Westlake Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2023

There are 14 speakers on the call.

Operator

Everyone, and welcome to the Westlake Corporation conference call to discuss our Q2 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 will 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. Steve will then discuss our financial and operating results.

Operator

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 discussed in Westlake's Form 10 ks for the year ended December 31, 2022 and other SEC filings. 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.

Operator

This morning, Westlake issued a press release with details of our 2nd quarter 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. This replay may be accessed via Westlake's website.

Operator

Please note that information reported on this call speaks only as of today, August 3, 2023, And therefore, you're 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'd like to turn the call over to Albert Chao. Albert?

Speaker 1

Thank you, Jeff. Good morning, everyone. We appreciate you joining us to discuss our Q2 2023 results. For the Q2 of 2023, we reported sales of $3,300,000,000 Net income of $297,000,000 and EBITDA of $690,000,000 In our Penn segment, The continuation of soft industrial and construction activity and unplanned maintenance activities Drills sales volumes declined, particularly impacting PVC resin, caustic soda and epoxy in North America and Europe. The elevated level of unplanned outages resulted in lost sales that impacted operating income by approximately $50,000,000 While our PEM segment average selling prices were lower than in the first quarter, We benefited from our strategically located globally advantaged feedstock position in North America, where we saw lower feedstock and fuel costs compared to the Q1.

Speaker 1

In our hip segment, We experienced an increase in sales volumes quarter over quarter with the start of the construction season in North America, With housing starts in the 2nd quarter averaging 1,400,000 units and repair and remodeling continuing to grow, HIP segment EBITDA margin increased sequentially due to the 13% volume improvement and raw material cost reductions. And this margin remained in line with a record Q2 of 2022 at approximately 22%, Reflecting the strength in our branded products and relationships with our customers, while we expect the challenging macro backdrop To continue, in the Q3, we will focus our efforts on operating our assets reliably and reducing costs. To that end, we now expect our cost reduction program to achieve between $75,000,000 to $105,000,000 of cost savings In 2023, up from the previous $55,000,000 to $105,000,000 target Optum, we achieved approximately $25,000,000 cost saving in the 2nd quarter $50,000,000 in the first half of twenty twenty three. Overall, our Q2 results reflected the weakness in global manufacturing and industrial activity, Along with the impact to sales volumes and margins from the planned and unplanned outages, and we continue to take a disciplined approach To managing our operations in this volatile economy and advance our long term strategic priorities, I would now like to turn our call over to Steve to provide more detail on our financial results for the Q2 of 2023.

Speaker 2

Thank you, Albert, and good morning, everyone. Westlake reported net income of $297,000,000 or $2.31 per share in the Q2 of 2023 on sales of $3,300,000,000 Net income for the Q2 of 2023 decreased $561,000,000 from the Q2 of 2022 as a result of lower average selling prices and integrated margins and lower production and sales volumes. When compared to the Q1 of 2023, net income decreased by $97,000,000 in the Q2 of 2023, primarily to lower average selling prices, particularly for caustic soda and PVC resin due to softer market conditions and unplanned production outages. For the Q2 of 2023, our utilization of the FIFO method Accounting had a negligible impact on pretax earnings compared to what earnings would have been reported if on the LIFO method. This is only an estimate and has not been audited.

Speaker 2

Moving to our segment performance. Our performance in Essential Materials segment 2nd quarter 2023 sales were $2,100,000,000 with EBITDA of $435,000,000 Compared to EBITDA of $1,200,000,000 in the Q2 of 2022 due to lower average selling prices, particularly for Performance Materials, in addition to lower sales volume, largely in PVC and Epoxy. PEM segment EBITDA of $435,000,000 in the second Order decreased $180,000,000 from the Q1 of 2023, largely due to lower average selling prices For both Performance Materials and Essential Materials, particularly for caustic soda, epoxy resins and polyethylene, Lower demand and resulting sales volumes, particularly for PVC, caustic soda and epoxy resin and elevated level of unplanned outages that impacted both sales volumes and integrated margins. Turning to our Housing and Infrastructure Products segment, 2nd quarter sales were $1,100,000,000 with EBITDA of $244,000,000 which declined 66,000,000 when compared to the record Q2 of 2022. The decrease in EBITDA was due to an 18% decline In segment sales volumes driven by lower housing starts and completions we've seen over the past year.

