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Westlake Chemical Corporation (NYSE:WLK)

Q1 2009 Earnings Call

May 5, 2009; 11:00 am ET

Executives

Dave Hansen - Senior Vice President, Administration

Albert Chao - President and Chief Executive Officer

Steve Bender - Senior Vice President, Chief Financial Officer

Analysts

Alex Kramer [Ph] - Banc of America Securities

David Begleiter - Deutsche Bank

Bill Young - Tim Street [Ph]

Operator

Good morning ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Chemical Corporation, first quarter 2009 earnings conference call. During the presentation, all participants will be in a listen-only mode. After the speaker’s remarks, you will be invited to participate in a question-and-answer session. As a reminder, ladies and gentlemen, this conference is being recorded for replay purposes.

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

Dave Hansen

Thank you very much. Good morning everyone and thank you for joining us for the Westlake Chemical Corporation first quarter conference call. I’m joined today by Albert Chao, our President and CEO and Steve Bender, our Senior Vice President and Chief Financial Officer and other members of our management team.

The agenda for today will be as follows; Albert will first make a few comments regarding Westlake’s performance during the fourth quarter. Steve will then provide you with a more detailed look at our financial and operating results. Albert will conclude with the discussion of recent developments and then we will open up the call to questions.

Today management is going to discuss certain topics that will contain forward-looking information that is based upon 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.

Westlake issued earlier this morning, a press release with details of our quarterly financial and operating results. This document is available in the Press Release section of our webpage at www.westlake.com.

A replay of today’s call will be available beginning one hour after completion of this call, until 1:00 pm Eastern Time on May 12, 2009. The replay may be accessed by dialing 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 31153377.

Please note that information reported on this call speaks only as of today, May 5, 2009, 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 www.westlake.com.

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

Albert Chao

Thank you, Dave. Good morning ladies and gentlemen and thank you for joining us. In spite of reporting a net loss, the first quarter was a vast improvement over the poor conditions we experienced in the fourth quarter of 2008. We were able to implement price increases for polyethylene and PVC resin due in the quarter and also had improved sales volumes for polyethylene, PVC resin and pipe.

In this morning’s press release, we reported a third quarter loss of $0.90 per diluted share as compared to a loss of $1.67 per diluted share in the fourth quarter of 2008. Sales for the quarter were $488 million, which were down due to greatly reduced product prices after the global collapsing commodity prices that occurred in the fourth quarter.

Energy and feedstock costs remained relatively flat, during the first quarter, after significant reductions in the fourth quarter. As you recall the fourth quarter was characterized by two major factors; falling product prices which were led down by falling energy and feedstock costs and low operating rates that came about as a result of curtailed demand from our customers, their poor economic conditions and a turmoil in the financial sector.

While first quarter conditions improved over the fourth quarter, our first quarter results where also negatively impacted by two major outages. In January, our Calvert City, Kentucky complex experienced an ice storm that caused a power failure at the facility and resulted in damage to a compressor in an ethylene unit.

The power outage caused the complex to shutdown for eight days; however, the damage to the compressor resulted in reduced production rates throughout the complex for an extended period. In addition, one of the ethylene units in Lake Charles, Louisiana, was idled during December 2008, due to significant customer de-stocking and weak demand for derivative products.

A maintenance turnaround for unit, which was scheduled for later in 2009 was brought forward and performed during this period. The unit was shutdown for a total of 71 days during the first quarter for maintenance turnaround and resumed production in March. We have estimated that the unabsorbed fixed manufacturing and repair costs from these outages negatively impacted operating income by approximately $20 million or $0.19 per diluted share during the first quarter.

As I mentioned earlier, we did successfully implemented a $0.07 per pound price increase for polyethylene during the first quarter and $0.03 per pound price increase for PVC resin. Energy and feedstock costs have remained relatively stable during the first quarter, after plummeting in the fourth quarter. Polyethylene’s operating rates remain weak; however, we have seen export opportunities improve during the first quarter.

On the vinyl side, PVC resin and pipe margins continue to be negatively impacted by the ongoing weakness in the construction markets and instability in the credit and financial markets. Caustic pricing which was very strong during 2008 has begun to fall as overall demand is weakening. In spite of these conditions, our cash flow for the quarter was strong due to continued reductions in working capital.

Now, I would like to turn the call over to Steve, for a review of our first quarter results.

Steve Bender

Thank you, Albert and good morning everyone. I’m going to begin today with a brief discussion of our consolidated financial results, followed by a more detailed discussion of our segment results.

