Westlake Corp (WLK) 2010 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 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 February 22, 2011. I would now like to turn the call over to today's host David 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 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 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 web page at westlake.com.

A replay of today's call will be available beginning two hours after completion of this call until 1 PM Eastern time on March 1, 2011. 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 12359421.

Please note that information reported on this call speaks only as of today February 22, 2011. 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 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 record quarter net income of $84 million, or $1.26 per diluted share. Up considerably from $0.19 per share in the fourth quarter of 2009.

Our Olefins segment again delivered record earnings for the third consecutive quarter, completing a record 2010 full-year performance. These results demonstrate earnings potential of our Olefins segment and have established a higher target for the future. Westlake's $378 million in operating income for 2010 set a new record as the strengthening global economy and the benefit of lower cost ethane feedstock drove strong olefins and polyolefins volumes and margins. Ethane based North American ethylene producers continued to have a significant advantage over European and Asian ether based producers due to an abundant supply of natural gas and natural gas liquids from North American shale gas production.

Our Olefins segment results also highlight the importance of our high value-added polyethylene product mix. Our polyethylene sales mix is heavily weighted toward the higher margin, low density polyethylene and specialty grades of polyethylene, such as vinyl acetate and acrylate copolymers, specialty polyethylene waxes, and polyethylene [tiling] resins. These products continue to grow as a percentage of our Olefins sales and reflect our market position as a more specialized polyethylene producer.

Our Vinyls segment, although better than the previous quarter, continues to reflect the weakness in domestic construction markets. But benefited from the stronger export markets. Our Vinyls segment margins improved over those in the fourth quarter of 2009 and in the third quarter of 2010. But continues to be negatively impacted by the inability of the vinyls industry to raise prices sufficiently to offset higher feedstock costs.

The cost advantage of ethane-based ethylene production we have seen in the Olefins segment also supports domestic vinyls producers. Thus the US PVC industry has become globally competitive, which has resulted in a significant growth in PVC export opportunities for the industry and for Westlake. Industry exports of PVC have increased significantly year-over-year as the following markets continue to see stronger recovery in the construction industries. US PVC resin exports increased from 20% of total sales in 2009 to over 30% in 2010. Caustic supplies remain tight during the quarter, due to steady domestic demand and industry exports of caustic supporting higher prices.

Overall, for 2010 I am very pleased with the performance of our Olefins segment and the progress we're making toward improving the performance of our Vinyls segment. Now, I would like to turn the call over to Steve for a review of the fourth quarter results and I will make a few closing comments before we take your questions.

Thank you Albert, and good morning everyone. Before I get into the numbers, I would like to take a moment and introduce Andrew Johannesen who has joined us for the call. Andrew is our new Treasurer and will be responsible going forward for Investor Relations. I'm sure all of you will get to know Andrew well.

As reported this morning, we announced record quarterly earnings as a result of continued strong demand for polyethylene products, higher integrated olefins margins, and the US industry's access to lower cost ethane feedstocks. I will 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 fourth-quarter net income of $84 million, or $1.26 per share compared to a net income of $12 million, or $0.19 per share in the fourth quarter of 2009. Our net income for the fourth quarter was $21 million higher than the third quarter net income of $63 million, or $0.95 per share. Our operating income for the fourth quarter was $137 million on sales of $795 million as compared to an operating income of $23 million on sales of $630 million in the fourth quarter 2009 and operating income of $107 million on sales of $780 million in the third quarter 2010.

Sales for the fourth quarter of 2010 were up significantly over the same period in 2009 as a result of higher prices for all of the Company's major products. Fourth quarter 2010 earnings were higher than fourth quarter 2009 earnings due to higher margins on all the Company's major products, particularly in our Olefins segment.

Net income for the full year of 2010 was $221 million, or $3.34 per diluted share, compared to a net income of $53 million, or $0.80 per diluted share for 2009. We posted record operating income for the full year 2010 of $378 million on sales of $3.2 billion, compared to an operating income of $107 million on sales of $2.3 billion for 2009. Operating income increased $271 million in 2010 over 2009 largely as a result of higher integrated olefins margins driven by strong demand for polyethylene and relatively low-cost ethane feedstocks.

