Westlake Corp (WLK) 2008 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 2008 Earnings Conference Call. During the presentation, all participants will be in 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 1st, 2008.

I would now like to turn the call over to your today's host Dave Hansen, Westlake 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 Corporation first quarter conference call.

I am joined today by Albert Chao, our President and CEO; and Steven Bender, our Senior 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 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 the discussions of recent developments, and then we will open up the call to questions.

Today, management is going to discuss certain topics that will contain forward-looking information that is based on management's belief 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 PM Eastern Time on May 8th, 2008. 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 47446557.

Please note that information reported on this call speaks only as of today, May 1st, 2008, and therefore you are advised that time sensitive information may no longer be accurate as of the time of any replay. I would finally advise you that this conference call is being broadcast live through an internet webcast system that can be accessed on our webpage 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. In this morning's press release, we reported first quarter earnings of $0.08 per diluted share, which was down from the $0.30 reported in the first quarter of last year, and also down from the $0.29 reported in the fourth quarter of 2007. However, the fourth quarter benefited from a favorable tax adjustment of $0.12 per share.

Sales for the first quarter were at record high at $915 million, driven by higher product prices in both our Olefins and Vinyls segments. While product prices have moved up, they have not been able to keep pace with the dramatic increases in feedstock costs that we experienced in the fourth quarter. The dramatic rise in feedstock cost slowed somewhat in the first quarter. However, they will likely remain high following crude oil prices, which are now in the $113 a barrel range.

Normal seasonal slowdowns during the winter months, poor conditions in the construction business and a general slowdown in some parts of our economy made it more difficult to pass along these higher feedstock costs over the winter months.

Both polyethylene and PVC resin prices moved up in the first quarter as price increases that went into effect in the fourth quarter were fully realized in the first quarter.

The industry is currently in the process of implementing a $0.06 per pound polyethylene price increase in the April/May timeframe and there was a further $0.05 per pound price increase announced at the end of last year, which has not been implemented yet. A $0.02 per pound increase of PVC in March is still under negotiation and an additional $0.04 increase has been announced for May 1st. While there is no certainty that these increases will be fully realized, we remain optimistic that we will achieve price increases to offset some of the increases in feedstock costs.

Polyethylene prices in Asia continued to increase during the first quarter due to record high naphtha feedstock costs and continuing strong demand. Natural gas-based feedstocks will still remain advantaged of a oil-based feedstock such as naphtha. Thus, North American producers are able to export polyethylene and maintain a reasonably strong supply demand balance in the US.

PVC resin like polyethylene is being exported as naphtha feedstock costs continue to increase. However, domestic demand is down due to the weakness in the housing and construction markets. So the overall supply demand balance for PVC is not nearly as strong as polyethylene.

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. I am going to begin today with a brief discussion of our consolidated financial results. Then I will discuss the results of our FIFO accounting and how that relates to LIFO, followed by a more detailed discussion of our segment results.

Beginning with our consolidated results, we reported operating income of $14 million on sales of $915 million in the first quarter of 2008, as compared to operating income of $20 million on sales of $851 million in the fourth quarter of 2007.

Our net income in the first quarter of 2008 was $5 million or $0.08 per diluted share compared to net income of $19 million or $0.29 per diluted share in the fourth quarter of 2007. The fourth quarter 2007 net income was favorably impacted by a tax benefit of $8 million or $0.12 per diluted share related to the reorganization of several subsidiaries.

Interest expense increased due to the issuance of $250 million of tax exempt bonds in December of 2007.

We incurred three one-time items that unfavorably impacted first quarter operating income by $7 million or $0.07 per diluted share. The first item was the scheduled turnaround of our styrene plant which was down for 45 days during the first quarter. The styrene plant underwent a major maintenance turnaround and revamp project designed to increase energy efficiency and modestly boost capacity.

The increases in plant efficiencies, lower energy cost, and incremental production will add to the overall profitability of the plant, which restarted on April 4th. We estimate that the unabsorbed fixed cost related to this turnaround during the first quarter was approximately $2.6 million.

