Westlake Corp (WLK) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Westlake Chemical Corporation first quarter 2010 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, May 4, 2010. I would now like to turn the call over to your host for today, Mr. Dave Hansen, Westlake's Senior Vice President of Administration. Sir, you may begin.

Good morning, everyone, and thank you for joining us for the Westlake Chemical Corporation first quarter conference call. I'm joined today by Albert Chao, our President and CEO; and Steve Bender, our Senior Vice President and Chief Financial Officer, as well as 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 first 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 the call up 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 webpage at Westlake.com. A replay of today's call will be available beginning one hour after completion of this call until 1 PM Eastern Time on May 11, 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 59464821. Please note that information reported on this call speaks only as of today, May 4, 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 webpage at Westlake.com. Now I'd like to turn the call over to Albert Chao.

Good morning, ladies and gentlemen, and thank you for joining us. In this morning's press release we reported net income for the first quarter of 2010 of $17.6 million or $0.27 per diluted share on sales of $778.3 million. These results were a significant increase over both the first quarter of 2009 net loss of $6.1 million or $0.09 per diluted share and over the fourth quarter 2009 earnings of $12.5 million or $0.19 per diluted share. These earnings reflect the continued good demand in our Olefins business and a seasonal pickup in our Vinyls segment.

The improvement in earnings occurred in spite of a 21-day outage at one of our ethylene units in Lake Charles in January and a sustained high cost level in most of our feedstocks during the quarter. Our Olefins segment turned in a strong performance in this quarter with higher volumes, higher sales prices and stronger margins. Sales revenue for the Olefins segment was $565 million, a 75% increase over the first quarter of 2009 and an increase of 23% over last quarter. Olefins sales volumes rose 17% year-over-year as polyethylene demand remained solid throughout the first quarter and inventories remained low.

Prices for ethylene rose steadily in the quarter and continued to remain elevated throughout the quarter. The sustained high level of ethylene prices and supply constraints due to cold weather prompted the polyethylene industry to implement price increases totaling $0.18 a pound during the first quarter to offset the effects of these higher feedstock costs.

The PVC industry has also responded to the higher ethylene prices with a series of price increases during the quarter, but these increases were not sufficient to completely offset the cost of higher feedstock costs. Sales for the Vinyl segment were $230 million, a 29% increase over the first quarter of 2009 and a 26% increase over the fourth quarter. Although construction markets remain challenged, our Vinyl segment saw a significant pickup in demand in the first quarter, when sales volumes and sales prices improving in PVC resin and PVC pipe year-over-year and compared to last quarter. These increases are the result of normal seasonal buying and stronger economic activity in the general economy.

Now I would like to turn the call over to Steve for a review of the first-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 Vinyl segment results.

Let me begin with our consolidated results. Our net income for the first quarter of 2010 was $17.6 million or $0.27 per diluted share, compared to a loss of $6.1 million or $0.09 per diluted share in the first quarter of 2009 and compared to net income of $12.5 million in the fourth quarter of 2009 or $0.19 per diluted share.

Our operating income for the first quarter was $34.4 million on sales of $778.3 million as compared to an operating loss of $900,000 on sales of the $488.3 million in the first quarter of 2009 and an operating income of $23 million on sales of $630 million in the fourth quarter of 2009. Our results were a significant improvement from a year ago and compared to last quarter, in spite of the 21-day outage of one of our ethylene units in Lake Charles, which is to we estimate had a negative pre-tax financial impact of approximately $15 million or $0.15 per diluted share.

As Albert indicated, during the fourth quarter of 2009 and throughout much of the first quarter of 2010 we experienced a spike in ethane and propane feedstock costs resulting in a significant increase in ethylene prices. The increase in ethylene prices was further aggravated by supply constraints as a result of numerous cracker outages in the Gulf coast. In response to this run-up in ethylene prices the polyethylene and PVC industries announced a series of price increases during the first quarter. These higher prices, along with continued strong Olefins customer demand, allowed us to offset these higher feedstock costs and expand margins in our Olefins products. Ethane and propane costs started declining late in the quarter due to reduced demand as a result of unplanned cracker outages experienced by the industry. However, ethylene prices remain high.

As a result of using FIFO accounting, the full benefit in our integrated margin in the Olefins segment that resulted from the decrease in ethane and propane cost in March will be realized as our polyethylene inventory is sold in the second quarter. With the recovery in the economy, our Company-wide sales points for all of our products were 20% higher over the first quarter of 2009 and 7% higher than last quarter.

