Westlake Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 4, 2023

Key Takeaways

  • Westlake delivered Q1 2023 sales of $3.4 billion, net income of $394 million and EBITDA of $825 million, marking a sequential improvement from Q4 driven by higher volumes, a shift to domestic markets and lower feedstock, fuel and power costs.
  • The Performance & Essential Materials (PEM) segment reported Q1 EBITDA of $615 million, down $456 million year-over-year due to lower average selling prices for PVC, polyethylene and epoxy resins and reduced sales volumes.
  • In the Housing & Infrastructure Products (HIP) segment, EBITDA margin held at 20% despite a 21% year-over-year volume decline from destocking and higher mortgage rates, underscoring the resilience of Westlake’s brands and product mix.
  • Westlake achieved $25 million of cost savings in Q1 toward its $55 million–$105 million 2023 target and reaffirmed full-year capital expenditures of approximately $1 billion, matching its depreciation run rate.
  • Management remained cautiously optimistic, citing expectations of improving North American and Chinese demand, a persistent U.S. housing supply deficit and continued progress toward a 20% carbon intensity reduction by 2030.
AI Generated. May Contain Errors.
Earnings Conference Call
Westlake Q1 2023
00:00 / 00:00

There are 14 speakers on the call.

Operator

Morning, ladies and gentlemen, and thank you for standing by. Welcome to the Westlake Corporation First 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. As a reminder, ladies and gentlemen, this conference is being recorded today, May 4, 2023.

Operator

I would now like to turn the call over to your host today, Jeff Holly, Westlake's Vice President and Treasurer. Sir, you may begin.

Speaker 1

Thank you. Good morning, everyone, Welcome to the Westlake Corporation conference call to discuss our Q1 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 or 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 discuss our financial and operating results. After which, Albert will add a few concluding comments and we will 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 discussed 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 Q1 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 section on our website. A replay of today's call will be available beginning today, 2 hours following the conclusion of this call.

Speaker 1

This replay may be accessed via Westlake's website. Please note that information reported on this call speaks only as of today, May 4, 2023, and therefore, you are advised that time 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 Q1 2023 results. For the Q1 of 2023, we achieved sales of $3,400,000,000 Net income of $394,000,000 and EBITDA of $825,000,000 These solid results Reflects significant improvement in volumes, margins and earnings from the Q4 of 2022 As customer destocking activity moderated, end market demand improved, and we benefited from lower feedstock, fuel and power costs. As demand improved in the Q1, we shifted sales volumes from exports to domestic markets, contributing to better sales mix and higher integrated margins.

Speaker 2

We also benefited from lower feedstock energy costs compared to the levels of 2022 as our globally advantaged low cost feedstock and energy position in the U. S. Gulf Coast improved further, but we also saw lower energy costs in Europe as well. Our results for the Q1 also reflected the achievement of approximately $25,000,000 of cost savings in its quarter towards our previously communicated $55,000,000 to $105,000,000 of targeted 2023 cost savings. Each of these factors supported solid improvement in our integrated margins from the Q4 of 2022.

Speaker 2

Looking at our Q1 financial results, I'm particularly proud of our hip segment performance, which maintained EBITDA margin of 20%, similar to the Q1 of 2022. These margins were achieved Despite a 21% decline in volume when compared to the prior year period, which was driven by the decline in homebuilding activity Due to lower affordability from higher mortgage rates, this demonstrates the benefit of our product mix and strengths of our brands. The margin stability of these businesses, along with the long term growth opportunity in the U. S. Housing market, The key reasons why we invested in the hip segment in 2021 through the acquisitions of Borrow Building Products, LESCO Fittings And Dynex, we continue to have a positive long term view of the U.

Speaker 2

S. Housing market, driven by the deficit in new housing construction Since the Great Recession in 20 20 2008 and increasing demographics demand. Turning to our PAM segment. We continue to operate with agility as we navigated the current market dynamics By shifting PVC and polyethylene sales volume back from export markets to rebounding domestic markets, Our solid chlor alkali markets drove higher average selling prices for both chlorine and caustic soda in North America. Lower feedstock energy prices combined with our cost reduction actions drove significant improvement in Integrated Margins from the Q4 of 2022.

Speaker 2

Overall, I'm very pleased with our Q1 performance and the team's ability to successfully adjust to rapidly changing end market trends. I would now like to turn our call over to Steve to provide more detail on our financial results for the Q1 2023.

