Westlake Corp (WLK) 2012 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Chemical Corporation first quarter 2012 earnings conference call. During the presentation, all participants will be in a listen only mode. After the speaker's remarks, you will be invited to participate in a question and answer session.

As a reminder, ladies and gentlemen, this conference is being recorded today, May 1, 2012. I would 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. 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, 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 in the first quarter and current perspective on the industry. Steve will then provide you with a more detailed look at our financial and operating results. Albert will have a few concluding comments and then we will open up the call for questions.

Today management is going to discuss certain topics that will discuss certain forward-looking information that is based on management's beliefs as well asassumptions 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 on factors including the cyclical nature of the chemical industry; availability, cost and volatility of raw materials, energies 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.

As you're probably aware, earlier this year we publicly announced a proposal to acquire all of the outstanding shares of Georgia Gulf Corporation. We continue to believe that combining the two companies would be beneficial to Westlake. While we are still evaluating this acquisition opportunity, during our prepared remarks we will not comment further and not be able to respond to any caller's questions regarding Georgia Gulf.

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 11.59 p.m. Eastern Time on May 8, 2012. 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 12583170.

Please note that information reported on this call speaks only of today May 1, 2012, 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. Westlake had a record first quarter and delivered a highest quarterly net income in our history. We report a net income of $87.8 million or $1.31 per diluted share in the first quarter.

We saw sales volumes increase sequentially in both of our segments, and margins extended as ethylene feedstock costs declined significantly. During the first quarter, ethane and propane feedstock costs decreased driven by the growing supply of these feedstocks and reduced demand as the industry saw a high level of ethylene plant maintenance turn-arounds impacting approximately 7% of industry production capacity. The impact of these feedstock price declines resulted in another quarter of strong performance by our olefin segment, and the best vinyl segment performance since mid-2008.

The PVC industry saw its highest domestic and total resin sales volumes during the first quarter since the second quarter of 2008. Our vinyls domestic sales volume improved over the first quarter of 2011 and those in the fourth quarter of 2011 as well. The combination of improved sales volumes due to an earlier start to the construction season as a result of a warmer winter and lower feedstock costs drove a significant improvement in earnings in our vinyl segment this quarter. The lower feedstock costs we saw in the first quarter indicate to us that increased production of natural gas liquids has had and will continue to have a positive impact on our feedstock costs.

The growing supply of natural gas liquids coming from new shale gas production, new NGL [fresh station] plants, and new pipelines should provide lower cost feedstocks for years to come, providing a globally competitive cost position for the ethane-based North American ethylene industry. During the first quarter of 2012, ethane-based ethylene had an average $0.30 per pound production cost advantage over naptha-based ethylene putting producers who use naphtha feedstock at a significant disadvantage.

I'm encouraged by this quarter's performance and I remain confident that feedstock cost advantage resulting from increased production of natural gas liquids will continue to have a very positive impact on our industry. Now let me turn over to Steve for a more detailed look at our financial and operating results.

Thank you, Albert. And good morning, everyone. I will begin with a discussion of the consolidated financial results followed by a more detailed discussion of our olefin and vinyl segment results. Let me start with our consolidated results. As Albert stated earlier, Westlake reported a net income for the first quarter of 2012 of $87.8 million, or $1.31 per diluted share compared to a net income $83.5 million or $1.25 per share in the first quarter of 2011.

Sales for the first quarter of 2012 of just over $1 billion were $168 million higher than sales of $867 million reported in the first quarter of 2011 as a result of higher sales prices and volumes for all vinyls products and sales of feedstocks. Westlake's operating income for the first quarter of 2012 was also a record at $146 million, an increase of $5 million compared to the operating income of $141 million in the first quarter of 2011. The increase in operating income compared to the first quarter of 2011 was a result of higher volumes and prices for PVC resin, building products and caustic, offset by lower integrated olefins margins.

