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Westlake Chemical Corporation (NYSE:WLK)

Q1 2008 Earnings Call

May 1, 2008 11:00 am ET

Executives

David R. Hansen - Senior Vice President, Administration

Albert Chao - President and Chief Executive Officer

M. Steven Bender - Senior Vice President, Chief Financial Officer and Treasurer

Analysts

Analyst for Mark Connelly - Credit Suisse

Edlian Rodriguez - Goldman Sachs

Kevin McCarthy - Bank of America

Charles Neivert - Morgan Stanley

Gregg Goodnight – UBS

Dave Silver - JP Morgan

Mike Judd - Greenwich Consultants

Roger Spitz - Merrill Lynch

Operator

Welcome to Westlake Chemical Corporation first quarter 2008 earnings conference call. (Operator Instructions) I would now like to turn the call over to your today’s host Dave Hansen, Westlake’s Senior Vice President of Administration.

David R. Hansen

Thank you for joining us for the Westlake Chemical Corporation’s 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 first quarter, and 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 up the call to questions.

Today management is going to discus 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 and 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 web page 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 8, 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 47446557. Please note that information reported on this call speaks only as of today, May 1, 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 advice you that this conference call is being broadcast live through an Internet webcast system that can be accessed on our webpage www.westlake.com. Now I would like to turn the call over to Albert Chao.

Albert Chao

In this morning’s press release we reported first quarter earnings of $0.08 per diluted share, which was down from the $0.30 reported in the first quarter of last year and also down from the $0.29 reported in the fourth quarter of 2007. However the fourth quarter benefited from a favorable tax adjustment of $0.12 per share.

Sales for the first quarter were at record high, at $915 million, driven by higher product prices in both our Olefins and Vinyls segments. While product prices have moved up, we have not been able to keep pace with the dramatic increases in feedstock costs that we experienced in the fourth quarter. The dramatic rise in feedstock cost slowed somewhat in the first quarter however, they will likely remain high following crude oil prices which are now in the $115 a barrel range.

Normal seasonal slow down during the winter months, poor conditions in the construction business, and a general slow down in some parts of our economy made it more difficult to pass along these higher feedstock costs over the winter months. Both polyethylene and PVC resin prices moved up in the first quarter as price increases that went into effect in the fourth quarter were fully realized in the first quarter.

The industry is currently in the process of implementing a $0.06 per pound polyethylene price increase in the April-May timeframe and there was a further $0.05 per pound price increase announced at the end of last year, which has not been implemented yet.

A $0.02 per pound increase for PVC in March is still under negotiation. An additional $0.04 increase has been announced for May 1. While there is no certainty that these increases will be fully realized, we remain optimistic that we will achieve price increases to offset some of the increases in feedstock costs.

Polyethylene prices in Asia continued to increase during the first quarter due to record high naphtha feedstock costs and continuing strong demand. Natural gas based feedstocks will still remain advantaged over oil-based feedstocks such as naphtha. Thus North American producers are able to export polyethylene and maintain a reasonably strong supply-demand balance in the U.S.

PVC resin, like polyethylene, is being exported as naphtha feedstock costs continue to increase. However domestic demand is down due to the weakness in the housing and construction markets. So the overall supply-demand balance of PVC is not nearly as strong as polyethylene.

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

M. Steven Bender

I’m going to begin today with a brief discussion of our consolidated financial results. Then I will discuss the results of our FIFO accounting and how that relates to LIFO followed by a more detailed discussion of our segment results.

Beginning with our consolidated results, we reported operating income of $14 million on sales of $915 million in the first quarter of 2008 as compared to operating income of $20 million on sales of $851 million in fourth quarter of 2007. Our net income in the first quarter of 2008 was $5 million or $0.08 per diluted share compared to net income of $19 million or $0.29 per diluted share in the fourth quarter of 2007.

The fourth quarter 2007 net income was favorably impacted by a tax benefit of $8 million or $0.12 per diluted share related to the re-organization of several subsidiaries. Interest expense increased due to the issuance of $250 million of tax exempt bonds in December of 2007. We incurred three one-time items that unfavorably impacted first quarter operating income by $7 million or $0.07 per diluted share.