Speaker 3

Thank you, Everett, and good morning, everyone. Westlake reported net income of $394,000,000 or $3.05 per share in the Q1 of 2023 on sales of $3,400,000 Net income for the Q1 of 2023 decreased $362,000,000 from the Q1 2022 as a result of lower average selling prices and integrated margins, particularly for PVC, polyethylene, epoxy resins and lower production and sales volume in each segment. When compared to the Q4 of 2022, net income increased by $162,000,000 The Q1 of 2023 due to higher production and sales volume in each segment, lower feedstock fuel and power cost In North America and Europe, the challenging market conditions that we experienced in Q4 of 2022 improved Throughout the Q1 of 2023, as destocking abated and North American demand for PVC and polyethylene improved, which allowed us to shift sales volumes back to domestic from export markets in this stronger environment, driving higher netbacks. The customer destocking in our hip segment that occurred in the second half of twenty twenty two also abated, which along with the seasonal uptick And spring construction activity drove a 10% sequential increase in hip volumes. Overall, we were pleased For the Q1 of 2023, our utilization of the FIFO method of accounting resulted in an unfavorable pretax impact of $45,000,000 compared to what earnings would have been reported on the LIFO method.

Speaker 3

This is only an estimate and has not been audited. Moving to our segment performance. Our performance in Essential Materials segment Q1 2023 EBITDA of $615,000,000 decreased $456,000,000 from the Q1 of 2022. As compared to the prior year period, Performance Materials sales in the Q1 decreased $647,000,000 Largely driven by lower average selling prices, particularly for PVC resin, in addition to lower sales volumes across our portfolio. Essential Materials sales in the Q1 of 2023 decreased $164,000,000 over the Q1 of 2020 primarily driven by higher average selling prices for caustic soda.

Speaker 3

As compared to the Q1 of 2022, our earnings impacted by lower integrated margins for all of our Performance Material products, including PVC, epoxy, polyethylene and lower production and sales volumes across most product lines. These headwinds were particularly were partially offset by higher average selling prices And Essential Materials along with lower fuel and energy prices. PIM segment EBITDA of $615,000,000 in the first quarter increased $172,000,000 from the Q4 of 2022 as a result of 6 key elements: Higher production and sales volumes, particularly in PVC and epoxy resins improved performance material sales mix as Volumes in polyethylene and PVC shifted to domestic markets, higher essential materials average selling prices driven by caustic soda, Lower feedstock and energy cost, reduced turnaround activity particularly in epoxy and benefits From the cost savings program we previously announced. Turning to our Housing and Infrastructure Products segment, we saw improved demand driven by seasonal uptick Compared to the Q4 of 2022 as our customers saw improved demand in their markets. HIP Segment EBITDA of $205,000,000 for the Q1 of 2023 decreased $53,000,000 when compared to the Q1 2022.

Speaker 3

Housing product sales decreased $154,000,000 from the prior year period as volumes declined by double digit rates across all product categories. Infrastructure product sales fell $63,000,000 from the Q1 of 2022, primarily due to a decline in sales volumes of infrastructure products servicing fresh and Wastewater Applications. The volume decline in housing and infrastructure products were driven by lower housing starts and lower inventories carried by our customers in the Q1 of 2023. These volume declines were only partially offset by higher average selling prices And while raw materials cost along with the benefits realized from our cost savings program, when compared to the Q4 of 2022, HIP segment EBITDA of $205,000,000 increased $72,000,000 Housing product sales of $818,000,000 in the Q1 2023 increased $60,000,000 while infrastructure products of 189,000,000 in the Q1 increased $9,000,000 from the Q4 of 2022. The higher sales and earnings were the result of lower raw material cost And broad based increases in sales volumes due to the moderating customer destocking and seasonal construction trends that I previously discussed.

Speaker 3

The overall macroeconomic backdrop remains uncertain and our customers have kept their inventories rather tight as they look for Improvements in economic activity. In our Hips segment, while the Q1 experienced the beginning of the seasonal increase in construction activity in North America, With March housing starts reported at 1,420,000 similar to the average level for the second half of twenty twenty two, We continue to see our hip customers remaining cautious in building inventory until they see less uncertainty in the economy. Therefore, we are controlling our cost, working closely with our customers to provide the PIM products they demand and supporting our building products customers With the premium brands and products to meet their building and remodeling needs. Turning to the balance sheet and cash flows. As of March 31, 2023 cash and cash equivalents were $2,400,000,000 and total debt was $4,900,000,000 with a staggered long term fixed rate debt maturity schedule.

