Westlake Corp (WLK) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Chemical Corporation fourth 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, February 18th, 2009. I would now like to turn the call over to today's host, Dave Hansen, Westlake's Senior Vice President of Administration. Sir, you may begin.

Thank you very much. Good morning, everyone.

Thank you for joining us for the Westlake Chemical Corporation fourth quarter conference call. I am 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 fourth 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 the call for questions.

Today management is going to discuss certain topics that will contain forward -looking information that's based upon 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 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 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 February 25th, 2009. 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 617-801-6688. The access code for both numbers is 21627930. Please note that information reported on this call speaks only as of today, February 18th, 2009, 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 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 fourth quarter was categorized by two major factors. Olefin prices, which were let down by falling energy and feedstock costs and low operating rates that came about as a result of poor economic conditions and the turmoil in the financial sector. In this morning's press release, we reported the fourth quarter loss of $1.68 per diluted share as compared to earnings of $0.29 per diluted share in the fourth quarter of 2007 and $0.42 per diluted share in the third quarter of 2008. Sales for the quarter were $597 million, which were down due to rapidly falling product prices, and lower sales volumes.

Energy and feedstock costs fell dramatically during the third quarter, reflecting the weak global economic conditions, which in turn resulted in falling prices for polyethylene and PVC resin and pipe. The operating loss in the fourth quarter was due to falling sales prices, and significantly lower volumes with very high feedstock costs, lowering through cost of sales as a result of utilization of FIFO inventory accounting. In addition, due to the poor economic conditions and falling prices, customers stay stocked inventory and we reduced production to match the lower orders in an effort to manage our inventories. We estimate that the fourth quarter was negatively impacted by $168 million on a pretax basis due to inventory losses and unabsorbed fixed manufacturing costs.

Ethane, which is one of our key ethylene feedstocks, had reached as high as $1.40 per gallon during the third quarter of last year. We are selling in the range of $0.80 per gallon at the end of the third quarter of last year and during the fourth quarter of last year, ethane fell below $0.35 per gallon and continue to be below $0.40 per gallon today. Industry polyethylene prices declined $0.41 per pound in the fourth quarter of last year, an unprecedented drop in prices for one quarter.

Customers' buying patterns slowed down dramatically as they waited for some pricing stability to take hold. Due to the weakened demand, we idled one of our ethylene units in Lake Charles in December, lowered operating rates at some of our derivative units and accelerated a scheduled maintenance turn around which was originally planned for the second quarter of 2009. The ethylene unit is expected to resume operations in the first quarter of this year.

On the Vinyls side, PVC resin prices declined $0.20 per pound in the last quarter. Also an unprecedented drop. PVC pipe prices follow the same pattern as PVC resin. In addition to normal seasonal flowdowns for PVC resin and pipe, customers further slowed buying patterns to manage their inventories in the face of falling prices. PVC resin and pipe margins continue to be negatively impacted by the ongoing weakness in the construction markets, and instability in the credit and the financial markets.

Caustic pricing, which has been very strong all year last year remained high, however, they finally see some reduction late in the fourth quarter due to the extremely weak economic conditions at that time. In spite of these poor operating conditions we experienced in the fourth quarter, our cash flow for the quarter was strong, and we are well positioned financially, which Steve will discuss in more detail later. We do expect to see some demand improvement in the first quarter of 2009, with a very low inventory in our industry.

We have announced price increases for the first quarter in both the Olefins and the Vinyls segments. With this being said, we are still not running our business at capacity rates, and are taking prudent actions accordingly.

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

Thank you, Albert. And good morning, everyone. I'm going to review the 2008 consolidated results in a moment, but there are three things I would like you to take away from our discussion this morning.

First, the financial results were very disappointing and reflected demand deterioration in global markets and the turmoil in the financial sector. Second we have good cash flows in our business and a strong balance sheet with no debt maturities until 2016 and no borrowings under our credit facility. Third, we have taken and will continue to take actions to reduce our costs during this economic downturn and we continue to pursue our long-term strategies. With that framework in mind, I will begin by looking back at 2008.

In the first half of 2008, we experienced a significant run up in energy and feedstock costs and just as raw material costs had begun to decline as we started the third quarter, the Gulf Coast was struck with two hurricanes, which disrupted much of North American capacity. The second half of the year saw financial markets unravel, and unprecedented destocking by customers that carried through to the end of 2008. This is reflected in the financial results reported in the the fourth quarter.

