Westlake Corp (WLK) 2007 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 2007 Earnings Conference Call.

(OPERATOR INSTRUCTIONS)

As a reminder, ladies and gentlemen, this conference is being recorded today, May 3, 2007. 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.

Good morning, everyone. Thank you for joining us for the Westlake Chemical Corporation first quarter conference call. I am joined today by Albert Chao, our President and CEO, and Steve Bender, our Vice President and Chief Financial Officer, and other members of our management team.

The agenda for today will be as follows; Albert will first make a few comments regarding Westlake's performance during the first quarter. Steve will then provide you with a more detailed look at our financial and operating results. Albert will conclude with a discussion of our recent developments, and then we will open the call up for 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 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 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.westlake.com. A replay of today's call will be available beginning one hour after completion of this call until 1:00 P.M. Eastern Time on May 10, 2007.

The replay may be accessed by dialing the following numbers. Domestic callers should dial 1 (888) 286-8010. International callers may access the replay at (617) 801-6888. The access code for both numbers is 48629607. Please note that information reported on this call speaks only as of today, May 3, 2007 and therefore you are advised that time-sensitive information may no longer be accurate as of the time of any replay.

I would finally like to advise you that this conference call is being broadcast live through an Internet Webcast system that can be accessed on our webpage at www.westlake.com.

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

Thank you, Dave. Good morning, ladies and gentlemen, and thank you for joining us. I am pleased to report some improvement in our results from our last quarter.

In this morning's press release, we reported first quarter earnings of $0.30 per diluted share which were an improvement over the $0.22 per diluted share reported in the fourth quarter of 2006. Sales for the quarter were $719 million, the highest in our history due to the acquisition of Eastman Chemical's polyethylene business in Longview, Texas in November of 2006.

The downward pressure we saw on all of our major products in the fourth quarter of 2006 continued into the first quarter of 2007. However, sales volumes, particularly for PVC resin and pipe rebounded during the quarter with PVC resin prices increasing. Our polyethylene sales volumes also increased with strong demand in both the domestic and export markets. Sales volumes from our existing polyethylene business increased and, in addition, we had higher sales volumes from our Longview polyethylene business.

The industry was able to implement a $0.06 per pound price increase for polyethylene in the later part of the first quarter, and has announced an additional price increase for April 1st. The April 1st increase calls for a $0.04 per pound price increase on all polyethylene products with an additional $0.03 per pound increase for hexene and octene linear low density products to offset the higher co-monomer cost.

In addition, the industry has also announced a $0.05 per pound price increase for June 1st. After price declines in January and February, we were also able to implement a $0.03 per pound increase for PVC resin beginning in March and currently have an additional $0.03 per pound price increase announced for April. In addition, we also saw pricing improvement in PVC pipe during the quarter.

We are mindful of rising feedstock costs. However, positive pricing momentum of our products was established in the first quarter and is being carried into the second quarter. We continue to see healthy demand, both domestically and abroad, though we remain concerned with the continued weakness in the residential housing market and the impact that it may have on the economy.

Now, I would like to turn the call over to Steve for a review of our first quarter results.

Thank you Albert, and good morning, everyone. As we reported in this morning's press release, Westlake had sales of $719 million in the first quarter, which represents a 16% increase from the $619 million reported in the first quarter of 2006. This was due to higher sales volumes for most of our products. Our PVC resin and pipe sales volumes increased by 19% in the first quarter of 2007 compared to first quarter 2006, while our polyethylene sales volumes increased by more than 125% for the same period.

The significant increase in polyethylene sales volumes was a result of higher sales volumes from our existing polyethylene business and the additional sales volumes from Longview. Polyethylene sales volumes were strong in the first quarter both domestically and in the export market.

The higher sales volumes were partially offset by lower selling prices on all of our products with the exception of styrene monomer. In contrast, selling prices in the first quarter of 2006 were very high in response to the feedstock cost increases and product shortages caused by the two hurricanes in 2005.

For the quarter, net income was $20 million or $0.30 per share, compared to net income of $51 million, or $0.79 per diluted-share, in the first quarter of 2006. The decrease was primarily the result of lower average selling prices and higher feedstock costs for ethane and propane which was partially offset by higher sales volumes.

The first quarter of 2006 included an after-tax charge of $16 million, or $0.25 per diluted share, related to debt retirement costs. Operating income in the first quarter of 2006 was one of the highest in the company's history.

