Westlake Corp (WLK) 2010 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Chemical Corporation second 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, August 3, 2010.

I would now like to turn the call over to your host, Dave Hansen, Westlake's 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 second 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 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 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 August 10, 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 36309906. Please note that information reported on this call speaks only as of today, August 3, 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. Albert?

Thank you, Dave. Good morning, ladies and gentlemen, and thank you for joining us. In this morning's press release, we report second quarter earnings growth of over 200%, as compared to a year ago and last quarter. Our Olefins segment achieved record quarterly earnings as a result of strong demand for polyethylene, our focus on higher margin, low-density and specialty grades of polyethylene, and the ethylene cost advantage of our natural gas-based feed slate.

Earnings benefited year-over-year from improved Olefins integrated product margins resulting from significant increases in product prices, which were only partially offset by increased feedstock costs. The polyethylene industry sales volume was strong compared to a year ago. The relatively low cost of ethane when compared to naphtha as a feedstock drove higher margins in the Olefins business.

Our focus on low-density polyethylene continues to benefit Westlake in the global polyethylene business. The cost advantage of ethane-based ethylene continues to create strong export opportunities for North American polyethylene producers that has helped maintain a healthy supply-demand balance in the domestic markets and left inventories relatively tight. Looking forward, the polyethylene industry has announced a price increase of $0.05 a pound, effective September 1, driven by higher naphtha and spot ethylene prices.

Our Vinyls business had a modest improvement from last quarter, albeit still at a loss. Commercial construction and infrastructure investments continue to lag behind the rest of the economy. Furthermore, municipal spending continues to be constrained due to budgetary limitations.

Sales for the Vinyl segment were 28% higher than those of a year ago and 13% higher than those in the first quarter, due to increases in prices and volumes. However, margins continue to remain under pressure as a result of higher feedstock costs.

While the second quarter loss from operations in the Vinyl segment was an improvement over the first quarter, sales volumes did not reflect normal seasonal uptick. As for the caustic industry, the ongoing improvements in the manufacturing sector of the economy continue to support domestic caustic demand, and industry announced and begun to implement $80 per ton price increase during the second quarter and has announced an additional $50 per ton increase for the third quarter.

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 the consolidated financial results, followed by a more detailed discussion of our Olefins and Vinyl segment results. Let me begin with our consolidated results.

Westlake had a very robust second quarter, posting net income of $57 million, or $0.86 per share, compared to net income of $17 million or $0.26 per share in the second quarter of 2009, and net income of $18 million in the first quarter of 2010, or $0.27 per share.

Our operating income for the second quarter was $100 million on sales of $818 million as compared to an operating income of $36 million on sales of $575 million in the second quarter of 2009, and operating income of $34 million on sales of $778 million in the first quarter of 2010.

Sales for the second quarter increased by $40 million over the first quarter, due largely to higher average selling prices for all of our major products. Our results were up significantly over both last quarter and a year ago, as our Olefins segment achieved record earnings. The increase in income from operations was primarily due to higher Olefins integrated margins resulting from lower feedstock cost and higher average selling prices.

Our Vinyls segment performance reflected an improvement over the previous quarter on the strength of higher caustic and PVC volumes and prices.

Now let's discuss the impact of FIFO accounting compared to LIFO accounting. Our second quarter results were negatively impacted by $0.17 per share, due to our use of FIFO inventory evaluation, as a result of falling feedstock prices when compared to the LIFO inventory evaluation method. Please bear in mind that this calculation is only an estimate and has not been audited.

Now, continuing with the discussion of our balance sheet and capital expenditures, I'll highlight a few key items. Our balance sheet continues to be one of strongest in the industry. Our net debt at the end of the second quarter was $142 million and our net debt-to-capitalization ratio remains very low at 9.5%. We ended the second quarter with $373 million in cash, including restricted cash of $84 million.

Just after the end of the second quarter, we issued $100 million of tax exempt Gulf Opportunity Zone muni bonds maturing in 2029 whose proceeds will be used for our facilities in Louisiana. We have no debt maturities until 2016 and our $400 million committed revolver remains fully available and undrawn.

Capital expenditures for the first six months for the year were $31 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.