Speaker 2

Despite the volume decline, year over year HIP Segment EBITDA margin of 22% in the Q2 of 2023 was unchanged as lower raw material cost and resilient pricing offset the impact of the lower sales volumes. When compared to the Q1 of 2023, HIP segment EBITDA of $244,000,000 increased $39,000,000 Housing product sales $918,000,000 in the Q2 of 2023 increased $100,000,000 due to solid sales volume growth supported by seasonal North America construction trends that more than offset slightly lower average selling prices. This housing product sales volume improvement was widespread with significant gains in most product lines. Infrastructure product sales of $197,000,000 in the Q2 of 2023 increased $8,000,000 From the Q1 of 2023, primarily due to growth in sales volume of infrastructure products serving fresh and wastewater applications. The overall higher hip segment sales in the Q2 of 2023 drove an improvement in EBITDA margin to 22% from the 20% in the Q1.

Speaker 2

Overall, we were pleased with hip Segment sequential volume improvement and solid margin performance. Our financial results, particularly in our PEM segment, reflected Globally, slow demand and production outages. As we enter the Q3, macroeconomic conditions remain sluggish, As evidenced by recently published manufacturing indices, we're adjusting our market conditions by taking a disciplined approach managing inventory, reducing our cost, matching production levels to demand and adapting our business to the evolving market conditions Our strong financial position supported by an investment grade credit rating support our long term objectives. As of June 30, 2023, cash and cash Loans were $2,700,000,000 and total debt was $4,900,000,000 with a staggered long term fixed rate debt maturity schedule. For the Q2 of 2023, net cash provided by operating activities was $555,000,000 While capital expenditures were $240,000,000 resulting in free cash flow of $315,000,000 which reflects our strong cash generative Business model.

Speaker 2

We continue to look for opportunities to strategically deploy our balance sheet in a manner to create long term value. Now let me provide some guidance for your models. Based on our current view of demand and prices, we expect second half of twenty twenty three revenue Our Housing and Infrastructure Products segment to be between $2,000,000,000 $2,200,000,000 with EBITDA margins in the high teens. We expect our company wide cost reduction program to achieve between $75,000,000 to $105,000,000 Cost savings in 2023, up from the previous $55,000,000 to $105,000,000 target after we achieved approximately $50,000,000 of savings to date in 2023. 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 2

For the full year of 2023, we expect our effective tax rate to be approximately 23% and cash interest expense to be approximately $160,000,000 Now let me turn the call over to Albert to provide a current outlook for our business. Albert?

Speaker 1

Thank you, Steve. Looking ahead, With continued high interest rates and a slowing economy, we're expecting a challenging environment in the second half of this year. However, we remain confident in our long term growth plans, the strength of our business portfolio and our disciplined approach to creating long term value. We'll look to expand our sales Through differentiated product offerings and innovations with sustainable product to meet our customers' needs While managing our costs and adapting to the changing market conditions as they unfold, in our PEM segment, We'll leverage our North American feedstock advantage and highly integrated production chain. We remain positive on the outlook for our Pan segment, driven by increased consumer activity and demand for clean, freshwater, electrification and renewable energy Benefits from the Infrastructure Investment Act and the Inflation Reduction Act and favorable demographic Trends.

Speaker 1

All driving demand for PVC resin, caustic soda, polyethylene and epoxy. While PEM average selling price Ending in June, we're below the average selling prices of the 2nd quarter. In the last few weeks, we have seen some signs of improvement In both PVC resin and polyethylene markets, from tightening export markets with unprofitable high cost international producers curtailing production and lower industry inventory levels. As a result, we remain constructive On the outlook for our Penn segment from recent levels. We also remain positive on the outlook for our Hipbus segment, Supported by the structural undersupply of homes in North America, improving demographics To support more first time homebuyers over the coming decade and potential benefits to our infrastructure product sales volumes On spending related to the Infrastructure Investment Act, we will continue to offer a broad portfolio of branded products and deliver value through innovation and service to meet our customers' needs.

