Westlake Corp (WLK) 2009 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 2009 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, August 4, 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's second-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 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 will 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 and 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 11, 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 6178016888. The access code for both numbers is 71161853.

Please note that information reported on this call speaks only as of today, August 4, 2009. Therefore, you are advised that time sensitive information may longer be accurate as of the time of any replay.

Finally, I would like to 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 this morning's press release we reported solid results for the quarter of $0.26 per diluted share, which was a sharp improvement over the first quarter of 2009. Sequentially, both our Olefins and Vinyl segments saw volumes and margins improve significantly. Sales for the quarter were $575 million, an increase of 18% over the first quarter as customers demand improved for most of our major products and we were able to implement price increases for polyethylene and PVC resin.

Our Olefins segment delivered solid sales volumes both in the domestic and the export markets. Sales volumes improved in the second quarter after rebounding in the first quarter from last year's fourth quarter as customers continue to replenish inventories. Export demand remains strong in the quarter due to the continued price advantages that natural gas-based ethylene producers like ourselves have over naphtha-based ethylene producers.

We also implemented a $0.06 a pound price increase for polyethylene in the second quarter as ethane and propane feedstock prices increased. The industry has also announced further polyethylene price increases for the third quarter. However, not all costs were up this quarter as we saw the cost of natural gas which impacts our fuel and electricity costs decline, which served to improve our margins in the second quarter.

On the Vinyl side PVC resin and pipe sales volumes improved as seasonal construction activities increased in the second quarter and customers began replenishment of some inventories. We were able to implement a $0.03 per pound price increase in the second quarter for PVC resin to cover the rising cost of feedstock. Nevertheless, PVC resin and pipe margins continue to be negatively impacted by the ongoing weakness in the construction markets and the instability in the credit and financial markets.

With the continued weakness in our economy, reduced industrial activity has caused a precipitous decline in demand for caustic. As a result, caustic prices have dropped sharply and tightened supplies accordingly. In spite of these conditions cash flow for the second quarter was strong due to increased earnings, continued reduction in working capital, our ongoing cost-cutting measures, and the Company's program of reduced discretionary capital spending.

Now I would like to turn the call over to Steve for a review of the 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 Olefins and Vinyls segment results. So let me begin with our consolidated results.

We reported a solid second quarter with net income of $16.9 million or $0.26 per diluted share compared to a net loss of $6.1 million or $0.09 loss per diluted share in the first quarter of 2009. We also reported an operating income of $36.2 million on the sale of the $575 million in the second quarter of 2009 as compared to an operating loss of $1 million on sales of $488 million in the first quarter of 2009.

Our sequential increase in earnings was the result of our four accomplishments. First, Petro 1, one of our ethylene crackers in Lake Charles, completed a turnaround in March and operated at full operating rates throughout the second quarter. Second, our Calvert City facility, which had an unscheduled outage in the first quarter, was repaired and operated for the full quarter.

Third, both of our segments delivered significantly improved sales volumes sequentially. And fourth, margins improved in both of our segments over the first quarter.

For the six months of 2009 we reported net income of $10.8 million on sales of $1.1 billion compared to net income of $52.7 million on sales of $2 billion for the same period last year. This decrease is primarily due to lower volumes and lower prices resulting from the current recessionary environment. During the second quarter we generated positive free cash flow of $25 million. Year-to-date our free cash flow was $114 million, so our businesses have continued to build cash and add to our already strong balance sheet.

Now continuing on with our discussion of the balance sheet and capital expenditures I will highlight a few key items. Our focus on tightly managing working capital has continued to provide significant benefits. Working capital excluding cash was $385 million at the end of the second quarter, down from the first quarter.

We ended the second quarter with $317 million in cash including restricted cash, had no borrowings under our revolver, and have no debt maturities until 2016. Our net debt to capitalization ratio remains low at 13%. Capital spending to the second quarter totaled $18 million and we are still on pace for the low-end of the full-year capital spending target of $100 million to $150 million.

Now let me turn to the Olefins segment. We reported operating income of $44 million on sales of $387 million during the second quarter as compared to $16 million of operating income on sales of $323 million reported in the first quarter of 2009. Our second-quarter operating results included a $9.8 million trading gain.

Our polyethylene business continued to see sequential improvements in sales volumes as in-use demand continued to improve and customers replenished inventories while export markets remained strong. As Albert noted earlier, we were able to implement polyethylene price increases totaling $0.06 per pound during the quarter in order to pass along increases in feedstock costs and improved margins.

