Westlake Corp (WLK) 2012 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 2012 earnings conference call. During the presentation, all participants will be in a listen-only mode. (Operator Instructions).

As a reminder, ladies and gentlemen, this conference is being recorded today August 2, 2012. 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. Good morning everyone and 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, 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 second quarter and a 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 to 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 risk 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 and 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 11.59 Eastern Time on August 9, 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 23500734.

Please note that information reported on this call speaks only as of today, August 2nd, 2012, and therefore, you are advised to 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 like 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 our earnings call. In this morning's earnings release, we report a record net income of $115.5 million or $1.72 per diluted share for the second quarter.

Our Olefins segment also achieved a record level of operating income and the Vinyls segment delivered its strongest performance in the third quarter of 2008.

The favorable dynamics in natural gas liquids continues. We expect the growing production of natural gas liquids from shale gas and oil drilling will cause ethane to become structurally long as billions of dollars of fractionation and pipeline infrastructure will bring ethane from the wellhead to market faster than the ability of the chemical industry to consume this production.

Ethane and propane feedstock prices declined significantly in the second quarter as the supply of these feedstocks outstripped demand. Westlake is one of the best positioned producers to leverage this NGL feedstock advantage for the benefits in the second quarter. And we are making further investments to bolster this competitive advantage.

The sustained favorable oil to gas ratio has provided margin expansion opportunities to ethane-based, ethylene producers, such as Westlake, and continues to encourage an increasing supply of ethane and attractive economics (technical difficulty) NGL extraction for the oil and gas producers.

All of these dynamics are game changers for our industry and provide the foundation for Westlake and other North American light-cracking ethylene producers to be globally competitive for many years to come.

Now, let me turn over to Steve for a more detailed look at our financial and operating results for the second quarter.

Thank you, Albert, and good morning everyone. I will begin with a discussion of our consolidated financial results followed by a more detailed discussion of our Olefins and Vinyls segment results.

Let me start with our consolidated result. As reported in this morning's press release, Westlake reported record earnings in the second quarter of $115.5 million or $1.72 per diluted share, an improvement of 43% from the $81 million or $1.21 per share reported in the second quarter of 2011.

The majority of the significant increase in earnings was the benefit of expanded ethylene margins. Included in our earnings this quarter is a pre-tax gain of $16 million on the sale Georgia Gulf stock and expense of $3 million embedded in SG&A related to the Georgia Gulf acquisition activity resulting in a net gain of $0.13 per diluted share.

Westlake's operating income for the second quarter of 2012 was also a record at $171 million on sales of $914 million compared to the operating income of $138 million on sales of $925 million in the second quarter of 2011.

The increase in operating margins in the second quarter of 2012 over the same period in 2011, was driven largely by the drop in feedstock prices. Also contributing to the improved margins was an improvement in building products margins and higher caustic sales volumes.

Relative to the second quarter of 2011, ethane feedstocks on the Gulf coast averaged $0.37 per gallon, lower in the second quarter of 2012. Sales of $914 million in the second quarter of 2012 were $121 million lower than the sales in the first quarter of 2012, of just over $1 billion due to our sales volumes as a result of the Geismar outage and lower sales prices.

Integrated olefins and vinyls margins increased in the second quarter compared to the first quarter as the drop in feedstock costs outpaced the decline in product prices. While the second quarter saw lower sales prices for polyethylene and lower sales volumes for PVC resin in building products in the first quarter, margins strengthened in the second quarter due to the decrease in ethylene feedstock cost.

The second quarter operating income of $171 million was $25 million higher than the first quarter of 2012 primarily due to these higher integrated olefin sales margins as a result of lower feedstock costs. For the six months ending June 30, 2012, we delivered net income of $203 million, a 23% increase over the $165 million reported in the first six months of 2011.

Income from operations in the first six months of 2012 was $317 million compared to $279 million for the first six months of 2011. The increase in income from operations is the result of higher integrated margins in both segments resulting from a significant drop in feedstock prices.

Now, let's talk about LIFO versus FIFO accounting. Our use of FIFO accounting had less than $1 million impact on our second quarter earnings. Please bear in mind that this calculation is only an estimate and has not been automated.

Now, let's review the performance of our two segments. Starting with the Olefin segment, the Olefin segment reported that for record operating income of $156 million during the second quarter of 2012, which was a substantial improvement over both the operating income of $133 million reported in the second quarter of 2011 and the $129 million reported in the first quarter of 2012.