Now let me continue with a discussion of our balance sheet and capital expenditure items. I'll highlight just a few key items. Our balance sheet is one of the strongest in the industry. Our net debt at the end of the quarter was $234 million and our net debt to capitalization ratio remains very low at 15%. We ended the quarter with $281 million in cash, including restricted cash. We have no debt maturities until 2016, and our $400 million committed revolver remains available and undrawn. Capital expenditures for the first quarter were $14.7 million, and our planned capital expenditures for 2010 are expected to be in the range of $100 million to $125 million.

Our cash flow, cash position and liquidity all remain very solid. We continue to be watchful of our costs, and at the same time we're actively searching for value-added opportunities to further grow our businesses.

Now let me turn to our Olefins segment. We reported operating income of $58.2 million on sales of $565 million during the first quarter as compared to $55.1 million of operating income on sales of $461.2 million reported in the fourth quarter of 2009. Volumes in the Olefins segment were up 5% over the fourth quarter and 17% year-over-year. Polyethylene sales volumes remained strong during the first quarter as the sales volumes momentum from last year continued into the first quarter while polyethylene inventories across the industry remained tight.

The rapid run up in feedstock prices that began in the fourth quarter and continued into the first quarter caused polyethylene producers to implement a series of price increases totaling $0.18 per pound. The run-up in ethylene prices slowed industry exports of polyethylene.

Now turning to the Vinyl segment, we saw a 26% increase in Vinyl segment sales volumes year-over-year and a 15% increase over the fourth quarter. These higher sales volumes were driven by improved construction activity and an increase in general economic activity, resulting in higher vinyls operating rates. Resin producers were able to implement a series of price increases totaling $0.13 per pound during the first quarter, which partially offset the substantially higher ethylene feedstock costs.

The Vinyl segment reported an operating loss of $14.9 million on sales of $213.3 million during the first quarter as compared to an operating loss of $15.4 million on sales of $165.5 million reported in the first quarter of 2009. Improved industry cost-supply demand balance helped industry costing prices increase by approximately $75 per ton during the first quarter. An additional price increase of $80 per ton on costs have been announced by the industry, to be implemented in the second quarter.

Cost control is and will continue to be a top priority in 2010, and we will continue to search for operational efficiencies to improve margins and returns. Now let me turn the call back over to Albert.

Now let us discuss the industry outlook. Turning first to our Vinyls business, we are optimistic that we will see moderate growth in the economy in 2010. We believe as the economy improves and the construction activity increases, the segment will improve its performance over 2009. Looking beyond the current conditions, we believe the pursuit of our vertical integration strategy will further position Westlake to take full advantage when the industry recovers.

As to the Olefins segment, over the next few years we expect the Middle East capacity additions, which have advantaged feedstock costs, will be more focused on 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. Westlake's focus is on the production of value-added grades of polyethylene that will serve to maintain our strong competitive position in the polyethylene business.

In addition, Westlake's natural gas-based production of ethylene should continue to have a cost advantage over naphtha-based ethylene producers around the world. Longer-term, we expect that additional shale gas drilling in the US will continue to keep US natural gas-based ethylene production globally competitive. As we move forward, we will continue to seek out opportunities to expand our businesses in a manner that will create value for our shareholders.

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

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'll provide that number again at the end of the call.

Operator, we are now prepared to take questions.

(Operator instructions) Jeff Zekauskas, JP Morgan.

I was wondering about your thoughts on the relationship between ethane over time and natural gas over time in the United States. That is, do you think that ethane -- the gap between natural gas and ethane will widen or contract over time? Will ethane become relatively more expensive or less expensive, in your opinion?

That's a good question, Jeff. In the past, ethane follows more natural gas prices, but in the last few years, as oil price has expanded or increased a great deal over natural gas price in terms of BTU value, ethane has become the preferred feedstock. As a result, the value of ethane has increased to be somewhere between natural gas prices on a BTU basis and crude oil. And I think it's a question of supply-demand.

Most of the ethylene plants that can burn ethane have been using ethane, and many of the naphtha-based ethylene plants in the US, which were about one third of the US capacity, many of them have moved towards using ethane for some part of their plant.

