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Westlake Chemical Corp. (NYSE:WLK)

Q4 2007 Earnings Call

February 19, 2008 11:00 am ET

Executives

Dave Hansen - SVP of Administration

Albert Chao - President and CEO

Steve Bender - SVP and CFO

Analysts

Kevin McCarthy - Banc of America Securities

Mark Connelly - Credit Suisse

Edlain Rodriguez - Goldman Sachs

David Silver - JP Morgan

Jason Winer - Deutsche Bank

Mike Judd - Greenwich Consultants

Roger Spitz - Merrill Lynch

James Potesky - Credit Suisse

Operator

Good morning, ladies and gentlemen. Welcome to the Westlake Chemical Corporation Fourth Quarter 2007 Earnings Conference Call. (Operator Instructions). As a reminder, ladies and gentlemen, this conference is being recorded today, February 19, 2008.

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

Dave Hansen

Thank you very much. Good morning, everyone. Thank you for joining us for the Westlake Chemical Corporation’s fourth quarter conference call. I am 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 a discussion of recent developments, and then we will open the call up for questions.

Today, management is going to discuss certain topics that will contain forward-looking information that is based on management's beliefs, as well as assumptions made by and information currently available to management. These forward-looking statements suggest predictions or expectations and thus are subject to risks or uncertainties. Actual results could differ materially based upon factors including the cyclical nature of the chemical industry; availability, cost and volatility of raw materials 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 February 26, 2008. 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 53243054.

Please note that information reported on this call speaks only as of today, February 19, 2008 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'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 fourth quarter earnings of $0.29 per diluted share, which was up from the $0.22 reported in the fourth quarter of last year, but down considerably from the $0.59 we reported in the third quarter of this year.

Sales for the quarter were $851 million, driven by the strength in our polyethylene business, which continued through the fourth quarter. Prices for ethane and propane feedstock rose sharply to unprecedented levels in the fourth quarter following crude oil prices, which reached $100 a barrel and remained in the $90 range.

After implementing polyethylene price increases of $0.15 per pound in the first nine months of the year, we were able to implement two additional price increases during the fourth quarter, the $0.04 per pound increase in October and another $0.05 per pound increase in November totaling $0.09 per pound. Despite the implementation of these increases, they were insufficient to keep pace with a rapid rise in feedstock costs of ethane and propane, which led to lower margins. Additional price increases as we announced for the first quarter is $0.06 per pound increase previously announced for the fourth quarter is now split. So that $0.03 will be implemented on February 1st, with the remaining $0.03 to be implemented on March 1st. In addition, a $0.05 per pound increase has been announced for March 1st as well.

Prices in Asia increased during the fourth quarter and had continued this upward trend in 2008 due to record high naphtha feedstock costs and strong demand. Natural gas-based feedstock still remain advantaged of a oil-based based feedstock such as naphtha, thus North American producers continue to export products and are maintaining a strong supply/demand balance.

On the PVC side, both margin and volume continue to deteriorate due to the weakness in the construction market, which was further compounded by normal seasonal declines. PVC resin prices moved up during the fourth quarter with a $0.02 per pound increase in October, and an additional $0.04 increase in November. In spite of these price increases, however, the sharp escalation in raw material costs for propane and ethylene combined with lower demand, continue to cause margins in the Vinyls segment to decline in the fourth quarter.

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

Steve Bender

Thank you, Albert, and good morning everyone. I am going to begin today with a brief discussion of our consolidated financial results. I will then discuss the results of our FIFO accounting and how it relates to LIFO, followed by a more detail discussion of our segment results.

Beginning with our consolidated results; we reported operating income of $20 million on sales of $851 million in the fourth quarter of 2007 as compared to operating income of $60 million on sales of $840 million in the third quarter. Our net income in the fourth quarter of 2007 was $19 million or $0.29 per diluted share compared to net income of $38 million or $0.59 per diluted share in the third quarter of 2007.

Operating income for the full year 2007 was $175 million on sales of $3.2 billion as compared to operating income of $313 million on sales of $2.5 billion in 2006. The increase in sales was primarily due to the Longview acquisition in November 2006.

Net income for the full year 2007 was a $115 million or $1.76 per diluted share compared to $195 million or $2.98 per diluted share for 2006. SG&A costs increased by $14 million in 2007 as compared to 2006 primarily as a result of the additional costs related to the Longview asset.

