Westlake - Earnings Call - Q1 2016
May 3, 2016
Transcript
Speaker 0
Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Chemical Corporation First Quarter twenty sixteen Earnings Conference Call. As a reminder, ladies and gentlemen, this conference is being recorded today, 05/03/2016. I would now like to turn the call over to your host, Bette Ed Rigton, Westlake's Vice President and Chief Administrative Officer.
Sir, you may begin.
Speaker 1
Thank you. Good morning, everyone, and welcome to the Westlake Chemical Corporation First Quarter twenty sixteen 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 twenty sixteen, 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 the call up to questions. During this call, we refer to ourselves as Westlake Chemical. Any references to Westlake Partners is to the master limited partnership, Westlake Chemical Partners LP, and references to OpCo refer 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 sixteen 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 11:59PM Eastern Time on May 1036. The replay may be accessed by dialing the following numbers.
Domestic callers should dial 505056. International callers may access the replay at (404) 537-3406. The access code for both numbers is 9025001315. Please note that information reported on this call speaks only as of today, 05/03/2016, 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?
Speaker 2
Thank you, Ben. Good morning, ladies and gentlemen, and thank you for joining us on our earnings call to discuss our first quarter twenty sixteen results. In this morning's press release, we reported quarterly net income of $123,000,000 or $0.94 per diluted share on net sales of $975,000,000 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 twenty fifteen. 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 investments that we have made over the past several years to integrate our product chains, a lower cost position have meaningfully contributed to our results. Our Vinyl 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 Vinyls 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
Speaker 3
to Steve to provide more detail on the financial and operating results for the first quarter twenty sixteen. Steve? 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 sixteen of $123,000,000 or zero nine four dollars per diluted share on net sales of $975,000,000 compared to the first quarter of twenty fifteen net income of $146,000,000 or $1.1 per diluted share on net sales of $1,100,000,000 Net sales for the first quarter of twenty sixteen decreased by $128,000,000 compared to the first quarter of twenty fifteen, 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 twenty sixteen income from operations was $2.00 $2,000,000 which was $27,000,000 lower than operating income in the first quarter of twenty fifteen, 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 core Aqua facilities as compared to the first quarter of twenty fifteen. Compared to the fourth quarter of twenty fifteen, sales revenue in the first quarter of twenty sixteen of $975,000,000 decreased by $12,000,000 while income from operations of $2.00 $2,000,000 increased by $21,000,000 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 $5,000,000 pretax or $03 per share in the first quarter compared to what earnings would have 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 Elephant segment. In the first quarter of twenty sixteen, the Elephant segment reported income from operations of $149,000,000 and sales of $431,000,000 compared to operating income of $191,000,000 and sales of $583,000,000 in the first quarter of twenty fifteen. The decrease in results was mostly due to lower Olefins integrated product margins, primarily as a result of reduced sales prices, partially offset by higher polyethylene sales volume and lower feedstock and energy costs.
Demand for polyethylene improved late in the first quarter of twenty sixteen 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 $05 per pound polyethylene price increase in March and a second price increase of $04 per pound has been announced for April. First quarter operating income of $149,000,000 increased by $10,000,000 compared to the fourth quarter of twenty fifteen, while sales of $431,000,000 decreased by 37,000,000 The rise in operating income was primarily attributable to higher polyethylene sales volumes and improved operating rates. Results for the fourth quarter of twenty fifteen were negatively impacted by several polyethylene turnarounds. Now moving on to the Vinyls segment.
The Vinyls segment reported operating income of $62,000,000 in the first quarter of twenty sixteen on sales revenue of $544,000,000 compared to operating income of 47,000,000 on sales of $520,000,000 in the first quarter of twenty fifteen. 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. Vinyl segment operating income of $62,000,000 in the first quarter of twenty sixteen increased by $10,000,000 over the fourth quarter of twenty fifteen, while sales of $544,000,000 increased by 25,000,000 The improved results were due to higher PVC sales volumes and improved operating rates.
