Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Westlake Chemical Corp. (NYSE:WLK)

Q2 2008 Earnings Call

August 5, 2008 11:00 am ET

Executives

Dave Hansen - SVP, Administration

Albert Chao - President and CEO

Steve Bender - SVP, CFO and Treasurer

Analysts

Kevin McCarthy - Banc of America Securities

Nils Wallin - Credit Suisse

Mike Judd - Greenwich Consultants

Gregg Goodnight - UBS

Jim Friedland - Deutsche Bank

David Silver - JPMorgan

Operator

Welcome to the Westlake Chemical Corporation second quarter 2008 Earnings Call. During the presentation all participants will be on a listen-only mode. After the speakers remarks you will be invited to participate in the question-and-answer session. As a reminder ladies and gentlemen this conference is being recorded today August 5th, 2008.

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

Dave Hansen

Thank you very much and good morning everyone. Thank you for joining us for the Westlake Chemical Corporation second 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 second quarter. Steve will then provide you with a more detailed look at our financial and operating results. Albert will conclude with the discussion of recent developments, and then we will open up the call 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, 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 market; 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 August12th, 2008. The replay may be accessed by dialing the following numbers.

Domestic callers should dial 1-888-286-8010. International callers may access to replay at 617-801-6888. The access code for both numbers is 52344617. Please note that information reported on this call speaks only as of today, August 5th, 2008, and therefore you are advised that time sensitive information may no longer be accurate as of the time of the replay. I will advice you that this conference is being broadcast live through an internet webcast system that can be accessed on our web page at www.Westlake.com.

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

Albert Chao

Thank you, Dave. Good morning ladies and gentlemen, and thank you for joining us. In this morning's press release, we reported second quarter earnings of $0.72 per diluted share, which was up from the $0.58 per diluted share reported in the second quarter of last year, and significantly higher than the $0.08 per diluted share reported in the first quarter of 2008.

Sales for the quarter were a record high at $1.1 billion driven by, higher product prices and strong volumes in both our Olefins and Vinyls segments. Margin improved as recent price increases out paced higher feedstock costs on higher sales volumes.

In the Olefin segment we implemented polyethylene price increases of $0.06 per pound in the April, May timeframe and an additional $0.05 in June which improved our margins. Ethane and propane feedstock costs continue to increase into the third quarter and to offset these increases, we have implemented a $0.07 per pound polyethylene price increase in July, an additional $0.08 per pound price increase in August, and we have announced a $0.05 per pound increase for September.

We have also announced a fuel surcharge for railcar and truck shipments of our chemical products beginning in September. These fuel surcharges will help us recover increases in transportation costs. Polyethylene prices in Asia continue to increase during the second quarter, due to high naphtha feedstock costs.

Natural gas based feedstock still remain advantaged over oil-based feedstock, such as naphtha for ethylene producers. Thus North American producers are continuing to export polyethylene which helps in maintaining a strong supply demand balance in the US.

On the Vinyl side of the business; PVC resin prices moved up during the second quarter with a $0.02 per pound price increase implemented in the March April timeframe, and an addition of $0.02 a pound increase in May. In addition, we have also implemented a $0.08 per pound increase for the July August timeframe. Caustic demand continues to strengthen with prices exceeding $600 per ton in the second quarter and further price increases up to $240 per ton had been announced for the third quarter.

Second quarter PVC resin and pipe sales volumes increased significantly after coming out of seasonal slowdown and extended winter conditions in some parts of the country and construction activity resumed. In spite of this, PVC pipe prices have not been able to keep pace with the rising feedstock costs and the weakness in the housing and construction markets continues to negatively impact the margins in the Vinyl segment.

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

Steve Bender

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

I will begin with our consolidated results. We reported operating income of $74 million on sales of $1.1 billion in the second quarter of 2008, as compared to operating income of $14 million on sales of $915 million in the first quarter of 2008, which was unfavorably impacted by several one-time items, totaling $7 million.

Our net income in the second quarter of 2008 was $47 million, or $0.72 per diluted share, compared to net income of $5 million, or $0.08 per diluted share, in the first quarter of 2008. The net income this quarter benefited from the reversal of $3 million of tax reserves due to tax settlements, which reduced income tax expense and lowered our effective tax rate to 29% for the quarter.

Now let's look at the year-to-date results.

