Westlake Corp (WLK) 2013 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Chemical Corporation's third-quarter 2013 earnings conference call. (Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded today, November 7, 2013.

I would now like to turn the call over to today's host, Dave Hansen, Westlake's Senior Vice President of Administration. Sir, you may begin.

Thank you and good morning, everyone, and welcome to the Westlake Chemical Corporation third-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 third quarter and a current perspective on the industry. Steve will then provide a more detailed look at our financial and operating results; and 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 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.

This morning Westlake issued a press release with details of our third-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 four hours after completion of this call until 3 PM Eastern Time on November 14, 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 45573736.

Please note that information reported on this call speaks only as of today, November 7, 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 which can be accessed at our webpage at Westlakecom.

Now I would like to turn the call over to Albert Chao. Albert?

Thank you, Dave. Good morning, ladies and gentlemen, and thank you for joining our third-quarter earnings call. This morning our third-quarter 2013 press release reported record quarterly net income of $170 million or $2.54 per diluted share on sales of $1 billion. This record quarter nearly doubles the net income that we reported in the third quarter of 2012, driven by continued strong results in our Olefins segment and improved results in Vinyls.

Both our segments continue to benefit from the low-cost feedstock environment that is a result of the abundant supply of natural gas liquids. Ethane prices decreased in the third quarter, as ethane remains in an oversupplied situation due to increased shale drilling, which contributed to strong integrated margins across both of our Olefins and Vinyls segments. We believe that this ethane feedstock cost advantage over heavier feedstock-based ethylene will continue, as significant capacity in fractionation and pipeline infrastructure bring additional supplies of ethane to market faster than the North American chemical industry can consume it.

The Olefins segment result continues to benefit from strong margins created by low-priced natural gas liquids raw materials and continued good demand for polyethylene. Our results also reflect the benefits from the additional ethylene capacity that we brought online early this year at our Lake Charles, Louisiana, facility as well as the improvement in our integrated cost position that allows us to capture a greater portion of the ethylene value chain.

The improving result in the final segment was driven by the improvements in integrated vinyls margins. I would now like to turn it over to Steve for a more detailed look at the financial and operating results for the third quarter and the year to date.

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.

In this morning's press release Westlake reported record quarterly net income for the third quarter of 2013 of $170 million or $2.54 per diluted share, an increase of $83 million over the third quarter of 2012 net income of $87 million or $1.30 per diluted share. Net sales for the third-quarter 2013 were $1 billion, which were $183 million higher than sales reported in the third quarter of 2012, primarily as a result of higher sales volumes for styrene and higher sales price for most of our major products.

Westlake's operating income for the third quarter of 2013 was also a record at $267 million, an increase of $124 million compared to the same period in 2012. The increase in operating income compared to the third quarter of 2012 was driven mainly by improved olefins and vinyls integrated product margins due to higher sales prices for most of our major products and lower feedstock costs as compared to the prior-year period. Contributing to this sequential annual improvement is the realization of the additional ethylene capacity from our Lake Charles facility, which allows us to produce ethylene at a lower cost than purchasing it on the market, thus capturing a greater portion of the olefins integrated margins.

Sales revenue of $1 billion in the third quarter of 2013 were $65 million higher than sales in the second quarter of 2013, driven by higher sales volumes for polyethylene. The third-quarter income from operations of $267 million was $32 million higher than in the second quarter of 2013, primarily due to lower feedstock cost and higher polyethylene sales volumes.

For the nine months ended September 30, 2013, we reported net income of $439 million, an increase of $149 million over the $290 million reported in the first nine months of 2012. Sales revenue for the first nine months of 2013 increased by $38 million compared to the prior-year period, mainly due to higher sales volumes for styrene and sales contributed by our recently acquired specialty PVC pipe business. These increases were partially offset by lower feedstock, ethylene, and ethylene coproducts sales volumes.