The first quarter results were minimally impacted by the utilization of first in, first out FIFO method of inventory accounting, as compared to the utilization of last in, first out LIFO method used by some companies in the industry. In contrast, the first quarter of 2006 incurred a negative impact from the use of FIFO accounting. Please bear in mind that the FIFO calculation is only an estimate, is not audited and is not a GAAP calculation.

The following is a sequential discussion of our operating results for the first quarter versus the fourth quarter of 2006. First quarter 2007 sales were 37% higher than the $524 million reported in the fourth quarter 2006. This increase was primarily due to higher sales volumes for all of our olefins and vinyls products.

Also, in addition to higher polyethylene sales volumes from our existing polyethylene business, we had increased sales volumes from our Longview polyethylene facilities which were acquired on November 30, 2006. This increase was partially offset by lower average selling prices for our products.

Net income increased $6 million, or $0.08 per diluted share from the $14 million, or $0.22 per diluted share reported in the fourth quarter 2006. This increase in earnings resulted from higher sales volumes for all of our major products which were partially offset by lower average selling prices.

The fourth quarter of 2006 was negatively impacted by the unscheduled outage at one of our ethylene units in Lake Charles. The unscheduled outage and maintenance turnaround of the ethylene unit had a negative effect on our operating income of approximately $30 million in the fourth quarter of 2006, due to higher maintenance expense, unabsorbed cost and lost opportunity.

Now, turning to our segment analysis. Our Olefins segment generated earnings from operations of $27 million in the first quarter of 2007, compared to earning $60 million in the first quarter of last year. Results were reduced due to lower selling prices for ethylene, polyethylene, higher feedstock costs and transition costs related to the Longview acquisition.

We incurred approximately $4.5 million in transition services cost during the first quarter of 2007. These transition services will be phased out during the second quarter beginning in May. These reductions were partially offset by higher polyethylene sales volumes in both our Lake Charles and the Longview polyethylene facilities.

First quarter income from operations for Olefins was $30 million higher than the $3 million loss reported in the fourth quarter of 2006 which was adversely impacted by the unscheduled outage at one of our ethylene units in Lake Charles. Higher sales volumes for ethylene, polyethylene and styrene in the first quarter of 2007 were mostly offset by lower average selling prices, higher feedstock costs and the transition services cost related to Longview.

Although average selling prices indicate a decline versus the fourth quarter, they showed a positive trend during the first quarter with each product benefiting from price increases implemented in the first quarter. Turning to the Vinyls segment

Income from operations for our Vinyls segment was $8 million in the quarter, compared to $54 million in the first quarter of 2006. The $46 million decrease was primarily due to lower selling prices and margins for both PVC resin and pipe. Selling prices and margins for PVC resin and PVC pipe fell dramatically in the fourth quarter of 2006 due to falling energy prices, weakness in the residential housing market and seasonal slowdowns.

Selling prices remained under pressure in the first quarter of 2007, however sales volumes have rebounded. The industry implemented a $0.03 per pound PVC resin price increase in March and we have seen price increases for PVC pipe as well. By contrast, the first quarter of 2006 was unusually strong after the impacts caused by Hurricanes Katrina and Rita.

First quarter income from operations for the Vinyls segment decreased by $2 million from the $10 million reported in the fourth quarter of 2006. This decrease was due to lower average selling prices for PVC resin and PVC pipe and higher feedstock costs. These reductions were partially offset by higher sales volumes. Both PVC resin and PVC pipe sales volumes increased as compared to the fourth quarter of 2006.

Turning to the balance sheet and summarized statement of cash flow. Cash outflows from operating activities were $42 million for the quarter which was due to increases in working capital mostly attributable to the acquisition of Longview. Capital expenditures for the quarter were $19 million.

Our cash balance was $13 million at March 31st, 2007, down $40 million since December 31, 2006, which was mostly attributable to capital expenditures and increases in working capital. Our long term debt at March 31, 2007 was $281 million which included $21 million drawn under our $300 million revolving credit facility during the first quarter. Our debt to total capitalization ratio is 19%.

Now, I'll turn the call back over to Albert. Albert?

Thanks, Steve. First, let me update you on the status of our turnaround activity and debottlenecking projects that will allow us to continue to upgrade our competitive advantages. As mentioned in our last conference call, our turnaround activity is currently under way with our Petro 2 ethylene unit to complete the installation and remaining tie-ins of the Feed-Flex project that will allow us to begin cracking light naphtha when market conditions warrant.