Domestic PVC sales increased in first quarter reflecting a gradual improvement in the construction markets and lower PVC resin exports. Sales of just over $1 billion in the first quarter of 2012 were $176 million higher than sales in the fourth quarter of 2011. The increase in sales revenue was a result of higher sales volumes for PVC resin, building products and caustic, and sales of feedstocks.

The first quarter operating income of $146 million was $95 million higher than the fourth quarter of 2011 due to higher integrated olefin sales margins, higher sales margins on PVC resin, higher co-product prices and higher sales volumes for PVC resin, building products and caustic. Now let me review the performance of our two segments.

Starting with the olefin segment. The olefin segment reported operating income of $129 million on sales of $732 million during the first quarter of 2012 compared to an operating income of $145 million on sales of $605 million in the first quarter of 2011. The lower operating income was a result of lower integrated olefins margins compared to the first quarter of 2011 as a result of high cost feedstock and inventory at the end of the fourth quarter flowing into the first quarter. While integrated olefin sales margins in the first quarter of 2012 were strong, our use of FIFO inventory accounting caused the margins to be lower than the first quarter of 2011.

Olefin's operating income of $129 million in the first quarter of 2012 was $53 million higher than operating income of $76 million in the fourth quarter of 2011. The increase in operating income was a result of higher integrated olefins margins due mostly to a decrease in ethane feedstock cost and an increase in ethylene prices resulting from lower ethylene supply. The industry was able to increase polyethylene prices a total of $0.06 a pound during the quarter to offset the elevated ethylene prices that persisted throughout the first quarter. Looking forward to the second quarter, the industry has announced an additional price increase of $0.07 a pound and the heavy maintenance turnaround schedule is expected to take approximately 8% of ethylene capacity offline during the quarter, which may keep ethylene prices elevated during the period.

Now let's discuss the vinyl segment, The vinyl segment reported its highest earnings from operations since the third quarter of 2008, with operating earnings of $21 million in the first quarter of 2012,compared to a loss of $3 million in the first quarter of 2011. The increase in earnings was a result of higher vinyls chain sales margins and sales volumes. Sales margins in the first quarter of 2012 improved as a result of higher PVC resin, building products and caustic prices, as well as lower propane costs and higher co-products revenue.

The operating income included $1.3 million in expenses related to a fire at our Geismar, Louisiana facility that occurred at the end of March. The total cost of the fire including the lost production and repair is estimated between $5 and $7 million, so we will see some of the impact of the event carry over into the second quarter. The vinyls olefin -- excuse me, the vinyls operating income of $21 million in the first quarter of 2012 was a significant improvement over the operating loss of $20 million reported in the fourth quarter of 2011.

The improvement in operating income was a result of improved propane-based ethylene economics, higher sales volumes for PVC resin, building products and caustic, and higher PVC resin sales prices. As a result of the stronger domestic PVC sales volumes experienced during the quarter, export PVC sales decreased. A gradual recovery in construction and a milder winter led to an earlier construction season, and gave the industry a boost as it saw the highest quarter of PVC resin sales volumes since the second quarter of 2008.

The Company's caustic sales remain strong in the first quarter, andthe industry caustic prices remained $55 a ton higher than the average for the year of 2011. Several producers have announced price increases effective for the second quarter.

Now let's talk about LIFO versus FIFO accounting. As a result of the decrease in ethane and propane feedstock prices this quarter, our utilization of the FIFO method of accounting reduced our earnings from operations by approximately $22 million and our after tax earnings by $14 million or $0.21 per share compared to what earnings would have been had we used the LIFO method. The benefit of the lower cost feedstock should be more fully evident in the second quarter. Please bear in mind this calculation is only an estimate and has not been audited.

Now turning to the balance sheet, and the statement of cash flow, we generated $110 million in cash from operating activities in the first quarter of 2012 and spent $65 million on capital expenditures. Our cash balance, including restricted cash was $961 million, and our total debt was $765 million at the end of the first quarter. Our guidance for this year capital expenditures remain between $400 million and $450 million including expenditures on the Geismar chlor-alkali project and the ethane cracker expansion at Lake Charles, Louisiana. These expenditures will be funded from our cash reserves. The ethane cracker turn-around and expansion will take place in the fourth quarter of this year and the unit will be down for approximately 45 days.