Income from operations was $696 million for the first nine months of 2013, an increase of $237 million over the prior-year period, and was mainly attributable to higher olefins and vinyls integrated product margins due to a significant decrease in feedstock cost as industry ethane prices decreased 40% and industry propane prices decreased by 10% from the prior-year period.

Our utilization of the FIFO method of accounting resulted in a favorable impact of $1.6 million pretax or $0.02 per share in the third quarter, as compared to what earnings would have been if we reported on the LIFO method. Please bear in mind that this calculation is only an estimate and has not been audited.

Let's move on to review the results of our two segments. Starting with the Olefins segment, the segment reported operating income of $237 million on sales revenue of $679 million during the third quarter of 2013, compared to operating income of $124 million on sales of $540 million in the same period of 2012.

The increase in operating income was mainly attributable to higher olefins integrated product margins as compared to the prior-year period, primarily as a result of higher sales prices for most of our major products and lower feedstock cost. Olefins operating income of $237 million in the third quarter of 2013 was $49 million higher than operating income in the second quarter of 2013.

Third-quarter operating income benefited from higher polyethylene sales volumes and higher integrated olefins product margins, driven by lower feedstock cost. Partially offsetting this benefit in this quarter was the impact of an unplanned outage at one of our crackers at our Lake Charles facility, which resulted in the unit being down for 14 days. We estimate that the impact of the lost production and associated cost to be approximately $21 million on a pretax basis in the third-quarter results.

For the first nine months of 2013 the Olefins segment reported an increase of $176 million in income from operations to $586 million, up from $410 million for the same period in 2012. This increase was mainly attributable to higher olefins integrated product margins as compared to the prior-year period, driven by lower feedstock cost, which was partially offset by the lost production and expensing of approximately $70 million related to lost production and other costs associated with the turnaround and expansion of one of our Lake Charles ethylene units.

Now let's move to the Vinyls segment. The Vinyls segment reported income from operations of $40 million in the third quarter of 2013, which is an increase of 64% compared to the $24 million reported in the third quarter of 2012. The increase in earnings was driven by higher vinyls integrated product margins, largely resulting from higher sales prices and improved operating rates as compared to prior-year period.

The Vinyls operating income of $40 million in the third quarter of 2013 decreased $13 million from the operating income reported in the second quarter of 2013. The decrease in operating income was primarily due to higher propane cost as compared to the second quarter of 2013.

For the first nine months of 2013, the Vinyls segment reported income from operations of $136 million, an increase of $68 million over the $68 million reported for the first nine months of 2012. This increase was driven by lower feedstock cost, higher sales volumes for PVC resin, and higher operating rates compared to the prior-year period, partially offset by nonrecurring cost associated with our specialty PVC pipe acquisition.

Now let's turn our attention to the balance sheet and the statement of cash flow. As of September 30, 2013, we had cash and marketable securities balance of $717 million, and total debt was unchanged at $764 million. In the third quarter of 2013 we generated $292 million in cash from operating activities and incurred $200 million in capital expenditures.

Throughout 2013 our capital expenditures have been 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 $19 million to $22 million.

Our guidance for 2013 capital expenditures is in the range of $550 million to $600 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, Louisiana, chlor-alkali plant that is scheduled to start up in the fourth quarter of this year; and the procurement of long-lead items related to our Calvert City, Kentucky, ethylene plant feedstock conversion and expansion project in 2014.

We anticipate that startup costs associated with our Geismar chlor-alkali plant are expected to be approximately $5 million in the fourth quarter of 2013. As we look forward, we expect to complete our debottleneck and feedstock conversion in Calvert City in the second quarter of 2014, which will impact first-quarter and second-quarter results.

We believe that our current capital structure gives the flexibility to consider a variety of capital deployment opportunities as we consider future growth prospects and investment opportunities. This allows us to pursue projects that bring value to our shareholders and to maintain our conservative approach to growth.