As a result of solid demand, industry implemented a PVC price increase of $04 per pound in March and $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 the first quarter of twenty sixteen was $129,000,000 and we spent $136,000,000 in capital expenditures. At the end of the first quarter, we had cash and marketable securities of approximately $1,100,000,000 and long term debt was approximately $758,000,000 Now let me provide you some guidance for modeling purposes. Our estimate for 2016 capital expenditures is in the range of 500,000,000 to $550,000,000 which we will fund from our cash balance.
This includes spending for expansion of our Petro one ethylene unit in Lake Charles, Louisiana, which will begin in mid April and is expected to last for approximately eighty 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 twenty seventeen. We estimate that our second quarter twenty sixteen income from operations will be impacted by lost production and associated cost from the Petro one planned maintenance turnaround and expansion project and other planned turnaround activity of approximately $65,000,000 which will primarily impact our Olefins segment. Once completed, this project will add two fifty million pounds of additional ethylene capacity to our Lake Charles site. Looking to the third quarter, we expect our operating income to be additionally impacted by 15,000,000 to $20,000,000 due to planned turnaround activity and 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? Thank you, Steve.
Speaker 2
We are pleased with our first quarter results, which benefited from strong demand for polyethylene and PVC 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 our Petrol I ethylene expansion project a few weeks ago and are on track to complete our Culbers City ethylene expansion in the first half of twenty seventeen. These two projects along with other incremental expansion projects will add three fifty million pounds of additional ethylene capacity to our portfolio, lessening 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 believe underlying economic growth and demand for our products will continue to strengthen. We are focused on creating value for our shareholders.
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 Axial Corporation. As I'm sure you are all aware, on April 4, we announced that we had increased our proposal to acquire all of the outstanding shares of Axcel for $23.35 per share in cash and stock after Axcel allowed us to conduct due diligence. The revised proposal, which reflects increased potential synergies of 90,000,000 to $100,000,000 per year was summarily rejected by Axcel's Board of Directors without making a counter proposal or otherwise providing us with any meaningful feedback.
Instead, Axios continues to pursue a sale of its building products business, which we are concerned could negatively impact Axios remaining business and reduce potential synergies. Based on Axios 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 Axios Board of Directors at Axios 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 Accel's options. We believe that our proposal represents the best value creation strategy for Axial shareholders and is far superior to its standalone plan. A combination of Westlake and Axial will create all of the leading North American olefins, vinyls and building products producers with increased scale in the growing global vinyls market and with additional growth opportunities for our combined company.
By including Westlake stock in our proposed consideration, both Axial and Westlake shareholders will 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'll turn the call back over to Ben.
Speaker 1
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.
Speaker 0
Thank you. Our first question comes from line of Don Carson of Susquehanna Financial. Your line is now open.
Speaker 4
Yes. A question on your vinyls business, specifically caustic. You show benchmark pricing is down. Just wondering what your realizations were and also what you're expecting for caustic pricing in the second quarter with all of the price initiatives 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?
Speaker 2
Yes, in the first quarter caustic prices went down in The U. S. And now we have industries down to $75 a ton of price increase for the first and second quarter. The volume has improved for our caustic business and we have not participated in any amount for export market.
Speaker 4
Okay. And then on the olefin side with your outage at Petro one, did you rebuild enough 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?
Speaker 2
We have a reasonable inventory in polyethylene to satisfy our customer needs during the year.
Speaker 1
Thank you.
Speaker 5
You're welcome.
Speaker 0
Thank you. Our next question comes from line of Frank Mitsch of Wells Fargo Securities. Your line is now open.
Speaker 6
Hey, good morning. 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?
Speaker 2
Certainly, as Steve mentioned, there was a $05 a pound price increase went to the effect in March and further for April $04 a pound price increase. And the demand has been very strong ACC came out with the polyethylene demand also domestic consumption export being quite strong and we see continued strength going into May.
Speaker 6
So you realized the $05 in March. You expect to realize the $04 in April. Is that fair for us to surmise?