Now, let me review our consolidated results. We reported an operating loss of $166 million on sales of $597 million in the fourth quarter of 2008, as compared to operating income of $49 million on sales of $1.1 billion in the third quarter of 2008. As Albert mentioned earlier, the fourth quarter operating losses were negatively impacted by approximately $168 million, resulting from inventory losses and the expensing of unabsorbed fixed manufacturing costs. The inventory losses are a result of using the FIFO inventory method of accounting. Selling, general and administrative expenses increased in the fourth quarter, primarily due to a $9 million increase in the allowance for doubtful accounts which is directly relatable to the economic conditions currently. Reported net loss in the fourth quarter of 2008 was $110 million or $1.68 per diluted share compared to net income of $27 million or $0.42 per diluted share in the third quarter of 2008. As previously reported, the third quarter 2008 operating income was negatively impacted by outages caused by hurricanes Gustav and Ike by approximately $20 million or $0.20 per diluted share.

Now, let's look at the full year results. The operating loss for 2008 was $30 million, on sales of $3.7 billion, as compared to operating income of $1.75 million on sales of $3.2 billion in the prior year. Net loss for 2008 was $30 million, or $0.45 per diluted share as compared to net income of $115 million or $1.76 per diluted share in 2007. The losses for the year were all attributable to the inventory losses sustained in the fourth quarter.

Selling, general and administrative expenses increased over the prior year due to an $11 million increase in the allowance for doubtful accounts which was partially offset by the long view transition cost and a decrease in legal fees. Interest expense increased year-over-year, due to the issuance of our $250 million tax exempt bonds in December of 2007. Westlake continues to be well positioned financially in spite of these challenging times.

In September 2008, we up sized our revolving credit facility, increasing commitments under the long-term credit facility from $300 million to $400 million, and extended the maturities to 2013. Currently the revolver is undrawn and we have approximately $225 million in cash, which includes the remaining $134 million in proceeds from the tax exempt bonds which will be used to fund maintenance and other capital projects in Louisiana.

With the reduction of raw materials costs and reduced selling prices, our working capital requirements have been greatly reduced. Our working capital, excluding cash, decreased $197 million during the fourth quarter. So, as you can see, the Company has good liquidity and the necessary financial flexibility for the foreseeable future.

Now, turning to capital expenditures in our balance sheet, I will highlight a few key items. Capital expending for the year totaled $173 million, and in addition, we incurred $16 million in capitalized turn around costs at our styrene facility. At the end of the year, our long-term debt was $510 million. Westlake has no debt maturities until 2016s and no borrowings under the revolver. Our net debt to total capitalization ratio still remains low at 19%. So, expect us to maintain our focus on generating cash, pushing productivity throughout 2009, just as we did in 2008. Protecting the balance sheet and maintaining our financial flexibility will continue to be key objectives for us in 2009.

Now, let me turn to our Olefins segment. We reported an operating loss of $136 million on sales of $396 million during the fourth quarter, as compared to operating income of $18 million on sales of $725 million reported in the third quarter of 2008. The operating loss in the fourth quarter was due to falling sales prices and significantly lower volumes with very high feedstock prices flowing through cost of sales as a out of the utilization of FIFO inventory accounting.

Polyethylene prices fell by $0.41 per pound during the quarter, and most of the olefins facilities operated at reduced rates with one of the ethylene units undergoing a turn around that started in December. Operating income in the third quarter of 2008 was negatively impacted by outages caused by hurricanes Gustav and Ike and the lower polyethylene sales volumes. Sales volumes had already begun to decline in the third quarter in response to falling feedstock costs and weakening economic conditions, in addition to the impact from the hurricanes.

For the full year, our Olefins segment reported an operating loss of $40 million on sales of $2.5 billion, as compared to operating income of $153 million on sales of $2.2 billion reported in 2007. This decrease was primarily due to the inventory losses sustained in the fourth quarter 2008.

In addition, 2008 earnings were negatively impacted by approximately $20 million, due to the outages caused by the hurricanes and trading losses of $9 million, as compared to a trading loss of $1 million in 2007. Through the first half of 2008, the Olefins segment benefits from strong demand due to a strong export market and balanced industry supply and demand fundamentals. The 2008 full year results include the impact of the styrene turn around and revamp project and the 2007 results include the impact of the turn around at one of our ethylene units in Lake Charles.