The first item was the scheduled turnaround of our styrene plant which was down for 45 days during the first quarter. The styrene plant underwent a major maintenance turnaround and revamp project designed to increase energy efficiency and modestly boost capacity.

The increases in plant efficiencies, lower energy cost and incremental production will add to the overall profitability of the plant which restarted on April 4. We estimate that the unabsorbed fixed cost related to this turnaround during the first quarter was approximately $2.6 million.

Additionally we permanently closed our Pawling, New York fabricated Vinyls product facility to optimize our window and door profile capacity and consolidating our manufacturing of window and door components to Calgary, Alberta. Asset impairment, severance and other costs recorded in the first quarter of 2008 related to this closure were approximately $2.5 million.

The consolidation of our window and door manufacturing in Calgary will improve our facilities cost position and scale and in addition we are beginning to source window profiles from our joint venture in Suzhou Huasu, China, which will further improve our overall cost position in North America. Lastly, during the quarter we retired approximately $2 million of equipment taken out of service primarily related to turnaround activity.

Now turning to our balance sheet, I’ll highlight a few items. Capital expenditures in the first quarter totaled $43 million and in addition we incurred capitalized turnaround cost at our styrene facility totaling $13 million. Our long-term debt was $555 million which reflects our $250 million tax-exempt bond issued in December 2007.

The balance sheet also reflects a restricted cash balance of a $187 million representing monies in escrow from the unused proceeds of these bonds that we said will provide the liquidity to fund our various capital projects in Louisiana over the next several years. Our net debt to total capitalization ratios still remains low at 20%. I would like to mention that we estimate our capital spending for 2008 will be in the $175 million to $200 million range.

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

In contrast the fourth quarter 2007 had a positive FIFO impact of approximately $28 million or $0.28 per diluted share, which was the result of sharp increases in feedstock cost during the fourth quarter. A dramatic rise in feedstock in the fourth quarter 2007 had a significant impact in the first quarter of 2008 as most of these high feedstock costs incurred in the fourth quarter flowed through our income statement in the first quarter of 2008. Please bear in mind that the FIFO calculation is only an estimate, it is not audited and it’s not a GAAP calculation.

Let me point out that we did experience margin expansion in the first quarter as compared to the fourth quarter when we remove the effects of FIFO accounting. As I mentioned, the fourth quarter operating income of $20 million was favorably impacted by a $28 million FIFO gain and an unfavorable $7 million trading loss. In contrast, first quarter operating income was $14 million, which included approximately $7 million in unfavorable onetime adjustments that I mentioned earlier.

Now to our Olefin segment, our Olefin segment reported operating income of $20 million on record sales of $661 million during the first quarter as compared to operating income of $26 million on sales of $606 million reported in the fourth quarter of 2007.

Polyethylene prices moved up in the first quarter as the price increases that went into effect in the fourth quarter were fully realized in the first quarter. As Albert mentioned, a $0.06 per pound increase that was slated to be implemented during the first quarter has now been moved to the April-May timeframe and an the additional $0.05 per pound increase has been announced.

Ethane feedstock costs leveled off at very high levels in the first quarter, however, propane feedstock cost have increased to unprecedented levels in April. As we mentioned earlier, because of our FIFO accounting, most of the high priced feedstock costs incurred during the fourth quarter flowed through our income statement in the first quarter of 2008.

And despite the sequential increase in polyethylene prices, overall margins were squeezed during the first quarter due to the these feedstock costs. The export demand for polyethylene remained strong and prices moved up during the first quarter as North American gas based ethylene producers continued to have a cost advantage over naphtha producers domestically and abroad.

While we have seen some slowdown in North America’s polyethylene demand, export opportunities have remained strong. As I mentioned earlier, the styrene turnaround, which resulted in a 45-day outage during the quarter impacted our operating income by approximately $2.6 million. The facility went back into operation on April 4.

Now let me turn to the Vinyls segment. Our Vinyls segment reported an operating loss of $3 million on sales of $254 million during the first quarter as compared to an operating loss of $4 million on sales of $245 million reported in the fourth quarter of 2007. The modestly lower operating loss was due to the slight increase in overall margins. Average PVC resin prices leveled off during the first quarter after implementing two price increases in the fourth quarter.