Our strong balance sheet and healthy cash reserves gives us the ability to expand our production base, increase our efficiency and reduce our costs while pursuing other business opportunities. We will maintain our conservative approach to investments and will pursue those investments that help us build further on our financial flexibility and strength. We will continue to pursue internal expansion projects and external business opportunities that bring increased value to our share holders. Now I'll turn the call back over to Albert to make some closing comments.

Thanks Steve. I'm pleased with Westlake's record first quarter performance and as we look forward into the future we see the continuing cost benefits brought about by the growing natural gas liquid production from shale gas drilling. The abundant availability of natural gas liquids coming to the market, coupled with pipelines and other infrastructure improvements which will deliver this feedstock to the Gulf Coast, supply the cost advantage feedstock necessary for our industry to remain globally competitive. Our ethylene expansions will capitalize on these cost competitive feedstocks with some of the benefits to occur later this year.

The expansion of one of our other ethane cracker at Lake Charles will be complete in the fourth quarter of this year, with expansion of the other cracker targeted for completion in the fall of 2014. These two crack ethane [backer] expansions could add approximately 400 million to 500 million pounds of additional ethylene capacity and balance the company's ethylene needs.

We are also evaluating the conversion of our ethylene plant at Calvert City, Kentucky from propane to ethane feedstock which allows the Company to utilize low-cost ethane, from the Marcellus and Utica shale gas fields, thus lowering the cost of production. The chlor-alkali project at Geismer is continuing to make progress and is expected to be completed in the second half of 2013.

These projects will complete the fee stock integration of our business segments and [inevitably] lower our cost of production. These projects along with other initiatives we're undertaking underscore our optimism about the future and our belief that natural gas liquids from shale gas has become a game changer for the North American chemical industry and for Westlake's olefins, and vinyls, businesses. 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'll provide the number at the end of the call. Operator we'll now take questions.

[Operator Instructions] Our first question will come from the line of Brian Mcguire with Goldman Sachs. Please proceed.

Good morning, guys.

Good morning.

Good morning Brian.

Given the big spread between spot ethylene and contract ethylene prices in the quarter, I was wondering you if could address a couple of items. First, do you buy much of your ethylene on the spot market, did you in the quarter or is it primarily all on contract, and then, second, did you forego any -- given the relatively thin margins in polyethylene, did you forego any polyethylene or PVC sales so that you could sell some of your ethylene production into the spot market?

Certainly. We are net buyer of ethylene and we do buy from the market whether it's contract or spot basis. And we also trade on ethylene as well. We do sell ethylene on time basis to the ethylene market depending on how our business margins are performing.

Would you characterize the spread between spot and contract as a net positive, negative, or really not significant to the way the quarter shaped up?

The spot price today is higher than the contract price for ethylene.

Did that change the way you ran your business at all or have any impact on the earnings if the spot and contract have been closer to even, would it have made any difference to you?

It could be. I Think that the U.S. exports in the PVC and the polyethylene area have been affected by the high spot price in ethylene.

Do you think -- does that mean the lower spot ethylene prices could have actually led to some more PVC export sales for you?

Yes, we believe so.

And then the question of where ethane is going this summer is a hot topic. One of the governing factors there is propane and propane prices. In your mind, how much higher could ethane prices go before you would consider switching your Lake Charles plant, from ethane in to propane to the extent that you can there?

Well, if you look at IHS's recent publication, the cash cost using a spot price as indication between ethane and propane [fixed stuff] is only about $0.025 difference.

Per pound on a ethylene margin?

Pardon?

Is that $0.025 on an ethylene margin?

Yes, it's cash cost for using ethylene, ethylene margin, $0.025 difference. Propane (inaudible) a cap and how high the ethane can go up to.

