Westlake Corp (WLK) 2008 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Chemical Corporation's Second Quarter 2008 Earnings Conference Call. (OPERATOR INSTRUCTIONS) As a reminder, ladies and gentlemen, this conference is being recorded today, August 5, 2008. I would now like to turn your call over to today's host, Dave Hansen, Westlake's Senior Vice President of Administration. Sir, you may begin.

Thank you very much and good morning, everyone. Thank you for joining us for the Westlake Chemical Corporation's Second Quarter Conference Call. I'm joined today by Albert Chao, our President and CEO, and our Steve 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 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'll open up the call for 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, energy, 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 p.m. Eastern Time on August 12, 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 52344617.

Please note that information reported on this call speaks only as of today, August 5, 2008, and therefore you are advised that time-sensitive information may no longer be accurate as of the time of the replay. I will 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. In this morning's press release, we reported second quarter earnings of $0.72 per diluted share, which was up from the $0.58 per diluted share reported in the second quarter of last year, and significantly higher than the $0.08 per diluted share reported in the first quarter of 2008. Sales for the quarter were a record high, at $1.1 billion, driven by higher product prices and strong volumes in both our Olefins and Vinyls segments.

Margin improved as recent price increases outpaced higher feedstock costs on higher sales volumes. In the Olefin segment, we implemented polyethylene price increases of $0.06 a pound in the April-May timeframe and an additional $0.05 in June, which improved our margins.

Ethane and propane feedstock costs continued to increase into the third quarter, and to offset these increases, we have implemented a $0.07 per pound polyethylene price increase in July, an additional $0.08 per pound price increase in August, and we have announced a $0.05 per pound increase for September.

We have also announced a fuel surcharge for rail, car, and truck shipments of our chemical products, beginning in September. These fuel surcharges will help us recover increases in transportation costs.

Polyethylene prices in Asia continued to increase during the second quarter due to high naphtha feedstock costs. Natural gas-based feedstocks still remain advantaged over oil-based feedstocks such as naphtha for ethylene producers. Thus, North American producers are continuing to export polyethylene, which helps to maintain a strong supply-demand balance in the US.

On the Vinyls side of the business, PVC resin prices moved up during the second quarter, with a $0.02 per pound price increase implemented in the March-April timeframe, and an additional $0.02 a pound increase in May. In addition, we have also implemented an $0.08 per pound increase for the July-August timeframe.

Caustic demand continues to strengthen, with prices exceeding $600 per ton in the second quarter, and further price increases up to $240 per ton have been announced for the third quarter.

Second quarter PVC resin and pipe sales volumes increased significantly after coming out of seasonal slowdowns and extended winter conditions in some parts of the country and construction activity resumed.

In spite of this, PVC pipe prices have not been able to keep pace with the rising feedstock costs; and the weakness in the housing and construction markets continues to negatively impact the margins in our Vinyls segment.

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

Thank you, Albert, and good morning, everyone. I am going to begin today with a brief discussion of our consolidated financial results, followed by a more detailed discussion of our segment results.

I'll begin with our consolidated results. We reported operating income of $74 million on sales of $1.1 billion in the second quarter of 2008, as compared to operating income of $14 million on sales of $915 million in the first quarter of 2008, which was unfavorably impacted by several one-time items totaling $7 million.

Our net income in the second quarter of 2008 was $47 million, or $0.72 per diluted share, compared to net income of $5 million, or $0.08 per diluted share, in the first quarter of 2008. The net income this quarter benefited from the reversal of $3 million of tax reserves due to tax settlements, which reduced income tax expense and lowered our effective tax rate to 29% for the quarter.

Now, let's look at the year-to-date results. Operating income for the first half of 2008 was $87 million on sales of $2 billion, as compared to operating income of $95 million on sales of $1.5 billion in the first half of the prior year. Net income for the first half of the year was $53 million, or $0.81 per diluted share, as compared to net income of $58 million, or $0.88 per diluted share, last year.