Let me now turn to the Olefins segment. We reported operating income of $111 million, on sales of $577 million during the second quarter, as compared to $58 million of operating income, on sales of $565 million reported in the first quarter of 2010. Our results were also a substantial improvement over the $44 million in earnings, on $387 million in sales, in the second quarter of 2009.

The operating earnings for this quarter represent a record for our Olefins segment and reflects the combination of our ethane cost advantage over other feedstocks and continuing strong demand for our product mix that have resulted in solid integrated margins for our Olefins segment. Our Olefins segment margins resulted from decreasing feedstock cost, strong demand for polyethylene and our advantage product slate of higher margins, specialty products and low-density polyethylene. Thus, the spread between the ethane and polyethylene price is the key to our Olefins margins.

As to the market trend, while polyethylene prices fell in the second quarter, feedstock costs declined at a faster rate than polyethylene prices. Low-density polyethylene prices decreased approximately $0.04 in April and another $0.04 in May, but did not decline in June, indicating that prices have stabilized. Since the end of the quarter, polyethylene industry has announced a $0.05 per pound increase effective September 1st. As volumes, total polyethylene sales volumes remained solid during the second quarter.

Now turning to the Vinyl segment. Our Vinyls operating loss for the second quarter was $11 million, on sales of $241 million, which was an improvement over the first quarter 2010 loss of $15 million, but is still a disappointment. The improvement in operating results was primarily due to higher caustic prices and slightly higher PVC margins when compared to the prior quarter.

Sales volumes in PVC did not reflect the normal seasonal uptick, though Vinyl segment sales revenues improved as PVC pipe and caustic prices were higher than the first quarter. However, industry resin prices moved lower in the second quarter as ethylene feedstock costs declined.

The second quarter 2010 operating loss of $11 million was weak when compared to the second quarter 2009 operating loss of $5 million. While volumes for PVC were similar in both quarters, PVC margins decreased year-over-year, due to increased feedstock cost that were not fully offset by higher PVC resin prices.

Caustic sales volumes were higher year-over-year, but were offset by lower caustic prices. Comparing our caustic activity to the first quarter of 2010, the positive momentum and improvement seen elsewhere in the economy in the second quarter resulted in an increase in our caustic prices and sales volumes. The industry is implementing an $80 per ton increase in caustic prices over the $75 per ton price increase implemented in the first quarter. We continue to be watchful of our cost and at the same time we will pursue value added opportunities to further grow our business.

Now, I would like to turn the call back over to Albert. Albert?

Thanks Steve. Now let's discuss industry outlook. Turning first to our Vinyls business, we are optimistic that we will see continued gradual growth in the economy. We recognize there are continuing challenges, especially in the construction industry, that weigh heavily on the wireless industry. As the economy improves and the construction activity increases, and with continued export opportunities, we believe we will see improvements in our Vinyls business performance.

Looking beyond the current conditions, our pursuit of a vertical integration strategy will further position Westlake to take full advantage of its benefit when industry recovers. As to the Olefins segment, we expect to continue to benefit from our value-added grades of polyethylene and our advantaged cost position of our natural gas-based ethylene production.

The startup of Middle East polyethylene capacity additions are focused on the higher volume commodity grades of a linear low-density polyethylene and high density polyethylene. These grades of polyethylene are targeted for the European and Asian markets, where costs of polyethylene are higher due to the higher costs of naphtha-based ethylene produced in those regions. Our focus remains on the production of value-added grades of polyethylene, which will serve to maintain our competitive position.

Looking forward, US shale natural gas production would add to the growing availability of ethane and thus will provide a continuing benefit to natural gas-based ethylene producers such as Westlake.

In conclusion, we will continue to remain focused on delivery on our commitments. This means maintaining operational and financial discipline, and investing for growth, that delivers value to our shareholders. Thank you very much.

Now let me turn the call 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.

Certainly. [Operator Instructions]. Your first question is from the line of Kevin McCarthy with Bank of America. Please proceed.

Yes, good morning.

Good morning.

Good morning.

Albert, first of all, congratulations on very good quarterly results here, particularly in ethylene and polyethylene. I want to ask you about Vinyls though. So, it looks like volumes improved sequentially, caustic prices up, ethylene prices down. Why did you not see a greater sequential improvement in profitability in the quarter, would you say?

Well, I think our feedstock costs has increased due to the high ethylene prices in the second quarter, as well as the chlorine prices remained high. That impacted our profit margin. By the way, thank you for the kind remarks.

