Westlake Corp (WLK) 2009 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 2009 Earnings Conference Call. (Operator instructions.) As a reminder, ladies and gentlemen, this conference is being recorded for replay purposes. This call is being recorded today, May 5, 2009. I would now like to turn the call over to Mr. Dave Hansen, Westlake Senior Vice President of Administration. Sir, you may begin.

Thank you very much. Good morning, everyone, and 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 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 will open up the call to questions. The access code for both numbers -- excuse me.

Today, Management is going to discuss certain topics that will contain forward-looking information that is 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 p.m. Eastern time on May 12, 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 617-801-6888. The access code for both numbers is 31153377.

Please note that information reported on this call speak only as of today, May 5, 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 webpage 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. In spite of reporting a net loss, the first quarter was a vast improvement over the poor conditions we experienced in the fourth quarter of 2008. We were able to implement price increases for polyethylene and PVC resin during the quarter and also had improved sales volumes for polyethylene, PVC resin, and pipe.

In this morning's press release, we reported a first quarter loss of $0.09 per diluted share, as compared to a loss of $1.67 per diluted share in the fourth quarter of 2008. Sales for the quarter were $488 million, which was down due to greatly reduced product prices after the global collapse in commodity prices that occurred in the fourth quarter.

Energy and feed stock costs remained relatively flat during the first quarter after significant reductions in the fourth quarter. As you'll recall, the fourth quarter was characterized by two major factors - falling product prices which were led down by falling energy and feedstock costs, and low operating rates that came about as a result of curtailed demand from our customers, very poor economic conditions, and the turmoil in the financial sector.

While first quarter conditions improved over the fourth quarter, our first quarter results were also negatively impacted by two major outages. In January, our Calvert City, Kentucky complex experienced an ice storm that caused a power failure at the facility and resulted in damage to a compressor in an ethylene unit. The power outage caused the complex to shut down for eight days. However, the damage to the compressor resulted in reduced production rates throughout the complex for an extended period.

In addition, one of the ethylene units in Lake Charles, Louisiana was idled during December 2008 due to significant customer destocking and weak demand for derivative products. A maintenance turnaround for the unit, which was scheduled for later in 2009, was brought forward and performed during this period. The unit was shut down for a total of 71 days during the first quarter for the maintenance turnaround and resumed production in March. We have estimated that the [end] result fixed manufacturing and repair costs from these outages negatively impacted operating income by approximately $20 million or $0.19 per diluted share during the first quarter.

As I mentioned earlier, we did successfully implement a $0.07 per pound price increase for polyethylene during the first quarter and a $0.03 per pound price increase for PVC resin. Energy and feedstock costs have remained relatively stable during the first quarter after plummeting in the fourth quarter. Polyethylene operating rates remain weak. However, we have seen export opportunities improve during the first quarter.

On the vinyl side, PVC resin and pipe margins continue to be negatively impacted by the ongoing weakness in the construction markets and instability in the credit and financial markets. Caustic pricing which was very strong during 2008 has begun to fall as overall demand is weakening. In spite of these conditions, our cash flow for the quarter was strong due to continued reductions in working capital.

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'm 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 an operating loss of $1 million on sales of $488 million in the first quarter of 2009, as compared to an operating loss of $166 million on sales of $597 million in the fourth quarter of 2008. Our reported net loss in the first quarter of 2009 was $6 million or $0.09 per diluted share, compared to a net loss of $110 million, or $1.67 per diluted share in the fourth quarter of 2008.

Selling, general, and administrative expenses were $21 million in the first quarter, compared to $30 million reported in the fourth quarter of 2008 and were lower primarily due to $9 million in allowance for doubtful accounts recorded in the fourth quarter.

The tax rate for the first quarter was 13% versus our estimated tax rate for the year of 34%, which had the effect of increasing our net loss by approximately $0.02 per diluted share. The first quarter results were minimally impacted by our use of FIFO method of inventory accounting as compared to utilizing the LIFO inventory method. In contrast, the operating loss in the fourth quarter was due to falling product prices with very high feedstock costs that flowed through cost of sales as a result of the utilization of FIFO inventory accounting.

Now turning to capital expenditures in our balance sheet, I'll highlight a few key items. Capital spending for the first quarter totaled $33 million and in addition we incurred $23 million in capitalized turnaround costs at one of our ethylene units in Lake Charles. This is on pace for the low end of our full year capital spending target of $100 million to $150 million.

We are also focused on tightly managing working capital. Working capital, excluding cash, was $390 million at the end of the first quarter, which was down from $496 million at the end of last year. With the reduction of raw materials cost and the slowed business climate, our working capital requirements have been greatly reduced and provided a significant source of liquidity in the quarter.

We ended the first quarter with $300 million in cash, including restricted cash, had no borrowings under our revolver, we had no debt maturities until 2016, and our net debt to capitalization ratio remains low at 15%. Maintaining our financial flexibility will continue to be a key objective for us in 2009.

