Westlake Corp (WLK) 2010 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 2010 earnings conference call. During the presentation all participants will be in a listen-only mode. After the speakers' remarks you'll be invited to participate in a question-and-answer session.

As a reminder, ladies and gentlemen, this conference is being recorded today, November 3, 2010. I would now like to turn the call over to today's host, Dave Hansen, Westlake's Senior Vice President of Administration. Sir, you may begin.

Thank you very much. Good morning, everyone; thank you for joining us for the Westlake Chemical Corporation 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 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 two hours after completion of this call until 1 p.m. Eastern Time on November 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 27501313.

Please note that information reported on this call speaks only as of today, November 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 reported third-quarter earnings of $0.95 per diluted share, which is up over 100% as compared to our third quarter of last year. Our Olefins segment delivered record quarterly earnings for the second consecutive quarter as we continue to see strong global demand for polyethylene and a benefit of using low-cost natural gas-based feedstocks.

Shale gas drilling in the North American market continues to provide abundant supplies of natural gas and natural gas liquids which has given ethane-based ethylene production a cost advantage over naptha-based production. This cost advantage continues to benefit Westlake and other North American polyethylene producers and has kept the North American industry globally competitive.

Our Olefins segment results highlight the value of our ethane-based production, as well as our advantaged polyethylene product mix. Westlake's polyethylene mix is heavily weighted towards a higher margin, low density polyethylene, our specialty polyethylene grades such as vinyl acetate and acrylate copolymers, tie layers and specialty waxes. Such grades continue to grow as a percent of our sales.

Our Vinyls business had a difficult quarter as Vinyl segment margins were lower as compared to the third quarter last year due to increases in feedstock and energy prices. The industry has not been able to increase PVC resin and PVC pipe prices sufficiently to offset these higher ethylene and energy prices. However, industry exports of PVC have increased significantly year over year as foreign markets have seen stronger economic recovery.

The cost advantage of ethane based ethylene production in the US has also supported domestic Vinyls producers in making the industry more globally competitive and resulted in a significant growth in industry PVC resin exports. Caustic supplies remain tight due to steady domestic demand, several unplanned industry plant outages during the quarter, and stronger industry exports of caustic.

Now I would like to turn the call over to Steve for a review of the third-quarter results and I will make a few closing comments before we take questions.

Thank you, Albert, and good morning, everyone. This morning we announced another quarter of strong results. Virtually every financial measure is up -- higher earnings, lower working capital and stronger cash flow. I'll 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.

Westlake posted a third-quarter net income of $63 million or $0.95 per share compared to a net income of $30 million or $0.45 per share in the third quarter of 2009. Our net income for the third quarter was also $6 million higher than our second-quarter net income of $57 million or $0.86 per share.

Our operating income for the third quarter was $107 million on sales of $780 million as compared to an operating income of $49 million on sales of $633 million in the third quarter of 2009, and operating income of $100 million on sales of $818 million in the second quarter of 2010.

Sales for the third quarter of 2010 were up significantly over the same period in 2009 as prices and volumes were higher. Sequentially, sales volumes in the third quarter of 2010 were up over those in the second quarter, though sales revenues were slightly lower due to lower average selling prices for our major products.

Our Olefins segment achieved record quarterly earnings. The third-quarter increase in Olefins earnings over those in the second quarter were primarily due to the higher sales volumes in the third quarter. While average sales prices fell during the quarter, integrated margins improved as a result of higher sales volumes and lower feedstock cost.

The Vinyls segment reported disappointing results as their loss from operations increased over the loss incurred in the second quarter of 2010. Overall sales revenue for the Vinyls segment decreased primarily as a result of a decrease in average PVC resin and PVC pipe prices. While caustic prices increased during the quarter, the increase was not sufficient to offset the fall in PVC resin and downstream PVC building products prices.

Now let's discuss the impact of FIFO accounting compared to LIFO accounting. Our third-quarter results were negatively impacted by $0.08 per share due to our use of FIFO method to value our finished goods inventory when compared to the LIFO method for inventory accounting. The negative impact on earnings occurred as a result of a fall in average feedstock prices compared to the prior quarter. Please bear in mind that this calculation is only an estimate and has not been audited.