Additionally, we permanently closed our Pawling, New York fabricated Vinyls product facility to optimize our window and door profiles capacities and consolidating our manufacturing of window and door components to Calgary, Alberta. Asset impairment, severance and other costs recorded in the first quarter of 2008 related to this closure were approximately $2.5 million.

The consolidation of our window and door manufacturing in Calgary will improve our facilities cost position and scale and in addition, we are beginning to source window profiles from our joint venture in Suzhou Huasu, China which will further improve our overall cost position in North America. Lastly, during the quarter we retired approximately $2 million of equipment taken out of service primarily related to turnaround activity.

Now, turning to our balance sheet, I'll highlight a few items. Capital expenditures in the first quarter totaled $43 million and in addition we incurred capitalized turnaround cost at our styrene facility totaling $13 million.

Our long-term debt was $555 million, which reflects our $250 million tax exempt bound issued in December 2007. The balance sheet also reflects the restricted cash balance of $187 million, representing moneys in escrow from the unused proceeds of these bonds that will provide the liquidity to fund our various capital projects in Louisiana over the next several years.

Our net debt to total capitalization ratio still remains low at 20%. I would like to mention that we estimate our capital spending for 2008 will be in the $175 million to $200 million range.

Now let's talk about FIFO accounting. The first quarter results were minimally impacted by the utilization of first-in, first-out or FIFO method of inventory accounting as compared to utilizing the last-in, first-out LIFO method used by some companies in the industry.

In contrast, the fourth quarter 2007 had a positive FIFO impact of approximately $28 million or $0.28 per diluted share, which was the result of sharp increases in feedstock cost during the fourth quarter. The dramatic rise in feedstock cost in the fourth quarter 2007 had a significant impact in the first quarter of 2008 as most of these high feedstock cost incurred in the fourth quarter flowed to our income statement in the first quarter of 2008. Please bear in mind that the FIFO calculation is only an estimate, is not audited, and is not a GAAP calculation.

Let me point out that we did experience margin expansion in the first quarter as compared to the fourth quarter when we removed the effect of FIFO accounting. As I mentioned, the fourth quarter operating income of $20 million was favorably impacted by a $28 million FIFO gain, and an unfavorable $7 million trading loss. In contrast, first quarter operating income was $14 million, which included approximately $7 million in unfavorable one-time adjustments that I mentioned earlier.

Now to our Olefins segment. Our Olefins segment reported operating income of $20 million on record sales of $661 million during the first quarter as compared to operating income of $26 million on sales of $606 million reported in the fourth quarter of 2007. Polyethylene prices moved up in the first quarter as the price increases that went into effect in the fourth quarter were fully realized in the first quarter.

As Albert mentioned, a $0.06 per pound increase that was slated to be implemented during the first quarter has now been moved to the April/May timeframe, and an additional $0.05 per pound increase has been announced. Ethylene feedstock cost leveled off at very high levels in the first quarter. However, propane feedstock costs have increased to unprecedented levels in April.

As we mentioned earlier, because of our FIFO accounting, most of the high priced feedstock costs incurred during the fourth quarter flowed through our income statement in the first quarter of 2008. And despite this sequential increase in polyethylene prices, overall margins were squeezed during the first quarter due to these feedstock costs.

The export demand for polyethylene remained strong and prices moved up during the first quarter as North American gas based ethylene producers continued to have a cost advantage over naphtha producers domestically and abroad. While we have seen some slowdown in North America's polyethylene demand, export opportunities have remained strong.

As I mentioned earlier, the styrene turnaround, which resulted in a 45-day outage during the quarter, impacted our operating income by approximately $2.6 million. The facility went back into operation on April 4th.

Now let me turn to the Vinyls segment. Our Vinyls segment reported an operating loss of $3 million on sales of $254 million during the first quarter as compared to an operating loss of $4 million on sales of $245 million reported in the fourth quarter 2007. The modestly lower operating loss was due to the slight increase in overall margin.

Average PVC resin prices leveled off during the first quarter after implementing two price increases in the fourth quarter. No additional increases have gone into effect during the first quarter. However, we still have $0.02 increase for March under negotiation. In addition, we now have $0.04 increase announced for May 1st.

The seasonal slowdown we normally experience was extended due to the longer winter weather conditions in many parts of the country. PVC pipe operating rates fell to low levels during the first quarter as producers managed inventories while PVC resin operating rates increased somewhat over the fourth quarter.