Now, let me turn to our olefins segment. We reported operating income of $16 million on sales of $323 million during the first quarter, as compared to an operating loss of $136 million on sales of $396 million reported in the fourth quarter of 2008. The reduction of sales were primarily due to lower selling prices for all of our olefins products after the sharp decline that occurred in the fourth quarter.

However, sales volumes for polyethylene improved in the first quarter as compared to the fourth quarter of 2008 as customers began to restock inventories after raw material costs stabilized and product prices bottomed out. This was in spite of the fact that one of our ethylene units was idled for a total of 71 days during the first quarter, as Albert mentioned earlier. Domestic prices moved up during the first quarter and we continued to see export opportunities as gas-based feed stocks remained globally competitive.

Now, let me turn to the vinyls segment. Our vinyls segment reported an operating loss of $15 million on sales of $165 million during the first quarter, as compared to an operating loss of $28 million on sales of $201 million reported in the first quarter of -- the fourth quarter of 2008. The major contributor to the operating loss in the first quarter was the outage in Calvert City caused by an ice storm and related damage to an ethylene compressor, which resulted in reduced production rates for all of the major products.

Average selling prices were lower for all major products in the first quarter as compared to the fourth quarter. However, sales volumes for PVC resin and pipe improved and customers began restocking inventories. As Albert previously mentioned, we were able to implement a $0.03 per pound price increase for PVC resin in the first quarter. Caustic prices, which began to fall in the fourth quarter of 2008, continued to fall during the first quarter of 2009.

Cost control is a top priority. 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 growth strategies.

Now, I'll 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 in the ethylene turnaround, and then I will discuss the outlook for the industry.

We have continued our investment program that significantly re-strengthens our market position and enhances our integration. These include our chlor-alkali expansion project, PVC resin, and PVC pipe plants. Our PVC resin plant expansion in Calvert City was completed in the first quarter of 2009, which adds 300 million pounds of annual capacity.

We also began operating our new PVC pipe plant in Yucca, Arizona during the first quarter, which will produce pipe for water, sewer, irrigation, and related industrial and residential markets in the western United States. And we acquired a PVC pipe plant in Janesville, Wisconsin. The combined capacity of these two PVC pipe plants is approximately 300 million pounds.

The maintenance turnaround at one of our ethylene units in Lake Charles along with several energy savings projects was completed in March and the unit is fully operational. No other major maintenance turnarounds are scheduled for 2009.

Finally, let's talk about the outlook for the industry. We believe the vinyls industry will continue to be negatively impacted by weak construction markets. Although negative conditions exist in the vinyls industry, the seasonal increase in PVC demand coupled with weakening caustic demand and the resulting chlorine tightening, the industry has announced a $0.03 per pound PVC price increase on May 1.

Caustic prices, which were strong last year, began to deteriorate in the fourth quarter of 2008 and have continued falling through the first quarter of 2009 as demand for caustic has slowed with the general economy.

Some elements of the federal government's economic stimulus package are aimed directly at infrastructure, housing, and energy efficiency. We are hopeful these initiatives will benefit and improve our vinyls business conditions.

As to olefins, operating rates have stabilized. However, they are still below the levels we had one year ago. The industry currently has announced a $0.05 per pound increase for polyethylene with $0.03 a pound to be implemented on May 1. U.S. gas-based ethylene producers continue to have a cost advantage over naphtha-based ethylene producers around the world, which should set a reasonable floor price for polyethylene.

Improvements in export opportunities continued into the second quarter, which will improve our operating rates. As discussed in the past, a significant portion of our polyethylene is sold into food packaging and other consumer nondurable markets. And the underlying volume in that segment tends to be more resilient in an economic downturn.

However, in spite of these -- some positive signs, we remain cautious about the severity and the duration of this global recession and the impact it will have on the U.S. 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 are continuing to reduce any unnecessary spending, including capital expenditures. We have a track record of strong financial discipline and are committed to maintaining financial flexibility and have positioned ourselves to expand our business as opportunities present themselves during these challenging times.

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.

(Operator instructions.) And the first question comes from the line of Kevin McCarthy from Banc of America Securities. Please proceed.

Hi. This is [Alex DeFramo] for Kevin. I have a question about your operating rates. Could you comment on utilization rates in the last few months?

Generally speaking, because of our ethylene unit shutdown in Lake Charles, Louisiana, certainly our ethylene -- average ethylene operating rate's down. Our other ethylene unit was running throughout.

In the vinyls side, again, because of the ice storm impact and resulting compressor problems, our operating rates at Calvert City also was impacted.

Thank you. And another question. Could you break out the $19.5 million charge for the downtime between vinyls and olefins?

Sure. Yes. The breakout of that is about $12 million related to the vinyls segment and the remaining $8 million in the olefins segment.

Okay, thank you.

You're welcome.

And the next question comes from the line of Costas Karathanos from Goldman Sachs. Please proceed.

Good morning, Albert and Steve.

Good morning.

Good morning, Costas.

