported net income in cash flow from operating activities at the end of the press release we issued this morning. Our effective tax rate in the first quarter was 36.1% compared to 33.6% in the first quarter of 2004. As a result of last year's IPO, our share count also increased from 49.5 million shares in the first quarter of '04 to 65.3 million shares in the first quarter of this year on a fully diluted basis.

Turning to our segment analysis. Our Olefin segment enjoyed higher revenues compared to last year as well as on a sequential basis. The Olefin segment generated $62 million of income from operations during the quarter, 100% increase from the $31 million in the first quarter of '04 and slightly lower than the $65 million in the fourth quarter of last year.

The sequential decrease is due primarily to an increase in depreciation. Turning to the Vinyls segment, our Vinyls segment earned $42 million of income from operations during the first quarter, a $45 million improvement, over a $3 million loss from operations in the first quarter of '04 and $19 million in the fourth quarter of '04.

Once again, the year on year comparison was affected by the Calvert City outage last year. PVC resin prices and cost to prices increased again during the quarter. Compared to the fourth quarter, we experienced higher selling prices in volumes for our Vinyls products. Overall, volumes in the segment improved during the quarter despite some challenging weather conditions in January and February.

In addition to the increase in merchant volumes, we also experienced the ramp up of our Geismer facility. This phase of the start up will result in approximately 300 million pounds of PVC and VCM capacity per year. You may recall that the output of the Geismer plant is largely earmarked for the Bristol pipe operations we acquired last year.

Fabrication sales volumes were also strong during the first quarter and pipe pricing in margins compared favorably to both the first and fourth quarters of 2004. Now turning to the balance sheet and cash flow. Our working capital increased by $28 million during the first quarter as compared to the fourth quarter of '04 due in large part to an increase in receivables which in turn was due to price increases.

The key metric that we tracked, mainly days on hand, was basically steady with the fourth quarter. Inventories were essentially flat versus the fourth quarter of last year despite planning for a turnaround in our polyethylene business in April.

Notwithstanding the working capital increase, we generated positive operating cash flow of $52 million. Cap Ex was $17 million in the fourth quarter. We pre paid $30 million of our senior secured notes during the quarter leaving the senior debt level at $268 million currently. We ended the quarter with $47 million of cash on our balance sheet and our revolver borrowings remain at 0.

For 2005, we continue to expect our interest expense to decrease as we continue to repay debt and accumulate cash. Our capital spending assumptions for '05 should probably be in the $120 to $130 million range consistent with what we have said before.

Seasonally, the second quarter is usually stronger than our first quarter, but the next quarter may not follow historical patterns. The outlook for the second quarter relative to the first is unclear. While we were seeing price pressure in ethylene and polyethylene both here and in the export markets will also experience a decrease in fee sub costs.

The seasonality in Vinyls usually favors the second quarter and may offset the temporary slowdown we are experiencing in Olefins. On a separate note, yesterday we filed a universal shelf registration statement on Form F-3 with the Securities and Exchange Commission for up to $750 million.

Our objective in filing the shelf registration is to create enough financial flexibility for Westlake to plan for the long-term. As you know at present, we have no immediate needs for financing, but will regard the shelf as a tool for future consideration.

In summary, I would like to end by saying that we are pleased with our first quarter performance and remain optimistic about the cyclical upturn in the industry and the prospects for a strong 2005.

Thank you very much, Ruth. Before Albert and Ruth begin taking questions, I would like to remind you that a replay of this teleconference will be available starting an hour after we conclude the call. We will provide that number again at the end of the call. Operator, we are now ready to take questions.

Thank you sir, ladies and gentlemen, if you'd like to queue up for your questions, please key star one on your touchtone phone. If you'd like to withdraw your question, please key star two. Your questions will be taken in the order they are received by. Please hold for your first question. Again, that's star one on your touchtone phone, thank you for standing by.

We'll take a question from Mr. David Begleiter of Deutsche Bank. Please go ahead.

Thanks.

Good morning.

Albert, on the temporary slowdown in the Ethylene/Polyethylene chain, how long do you think it will last and if you could comment on the level of export activity as well. It has been low, any confidence it may be picking up over the next few months?

