Westlake Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 16 speakers on the call.

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Corporation Third Quarter 2023 Earnings Conference Call. During the presentation, all participants will be in a listen only mode. After the speakers' remarks, you will be invited to participate in a question and answer session.

Operator

As a reminder, ladies and gentlemen, this conference is being recorded today, November 2, 2023. I would now like to turn the call over to today's host, Jeff Holly, Westlake's Vice President and Treasurer. Sir, you may begin.

Speaker 1

Thank you, Maria. Good morning, everyone, and welcome to the Westlake Corporation conference call to discuss our Q3 2023 results. I'm joined today by Albert Chao, our President and CEO Steve Bender, our Executive Vice President and Chief Financial Officer and other members of our management team. During the call, we will refer to our 2 reporting segments Performance and Essential Materials, which we refer to as PEM or materials and Housing and Infrastructure Products, which we refer to as HIP or products. Today's conference call will begin with Albert, who will open with a few comments regarding Westlake's performance.

Speaker 1

Steve will then to discuss our financial and operating results. After which, Albert will add a few concluding comments and we'll open the call up to questions. Today, management is going to discuss certain topics that will contain forward looking information that is based on management's beliefs as well as assumptions made by and information currently available to management. These forward looking statements suggest predictions or expectations and thus are subject to risks or uncertainties. These risks and uncertainties are disclosed in Westlake's Form 10 ks for the year ended December 31, 2022 and other SEC filings.

Speaker 1

We encourage you to learn more about these factors that could lead our actual results To differ by reviewing these SEC filings, which are also available on our Investor Relations website. This morning, Westlake issued a press release with details of our Q3 results. This document is available in the press release section of our website at westlake.com. We have also included an earnings presentation, which can be found in the Investor Relations A replay of today's call will be available beginning today, 2 hours following the conclusion of this call. This replay may be accessed via Westlake's website.

Speaker 1

Please note that information reported on this call speaks only as of today, November 2, 2023, and therefore, you are advised that time sensitive information may no longer be accurate as of the time of any replay. Finally, I would 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 would like to turn the call over to Albert Chao. Albert?

Speaker 2

Thank you, Jeff. Good morning, everyone. We appreciate you joining us to discuss our Q3 2023 results. For the Q3 of 2023, We reported sales of $3,100,000,000 net income of $285,000,000 and EBITDA of $682,000,000 including record HIP segment EBITDA of $327,000,000 Our HIP segment Benefited from resilient North American housing and infrastructure construction activities, while higher operating rates in our PAM segment drove sequential volume growth despite generally lower average selling prices. The strength of our business portfolio was highlighted by the quarterly earnings achieved by our HIP segment, where EBITDA exceeded the segment's previous record set in the Q2 of 2022 during a much Stronger housing and overall economic environment.

Speaker 2

Hip segment EBITDA margin of 29% was also a record, driven by our strong brands and disciplined pricing in a period of lower material costs as well as solid progress in our cost saving initiatives. The EBITDA generated in our HIP segment typically comes from with lower capital requirements Then in our Penn segment, Penn converts to cash flow generation at a higher rate, which is additional benefit of our vertical integration and downstream diversification strategy. We'll have more to say about our hip results and outlook later in the call, But I want to congratulate all of our hip employees on their record performance. Overall, our 3rd quarter results reflected the advantages of our portfolio diversification. While our Penn businesses experienced pricing pressure and margin compression, Our housing and infrastructure businesses delivered significant cost and earnings improvement.

Speaker 2

As a result, Western EBITDA margin of 22% was consistent with our 2nd quarter margin of 21% and our prior year margin of 20%, Demonstrating the earnings and cash flow stability of our strategy to be a vertically integrated performance and essential materials producer combined with our value added portfolio of leading offerings for housing and infrastructure products. Our consistent focus on cash flow generation enabled Westlake to deliver $696,000,000 and cash flow from operations in the Q3 and $1,800,000,000 year to date. The solid cash flow generation, The strength in the business and our confidence in the company's future allowed us to increase our dividend by 40% in August and to return approximately $180,000,000 to shareholders since January. I would now like to turn our call over to Steve He would like more detail on the financial results for the Q3 of 2023.

Speaker 3

Thank you, Howard, and good morning, everyone. Westlake reported net income of $285,000,000 or $2.20 per share in the Q3 of 2020 3 on sales of $3,100,000,000 Net income for the Q3 of 2023 decreased $116,000,000 from the Q3 of 2022 as a result of lower average selling prices and integrated margins as well as lower sales volumes. When compared to the Q2 of 2023, net income decreased by $12,000,000 in the Q3 of 2023 due primarily to lower prices and integrated margins for most of our products in our PIM segment, partially offset by higher operating rates and sales volumes. For the Q3 of 2023, our utilization of the FIFO method of accounting had a $50,000,000 unfavorable impact in pre tax earnings compared to what earnings would have been if we reported on the LIFO method. This is only an estimate and has not been audited.

