The Credit Suisse 29th Annual Basic Materials Conference

Sep 14, 2016

Slides

So next up, we have Albert Chao, CEO of Westlake Chemical. Albert and his team have naturally been busy over the summer with the acquisition of Axseal, and I'm sure we're all eager to hear a detailed update of the transaction as well as Albert's aspirations for the company. And with that, I'll turn it over. Thank you. Good morning, ladies and gentlemen. Thank you to be here today. Two weeks ago, August 31, we closed on the transaction to acquire Axial Corporation. Axial Corporation was a major U. S. Core vinyl and building products as well as home improvement products manufacturer in North America. The business fits very well with our legacy Westlake business being the olefins and vinyls. You can see from the chart here, the pro form a of second quarter of twenty sixteen, what a combined company look like, both from a revenue and from an EBITDA point of view. You can see the boxes, Westlake was an olefins and vinyls business. And today, Westlake is still an olefins and vinyls business. We're going to explain a bit more what the actual acquisition strengthens our position. With the combined company, you can see those two boxes, the green and the gold boxes. The EBITDA business from the two segments will be more or less being equal. But what's important is our mission statement, you can see the bottom, and that will continue to be the same. We want to pursue profitable growth and not just for top line growth, it's bottom line growth, that's what's important to us. We are focused as a business we understand, namely the olefins and vinyls business. And by olefins, as you know, we start from ethylene ethane to make ethylene. All of our ethylene plants today are NGL ethane capable. So we start from ethane to make ethylene and olefin side will integrate into polyethylene and you have a small position in the styrene business. In the vinyls business, we start from ethylene and chlorine and actually we have now our own brine, so we have our own salt And Axial has a lot of its power being self generated. They have approximately 800 megawatts of their own power. So we're integrated really from our own salt. We do buy gas. And I think today, if you look at all the natural gas we buy for our cogen, for our boilers and furnaces, and if you look at the natural gas equivalent in the ethane we purchase, we probably use half a BCF a day of gas equivalent. So we are a major gas focused company in The U. S. As you know, S. Produces or consumes approximately 19 Bcf a day. So we are a major gas impacted. And looking forward, U. S. Would still be a major and low cost gas producer in the world for many years to come. So Westlake, you call it New Westlake or Westlake will benefit from the low cost gas position in The U. S. Then we're going from our own salt buying gas to make power, make chlorine caustic. And then we go from the chlorine side to PVC, which is the major products for us. But also we have we'll discuss on the second page, a large position in chlorinated derivatives as well. And now we also will be one of the largest vinyl based building products and construction home improvement producer in North America. So really get into many business that Westlake has been involved in the vinyls business. And so we are focused in business we understand still the olefins of vinyls business. We do business globally where we can gain an edge. As you know that two years ago we bought the Vinylnett business. It's a German subsidiaries to a part of the two subsidiaries of Bakker and Hoeghst, two old line driven companies and we are the leading vinyls technology licensing company in the world. We have the best technology in the world for making VCM, PVC, EDC and also the other world's largest specialty, which is emulsion PVC manufacturing, we'll discuss a little bit about that. And with the acquisition of EXO, they also have a position joint venture in Taiwan and in India. So we are new to India with a joint venture over there. And what's more again, what's most importantly, it is continue to act in the discipline financially disciplined and optimistic manner. We are investing in a great company after the merger and we intend to continue to be investing great in company going forward and to maintain our financial flexibility and strengths. We are very excited about the merger and combined company will continue to be the number one LDP manufacturer in North America, actually in all Americas, both North And South America. We will be number two in PVC manufacturing capacity in North America. And if you combined with our position in Germany, Vimalit and in China with Huazhu joint venture, we'll be number three PVC manufacturer globally. In chlor alkali, we are number three in North America. Again, with our chlor alkali position in Vilolet in Germany, we'll be number three chlor alkali producer globally. So we are a major producer in the olefins and the vinyl business on a global basis. And our strategy is continue the integration and strengthening our position on a global basis when it makes sense. We also mentioned we have a large position in our building products business. This is an area that, as you know, Westlake is was involved in the pipe business. We have a small Windows and Defense business, but now with acquisition of Axial with their Royal business will be a major building home improvement and construction building products material business in North America. With the acquisition, Georgia Gulf Axial has an ongoing $100,000,000 cost down that we're on the way to accomplish that sometime, if not this year, early next year. And as we have report to the public that we have an ongoing $100,000,000 of synergy and this is what we have estimated before we did acquisition. And now things are only two weeks into the acquisition, we'll definitely finding more opportunities to