Yeah, we are seeing real tough (ph) from the polyethylene business, we are seeing the real card (ph) turn around from customers increasing. So we believe that customers are using and depleting inventory and should be in the recovering stage for the next improvement in the following months.

However, the economy has slowed down, as we have learned that first quarter GDP growth is much lower than expected and lower in the fourth quarter. And we also had a Fed rate increase yesterday. So we don't know the impact, how the economy had on the consumer demand in general, GDP in general.

But oil price also has come down; energy price has come down so that should be a benefit for the economy as well, not only for the U.S., but globally. On the export side, we see somewhat of the reduction in export mainly because of a demand in Asia, primarily in China has slowed down the dates, especially in second quarter.

One is they have this weeklong festivity on May 1st, it's going on right now. And two that there are two new plants coming up. I think ethylene prices have come down because of the new plants, Seiko’s (ph) plant is -- ethylene tons (ph) running downstream, not caught up yet. So people in China have a wait and see attitude to see how much that will drive the price down.

So they are also buying a bit less. But I think there is the infrequent demand, China's economy is still growing quite strong. We believe in truth demand is still there. So, we'll see whether it takes a few months or a quarter to see the improvement in activities.

Albert, we saw some price erosion in both ethylene and polyethylene in April. Are you expecting some further erosion in May?

Well, I think April month as reported in some of the trade journals is the first price erosion in about 12 months. And we are seeing some pressure still in the marketplace. Generally they do not turn on a dime.

But also the fact that fee stock prices come down and we show that all our customers and we can see very clearly. So they may have some impact on price as well. But the fee stock may or may not offset the price decrease in polymers.

And lastly, did you, between the weather impact on PVC and the Geismore startup, can you quantify those impacts on the numbers in the quarter for Vinyl?

I think that the PVC sales for first quarter is pretty strong. And partially, it's because of the Geismore startup, we have producing, selling PVC. I think in the pipe size, there was some impact in first quarter because of the weather. But it's small. So we are looking forward to a robust, vinyls business in this year.

Thank you very much.

You're welcome.

And we'll take our next question from Jeff Biachi (ph), UBS.

Hi, I just wanted to follow up a little on polyethylene. You clearly see some, just a little softness in the market. I'm just wondering, is it more of a price push down or is it more of a volume demand. How much new capacity has arrived to cause that?

I think from the U.S. point of view, we don't believe that any new capacity comes on market, the business operating under pretty high clip. I think that partially is companies have bought products back in the fourth quarter last year and maybe some the first quarter of this year because of high energy prices in expectation of.

And as you see from the MPRE numbers, I think polymer volume of polyethylene increased by what, 9% last year or some experienced a high number. And we're seeing some adjustments averaging out because the economy is not going at that clip. But I think the basic demand is there and as I said before, we're seeing the real card turnaround faster from the customers, so they're spending (ph) empty spec.

Yeah, usually inventory corrections at the customer level don't last this long so you have a higher confidence that some point in the second quarter we're through that? And if you could add to your comments earlier that Ruth made, why then if that occurred, would the second quarter possibly be below the first?

Yeah, it's difficult to tell, it’s the combination of factors, the economy, the customers. We don't believe the customer industries are excessively high at all. I think there is some inventory build in the producer level and it really depends on the producers' production rate and customers' demand changes from the changing economy.

Right and Ruth to clarify your comment about that second quarter, would not a FIFO hit start to flow through more positively?

It could yes, it could. I'm just, what I was just really trying to say, Jeff, is that things are moving so quickly. With fee stock costs coming down, there was also a decrease that was reported as Albert said for April on the price said in polyethylene.

It's just, we, because of things, all the different variables moving so quickly, we're just trying to say that we really don't have a clear projection of the second quarter. Finals are still strong as we say and should be strong in the second quarter, that's another offsetting factor.

It just strikes me that the variables you mention all seem to be mostly positive with the one exception of the ethylene chain which Albert maybe pointing out, could start to reverse, that's all, just wanted a little more clarity.

Yeah, I think we could, but we just don't know when.

OK, thanks so much.

We'll take our next question from Nancy Traub of Credit Suisse First Boston.