The higher operating income in the second quarter of 2012 was a result of higher integrated olefins margins due to a significant decrease in feedstock costs, which were partially offset by lower sales prices. During the second quarter, ethane prices continue the downward trend that started in the first quarter declining in an average of 28% or $0.16 a gallon.

Industry polyethylene prices declined $0.14 a pound during the quarter to reflect lower ethylene costs. However, the industry has announced a polyethylene price increase of $0.05 a pound effective August 1. And some polyethylene producers have announced another $0.05 per pound price increase effective September 1, all due to increasing demand.

Now, let's discuss the Vinyls segment. The Vinyls segment continues to deliver solid improvement this quarter. Reporting record operating income of $23 million in the second quarter of 2012 compared to operating income of $10 million in the second quarter of 2011, the best quarter since the third quarter 2008.

The increase in operating income was a result of a significant drop in propane feedstock cost, improved building products margins and higher caustic sales volumes. The Vinyls operating income of $23 million in the second quarter of 2012 was an improvement over operating income reported for the first quarter of 2012 driven largely by lower propane feedstock cost.

It is important to note that we delivered these results in spite of the loss production resulting from the Geismar outage in late March. The facility resumed operation in May.

For the first six months of 2012, the Vinyls segment reported operating income of $44 million compared to $7 million reported in the same period in 2011. As a result of lower feedstock costs and improved building product and caustic margins.

The significant improvement in our building products business and the margin expansion we have delivered is a result of changes we have implemented in the business. Industry exports of PVC resin were approximately 4% higher in the first six months of 2012 compared to the same period in 2011while our exports lagged due to the outage in Geismar during the second quarter.

Some industry producers have announced price increases on PVC resin of between $0.03 and $0.05 a pound effective September 1. Caustic sales volumes in the second quarter were comparable to sales volumes in the first quarter and the second quarter caustic producers announced a price increase of $60 per ton, which is expected to be implemented during the third quarter.

Now, turning to the balance sheet and the statement of cash flows, we've generated $323 million in cash from operating activities in the first six months of 2012 and spent $141 million in capital expenditures.

At the end of the second quarter, our cash balance was $1.1 billion including restricted cash of $20 million and our total debt was $765 million. In July, we redeemed $250 million of our 6.625% notes and refinanced them with new 10-year notes at 3.6% cutting $7.6 million in interest cost per year.

By way of guidance, I would estimate the third quarter will include a non-operating charge of approximately $6.8 million in redemption call premiums and the writeoff of previous financing costs. Our guidance for this year as capital expenditures continues to be between $400 million and $450 million including expenditures on the Geismar chlor-alkali project and the ethane cracker expansion at Lake Charles.

The ethane cracker turnaround and expansion will take place in the fourth quarter of this year, and a result in the unit being down for approximately 50 days. We will be taking a normal maintenance turnaround on our styrene unit in the third quarter of 2012 and expect the financial impact to be approximately $3 million in the quarter.

These expenditures will be funded from our cash reserves. The flexibility of our capital structure gives us a variety of options when considering future growth perspect -- prospects. This flexibility allows us to maintain our conservative approach to investing or pursuing projects that bring value to our shareholders.

Now, I'll turn the call back over to Albert to make some closing comments. Albert?

Thank you, Steve.

I believe Westlake's strong second quarter performance illustrates the earnings power of the company. Westlake is very well positioned to deliver value both in the near term as well as over the long term. First, through our favorable feedstock position, an advantage that will be with us for years to come.

Second, through a pursuit of initiative that expands our bottom-line and takes advantage of the low cost feedstocks that shale gas and oil drilling are providing. These initiatives include expansion of our ethylene plant at Lake Charles in Louisiana, the first of which will deliver benefits in the fourth quarter of this year.

We will follow up that expansion project with expansion of the other Lake Charles ethane cracker in 2015. We're also finalizing our study of the conversion of the Calvert City, Kentucky ethylene unit from propane to ethane as well as the expansion of that cracker.

Third, turning to our chlor-alkali project, we've made substantial progress on our new facility at our Geismar plant and expect it to be operational in the second half of 2013. The project also capitalizes on the globally competitive cost on natural gas used for electricity, the key cost element in the production of chlor-alkali.