increase the synergy value as we get into it. And we believe the transaction will be accretive in the first year after we close. This is a history of Westlake's growth, you can call that. Westlake started thirty years ago, actually our first sale was in September of nineteen eighty six, exactly this month is our thirty years anniversary. And we started with the acquisition of LDPE business that was owned by Occidental and formerly City Service in Lake Charles, Louisiana, 1986. And we grew both from organic means, which means building the state of the art plants when we need it, like our ethylene plants, the miller plants, chlorine plants and through inorganic acquisitions, our first vinyls plants, our building products plants and Vinylid plants in Germany as well as now the Axial plants. So we acquire assets at the right price at the right time. And if we need those feedstock we don't have or downstream, we build them at the right place and the right technology. So we are very focused. You can see the green bars are the capacity for Olefins business. And of course, with the acquisition of Axo, the gold bar looks much bigger. And if you look at the capacity, because inflation, we don't use the revenues. If you use capacities only for the last twenty nine years all the way to 2015 before the acquisition of Axial, our compounded annual growth rate for our capacity is 15.3%. If you include axial 2016 thirty years, the compound annual rate is about 19% for the last thirty years. But what's important, as I said earlier, is not the growth on the top line, it's really the growth on the bottom line that's important to us. This is it shows integration nature of Westlake's business with Axial as well. You can see the green boxes of the olefins business and we have existing about GBP 3,600,000,000.0 of ethylene capacity in three ethylene plants. And we have ongoing expansion that will be the first half of next year at Calvo City at GBP 100,000,000. And now with Axle, we have an investment in a joint venture for a new ethane based ethylene plant in Lake Charles that we have a 10% equity position, which is about GBP $220,000,000, and we have the option to buy additional 40% up to 50% of this 1,000,000 metric ton ethylene plant within three years after the plant started. So we have all the way until 2021 or so to make the decision whether we want to increase our position from 10% to 50%. And so we have a very good position in olefins business. As we said earlier, polyethylene were integrated and starting into ethylene. In the vinyls business, some of the ethylene we have goes to the vinyls business. And then with the chlorine, Westlake's position of chlorine and legacy Ekso, we have a large position. As I said, we are the third largest chlor alkali manufacturing in North America. And with the combination of XL, we are the second largest PVC manufacturer with PVC. With building products, they have a compounding business as well. And as well as the chlorinated products. They are in various refrigerants, water treatment, chemicals and other chlorinated derivatives. So this is a very strong positions for us going forward. The polyethylene we are focused, we'll discuss later more on the LDPE side, which is focused on the food packaging. So our products supplies not only The U. S. On a global basis, we're a leading material for the food packaging side of polyethylene, which enhances the shelf life of food around the world. The vinyls business, certainly PVC goes through a lot into construction, but also goes into building improvements for residential, commercial, industrial buildings. And one big area is water and sewer pipe, one of the leading water and sewer pipe manufacturer in North America and that brings clean water to municipalities. And now with the water treatment business that we bought with Axo, that will increase our position in the clean water area, which is very important for us. This slide shows just the NGL natural gas liquid feedstock. On the upper right side, you can see that on global basis, about one third of the global ethylene feedstock is NGL based, natural gas liquids based which is mainly ethane. And for Westlake, we are 100% ethane capable. We do have capability to switch into other NGLs, which is the middle of the right hand side pie chart. We can use propane and butane and even some portion of naphtha in some of our two of our ethylene plants. And on the bottom shows, we are a merchant buyer of ethylene in Europe and European ethylene are primarily naphtha based. So if you say a cost position or not also exposed to naphtha in the European ethylene purchase. On the left hand side, you can see all the pipelines, existing and new pipelines being built to bring the natural gas liquids from whether it's Marcellus, Utica areas in Northeast Of U. S, within the Balkans, in the Northwest Of The U. S. And down to the Gulf Coast. So there are lots and lots of projects, both pipeline as well as fractionators that will bring needed ethane down to the Gulf Coast. And you may have heard even last month or so that Exxon and SABEK are looking at additional new ethylene plants, ethane based plant on the Gulf Coast. So The U. S. Is blessed with shale and blessed with low cost supply of gas and its derivative of natural gas liquids. So this will bring makes Westlake much more competitive on a global basis outside of Middle East. In The Middle East now, the reason that they're coming to The U. S. Is that they are lack of low cost feedstock for their further expansions looking at The U. S. In The U. S, we are blessed with the low cost gas, which means low cost ethane, low cost power. And so both polyethylene and the PVC and caustic basis will be one of the lowest cost producer in the world. On this chart, pie chart on the left shows the global twenty fifteen polyethylene, we have about 195,000,000,000 pounds of capacity polyethylene, the