Now let me turn the call back over to Albert to make some closing comments. Albert?

Thank you, Steve. Westlake's third-quarter results are reflective of our earnings potential which is driven by the ongoing low-cost feedstock environment and the ethylene expansion that we completed in Lake Charles in the first quarter of 2013. Looking forward, the fundamental factors that contributed to our success remain in place, as growing natural gas liquids production from shale oil and gas drilling continues.

Westlake remains well positioned to benefit from the low-cost gas-derived ethane versus the more expensive oil-derived naphtha feedstocks. The continued industry investments in infrastructure to produce, fractionate, and deliver these NGLs to the Gulf Coast will help sustain this cost-advantaged position.

We continue to make important progress in our near-term growth initiatives that are part of our broader integration strategy. We successfully completed our ethylene expansion project at our Lake Charles facility in the first quarter of this year, and we will start up our chlor-alkali plant in Geismar within the next month.

In the second quarter of next year we expect to complete a 180 million pounds ethylene expansion and conversion of our Calvert City ethylene unit from propane to ethane. We are evaluating another ethylene expansion at our Lake Charles, Louisiana, facility for 2015.

These projects will enhance our product integration and improve our profitability, which will allow us to further capture the low-cost feedstock advantage, reduce our costs, and create value across our businesses that will drive earnings growth. Thank you very much for listening to our earnings call this morning. Now I will turn the call back 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 four hours after we conclude the call. We will provide that number again at the end of the call. Operator, we are now prepared to take questions.

(Operator Instructions) Brian Maguire, Goldman Sachs.

Good morning, guys. A question for you, Albert, on the impact from the Evangeline pipeline being down, and you have seen the spot price of ethylene in Louisiana in the Choctaw system rise up to $0.65 a pound; and Texas was down in the $0.40s for a while; it's picked up into the $0.50s. But as I remember I think you are a little bit long ethylene in Louisiana and a little bit short in Texas.

So is there an opportunity there to benefit from that and maybe sell some of your ethylene volumes in Louisiana rather than turning them into polymers? Is that something that you have the opportunity to take advantage of in the fourth quarter?

Yes, we certainly try to optimize our earnings potential across both our Geismar and Lake Charles facilities in terms of ethylene and other products.

Okay. Then for the start-up of the chlor-alkali unit in Geismar, I think, Steve, you commented that it will be about a $5 million impact from some downtime due to the tie-in there. Just curious for the benefit for 2014, how quickly should we expect that unit to ramp up?

And as you think about trying to place the caustic volumes into the merchant market there, what kind of a mix between domestic and international do you think you will have? And what sort of a netback do you think you will get on that versus what some of the consultants like IHS are publishing for caustic prices?

Brian, we will bring that unit up over the quarter as we start up and certainly be operating that unit as we go forward into 2014. It is hard to know exactly what the conditions from a netback will be in 2014; so we will wait as we get into 2014 to see what those results look like.

Okay, great. Just one last one if I could. I know you guys periodically do some hedging on propane, especially around the winter months. So just as we think about the impact from higher propane on the fourth quarter, any guidance or sense on how much of that you might have hedged at lower prices already?

Nothing that is material, Brian.

Great. Thanks very much.

Hassan Ahmed, Alembic Global.

Good morning, Albert and Steve. Listen, obviously you guys continue to benefit from cheap ethane. And obviously you are carrying out the propane to ethane conversion in Calvert City next year. Just wanted to hear your views about how you see these certain coproducts pan out in the near to medium term? You know, propylene, butadiene, in terms of pricing and of course supply/demand.

Certainly propylene price is still pretty strong and butadiene price has been rather low but has recovered somewhat. And looking forward we still believe that ethane will be advantaged materially over propane, so our conversion at Calvert City from propane to ethane will reap good benefits for Westlake.