Beginning with our consolidated results, we reported an operating loss of $1 million on sales of $488 million in the first quarter of 2009, as compared to an operating loss of $166 million on sales of $597 million in the fourth quarter of 2008. Our reported net loss in the first quarter of 2009 was $6 million or $0.09 per diluted share, compared to a net loss of $110 million or $1.67 per diluted share in the fourth quarter of 2008.

Selling, general and administrative expenses were $21 million in the first quarter, compared to $30 million reported in the fourth quarter of 2008; and revolve are primarily due to $9 million in allowance for doubtful accounts recorded in the fourth quarter.

The tax rate for the first quarter was 13% versus our estimated tax rate for the year of 34%, which had the effect of increasing our net loss by approximately $0.02 per diluted share. The first quarter results were minimally impacted by our use of FIFO method of inventory accounting as compared to utilizing the LIFO inventory methods. In contrast, the operating loss in the fourth quarter was due to following product prices, with very high feedstock costs, that flowed through cost of sales as a result of utilization of FIFO inventory accounting.

Now, turning to capital expenditures in our balance sheet, I’ll highlight a few key items. Capital spending for the first quarter totaled $33 million and in addition we incurred $23 million in capitalized turnaround cost at one of our ethylene units in Lake Charles. This is on pace with the low end of our full year capital spending target of $100 million to $150 million.

We are also focused on tightly managing working capital. Working capital excluding cash was $390 million at the end of the first quarter, which was down from $496 million at the end of last year. With a reduction of raw materials cost in the slowed business climate, our working capital requirements have been greatly reduced and provided a significant source of liquidity in the quarter.

We ended the first quarter with $300 million in cash, including restricted cash; had no borrowings under our revolvers; we have no debt maturities until 2016 and our net debt-to-capitalization ratio remains low at 15%. Maintaining our financial flexibility will continue to be a key objective for us in 2009. Now let me turn to our Olefins segment.

We reported operating income of $16 million on sales of $323 million during the first quarter, as compared to an operating loss of a $136 million on sales of $396 million reported in the fourth quarter of 2008. The reduction in sales were primarily due to lower selling prices for all of our olefins products after the sharp decline that occurred in the fourth quarter.

However, sales volumes for polyethylene improved in the first quarter, as compared to the fourth quarter of 2008, as customer begin to restock inventories after raw material cost stabilized and product prices bottomed out. This was in spite of the fact that one of our ethylene units was idled for a total of 71 days during the first quarter, as Albert mentioned earlier. Domestic prices moved up during the first quarter and we continue to see export opportunities as gas based feed stocks remained globally competitive.

Now, let me turn to the vinyl segment. Our vinyl segment reported an operating loss of $15 million on sales of a $165 million during the first quarter, as compared to an operating loss of $28 million on sales of $201 million reported in the fourth quarter of 2008. The major contributor to the operating loss in the first quarter was the outage in Calvert City caused by an ice storm and related damage to an ethylene compressor, which resulted in reduced production rates for all of the major products.

Average selling prices were lower for all major products in the first quarter as compared to the fourth quarter; however, sales volumes for PVC resin and pipe improved and customers began restocking inventories. As Albert previously mentioned, we were able to implement a $0.03 per pound price increase for PVC resin in the first quarter.

Caustic prices which began to fall in the fourth quarter of 2008 continue to fall during the first quarter of 2009. Cost control is a top priority. We have taken a range of actions to reduce our cost and we are continuing in these efforts, so that we can maintain our comparativeness and pursue our long term growth strategies.

Now I’ll turn the call back over to Albert. Albert

Albert Chao

Thanks Steve. First let me provide an update on the status of a number of our strategic initiatives in the ethylene turnaround and then I’ll discuss the outlook for the industry. We have continued our investment program that significantly re-strengthens our market position and enhances our integration. These include our chlor-alkali expansion project, PVC resin and PVC pipeline.

Our PVC resin plant expansion in Calvert City was completed in the first quarter of 2009, which adds 300 million pounds of annual capacity. We also began operating our new PVC pipeline in Yucca, Arizona during the first quarter, which will produce pipe for water, sewer, irrigation and related industrial and residential markets in the Western United States and we acquired a PVC pipe plant in Janesville, Wisconsin. The combined capacity of these two PVC pipe plants is approximately 300 million pounds.

The maintenance turnaround at one of our ethylene units in Lake Charles, along with several energy savings project was completed in March and the unit is fully operational. No other major maintenance turnarounds are scheduled for 2009.