Operating income for the first half of 2008 was $87 million on sales of $2 billion, as compared to operating income of $95 million on sales of $1.5 billion in the first half of the prior year. Net income for the first half of the year was $53 million, or $0.81 per diluted share, as compared to net income of $58 million, or $0.88 per diluted share, last year.

Selling, general and administrative expenses decreased slightly in the first half of 2008, as compared to the first half of 2007, while interest expense increased year-over-year due to the issuance of our $250 million of tax-exempt bonds issued in December of last year.

Now turning to our balance sheet, I will highlight a few key items.

Capital expenditures for the first six months, totaled $82 million. In addition, we incurred capitalized turnaround cost at our styrene facility, totaling $16 million. Our long-term debt was $549 million, which reflects our $250 million tax-exempt bond issued in December 2007.

The balance sheet also reflects a restricted cash balance of a $146 million, representing monies in escrow from the unused portions of these bonds that will continue to provide the liquidity to fund capital projects in Louisiana over the next several years. Our net debt to total capitalization ratio still remains low at 20%. We estimate our capital spending for the full year 2008 will be in the $175 million to $200 million range.

Now let's talk about FIFO accounting. We utilize FIFO or the first-in,-first-out, method of inventory accounting as to many of our public company peers. Therefore, our second quarter operating income benefited from selling inventories that were based on the feedstock cost, that were lower than what have been realized had LIFO accounting being utilized, of course, cash flow operations is not effected by which inventory accounting method is employed.

Now turning to our Olefin segment; our Olefin segment reported operating income of $58 million on sales of $766 million during the second quarter, as compared to operating income of $20 million on sales of $661 million reported in the first quarter of 2008. These results included a $7 million trading loss in the second quarter. This increase is primarily due to higher selling prices and strong volumes for polyethylene and styrene.

While it is domestic and export demand remain strong and we implemented price increases totaling a $0.11 per pound in the quarter to pass along increases in feedstock cost and improved margins. We have begun to see improvement in our styrene operations, as styrene prices and margins moved up in the second quarter, as compared to the first quarter.

As I mentioned in our last call, we conducted styrene turnaround and completed a revamp project in the first quarter. The revamp project improved energy efficiency and modestly boosted capacity.

On a year-to-date basis, our Olefin segment reported operating income of $78 million on sales of $1.4 billion, as compared to operating income of $70 million on sales of $1 billion reported in the first half of 2007. Higher polyethylene and styrene prices partially offset by higher feedstock cost in the first half of 2008, as compared to the first half of 2007 resulted in higher margins.

The first half of 2008 was negatively impacted by trading activities resulting in a $7 million loss as compared to a $5 million gain in the first half of 2007. The first half of 2008 was also negatively impacted by the styrene turnaround in revamp project, while the first half of 2007 was negatively impacted by a turnaround at one our ethylene units in Lake Charles, Louisiana.

Now let me turn to the Vinyl segment. Our Vinyl segment reported operating income of $18 million on sales of $340 million during the second quarter, as compared to an operating loss of $3 million on sales of $254 million reported in first quarter of 2008. PVC resin prices moved up during the second quarter as we were able to implement a $0.02 per pound increase in the March, April timeframe and an additional few cents increase in May.

Our sales volumes for PVC resin increased during the second quarter and we are able to deliver higher margins from our PVC resin sales this quarter. Again, our feedstock costs have continued to rise, we have now implemented a $0.08 per pound increase for the July, August timeframe.

We saw significant increase in PVC pipe sales volumes during the second quarter, as the extended winter conditions in parts of the country subsided. In spite of strong increases in demand, average PVC pipe selling prices for the quarter decline slightly, as compared to the first quarter. The weakness in the domestic housing and construction markets, and the effects they are having on the economy, continue to negatively impact our PVC pipe business.

The weakness in demand for PVC, have led to reduce demand for chlorine, which in turn has resulted in tight supplies for caustic. Caustic prices continue to climb in the second quarter exceeding $600 per ton. Additional, price increases for caustic have been announced for third quarter up to $240 per ton.

On a year-to-date basis, our Vinyl segment reported operating income of $15 million on sales of $595 million, as compared to operating income of $29 million on sales of $502 million reported in the first half of 2007. The decrease year-over-year is primarily due to increases in feedstock cost for the propane and ethylene.

While we have seen substantial increases in PVC resin, and caustic pricing, PVC pipe prices have not been able to keep pace with increases in feedstock cost.

Now, I will turn the call back over to Albert. Albert?