When these four major projects are complete, Westlake will be one of the most fully integrated and lowest cost vinyls producers globally. We're working on all fronts, beginning with our strong feedstock position, and leverages this advantage through the investments we are making to further our competitive position.

We will continue to look for avenues to grow our business and bring value to our shareholders. We have ample ability to fund our growth and we have the patience and discipline to invest when the risk-reward tradeoff is favorable. Thank you very much.

Now, let me turn it 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 the call.

Operator, we'll now take some questions.

(Operator Instructions). And our first question comes from the line of David Begleiter with Deutsche Bank. Please proceed.

Thank you. Good morning.

Good morning, Dave.

Good morning.

Albert, can you comment on the prospects, your view for the PE price increases that goes through in both August and September?

Yes, we believe the prices hit bottom in June and as the oil price globally has increased and the sentiment and demand for products is also a sudden increase and people start to build inventory back that we believe that the strong possibility of the price increases to be implemented.

And Albert, can you comment on PE volumes in the last couple of weeks? It seems some of the restocking has slowed a little bit.

Well, what we see is that inventory levels in both producers and consumers are at the low range of the normal levels. So, we believe that inventory demand, the product demand would increase compared with the lows of the April, May time period.

And Steve, are you able to comment on what your operating rates were in Lake Charles for both ethylene and polyethylene in Q2?

Yes, we are running in the best way we can, suddenly, the margins there. So, everybody is running as fast as we can.

Thank you very much.

You're welcome.

Our next question comes from the line of Brian Maguire with Goldman Sachs. Please proceed.

Hi, good morning.

Hi, Brian. Good morning.

Albert, you've generated a lot of cash in the second quarter and you're kind of in the high class situation of having a lot of cash on your balance sheet, gross cash is about $70 a share, net cash about $365 million. Yet, you pay about $50 million a year in net interest expense. So, that's a big penalty you're paying for having a very conservative balance sheet.

I was just wondering, going forward, you have a pretty good outlook for the industry. It seems like you're going to continue to generate a lot of cash to meet all your internal growth needs. So, I was wondering if you and the Board were considering more aggressive return of this cash to shareholders here in the forum of higher regular dividend or a special dividend going forward.

Certainly. We do have -- I mentioned in the call, substantially the capital investment that we're making. Some of them we already announced the size in terms of our first ethylene cracker expansion at Lake Charles and polyethylene plant.

We are working on our second ethylene plant expansion at Lake Charles as well as expansion and conversion from propane to ethane for our Calvert City plant. And all these are pretty large size capital expenditures.

So, this is where the use of our cash will be in the near term. As far as dividend is concerned, we certainly review with our Board every quarter and we will be reviewing in the upcoming quarterly Board meeting.

Okay. Great. And hopefully, you may comment on the inter-quarter trends for volumes of PE and PVC, for example, was May higher than April. And how did you compare to May? And then kind of what have you been seeing in July so far?

Suddenly with the price drop in oil and in gas demand for our products, not only the US and globally has slowed down in April, May period. But since the oil price has hit the bottom, they're moving up in June, July. We see people who start replenishing the inventory level. And demand generally is pretty healthy, especially in the US.

And with the competitive cost position with US olefins and integrated vinyl producers, I think we also have a great position to supply the export market.

Okay. Great. I know each of your crackers in Lake Charles had a fairly small operational hiccup in the quarter, one in May and one June. I'm just wondering if there was any financial impact on the second quarter numbers or any expected impact on the third quarter earnings from those small outages.

Brian, there certainly was. When you think about the outages that we have both with the Petro 2 and Petro 1 units, there was an impact in the second quarter about $15 million in the second quarter. And I expect in the third quarter we'll see a number in that same area as well in the third quarter.

Great. Thanks very much.

Our next question comes from the line of Frank Mitsch with Wells Fargo Securities. Please proceed.

Good morning, gentlemen, and congratulations on a nice quarter. And, of course, congratulations on your shrewd investment, paying off $16 million in a short period of time is something to -- that a lot of folks on the line would love to achieve.

I just want to confirm, are you fully out of Georgia Gulf stock at this point?

Yes, we are. And thank you, Frank, for that nice comment.

Great. And so, you mentioned that this is the first -- the best quarter in vinyls in several years. I was curious as to a couple of things; one, how much of the benefit, the $22 million that you reported was due, you think, to the propane cracker that you have there? And then secondly, I guess, there was a lot of talk in terms of building products that were pulled forward from Q2 and to Q1 due to the weather.