Speaker 3

Before I discuss our segment results, I want to provide some high level thoughts on the quarter. We were pleased with HIP Segment's ability to deliver value to our customers while managing cost to produce record earnings against a challenging North American housing backdrop. These results are a testament to the strength of our brands and the importance of our products to our customers. We believe this record performance illustrates the benefits of our vertical integration and diversification strategy as lower cost materials used in our hip segment drove margin Expansion at a time when margins in our PIM segment compressed due to sales price decreases. The net result of this downstream integration was that Westlake delivered a 22% EBITDA margin in the 3rd quarter compared to 21% in the 2nd quarter and 20% in the Q3 of 2022 despite a period of commodity price declines.

Speaker 3

While we are pleased with the performance of our hip segment, The financial results in our PIM segment continue to reflect soft global demand and we are taking actions to address the challenging macroeconomic conditions. We continue to implement targeted actions to deliver cost savings in 2023. We now expect our company wide Cost reduction program to achieve $95,000,000 to $110,000,000 of cost savings in 2023, up from the previous 75 to $105,000,000 target after we achieved approximately $80,000,000 of cost savings to date in 2023. We are taking a prudent approach to managing cost and capital investments in markets and regions that don't contribute to our global feedstock and energy cost advantage or our vertical integration strategy. Moving to the specifics of our segment performance, our Housing and Infrastructure Product segment produced record quarterly EBITDA of $327,000,000 on $1,100,000,000 of sales.

Speaker 3

The solid EBITDA growth of $73,000,000 from the previous year EBITDA of $254,000,000 The year over year increase in EBITDA was due to lower materials cost that more than offset an 8% decrease in average sales price, driving expansion in our HIP segment EBITDA margin to 29% from 20% in the prior year period. When compared to the Q2 of 2023, HIP segment sales of $1,100,000,000 were driven by 7% growth in sales volume, which more than offset a 5% decrease in average sales prices. Housing product Sales of $963,000,000 in the quarter increased $45,000,000 due to solid sales volume growth in pipe and fittings applications in Siding and Trim that more than offset lower average selling prices. Meanwhile, infrastructure product sales of $181,000,000 in the Q3 of 2023 decreased $16,000,000 from the Q2 of 2023, primarily due to lower average selling prices and sales volumes in our compound business. The overall higher hit Segment sales in the Q3 of 2023 along with lower materials cost drove an improvement in EBITDA margin to 29% from the 22% in the 2nd quarter.

Speaker 3

As a result, HIP segment EBITDA increased $83,000,000 from the 2nd quarter to $327,000,000 in the 3rd quarter. Turning to our performance in Essential Materials segment, Q3 2023 sales for $2,000,000,000 with EBITDA of $339,000,000 When compared to the Q3 of 2022, EBITDA fell by $222,000,000 due to lower average selling prices, particularly for Performance Materials, In addition to lower sales volume, largely in epoxy driven by weak global demand and increased competition from Asian imports. PIM segment EBITDA of $339,000,000 in the 3rd quarter decreased $96,000,000 from the Q2 of 2023 as improved sales volumes particularly for PVC resin and polyethylene were more than offset by a combination of lower average selling prices, particularly for caustic soda, PVC resin and epoxy, higher feedstock and energy cost and certain charges. Net sales in our PIM segment in the 3rd quarter were 8% lower sequentially as volume gains over the Q2 were more than offset by price declines, which coupled with certain charges drove a decline in segment earnings. As the quarter progressed, we saw modest improvement in pricing in some markets such as PVC and polyethylene, while other markets continue to face pricing pressure.

Speaker 3

Our PIM segment is globally competitive with a well invested vertically integrated position processing a low cost feedstock as we continue to grow our specialty and differentiated product offerings. Shifting to our balance sheet, as of September 30, Free cash and cash equivalents were $3,100,000,000 and total debt was $4,900,000,000 with a staggered long term fixed rate debt maturity schedule. For the Q3 of 2023, net cash provided by operating activities was $696,000,000 While capital expenditures were $245,000,000 resulting in free cash flow of 451,000,000 which reflects our strong cash generative business model. We continue to look for opportunities to strategically deploy our balance sheet in order to create long term value. Now let me provide some guidance for your models.

Speaker 3

Based on the current view of demand and prices and taking into account typical seasonality, We expect 4th quarter revenue in our Housing and Infrastructure Products segment to between $875,000,000 to $975,000,000 with EBITDA margins in the mid teens. We also expect to achieve the $95,000,000 to $110,000,000 of savings in 2023 that I previously mentioned. We continue to expect total capital expenditures for 2023 to be approximately $1,000,000,000 which is unchanged from our earlier guidance and is similar to our depreciation and amortization run rate. For the full year of 2023, we now Our effective tax rate to be approximately 21%, which we will continue to expect our cash interest expense to be approximately $160,000,000 Now I'll turn the call back over to Albert to provide a current outlook of our business. Albert?

