Westlake Corp (WLK) 2014 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Westlake Chemical Corporation first quarter 2014 earnings conference call.

(Operator Instructions)

As a reminder, ladies and gentlemen, this conference is being recorded today, May 5, 2014. I would now like to turn the call over to your host for today, Mr. 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 first-quarter 2014 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 first 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 then we'll 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/demand balance for Westlake's products, competitive products and pricing pressures, access to capital markets, technological developments, and other risk factors.

As you are probably aware, Westlake issued a press release on April 29, 2014 describing our intention to pursue the creation and initial public offering of an MLP that would own a minority interest in a newly formed operating subsidiary that would hold our Lake Charles, Louisiana and our Calvert City, Kentucky ethylene production facilities. Also on the 29th of April, we filed a registration statement with the Securities and Exchange Commission which describes the structure of the proposed MLP, as well as its business and ongoing relationship with Westlake. We believe the creation of this MLP is in the long-term best interest of Westlake's shareholders by highlighting the value of our ethylene assets. As you are probably also aware, the SEC imposes significant restrictions on what we can publicly say about the proposed MLP IPO prior to its closing.

Accordingly, we encourage you to read our press release and registration statement, as we will be unable to answer any specific questions you might have about the proposed MLP on this call or otherwise. This morning, Westlake issued a press release with details of our first 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 11:59 PM Eastern time on May 12, 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 68118182.

Please note that information reported on this call speaks only as of today, May 5, 2014. 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. Thank you for joining us on our earnings call to discuss our first quarter results. In this morning's press release, we reported quarterly net income of $158 million or $1.18 per diluted share on sales of $1 billion. Our first quarter results were lifted by record income from operations reported in our Olefins segment, which benefited from the ethylene expansion work that was completed last year at our Lake Charles facility and strong integrated margins in the Olefins segment, in spite of higher ethane feedstock prices.

The Vinyls segment completed an important milestone by converting our Calvert City ethylene unit from propane to ethane feedstock and expanding its capacity by approximately 180 million pounds. As discussed in our last conference call, the planned downtime associated with the project impacted our Vinyls first quarter results. Our Vinyls segment results were also impacted by the severe winter weather that caused the rise in propane feedstock cost and delayed the start to this year's construction season.

The completion of the expansion and feedstock conversion project at our Calvert City facility allows us to access Marcellus-based ethane and further improve our integrated margins at the site. While allowing Calvert City business Vinyls business to capture the advantageous ethane-based ethylene cost position that our Lake Charles Olefins business has benefited from over the past several years. In conjunction with this project, we are completing a project to expand our PVC capacity by approximately 200 million pounds at Calvert City, which will allow us to take advantage of the increased ethylene production at the site.

The benefit of investments that we have made in Lake Charles, Geismar, Louisiana, and Calvert City to capture the ethane natural gas advantage in North America to produce ethylene and chlorine for our downstream businesses will drive our future results. I would now like to turn it over to Steve to discuss the financial and operating results for the first quarter.

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 first quarter of $158 million, or $1.18 per diluted share, which is an increase of $35 million over first quarter 2013 net income of $123 million or $0.92 per diluted share. Net sales for the first quarter of 2014 of $1 billion was $163 million higher than sales reported in the first quarter of 2013, primarily driven by higher sales volumes in our Olefins segment, higher sales prices for most of our major products, and added sales contributed by our specialty PVC pipe business that was acquired in May 2013.

Westlake's operating income for the first quarter of 2014 was $248 million, an increase of $54 million compared to $194 million reported in the same period of 2013. Operating income in the first quarter 2014 primarily benefited from improved Olefins integrated margins, as higher polyethylene sales prices more than offset the increases in feedstock and energy cost. The increase in first quarter 2014 operating income was partially offset by the lost sales, unabsorbed fixed manufacturing costs, and other costs totaling approximately $17 million associated with the planned 19-day maintenance turnaround of our Calvert City production facilities.