Now turning to the Vinyls segment. The Vinyls segment reported an operating loss of $5 million on sales of $188 million during the second quarter as compared to an operating loss of $15 million on sales of $165 million reported in the first quarter of 2009. On a year-to-date basis our Vinyls segment reported an operating loss of $20 million on sales of $354 million as compared to an operating income of $15 million on sales of $595 million in the first half of 2008.

We saw a pickup in PVC volumes and prices as a result of a seasonal increase in construction activities in the second quarter. The $23 million increase in Vinyls revenue in the second quarter over the first quarter was largely the result of a 27% increase in sales volume, but this was partially offset by decreases in caustic prices. We implemented two PVC resin price increases in the quarter -- an increase of $0.015 per pound in May and an additional $0.015 per pound in June -- but these increases did not offset the impact of price declines in caustic soda.

While the overall economy has had a major decline in the fourth quarter of last year, this decline was not fully evident in the caustic business until the second quarter. While the price declines for the caustic are following cyclical trends, the rate of decline has been more rapid than we experienced in prior cycles and reflects the pullback in industrial demand. In-use markets in the Vinyls segment are likely to remain challenging.

Cost control is the top priority. We will continue to reduce our costs to improve margins and returns, not only to improve near-term results, but more portly they also position us to maintain our competitiveness and pursue our long-term strategies.

Now I will turn the call back over to Albert. Albert?

Thanks, Steve. Now let's talk about the outlook for the industry. We believe the vinyls industry will continue to be negatively impacted in the short term by lower caustic prices and weak construction markets. Despite these conditions, due to rising feedstock costs we have implemented a $0.03 a pound price increase for PVC resin in July and have announced an additional $0.05 per pound increase on PVC resin for the balance of the quarter.

Looking beyond the current conditions in the economy, our long-term goal is to continue with our integration strategy in the vinyls chain. Our recent investments in PVC resin, PVC pipe facilities, and expansion of our chlorine facility in Calvert City are focused on improving our business and growing EBITDA over the cycle.

Now let's turn to Olefins. Near-term industry has responded to an increase in feedstocks by announcing price increases for polyethylene totaling $0.08 a pound for the third quarter. Natural gas-based ethylene producers like Westlake will continue to have a cost advantage over naphtha-based ethylene producers around the world which will set a floor price for polyethylene. Therefore, we expect to see continued export opportunities due to these advantages that should sustain industry operating rates into the third quarter.

Longer-term, the utilization of gas-based feedstocks combined with our focus on value-added grades of polyethylene should maintain our competitiveness in the Olefins segment. Middle East and Asian capacity additions over the next few years will be more focused in commodity grades of linear low-density polyethylene and high-density polyethylene that are largely targeted for the European and Asian markets. There is no new capacity expected globally for autoclave low-density polyethylene, which is a focusing area for Westlake, and thus the supply-demand scenario should continue to be better balanced for these products versus the more commodity grade.

We have a track record of strong financial discipline and are committed to maintaining financial flexibility. We are positioning ourselves to be able to expand our business as opportunities present themselves during these challenging times.

Thank you very much. Allow me to 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 are now ready to take questions.

(Operator Instructions) Costas Karathanos, Goldman Sachs.

Good morning, Albert and Steve. Two quick questions, if I may. The first one on polyethylene sales, Albert, what is your take over there? How much -- what percent was actual demand improvement, demand increase versus restocking after the hurricane season?

I think that demand has improved over the fourth quarter and the first quarter of this year. Fourth quarter last year in first quarter of this year we see [railcar] turns improving. Our customers are still maintaining pretty low levels of inventory, so we think real demand is both in domestic and export markets.

So you are getting a little bit more bullish or more constructive, like for the second half of the year then?

Well, we will see. We have $0.08 a pound price increase announced for the second quarter. In the third quarter -- we are early in the third quarter so we will see how the market react to the price increases. We are seeing suddenly feedstock price increases. Oil has gone to $70 a barrel and so there is feedstock pressures globally.

Thanks, Albert. And then one more as a follow-up to what you said about oil and nat gas, the advantage continues on the light feed slate for sure and the consultants continue to see that continuing. Now what is your take on that? Do you expect more older plants based on [a heavy feed slate] shutting down in the North America? Thanks, Albert.

You are welcome. Yes, there has been some announcements of older plants shutting down or will be shutting down. The advantage of gas-based North American ethylene producers is quite apparent. At the end of July there is between $0.09 to $0.14 a pound benefit as reported by CMEI over naphtha-based ethylene producers in the US.

James Sheehan, Deutsche Bank.

Good morning. Albert, could you comment on what your operating rates are in Olefins and Vinyls currently?

Well, our Olefins -- as Steve mentioned, after our turnaround in the first quarter of this year our olefins plant at Lake Charles are running very well. Those are gas-based ethylene plants so we are operating at good rates.