Speaker 1

Over the past several quarters, Our Higgs business has demonstrated that it can adapt to the changing market conditions, and its results over this period reflect this Adaptability, strength in branding and its capital light characteristics. Sustainability and environmental stewardship Remaining critical to our strategy at Westlake. We continue to invest in developing and commercializing innovative new products To meet our customers' sustainability challenges, we are proud to report increased customer adoption of our Green Vein, One pellet solution and PVCO innovations in the 2nd quarter as a result of these efforts. Separately, we continue to invest capital to improve our plants to reduce our carbon and emissions intensity We have made significant progress towards our 20% by 2,030 reduction goal. Finally, We continue to look for opportunities to redeploy our well capitalized balance sheet in a disciplined manner They will create long term value for our shareholders.

Speaker 1

With a robust cash flow generation capability, investment grade credit rating And strong balance sheet with net debt below one time trailing 12 months EBITDA, we seek significant opportunities To create value for our shareholders through multiple avenues, including returns of capital through dividends and share buybacks, Organic expansions in high returning quick payback investments and synergistic acquisitions with return profiles exceeding our cost capital as these opportunities present themselves. Thank you very much for listening to our Q2 earnings call. I will now turn the call back over to Jeff.

Operator

Thank you, Albert. Before we begin taking questions, I'd like to remind listeners that our earnings presentation available on our website and a replay of this teleconference will be available 2 hours after the call has ended. We will now take questions.

Speaker 3

Thank you. We will now conduct the question and answer session. Our first question comes from the line of Joshua Spector from UBS. You may proceed.

Speaker 4

Hello. Good morning, everyone. It's Chris Perrella on for Josh. I wanted to follow-up on the outlook for 3rd quarter in the PEM segment. With the volumes being impacted by turnarounds in the second quarter, What is the volume improvement that you're looking for sequentially in the 3rd quarter?

Speaker 4

And then are you expecting normal seasonality in the 4th quarter? Or what's the outlook there?

Speaker 1

Yes. Normally, The Q3, our strong quarter, just like the Q2, are the 2 strong quarters for the year. And Q4 typically, seasonally is the weaker weakest quarter. So assuming the economy continues to be Growing even though at a modest rate that the volume should improve In the Q2 in the Q3, pretty much like the Q2.

Speaker 4

But what were they doing underlying, I guess, in the Q2 that you should see something similar in the Q3 absent the turnaround, the unplanned turnarounds.

Speaker 2

Yes, Chris, it's Steve. And so when you think about the both the turnaround planned outages and the unplanned outages, as Albert said, the 3rd quarter tends to be A good strong quarter, just like the Q2. Clearly, the Q2 was impacted by both planned and unplanned outages. And so I do expect that, that Q3 Should have more normalized sales volumes and production volumes as we would have expected in the Q2, not been for those outages. As you as Albert noted, in that Q4, we also see some seasonality impacting both the PIM and the HIF segment.

Speaker 2

So that typically is lower than the second and third quarter volumes.

Speaker 4

All right. Thank you. And then just a follow-up one quick one on the pricing that I think Albert called out average Pricing at the end of June was below the 2Q average. How does it lag through How do your does your pricing lag? And how quickly can it improve over the course of 3Q?

Speaker 1

Well, Prices, when it comes down, it comes down pretty quickly. It doesn't lag. But when price increase, as We and some industry members have announced price increases in both polyethylene PVC for the Q3. Some of those price increases may have a lag Going up.

Speaker 4

All right. Thank you very much.

Speaker 5

You're welcome.

Speaker 3

Thank you. One moment please. Our next question comes from the line of Patrick Cunningham from Citi. You may proceed.

Speaker 6

Hi, good morning.

