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Westlake Chemical Corporation (NYSE:WLK)

Q3 2011 Earnings Call

November 1, 2011 11:00 AM ET

Executives

David Hansen – SVP, Administration and Head, IR

Albert Chao – President and CEO

Mark Bender – SVP and CFO

Analysts

Brian Maguire – Goldman Sachs

James Sheehan – Deutsche Bank

Don Carson – Susquehanna Financial

Sabina Chatterjee – Wells Fargo

Aleksey Yefremov – Bank of America Merrill Lynch

Hassan Ahmed – Alembic Global

Jeffrey Zekauskas – JPMorgan

Gregg Goodnight – UBS

Charles Neivert – Dahlman Rose

Jonathan Chung – Lord Abbett

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Chemical Corporation’s Third Quarter 2011 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. After the speakers’ remarks you will be invited to participate in a question-and-answer session. As a reminder, ladies and gentlemen, this conference is being recorded today November 1, 2011.

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.

David Hansen

Thank you. Good morning, everyone, and thank you for joining us for the Westlake Chemical Corporation’s third quarter 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 agenda for today will be as follows: Albert, will first make a few comments regarding Westlake’s performance during the third quarter. Steve, will then provide you with a more detailed look at our financial and operating results. Albert, will conclude with a discussion of recent developments. And then, we’ll open up the call for questions.

Today, the 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.

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 westlake.com. A replay of today’s call will be available beginning two hours after completion of this call until 1:00 P.M. Eastern Time on November 8, 2011. 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 60922534. Please note that information reported on this call speaks only as of today, November 1, 2011, and therefore you are advised that time sensitive information may no longer be accurate as of the time of any replay.

I would finally advise you that this conference call is being broadcast live through an Internet webcast system that can be accessed on our webpage at westlake.com.

Now, I’d like to turn the call over to Albert Chao. Albert?

Albert Chao

Thank you, Dave. Good morning, ladies and gentlemen, and thank you for joining us. In this morning’s press release, we reported net income for the third quarter of $67.9 million or $1.01 per diluted share, an increase from the $0.95 per share in the third quarter of 2010. Westlake’s operating income of $117 million increased 8% compared to the $107 million recorded in the third quarter of 2010. The year-over-year improvement in operating income was largely driven by an increase in selling prices across all of our business segments. The improvement in performance especially in light of today’s economic backdrop reflects our pricing discipline in response to rate increases of costs.

Ethane and propane feedstocks were elevated throughout the third quarter when compared to the second quarter. But ethane-based ethylene still had a significant cost advantage over naphtha-based ethylene. The third quarter benefited from higher sales prices in our Vinyls business including PVC resins, PVC pipe and caustics. While we were presented with some headwinds, I’m pleased with our olefins segment performance and the improved profitability in our Vinyls business.

Now, I’d like to turn the call over to Steve for a review of the third quarter results. And I’ll make a few closing comments before we take your questions.

Mark Bender

Thank you, Albert, and good morning, everyone. I’ll start out today with a discussion of the consolidated financial results followed by a more detailed discussion of our olefins and Vinyl segment results. Let me begin with our consolidated results.

Westlake reported third quarter net income of $67.9 million or $1.01 per share compared, to a net income of $62.7 million or $0.95 per share in the third quarter of 2010. Sales for the third quarter 2011 of $968 million were $189 million higher than sales of $780 million reported in the third quarter of 2010, driven by higher sales prices for polyethylene and all Vinyls products. Our operating income for the third quarter of 2011 was $117 million, an increase of $10 million compared to an operating income of $107 million in the third quarter of 2010. The year-over-year improvement in operating income was a result of higher PVC and caustic margins offset by a decrease in polyethylene volumes.

Export sales volumes of PVC resin in the third quarter of 2011 were also higher than the third quarter of 2010 as ethane-based ethylene provided domestic PVC producers a strong export cost advantage. Sales in the third quarter of 2011 were higher than in the second quarter 2011 due to increased sales volume of caustic, ethylene co-products in feedstocks offset by a decline in building products volumes. Operating income of $117 million in the third quarter was lower than the operating income of $138 million in the second quarter 2011 primarily as a result of a decrease in integrated Olefins margins as polyethylene prices decreased and feedstock costs rose. The decrease in Olefins margins was partially offset by an increase in caustic volumes and margins.

Earnings of $233 million in the first nine months of the 2011 exceeded the $137 million earned in the first nine months of the 2010 by $96 million. Sales in the first nine months of 2011 of $2.8 billion were $384 million or 16% higher than sales in the first nine months of 2010 due to the higher sales prices on all of the company’s major products and higher sales volumes for PVC. Operating income for the first three quarters of 2011 was $396 million, an increase of $155 million over the $241 million for the same period in 2010. The higher earnings were the result of higher integrated Olefins margins, higher caustic margins and improvements in PVC margins. Polyethylene volumes decreased in the first nine months of 2011 compared to the same period in 2010, but the decrease was offset by higher – by stronger product margins.