Vinyls business certainly has impacted by the construction slowdown and is operating at or above industry operating rates.

Thank you. Also on your trading gain of $9.8 million, is that related to your hedging of ethane and feedstock costs and why did you see a gain in that category?

The $9.8 million gain is just certainly the normal purchasing activity we have in feedstocks and this is just a mark-to-market that we take each and every quarter. So it's just normal, if you will, trading activity related to our feedstocks.

Okay. Albert, do you think that caustic soda prices have reached bottom yet?

Well, it's pretty low now, so I think the closer it is to the bottom -- I think we are pretty close to the bottom. The question then is how long will it stay there.

Okay. Thank you very much.

Kevin McCarthy, Bank of America-Merrill Lynch.

Good morning. Thanks. Albert, you mentioned the notion that your position in low-density polyethylene may be somewhat insulated from some of the capacity additions of linear low and high density coming from the Middle East. I was wondering if you could talk a little bit about that and specifically address the differences between autoclave and tubular low density and the amount of switching or lack thereof that could occur between those two grades of low density polyethylene.

Certainly. Over 60-odd% of our polyethylene is low-density based, the majority of that is autoclave. And the autoclave and the tubular process are different process altogether, different equipment. The products are different. Example, the autoclave goes into coating grades and high clarity grades and tubular goes mainly into heavy sacks and liners and those type.

So even though in the middle using (inaudible) expansions the LDP portion is the smallest amount among the radial, low, high density polyethylene total. Those LDP expansions are all in the tubular side, not in autoclave side.

So just to follow-up up what percentage of your autoclave low-density polyethylene customers do you think might have flexibility to switch over and use tubular product?

Well, those companies that can switch have switched already. Now the autoclave is finding a niche market where it can bring value to the customers in their special applications.

Got it. Thanks. And then over on the vinyls side, Albert, in your pipe business what is your current production slate of large diameter versus small given the two new plants that you have started and the acquisition there? Maybe you could comment on the degree of exposure in terms of residential versus non-residential construction in that business?

Yes, certainly. The small diameter pipe, which goes mainly inside the house on residential, is 20% or less of our total capacity. So our capacity are more oriented towards the larger diameter outside the house type. And the fact that we add capacities to super large diameters, over 30 inches, and that will position ourselves better for the impending infrastructure expenditures that we are seeing across the US.

And then last question, if I may, on costs. I always think of Westlake as a very lean company to begin with. Can you maybe provide a little bit more color on what you are doing in this environment to reduce costs? Maybe provide some examples and if possible quantify any savings there.

Yes, certainly. You can look at our SG&A that we reported and we have cut unnecessary expenditures or postponed some expenditures and cut back in cap expenditure, as Steve mentioned, in discretionary spending. We have also idled some assets, a pipe plant that we reported earlier in the past and that has low productions, and also we watch our working capital very carefully. Steve, any more comments on this?

Yes, I was going to say, Kevin, just general guidance that we have had an opportunity to reduce our fixed costs in the neighborhood of about $20 million or so dollars through this six-month period.

Okay. Thank you very much.

[Tyree Khamid], JPMorgan.

A quick question, you have done a great job on the working capitals year-to-date. How much more is there to go do you think or are you going to start to give a little bit of that back just given the new higher-end feedstock costs?

Well, I think what we can reduce in terms of inventory levels and finished goods and raw materials levels we have reached those kind of levels. And so I think it is a driver for working capital as we see energy prices rise. And so if we see a rise in raws, so they will be obviously an impact to working capital accordingly.

Understood. And then with the sort of the fact that we are in a little bit of an inflationary environment, any context or color you can give us on what the impact of FIFO accounting was this quarter?

This quarter it was a minimal impact. We didn't see any meaningful difference between a LIFO and FIFO in our numbers.

Great. That is all I have. Thank you very much.

Mike Judd, Greenwich Consultants.

Good morning. With some of the other companies that are in the caustic business there is a little bit of a lag in terms of being able to adjust prices on the chlorine side as well as the caustic side. I realize that you guys are relatively balanced in terms of your consumption of chlorine, but can you just talk a little bit about the leads and lags in caustic and chlorine in terms of what you are seeing in the marketplace?

Yes, I think certainly we are reflecting what the market is doing and we are adjusting the prices on a monthly or sometimes quarterly basis depending on the contract. So we are reflecting the market conditions.

So is there typically a 1.5 quarter type of lag is that what we see with some of the other companies? Is that the typical for you guys?

No, I think we are more reflective on the more current basis. Depending on the contracts some are monthly, some are quarterly.

