Westlake Corp (WLK) 2008 Q3 法說會逐字稿

Good day ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Chemical Corporation Third Quarter 2008 Earnings Conference Call. During the presentation, all participants will be in a 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 November 6, 2008.

I would now like to turn the call over to today's host, Mr. David 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 third quarter conference call. I'm joined today by Albert Chao our President and CEO and 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 third 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 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, 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 market; 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 web page at www.westlake.com.

A replay of today's call will be available beginning one hour after completion of this call until 1:00 pm Eastern Time on November 13, 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 73527705.

Please note that information reported on this call speaks only as of today, November 6, 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 advice you that this conference call is being broadcast live through an internet webcast system that can be accessed on our web page at www.westlake.com.

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

Thank you, Dave. Good morning ladies and gentlemen, and thank you for joining us. The third quarter was characterized by three major events, the two major Hurricanes that hit the Gulf Coast, the global economic deceleration, and extreme volatility in energy and feedstock cost.

Westlake performed well in spite of these events and Steve will discuss the details of Westlake's performance and our strong liquidity position later in discussion. Now, let us talk about the results.

In this morning's press release, we reported third quarter earnings of $0.42 per diluted share, which was down from the $0.59 per diluted share reported in the third quarter of last year, and $0.72 per diluted share reported in the second quarter of 2008. These results include a negative impact of approximately $0.20 per diluted share related to the two hurricanes. Sales for the quarter were $1.1 billion driven by higher product prices in both our Olefins and Vinyls segment. Margins declined in our Olefins segment, but margins improved significantly in our Vinyls segment as compared to last year and over the proceeding quarter.

During August and September, we shutdown our Vinyl facility at our Geismar complex once and our Olefins facilities at our Lake Charles complex twice due to Hurricanes Gustav and Ike. Our damage to facilities was minimal. The lack of electrical power, feedstocks, and other utilities extended the outages.

The Lake Charles facilities were shutdown for about three weeks due to the hurricanes while the Geismar facilities were shutdown for about one-and-half weeks due to Hurricane Gustav. Approximately 70% of US ethylene capacity was shutdown in September, our facilities were some of the first plants up after the two storms due to the hard work of our staff and our various suppliers.

These outages negatively impacted our third quarter earnings due to unabsorbed fixed cost and lower sales volumes. We have estimated the reduction in operating income as a result of these outages was approximately $20 million or $0.20 per diluted share during the quarter. So, if you add the hurricane impact to our reported earnings of $0.42, I believe this was a good quarter for Westlake particularly considering the numerous challenges we faced.

Our Olefins segment began the quarter with strong sales volumes, both domestically and in the export market and implemented a $0.07 a pound price increase, offsetting feedstock costs which had reached unprecedented levels at that time. Late in the quarter, the economic malaise accelerated and energy and feedstock costs begin to fall. Customers slowed their buying patters in anticipation of lower prices due to these steep declines in feedstock costs which further weakened demand.

As an example, ethane price, after reaching almost $1.40 per gallon early in the quarter, fell to $0.80 per gallon by the end of the quarter and continued falling rapidly into October. The significant increases in polyethylene pricing in the third quarter followed the upward trend in feedstock costs early in the quarter; similarly price declined later in the quarter as feedstock fell.

On a vinyls side, we implemented a $0.04 a pound price increases for PVC resin in July, and we're seeing some increases in PVC pipe as well. In spite of this, PVC resin and pipe margin continued to be negatively impacted by the ongoing weakness in the construction markets and instability in the credit and financial markets which is now further compounded with the start of new capacity. Caustic demand strong in the third quarter and prices continued to increase as lower demand for chlorine caused tightness in supply with caustic.

Now, I will like to turn the call over to Steve for a review of our third 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.

Beginning with our consolidated results. We reported operating income of $49 million on sales of $1.1 billion in the third quarter of 2008, as compared to operating income of $74 million on sales of $1.1 billion in the second quarter of 2008. As Albert mentioned earlier, we have estimated that the negative of the outages caused by the two hurricanes was approximately $20 million or $0.20 per diluted share.

Our reported net income in the third quarter 2008 was $27 million or $0.42 per diluted share compared to net income of $47 million or $0.72 per diluted share in the second quarter of 2008. Net income in the second quarter benefited from the reversal of $3 million of tax reserves due to tax settlements.

