Westlake Corp (WLK) 2009 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Chemical Corporation third-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, November 3, 2009.

I would now like to turn the call over to your -- for 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 third-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 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 markets; technological developments; and other risk factors.

00 p.m. Eastern Time on November 10, 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 36570560.

Please note that information reported on this call speaks only as of today, November 3, 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 like to advise you that this conference call is being broadcast live through an internet webcast system that can be accessed at our web page at westlake.com.

Now I'd like to turn the call over to Albert Chao. Albert?

Thank you, Dave. Good morning, ladies and gentlemen. And thank you for joining us. In this morning's press release we reported earnings for the third quarter of $0.45 per diluted share which was a significant improvement over the second quarter of 2009 and over the earnings of the third quarter of 2008.

Sales for the quarter was $633 million, an increase of 10% over the second quarter, mostly as a result of higher prices for polyethylene and PVC resin. Our Olefins segment delivered a solid performance in the third quarter. Sales prices and margins were higher than in the second quarter, indicating further recovery in the economy. Industry -- our export demand remained strong during the third quarter due to the continued cost advantages that natural gas-based ethylene producers like Westlake have over naphtha based ethylene producers.

Our polyethylene margin in the third quarter improved as the result of a $0.04 a pound price increase which offset ethane and propane feedstock price increases. Margins also improved as a result of the continued decline in the price of natural gas, which impacts our fuel and electricity costs.

On the Vinyl side, sales volumes of PVC resin fell as a result of the continued weakness in the construction market. However, PVC pipe sales volumes improved in the third quarter, ahead of expected price increases for pipe. The industry was able to implement a $0.06 a pound price increase for PVC resin in the quarter, which served to offset the rising cost of feedstocks.

Caustic prices appear to have bottomed out during the quarter, and we saw mild price increases near the end of the quarter (technical difficulty) the Company to reap the benefits of our ongoing cost reduction measures. In addition, we idled a PVC fabrication facility in October and shifted its production to other facilities, thereby keeping our costs low and continuing to service customer requirements.

During the quarter we generated $60 million in cash flows from operations. So, as you can see, this was a quarter marked by solid performance by our Olefin segment and proactively managing our business across all segments.

Now I would like to turn the call over to Steve for review of the third-quarter results.

Thank you, Albert. And good morning, everyone. I'm going to begin today with a brief discussion of the consolidated financial results followed by a more detailed discussion of our Olefins and Vinyls segments. Let me begin with our consolidated results.

We had a very solid third quarter with net income of $29.8 million or $0.45 per diluted share, compared to a net income of $16.9 million or $0.26 per diluted share in the second quarter of 2009. We also reported an operating income of $49 million on sales of $632.6 million in the third quarter of 2009, as compared to an operating income of $36.2 million on sales of $574.9 million in the second quarter of 2009.

As Albert indicated, price increases were implemented in polyethylene and PVC resin, which offset price increases in feedstocks that occurred in the third quarter. The third-quarter earnings also benefited from a lower effective tax rate of 29%. For the first nine months of 2009 we reported net income of $40.5 million on sales of $1.7 billion, compared to net income of $80 million on sales of $3.1 billion for the same period last year. This decrease was primarily due to lower volumes and lower prices resulting from the current recessionary environment.

During the third quarter we generated about $50 million in positive free cash flow. Year to date, our free cash flow is $163 million. So you can see our businesses have continued to build cash and add to our already strong balance sheet.

Now, continuing with a discussion of our 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. We ended the third quarter with $365 million in cash, including restricted cash, up over 15% from second quarter. We have had no borrowings under the revolver. And we have no debt maturities until 2016. Our net debt-to-capitalization ratio remains low at 11%.

Capital spending for the third quarter totaled $15 million. And we have reduced our expected capital spending for the year and now expect capital spending to be in the range of between $90 million to $110 million.

Now let me turn to the Olefins segment. We reported operating income of $62 million on sales of $441 million during the third quarter, as compared to $44.3 million of operating income on sales of $387 million reported in the second quarter of 2009. As Albert noted earlier, the industry was able to implement polyethylene price increases totaling $0.04 per pound during the quarter, offsetting increases in feedstock costs and improving margins.

Now turning to the Vinyls segment. The Vinyls segment reported an operating loss of $8 million on sales of $192 million during the third quarter, as compared to an operating loss of $5 million on sales of $188 million reported in the second quarter of 2009. On a year to date basis, our Vinyls segment reported an operating loss of $28 million on sales of $545 million, as compared to an operating income of $46 million on sales of $943 million in the first nine months of 2008.

PVC resin volumes decreased in the third quarter, while PVC pipe volume increased as a result of pipe distributors buying inventory before expected price increases. Vinyls revenue increased as a result of pipe increases for PVC resin and higher pipe volumes.

The industry was able to implement price increases totaling $0.06 per pound during the quarter on PVC resin to offset the increased cost of feedstocks. Cost control is and will continue to be a top priority. We will continue to reduce our costs to improve margins and returns, not only to weather the current economic conditions, but to position us for the longer term as a low-cost efficient producer with the resources to pursue investments that bring shareholder value.

Now I'll turn the call back over to Albert. Albert?

Thanks, Steve. Now let's discuss the outlook for the industry. We believe the vinyls industry will be negatively impacted in the short term by low caustic prices and weak construction markets. Despite these conditions, we have announced an additional $0.03 a pound price increase for PVC resin effective November to offset the rising cost of feedstocks. Looking beyond the current conditions, our long-term goal is to continue with our vertical integration strategy. Our recent investment in PVC resin, PVC pipe facilities and expansion of our chlorine facility are focused on these goals and growing EBITDA over the cycle.