Speaker 3

For the Q1 of 2023, net cash provided by operating activities was $512,000,000 while capital expenditures were $267,000,000 resulting in free cash flow of 245,000,000 We continue to look for opportunities to strategically deploy our balance sheet in a shareholder friendly manner, create long term value and reward our shareholders. Now let me provide some guidance for your models. We are reaffirming our earlier guidance for full year 2023 revenue in our Housing and Infrastructure Products segment to be between $4,300,000,000 $4,800,000,000 with an EBITDA margin in the high teens. We continue to target $55,000,000 to $105,000,000 annualized savings in 2023 with approximately $25,000,000 already achieved in the first Our significant cash balance and investment grade credit rating position allow us to invest in our business and support our customers. 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.

Speaker 3

As a reminder, this includes the planned 30 day turnaround at our Calvert City ethylene unit in the Q2 of 2023. For the full year of 2023, we expect our effective tax rate to be approximately 23%. We also continue to expect cash interest expense to be approximately $160,000,000 Now let me turn the call over to Albert to provide current outlook for our business. Albert?

Speaker 2

Thank you, Steve. Since the Q4 of 2022, the economic environment has improved, but with some mixed economic signals. This improvement in the economy drove demand growth for all our products during the Q1 of 2023 as compared to the Q4 of 2022. Additionally, lower natural gas, ethane and power costs further improved our structurally advantaged low cost position in North America. Taken together, the volume improvement and lower cost position drove the improved 1st quarter results and highlight the strength of our business in the current economic environment.

Speaker 2

Looking ahead, we are cautiously optimistic that economic conditions have stabilized and believe demand for our products We'll continue to improve as 2023 progresses. We expect demand from China to continue to improve, which would spur demand for many of our products, improving integrated margins. We also expect Demand in the U. S. To improve with increasing industrial and construction activity.

Speaker 2

In our hip segment, The overall housing market continues to be impacted by affordability concerns resulting from the higher mortgage rates. Yes, we have seen homebuilders taking action to address these conditions and adjust prices, Including increased incentives, our strong brand and product mix of 50% new construction And 50% repair and remodeling has remained resilient and supportive of margins in these market conditions. Longer term, U. S. Housing remains structurally undersupplied due to the homebuilding deficits in 2,007 Relative to the 50 year average of 1,500,000 new homes built annually and improving demographics Support more first time homebuyers over the coming decade.

Speaker 2

As a result, we continue to have a very positive outlook on the long term fundamentals for our Building Products business. In our PAM segment, growth in global population And continuing urbanization keep the outlook remaining favorable as performance materials using everyday products Such as housing, packaging, healthcare, automotive and wind energy, drive demand of PVC, polyethylene and epoxy. At Westlake, we recognize that improving the sustainability of our products and operations remains critical to our future success. In the Q1 of 2023, we continued to make progress towards our goal to reduce our carbon intensity by 20% by 2,030. We also made significant progress in the commercialization of many of our sustainable products.

Speaker 2

These exciting products include our 1 pellet solution, An efficient polyethylene solution incorporating post consumer resin while maintaining its strengths In our Molecular oriented PVC pipe or PVCO, which provides a lighter weight and more durable PVC pipe With a lower carbon footprint than any other water main pipe material, our Dynex business Acquired in 2021 is one of the largest recycler of plastic materials in the United States, processing £100,000,000 of scrap and waste annually, Including an increasing amount of scrap from other Westlake businesses. As part of our sustainability focus, We are continuing to introduce products into the market that include recycled and bio attributed components that satisfy consumer demands. Finally, we continue to look for opportunities To redeploy our well capitalized balance sheet in a disciplined manner that will create long term value for shareholders. This includes both identifying acquisition candidates with returns that can seed our cost capital Returning cash to shareholders through both dividends and share repurchases. We expect more opportunities to redeploy capital to present themselves as economic conditions stabilize throughout 2023.

Speaker 2

In the meantime, we continue to benefit from the earnings power and the stability created by the investments we have made in our business and our increasing focus on Specialty Material and Downstream Products. Thank you very much for listening to our Q1 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, which provides additional clarity into our results, is available on our website and a replay of this teleconference will be available 2 hours after this call has ended. We will provide that number again at the end of the call. We will now take questions.

Operator

Your first question comes from the line of Michael Seaton of Wells Fargo. Your line is now open.

Speaker 4

Hey, guys. Nice start to the year. Albert, I think you mentioned that 2Q tends to be seasonally better than 1Q. As you look at demand and where integrated margins are for all your businesses, how do you think that plays out this year given Yes, things are weakening across the board.