Consumer inventory levels were low, driven by concerns about construction activity and cash flow management. In spite of this, PVC pipe prices moved up during the first quarter as compared to the fourth quarter.

Sales volumes for PVC pipe did improve in March as compared to January and February and this trend has continued into April as construction activities picked up. The slowdown in demand for PVC has led to reduced demand for chlorine, which in turn has resulted in tight supplies for caustic.

Caustic demand remained strong and prices continue to move up in 2008 with a $50 per ton increase in January, and an additional $75 per ton increase announced for February, which is not settled. Caustic prices are at an all time high and we are currently in the mid $500 per ton range.

Now I would like to turn the call back over to Albert. Albert?

Thanks, Steve. First, let me update you on the status of a number of our strategic initiatives and then we will discuss the outlook for the industry.

As discussed in our last call, work is underway on several profit improving projects in our Vinyls segment, which includes expansion of our chlor-alkali unit and PVC resin plant in Calvert City, Kentucky.

Also under construction is a grass roots large diameter PVC pipe facility which is still seeing good demand located in close proximity to our PVC resin plant in Calvert City and a grass roots PVC pipe facility in Yucca, Arizona that will be ready in 2009 to serve the western region of the US.

Now, I want to talk about the status of our turnaround in our Trinidad project. We have completed the maintenance turnaround and plant upgrades at our styrene plant in Lake Charles. As we said, the facility was down for 45 days during the first quarter and restarted on April 4th. We have estimated that impact of the unabsorbed fixed cost was approximately $2.6 million.

In addition, in our last conference call we mentioned that we will perform a maintenance turnaround at one of our ethylene units in Lake Charles later this year. The turnaround will require a 30-day outage, which will reduce ethylene production by approximately 100 million pounds. We have now scheduled this turnaround to occur in the first half of 2009 to coincide with a number of energy saving projects associated with this unit at a time. As to our Trinidad project, we continue to work on the feasibility study and will update you when more progress is made.

Finally, let's talk about the outlook for the industry. On the Vinyls front, the domestic housing problem continues to be headline news and while only about 20% of our Vinyls products go directly into that sector, it has impacted the whole industry. As mentioned earlier, the normal seasonal slowdown was extended due to poor weather conditions in some parts of the country.

The PVC industry still has a $0.02 per pound price increase for March being negotiated and an additional $0.04 a pound price increase announced for May 1st to help offset feedstock costs. However, we remain cautious about the outlook for the Vinyls in the coming year given the weakened demand and the capacity increases expected to come online.

Now let's turn to Olefins. Elevated crude oil prices and a weaker US dollar continue to give the US gas based ethylene producers a cost advantage, which allows us to export our product and maintain a strong supply demand balance in the US. In light of the higher feedstock costs we are experiencing, we will require price increases to improve the margin deterioration we have had over the last six months. We are optimistic that the current $0.06 per pound price increase will be implemented which will lead to margin expansion. We are concerned however with the impact a potential recession may have on the economy and our ability to raise prices efficiently to counter potential increases in feedstock costs.

Thank you very much. Now, let me turn it back over to David 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 for you at the end of the call. Operator, we are now prepared to take questions.

[OPERATOR INSTRUCTIONS]. And your first question comes from the line of Mark Connelly with Credit Suisse. Please proceed.

Good morning. This is Neil Stein sitting in for Mark. Just briefly I want to make sure I got some of the numbers correct. Is it the FIFO -- FIFO impact was around $0.07 per share, is that correct?

No, no. In the first quarter there was no FIFO impact at all, neither gain nor a loss in the first quarter.

Okay.

And, the number you are referring to I think are the one-time items that we had, which totaled $7.1 million or $0.07.

Okay. Now, with the number of expansions underway on the Vinyls side, how would you characterize the timing of the start-ups with your expectation on the health of the market at that time? That is, would you potentially delay start-up if you felt the market proved more negative than you had expected?

Okay. One other important segment of the Vinyls expansion is our propylene capacity expansion. As you know, we are net buyers of chlorine and today the chlor-alkali business has the bulk of the profit margins in the whole Vinyl's chain and that would definitely help us to increase our profit margin debt sector.