Albert Chao

Thanks, Steve. First, let me provide an update on the status of a number of our strategic initiatives, and then I will discuss the outlook for the industry. As discussed in our last call, work continues on several projects in our Vinyl segment which includes expansions of our chlor-alkali unit and our PVC resin plant in Calvert City, Kentucky.

A large diameter PVC pipe facility located in close proximity to our PVC resin plant in Calvert City and a PVC pipes facility in Yucca, Arizona, to serve to western region of the US which have not actively participated. These projects will all add to our Vinyl's integration strategy.

Now I want to talk about the status of our turnarounds in our Trinidad project. As mentioned in our last call, we plan to perform a maintenance turnaround at one of our ethylene units in Lake Charles in the first half of 2009, which will coincide with a number of energy savings capital projects associated with unit at a time.

We will keep you updated on the timing of the turnaround. As to our Trinidad project, we continue to study the project and I will update you when more progress is made.

Now let's talk about the outlook for industry. On the Vinyls front, the domestic housing and related credit problems are continuing and have had a negative impact on our Vinyls segment, even though only about 20% of our downstream products go directly into that sector. There were some positive signs in the second quarter, with PVC resin price increases, and increases in PVC resin and pipe sales volumes.

In addition, the slowdown in demand for PVC has led to reduced demand for chlorine, which in turn has result in tight supplies of caustic. The resulting caustic price increases have proved to be a valuable hedge against a weak Vinyls market. In spite of these improvements, PVC margin remained under pressure. We must remain cautious about the outlook for Vinyls in the coming year, given the weakened demand and capacity increases expected to come online this year.

Now let's turn to Olefins, while they are risks steps high crude oil prices compound with housing and credit profits in the US they hamper US polyethylene industry's ability to raise prices sufficiently to offset rising feedstock costs. We continue to see strong domestic and export demand.

As a result of the continuing rising feedstock prices, we implemented a $0.07 per pound price increase in July and $0.08 per pound increase in August and have announced an additional $0.05 per pound increase for September along with the fuel surcharge effective September 1st for our chemical products.

As naphtha-based ethylene producer around the world continue to set the floor price for polyethylene, high crude oil prices and a weaker US dollar continue to give US gas-based ethylene producers, such as ours, a cost advantage which will continue to provide an export market, while keeping the supply demand balance in the US strong.

In conclusion, we continue to focus on energy efficiency, low cost incremental capacity, expansions, and a favorable feedstock profile and enhanced integration, which will position the company well when economic conditions improve. Thank you very much.

Now let me turn it back over to Dave Hansen.

Dave Hansen

Thank you, Albert. Before we begin taking questions, I would like to remind you that a replay of this teleconference will be available starting an hour after we conclude the call. We will provide that number again at the end of the call. Operator, we are now prepared to take questions.

Question-and-Answer Session

Operator

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

Kevin McCarthy - Banc of America Securities

Yes, good morning. The volume numbers on PVC resin at least for the segment came in fairly strong at positive 12.5%. Just wondered if you could comment on your utilization rate in that business and whether or not you feel as though you gained any market share from competitors?

Albert Chao

Well, our second quarter was a strong volume quarter for our Vinyls business and we have been running at a operating rate somewhat higher than what we read industry reported from, there is trade journals and we participate also somewhat in the export market even though at a somewhat lower rate than industry average.

Kevin McCarthy - Banc of America Securities

Albert, do you believe that second quarter volume is benefited at all from the late winter and perhaps the furlough of business from 1Q?

Albert Chao

Definitely, yes. The 1Q was a very slow month because of the bad weather and seasonal slowdown and we had really improved in second quarter.

Kevin McCarthy - Banc of America Securities

Okay. Then on the ethylene side, feedstocks as of yesterday anyway look like you are actually down versus June 30th levels for ethane and propane. Can you comment on the realizations of the announcements that you made, in other words overall $0.07 in for July and what is your expectation for August on an industry wide basis?

Albert Chao

Yes. I think some of the trade journals reported that $0.07 in July, the third quarter number, we implemented $0.08 well. As you know, the feedstock volatility has been quite difficult to predict and it takes time to implement price increases in the PE business. So, I think the $0.08 announcement is in line with recent price increase we have seen in the ethane and propane costs.

Kevin McCarthy - Bank of America Securities

Okay, great. Then finally if I may for Steve, what was the magnitude of the FIFO accounting related benefit in the quarter, please?

