David R. Hansen - Senior Vice President of Administration Albert Y. Chao - Chief Executive Officer, President, Director, Member of Nominating & Governance Committee, Member of Compensation Committee and Member of Corporate Risk Committee M. Steven Bender - Chief Financial Officer, Senior Vice President and Treasurer.

Edlain S. Rodriguez - UBS Investment Bank, Research Division Frank J. Mitsch - Wells Fargo Securities, LLC, Research Division James Sheehan - SunTrust Robinson Humphrey, Inc., Research Division Donald Carson - Susquehanna Financial Group, LLLP, Research Division Hassan I.

Ahmed - Alembic Global Advisors John Roberts - UBS Investment Bank, Research Division Charles N. Neivert - Cowen and Company, LLC, Research Division Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Chemical Corporation's Second Quarter 2014 Earnings Conference Call. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded today, August 5, 2014.

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

domestic callers should dial 1 (888) 286-8010. International callers may access the replay at (617) 801-6888. The access code for both numbers is 62091806. Please note that information reported on this call speaks only as of today, August 5, 2014.

And therefore, you're 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 web page at westlake.com.

Now, I'd like to turn the time over to -- call -- turn the call over to Albert Chao.

Albert?.

Thank you, Dave. Good morning, ladies and gentlemen, and thank you for joining us on our earnings call to discuss our second quarter results. In this morning's press release, we reported quarterly net income of $169 million, or $1.26 per diluted share, on sales of $999 million.

We also reported record income from operations of $267 million, driven by strong earnings in both our Olefins and Vinyls segments. Both those segments continued to benefit from the low-cost ethane feedstock environment as well as from an expanded ethylene capacity.

Our ethylene expansion projects have increased our ethylene capacity by approximately 420 million pounds at both our Lake Charles, Louisiana and Calvert City, Kentucky facilities.

Our Olefins segment benefited from higher integrated Olefins margins as higher sales prices more than offset increases in feedstock and energy costs compared to the same period last year.

Our Vinyls segment returned an improved quarterly result following 2 consecutive quarters in which we completed major capital investments, including start-up of our world-scale chlor-alkali plant in Geismar, Louisiana that was completed at the end of fourth quarter last year, as well as the ethylene unit expansion and conversion from propane to ethane feedstock that we completed in the beginning of the second quarter at our Calvert City facility.

The completion of these projects positions our Vinyls business to benefit from a further integrated vinyls product chain as well as a lower cost position, as it can now access advantaged ethane from the Marcellus and Utica shales.

We delivered a strong second quarter, and I'm pleased with the direction and performance of both our Olefins and Vinyls segments. I would now like to turn the call over to Steve to provide more details on the financial and operating results for the second quarter..

On July 31, we completed the acquisition of the German-based specialty PVC manufacture, Vinnolit Holdings GmBH. Vinnolit had EBITDA of approximately EUR 40 million for the first half of 2014. We anticipate that third quarter benefits from this transaction will be offset by the required inventory writeup and associated transaction costs.

Also we expect that if ethane prices continue to decline in the third quarter, our FIFO impact will be negative. Now, I'll turn the call back over to Albert for some closing comments.

Albert?.

Thank you, Steve. In the second quarter, we continue to demonstrate strong results as well as announced 2 strategic initiatives. On July 31, we closed on our acquisition of Vinnolit, the global leader in specialty PVC.

This acquisition along with our strong suspension grade PVC position in North America and our presence in Asia makes Westlake one of the leading global PVC manufacturers and suppliers and opens up new opportunities for growth.

Additionally, yesterday, we completed the initial public offerings of Westlake Chemical Partners LP, a new master limited partnership, which we believe creates value for our shareholders and provides a platform for future growth.

We will continue to seek opportunities to further integrate our product chains as we plan our next ethylene expansion project for the end of 2015 or early 2016. We believe the investments Westlake has made lowered our costs and expand our product offerings into the specialty PVC markets.

We remain confident in our long-term outlook, and we continue to focus on achieving our strategy to create value for our shareholders. Thank you very much for listening to our earnings call this morning. Now, I'll return the call back over to Dave Hansen..