The 2006 results included an after-tax charge of $16 million or $0.25 per diluted share related to the debt retirement costs. Both the 2006 and 2007 results also included tax benefits that incurred in the fourth quarters. The fourth quarter of 2007 net income was favorably impacted by a tax benefit of $8 million or a $0.12 per diluted share related to a reduction in deferred taxes due to a change in [enforcement] ratios upon the reorganization of several subsidiaries.

The fourth quarter of 2006 was favorably impacted by a tax benefit of $7 million or $0.10 per diluted share related to the reversal of various tax accruals due to the resolution of certain tax matters.

Now turning to our balance sheet, I'll highlight a few key issues. Capital expenditures for the year totaled a $136 million. Our cash balance was $25 million at December 31, 2007 and our long-term debt was $511 million, which reflects our $250 million tax exempt bond issued in December 2007 with an interest rate of 6.75 due November 2032.

The balance sheet also reflects restricted cash balance of a $199 million, representing moneys in escrow for the unused portion of these bonds that are intended to be used for various capital projects in Louisiana over the next several years. These bonds provide the liquidity to fund our growth in Louisiana and increase our financial flexibility going forward at attractive interest rates.

Our net debt to total capitalization ratio still remains low at 16%. I would like to mention that we estimate our capital spending for 2008 will be $175 million to $200 million range.

Now let's talk about FIFO accounting. The fourth quarter results were favorably impacted by the utilization of first-in, first-out or FIFO method of accounting as compared to the utilization of last-in, first-out LIFO method used by some companies in the industry.

Positive impact results from the sharp increase in feedstock prices during the quarter. We estimate that the positive FIFO impact in the fourth quarter of 2007 was approximately $18 million after-tax, or $0.28 per diluted share.

This compares to an $8 million after-tax benefit or $0.12 per diluted share in the third quarter of 2007. Please bear in mind that the FIFO calculation is only an estimate, it is not audited and is not a GAAP calculation.

Now our Olefins segment. Our Olefins segment reported operating income of $26 million on sales of $606 million during the fourth quarter as compared to operating income of $57 million on sales of $570 million reported in the third quarter of 2007.

This significant reduction in operating income was directly related to sharp increase in ethane and propane feedstock costs during the fourth quarter. Ethane prices averaged approximately $1.04 per gallon in the fourth quarter, up from $0.82 in the third quarter, while propane averaged approximately $1.51 per gallon in the fourth quarter, up from a $1.22 in the third quarter.

The industry was able to implement price increases for polyethylene totaling $0.09 per pound in October and November. However, the effect of these increases was not enough to offset the rise in feedstock costs and resulted in reduced margins. Additional price increases totaling $0.11 per pound have been announced for the first quarter of 2008. Polyethylene sales volumes remained strong during the quarter as customers maintained their buying patterns anticipating higher prices.

In addition to the lower polyethylene margins our Olefins segment recorded trading losses of $7 million in the fourth quarter as compared to a trading gain of $2 million in the third quarter.

For the full year, our Olefins segment reported operating income of a $153 million on sales of $2.2 billion for 2007 as compared to operating income of a $161 million on sales of $1.4 billion in 2006. The increase in sales is primarily the result of the November 2006 acquisition of Eastman Chemical’s polyethylene business in Longview, Texas. The decrease in operating income was primarily due to lower polyethylene prices and margins in 2007 as compared to 2006.

Sharp decreases in product prices and margins began in the fourth quarter of 2006 as feedstock costs fell and industry ethylene capacity restarted after several planned and unplanned outages, thereby placing downward pressure on ethylene and ethylene derivatives. In addition, customers de-stocking inventories built in anticipation of hurricanes that never materialized, added to the downward pressure.

These lower prices and margins continued into the first part of 2007. Feedstock costs reached unprecedented levels in 2007, while the industry implemented polyethylene price increased totaling $0.24 per pound during the year. In spite of these increases 2007 margins remained significantly lower than margins in 2006.

In addition, the lower polyethylene margins trading activity in our Olefins segment resulted in the loss of a $1 million in 2007 as compared to a gain of $19 million in 2006. These reductions were partially offset by the added income from operations contributed by the Longview facility and the net effects of the ethylene outages in both 2006 and 2007.