Now, let's discuss the impact of FIFO accounting compared to LIFO accounting. During the year 2010 our earnings results were positively impacted by $0.08 per share due to our use of FIFO method to value our finished goods inventory when compared to the LIFO inventory evaluation method. The positive impact on earnings occurred as a result of an increase in feedstock prices compared to the prior year. Please bear in mind that this calculation is only an estimate, and has not been audited.

Now, turning to capital expenditures. We spent $81 million in capital expenditures during 2010, compared to $100 million during 2009. Capital expenditures for 2011, including expenditures associated with the construction of the Chlor-Alkali plant, are expected to range from $190 million to $215 million. In December, we issued $154 million of taxes and bonds with a tender of 25 years. These proceeds, in addition to the proceeds from the $100 million tax incentive bonds raised in the third quarter, we used to fund the new Chlor-Alkali plant and other capital expenditures in Louisiana. Our cash balance including restricted cash at the end of the year, was $780 million.

Moving now to review our individual segments, let me start with the Olefins segment. This was the third consecutive quarter of record Olefins earnings. The Olefins segment reported an operating income of $155 million on sales of $564 million during the fourth quarter 2010, compared to operating income of $55 million on sales of $461 million in the fourth quarter 2009.

While typically the fourth quarter sees some seasonal weakness, our Olefins segment fourth quarter 2010 earnings were 14% higher than the third quarter of 2010. This quarter's growth in operating income was due to significantly higher integrated margins compared to the same period in 2009. The result is strong demand for Olefins products including our higher polyethylene product slate. Higher operating results, lower cost ethane feedstocks, and low industry inventories.

Ethylene prices increased in the fourth quarter due to strong derivative demand, unplanned industry ethylene cracker outages and rising naphtha based ethylene prices in overseas markets. Polyethylene producers responded to the ethylene price increase by implementing two price increases totaling $0.09 per pound. While average feedstock prices rose during the quarter, the spread between ethane and polyethylene prices also rose, improving Olefins margins. Thus, the spread between ethane and polyethylene is the key to understanding our margins and Olefins segment earnings. As to current market trends, polyethylene producers have announced and will be implementing a $0.05 per pound increase during the first quarter.

For the full year 2010 the Olefins segment operating margins grew to 20%. As reported income from operations were $460 million, compared to $177 million for the year 2009. The Olefins segment significant increase in income from operations of $283 million for the year 2010 was due to higher polyethylene sales volumes and higher Olefins integrated margins. Our 2010 polyethylene sales volumes increased by over 5% compared to 2009. And margins remain strong throughout the year due to a tight supply situation and the industry's ability to increase prices to offset higher average feedstock cost.

Now turning to the Vinyls segment. The Vinyls segment also reported better results than the third quarter and continued -- but continue to suffer from the effects of prolonged downturn in the US construction markets. The Vinyls segment reported a loss from operations of $12 million in the fourth quarter 2010, an improvement over the loss from operations of $29 million during the same period in 2009, and the loss of $24 million in the third quarter 2010.

In the fourth quarter, which is typically a slower period due to seasonal issues, our overall sales revenues and margins for the Vinyls segment increased primarily as a result of a significant increase in PVC exports and higher caustic prices. However PVC resin and PVC building products margins in the fourth quarter 2010 remained under pressure as a result of higher feedstock cost, particularly propane and the inability of the industry to increase prices sufficiently to cover the increase in cost. Industry prices for PVC increased $0.045 per pound in the fourth quarter to only partially offset the rise in feedstock cost.

Caustic volumes and prices in the fourth quarter of 2010 were stronger than those of the fourth quarter 2009 due to improved economic conditions. During the fourth quarter of 2010, the industry implemented caustic pricing increases of $85 per ton reflecting an improvement in overall demand. An additional $40 per ton price increase in caustic has been announced for the first quarter of 2011.