Thank you, Albert. Ladies and gentlemen, before we begin taking questions, I would like to remind you that a replay of this teleconference will be available starting 4 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..

[Operator Instructions] Your first question comes from the line of Edlain Rodriguez with UBS..

A quick question for you, Albert. I mean given what's going on in the industry right now, I mean we have the outages and everything else.

And while your numbers came below expectations, when you look at industry fundamentals, I mean has anything changed for the worse, or is it still as strong as it was earlier in the year?.

I think the industry fundamentals is quite strong. Our business is really impacted by the difference between gas prices and the international oil prices. And the gap between natural gas prices is still quite much below the international brand oil prices, which supports the polyethylene prices globally, as well as PVC prices.

And as we see that ethane price recently has dropped to -- in the low 20s, which helped the ethylene cash costs. And there are prices going -- increases going on both domestically and overseas in polyethylene PVC. So I think the industry fundamentals are still quite strong..

Okay, just another question. We follow the ethylene production issues, and the market is extremely tight.

What are you seeing in ethylene and polyethylene prices, let's say, for July, August and September? What do you expect prices to do going forward?.

Basically there are -- 4 producers announced price increases in September in the 3 to 4 pound -- cents a pound range. And as you know, the spot ethylene prices have been in the $0.60 to $0.70 a pound in Houston and in the Riverside.

And as the plants come back from their turnaround or their stoppages, we think that the ethylene price will moderate somewhat. But the future prices for ethylene are still quite strong going even into 2015..

Your next question comes from the line of Frank Mitsch with Wells Fargo Securities..

You've been very busy. You closed Vinnolit late last week. You closed the MLP yesterday. You're announcing earnings today.

I'm just wondering, what are you guys doing tomorrow?.

Work..

Work.

Would possibly announcing something in terms of the pipeline dispute? And could you give us an update as to where you stand with the Texas Railway (sic) Commission on that, and when might we expect a resolution to that issue?.

Frank, it's Steve. As you think about that, that the Texas Railroad Commission has had hearings both in May, and we expect them in August and have not had a resolution of the issue that they heard in May, and of course, no conclusion on the issues that will be heard in August.

So as you can imagine, these issues have and could continue in the -- continue to be pushed into the next stage. And if one party or the other wants to, they can appeal it or even take it into the court issue. So as you can see, it could continue for a while..

I'm still betting on tomorrow.

And then in -- you talked about the Geismar plant start-up and that you're ramping up operating rates, can you give us an idea as to where you are now in terms of that? And then as I look at the ECU metrics that you provide in the release, some of the industry data, it looks as if on a benchmark basis, your ECU would have been up $10-plus sequentially from Q1.

What sort of realizations did you have there, and how do things look here in July in that area?.

Yes. Our Geismar plant, as you know, we started the end of last year and tried to ramp it up through the first quarter and second quarter. We have had some new plant start-up problems. But pretty much, those issues are behind us. And the plants are running at or above industry operating rates. In terms of ECU, it bounces up and down.

There were some announcements for caustic price increases by the industry, which by and large, did not go through. And so I would think it's pretty much flat ECU values..

Your next question comes from the line of James Sheehan with SunTrust..

Could you provide us some comment on your building products prices and volume trends during the quarter?.

Yes, the building products has been going, I would say, okay even though the season has come back and has had some improvement over the first quarter. It has not jumped up as people in the industry have expected. The prices reflect the improvements in PVC price. There's some PVC price announcements out there for August.

So I think the pipe price reflects the increasing costs. But by and large, it has been okay, but it's not been doing great..

And did those trends continue in July?.

Yes..

And could you also give us your thoughts on inorganic growth opportunities? Do you have any interest in getting bigger in chlor-alkali if the price were right?.

Well, we look at opportunities both organically and inorganically in our business segments, mainly Olefins and Vinyls; go up and down the chain. So we will look at opportunities as they come..

And finally, just on caustic demand, it seems to have been a little bit weaker than expected.