During the first nine months of 2011, PVC sales volumes increased as a result of a substantial increase in PVC exports that offset lower domestic PVC resin and building products sales volumes. Ethane-based ethylene supported growing exports of PVC resin throughout the first nine months of 2011 as the domestic markets continue to see weak construction demand.

Now let’s review the performance of our two segments, starting with the Olefins segment. The Olefins segment reported operating income of $105 million on sales of $696 million during the third quarter of 2011, compared to an operating income of $136 million on sales of $555 million in the third quarter of 2010. Feedstock costs increased substantially over this period, but margins remained strong due to higher polyethylene prices. The decrease in operating income was primarily due to lower polyethylene sales volumes, resulting from a slowdown in global demand and lower polyethylene production. Polyethylene production was down approximately 10% due to planned maintenance outages on several of our reactors.

Operating income in the third quarter of 2011 was $105 million, was $28 million less than the operating income in the second quarter of 2011. Ethylene prices, which had been very strong due to tight supplies began falling in September and continued their decline into October. Polyethylene volumes slowed and prices fell early in the third quarter by an average of $0.06 a pound due to slower demand.

In addition, ethane and propane feedstock costs increased, further reducing overall Olefins margins for the quarter. Looking forward, feedstock prices, particularly ethane, continue to increase, which could prevent a potential decline in the price of ethylene. Looking at the Olefins segment year-to-date performance, our operating earnings for the Olefins segment increased $77 million or 25% from $306 million in the first three quarters of 2010 to $383 million in the first three quarters of 2011. The increase in earnings was the result of higher integrated Olefins margins.

Now let’s discuss the Vinyls segment. The Vinyls segment reported operating income of $16 million in the third quarter, an increase of $40 million compared to the loss of $24 million reported in the third quarter of 2010. Globally, competitive feedstocks in the U.S. permitted our continued PVC exports throughout the third quarter. The improvement in operating income is largely due to an increase in PVC resin export volume and margins, building products margins and an increase in caustic prices.

Sales for the Vinyls segment increased $48 million in the third quarter of 2011 compared to the same period in 2010 driven by higher prices for all of our Vinyls product offset by lower building products sales volumes. Vinyls segment operating income was $16 million in the third quarter of 2011, an improvement of $6 million compared to the $10 million earned in the second quarter of 2011.

Third quarter sales revenue for the Vinyls segment of 2011 of $273 million decreased slightly from the $280 million reported in the second quarter of 2011. The increase in operating income was due to the higher caustic prices and volumes and the impact on second quarter earnings of the turnaround at our Calvert City, Kentucky facility. Domestic PVC resin sales volumes and building products sales volumes softened as a result of inventory destocking and reconstruction markets. In spite of an increase in export PVC volumes in the third quarter, PVC resin margins were lower compared to the second quarter due to an increase in propane feedstock cost and a decrease in export PVC resin price.

For the first nine months of 2011, the Vinyls segment achieved an operating income of $24 million compared to a loss of $15 million for the first nine months of 2010. Vinyls segment sales for the first nine months of 2011 were $815 million compared to $679 million for the first nine months of 2010 as a result of higher prices for all of our Vinyls products, offset by a decrease in building products volume. The significant improvement in Vinyls operating income is a result of increases in cost prices and volumes as well as increases in PVC resin and building products prices that offset increases in feedstock cost.

In addition, ethane-based ethylene and competitively priced chlorine have supported margins and encouraged a strong PVC export market. Caustic demand in the third quarter allowed the industry to increase average prices by approximately $35 per ton compared to the second quarter average. Westlake’s caustic volumes increased during the quarter as a result of stronger demand and the impact of the turnaround at our Calvert City facility in the second quarter volumes.

Now turning to the balance sheet and summarized statement of cash flow, we generated $244 million in cash from operating activities during the first nine months of 2011 and spent $112 million on capital expenditures. Our cash balance including restricted cash was $876 million and our total debt was $765 million at the end of the quarter. Our cash we use to fund our capital expenditure projects in the two segments and we will continue to evaluate both organic and external investment opportunities while maintaining our financial strength and flexibility.

Finally, we will continue to pursue our stock buybacks strategy as opportunities present themselves. Now, I’d like to turn the call back over to Albert to make some closing comments. Albert?

Albert Chao

Thanks, Steve. Macroeconomic issues cloud the horizon today, where we see an uneven pace of demand growth and further near-term feedstock volatility. However, our integrated Olefins stock position is strong and we are further strengthening our Vinyls business as we execute our capital program that will complete our Vinyls chain integration.

