Westlake Corp (WLK) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Chemical Corporation Second Quarter 2007 Earnings Conference Call.

(OPERATOR INSTRUCTIONS)

As a reminder, ladies and gentlemen, this conference is being recorded today, August 2, 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.

Thank you and good morning, everyone. Thank you for joining us for the Westlake Chemical Corporation second 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 second quarter. Steve will then provide you with a more detailed look at our financial and operating results. Albert will conclude with a discussion of 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 August 9, 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 71372338. Please note that information reported on this call speaks only as of today, August 2, 2007, and therefore you are advised that time-sensitive information may no longer be accurate as of the time of the 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 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 a significant improvement in our results from the first quarter.

In this morning's press release, we reported second quarter earnings of $0.58 per diluted share, which was more than a 90% improvement over the $0.30 per diluted share reported in the first quarter of 2007. Sales for the quarter were $783 million, the highest in our history due to the acquisition of the Longview Polyethylene business late last year.

The improvement we saw in the second quarter for all of our major products was a continuation of the improving trends in the first quarter. Sales volumes remained strong after rebounding in the first quarter from last year's fourth quarter. After implementing a $0.06 per pound price increase for polyethylene in the first quarter, we were able to implement a $0.04 per pound price increase during the second quarter. And in addition, we were also able to implement an additional $0.02 per pound increase for hexene linear low density polyethylene products to cover the rising cost of the co-monomer.

The industry is currently in the process of implementing a $0.05 per pound increase for July and had announced a further $0.04 per pound increase for August 1.

On the PVC resin side, we were able to implement several price increases in the second quarter, totaling $0.06 a pound after implementing a $0.03 per pound increase in the first quarter. In addition, industry has announced a $0.02 per pound price increase for August 1.

We continue to see non-residential construction activity supporting PVC domestic demand and PVC exports remain healthy. However, we remain concerned for the continued weakness in the residential housing market and the impact it is having on the economy and the PVC industry.

In addition, the price increases we have seen for both polyethylene and PVC resin are substantial. Rising feedstock costs have kept overall profit margins well below those of last year.

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

Thank you Albert, and good morning, everyone. As Albert mentioned earlier, Westlake had sales of $783 million in the second quarter, which represents a 17% increase from the $669 million reported in the second quarter of 2006, and is a record sales period for Westlake. This increase was primarily due to the significant increase in polyethylene sales volumes attributable to the Longview facility acquired late last year.

Sales volumes for both olefins and vinyls have been on the increase this year after the significant decrease that had begun in the fourth quarter of 2006. The higher sales were partially offset by lower selling prices for polyethylene, PVC resin and PVC pipe compared to the second quarter of 2006.

Selling prices for both olefins and vinyl products increased this year after a dramatic decrease that had begun in the fourth quarter of 2006. However, they have still not reached the level experienced during the first half of 2006. Selling prices for polyethylene and PVC resin and pipe in the first half of 2006 were still very high after the product shortages caused by the 2 hurricanes in 2005, and were coupled with strong demand.

For the quarter, operating income was $62 million and net income was $38 million or $0.58 per diluted share compared with operating income of $107 million and net income of $67 million, or $1.03 per diluted share in the second quarter of 2006. The decrease was primarily the result of lower average selling prices, and narrowing margins caused by higher feedstock costs for ethane and propane.

The second quarter of 2007 was also negatively impacted by a previously-announced turnaround at one of ethylene units in Lake Charles which was down for approximately 30 days beginning on April 9. During the shutdown, we completed the tie-in portion of our project to upgrade the Feedstock Flexibility of the plant, which also is expected to reduce energy costs and provide additional ethylene capacity. We estimate that the unabsorbed fixed costs and lost opportunity from the shutdown was approximately $20 million on a pre-tax basis, or $0.20 per share.

Additionally, we incurred approximately $1.5 million in transition service costs related to the Longview acquisition. These transition service costs ended during the second quarter. By comparison, the operating income reported in the second quarter of 2006 was one of the highest in the Company's history.

