Westlake Corp (WLK) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Chemical Corporation's second quarter earnings conference call. (Operator Instructions)

I would now like to turn the call over to today's host, Dave Hansen, Westlake's Senior Vice President of Administration. Sir, you may begin.

Thank you and good morning, everyone. Thank you for joining us for the Westlake Chemical second 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 second 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 upon 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 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 has issued early 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 web page at www.westlakechemical.com.

A reply of today's call will be available beginning one hour after completion of this call until 12 p.m. Eastern Time on August 10th. The replay may be accessed by calling the following numbers. Domestic callers should dial 1-888-286-8010. International callers may access the replay at 617-801-6888. The access code at both numbers is 98735767. Please note that information reported on this call speaks only as of today, August 3, 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 webcast 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 this morning before the market opened we report a solid second quarter which significantly outpaced last year's results, driven mainly by record revenues and earnings in our vinyl segment which benefited from our integration strategy.

Year to date, both our olephins and our vinyl segment experienced higher revenue and earnings compared to the first half of last year. Sequentially, despite strong vinyls results, our earnings were below first quarter due to softer olephins pricing and margins. As we touched on in our last conference call, during the second quarter the global market for olephins and polyolephins experienced a temporary slowdown. By the end of the quarter, however, we had already seen signs that this trend had started to reverse.

In olephins, sales volumes have risen and inventories are down, indicating an increase in demand. Export prices and demand are improving as well. Domestically, ethylene spot prices have recovered approximately $0.10 a pound, indicating improved market conditions. Furthermore, polyethylene producers have announced price increases.

Our vinyls segment had an excellent quarter with sales volumes up over 20% year on year and up over 5% sequentially. With our vinyls segment operating at record performance levels and with an improved outlook in the olephins segment and good supply/demand fundamentals in the chemical industry, we believe on the whole Westlake is positioned for a strong second half of 2005 with good momentum going into 2006.

Now, I would like to turn the call over to our Chief Financial Officer, Ruth Dreesen, for review of our second quarter results. Ruth?

Thanks Albert, and good morning, everyone. Before I get into the numbers I'd like to take a moment and introduce Steve Bender, who has joined us for the call. Steve is our new treasurer and will also be responsible going forward for investor relations. I'm sure you will all get to know Steve well.

As reported in this morning's press release, Westlake had improved sales of 581 million in the second quarter compared to 449 million in the second quarter of last year due to higher prices and volumes. However, sales were below the 619 million reported for the first quarter of this year, primarily due to price erosion in our olephins segment.

Net income improved to $49 million, or $0.74 per diluted share, in the second quarter compared to net income of $34 million, or $0.69 per diluted share, in the second quarter of 2004, primarily due to margin and volume improvement. Second quarter net income was below the 61 million, or $0.94 per share, reported in first quarter of '05, primarily due to price and margin erosion in our olephins segment, which we will discuss in more detail in a moment.

Also included in our second quarter results is a small negative impact from FIFO accounting which negatively impacted EBITDA by about $2 million and earnings per share by approximately $0.02. As you know, our utilization of FIFO inventory accounting impacts our earnings differently as compared to LIFO accounting. Please bear in mind that the FIFO calculation is only an estimate, is not audited, and is not a GAAP calculation.

Meanwhile, we remain focused on our cost structure. During the quarter, SG&A expenses remained approximately 3% of revenues. EBITDA increased from 85 million last year to 102 million in the second quarter of this year, driven by margin and volume increases, particularly in our vinyls segment. You can find a reconciliation of EBITDA to reported income in cash flow from operating activities at the end of the press release we issued this morning.

Sequentially EBITDA fell short of the first quarter EBITDA by about 20 million due to the industry conditions discussed earlier. Our effective tax rate in the second quarter was 35.8% compared to 35.4 in the second quarter of 2004. As we expected, our NOLs were fully utilized in the second quarter and we paid taxes of approximately $30 million and will pay cash taxes going forward.

As a result of last year's IPO, our share count also increased from 49.5 million shares in the second quarter of '04 to 65.2 million shares in the second quarter of this year.

Turning to our segment analysis, our olephins segment generated 32 million in income from operations during the second quarter of '05, which is below the 62 million generated in the first quarter of '05 and also below the 38 million generated in the second quarter of last year. This decrease was primarily due to reduced ethylene and polyethylene cash margins resulting from falling prices and increased raw material costs. Volumes for the segment were up 3% from quarter one this year.