Now turning to capital expenditures. For the first nine months of 2010 capital expenditures were $51 million compared to $65 million during the first nine months of 2009. Full-year 2010 capital expenditures are expected to be within the range of $75 million to $100 million. In August we announced that we were proceeding with the construction of the chlor-alkali unit at our Geismar, Louisiana facility and have started construction at the site.

In July we issued $100 million of 6.5% tax exempt Gulf opportunity zone muni bonds maturing in 2029 whose proceeds will be used to partially fund this and other projects in Louisiana. Our unrestricted cash balance at the end of the third quarter was $428 million and our restricted cash balance was $173 million. The restricted cash balance represents the proceeds from our issuance of muni bonds and will be used to fund Louisiana capital expenditures. If we don't spend all these funds we can use it to retire these bonds without penalty. Our total cash position of $601 million, thus our cash flow and liquidity, remain very solid.

Moving now to review our individual segments, let me start with the Olefins segment. It was another record quarter for our Olefins segment which easily eclipsed our prior record last quarter. We reported operating income of $136 million on sales of $555 million during the third quarter as compared to $62 million of operating income on sales of $441 million reported in the third quarter of 2009. This increase was mainly due to improved margins which benefited from an increase in product prices and 8% higher sales volume.

Earnings in the third quarter 2010 also compared well to the second-quarter 2010 with a $25 million improvement over the $111 million in income from operations on $577 million in sales in the second quarter of 2010. While average selling prices in the third quarter were lower than those in the second quarter 2010, integrated Olefins margins improved as a result of higher sales volumes and lower feedstock costs during the quarter, reflecting strong demand for polyethylene. Thus the spread between ethane and polyethylene is the key to understanding our Olefins margin and segment earnings.

We continue to believe the increase in shale gas production in the US, which also increases ethane production, will sustain a favorable cost structure. Ethane market prices have declined 27% since the fourth quarter of 2009 while global demand for polyethylene has pushed prices and operating rates higher resulting in higher margins and earnings.

As to market trends, while average polyethylene prices were lower in the third quarter due to price declines that began in the second quarter, the industry announced a $0.05 per pound price increase effective September followed by a $0.04 per pound increase effective October 1. Since then the industry has announced a further increase of $0.05 a pound effective December 1.

To summarize, our Olefins segment results in the third quarter reflect the value of our advantaged product slate of higher priced polyethylene products and lower average feedstock cost.

Now turning to the Vinyls segment. Our Vinyls operating loss for the third quarter was $24 million on sales of $225 million compared to a loss of $8 million in the third quarter of 2009. The lower earnings were mainly due to lower PVC resin margins as a result of higher feedstock costs and energy costs which were only partially offset by higher product prices.

While activity levels in the US construction markets, both commercial and residential, served by our Vinyls segment remained challenging, sales volumes of PVC resin were significantly stronger in the third quarter of 2010 compared to the third quarter 2009 and to the second quarter 2010 due to increased exports.

Margins, however, were lower in the third quarter compared to last quarter as a result of a drop in PVC resin and downstream PVC building product prices that was not matched by a decrease in feedstock costs, particularly propane and chlorine. However, the industry has announced a $0.03 per pound price increase for PVC resins effective October 1.

Caustic volumes in the third quarter 2010 were stronger than those in the third quarter 2009 and flat compared to the second quarter. Early in the third quarter the industry announced a $40 per ton increase for caustic, and later in the quarter the industry announced an additional $45 per ton increase in caustic which will be implemented in the fourth quarter. In addition, there has been an announcement of a $50 per ton increase effective December 1 as well.

Let me conclude my comments by saying that we had an overall strong third quarter while maintaining our financial discipline, continuing our focus on improving our existing businesses and exploring new business opportunities. Now I'll turn the call back over to Albert. Albert?

Thanks, Steve. Now let's discuss the industry outlook. Turning first to our Vinyls business, we are optimistic that we'll continue to see gradual recovery in the economy and with it improvements in the construction industry and our Vinyls business performance. Looking beyond current conditions we plan to continue to invest in our vertical integration strategy such as the construction of the chlor-alkali facility in Geismar, Louisiana which will lower our cost structure and improve our competitive position.