Now let's talk about FICO accounting. Third quarter results were negatively impacted by the utilization of First In, First Out or FIFO method of inventory accounting as compared to utilizing the Last In, First Out or a LIFO method used by some companies in the industry. The unfavorable impact resulted in the sharp decreases in feedstock during the quarter. We estimate that the unfavorable FIFO impact in the third quarter was approximately $12 million after tax or $0.18 per share. In contrast, the second quarter was favorably impacted by the use of FIFO accounting by the significant increases in feedstock cost that occurred in that quarter. The estimated positive impact in the second quarter was approximately $23 million after tax or $0.36 per share.

Now let's look at the year-to-date results. Operating income for the first nine months of 2008 was $136 million on sales of $3.1 billion as compared to operating income of $155 million on sales of $2.3 billion in the first nine months of the prior year.

Net income for the first nine months of the year was $80 million or $1.23 per diluted share, as compared to net income of $96 million or $1.47 per diluted share last year. Selling, general, and administrative expenses decreased in the first nine months of 2008, as compared to the first nine months of 2007 primarily due the transition cost related to the acquisition of the Longview facilities that we incurred in the first part of 2007 and a decrease in legal fees largely due to a legal settlement in the third quarter of 2007. Interest expenses increased year-over-year due to the issuance of our $250 million tax-exempt bonds last December.

Now turning to our balance sheet, I will highlight a few key items. At the end of the third quarter our long term debt was $516 million which reflects our $250 million tax-exempt bond issued in December of 2007. The balance sheet also reflects a restricted cash balance of $147 million representing moneys in escrow from the unused proceeds of these bonds that will continue to provide the liquidity to fund our various capital projects in Louisiana over the next several.

Our net-debt-to-total capitalization ratio remains low at 20%. Capital spending for the first nine months totaled $143 million and includes the $16 million in capitalized turnaround cost at our styrene facility.

We estimate our capital expenditures for the full year 2008 will be in the $175 million to $200 million range. We have not yet finalized our 2009 capital plan but we will provide guidance when we discuss our fourth quarter results. I'd like to the moment to say a few words about our liquidity.

Now as we all know, these are challenging times, but I want to assure you that Westlake is well positioned financially. In September, we amended our revolving credit facility and increased the lenders' commitment under the long term credit facility from $300 million to $400 million and extended the maturity to 2013. Currently, the revolver is for the most part undrawn.

In addition, we have the proceeds from the tax-exempt bonds of $147 million which will be used to fund capital projects in Louisiana. We also add that the steep declines in raw material cost -- we can expect working capital to decline providing additional liquidity. Thus, the company has ample liquidity and financial flexibility.

Now let me turn to our Olefins segment. We reported operating income of $18 million on sales of $725 million during the third quarter as compared to operating income of $58 million on sales of $766 million reported in the second quarter of 2008. Operating income declined in the third quarter as compared to the second quarter, primarily due to the impact of the outages caused by Hurricanes Gustav and Ike and lower polyethylene sales volume.

The negative hurricane impact of $20 million and the FIFO effects were largely attributable to the Olefins segment. Sales volumes declined due to the two hurricanes and because customer slowed their buying patterns in anticipation of lower prices as feedstock cost began to decline rapidly.

After the two storms and significant declines in feedstock cost, the polyethylene price increases that were implemented during the July-August timeframe were rolled back in September. Trading activity in the third quarter resulted in a loss of $1 million as compared to a $7 million trading loss in the second quarter.

On a year-to-date basis, our Olefins segment reported operating income of $96 million on sales of $2.2 billion as compared to operating income of $127 million on sales of $1.6 billion reported in the first nine months of 2007.

Hurricane outages were the largest single factor that led to the decrease in operating income. In addition, during the first nine months of 2008, we incurred trading losses of $8 million as compared to the trading gains of $6 million last year. While the first nine months of 2008 included the impact of the styrene turnaround and revamp project and the first nine months of 2007 included the impact of the turnaround at one of our ethylene units in Lake Charles, the overall polyethylene and styrene margins increased year over year as selling prices outpaced higher feedstock cost.

Now let me turn to the Vinyls segment. Our Vinyl segment reported operating income of $30 million on sales of $349 million during the third quarter as compared to an operating income of $18 million on sales of $340 million reported in the second quarter of 2008.

PVC resin prices moved up during the third quarter as we were able to implement a $0.04 per pound increase in July. PVC pipe prices moved up in conjunction with PVC resin during the quarter. Margins for these products increased in the third quarter as compared to the second quarter as prices increased while average feedstock cost for propane and ethylene for the period remained relatively flat.

However, PVC resin and pipe sales volumes were lower than the third quarter as compared to the second quarter. Customers slowed their buying patterns anticipating lower prices as the feedstock cost began to fall rapidly in the latter part of the quarter, and the Vinyl segment continued to be negatively impacted by the weakness in the construction markets.