What's your outlook for that going forward, and what's been the cause of the weakness?.

Well, I think caustic demand has gone with the economy. As you know, the first quarter economy was pretty bad. It has improved second quarter. And I think it is just -- it follows the economy generally speaking. I don't think there's anything unusual going on there..

Your next question comes from the line of Don Carson with Susquehanna Financial..

Steve, just a clarification. The $4 million costs associated with Calvert City and the $9 million with the Lake Charles outage, was that just a direct cost of the outage, or did that include lost volumes? And going into Q3, do you have less inventory than you normally did? And then also one question on the MLP impact.

Just wondering what's the net tax impact on putting those assets into the MLP from a Westlake standpoint?.

Don, as it relates to the impacts, the $4 million was really costs associated with the turnaround and just carried into the second quarter. The $9 million is related to lost volumes.

As it relates to, I guess, your other question related to the tax impact related to the MLP, there has been -- and we've been very clear, we don't see adverse tax impacts to the parent nor to partners related to dropping these assets into and monetizing part of Westlake Chemical OpCo..

And then your inventory position going into the third quarter because of the downtime, do you have lower-than-expected inventory? So is there going to be a -- some lost sales potential in Q3 as well?.

I think our inventory was pretty low at the end of the first quarter. And we built some inventory back in the second quarter. So we're pretty much back into reasonable -- I won't say high range, but reasonable, comfortable range for inventories, in both our polyethylene and PVC segments..

And then one final question. On the Vinnolit acquisition, I mean know you've long talked in North America about 70%, 80% of the PVC chain profitability comes from having a position in the monomer.

And even though Vinnolit has a lot of specialty product, I'm just wondering why you would be interested in an operation with somewhat limited monomer supply?.

Yes. Vinnolit produces its own chlorine, but it purchased ethylene in the marketplace. They have a leading global position in specialty PVC. They're adding the value from -- on chlorine-purchased ethylene. And we purchased at approximately 6x EBITDA at -- we think, at a low part of the business cycle for the European PVC business.

And we believe there's synergy in terms of potential business in Asia and the U.S., which are not very active. And we are not very active in the European business either. So with those synergies at the price that we are paying, we think it's a reasonable return for us..

Your next question comes from the line of Hassan Ahmed with Alembic Global..

Question around volumes. You guys obviously broke out the negative impact from Calvert City and Lake Charles. But as I look at the sequential volume trends that you've -- the numbers that you've given by segment, volume is down around 4% in Olefins, down around 7% in Vinyls.

If these outages have not taken place, what would those numbers have looked like? The only reason I ask is as I looked at some of your competitors, and those sequential figures are somewhere close to 3%.

Would you have been in line with those numbers?.

Hassan, it's Steve. As it relates to the Vinyls volumes, those are really related to the co-products. And as we've switched feedstocks from propane to ethane, obviously, that's going to have an impact in volumes.

But in terms of margin, you can see, as I mentioned in my prepared remarks, we'll continue to see the significant bottom line impact of switching from propane to ethane. As it relates to the Olefins side, as Albert earlier commented, we built inventories back in both polyethylene and in Vinyls.

And going forward, we're back at what I would consider more normal levels as we've gone through these operational and turnaround events. So we're back to, what I would consider, normal operating inventory levels..

Fair enough. And switching gears to the ethane side of things, obviously, nat gas prices have come down as have ethane. But alongside that, we've heard a few newer announcements, Reliance in particular, may be considering ethane imports.

Does that change in any way your near to medium-term view about, call it supply demand for ethane in the U.S.?.

Not really; near term, definitely not. I think the Enterprise terminal, supposedly startup in third quarter of 2016. So near term, that's -- who knows, that today with the construction environment, whether the project's delayed or not.

But at the same time with the announcement of this terminal, Enterprise also said they estimate by 2020, there will be 700,000 barrels a day of excess ethane. And the terminal can export only 240,000 barrels a day of excess ethane. So there's technically 460,000 barrels of excess ethane still in existence by year 2020..

Your next question comes from the line of John Roberts with UBS..

