Westlake Corp (WLK) 2013 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Chemical Corporation fourth-quarter 2013 earnings conference call.

(Operator Instructions)

As a reminder, ladies and gentlemen, this conference is being recorded today, February 20, 2014. I would now like to turn the call over to today's host, Ben Ederington, Vice President and General Counsel. Sir, you may begin.

Thank you, Marie. Good morning, everyone, and welcome to the Westlake Chemical Corporation fourth-quarter 2013 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 conference call agenda will begin with Albert who will open with a few comments regarding Westlake's performance in the fourth 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 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 fourth 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 February 27, 2014 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 35323816.

Please note that information reported on this call speaks only as of today, February 20, 2014. 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 to an internet webcast system that can be accessed on our webpage at Westlake.com. Now I would like to turn call over to Albert Chao.

Thank you, Ben. Good morning, ladies and gentlemen, and thank you for joining our fourth quarter earnings call. This morning we reported record quarterly net income of $171 million or $2.54 per diluted share on sales of $952 million.

Our strong fourth quarter concluded a record year for Westlake. With 2013 net income of $610 million, or $9.09 per diluted share. Our net sales of $3.8 billion.

Throughout 2013, both our Olefins and Vinyl segments continue to benefit from lower cost ethylene-based ethylene production resulting from North American shale gas and oil production. Our Olefins segment achieved record annual income from operations while our Vinyls business continues to see improvement as the construction industry gradually recovers.

We also achieved a number of important accomplishments in 2013 that will improve our cost position and extend our product offering. In March, we completed the successful turnaround and expansion of one of our ethylene units at our Lake Charles, Louisiana site, increasing our ethylene capacity by approximately 240 million pounds.

In May, we acquired a specialty PVC pipe business which enhances our North American pipe and building product portfolio by adding specialty product lines and supporting technology to our portfolio. And most recently, in December, we completed the new chlor-alkali plant at our Vinyls facility in Geismar, Louisiana adding 350,000 ECU production capacity, which will improve the vertical integration of our Vinyls business from chlorine down streams into VCM and PVC, as well as increase our caustic soda sales.

The completion of these projects, as well as the recent specialty PVC pipe acquisition, will further our integration strategy and improve the cost structure in our Vinyls business. These investments, plus our ongoing expansions, reflect our continuing confidence in the strength of the business and better position us for 2014 and beyond. I would now like to turn it over to Steve to discuss the financial and operating results for the fourth 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.

In this morning's press release, Westlake reported net income for the fourth quarter of 2013, $171 million or $2.54 per diluted share, an increase of $76 million over fourth-quarter 2012 net income of $95 million or $1.42 per diluted share. Net sales for the fourth quarter of 2013 were $952 million, which were $151 million higher than sales reported in the fourth quarter 2012, primarily due to higher sales prices for polyethylene, styrene, PVC resin, and higher sales volumes from most of our major products.

Westlake's operating income for the fourth quarter 2013 was $258 million, an increase of $102 million compared to the same period in 2012. The increase in operating income compared to the fourth quarter 2012 was driven mainly by higher polyethylene and PVC resin sales prices, as well as a lower ethane costs, which were partially offset by higher propane costs.

Sales revenue of $952 million in the fourth quarter of 2013 decreased by $52 million from sales in the third quarter 2013, driven by lower sales volumes for polyethylene, PVC resin, and building products, partially offset by higher polyethylene sales prices and higher ethylene sales volumes. The fourth quarter income from operations of $258 million was $9 million lower than in third-quarter 2013 primarily due to lower Vinyls margins resulting from higher feedstock costs, which were partially offset by higher polyethylene sales prices.

For the year 2013, we reported net income of $610 million, an increase of $224 million over the $386 million reported for the full-year 2012. Sales revenue of $3.8 billion for the year 2013 increased by $188 million compared to 2012 mainly due to higher sales prices for most of our major products. Higher sales volumes for styrene, caustic and PVC resins, and sales contributed by our specialty PVC pipe business which we acquired in May 2013.