As to the Olefins business, we expect to continue to benefit from our advantaged cost position as a natural gas-based producer of ethylene and a manufacturer of value added grades of polyethylene. The growing abundance of natural gas and natural gas liquids from shale gas drilling in North America will bring forth the cost advantage of ethane-based ethylene production versus naphtha-based ethylene production from high-priced oil and sustain the US industry's competitive position.

Our focus in the manufacturing of higher value added grades of polyethylene will serve to maintain our strong competitive position in the global polyethylene industry.

Let me conclude by reiterating that our Olefins segment delivered record earnings this quarter resulting in a very strong third-quarter performance by Westlake, despite the fact that the sales and profitability of our Vinyls segment have yet to recover from the trough like conditions. This, combined with our continued growth prospects and strong balance sheet, gives me confidence about our future earnings potential. Thank you very much. Now I will 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 two hours after we conclude the call. We will provide that number again at the end of our call. Operator, we're now prepared to take questions.

(Operator Instructions). Frank Mitsch, BB&T Capital Markets.

Good morning, gentlemen, and congratulations on a very strong performance on the Olefins side.

Thank you.

Albert, can you talk about the operating rates that you experienced on the Olefins side in the third quarter? And I guess there's not as much seasonality in this business as in some other businesses, but there probably is some in the fourth quarter. What are your expectations in terms of the seasonality decline? And might the Ineos outage in Chocolate Bayou forestall any of that that would allow you to have similarly strong results in the fourth quarter here?

Yes, certainly. I think the industry performance in terms of operating rates has been quite high during the third quarter. And with good margins pertaining to ethane and polyethylene, or between ethylene and polyethylene. Even though there could be some lower demand in the third quarter from domestic consumers, it's only for year-end inventory reasons but the export market is still quite strong. So, I think the industry consultants are saying that as well, that they don't believe and we don't believe there will be much reduction in operating rates going into the fourth quarter.

All right, and then combining that with the unplanned outage out there -- you talked through -- or I think Steve talked through some of these price increases on polyethylene out there. It would argue, I guess, that your margins -- if you're volumes are very strong in the fourth quarter that your margins probably remain very strong as well. Is that not the way that we should be looking at that?

Well, I think Steve mentioned really the margin is between ethane to polyethylene. So depending -- coming the winter months and usually natural gas prices or energy price could go up with the weather, and so the feedstock costs could change or might be volatile. With polyethylene we, as Steve mentioned, announced the price increases of both $0.04 for this month, October, and $0.05 in December. So, that spells out the operating rates for the industry as well.

All right. And lastly, a whole group of us were out at Dow the last couple of days and they were quite positive on their plastics business and articulated a view that following next year the stage is set for a path -- a clear path to the next Olefins peak. Would Westlake share that view?

Certainly hope so.

All right, thank you so much.

You're welcome.

Kevin McCarthy, Bank of America-Merrill Lynch.

Yes, good morning, Albert. Given the shale gas discoveries and the associated ethane, do you anticipate any industry announcements of ethylene capacity expansion in the United States over the next year or so?

It could be. As you know, we have two of the newer ethylene plants, whereas many of the US ethylene plants are much older than ours and have gone through various debottlenecks over the last few decades. So we don't know how much additional capacity expansions the US industry can have going forward. But I'm sure there will be various debottleneck expansions if it's possible.

Okay. I just have a brief follow-up. Does Westlake see opportunities to expand or procure additional ethane on attractive terms?

We hope so.

Okay. Then second, with regard to polyethylene, I guess generally what we're hearing is that the $0.04 looks pretty good for the low-density and linear low grades where you compete more so than high-density. Is that what your expectation is and maybe you could talk about the realization on that $0.04?

Yes, I think with the good balance in operating rates and inventory in the system, as well as the demand for exports, I think the $0.04 should be quite positive.

Okay.

Essentially for the $0.05 going December.

Then finally, Albert, your net debt is approaching zero here. What are your updated thoughts on use of excess cash and cash flow given the very strong conditions in ethylene and polyethylene these days?

Certainly, as Steve mentioned, that we have ongoing projects with our chlor-alkali facility in Geismar, Louisiana and we'll look at other ways to improve our cost structure or debottleneck our plans and look at other opportunities to grow our business.

So you're continuing to look externally as well?

Yes, internal and external.

Okay, thank you.

Thank you.

James Sheehan, Deutsche Bank.

Yes, with caustic soda prices moving higher, when would you anticipate that the Vinyls segment could return to profitability?