The second quarter results were favorably impacted by the utilization of first-in, first-out FIFO method of inventory accounting, as compared to utilizing last in, first out, or LIFO method used by some companies in the industry. The positive impact resulted from rising feedstock prices during the quarter. We estimate that the positive FIFO impact in the second quarter of 2007 was approximately $12 million after tax, or $0.18 per diluted share. This compares to a $10 million after-tax benefit, or $0.15 per diluted share in the second quarter of 2006. Please bear in mind that the FIFO calculation is on an estimate, is not audited, and is not a GAAP calculation.

The following is a discussion of our sequential operating results for the second quarter versus the first quarter of 2007. Second quarter 2007 sales were 9% higher than the $719 million reported in the first quarter 2007. This increase was primarily due to higher selling prices for polyethylene, caustic, PVC resin, and PVC pipe.

Operating income increased $29 million and net income increased $18 million, or $0.28 per diluted share from the operating income of $33 million, and net income of $20 million, or $0.30 per diluted share reported in the first quarter of 2007. This increase was due to higher selling prices for polyethylene, caustic, PVC resin and pipe; however, was partially offset by higher feedstock costs and the negative impact from the ethylene outage in Lake Charles.

Now, turning to our segment analysis. Income from operations in our olefins segment $43 million in the second quarter of 2007, compared to $62 million in the second quarter of last year. Income from operations were lower primarily due to lower polyethylene selling prices, higher feedstock costs and the negative impact of the ethylene turnaround in Lake Charles to complete the tie-in for the Feedstock Flexibility project. These decreases were partially offset by higher polyethylene sales volumes from our recently-acquired Longview facility.

Second quarter income from operations for olefins was $16 million higher than the $27 million income from operations reported in the first quarter. Polyethylene prices continued to increase in the second quarter, and outpaced rising feedstock costs improving polyethylene margins. The higher polyethylene margins were partially offset by the negative impact of the ethylene turnaround in Lake Charles.

Turning to the vinyl segment; income for operations for our vinyl segment was $21 million in the second quarter compared to $44 million in the second quarter of 2006. The $23 million decrease was due to lower margins resulting from the lower selling prices and higher feedstock costs for both PVC resin and pipe. This decrease was partially offset by higher caustic sale volumes.

Lower PVC pipe sales volumes were offset by higher PVC resin sales volumes. The lower PVC pipe volumes are a reflection of the sluggish residential housing market. We should emphasize, however, that Westlake is somewhat less sensitive to the residential construction in the industry than the industry average. Our PVC pipe product mix is focused more towards large-diameter used in the infrastructure and non-residential construction uses.

Second quarter income from operations for the vinyl segment increased by $13 million from $8 million reported in the first quarter. This increase was primarily due to several PVC resin price increases that were implemented during the quarter, higher caustic prices and higher PVC resin sales volumes, which were partially offset by rising feedstock costs.

Now turning to the balance sheet and summarized statement of cash flow; cash flow from operating activities was $34 million for the first 6 months of 2007 compared to $147 million earned during the same period in 2006. Capital expenditures for the first 6 months of 2007 totaled $50 million. We have also received $8 million to finalize our working capital adjustment for the Longview acquisition.

Our cash balance was $43 million at June 30, 2007, down $10 million since December 31, 2006, which was mostly attributable to capital expenditures and increases in working capital. Our total long term debt at June 30, 2007 was $260 million, and our debt to total capitalization ratio stands at 17% providing considerable financial flexibility going forward.

Now, I'd like to 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 Steve mentioned earlier, we completed tie-in portion of the Feed-Flex project during the second quarter, which will allow us to begin cracking light naphtha when market conditions warrant.

The project is also expected to reduce energy costs and provide additional 100 million pounds of ethylene capacity. The Feedstock Flexibility project will improve our cycle average margins and reduce overall earnings volatility.

Also as mentioned in our last call, a maintenance turnaround at our styrene plant in Lake Charles is planned for early next year. That outage will last approximately 35 days and will include a project to revamp the styrene plant and enhance its energy efficiency.