For the year 2010, the Vinyls segment reported an operating loss of $62 million, compared to an operating loss of $57 million for 2009. The losses in our Vinyls segment in 2010 reflected higher priced propane feedstock and chlorine, and an inability to raise PVC prices to offset these increases. While Vinyls segment margins remain challenged throughout 2010, we saw an increase of 9% in total sales volumes compared to 2009, helped by a strong export market.

This coming May we will perform a scheduled maintenance turnaround at our Calvert City facility. The ethylene and VCM plants will be down for 16 days, while the Chlor-Alkali and PVC plants will be down for shorter durations.

Let me conclude my Vinyl's comments by saying that we are working to complete our chlorine integration with the construction of our Geismar Chlor-Alkali plant and remain focused on addressing the challenges that face our Vinyls business. We will continue to maintain our financial discipline while looking for new business opportunities, and the further development of our current asset base. Now I'd like to turn the call back over to Albert to make some closing comments.

Thanks Steve. Westlake's 2010 performance, which had four succeeding quarters of improving earnings, demonstrated the strengths of our value-added, integrated Olefins business and provides good momentum for 2011. Looking forward, we are encouraged by the economic recovery that is underway. Let's discuss the industry outlook.

Turning first to our Vinyls business, we believe that we will continue to see improvements in the construction industry and our Vinyls business performance. We saw a significant increase in PVC resin exports in 2010, due to North American industries access to low-cost ethane-based ethylene and a healthy Chlor-Alkali market. Making the PVC industry globally competitive. We expect that the PVC industry exports will remain strong as the domestic markets continue to recover. Looking beyond current conditions, we will continue our vertical integration strategy by investing in projects such as our Geismar Chlor-Alkali facility that will lower our costs, provide us with access to lower-cost feedstocks, and improve our competitive position.

As to the Olefins business, we expect a growing abundance of natural gas and natural gas liquids from shale gas drilling in North America to sustain the cost advantage that ethane-based ethylene production has over naphtha-based ethylene production, and thus strengthen the North American industry's competitive position. Therefore, we expect to continue to benefit from our advantaged position as a natural gas-based producer of ethylene and a manufacturer of value added grades of polyethylene. The record earnings performance by our Olefins segment combined with a new investment in Chlor-Alkali, our continued growth prospects, and a strong balance sheet gives me confidence about our future earnings potential. 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 two hours after we conclude the call. We will provide that number again for you at the end of the call. Operator, we will now prepare to take questions.

Thank you. (Operator Instructions) Frank Mitsch with BB&T Capital Markets.

Yes, thank you, and good morning, gentlemen.

Good morning.

Nice end to the year, obviously. I was curious if you could expand upon the impacts that you are seeing with respect to the Enterprise fire on your feedstocks, and any other operational issues that this may bring to you?

Yes, the Enterprise fire did affect the supply of feedstock to our ethylene plant in Lake Charles. And we have used our feedstock inventory, went to alternative feedstocks, and that helped to mitigate most of the impact on our feedstock. Our downstream polymer plant ran at almost production rates was not impacted. From CMAI's latest report indicates that Enterprise ethane production should get to normal sometime this week.

All right, so you say it was a minor impact then on your operations?

Yes, that's right. As Albert said, we were able to switch to alternative supplies of feedstock, and continue to operate, at a small impact.

Okay, all right. You are using your cash obviously to expand the Chlor-Alkali facility, but it looks as if you will still be in a very solid financial position, even with that expenditure. Can you comment on your preferred uses of cash over the next year or so?

Certainly, we are looking at other opportunities to debottleneck our plants, such as our ethylene plants, and to further increase our production capacity. And certainly, we are looking at new business opportunities as well. So, our first use for cash is looking at capital expenditures and expansion plans, and then we will look at potential acquisitions, and thirdly pay down debt, which we have 2016 $250 million bonds mature in 2016. And certainly, we can also pay dividends or buy back shares, in that order.