No additional increases have gone into effect during the first quarter. However, we still have a $0.02 increase from March under negotiation. In addition, we now have $0.04 increase announced for May 1. The seasonal slowdown we normally experience was extended due to the longer winter weather conditions in many parts of the country.

PVC pipe operating rates fell to low levels during the first quarter as producers managed inventories while PVC resin operating rates increased somewhat over the fourth quarter.

Consumer inventory levels were low, driven by concerns about construction activity and cash flow management. In spite of this, PVC pipe prices moved up during the first quarter as compared to the fourth quarter.

Sales volumes for PVC pipe did improve in March as compared to January and February, and this trend has continued into April as construction activity has picked up. The slowdown in demand for PVC has led to reduced demand for chlorine, which in turn has resulted in tight supplies for caustic.

Caustic demand remained strong, prices continue to move up in 2008 with a $50 per ton increase in January, and an additional $75 per ton increase announced for February, which is not settled. Caustic prices are at an all time high and we are currently in the mid-$500 per ton range.

Now I’d like to turn the call back over to Albert.

Albert Chao

First let me update you on the status of a number of our strategic initiatives and then we’ll discus the outlook for the industry. As discussed in our last call, work is under way on several profit improving projects in our Vinyl segment, which includes expansions of our chlor-alkali unit and PVC resin plant in Calvert City, Kentucky.

Also under construction is a grass root large diameter PVC pipe facility, which is still seeing good demand located in close proximity to our PVC resin plant in Calvert City. And a grass root PVC pipe facility in Yucca, Arizona that will be ready in 2009 to serve the Western region of the U.S.

Now I want to talk about the status of our turnarounds in our Trinidad project. We had completed the maintenance turnaround and plant upgrades at our styrene plant in Lake Charles. As we said the facility was down for 45 days during the first quarter and restarted on April 4. We have estimated that the impact of the unabsorbed fixed cost was approximately $2.6 million.

In addition in our last conference call we mentioned that we will perform a maintenance turnaround at one of our ethylene units in Lake Charles later this year. The turnaround will require a 30-day outage, which will reduce ethylene production by approximately 100 million pounds.

We have now scheduled this turnaround to occur in the first half of 2009 to coincide with a number of energy saving projects associated with this unit at the time. As to our Trinidad project, we continue to work on the feasibility study and we’ll update you when more progress is made.

Finally let’s talk about the outlook for the industry. On the Vinyls front, the domestic housing problem continues to be headline news and while only about 20% of our Vinyls projects go directly into that sector. It has impacted the whole industry. As mentioned earlier, the normal seasonal slowdown was extended due to poor weather conditions in some parts of the country.

The PVC industry still has a $0.02 per pound price increase for March being negotiated and an additional $0.04 a pound price increase announced for May 1 to help offset feedstock costs. However we remain cautious about the outlook for the Vinyls in the coming year given the weakened demand and the capacity increases expect to come ‘09.

Now let’s turn to Olefins. Elevated crude oil prices and a weaker U.S. dollar continue to give the U.S. gas based ethylene producers a cost advantage, which allows us to export our product and maintain a strong supply demand balance in the U.S. In light of the higher feedstock costs we are experiencing, we will require price increases to improve the margin deterioration we have had over the last six months.

We are optimistic that the current $0.06 a pound price increase will be implemented, which will lead to margin expansion. We are concerned however, what impact a potential recession may have on the economy and our ability to raise prices sufficiently to counter potential increases in feedstock costs.

Now let me turn it back over to David Hansen.

David R. Hansen

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 are now prepared to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Analyst for Mark Connelly - Credit Suisse.

Analyst for Mark Connelly - Credit Suisse

Is it the FIFO impact was around $0.07 per share, is that correct?

M. Steven Bender

No, no. In the first quarter there was no FIFO impact at all, neither gain nor loss in the first quarter. And the numbers you’re referring to I think are the one-time items that we had, which totaled $7.1 million or $0.07.

Analyst for Mark Connelly - Credit Suisse

Now with the number of expansions underway on the Vinyl side, how would you characterize the timing of these start-ups, with your expectation on the health of the market at that time? That is would you potentially delay start-up if you thought the market proved more negative than you had expected?