Now, let us discuss Trinidad. Work continues with the government of the Republic of Trinidad and Tobago to complete a feasibility study for a feedstock advantaged ethane-based ethylene and polyethylene project. We expect to have a definitive decision as to the project's feasibility later this year. Once we complete the feasibility study and finalize the terms of the project agreement, we can begin to work on our project financing arrangements. Once that is complete, construction can begin.

Finally, let us talk about the outlook for the industry. As I mentioned earlier, we continue to see improvements in the second quarter in both olefin and vinyls. We were able to implement price increases for polyethylene and PVC resin during the second quarter, and currently have additional price increase announcements pending for both products. Sales volumes also strengthened for both products and export markets for polyethylene and PVC remain very strong.

The current crude oil to natural gas pricing differential continues to provide the US light feedstock ethylene producers such as ourselves, at an advantaged cost position globally.

While our vinyls business represents about one-third of our total sales, we remain concerned with the continued weakness in the residential housing market and impact it may have on the economy. We are optimistic about strong market conditions that exist in our polyethylene business, in spite of rising feedstock costs.

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 you that number again at the end of the call. Operator, we're now prepared to take questions.

(OPERATOR INSTRUCTIONS).

Kevin McCarthy, Banc of America.

Yes, good morning Albert and Steve; would you provide us with an update on the Trinidad project and include timing, when we should expect capital expenditures to begin, and what kind of feedstock economics you've been able to negotiate there, where that stands?

Yes, as may remember we signed MOU with the Government of Trinidad Tobago in April of last year, and we're working with the Government people on the specific study. We were hoping to complete it by the end of last year, but the work continues, and we are working with the Government of Trinidad Tobago to try to finish the project. We anticipate that the decision will be made some time before the end of this year. And all the projects are in -- all the agreements I should say -- are in discussion .

Okay; if that's the case, should we expect capital expenditures to kick in Albert in the early part of 2008?

Yes, I would think that once the study decision has been made, then we'll go to project financing and then start construction. So I would think it will be some time not in the early part, probably in the middle part of '08.

Okay and shifting gears, you mentioned the strength in the export markets for both polyethylene and PVC resin. How much of your production is being exported, or was being exported in the second quarter? And how might that vary versus last year?

Yes, I think from the polyethylene side, we export I would think still below industry average as we have said in the past. On the PVC side, our export portion is quite small in comparison to industry average because as you know, a great part of our PVC is used internally.

Okay so your comment was more of a general market comment than a factor that's keeping the market tight in supporting your increases?

Yes.

Okay.

Yes, but we have export, of course, both in polyethylene and PVC in this quarter.

I understand; and then finally Albert, your balance sheet is in great shape here. Can you comment on uses of cash flow, and in particular what you might be seeing on the acquisition front in the private market and what we should expect there over the next 6 to 12 months?

Certainly; as we said in the past, our dollars go first into satisfying our capital expenditures, then we'll apply to acquisition like we did with the Eastman acquisition in November of last year. We will then look at dividends as well as pay down debt I think. We have no floating debt, short-term debt to pay. Outstanding or long-term debt then it will be in this quarter.

Okay, thank you very much.

Mark Connelly, Credit Suisse.

Thank you; just 2 questions Albert. First on the commercial construction side, we've been hearing that strip mall telephone utility activity has been good, but the underground activity has been weak, especially in maybe the South and Midwest. I wonder if you could comment on whether that's consistent with your view, and how your large-diameter pipe position is helping or hurting given that outlook.

Yes, I think certainly the large-diameter pipe used for real estate development, for commercial, industrial, and residential as well as for infrastructure needs. So certainly on the residential side, if housing demand is down, land development will slow down, which would impact large-diameter water sewer for land development for residential market.

But so long as industrial, commercial are still progressing well nationwide, the demand for large-diameter pipe should continue. And we believe the infrastructure needs for the US is woefully inadequate and expenditures will continue in that area for large-diameter pipe for the primary uses in PVC pipe for infrastructure improvements.