Did you see any of that impacting your business as well?

Frank, it's Steve. As it relates to the propane pricing, that was probably the biggest driver of the vinyls in the second quarter with much -- meaningfully lower propane. And certainly, from a volume point of view, we did see as we commented throughout the quarter that we pull through from 2Q back into the first quarter so that certainly did impact volumes.

Okay. Great. And how would you characterize the operating rates in your building products type business as it stands today versus where it was, let's say, a year ago?

Oh, they're still out.

All right. Much appreciated. Thank you.

You're welcome.

Our next question comes from the line of Don Carson with Susquehanna Financial. Please proceed.

Yes, thank you. Steve, can you comment on how much the Geismar VCM outage cost you in the quarter? And I was surprised the FIFO adjustment was so small because given the sharp drop in both ethane and propane from Q1 to Q2 I thought you would have had a bigger FIFO impact.

Yes. Don, the impact to the outage was just really a couple of million dollars. As it relates to the FIFO/LIFO, that really is an accounting mechanism that we use for finished goods. And so, with a drop in feedstock, especially late in the quarter, the effect of that will really carry over into Q3. So, we'll wait and see how the rest of the quarter lays out in terms of feedstocks.

But that drop in -- late in the quarter is not on a FIFO basis, our finished goods on a FIFO basis. So, the effect of that would really flow in to Q3.

Okay. And then going forward into the second half, how big of an impact will this 50-day outage at Lake Charles have? And are you building inventory now to account for that?

And then one final question on polyethylene, again, there's just questions to how much of this is restocking versus improved final demand. What does your forward order book look like as you get out into the later part of this month and into September? Is that still relatively robust?

In terms of the outage, we are continuing to build and plan for that turnaround. And so, we are beginning to build ethylene in terms of, as Albert commented on the order book for polyethylene, the price increases I think speak for themselves. As Albert commented, we're seeing good demand at this level. And I think those price increases in August, September reflect that good firm demand that we're seeing in polyethylene.

Okay. Thank you.

You're welcome.

Our next question comes from the line of Jeff Zekauskas with JP Morgan. Please proceed.

Hi, good morning.

Hi, Jeff.

Good morning, Jeff.

You plan to expand your Calvert City cracker, how much could you expand it by?

That's what we are studying right now.

Right. But order of magnitude, is this a couple of million hundred pounds or is it much more than that? I realize that for feasibility, you try to examine your costs and what's a good investment for the company. But could you be more precise?

Well, we are doing the study right now, so we can't be precise. But we will not be adding a huge amount of capacity. This is a plant that was very small when it first started and we have de-bottlenecked several times. And we are studying right now how much more can we de-bottleneck.

But we believe there will be some additional pounds. And hopefully, we will be able to discuss that in the future quarters.

Okay. Separately, does the combination of Georgia Gulf and PPG in the chlor-alkali area change anything at West Lake in the sense that -- do you think that this combination is positive or negative or neutral for industry PVC and chlor-alkali dynamics?

Well, we can't comment on the merits of the deal, but the merger of two that are the same companies won't add any more capacity. And what we've read is that Georgia Gulf will not add any new chlor capacity as a result. So, that should be positive for the industry.

Okay. And if I could ask a final naive question, whenever I look at your vinyls income, I always think that it could be accounted for either by the profitability of the propane cracker or it could be accounted for by self and caustic soda. I'm always surprised that it's not higher. Do you think the same way or you're not?

Well, I think you hit a very good point, is that the propane cracker has been losing money for quite a while when we have propane price following mostly oil price. And in the last two years, propane was -- oil was very high and propane was very expensive.

But now, with propane price coming down and with our ability to convert to ethane within that -- in the future, we will have quite a good positive impact on our bottom-line for our bundled business.

And then, lastly, do you buy your propane essentially at spot, or have you bought your propane at some contractual rate?

We buy at market prices.

At market prices.

-- and bring it by pipeline to Calvert City, Kentucky.

Okay. Good. Thank you very much.

You're welcome.

Our next question comes from the line of Gregg Goodnight with UBS. Please proceed.

Good morning, Albert and Steve.

Good morning, Gregg.

Good morning, Gregg.

Hey, your Lake Charles, your second expansion, I'm curious as to why that timing is 2015, it would seem like in these market conditions and all the expansions that have been announced it would be wise to do that as soon as possible. And what is the logic for 2015?