The turnaround, which began on April 9th, is expected to last approximately 45 days and will result in unabsorbed fixed cost and lost opportunity of approximately $20 million to $30 million. The added ethylene capacity resulting from the Feed-Flex project will add to our integration. We believe the Feedstock Flexibility project will improve our cycle average margins and reduce overall volatility.

We also mentioned in our last call, a maintenance turnaround at our styrene plant in Lake Charles later this year. We now plan to move that turnaround into the first half of 2008. That outage will last approximately 35 days and will include a project to revamp the styrene plant and enhance its energy efficiency.

Now, let me discuss our activities in Trinidad. We continue to work with the government of the Republic of Trinidad and Tobago to develop a feasibility study for a feedstock advantaged ethane-based ethylene and polyethylene project. We continue to make progress and expect to have a definitive decision as to the project's feasibility later this year. Once we complete the feasibility study and finalize project agreements we can begin to work on our project financing arrangements. Once that is complete, construction can begin.

Finally, let's talk about the outlook for the industry. As I mentioned earlier, we have seen signs of improvement in the first quarter. PVC resin and pipe sales rebounded in the first quarter and polyethylene sales volumes strengthened as well. Industry sales volumes for polyethylene were strong both domestically and in the export market in the first quarter and that trend appears to be continuing in the second quarter.

We have implemented a $0.06 a pound price increase for polyethylene and a $0.03 per pound price increase for PVC resin in the first quarter with additional price increases announced for both products. We continue to see healthy demand for our products. However, we remain concerned with the continued weakness in the residential housing market and the impact that it may have on the economy.

We cannot say with certainty at this time whether any of the future price increases will be implemented or what impact they may have on the whole year but we do remain optimistic.

Thank you, very much. Now, let me turn it 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 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.

(OPERATOR INSTRUCTIONS)

And our first question comes from the line of Mike Judd with Greenwich Consultants. Go a head.

Good morning. The styrene monomer maintenance that you're moving from the end of this year into the first half of next year, how much did you indicate on the last conference call, the lost opportunity cost was going to be in terms of profit?

I think we mentioned last time it's more.

Okay. All right. And just was the cracker change-over here, when should that be complete?

It's 45 days from April 9th, so it'll be sometime at end of May, I would think.

Okay. And just one last small thing. It looks like the tax rate was a little lower than the 36% that I had been using. Should we be using that 34.5% rate for the rest of the year?

Let's give guidance at 35% for the year. And I do want to mention that, on a cash tax basis, because of bonus depreciation for our capital expenditures largely in Louisiana, that our cash tax rate will probably be in the neighborhood of 25% this year. But for a effective tax rate, use 35% for the year.

Okay. And just lastly, what was FIFO in the quarter, please?

It was minimal at less than a penny.

Thank you.

Our next question comes from the line of Kevin McCarthy with Banc of America Securities. Go a head.

This is [Batal Aleone] sitting in for Kevin today. Hi. Can you hear me?

Good morning.

Good morning.

I just wanted to ask a question regarding the growth rate. It appears that if I add price and volume, I get 21.6%. But on the top line, my calculation is 16%, so I'm missing a 5% number. Can you help me with that?

Talking about compared with first quarter of '06 or what?

'07 comparing to '06, year-over-year. The price and the volume, if I add them up, they look like a 21.6% and yet the top is only 16%.

We had to do the math to check that.

Yes. Batal, why don't you get back with me so that I can take a look at the numbers and make sure I know what you're looking at and we can talk about this off-line later today.

Good deal. All right. Thanks.

Our next question comes from the line of Edlain Rodriquez with Goldman Sachs. Go a head.

Good morning. Can you guys talk about the export activity during the quarter? I mean, 'cause polyethylene prices were higher in Asia. Did you take advantage of that and by how much?

Yes. Yes, we did export some polyethylene. The polyethylene market in Asia is doing quite well. The U.S., I think, had a record export in December of last year and this trend continued. Certainly Westlake participated in that export market. We believe we are somewhat below the industry average.

So did you increase your export activity or did you maintain?

We maintained our share.

Okay. Thank you.

You're welcome.

Our next question comes from the line of Nils Wallin with Credit Suisse. Go a head.

Good morning.

Good morning.

I had a question about the higher feedstock costs and how they crimped margins. When I look some of the industry data and some of the numbers you provided, it looks like ethane costs actually went down, propane went up slightly, but overall cost of ethylene per pound was down. So maybe you could provide me a little bit of color on that.

