Westlake Corp (WLK) 2009 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 2009 earnings conference call. During the presentation, all participants will be in a listen-only mode. After the speaker's 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 23, 2010.

I would now like to turn the call over to today's host, Dave Hansen, Westlake Senior Vice President of Administration. Sir, you may begin.

Thank you very much, and 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. 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 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 1pm Eastern Time on March 2, 2010. 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 35127021.

Please note that information reported on this call speaks only as of today, February 23, 2010, 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 over the call 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 net income for the fourth quarter of 2009 of $12.5 million, or $0.19 per diluted share, and $0.80 per diluted share for the full year of 2009, up considerably from the loss of $1.67 per diluted share in the fourth quarter of 2008, and a loss of $0.45 per diluted share for full year 2008. In spite of rising energy prices and raw material costs and recessionary impacts on customer demand.

Sales for the fourth quarter were $630 million, driven by the continued strength of our polyethylene business. Our Olefin segment continued to build on successful 2009 recovery by delivering solid results in the fourth quarter. Prices for ethane and propane feedstock rose sharply in the fourth quarter, following crude oil prices which increased an average of $8 a barrel, to an average of $76 a barrel during the quarter.

After implementing polyethylene price increases of $0.17 a pound in the first nine months of 2009, the industry announced a further increase of $0.05 a pound for polyethylene for the fourth quarter, to offset the continued rise in feedstocks.

While polyethylene industry inventory levels remained low, slower seasonal demand hampered industry ability to fully implement the price increase, which tightened margins in the quarter. However, a $0.04 per pound price increase was fully implemented in January of 2010. In addition, the industry has announced a further series of price increases totaling $0.14 a pound, to be implemented throughout the first quarter, to offset the record increase in feedstock costs. Polyethylene demand continued to show its resiliency, compared to other commodities during this recessionary period.

Our fourth quarter sales volume reflected good demand in the domestic polyethylene markets, and very strong export opportunities. Westlake continued to benefit from the favorable cost advantage on the US Gulf Coast, for both raw materials and energy, that gas-based ethylene producers have over naphtha-based ethylene producers. This has allowed North American producers to remain globally competitive, resulting in strong industry export opportunities throughout the quarter.

Our Vinyls segment continued to face headwind in the quarter, even though sales volumes in the fourth quarter of 2009 for PVC resin exceeded those in the fourth quarter of 2008, and the third quarter of 2009. Our PVC pipe volumes were lower in the fourth quarter of 2009 than in the third quarter of 2009, due to the typical seasonal decline, and the slower construction activities.

The fourth quarter experienced a significant run-up in propane prices due to seasonal heating demand, but the announced price increase of PVC resin was not sufficient to offset increased cost of feedstocks during the quarter, and margins were adversely impacted.

To counter these cost increases, the PVC industry has announced price increases totaling $0.15 per pound for PVC resin to be implemented in the first quarter. Industry caustic prices, which had fallen from significant highs in the fourth quarter of 2008, appear to have reached a low point during the third quarter of 2009, and showed some recovery in the fourth quarter of 2009, increasing by $45 a ton according to CMAI.

The industry has announced a price increase of $35 a ton on caustic to be implemented in the first quarter. So that is a brief overview of our quarter. I want to reinforce that we have been saying all year, we are focused on items we can control, so act swiftly to reduce costs and position our business for growth in the future.

Now I would like to turn the call over to Steve for a review of the fourth quarter and full year results.

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

Let me begin with our consolidated results. Our net income for the fourth quarter 2009 was $12.5 million, or $0.19 per diluted share, compared to a loss of $109.6 million, or a loss of $1.67 per share in the fourth quarter of 2008, and compared to net income of $29.8 million in the third quarter of 2009, or $0.45 per diluted share.

Our operating income for the fourth quarter was $23 million on sales of $630 million, as compared to an operating loss of $165.8 million, on sales of $597 million in the fourth quarter of 2008. And compared to an operating income of $49 million on sales of $633 million in the third quarter of 2009.

Net income for the full year of 2009 was $53 million, or $0.80 per diluted share, compared to a loss of $29.5 million, or $0.45 per diluted share for 2008.

Operating income for the full year was $107.3 million on sales of $2.3 billion, compared to an operating loss of $29.5 million on sales of $3.7 billion for 2008. The tax rate for the fourth quarter was 19%, and the tax rate for the full year 2009 was 32.7%. Our low tax rate for the quarter was the result of tax settlements in the quarter. Despite the severe recessionary environment that existed at the beginning of 2009, the strength of the polyethylene market and our strict cost control contributed to significant improved earnings and strong liquidity throughout the year.