Speaker 2
Yes.
Speaker 6
All right. Great. And then can you offer the same sort of commentary on what you're seeing on the PBC side?
Speaker 2
Certainly. PVC business, we also suffered 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 springtime, there's been price increase of $04 in March and I think the industry announced $03 or $04 in April which yet we will see in the next few days.
Speaker 6
My understanding is that some of the consultants out there are saying that it's up $02 in April. Does that seem realistic?
Speaker 2
I think CDI reported $02 That's right.
Speaker 1
All right. Thanks so for the investment.
Speaker 5
You're welcome. Thank you.
Speaker 2
Thank you.
Speaker 0
You. Our next question comes from the line of James Sheehan of SunTrust Robinson. Your line is now open.
Speaker 7
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 chlor alkali?
Speaker 2
Yes, it's very unfortunate what happened Mexican operation in Mexico. There has been increased demand and price movements on the export market, but we believe with the export from The US and from Asia, the export demand that Latin America for Mexican products will be fulfilled.
Speaker 7
Okay, thanks. Albert just on the ethane price outlook for the second half of the year, we're seeing natural gas prices move up, possibly some more export activity. What do you think ethane prices are going to look like in the second half of the year relative to fuel value?
Speaker 2
Right. IHS has forecasted the ethane price which today is $0.19 to $0.20 a gallon and is above the fuel value would 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 through pipeline or through ship of ethane. But we still believe looking at the figures that U. S. Ethane based ethylene cracker will still be cost advantaged over the global naphtha based ethylene crackers.
Speaker 7
Thank you. And could you provide an update on the pipeline dispute with Eastman Chemical? When do you think that might be resolved?
Speaker 3
James, this is Steve. You know, those issues are still being sorted out in the court system and so I expect that to be sometime hard to call at this date in terms of time window, but still some time to work through the court system.
Speaker 7
Thank you.
Speaker 2
You're welcome.
Speaker 0
Thank you. Our next question comes from the line of Alexey Yefremov of Nomura Securities. Your line is now open.
Speaker 8
Good morning. Thank you. Good morning. Morning. Could you discuss how you think about offer price for Axial and how much of potential improvement in caustic soda and PVC was already in that number or whether you might rethink that number if fundamentals in caustic soda and PVC improve further?
Speaker 2
Well, without going into details, the questions you proposed, but we just say that our offer, the last offer is very compelling offer with 143% premium over the unaffected price in January 22 of $9.6 a share of Axial.
Speaker 8
Thank you very much.
Speaker 2
You're welcome.
Speaker 0
Thank you. Our next question comes from line of Sana Ahmed of Almedic Global. Your line is now open.
Speaker 5
Good morning, Albert and Steve.
Speaker 2
Good morning. Across
Speaker 5
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 a bunch of these polyethylene price hikes 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're seeing from an inventory rebuild in sort of anticipation of further price hikes?
Speaker 2
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.
Speaker 5
But in terms of inventories, do you continue to see them at relatively normal or below normal levels?
Speaker 2
Definitely in The US, I think our inventory is below normal. I think ACC number shows and people look at saying we're below average inventory for all polyethylene in The US. I can't speak that for overseas.
Speaker 5
Fair enough. Now moving on to the chlor alkali side of things, you know, obviously we've 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?
Speaker 2
That's a good question. I think this year there are three or four chlor alkali plant, new plants and 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 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 industry on a global basis, but those numbers are still quite small completed global capacity.
I think in Asia and China, the clockwork plants still running in between 50% or 60% operating rates.
Speaker 5
Got it. Very helpful Albert. Thank you.
Speaker 2
Thank you.
Speaker 0
Thank you. Our next question comes from the line of John Roberts of UBS. Your line is now open.
Speaker 3
Good morning. Good morning. Good morning.
Speaker 9
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 actual situation?
Speaker 3
John, the guidance I gave for this year of 5,000,000 to $550,000,000 is obviously for the Petro one 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.