Good morning.

Good morning Nancy.

Hi. The comments you made about the economy slowing and the Feds bringing the rates up, et cetera. I would think that would have more impact on PVC and pipe demand. I wondered if you could comment on why you see that still being so strong.

Yes, I think, if you talk about housing, PVC pipe is a housing market, it's a small part, these will be drain, waste and vent area. And even for that, people, the economy slows down in the past, people go to refurbishment.

So some of those business still continues. But I think if you talk about PVC pipe, a big part of PVC pipe goes into infrastructure, which is in need in the U.S. to upgrade improve. And also that it goes into whether siding or windows which goes a lot into replacement markets as well.

And they all look good?

Reasonably good, yes.

And Albert, how about cost exploding? You really didn't quantify things there.

Yeah, we believe the toxic market is pretty strong in the U.S. There's been some announced price increases and there’s been some upset in the industry from production point of view. I think on a whole the toxic business is quite good.

OK, thank you.

You're welcome.

And we'll take a question from Andy Parr of Andover Capital, please go ahead.

Hi, a quick question. Two questions. First off, what you saw the inventory building and you felt the pressure in the market? Did you turn down your old capacity (inaudible) pressure to pull it back?

Is your question on the industry or on Westlake?

Westlake in particular. You I guess have taken steps to remedy that at Westlake in particular.

Are you asking a question or are you making a statement.

I'm asking a question, did you reduce your operating rates as you moved through the first quarter?

I think depending on the grades, on the products, as you know, we produce high (inaudible) and LDP from polyethylene.

Yep.

And depending on the grade and the product, we have made some adjustments where we needed to.

And secondly when your heavy fee stock project is done, how much of your capacity will have flex fee capability?

For Lake Charles is about 20%. Right now, actually Westlake is pretty much about 50/50 ethane to propane. And if you read one of the trade journals they said propane today is the most favored fee stock for fee stock, ethane, propane, (inaudible) and gas oil. So today, Westlake, on the average, capability is 50/50 ethane propane. And hopefully when we finish that we'll be having about 20% Lake Charles being flexible to (inaudible).

Great thanks.

You're welcome.

As a reminder, if you'd like to queue up for questions, please key star one on your touchtone phone. We'll take a question from Sir Twan Paul (ph) of Banc of America Securities.

Hi Ruth. Assuming the asset base remains the same, what do you think is the most efficient capital structure or the most efficient use of your pre cash at this point?

Twan, I think what we have said, pretty consistently since our IPO is that if you look at our history, we have grown over the time since we were founded about 20%. We're very committed to either internal growth or acquisitions that make sense for our industry, in that we analyze very carefully.

So growth is really our number one priority. After that, if we have excess cash flow, we will continue to pay down debt. And so if we don't have any good opportunities, the capital structure will become more conservative. But what our goal overall is to have enough flexibility in terms of excess debt capacity, liquidity, et cetera to serve us well in all aspects of the chemical cycle, the downside as well as the up cycle.

So which business line would you think is more attractive at this point, Olefins or the Vinyls business as far as expansion?

Well, I think Olefins today is about 60% of our sales, total company sales and Vinyl is 40%. And that both have the good dynamics in the U.S. and globally. On the Vinyl side we have integrated down to the finished, consumer products or industrial products like pipe, windows and fence. So there are more activities in the Vinyl side than the Olefin side. We're not integrated to the oil or gas on the Olefin side.

OK, so it doesn't sound like a stock buy back or any sort of increase in dividend, necessarily makes sense at this point.

Well, as Ruth said, we will go through that priority of priority for us to pursue and not only dividend will be a one consideration at end of the hierarchy.

OK, thank you Albert.

You're welcome.

And we'll take a question from Seth Harvey of UBS.

Hi, I just wanted to, I am sorry, I jumped on the call a little bit late, but I heard that you said you have repurchased. You said notes for purchase? Was that an actual open market purchase of your? Or do you say term loan?

No, we just prepaid, we just prepaid some of our term loans, not under notes.

OK, and second, there was a question on operating rates in the Olefins. Maybe I missed this but what was your PVC kind of PVC and basic resin operating rates?