And the second part is we have a PVC expansion, that today we are selling some of our ECN which -- with our expansion we would able to utilize more of the ECM internally, be more fully integrated and likewise our expansions in our PVC pipe facility - one that is right next to our PVC pipe plant in Calvert City which is large diameter pipe I mentioned earlier. And the large diameter pipe is still the best segment in the pipe sector. And the fourth one is our Yucca, Arizona pipe plant expansion. That is - we only serve west of the Rockies'. This is our plant to serve the western part of the US, which have no plants there. And so, we will expand the coverage to really the whole US.

Okay. One last question if I may. Have you been seeing more opportunities for one type of polyethylene resin in the export market, say for example, more interest in low density versus linear low or how is the actual composition of your exports looked in terms of resin?

Well, I think in both sections since Westlake has more - the highest proportion of LDPE; Low Density Polyethylene in the total polyethylene business, we would export more LDPE than linear low. As you know also LDPE commends a higher price and higher margin than linear low domestically and in volume markets.

Thank you very much.

You are welcome.

Your next question comes from the line of Edlain Rodriguez with Goldman Sachs. Please proceed.

Good morning.

Good morning.

Albert, question for you. It appears like your outlook for the Vinyls business is pretty somber. Can you talk about what Westlake can do to absorb higher fixed costs or maintain higher operating rates, because it seems like the construction market is not picking up at all?

Right. Well as I mentioned earlier, we are having various initiatives to; for example, increase our chlorine and chlor-alkali portion of our business to capture the higher profit margin chain. And we will selectively look at which part of the chain that we should emphasize on, whether we sell more pipe or more PVC for export or more large diameter pipe. So, once we are integrated, certainly we have more ability to pick and choose where we are going to run our plans, and thus we feel that we will able to have the higher operating rates than people who are not fully integrated.

Okay, that makes sense. The other question is on polyethylene. Now that you have all those price increases on the table for April and May, are you seeing any signs of re-buying from your customers ahead of those price increases?

I would think that with the high prices, our customers would tend not to buy a lot of inventory. There could be a little bit of pre-buying, but we are seeing a steady demand in the inventory levels and our customer levels being reasonable on the low side.

Okay, thank you.

You are welcome.

And your next question comes from the line of Kevin McCarthy with Banc of America Securities. Please proceed.

Yes, good morning.

Good morning.

Albert, have you seen any product in the Vinyls market from the new Shintech facility in Louisiana yet? And if not, when might you expect that to start-up?

From what we heard their plants have not started yet, it will be sometime in the second quarter -- later on in the second quarter.

Okay. And obviously the dollar has been very weak, and we have been seeing higher export activity in general across the industry. Can you update us on how much of your PVC and polyethylene production Westlake is exporting these days?

Yes, industry wide, I think the polyethylene industry exports close to 20% of its products and Westlake certainly exports much less than that. Historically, we are not a big exporter of products both in the polyethylene and PVC side and I think for PVC, that there is talk for between 10, 15% of industries exports and we also export much less than that.

Has that percent has been trending upwards though over the past year Albert?

Yes, I think the industry in Westlake has increased our export compared with say a year or two years ago.

Yeah, okay. And a final question if I may on PVC, you mentioned that the March proposed increase of $0.02 a pound is still being negotiated. So, as you close your books for the first quarter, I imagine you need to make an assumption as to how much of that $0.02 will stick. Can you help us out with understanding what is embedded in the modest operating loss that you posted for Vinyls in the quarter?

Absolutely. We did not record any increase on the books for first quarter.

Great, thank you very much.

You are welcome.

And your next question comes from the line of Charles Neivert with Morgan Stanley. Please proceed.

Good morning guys.

Good morning.

Quick question, on the ex -- getting back to the exports as you said, you are doing a little bit more of it than you've done. Where would you put the pricing? Not so much the number, but if you look at it against your US sales, would it be at the top end, the bottom end or somewhere close to the bottom? Typically there are some lower end sales. Is this a little bit better than let's say the worst customer sales in the domestic market, say a little bit better for export pricing?