A couple of quick questions on ethylene, please. What do you expect ethylene profitability to be in the second quarter versus the first quarter?

Well, I think the CMA reports that with the startup of several ethylene plants that were down there should be more capacity available, so there's more impact potentially on the margin in the ethylene side. Again, also, the feedstock, whether it's ethane, propane prices, the change in feedstock could also impact the ethylene margin.

Do you see, Albert, stabilization on spot ethylene pricing or do you see it continue to move lower?

I think ethylene spot price should stabilize. As you know, the naphtha -- the global ethylene majority is produced from naphtha and naphtha prices are still a bit high. I think today crude oil is in the mid-50s. So naphtha price should set some kind of floor on a global basis, which will impact the U.S. ethylene pricing and derivative pricing.

Okay, thanks. And then, one last question, Albert. How long do you expect the advantage of [lights] of ethane over naphtha to last?

From what we understand, with the abundant supply of natural gas in the U.S., the advantage should last quite a while.

Thanks for the color.

You're welcome.

Your next question comes from the line of David Begleiter from Deutsche Bank. Please proceed.

Thank you. Good morning.

Good morning, David.

Albert, you commented on operating rates in the quarter. Where do they stand actually today in both your olefins business as well as vinyls business?

Our plants are operating at close to full rate.

And that's for both crackers down in Lake Charles?

Yes, because we are a net buyer of ethylene, generally speaking. So generally, our ethylene prices at Lake Charles are running [full out].

And just on the PE price increase. What's the rationality you're using with your customers to raise prices $0.03 May, $0.02 June?

Well, as you know, the polyethylene and ethylene margin has dropped tremendously in the fourth quarter. We have recouped some margin in the polyethylene side with our $0.07 per pound price increase.

But we are seeing pressures of feedstock increases, both in the ethane and propane, as well as in the naphtha, crude oil side, as well as the export market to be very strong. I think U.S. on the average, product prices whether it's polyethylene or PVC, are among the lowest in the world. Export prices are higher than U.S.

And just on PE, how much of your PE are you exporting today or in the last few weeks?

Westlake generally exports much less than the industry average. We are less than half of the rate and that's the industry average.

And which is -- can you remind me how much that is?

Generally speaking, the industry has been the 20% range or higher.

And you are at roughly half of that or less?

Less than half.

And last, just comment on any M&A opportunities you're seeing in this downturn.

Well, we just announced that -- in the last quarter, our first quarter report, the Janesville, Wisconsin PVC pipe plant and we'll always evaluate opportunities when they arise.

Thank you very much.

You're welcome.

And your final question comes from the line of Bill Young with Credit Suisse. Please proceed.

Good morning, Albert and Steve.

Good morning.

Good morning. How are you?

You referenced in your press release some CMAI information on pricing. Can you give us an idea from your own experience how far have caustic prices dropped since the peak early in the fourth quarter?

Well, what I can report is CMAI reported the caustic -- the average pricing -- [evolution] pricing in December of $950 a short ton, dry short ton, and end of the first quarter, March, was $700 a short ton and April is even lower.

And has your experience been analogous to that?

I think so, yes. As we reported earlier, the prices dropped in the first quarter and continued to drop in the second quarter.

Okay. Now, on the polyethylene, I think you said you got $0.07 in the first quarter.

Yes, sir.

That was phased in roughly how much January, February, March? Equal amounts or which was the best month?

Certainly, March was the best month.

Okay. But as you said, you need more price to get -- restore some of your margins there.

Absolutely.

Okay, great. Thanks.

You're welcome.

(Operator instructions.) And the next question comes from the line of Costas Karathanos from Goldman Sachs. Please proceed.

Albert, one last question on PVC. Looking at the publications, consultants give operating rates of 70%, 72% range, but also they've started talking about chlorine issues have been impacting exports. What's happened in the chlor-alkali market and how has it been impacting the PVC [chain]?

Yes, as you know, caustic was very high last year due to the low demand for chlorine for vinyls and other chlorine derivatives. With the general economic condition deteriorating, finally the caustic demand has reduced and now there is a tightening in the chlorine in the market which will impact the amount of PVC that you can produce. And it's happening kind of around the world, so the U.S. is now able to export PVC at a higher price overseas, to Asia, for example, than in the U.S.

But still though, at 70% -- so low chlorine still is impacting those exports.

Yes. It will have some impact. I think U.S. export of EC and PVC has impacted prices as not going up and the bottom we have come down also.

Okay. Thank you so much, Albert.

You're welcome.

And we have no further questions for today. I would now like to turn the call back over to management for closing remarks.

Ladies and gentlemen, thank you very much for your attendance on our first quarter call. And we hope you will join us again for our next conference call to discuss our second quarter 2009 results. Thank you very much and have a wonderful day.

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 in one hour after this call has ended and may be accessed until 1:00 p.m. Eastern time on Tuesday, May 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 1-617-801-6888. The access code at both numbers is 31153377. And this concludes the presentation for today, ladies and gentlemen. Have a good day.