Got it. And then just one last one if I might. The impact on the Lake Charles turn around in the fourth quarter, how many week do you expect it to be own down and are you meeting inventory now to meet your production requirements and your sales commitments not fourth quarter?

Brian, we expect it to be down about 45 days and we'll be prepared to -- as we get near the period, by doing things such as that.

Great. Thanks a lot.

You're welcome.

Our next question will come from the line of David Begleiter with Deutsche Bank. Please proceed.

This is Jim Sheehan sitting in for David how you doing?

Fine, how are Jim. (multiple speakers)

Albert, my first question is on the prospects for the polyethylene price increase in the second quarter when we see a lot of these turn arounds and possibly seeing ethylene prices move lower. Do you think any of that polyethylene price increase will stick?

Well, we have increased the prices by $0.03 a pound for both February and March and both as be in place. There is a $0.07 a pound price increase now for the second quarter and time will tell whether the $0.07 will be in place or not.

Okay. Just on the poly-- the PVC demand trends that you saw into construction and sort of broader construction demand, you mentioned weather was an impact, do you think that there was any pulling forward of demand into Q1 or are you seeing April trends continuing having the same momentum as in Q1?

We have pass through price increases each month in the first quarter, January, February and March, and there's another $0.02 being announced for May. There was some, we believe, pre-buying with the price increase, but also we believe some improvement in new construction which helped with the demand. Again, we had to see in the second quarter how much of the demand increase in first quarter was due to warm weather, how much was really due to the fundamental improvement in housing.

Okay. And finally on ethane prices, when we see these turn arounds and, Albert, how much are you expecting ethane prices to increase in June-July time frame and what is your longer-term outlook as the year progresses for ethane prices?

Well, if you look at -- there's a difference in terms of what IHS is forecasting for ethane prices and the forward market for ethane prices. And today, I think ethane is about $0.49, $0.50 a gallon, and the forecast for the rest of the year is about at this range and then declines further in 2013 and 2014. I presume there will be movements in twelve months and maybe in one or two months. We believe with the increased production of natural gas liquids, as well as the very closeness in terms of the ethylene cash costs with propane as at feedstock, that would put a lid on how much ethane price can go up.

Okay. Thank you very much.

You're welcome.

And our next question will come from the line of Don Carson with Susquehanna Financial. Please proceed.

Albert, wondering to what extent you're building inventory now both in polyethylene and PVC to take advantage of low ethane and propane costs before they might spike in the June-July time frame? And then secondly, what volume benefit do you think you got in the first quarter and even second quarter to date from all your competitors being out and you up and running on the polyethylene side, and just give that back in the fourth quarter when Lake Charles is down.

Certainly. We are net bio-ethylene. So as we said earlier, that depending on the prices for the ethylene that we buy and the market prices as well as depending on the sales price for our finished products, whether domestic or export, that impacts how we run our polyethylene units. With the turn-around coming up in fourth quarter, suddenly we would be building inventory as needed to supply to our customers.

Do you think you benefited on the volume side with your competitors being down, because clearly they were constrained on their polymer production?

We believe that since we are a net buyer of ethylene, you can get access to ethylene so long as you pay for the price for ethylene. We optimized, as I said earlier, our profits based on the purchase price for ethylene as well as the sales price of finished products, whether it's polyethylene or PVC.

And then on our Calvert City potential conversion to propane, given how attractive propane pricing is, and I realize it's more seasonal than ethane, but also the growing propane surplus, does it justify investment to give yourself ethane flexibility given the relatively narrow spread between the two NGLs?

Propane, as we said earlier, is very seasonal. Winter time propane price can go quite high. And two is with conversion to ethane, potentially we could increase our capacity without spending a great deal of money. So we're studying both sides of it.

Thank you.

You're welcome.

And our next question comes from the line of Kevin McCarthy, Bank of America Merrill Lynch Please proceed.

Good morning, this is Alex Uframoff for Kevin. Albert, what is your view of industry-wide ethane inventories currently in the U.S.? Do you think the inventories are above normal or about normal?