Income from operations was $953 million for the year 2013, an increase of $338 million over the prior period and was mainly attributable to higher Olefins and Vinyls integrated product margins, predominantly due to a significant decrease in feedstock costs. The increase in income from operations was partially offset by the lost production and the unabsorbed fix manufacturing and other costs associated with the turnaround and expansion of one of our Lake Charles ethylene units in the first quarter 2013.

Our utilization of the FICO method of accounting resulted in an unfavorable impact of $11 million pretax or $0.11 per share in the fourth quarter as compared to what earnings would've 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 performance of our two segments.

Starting with the Olefins segment, the segment reported operating income of $247 million, on sales revenue of $668 million for the fourth quarter of 2013. Compared to operating income of $143 million on sales of $550 million in the same period of 2012. The increase in operating income was mainly attributable to higher integrated Olefins margins primarily as a result of higher polyethylene sales prices and lower feedstock costs.

Olefins operating income of $247 million in the fourth quarter of 2013 was $10 million higher than operating income in the third quarter of 2013. This increase is primarily due to higher polyethylene sales prices, partially offset by lower polyethylene sales volumes. For the year 2013, the Olefins segment reported an increase of $280 million in income from operations to $833 million up from $553 million for the same period in 2012. This increase is mainly attributable to higher integrated product margins as compared to 2012 driven by significant lower feedstock costs.

Now let's move on to the Vinyls segment. The Vinyls segment reported income from operations on $19 million in the fourth quarter of 2013, which is an increase compared to the $18 million reported in the fourth quarter 2012. The increase in earnings benefited from higher sales volumes for caustic and PVC resin despite a 36% increase in propane cost compared to the fourth quarter of 2012.

The fourth quarter of 2012 was negatively impacted by the lost PVC resin production and cost due to a scheduled maintenance turnaround at the Geismar Vinyls complex. The Vinyls operating income of $19 million in the fourth quarter 2013 decreased by $21 million from the operating income reported in the third quarter of 2013. The decrease in operating income was primarily due to seasonally lower sales volumes for PVC resin and building products and higher propane cost as compared to the third quarter of 2013.

For the year 2013, the Vinyls segment reported income from operations of $155 million, an improvement of $69 million, over the $86 million reported for the full-year 2012. This increase was largely driven by lower feedstock cost, higher sales volumes for PVC resin, and higher operating rates as compared to 2012, partially offset by nonrecurring costs 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 December 31, 2013, we had cash and marketable securities balance of $701 million and total debt was unchanged at $764 million. During 2013 we invested $679 million in our capital programs.

For 2014, our guidance for capital expenditures is in the range of $475 million to $525 million. This estimate includes the ethylene plant feedstock conversion and expansion and the PVC expansion in Calvert City, Kentucky that we expect to complete in the second quarter 2014. And the engineering and long lead equipment for the ethylene expansion at our Lake Charles facility that is planned for late 2015 or early 2016.

Looking forward into 2014, we estimate that the outage in Calvert City to complete the conversion and expansion of our facility will be approximately 20 days starting in the first quarter. Additionally, we expect our first quarter Vinyls results to be negatively impacted by the extreme weather conditions that the US has been experiencing, which has driven up propane feedstock cost for out Calvert City, Kentucky plant and delayed the start of the normal construction season.

2013 results reflect the execution of our investment strategy to improve our product integration and lower our cost. We remain focused on growth and investment opportunities and rewarding shareholders. Our dividend increase of 12% announced this week, the second increase in six months, combined with a 2 for 1 stock split, reflect our confidence in the future.

Now I will turn the call back over to Albert to make some closing comments. Albert?

Thank you, Steve. Westlake had an excellent 2013; delivering record results and achieving a number of important milestones including a significant ethylene expansion and the completion of our chlor-alkali plant with the achievement of our best safety performance on record, which lays foundation for our continued success in 2014 and beyond. In 2014, we expect to see the full financial contribution from the completion of the Lake Charles ethylene plant expansion, the Geismar chlor-alkali plant, and our specialty PVC pipe acquisition.