Fair enough. I guess, let me ask you this slightly differently. Obviously the marginal producers out in, call it, Europe and Asia are sitting there not really making very healthy margins. So what I'm trying to just understand is that, if at all the cycle does take off, will that -- in your mind -- recovery be induced by much higher than where we are today coproduct values? Or will it be an absolute rise in ethylene prices?

We believe there will be a -- when demand recovers globally from improved economies around the world we believe product prices will improve across the board. And that would help the high-cost plants to make reasonable return on their investments.

Okay. Just a slight follow-up. Styrene seemed to be a decent contributor in the quarter, and I would imagine that -- but if you could just tell me how much of a contribution roughly styrene was in the quarter. And as a follow-up to that, just wanted to figure out how CertainTeed's run rate EBITDA is looking, now that it is under your umbrella.

Hassan, the contribution from styrene was positive but not significant. And certainly the continued delivery of returns in our specialty PVC business continue to perform as expected.

But is it higher than the levels it was trending at over the last couple of quarters? Decently higher?

Well, we acquired this in May and so there was some transaction-related costs in that quarter. So those are behind us, and so we are now on the performance level as expected at this stage.

Perfect. Thank you so much, guys.

Frank Mitsch, Wells Fargo Securities.

Chatterjee in for Frank this morning. So just a question on the balance sheet. It's still really strong, and obviously you are investing heavily on internal growth projects. But what are your thoughts on M&A here, to further enhance your capacity?

Well, Sabina, as we continue to look at these investments that we have organically, that is a continued focus. But certainly as we have said very consistently, we look at deploying capital first at some of these projects that we have underway today. And we certainly will look at opportunities both internal and external; so we certainly look for opportunities that are of value to further the integration and expansion of our product offering.

Okay. Then do you have any update regarding the Eastman situation?

No, and frankly I think we have had this issue certainly brought in front of us, and frankly there isn't anything further to advise at this stage.

Okay. Then if I could ask a question just on PVC dynamics there, what were your operating rates in Q3? And maybe how you see volumes and rates evolving over the next year; I guess that depends on your view of construction as well.

Yes, I think the PVC operating rate really has improved over last year. And we are heading into a seasonally weaker period of the year. Looking forward to next year with our integration, improvement from our new chlor-alkali plant and ethylene expansion, that would help further improve our margins in the Vinyls business.

All right. Thank you.

Edlain Rodriguez, UBS.

Thank you. Good morning, guys. Just a quick question on PVC as a follow-up. Again, prices have been soft. Do you see any prospect for higher prices in the next year? I mean once the uncertainty about all the capacity coming in -- where do you see prices going?

I think global demand has grown this year; and we expect as the economy improves next year globally that demand will further increase and will help certainly price margin improvements. As you know, around the world very little PVC capacity is being added, other than US and China. So I think the rest of the world demand continues to increase and will benefit the US PVC producers.

Okay. Also just on ethylene, polyethylene, I know you had the $0.05 price increase in polyethylene; but contract prices for ethylene have been up and down. Do see polyethylene prices following ethylene up and down?

I think polyethylene prices follows more the global demand for polyethylene. As you know, the US exports around 20% of its production today. So the global price has a pretty large impact on US prices. I think ethylene price has less effect on polyethylene price.

Okay, thank you.

Aleksey Yefremov, Bank of America Merrill Lynch.

Good morning. One of your competitors reported 10% volume gain in fabricated products in the third quarter and better margins. Do you see signs of an uptick in demand in this product line in your business?

And maybe could you talk about your sentiment or your customers' sentiment going into the building season in 2014?

Yes, certainly with the recovery of the housing market, the fabricated home-building products segment has improved. But the improvement is rather gradual as the housing demand has also been gradual.

We expect that 2014, with improving economy the housing market will improve further and so will our building products segment.

Then maybe a follow-up, Albert, on your comment regarding -- I think you said you are still of evaluating a further expansion of your ethylene cracker at Lake Charles in 2015. Are you committed to this expansion at this point? Or is this sort of -- I guess, could you update us on the status of your thinking on this expansion?