So just a follow-up. If I look at CMAI benchmark numbers for example, they have ethylene prices down, it looks like $0.06 or $0.07 sequentially in 2Q versus 1Q, but am I understanding correctly that your cost did not go down?

I think during the second quarter, especially with the ethylene problems we have seen, for a while ethylene spot prices were very high in April time period, which carried over to our higher cost in the second quarter.

I see. Okay, thank you. Then maybe Albert a broader question, if I may. Your net debt level, it looks like it's the lowest since 2006. What are your latest thoughts with regard to uses of cash flow and particularly any opportunities that you might see for M&A in the private market these days?

Certainly, as we have said before, our cash flow first apply to capital expenditure and we mentioned that we have estimates about $100 million to $125 million for this year. And then, we look at M&A opportunities and we always look for opportunities and when it comes to fruition we will make the announcement. And thirdly, with paying down debt, how much debt we can pay down. And lastly, we look at paying dividends or share buybacks.

Okay. And then finally if I may for Steve, you mentioned you had a $0.17 headwind from FIFO in the quarter. I was a little bit surprised to hear that. Perhaps you could comment on how much feedstock inventory you keep. I wouldn't have thought that that would create such a swing.

No, Kevin the feedstock is always very small. Our FIFO number is really a function of the finished goods inventory that we have, and finished goods inventory really remain largely unchanged. So really what you saw was, as I mentioned in the first quarter call, some carryover from first quarter into second, as we work through the sales of that material from first quarter into second.

Okay, very good. Thank you very much.

Welcome.

Your next question is from the line of Frank Mitsch with BB&T Capital Markets. Please proceed.

Good morning and congrats on a record Olefins quarter.

Thank you, Frank.

Thank you.

Just to follow up on Kevin's question. Obviously $0.17 FIFO negative Q2. What, as you stand here today on August 3rd, what's your thoughts on FIFO plus/minus neutral in Q3?

That's a very difficult call to make because it's so much a function of the direction that we see feeds trending. And at this stage my crystal ball is cloudy. So, it really is a difficult call to make when we take a look at the impact, at this stage in the quarter.

If the quarter ended today, what would the number be roughly?

Quarter ended today, we're still seeing a trend down and so it would still be a headwind.

All right, that's what I thought, all right, great. And speaking of trending down, obviously you guys benefited from the lower ethane price out there, and Albert, it sounded from your comments, you obviously expect that to continue in the third quarter. Can you talk a little bit longer about the sustainability of low ethane relative to nat gas or naphtha going forward, thoughts on 2011 in that regard?

Yes, that -- right now the ethane inventory is quite high in the US and, as we speak ,more ethane being produced from the shale natural gas productions both on the Gulf Coast and other part of the US. And, so with more shale gas production, I would expect more ethane will be available in the future 2011 and beyond.

All right. So, this is -- from your perspective, this is a sustainable advantage that Westlake has?

Yes. And also, there are no new ethylene plant build in US or material capacity expansions, so the demand for ethane is growing at a slower rate than the supply.

Terrific. And speaking of expansions, what are your latest and greatest thoughts on possible chlor-alkali expansion plants?

We are finalizing our preparation for the project.

And when would you anticipate a go, no-go decision?

We will make announcement when it happens.

Okay, all right. Thank you so much.

You are welcome.

Your next question is from the line of Jeff Zekauskas with JPMorgan. Please proceed.

Hi, good morning.

Hi Jeff.

Hi. Your working capital use from the first half was about $90 million. Where do you think we will stand by the end of the year, all things being equal?

Well, I think the working capital is really a function of where we see sales support, right. So when you take out cash out of the calculation, certainly working capital did continue to build, just because of the strong level of sales we have. So I think you can kind of take a look at where you expect or where your model shows the sales to go and where you expect fees to go and that will give you a pretty good indication of where you expect working capital to trend.

Well, it seems your receivables are just up a lot, I mean your inventories haven't really moved all that much?

That's right. Inventories, not only ours but the industry, haven't changed much. But as we mentioned with Olefins having a record quarter, you would expect that we would have a much higher receivable balance. Price is up.

So I take that you think that that number will come down toward the end of the year, is that the idea?

No, I am not really any guidance. It's just really a function of where you see your model taking you.