Speaker 2

Yes. We've seen Inventory destocking run its course and pretty much finished that destocking process. And we believe that customers are reordering as they see the demand. And we believe that economy has Stabilized through the changes in interest rate increase and it should improve from The bottoms we're seeing in Q4 of 2022. But having said that, the Fed just raised interest rates And they could have repercussions in the economy going forward, but we believe that the U.

Speaker 2

S. Economy is still quite strong, domestic demand is quite strong. We've seen that in our both in the PEM segment, polyethylene PVC as well as in our hip building materials business. So we are cautiously optimistic that we'll see some improvements.

Speaker 3

Does it mean that we'll go back

Speaker 2

to 2022 or 2021 high levels before the interest rates start increasing.

Speaker 4

Got it. And then for PVC and polyethylene, how is China recovering? And is the export market Starting to improve where could really shore up domestic operating rates.

Speaker 2

Yes. I think China's economy is improving slowly, Slower than people expected after the opening up from pandemic and after the Chinese New Year celebrations. But we see that the economy is still strong and people are Going out about traveling and spending and the stimulus from the government as well It will take some time, but we believe that China's economy should be improving.

Speaker 5

Great. Thank you. You're welcome.

Operator

Thank you so much. Your next question comes from the line of Kevin McCarthy of Vertical Research Partners. Your line is now open.

Speaker 6

Yes, good morning. Albert, in your Press release, there is a comment that you saw increasing demand for epoxy resins, Which surprised me a little bit. Can you elaborate on what you're seeing in the epoxy market with regard Demand and operating rates and looking ahead, are you seeing any increased stability in the pricing function there?

Speaker 2

Sure. Good morning, Kevin. Yes, we see epoxy demand improving primarily in North America, It's still quite weak in Europe with a high cost position in Europe and also in Asia, it's relatively weak. We are seeing signs of improvement, and the U. S.

Speaker 2

Economy is still growing. We need more Wingmill Blades and Coatings as well as Structural Products. So We believe that the POCI business should have a good position going forward, but not as, of course, robust as In 2021, 2022, but we believe the demand is there. And I think when the economy recovers, the increased demand in epoxy,

Speaker 6

And then secondly, Your hip segment margins hung in quite well given the volume decline. As you sort of Prove out that business through what seems to be a tougher external environment demand wise. Albert, do you see opportunities to add to the construction related portfolio during the current Cyclical downturn, looks like your net debt has declined about $1,600,000,000 year over year providing you with more financial flexibility. So Curious as to your appetite to add via acquisitions to that business.

Speaker 3

Kevin, it's Steve. And you're right. We've seen, I think, good performance in the Q1 to be able To maintain very strong margins in that business, and I think it illustrates the strength of the brand and the mix. And as we think about the mix of products that we have and Branding, there are opportunities to add to the portfolio in that Building Products business. And we continue to be quite interested to look to fill Opportunities where we see demand and can satisfy our customers with those branded products and add to that portfolio.

Speaker 3

We'll continue to look for opportunities to build out that portfolio where it makes sense. So we are constantly looking, as you would guess, And actively in dialogue with folks, just finding the right opportunity and the right price.

Speaker 6

Understood. Thank you so much.

Operator

Thank you so much. And our next question comes from the line of Josh Spector of UBS. Your line is now open.

Speaker 7

Yes. Hi. Thanks for taking my question. I was just wondering where you would say your cost base is now. So with what you reported in the quarter, Does that reflect kind of the lower energy feedstock environment or your LIFO adjustments you call out?

Speaker 7

Is that the right way to think about that? Was there another tranche that kind of flows through inventory that could help you versus where you are today?

Speaker 3

Yes. Certainly, as a FIFO Reporter, you would imagine that there is still some of that lower cost that will flow through as a result, which is why I always like providing you Some sense of what we would see if you're using LIFO versus our FIFO. As you look forward into the Forward prices for gas or for ethane, you can see that compared to 2022, 'twenty three numbers for gas Score for ethane will be significantly lower as we see in the forward curve. So we I think we're very well positioned With a Gulf Coast North American footprint for a large portion of our portfolio and that strong position will continue to play well Yes, the 4 curve plays out as it is forecasted to.

Speaker 2

Yes, Joe, just want to add some more numbers. As Steve said, The average gas price in 2022 was $6.55 per 1,000,000 BTU. And the current and forecast estimate for 2023 is $2.95 per 1,000,000 BTU, less than half of that. And as you know, natural gas also impact the price of ethane, which is a fixed store for ethylene and Also impact our power price, we buy a fair amount of power and natural gas price. Natural gas is a large fuel input for power.

Speaker 2

So all that has a Very positive impact on our cost position.

