Westlake Corporation (WLK) Q1 2016 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Chemical Corporation First Quarter 2016 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. After the speakers' remarks, you'll be invited to participate in a question-and-answer session. As a reminder, ladies and gentlemen, this conference is being recorded today, May 3, 2016. I would now like to turn the call over to your host, Ben Ederington, Westlake's Vice President and Chief Administrative Officer. Sir, you may begin. L. Benjamin Ederington - Vice President, General Counsel, Chief Administrative Officer & Corporate Secretary: Thank you. Good morning, everyone, and welcome to the Westlake Chemical Corporation first quarter 2016 conference call. I'm joined today by Albert Chao, our President and CEO; Steve Bender, our Senior Vice President and Chief Financial Officer; and other members of our management team. The conference call agenda will begin with Albert, who will open with a few comments regarding Westlake's performance in the first quarter of 2016, followed by a current perspective on the industry. Steve will then provide a more detailed look at our financial and operating results. Finally, Albert will add a few concluding comments, and we will open up the call up to questions. During this call, we refer to ourselves as Westlake Chemical. Any reference to Westlake Partners is to the master limited partnership, Westlake Chemical Partners LP. And references to OpCo refers to our subsidiary, Westlake Chemical OpCo LP, who owns certain olefin facilities. 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 many factors, including the cyclical nature of the chemical industry; availability, cost, and volatility of raw materials, energy and utilities; governmental regulatory actions and political unrest; global economic conditions; industry operating rates; the supply/demand balance for Westlake's products; competitive products and pricing pressures; access to capital markets; technological developments; and other risk factors discussed in our SEC filings. This morning, Westlake issued a press release with details of our first quarter 2016 results. This document is available in the Press Release section of our webpage at westlake.com. A replay of today's call will be available beginning two hours after completion of this call until 11:59 PM Eastern Time on May 10, 2016. The replay may be accessed by dialing the following numbers. Domestic callers should dial 1-855-859-2056. International callers may access the replay at 404-537-3406. The access code for both numbers is 90251315. Please note that information reported on this call speaks only as of today, May 3, 2016 and therefore you are advised that time-sensitive information may no longer be accurate as of the time of any replay. I would finally advise you that this conference call is being broadcast live through an internet webcast system that can be accessed on our webpage at westlake.com. Now, I'd like to turn the call over to Albert Chao. Albert? Albert Yuan Chao - President, Chief Executive Officer & Director: Thank you, Ben. Good morning, ladies and gentlemen, and thank you for joining us on our earnings call to discuss our first quarter 2016 results. In this morning's press release we reported quarterly net income of $123 million or $0.94 per diluted share, our net sales of $975 million. Our quarterly results reflect lower integrated margins for our major products as sales price decreased following the continued decline of global crude oil prices, which are down by over 30% from the first quarter of 2015. Crude oil prices have started to rebound from these low levels, which we expect will move product prices higher. We continue to benefit from strong global demand for our products, as we saw higher sales volumes for polyethylene, PVC resin and building products, along with the benefit of lower cost feedstock compared with the prior year period. Overall, our segments performed well in the first quarter, and the investments that we have made over the past several years to integrate our product chains to lower our cost position have meaningfully contributed to our results. Our Vinyls segment delivered a good quarter, as we saw improving demand and margins with our expanded and more integrated Vinyls business in the U.S. which allowed our Vinyl segment to capture a greater portion of the integrated Vinyls margin. Additionally, our European operations benefited from higher product margins as a result of continued strong demand and lower ethylene feedstock costs. In our Olefins segment, we continue to see positive contribution from our investments in incremental ethylene capacity, which allows us to capture value from low cost gas-based feedstocks and our growing specialty polyethylene product mix. I would now like to turn our call over to Steve to provide more detail on the financial and