Speaker 7

Thanks for taking my question. You delivered roughly flattish margins in the hip segment year on year amidst pretty steep volume decline. How should we think about long term margins through the cycle in that business?

Speaker 2

Yes. Well, Patrick, as you can see, even in these markets where we're seeing home starts in the neighborhood of 1.4%, which was the average Q2, we continue to see real resiliency in pricing. And certainly, even though we've seen the challenges in volume, if you think about year over year, We certainly have got a branded product that continues to sell through and is a product of selection by our customers. And so as we think about using that branding and that relationship with our customer base, as we see improvements in starts Over the horizon, we do expect we'll continue to improve the overall margin. We've not given the high end range of margins, but you can see we still expect To see some headwinds in the second half of this year, I've guided to the high teens range for the second half of this year.

Speaker 2

But nevertheless, we think there is certainly with the innovative products, branding that we have in the relationships, that margins should improve as the market improves.

Speaker 7

And then what's driving the weakness in epoxies? And how do you see demand trending by region for the balance of the year?

Speaker 1

Yes. Epoxy applies to many areas, mostly into the industrial coatings and also in Windmill Blades and Light Weighting of Vehicles. And the Windmill Blades business is still coming back from a slow demand, Especially China, China has one of the largest capacities in the world in epoxy, and China's economy is really not growing much. And there's overcapacity of new plants coming on. So the business is very weak and impacted global.

Speaker 1

And we expect U. S. And European policy demand to pick up in the coming quarters or years, but it takes a while. But China is the main issue we have.

Speaker 6

Great. Thank you.

Speaker 5

You're welcome.

Speaker 3

Our next question comes from David Begleiter from Douche Bank. Your line is now open.

Speaker 8

Thank you. Good morning. Howard and Albert and Steve, if you think about PEM sequentially, you will have lower outages In Q3, we might be facing lower price as well as higher feedstock costs. So is PEM still up In Q3 versus Q2 given those dynamics?

Speaker 2

So David, when you think about The strength that we expect seasonally in Q3, that and given the fact we don't have the headwinds In our PIM business, because of both the planned and the unplanned outages, that volume improvement should pick up. Certainly, from a pricing perspective, we exited the end of the quarter at lower average prices than we had over the course of the second quarter. But obviously, as we look forward into the future for ethane pricing, ethane pricing was certainly elevated Still staying really in kind of the low to mid-20s over the course of the second half of the year.

Speaker 8

Very good. And Albert, you mentioned some Improvements in the global polyethylene market landscape. Can you give a little more color as to what you're seeing right now in that market?

Speaker 1

Yes. I think The export polyethylene prices primarily in Asia being quite weak, and prices dropped a fair amount Over the months during the year, we see some kind of bottling out in polyethylene prices, and demand has picked up in Asia as well. And so we expect there's some kind of price improvements in the U. S. As a result as well as the higher feedstock costs that Steve mentioned, we saw at the tail end of Q2, early part of July.

Speaker 1

So with the cost price Increased push and as well as demand improving globally for polyethylene. We expect some kind of pricing movement In the Q3 for polyethylene and PVC, but that's assuming that economy is still going strong. We see that The 10 year rate is almost approaching 4.2%. So we don't know the impact we'll have on general economy and also on housing.

Speaker 5

Thank you. You're welcome.

Speaker 3

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

Speaker 7

Thanks and good morning everyone. So lately with some improvements in new residential Construction domestically, have you seen any uptick in PVC demand?

Speaker 2

Yes. And so, Alexey, when you think about the strength that we've seen in the construction materials business pulling through into pipes and siding and trim, I would say that and you see this really in the announcements that many of our competitors have announced as well as we in PVC pricing. So we have price announcements out for August September. And so that is reflective of what we're seeing in strength. And you may have seen that we've also seen export prices Also begin to rise in PVC in overseas markets.

Speaker 2

So that strength that we've seen in the construction market pulling through in volume, but also pricing nominations reflecting that strength both domestically and we're seeing, as I mentioned, in the export markets.