Speaker 3

So to give you some sense of the earnings potential here, when you think of the sensitivities we have Just to natural gas, dollars 1 in MMBtu on an annualized basis across the entire portfolio of Westlake It's $125,000,000 improvement in EBITDA. And so given the fact that Albert was looking at $6.55 for 2022 and the forward curve of 2.95 Since you've got over $3 of forward value that could play through. So that sensitivity I gave you of $1 to

Speaker 7

Thanks. I appreciate all that. And just quickly on the PVC sales mix, I mean, you noted it's improved in Would you say it's normal in terms of your mix now? Or are you still a little bit more skewed to export than you typically are?

Speaker 2

Yes, it's more normal. At the end of last year, Q4 of 2022, because of lack of demand, people are destocking the inventory. We had to export a lot overseas and those prices have been lower. And as the domestic demand recover as well as the start of building season, It's really starting from March. So we're seeing the Q2, the demand has increased improved a lot more.

Speaker 5

Okay. Thank you. You're welcome.

Operator

Thank you so much, Josh. Our next question comes from the line of John Roberts of Credit Suisse. Your line is now open.

Speaker 8

Thank you. You noted the increased exports of polyethylene and vinyls.

Speaker 3

Could you talk about some of the Could you talk about some of the geographic shift that's going on in epoxy? So we've got China epoxies moving into Europe. Are you Shifting any of your geographic footprint in your epoxy sales as well?

Speaker 2

Yes. We are reacting to In the very competitive global marketplace, and as I said earlier, that China, with its Economy has been slowing in the past year or quarters. They exported epoxy and as well as PDC To places like India and Europe, but we're seeing that being slowing down, the Chinese economy is improving, But things could change, so but we are very cautious and cognizant of all the activities going on. And

Speaker 3

then secondly, on the Westlake partnership, are you still just waiting for a better value to do more dropdowns? And Does it make sense at some point to drop the Lotte cracker interest into the MLP? Yes. So when we think of the Opportunity there to put the ethylene our ownership of the ethylene unit for Lotte into the unit, it's certainly possible. The issue is, as you noted, is really having Right valuations and the capital access.

Speaker 3

So there is an opportunity to do that if we see the right valuations and the right access to capital. Okay. Thank you. You're welcome.

Operator

Thank you so much. Your next question comes from the line of Duffy Fischer of Goldman Sachs. Your line is now open.

Speaker 3

Duffy, are you there?

Speaker 9

Yes. Can you hear me?

Speaker 3

Yes, I can now.

Speaker 9

Okay. Sorry about that. When you look at the vinyl Chane, chlorine, EDC, VCM into PVC, do you see significant shifts in the relative contribution between the

Speaker 2

Yes. Well, we looked at the chain economics, You're right. They do move up and down the chain. Right now, the chlorine value is very high. So the chain value is more on the chlor alkali Business spot and downstream PDC, but that could change also.

Speaker 9

Fair enough. And then one of your large competitors The right footprint, do you think in epoxy? Or do you think you need to do some significant restructuring of your asset base as well?

Speaker 2

Yes. Certainly, we are new to the epoxy business and have had ownership for a year. We find a lot of opportunity to improve. And as we go forward, We'll try to improve our positions.

Speaker 9

Great. Thank you, guys.

Speaker 3

You're welcome.

Operator

Thank you so much. Our next question comes from the line of Steve Byrne of Bank of America. Your line is now open.

Speaker 10

Good morning. This is actually Matt on for Steve. So just kind of looking at And we spoke a little bit to this, but Chinese coal prices have been softening up here a bit. And I know There was an expectation that perhaps China could rationalize some capacity of PVC because margins are pretty weak. But If we think about the competitive position out of Asia right now with maybe a softer feedstock market, do you expect You expect that maybe just goes to some margin relief for those producers and prices will stay kind of Where we are or do you see this as deflationary for global prices?

Speaker 10

Do you think the demand can kind of So cut out. Yes.

Speaker 2

That's a very good question. I think China, the double control on the carbon emissions, environmental Impact per dollar of GDP they generate is still very much concerned by the government at implementing double control. And with the PVC, 80% of Chinese PVC are produced from the coal based carbide process. And the non integrated producers who are not integrated coal mines with a low PVC price cannot really compete in losing money. So there could be Quite a chunk of Chinese non liquid producers being getting out of business.

Speaker 2

But doesn't mean that there's also still some expansions announced by the integrated producers. So We'll see how those dynamics play out, but it should improve the global economy when Chinese Coal based PVC producers are shut down or phased out.