Steve Bender

Yes, I would estimate the effect to be somewhere in the range of $0.33 to $0.36.

Kevin McCarthy - Bank of America Securities

Okay. Thank you very much.

Operator

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

Nils Wallin - Credit Suisse

Good morning. This is actually Nils Wallin sitting in for Mark.

Steve Bender

Good morning.

Nils Wallin - Credit Suisse

I also had a question on volume. Mainly on the Olefins business, it seems like you had substantial acceleration both on a year-over-year and a sequential basis in terms of growth that was much better than some of what your competitors had reported. To what would you attribute these results?

Albert Chao

I think this bodes of strong demand in the domestic and export market for the industry and for Westlake, and possibly with a price increases announced that some customers could be buying bit more than usual.

Nils Wallin - Credit Suisse

Would you say, would it be a fair assessment to say that because you are more heavily weighted toward the lighter feedstocks relative to some of your competitors who are on the Gulf Coast, who are more flexible that you had the opportunity to offer competitive volumes?

Albert Chao

I can not say about our competitors. Suddenly as you know, our ethylene crackers all light feed namely ethane and propane crackers. So yes, we are more competitive than outside crackers. As how they operate their polyethylene plants, I do not know.

Nils Wallin - Credit Suisse

Alright, just one final question if I may. I mean from everything we are hearing and reading, it sounds like the commercial construction market is pretty anemic and it might get worse as municipal spending on infrastructure is drying up, certainly projects that were already in the pipeline are happening. What is your view right now on the market place for commercial construction for municipal infrastructure and particularly large diameter pipe?

Albert Chao

Yes, we are concerned general with the construction, as you know residential construction has been slow. The commercial industrial construction has been stronger definitely than residential side. We are concerned about the economy in general and tax revenue we see spun in municipalities. I will say that our large diameter pipe demand is better than the small diameter pipe demand.

Nils Wallin - Credit Suisse

You are welcome.

Operator

Your next question comes from the line of Mike Judd with Greenwich Consultants. Please proceed.

Mike Judd - Greenwich Consultants

Yes, thanks for taking my question. Just a quick one how much of the Vinyl's profit in the quarter, how much of that was the chlor-alkali piece please?

Steve Bender

We have about 225,000 short tons of ECU capacity. You can figure out what that capacity will contribute in earnings.

Mike Judd - Greenwich Consultants

I mean any more specific percentages or anything like that, that you could help to start with?

Steve Bender

Mike, we just do not break out that number at that level of detail.

Mike Judd - Greenwich Consultants

Thanks for the help.

Steve Bender

With the transparency in the business, in the volume, and in the price, I think you get to that number.

Mike Judd - Greenwich Consultants

Okay, thanks.

Operator

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

Gregg Goodnight - UBS

Good morning all.

Steve Bender

Good morning.

Albert Chao

Good morning.

Gregg Goodnight - UBS

A question on your large diameter pipe facility, what is your anticipated start up timing of that plant and if I were,

let say a $50 million pound a year plant. When would you anticipate that plant getting up to reasonably to full rates?

Albert Chao

We are in the process of starting that plant up as we speak. Depending on the market dynamics, we hope we will be running at full rate, as soon as possible.

Gregg Goodnight - UBS

Okay. So in your last question, you said that the large diameter pipe market place is still pretty strong; is that correct?

Albert Chao

Yes.

Steve Bender

Yes.

Gregg Goodnight - UBS

Okay. Now another response that you had, you said that the $0.07 July increase for polyethylene was reported to be in the market place by some of the consultants. In my own checking that is not generally understood to be a 100% in place by many market participants, is that your own view also that the $0.07 in place or is that just what the consultants have reported?

Albert Chao

Well, as you know in our industry, as I mentioned earlier there are various pricing announcements and price protection. So from that sense it is that various people have different deals that are coming plays in different time. In general I think the $0.07 is being implemented.

Gregg Goodnight - UBS

Okay. The large customers, have they taken the whole $0.07?

Albert Chao

That is what I said.

Gregg Goodnight - UBS

Okay. Thank you for your help.

Albert Chao

You are welcome.

Operator

Your next question comes from the line of Jim Friedland with Deutsche Bank. Please proceed.

Jim Friedland - Deutsche Bank

Yes, hi. Can you quantify how much the fuel surcharges would be in coming September?

Albert Chao

The fuel charge I think right now is about $570 per hoper cart which is about approximately $0.03 a pound of product.