We remain confident in our long-term outlook and we’ll continue to operate our business with a bottom line focus while keeping costs in line. The catalysts that we believe form the basis of our future earnings growth are moving into place. First, we see a growing and abundant supply of ethane from shale gas production. This ethane supply will provide a platform to make U.S. ethylene producers more globally competitive.

Industry consultants project 300,000 barrels per day of additional ethane production capacity or over 30% of current capacity being added through 2013. Beyond 2013, more ethane supplies are anticipated as further shale gas fields and infrastructure are developed. Second, we have a strong market position in our value added polyethylene product mix. Third, we are committed to further – chlor-alkali and ethylene. We have begun construction of our chlor-alkali facility and work is in the way for the first of our two ethylene expansions in the Lake Charles. We are also evaluating the conversion of our propane-based ethylene crackers to ethane in Calvert City, Kentucky, which will improve our cost competitiveness.

Lastly, we’ll keep our focus on maintaining financial strength and flexibility. We have the financial strengths to fund these growth opportunities and the commitment to maintain the financial flexibility in the future. Thank you very much.

Now let me turn the call over to Dave Hansen.

David 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 two hours after we conclude the call. We’ll provide that number again at the end of the call.

Operator, we’re now prepared to take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And your first question comes from the line of Brian Maguire with Goldman Sachs. Please proceed.

Brian Maguire – Goldman Sachs

Hi. Good morning, guys.

Albert Chao

Good morning, Brian.

Mark Bender

Good morning, Brian.

Brian Maguire – Goldman Sachs

Just want to spend a few minutes on the Vinyls segment, really impressive margin expansion there year-over-year and good EBIT results. I was a little surprised given the deterioration in PVC spot prices that we see looks like they’re off about, currently about 30% below where they were at the peak this summer, and I know caustic is probably driving a lot of the year-over-year increase, but you also did mention that the PVC margin was up year-over-year. That seems a little contrary to some of the numbers that we see from the consultants. So just wonder if you’re getting better prize realization on it or you’re selling it to different markets and taking less of a discount on it or is there something going on that we might not know.

Albert Chao

No. I think, in PVC area, we are selling in domestic at prices that’s market price. We have increased our exports in PVC and that has been a healthy market. And let’s talk – certainly our Vinyls business, profit improvement was helped by strengthening in caustic prices and volume.

Brian Maguire – Goldman Sachs

Okay. And could you give an update on what you’re seeing in some of those PVC export markets. Obviously, we see the price falling quite a bit here and the input – raw material cost declines have something to do with that, but demand by all accounts seems fairly weak in most of those markets. Are you seeing any change in trend there or anything to indicate that, that trend will change in the fourth quarter?

Albert Chao

Yes. Certainly, export prices and PVC prices have dropped. But also in the U.S., we are seeing declining ethylene prices, which helped and as well as a very competitive ethylene – chlorine price position. In the global market, U.S. is the fourth competitive country to produce PVC with our ethylene and growing position, and there is no Middle East capacity unlikely in the polyethylene side to compete with us. So we believe that PVC demand from – exports from the U.S. continue to grow in the future.

Brian Maguire – Goldman Sachs

Okay. Just one housekeeping one, if I may. What was the FIFO impact in the quarter?

Mark Bender

The number was very small, less than $0.5 million.

Brian Maguire – Goldman Sachs

Okay. Thanks very much.

Albert Chao

You’re welcome.

Operator

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

James Sheehan – Deutsche Bank

Hi. This is James Sheehan in for Dave Begleiter.

Albert Chao

Good morning, James.

Mark Bender

Good morning.

James Sheehan – Deutsche Bank

Hi. Just looking at the ethane prices, you know, well $0.90 per gallon, it’s quite a bit higher than we would have expected and the ethane market is quite tight right now. What is your outlook for lower ethane prices going forward as you see higher fractionation capacity and when would you expect this year a reversion of those prices back towards more normal levels?

Albert Chao

Certainly, we believe that the logistics – some of the logistics problems we’ve been seeing in the past will improve as we speak. Certainly, we mentioned that additional of 300,000 barrels a day of ethane capacity coming online all the way through 2013. And we believe also that some of the turnaround definitely in the first quarter of next year will also reduce some of the ethane demand.

James Sheehan – Deutsche Bank

Okay. And you mentioned, you’re seeing some inventory destocking in some of your markets. Would you just say that that’s higher than the usual amount of inventory management heading into year end?

Albert Chao

No. We don’t believe so. Certainly, we had an inventory destocking on a global basis during the spring time, heading to summer of this year. Then the oil prices improved somewhat and now, we have the European economic shock that has again dampened global economic demand. So I think both on producers’ and customers’ level, people have been cautious on inventory level. But as we – since price is coming down, I’m sure that people have become even more cautious in their inventory positions.