upper left hand side chart, about 23% of the capacity globally is LDPE. On the lower left hand side, you can see the dark blue for Westlake, we are about 58% of our polyethylene is LDPE. And why we like LDPE? You can see the bar chart on the right that for the last fifteen years, LDPE commenced a much higher margin than the other polyethylene, which is linear low and high density. And the bar chart on the right hand side of this box shows that in the last five years that premium continues, if not even higher than the last fifteen years average. So and it's important to us because we are on this chart, this page, LifeInsight, we are the largest LDP manufacturer in North America. And you can see the bar charts on the right that it's I said, 58% of Westlake's polyethylene is LDPE, because of the higher margin in LDPE, have among the highest margin for all the polyethylene business. If you can just use the average of linear low, high density and LDPE, we have among the highest margin in the industry. Certainly, understand their capacities are being added. You can see on this chart here of polyethylene, the blue shows LDPE, the gray is near low and the green is HDPE. Those are the new capacity added from 2012 all the way to 2021. We group together 2016, 2021 because we don't know exactly when those plans will come up. But what's important is those two lines, one is purple, one is brownish. The brownish line shows a one time GDP growth rate and 1.5 times is GDP growth rate is purple line. What's important is that these are the OECD estimates going forward is that demand globally for polyethylene grows between one and one point five times GDP. Typically in emerging markets, they're growing at higher 1.5 times and for mature economy in The U. S. Is one times. You can see that if indeed the growth rates is going towards more or 1.5 times that going in the future, the new capacity added in North America and other parts of the world will not be sufficient to meet the demand. On this chart, want to show the global footprint for Westlake's PVC business. As I mentioned, we are the second largest PVC manufacturer in the world after acquisition of Axial, plus we are the third largest second largest North America, third largest in the world. We have positioned not only The U. S, we are positioned to mention earlier that we are leading motion producer in Europe and we have in Huazhu, our joint venture in China, we own 95 of that. It's a leading PVC as resin as well as high quality film manufacturer. And now we have a position a compounding position in India that will bring us into the new market for future growth. On this chart here, it shows that the combination makes us number two in PVC and number three in chlor alkali in The U. S. On this chart shows the integration. On the left, you can see that we produce chlorine and caustic along with ethylene, you make all the products to PVC and then going through the building products and chlorinated products. What's important is the pie chart on the right. The top pie chart shows the PVC margins changed through the last cycle, probably the last ten years. And the majority of the margin within the PVC chain is in raw materials being chlor alkali and ethylene. And the last five years from 2020 to 2015, still the same that is switched from chlor alkali margins to ethylene. And today it's probably somewhere in between. So it's important to have your feedstock in the integrated chain and we plan we were Westlake was integrated in terms of its ethylene chlorine before the acquisition of Axial. And going forward, we'll be long as in chlorine because of the chlorine applications and derivatives, but we are shorting ethylene. This joint venture with Lotte, if we exercised our option to go to 50%, we will only supply 50% of our needs, we have additional billion pounds needs of going forward. So we will look for opportunities to improve our ethylene position to be integrated This chart here shows the our specialty PVC, which is emulsion or some people call it paste resin business. We are the largest in the world combination with only the plants. We have six plants in Europe, five in Germany and one in UK that makes the emulsion PVC. The And applications of the products are very extensive. It goes not only it doesn't really go to the construction as we know, but one of the leading products are into the wallpaper, the flooring business, artificial leather, many of the German cars that the panel side panels, the sidelis seats are all vinyl that look like leather, really vinyl, more durable and easy to clean. And also they are very big in textile coatings as well as topplings, a lot of the truck topplings and coverage for tents, for example, are all nylon overlaid with PVC. And I think one of the Olympic Stadium in London was top covering all made of paste resin PVC products. So it's really a very, very broad consumer products, not really focused on the construction. On this chart, it just shows the global demand for PVC in general, the blue bar shows the demand PVC actually it dipped from 02/1929 mainly because of the US housing meltdown. But since then, the global demand PVC has regained position to continue to grow. The brown line shows The U. S. Exports, U. S. Was exporting about 10%, 15% of the products before the housing meltdown. But since the housing meltdown, S. Had to export its PVC and we are blessed with the low cost position that we're able to export and the forecast going forward, this is by IHS chemical consulting that U. S. Continue to export a large position. But again, our cost position and with very little capacity, PVC capacity added around the world, The U. S. With low cost position and with capacity we have we'll be in a greater position to supply the world's needs. With that, I'll turn over to Steve to go over our financials. Thank you very much, Albert. And this next slide, there we