Certainly. We are doing work on that. As we said we are still evaluating the expansion, which will be timed to our turnaround of the other ethylene plant in Lake Charles.

A final question if I may, just a follow-up on M&A. Dow has announced as we all know that they may potentially be selling some chlor-alkali and related downstream assets. Is this something that is on your radar screen? Is it something you could be potentially interested in?

Since we are part of the industry and these assets are in that space, Aleksey. We look at a lot of things in this space and certainly we look at all things that are relevant to us in this industry.

Okay, thanks a lot.

There are currently no further questions in the queue. (Operator Instructions). Brian Maguire, Goldman Sachs.

Just one last one if I could at the end here. Albert, I think earlier in the year you set an expectation that you might have a decision about changing the corporate structure to an MLP or trying to work that into the corporate structure somehow by the end of the year. We still have about two months left in the year, but just was curious if you had any updates there or any updated thinking on that front.

Brian, as I have said consistently, we continue to evaluate and study this. And as you well know it has many moving parts, and we are continuing to evaluate and study this concept.

Okay, thanks.

Aleksey Yefremov, Bank of America Merrill Lynch.

Hello again. I just had a follow-up on the Calvert City project next year, feedstock flexibility. Could you give us some sense -- maybe if you don't have an exact number -- of the cost associated with this turnaround. How could, for example, it compare to the turnaround cost that you had at Lake Charles this year?

As we get closer into that turnaround we will give better guidance in terms of what those costs are. But at this stage I would like to reserve until we get a little closer to those costs for the turnaround itself.

The overall project, we have given some indication of the cost not only the expansion and debottleneck and the PVC to be between $210 million and $240 million. But that is the expansion and the PVC, but not specifically the debottleneck.

Maybe at this point, Steve, another way to ask this question -- do you have an idea of how long the site will have to be down to do this upgrade?

It will be a shorter period than the 74-day outage that we took in the first quarter of this year for the Lake Charles facility. The work is not that extensive.

But we will give better guidance as we get closer. But it will be shorter than that 74-day period.

Thank you.

Robert Reitzes, Broad Arch Capital.

I may have come on just a little bit late and I just wanted to -- what did you say, Albert or Steve, about the caustic in terms of pricing? Do you guys feel that supply/demand is in balance? Or do you feel that maybe caustic is a little out of balance? Just curious what your views are on that, your subjective views.

Certainly. Into the fourth quarter we see that caustic demand and pricing has softened somewhat on a global basis. And that is usually the case in this time of the year.

Okay, thank you.

[Mike Shakdos] from [Nikoga.]

Yes, was just wondering. Can you guys comment -- how long is the lead time on PVC pipe that you would ship out to, call it, builders? So builders are going to be ramping up in March; when do you see those orders coming in, and how long does it take you to fill them?

Well, I think typically we deliver from inventory, so the time lag is a matter of a few weeks.

So if you deliver within a few weeks, does it only take you -- I mean if you are anticipating a pickup next year, how are you planning on building inventories? Will inventories be above last year, going into year-end?

Usually wintertime people build inventory, ready for the spring building season.

Do you anticipate that your inventories in PVC pipe will be higher than last year?

It will be probably similar.

Thanks.

Thank you for your question. Ladies and judgment, at this time the Q&A session has now ended. Are there any closing remarks?

Thank you again, ladies and gentlemen, for participating in today's call. We hope you will join us again for our next conference call to discuss our full-year 2013. We hope you have a wonderful day. Thank you.

Thank you for participating in today's Westlake Chemical Corporation third-quarter earnings conference call. As a reminder, this call will be available for replay beginning four hours after the call has ended and may be accessed until 3 PM Eastern Time on Thursday, November 14, 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 45573736.

Thank you for your participation in today's conference, ladies and gentlemen. This concludes the presentation. Good day.