Speaker 2

Thank you, Steve. During the Q4, The economic backdrop remains challenging. The rate of inflation remains high and the mortgage rates are at the highest level in over 20 years. These inflationary and affordability pressures are negatively impacting consumer and housing demand. This volatile economic backdrop Combined with ongoing geopolitical turmoil and a normal seasonal decline in demand, leads us to expect Challenging conditions to continue throughout the Q4.

Speaker 2

The uncertain macroeconomic outlook makes it difficult to predict demand trends over the next several quarters. That said, we believe that customer inventories are much lower today and they were at this time last year, which combined with the recent pricing momentum in some of our key products should reduce the degree of customer destocking activity in both our PEM and hip segments relative to what we experienced in the Q4 of last year. As we head into 2024, Our leading market position with a broad product portfolio and strong brands combined with our globally advantaged Low cost position enable Westlake to respond to evolving market trends, while executing our business strategies. Westlake has demonstrated the solid cash generative nature of our business, resulting in 2.6 and invest in our long term strategic priorities while continuing to return capital to shareholders. Notably, Our quarterly dividend has doubled over the last 5 years as a testament to our commitment to returning value to our shareholders.

Speaker 2

We are also reaffirming our commitment to our broader stakeholder community to improve the sustainability of our products and operations. We continue to introduce new products into the market to meet customers' Sustainability requirements. In September, we're pleased to introduce our pivotal line of 1 pellet solutions. This innovative portfolio of products incorporates up to 45% post consumer recycled material into resin pallets with properties comparable to that of virgin resin. The product line has already achieved Green Circle Certification, which independently validates our post consumer recycled content efforts, and we're seeing increasing interest from our customers for this more sustainable material.

Speaker 2

Separately, I'm pleased to announce that we have achieved an 18% reduction In our Scope 1 and Scope 2 CO2 emissions intensities since 2016, moving Westlake closer to our goal of a 20% reduction by 2,030. As we continue to achieve significant progress, We look for opportunities to increase our emission intensity reduction goals. Before we open the call to our I want to provide some closing thoughts on the Q3 and our outlook. Our 3rd quarter results highlight the benefits of our vertical integration and downstream diversification strategy. A key component of the strategy is the goal to reduce volatility earnings and cash flow, While maximizing growth potential, recognizing that profitability can shift up or down the value chain, Depending on economic conditions, we believe that it's important to have a broad product portfolio with strong brands supported by a manufacturing culture focused on low cost operational excellence.

Speaker 2

In the 3rd quarter, This strategy proved very beneficial as profitability moved to our downstream hip businesses. Through the investment that we have made in our head segment in recent years, we're able to capture this value shift to enhance the stability of our EBITDA margin and cash flows. As we look forward, we seek additional ways to broaden our business through organically and through acquisitions to further this strategy. Thank you very much for listening to our Q3 earnings call. I will now turn the call back over to Jeff.

Speaker 1

Thank you, Albert. Before we begin taking questions, I would like to remind listeners That our earnings presentation is available on our website and a replay of this teleconference will be available starting 2 hours after this call has ended. Maria, we will now take questions.

Operator

Thank you. At this time, we will conduct the question and answer session. Our first question comes from the line of Patrick Cunningham from Citi. Your line is now open.

Speaker 4

Hi, good morning. What drove the pricing declines in the hip segment for the quarter? Was it Rob based or are there any specific areas of pricing pressure to highlight and sort of any sort of outlook into 4Q and into next year would be helpful?

Speaker 3

Yes. So when you think about some of the pricing decline we saw certainly we're seeing certainly And some of these portfolio offerings where there is pressure, certainly you can see when you think about the quarter compared To Q2, we certainly had nice volume pickup, 7% volume pickup over Q2. But certainly as we all know, affordability is an issue in the housing sector. And so certainly to continue to be performing very solidly as we did in fact record results, There is some pressure in certain segments within that portfolio within HIP.

Speaker 4

Got it. And then just a similar follow-up, I appreciate the sales and EBITDA guide for the hip segment. The narrower 4Q Sales range seems to point maybe towards the bottom end of your previous range. Is this some indication that the business might be more challenged beyond just what you would Back from typical seasonality or are there any other negative trends to point to there?

Speaker 3

Well, it is a combination, Patrick, of both seasonal Plus, we've seen certainly the compounding effect of interest rates and impacting affordability. But certainly, It's a combination of both that impact of rising interest rates for mortgages and certainly a seasonal play. So that's really the 2 primary drivers within the guidance that we've provided.

Speaker 4

Great. Thank you.

Speaker 5

You're welcome.