Now that you've got the ethylene MLP complete, did you learn anything from the process that might make you think about chlorine as an MLP-able [ph] asset?.

John, as we continue to look at this MLP, we find that it was, I think, a very value-added exercise. And as we said very consistently, we'll continue to assess opportunities. But we see no other assets dropped into MLP at this stage..

And then secondly, would there be an opportunity to close chlorine at Vinnolit and export monomer from the U.S.?.

In terms of what?.

Export EDC or VCM over to Vinnolit?.

Certainly, there's possibilities. And things we just closed this week, we are looking at ways to have synergies between the 2 businesses..

[Operator Instructions] Your next question comes from the line of Charles Neivert of Cowen and Company..

A couple of quick questions. I know you guys don't export a lot of products.

But I mean what are you seeing in the export markets for both the Vinyls side and the polyethylene side? Do they seem to be improving, or what do you see out there in terms of both volumes and pricing?.

We see that the demands are pretty strong globally. It is the time, some time where a demand for polyethylene and PVC are both strong. And as I said, there's some price increases going on with the higher oil price..

Okay. And then on the other side on the coin, on the new chlor-alkali unit, as a company if I understand it, you guys are generally -- if all the PVC is running, basically balanced in chlorine. But if you're not running all your PVC, you have some excess chlorine.

Do you -- would you typically or until operating rates get higher, would you typically sell any chlorine? Or you're just going to basically run the balance?.

Yes. We have -- we are -- even if we run our existing PVC plants, we will have a long excess in chlorine. We are expanding our PVC capacity, which will take some of that away. And if we have long, then we look at whether we can sell the chlorine in terms of EDC or ship it to our sister companies to make into PVC -- VCM, whether it's in Europe or Asia..

Your next question comes from the line of Jeff Zekauskas with JPMorgan..

My impression is that caustic -- domestic caustic soda prices are hedging lower.

Is that your impression?.

I think it's pretty much flat. It has been hedging lower during the year. Definitely, it's lower than last year at the same period. But we have had 800,000 -- 880,000 short-term capacity additions by now. We added 350,000 tons capacity and Oxy added about 200,000 ton capacity.

So those capacity are being absorbed by the industry, and it takes them a while to, for industry to balance itself..

I don't think there was a PVC price increase in July, and ethylene prices are up.

Why do you think that is, or can you speak to the overall PVC supply-demand balance? Where do you think industry operating rates are now?.

Yes. I think for PVC, people were expecting the ethylene plants to come back. And as a result, the ethylene prices dropped. So people are waiting for PVC price to also drop. It turns out the ethylene price stayed high or went higher. And so there is a $0.02 a pound price increase for PVC in August. And we believe that, that will definitely go through.

And well, time will tell in terms of the strength of PVC. But if you look at CDI's estimates, PVC operating rates for the second quarter is about 83%, and we expect the fourth -- third quarter of this year to go to 89.6%..

What do you think is a normal operating rate for your Geismar chlor-alkali plant?.

Well, it's all depending on our plants operations, both downstream and upstream. But I think we'll be at or above the industry operating rates..

At or above.

You don't think you can do much better than the industry operating rates? And then do you think you'll be at those rates?.

At or above industry operating rates..

Do you mean negligibly above or materially above? What do you mean?.

It's depending on the supply and demand and also depending on EDC. I mentioned EDC exports..

Yes, sir, we have a follow-up from John Roberts with UBS..

Do you, in the future, plan on releasing WLKP results simultaneous with WLK? And will WLK results change in any way as a result of the MLP?.

We will release partners results the same day that we release WLK's results. And because Westlake Chemical will consolidate partners, we will not see a material change. Obviously, there'll be a minority interest. But you'll consolidate, you'll see Westlake Chemical consolidated partners from a financial statement perspective..

So the WLK release will essentially look very similar to what we've been getting in the past..

That's correct..

At this time, that ends the Q&A.

Are there any further remarks, closing remarks?.

We would like to thank all of you for participating in today's call. We hope you will join us again for our next conference call to discuss our third quarter 2014 results. Have a great day..

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 62091806..