Speaker 10

Okay. And If I look at the U. S. Vinyls, like vinyl derivatives, PVC and just merchant chlorine markets, I mean, Is there room for these markets to absorb further chlorine prices should caustic weaken and We see the core inside of the ECU push further pricing.

Speaker 2

That's a good question. I think Today, U. S. Exports around 30 odd percent of its PVC already. And I think the caustic wise, we export around 20 odd percent.

Speaker 2

So new capacity added on will also be accessing the export market, which is very volatile. It can be good, it can be bad.

Speaker 10

From a price perspective and the implied margins that we're dealing with in PVC, do you see a world where you can kind of Push further chlorine prices into this market? Or do you think there's going to be buyer pushback?

Speaker 2

Well, if you're integrated, certainly there's margin to be shared. If you're not integrated, then depending where the chain you have. And the biggest use of chloro in the U. S. Is still PVC.

Speaker 2

So if you have chlor alkali but no PVC, you're not able to access that market. And vice versa, if you have PVC and no chlor alkali, You can't get a margin. So and I think Westlake, one of the best integrated producer in the U. S. Or in the world.

Speaker 5

Okay. Thanks, Alan.

Speaker 2

You're welcome.

Operator

Thank you so much. Our next question comes from the line of Matthew Blair of TPH. Your line is now open.

Speaker 8

Hey, good morning, Albert and Steve. The hip volume improvement of up 9.6% quarter over quarter appears Quite strong, especially in light of just the weak construction markets. Are you able to break this out into 1, What is just the normal seasonal move for SHIP in Q1? 2, what was the impact of less destocking? And then 3, what was the impact of just underlying demand improvement, if any, in the segment?

Speaker 8

Yes.

Speaker 2

Matthew, good morning. Yes, I think it's probably a large part is The impact of reduction of destocking because of the sharp interest rate increase Last year, the mortgage rate high mortgage rates, the people really Reduced home purchases and I think many of the builders are very cautious and they stopped and use up all their products In the inventory, so but even then you still compare with Q1 2022, that's But maybe a high peak of our infrastructure business is still 21% reduction in volume. So It's quite a dramatic reduction despite that compared with Q4 last year, it was improvement. And the Q2 usually is the strongest quarter construction, as we said earlier. And hopefully, we as we read that Some of the homebuilders, they had incentives and everything else to increase the demand.

Speaker 2

And we read that Recently, they are reducing some incentives because of events coming back. The 10 year average treasury rate is coming down from the 4% is down to 3.4%. So it is a benefit from mortgage interest rates. So we're seeing time of improvement, but it's still a bit early. We don't know how the economy will pan out second half of this year.

Speaker 2

I think most people are reading that housing will be poor this year compared to last year and will improve 20242025 sequentially.

Speaker 8

Great. Thanks for that. And then it looks like Southeast Asia spot caustic prices are down about 20% Versus Q1 levels, is that mostly a function of weaker industrial demand? And how likely is it that those weaker Asia prices will flow into the U. S.

Speaker 8

Market?

Speaker 2

Yes. As Asia was exporting PVC, they had more excess caustic. And coupled with a weak Generally speaking, in Asia, caustic price came down. We believe that export or Asia caustic price has bottomed out, And we're seeing signs of improvement. And also the economy in Asia are improving gradually, especially China.

Speaker 2

That will help. So we think that the demand will absorb some of those excess capacity.

Speaker 3

Thank you. You're welcome.

Operator

Thank you so much. And our next question comes from the line of Arun Viswanathan of RBC Capital Markets, your line is now open.

Speaker 11

Great. Thanks for taking my questions. Congrats on the quarter. So I guess first question is, you guys commented on some improving trends in PVC and epoxy. Could you just elaborate on those?

Speaker 11

And I guess, is that do you expect that to continue and then maybe accelerate with China reopening? Thanks.

Speaker 2

Well, PVC demand should be improving From Q4 level and into the Q1 and Q2, but I think some of the consultants, chemical market analytics, are saying that they foresee The rest of the year pretty much flat in prices, which shows that this is domestic U. S. Price. And they are looking at Somewhat improving prices for next year. This is forward looking.

Speaker 2

So I think people believe that we've seen the bottom of Q4 last year and things will improve gradually as demand improves. Great. Thanks.

Speaker 11

And then maybe you can just update on your thoughts on caustic as you move through the year. You So expect declines? Is there any stabilization there? Thanks.

Speaker 2

Yes. Again, Caustic price has probably reached very high levels first end of last year, early this year. And the forecast by consultants are saying the price will decline gradually throughout the year And stabilize by the end of the year next year. Well, it depends again on the U. S.