Now, let me turn to the Vinyl segment. Our Vinyl segment reported an operating loss of $28 million on sales of $201 million during the fourth quarter, as compared to operating income of $30 million on sales of $349 million reported in the third quarter of 2008. The operating loss was primarily due to sharply reduced product prices, with high feedstock costs flowing through cost of sales resulting from our use of FIFO inventory accounting. Industry PVC prices fell by $0.20 per pound during the quarter and PVC pipe prices followed this trend.

In addition, most of our vinyl facilities reduced operating rates during the fourth quarter to manage inventories. Caustic profitability remained strong despite reduction in price late in the fourth quarter. For full year, the Vinyl segment reported operating income of $18 million on sales of $1.1 billion as compared to operating income of $30 million on sales of $1 billion reported in 2007. This decrease year-over-year is primarily the result of inventory losses in the fourth quarter. Even though caustic prices were higher in 2008, as compared to 2007, they were offset by lower PVC pipe sales volumes and margins. The Vinyls business continues to be negatively impacted by the ongoing weak economic conditions and the instability in the credit and the financial markets. We have taken a range of actions to reduce our costs and we are continuing in these efforts so that we can maintain our competitiveness and pursue our long-term strategies.

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 initiative and then I will discuss the outlook for our industry. Our chlor-alkali expansion in Calvert City was completed in the fourth quarter, and has added 50,000ECU tons of end use capacity. Our PVC resin plant expansion, also in Calvert City was completed in the first quarter of this year, increasing capacity by 300 million pounds per year. In addition, we have completed our first -- our new PVC pipe plant in Yucca, Arizona, this quarter, which will produce pipe for water, sewer, irrigation and related industrial and residential markets in the western United States, a region which we have not actively participated in the past. Our Geismar (inaudible) project is continuing.

Now I want to talk about the status of our turn around. The planned maintenance turn around at one of the ethylene units in Lake Charles is currently underway and it's expected to be completed in this quarter. In addition to the maintenance work, several energy-saving capital projects are underway at the facility. No other major maintenance turn around are scheduled for 2009.

Finally, let's talk about the outlook for the industry. The Vinyls industry continues to be negatively impacted by weak construction markets compounded by the financial and the credit crisis, and the general health of the economy. In spite of these weak economic conditions, our Vinyl segment reported positive operating income to 2008, in part due to the strength of our caustic profitability which is now benefiting from the expansion completed in the fourth quarter of last year. We are seeing some signs of improvement in January after a dismal fourth quarter. The industry has announced a PVC resin price increase of $0.05 per pound for February 1st and we are hopeful that customers will begin restocking inventories. Some elements of our new government stimulus package are aimed directly at infrastructure, housing, and energy efficiency. So we remain guardedly optimistic about the outlook for the latter part of 2009, and beyond.

As to Olefins; as we have discussed, polyethylene sales volumes slowed to very low levels in the fourth quarter as customers destocked inventories waiting for some pricing stability. Currently, energy and feedstock costs appear to have leveled off and we expect to see some increases in demand of our Olefins products as inventory levels throughout the chain replenish. The industry currently has several price increases announced -- $0.07 a pound for January 1st, $0.05 a pound for February 1st, and an additional $0.06 per pound for March 1st. The $0.07 increase has been implemented, which is an encouraging sign.

A significant portion of our polyethylene is sold in food packaging and other consumer non-durable markets, and the underlying volume in those segments tends to be more resilient. We believe the possibility exists for restocking to begin going forward; however, we are prepared for difficult economic conditions to persist throughout 2009.

Currently, US gas-based ethylene producers have a cost advantage over naphtha based ethylene producers throughout the world which should open up export markets as it did in first half of 2008 and set a reasonable floor price for polyethylene.

In spite of these positive signs, it is unclear how severe and for how long this global recession will impact the US economy and our business. In response to these uncertain market conditions, I want to assure you again that we are taking steps to preserve our financial flexibility. We have taken a rigorous study of our cost structure with the objective of reducing any unnecessary spending, both at an operational and at a sales, general and expenses levels and have curtailed our planned capital expenditures. The capital expending for 2009 is now expected to be approximately $100 million to $150 million including a portion of our chlor-alkali expansion project. We have a track record of strong financial discipline and are committed to maintaining financial flexibility and position ourselves to expand our business as opportunities present themselves during these challenging times.

Thank you very much. Let me turn it back over to Dave Hansen.

Thank you, Albert. Before we begin taking questions, I would like to remind you that a replay of this teleconference will be available starting an hour after we conclude the call. We will provide that number again at the end of the call. Operator, we're now prepared to take questions.