I think generally export pricing has been lower than the domestic pricing, from a FOB US point of view. But I think depending on all the price increases that we announced will go or not, and we think the big part of them will go through, and that will get export pricing very close to domestic pricing.

Okay, good. And the other thing is, we've seen a fairly steep decline in the ethylene pricing since the beginning of the year, I think it was about $1.12 or $1.15 a gallon, it's now right around $0.90, $0.91. Any idea, assuming it was sort of flat from here and ethylene didn't move, what would that likely be worth per pound of ethylene that you are working? I know you don't sell ethylene but, work that through the chain; do you have any -- sort of a quick run as to what that might be worth in the quarter?

Yes, I think every pound of ethylene takes approximately 1.3 pounds of ethylene. And if natural gas, which is a big component of the energy cost to produce ethylene does not change, it's pretty easy figure out what the benefit of the reduction in ethylene price to the ethylene margin.

Okay. So this, again if it goes flat from here, we are going to see a very substantial gain in the ethylene margin so to speak, and assuming all other things being held equal?

That's right. We do buy also -- to make sure you understand, we do buy propane for our Calvert City ethylene plant, which is propane based, and we used a little bit of propane also in Lake Charles.

Okay.

Our second ethylene plant. So, that -- that propane price has gone up, as you know, as we said before.

Just as a follow, in the overall scheme of just the Lake Charles operations and I know it's only one of the two crackers there, but how much propane do you buy for let's say for that cracker in terms of a percentage?

Just the EP, we run the EP feed in our second cracker most of the time.

Is that like an 85:15 type of...

80:20.

80:20, okay.

80 being...

Yeah. Okay, very good, thank you.

You are welcome.

And your next question comes from the line of Gregg Goodnight with UBS. Please proceed.

Good morning all.

Good morning.

Question on exports. Do you have any logistical limitations for exporting and if you don't, what are your current operating rates for both ethylene and polyethylene?

I think the whole industry has seen tightness in the export arena in terms of logistics, whether it's real cost bagging or getting enough container space. I think the fact that US, as I mentioned, the exports increased along with maybe a decrease of imports with the slowed down US economy, but I think that is been worked out as we speak. I think since we are a net buyer of ethylene, our ethylene plants are running at flat out and both on Lake Charles Ethylene plant, as you know are light feed, gas feed crackers - are very competitive compared with the naphtha based ethylene crackers, which has up to $0.10 or $0.20 a pound higher costs as we speak today.

Okay. So, other than propane, you are not running any of your feeds in propane I would assume?

No, even though we do have feed flexibility, we have -- ethylene by far is the better feedstock, propane is next to it, I think naphtha gas is the most expensive feedstock today.

I see, I see. Second question, would you update us on your capacity expansions for chlorine. My understanding is you have both incremental 50,000 ton expansion, and then you are potentially looking at a grass roots expansion, is that correct?

Yes, we have announced the 100 million pound or 50,000 short-term expansion in Calvert City, which we expect to come online in the second half of 2009. And we are studying and planning for a grass roots plant in Louisiana.

Okay. How would you typify the status of that study right now, is this...?

Ongoing.

Okay, ongoing. Any projected timing for that plan?

It will be announced, we would be expecting sometime in the 2010 range.

Okay, excellent. Okay, thank you gentlemen.

You are welcome.

And your next question comes from the line of Dave Silver with JP Morgan. Please proceed.

Yes, hi. I was hoping to go back to the topic of ethane for just a moment. So I guess you rightly pointed out that even though natural gas and crude oil have risen year-to-date, the price of ethane in the US Gulf has declined. Can you maybe just discuss from your purchasers' perspective first maybe why you think that's happened, and second sustainability, and then if there are things you can do either in financial markets or using storage capability to kind of exploit that cost position to the greatest extent?

Certainly. As you know, ethane is derived from natural gas liquids. And so when ethane is taken out of natural gas, they call it [shrinkerage], you have to replenish with additional natural gas to fill up that BTU loss. So typically in the past ethane has been priced on natural gas plus the cost of extraction. But because of the demand for ethane, ethane prices started to couple from natural gas prices and follow the high crude oil price. So ethane was almost twice the BTU value rather than closer to the natural gas BTU value. But since more ethane is produced and from that more natural gas coming out of the Rocky Mountain area, other parts on the Gulf Coast, the supply of ethane has increased, yet the demand -- since there are no new ethylene plants built in the US the demand is more or less maximized. And so, with supply demand out of balance, the price started to drop too. I think it's still much higher than BTU value, but it's a lot closer to it than it was in the fourth quarter let's say of last year or even big part of last year.