Now as previously stated, we estimate that the unabsorbed fixed costs and the lost opportunities of these outages was approximately $40 million in 2006 and $20 million in 2007. Additionally, we incurred approximately $6 million in transition costs in 2007 related to the Longview acquisition.

Now let me turn to the Vinyls segment. Our Vinyls segment reported an operating loss of $4 million on sales of $245 million during the fourth quarter as compared to operating income of $5 million on sales of $270 million reported in the third quarter of 2007.

This reduction in operating income was primarily related to sharp increases in propane and ethylene feedstock costs and was compounded by softer demand and lower sales volumes due to the weakness in the construction market and the normal seasonal slowdowns. The industry was able to implement PVC resin price increases in October and November; however, these increases could not keep pace with rising feedstock costs.

In spite of rising PVC resin prices, PVC pipe prices did not increase during the quarter and margins remained under pressure. Caustic prices did, however, move up during the fourth quarter. The industry was able to implement at $30 per ton increase for caustic during the quarter and we were able to increase our sales volumes.

For the full year our vinyl segment reported operating income of $30 million on sales of $1 billion for 2007 compared to operating income of $158 million on sales of $1.1 billion in 2006. This decrease is primarily due to lower selling prices for PVC resin and pipe and higher feedstock cost. PVC resin sales volumes increased year-on-year as we were able to increase PVC production at our Geismar Louisiana facilities.

Selling prices and margin sale dramatically started in the fourth quarter of 2006 and margins remained under pressure throughout 2007 due to the continued weakness in the construction market. The industry was able to raise PVC resin prices with increases totaling more than $0.15 per pound during the year, however, these increases could not keep pace with rising feedstock costs. We did see increases in cost of selling prices and sales volumes. Caustic demand remained strong during 2007 and we increased production at our Calvert City plant with a small debottleneck early in the year.

Now, I'd like to turn the call back over to Albert. Albert?

Albert Chao

Thanks Steve. First, let me update you on the status of our projects and then we will discuss the outlook for the industry. As mentioned in our last call, we have begun work on several projects in our vinyl segment, which includes expansions of our chlor-alkali unit and PVC resin plant in Calvert City, Kentucky, and large diameter PVC pipe facility, which will be located in close proximity to our PVC resin plant in Calvert City. These projects are all under way and we will continue to update you in coming months. In addition to these projects, we are also planning a new PVC pipe facility in the Western region of United States in 2009.

Now, I want to talk about turnarounds. A maintenance turnaround is being performed at our styrene plant in Lake Charles beginning this month. The outage will last approximately 35 to 40 days, will including relenting of the styrene plant, which will enhance its energy efficiency. In addition, we've also performed a maintenance turnaround at one of our ethylene units in Lake Charles, which is scheduled in the second half of this year. The plant will be shutdown for approximately 30 days, which will reduce ethylene production by approximately 100 million pounds.

Now, let us discuss Trinidad. We are continuing our work with the government of the Republic of Trinidad and Tobago to complete the feasibility study for a feedstock advantaged ethane-based ethylene and polyethylene project. One of the major constraints to the project is the rising capital cost of the construction of such plant around the world. We're discussing with the Trinidad government on how to overcome that challenge and we'll continue to update you in coming months.

Finally, let's talk about the outlook for the industry. As I mentioned earlier, we have seen continued strength in the polyethylene markets, both domestically and with exports. Elevated crude oil prices and a weak US dollar continue to give US-based ethylene producers a cost advantage, which allows us to export our products and maintain a strong supply/demand balance in the US.

Feedstock costs rose sharply during the fourth quarter, which reduced overall margins as the polyethylene industry implemented additional increases in the fourth quarter, totaling $0.09 per pound. In addition, the industry currently has price increase announcements totaling $0.11 per pound for the first quarter of 2008. Any price increase in the first quarter combined with recent decline in feedstock costs in January and February could lead to margin growth. The polyethylene supply/demand balance should remain strong until a new Middle East capacity comes along.

