Westlake Corp (WLK) 2013 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by.  Welcome to the Westlake Chemical Corporation's second-quarter 2013 earnings conference call.  During the presentation, all participants will be in a listen-only mode.  After the speakers' remarks, you will be invited to participate in a question-and-answer session.

As a reminder, ladies and gentlemen, this conference is being recorded today, July 30, 2013.

I'd 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, and welcome to the Westlake Chemical Corporation's second-quarter 2013 conference call.

I am 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 conference call agenda will begin with Albert, who will open with a few comments regarding Westlake's performance in the second quarter and a current perspective on the industry. Steve will then provide a more detailed look at our financial and operating results. Finally, Albert will add a few concluding comments and we will then open the call up 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 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 rates; the supply/demand balance for Westlake's products; competitive products and pricing pressures; access to capital markets; technological developments; and other risk factors.

This morning, Westlake issued a press release with details of our second-quarter financial and operating results. This document is available in the press release section of our webpage at Westlake.com.

A replay of today's call will be available beginning one hour after completion of this call until 1 PM Eastern time on August 6, 2013. 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 96627066.

Please note that information reported on this call speaks only as of today, July 30, 2013, 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 this morning.

In this morning's press release, Westlake reported record quarterly net income of $146 million, or $2.17 per diluted share. This is the fourth consecutive quarter of increased earnings for Westlake and a 26% increase year over year.

These record quarterly results reflect increased integrated margins for both Olefins and Vinyls. We continue to benefit from the ongoing low-cost feedstock environment that is a result of the abundant supply of natural gas liquids available from the shale oil and gas production in the US.

Our second-quarter earnings results include record operating income for our Olefins segment, which demonstrates the continued benefit of our light olefins crackers, and our expanded ethylene capacity that was added in the first quarter of 2013. The Vinyls segment results demonstrate improving income from operations, driven by lower feedstock costs and a gradual recovery in the construction market.

Ethane-based ethylene continues to have a significant cost advantage over naphtha-based ethylene, benefiting our globally competitive light olefin crackers. The combination of expanded low-cost ethylene capacity, improved feedstock costs, and expanding integrated margins of polyethylene contributed to these record Olefins earnings. Thus, I'm pleased with our Olefins segment performance, as well as improving earnings in our Vinyls businesses.

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

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

Let me start with our consolidated results. As Albert just stated, we reported a record quarterly net income for the second quarter of 2013 of $146 million, or $2.17 per share, an increase of $30 million, or approximately 26%, over second-quarter 2012 net income.

The low-cost feedstock environment for natural gas liquids continued in the second quarter as ethane prices declined by 32% and propane prices declined by 6% over the same period last year, contributing to the higher integrated margins from both Olefins and Vinyls.

Sales for the second quarter of 2013 were $939 million, which were $25 million higher than sales reported in the second quarter of 2012, primarily as a result of the May 1 acquisition of the pipe and foundations group of CertainTeed, as well as higher sales volumes for the major Vinyls products, partially offset by lower feedstock and ethylene sales volumes.

Westlake's operating income for the second quarter of 2013 was also a record at $235 million, an increase of $64 million compared to the operating income in the second quarter of 2012. The increase in operating income compared to the second quarter of 2012 was driven mainly by lower feedstock costs and higher sales volumes for building products and PVC resin.

Sales revenue of $939 million in the second quarter of 2013 were $74 million higher than sales in the first quarter of 2013. The increase in sales were largely driven by higher sales volumes for building products and PVC resin. The second-quarter operating income of $235 million was $41 million higher than in the first quarter of 2013 due to higher average sales prices for polyethylene, PVC resins, and higher sales volumes from most of our major Vinyls products.

Now, let me talk about LIFO versus FIFO accounting. Our utilization of the FIFO method of accounting resulted in an unfavorable impact of approximately $32 million -- $32 million pretax, or $0.30 per share, in the second quarter as compared to what earnings would have been if we reported in the LIFO method. This FIFO impact was driven by the utilization of purchased ethylene that was necessary due to the planned turnaround of one of our Lake Charles ethylene units at the end of the first quarter.