Okay, that's helpful. Now just one point of clarification. In the commentary you talked about Q2 polyethylene volumes improving sequentially, but in the data table, it looks like a 3% volume decline. If I do the math, it sort of implies that ethylene and styrene were way off. Am I doing this right?

Well, we had some ethylene outages as we mentioned earlier that impacted on the volume. But the volume has been quite well in polyethylene. The styrene has been up and down; I think styrene is also a small part of our business. Primarily it's olefins and, polyethylene and olefins impacted by the outage.

Okay and if I could just squeeze in one last question; the FIFO benefit, could you give us a sense of how much that was on the olefin or on the vinyl side?

We don't break it down between olefins and vinyls. As you know, it only impacts when prices are going up and the second quarter price moved a fair amount over the first quarter, but especially in ethane and propane.

Okay, very helpful; thank you.

Gregg Goodnight, UBS.

Good morning all; when you mentioned your shutdown impact is $20 million pre-tax, how much of that was actually seen in the quarter and how much is spread out due to maintenance accruals and the other? I mean, did the entire amount that you mentioned hit in the quarter?

Yes Gregg, all of that fell in the quarter, so as I say, the unit went down in early April and came back up in May, so it all fell in the quarter.

Okay great; the second question would you comment on what is the demand level you're seeing for your fabricated PVC products, window and door profiles in that side of the business?

Yes, I think that generally speaking, the fabricated products have been impacted by the slowdown in the housing market, and the economy in general. Certainly in the windows business, more than half of our windows business goes through the refurbishment business and less than half goes into the new home construction business, and that has been impacted somewhat. The fins as well has been impacted somewhat and that's actually PVC pipe in general has been, especially the pricing side, has been impacted by the housing slowdown.

Would you give us some sort of sense is it down a third, down a half, down 10%? Could you quantify it just a little more?

Yes, I think it will be more than 10%, less than a third.

Okay good; in your outlook statement, you mentioned that you've seen improvement for both olefins and vinyls in the second quarter, but could you focus on the third quarter. Are you seeing improved olefins and tailing off vinyls, or could you give us a little more color on the third quarter outlook?

Well, if you read all the industry reports, and furthermore, there's a price announcement in both olefins and vinyl, the ethylene, polyethylene businesses are running pretty well. If you read various industry reports, some are saying that third quarter volumes slow down a little bit than the second quarter; some other reports say no, they'll be in line with second quarter.

If you look at export markets in both PVC and polyethylene, the US, the textile price has been higher than US depending on how much of the price increase can be actually fixed, especially August price announcement. So then if the export price and US price are in the same level then the business should be pretty good.

I think generally speaking inventory levels are pretty good, both in the producers and the fabricators level, but we don't see any huge overbuild in inventory, and who knows what impact the weather may have. We don't know; so far, there's no forecast of bad weather coming up.

Okay, yes you mentioned the consultants' reports and one report had suggested the August PVC price increase would be somewhat off an uphill battle. Do you think that's a proper way to typify that?

I think definitely with the push in the energy cost, ethylene prices are up, as you know chlorine prices went up also as a result. So with the cost push, I think the price increase should be quite certain.

Okay, thank you for your help.

David Begleiter, Deutsche.

Good morning; Albert on the pricing issue again, if the August price increase is highly certain, how would you characterize the August PE price increase and could you just confirm that you get the full $0.05 for PE in July? Thank you.

Yes, I think the $0.05 we think is already there, and the August announcement still waits to be seen.

Albert given the $0.05 July increase, have you seen any slowing of export activity?

No, we haven't seen any.

And can you quantify the impact of the Eastman acquisition in the quarter?

It's a big plus.

Has the Eastman profitability been where you expected it to be on their more higher value-added products?

Yes, it's in line with our expectations.

And as we approach the Shintec startup what's your expectation of how the market will react when that capacity comes on stream over the next year?

Not very well.

Any more clarity; what are you expecting?