We will continue to build on our success as we plan to convert our Calvert City ethylene plant from propane to ethane, as well as expand the ethylene capacity by approximately 180 million pounds, and the PVC capacity by approximately 200 million pounds, starting in the first quarter of this year. In late 2015 or early 2016, we will complete another ethylene expansion in Lake Charles. Further expanding our (inaudible) integration by adding approximately 250 million pounds of ethylene capacity.

All of these investments expand our integration while leveraging our existing asset base to deliver immediate benefits and demonstrate our belief that a [shale gas] advantage will benefit us for years to come. Thank you very much for listening to our earnings call this morning. Now I will turn the call back over to Ben Ederington.

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. Marie, we will now take questions.

(Operator Instructions)

Brian Maguire, Goldman Sachs.

Steve, how much cash do you estimate that you need to run the business on a day-to-day basis?

Brian, the number isn't nearly the size of the balance we have today. The number is in the neighbor of $100 million or so.

And as a follow-up, as you sit here today and look at your investment opportunities, do you think Westlake as a corporation has a better opportunity to earn a higher return on that cash then your shareholders do? How do you think about the timing on the reallocating that cash?

Brian, as we continue to look at opportunities we certainly are looking for ways to deploy it in ways that give us return on a risk-adjusted basis above our cost of capital. So, if we can't find those opportunities, we are certainly well-positioned to return that. But we will continue to look for opportunities that provide a value to the shareholders.

One last one, if I could, on the Lake Charles second expansion there, I know initially it was slated for late 2014 and then it slipped to early 2015. Now it sounds like the thinking is maybe late 2015 or early 2016. As good as the margins are now and what we would expect them to be next year, what would be the reasoning for pushing that out?

We are timing it with our turnaround and our turnaround looking at sometime in 2015 maybe early 2016 time period.

But still, 100% confident just go ahead with that expansion? It seems like a good opportunity for you, right?

Yes, it is our plan.

Great. Thanks very much.

Welcome.

Don Carson, Susquehanna Financial.

Steve, question on feedstock positions: I little surprised that FIFO hurt you in Q4 given that feedstocks were rising as a quarter when on. But you talk about your propane requirements in Q1?

Sounds like you're going to be shutting down Calvert City imminently to convert over to ethane. So, how long will it be running on propane in Q1? And secondly, when will that ethane conversion start up?

As I mentioned in my comments, we will be undertaking the start of that work in 1Q. And we will be out for of approximately 20 days, and so the unit will come back up on ethane feedstock in the second quarter. So, we will no longer be exposed to that propane feedstock once we complete this feedstock conversion.

And then just as a follow-up, I know you commissioned guys for chlor-alkali expansion yesterday, so are you out the market in terms of buying chlorine now; it's all vertical integration?

Yes.

And what benefit do see that providing to you in Vinyls in Q1?

Well, as we know, the season for the construction market given the weather conditions is really been somewhat delayed because of this severe cold weather. But I think as we go forward, I think you can continue to see that with the integration in ethylene and chlorine, that we will continue to benefit as we march forward.

I just wanted a clarification on that $0.11 FIFO cost in Q4. Again, I would've thought FIFO would benefit you, so why was it a penalty?

Remember, we are using that as a finished goods measure. Feedstocks are coming in at an average cost, and so this effect is the flow through from earlier in the quarter and late last quarter.

Okay. Thank you.

You're welcome.

Frank Mitsch, Wells Fargo securities.

Can you tell us what are your operating rates right now at Geismar, and when would you anticipate that being closed to100%?

Frank, as we said earlier, the season for the construction market really begins to occur typically at the end of the quarter and into second quarter and well into third. So, we will be a commercial operating rates as the season for construction begins.

In terms of the start-up, there's no issues, everything is running fine? It's really a matter of the market is dictating?

That is correct.