James Sheehan – Deutsche Bank

Okay. And just over on Vinyls, we mentioned in the last question or asked about lower export levels and falling prices. But then on the other side of that, you’ve got caustic soda supply/demand seems to be tightening. Do you need both PVC resin exports to be strong and caustic to be tight for the segment to remain profitable in Q4 or where – what is your outlook for continued profitability in that segment?

Albert Chao

Certainly, I think we mentioned that actual export in PVC has improved. It did not decline versus the last year’s third quarter and also compared with the second quarter. We believe since the U.S. PVC demand – domestic demand is weak because of the slow construction market that the U.S. Vinyl business is dependent on the PVC export as well as the caustic prices to help maintain profitability in the Vinyls segment.

James Sheehan – Deutsche Bank

Okay. Thanks a lot.

Albert Chao

You’re welcome.

Operator

Your next question comes from the line of Don Carson with Susquehanna Financial. Please proceed.

Don Carson – Susquehanna Financial

Yes. Thank you. Just a question on how things are shaping up in the fourth quarter in terms of volumes, obviously, ethane and propane costs are elevated here. But what are you seeing on volumes? I mean, is it beyond just the normal seasonal decline in both polyethylene and PVC?

Albert Chao

I think that certainly – the fourth quarter, generally is a slower seasonal quarter and certainly with the economic turmoil, we are seeing, has a impact on people’s sentiment of how much they will purchase. So I think the volumes will be affected by all the above. However, I think globally, economy is slowing down, but still pretty strong from our point of view for exports. So we believe that PVC and polyethylene exports from the U.S. will continue to be a major – have a significant impact on our business.

Don Carson – Susquehanna Financial

How do you see volumes on a year-over-year basis in the fourth quarter? Do you expect them to be down with potential destocking at year end or do you think they can stay flat to slightly up?

Albert Chao

Well, it’s too early. We’re just in October, finished October, in November. It’s too early to tell.

Don Carson – Susquehanna Financial

Okay. And then finally, on the chlor-alkali side, I assume that you’re – with lower operating ratio cutting back on your purchases, are you still able to run your own plants flat out or how severely have you cut back on purchase of chlorine?

Albert Chao

Yes. Certainly that we are a merchant to buy chlorine, so with – if the world demand is weaker, we’ll reduce our purchase.

Don Carson – Susquehanna Financial

All right. Okay.

Albert Chao

But our plants are running at full production.

Don Carson – Susquehanna Financial

And how much of the $65 caustic increase do you expect to realize this quarter?

Albert Chao

We believe, the industry will see the full $65 caustic increase this quarter.

Don Carson – Susquehanna Financial

Okay. Thank you.

Albert Chao

You’re welcome.

Operator

Your next question comes from the line of Frank Mitsch with Wells Fargo. Please proceed.

Sabina Chatterjee – Wells Fargo

Hey, guys. Good morning. It’s Sabina Chatterjee in for Frank Mitsch.

Albert Chao

Good morning.

Mark Bender

Good morning, Sabina.

Sabina Chatterjee – Wells Fargo

I just want to understand the Q3 volume changes a little better. It looks like in Olefins, volumes increased about 10% sequentially. Can you just break down how much of that was actually related to Lake Charles being back on line versus demand growth? And maybe similarly on the Vinyls side, volumes look like they were down 7% from Q2, ex-Q2 events like Calvert City and PVC, by what magnitude did volumes actually fall?

Albert Chao

For sequential quarters?

Sabina Chatterjee – Wells Fargo

Sequential, yes.

Albert Chao

Yes. I think that polyethylene export has helped in the third quarter versus second quarter, and also we had a more byproduct quarter – coal product sales from Olefins, because we had some problems during the second quarter with the Mont Belvieu storage issues. So our ethylene plants in Lake Charles did not run at high rate during the second quarter.

Sabina Chatterjee – Wells Fargo

Okay. And then on Vinyls, with volumes down 7%?

Albert Chao

Yes. The Vinyls, sequentially PVC sales has been down somewhat, but caustic volume has improved. As you know, we had turnaround during the second quarter in Calvert City, which reduced production and sales volumes. So third quarter, we were in higher production rates.

Sabina Chatterjee – Wells Fargo

Okay. And then you mentioned higher feedstock costs as one of the drivers of the sequential profit decline in Olefins. But if I look at the table in your release it shows industry prices basically flat on ethane from Q2 to Q3, I’m just curious what the discrepancy could be there? If your costs were above the industry or –

Albert Chao

Yes. I think those are quarterly averages and depend on instruments where we buy that, has a difference. As you know, we buy feedstock on a daily basis. Also propane is somewhat higher in the third quarter compared with second quarter.