Speaker 7

Thanks, Steve. And second question on M and A. How does your pipeline look today? Do you find more or fewer attractive deals? And how would you characterize your Kind of level of engagement on M and A right now.

Speaker 2

Yes. So there is always an active dialogue amongst ourselves And others for opportunities in the market, both on the materials side as well as on the building products side, It's all about really looking for the right kind of value opportunity that we see in the marketplace.

Speaker 1

But I

Speaker 2

would say there's still a good number of opportunities to deploy capital. It's just about finding the right value added opportunity for both parties, obviously.

Speaker 7

Thanks a lot, Steve.

Speaker 3

Our next question comes from the line of Kevin McCarthy Vertical Research Partners. You may proceed.

Speaker 9

Yes. Good morning. Just to follow-up on PVC, we've seen the export prices come up appreciably over the last 3 to 4 weeks. Can you speak to what is driving that? How sustainable you think the move might be?

Speaker 9

And do you think it will be enough For PVC producers to raise the U. S. Domestic contract price in August, I believe you and others Have a proposed increase on the table there.

Speaker 2

So Kevin, there are a number of Asian producers that really are at to either the bottom end or very near the bottom end from a margin perspective. And as you can see from our remarks, we see a number that have really lowered Rates because of the margin challenge they're facing with their feedstocks, if you use Brent as a benchmark in the mid-80s, Those producers are seeing margin challenges, and that really is supportive of That driver for rising prices in the market and I think as we see the seasonal strength in Q3 And the price announcements by ourselves and frankly others for August for PVC. My comments about the strength we're seeing in even at this A more muted level for building products continues to pull vinyl through into the construction markets, not only here in the North American market, but elsewhere.

Speaker 9

That's helpful. And then as a second question, Albert, I would appreciate any updated thoughts you might have on China. Generally speaking, we've seen demand from China languish across many commodity chemical markets. In the markets where you compete, are you seeing any signs of improvement there following recent efforts to stimulate Or for that matter, any improvement on the supply side dynamics in China?

Speaker 1

Yes. China is The elephant in the room. It has the largest capacity to produce many of the chemicals and plastics as well as one of the largest market for it. And as we all know that China did not recover much since the Chinese New Year, people fact, it's after coming out of the pandemic. And the economy is still quite weak.

Speaker 1

As a result, Polymers and chemical market prices has dropped a lot and impacted global prices as well. Not only that, you used to import Products and now they're being exporting products. So all that impacted global prices for those products. And as we all read that economy, especially for unemployment for young people, It's been quite surprisingly high. And it's recently the Chinese government have made a statement Coming up with policies to stimulate, but those statements has not come out with concrete actions, specific action plans yet.

Speaker 1

But I think Chinese I presume leadership in China is very well of the issues, and central government is Still quite well off. They have a lot of firepower to do things. So we believe that over time, the Chinese economy will improve, and they talk about target at 5% GDP growth for the near term coming years. So time will tell. But meantime, as Steve mentioned, the spot price has really bottomed out in China.

Speaker 1

We see Coupled with some plant issues with turnaround and all that, that the prices have stopped moving up Last several weeks, we hope that will be sustained, especially during the Q3, which is usually a busy quarter. So time will tell, but we think China should improve over time.

Speaker 9

Very good. Thank you so much.

Speaker 5

You're welcome.

Speaker 3

Thank you. One moment please. Our next call comes from the line of Michael Linhead from Barclays. You may proceed.

Speaker 10

Great. Thank you. Good morning, guys.

Speaker 6

Good morning. First question on PEM and maybe sticking on the last Your slides talk about competitively priced exports out of China for epoxy. And when you sort of do the back of the envelope math, It seems like producers there are selling export products below cash breakeven levels. So how do you think this dynamic a down cycle plays out and does it change at all how you approach the epoxy market?

Speaker 1

Certainly. Some of the Chinese depending on the industry, definitely in the integrated ethylene to polyethylene, Our information shows that individual plates in China based on naphtha cracking are losing cash, whereas the U. S. Integrated layers are still based on ethane, feedstock, ethylene, we still have very good cash margin. So but in business like epoxy, where they have built additional capacities, Some of the Chinese plants are running below 50%, and some new plants have not started up, well, either idle than starting up.