Operator

Thank you. One moment while we compile our next question. Our next question comes from the line of Frank Mitsch from Fermium Research. Your line is now open.

Speaker 6

Hey, good morning. If I could follow-up on hip, obviously very impressive EBITDA margins of 29% in the 3rd quarter. And based on your guidance, it looks like the year It's probably going to come in close to like 22% or so for the full year, which is up 200 bps from last year. How do you think about normalized EBITDA margins in hip as you look out into 2024 and beyond?

Speaker 3

Yes, Frank, good question. And certainly, I think you see from the strong portfolio offering that we had and The acceptance by our broad customer base that we continue to perform even very well in a period of rising interest Great. And so I think the portfolio we offer does provide an ability to deliver really strong and compelling EBITDA margins in this business. It is a combination of what I would call exterior building products, of course, our infrastructure products going into some of the infrastructure markets that we're seeing, both pipes and fittings. And of course, our portfolio adds compounds, which goes into a variety of applications, whether it is building wire or Other applications in automotive or medical.

Speaker 3

So it's a broad portfolio offering and I think the portfolio offer attracts I think the kind of good margins that you see even in the face of these strong headwinds we've seen given interest rates And some of the pricing pressure. So I do believe that it's performing incredibly well and we expect it to continue to be strongly performing.

Speaker 2

That's helpful. Good morning.

Speaker 7

Yes, hi. Yes, go ahead, please.

Speaker 2

Hi, Albert. I just want To comment that I think Steve in the past had also said our target for the hip business EBITDA margin is the high teens. No, I can go up and down depending on the time of the season. Usually, it's maybe higher second and third quarter lower first and fourth quarter.

Speaker 6

Understood. And then obviously then this does appear to be somewhat of an anomalous year and I was trying To get at that, but I also think that the cost improvement that you've talked about, you've raised your target for the year Fairly significantly, you did $80,000,000 year to date. How much of that cost improvement is coming from the hip segment versus PEM?

Speaker 3

It's actually well across the portfolio, everything from procurement opportunities in both PIM and in HIP as well as logistics opportunities. So it really is across both segments roughly, let's say, equally so.

Speaker 6

Interesting. Okay. Thank you so much.

Speaker 2

You're welcome.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Aleksey Yefremov from KeyBanc Capital Markets. Your line is now open.

Speaker 8

Great. This is Ryan on for Alexey. Thanks for taking my question. My first question would be around current dynamics in chlor alkali. Have recent capacity reductions by some of your peers Had a positive impact on the market thus far and are there any areas like where you're seeing incremental demand for your product?

Speaker 2

Yes. As we know that coring the biggest use of coring is for PVC And the biggest user of PVC is construction. And as Steve mentioned, not only we are impacted by the high interest rate, high mortgage rate Impact on affordability on new housings and also on the repair and remodeling activities, But also seasonality is impacting it. So I think the operating rate tends to go down for both PVC And for chlorine and chlor alkali, especially in the Q4, maybe even part of the Q1.

Speaker 8

Helpful. Thank you. And then can you just talk about what you're seeing in the epoxy market? Seems like there might have been some stability in prices here in October, albeit it's at a low level and it seems like costs are kind of continuing to eat at margins. Just any commentary you can give us there would be much appreciated.

Speaker 8

Thank you as always.

Speaker 2

Yes. As Steve mentioned, our proxy business impacted by imports, both Asian imports to Europe and Asian imports to U. S. And the prices both in Europe and U. S.

Speaker 2

Have dropped and very close now to the import price. So we see some stability even though the margin is pretty poor.

Operator

Wonderful. Thank you. One moment for our next question. Our next question comes from the line of Bhavesh Lodaya from BMO Capital Markets. Your line is now open.

Speaker 9

Yes. This is Bhavesh for John. Good morning, Albers and Steve. Congrats on the quarter and the continued outperformance on the hip segment. If I compare your performance in HEAP this year versus last during the quarter, so volumes are roughly flat and your margins are Up 8% year over year.

Speaker 9

Is that all price versus cost or is there an element of Changes in the product mix of what you are selling?

Speaker 3

No. So when you think about year over year results, Of course, you're right, volumes are flat, but I would say that given the headwinds we've seen related to affordability driven by Higher rates, it really is I think a testament to the strength of the portfolio offered. Obviously, we've seen some pressure on price either quarter over quarter or year over year. But nevertheless, I think the strength relative to the year over year with 'twenty two a much stronger year than 'twenty three is a testament to really the strength that we have with our customers and the offerings that hip does provide. I think if you think about the performance we had Quarter over quarter, a nice pickup in volume of 7% from 2Q to 3Q, which tells you even in this Market that we've seen, we're right where rates are at 8% plus for 30 year mortgages, still strong performance from a volume perspective In the portfolio in our hit business.