With the start up, obviously you have a lot more caustic soda to sell. What's your outlook in terms of pricing there? We heard from another player in the market that they thought the overall ECU was bottoming or near a bottom. What is your take?

There was a move to increase prices by $40, $50 a ton in the first quarter and industry has yet be able to implement that price increase.

Okay. There's also a move to increase corn, but it looks like that is DOA. In terms of natural gas having spiked here, do you have any hedges in place what are your concerns regarding the inflationary effects of nat-gas? And, of course, ethane has also ticked up here, as well.

Yes, I think the short-term, certainly, it has impact on energy costs and feedstock costs. But if you look at future prices for gas and ethane, starting March, April the price will come down to a normal level.

We can hope so. And lastly, is there any update on your perspective on the case in front of the Texas Railway commission ruling on the pipelines? What you see on the next steps in that process?

Frank, as we look forward, think that case was play out. We expect that both parties will continue to position themselves to benefit their shareholders and to take the right steps and work with the commission as we move forward.

Nothing in terms of dates or anything like that the we can point towards?

I think there's a hearing in May and there's another hearing in August.

Okay. Great. Thank you so much.

You are very welcome.

Hassan Ahmed, Alembic Global.

A question around ethane. Obviously, you talked about how looking at natural gas near-term futures you expect pricing to take down. And then in past calls we have obviously talked about the oversupply situation in ethane.

Nowadays, obviously we're hearing a fair bit of chatter about European exports. How do you see that playing out? Do you think that's change the slack US ethane supply demand story?

As we understand, there is an ethane terminal for export in Philadelphia that won't be finished for at least year or two or maybe three. And, there's talk about maybe 55,000 barrels a day of ethane that will be shipped to Europe.

Today, as we -- stands about 200,000 to 300,000 barrels a day of ethane have been rejected. So that's a small part of the excess ethane that we are seeing.

Fair enough. So not a big needle mover at all.

Changing gears a bit, in 2012, obviously you guys paid out a special dividend, did not in 2013. Just trying to understand, what made you guys lean toward a special dividend side of things and 2012, and not do so in 2013?

Well, Hassan, when you think about the special and look across all industries, you saw there was quite a significant numbers of firms that were paying specials, and there were certainly some changes in tax legislation that were contemplated that were also a big prompter for that. As we look forward into 2013, and I made a comment earlier about 2014 about deployment of capital, we're continuing to look for ways to deploy capital that provide value above our risk adjusted cost of capital. If we can find ways to do that we will deploy that capital that way, but if we cannot there are certainly a number of ways returning that capital whether it is through the form of a dividend, special or regular, or through additional share repurchases.

Very good. Thanks so much.

Aleksey Yefremov, BOA Merrill Lynch.

Could you comment on the status of polyethylene price increases for February and whether you're complimenting an increase in March?

Yes, at present, as reported in IHS and chem data there's a $0.04 pound price increase for polyethylene in February and we believe that this price increase will be implemented.

How about March?

There's one company that made announcement of price increase, I think about $0.06 per pound, but that is the only company that made that has made that price announcement.

Okay, fair enough. And after you start up at Geismar, your exposure to natural gases increase, can you give us a sense of how many BTU you now consume as a company in total? Or maybe a sensitivity, earnings sensitivity of $1.00 change in gas?

I think our exposure to gas is still very small despite the increase in power consumption at Geismar. We can get back to you on that.

Aleks, if you will call me, I don't have the number at the tip of my tongue, but we can give you the numbers off-line.

Great. Thanks a lot. Steve, as best you can tell at this point, do you think in Q1 you will have a positive or negative inventory accounting impact?

FIFO?

Right.

It's always hard to call mid-quarter, but if we drew the quarter right now I think it would probably be a positive impact. But it is hard to know what the next month will play out to be.

Final question, if I may? Are you benefiting from tight ethylene market in Louisiana? And if you are, could you help quantify that?

As we take a look at the market there we still see a tightness in ethylene over by the river in the New Orleans, Baton Rouge area and we can opportunistically look at that. But we still have customers requirements that we have to meet. So we have to moderate the opportunities there to meet customer demand at the same time.