Albert Chao

One of the important segments of the Vinyls expansion is a chlor-alkali capacity expansion. We are net buyers of chlorine, and today the chlor-alkalis business has bulk of the profit margins in the whole Vinyls chain. And that will definitely help us to increase our profit margin in that sector.

And second part is we have a PVC expansion as today we are selling some of our VCMs, which without expansion we would be able to utilize more of the VCM internally to be more fully integrated. And likewise, our expansion in our PVC pipe facility, one is right next to our PVC pipe plant in Calvert City, which is a large diameter pipe I mentioned earlier. And the large diameter pipe is still the best segment in the pipe sector.

And the fourth one is our Yucca, Arizona pipe plant expansion. Since we only serve west of the Rockies, this is our plan to serve the Western part of the U.S., which has no plants there. And so this will expand our coverage to really the whole U.S.

Analyst for Mark Connelly - Credit Suisse

Have you been seeing more opportunities for one type of polyethylene resin in the export markets? Say for example, more interest in low density versus linear low or how has the actual composition of your exports looked in terms of resin?

Albert Chao

Well I think in both sections, it seems Westlake has more the highest proportion of LDPE, low density polyethylene, in the total polyethylene business. We would export more LDPE than linear low. LDPE commands a higher price and higher margin than linear low, domestically and in foreign markets.

Operator

Your next question comes from Edlian Rodriguez - Goldman Sachs.

Edlian Rodriguez - Goldman Sachs

It appears as if your outlook for the Vinyls business is pretty somber. Can you talk about what Westlake can do to absorb higher fixed cost or maintain higher operating rates because it seems like the construction market is not picking up at all?

Albert Chao

I mentioned earlier, we are having various initiatives to for example, increase our chlorine and chlor-alkali portion of our business to capture the higher profit margin chain. And we will selectively look at which part of the chain that we should emphasize on whether to sell more pipe or more PVC for export or more large-diameter pipe.

So once we are integrated, certainly we have more ability to pick and choose where we want to run our plants. And thus we feel that we will be able to have a higher operating rates than people who are not fully integrated.

Edlian Rodriguez - Goldman Sachs

On polyethylene, now that you have all those price increases on the table for April and May, are you seeing any signs of pre-buying from your customers ahead of those price increases?

Albert Chao

I would think that with the high prices our customers would tend not to buy a lot of inventory. There could be a little bit of pre-buying but we are seeing a steady demand and inventory level, and our customers’ level being reasonable on the low side.

Operator

Your next question comes from Kevin McCarthy - Bank of America.

Kevin McCarthy - Bank of America

Albert, have you seen any product in the Vinyls market from the new Shintech facility in Louisiana yet, and if not, when might you expect that to start up?

Albert Chao

From what we’ve heard their plans have not started yet. It will be sometime later on in the second quarter.

Kevin McCarthy - Bank of America

Obviously the dollar has been very weak and we’ve been seeing higher export activity in general across the industry. Can you update us on how much of your PVC and polyethylene production Westlake is exporting these days?

Albert Chao

Yes, industry-wise, I think the polyethylene industry exports close to 20% of its products, and Westlake certainly exports much less than that. Historically we’re not a big exporter of products, both in the polyethylene and PVC side. And I think PVC that there are talks of between 10% and 15% of industries export it, and we export much less than that.

Kevin McCarthy - Bank of America

Has that percentage been trending upwards over the past year, Albert?

Albert Chao

Yes, I think the industry and Westlake has increased our export compared with a year, two years ago.

Kevin McCarthy - Bank of America

On PVC, you mentioned that the March proposed increase of $0.02 a pound is still being negotiated. So as you close your books for the first quarter I imagine you need make an assumption as to how much of that $0.02 will stick? Can you help us out with understanding what is embedded in the modest operating loss that you posted for Vinyls in the quarter?

Albert Chao

No, we do not record any increase on our books for first quarter.

Operator

Your next question comes from Charles Neivert - Morgan Stanley.

Charles Neivert - Morgan Stanley

Getting back to the exports, as you said, you’re doing a little bit more of it than you’ve done. Where would you put the pricing, not so much the number, but if you look at it against your U.S. sales, would it be at the top end, the bottom end, or somewhere close to the bottom end? Typically they’re lower end sales. Is this a little bit better than let’s say the worst customer sales in the domestic market, and a little bit better for export pricing?