I hope soon. But I think the Vinyls segment really is linked with the US construction industry in general and with the recovery of the US economy though. So we hope, soon.

Okay. Could you explain what is driving the tightness in low-density grades of polyethylene versus other resins? What are the factors behind that?

Yes, I think low-density polyethylene has become more of a specialty polyethylene. And even though demand for low density polyethylene growth is slower than other polyethylene linear low or high density, the supply of LDPE, low density polyethylene, is very limited on a global basis. So as the economy grows on a global basis demand exceeds supply and as a result margin improves in low density polyethylene.

Okay. And finally a question on capital spending. It sounds like your target for the year has been reduced by about $25 million. Do you expect to -- has that being pushed down into 2011 or can you give us a view onto what CapEx may look like next year?

Yes, well we haven't finished our planning for the 2011 year. But as Albert mentioned, we continue to work on our chlor-alkali project. And I would expect those dollars to go into 2011. And we'll talk about our 2011 capital budget after we get into the completion of our capital budgeting and that will be when we talk about our fourth-quarter results in February.

Thank you very much.

You're welcome.

Mike Shrekgast, Longacre.

My question has been answered, thank you.

Charles Neivert, Dahlman Rose.

Good morning. A quick question -- I think you talked about it a little bit in terms of maybe lessening seasonality on the Olefins side. But if you look at the PVC and the Vinyls picture, with the strong exports are we likely to see some of that take place? Meaning usually a very strong seasonal move downward in the fourth quarter in volumes. Can exports clean up at least a chunk of that? Is there less seasonality on the export side there?

Yes, I believe so.

So is it possible that we might not see the normal drop off considering you increased your export exposure on that business, so we might not see the normal drop-off in volume quarter on quarter into fourth quarter?

Export definitely helps reduce (technical difficulty).

Okay, thank you.

You're welcome.

Arun Viswanathan, Susquehanna.

Hey, guys, thanks for taking my question. Just going back to I guess the topic that you guys addressed just a little bit ago on the spread on LDPE and LLDPE. How does that compare to historical levels? Do you think it's peaked or what would continue to drive that further going forward?

(inaudible) about the spread between LDPE and LLDPE?

Or LDPE and just any other grade of polyethylene.

I think it's out of supply/demand. If demand for LDPE continues and supply is limited then the margin could stay this way or even expand.

And because there's no -- there's limited capacity there you see that continuing to rise?

Well, as I said, depending on supply/demand difference.

And how does the -- so where is the current premium and where do you see that going forward in the next couple quarters?

We believe that the spread will be sustained and going forward it depends on demand/supply of LDPE. We have been seeing a lot of LDPE capacity build and amounts billed are more tubular LDPE (multiple speakers) LDPE predominately is autoclave which is a more specialty form of LDPE compared with the tubular.

Right. So, do you think the spread has actually reached new heights or do you think they can actually further widen even with more tubular capacity coming online?

Hope both.

Okay. And then I guess the other thing is on the Vinyls side, do you expect to get any kind of price increases on the pipe side in the current construction market? I guess you addressed that a little bit, but can you just give us a little bit more detail on that -- on the outlook there?

Yes, $0.03 a pound price increase announced for October and, depending on the feedstock situation, there could be further increases even going into the winter months and there are also export opportunities. And usually when feedstock price for pipe such as PVC resin going up there's a lot of pressure to increase pipe price as well.

What do you think operating rates are on the pipe side? I mean, how much capacity do you think needs to be closed or idled in order to get tightness on the pipe market side?

The construction market has dropped substantially from the peak time period. So there is excess capacity in the industry and there are companies, including Westlake, that have shut down pipe capacity or pipe plants. So the issue now is not capacity, it's more on the demand for pipe (inaudible) and supply for pipe.

But if the demand does not recover, wouldn't ultimately you'd need to see more shuts of capacity or --?

It could be.

And then lastly. So, the restricted cash -- just to clarify -- will you be using it for the Geismar construction project as well?

Yes, that's the purpose of these funds, to be used in both the chlor-alkali facility. The funds can also be used over in our Lake Charles facility. So we have, as you can see, a fair amount of tax exempt proceeds in there and those are the funds that will be used for that project.

So, where do you think -- so most of that you expect to use through 2013, I guess, when construction (multiple speakers)?