James Sheehan, Sun Trust.

Albert, would you care to give us your thoughts on the prospects for PVC price increases in March?

Yes, as you know as reported in the trip applications, there are three price increases announced by the industry, $0.03 in January, $0.03 in February, and $0.03 in March. And we received the benefit from the $0.03 in January. We believe the second $0.03 will be also implemented in February, but I think it's a little too early to tell how the merger in price increase will be received by the industry.

And what is your sense for the level of caustic soda inventories right now?

I think, as you know that we started our chlor-alkali plant in December and then there are two other chlor-alkali plants being started up. So, that will -- if they don't start up and there is no reduction in capacity by the other companies or plants, then there will be an increase in supply of caustic to the marketplace.

Last one, if I could? As you've analyze the potential for unlocking value through an MLP structure, do you think there's a good potential for doing that or have you made any conclusions?

As we continue to assess that we're looking at all the moving pieces, while I don't have answer in terms of our conclusion of our analysis today, we will continue to assess that. And if we come to some conclusions, we will certainly talk about them at that time.

All right. Thank you very much.

Jeff Zekauskas, JPMorgan.

Good morning. Are there costs that would pester the income statement in the first quarter from the Calvert City conversion and if there are, what would be the magnitude?

As I said, Jeff, we're going to have a 20-day outage and so certainly we will have some turnaround expenses, and those will be expensed. And we will certainly also have the unabsorbed impact there. So, I think if you think about those numbers, they certainly are going to be significant to the Vinyls business in the neighborhood of probably that 20-day period.

Right. I understand how to think about the lack of production. I just don't know about the cost that you might spend in order to do the conversion that would pass through the income statement.

I think, Jeff, when you think about the impact, it's probably going to be between the turnaround expenses and the unabsorbed cost. You're probably talking in the neighborhood of $20 million to $25 million all-in in terms of the turnaround expenses and the other unabsorbed cost.

Is it a very easy to go up to a full utilization rate once the conversion is done or is it more difficult to do that?

Once you've completed the expansion and the feedstock conversion, you can ramp up to capacities reasonably quickly.

Can you talk about the ease of ramping up the new chlor-alkali facility to a full rate of utilization or the difficulty?

I'm sorry?

Can you talk about the ease or difficulty of ramping up your new chlor-alkali facility to a full rate of utilization?

As you think about starting up a new plant, it takes time and fortunately, as I mentioned earlier, we are in a period of slack and normal seasonal demand. So we have the opportunity to ramp that up as the market dictates. It will be at this commercial rates by the end of the first quarter.

And then lastly, you're always looking for domestic acquisitions that are interesting. Do you now look for offshore acquisitions, as well, with any diligence?

In this space, both with our footprint largely in North America, of course it's a natural, but we also look, and always have, looked very broadly across the space. You may recall, we look at opportunities to grow organically or through acquisition very broadly for a number of years. So we continue that look.

Okay. Great. Thank you so much.

You're welcome.

(Operator Instructions)

Richard O'Reilly, Revere Associates

Good morning. Thank you.

(Multiple Speakers)

But once you do the Calvert City conversion, are you out completely of propane as a feedstock?

We will be no longer using propane as a feedstock. Our facilities in Lake Charles are ethane today, and once we finish this conversion in Kentucky we will be an ethane cracker there.

So we would have the ability if the economics indicated to go back and crack propane in some those locations in Kentucky and Lake Charles. But today with the outlook for ethane, we expect them to be ethane crackers.

So propane shouldn't be an excuse, then. Okay, that's it. Thank you then.

At this time we have no further questions and I'd like to hand back to Ben for any closing remarks.

Thank you, Marie. Thank you again for participating in today's call.

We hope you will join us for our next conference call to discuss our first quarter 2014 results. Thank you.

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

(Operator Instructions)

Thank you for participating in this call. You may now all disconnect. Thank you.