Selling, general, and administrative expenses decreased slightly in the first half of 2008, as compared to the first half of 2007, while interest expense increased year over year due to the issuance of our $250 million of tax-exempt bonds issued in December of last year.

Now, turning to our balance sheet, I'll highlight a few key items. Capital expenditures for the first six months totaled $82 million; and in addition, we incurred capitalized turnaround costs at our styrene facility totaling $16 million.

Our long-term debt was $549 million, which reflects our $250 million tax-exempt bond issued in December 2007. The balance sheet also reflects a restricted cash balance of $146 million, representing monies in escrow from the unused portions of these bonds that will continue to provide the liquidity to fund capital projects in Louisiana over the next several years.

Our net debt to total capitalization ratio still remains low, at 20%. We estimate our capital spending for the full year 2008 will be in the $175 million to $200 million range.

Now, let's talk about FIFO accounting. We utilize FIFO for the first-in, first-out method of inventory accounting, as do many of our public company peers. And therefore, our second quarter operating income benefited from selling inventories that were based on the feedstock costs that were lower than would have been realized had LIFO accounting been utilized. Of course, cash flow from operations is not affected by which inventory accounting method is employed.

Now, turning to our Olefins segment. Our Olefins segment reported operating income of $58 million on sales of $766 million during the second quarter, as compared to operating income of $20 million on sales of $661 million reported in the first quarter of 2008. These results included a $7 million trading loss in the second quarter. This increase is primarily due to higher selling prices and strong volumes for polyethylene and styrene.

Both domestic and import demand remain strong, and we implemented price increases totaling $0.11 per pound in the quarter to pass along increases in feedstock costs and improve margins. We have begun to see improvement in our styrene operations, as styrene prices and margins moved up in the second quarter as compared to the first quarter.

As I mentioned in our last call, we conducted a styrene turnaround and completed a revamp project in the first quarter. The revamp project improved energy efficiency and modestly boosted capacity.

On a year-to-date basis, our Olefin segment reported operating income of $78 million on sales of $1.4 billion, as compared to operating income of $70 million on sales of $1 billion, reported in the first half of 2007. Higher polyethylene and styrene prices, partially offset by higher feedstock costs in the first half of 2008 as compared to the first half of 2007, resulted in higher margins.

The first half of 2008 was negatively impacted by trading activities resulting in a $7 million loss as compared to a $5 million gain in the first half of 2007. The first half of 2008 was also negatively impacted by the styrene turnaround and revamp project, while the first half of 2007 was negatively impacted by a turnaround at one of our ethylene units at Lake Charles, Louisiana.

Now, let me turn to the Vinyls segment. Our Vinyls segment reported operating income of $18 million on sales of $340 million during the second quarter as compared to an operating loss of $3 million on sales of $254 million reported in the first quarter of 2008.

PVC resin prices moved up during the second quarter as we were able to implement a $0.02 per pound increase in the March-April timeframe and an additional $0.02 increase in May.

Our sales volumes for PVC resin increased during the second quarter and we were able to deliver higher margins from our PVC resin sales this quarter. Again, our feedstock costs have continued to rise. We have now implemented an $0.08 per pound increase for the July-August timeframe. We saw a significant increase in PVC pipe sales volumes during the second quarter as the extended winter conditions in many parts of the country subsided.

In spite of strong increases in demand, average PVC pipe selling prices for the quarter declined slightly as compared to the first quarter. The weakness in the domestic housing and construction markets and the effects they are having on the economy continue to negatively impact our PVC pipe business. The weakness in demand for PVC has led to reduced demand for chlorine, which in turn has resulted in tight supplies for caustic.

Caustic prices continued to climb in the second quarter, exceeding $600 per ton. Additional price increases for caustic have been announced for the third quarter, up to $240 per ton.