Our olephins performance in the second quarter was part of an industry-wide phenomenon which Albert mentioned earlier. We have already begun to see signs of improvement in June and July. The Asian markets are improving and on the domestic front, the industry has announced a $0.06 price increase in polyethylene and another $0.06 increase is on the table.

Turning to the vinyls segment, the segment earned 51 million of income from operations during the second quarter compared to 28 million in the second quarter of last year and 42 million in this year's first quarter. Second quarter '05 sales volumes increased by more than 20% as compared to second quarter of '04 and by more than 5% as compared to the first quarter of '05.

The Bristolpipe acquisition certainly had a positive impact on our vinyls sales compared to the prior year. However, removing the impact of Bristol we were still able to increase our vinyl sales by 9% while the overall industry appears to have decreased. We believe this positive trend is the result of our strategy of targeting the higher growth segments of the PVC market.

Now turning to the balance sheet and cash flow. Our working capital increased by $39 million during the second quarter compared to the first. However, this increase is due to an increase in our cash balance. We have cash on our balance sheet as of June 30th of 110 million, up 63 million from the 47 million reported in the first quarter. The remaining components of working capital went down 24 million as compared to the first quarter, due in large part to decrease in receivables resulting from lower sales.

Inventories were reduced slightly in spite of higher raw material prices. We generated 91 million in cash from operating activities and 63 million in total cash flow after spending 27 million for capital and making debt amortization payments of 300,000. We have no revolver borrowings at this time and expect our net interest expense to decrease as we continue to repay debt and accumulate cash. Net debt as of June 30th was 158 million. Our capital spending assumptions for 2005 remain in the 120 to $130 million range as previously discussed.

In summary, I'd like to say -- I'd like to end by saying that we remain optimistic for a strong second half of 2005 with positive momentum going into 2006.

Thank you very much and now let me turn it back to Dave Hansen.

Thank you very much, Ruth. Before Albert and Ruth begin taking questions, I'd 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're now prepared to take questions.

Thank you, sir. (Operator Instructions)

And sir, our first question is from the line of Nancy Traub with Credit Suisse First Boston.

I wondered if you could comment a little more on the volumes. Vinyls was up real strong versus the first quarter and year over year. I wondered if any of that had to do with you gaining share from the competition that had operating problems?

I don't think that we want to talk about any specific companies, but I will remind you that our vinyls segment is made up of several different products, including pipe and fabricated products. And so the increase was an overall increase, not just resin.

So we should expect it to stay pretty strong, the comparisons to remain pretty strong going forward?

Yes, we believe so.

Okay. Are there any price hikes on the table for -- or could you give us some color on the price trends in the pipe industry?

The pipe business, there's no price move on a daily basis, there's no set price. And generally it follow supply demand and some industry PVC prices have effect on pipe price. And I think some of it generally it's slow months, slow months for the summer. But as the summer ends, it'll pick up all the way, depending on the weather, until near the end of the fourth quarter. So with good weather, we will think that demand should continue to be strong.

It seemed like maybe there was an inventory correction in the pipe business.

Yes, we believe just like PVC when the prices were high people bought resins, or prices going up people bought resin and pipe. And then when the pipe resin price stabilized and people start using up inventory, it happened in pipe inventory as well, and we believe that pipe inventory has adjusted to a reasonable level.

How about expanding your capacity or bringing on the rest of your capacity at Geismar? Can you give us an update?

Yes, the Geismar startup will be complete in the third quarter, this current quarter. And as demand allows, we would ramp up.

You anticipate that will be before year end?

We cannot say.

But you're ready to go?

By third quarter when the completion is finished, it will be ready to go if the demand is strong.

Sir, our next question is from the line of Kevin McCarthy with Banc of America Securities.

You've made a lot of progress in reducing net debt. It looks like it stands at 15% of total capital now with a cash balance of 110 million. You've been public now for about a year. Albert, could you maybe update us on your thoughts with regard to dividend policy? Is there some potential you'll bump it up here?

Certainly. As we have said in many occasions, our primary goal is to use our cash to fund good projects within our company, CapEx, and after that we will look for opportunities that can increase returns for the company for shareholders. After that we'll pay down our debt and after that we'll consider dividends. And those four alternatives will still be reviewed and our Board reviews on a quarterly basis our dividend policy and payouts.

Okay. And could you update us, please, on the status of your feedstock flexibility project?