The continued weakness in the construction market has resulted in the vinyl industries inability to raise prices to sufficiently cover rising feedstock costs causing further margin erosion, normal seasonal slowdowns during the fourth quarter and the unprecedented high feedstock costs have only compounded the problem. The PVC industry was able to implement a $0.02 per pound increase in October and had an additional $0.06 increase for November that was partially implemented with the remainder pushed into 2008. In addition, the industry has announced $0.02 per pound price increase for January and $0.02 for February.

We remain cautious about the outlook for the vinyls in the coming year with a weakened demand and a capacity increases expected come online in the first half of 2008. Now, as we look forward in 2008, should crude oil prices remain at elevated levels so will naphtha and, thus the outlook for gas based ethylene producers looks good, with strong domestic polyethylene demand and strong export opportunities

Thank you very much. Now, let me turn it back over to Dave Hansen.

Dave Hansen

Thank you, Albert. Before we began 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 to you at the end of the call. Operator, we're now prepared to take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Kevin McCarthy of Banc of America Securities. Please proceed.

Kevin McCarthy - Banc of America Securities

Good morning, Albert, how would you characterize demand for PVC fabricated products and municipal or commercial construction as opposed to residential? Obviously, residential has been week for over a year now, remains difficult but what are you seeing in the other segments of the market as relates to vinyls?

Albert Chao

Yes. As you know, approximately 20% of our PVC pipe business goes into the residential sector remaining goes into more of the water, sewer and infrastructure road construction. And that segment is doing better than the residential side. However, because of the total reduction in the construction market is still a very highly competitive position among all the producers for pipe in both segments.

Kevin McCarthy - Banc of America Securities

Okay. And with regard to that competitive intensity, what is the latest that you're hearing regarding the new capacity that's to come online from Shintech in Louisiana?

Albert Chao

As we understand, Shintech plant will first base will come aligned some time in the first half but most likely in the second quarter of this year.

Kevin McCarthy - Banc of America Securities

Okay. And then finally on the subject of capital spending, did I hear you correctly that the number for '08 is $175 million to $200 million? And if that's correct maybe could elaborate on some of the larger capital projects that are embedded in that number and also whether or not that includes any contemplated spending on Trinidad?

Albert Chao

Yes. This number included a carryover of raw material 07's projects, which was not completed. So I think these capital projects included a carryover plus as you mentioned our ongoing expenditures in Calvert City, which includes the debottleneck in our chlor-alkali assets in Calvert City, PVC resin plant as well as the PVC pipe plant and ongoing maintenance, capital spending across our businesses. Now, there is no cost involved in any of the Trinidad activities in capital side.

Kevin McCarthy - Banc of America Securities

Okay. Thank you very much.

Albert Chao

You're welcome.

Operator

Your next question comes from the line of Mark Connelly of Credit Suisse. Please proceed.

Mark Connelly - Credit Suisse

Thank you. Albert, just a couple of things. I am wondering if you can tell us how this FIFO impact, which was obviously very pretty big, is that mostly in the olefin's business. Do you have a split between the two? And second, you've talked about the export market a bit, I wonder as I was listening which one are you actually more optimistic about, the PVC export opportunities or polyethylene? And do you see one of those markets rolling over before the other?

Albert Chao

Yes we don't split the FIFO impact routine olefin and vinyl, but I will think being both because both uses fair amount of ethylene, which is the main feedstock for those products. What's your second question, please?

Mark Connelly - Credit Suisse

About the export market for PVC versus polyethylene, I couldn't tell from your comments which one you are more optimistic about.

Albert Chao

I think definitely, the polyethylene -- thinks polyethylene compose a 100% ethylene and the US gas-based ethylene producers has cost advantage of most of international naphtha-based ethylene producers with high oil prices. Thus, we believe the polyethylene sector would have a favorable competition in the international export market.

On the PVC side, about 50% of that is ethylene, the other side is chlorine and caustic. And foreign prices and ECU price in the US are still pretty high. And you do have some competitive advantage, but not as much as in ethylene, polyethylene.

Mark Connelly - Credit Suisse

Okay. Just one last question. It looks like the run-up in propane was a big part of your issues. Is there anyway you can mitigate that and related to that will Calvert City include feedstock flexibility in its ethylene?

Albert Chao

Yes. Both propane and ethane prices have dropped in January and February. I think reached a high of $1.15 per gallon for propane and ethane was -- sorry it was $1.15 for ethane and $1.60 something per gallon for propane. And today, recently ethane is the 90s and propane is $1.30 something, so it has helped coming down. Calvert City is served by pipeline. So it's well limited as to what feedstock flexibility you're going to have.