On a year-to-date basis, our Vinyls segment reported operating income of $15 million on sales of $595 million, as compared to operating income of $29 million on sales of $502 million reported in the first half of 2007. The decrease year over year is primarily due to increases in feedstock costs for the propane and ethylene. While we have seen substantial increases in PVC resin and caustic pricing, PVC pipe prices have not been able to keep pace with increases in feedstock costs.

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

Thanks, Steve. First, let me provide an update on the status of a number of our strategic initiatives and then I'll discuss the outlook for the industry.

As discussed in our last call, work continues on several projects in our Vinyls segment, which includes expansions of our chlor-fluor unit and our PVC resin plant in Calvert City, Kentucky; a large-diameter PVC pipe facility located in close proximity to our PVC resin plant in Calvert City; and a PVC pipe facility in Yucca, Arizona, to serve the Western region of the US, which has not actively participated. These projects will all add to our Vinyls integration strategy.

Now, I want to talk about the status of our turnaround in our Trinidad project. As mentioned in our last call, we plan to perform a maintenance turnaround at one of our ethylene units in Lake Charles in the first half of 2009, which will coincide with a number of energy-saving capital projects associated with units at the time. We'll keep you updated on the timing of the turnaround.

As to our Trinidad project, we continue to study the project 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 and related credit problems are continuing and have had a negative impact on our Vinyls segment, even though only about 20% of our downstream products go directly into that sector. There were some positive signs in the second quarter, with PVC resin price increases and increases in PVC resin and pipe sales volumes.

In addition, the slowdown in demand for PVC has led to reduced demand for chlorine, which in turn has resulted in tight supplies of caustics. The resulting caustics price increases have proved to be a valuable hedge against a weak vinyls market. In spite of these improvements, PVC margins remain under pressure -- we must remain cautious about the outlook for Vinyls in the coming year given the weakened demand and the capacity increases expected to come on line this year.

Now, let's turn to Olefins. While there are risks that high crude oil prices, compounded with housing and credit problems in the US, may hamper US polyethylene industries' ability to raise prices sufficiently to offset rising feedstock costs, we continue to see strong domestic and export demand. As a result of the continuing rising feedstock prices, we implemented a $0.07 per pound price increase in July, an $0.08 a pound increase in August, and have announced an additional $0.05 a pound increase for September, along with a fuel surcharge effective September 1 for our chemical products.

As naphtha-based ethylene producers around the world continue to set the floor price for polyethylene, high crude oil prices and a weaker US dollar continue to give US gas-based ethylene producers such as ours a cost advantage, which will continue to provide an export market while keeping the supply-demand balance in the US strong.

In conclusion, we continue to focus on energy efficiency, low-cost incremental capacity expansions, a favorable feedstock profile, and enhanced integration, which will position the Company well when economic conditions improve.

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.

Thank you. (OPERATOR INSTRUCTIONS) Your first question comes from the line of Kevin McCarthy with Bank of America Securities. Please proceed.

Yes, good morning. The volume numbers on PVC resin, at least for the segment, came in fairly strong at positive 12.5%. I was wondering if you could comment on your utilization rate in that business and whether or not you feel as though you gained any market share from competitors.

Our second quarter was a strong volume quarter for the Vinyls business and we've been running at our operating rate somewhat higher than what we read the industry reported from various trade journals. And we participate also somewhat in the export market, even though at a somewhat lower rate than industry average.

Albert, do you believe that second quarter volumes benefited at all from the late winter and perhaps deferral of business from 1Q?

Definitely, yes. The 1Q was a very slow one because of bad weather and seasonal slowdown. And we have really improved second quarter.

Okay. Then, on the ethylene side -- feedstocks, as of yesterday anyway, looked like they were actually down versus June 30 levels for ethane and propane. Can you comment on the realizations of the announcements that you made? In other words, are all $0.07 in for July; and what's your expectation for August on an industry-wide basis?