go. I thought I'd spend just a few minutes talking about our disciplined investment culture. You've seen that in action with our acquisition of Axial. Strong balance sheet that we have even after the acquisition of Axial, you'll see that we still have a very strong balance sheet, allows us to take opportunities to grow the business as we march forward. And of course, the advantaged structure that that Everest talked about in terms of the integration. A key element of our philosophy is the prudent investment in capital and at the right time and the right stage of the cycle and to build that integration model that I've talked about. And that allows us to therefore to be able to get the efficient return on that investment as we go through the cycle. On this chart that I've shown that we've made a very significant number of investments over the last half a dozen or so years, you can see that we've invested over $6,000,000,000 in capital to integrate the business and to grow the business and said not necessarily to get bigger, but to become more stable in terms of the earnings stream and to be very profitable on the bottom line. And that really is the focus that integration drives stability of earnings, gives us that dedicated off take at each stage of production and provides an ability to capture the margin as it moves back and forth across the chain. So as you think about the investments we've made and the acquisitions that we've made, can see that we've continued to build on a very strong balance sheet. This chart shows that we go over a long period of time and I've gone all the way back to 02/2006, going back a number of years showing where we stand in terms of the capital structure versus our industry peers. And on the far right end of this chart, you can see that we continue to maintain a very strong capital base even after investing the capital necessary to close the Axial transaction. I think the implications here for you should be quite clear that we have ample ability to fund and continue to grow the business and we have the patience and the opportunity and the discipline to invest at the right stage to be able to generate that return on investment. So with the capital base that we have, you can see the agencies still keep us strongly investment grade rated. And certainly as we march forward, the cash flow that we have that comes out of the business continue to be focused at continuing to grow business and delever the business as we see our opportunities march forward, but still have an opportunity to invest at the right stage and in the right set of products. The disciplined approach that Albert talked about in spending and the competitive factors he talked to in terms of as we built the business over the last thirty years provide us an opportunity to provide and continue to drive value for all the investors. Here I've shown a series of metrics ROA, ROCE and EBITDA margin. And you can see that against our peer set that we outperform all those peers irrespective of which time period and which metric you choose to use. Again, I attribute that largely to the drivers that Albert spoke to. Focus in bottom line growth, expanding that clear integration across the chain, the advantage that we have in the products and the feedstocks as well as the mix of assets that we have both in specialties and the polyethylene as well in our vinyls business. I thought on this slide I'd spend just a few minutes and talk about the formation that we created in 2014 of the Master Limited Partnership. We took our ethylene assets and dropped them into an operating company and from there continue to drop those into the MLP. That MLP allows us to have a very cost effective form of equity capital to be able to continue to grow and fund the business as we march forward. You can see here that we have just a little over 13% of the operating company dropped into to continue to fund and grow this MLP as we march forward, gives us tremendous financial firepower at a very cost advantage position to be able to grow and fund opportunities as we march forward. You can see here that what we have is a number of levers to be able to continue to grow the Master Buildment partnership, of course, dropdown opportunities, which we took opportunities in 2015 organic growth opportunities to grow the footprint and we did that over the last several years completing a recent expansion in 2016. As Albert mentioned, we have an ethylene expansion planned for 2017, which all be advantaged for the partnership. Acquisition opportunities. As a result of acquiring the Axial assets, we acquired an interest in an ethylene asset. This is the Lotte joint venture that Albert mentioned and allows us to continue to put those assets into venture over time to continue to grow that distribution which is that low double digit growth rate. And of course, the contract structure that we have provides a stable predictable cash flow base since we have a 95% of the revenue streams are tied to Westlake's offtake arrangement with a very, very small 5% exposure to the ethylene margin business. So again, four levers of growth and an ability to continue that trajectory of growth and distributions. So I think to just summarize here what I do is what I've done here on this chart is really outline the growth that you've seen in terms of organic growth and acquisition growth. All that growth is designed to grow the bottom line. Size is not important to us, but profitability is. And you can see here as we've gone forward to integrate the chain of the businesses through organic growth or acquisition growth, we've continued to grow the bottom line value of the business to benefit the investors who are focused in really seeing a very integrated story and a very strong growth story on a bottom line basis. But I'd pause here. We've got a few minutes to then take questions. I thought I'd invite Albert up to the