Well, we believe the -- with the less of demand with the turn-arounds and with the increased production of natural gas liquids we believe the ethane inventory in the U.S. is building.

Okay. Thank you. And as -- as it concerns Westlake, how many days of ethane or ethylene inventory do you typically hold and how does that compare to your current inventory?

We typically don't hold a lot of ethane inventory. As you know, ethane can be stored in underground wells. You can't store them in rail cars. So the limited capacity how much you can store.

How about ethylene

Same. Ethylene you store in underground wells. And the industry's ethylene inventory is usually is very low especially today with the high price of ethylene people are not storing ethylene.

Finally if I may, for U.S., for your U.S. Gulf ethylene crackers, what's the maximum share of propane that you can take as feedstock for those assets?

For Westlake or for the industry?

For Westlake.

We have two ethane crackers in Lake Charles. The first one is a purity ethane cracker. The second one which we're doing expansion can go up to 50% propane.

Thank you.

Our next question will come from the line of Jeff with JPMorgan. Please Proceed.

Hi, good morning.

Good morning.

Good morning, Jeff.

Today the spot price of ethylene is about $0.68 a poundand contract is $0.53. Why, do think there's such a large difference between spot and contract and how do you see that spread changing through the course of the year if you do think it will change?

Certainly. The contract price is a combination of feedstock costs to produce ethylene as well as a movement and spot price. So when feedstock costs dropped significantly in the first quarter, the contract price was kept low even though the spot prices went up. Going forward, at least IHS forecasting for the rest of the year, that ethylene spot price will come down but would still be higher than the contract price for this year.

What do you think is determining the higher spot price than the contract price?

Well, people, when they buy ethylene, they have a combination of proportion what's in the contract price, what's in the spot price, and people need to run their plants and when we have the turn-around in the first quarter and it's mentioned earlier that we will have also a turn-around in second quarter-- in second quarter and second half as well, and people need to run their plants and so it's combination of those prices that will determine how much, how high they run the plants at.

In your chlor-alkali expansion, how much have you spent so far and how much do you have to go?

We spend a significant portion of our budget amount. We mentioned in previous discussions about $370 million to $420 million project capital -- estimated project capital costs and we have spent a large amount of that.

Have you spend a third?

Well, we have spent plus committed a fair amount.

Jeff, as you can imagine, we're at the stage, we're coming up the steeper end of the spending curve. As we mentioned, the unit will come on second half of 2013.

Your volumes in your vinyls operation grew I think 5% in the quarter, were you surprised they didn't grow faster give the weather?

Well, as we said earlier, the higher spot ethylene price is determined for increasing the production and sales as well. And also, we had suddenly a small impact but an incident in our Geismer plant near the end of March which also reduced production for Geismer.

And lastly, you were kind enough to talk about the sources of your profit improvement in vinyls, and you said on the one hand, probably lower propane prices and better prices in PVC, in volume growth. When you analyze the difference in profits year over year, did more of that come from PVC volumes and raw materials spreads than propane or was it the other way around?

I think propane suddenly is a large part but improvements in PVC both from PVC resin price that was mentioned earlier. We had three price increases this the first quarter and we'll be getting the full benefit in the second quarter of those price increases. Plus our fabricating business has also improved in margins. So combine those two has -- three really, the propane, the improving PVC, and improving fabricated products -- building products -- has helped the [overall] business to improve.

Great. Thank you very much.

You're welcome.

And our next question will come from the line of Hassan Ahmed with Alembic Global. Please proceed.

Good morning Albert and Steve.

Good morning.

Good morning.

A question around pricing. I guess everyone seems to be talking about it nowadays. The delta between U.S. pricing on the polyethylene side of things, and Asian pricing seems to be fairly above normal. How do you explain that, I mean, is it a case of pricing just being so depressed in Asia, desperate to correct upwards or vice-versa really?