Yes, I think some of the trade journals reported that the $0.07 is, in July, the third quarter number; we have implemented $0.08 as well. As you know, the feedstock volatility has been quite difficult to predict, and it takes time to implement price increases in the PE business. So I think the $0.08 announcement is in line with the recent price increase we've seen in the ethane and propane costs.

Okay, great. And then finally, if I may, for Steve -- what was the magnitude of the FIFO accounting-related benefit in the quarter, please?

Yes, I would estimate the effect to be somewhere in the range of $0.33 to $0.36.

Okay; thank you very much.

Your next question comes from the line of Mark Connelly with Credit Suisse. Please proceed.

Good morning. This is actually Nils Walin, sitting in for Mark.

Good morning.

I also had a question on volume, mainly on the Olefins business. It seems like you had substantial acceleration, both on a year-over-year and a sequential basis, in terms of growth that was much better than some of what your competitors had reported. To what would you attribute these results?

I think both a strong demand in domestic and export markets for the industry and for Westlake. And possibly with the price increase announced, some customers could be buying a bit more than usual.

Would you say-- would it be a fair assessment to say that because you're more heavily weighted toward the lighter feedstocks relative to some of your competitors who are on the Gulf Coast who are more flexible, that you had the opportunity to offer competitive volumes?

I can't say about our competitors. Certainly, as you know, our ethylene crackers are light feed, namely, ethane and propane crackers. So yes, we are more competitive than naphtha crackers. As to how they operate their ethylene-polyethylene plants, I do not know.

All right. Just one final question, if I may. I mean, from everything we're hearing and reading, it sounds like the commercial construction market is pretty anemic and might get worse. Plus municipal spending on infrastructure is drying up -- certainly projects that were already in the pipeline are happening. What is your view right now on the marketplace for commercial construction, for municipal infrastructure, and particularly large-diameter pipe?

Yes, we are concerned, in general, with the construction. As you know, residential construction has been slow, and the commercial-industrial construction has been stronger, definitely, than the residential side. But we are concerned about the economy in general, and the tax revenue receipts by the municipalities. But I will say that our large-diameter pipe demand is better than the small-diameter pipe demand.

Thank you very much.

You're welcome.

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

Yes; thanks for taking my question. Just a quick one -- how much of the Vinyls profits in the quarter-- how much of that was the chlor-alkali piece, please?

We have about 225,000 short tons of ECU capacity, and you can figure out what that capacity would contribute in earnings.

Any more specific percentages or anything like that that you could help us out with?

Mike, we just don't break out that number at that level of detail.

Thanks for the help.

But with the transparency in the business and the volume and the price, I think you can kind of get to that number.

Okay, thanks.

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

Good morning, all.

Good morning.

Good morning.

A question on your large-diameter pipe facility -- what is your anticipated startup timing of that plant? And if I remember, that's a 50 million pound-a-year plant; when would you anticipate that plant getting up to reasonably full rates?

We are in the process of starting that plant up as we speak. And depending on the market dynamics, we hope we'll be running at full rate as soon as possible.

Okay. So in your last question, I guess, you said that the large-diameter pipe marketplace is still pretty strong. That's correct?

Yes.

Yes.

Okay. Now, another response that you had -- you said that the $0.07 July increase for polyethylene was reported to be in the marketplace by some of the consultants. In my own checking, that is not generally understood to be 100% in place by many market participants. Is that your own view also, that the $0.07 is in place, or is that just what the consultants have reported?

Well, as you know, in our industry, as I mentioned earlier, there are various pricing announcements and price protections. So from that sense, it is that various people have different deals coming in place at different times. But in general, I think the $0.07 has been implemented.

Okay. The large customers -- have they taken the whole $0.07?

That's what I said.

Okay. Thank you for your help.

You're welcome.

Your next question comes from the line of James Sheehan with Deutsche Bank. Please proceed.

Yes, hi. Could you quantify how much the fuel surcharges will be come September?

The fuel charge, I think right now, is about $570 per hopper car, which is about approximately $0.003 a pound of product.