Speaker 1

So I think companies are adjusting to the new dynamics. And over time, they should make The right decisions what to do with the business.

Speaker 6

Great. That's super helpful. And then maybe just a follow-up on STIP. Could you maybe The different product lines or categories within the segments, we can obviously fairly decently track from the outset of moving pieces Within but just within hip, what areas performed, say, better or worse relative to the overall segment this quarter?

Speaker 2

Yes. So we saw broad strength Across really the portfolio, so strength really in our businesses such as stone, siding, roofing, of course, pipe for storm and wastewater applications. So a broad application really in what we would call the Westlake Royal Building Products business as well as our Pipe and fittings businesses. So broad strength in all of those businesses within the hip business Really made nice contributions in the Q2.

Speaker 11

Okay. Thank you.

Speaker 2

You're welcome.

Speaker 3

Thank you. One moment please. Our next call comes from the line of Matthew DeYoe from Bank of America. Please proceed.

Speaker 7

Good morning, everyone. What percent of China's PVC production do you Expect they're exporting right now.

Speaker 1

Yes. China used to be an importer of PVC, And I think they have been exporting that export is 80% of Chinese PVC produced from a carbide process. And usually, So the quality is not that great, and I think India has put a VCM free VCM monomer level On import PVC and some of the Chinese producers are not able to meet it. So I think the PVC export volume has reduced from China, But nevertheless, this has an impact on those markets, primarily exporting to it was South Asia and Southeast Asia as a main market.

Speaker 7

Do you have a number, I guess, Steven, when we've talked in the past, I think you had said you expected it to be or you thought it was around 20%. I'm assuming To Albert's comments, it's less than that now, but is it 10% is it 5% is it 15% do you have any idea?

Speaker 2

Yes, it's meaningfully lower than that 20%.

Speaker 7

Understood. And if I can, What was your mix of import versus exported product shipped for caustic and PVC in the quarter? And do you expect it to change meaningfully next quarter with when you get your capacity back?

Speaker 2

Yes. And so when you think of the Exports that we have both in caustic and PVC, the industry is exporting kind of in the 20 range and we're just below that kind of a number. And From a PVC perspective, the industry has been exporting historically in the 30s. And so we're also below that kind of a threshold Because remember, PVC is going into our building products business. So we have a pretty good domestic consumption number internally for our own PVC.

Speaker 3

Our next question Comes from the line of Matthew Blair with TPH. You may proceed.

Speaker 6

Hey, good morning, Albert and Steve.

Speaker 2

Good morning. Good morning, Matthew.

Speaker 6

Could you share any more color on the $50,000,000 outage impact in PEM in Q2? What assets did that impact? And were they fully back up and running by July 1st? Or do you expect anything to roll into Q3. And then also, are there any planned turnarounds for Q3 or Q4 that we should be keeping in mind?

Speaker 2

And so in terms of the businesses within PEM, it was in our core vinyls business. And I would say that We obviously took corrective action in the Q2, and I think those issues are behind us as we are into the Q3 at this stage.

Speaker 1

And as our turnaround concern, there are always more turnaround going on, but nothing major.

Speaker 6

Yes. Okay. Sounds good. And then, Albert, I think you mentioned that you're matching up production with demand. Could you clarify When you run your EU assets, are you matching up to caustic demand in the market or to chlorine Demand in the market?

Speaker 1

Depending on the products and markets and pricing, certainly, we would look out for all these areas. Right now, the PVC demand is being a construction season that is stronger, And caustic demand is a bit weaker. Caustic price has been coming down globally and every month gradually. So until the industrial activity Picks up, economy picks up. The caustic is becoming weaker.

Speaker 6

Okay. And are you running To meet all of that chlorine demand? And I guess the implication is would that mean that caustic side is oversupplied?

Speaker 1

It's a combination. We have plants that are integrated to chlorine PVC, and we have plants that are not integrated. So depending where they are and The box situation in those areas we adjust.