Okay, so you don't have an opinion on it?

As I said, we don't give that kind of a guidance.

Okay. Why were your Olefins volumes down sequentially?

They were basically flat, Jeff. The numbers were very strong quarter-to-quarter and there was really no meaningful change in volumes.

So, it said it was down a couple of percent, so I guess the meaning of that is you are operating at sort of about as high a rate as you can plus or minus a tiny bit, is that the idea?

That's right.

Yes, Jeff.

Yes? Okay. You said your CapEx I think was $100 million to $120 million, but you spent $30 million in the first half, so...?

Well, the first two quarter is typically a lighter quarter capital expenditure-wise. I think the guidance is still accurate.

So for the six months though, you've spent $30 million right?

Yes.

So, how are you going to get, I don't know $60 million to 80 million spent in the second half, can you do that?

Yes, Jeff. As I said, I think the guidance is still accurate. As I mentioned, the first quarter is typically, seasonally, a softer quarter in terms of capital spending.

We usually try to catch up in the last quarter.

Okay. Can you talk about what went especially well in Vinyls in the second quarter and what went especially weakly for you, or where were you surprised on the positive side and on the negative side, as far as particular parts of your Vinyls operation?

Well, I think that the Vinyl operation in the second quarter was a slight improvement over the first quarter, but still in a very poor condition. I think the operating rate industry is still low in 80s and we are handicapped that we are buying ethylene and buying chlorine, so we don't get the full benefit of the margins both in the Olefins side and the Vinyls side and the PVC pipe business is still quite weak and construction business is still very slow and the margin has been squeezed in the pipe side at the same time.

Are you weighing any ethylene or polyethylene capacity expansions?

We are certainly looking at de-bottlenecking our ethylene plants, but these are not material changes right now.

And then, lastly, in terms of the acquisition environment, are there interesting properties on the market or it's not so interesting and if you got something, what is the size of things you are looking at?

Certainly we look at most of the businesses that are coming to the market or potentially could come to the market in our space, mainly the Olefins and Vinyls business. And as to how you should see us, we can't tell. Right now we don't have anything to announce.

Okay, good. Thanks very much.

You are welcome.

Your next question is from the line of Charles Neivert with Dahlman Rose. Please proceed.

Good morning.

Good morning.

Quick question. I guess you talked about the fact that polyethylene exports were doing well from the US, it was helping to support numbers. Were you guys any larger participant than you've been in the recent past? I know historically, or less recently, you guys haven't done too much in the way of exporting. Has that increased at all or is it still mostly a domestic sale situation?

We are primarily domestic. We do get involved with export markets, but at a much lesser extent than industry average.

Okay. And that hasn't really changed in any significant way in the last few quarters?

Has not changed.

Okay. And then, if I was looking at the Olefin margin from 2Q into 3Q, the whole chain margin, are we looking at likely to be a little bit of -- I mean let's just make the assumption that the September hike goes through just give it to you for now. But under that circumstance would we be looking at a compression or flat or may be a slight increase in the chain margin based on where we are versus 2Q?

Good question. The 2Q price went down for LDP, about $0.08 and a linear low of about $0.12 a pound, and so we are seeing a $0.05 a pound increase announced for September 1. I think CMAI, CDI forecasting for linear low a $0.02 of price decline in July and afterwards flatten out. It depends really on the ethane pricing and ethane price, as we discussed, has fallen in 2Q and there is some sign that ethane could be moving higher with the increased oil prices and naphtha prices. So, it's hard to tell early in the 3Q.

Okay. That's it on my side, thank you.

Thank you.

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

Thank you, good morning.

Good morning.

Albert, on your Vinyls business, do you expect to be profitable in either Q3 or Q4?

I would like to be, but it's hard to tell, depending on the feedstock costs as well as prices.

Fair enough. And on the $0.05 September increase, what do you think the industry needs to get that price increase through? How much more -- is it demand, is it outages, what's required for the $0.05 increase to be effective?

I think in terms of low density, it's pretty snug in the US and Olefins as well. So I think it's a good chance for the linear or high density side. It depends on the speed of Middle East plants coming up and can run smoothly. If they not, there is a good chance, because US export prices are going up in Asia as well as we speak and bottomed out in July and so depending on supply demand in Asia, which affects the supply demand in US as well as prices in US.