Sabina Chatterjee – Wells Fargo

All right. Thank you.

Albert Chao

You’re welcome.

Operator

Your next question comes from the line of Kevin McCarthy with Bank of America Merrill Lynch. Please proceed.

Aleksey Yefremov – Bank of America Merrill Lynch

Good morning. This is Aleksey Yefremov for Kevin.

Albert Chao

Good morning.

Mark Bender

Good morning, Aleksey.

Aleksey Yefremov – Bank of America Merrill Lynch

Just wanted to follow-up on ethane. Albert, in ethane supply, what do you view as the largest or the most important bottleneck right now? Is this – is it the fractionation capacity or the pipeline limitations or perhaps something else?

Albert Chao

Well, I think it’s really all of the above. I think demand for ethane is strong, because today, on the spot price basis, ethylene produced some ethane probably is $0.20 a pound cheaper than naphtha because of the low co-product prices in aromatics and in inherent C4. The demand, I think for ethane is strong plus that the bottlenecks of having – we’re still having in pipelines for Y grades or even some of the finished products’ transportation. And fractionation capacity, new plants are being start and run, but I think we – as I said earlier, we’ll see more fractionate capacity coming up in the next two years.

Aleksey Yefremov – Bank of America Merrill Lynch

And so we have some visibility into fractionation capacity based on the announcements, but it’s a little bit harder with the pipelines. Do you see any meaningful pipeline projects finishing over the next three to six months back that could change the supply situation materially?

Albert Chao

Certainly, I think pipelines as I said is less visible than fractionation capacity, but quite a few pipelines, some of the smaller ones are being worked on and they will help alleviate the constraints we have today.

Aleksey Yefremov – Bank of America Merrill Lynch

Okay. Thank you. And I guess switching to Vinyls, you have a window into Chinese construction markets for your JV there. Do you see a change in growth in demand for construction materials in general, and PVC resin in particular, over the past few months in the country?

Albert Chao

In China or globally?

Aleksey Yefremov – Bank of America Merrill Lynch

In China?

Albert Chao

Certainly, China is slowing down in the economic market and construction material has been impacted. But Chinese – China is a big market and the Chinese Carbon based manufacturing today is not competitive compared with the U.S.-based PVC manufacturing.

Aleksey Yefremov – Bank of America Merrill Lynch

Okay. Thank you.

Albert Chao

You’re welcome.

Operator

Your next question comes from the line of Hassan Ahmed with Alembic Global. Please proceed.

Hassan Ahmed – Alembic Global

Good morning, Albert and Steve.

Albert Chao

Good morning.

Mark Bender

Good morning, Hassan.

Hassan Ahmed – Alembic Global

Just wanted to revisit obviously the question that sure is all about ethane prices and the like, just again wanted to revisit that subject. Just trying to sort of struggling a bit, trying to understand what really is happening on the ground. Everyone talks about bottlenecks, be their pipeline or at least for the time being, gas processing capacity. Yet, we haven’t really seen any meaningful declines in ethylene operating rates. So it seems that ethane is available. I mean is it a question of the pricing power really being with the gas processors and then just saying no to business at a lower price?

Albert Chao

I think you’re right. The demand for ethane is strong because the naphtha coal product prices as I said earlier, aromatic spending (inaudible) have – and propylene has come – have come down a long way. And that has increased the naphtha manufacturing costs a lot globally. And so the ethane demand in U.S. in particular is quite strong, which put pressure on supply especially when they were constraints in supply system.

Hassan Ahmed – Alembic Global

Right. But I mean it’s not that people are not receiving ethane. Ethane is – I mean, as seen by sort of decently higher operating rates at ethylene facilities across the U.S.

Albert Chao

Yes. And the ethane inventory has come down a fair amount. It’s now at a very quite low side.

Hassan Ahmed – Alembic Global

Right.

Albert Chao

And people have been depleting inventory and that’s why, I think the ethylene –

Hassan Ahmed – Alembic Global

So, hence we see these spikes in ethane prices.

Albert Chao

Exactly.

Hassan Ahmed – Alembic Global

Fair enough. Now, on the pricing side of things, you obviously mentioned, core product value sort of coming down and the like. And one of the things that you talked about earlier was that high ethane prices, ethylene prices sort of a bit lower maybe, maybe they all as equal, energy remains where it does maybe they hit some sort of a bottom here. As you look at Asia in particular, are you sort of seeing Asia in ethylene facilities and crackers sort of scaling back production levels, the utilization rates. I mean, just trying to establish, if crude and nat gas remain where they do, are we approaching some sort of bottoming out in pricing?

Albert Chao

I agree with you, Hassan. I think, as you know most of the Asian crackers are naphtha based and with the low polymer prices in Asia that – even integrated producers are now making money. So I foresee some of the smaller, older naphtha crackers may be forced to reduce production.