Finally, let’s talk about the outlook for the industry. We believe the vinyls industry will continue to be negatively impacted by weak construction markets. Although, negative conditions exist in the vinyls industry, with seasonal increase in PVC demand, coupled with weakening caustic demand and resulting chlorine tightening, the industry has announced a $0.03 per pound PVC price increase for May 1.

Caustic prices which were strong last year began to deteriorate in the fourth quarter of 2008 and have continued falling through the first quarter of 2009, as demand for caustic has slowed with the general economy. Some elements of the Federal Government’s economic stimulus package are aimed directly at infrastructure, housing and energy efficiency. We are hopeful these initiatives will benefit and improve our vinyls business conditions.

As to olefins, operating rates have stabilized; however, they’re still below the levels we had one year ago. In the industry Calvert has announced a $0.05 per pound increase for polyethylene, with $0.03 per pound to be implemented on May, 1. U.S. gas-based ethylene producers, continue to have a cost advantage over naphtha-based ethylene producers around the world, which should set a reasonable fall price for polyethylene.

Improvement in export opportunities continued into the second quarter, which will improve our operating rates. As discussed in the past, a significant portion of our polyethylene is sold into food packaging and other consumer non-durable markets and the underlying volume in that segment tends to be more resilient in an economic downturn.

However, in spite of these, some positive signs, we remain cautious about the severity and the duration of this global recession and the impact it will have on the U.S. economy and our business.

In response to these uncertain market conditions, I want to assure you again that we are taking steps to preserve our financial flexibility. We are continuing to reduce any unnecessary spending including capital expenditures. We have a track record of strong financial discipline and are committed to maintaining financial flexibility and have positioned ourselves to expand our business as opportunities present themselves during these challenging times. Thank you very much.

Now let me turn it back over to Dave Hansen.

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 an hour after we conclude the call. We will provide that number again at the end of the call. Operator, we’re now prepared to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) and the first question comes from the line of Kevin McCarthy from Banc of America Securities; please proceed.

Alex Kramer [Ph] - Banc of America Securities

Hi this is Alex Kramer [Ph] for Kevin. A question about your operating rates, could you comment on utilization rates in the last few months?

Albert Chao

Generally speaking, the thought of our ethylene unit shutdown in lake Charles, Louisiana certainly our average ethylene operating rate is down, our ethylene unit approximating [Inaudible]. In the final side, again because of the ice storm impact and resulting compressor problems, our operating rates at Calvert City is also impacted.

Alex Kramer [Ph] - Banc of America Securities

Thank you and other question; could you breakout the $19.5 million charge for the down time between Vinyls and Olefins?

Steve Bender

Sure, yes the breakout of that is about $12 million related to the Vinyl segment and the remaining $8 million in the Olefins segment.

Alex Kramer [Ph] - Banc of America Securities

Okay, thank you.

Albert Chao

Welcome.

Operator

The next question comes from the line of (Inaudible) from Goldman Sachs, please proceed.

Unidentified Participant

Good morning Albert and Steve.

Steve Bender

Good morning.

Unidentified Participant

A couple of quick questions on ethylene please. What do you expect ethylene to prove to be in the second quarter versus the first quarter?

Albert Chao

Well, I think CNN reports that with the start up of several ethylene plants that were down there should be more capacity available, so there’s more impact potentially on the margin in the ethylene side. Again, also the feedstock, whether it’s a ethylene grouping, prices; the change in feedstock could also impact the ethylene margin.

Unidentified Participant

So do you see other stabilization on spot ethylene pricing or you see it continue to move lower?

Albert Chao

I think ethylene spot price should stabilize. The global ethylene majority is produced on naphtha and naphtha price is still a bit high. I think today, crude oils in the mid 50. So naphtha price should set some kind on a global basis, which will impact the U.S. ethylene pricing and derivative pricing.

Unidentified Participant

Okay and then one last question Albert. How long do you expect the advantage of life of ethylene over naphtha?

Albert Chao

Somehow we understand, with the abundant supply of natural gas in U.S. the advantage should last quite a while.

Unidentified Participant

Okay, thanks for the color.

Albert Chao

Welcome.

Operator

The next question comes from the line of David Begleiter from Deutsche Bank. Please proceed.

David Begleiter - Deutsche Bank

Thank you. Good morning.

Steve Bender

Good morning.

Albert Chao

Good morning, David.

David Begleiter - Deutsche Bank

Albert, you commented on operating rates in the quarter, where do they stand actually today in both your Olefins business as well Vinyls business?

Albert Chao

Our plants are operating at close to full rates.