Yes. I think certainly the ethane price during the first quarter went down and went up again. And today, as we speak, ethane's about $0.73 a gallon which is a lot higher than the average during the first quarter. But so has the naphtha price increased also with higher crude oil prices. And it has impacted on our feedstock costs.

But the price now wouldn't -- or at the end of the quarter, wouldn't necessarily be affecting you because you're on FIFO. Is that correct?

Yes. There's a one month's lag. Yes. But the price has moved up things sometime in early March.

Okay.

I think it's been lowest about 60 or $0.50 or $0.60 and then keep on going up from there.

All right. My other question relates to what you're seeing in Asia. I mean, I understand that prior to this China was a little bit sleepy but because of some cracker outages, I think in Korea, that it's stepped up the opportunities. Do you see those export opportunities diminishing over the second quarter? Or do you -- where do you see the overall demand profile in Asia moving.

I think, generally speaking, second quarter is a strong quarter for Olefins on a global basis. In China now it's just finishing its May 1st holiday period and ethylene price is still quite high. I think polyethylene price may have come down a little bit, but I think the demand that we see is continuing into the second quarter not only in China, but on a global basis. The economy's doing better than the U.S. economy on global basis.

Do you have a sense of how much higher the Asian polyethylene price is versus the U.S.?

Well it depends on the export domestic -- the U.S. price, as you know, we had $0.06 price increase finished and we have another further $0.04 and $0.05 price announcements. So as U.S. price increases, I would think that some of those products will divert into the U.S. market. It'll be probably lesser volume of exports from the U.S.

All right. Thank you, very much.

You're welcome.

Our next question comes from the line of Gregg Goodnight with UBS. Go a head.

Good morning, gentlemen.

Good morning.

Good morning.

You had, in the past, had mentioned that your anticipation for margins on the low density polyethylene business you had acquired from Eastman was going to be about the same as your existing low density polyethylene business. Am I correct on that one?

Yes.

Okay. But in the first quarter, you mentioned the transition services cost. Could you give us an idea of the impact of that cost?

Yes. Gregg, the transition services costs were $4.5 million for the quarter. And we'll begin to phase those out beginning in May. Those costs are the normal transition costs, IT accounting and other administrative costs.

Okay. Very good. And I assume your ethylene acquisition is some sort of market facing agreement so that we wouldn't consider that as abnormal in terms of your impact?

That's right.

Okay. Next question, if I could. Assuming operating rates for the industry were about 89% on a nominal base in the first quarter, how would you put your operating rates, average operating rates for your crackers? Was it above that as normal or below or -- could you give me an idea?

Our crackers have been running on a full capacity basis until the turnaround activity now on our second cracker in Lake Charles.

Okay. So literally 100% for the first quarter?

Right, because, as you know, we are [net buyers] of ethylene so we are producing as much as we can.

Great. Finally, what is your sense of -- I hear what you're saying in terms of demand being good for polyethylene, but what is your sense in terms of pre-buying? How much pre-buying is going on right now a head of the increases? What are the inventories of the customers? Are they restocking? Are they going to load up with inventory just basically to fight off these increases or is that happening a lot in the industry right now?

I think certainly the inventory of customers is quite low since last quarter and people [saw] the price coming down with energy prices and with the winter months being slow months. And now with price increases, now several of them in a period, I'm sure they'll be some pre-buying and customers want to get their inventory back to more normal level.

So would you believe that pre-buying is excessive right now or normal?

I would not say it's excessive. I think inventory of customers getting -- try to get back to more normal levels.

Okay. I guess we'll see in a few months, then. Okay. Hey, thank you, guys.

You're welcome.

Our next question comes from the line of Mike Segall with Deutsche Bank Securities. Go a head.

Yes, good morning. Thank you. After the turnaround is completed in Lake Charles, what will be the rate of capacity?

Rate of capacity --

Of ethylene.

I think 2.5 billion pounds for Lake Charles ethylene capacity.

Okay. And what was it before the turnaround or before the Flex-Feed project?

The (inaudible) before the Feed-Flex will be about 2.4. We add about 100 million pounds with the Feed-Flex Project.

I see. Are there any other incremental debottlenecks you can do there? Or are we pretty much run the course on this?

Well there's no active project that we have now to mention but, as you know, our two ethylene plants are not the newest in the U.S. Certainly, there are rooms for debottleneck.