mic, see if there are any questions from the audience. I'll just start it off. Can you just give us a brief update of what you've seen in the near term in both the P and the PVC cycles? And then also over the next three to five years, there's obviously a fairly heavy debate among investors on what they're seeing specifically on the supply side. Can you just give us an update on your own view and any kind of key differentiating factors of your view versus where you expect IHS and the investment community to be? Sure. Right now, there's a $05 a pound price increase that's been passed through to the polyethylene business for September. And some of the industry players, including Westlake have announced another further $04 a pound price increase for October. And we believe that the $05 will go through in September now this year because some of the customers are raising their finished film prices to their customers as well successfully. So they will go through and we'll see whether the $04 will go through October or not. Global demand is quite strong for polyethylene. Despite what people think about the economy, economy in The U. S. And globally are doing okay. I won't say it's are all pistons going, but it's doing quite well. On the PVC business, there's a $04 a pound price increase going up going in for October, partially because of the ethylene price, some of the spot ethylene price with the disruptions in some of the turnaround going on planned and unplanned, ethylene spot price come as high as $0.39 $0.40 a pound. So the PVC producers out of the four we have today, two are not integrated in ethylene. So there's a cost push to push the PVC price going up as well. Time will tell in October how much of the $04 will go through. We're heading into winter as well. On a longer term basis, as I said earlier, there's more capacities, about 40% of ethylene capacity added from 2017 all the way to 2021. And a lot of that 60% of U. S. Maybe global ethylene goes to polyethylene. And I think the same ratio will be about 40% of polyethylene capacity added in North America. If you look today, S. Exports about 20% of its ethylene derivatives and polyethylene being 60%, it's about 20% of polyethylene is being exported. So if you add in the 40%, you're saying, wait, you cannot absorb that internally, which is true. So we think that most of those capacity additions will be exported. Luckily that U. S. Is blessed with low cost feedstock. Today ethane is selling at BTU value gas price. So there's certainly there's ethane exports be going on through pipeline and through ship and there's new capacity of ethylene plants being built. So the forecast by IHS and other industry consultants are seeing the ethane price should not be selling on a Gulf Coast at BTU value, which we agree will go up. But even looking at price going up, still ethane will be competitive outside The Middle East with rest of world in oil. And the $64 question is what do you think oil price will be, not this year, not next year, five years from now, ten years from now. When you build these ethylene plants billions of dollars, you don't build them for one year or five years, you build for next twenty years. So it's your view on what oil price is going to be. The other alternatives to ethane really is also oil, naphtha. And the fact that people like SABIC and Exxon are looking at building further ethylene plants in The U. S. Shows that the smartest and biggest guys in the world in the business wants to invest in The U. S. Going forward. So if you are patient, long term base, I'm sure when those the 40% come up, means whichever months they come up in the next few years, there'll be hiccups in our margins and take some time to for the global to absorb the capacity and depending on which year, how many plants come on. But I think if you're looking at a long term basis, which Westlake is a long term player in the industry that we feel a very good position going forward. Yes, sir. Albert, can you have any sense of what the outcome will be from the MLP issues with the IRS? I'll let experts talk about the expert to talk for a moment. Well, I wish I had that clarity of foresight. But I will tell you that there is going to be a conference this week actually in D. C. The MLP Association has their annual conference Thursday and Friday this week. And actually the keynote speakers over the lunch on Thursday will actually be the be Kurt Wilson who is actually the project leader on this initiative and his counterpart from U. S. Treasury. So I think what they've been very clear that they've been working on this initiative for some time and because of and speaking with them because of a number of other initiatives that have gotten in the way specifically Reg three eighty five, which is really the inversion regs have slowed them releasing these down. And I think they'll speak to that later this week. But we'll let them speak in terms of exactly where they are. But I think they've worked diligently. And I am hopeful that we get something out of them reasonably soon. But we'll have more clarity later this week. Just one other question, Albert, on the operations. Has the Olin Dow issues does that have any effect of how they operate their chlorine businesses? Do you have any observations on them versus yourselves? Well, you should ask Olin for that. We don't have a good idea on what is going on in Olin and Dow. They have a I'm sure a lot of relationships since they bought the assets from Dow. And before I heard that before Dow bought Roman Haas, 40% of Dow's products touches chlorine or caustic. So there's a lot of relationship between those two companies. But in terms of Axo, we bought a company standalone, they are selling merchant products. So we don't have those intercompany relationship all in dies. You. With that, I think we'll wrap it up. Thank you both. Thank you very much. Thank you very much.