Hassan Ahmed – Alembic Global

Very helpful. Thank you so much.

Albert Chao

You’re welcome.

Operator

Next question comes from the line of Jeff Zekauskas with JPMorgan. Please proceed.

Jeffrey Zekauskas – JPMorgan

Hi, good morning.

Albert Chao

Good morning, Jeff.

Mark Bender

Good morning.

Jeffrey Zekauskas – JPMorgan

You are kind enough to provide your forecast or consultancy forecast of the amount of additional ethane that will come on over the next two years. And you said, it was 300,000 barrels per day. I was wondering, how much if all would come on by the end of 2012?

Albert Chao

Some that’s coming on this year, then a bit less next year and a lot more in 2013.

Jeffrey Zekauskas – JPMorgan

Yes. And so I was wondering how much you thought was coming on in ‘11 or ‘12 or according to the same consultant that you use?

Albert Chao

As I said earlier, I think probably about less than half this year, next year and more than half 2013.

Jeffrey Zekauskas – JPMorgan

Okay. Can you remind me when your new chlor-alkali unit should be on stream?

Albert Chao

It’s the second half of 2013.

Jeffrey Zekauskas – JPMorgan

The second half of 2013. And can you also remind me when your next ethylene expansion should be online?

Albert Chao

Second half of 2012.

Jeffrey Zekauskas – JPMorgan

Second half of ‘12. And can you remind me what the size of that is?

Albert Chao

It’s about 240 million pounds.

Jeffrey Zekauskas – JPMorgan

Okay. Fair enough.

Albert Chao

And our second ethylene expansion we are targeting for the second half of 2014 and also these based tying with our turnaround for the ethylene plants.

Jeffrey Zekauskas – JPMorgan

Okay. And in general, as far as domestic PVC demand goes, can you talk about the change in the industry from say the second quarter to the third quarter. And your expectations for the fourth adjusted for seasonality?

Albert Chao

I think, as we probably discussed earlier, that domestic construction market is still quite weak. That domestically we see that third quarter was weaker than the second quarter at least from what we have seen. And as I said earlier, we are heading into a slow season the fourth quarter. So we will expect that fourth quarter business to be as slow or slower than the third quarter.

Jeffrey Zekauskas – JPMorgan

And year-over-year, do you believe that export volumes will be – PVC export volumes will be higher in the fourth quarter than they were in the fourth quarter of last year?

Albert Chao

That’s a good question. We hope it will be as high as last year, but it depends on the global economic health and that will impact demand as well.

Jeffrey Zekauskas – JPMorgan

Okay. Thank you very much.

Albert Chao

You’re welcome, Jeff.

Operator

Your next question comes from the line of Gregg Goodnight with UBS. Please proceed.

Gregg Goodnight – UBS

Good morning, gentlemen.

Albert Chao

Good morning, Gregg.

Mark Bender

Good morning, Gregg.

Gregg Goodnight – UBS

A question on, you mentioned your potential conversion from propane to ethylene at the Calvert City plant. Have you guys quantified how much that would cost you at least in terms of order of magnitude and potential timing?

Albert Chao

No. We have not yet. But as you know, people give a low sum of $0.50 a pound for new plant. So the conversion will be less than that.

Gregg Goodnight – UBS

Okay. It’s what you typified as a reasonably easy conversion, if you can get the ethane pipe to the plant?

Albert Chao

We believe so. Yes.

Gregg Goodnight – UBS

Okay. That’s great. Second question, are you having any pickup at all in your large diameter PVC pipe business?

Albert Chao

That’s being probably in line with the general construction business.

Gregg Goodnight – UBS

Okay.

Albert Chao

(Inaudible).

Gregg Goodnight – UBS

Okay. Third question is the background, I don’t remember you guys, talking this much about PVC exports in any previous conference call, certainly that’s where the opportunity is and, it’s getting your attention. Would you typify for us your participation in the export market in terms of percent of your PVC production? I seem to recall that you are not an extremely large – typically an extremely large participant in the market perhaps that is, that’s picked up.

Albert Chao

You’re right, Gregg. I think the industry export is at around 35% to 40% of its production during this year and because we have our downstream fabricated during product business that we, as a rule export much less than industry average.

Gregg Goodnight – UBS

That’s typical. Your recent experience though would you typify that as certainly up?

Albert Chao

Still is up from come – in the past but still less than the industry average.

Gregg Goodnight – UBS

Okay. Thank you for your help.

Albert Chao

You’re welcome, Gregg.

Operator

Your next question comes from the line of (inaudible) with Ticonderoga Securities. Please proceed.