Okay. And just a follow-up, from your perspective, what can Westlake do or what strategies or tactics is Westlake using in today's market to exploit that, or are you just kind of playing the market as -- watching the market as it progresses?

Well, we are running as much ethane as possible in our system, mainly in Lake Charles. And hopefully the ethane price will go down further and make the US -- as you know, natural gas to crude oil today is much cheaper in the US and the US does have a competitive advantage over the rest of the world outside of Middle East. And as a result, US is able to compete from exporters of polyethylene or other olefin-derived products for natural gas, those who are gas-based crackers in the US.

Okay, thanks. And if I can just ask you a question about ethylene, polyethylene. I guess you have a couple of arrangements where you have produced ethylene that you use captively to make polyethylene, then you also have a purchasing arrangement with I guess Eastman Chemical. And my impression is for the Eastman portion of your business, that the margins on that portion of your polyethylene business should be relatively stable. So I was wondering A) if that was true or if it's been stable let's say over the last few quarters or year-over-year. And then secondly I was wondering if Eastman's announcement that they were further reducing or taking down another portion of their ethylene capacity at Longview, whether that affects your relationship there. Thank you.

That's a good question, you are welcome. Certainly we are buying ethylene from Eastman and at the market related pricing structure. And there is [Technical Difficulty] ethylene the Longview, Texas facility [Technical Difficulty] the ethylene hub [Technical Difficulty] pipeline to Longview. So whether we buy from Eastman or buy from other ethylene producers in the Gulf Coast, we can deliver all the ethylene we need to Longview and certainly we are buying ethylene at market related prices.

Okay. Thank you very much.

You are welcome.

And your next question comes from the line of Mike Judd with Greenwich Consultants. Please proceed.

Yes, thanks for taking my question. The last piece of the $7.1 million that you were talking about that looks like its one-time in nature, is that $2 million, was that associated with the olefins unit or was that a corporate allocation or if one was going to add it back?

Olefins unit.

Okay. And then, secondly getting back again to this ethane discussion. Your comments are very interesting in the context of ethylene capacity, and North America being fairly static, but I'm curious what your perspective is on ethane prices over the next six months or so related to basically switching out those flexi-crackers, the ones that can crack either propane or ethane or naphtha or gas oil, to the extent that they obviously are moving towards cracking lighter feeds. Won't that greater demand for ethane? And as you think about that, is there a point at which the surplus as you view it now basically gets used up and then there could be a potentiality for higher ethane prices say by mid-year or something or -- what are your thoughts about that please?

That's a good question. Well, there's not a clear view of NYMEX sample on future gas prices, so the ethane future price is not so clear. But as I said, this advantage of ethane over let's say naphtha is not just this quarter, it's been there for quite a while. So whichever flexible crackers -- ethylene crackers in the US that can use ethane would have used ethane to its maximum rate possible. And you've heard some ethylene plants in North America that were based on a smaller higher cost plant base on naphtha has been temporarily shut down or permanently shutdown. Since more gas is produced in the US, gas prices has remained low compared with oil. As a result, more ethane is produced and it is purely a supply demand balance. And as you know, there is some discussion on even ethane content in LNG imported natural gas, it could also supply the US market in the future. So, all these supplies coming on stream with demand more or less being static would give ethane price be more competitive further compared with naphtha based ethylene.

That's very interesting. Just as a follow-on question, I just don't really have a very good sense of how much extra ethane there is relative to current ethylene -- ethane cracking demand. So in terms of the supply and demand relationship right now, and obviously we've seen sequentially a decline from fourth quarter to first quarter in the ethane price, which is obviously helpful. But, with this transition in the different types of crackers operating with different feedstocks, how big is the differential there in terms of supply and demand now, and how do you think it could look a few -- a quarter or two out?