David Begleiter - Deutsche Bank

And that’s for both crackers down in Lake Charles?

Albert Chao

Yes, Lake Charles, we are a net buyer of ethylene, generally speaking. So generally our ethylene factors in Lake Charles are running throughout.

David Begleiter - Deutsche Bank

Just on the PE price increase, what’s the rationality you’re using with your customers to raise prices; $0.03 in May, $0.02 in June?

Albert Chao

Well, as you know the polyethylene and ethylene margin has dropped tremendously in the fourth quarter. We have recouped some margin in the polyethylene side with a (Inaudible) price increase, but we are seeing pressures of our feedstock increases both in the ethane and propane, as well as in the naphtha crude oil side, as well as the export market if there is some. I think U.S., on the average product prices for polyethylene and PVC are among the lowest in the world; export prices are higher than U.S.

David Begleiter - Deutsche Bank

Just on PE, how much of your PE are you exporting today or in the last two weeks?

Albert Chao

Let’s say generally the export is much less than the industry average, so less than half of the rate of the industry average.

David Begleiter - Deutsche Bank

And which is, could you remind me how much that is?

Albert Chao

Generally speaking the industry has been at a 20% range to higher.

David Begleiter - Deutsche Bank

And you are at roughly half of that or less?

Albert Chao

Less than half

David Begleiter - Deutsche Bank

And last, just comment on any M&A opportunity that you are seeing in this downturn.

Albert Chao

Well, we just announced that in the last quarter or this quarter we bought the Janesville, Wisconsin PVC pipe plant and we always evaluate opportunities when they arise.

David Begleiter - Deutsche Bank

Thank you very much.

Albert Chao

You’re welcome

Operator

And the final question comes from the line of Bill Young from Tim Street [Ph]; please proceed.

Bill Young - Tim Street [Ph]

Good morning Albert and Steve.

Steve Bender

Good morning how are you?

Bill Young - Tim Street

You referenced in your press release some CMAI information on pricing, can you give us some idea from your own experience, how far have caustic prices dropped since the peak in the fourth quarter.

Steve Bender

Well, what I can report is that CMAI reported caustic average pricing in December of $950, a short term and end of the first quarter of March was $700 short term and April even lower.

Bill Young - Tim Street

Has you’re experience been an evidence to that?

Steve Bender

I think yes, as we reported earlier the prices dropped in the first quarter and continue to drop in the second quarter.

Bill Young - Tim Street

Okay, now on the polyethylene; I think you said you’ve got $0.07 in the first quarter? That was phased in roughly how much January, February, March; equal amounts or which was the best month?

Steve Bender

Certainly, March was the best month.

Bill Young - Tim Street

But as you said you need more price to restore some of your margins there.

Steve Bender

Absolutely

Analyst

Okay, great thanks

Operator

(Operator Instructions) and the next question comes from the line of (Inaudible) from Goldman Sachs, please proceed.

Unidentified Participant

Albert one last question on PVC; we’re looking at the publications; consultants gave operating rates at the 72% range, but they also started talking about chlorine issues that have been impacting exports. What’s happened to the chlor-alkali market and how it has been impacting the PVC chain?

Albert Chao

As you know caustic was very high last year due to the lower demand falling for vinyls and other chlorine derivatives. With the general economic condition deteriorating, finally the caustic demand has reduced and now there is a tightening in the chlorine in the market, which will impact the amount of PVC that you can produce and it’s happening kind of around the world. So U.S. is now able to export PVC at a higher price overseas to Asia for example than in the U.S.

Unidentified Participant

That’s 2.70%, so low chlorine is still impacting those exports?

Albert Chao

Yes, it will have some impact. I think U.S. export of ECM and TDC and PVC has been impacting the prices. It’s not going up and the volume has come down.

Unidentified Participant

Okay, thanks as always Albert.

Albert Chao

You’re welcome.

Operator

We have no further questions for today. I would now like to turn the call back over to management for closing remarks.

Albert Chao

Ladies and gentlemen, thank you very much for your attendance on our first quarter call. We hope you will join us again for our next conference call to discuss our second quarter 2009 results. Thank you very much and have a wonderful day.

Operator

Thank you for participating in today’s Westlake Chemical Corporation, first quarter earnings conference call. As a reminder, this call will available for replay beginning in one hour after this call has ended and maybe accessed until 1:00 Eastern Time on Tuesday, May 12.

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 1-617-801-6888. The access code at both numbers is 31153377 and this concludes the presentation for today ladies and gentlemen. Have a good day.

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