Speaker 6

Okay, sounds good. Thank you.

Speaker 5

You're welcome.

Speaker 3

Thank you. One moment please. Our next question comes from the line of Arun Viswan

Speaker 11

Just wanted to look into the PVC side. You noted some weakness Maybe in PEM driven by POX and PE, but what are your comments on PBC as you head into the rest The year, there's been obviously some volatility on the ethylene side. Is that affecting PVC? And then similarly, Building products and the housing environment, what's your outlook for PVC market with that?

Speaker 1

Sure. As we said earlier, PVC market has turned tighter. Export prices improved. Demand, being a seasonal Quarter has increased domestically and internationally. So there's price announcements for both August September Domestically in the U.

Speaker 1

S. And if you look at consultants' view of pricing, they're thinking this Pretty much flat from now maybe a little increase in 3rd quarter, down a little bit since the 4th quarter. And also looking at prices improving next year. So I think just from general view of the market, It seems PVC is stabilized and is improving going forward.

Speaker 11

And just wanted to also ask about the compounding and European side. Are there any Nuances that you'd add to your comments as it refers to that part of the business? Thanks.

Speaker 2

Yes. So Arun, the compounding business has A nice business. As you know, the markets that we're addressing really are the wiring cabling business, the medical and auto businesses. That business continues to perform well. As we think about some of the contributions we've been making really in the wire and cabling business, we've mentioned the strength we've seen really in the infrastructure bill and part of that is Internet connectivity and certainly we also see that wire and cabling going into the construction markets as we see housing starts.

Speaker 2

Of course, the auto business, the medical businesses have their own cycles but continue to be good markets at this stage. And so we're pleased with that compounding business, both domestically as well as in

Speaker 10

Thank you.

Speaker 3

Thank you. One moment please. Our next question comes from the line of Vincent Andrews from Morgan Stanley. You may proceed.

Speaker 12

Hi. This is Turner Henricks on for Vincent. You commented that you're optimistic about the longer term opportunity from public and private investments in U. S. Infrastructure and construction.

Speaker 12

Can you size the degree of exposure Westlake has to these medium term tailwinds? We generally think of Westlake as having more residential than non

Speaker 2

products business, our pipe and fittings business, we are seeing the majority of that going into residential But certainly, there is a significant portion, not 50%, but a significant portion nevertheless, that is a larger diameter pipe that is Well suited for the infrastructure bill that we see, that's $55,000,000,000 that is sizable that will address the infrastructure needs the country has. So we think we're very well positioned to be able to address those needs for counties and municipalities.

Speaker 1

So we are one of the largest Large diameter pipe for wall and sewer, as mentioned as Steve mentioned, municipalities, but also our epoxy business is As biggest supplier for coatings for any infrastructure bridges and structures. So as those Funds are getting sent to the municipalities and government state governments will see more demand for both PVC And as well as for POCI.

Speaker 10

Okay. That makes a lot of sense.

Speaker 12

Thanks for the color. I was also wondering if you Could remind us of your view of hip's profit margin through the cycle from trough to peak? And has that changed at all with mix?

Speaker 2

No. I think what you've seen is the very resilient capabilities of the business to Scale based on market conditions. And you can see the I think the performance in this market where we have housing starts at about 1.4 Averaging over the course of the second quarter was still margin EBITDA margins in the 22% range. And so when you think of The business and its ability to scale, we think it's a very good business and certainly has an ability to perform well beyond the kind of margins we're delivering even in this market So given the strength of the product brands that we have and the customer relationships and the innovation that comes out of that business because it's very brand oriented, as you would guess, We think has good upside to it. We have not given specific guidance of margins beyond the current guidance we've been providing.

Speaker 2

But I would say that we do see good solid upside in that business.

Speaker 12

Great. Thank you.

Speaker 6

You're welcome.

Speaker 3

Thank you. One minute please. Our next question comes from the line of Michael Sison from Wells Fargo. You may proceed.