Jim Friedland - Deutsche Bank

Okay. Would you also give us a little color on the $7 million trading loss, what is that comprised of?

Steve Bender

Well, we typically go out and manage our feedstocks and certainly as the volatility of these markets swing up and down, that is simply just mark-to-market of those transactions that we use to hedge that or entertain transactions to hedge that feedstock.

Jim Friedland - Deutsche Bank

Okay. Then finally on the PVC pipe volume increase that you saw, does that reflect normal seasonality or would you say it was up higher than a normal quarter-on-quarter increase?

Albert Chao

It does reflect normal seasonality, as you take the first quarter and second quarter combined; it is then become more normal. First quarter was abnormally slow.

Jim Friedland - Deutsche Bank

Okay. Thank you very much.

Albert Chao

You are welcome.

Operator

Your next question comes from the line of David Silver with JPMorgan. Please proceed.

David Silver - JPMorgan

Hi, good morning.

Albert Chao

Good morning.

David Silver - JPMorgan

Okay. I have a couple of questions little bit scattered. I would like to follow up on Mike Judd's question, I think about caustic. So my notes are little scratchy, but Steve can you confirm, did you indicate that your caustic realizations were north of $600 for the quarter or were you quoting the benchmark numbers in the back of your release?

Steve Bender

Those are benchmark numbers.

David Silver - JPMorgan

Okay, all right. Then I was wondering if you would clarify a level of export activity in the shipments number you reported. So you mentioned that it was a little stronger in polyethylene, and you are below the market averages in Vinyls. I mean, overall was this a period were Westlake was able to access the export markets proportionately greater than you normally do?

Albert Chao

We export both polyethylene and PVC, but generally at lower, much lower rate than industry average.

David Silver - JPMorgan

That was consistent for the quarter as well?

Albert Chao

Yes, right.

David Silver - JPMorgan

That is okay. Not an unusual amount from your normal business. Then within Vinyls, I was interested if you could add a little more color maybe into the end markets for your downstream fabrication business. So we know certain parts of the markets are certainly soft, but you did record some very nice volume gains even on a year-over-year basis. So I was wondering are there certain segments, is it repair and remodeling or is it municipal business, I mean where were you able to grow your volume within the fabricated products market?

Albert Chao

Yes. Our fabricated products market consists mainly of PVC price that is the majority of our business. We do have a window and fence and decking business which are much smaller than pipe. We generally serve the non-residential site, residential site of small diameter pipe, it is about 20% of our pipe business. So we go to the wardens who market generally.

David Silver - JPMorgan

Okay. Albert, you do have an operation in China and you do get a little bit of snapshot of what is going on there. There has been some talk that maybe there is a slowdown in economic activity in that region or in that country. From your take-on things, how would you describe the demand overall for final and then polyethylene in Asia, the part of it that you see?

Albert Chao

Yes. From what I understand the economy is still pretty strong in China. Demand for polyethylene import is still strong. Our PVC joint venture we have consists of PVC resin and PVC fabricated film business mainly and the business is doing okay. I think the film business had seen slowdown for export because of the slowdown in US and other foreign developed markets, but generally speaking the economies are going pretty strong.

David Silver - JPMorgan

Would you say that the Olympics or decisions that the government has made really guarded the Olympics as it had a noticeable effect, and would you expect activity to rebound after that event?

Albert Chao

Yes, we heard that. China is a large country, northern markets near Beijing, some of those fabricated plants has either slowdown or shutdown. The demand for plastic resin has slowdown somewhat in northern part, but in the rest of the country, I think business goes on. China, as you know, has tried to slow down its export business by withdrawing some of the subsidies and refunds, rebate, [DAT] it has had some effect on the export market as well.

David Silver - JPMorgan

Thank you very much.

Albert Chao

You are welcome.

Operator

(Operator Instructions).

Albert Chao

Ladies and gentlemen, we thank you very much for joining us today in our conference call. We hope you will join us again for our next conference call to discuss our third quarter results. Have a great day.

Operator

Thank you for participating in today's Westlake Chemical Corporation second quarter earnings call. As a reminder, this call will be available for replay beginning an hour after the call have ended and may be accessed until 1.00 PM Eastern Standard Time on Tuesday, August 12th. A 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 52344617.

Thank you for your participation. You may now disconnect and have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Westlake Chemical Corporation. Q2 2008 Earnings Call Transcript
This Transcript
All Transcripts