Speaker 9

Got it. And then a question on the PE markets here. So we have seen international prices move higher in line with the feedstocks and pretty heavy volumes going from the U. S. Into exports in general.

Speaker 9

How do you see the mix going ahead and any color on your outlook for PE pricing here?

Speaker 2

Yes. The U. S. Industry is exporting in the high 40 percent of percent in polyethylene and with new additional capacity coming up, U. S.

Speaker 2

Local demand, domestic demand cannot absorb the capacities. So I think as the new capacity comes up, More export, more volume will be exported, which is coming at lower price, of course.

Speaker 3

Thank you.

Operator

You're welcome. One moment for our next question. Our next question comes from the line of Matthew Blair from TPH. Your line is now open.

Speaker 10

Hey, good morning, Albert. With $3,100,000,000 of cash, could you assess the M and A landscape? What kind of areas would you be interested in adding in? And is it fair to think that if you did make an acquisition, it's more likely that would be in hip than PEM?

Speaker 3

Matthew, it's Steve. I would say that as we look across the landscape, we look equally hard at both A material side in our PIM segment as well as in our building products space. We're looking for opportunities where there is good compelling Value, good compelling synergies are immediately accretive to the bottom line. And so as you've seen, we're Willing to invest where we find the right opportunity as we have over the last year or 2, but we're looking for opportunities in both segments, Not necessarily focusing on 1 or the other, but those that really drive real value at the bottom line. And while we do have cash on the balance It doesn't compel us to really go out and do just a transaction to spend that cash.

Speaker 3

It's incredibly easy to spend the cash. It's always more challenging to get the return. And as you know, we're really focused on that return basis. So that's where our focus will be as synergistic opportunities at either the hip or the PIM segment and we'll continue to look for those.

Speaker 10

Sounds good. And then, Steve, you mentioned the raw material tailwinds in ship. Would that be PVC? And if so, are there any other raws that helped you out in the quarter? And also, were there any one time boost in hip?

Speaker 3

The impact on the one time items were or the period items were really all in PIM. And as it relates to the Reduction in inputs, it was really vinyl. We've seen actually that being the biggest input that had a benefit to the contribution of margin expansion in the hip business.

Speaker 10

Thank you.

Speaker 7

You're welcome.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Michael Sison from Wells Fargo. Your line is now open.

Speaker 3

Good morning, Mike. Are you there? Maria, maybe we put Mike back in the queue and let's take the next question.

Operator

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

Speaker 3

Arun, are you there? Maria, do we have a connectivity issue?

Operator

Not that I am seeing. Everything looks clear. Do we want to try to go on to the next person?

Speaker 3

Yes. Let's put Arun also in the next queue and let's go to this The next question please.

Operator

One moment for that question. Our next question comes from the line of David Begleiter from Deutsche Bank. Your line is now open.

Speaker 11

Thank you. Can you hear me?

Speaker 3

Yes, David, we can. Thank you.

Speaker 12

Good morning.

Speaker 11

Thank you. You mentioned some in PEM, some one time impacts in the quarter. How much were they? And should they all be a tailwind into Q4 and are there any other one timers in Q4?

Speaker 3

David, I see none at this stage in terms of impacts In Q4 and I would say these all were attributable to the PIM segment and this was a $20,000,000 item that we called out.

Speaker 11

Very good. And Albert and Steve, looking at 24, do you have an early view on hip volumes next year given the Weakness you're seeing in North American construction?

Speaker 2

Yes. We expect the hip The general housing industry to still be impacted by the high mortgage rate, high interest rate. So until the Fed Start lowering rates. We don't see any recovery in housing demand or in building related demand.

Speaker 11

So would you expect your volumes to be down next year in hip?

Speaker 2

Possibly.

Speaker 11

Thank you.

Operator

Wonderful. Thank you. One moment for our next question. Our next question comes from the line of Duffy Fischer from Goldman Sachs. Your line is now open.

Speaker 13

Yes. Good morning, guys. Question around epoxy. With the oversupply we're seeing Largely out of China, which of your end markets are being impacted by that, which are not? And have you seen kind of a change in global trade flows for epoxy?

Speaker 2

I think the coatings generally are the largest market for epoxy And as well as areas such as composite and windmills, I think generally, China has the largest capacity in the world by a big stretch over the next producer. And the economy in China really has not We covered even though government has put in several steps of incentives. Again, we're heading to winter season And things are slowing down in China as well. So I think it's the impact is across the board in all epoxy activities.

Speaker 13

Okay. And then do you think the industry if we roughly stay at these levels because you talked about Construction may still struggling next year. Does the industry need to do something strategic, meaning, are people running kind of Low cash breakeven, do you think in some parts of the world? Or is this just something we're going to have to wait out until we get some demand rebound? I

Speaker 2

think generally speaking, if you talk about just chemical industry or

Speaker 13

Oh, epoxies, I'm sorry, epoxies in general.