Yes, the Asian demand, which primarily is from China has been weak because of the weak economic conditions in China. This explains, I think, most of the weakness in the polymer prices in Asia.

Predominantly China?

That's what we believe.

Yes.

Okay. Fair enough. Now a slightly longer term question. Obviously, there's been at least a slew of new capacity addition announcements from a variety of players in the industry. Now as one thinks about just the timing of these capacity adds within the U.S., what are you hearing, what are you seeing in terms of just how long it's taking in terms of getting the environmental commissioning side of things sorted out and then generally all of us use the rule of thumb of around four years for the EP&C guys to come and build a new plant, but what are you seeing in terms of just the timing from concept to production so to say as well as any capital cost inflation out there?

I think four or five years is a good indication of the time. I think in Chevron, CP Chem and Dow Chemical have announced their new complexes and it takes a long time to get permitted and to get built in today's environment.

Okay. Fair enough. Thanks so much.

You're welcome.

And our next question will come from the line of Grant Goodnight with UBS. Please Proceed

Good morning, gentleman.

Good morning, Greg.

Did I understand the Geismar VCM plant will be restarted in the second quarter and there will be no residual impact in the third quarter or what is the timing of the restart?

Our estimate is by mid-May the vinyl plant will be operational and it will have some impact during the second quarter in terms of how much PVC we can sell.

Great. The second thing, could you typify your volume trends in the fabricated PCV products area?I know you commented a little bit earlier, but could you flesh out your view of growth in the large diameter pipe or windows and door segment in terms of volume increase year over year?

Yes. We definitely saw an increase in the first quarter of 2012 versus 2011 first quarter and fourth quarter of 2011. So it is a market improvement.

Would you say it was 10% or 20% or somewhere in those ranges?

Yes. I would think less that 20%.

Okay. Excellent. Finally, is there any update you might be able to give us on a potential large transaction that had been previously discussed in these calls?

As Dave Hansen has said earlier, we have no other comments other than what he has said already.

Okay. I had to try. But thank you so much.

You're welcome.

Our next question will come from the line of Robert Reitzes with BroadArch CapitalPlease proceed.

I have two quick questions. One is are you finished with your inventory, the FIFO adjustment, is that over? And the second thing, have you seen -- you answered a good question about PVC, the same question about polyethylene, do you still see strong demand both here and if you have any insights into overseas I would be curious to hear what your thoughts are on polyethylene.

Yes. As it relates to the FIFO effect, I gave a good indication, we saw about a $0.21 impact, with obviously with lower cost of feedstocks we'll see the benefit of that flow into the second quarter. And unless we see other significant moves in feedstocks that will be the bulk of the change. But obviously we'll all wait to see how the second quarter will lay out.

Yeah, as to the polyethylene and PVC, we believe that things -- we had several price increases in the first quarter for both segments. The industry will have to settle down and see how the [vent] supply adjusts itself, plus the U.S. economy and plus the global economy for export market. And plus the ethylene price movements as we said earlier, the lower the ethylene spot price and contract price will give more chance for U.S. industry to export. So all of these dynamics will impact how the supply-demand pricing for both PVC and polyethylene will happen in the U.S.

Let me follow up. I understand those dynamics well. My question to you is, based on you see those dynamics going on, have you guys been encouraged by what you've been seeing or discouraged?

As I said earlier, there's a $0.07 per pound price increase announced for the second quarter in polyethylene, and there's also $0.02 per pound announced for PVC for the month of May. The industry still believes there's a room for price movement. As I said earlier, the supply-demand adjusts itself to see how much of those of prices increases can be implemented in the second quarter.

Thanks for the answer.

You're welcome.

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

We'd like to thank you for participating in today's call. We hope you join again for our next conference call to discuss the second quarter 2012 results. Thank you very much and have a wonderful day.

Thank you for participating in the Westlake Chemical Corporation first 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 11.59 p.m. Eastern time on Tuesday, May 8, 2012.

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 12583170. Thank you for your participation in today's conference and have a great day everyone.