operating results for the first quarter 2016. Steve? Mark Steven Bender - Senior Vice President, Chief Financial Officer & Treasurer: Thank you, Albert. And good morning, everyone. I will start with discussing our consolidated financial results, followed by a detailed review of our Olefins and Vinyls segment results. Let me begin with our consolidated results. In this morning's press release, Westlake reported net income for the first quarter of 2016 of $123 million or $0.94 per diluted share on net sales of $975 million, compared to the first quarter of 2015 net income of $146 million or $1.10 per diluted share on net sales of $1.1 billion. Net sales for the first quarter of 2016 decreased by $128 million compared to the first quarter of 2015, mainly due to lower sales prices for all of our major products, partially offset by higher sales volumes for polyethylene and most of our major Vinyls products. First quarter 2016 income from operations was $202 million, which was $27 million lower than operating income in the first quarter of 2015, mainly due to lower North American integrated product margins primarily as a result of the decline in sales prices for all of our major products, following the decline in crude oil prices. This was partially offset by lower feedstock and energy cost, higher product margins for our European operations and higher production rates at our chlor-alkali facilities as compared to the first quarter of 2015. Compared to the fourth quarter of 2015, sales revenue in the first quarter of 2016 of $975 million decreased by $12 million, while income from operations of $202 million increased by $21 million. The increase in operating income was mainly due to continued good demand and resulting higher sales volumes for polyethylene and PVC, and higher operating rates for most of our facilities. Our utilization of the FIFO method of accounting resulted in a favorable impact of $5 million pre-tax or $0.03 per share in the first quarter compared to what earnings would've been if we reported on the LIFO method. Please bear in mind that this calculation is only an estimate and has not been audited. Let's move on to review the performance of our two segments, starting with the Olefins segment. In the first quarter of 2016, the Olefins segment reported income from operations of $149 million and sales of $431 million, compared to operating income of $191 million and sales of $583 million in the first quarter of 2015. The decrease in results was mostly due to lower Olefins integrated product margins, primarily as a result of reduced sales price, partially offset by higher polyethylene sales volume and lower feedstock and energy cost. Demand for polyethylene improved late in the first quarter of 2016 as crude oil prices began to rebound, and the ethylene market tightened due to the upcoming turnaround season. As a result of this improved demand, industry announced a $0.05 per pound polyethylene price increase in March, and a second price increase of $0.04 per pound has been announced for April. First quarter operating income of $149 million increased by $10 million compared to the fourth quarter of 2015, while sales of $431 million decreased by $37 million. The rise in operating income was primarily attributable to higher polyethylene sales volumes and improved operating rates. Results for the fourth quarter of 2015 were negatively impacted by several polyethylene turnarounds. Now moving on to the Vinyls segment. The Vinyls segment reported operating income of $62 million in the first quarter of 2016, and sales revenue of $544 million, compared to operating income of $47 million on sales of $520 million in the first quarter of 2015. These improved results were mainly due to higher product margins at our European operations and higher U.S. caustic soda sales volumes as compared to prior-year period. The Vinyls segment operating income of $62 million in the first quarter of 2016 increased by $10 million over the fourth quarter of 2015, while sales of $544 million increased by $25 million. The improved results were due to higher PVC sales volumes and improved operating rates. As a result of the solid demand, industry implemented a PVC price increase of $0.04 per pound in March, and $0.04 per pound increase has been announced for April. Now let's turn our attention to our balance sheet and cash flow. Cash generated from operating activities in first quarter of 2016 was $129 million, and we spent $136 million on capital expenditures. At the end of the first quarter, we had cash and marketable securities of approximately $1.1 billion, and our long-term debt was approximately $758 million. Now let me provide you some guidance for modeling purposes. Our estimate for 2016 capital expenditures is in the range of $500 million to $550 million, which we will fund from our cash balances. This includes spending for expansion of our Petro 1 