Recent capacity additions and the dysfunctional credit markets have further compounded these problems. Despite all of this, caustic prices continued to rise during the quarter. The weakness in PVC demand has lead to reduced chlorine production, which in turn has caused tightness in supplies for caustic. Caustic contract prices, as reported by CMAI, increased in each of the three months during the third quarter and reached more than $900 per ton by the end of the quarter.

On a year-to-date basis, our Vinyls segment reported operating income of $46 million on sales of $943 million as compare the operating income of $34 million on sales of $772 million reported in the first nine months of 2007. This increase year-over-year is primarily related to the significant increases in caustic prices. In addition, PVC resin prices have outpaced higher raw material cost and our PVC resin sales volumes are higher. These increases are partially offset by lower PVC pipe prices and sales volumes.

Now I will 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 will 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-alkali unit and our PVC resin plant in Calvert City, Kentucky, and a PVC pipe facility in Yucca, Arizona, to serve the western region of the US, a region which we have not actively participated. These projects will add to our Vinyls' integration strategy. Our new large diameter pipe facility located in close proximity to our PVC resin plant in Calvert City started up during the third quarter. The plant has capacity of approximately 50 million pounds a year.

In August, we announced that we will construct a new chlor-alkali plant to be located in our Vinyls complex in Geismar, Louisiana. The new chlor-alkali unit will have annual capacity of approximately 250,000 ECU tons. We will bring our total capacity to 525,000 tons per year. This new plant will allow us to achieve full chlorine integration. The project is currently estimated to cost approximately $250 to $300 million. It is targeted for completion in the first half of 2011 and will be partially funded by the tax-exempt bonds issued in 2007.

Now, I want to talk about the status of our turnarounds. As mentioned in the last call, we now 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 savings capital projects associated with the unit. We will continue to keep you updated on the timing of the turnaround.

Not only -- let's talk about the outlook for the industry. On the Vinyl's front, the financial markets breakdown characterized by instability in the credit market is now affecting virtually every segment of our economy. The seriously troubled residential housing sector along, with a slowdown in other construction markets and a recent startup of new PVC capacity, will continue to negatively impact our Vinyls business for sometime. Compounding this further, the seasonal slowdown months are just ahead of us.

Our caustic sales have proven to be a valuable hedge against a weak vinyls market as reduced chlorine production has tightened the caustic market by fully integrating our chlor-alkali capacity, we expect to significantly strengthen our position in the vinyls marketplace.

Now let's turn to olefins. Polyethylene sales volumes are currently at low levels, as you might expect with the severe drop in energy and feedstocks costs and economic uncertainty. Customers have de-stocked inventories and are buying only what they need while export markets have slowed considerably. Because of the rapid decline in feedstocks costs, current polyethylene margins remain at high levels and customers expect prices to decline further before they resume rebuilding their inventories.

A positive outcome from all of this is that we fully expect our working capital requirements to be reduced significantly. Over the last couple of years, as feedstock costs have climbed, the working capital we have had to maintain reached very high levels. The reduction in working capital will give us additional liquidity in the coming months.

We believe that the cost of almost all of our polyethylene, mainly low density and linear low density goes into consumer non-durable products such as food packaging and trash bags, the demand for our products should be less impacted by the economic slowdown. This being said, an extended US or even broader global recession could have a negative impact on the industry. Over the long-run, however, lower polyethylene prices would stimulate increases in consumption and demand globally.

In response to these market conditions, I want to assure you that we are taking steps that will further re-preserve our financial flexibility. We have a track record of strong financial discipline, and we are cutting costs and reviewing our capital projects throughout the company as we face these economic challenges. At the same time, we are well positioned to look at opportunities to expand our business.

Thank you very much. Now, let me turn it back over to David Hansen.

Thank you, Albert. Before we begin taking questions, let me 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 Dave. (Operator Instructions). And your first question will come from the line of Mark Connelly from Credit Suisse. You may proceed Mark.

Good morning, this is Nils Wallen sitting in for Mark, how are you?

Good morning.

Good morning.

Question about caustic soda pricing, obviously that's a big driver right now in the vinyls chain and the published prices are very high, although some of your competitors put out an ECU netback which is lower than what you typically see by the consultants. Are we just in a lag period or is it out of the price increases that have been nominated just are not going through as much because of contracts and caps and things like that?

We are seeing strong demand for caustic because of the sharp reduction in demand for chlorine which goes into PVC. As a result, we are seeing prices increases and at Westlake, we don't have some of those price caps though we are not affected by those price caps.