Speaker 2

Yes. Yes. As I said, one of the questions earlier was where we're seeing prices and as mentioned that prices pretty much Has dropped in both U. S, European markets to meet imports, and we're seeing the imports to start slowing down as well Because of the cost pressures, oil price going up and the economy is not great and even Companies in China are cutting production or some of the plants are not running. So we are seeing people are taking actions to reduce production, Reduce losses all across the world.

Speaker 2

So I think very few epoxy people we know are making any money.

Speaker 13

Great. Thank you, guys.

Speaker 2

You're welcome.

Operator

One moment for our next question. Our next Question comes from the line of Kevin McCarthy from Vertical Research Partners. Your line is now open.

Speaker 1

Yes, good morning.

Speaker 14

Albert, I'd appreciate your updated view of PVC resin prospects moving into 2024. The U. S. Contract price seems to be trending about flat, but it seems also that there's a lot of supply length in China against the backdrop of Dislocated property sector there. So how do you see that playing out?

Speaker 14

Would you anticipate rationalization of Capacity or throttling back, what is your view on PVC for next year?

Speaker 2

I think at least the U. S. Market PTC demand were impacted by both domestic housing construction And as well as global economy, as you know, about a third of the U. S. Production PVC are exported And being at that ratio for quite a while.

Speaker 2

So and the U. S. Has the lowest cost To produce PVC in the world, we are benefited from low cost natural gas for generating power for making chlor alkali and low cost natural gas For producing ethane, which is predominant feedstock for U. S. Ethylene producers And half of PVC is ethylene and half is chlorine.

Speaker 2

And so we have the lowest cost Produce in a world to produce PVC and we can export anywhere in the world and compete. The issue then is margin. And China, one thing is going on is that the Chinese government are moving less and less In the carbide, about 80% of the Chinese capacities are carbide coal based, which is high cost and high polluting Process and the Chinese government having containment of any new capacities in the carbide process and the switching to Ethylene based PVC production, which comes at a higher cost because ethylene in China is all based on NAFTA, which comes from cracking refining oil. So the cost base is higher And so they are less able to compete on a global basis. Also from that sense, again, our U.

Speaker 2

S. Based producers are much Better positioned to compete globally against even Chinese exports. So, At the end is the global economy and China, construction activity is a big part of the Chinese economy and is really going through recessions Right now, so until the construction and housing activity in China improves, you're not going to see improvements in Possibility in Vinyl Business in China either, which will impact the rest of the world as well.

Speaker 14

Thank you for that. And then Steve, I had maybe 2 housekeeping ones for you. Apologies if I missed it, but How did the $50,000,000 FIFO headwind that you referenced split between your segments? And also curious, do you have any 4th quarter maintenance turnarounds planned?

Speaker 3

Yes. And so, about 3 quarters of that is in PEM, Kevin. And your second question was tell me again.

Speaker 14

Are you planning to turn around any of your manufacturing plants in the current quarter?

Speaker 3

In the current quarter, only a small activity from a maintenance level perspective. Our bigger activity will be in 2024 when we have a Ethylene turnaround in 2024, but otherwise in the Q4, it's really small maintenance activity not attributable to any significant turnaround levels.

Speaker 14

Okay. Thank you very much.

Speaker 9

You're welcome.

Operator

One moment for our next question. Our next question comes from the line of Josh Spector from UBS. Your line is now open.

Speaker 5

Hi, good morning everyone. It's Chris Perrella on for Josh. Just following the guidance for hip for the 4th quarter, What's causing the halving of margins sequentially? Is that higher raw material costs? And is that final headwinds?

Speaker 5

And what are the moving pieces, I guess, up in the 3rd quarter on the margin and then down in the 4th quarter sequentially there?

Speaker 3

Yes, a big piece of that headwind is really attributable to seasonal slowdown and so diminished demand level. We're also seeing since we are a FIFO reporter, some of that cost will also roll through that We'll roll through in the Q4 in terms of some of the feedstock cost will come through as well. And of course, the compounding of interest rates We've seen will continue to be a headwind in terms of affordability. So it's a combination of those factors.

Speaker 5

All right. Appreciate that, Steve. And then just one quick follow-up On the caustic soda, Albert and Steve, I'd just like to hear your thoughts on the caustic soda market as we move through the year, given The weaker demand outlook for PVC?

Speaker 2

Yes. Caustic soda generally, The global demand correlates well with the global GDP growth and global GDP is really not doing that well. So this year, we have experienced price declines almost every month of the year. And I think at least the consultants are saying that after the price erosion of this year, I think they're expecting another $20 For November December, we'll drop, but next year, there'll be more stable and more price increases coming up. I've got all these subject to global economic demand and it's hard to forecast these days.