(Operator instructions). All questions must be submitted at this time for your question to be registered. We will pause for a moment to compile a list of questions. Your first question comes from the line of Roger Smith of Bank of America.

Hi. Thank you very much.

Just on the FIFO losses and the planned overhead expenses in the Olefins and Vinyls, is it possible to break it down between the two, meaning how much was FIFO and how much was unabsorbed plant overhead expense for each of those two segments.

Yes. Good morning, Roger.

How are you?

I'm fine. How are you?

Good.

Let me break it down for you. As I mentioned, we had $168 million in total, and in the Olefins group, that total was $105 million, broken out as $86 million of inventory related losses, and $19 million of unabsorbed fixed costs nd in the Vinyls, the total was $63 million with $41 million related to inventory losses and $22 million related to fixed costs. All totaling $168 million.

Great. And of that amount that was the FIFO inventory, was that all for inventory that was sold during Q4, or was any of that related to a write-down on December 31st for inventory that has not yet been sold as of December 31st.

No, all related to sales in the fourth quarter.

Great. And how would you characterize North American industry caustic and client demand so far into this year and what have client caustic pricing been doing into this year, say January or first bit of February?

Yes, as we said, caustic prices have reached, I think, historical high sometime in October of last year. And with the slowdown in the economy, the fourth quarter, the demand of caustic has slowed down somewhat and as a result, the caustic price has come down a little, and as reported in many industry trades, that caustic demand has picked up again in the fourth quart -- in the first quarter of this year, but prices -- the forecast prices once more caustic is coming down some what this year.

Okay. Do you share their view? I mean, there are some people where they are thinking ECU -- caustic and ECU realizations may come down fairly hard over the course of 2009 and 2010 and some are more moderate. Do you have a particular view on that industry question?

As the economy -- the housing market does improve, then chlorine demand will go up, and caustic price commercially will come down, because there will be more supply of caustic available. The reason for such a high caustic price we had last year, because the demand for chlorine was down so much that caustic plant production has come down a lot, which limited the supply of caustic to the market. And the demand for caustics come down with the general economy, and finally, the caustic demand supplies a kind of balance and maybe on the long side, the caustic price come down somewhat, but I think ECU is still very high level and the projection by industry analysts is that ECU come down somewhat. I don't know how severe it will come down, but we don't belive it will come down severely this year.

The next question comes from the line of Kevin MacKathy of Banc of America Securities.

Yes, good morning.

Good morning.

Albert, you mentioned that you expect better demand in the first quarter. What gives you confidence that that will be the case and maybe you can elaborate a bit and also comment on what kind of operating rates you are experiencing in your system for January and the first half of February versus what you saw in the fourth quarter.

Sure. I think the fourth quarter, especially November and December, the operating rates were dismal. And the demand was very, very low and people have to cut back production. You have read and heard of various industry members, how much has come down. We see and report in the journals also that demand has come back; as a result, we are able to pass the $0.07 price increase of polyethylene, and further announcements in PVC as well, an announcement of $0.05 a pound in February and we are seeing a portion of that sticking. So I think the fact that price increase can be effective means that demand has improved. Now, as we said, we are not running at full capacity in some of our plants because demand is still low in comparison to running the plant at full capacity.

Just to follow up on that, Albert, some of our checks in the market had suggested that low density polyethylene was up $0.07 in January, but some of the other grades such as high density were a little bit slower to take that increase but may take it in February. Can you comment a little bit on some of the differentiation in the market place that we are seeing within the polyethylene resin family?

Yes. Certainly. A large majority portion of our polyethylene is in LDP, low density polyethylene and the balance in [linear low] density. We are not actively participating in the high density market, but we are seeing the price increases in both the LDP and in [linear] low density.

Why do you feel that those grades are stronger than high density right now?

Partially, it's the linear low density and low density goes primarily into the consumer non-durables. The food packaging we mentioned. Whereas high density can go into consumable durables, whether it's tubs or paint, buckets or pipe, those areas. And maybe they are also more capacity coming up from the Middle East, which are more high density and somewhat linear low and very low amounts of LDPE capacity coming up in the Middle East.

That's helpful. Final question, if I may, if I add up the $86 million of inventory in Olefins with $41 million in Vinyls, it looks like you had a total of $127 million there in the quarter. I know it's early in 1Q but do you anticipate additional FIFO hits or inventory write-downs in the first quarter of 2009?

Kevin, I do not.