ethylene unit in Lake Charles, Louisiana, which will begin in mid-April and is expected to last for approximately 80 days. This also includes early engineering work and the purchase of long lead items related to the expansion of our Calvert City, Kentucky ethylene unit that we announced in January and which is planned for the first half of 2017. We estimate that our second quarter 2016 income from operations will be impacted by loss production and associated cost from the Petro 1 plant maintenance turnaround and expansion project, another planned turnaround activity of approximately $65 million which will primarily impact our Olefins segment. Once completed, this project will add 250 million pounds of additional ethylene capacity to our Lake Charles site. Looking to the third quarter, we expect our operating income to be additional impacted by $15 million to $20 million due to planned turnaround activity in our other Olefins and Vinyl units. We estimate that our 2016 effective tax rate for the year will be approximately 35%. With that, I will turn the call back over to Albert to make some closing comments. Albert? Albert Yuan Chao - President, Chief Executive Officer & Director: Thank you, Steve. We are pleased with our first quarter results which benefited from strong demand for polyethylene and PVC products and from low cost gas based feedstock prices. We are actively engaged in the next phase of our integration strategy as we began work on out Petro 1 ethylene expansion project a few weeks ago, and are on track to complete our capacity ethylene expansion in the first half of 2017. These two projects, along with other incremental expansion projects, will add 350 million pounds of additional ethylene capacity to our portfolio, lengthening our product integration and allowing us to further capture the full Olefins and Vinyls chain value. We remain confident in our long-term outlook and bring underlying economic growth and demand for our products will continue to strengthen. We are focused on creating value for our shareholders and we remain disciplined as we look at opportunities to grow our businesses. We continue to maintain a strong balance sheet, which allows us to pursue both our expansion plans and other future growth opportunities as they arise. I would like to make some brief comments regarding our proposal to acquire Axiall Corporation. As I'm sure you're all aware, on April 4 we announced that we had increased a proposal to acquire all of the outstanding shares of Axiall for $23.35 per share in cash and stock, after Axiall allowed us to conduct due diligence. The revised proposal which reflects increased potential synergies of $90 million to $100 million per year was summarily rejected by Axiall's Board of Directors without making a counter proposal or otherwise providing us with any meaningful feedback. Instead, Axiall continues to pursue a sale of its building products business which we are concerned could negatively impact Axiall's remaining business and reduce potential synergies. Based on Axiall's response and unwillingness to negotiate, and the feedback we received from its shareholders in support of a combination of our two companies, we are proceeding with soliciting proxies to elect new slate of nine independent and highly qualified candidates to Axiall's Board of Directors at Axiall's upcoming Annual Meeting. The nine independent nominees each have impressive track records with significant experience as public company directors and executives at major global corporations, and will bring a fresh perspective to evaluating all of Axiall's options. We believe that our proposal represents the best value creation strategy for Axiall's shareholders, and is far superior to its standalone plan. A combination of Westlake and Axiall will create one of the leading North America olefins, vinyls and building products producers. With increased scale in their growing global vinyls market, and with additional growth opportunities for our combined company by including Westlake stock in our proposed consideration, both Axiall and Westlake shareholders would be able to enjoy the meaningful synergies from this combination. That's all we have to say on our proposal today. We would like to focus our question-and-answer session on Westlake's financial and operational results, and ask that you please keep your questions to the same topic. Thank you very much for listening to our earnings call this morning. Now, I will turn the call back over to Ben. L. Benjamin Ederington - Vice President, General Counsel, Chief Administrative Officer & Corporate Secretary: Thank you, Albert. Before we begin taking questions, I would like to remind you that a replay of this teleconference will be available starting two hours after we conclude the call. We will provide that number again at the end of the call. Operator, we're now prepared to take questions.