Unidentified Analyst

Good morning and thanks for taking my questions. I had two. First, could you talk about what your actual dollar of capital spending is going to be in 2012 and then maybe break that down either among the segments or the major projects and then I’ve got a second follow-up question after that one.

Mark Bender

As it relates to the 2012 capital spending program, we haven’t finalized that program and we will be announcing our CapEx program for next year as we get into the fourth quarter results and so we will be talking about that then. But as you would imagine the big portion of those should be these major projects that Albert just spoke of. It will be the chlor-alkali projects, since we’re under way today as well as the 2012, expansion in the bottleneck of our facilities in Lake Charles, but we’ll get into these specifics when we get into the fourth quarter results.

Unidentified Analyst

Fair to assume that it’s going to be of a significant amount from 2011.

Mark Bender

That’s correct.

Unidentified Analyst

Fair enough and I’ll wait. Could you just talk about the availability and this kind of gets back to the question on ethane (inaudible) at Calvert. Can you just talk about the availability of ethane for your Calvert City facility as you look out into the future and as you get out to 2013, 2014. Are you really confident that there is going to be kind of an ample logistic supply available to get I think in the Calvert City?

Albert Chao

Certainly, Paul. As you know, there have been quite a few projects been discussed of getting Marcellus ethane down to the Gulf Coast. And there are two projects that have been in discussion for the past two months and we believe that when those projects come fruition, we will get to have access to ethane to capacity.

Unidentified Analyst

What you have view on the timing of really beginning to see deliveries of gas out of the Marcellus into the Gulf Coast regions?

Albert Chao

The projects have been discussed for the first part of the 2014.

Unidentified Analyst

Fair enough. Thanks very much.

Albert Chao

You’re welcome.

Operator

As a reminder, (Operator Instructions) Your next question comes from the line of Charles Neivert with Dahlman Rose. Please proceed.

Charles Neivert – Dahlman Rose

Good morning, guys. Just a quick question. The gap between linear low and low density, which should have gotten off pretty high in terms of pricing, were does that stand now and how far off of its peak number has it come?

Albert Chao

Certainly, Charlie. The gaps it moves (inaudible) quarter-on-quarter. There were some reductions by $0.01 or $0.02 during this year when the price, but it moves on a monthly basis. But I think there still – LDPE still commands a large delta higher price than the low density in the U. S. and overseas.

Charles Neivert – Dahlman Rose

And I guess historically that number for a while was running around numbers about $0.05 gap on the two commodity versions of the products and I think, you guys have talked about the number getting north of kind of one point. Is it now sitting between that $0.05 and $0.10 range, again on these sort of commodity versions of the two products?

Albert Chao

Yes. If you look at PDI’s report for the (inaudible) $0.09 is the difference.

Charles Neivert – Dahlman Rose

Okay. That helped. And I guess – again I guess, fabricated products also that’s going to be the normal seasonality surrounding that obviously the housing market and/or the construction markets are not that all great, but you still got as well the seasonal issues that come with the winter as well.

Albert Chao

And it’s right.

Charles Neivert – Dahlman Rose

Taken into account, okay. And in terms of the Calvert City conversion, is it simply a matter of bringing product to the plant or are there more significant things to do with the plant in order to take on more ethane? I mean, are they mostly pipeline work or some or mostly plant work or sort of evenly split?

Albert Chao

Yes. I think there’s certainly some work needs to be done to the plant to be able to run ethane and propane on a flexible basis. Right now, it’s only propane.

Charles Neivert – Dahlman Rose

Okay. And in the propane – since you are running propane, I guess, there is some propylene where is that going right now?

Albert Chao

All utilities

Charles Neivert – Dahlman Rose

(Inaudible).

Albert Chao

All in the U.S. markets.

Charles Neivert – Dahlman Rose

Okay. Just trade out. So that would obviously get reduced in time. Are there is – is there any contract structure around that, that’s going to commit you to a certain amount of propane going forward, if you do – if you are able to bring in ethane or you’re much pretty much free to run whatever makes you can run for the best economics?

Albert Chao

Yes. We will have the flexibility.

Charles Neivert – Dahlman Rose

Okay. Great. Thanks very much.

Albert Chao

You’re welcome, Charlie.

Operator

Your next question comes from the line of Jonathan Chung with Lord Abbett. Please proceed.

Jonathan Chung – Lord Abbett

Hey, guys. How are you?

Albert Chao

Fine, how are you.

Mark Bender

Hi, how are you?

Jonathan Chung – Lord Abbett

It feels like all the smart guys asked all the detailed questions. Shouldn’t be surprised no one asked if you guys send resident degrees. But I was hoping that – I have two questions, one is housekeeping. Where are you guys in terms of the buyback and just kind of remind me what are your thoughts are and in terms of a bigger sense, maybe a small recap or something so you guys are in the cash and I know you have calls for capital with the integration projects and all. But just kind of help me understand on a higher level.