Certainly. As you may have seen, we've engaged ABB Lummus to help us with our feedstock flexibility project and they made a press release on that not long ago. The project is moving well. We will be doing that in early next year as turnaround for Petro 2 and with that we would -- after it's turned, we anticipate to have about 20% of our Lake Charles ethylene capacity able to have feed flexibility going into light naptha feed.

Okay. And then finally on your vinyls volumes, I think you mentioned they were up 20% year to year and 5% sequentially. Would you have similar numbers as adjusted for the acquisition of Bristolpipe?

Yes, Ruth, please go ahead.

Yes. I think that I mentioned that if you take the benefit of Bristol out of the year on year comparison, vinyls are up 9%.

That was a sales number, though, I think you said.

That's volumes.

Oh, that would be a volumes number, my mistake.

Sir, our next question is from the line of Gregg Goodnight with UBS.

Recently in a trade journal there was some mention about your company's potential involvement in a Middle East project. My question to you, are you prepared to say anything about that at this time or is that -- was that report speculation or can you give us any guidance at all in this area.

Certainly. As I mentioned, answering questions about where looking at our investments, we look at investment opportunities globally all the time, multiple areas and projects. And we'll make the comments to the public when the time is right.

Okay. Second question in vinyls, PVC had a seasonally weaker quarter than one might expect for the second quarter. Would you comment on your operating rates vis a vis the industry? A publication has reported, for instance, PVC on an industry basis operated 91% in the second quarter, VCM about 90.5% and the like. And traditionally, your integrated vinyls segment has been able to operate at higher than industry average rates. So would you comment on directionally how were your rates in the second quarter compared to these benchmarks?

Our rates operate at pretty high levels. We are usually operating at the highest level we have with capabilities and because of our integration strategy, we're able to run our plants at high levels. Now certainly there are times, generally speaking, when demand is down. That's when we'll watch our inventory and make corrections as necessary.

Okay, so are you implying then in second quarter you were running as hard as you could?

Yes.

And that includes also your fabricated products side?

Yes. I think there were some slowdowns where we had inventory corrections, in the pipe area for example. But otherwise we run plant at very good clip.

Okay. Last question, if I could. The price increases that have been announced for polyethylene in August, where does that stand right now in terms of implementation? Does it look like these are likely to succeed?

Yes. As you may have heard, there was a price announcement in July in polyethylene and there's a further $0.06 a pound and there's another $0.06 a pound made in August. I think industry is implementing the first price increase, so after that is done they will see how the second one will be done.

Am I correct, did you have an outage in low density polyethylene in the second quarter?

We had a turnaround in, I think our high pressure polyethylene plant, yes.

Okay. Did you quantify the impact in terms of millions of dollars lost EBIT for the quarter?

It's not material.

Sir, our next question is from the line of Jeff Cianci.

I think, Ruth, you made comments about debt coming down and cash going up and, Albert, you did say that acquisitions would have a priority to debt pay-down. So just want to put you all on the spot and try and guess what's next here. Are we going to wait for deals, is it -- is there stuff in the hopper in the second half of this year, are they mostly in downstream vinyl? And if not, is -- can we see the debt go to zero? In other words, do you feel a need to spend the money before your debt gets to zero?

I think I can answer that from a financial perspective, Jeff. I don't feel any pressure to make an acquisition or an investment in our business that doesn't make sense just to prevent the debt from going to zero. We are always looking for opportunities. We have a pretty active corporate development effort.

But, as you know from our history, we are very selective. So yes, we're looking for opportunities, both from an acquisition perspective and from an internal investment perspective. And we will make a move when we think the situation is favorable. I think that, as you know, acquisitions are very risky and you have to be very, very careful in choosing the right situation.

If I could follow-up. Valuation of things you look at, are they moving in either direction, up or down? Any comment on you might say hey, there's an opportunity or these are expensive right now. Anything like that?

I think it depends on your perspective, how many years are you talking about? Our valuation's up from the trough of the cycle, sure, but so are earnings.

How about since the last two years?

Perhaps, but we look in a lot of different segments. We have the fabrication as well as the chemical segment. We look globally, as Albert has mentioned, and you have different valuation dynamics depending on the segment and the geography.

Sir, our next question is from the line of Rick Rosenthal (ph) with Bear Stearns.

This is Bob for Rick. My question is I came in a little bit late, I was just curious on what you guys said about the caustic and chlorine both pricing and demand for the Q3 period.

There is announcement for caustic increase in the third quarter. I think the chlorine price has somewhat stabilized, depending on the demand of PVC and other chlorine derivatives. But there's announced price increase in the third quarter, for the third quarter.