Thank you. Our first question comes from the line of Don Carson of Susquehanna Financial. Your line is now open.

Yes, a question on your Vinyls business, specifically caustic. You show benchmark pricing as down, just wonder what your realizations were and also what you're expecting for caustic pricing in the second quarter with all of the pricing issues that you have. And just as a follow-on, you did mention you had higher U.S. caustic sales; does that mean you're participating in exports or was this all domestic business? Albert Yuan Chao - President, Chief Executive Officer & Director: Yes. In the first quarter, op (17:54) caustic prices went down in the U.S. and now we have – industry is down so $75 a ton of price increase for the first and second quarter. The volume has improved for our caustics business, and we have not participated in any amount for export.

And then on the Olefins side, with your outage at Petro 1, did you rebuilding a sufficient inventory of polyethylene to see you through that in Q2, or are your inventories below normal levels as you come into the seasonally strong second quarter? Albert Yuan Chao - President, Chief Executive Officer & Director: We have a reasonable inventory in polyethylene to satisfy our customer needs during the year.

Thank you. Albert Yuan Chao - President, Chief Executive Officer & Director: You're welcome.

Thank you. Our next question comes from the line of Frank Mitsch of Wells Fargo Securities. Your line is now open.

Hey, good morning. Albert Yuan Chao - President, Chief Executive Officer & Director: Good morning. Mark Steven Bender - Senior Vice President, Chief Financial Officer & Treasurer: Good morning.

Albert, you were talking about polyethylene improving late in Q1. I was wondering if you could offer some commentary on what you're seeing here in Q2 and your expectations in terms of pricing. Albert Yuan Chao - President, Chief Executive Officer & Director: Certainly. As Steve mentioned, there was a $0.05 a pound increase went in effect in March, and further for April there's $0.04 a pound price increase. And the demand has been very strong. ACC came out with the polyethylene demand also the mass consumption export being quite strong. And we see continued spend going into May.

So you realized the $0.05 in March; you expect to realize the $0.04 in April. Is that fair for us to surmise? Albert Yuan Chao - President, Chief Executive Officer & Director: Yes.

All right, great. And then can you offer the same sort of commentary on what you are seeing on the PVC side? Albert Yuan Chao - President, Chief Executive Officer & Director: Certainly. PVC business, we also suffered a price decrease in the first quarter but as, again, Steve mentioned earlier, with the crude oil price turning around and with the building season coming in the spring time, there's been price increase of $0.04 in March, and I think the industry announced $0.03 or $0.04 in April, which yet we will see in the next few days.

My understanding is that some of the consultants out there are saying that it's up $0.02 in April, does that seem realistic? Albert Yuan Chao - President, Chief Executive Officer & Director: I think CDI reported $0.02, that's right.

Okay. Alight. Thanks so much. Albert Yuan Chao - President, Chief Executive Officer & Director: That's only an estimate. You're welcome.

Thank you. Albert Yuan Chao - President, Chief Executive Officer & Director: Thank you.

Thank you. Our next question comes from the line of James Sheehan of SunTrust Robinson. Your line is now open.

Thanks. Albert, could you comment on tightness in the PVC market? Are you seeing anything out there as a result of the accident down at Mexichem in either PVC or caustic soda core-alkali? Albert Yuan Chao - President, Chief Executive Officer & Director: Yes. It's very unfortunate what happened in the Mexichem operation in Mexico. There has been increased demand and price movement on the export market. We believe with the export from the U.S. and from Asia, the export demand in Latin America for Mexichem's products will be fulfilled.

Okay. Thanks. Albert Yuan Chao - President, Chief Executive Officer & Director: You're welcome.

And Albert, just on the ethane price outlook for the second half of the year, we're seeing natural gas prices move up, possibly some were export activity. What do you think ethane prices are going to look like in the second half of the year relative to fuel value? Albert Yuan Chao - President, Chief Executive Officer & Director: Right. IHF has forecasted the ethane price which today is $0.19 to $0.20 a gallon and above this fuel value would r move up second half of the year to the mid or high $0.20 a gallon due to increased demand for ethane, both on domestic expansions that we are seeing, as well as on exports, whether it's through pipeline or through ship of ethane. But we still believe looking at figures that the U.S. ethane-based ethylene cracker will still be caught advantaged over the global NAFA-based ethylene crackers.

Thank you. And could you provide an update on the pipeline dispute with Eastman Chemical? When do you think that might be resolved? Mark Steven Bender - Senior Vice President, Chief Financial Officer & Treasurer: James, this is Steve. On those issues, they're still being sorted out in the court system, and so I expect that to be sometime – hard to call it at this stage in terms of time win – time window but still sometime to work through the court systems.

Thank you. Albert Yuan Chao - President, Chief Executive Officer & Director: You're welcome.

Thank you. Our next question comes from the line of Aleksey Yefremov of Nomura Securities. Your line is now open.

Good morning. Thank you. Albert Yuan Chao - President, Chief Executive Officer & Director: Good morning.

Good morning. Could you discuss how you think about offer price for Axiall and how much of potential improvement in caustic soda and PVC was already in that number or whether you might rethink that number if fundamental in caustic soda and PVC improved further? Albert Yuan Chao - President, Chief Executive Officer & Director: Well, we're not going through details the questions you proposed. I would just say that our offer – the last offer was a very compelling offer with 143% premium already unaffected price in January 22 of $9.60 a share of Axiall.