An important part of our culture is keeping our costs low through productivity improvements, process improvements and cost reductions actions, and we will continue to focus on these issues in 2010, as we pursue our integration strategy.

During the fourth quarter we generated $22 million in cash from operations, and $235 million in cash from operations for the full year of 2009. We ended the year with $347 million in cash including restricted cash.

Now continuing with a discussion of our balance sheet and capital expenditures I will highlight a few key items. We finished 2009 with $168.7 million in net debt, and our net debt to capitalization ratio remains very low at 12%. We have no debt maturities until 2016, and our $400 million committed revolver remains available and undrawn. Our balance sheet is one of the strongest in the industry.

Capital expenditures for the fourth quarter were $34.7 million and $99.8 million for the full year 2009. Our planned capital expenditures for 2010 are expected to be in the range of $100 million to $125 million.

Now let me turn to the Olefins segment. We reported operating income of $55.1 million on sales of $461.2 million during the fourth quarter, as compared to $61.7 million of operating income on sales of $441 million reported in the third quarter 2009.

Polyethylene sales volumes remained strong during the fourth quarter, as strong, very strong exports supplemented a steady domestic market. Prices for ethane and propane feedstock rose sharply in the fourth quarter, and thus integrated polyethylene margins were negatively impacted in the fourth quarter as a result of these higher feedstock costs, and the inability of the industry to fully implement the announced $0.05 per pound price increase.

Our feedstock trading activities resulted in a gain of $1.7 million in the fourth quarter, and a gain of $5.3 million for the full year 2009. Operating income for the full year 2009 was $177.1 million on sales of $1.6 billion, compared to a loss of $40 million on sales of $2.6 billion for 2008.

Polyethylene demand rebounded from the recessionary levels at the beginning of 2009, and the full year 2009 sales volumes reflected continued solid demand in the domestic market, and a strong export market that has continued to keep polyethylene inventories tight all year, even as prices continue to rise. As mentioned earlier, the industry implemented a $0.04 per pound increase in January, and has announced further price increases totaling $0.14 per pound to be implemented during first quarter in 2010, due to sharply higher feedstock costs.

Turning to the Vinyls segment, Vinyls segment reported an operating loss of $29.2 million on sales of $168.9 million during the fourth quarter, as compared to an operating loss of $8.1 million on sales of $191.6 million reported in the third quarter of 2009. This operating loss was primarily related to sharp increases in propane and ethane feedstock costs, weakness in the construction markets, and normal seasonal slowdowns. The industry was able to implement a $0.01 per pound increase for PVC resin during the quarter, but this increase was insufficient to offset the sharply higher feedstock costs.

Our Vinyls segment continues to face headwinds in the quarter even though sales volumes for PVC resin increased over the fourth quarter of 2008 and the third quarter of 2009.

Our PVC pipe volumes were lower in the fourth quarter of 2009 compared to the third quarter of 2009, due to the typical seasonal slowdown and slower construction activities. Demand for caustic fell in the fourth quarter versus a seasonally stronger third quarter, but as Albert noted earlier, industry caustic sales prices reached a bottom in the third quarter, and industry prices have increased by $45 per ton in the fourth quarter.

For the year 2009, our Vinyls segment reported an operating loss of $57.4 million on sales of $714 million, as compared to operating income of $17.9 million on sales of $1.1 billion for the full year 2008.

The soft construction markets and weakness in caustic demand continued to plague the Vinyls industry in 2009. The significant decline in caustic pricing in the first nine months of 2009, reversed itself as caustic prices appeared to have bottomed, and prices have moved up in the fourth quarter. Cost control was a top priority at Westlake throughout 2009, and will continue to be a top priority in 2010, as we pursue our integration strategies.

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

Thanks, Steve. Now let's discuss the outlook for the industry. Turning to our Vinyls business, we believe the Vinyls industry will continue to be negatively impacted by weak construction markets, and we maintain a cautious outlook for the business as the economy recovers. Near-term, the PVC industry has announced a $0.05 per pound price increase implemented in January, and another $0.10 a pound price increase to be implemented over the remainder of the quarter to partially offset the sharp rise in ethylene costs.

Looking beyond the current conditions, our long-term goal is to push forward with our vertical integration strategy. Our investments in the PVC resin expansion in Calvert City, PVC pipe facilities and expansion of our chlorine facility, are focused on this strategy, as we believe the vinyls industry will experience strong growth when the construction markets and the economy rebound.