Mark Connelly - Credit Suisse

Okay. That's helpful. Thank you.

Albert Chao

Thank you.

Operator

Your next question comes from the line of Edlain Rodriguez of Goldman Sachs. Please proceed.

Edlain Rodriguez - Goldman Sachs

Good morning. A question for you, Albert. And this regarding ethylene and polyethylene price increases. You've mentioned that strength, I mean the domestic and the export market is fairly strong, but given that cost have been going up significantly, why do you think the industry is having so much trouble in holding into prices like we have to split prices or delay implementation of prices I mean why do you think this is going on?

Albert Chao

Well, I think that definitely the cost push in our industry has made the price increases possible and the same time, it's mentioned about supply/demand balance in the US and worldwide where the export is going overseas makes the balance pretty strong. I think we have, I think close to unprecedented direct high prices for polyethylene and the consumers of polyethylene are resisting the price increases.

That's why you have the back-in force of all delays. And with recent reduction in feedstock costs, again, as we speak oil price for March come back to $98 a barrel now, so we don't know that its energy prices and feedstock prices are volatile. It's difficult to forecast what the price will be. By the recent decline in feedstock costs in gas side has many consumers taking a look again as where the direction would go.

Edlain Rodriguez - Goldman Sachs

So, if costs do come down do you expect the industry to just give up some of the price against that you have in place right now some of the price increases implementation?

Albert Chao

I think depending on supply/demand, if the US. economy is good, the demand is reasonable and export demand is very high. Then certainly the supply/demand balance, which will support further price increases and not knowing what the energy price would be because for us to implement price increase it's takes quite a well where feedstock costs can change in one day.

Edlain Rodriguez - Goldman Sachs

Of course. One last question on the trading gains and losses, where are they coming from and what should we be looking at going forward in the next quarter or so, just so we could forecast them properly?

Albert Chao

Yes. The trading gains and losses comes mainly from our feedstock and sometimes a gas purchases. So we don't expect to be of large swings, but we have had good gains in the past years and in 2007, we had a net loss of $1 million.

Edlain Rodriguez - Goldman Sachs

Okay. Thank you. And Steve, congratulations on your promotion.

Steve Bender

Thank you very much.

Operator

Your next question comes from the line of David Silver of JP Morgan. Please proceed.

David Silver - JP Morgan

Yeah. Hi. Good morning. I had a question, I guess about for Steve, I just wanted to ask a question about the capital spending in restricted cash. So, Steve, you mentioned CapEx budget for 2008 of $175 million to $200 million, and then you talked a little bit about the restricted cash portion of your financing or your balance sheet. Can you give us an estimate of how much of the 2008 capital spending is going to be from that restricted cash balance versus the unrestricted, just a rough balance?

Steve Bender

When you look at our capital spending as Albert commented that the major projects in that program or those related to operations largely in Kentucky. But having said that, we have a continuing spend in maintenance capital, which these goes on bonds and the escrow balance could be used for, that maintenance capital is $60 million and that's across the entire organization. But some meaningful portion of that is in Louisiana both in Lake Charles and in Geismar. I can't give you a specific number, but I can certainly say that a reasonable number of that maintenance capital would be spent out of the escrow balance.

David Silver - JP Morgan

Okay. Feedstock costs have come up several times in your discussion in the last quarter and the upcoming quarters. Let's say, in particular, in the Gulf, the pricing has become disconnected or decoupled from the underlined natural gas values that it used to hue pretty closely to from many years. As you guys look at the feedstock situation in the Gulf there for ethane, is it your belief that the linkage will be recouple or will we remain decoupled? And maybe if you have any thoughts about what the key drivers there are? Thank you.

Albert Chao

Yes. If you can study various industry analyst comments, we believe there will be more feedstock coming to the market this year, next year and going forward. And so we believe that the ethane pricing will get closer to natural gas prices strong and following closer to the crude oil price.