So you're saying caustic there's an announced price increase and chlorine is stable or is it -- it has stabilized?

Chlorine is -- the contract price is pretty stable. The spot price, that moves all over the place.

Okay. And how does demand look for these products?

I think generally speaking caustic follows very much the GDP growth, whereas chlorine is really PVC and some of its major derivatives, like the urethanes.

I understand that, but I'm just saying from your perspective does it look -- is the third quarter going to be, from a buying standpoint, stronger than the second quarter or you can't say or just how's it feel right now, what's your view?

I think stable.

And, sir, our next question is from the line of David Silver with JP Morgan.

Albert, I had a question about the PVC market globally. I guess there seems to be a large disparity in price currently between the North American price for resin and the Asian price for resin and I was wondering if you can comment on a couple of things based on your activities in China, if you could comment on the capability or the level of PVC production in China and how that might be changing?

And then I'd also wonder if you could comment on whether you're seeing any influence in the domestic market from the lower price Asian market?

Certainly. From what we understand, there has been plastic increases in China in PVC. A large part of that increase has come from the carbide process-based VCN, which is made from coal. As you know, with the high oil price, olephins price derived from petrochemicals has -- is rather high due to the high cost push, whereas even coal price has come up, coal price is relatively cheap compared with crude oil. And as a result, Chinese companies, especially some of the local governments, have built carbide-based VCN plants, switch that into PVC. The carbide process do not make good quality PVC due to impurities compared with ethylene-base VCN. But the new capacity increases, majority of those are from carbide process. It results with the capacity increase.

The prices for PVC has not risen as we've seen in other countries where based on the ethylene-based VCN process. But China has -- the government has denounced the carbide process because high pollution and high power consumption and not all the power plants able to supply because of the shortage of power currently in China. Not all the plants are able to get power for making carbide, as well as the chlorine equivalent with that. But still China imports fair amount of vinyls. May not be in the form of PVC, but in terms of EDC (ph) or VCN, and some of the major announcements on the coast, (inaudible) for example, and Shanghai (inaudible), those people are, I think even LG group, their expenses are all based on the ethylene-based VCN. So there's a dichotomy going on in China between the ethylene-based VCN, TDC guys and the carbide-based guys.

So have I given you a -- ?

Yes. I'm trying to write all that down, so I appreciate that. And I have one other question and again, I'm probably just not writing fast enough. But, Albert, earlier you discussed the progress with polyethylene price increases in North America and I know that there are at least two separate announcements that are out there with different timing and different implementation dates. So I was just wondering if you could restate the status of maybe the first of those price increases or just how you evaluate the progress on those two separate polyethylene price denominations for North America.

Okay, I answer the previous question but I like to do that. The first one is announced in July of $0.06 a pound. As we mentioned earlier, the inventory for polyethylene is down for producers and for fabricators, few in second quarter. So we feel very strongly that the price announcements for July, which will be worked out depending on how many people have how many days of price protection would work into the system. The second price announcement is made effective August and we are not in August yet, but we will go through the first one before the industry evaluates the second one. So we are pretty confident that with the low inventories and with anticipated winter months feed stock price increases in both crude oil and natural gas, that price push is necessary.

Okay. And then just the follow-up. Would you say that the first $0.06 per pound price increase will be in place, let's say by the end of -- will it be in place by the end of July or by the end of August in your estimation?

As we mentioned, that depending on the customer -- on price protection days that it'll push through in whether July, August, but it will be pushing through. We strongly believe that is the case.

Sir, our next question is from the line of Aaron Whiteman (ph) with Appaloosa Management.

First off I was wondering, can you give us the actual breakdown of your external sales (inaudible - audio disruption)?

Sir, could you repeat the question? You're breaking up a little bit on it, please.

Sorry about that. I was wondering, can you give us an actual breakdown of your external unit sales volumes in pounds?

We give you volumes by segments and that's basically the level that we're willing to go to.

Okay. My second question was in terms of still being short chlorine, do you have any comments on whether building versus buying is looking more attractive or might be an opportunity?

We certainly reevaluate our alternatives all the time and you are absolutely right, chlorine is an area that we are major purchasers for our vinyls business.

And, sir, our next question is from the line of Alec Mitchell with Copia Asset Management.

I guess the commentary was that you executed well. And market share, how would you characterize the volume increase there, the fact that -- ?