Greg, as I commented earlier in the Q&A, that unit was down for a short period of time in the second quarter. And while it was down, we did a lot of maintenance on it and that allows us to move it into 2015.

Okay. Why not 2014 or even 2013 maybe?

Well, we're working on our turnaround for the first unit this year, and while the margin's good we like to run the plant as long and fast as possible.

Okay. Second question, you mentioned that your operating rates on fabricated PVC were low. Are you seeing any pickup in either of your window or door profile business or your diameter pipe business coincident with this slight increase in housing starts that we're seeing?

We do not see a material improvement in the pipe side, but we see some benefits in terms of the window, from the fence business because they're used also replacement and for new housing. And also a bigger proportion now of the new housing -- multifamily units, which also uses more PVC windows.

On a year-over-year basis, could you give us a rough idea of what volumes would be up in your window and door profile business?

It's better but not materially better.

Okay. All right. Thank you, gentlemen.

You're welcome.

Next question comes from the line of Kevin McCarthy, Bank of American Merrill Lynch. Please proceed.

Good morning. This is Alex [Ubramov] for Kevin.

Hi.

Good morning. Question on NGL markets, do you see potential impact in the short term over the next six months maybe related to increased ethane rejection and also potential cuts in NGL production levels overall? Do you see potentially an upwards pressure in the price of ethane and propane?

Well, the forward market for ethane and propane are pretty flat for the rest of the year and in next year. Even today, we have $0.35 for ethane. It's like $5.25 million BTU, still substantially higher than the $3 gas price. So, there are still very positive return benefits to the producers to sell at these prices.

Okay. Thank you.

And then you mentioned some changes you made to your fabricated products business, could you just maybe elaborate what kind of changes were those?

We improved our cost position and rationalized some of the plans and also take some part that makes it more profitable.

Okay. And finally question if I may, is there an explicit financial impact in the fourth quarter related to your Lake Charles turnaround and expansion that we should pencil in?

Sure. The impact is we're going to be out for a 50-day period as we go through that -- both that turnaround and de-bottleneck. And so, you need to take into consideration the outage for that 50-day period.

Okay. Thanks.

You're welcome.

(Operator Instructions). Our next question comes from the line of Hassan Amed with Alembic Global. Please proceed.

Good morning, Albert and Steve. How are you?

Good morning.

Good morning, Hassan. How are you?

Good. Thank you. This is a more macro question, obviously, feedstock costs, particularly the crude oil based ones, gyrated all over the place through the course of the quarter. What sort of trends have you been seeing out in Asia in particular? Call it on the Chinese side of things in terms of the operating rates out there, the demand trends out there on the ethylene, polyethylene side of things. And are there at all any export opportunities for you guys to take advantage of?

Certainty, because of most of Asia are naphtha- based, they're fixed cost has been influenced by oil. With the recent increased oil price, ethylene price has moved up. And today there are about $1,150 a ton, which is about $0.52 a pound equivalent in the US.

We understand that polyethylene prices have not moved up yet. And we believe that polyethylene prices in Asia will be going up higher to meet the higher ethylene cost.

Fair enough. And in terms of just the export-ability side of things, do you think there's opportunity for Westlake and other producers out here to maybe pop up their volumes by exporting more product out there?

Yes, yes, absolutely. I think US polyethylene producers exports approximately 20% of its production. And because of the competitive nature of the US ethane-based -- ethane producers, these prices are attractive for export markets.

Very helpful. Thanks so much, Albert.

You're welcome. Thank you.

Our next question is a follow-up question from the line of Brian Maguire with Goldman Sachs. Please proceed.

Yes, Steve, I'm just wondering, I see that Eastmen is going to have a turnaround in one of its crackers in Longview in the fourth quarter. I know you sourced some of your ethylene from there, I just want to get -- do you have expected financial impact on the fourth quarter or first quarter of '13 results?

Brian, as I mentioned earlier, we have already begun to inventory for the planned turnaround. It shouldn't have an impact to us.

Great. Thanks very much.

You're welcome.

We have no further audio questions. I will now turn the call back over to Dave Hansen for any closing remarks.

Well, thank you very much. We appreciate you participating in our call today. We hope you'll be able to join us again for our next conference call to discuss our third quarter 2012 results. Thank you, and have a wonderful day.

Thank you for your participation in today's conference. This concludes the presentation. Everyone may now disconnect and have a great day.