The purchased ethylene contributed to the higher-cost inventory at the end of the first quarter, which flowed through cost of sales in the second quarter. Please bear in mind this is only an estimate and has not been audited.

Let's now move on to review the performance of our two segments, starting with the Olefins segment. The Olefins segment reported operating income of $188 million on sales revenue of $623 million during the second quarter of 2013, compared to an operating income of $156 million on sales of $673 million in the same period of 2012. The lower sales revenue in the second quarter of 2013 are attributable to lower ethylene and feedstock sales volumes. The higher operating income was mainly attributable to higher Olefins integrated margins as compared to the prior-year period, primarily as a result of lower feedstock costs.

Olefins operating income of $188 million in the second quarter of 2013 was $27 million higher than operating income in the first quarter of 2013. The increase in operating income benefited from higher integrated margins, primarily as a result of higher average sales prices for polyethylene and higher ethylene sales volumes, which were partially offset by lower polyethylene sales volumes. Elevated ethylene prices and solid demand for polyethylene supported industry price increases for polyethylene totaling approximately $0.03 a pound during the second quarter.

Looking forward, the industry has announced an additional polyethylene price increase of $0.04 a pound going into effect in the third quarter.

Now let's move to the Vinyls segment. The Vinyls segment reported income from operations of $53 million in the second quarter of 2013, which is its strongest quarter in seven years and $30 million higher than the second quarter of 2012. The increase in earnings was the result of higher Vinyls integrated margins largely resulting from lower feedstock costs and higher sales volumes for all major products as compared to the prior-year period.

These results were partially offset by one-time costs (technical difficulty) million dollars related to the acquisition of the specialty pipe business that we purchased in May.

The Vinyls operating income of $53 million in the second quarter of 2013 increased $9 million over the operating income reported in first quarter of 2013. The increase in operating income was the result of improved integrated Vinyls margins resulting from higher PVC sales prices and volumes.

The industry has announced an additional price increase of approximately $0.04 a pound for PVC and a $40 per ton increase for caustic for the third quarter.

Now let's turn to the balance sheet and the statement of cash flow. Our cash and marketable securities balance was $656 million and our total debt was $764 million at the end of the second quarter. We generated $256 million in cash from operating activities in the first six months of 2013 and incurred $298 million in capital expenditures. In addition, we completed the acquisition of a PVC pipe, fittings, and foundation business in the second quarter of 2013 for $178 million after making a working capital adjustment.

As we mentioned in our first-quarter earnings call, we like to remind you that our capital expenditures are being funded from our cash balances and interest associated with the funding of these projects is being capitalized. We expect our interest expense for 2013 to be in the range of $23 million to $27 million.

We expect the full-year 2013 capital expenditures to remain between $500 million to $550 million. This capital expenditure estimate includes the Lake Charles ethylene expansion that was completed in the first quarter of 2013, the construction of our Geismar chlor-alkali plant that is scheduled to be completed in the fourth quarter of this year, and the long lead items related to our Calvert City ethylene plant feedstock conversions and expansion project that will be completed in 2014.

The flexibility of our capital structure provides us with a variety of options as we consider growth prospects and new investment opportunities, both internally and externally. This flexibility allows us to maintain our conservative approach to growth and pursue projects that bring value to our shareholders.

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

Thank you, Steve.

Westlake's second-quarter financial results reflect the earnings potential of our light olefin crackers, driven primarily by lower-cost natural gas liquids-based ethylene production resulting from North American shale gas and oil production. We have benefited from integrated margins that are driven by favorable natural gas liquids cracking economics. The billions of dollars invested to produce, fractionate, and transport natural gas liquids should keep feedstock abundant, sustaining this global cost advantage.

Our integration strategy, which is aimed at improving our cost and market position, continues to move forward as planned. In the first quarter, we successfully completed the expansion of one of our Lake Charles crackers to enhance our ethylene integration and improve our cost structure. In the second quarter, we completed the strategic acquisition of our new specialty pipe business, which enhanced our North American pipe and building products portfolio by adding specialty product lines and supporting technology that we did not previously have.