Speaker 9
And then a small idled Gulf Coast ethylene plant was sold during the quarter. Did you bid on that?
Speaker 3
No, we don't ever speak to the activities we have in the corporate development front.
Speaker 2
Okay. Thank you.
Speaker 5
You're welcome.
Speaker 0
Thank you. Our next question comes from line of Arun Viswanathan of RBC Capital Markets. Your line is now open.
Speaker 9
Thank you. Good morning, Albert and Steve.
Speaker 3
Good morning. Good morning.
Speaker 9
So I guess you mentioned that following the Petro one expansion, you'd be balanced on ethylene. Do you foresee any other further debottlenecking opportunities or what are your kind of internal organic plans for growth over the next couple of years?
Speaker 3
We always assess those Always assess those as we go forward and that we have a team of engineers that do that work on an ongoing basis. But there's nothing that we've announced or are working on actively at this stage. But if we have something that we'll certainly come forward with that. Just the Petra One and the Calvert facility is the only ones that we're moving forward on. But we, of course, always assess our plans and opportunities as they present themselves.
Speaker 9
Okay, great. And then I guess maybe you can just comment on pricing in both LDPE and PVC. Are you seeing any greater uptick in some of your specialty products versus commodity grade or those following the basic indexes? Thanks.
Speaker 2
Yeah, think specialty products, certainly their prices are much higher than commodity grades and their price movements are more supply demand oriented, not so much commodity price oriented.
Speaker 9
And then last question I guess is just on kind of near term construction. Have you noticed any improvement I guess or how would you kind of characterize the building product side of your business? Is it, I guess, strong or and then maybe you can just kind of differentiate that between residential and non residential construction? Thanks.
Speaker 2
Yeah, I think that building part is certainly well into this building season has improved over prior quarters and over prior years, but as you can see that in March the new home start has dropped, So I think the improvement is slow, we're seeing signs of improvement.
Speaker 9
Sorry, 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 realize further increases in May and June? Thanks.
Speaker 2
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 said earlier, there's more demand for chlorine for PVC as a result of the production of caustic also increases.
Speaker 5
Right. Okay, thanks. You're welcome.
Speaker 0
Thank you. Our next question comes from the line of David Begleiter of Deutsche Bank. Your line is now open.
Speaker 10
Thank you. Good morning. Morning. Thank you. Styrene, can you give us your updated thoughts on the styrene chain and in terms of any potential for reinvestment do you think in the chain either by you or other people?
Speaker 2
That's a good question. I think in The US our starting plant which was built in 1991 is still the newest starting plant in The US. So with the increase in crude oil prices, which styrene mainly is from benzene, it has affected the competitiveness of styrene, and then with the fall of 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 supply demand and profitability. So I don't know in The US, I think in Asia there are styrene plants being built, but in The US we do not see any announcements for new starting plants.
Speaker 10
Understood. And 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?
Speaker 2
When you say fuel value, mean gas value, right? Yes, gas value, yes. We think that historically ethane should trade above gas value to have a return investments for the cost of extracting and fractionating out ethane. So we believe on the long term they should have some premium over gas BTU value.
Speaker 10
Can you quantify the premium at all?
Speaker 2
No, depending on the gas price in the market. Understood. Thank you. You're very welcome.
Speaker 0
Thank you. At this time, the Q and A session has now ended. Are there any closing remarks?
Speaker 1
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 twenty sixteen results.
Speaker 0
Thank you for participating in today's Westlake Chemical Corporation first quarter twenty sixteen earnings conference call. As a reminder, this call will be available for replay beginning two hours after the call has ended and may be accessed until 11:59 p. M. Eastern Time on Tuesday, May 1036. The replay can be accessed by calling the following numbers.
Domestic callers should dial 558592056. International callers may access the replay at (404) 537-3406. The access code for both numbers is 9025001315. Thank you for participating in today's conference. That does conclude today's forum.
May all disconnect. Have a great day everyone.