Mark Bender

Yes. Jonathan. We did – and you’ll see this in our 10-Q, when it gets filed tomorrow. We did initiate some share buyback later in the quarter, last quarter we bought $2 million worth of shares and we’ll continue to buy opportunistically as the market conditions permit.

Jonathan Chung – Lord Abbett

Okay. And okay. What is now 15% obviously, you guys were in the market today. The other question, I want to ask you, was less kind of exactly what’s happening this quarter or possibly even next quarter. I think everyone’s kind of killed the ethane question to death. But can you guys, kind of talk and help me understand how this all plays out in your minds. Obviously, the world’s a little choppy, it seems like every day we have to deal with kind of Europe situation, but it feels like, I don’t know, people are getting – will ultimately get desensitized to it because obviously the U.S. is okay and China feels like it is shifting to a little more of a expansionary policy. But help us appreciate, how this plays out for you guys in the businesses that you are in over the next couple of quarters or years as that you can kind of talk to that?

Albert Chao

Certainly, as we believe that oil price will stay very high compared with gas. And both consultants and the futures market shows future ethane price to trend downwards as more ethane – as fractionating capacity comes on stream as well as pipeline logistics. So we believe that the U.S. Olefins producers, in particular, in our case, will integrate to polyethylene with our LDP position, will be able to benefit from this very strong cost competitive position in the U.S. going forward. In the Vinyls side with low nature gas prices, we believe that U.S. will be very well positioned to benefit from low gas prices, which will translate into low electricity price, would translate into very cost competitive qualified position. And the U.S. also has one of the largest market for caustic in the world. So that will benefit the Vinyls business and with both the propane position and the ethylene position, U.S. will be very competitive in the Vinyl position to supply the rest of the world.

Jonathan Chung – Lord Abbett

And, I mean, so basically, you guys, kind of obviously agree with the consultants out there, and I’m just looking at consensus estimates for the most part. And so if you guys do believe, it does play out the way that consultants are kind of talking about and kind of what you are exactly saying. When you think about the earnings potential in the ranges for the company because I’m assuming polyethylene is going to run forward while we are waiting for the integration that could potentially help out with the dollar earnings, it sounds like plus or minus. How do you kind of proceed the range of quarterly earnings to be? I mean, what needs to happen for you guys to really break away the low $0.80 or something like that, because I’m just looking at back historically as we do have ethane advantage, how does this actually crack for you guys? And we are already seeing $0.90 something ethane prices or so?

Mark Bender

Well, I think, excuse me, Jonathan, certainly, I think as we talked about the historic paradigm that the industry worked in has changed and the feedstock environment, we have today in front of us, will continue to be well positioned for those of us with like crackers. And so I think as we look forward there is good strong earning power, but we certainly as you know don’t give guidance, but there is very good strong earnings power in the business and that feedstock position is going to set that up to be a good sustained front.

Jonathan Chung – Lord Abbett

Okay. Very good. Thank you, guys. I appreciate the call.

Albert Chao

Thank you.

Operator

Your next question is a follow-up from the line of Charles Neivert with Dahlman Rose. Please proceed.

Charles Neivert – Dahlman Rose

Just a follow-up just you guys are talking about relatively speaking low gas costs going forward. Do you currently buy for the chlor-alkali operations, electricity off the grid and would you consider going to co-gen, if you think gas is going to be on a relative basis cheap going forward. And I don’t know what you are paying off the grids in the different places, but gas make – doesn’t make sense to go to gas co-gen and get the steam and everything else that comes from that situation?

Albert Chao

Yes. Most of the U.S. electricity today are priced more on gas. So as gas price goes down most of the U.S. petrochemical plants are enjoying lower power costs.

Charles Neivert – Dahlman Rose

Thanks. Is there any reason that you would go after a co-gen situation where it would benefit the company?

Albert Chao

It’s possible. If we think that, co-gen will benefit more than buying power on the market.

Charles Neivert – Dahlman Rose

Okay. So, at this point the power pricing is reflective of the low gas and you guys are benefiting from that. So –

Albert Chao

Yes.

Charles Neivert – Dahlman Rose

Making that move. Okay. Great. Thank you.

Albert Chao

You’re welcome, Charlie.

Operator

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

David Hansen

We would like to thank you for your participation in today’s call. We hope you would join us again for our next conference call to discuss our fourth quarter results. Have a great day and thank you very much.

Operator

Thank you, for participation in today’s Westlake Chemical Corporation third quarter earnings conference call. As a reminder, this call will be available for replay beginning two hours after the call has ended, and maybe accessed until 1:00 P.M. Eastern Time on Tuesday, November 8, 2011. 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 the numbers is 60922534. Great day.

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