Speaker 5

I appreciate that. Thanks for the time this morning. You're welcome.

Operator

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

Speaker 7

Good morning, Albert and Steve. I wanted to revisit one of the earlier around chlor alkali supply demand fundamentals, particularly as they relate to your views on what ECU pricing and margins we'll do on a go forward basis. Look, I mean, the ECU pricing and margins have obviously come down over the last couple of quarters. But one of your larger competitors over the last few years has shut down a fair bit of capacity and has recently announced the Temporary idling of some capacity as well. And they were very vocal in saying that by the Q2 of 2024, They expect to see a positive inflection on the ECU pricing and margin side of it.

Speaker 7

So are your views in agreement with that?

Speaker 2

Yes. Generally speaking, we agree. Westlake, because of our Historical strategy of being more fully integrated. We have downstream manufacturing of chlorine to PVC and then also further Integration to hip businesses. So we have a lot more channel to sell products both domestically and export Along the whole Vinyls chain, which help us to moderate our operations, everything else.

Speaker 2

So as we explained earlier, The last quarter, the value chain really has moved down to the downstream hip business. And And since we have, as mentioned, high declines for caustic throughout this whole year and Consultants are forecasting much more stable and actually improving prices for next year. We're expecting Things to get better. Now this is subject to global economic conditions. We don't know what's going to happen with high interest rate.

Speaker 2

We're still seeing Feeling the impact of high interest rate, which until that reverses, would have a detrimental effect on demand both in the U. S. And overseas as well.

Speaker 7

Fair enough. And as a follow-up, Albert, I mean, we still seem to be living through some unprecedented times. The destock across a variety of sort of chemical product chains, including yours, has been quite severe 2022 onwards. And if we were to simplistically sort of Put that into historical context, obviously, a massive destock cycle like the one we've seen is followed by a Pretty impressive restock cycle, right? But I mean, is it fair to assume that on a go forward basis, we may actually eventually See a pretty impressive restock cycle or now with rates where they are, with housing doing what it's doing, with China doing what it's doing, Are we in a new sort of paradigm shift?

Speaker 2

Absolutely. I think, as you mentioned, we've been seeing destocking pretty much through the whole year. And I think most companies mentioned earlier, The destocking activity is over. The question is, what is the true demand and people are really because high interest rate, high Inventory costs are expensive to carry. People are really ordering what they need.

Speaker 2

The issue is, there need changes. So they don't know they're very short term oriented now. And So, as demand came down, we have more ability to serve. As you know, back in 2022, if our hip business, we have Backlog over a year of certain products and that's not good for our customers. So now, by and large, most of our Businesses were ready to serve our customers in a relatively short notice.

Speaker 2

So we as producer, we carry a bit more inventory to serve our customers And which also benefits from any import competition in the businesses. But having said it, Is that we don't know and customers don't know what is the true demand and we are ordering they are ordering as only they need and we're supplying them. And as you said, When the market turns and they want more of a reasonable higher level inventory, that will be a Multiply effect, if that you can say that, to production in the future, but who knows when that market turn will be. On the housing side, generally speaking, springtime, which start probably February, March is when people are seeing Benefits of the weather and the start putting sticks in the ground and do all that. So we should be seeing some Signs of improvement on housing in February, March related, but who knows, time will tell.

Speaker 7

Very helpful, Albert. Thank you so much.

Speaker 2

You're very welcome.

Operator

Thank you. One moment while we prepare our next question. Our next question comes from the line of Michael Cieszon from Wells Fargo. Your line is now open.

Speaker 12

Hey guys, can you hear me?

Speaker 3

Yes, we can, Mike. Good morning.

Speaker 12

Okay, good. Sorry. Albert, what do you think you're going to run your chlor alkali facilities in the Q4 in terms of the operating rate? And how do you think about that as you head into next year, if demand continues to be sort of challenged?

Speaker 2

Yes. Our operating rate pretty much follows the industry operating rates. And as mentioned earlier, generally the demand goes down In the Q4 and Q1, so our industry operating rate tends to go down and picks up again in the second and third quarter. And this is the general pattern. Of course, as Steve mentioned, we have not only seasonality, but also impact of high interest rate On the demand for construction activities.

Speaker 2

So those are compounded effects.

Speaker 12

Got it. And then if, when you think about PVC demand in 2024, If demand weakens as you head into 'twenty four, How do you think you'll run your facilities to sort of compensate for that? Will you pull back Some capacity or just sort of run it as is?

Speaker 2

Yes. The industry has pulled back. We have pulled back capacities When the demand is not there, but as I mentioned that in the Vinyl Industry, we are one of our fully integrated Companies going all the way from making ethylene and chlorine down to making pipes, windows and sidings and compounds. And the further you go down, the more easy for you to reach out a broader customer base. And for PVC resin, we don't export much pit business, but PVC resin has mentioned the industry exports about a third, 35% of its production.