Speaker 2

Industrial economy because caustic is used Very broadly in many areas, and pulp and paper right now is a bit weak, reflecting the economy. But who knows? Things will improve and alumina. Aluminum demand is increasing. The infrastructure construction is increasing and also mining, lithium mining, other kind of mining is increasing.

Speaker 2

So demand in caustic Could improve, we don't know. But as we said earlier in our call, that caustic and chlorine prices Very high levels, and we are benefiting from those with lower power costs and Natural gas prices, so we're benefiting from the margins.

Speaker 5

Thanks.

Operator

Thank you so much.

Speaker 2

You're

Operator

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

Speaker 12

Good morning. Good morning. Albert, we've seen Brent oil price dropped from the high 80s to the low 70s in the last 3 weeks. Anything about that drop and Impact on both the U. S.

Speaker 12

Cost advantage and your own ethylene chain profitability?

Speaker 2

Well, Definitely, it will have some impact. As you know, most of the world, probably twothree or so, Using naphtha as feedstock for the ethylene cracker, so as oil price drop, NAFTA price drop will improve the economics. But especially in Asia, the naphtha based Ethylene polyethylene producers have been losing money selling polyethylene based on the naphtha price. So this would help them improve the economics. But we are still very competitive With ethane cracking, our cost is really definitely the lowest among all the feedstocks And still a wide margin apart from naphtha cracking.

Speaker 12

Very good. And just on the U. S. Polyethylene prices, I don't believe the April contract How do you think about Q2 U. S.

Speaker 12

Polyethylene prices as a trend in

Speaker 8

the quarter?

Speaker 2

Yes. I think the polyethylene price for April has been flat. It came out settled at flat. And I think again, some of the consultants are looking pretty much flat price through the rest of the year. The industry has announced $0.05 a pound price increase actually for April and now push it to May.

Speaker 2

So the industry believes that The demand is improving. The price has been low compared with last year. It dropped sharply since the second half of last year Yes, we deserve some improvements in margins, but time will tell whether the $0.05 can be Part of it can be realized in May or the second half of second quarter of this year.

Speaker 5

Thank you very much.

Speaker 2

You're welcome.

Operator

Thank you so much. Our next question comes from the line of Aleksey Ivermov of KeyBanc. Your line is now open.

Speaker 13

Good morning, everyone. Albert, Talk about your utilization in the U. S. PVC assets and chlor alkali assets. If you can provide any comments about Your levels and also relative to industry averages?

Speaker 2

Yes. There's some turnaround going on and some plant outages. I think the chlor alkali running out 80 And TDC is in the mid-80s operating rates and also reflecting the supply demand dynamics globally.

Speaker 13

Thanks, Albert. And staying with PUC, how do you see domestic market, if we try to break it down In terms of demand between new housing, R and R and infrastructure, If you do know the kind of the rough percentages between those three buckets.

Speaker 2

The infrastructure is the smallest component and housing, I would think the largest component as we show in Our HIP separations, we show the sales of our housing and infrastructure segment part of the segment. And within, housing, probably 2 thirds All the sales are related to repair and remodeling in general, and new homes is 1 third. There are lots and lots, I don't know how many homes, close to 100,000,000 homes out there. And we're talking about $1,500,000 $1,400,000 new home construction. And depending on the repair and modeling, what they use, Whether it's siding, PVC window, roofing, so on and so forth, they use fair amount of PVC In repair and modeling than in new construction.

Speaker 2

But new construction is still a big part of it. And for Westlake, we're about fifty-fifty with our Capacities of in our hip business, our sales split about 50% goes into new construction homes and the 50% go to repair and remodeling.

Speaker 3

And you could see that in You could see that repair and remodeling in the Q1 was resilient. There are forecasters that would continue to suggest that repair and remodeling You're welcome.

Operator

Thank you so much. Our next question comes from the line of Hassan Ahmed of Alembic Global Advisors, your line is now open.

Speaker 5

Steve, a question Turnaround polyethylene, you talked a bit about the pricing dynamics. Obviously, there's a fair bit of capacity coming online this year. But as I sort of sit there and look through the different grades of polyethylene, you guys are fairly sort of exposed to the LDPE side of it. And it seems that the capacity growth on the LDPE side is far more tepid than the other grades. So should we sort of expect to see divergence sort of pricing trends between the different grades?

Speaker 2

Well, this is Albert. Good question. We always felt that LDP should be Separately priced and so is a year low and high density. They're all different. They're all polyethylene, but different sort of different segments.