We have two PVC sites. One is Calvert City and the other one is the Geismer. The Geismer we just started in the first quarter and we are running our plants at high clipped at Calvert City and also at a high clip in the first phase of Geismer. But it was first quarter, the Calvert started (inaudible) or say gradual ramp up.

And based on what you're seeing in the market now, is it your anticipation to continue at that or again, to kind of follow on the Olefin, the plan to kind of trim those down based on what the market demands.

We certainly would continue with our operation as we have and certainly we'll respond to market conditions. But because of integration, historically, we have been able to run at a higher operating rates than the industry average.

Right, OK. And if you could just comment, I'm just trying to get some, some kind of sense on the shelf registration. What was their kind of thinking in terms of timing, why now? Is there anything specific that you're looking at to do or is it just pretty much just a financial flexibility and something that you felt like you need to do at this point?

I can address that. I think in terms of why now, it really was the first opportunity that we had since our lock up expired six months after the IPO. Secondly, it really is just something that is going to be "on the shelf." It's spent for long term planning and to give us flexibility if we ever need it. As you know, these shelves are outstanding for many, many years.

Right. But so, there's no one specific (inaudible) aside from being, this is the first time that you could.

Right.

OK, thank you.

As a reminder, if you'd like to ask a question, please key star one.

Operator, do we have any more calls?

We have a question from Nancy Traub.

Hi, Albert I was interested in your commentary. You mentioned how ethylene had come down in price in the first quarter where I know we've seen it come down in April. But that was a little news that it had already come down in the first quarter. Could you comment on that?

Yeah, stock price, stock price has been fluctuating up and down. But I think really the first price change on the contract price is in April.

How much do you sell on the stock market, typically.

(inaudible-off mic)

But that would affect the transaction price, is that correct?

That transaction, I think that's a combination of various factor, would come with a natural (inaudible) price.

OK, thank you.

You're welcome.

Thank you for standing by as the questions are collected. We'll take a question from Greg Goodnight of UBS.

Good morning, I'm joining late so I apologize if I reask any questions.

Good morning.

Operating rates in the second quarter for ethylene, what is your anticipation for your operating rates?

Certainly, our ethylene mainly goes to our downstream businesses and we feel our downstream business is relatively strong, it should continue and the rest ethylene filled primarily under long term contract. So it should be operating at a pretty good clip.

Would you think above 90%.

I would hope so, definitely.

OK, second question, what are your plans, there is an additional increment of VCM at Geismar that I think your intention is to eventually bring up as the market allows. Can you refresh me as to what your current plans are?

That's where we are. We are creating our search space and the second phase will depend on market conditions.

OK, so it could be this year, it could be next year?

That's right.

OK, where do you see VCM demand going with, some of the announced shut downs and the like. It would seem like VCM should be very strong this year and next.

Right, I think that all new VCM plant built in the U.S. and with the plant shut down announced by one of the producers in North America we should see these companies quite strong going forward.

I see, in terms of the announced Shintech expansion, do you have insight as to the timing, they had originally announced late '06, possibly '07, do you have any insight on the timing with respect to permits or other impacts?

No, other than what has been reported, they hadn't received their permit yet.

OK, how long, you have some assets in Louisiana, how long do you think it might take to obtain a permit?

It depends on which case, as you know, Shintech back in the 90s applied for permit and never got it because of the legal issues. We don't know whether those issues will surface or not, we don't know.

OK, thank you very much.

You're welcome.

As a final prompt, star one on your touchtone phone if you'd like to ask a question. At this time, the question and answer session has now ended. Are there any closing remarks?

Well, we'd like to thank everyone for participating in today's call. We hope you will join us again for our next conference call to discuss our future results. Thank you and have a great day.

Thank you for participating in today's Westlake Chemical Corporation's First Quarter Earnings Conference Call. As a reminder, this call will be available for replay beginning an hour after the call has ended. It may be accessed until 11:59 PM Eastern Time on May 11th. The replay can be accessed by calling the following numbers.

Domestic callers should dial 1-888-286-8010. International dialers may access the replay at 617-801-6888. The access code on both numbers is 75355019. Again that's 75355019. Thank you for joining us, you may now disconnect.