Basically what I had said is that we think that the performance was due to our market positioning. We have targeted the rigid segments of the PVC industry, either through our direct resin sales or through the fact that we are a producer of rigid products ourselves. So we are squarely positioned in the segment of the industry that's growing. So I think that that is really the fundamental reason for the results.

And both Dow and Georgia Gulf talked about weakness in PVC in July and going forward. Can you talk about pricing?

Well, there is a price increase that has been announced. I think July, weakness in July is kind of a seasonal thing. A lot of the pipe fabricators tend to do maintenance and have turnarounds in July, but that is something that happens every year. And so I think that our feeling is that the third quarter generally has good weather and we are somewhat optimistic.

Is pricing down?

I think it's been reported that pricing was down a penny in July if you took CMAI and CDI, but there's another price increase that's been announced for September and we feel pretty positive about it.

And can you talk about your olephins margins going forward as you raise prices?

Well, we expect olephins margins to improve as price increases that have already come into -- that have already been announced or, for instance, in ethylene that have been negotiated fall into the numbers.

Would you expect a sequential increase in margin or ultimately flat?

I think the picture on pricing is very positive. What we don't know is raw materials and we just cannot predict. So I don't want to make a statement about margins.

Okay. And finally, I guess what you've heard lately about Shintek (ph)?

We have not heard anything new on the Shintek side other than what's been reported.

Well, when do you think that will be?

Well, they...

...plant will be built and running?

They said '07 if -- it takes quite a while. Haven't got a permit yet and so after permit, it takes quite a while to get plant built. And talking about a large plant, chlorine, VCN and PVC.

You haven't heard anything that they're building it offshore so that they can...

Not...

...the pieces of the plant offshore so they can start -- ?

I haven't heard anything like that.

And, sir, our next question is a follow-up from the line of David Silver.

Albert, I had a question I guess about some other activities going on in the North American PVC industry and I guess the Royal Group has been subject of a buyout offer. And without commenting directly on it, I was hoping you could offer your opinion about whether ultimately you think that the long term trend in the industry towards forward integration, resin producers becoming bigger in the downstream businesses, such as yourself, whether that might lead to ultimately a large downstream user of PVC like Royal Group ultimately becoming combined with one of the larger resin producers. Thanks.

I can't comment about the industry. We can only comment about Westlake. Westlake is quite highly integrated in the vinyl segment, raw material to VCN, PVC and (inaudible) products. Reason for that is with our roots back in Asia, we had a strong fabrication industry in our prior companies in Asia, so we had an understanding of that, whereas in North America, majority of the chemical companies have exited fabrication. It is a good industry. So I don't know other investors or other producers, whether they will go downstream as we have. But we are quite comfortable going downstream.

Okay. And I just have one other question about your expectations in polyethylene. So, Ruth, we agree that there's certainly some upward pricing momentum and I also agree with you that raw materials are kind of a wild card at this point. But I was wondering if you could comment on whether you expect the operating income or the per unit margins in your polyethylene business for the third quarter to be equal to or below what you've reported in the second quarter and whether you could take a rough guess at that?

Well, I think, Dave, the problem -- I mean on the pricing side, there's positive momentum, on volumes there's positive momentum. Particularly towards the end of the second quarter we saw a positive upswing in terms of volumes. The wild card here is raw materials and that is the part that I just cannot -- I don't feel comfortable making a judgment on. So I can't really speak to margins because I'm missing part of the equation.

I guess I was trying to gauge kind of there was a certain trend in margins, probably down through the second quarter and into the early part of the third, I'm guessing. But assuming that feedstock costs for Westlake were to stabilize at these current levels, would it be fair to say that there would be -- on average, third quarter cash margins would be lower than what you reported in the second quarter?

Lower?

Average for the full third quarter versus your average for the full second quarter.

I think if raw material prices stay the same, there's a chance the price -- the margins will be higher third quarter versus second quarter.

And folks, we have no further questions at this time. Back over to Mr. Hansen for any closing remarks.

Thank you very much. We appreciate your participation today. We look forward to hearing from you at our next conference call. Have a great day. Thank you.

Ladies and gentlemen, thank you for participating in today's Westlake Chemical Corporation's second quarter earnings conference call. As a reminder, this call will be available for replay beginning an hour after the call has ended and may be accessed until 12 p.m. Eastern Time on August 10th. The replay can be accessed by calling the following numbers; domestic callers should dial 1-888-286-8010 and international callers may access the replay at 617-801-6888. The access code at both numbers is 98735767.

Good day and you may now disconnect.