Our planned completion of a new chlor-alkali plant in Geismar, Louisiana, in the fourth quarter this year and a conversion to ethane feedstock and expansion of our ethylene and PVC capacity in Calvert City, Kentucky, in 2014 I expect to further enhance our integration and improve the profitability of our Vinyls segment.

We continue to make progress in our capital investments to complete our strategic objectives of enhancing product integration, leveraging our existing asset base, and adding meaningfully to our earnings potential. These investments provide a strong foundation for our future, which allows us to capture sustained benefits of ethane from shale oil and gas.

Thank you very much for listening to our earnings call this morning. Now I'll turn the call back over to Dave Hansen.

Thank you, Albert. Ladies and gentlemen, before we begin taking questions, I would like to remind you that a replay of this teleconference will be available starting one hour after we conclude this call. We'll provide that number for you again at the end of the call.

Operator, we are now prepared to take questions.

(Operator Instructions). Brian McGuire, Goldman Sachs.

This is actually Neal Sangani on for Brian. (Multiple speakers). Would you be able to give us some color on any potential interest in the ethylene crackers up for sale at Longview?

Well, certainly, we understand they're out selling these assets or marketing these assets, and as you can well understand, we are in the ethylene business. But I can't comment any further on the sales process.

And now that your ethylene expansions are complete, can you maybe elaborate on some of the debottlenecking opportunities you have in the months and years ahead?

We certainly have work underway today to expand and debottleneck and convert the feedstock of our cracker in Kentucky in 2014. We'll be expanding that cracker by about 180 million pounds and converting the feedstock from propane to ethane.

And we continue to study undertaking a similar initiative by expanding our cracker in Lake Charles, which would be slated for 2015, and we're continuing that effort now and studying that process.

Okay, thanks. Just a quick one on accounting from -- on ethylene sales from olefins to vinyls. Is that done on cost or market prices?

Done on a market transfer basis.

Okay, thank you.

Hassan Ahmed, Alembic Global.

A quick question around volumes. Obviously, we've all been sort of hearing about China sort of slowing down and the like, but -- and more and more sort of economists have come out and seem to be downgrading their GDP growth estimates for that country.

But now, you take a look at the polyethylene side of things and it seems to present a pretty divergent picture. I mean, I was reading an industry sort of journal and I came across sort of volume growth numbers on the polyethylene side in China of around 13% for the first half of this year. I mean, you know, would sort of really appreciate your insights as to what's going on out there.

Yes, China's economy certainly has slowed compared with last year's, but we see the demand for our products still continues to grow, but at a slower pace. And we are seeing polyethylene prices, as we speak, improving from the low of second quarter (multiple speakers)

So is this mainly restocking or decent demand coupled with some sort of restocking as well?

I won't say demand is decent, but demand is okay. With oil price going up in the last few weeks or months, there's a lot of pressure for prices going up. I think most of the naphtha crackers in Asia are breaking even at best.

Fair enough. Fair enough. Now on a separate note, just a question around the cost curves, I mean, it seems some interesting things seem to be going on over there. Obviously, the US continues to benefit from the ethane-based cost advantage, but would love to hear your views about the Middle Eastern side. Because at least over the last couple of quarters, I take a look a company like Saudi Kayan seems to be still running at reduced operating rates, which begs the question that are they truly getting the ethane allocation out in the kingdom. So that's one side.

And then, literally yesterday Industries Qatar came out with their earnings. And it seems that they've escalated the price of natural gas there, at least of some of their units, to almost $4.00 an MMBTU.

So, you know, how do you see at least the Middle Eastern side of the cost curve panning out over the next couple of years?

That's a very good question. I think with the new Middle East projects coming on stream, many of them are mixed feed, which means a combination of ethane, propane, butane, maybe naphtha. If you look at the combined costs for those feedstocks, they will be less attractive, less competitive than US ethane-based crackers today.

Fair enough. Thanks so much, Albert.

You're welcome. Thank you.

Frank Mitsch, Wells Fargo Securities.