Okay. Thank you very much.

Welcome.

Your next question comes from the line of [Tarrik Amid] of JPMorgan.

Good morning.

Good morning.

Can you talk a little bit about how we should be thinking about fixed cost absorption going forward. Obviously a big hit in the fourth quarter but what should we think about for 1Q '09 and what sort of visibility do you have on the rest of 2009?

You know, certainly as we go forward into the year, we are going to be certainly focused at operating as best that we can, but we don't really give a whole lot of guidance in terms of the -- in terms of operating rates per se, specific to Westlake or associated costs. So I think at this stage, it's a little treacherous to do a whole lot of forecasting with that degree of granularity.

Okay. Well, I mean, just sort of directionally, would you expect that to be a little bit better in the first quarter, or do you expect to be consistent with where it was in the fourth quarter.

Certainly fourth quarter operating rates were very, very low and you wouldn't expect to see those type of magnitude numbers if we see the -- directionally the kind of rates that we are seeing certainly for the first month or so of January.

I guess bigger picture, you obviously have a much better balance sheet than most of your competitors in the industry right now. Talk a little bit about your stomach for -- for acquisitions and joint ventures at this point of the cycle.

Certainly. We always are opportunistic in kind of how you look at things. You are quite right. We do want to maintain a good and strong balance sheet and as you pointed out, we have one today and believe that certainly as opportunities arise, we have certainly the financial flexibility to look at certain things.

Okay. What sort of targets would you expect, something on the Olefins side or the Vinyls side if you could imagine, hypothetically, what would happen.

I think there would be opportunities on both. I'm not just trying to dodge the issue, just that there will be opportunities on both sides.

Okay. Thank you very much.

Your next question comes from the line of [Kelly Rumshunion] of [State Street Global] and [Reiners].

Quick question. Does the revolver have any covenants? And if so, what are they at 2009 and at 2010.

The revolver doesn't have any covenants that are maintenance oriented in terms of its availability for us to make use of the revolver. You might have noticed that we filed an 8-K that amended, for the life of the revolver, our ability to pay dividends and to make acquisitions and those are the kinds of covenants that we have and, again, the banks given the amount of liquidity that we have had have been very flexible with us. And so availability covenants, there are none.

Okay. Thank you.

(Operator instructions). Your next question comes from the line of Mike Judd of Greenwich Consultants.

Yes, good morning.

Good morning.

If you've already answered this question in a previous call, I apologize for this. I do believe that you guys were planning on, at some point, adding some capacity in the Caribbean. Where are we with that project? Or just given the overall global economy, is that on hold indefinitely?

Yes. It is. We have stopped working on the project and pending resolution on several issues with the project, including the high (inaudible) costs that we have experienced in the past.

Okay. And then we are, unfortunately, in February now, so, we are February 20th. I'm just wondering, was there any directional -- has there been any directional pickup or decline in business in February versus January? I realize that we are getting kind of granular. It looks like in the last week or so, that some of the demand has slowed down. I guess we saw spot prices for ethylene come off a little bit in the last week. Certainly it makes sense that after what happened in December, there would be some pickup in demand in January, but the question is that starting to peter out in the latter part of February?

Well, certainly the economy and demand has improved in this quarter over the fourth quarter. As you mentioned, the fourth quarter has very low levels. I think the spot price of ethylene jumps up and down a fair amount. That will impact us not by only demand really, by the amount of the plants which were shut down during the (inaudible) coming up. So as more ethylene plants come up, we will have an impact on the spot price for ethylene, but it will mean the demand is coming down.

Okay. So basically, as I understand your comments, it sounds like February was as good as January?

I think the things are somewhat improving in the market place for the people who are replenishing inventories on the very low levels the end of last year.

Thanks for the help.

You're welcome.

At this time, the Q&A session has now ended. I would now like to turn the call back over to Mr. Dave Hansen.

Well, thank you very much. We appreciate your participation in today's call. We hope you will join us again for our next conference call to discuss our first quarter 2009 results.

Thank you for participating in today's Westlake Chemical Corporation fourth quarter earnings conference call. As a reminder, this call will be available for replay beginning an hour after the call has ended. It may be accessed until 1 p.m. Eastern time on Wednesday, February 25th. The replay can be accessed by calling the following numbers -- domestic callers should dial 18882868010, international callers may access it at 617-801-6888. The access code at both numbers is 21627930. Thank you for your participation in today's call. You may now disconnect. Have a great day.