The project is expected to be completed in the second half of 2013, that's correct.

Right. Okay, thanks.

Thank you.

(Operator Instructions). Hassan Ahmed, Alembic [Durable].

Good morning, guys. A quick question around ethane prices. If I take a look at spot ethane prices on the Gulf Coast over the last couple of weeks, they seem to have rallied fairly strongly. And now on an energy equivalents basis relative to natural gas, seems to be trading at a substantial premium.

So, how should I think about ethane prices in the near to medium term with obviously more and more of the share of gas coming on stream and supply of ethane actually rising significantly? I mean, in your mind what explains this rally that we've seen over the last few weeks?

Yes, definitely that's certainly short-term impact on supply/demand as well as more inter-median term and longer-term. Short-term wise suddenly plants having planned turnaround or shutdown problems the demand for ethane will go down at same time as the production side. And depending on some of the fractionators, they have turned around as well.

So, I think as well as certainly the oil prices and propane prices, they all have an effect on shortened supply/demand. On the medium- and longer-term basis, it's our understanding that there's a lot more supply of ethane coming up both from Gulf Coast regions, the Rocky Mountain area as well as the Marcellus Northeast area. We believe there is a lot more supply of ethane available for the industry.

So at least in the medium to long term, in terms of pricing we should think of ethane pricing correlated at a slight premium to natural gas on an energy equivalent basis, would that be the right way of thinking about it?

That's the historical way. In the past the US ethane price was based on gas plus something. That's right.

Right. Okay, super, thanks so much.

You're welcome.

Bill Young, ChemSpeak.

Good morning, gentlemen. A couple quick things. Could you give us just a little bit more granularity on your PVC and PE exports? I know they haven't been a big part, but can you tell me what percentage of your sales have been in the export market say a year ago versus today?

Yes, I think the industry has exported a lot more than in the past. I think the percentage for the industry is 20% to 30% range. And historically because of vertical integration in Westlake we have exported a lot less than industry. But we are participating in the export market.

That's (inaudible) for PE?

That's PVC.

PVC.

Oh, for PVC. It's hard to hear you, I'm sorry.

I apologize.

Yes, okay. Okay, great. Now secondly, can you give us any feel for the regional differences, if any, in the construction market as reflected in your sales of PVC pipe and other fabricated vinyl products?

Talking about for the third quarter?

Yes. Have you seen any say pickup in some areas versus others? Just on a relative basis where there might be some relative shrink.

I think the weakness is across the US. Our large diameter pipes business has done better than smaller diameter pipe in general. But I will not say there's a material difference between regions.

Okay. Okay, great. Thank you.

You're welcome.

Operator, do we have any more questions?

Kevin McCarthy, Bank of America-Merrill Lynch.

Yes, thank you. Albert, do you have a view on how much ethane fractionation capacity is likely to increase in coming quarters?

We believe there are two new fractionators coming up in the first quarter or first half of 2011 that would add a substantial amount of ethane to the market.

Okay. And then second, if I may, caustic soda prices have continued to rise through the back half of 2010. Looking ahead to 2011 what is your outlook for caustic? And perhaps you could comment on how high caustic prices might be able to go in the context of potential import pressure from Asia into the West Coast of the United States?

Yes, generally caustic demand tracks economic activities. So as the US economy improves, in the US there will be -- the caustic demand will increase. But as the economy improves globally the demand going up as well in overseas markets. Imports in the past primarily have been coming from Asia. And as you know, China has issues with the greenhouse gas emissions from their coal-based power plants. So there's concern how much caustic production they will have from Asia supplying potential to the US West Coast markets.

Have the energy concerns in China curtailed chlor-alkali production in a meaningful way based on what you've seen so far?

Yes, we've seen, especially the last few months, that caustic production as well as PVC production have been affected by the low power production.

How large is that affect in your view?

Well, the US has been exporting more PVC on a global basis as a result of that.

Okay. Thank you.

You're welcome.

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

Thank you very much for your attendance today at our meeting. We appreciate you participating in our call. We hope that you will join us again for our next conference call to discuss our fourth-quarter 2010 results. Thank you very much and have a wonderful 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 two hours after the call has ended and may be accessed until 1 p.m. Eastern Time on Wednesday, November 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 27501313.