This is Sabina Chatterjee in for Frank Mitsch. Albert, just a question on chlor-alkali, if I may. You and others have got additional capacity coming online in Q4. Can you just comment on what you see the industry structure being like at year-end and maybe into 2014? Like, for example, do you see rationalization and how do you think pricing could trend?

Certainly when you have additional capacity that's beyond the demand growth for the industry, there will be pressure on pricing and volume, and time will tell whether people rationalize or reduce their operating rates to meet the increased low-cost competitors.

So, if you could venture a guess on what could happen by year-end, do you think somebody will shut down capacity?

Potentially possible. But people can also look at export of chlorine derivatives or caustic to reduce the domestic pressure from increased capacity.

Okay, and then just a follow-up on PVC. The segment did a lot better than we had expected. Could you just carve out the contribution maybe from the PVC pipe acquisition and comment on your outlook for construction in general?

Well, we don't separate out the detail, the building products segment from our new acquisition, but certainly it helps contribute to the sales and profitability of our business going forward. I think the construction market has improved, albeit slowly, and we see the volume increase partially from the improved construction market in the US. But it's still very gradual.

All right, and then just an accounting question. FIFO, you said, was unfavorable by $0.30. As far as purchased ethylene goes, do we have to be concerned about that in Q3 or have we drawn down inventories of the purchased ethylene?

Yes, Sabina, that was a carryover from the first quarter. I mentioned in our prior call that we had purchased ethylene while we were doing the turnaround and debottleneck, and so we mentioned the first-quarter and now the second-quarter impact. There shouldn't be that big of an impact going forward at this stage.

Great, thank you.

You're welcome.

Charles Neivert, Cowen.

Just a quick question. On the acquisition, you talked about how it gives you additional technology, some higher-end product. Is any of that that you purchased in that acquisition transferable to other things within your fabricated products business? I mean, are we going to see sort of an improving mix not simply because you're adding something that's slightly higher end, but because you can improve the things that you are already doing through the technology you've acquired?

Yes, certainly. That's part of the synergy we believe will benefit Westlake's building cost going forward.

Okay, and also looking forward, ethylene pricing came down, I guess, stairstepped each month of the quarter. Are you guys seeing that stabilizing now that we're into the third quarter? Where is it looking like for July and August? Are we looking for another two-month settlement or are we going to probably get a real July settlement here?

Yes, from what we understand, the July settlement will probably be flat, but we haven't closed July yet, so time will tell. And the forward pricing is pretty flat going through the rest of the year. And as you know, there'll be turnaround coming up in the third quarter, as we speak.

Right, okay. Thanks very much.

You're welcome.

Alek Yefremov, Bank of America Merrill Lynch.

Good morning. I had a general and more specific question on the fabricated products industry. Maybe could you in general describe the state of the industry, whether it's healthy right now or it needs maybe further consolidation? And more specifically, have there recently been price increases in fabricated products, and maybe more specifically in pipes, and have those increases been catching up with increases in PVC?

Yes, there have been price increases across the board in various building product segments that we participate in. And it has [certainly] reflect the higher prices in PVC during this year, as well as improved business in the market economy. But I will say we're certainly not back to the good days during the height of construction activity in the US back in the mid-2000s.

Thank you. Now regarding your chlor-alkali startup, should we think about the first quarter of 2014 as when the benefits from the startup begin, and also, should we expect any startup costs in the fourth quarter?

As we've said, the unit will start up in the fourth quarter. That's our expectation. There will be startup costs incurred in the fourth quarter, and as we go forward into 2014, we'll begin to see the contribution. But we're not at this stage going to give any guidance into 2014.

How about startup costs? Do you have any idea how much those will be?

Yes, I'm not going to give you the startup costs at this stage, but as I say, there will be startup cost incurred as we start that unit up in that fourth quarter.

Okay. And lastly, maybe, if you could give us some idea on how demand is trending in July for both polyethylene and PVC resins?

The volume or prices?

The volume.

Yes, I think there was a summer lull in July. American fabricators typically take some vacations and plans in July. So we saw some reductions in volumes in June and July, but we believe that as the vacations are over, the volumes will pick up speed again. Typically, second and third quarters are the two best quarters of the year in both Olefins and Vinyls businesses.