Just further then to that, the increase that are there I would assume that -- do you have any sense of what the limit might be for those increases because certainly the end-market that typically take caustic, for example, pulp and paper, aluminum, fibers and things like that are not doing well. There is a lot of production cuts there. Is there -- what's your sense of how much higher these price increases could go before there is some sort of demand destruction?

I don't know that answer. However, we are seeing some import caustic overseas. But overseas wise, chlorine demand has dropped also and overseas caustic prices are very tight as well.

Okay, thanks. And just finally if I may, you have presence out in Asia and a couple different was tightened and also with your PVC units in China. Would you give us a sense of what the trade is like out there with tighter credit, with also obviously tighter letters of credits, has it shutdown, is it just at a much lower level, are people -- are people just waiting for credit conditions to return?

Nils, I think that what we are seeing in the US is happening globally. Furthermore, there is the sharp drop in feedstock cost both from crude oil and from naphtha and ethane and propane. That would cause prices to come down and that the buyers who want to wait until the prices stables. The second part is, with the financial crisis which led to economic recession globally, which cause demand to drop and that affects different products differently in different regions.

So, there is a fair amount of inventory de-stocking going on and people are buying only when they have to. But we believe on, specially on some of the petrochemical products like polyethylene, those are really go with consumers staples. So, there is certain demand in those area so, after the price stabilizes and after the inventory are being de-stocked, there should be some reasonable demand for the products.

Thank you very much.

You are welcome.

Thank you, gentlemen. And the next question will come from the line of Mike Judd from Greenwich. You may proceed, Mike.

Yes. Thanks for taking my question. I am just worried, obviously the conditions are difficult right now but in terms of customer orders and inventory levels and things like that, could you give us a sense of -- I don't know if you guys do a budget or you get together to do some planning for next year, but what is your expectations maybe beyond the fourth quarter, maybe into the first and second quarters of next year?

Yes Mike. Certainly, that we believe that our customers are keeping as low inventory as they can run and some producers are also keeping low inventories. And we are hearing various plant reductions or even shutdowns in our industry.

But looking at the projections, operating rates, certainly in the Vinyls segment, we are heading into the winter season which is traditionally a slower season, but you look at, for example, CDI reports. Their view of quarterly operating rates, we're seeing that -- compared with different products some in fourth quarter operating rates somewhat higher in the third quarter. As you know a large part of third quarter in petrochemical industry on the Gulf coast was affected by the two hurricanes. So, the fourth quarter operating rate is hired than third quarter. In the first quarter '09 some products are higher than the fourth, some are bit lower. But to compare the full year of '09 versus '08 with the estimate for '09 for many of the products are higher operating rates than '08.

So, I think, as these consultants are saying, there will be some inventory adjustment quarter to quarter but barring any huge deep recession globally, that industry will operating [sic] at low but reasonable clip going forward.

Okay. Just separately, do you have an estimate yet of what your capital expenditures will be next year?

No, Mike, we are just in the normal cycle of our budgeting process for 2009 and once we finalize that capital spending program, we'll be announcing that number.

Okay. And then, just lastly, looking at that the balance sheet, I am not sure I saw a lot of granularity on pension, is there any kind of update you can give us on pension in terms of funding levels and what to think about that, in terms of maybe potentially additional needs for cash flow in that direction?

Mike, we look at that on a regular basis and we're adequately funded at this time, but we watch on a regular basis.

Thanks for the help.

You are welcome.

Thank you gentlemen. And, the next question comes from Edlian Rodriguez from Goldman Sachs. You may proceed.

Thank you, good morning guys.

Hello Edlian.

Albert, a quick question for you. I mean, you've noted on the press release and you elicited also that you are looking for opportunities to expand your business, but is there anything outside of the chlor-alkali projects you've announced that excite to our idea that you would want to expand into?

Well, we are releasing vertical integration as well as strengthening our positions in olefins and vinyls market on a global basis. So, we constantly pursue -- review of opportunities and when there is a -- something to report, we will definitely report to you.

But, can you guide us to any, where would you would be interested. I mean, like what businesses? I mean anything else, anything that's out there that gets you excited?

We will wait and see depending on how things go.

Okay. That makes sense. In terms of -- I mean, we've talked about the inventory levels and so forth -- when your guys report to you, like what's the sense of how low the inventory levels are on the consumer side and how quickly will those guys have to come back to the market, if business activity or if feedstock prices stop going down?

That's a good question. I think that the inventory situation has been worked out through other systems, it's not producer only, it's not converter level only, it's not in the warehouses about all the way to the retailers. But when that system goes through which take a couple of months and then, depending on the economy, the demand levels, they will see how much inventory you could maintain. But, I presume if crude oil prices, which drives most of the energy and chemical supply demand in the world, start moving up then people may think that they have to restock again because price is going up.