First quarter 2014 results were also impacted by the extended severe winter weather that drove propane prices significantly higher and affected the start of the construction season. Sales revenue of $1 billion in the first quarter of 2014 increased by $176 million over sales in the fourth quarter of 2013, driven by higher sales prices for our Olefins products, PVC resin and PVC pipe, as well as higher sales volumes for polyethylene, caustic, and building products. First quarter income from operations of $248 million was lower by $10 million than the fourth quarter of 2013, primarily due to higher propane and ethane feedstock costs, lower sales volumes for PVC resin, and the planned downtime associated with the previously mentioned Calvert City project work, partially offset by higher PVC sales prices and higher polyethylene sales volumes.

With the successful conversion of our Calvert City ethylene unit to ethane feedstock, we have now eliminated our exposure to propane at the site. Our utilization of the FIFO method of accounting resulted in a favorable impact of $25 million pretax, or $0.12 per share, in the first quarter, as compared to what earnings would have been if we'd 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 Olefins segment reported income from operations of $272 million on sales revenue of $723 million during the first quarter of 2014, compared to operating income of $161 million on sales of $583 million in the same period of 2013. Olefins sales were up largely due to higher sales prices for most of our major Olefins products and higher sales volumes for our Olefins segment, as compared to the prior year period. The increase in operating income was primarily due to higher production volumes with increases in polyethylene prices expanding integrated Olefins margins.

In addition, first quarter 2014 income from operations benefited from higher Olefins sales volumes. As a reminder, income from operations in the first quarter of 2013 was negatively impacted as a result of lost production, unabsorbed fixed manufacturing costs, and other costs associated with the turnaround and expansion of the Lake Charles ethylene unit. Olefins sales revenue of $723 million in the first quarter of 2014 was $55 million higher compared to the $668 million that was reported in the fourth quarter of 2013, mainly due to higher sales volumes and higher polyethylene sales prices. Operating income of $272 million in the first quarter 2014 was $25 million higher than operating income in the fourth quarter of 2013 and was primarily due to higher polyethylene sales prices and Olefins segment volumes, partially offset by higher ethane prices.

Now, moving on to the Vinyls segment, the Vinyls segment reported an operating loss of $21 million in the first quarter of 2014 on sales revenue of $305 million, as compared to income from operations of $44 million on sales revenue of $282 million in the first quarter of 2013. Vinyls sales revenues were $23 million higher than the first quarter 2013 and were attributable to the sales contributed by our specialty PVC pipe business that was acquired in May 2013 and higher caustic sales volumes partially offset by lower ethylene co-product sales volumes, due to the planned maintenance turnaround of our Calvert City ethylene plant.

The operating results were lower by approximately $23 million, due to significantly higher propane cost, as average industry prices for propane increased by approximately 50% as compared to the prior year period, driven by the severe winter weather that the US experienced. Operating results in the first quarter of 2014 were also negatively impacted by the lost sales and other costs totaling approximately $17 million associated with the planned maintenance turnaround of our Calvert City production facilities, as well as by lower caustic sales prices. We estimate that the second quarter results will be negatively impacted by approximately $5 million to $10 million, due to higher cost inventory which was produced in Calvert City from propane feedstock in the first quarter and by cost associated with the maintenance turnaround and project activities that carried over into the second quarter.

The Vinyls segment incurred an operating loss of $21 million in the first quarter of 2014 on sales of $305 million compared to the $19 million operating income reported on sales of $283 million in the fourth quarter 2013. First-quarter Vinyls sales revenue was $22 million higher than the fourth quarter of 2013, driven by higher PVC pipe and caustic sales volumes. The operating results for the first quarter 2014 were negatively impacted by the severe winter weather, elevated propane feedstock costs, and the previously mentioned downtime in our Calvert City facility due to planned maintenance turnaround and expansion activities.

The operation of our new Geismar chlor-alkali plant improved throughout the quarter as we increased production, but had a small contribution to earnings in the first quarter. At the end of the first quarter, the plant was running at planned operating rates and we expect it to be a meaningful contributor to earnings going forward.

Next, let's turn our attention to the balance sheet and the statement of cash flow. As of March 31, 2014, we had cash and marketable securities of $776 million and total debt was unchanged at $764 million. We generated $213 million in cash from operating activities in the first quarter 2014 and spent $111 million on capital expenditures. Our guidance for 2014 capital expenditures remains in the range of $475 million to $525 million.