Now let us discuss the Olefins markets. The cold weather and strong demand in ethylene derivatives, resulted in sharp increases in energy and feedstock prices. The cold weather also caused a number of industry plant shutdowns along the Gulf Coast, including one of our Lake Charles ethylene units, which was down for 20 days in January. Looking forward, natural gas-based ethylene producers like Westlake, will continue to have a cost advantage over naphtha-based ethylene producers around the world.

We expect to see continued polyethylene export opportunities, to supplement our well-positioned domestic business. We also expect that our focus on value-added grades of polyethylene will 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 on lower value, higher volume commodity grades of linear low-density polyethylene and high-density polyethylene. These commodity grades will be targeted primarily for the closer European and Asian markets.

As we look forward to 2010, we will pursue our plans to grow the businesses, while continuing to exercise the financial discipline that has kept us strong through this recession.

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 are now prepared to take questions.

(Operator Instructions). We have a question from the line of Kevin McCarthy, Bank of America/Merrill Lynch. Please proceed.

Good morning, this is Alex Uframoff for Kevin. Albert, can you give us an estimate of how much the outage at one of your ethylene crackers might have caused, in terms of direct costs or additional open market ethylene purchases?

Yes. Good morning, Alex. Certainly this has impacted our business. As you know, we are net buyers of ethylene. So the outage has further caused us to go out to the market and purchase additional ethylene for our needs.

So can you give us an estimate if there was a direct cost involved in fixing the technical problem?

Yes. This is Steve. There was about $1 million cost for the repair of the facility.

We will report that in the next quarter's conference call.

Got it. Thank you. And then a question on polyethylene. Could you give us just an update on how volumes are tracking in the first quarter, compared to the fourth quarter of 2009, in both the exports markets and domestic?

Yes, I think certainly there are some seasonal factors in the polyethylene business, ethylene not as seasonal as the PVC business. But as a whole the demand is strong, the export demand is strong, and prices as we have discussed in the conference call is moving up, both domestically and in export markets.

Okay. Thank you.

You are welcome.

We have a question from the line of Don Carson, UBS, please proceed.

Yes, thank you. Question on feedstocks, Albert. We have seen the ethane advantage versus naphtha come in quite a bit with the run-up in ethane prices and higher ethane demand, just wonder what impact that has had on your feedstocks slate. Have you switched a little more to propane, in order to take advantage of some of those high propylene co-product credits?

Yes, certainly. As a whole ethane is still preferred over propane. Propane prices have been affected more with the cold winter weather in the US. So despite the favorable by-product credits, ethane feedstock is still preferred over propane cracking.

And what is your outlook for exports this year, I know you talked about how most of the new Mid East capacity is linear low and high density. So do you still see from the volume perspective that you could in 2010, that your low density exports could approach what the volumes were in 2009? Or do you see some potential for reduction there?

For the industry, I think that certainly if more Middle East plants start up, and some of those as you know have been delayed for a while, it will have a global impact. But for LDPE, we think very little capacity has been added in the Middle East. It should have the least impact on linear low or high density, and for Westlake, we have predominantly domestic sales company, our export volume on the average is much lower than the industry export volume for polyethylene.

And finally just a question on Vinyl. When do you think we reach bottom? I mean we are looking for about a 10% decline in nonresidential construction in 2010. Is that really what we have to see bottom first, before there is this prospect of improved volumes in your Vinyls business?

I think the construction market, not just residential, it is governmental infrastructure, as well as industrial and commercial, all that has impact on the demand for PVC. And that really goes with the economy and the government's stimulus plan to do further infrastructure work. So I believe that the new home starts probably has bottomed already, but the question is how fast does the growth come back.

Okay. Thank you.

You are welcome.

(Operator Instructions). We have a question from Tarek Hamid with JPMorgan. Please proceed.

Good morning.

Good morning.

You mentioned a couple times that vinyl resin sales were up in the fourth quarter over the third quarter. Was that due to export demand, or is that something funky going on in the domestic market?

I think a bit of both. Export demand is quite strong. The price increases announced certainly for the first quarter, so there is some prebuying as well. But I think the inventory has been held very low in the industry. So whether an export push or price increase, there tends to be more demand.

I guess on working capital, any sort of early thoughts for working capital in 2010? Obviously great performance in 2009.

Well, working capital certainly will follow if we see a continued and sustained level of rising prices in feedstocks, if we are not able to get our increases in prices through. But if we are able to get these increases in prices through, I wouldn't expect to see a significant rise in working capital.