Thank you very much. Albert Yuan Chao - President, Chief Executive Officer & Director: You are welcome.

Thank you. Our next question comes from the line of Hassan Ahmed of Alembic Global. Your line is now open.

Good morning, Albert and Steve. Mark Steven Bender - Senior Vice President, Chief Financial Officer & Treasurer: Good morning. Albert Yuan Chao - President, Chief Executive Officer & Director: Good morning.

Across the board, it seems that the demand for polyethylene continues to be strong. Obviously, the backdrop is that we've seen energy prices go up and we've also obviously seen a bunch of these polyethylene price hike stick. So my question is that are you continuing to see strong underlying demand growth, be it in North America or across the globe, or is a large chunk of sort of this demand growth that you are seeing from an inventory rebuild in sort of anticipation of further price hikes? Albert Yuan Chao - President, Chief Executive Officer & Director: I think maybe a bit of both. I think the fundamental demand globally for polyethylene is there, but also, I think that the increased oil prices in the last few months has helped to propel the higher prices as well.

But in terms of inventories, do you continue to see them at relatively normal or below normal levels? Albert Yuan Chao - President, Chief Executive Officer & Director: Definitely in the U.S., but I think our inventory is below normal. I think ACC number shows and people will look at it saying we're below average inventory for all polyethylenes in the U.S. I can't speak that for overseas.

Fair enough. Now moving onto the chlor-alkali side of things, obviously we have heard of some capacity closure announcements in the U.S. in the near term, and then thereafter sort of as we look towards 2017, there's expectations for capacity closures in Europe. So what are your near- to medium-term views on supply-demand fundamentals? Or asked differently, do you think these closures near- to medium-term will be enough to create snugness in the market? Albert Yuan Chao - President, Chief Executive Officer & Director: That's a good question. I think this year there are three or four chlor-alkali plant – new plant expansions totaling about 400,000 tons coming up. So that pretty much offsets the 400,000 tons that was discussed on closures this year. And Europe is between about 800,000-or-so tons potential closures due to the mercury cell closures in Europe, I think, up to 2017. So I think any reduction in excess capacity will be good for the industry on a global basis, but those numbers are still quite small compared to global capacity. I think in Asia and China, the chlor-alkili plants are running in between 50% or 60% operating rates.

Got it. Very helpful, Albert. Thank you. Albert Yuan Chao - President, Chief Executive Officer & Director: Thank you.

Thank you. Our next question comes from the line of John Roberts of UBS. Your line is now open.

Good morning. Mark Steven Bender - Senior Vice President, Chief Financial Officer & Treasurer: Good morning. Albert Yuan Chao - President, Chief Executive Officer & Director: Good morning.

I think your internal capital spending outlook after the current expansion is relatively low. Should we expect you to maintain a low capital spending outlook until you finish with the Axiall situation? Mark Steven Bender - Senior Vice President, Chief Financial Officer & Treasurer: John, the guidance I gave for this year of $5 million to $550 million is obviously for the Petro 1 and the Calvert project. Those are the only two projects that we have of significant size that have been announced. So I would expect our capital spending to decline as we complete these projects back to kind of normal levels.

And then a small idled Gulf Coast ethylene plant was sold during the quarter; did you bid on that? Mark Steven Bender - Senior Vice President, Chief Financial Officer & Treasurer: We don't ever speak to the activities we have on the corporate development front.

Okay. Thank you. Mark Steven Bender - Senior Vice President, Chief Financial Officer & Treasurer: You're welcome.

Thanks Our next question comes from one of Arun Viswanathan of RBC Capital Markets. Your line is now open.

Thank you. Good morning, Albert and Steve. Albert Yuan Chao - President, Chief Executive Officer & Director: Good morning. Mark Steven Bender - Senior Vice President, Chief Financial Officer & Treasurer: Good morning.

So I guess you mentioned that following the Petro 1 expansion, you'd be balanced on ethylene. Do you foresee any other further development opportunities, or what are your kind of internal organic plans for growth over the next couple years? Mark Steven Bender - Senior Vice President, Chief Financial Officer & Treasurer: We always assess those as we go forward in that we have a team of engineers that do that work on an ongoing basis, but there's nothing that we have announced or are working on actively at this stage. But if we have something, then we'll certainly come forward with that. Just the Petro 1 and the Calvert facility is the only ones that we're moving forward on. But we, of course, always assess our plants and opportunities as they present themselves.