So we think that the majority of those capacity conversions have been done already. So the incremental demand for additional ethane is limited. However, depending on the shale gas production, there could be more ethane available. So, as we learn how much ethane will be available from the shale gas production, it will have an impact on the supply side.

So, if I understand what you said to me, you think that ethane will be relatively cheaper over time in the United States, all things being equal, because production of natural gas liquids will step up?

Yes. We believe that ethane definitely in the US will be more competitive with the Naphtha-based ethylene producers around the world.

Okay, just a couple of practical questions. Why were your revenues in Olefins so high in that, if you look at the CMAI data that you provide, the per-pound prices were really much lower on average than what you seem to have realized in the quarter? How did you get all those revenues?

I think polyethylene price has increased to $0.18 a pound over the last three months in the first quarter of 2010, and that's a material increase. Suddenly our volumes improved as well, so if you add those two together, then you have a substantial revenue increase, especially compared over the first quarter of 2009, when volumes were low and prices were low also.

How did the outage impact -- your ethylene outage impact your polyethylene production? Was that material or was that not material?

It was material in the sense that we have to purchase ethylene on the market to supplement because we are a net buyer of ethylene. So when the ethylene plant went down, not only we lost opportunities in margin in selling ethylene to our polyethylene units, but we had to go outside and buy very expensive ethylene.

And lastly, why were your corporate expenses so high, or was this an unusual bump up having to do with the outage?

No, Jeff. The reason for the increase is, if you're looking at the income from operations, are you talking about, or are you talking about SG&A?

I'm talking about your segment information.

When you look at that, you have to recognize that we have to eliminate certain items that are intercompany items from the segment information. And so the residing point for that elimination is in the corporate segment.

So why were the eliminations higher this quarter than they were, say, last year?

They were hire because of the higher level of business activities compared to the first quarter of 2009, simply to a higher level of sales level.

So if your revenues were more or less the same for the next three quarters, then you would expect corporate and other to be close to $9 million per quarter?

No. I think it's a function also of the rapid run-up. Remember, we are selling ethylene into the polyethylene unit. And because of the rapid run-up of feedstocks and ethylene, you do have some intercompany eliminations that are going on there.

James Sheehan, Deutsche Bank.

Could you please quantify what was the impact of FIFO accounting in the quarter?

Very small this quarter, just about a $0.02 impact positively.

Also, Albert, how do you think your volumes for polyethylene are looking in April? Can you give us some color on that, please?

Well, generally industry speaking, I think that the price increase of $0.18 has held, and the industry has announced another $0.05 a pound price increase in April, which we think yet to be implemented. So with a run-up in prices so high, I think there will be some adjustment in terms of domestic purchase as well as export. The export business has slowed down somewhat because of the high cost of ethylene, but as we speak spot ethylene price has come down significantly on the very high levels, in the $0.70 down. So we think that both export and domestic then should be recovering.

Also, finally, on your polyethylene business, could you just comment on what your operating rate was during the quarter?

We are operating at industry or higher than industry rates.

Don Carson, UBS.

Albert, you referred to spot ethylene coming down pretty hard here, although it's still well above -- I guess ethylene cash costs are $0.25-$0.26. So what are you expecting on the progression of prices this quarter? I understand that the $0.05 April price increase got pushed to May and, in fact, it looks like it's not going to go through and pricing could come down. So with the industry getting a little looser here, some of the outages behind us, how quickly do you expect spot ethylene to come down and polymer prices to follow that?

Spot ethylene price, still very high, as you said. The ethane cash cost is about around $0.25 a pound today, and spot ethylene is being as low as $0.40 but as (inaudible) will be, it just changes day by day. So it's still substantial margin for ethylene-based ethylene producers.

I think, from the polyethylene point of view, looking at CDI's forecast, that the average of first-quarter and second-quarter polyethylene prices are very close. So, even though there is a potential drop in the first half and second half of 2010 by CDI's forecast. But in the first half, the price between the first and second quarter are pretty close.

Obviously, you do a more value-added grade in the form of high pressure, low density. But what happens to the spread between LDPE and linear low and HTPE as those prices fall? Are you able to widen your spread, or does it stay pretty constant?

It depends on the grades. Suddenly LDP is the preferred -- LDP from a margin point of view, from a producer point of view. And it's a limited supply internationally. So we think that the margin spread between LDP linear low and high density should at least maintain, if not widen.

Finally, turning to the chlor-alkali side, what was your operating rate in the first quarter versus the industry rate of roughly 86%?