All right, great. And then lastly, Steve, you mentioned that the FIFO impact for the year was a positive $0.08, roughly. What would you envision that it was in the fourth quarter?

In the fourth quarter it was $0.23.

All right, terrific. Thank you so much.

You're welcome.

Kevin McCarthy with Bank of America.

Yes, good morning. In your Olefins segment, you indicated a sequential average-price increase of 10.2%, which looks to be a bit higher than some of the benchmarks that we observe. Could you comment on the price premium for low-density polyethylene versus other grades of polyethylene in today's market? And within low density, are you getting a premium for autoclave process product versus tubular?

Yes, we are seeing between $0.10 to $0.12 a pound higher price over [routine load], for example, both in the domestic and export markets.

Okay, and is that true for both autoclave and tubular, Albert, or does one command a higher premium than the other?

Certainly in the autoclave side, we produce special copolymers, which command even higher premiums.

Okay, great. And then on Chlor-Alkali, has there been any change or update to your timeline for the expansion at Geismar?

We are looking still the same at the second half of 2013 start up.

Okay. And then, Albert, finally, what is your outlook for caustic-soda pricing? You mentioned the market was tight; do you expect additional price increases in the first half of 2011?

As you know, there's been two price announcements late end of last year, early this year of $50 a ton and $40 a ton, and I think the $50 per ton, some portion of that is being implemented, and we will see how the spring time economic recovery will help the demand for caustic.

All right, thank you very much.

You're welcome.

Robert Koort with Goldman Sachs.

Thank you, good morning.

Good morning, Bob.

Albert, you made a reference to maybe doing something around a buyback or dividend. You have got a pretty skinny dividend at the moment, in terms of yield. Can you give us some sense of how much that might increase? Would we expect to see you maybe more towards peer-group yields, or what should we think about there?

We review the dividends on a quarterly basis, so when we decide to make a change, we will certainly make an announcement.

Okay. And then you mentioned you have got some incremental stuff you can do internally. I think you also made a reference to some other opportunities, so I'd like to explore what other opportunities might mean. And then also, what would you need to see in order to have the confidence to go ahead and build a new ethane-based cracker in North America? What conditions would need to be met for you to have the willingness to expend that capital?

We are looking at various debottlenecking opportunities, I mentioned earlier, for example, our two ethylene plants in Lake Charles, which is ethane and ethane-propane based. That would be able to increase our integration. As you know, we are net bioethylene right now; we are short of ethylene. That would help us. So you're looking at other downstream integration expansion opportunities in the Vinyls and Olefins side.

As to new ethylene crackers, as you know, US is a net exporter of ethylene derivatives, [whether] in the polyethylene style PVC side. So, any new expansions, we will be looking at the export market, which can be quite volatile, and certainly [major]. The US natural gas prices, even though we believe that natural gas prices going forward could be an advantage on a longer-term basis, but still could be quite volatile. Two years ago we saw natural gas prices as high as $10, whether it's hurricane or winter time. So, if you are looking at export-based markets where it is a volatile feedstock, it blends a lot of uncertainty for new productions.

And Albert, do you think your competitors share that view, or would you expect that somebody might finally pull the trigger on something in North America?

You can tell me about what they think.

All right, thanks.

You're welcome.

Gregg Goodnight with UBS.

Good morning, gentlemen.

Good morning, Gregg.

On your cash flow statement for the 12 months, you are showing a $9.5 million settlement of derivative instruments. Was there any hedging gain in the fourth quarter that was reported with your Olefins segment EBITDA?

Gregg, it was very, very small.

Okay. Second question, the operating rates you also mentioned were high. Your Company tends to run higher operating rates. Could you benchmark or give us some more color on your fourth-quarter operating rates, say compared to third-quarter operating rates or the industry?

As you know, the ethylene margin and polyethylene margin is quite high during the fourth and third quarter. I think every plant that can run, other than weather-related issues or operating-related issues, are running. It's a matter of whether you had more issues than others or not.