David Silver - JP Morgan

Okay. That's helpful. And then last question about, I guess, I was hoping Albert could comment a little bit on the China outlook. So currently, I guess was the Chinese New Year, this is considered or we consider it kind of a slower demand period, but, I mean markets are quite volatile. We know there is some weather events in China. I was wondering if, Albert, you could just give us your sense of what's going on there in terms of their ability to run the processing facilities and where do you think that export demand for PVC or probably ethylene. Is this going to be negatively impacted by the weather and other issues there or should we see market's kind of just reacting more maybe to the pricings from the crude market and there might be an increase in interest? Thank you.

Albert Chao

Yes. Suddenly, we all hear about the bad whether China had during the Chinese New Year. We believe that's over and if we can speak for the Asia market as we understand the polyethylene prices has hit the record high in Asia not just in China, in Asia as a whole. And this is mainly due to demand and high cost of naphtha, and also PVC prices have not hit record high or close to record high. So, we believe demand in Asia is quite strong. And as you know, this year's Olympics is here so economy in China should be pretty robust.

David Silver - JP Morgan

Thank you very much.

Albert Chao

You're welcome

Operator

(Operator Instructions). And your next question comes from the line of David Begleiter of Deutsche Bank. Please proceed?

Jason Winer - Deutsche Bank

Hi, guys. Good morning, it's Jason [Winer] sitting in for David this morning. Just a quick question on caustic. With caustic looking pretty good, could you share with us your outlook for Caustic for 2008?

Albert Chao

Yes. I think there have been price announcements made in the first quarter for caustics, and I think the ECU value also probably close to record high as well in the US, and demand is strong with a slowdown in the vinyls business, certainly chlorine demand has come down a bit, that cost certainly -- strengthening caustic pricing. Shintech chlor-alkali plants will be coming on stream sometime this year. That will add more supply into the market.

Jason Winer - Deutsche Bank

Okay. That's helpful. Thank you.

Albert Chao

Welcome.

Operator

And your next question comes from the line of Mike Judd of Greenwich Consultants. Please proceed.

Mike Judd - Greenwich Consultants

Yes. Good morning. A question about logistic, for export sales your company and others were also looking to increase exports, not only into Asia but also into Latin America and even potentially into Europe. I am just wondering, given the availability of ships and tankers and this, that and the other, are there are any logistical issues that we should be aware or be thinking about?

Albert Chao

Well, certainly with the increasing exports that puts more pressure on the whole system of logistics, but I think the system will work itself out because US certainly is still a large net importer of products from all over the world. So the logistics just takes time to work out and we believe that should not be a big problem going forward.

Mike Judd - Greenwich Consultants

So I mean basically if you look in the current quarter and maybe next quarter, if there are logistical issues is it warehouse space on the Gulf coast, is it the availability of ships? What types of things are you working on? Do you have everything that you need to export as much as you want or what do we need to be thinking about?

Albert Chao

Yeah. I think that there were problems with the warehousing and bagging places. I think those system has worked itself out. It won't take a long time -- lot of time to add capacity in those areas. I think that containers shipping, rail and those system will take time to adjust, but once people realize this is not a short phenomenon, supplies will be made available we believe

Mike Judd - Greenwich Consultants

Okay. And then just lastly on in terms of industry inventories, I am not talking producer inventories, but what is your sense in terms of where inventory levels are at the converters level for both polyethylene and PVC?

Albert Chao

Yes. We believe converters levels of inventory in polyethylene is pretty much balanced. We believe that the inventory in the vinyl side could be little bit on the higher side because as you know, it's seasonal. This is the time when people have more PVC pipe sample made for the spring time coupled with the price increases people had in October and November, whereas in polyethylene you won't have that much seasonality.

Mike Judd - Greenwich Consultants

Okay. And then just finally, one of the strengths of your company is that on the PVC side, you do have a pretty good balance in regards to the commercial side of the business, but I guess I've been noticing recently in the financial press that there has been discussions about while it's not nearly the magnitude of problems with the residential mortgages, but there evidently have been some issues on the commercial side and are you seeing any impacts or is that something -- in other words, that impact you wouldn't necessarily have seen it yet, it might be down the road.

Albert Chao

I think generally speaking with the [climate] conditions I think there is impact on both residential and some construction side. Along also with seasonality, as you know, much of the installations of pipe are done in the spring, summer and fall, not wintertime. So we expected to have this slowdown wintertime. But we believe the construction side and commercial side will fair much better than residential side.