Speaker 2

And we are the lowest cost producer in the world for PVC. We mean American Vinyl Producers. So So now the margin is good enough, our industry will export PVC and will also to benefit the upstream chlorine ethylene side.

Speaker 5

Got it. Thank you.

Speaker 9

You're welcome.

Operator

Our final question comes from the line of Arun Viswanathan from RBC Capital Markets. Your line is now open.

Speaker 15

Great. Good morning. Thanks for taking my question. Hope you're all well. So I guess my first question I'll have 2 questions.

Speaker 15

So first question is on hip. When you, I think, Discuss this segment in the past. You've noted kind of a 15% to 20% EBITDA margin range. You've done very well in executing here. And Do you think that's still the appropriate range to consider?

Speaker 15

And could you potentially go well beyond that range in a higher volume environment?

Speaker 12

I'll start with that. Thanks.

Speaker 3

And so Arun, when we think about the demand environment we've been in, we've been guiding to kind of the Upper teens and you see that we've exceeded that in a couple of quarters. This quarter was record quarter with 29. But I think in a much stronger demand environment, Given the fact that we've got a very broad product offering, there is a potential for that. But I think as we've seen here, we've got to see a much Stronger demand market to be able to then move margins and pricing up. We've got a very strong headwind currently with Seasonality coming into play and with mortgage rates 8% plus for 30 year mortgages, that's quite a bit of a sticker shock for most homebuyers.

Speaker 3

And so to be able to get a better, tighter market, if you will, we need a much better backdrop in terms of affordability And a more constructive macroeconomic outlook. There's a lot of uncertainty in the market these days and that's causing a lot of people to be cautious about deploying Personal capital into repair and remodeling and other construction. But yes, there's potential, but we need a better macroeconomic backdrop.

Speaker 15

Okay. Thanks, Steve. And just on PEM as well, another question I had was, I think you touched on the footprint on chlor alkali. Your operating rate is kind of following the industry. But what about epoxy?

Speaker 15

I mean, do you think that there's further rationalization required there just given the weakness that we've experienced over the last couple of years? What's it going to take to really see a better market there, understanding that China appears to be the biggest driver, but could there also be And capacity reductions on your part that would that accelerate that? Thanks.

Speaker 2

Yes, that's a good question. As we discussed earlier, That is all the capacity in the world. I think China built a lot of capacity for their anticipation of demand for both EV Lightweighting cars, windmills generating the renewable power. So that's the reason why China is building capacities. But For one of the reasons, the EV demand is not that going that strong.

Speaker 2

I think adoption is still takes while globally. China's exporting EV cars around the world are leading competition. At the same time, the renewable power, the windmill blades, The various activities going on even in the U. S. And Europe, a lot of people want to do it, but the cost increases and all these issues are impacting The pace of further development in windmills, we think will come.

Speaker 2

And the Westlake, we have Technology that can make over 100 meter long blade and longer the blade, better the properties efficiency of the windmills. So, it just takes time. And I think some of the older plants in China, non integrated plants, running low rates or shutdown. So, just like anything, It will be rationalization going on and it takes time, but I think the demand for epoxy globally is still very strong, Especially in the U. S, you have infrastructure, we build bridges and ship and So on and so forth, and they all need coatings, car needs coatings, and the windmill blades and epoxies and electronics.

Speaker 2

So the global demand for epoxy, we are very optimistic on the long term demand. I think short term, we have these

Operator

Thank you. At this time, the Q and A session has now ended. Are there any closing remarks, Jeff?

Speaker 1

Thanks. Thank you again for participating in today's call. We hope you'll join us again for our next conference call to

Operator

Thank you for participating in today's Westlake Corporation Third Quarter Conference Call. As a reminder, this call will be available for replay beginning 2 hours after the call has ended. The replay can be accessed via Westlake's website. Goodbye.

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Key Takeaways

  • Westlake reported record HIP segment EBITDA of $327 million in Q3 with a 29% EBITDA margin, driven by resilient housing and infrastructure demand and lower material costs.
  • The Performance & Essential Materials segment saw EBITDA fall to $339 million, down $222 million year-over-year due to lower average selling prices, volume declines, and increased Asian competition in epoxy.
  • Management raised its 2023 cost-savings target to $95–110 million from $75–105 million after achieving $80 million of savings year-to-date.
  • Strong cash flow generation—$696 million in Q3 and $1.8 billion YTD—supported a 40% dividend increase in August and $180 million returned to shareholders since January.
  • For Q4, Westlake expects HIP sales of $875–975 million with mid-teens EBITDA margins and anticipates ongoing challenges from seasonality and high mortgage rates, while maintaining full-year capex of $1 billion.
AI Generated. May Contain Errors.
Earnings Conference Call
Westlake Q3 2023
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