Now let's turn to Olefins. With the relatively high crude oil prices, natural gas based ethylene producers like Westlake will continue to have a cost advantage over naphtha based ethylene producers around the world. Therefore, we expect we will continue to see polyethylene export opportunities.

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. We expect that Middle East capacity additions over the next few years which will take advantage of lower cost feedstocks will be more focused in lower value, high volume commodity grades of linear low-density polyethylene and high-density polyethylene. These commodity grades should be targeted primarily for the closer European and Asian markets. There is no new capacity expected globally to compete with Westlake's autoclave low-density polyethylene. And thus, we should see a balanced demand in the future for a larger part of our polyethylene production.

Westlake has a history of strong financial discipline and a quick response to changing market conditions, as we have shown in the last year. We are committed to maintaining our strong financial resources and our financial flexibility, and our positioned to pursue new business opportunities as they present themselves.

Thank you very much. Now let's turn back over to Dave Hansen.

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

Operator, we're now prepared to take questions.

Thank you. (Operator instructions.) Your first question comes from the line of James Sheehan with Deutsche Bank. Please proceed.

Good morning.

Good morning.

Good morning.

Steve, did you have any FIFO accounting impacts positive or negative in the quarter?

They were very small this quarter as -- well under $5 million on a pretax basis.

Okay. And Albert, could you please comment, what do you think the prospects are for higher polyethylene prices in November?

Certainly. I think it depends on the energy prices. As you know, we had a $0.04 price increase [incident] in September. And we have a $0.08 price announced for the fourth quarter. And depending on the movement of energy prices, would have a material impact on the price increase of polyethylene.

Albert, do you think that because of the ethane advantage with lower natural gas relative to oil prices and the boost to exports in the industry, do you think you'll be increasing your overall level of exports over in the next 12 months?

Westlake focused primarily on domestic sales in polyethylene. And as I said before in the conference calls that our export amount is materially lower than industry average.

Thank you.

You're welcome.

Your next question comes from the line of Kevin McCarthy with Bank of America-Merrill Lynch. Please proceed.

Hi, this is Alex [Ufremma] for Kevin. Question on volumes, could you comment on the volume trends in October in Olefins?

I think volume is pretty strong. The industry -- producer inventory, as we understand, is pretty low. And the converted inventory is reasonable. And the demand is still there. And certainly export demand is still there as well. So volume is doing pretty well, as we understand.

So you see a pickup in domestic demand in addition to exports?

I think domestic demand has been fairly good. We are coming back from the recession but -- so it will pick up further as the economy improves.

Okay. And I had a follow-up on polyethylene prices. I think your press release indicated that your olefins prices rose 19% sequentially in the third quarter. And I'm looking at benchmark prices published by Industry Consultants, and they are showing about 6% increase. Is there -- what is the reason for such a fairly large discrepancy?

You're talking about olefin prices?

Yes. Olefins prices were up 19% for Westlake, but 6% according to benchmark prices.

The olefins -- in our Olefins segment we have ethylene, propylene, polyethylene, styrene, so the combination of those products, and not just one polyethylene.

Okay, so other products drove the upside?

That's right.

Okay, thank you.

Thank you.

Your next question comes from the line of Tarek Hamid with JPMorgan. Please proceed.

Good morning.

Good morning.

Good morning.

Could you talk a little bit about the timing of caustic soda contracts? I guess we've seen sort of the full impact of caustic soda coming down, or is there a little bit of lag that shows up -- that should show up in the fourth quarter?

Talking about the caustic volumes or caustic prices?

Prices.

Caustic prices, there's announced a caustic price increase in the -- for the fourth quarter about $180 a short ton for membrane grades. And they are being implemented on a gradual basis. It's a lot depending on the demand for caustic as well as the balance between the demand for chlorine as well.

Okay. And then on the working capital side, can you talk a little bit about your expectations for the rest of the year? You've obviously done a great job so far this year.

Well, we've managed working capital tightly, as you can see. And working capital obviously creeped up in the third quarter as a result of higher sales prices and higher feedstock cost. And so we'll continue to keep a close eye and continue to manage that very tightly going forward.

Okay. And then any revised CapEx expectations for next year?

We haven't completed the 2010 numbers, but we'll talk about it the next quarter conference call.

Okay, fair enough. Thank you very much.

You're welcome.

(Operator instructions.) Your next question comes from the line of Bob Koort with Goldman Sachs. Please proceed.

Hi, this is Dave Howard filling in for Bob. I was just wondering --

Dave, good morning.

Hey, how are you guys doing?

Good.

I was just wondering if you could mention -- or you could comment a little bit on the assumptions that you made. You said that you're expecting a cautious economic outlook for 2010. But I was wondering if there were any specific US GDP assumptions that you've built into your expectations?

No, and certainly when we look out there, we certainly read the same information that you and many of the others read. And so we're -- as we go forward, we're certainly seeing continued reasonable demand in products, and certainly the expectation is that trend will continue very slowly.

Okay, thanks for that. And also, just a quick little housekeeping item. Just -- could you talk a little bit about the lower tax rate that you guys had? What drove that and how should we think about taxes going forward for modeling purposes, just given that historically you've been somewhere between 35%, 40%?

Well, I guess I'd continue to give you guidance to use 36% rate for the rest of this year and going forward. But obviously, it does bounce from period to period depending on how results weigh out. But the guidance I'd give is 36%.

Okay, great. Thanks a lot, guys.

Welcome.

At this time, there are no additional questions. Are there any closing remarks?

We'd like to thank everyone for participating in today's call. We are hopeful that you'll join us again for our next conference call to discuss our fourth-quarter 2009 results. Thank you, and have a great day.

Thank you for participating 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 time on Tuesday, November 10. 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 number is 36570560.

You may now disconnect. Thank you and have a good day.