Mike Judd - Greenwich Consultants

Thanks for the help.

Albert Chao

You're welcome.

Operator

(Operator Instructions). And your next question comes from the line of Roger Spitz. Please proceed.

Roger Spitz - Merrill Lynch

Good morning. Can you tell us what your current operating rates are at your PVC resin plants in Q4 '07 average and currently?

Albert Chao

We don't report plant-by-plant, but we are operating at or above industry average for our PVC plant.

Roger Spitz - Merrill Lynch

Okay. And were you able to raise prices in your window, patio and fence components businesses in Q4 '07?

Albert Chao

We have increased prices in our window side with an increase in resin. I don't know where exactly in Q4 because the windows and fence prices are not done on a monthly basis, they are more done on the odd times during the year. So I can't say exactly what's done in the fourth quarter, but we have increased prices during the year last year.

Roger Spitz - Merrill Lynch

You're saying more the pricing is set more contractually at specific times during the year.

Albert Chao

That's right.

Steve Bender

That's right.

Albert Chao

Exactly.

Roger Spitz - Merrill Lynch

Changeovers? Okay.

Albert Chao

That's right.

Roger Spitz - Merrill Lynch

Okay. And lastly you mentioned ECU prices being very high, I understand caustic pricing but in your view why is chlorine pricing staying relatively high given all that's going on?

Albert Chao

I think that chlorine is -- well, PVC is being exported and there is demand for chlorine in the TDI, MDI and other segment of the industry. So there are certain benchmark prices for chlorine and then people negotiate from that benchmark price.

Roger Spitz - Merrill Lynch

Right. But presumably, chlorine demand itself you might characterize as relatively weak because of the PVC side.

Albert Chao

For the vinyl business, but it may not be so for the other side of the -- other industries for chlorine consumption.

Roger Spitz - Merrill Lynch

Okay. And then do you have any sense, I know it's not quite your business but where chlorine prices might be going over the next year, over this year 2008?

Albert Chao

As a buyer of chlorine I wish it's coming down more.

Roger Spitz - Merrill Lynch

All right. Thank you very much.

Albert Chao

You're welcome.

Operator

And your question comes from the line of James Potesky of Credit Suisse. Please proceed.

James Potesky - Credit Suisse

Hi. Good morning. James Potesky, Credit Suisse Alternative Capital. I have two questions. One, just on your debt balance, I think it rose significantly $170 million, $180 million from the end of September. I was wondering if you could give us a little more insight into that.

And the other question is on your outlook for 2009, a lot of new capacity coming on stream from Middle East and globally, and what impact you think that will have on your business?

Steve Bender

Sure. Let me first talk about the increase in debt. There was an increase in debt in the fourth quarter, if that's what you are comparing, and that was through the issuance of these Gulf opportunity or Gozon bonds, we issued $250 million of those bonds. And as you can see, we escrowed the proceeds and they're shown as restricted cash.

Now, we obviously, therefore, carry at the end of the year $199 million of the unused portion of those. So when we talk about net debt, we're obviously looking at the debt less the cash balances carried. That's the net change, if you will, from period-to-period.

James Potesky - Credit Suisse

Thank you. I had overlooked that.

Albert Chao

Let me answer on the outlook for '09. Suddenly, if you read all the analyst reports that Middle East capacity start to -- the new capacity will start to come online in '09 and onwards. At Westlake, our polyethylene business is highly concentrated in the LDPE or low-density polyethylene side, which has least capacity increase from the Middle East. And so we will expect to fair better than the industry average in the polyethylene side.

Secondly, much of the capacity from Middle East is gained for the Asian and European market because netbacks setting for those markets are better than coming to the states.

James Potesky - Credit Suisse

Okay.

Operator

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

Dave Hansen

Well, thank you very much for joining us in today's call. We hope you will join us again for our next conference call to discuss our first quarter of 2008 results. Thank you very much and have a wonderful day.

Operator

Thank you for your participation in today's Westlake Chemical Corporation fourth quarter earnings call. As a reminder, this call will be available for replay beginning an hour after the call has ended, and maybe accessed until 1:00 pm Eastern Time on Tuesday February 26th. 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 53243054. Thank you.

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Source: Westlake Chemical Q4 2007 Earnings Call Transcript
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