Albert Chao

I think generally export pricing has been lower than the domestic pricing. But from a FOB U.S. point of view. But I think depending on how the price increases that we announced will go or not, and we think that the big part of them we will go through, and that will get the export pricing very close to domestic pricing.

Charles Neivert - Morgan Stanley

We’ve seen a fairly steep decline in the ethane pricing since the beginning of the year. I think it was about $1.12, $1.15 a gallon. It’s now right around 0.90, $0.91. Any idea, assuming it was flat from here and ethylene didn’t move, what would that likely be worth per pound of ethylene? I know you don’t sell ethylene but, if you work that through the chain, you have any idea, quick run as to what that might be worth in the quarter.

Albert Chao

Yes, I think every pound of ethylene takes approximately 1.3 pounds of ethane. And if natural gas, which is a big component of the energy cost to produce ethylene, does not change, you can pretty easily figure out what’s the benefit of a reduction in ethane price to the ethylene margin.

Charles Neivert - Morgan Stanley

Again if it goes flat from here, we’re going to see a very substantial gain in the ethylene margin so to speak assuming all other things being held equal.

Albert Chao

That’s right. But we do buy, also to make sure we understand, we do buy propane for our Calvert City ethylene plant, which is propane based, and we use a little bit of propane also in Lake Charles for our second ethylene plant. So that propane price has gone up, as we’ve said before.

Charles Neivert - Morgan Stanley

In the overall scheme of just the Lake Charles operations and I know it’s only one of the two crackers there, but how much propane do you buy for that cracker in terms of a percentage?

Albert Chao

Just the EP, we run the EP feed in our second cracker most of the time.

Charles Neivert - Morgan Stanley

Is that like an 85-15 type?

Albert Chao

80-20, 80 being ethane.

Operator

Your next question comes from Gregg Goodnight - UBS.

Gregg Goodnight - UBS

Do you have any logistical limitations for exporting, and if you don’t, what are your current operating rates for both the ethylene and polyethylene?

Albert Chao

I think the whole industry has seen, I will say, tightness in the export arena in terms of logistics, whether it’s real costs, bagging or getting enough container space. I think the fact that U.S. as I mentioned, the export increased along with maybe a decrease of imports with the slowed down U.S. economy, but I think that that system is being worked out as we speak. I think we are a net buyer of ethylene.

Our ethylene plants are running at flat out and both our Lake Charles ethylene plants are light feed, gas feed crackers, and they are very competitive compared with the naphtha based ethylene crackers, which has up to $0.10 or $0.20 a pound of higher costs as we see speak today.

Gregg Goodnight - UBS

But other than propane you’re not running any heavier feeds than propane I would assume?

Albert Chao

No, even though we do have feed flexibility ethane by far is the better feedstock; propane is next to it. I think naphtha and gas oil are the most expensive feedstocks today.

Gregg Goodnight - UBS

Would you update us on your capacity expansions for chlorine? My understanding is you have both incremental 50,000 ton expansion and then you’re potentially looking at a grass roots expansion, is that correct?

Albert Chao

Yes, we have announced the 100 million pounds or 50,000 short-term expansion in Calvert City which we expect to come on line in second half of 2009. And we are studying and planning for a grass roots plant in Louisiana.

Gregg Goodnight - UBS

How would you typify the status of that study right now?

Albert Chao

Ongoing.

Gregg Goodnight - UBS

Any projected timing for that plant.

Albert Chao

If it was being announced we would be expecting sometime in the 2010 range.

Operator

Your next question comes from Dave Silver - JP Morgan.

Dave Silver - JP Morgan

You rightly pointed out that even though natural gas and crude oil have risen year-to-date, the price of ethane in the U.S. Gulf has declined. Can you maybe just discuss from your purchasers’ perspective, first, maybe why you think that’s happened and second, the sustainability, and then if there are things you can do either in financial markets or using storage capability to exploit that cost position to the greatest extent?