Great. Thank you.

We have a question from the line of David Howard, Goldman Sachs. Please proceed.

Good morning, guys.

Good morning, David.

I had one question about operating rates in polyethylene. Could you comment a little bit on that? I think I recently heard they were around the mid-80s. But where are they now? And what do you expect them to be going forward as the Middle East capacity additions come online?

Yes. I think that operating rates have been in the probably high-80s and low-90s in the fourth quarter of '09 and the first quarter of '10. But I think the industry consultants are looking at high-80s on the average for this year, and 80s in the following year.

Okay. Great. And then just a follow-up, a little bit of a housekeeping thing. For taxes, I know you guys had recorded a lower tax rate this quarter. I was wondering what we should expect for that going forward, plus in terms of the Olefin D&A, that came down pretty substantially as a percentage of sales. Is that something that is sustainable?

Well, in terms of tax rate, again we are going to give guidance of a 36% rate for the full year of 2010. And your question on Olefins?

Yes.

Can I get you to repeat that?

Oh, yes. Olefins D&A as a percentage of sales came down a little bit. I was just wondering whether or not that is going to be sustainable going forward?

No. No. I wouldn't expect any material change there.

Okay. Great.

We have a question from the line of Bill Hoffmann, RBC Capital Markets. Please proceed.

Good morning.

Good morning.

Albert, I wonder if you could talk a little bit about what percentage of sales were in the export markets in maybe the fourth quarter, and whether you see obviously in the short-term here any change in export demand as you see prices going up? And this is obviously in the Olefins business.

And then my second question has to do more with the Vinyls side of the equation. And there, just trying to get a sense of whether you are seeing some normal seasonal improvement in pipe demand.

And then finally if you could comment on your chlor-alkali expansion, and how you feel about the timing of bringing that online at this point?

Yes. I think the industry consultants reported that export in the Olefins polyethylene industry in the US probably has averaged about high-20s percentage. And depending on the global demand for economy recovery and demand, certainly that number can't maintain the area unless demand drops a lot, or the Middle East impact is felt in a stronger fashion.

The question for the Vinyls, certainly the pipe industry, generally about the spring, probably starting about March onwards is a good season. And this winter has been particularly cold in many parts of the country. So the demand, the usage for pipe certainly was not as strong as expected. So expect volumes to improve, and as we have discussed $0.13 a pound price increase announced for PVC in the first quarter, definitely will have an impact on the PVC pipe prices.

As far as our chlorine products are concerned, we are studying the timing of construction, so a bit of estimating when we feel that the recovery would warrant the construction of the plant.

Okay. Thanks. And just a follow-up on the export questions. Running these export levels obviously quite high, from your own mix and the fact that you are more in LDPE than some of the other grades, do you expect to be able to keep an export level volumes up higher longer?

As I said earlier, Westlake exports at much lower percentage of our total sales than the industry in the US. Certainly we do export LDP as well. And because of the more specialty nature of LDPE, the volatilities should be less than the other commodity grades we spoke about.

Okay. Thank you.

You are welcome.

And we have a question from the line of Frank Mitsch, BB&T Capital Markets. Please proceed.

Hi. It is Sabina Chatterjee in for Frank Mitsch. Most of my questions have been answered already. But just a follow-up on the chlor-alkali expansion. I noticed there was a use of restricted cash in the quarter. And from what I recall, that is earmarked for the chlor-alkali facility. So can you just update us on the progress that you actually made? I know you mentioned it on the last question, but just a little more detail would be great.

Sure. The restricted cash can be used throughout our sites in Louisiana, be it in the facility in Lake Charles or in Geismar. So there isn't a restriction in terms of that particular project. But across the uses that we have in those projects. And so we used the restricted cash during the year and during the quarter for projects both in Lake Charles and in Geismar.

Okay, great. And so as far as the decision to go forward with the expansion, that is still set to be some time over the next few months?

As Albert was saying, we are continuing to study the demand market for that, and looking at the economy and how that begins to return. And the economics behind that.

Okay. Great. Thank you.

(Operator Instructions).

Okay. Operator, are there any more callers?

There are no more questions at this time. This concludes the Q&A session. Are there any closing remarks?

We would like to just thank you for participating in today's call. And we are hopeful that you will join us again for our next conference call to discuss our first quarter 2010 results. Thank you very much, and have a great day.

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, and may be accessed until 1pm Eastern Standard Time on Tuesday, March 2, 2010. 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 for both numbers is 35127021. Thank you, and you may now disconnect, have a great day.