Okay, great. And then I guess maybe you can just comment on pricing in both LDPE and PVC. Are you seeing any greater uptake in some of your specialty products versus commodity grade? Are those following the basic index fees? Thanks. Albert Yuan Chao - President, Chief Executive Officer & Director: Yeah, I think specialty products, certainly their prices are much higher than commodity grade, and their price movements are more supply-demand oriented and not so much commodity price oriented.

And then last question, I guess, is just on kind of near term construction. Have you noticed any improvement, I guess, or how do you kind of characterize the building products side of your businesses? Is it, I guess, strong or – and maybe you can just kind of differentiate that between residential and non-residential construction? Thanks. Albert Yuan Chao - President, Chief Executive Officer & Director: Yeah. I think that building part is certainly into this building season has improved over prior quarters and over prior years. But as you can see that in March, the new home starts has dropped. So I think the improvement is slow but we're seeing signs of improvement.

Sorry, I just had one more quick question. On caustic, there's been a number of price increase announcements the index appears to have moved up $15 to $20 for April. I guess maybe you can just give us your characterization on probability that you'd realize further increases in May and June. Thanks. Albert Yuan Chao - President, Chief Executive Officer & Director: Yeah. We believe that some portion of the price increase will be accepted by industry over the next few months. But as you know, now is also the building season, as I said earlier, the small demand for calling for PVC. As result, the production of caustic also increases.

Right. Okay, thanks. Albert Yuan Chao - President, Chief Executive Officer & Director: You're welcome.

Thank you. Our next question comes from the line of David Begleiter of Deutsche Bank. Your line is now open.

Thank you. Good morning. Albert... Mark Steven Bender - Senior Vice President, Chief Financial Officer & Treasurer: Good morning, David.

Thank you. On Styrene, can you give us your updated thoughts on the styrene chain? And in terms of – any potential for reinvestments, do you, think in the chain either by you or other people? Albert Yuan Chao - President, Chief Executive Officer & Director: That's a good question. I think in the U.S. our styrene plants, which was built in 1991, is still the newest, the styrene plant in U.S. So with the increasing crude oil prices which styrene mainly is from benzene, it has affected the competitiveness of styrene. And then with the fall, crude oil prices has benefited styrene. So the global demand for styrene is quite good now, but depending on which direction oil goes. It's very volatile in terms of the supply-demand of operating. So I don't know in the U.S. I think in Asia, there are styrene plants is being build but in the U.S. we do not see any announcement for new styrene plants.

Understood. Just lastly on ethane, Albert. Longer term, should ethane trade at or very near its fuel value, or do you think there should be a premium given potential supply-demand tightness? Albert Yuan Chao - President, Chief Executive Officer & Director: When you say, fuel value you mean gas value, right?

Yes. Gas value, yes. Albert Yuan Chao - President, Chief Executive Officer & Director: We think that historically ethane should trade above gas value to have a return investment for the cost of extracting and fractionating out ethane. So long-term they should have some premium over gas btu value.

Can you quantify that premium at all? Albert Yuan Chao - President, Chief Executive Officer & Director: No, depending on the gas price in the market.

Understood. Thank you. Albert Yuan Chao - President, Chief Executive Officer & Director: You're very welcome.

Thank you. At this time the Q&A session has now ended. Are there any closing remarks? L. Benjamin Ederington - Vice President, General Counsel, Chief Administrative Officer & Corporate Secretary: Thank you again for participating in today's call. We hope you will join us for our next conference call to discuss our second quarter 2016 results.

Thank you for participating in today's Westlake Chemical Corporation First Quarter 2016 Earnings Conference Call. As a reminder, this call will be available for replay beginning two hours after the call has ended. It may be accessed until 11:59 PM Eastern Time on Tuesday, May 10, 2016. The replay can be accessed by calling the following numbers. Domestic callers should dial 1-855-859-2056; international callers may access the replay at 404-537-3406. The access code for both numbers is 90251315. Thank you for participating in today's conference. That does conclude today's forum. You may all disconnect. Have a great day everyone.