Speaker 2

But somehow our industry lumped altogether. And as you said, all the new capacity and those haven't started yet, but At mechanic completion, but having difficulty starting up, those are primarily high density and linear low density And not LDP. I think the LDP has already started. But nevertheless, it has impact on all the industry. They lump together and the pricing Ups and down kind of linked together.

Speaker 5

Understood. Understood. Yes. But one point

Speaker 2

I want to make is that the margins, Even the price move up and down together, the margin for LDP is far better than the margins for The baking polyethyl density or high density?

Speaker 4

Fair enough.

Speaker 2

So earnings per margin,

Speaker 3

yes, okay.

Speaker 5

So now on the Epoxy side of it, Albert, you obviously the commentary sounded incrementally positive. So, is it fair to assume that potentially Q4 and Q1 were the trough and sort of things start cycling up from there? And if that is the case, this inflection, will this be primarily sort of demand driven with sort of China Picking up and the like or will it be partly demand driven and partly supply driven as well, where sort of in that sort of positive commentary you're baking in, maybe some capacity rationalization in the You're baking in maybe some capacity rationalization in the marketplace, maybe less disruptive pricing. You talked obviously about China exporting less now. So just trying to figure out supply and demand wise what you guys are seeing there.

Speaker 2

Yes. That's a very good question. I think for PVC, I think you're right That Chinese demand increasing, especially real estate, which is a big component of the economy, and the government tried to stimulate that part as well, That demand should increase of less export and pricing should improve and so is caustic. On the epoxy side, little bit different. It's not that big business, and the Chinese are building, looking for the windmills, and windmills are just getting back In China, of new construction, certainly, everybody needs renewable energy and lower cost.

Speaker 2

So but takes time for that to come into its place. And meanwhile, As one of the earlier questions that they have been exporting a fair amount overseas. As the year progresses in next year, I think next few years, definitely the demand for POXY globally will increase, improve. But this year is still a Maybe it's a bottom of the cycle year.

Speaker 5

Very helpful. Thank you so much.

Speaker 2

You're very welcome.

Operator

Thank you so much. And wait for your name to be announced. Our next question comes from the line of Angel Castillo of Morgan Stanley. Your line is now open.

Speaker 3

Hi. This is Turner Henricks on for Angel. I was wondering if you could give us a little More color on your epoxy business results, specifically how they compare to 1Q 'twenty 2 of last year and 4Q 2022 of last year as well. And as part of that, would you say your epoxy business is gaining share in the market? Or how is Westlake's position evolving in light of the ongoing imports from Asia and strategic moves by one of your peers?

Speaker 3

So good question. So the market was meaningfully stronger in the Q1 2022. And so you certainly have seen A change in market dynamic in terms of demand from Q1 2022. So I'd say that with the energy power Circumstance that we have, let's say, in Europe, European epoxy is in a much better position to be able to compete. But you're right, there is still imports of Asian epoxy into the European market, though as the Asian markets begin to rebound, Less so in terms of the volume of epoxy resins into that market.

Speaker 3

When you think of the domestic market for our epoxy resins, as Albert noted earlier, it's Stronger position that we see there in terms of overall market demand. And so I would say that The troughs that we saw in Q4 as everybody was destocking across all product chains, we certainly saw that Really come to an end at the end of the Q4. And so I would say that we see some recovery as we get into 'twenty three With 'twenty four and beyond being stronger markets as we see greater demand for wind energy and windmill contracts being let in 'twenty two, 'twenty three and 'twenty four and beyond, and those will take time before those windmills are constructed And demand really gets much stronger. So I'd say 'twenty three is one of those years where we see a The strengthening of the market, but not fully back by any means back to the levels that we saw in 2021 Q1 of 2022. Thank you so That's great color.

Speaker 3

Another one, could we get a little more color on the export mix picture for PVC and PE, And can you give any comments on your domestic and export sales mix and mix shifts relative to levels seen in the industry?

Speaker 2

Yes. This is Albert. The industry exports for polyethylene is about 41% in March, Year to date, about 42%. For PVC, it's about 34% for March, 38% year to date. And for Westlake, we export less than industry average in general.

Speaker 3

All right. Thank you so much. You're welcome.

Operator

Thank you so much. And there are no further questions at this time. The queue session has now ended. I would like to Turn it back to Jeff for closing comments.

Speaker 1

Thank you. Thank you again for participating in today's call. We hope you will join us again for our next conference call to discuss our Q2 2023 results.

Operator

Thank you for participating in today's Westlake Corporation's 1st 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.

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