Albert Chao

Ethane is derived from natural gas liquids and so, when ethane is taken out of natural gas, it is called shrinkage. You have to replenish with additional natural gas to fill up that BTU loss. So typically in the past, ethane has been priced from natural gas plus a cost of extraction. But because of the demand for ethane, ethane prices have started to decouple from natural gas prices and follow the high crude oil price. So ethane was almost twice the BTU value rather than close to the natural gas BTU value.

But since more ethane is produced and from that, and from the natural gas coming out of the Rocky Mountain area, other parts on the Gulf Coast, the supply of ethane has increased, yet the demand since there are no new ethylene plants built in the US, the demand is more or less maximized. And so with supply-demand out of balance, the price had to drop to, I think it’s still much higher than BTU value but a lot closer to it than it was in the fourth quarter, let’s say, of last year or even, big part of last year.

Dave Silver - JP Morgan

What can Westlake do or what strategies or tactics is Westlake using in today’s market, to exploit that or are you just playing the market, or watching the market as it progresses?

Albert Chao

We are running as much ethane as possible in our system, mainly in Lake Charles and hopefully the ethane price will go down further and make U.S., natural gas is to crude oil today is much cheaper in the US. And the U.S. does have a competitive advantage over the rest of the world, outside of Middle East and as a result U.S. is able to compete from export of polyethylene or other Olefin derived products from natural gas for those who are gas based crackers in the U.S.

Dave Silver - JP Morgan

About ethylene, polyethylene, you have a couple of arrangements where you produced ethylene that you used captively to make polyethylene, and then you also have a purchasing arrangement with Eastman Chemical. And my impression is for the Eastman portion of your business that the margins on that portion of your polyethylene business should be relatively stable.

So I was wondering if that was true or it has been stable, let’s say, over the last few quarters or year-over-year? And then secondly, I was wondering if Eastman’s announcement that they were further reducing or taking down another portion of their ethylene capacity at Longview whether that affects your relationship there?

Albert Chao

Normally we are buying ethylene from Eastman, and that’s a market-related pricing structure, and their ethylene along with the second facility ethylene hub pipeline to Longview. So whether we buy some Eastman or buy some other ethylene producers in the Gulf Coast we can deliver all the ethylene we need to Longview and certainly we are buying ethylene at market related prices.

Operator

Your next question comes from Mike Judd - Greenwich Consultants.

Mike Judd - Greenwich Consultants

The last piece of the $7.1 million that you were talking about that look likes it’s one-time in nature, that $2 million, was that associated with the Olefins unit or was that a corporate allocation or if one was going to add it back?

M. Steven Bender

Olefins unit.

Mike Judd - Greenwich Consultants

Your comments are very interesting in the context of ethylene capacity and North America being fairly static. But I’m curious what your perspective is on ethane prices over next six months or so related to basically switching out those flexi crackers, the ones that can crack either propane or ethane or naphtha, gas oil, to the extent that they obviously are moving towards cracking lighter feeds.

What’s the greater demand for ethane and as you think about that, is there a point at which the surplus, as you view it now, basically gets used up and then there could be a potentiality for higher ethane prices by mid-year or something? What are your thoughts about that please?

Albert Chao

There is not a clear view of NYMEX example on future gas prices. So the ethane future prices is not so clear. But as I said this advantage of ethane over let’s say, naphtha is not just this quarter. It has been there for quite a while. So whichever flexible practice, ethylene practice in U.S. that can use ethane would have used ethane to its maximum rates possible.

And you heard some ethylene plants in North America that were based on a smaller higher cost spend based on naphtha has being temporary shut-down or permanently shut-down. Being small gases produced in the US, gas price has remained low compared with oil as a result more ethane is produced and is purely a supply-demand balance.

And there is some discussion, even ethane content being L&G imported natural gas, it could also supply the U.S. market in the future. So all these supplies coming on stream with demand more or less being static would give ethane price and be more competitive further compared with the naphtha-based ethylene.

Mike Judd - Greenwich Consultants

I just don’t really have a very good sense of how much extra ethane there is relative to current ethylene, ethane cracking demand. So in terms of the supply and demand relationship right now, obviously you’ve seen sequentially a decline from fourth quarter to first quarter in the ethane price, which is obviously helpful.

But with this transition in the different types of crackers operating with different feedstocks, how big is the differential there in terms of supply and demand now and how do you think it could drop in a quarter or two out?