Very high because we are net buyers of chlorine so we run our plants at a very high rate.

Charles Neivert, Dahlman Rose.

Just a quick question on getting back to that same margin gap. I understand you guys sell at higher grade. But typically, if we are looking at linears, both in the linears and in the low density, what is typically your price gap over the commodity grade of each, let's say, over butane for a linear low and like a clarity grade for low density? On average, what would you guys think of your differential between your product and the commodity grade?

Well, according to CDI, the butane grade linear low and LDP is about $0.05 a pound.

Okay. And between what you guys sell and those grades, in each of those areas -- so the linears that you sell -- what's the gap up between that and butane? And the same thing on the low density, is there a range that it tends to fall in?

Particularly on the grades, it can be higher than that.

Are we talking, let's say on the low density stuff versus the commodity, is it $0.05-$0.10 higher than the commodity version?

As I said, the commodity version as reported by CDI is about $0.05 a pound. And the specialties will be greater.

That's it for my questions today. Thank you.

Bill Hoffmann, RBC Capital Markets.

I wonder if you could talk a little bit about the export markets. We're also hearing about softness there. I'm just curious about whether we could put any parameters about how much softer it is than where they had been maybe last year, certainly where the export markets were really strong.

Are you talking about from US point of view or --

Yes, from a US point of view.

Yes, I think US has -- in polyethylene?

Yes.

Polyethylene has had a lot of export last year, and I think, going to the first quarter of this year, because of the run-up in ethylene prices and the shortage of ethylene due to the cold weather cost, a lot of problems with ethylene producers in Gulf Coast, the export amount has reduced compared with the fourth quarter of last year, for example.

But as the crackers come back online domestically, our understanding is, as producers go back to the export markets from North America, they are finding softer market conditions out there?

I would expect, as ethylene prices come down, US producers will export more polyethylene. As you know, the rest of the world is still based on -- half are the Middle East based on ethyl crackers, and oil prices are pretty high. So we think the US producers will be able to compete globally in the (inaudible) export market.

Do you sense that the Chinese are still buying heavily out there?

It's -- I think, goes week by week. The demand we think is still quite strong. There were some inventory adjustments after the Chinese new year, but we think that it has returned to more of a steady state condition.

Just with regards to Vinyls business, I just wondered if you could talk a little bit about, sort of on a month by month basis, whether you are seeing normal seasonal recovery here through April versus March or how you can characterize those markets.

Yes. I think, generally speaking, springtime is the larger demand time during the year for PVC pipe for construction. And so we've seen, definitely, an increase in volume and prices, as we said. But we'll see whether this will continue, depending on the US economy and the construction market for both residential and non-residential.

Do you feel like you are getting the same level of seasonal pickup here, though, this year versus prior years? Obviously we are at a lower rate, but --

(multiple speakers) definitely. Definitely, we are seeing volume has improved over last year's first quarter and over last quarter, in the fourth quarter in last year. But it's still not returning to the heydays of the construction business, definitely by no means.

And, how about more in the commercial, the large diameter pipe business? What's the dynamic here in April?

The large diameter pipe business is, on the average, doing better than the other, smaller-diameter pipe business.

Bill Young ChemSpeak.

Speaking on one of the other questions, historically, when you've had a run up in prices, you said like $0.18 on polyethylene, and this has led to inventory building and typically a correction when the strain on the system is removed. In this case, ethylene availability has improved and spot price has dropped -- while still high, spot price has dropped. How confident are you that the industry is not going to experience an inventory correction, say, in the next two or three months, as things flatten out or even come down? As was said, the polyethylene price hike has been pushed off from April to May.

I think that, as we said, we think the producers inventory -- because of the lack of ethylene and high-priced ethylene, the polyethylene producer inventory is low. And we think that, because of the high run-up in prices last quarter, the consumer's inventory, the converters who buy polyethylene inventories also very low. We are seeing [a real] (inaudible) turnaround being pretty good.

So I don't think people, at these high prices, are holding more inventory.

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

Yes. Thank you very much. We'd like to thank you again for participating in today's call, and we hope you will join us again for our next conference call to discuss our second-quarter 2010 results. Thank you very much and have a great 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 an hour after the call has ended and may be accessed until 1 PM Eastern Time on Tuesday, May 11, 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 at both numbers is 59464821. Thank you and have a great day.