And lastly on the caustic price increase where do you stand in getting the full $80 per ton increase?

The $80, I think in the third quarter we will get the full $80 as we said as the $50 being announced in third quarter. So as $80 gets implemented, $50 will get implemented in due course.

Thank you.

Thank you.

(Operator Instructions). Your next question is from the line of Bill Hoffmann with RBC. Please proceed.

Yes, good morning.

Good morning.

Good morning, Bill.

Albert, I wondered if you could talk a little about the Vinyls demand sort of on a month-by-month basis through the summer. We've got a sense that the demand level sort of dropped off precipitously coming into June, I just wonder what you were seeing in July in the Vinyls business?

Usually in July, also in summer time, that some companies take turnarounds in the fabricating business, there is some slowdown in the third quarter. And then September-August, September-October, they pick up again.

Okay. I mean -- but it's our sense though that one, it's more than seasonal declines, do have any sense of that at this point?

Well, it depends really, as I said earlier, on the demands on the construction business. As you know most of the PVC are used in construction business. So they have seasonality involved as I said about fabricating plants sticking -- some shutdowns, and also you're right, the construction business has not recovered and so we are still suffering on the low demand for PVC.

Okay, thanks. And then just regards to the Olefins business, would your price increase on the LDPE, just sort of curious what you are hearing sort of -- I know you don't participate in the other segments as much, but I guess it's our thought that we will continue to see pricing pressure in HDPE and LLDPE as this facilities come online. So I just wondered what anecdotally you are hearing about competitive substrates that way?

Yes, as we said that US, outside of Middle East, probably has most competitive ethylene cost because of our largely ethane or natural gas liquids based ethylene crackers. So we are comparative with first the European and Asian producers. So the export markets for both linear low and high density is still pretty robust, of course it will be impacted by the speed of Middle East plants coming up. But as far as LDPE is concerned and there is very little new capacity coming out in the Middle East, and as a result, we are seeing snugness on a global basis in terms of supply demand and, as a result the prices are going faster than linear low and high density.

Great, okay. Thank you. And then Steve, just a question on the capital spend in the second half of the year. Can you just give us a sense of what that's focused on, is any of that sort of pre-work for the Vinyls -- core Vinyls expansion?

Yes, all combinations of that and...

Yes, there is certainly as what we were saying some combination of that, we also do ongoing work at all of our sites, but not a large portion of it necessarily related to the Vinyl side. But certainly it is a combination of all that work. I do think that the capital spend is still very much on target.

Okay. Thanks.

We have a follow-up from the line of Jeff Zekauskas with JPMorgan. Please proceed.

Thanks. You've talked about the FIFO headwind, I think at $0.17, can you divide that up roughly between the two divisions?

Jeff, we don't. We don't run a set of LIFO books and so, when we calculate that number, it is an estimate, but we don't break it between the two segments.

Okay. And then lastly, have you seen resin buyers held back purchases because -- the customers are watching ethylene prices fall and waiting for lower resin prices, or do you think that's not a factor?

Yes, I think that the drop in PVC price early this year definitely impacted by ethylene price drop and as we said that ethylene spot price has bottomed out and has coming up again because of the higher naphtha and ethane and propane prices, we will see that potentially there is the increase in PVC price in future.

Do you think there might be a step-up in PVC volume in the third quarter because of that?

Could be, and also because of the relative competitiveness of the US PVC production basis overseas, there is also a fair amount of export going from the US.

Yes. Okay, great. Thank you very much.

You are welcome.

We have another question from the line of Kevin McCarthy with Bank of America. Please proceed.

Yes. Albert, has there been any meaningful change in your negotiations in Trinidad over the past three months or so that you care to comment on?

Yes, Kevin. There is no change in our position with Trinidad -- in terms of Trinidad discussions.

Would you describe the project as dormant at this point or do you still think that there is a meaningful chance you would elect to proceed with that project over the next year or so?

It is dormant right now and certainly we'd like to do have the project become a fruition, but as we speak today I think it's dormant.

Okay. Thank you very much.

Thank you.

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

We would like to thank you for participating in today's call. We hope that you will be able to join us for our next conference call where we will discuss the third quarter results and we hope that you all have a great day. Thank you very much.

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 PM eastern time on Tuesday, August 10, 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 36309906.