Okay. Thank you very much.

You are welcome.

Thank you gentlemen. And, your next question will come from the line of David Silver from JP Morgan. You may proceed sir.

Yeah, hi good morning.

Good morning David.

Good morning David.

Couple of questions, I guess, may be I'll ask this to Steve. And this would be kind of may be ask you to comment a little bit on -- you mention the negative effects from the hurricanes on your Geismar and certainly Lake Charles facilities. I am wondering if you notice -- noted or if you could identify hurricane benefit that you enjoyed this quarter related to your Calvert City facilities. I mean, I think it's one of the few integrated PVC caustic units that was unaffected by the significant weather issues in the quarter. So, was there either a volume pickup there or some attractively priced spot business that you were able to exploit as a result of the favorable geography from Calvert City relative to the vast majority of your competitors?

It's hard to quantify that, but being Inland as it was and not being affected by storm surge or by power outages or other issues. Certainly, we were continually able to service our customers. But it's hard to give any quantification to that. And certainly that's one of the benefits being that far removed from weather issues like that, but it's difficult to put a number on that.

Okay. I am going to ask you another question Steve, that's going to be difficult to put a number on. But, you mentioned a negative FIFO effect in the third quarter in the $12 million range and we'll have to see how the fourth quarter goes but if quarter to-date trends persist, I mean I think we're looking at another large negative FIFO effect. Should we be thinking that in the fourth quarter that effect could be greater than the $12 million that you estimated for 3Q?

I wish I had my crystal ball and could gauge where we see prices end the quarter. But I think it is correct to say that with the trend there will be some tendency to see another negative impact, but it's hard to give a specific number, because as I said, we don't know where prices will be. But given where we started the quarter, we'll certainly see that directionally move.

Okay. And then Steve one other question, I am hoping you can help me so. You have an existing chlor-alkali production unit in Calvert City, I think I have it at 205,000 ECUs. And then you are -- you have announced 250,000 ECU grassroots facility in Geismar. I believe you also had a de-bottlenecking underway at Calvert City, could you just remind me the size of that and the timing? Has that been completed, are you running at the higher rate there?

Well, we do expect that to be completed in the first half of 2009 and so that's -- we're not quite there yet, but we do expect that to be completed in the first half of '09.

And can you remind me the size of that, is it 80,000 ECUs or what was that?

This is Albert. Combined with our existing chlor-alkali plants, the expansion will take us to about 275,000 tons -- ECU tons.

Up to 275 okay. Thank you for that. All right, that's it. I will get back in the queue. Appreciate it.

You are welcome.

Thank you gentlemen. [Operator Instructions] And your next question will come from the line of Kevin McCarthy from Banc America Securities. You may proceed sir.

Yes good morning.

Good morning.

Good morning.

In the Vinyls segment, your profit more than doubled year-over-year and despite the FIFO headwind and despite the hurricane effects. So, if you look at that improvement in profitability, how much would you attribute to better caustic soda margins or ECU margins versus other factors?

Kevin, that was probably the single largest driver here. We saw very significant movement in pricing there. And as you know on the integrated chain, that is the performing element in that chain.

Okay. Then shifting gears, Steve, to uses of free cash flow. I was wondering if you could update us on your priorities there and in particular you've been raising the dividend in fairly modest increments since you've become a public company. I was wondering if you could comment on your dividend policy and future opportunities for increases there?

When we look at cash, we certainly look at the range of uses we look at capital spending, acquisition opportunities, and ways which we can increase shareholder value whether it's through dividend or buyback. And so the Board certainly looks at dividends on a regular basis. But as I say, that's the order in which we look at the use of our free cash flow.

Okay. Then finally with the new project that you've announced on the chlor-alkali side at Geismar, how should we think about the project that you had previously announced on the polyethylene side in Trinidad? Is it fair to say that will be a lower priority at this point or a lower probability of proceeding there?

Yes, we are still discussing with the Government of Trinidad and Tobago and when there is news in that front we definitely will report back, but right now there is no change on the status we have reported last time.

Okay. Thank you very much.

You're welcome, sir.

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

Well, we just like to thank everyone for your participation in today's call. We hope that you'll be able to join us for our next conference call to discuss our fourth quarter 2008 results. We wish you a good day. Thank you very much.

Thank you for your participation in today's Westlake Chemical Corporation third 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 Standard Time on Thursday, November 13th. 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 73527705.

And once again, ladies and gentlemen thank you for your participation.