Thank you.

You're welcome.

John Roberts, UBS.

The price variance table in your release that shows the sequential price changes has the Vinyls prices down 0.5% sequentially. What declined in price to cause that to be down 0.5%?

Those are probably more in our olefins. We have byproduct credits in our olefins unit, in the Vinyls segment. As you know, many of the propylene and butadiene prices have dropped and that has an impact on the pricing. Even for PVC, we had price increases.

Yes, that's right. I looked at most of the prices went up in the Vinyls segment, so I wouldn't expect that to be overwhelmed by co-products going down.

It had a big influence.

Okay. And then, did you see any impact during the quarter of the Williams outage? And what I'm thinking about is whether the exports of some of the derivatives might have been less -- or some of your nonintegrated competitors might have been less competitive in the marketplace and maybe the export market was a little healthier with the Williams plant down.

I think the spot ethylene price shot up [off in fortune england] from low $0.50s to above $0.60 a pound for spot ethylene. But things at most of the other ethylene plants that had turnaround came back to operations, so the ethylene -- spot ethylene price is now in the mid $0.50s.

So you don't think the competitive intensity in the export market was affected by that?

Maybe for a while, yes. But I think today's spot pricing in the mid $0.50s certainly reflects the availability of ethylene compared when it was in the $0.60 range.

Thank you.

You're welcome.

(Operator Instructions). [Ken Fineton], [ICIS].

I wanted to ask you, Eastman was asked earlier today about the pipeline between Longview and Mont Belvieu and a tariff dispute between your company and those who use that pipeline. I wanted to know if you had any comments about that tariff dispute.

Well, as you mentioned, there is a pipeline that runs between Longview and the Gulf, and there is a tariff rate that is in effect. We've seen and received no comment or complaint from Eastman, nor from the Texas Railroad Commission, at this time. So it would be premature for me to make any comment.

I see. Thank you very much.

Richard O'Reilly, Revere Associates.

I believe on your first-quarter call, you had highlighted the course of the Lake Charles turnaround, and I thought you had indicated there would be more expense costs in the second quarter. Did that turn out to be what you thought?

Yes, in fact, I outlined that we thought we'd have about a $30 million impact that would carry over into the second quarter. And in my comments this morning, I mentioned that there was a $32 million impact for (multiple speakers)

Oh, I missed it, I'm sorry. Okay, thank you.

Yes. So that was the impact that I made reference to last quarter.

Okay, fine. I'm sorry, I didn't hear that number. Okay, fine. I guess I'm a little confused, but also like John Roberts, the ethylene co-products show up in the Vinyls segment, not the Olefins?

Yes, we have an ethylene cracker in western Kentucky that sits in the Vinyls segment. And that is the co-product that Albert was referring to (multiple speakers)

Okay, fine. And then, just to follow up on the Eastman --- the previous Eastman question. They did make a comment this morning about filing something with the Texas Railroad Commission. So I don't expect you to comment on that, but that's what they had told us today. Okay, thank you, then.

Thank you.

Bill Young, ChemSpeak.

A question about PVC. Can you give us a rough idea what your capacity utilization has been across the board for your PVC resins? And what proportion right now do you think is being exported for Westlake versus the industry overall?

Certainly, I think we are operating at a relatively high rate. We are still buying ethylene and buying chlorine, so that has some impact on our ability to export the pricing. Does that answer your question, Bill?

Oh, well, I was just wondering how your export proportion compares to that for the industry overall.

I think ACC reported exports in second-quarter PVC is about 37% of its production. And we believe that in most our products, we export a lower ratio than the industry exports.

Okay, okay, great. Thank you.

You're welcome.

Thank you. At this time, the question-and-answer session has now ended. Are there any closing remarks?

We would like to thank you today for your participation in our call. We hope you will join us again for our next conference call to discuss our third-quarter 2013 results. Have a wonderful day.

Thank you for participating in today's Westlake Chemical Corporation second-quarter earnings conference call.

As a reminder, this call will be available for replay beginning one hour after the call has ended and may be accessed until 1 PM Eastern time on Tuesday, August 6, 2013. 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 96627066.