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

Thank you, Steve. We are pleased to report a strong start to 2014 with these first quarter results. Driven by growth in Olefins sales volumes and margins, our Olefins segment delivered record income from operations, while Vinyls segment successfully completed an expansion and ethane conversion project at our Calvert City ethylene plant that will improve the cost position of our Vinyls business and drive future results.

The important milestone, combined with our achievements in 2013, where we expanded our ethylene capacity and completed our chloride integration with the start up of our new Geismar chlor-alkali facility, lays the foundation for improved operating results. We have further growth opportunities, including the completion in the second quarter of our PVC expansion project at Calvert City, which will expand our PVC capacity by approximately 200 million pounds.

Additionally, we're currently planning another ethylene expansion at our Lake Charles facility, which will further expand our vertical integration by adding approximately 250 million pounds of ethylene capacity in late 2015 or early 2016. All of these investments reflect our strategy to integrate our product chain to allow us to further benefit from low-cost ethane feedstock, as well as improve our cost position, which will drive our near-term and future results.

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. Ladies and gentlemen, 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'll provide that number again at the end of the call. Operator, we'll now take questions.

(Operator Instructions) Brian Maguire, Goldman Sachs.

Congratulations to Steve and Albert on the recent MLP, IPO filing. I know you guys have been looking at that for a long time. It sounds like you came to a good decision. It sounds like it will be very value accretive to the shareholders, so my thoughts on that. Congratulations.

On that note, I was hoping you might provide some guidance on what kind of tax considerations there might be as it pertains to Westlake? What kind of a tax impact this might have for you if the transaction goes through and would there be a one-time check you write to the IRS for transferring the assets? Any kind of guidance you could give there would be great.

Brian, as we mentioned, there's not much I can say is it relates to the MLP at this stage. But I would say, as you know, we spent a lot of time studying this proposed transaction. Certainly, we want to move forward to make sure that it's beneficial to not only to the Westlake shareholders, but any potential future chemical partners, unitholders. I would say it's just been an area of detailed study, but I can't really say a whole lot more.

Okay. Great. The results in the quarter from Olefins were very strong, I thought, sequentially, moving up quite a bit, $25 million also despite the higher feedstock costs. I was wondering, was there any benefit or material benefit from the differential between Texas and Louisiana spot prices in the quarter? Where you able to take advantage of that, selling a little bit more volume into the Louisiana spot market?

The impact was quite small. Net volumes of ethylene.

Okay, great. Steve, thanks for quantifying the impact of the second quarter from the Calvert City turnaround and some of the inventory issues. I think Petro One also had a little bit of a hiccup this month, as well. Anything we should be thinking about for the impact of the Olefins segment from that?

It will be a small impact.

Okay, great. Thanks a lot.

Hassan Ahmed, Alembic Global.

In the past, Albert, you've been fairly vocal about ethane being quite long in the near to medium term in the US. With this recent announcement from Enterprise, does that change your views, at least as far as the medium-term growth?

No. We believe that ethane will be long for the foreseeable future. The fact that Enterprise is building this terminal, it further reinforces the fact that there will be access to ethane that the US needs to find homes for it.

Fair enough. Now you have your Geismar chlor-alkali facility up and running. You said there were some, for lack of a better way of putting it, hiccups in Q1. But in the Q4 call, you talked about how you felt that chlor-alkali pricing may have potentially bottomed out. Is that what you continue to see as we sit here today?

We have industry-announced price increases for the first quarter and the price increase was partially implemented going forward, depending really on the global demand and US demand for chlor-alkali and chlorine. Time will tell how that demand will offset by increased capacity in the industry.

Very good. Thank you, Albert.

Don Carson, Susquehanna.

Steve, I was wondering if you could quantify how much you've spent on your crackers over the last three years, if you total up the money spent at Calvert and the first expansion in Lake Charles? Remind us how much you'll be spending next year on the expansion of Petro Two?