Yeah. There are various companies, which have made sizable investments in the US on adding pipelines, fractionators that will bring more ethane available to the Gulf Coast where the ethane is consumed only for petrochemicals for ethylene production. And because that is being announced, so we definitely feel that with added supply, ethylene should be more competitive. But as I said earlier, I feel the ethane price is still high and still huge margins for ethane producers.

Okay. Thanks for the help.

You are welcome.

[Operator Instructions]. And your next question comes from the line of Roger Spitz with Merrill Lynch. Please proceed.

Thank you, good morning.

Good morning.

What do you think Vinyl's income would have increased in Q1 2008 versus Q4 2007 if Calvert City ethylene margins would have been constant over that period instead of, as I've assumed, having been compressed?

As a result of the rapid run-up in...

Propane.

Propane?

Yeah.

Well, I think when you take a look at the FIFO number that we had from fourth quarter, which really picked up the very rapid run-up in all feedstocks, not only propane but obviously also ethane, there was a meaningful component of that $28 million in the fourth quarter that pertained to the Vinyl's segment that we see flowing through a form of cost of sales. And so it certainly would have improved and did improve the margin in the Vinyl's segment in the first quarter. But it gets masked because of the movement of the FIFO effect in the fourth quarter and the impact on the earnings in the first quarter.

If I may add also, it takes approximately 2.4 pounds of propane to make a pound of ethylene when we are propylene cracking. And since we -- you produce more propylene that is sold already at market price. So from a cost of point view, you can figure out what the price differences in propane and times 2.4 in pounds now, that will be impact.

Okay, thank you. And do you have any VCM export capabilities say in the Geismar or something?

VCM, no Geismar we use all the VCM internally to produce PVC. So we don't export VCM from Geismar.

Okay, thank you.

You are welcome.

And you have a follow-up question from the line of Dave Silver with JP Morgan. Please proceed.

Yeah, hi. I have a couple of follow-ups. First of all, Steve, could you maybe discuss the upcoming turnaround I guess of the ethylene cracker? Do we know the timing of that? And I apologize if I missed this, but I was wondering if you could kind of discuss the duration and the expected effect of that on reported results?

Sure. We've got a turnaround that we've talked about moving probably about a 30-day outage, that would be planned about 100 million pounds, and that will be in the first half of 2009. We talked earlier that that had been planned to be in 2008, I've got to say we've now scheduled that to be in the first half of 2009 and that will be about a 30-day turnaround.

Okay. And what does that change do to your capital budget CapEX projections for this year? Does that push some dollars out of this year into 2009?

It doesn't really have a material impact. As you know, the turnaround capital isn't a sizable portion of the capital spending we had for 2008. The 2008 capital spending plan was $175 million to $200 million. And as Albert mentioned earlier, we have a number of expansions in our vinyls business both in Yucca, and in Calvert City that make up the preponderance of the CapEx this year.

And of that total this year, how much do you think applies to the restricted portion of your cash?

We have about a --- when you think about the categories of our spend, maintenance spend and then kind of what I would call new capital, our maintenance spend on an annual basis is about $60 million. And the bulk of that would be in the Lake Charles area, which would qualify. And then there will certainly be some reasonable spend, the styrene turnaround and some of its capital costs would also qualify, that were spent earlier this past quarter in the first quarter.

Okay. And then just last question I was going to ask about tax accrual rate. It's been kind of a little bouncy from quarter to quarter, but the last couple of quarters it's been in the very low 30s. Is that kind of the right number for projecting forward or is the mid 30s [inaudible]?

This quarter it was a 30% effective tax rate, but it was lower because we had some state tax credits. I would give again guidance on an effective tax rate to be in the 35 to 36% rate, on a cash tax basis still about 30%.

And I'm -- just to clarify 35 to 36 including the first quarter or just moving forward?

No, for the entire year.

For the entire year. Thank you very much.

At this time, the question-and-answer session has now ended. I would like to turn the call over to Mr. Dave Hansen for closing remarks.

Well, thank you very much for joining us for -- with today's call. We hope to have you for our next conference call to discuss our second quarter 2008 results. Have a great day. Thank you.

Thank you for participating in today's Westlake Chemical Corporation first 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, May 8. 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 47446557. Good day.