Okay. And then just finally here, you guys have done a pretty good job on the inventory to sales type of ratio, bringing that down from a relatively high point at the end of the first quarter. Where do you think that type of ratio will head in for the rest of the year?

I think we plan to maintain those ratios.

Thanks for the help.

Bill Hoffman, RBC Capital Markets.

Good morning. Albert, I wondered if you could talk a little bit about order patterns in the Vinyls segment. What you are seeing here in the third quarter, whether you are running consistent to where you were in the second, and also maybe some color on what kind of visibility you have got at this point?

Yes, certainly. The summer, the second and third quarter are usually the good quarters, seasonally good quarters for the vinyl business. Then the fourth quarter and the first quarter with the weather usually are slower quarters. Sometimes customers do have summer time shut down for a week or so for their maintenance, so it's depending on which month in the summertime.

But, generally speaking, we see volume has seasonably improved definitely over the first quarter. But the market we don't see a real improvement in construction market as we speak.

No, certainly but are you -- the order patterns here are sort of July and August. Are they running pretty consistent to where you were in the second quarter or are you seeing any weakness earlier than you might otherwise?

Well, I think we are seeing fairly consistent average during the summer months.

Okay. And then just this second question, just as you look forward in the second half of the year from a capital spending standpoint, any changes in your thoughts there?

No, I think as we have indicated we are going to be in the low end of the range that we have given; the range being $100 million to $150 million. But I think we will be at the very low end of that range.

Okay, thank you.

Gregg Goodnight, ChemAnalysis Consulting.

Good morning, all. Speaking of CapEx, the $100 million you mentioned would you typify that as pure maintenance CapEx or is there some improvement capital in there?

Well, there is always some improvement, but you know our maintenance capital runs $50 million to $60 million a year typically. And so the rest of it is capital revolving around some of the energy saving and improvement opportunities that we have seen, Gregg.

Okay, excellent. Would you talk about price increases downstream of PVC resin? For instance, my understanding was the pipe folks have been looking for about $0.06 increase to correspond with the $0.08 of PVC increases you mentioned that are going to be put on the table in the third quarter. Is that $0.06 number right and what is the experience so far in being able to capture any of that?

Yes. As I said, we are still in the midst of the early part of the third quarter and definitely prices has moved upwards along with the price increase in PVC resin.

Okay. So you are saying there is some movement in pipe prices then?

Yes.

Speaking of prices, you mentioned the $0.08 polyethylene price increase in third quarter. My understanding was July and August were split four and four. My specific question is have you seen -- did you see any of the $0.04 July increase now that July is over?

Well, I think depending on the customers and the market, as we read in some of the trade journals, they are saying that some push of the $0.04 a pound from July to August.

Okay. And then there was, I guess, a following increase on top of that for the -- it was going to be in August, but I guess that is probably pushed out also then. Is that --?

Probably, probably. Yes.

Okay. That is all I had. Thanks for your help.

James Sheehan, Deutsche Bank.

Just following up on your comments on possible government infrastructure spending and the possibility of that increasing demand for PVC pipe, when do you see the impact from that stimulus occurring? Is it more a Q4 event or should we wait to see it until 2010?

Well, we hope it would be in the second half of this year. As you know, their projects are shovel-ready. They are waiting for the stimulus package to arrive at the local level, but we believe and we hope that the fund is going through the channels, eventually will arrive at the right point.

Okay, thank you very much.

Operator, I believe we have time for another question. One more question, please.

Bill Young, ChemSpeak.

Morning, gentlemen. Just wanted an update, what is the timing on the startup for your new chlor-alkali plant in Louisiana? You said you were at the lower end of the CapEx range. I am just wondering if the timing has slipped there.

We are still evaluating the starting time of the project. As you know we have very weak economic and [market] conditions right now so that is the starting time.

Secondly, can you give us an idea of the export situation in the vinyls area, whether it's intermediates or the resin itself?

Yes, certainly. I think the demand increases in vinyls in Asia are quite apparent and a fair amount of exports from the US to Asia, whether in the form of PVC or EDC or BCM.

Okay. Is it significant at this stage? I mean, are you talking about up 10% of your product being exported or 5%, rough order of magnitude?

Our part of this on the vinyl side is we can export very small amounts.

Okay. Okay, great. Thanks, Albert.

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

Thank you very much for participating in today's call. We hope you will join us again for our next conference call to discuss our third-quarter 2009 results. Have a wonderful day. Thank you.

Thank you for participating in today's Westlake Chemical Corporation second-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 p.m. Eastern Time on Tuesday, August 11.

The replay can be accessed by calling the following number. Domestic callers should dial 1-888-286-8010. International callers may access the replay at 6178016888. The access code at both numbers is 71161853.