The expansion of Petro One next year in 2015, late 2015 to 2016, will be adding about 250 million pounds of capacity. We estimate the capital cost will be in the neighborhood of $250 million to $315 million of capital. In terms of the capital that we spent in Kentucky and Lake Charles on Petro Two, we press released that. That's been, I think, a very transparent number.

On those expenditures, how much would that have collectively raised your tax bases in those assets?

Certainly, we had the benefit of accelerated tax depreciation over the last couple of years. While we've had those capital dollars spent, we've also been able to reap the benefit of bonus depreciation over the last couple of years. Last year was the last year of the 50% bonus depreciation. We've been able to benefit in 2012 and 2013 from those dollars spent.

Secondly, on the Geismar expansion, you mentioned that made a very modest contribution in Q1, but you're looking at meaningful contribution going forward. Can you size the delta between small and meaningful?

What I would say is, during the first quarter of 2014, we were in the process of ramping the operating rates up for that unit. Today, with that unit at, what I would call, commercial operating rates, it'll make its normal contribution based on the margins that you see in the marketplace. That's all I was trying to guide, was that we didn't have didn't have it at full operating rate in the first quarter as we've ramped it from a start up to its rates today.

Thanks. Finally, just a follow-up on caustic pricing, Albert, the industry's got this $50 initiative out there. It doesn't seem like much came through in Q1. What's a good rule of thumb for how you might realize this quarter? Half of that price increase, if it is successful?

We believe that approximately half of that announced price increase will implement it.

Thank you.

Aleksey Yefremov, Bank of America.

Could you provide early indicators of demand for PVC resin and also fabricated products in the domestic market? Do you see meaningful pickup with warmer weather arriving in the US?

Yes. We see that demand is recovering from the cold winter we had. As you know, PVC prices increased in the first quarter substantially. There was some inventory building by fabricators. It will adjust all through the second quarter. We believe, with the upcoming warm weather and improving economy, the demand for PVC will increase in second quarter.

Related to that, what is your outlook for PVC prices? Do you think the current domestic PVC prices are sustainable, given the gap between domestic and export prices?

Time will tell. I think the demand increase will see whether it will be balanced by the increased capacity coming onstream.

Probably more of a short-term question: do you see an impact on the PVC and chlor-alkali industries in the near-term from Dow's outage in Louisiana?

It depends. It's all about the ethylene situation and depending how long the outage would be. Ethylene production capacity come onstream from the turnaround.

Thank you.

John Roberts, UBS.

Could you give us an update on your interest in acquisitions in the current M&A environment?

We continue to look at ways of deploying capital in lots of different fashions. As you know, we've looked at and we've talked about this morning expanding our ethylene footprint in Lake Charles by expanding that cracker in late 2015, early 2016. We'll also continue to look for opportunities to deploy capital and opportunities that present themselves that have good returns above our risk-adjusted cost of capital. We'll look at ways to deploy capital, both internally and externally.

As a follow-up, now that your caustic capacity's placed in the market, is your mix of customers similar to the overall market mix or are there any significant differences between the average competitive mix in customers?

Certainly, we have a different footprint because we have a business up there in Western Kentucky. While I can't speak to the customer mix of all my competitors, I would say that we have good coverage of the customers, both in the Midwest, as well as Gulf Coast.

Thank you.

Frankly, across both coasts, as well.

Frank Mitsch, Wells Fargo Securities.

You mentioned that the new Geismar plant was operating at the planned operating rates. Can you indicate, is that at the industry average or are you planning to operate that plant towards its nameplate capacity?

It's operating closer to industry average. We plan to increase production as demand increases.

Okay. Great. You mentioned that the Calvert City plant is complete. How is that running today?

Running smoothly, as I mentioned. We've completed the debottleneck and the feedstock switch from propane to ethane and we're pleased with that activity.

Great. Lastly, on building products, how did that trend, pricing volumes Q1 and how did that fare in April relative to Q1? That is, are we seeing a material bounce back in that sector?

Yes. We see demand recovering. As you know, the PVC price increased during the first quarter. The building products also reflected price increases, reflecting the cost of raw material increases.

Thank you so much.

James Sheehan, SunTrust.