Right. Okay. Question about the styrene turnaround deferral. Are you sensing improving markets there? I'm just trying to understand the rationale for pushing this into the first half of next year.

Well I think if you don't have to do a turnaround, you want to avoid it. It will cost you money and (inaudible) unabsorbed fixed costs. So when we find that we don't have to do it this year, we'll push next year.

I see. Okay. All right. Thank you.

You're welcome.

(OPERATOR INSTRUCITONS)

And our next question comes from the line of Seth Harvey with UBS. Go a head.

Good morning. I just wanted to kind of find out in the vinyl segment which areas are, I guess, exhibited the best demand growth between, sequentially from the fourth quarter to the first quarter? If you can kind of give us some industry kind of knowledge if you're seeing demand improvement, what segments of the vinyls industry are you seeing the most improvement in? And what's, if anything, are your seeing in the second quarter?

Well I think we're seeing overall improvements in all the vinyl sectors from the resin and fabrication pipe or profiles point of view. As you know, fourth quarter, late in the fourth quarter, was a dramatic drop in demand coupled with slow demand season; winter time, over building inventory for the (inaudible) of hurricanes, the slow down of the housing markets. And so we are seeing in all area of the vinyl business improving volumes for the first quarter.

And if I could just kind of follow-up. Normally we do see a pick up, a normal seasonal pick up between fourth and first. Would you characterize this as more normal or better than normal in terms of seasonal effect?

I think compare with the low volumes we hit in the fourth quarter, it's better than normal. I think people are building. The demand has come back in terms of the seasonal factor. But I think the -- if you're talking about housing returns, as least for what we can see and read, I don't think housing market has returned. It's just people reduced their purchases for quite a while to reduce inventory and then now they have to purchase to have reasonable inventory.

And I guess just another quick follow up. I know you had -- the industry kind of pushed through a price increase in March. Do you think, similar to Gregg's question, do you think that that was the demand pick up that you saw was in anticipation of that price increase?

I think both. Certainly demand has, as I mentioned, increased and the costs of the producers increased both from chlorine as well as from ethylene point of view which are the two [feedstock] to make PVC. So we have -- the industry announced further price increase for April and May.

Thank you.

You're welcome.

Again, ladies and gentlemen, if you would like to ask a question, please press star one. Please stand by for your next question.

Operator, do we have another question?

One moment, sir. Our next question comes from the line of Alex Mitchell with Scopus Asset Management. Go a head.

Good morning. This is Bob Goldberg sitting in for Alex. I was wondering if, and I apologize if I missed this earlier, but I was wondering about the impact from the Eastman acquisition on earnings given the transition costs you mentioned of, I think, $4 million to $5 million. Was the transaction still accretive to earnings in the first quarter? And if not, would you expect it to be a contributor net of the cash interest that you're losing on the second quarter?

Bob, I think we commented that the sales have been very good and strong in the polyethylene area and the primary savings were really in the SG&A area. As you know, we didn't assume any corporate overhead when we acquired the Eastman asset and so it's really just these transition services costs that I mentioned, $4.5 million in the quarter that I mentioned. And those will be phasing out. It has been a good operational asset.

But was the operating income contribution -- I assume it was in excess of the $4.5 million --

Yes, it was. And if you adjust for the $4.5 million, it was a good performing asset. As I mentioned, those transition services costs phase out beginning in May. And certainly they were accretive to earnings.

Okay. And in caustic soda and chlorine, are you seeing any -- I know you don't sell chlorine, but in caustic soda, do you see any push in terms of price momentum there?

Yes. I think there's some price increase announced by the industry for the second quarter.

Okay. So you're seeing that start to flow through. There was nothing in the first quarter, you see it to start flow through in the second quarter?

Yes, we've seen some price increase momentum.

Okay. Great. Thank you.

You're welcome.

And there are no further questions at this time. Mr. Hansen, do you have any closing remarks?

Well we'd like to thank you all for your participation today. And we look forward to having you join us again for our next conference call to discuss our second quarter results. We hope you have a great day. Thank you. very much.

Thank you for participating in today's Westlake Chemical Corporation fourth quarter earnings call. As a reminder, this call will be available for replay beginning an hour after the call has ended, and may be accessed until 1:00 PM Eastern Time on Thursday, May 10th. The replay can 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 replay access code for both numbers is 48629607. Thank you. Have a good day.

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