Albert Chao

There are various companies which have made sizeable investments in the US, adding pipelines, fractionators they will bring more ethane available to the Gulf Coast where the ethane is consumed, only for petrochemicals for ethylene production. And because it’s being announced, so we definitely feel that with added supply ethane price should be more competitive. Like I said earlier I feel the ethane price is still high and still huge margins for ethane producers.

Operator

Your next question comes from Roger Spitz - Merrill Lynch.

Roger Spitz - Merrill Lynch

What do you think Vinyls income would have increased in Q1 ‘08 versus Q4 ‘07 if Calvert City ethylene margins would have been constant over that period instead of, as I’ve assumed having been compressed?

M. Steven Bender

As a result of the rapid run up in propane?

Roger Spitz - Merrill Lynch

Yes.

M. Steven Bender

Well, I think when you take a look at the FIFO number that we had from fourth quarter, which really picked up the very rapid run up in all feedstocks, not only propane but obviously also ethane. There was a meaningful component of that $28 million in the fourth quarter that pertained to the Vinyl segment, that we see flowing through there in the form of cost of sales.

And so it certainly would have improved, and did improve, the margin in the Vinyl segment in the first quarter, but it gets mass because of the movement of the FIFO effect from the fourth quarter and the impact in the earnings in the first quarter.

Albert Chao

If I may add also, it takes approximately 2.4 pounds of propane to make a pound of ethylene, on a propane cracking and since you produce more propylene that is sold already at market price. So on cost point of view you can figure out what’s the price differences in propane and times 2.4 in pounds now that will be impact.

Roger Spitz - Merrill Lynch

Do you have any VCM export capability say in the Geismar or something?

Albert Chao

VCM, the Geismar we used all the VCM internally to produce PVC, though we don’t export VCM from Geismar.

Operator

You have a follow-up question from Dave Silver - JP Morgan.

Dave Silver - JP Morgan

Steve, could you discuss the upcoming turnaround of the ethylene cracker? Do we know the timing of that and I was wondering if you could discuss the duration and the expected effect of that on reported results?

M. Steven Bender

We’ve got a turnaround that we’ve talked about moving, probably about a 30 day outage would be planned about 100 million pound and that will be in the first half of 2009. We talked earlier and said that has been planned to be in ‘08 but as I said we’ve now scheduled that to be in the first half of 2009 and that would be the 30 day turnaround.

Dave Silver - JP Morgan

What does that change do to your capital budget CapEx projections for this year? Does that push some dollars out of this year and into ‘09?

M. Steven Bender

It doesn’t really have a material impact. The turnaround capital isn’t a sizable portion of the capital spending we had for ‘08. The ‘08 capital spending plan was $175 million to $200 million and as Albert mentioned earlier we have a number of expansions in our Vinyls business both in Yucca and in Calvert City that make up the preponderance of the CapEx this year.

Dave Silver - JP Morgan

And of that total this year how much do you think applies to the restricted portion of your cash?

M. Steven Bender

When you think about the categories of our spend, maintenance spend and then what I would call new capital, our maintenance spend on an annual basis is about $60 million and the bulk of that would be in the Lake Charles area which would qualify. And then there will certainly be some reasonable spend at styrene turnaround and some of its capital cost would also qualify that were spent earlier this past quarter and the first quarter.

Dave Silver - JP Morgan

Tax accrual rate, it’s been a little bouncy from quarter-to-quarter. But last couple of quarters it’s been in the very low 30s, is that the right number for projecting forward or is the mid 30s?

M. Steven Bender

This quarter it was a 30% effective tax rate but it was lower because we had some state tax credits. I would give again guidance on effective rate to be in the 35%, 36% rate on a cash tax basis still about 30%.

Dave Silver - JP Morgan

And just to clarify 35% to 36% including the first quarter or just moving forward?

M. Steven Bender

No, for the entire year.

Operator

At this time, the question-and-answer session has now ended.

David R. Hansen

Thank you very much for joining us with today’s call. We hope to have you for our next conference call to discuss our second quarter 2008 results. Have a great day. Thank you.

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Source: Westlake Chemical Corporation Q1 2008 Earnings Call Transcript
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