Looking at the polyethylene markets, you see inventories creeping up a little bit now, but polyethylene prices have been very strong recently. Do you think that the prices can hold where they are?

Time will tell. It's the season, the second quarter and third quarter, usually are the strong demand seasons for polyethylene. Time will tell how strong the demand will be.

Okay. A strategic question, if I might, on the MLP, I noticed in the S-1 documents that Westlake lands to lend money for the cracker expansion. Why did you choose to do it that way, amongst all the alternatives?

Jim, while I know that you'd love to have lots of questions on this, I can't really speak to a lot of the detailed elements of this. Once we get past the SEC comments and the registration statement's effective, I'll be able to be a lot more responsive to those questions and many more that I know that you have. But unfortunately, I just can't get into the details until the registration statement's effective.

Okay. On Dow's plans to divest its chlor-alkali business, what impact do you think that process may have on your business?

We don't think it will have much impact on our business.

All right. Thanks a lot, Albert.

(Operator Instructions) Jeff Zekauskas, JPMorgan.

It seems that in the first quarter, there was more pressure on ethylene prices than there was on polyethylene prices. Why do you think that is? Do you think that the weakness in ethylene prices has any bearing on polyethylene prices in the second quarter?

As you know, there were some unplanned outages in the ethylene industry; especially, also, with the Evangeline pipeline not in operations. Ethylene was very short on the river area. Eventually, when the Evangeline pipeline comes in operation sometime this month and after turnaround, there will be more ethylene available to the industry. But having said that, polyethylene global prices follow, really, global oil price. I think oil price has been fairly strong, globally. We anticipate that polyethylene prices globally will stay pretty stable at this level.

As you say, we shall see. Can you give us an idea of what you might do or how you see your free cash flow after you complete your next ethylene/polyethylene expansion? In that, is it possible for you to enlarge your footprint or is that the last step? If it is the last step, how do see use of cash flows after that time?

Jeff, as we continue to look for internal or organic opportunities, we'll continue to look at and assess whether it be invested in the ethylene or other areas of our business. Certainly, we'll continue to look, as well, outside of our business. As you know, we look at growth opportunities first, organically, because they're completely within our control.

The best and quickest payback projects are the ones that we're working on right now and then we'll look at opportunities outside of that. Those could be inorganic. But we'll continue to look at those opportunities and assess which ones have the best and quickest returns to us.

Okay. Good. Thanks so much.

Aleksey Yefremov, Bank of America Merrill Lynch.

Steve, could you break out the $25 million FIFO benefit between the segments? Also, do you have an idea of how FIFO could turn out in the second quarter?

Alex, we don't, typically, breakout the FIFO between Olefins and Vinyls, but I would say, given the concentration of our business of Olefins and Vinyls, you would expect that the preponderance of it would be on the Olefin side of the business.

How about 2Q outlook, if you have one?

We'll see where prices go over the next month and a half or two, but prices for feedstocks have trended down. If they continue on that trajectory, we'll certainly benefit from having a lower -- certainly, have a detriment in FIFO, as a consequence.

Thanks a lot.

PJ Juvekar, Citigroup.

Albert, your decision to do an MLP now, how should we read into that about your view of the ethylene cycle?

As we've said in the past few minutes, we believe the ethylene business will be quite strong going forward and we have favorable ethane feedstock position going forward, as well.

Okay. Steve, you said you would look at inorganic opportunities. Which chain are you more interested doing these deals? Is ethylene side or chlorine side?

PJ, we look at both. There isn't a preference, per se, at looking at one of the other. We look at both. It's a business. Both businesses are businesses that we well understand. As you know, they all are tied from feedstocks all the way through into polyethylene or into PVC. We'll some pursue opportunities in both.

Thank you.

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

We'd like to thank you again for participating in today's call. We hope that you will join us again for our next conference call to discuss our second quarter 2014 results. Have a great day.

Thank you for participating in today's Westlake Chemical Corporation's First Quarter Earnings Conference Call. As a reminder, this call will be available for replay beginning four hours after the call is ended and may be accessed until 11:59 PM Eastern Time on Monday, May 12, 2014. 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 68118182.