Well, we don't know the strategy; certainly Shintec has been exporting fin on the PVC historically, and whether they would -- as we've said in the past, they are the biggest PVC producer in the US. So whatever they do, they will impact themselves as well as everybody else.

And PPG has stated that they would sell their (inaudible) assets at the right price. Would that be of interest to you at the right price?

Certainly we will look at opportunities in our core business, which is the vinyls and the chlorine definitely is part of it, as well as in the olefins business. And we will only comment on that after a deal is done.

Thank you very much.

Ed Rodriquez, Goldman Sachs.

Good morning this is [Cosas Carsanos] for Ed. Albert can you please comment on the Chinese PVC export tax rebate reduction and how it will impact US producers in the short term?

Yes, I think as we understand the Chinese Government try to reduce the export of its carbide PVC produced resin. And they have I think also they want to reduce exports, encourage more domestic spending, so they have asked some companies to post the tax rebate and VAT when import resins overseas and they can only get a rebate back after they, they get a certain rebate back after they export. So that discourages export and encourages more domestic consumption. And the fact that if they would prohibit export of carbide (inaudible) resin it should be beneficial to the export business from the US.

Okay thanks; and then going forward, do you see the higher crude oil prices to push flex a producers to crack more ethane, so I think prices are going to be elevated? I mean what's your take going forward with that?

I think certainly any plant, most plants are designed to run certain mix of feedstock, and no plant as it stands in the US can go 100% ethane, 100% naphtha, or gas oil. So to the extent that their plants can allow them to go light, they will go light.

Okay and one last question if I may. Can you elaborate a little on the permit to build a (inaudible -- highly accented question).

Yes, we are currently studying a project to further integrate our (inaudible); as you know, we are producer of about 40% of our own chlorine requirements. And we purchase the rest, we are evaluating various alternatives, including possibly building a new plant.

I appreciate the help.

(OPERATOR INSTRUCTIONS).

Mike Segall, Deutsche Bank Securities.

Yes good morning; I'd like to ask a couple of questions about the Trinidad project. I'm just curious if the escalation in construction materials and just skilled labor that would be required to erect such a project has changed economics materially because I think there's been a long delay now in finalizing this. I'm just wondering if that's been a major factor in that delay.

Certainly we are aware of the inflationary tendency for projects around the globe, both for material and for labor, and certainly the ongoing project in Trinidad has been very sensitive to it, including importing overseas labor to help on the large part in Trinidad. And we are aware of that and we are trying to manage it as best we can.

Right, I mean has it changed the overall scope of the project? I mean, the original size of the cracker and related downstream facilities, I mean is that all still a pretty much fixed number?

Yes, as of now, I think the project, as I say we are well aware of sensitivities and if the project goes ahead, definitely it would be economically viable.

Right, and as far as the ownership structure, any changes contemplated, or are you still staying with the original plan?

Right now, staying with the original plan.

Okay great, thanks very much.

Mike Judd, Greenwich Consultants.

Yes good morning; now that you've made the conversion to your ethylene plant, are you going to be running at with naphtha/ethane split that you indicated before, or are you looking to continue running it with ethane here in the third quarter?

Yes, I think right now ethane is, and for the foreseeable future during this year, ethane is the preferred feedstock, and this is our plan. But we are able to switch back and forth fairly easily. So usually it's the time when natural gas, ethane prices are very high, crude oil or naphtha price comes down, then we can switch back and forth.

But right now for the foreseeable future, ethane is preferred feedstock in the US.

Okay, and then I guess Eastman has indicated that they're going to be shutting down one of their propane crackers at the end of the year. How will that impact how you run next year?

It will have no impact.

Okay thanks.

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

Thank you very much. We appreciate your participation in today's call, and we hope that you will join us again for our next conference call to discuss our third quarter results. Please have a great day.

Thank you for your participation in 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 1:00 p.m. Eastern Time on Thursday, August 9. The replay can be accessed by calling the following number; 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 71372338. Again 71372338.

Ladies and gentlemen, this concludes the presentation. You may now disconnect. Thank you.