Okay. And could you also give us a little color on the $7 million trading loss -- what is that comprised of?

Well, we typically go out and manage our feedstock. And certainly as the volatility of these markets swings up and down, that's simply just the mark-to-market of those transactions that we use to hedge that are entertained; transaction to hedge that feedstock.

Okay. And then finally, on the PVC pipe volume increase that you saw -- does that reflect normal seasonality or would you say it was up higher than a normal quarter-on-quarter increase?

It does reflect normal seasonality. If you take the first quarter and second quarter combined, it then becomes more normal. The first quarter was abnormally slow.

Okay; thank you very much.

You're welcome.

Your next question comes from the line of David Silver with JP Morgan. Please proceed.

Yes, hi; good morning.

Good morning.

I have a couple of questions -- a little bit scattered. I'd like to follow up on Mike Judd's question, I think, about caustics. My notes are a little scratchy but Steve, can you confirm -- did you indicate that your caustic realizations were north of $600 for the quarter, or were you kind of quoting the benchmark numbers in the back of your release?

Those are benchmark numbers.

Okay. All right. And then, I was wondering if you could just clarify kind of the level of export activity in the shipment numbers you reported? So you mentioned it was a little stronger in polyethylene and you're below the market averages in vinyls. But I mean over all, was this a period where Westlake was able to access the export markets proportionately greater than you normally do?

We export both polyethylene and PVC, but generally, at a much lower rate than industry average.

And that was consistent for the quarter as well?

Yes.

That's right.

Okay, so not an unusual amount from your normal business flow.

No.

No.

Okay. And then within Vinyls, I was interested if you could add a little more color, maybe, into the end markets for your downstream fabrication business. So we know certain parts of the market are certainly soft, but you did record some very nice volume gains, even on a year-over-year basis. So I was wondering -- are there certain segments -- for instance, is it repair and remodeling, or is it the municipal business? I mean, where were you able to grow your volumes within the fabricated products market?

Yes -- our fabricated products market consists mainly of PVC pipe; that's the majority of our business. We do have a windows and fence and decking business, which are much smaller than pipe. And pipe, we generally serve the non-residential side. The residential side of small diameter pipe is about 20% of our pipe business. So we go to the water and sewer market, generally.

Okay. Last question -- Albert, you do have an operation in China and you do get a little bit of a snapshot of what's going on there. There's been some talk that maybe there is a slowdown in economic activity in that region, or in that country. From your take on things, how would you describe the demand, over all, for vinyl and polyethylene in Asia -- the part of it that you see?

Yes. From what I understand, the economy is still pretty strong in China. Demand for polyethylene imports is still strong. Our PVC joint venture we have consists of PVC resin and PVC fabricated film business, mainly, and the businesses are doing okay. I think the film business has seen some slowdown for export because of the slowdown in US and other foreign developed markets. But generally speaking, the economy is still going pretty strong.

Would you say that the Olympics or decisions that the government has made regarding the Olympics -- has it had a noticeable effect, and would you expect activity to rebound after that event?

Yes, we heard that-- as you know, China's a large country. The northern markets, near Beijing, some of those fabricated plants have either slowed down or shut down. So the demand for plastics, resins, has slowed down somewhat in the northern part. But in the rest of the country, I think business goes on. And China, as you know, has tried to slow down its export business by withdrawing some of the subsidies and refunds, rebates, on VAT. So it has had some effect on the export market as well.

Thank you very much.

You're welcome.

(OPERATOR INSTRUCTIONS)

Ladies and gentlemen, we thank you very much for joining us today in our conference call. We hope you will join us again for our next conference call to discuss our third quarter results. Have a great day.

Thank you for participating in today's Westlake Chemical Corporation Second 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 p.m. Eastern Standard Time on Tuesday, August 12. 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 access code at both numbers is 52344617.

Thank you for your participation. You may now disconnect, and have a good day.