Okay. So, you are saying you didn't have many operating issues. I would assume that you are maxed out at your stated capacity, that you don't run higher than your nominal capacity?

Yes, we are running as fast as we can, especially on the Olefins side.

Okay. Would you comment on the March PVC $0.03 increase? Does it look like all the producers are now on board with that increase, or what is your outlook for near-term PVC price increases?

Yes, we believe the March $0.03 per pound price increase will stick because the feedstock cost, especially ethylene, has gone up a lot, and export markets for PVC is quite strong. Some of the margin could be even better than some of the PVC margins in domestic prices. So, we believe that would stay.

Okay. So, all producers are now on board or --?

We believe so.

Okay, thanks for your comments.

You're welcome.

Arun Viswanathan with Susquehanna.

Thanks for taking my question. Just wondering what do you think the sustainability of that LDP spread is, and did you see it expand in 2010, and do you think further expansions are possible in 2011?

We did see expansion in 2010. I think partially because the demand for the special-properties LDPE, especially the copolymers, encoding grades over conventional (inaudible) lower or even conventional tubular LDPE. And I'm sure that when there is a $0.10 or $0.12 spread, that customers will blend whatever they can. Lower-priced polymers with LDPE, I am sure that is going on. As to whether that spread will increase, I do not know; but I think as we increase our production to more copolymers, then that spread will increase on an average basis.

Okay, and what are you seeing right now as far as the PE market. Do you think customers have -- what do you think their inventory levels are? Do you think there was any pre-buying ahead of some of these increases, given the robust pricing that they already saw in the fourth quarter?

I think inventories are fairly balanced, both on the producer side and the converter side. As you know, the export market is quite active, so I think the inventory is well [balanced] in the whole system.

Okay, and then lastly, just on Chlor-Alkali, two quick questions. Have you seen any rationalization announcements following your announcement to build further production at Geismar? And then secondarily, how is the market looking over there as far as large-diameter and non-res and so on?

Yes, I think that there were some announcements that mercury sell, Chlor-Alkali plants will be shut down, and some converted to membrane sell. We have not heard any additional rationalization in Chlor-Alkali industry. That does not mean the next three years things won't change. I mentioned it last time, I presume you're talking about PVC pipe?

Right.

Yes, we believe that the [last] on the PVC pipe is still the higher growth segment of the PVC pipe market in North America, even though the whole market is still quite slow in terms of growth.

Thanks.

You're welcome.

(Operator Instructions) Bill Young with ChemSpeak.

Good morning, gentlemen.

Good morning.

Could you give us an idea for Westlake in 2010, what proportion of your polyolefins were exported, and the same for your PVC products?

Westlake generally exports much less than the industry average. We're focused on the Olefins side more to our domestic customers, so whatever the industry export is, you can think of the hefty discount over that. On the Vinyls side, because of integration with downstream fabricated products, we also tend to have a lower portion of PVC being exported than the industry average.

Were your percentages of exports in general up 2010 versus 2009?

I think for Olefins, probably it has increased somewhat up, but I think in the second half, because of growing demand domestic market, actually export has come down.

Okay. And for the Vinyls?

The Vinyls, I think the export probably increased because of the competitive position of the US ethylene and the vinyl industry.

Okay. And how about, in the fabricated products, are there any exports at all there that you are enjoying, or it's 95% or more domestic?

With PVC pipe, it's almost 100% domestic because of the [air] you are transporting.

Right. But (inaudible) some of the other products like moldings, things like that, there is not as much air, but I guess you're not getting much out of your export market there?

No, actually we import PVC window profiles from our Chinese operation to North America.

Okay, great. Thanks a lot, Albert.

You're welcome, Bill.

Operator, do we have any more questions at this time?

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

Thank you very much for participating in today's call. We're hopeful that you will join us again for our next conference call to discuss our first-quarter 2011 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 two hours after the call has ended, and may be accessed until 1 PM Eastern time on Tuesday, March 1, 2011. 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 12359421. You may now disconnect.