Speaker 10

Hey, good morning. Albert, when you think about your hemp portfolio after the Boral transaction, are there any other product lines Or sort of areas you'd like to do acquisitions sort of continue to expand that business

Speaker 7

and longer term?

Speaker 1

Well, we are very pleased with our PAM and Hip business, and we have 9 strategic business units. Each one are leaders in the markets around the world, and we can grow organically At these in these 9 platforms as well as potential integration vertically adjacencies, so on and so forth. So as Steve mentioned we are in constant dialogue with various parties, opening opportunities as well as we are doing a lot of internal Our studies on debottlenecking, where we have opportunity in the markets and also reducing our costs, and cost reduction is a major Continuous improvement is a major part of our internal initiatives and reliability. So we are working on all these areas, but certainly, Outside inorganic growth is something we're also looking at.

Speaker 10

Got it. And then just as a follow-up, if China To recover, will China end up importing PVC again? And if they do start importing PVC, What do you think or how do you think that affects margins here in the U. S? And how much

Speaker 1

where could

Speaker 11

it go from here?

Speaker 1

I think so long China stopped exporting PVC. That will be very good. As you know, I think in our Investment slides, we show that global additions of chlor alkali And PVC capacities are below the GDP growth. And typically, we're looking at around the GDP growth as a measure. And as for many years and for objectives going forward, the capacitations are below GDP growth.

Speaker 1

So we believe That the business and also, there's a lot of energy needed to make ethylene, to make chlor alkali. And U. S. Is by far the lowest energy cost producer in the world. So having a piece of advantage, Energy Advantage makes us much more competitive than anybody else in the world in making PVC and chlor alkali.

Speaker 1

So with the lack of New investment and with our cost position, we can really have a very good position globally in our business.

Speaker 10

Thank you.

Speaker 5

You're welcome.

Speaker 3

Thank you. One moment please. Our next question comes from the line of Frank Mitjes from Firming Research, you may continue.

Speaker 13

Thank you and good morning. I guess the pronunciation was close enough. I noticed that the inventory levels dropped 9% sequentially. Your inventory levels dropped 9% sequentially. And I assume some of that might be Selling out of inventory from the unplanned downtime or lower pricing and so can

Speaker 1

you talk about some of

Speaker 13

the factors there and what we should be expecting to see happen on that line?

Speaker 2

Yes. So Frank, good morning. And so you're right, because of some of the both planned and unplanned outages, inventory Did come down because obviously we were not producing during those outages, but we were selling. And so naturally that has an impact on inventories. But when you think of where as we think about where producers are, we're continuing to address and adjust our production levels to meet market demand conditions.

Speaker 2

So I would say that as we think about it, inventory levels are over the course second half of the year should be kind of in the medium level. And so as we think about it, both vinyl as well as polyethylene.

Speaker 13

Okay. Thank you. And one of the features of, I think, the last conference call was speaking of inventories was talking about customer destocking, etcetera. Do you feel that we're at an underlying level of demand throughout all of your businesses? Or are there Businesses that are still seeing some destocking going on?

Speaker 2

Yes. I'd say, Frank, that The destocking really started almost a year ago in this business and so accelerated at the very end of last year. So I would say that we're at a point in time where our customers' Inventory levels are at, I would say, low to low medium levels. And so I would not say that we've continued to see any destocking. That's behind us at this stage.

Speaker 1

This is Frank. I just want to add also that with high interest rate and uncertainty In the economy, our customers are very careful. They only order when they need to.

Speaker 8

That's very helpful. Thank you.

Speaker 5

You're welcome.

Speaker 3

Thank you. One moment please. Our next question comes from the line of John Roberts, Credit Suisse. You may proceed.

Speaker 4

Great. Thank you. Back to building products, do you have a sense for the divergence between new construction and Repair and remodeling activity?

Speaker 2

So John, I would say that we did see continued strong demand in both sides of that hip business. So strong demand really in repair and remodeling. And given the $1,400,000 average start number, you can see again a resilient business Being able to adjust to lower volumes year over year and still continue to perform. So I would say both the starts, The new construction activity and repair and remodeling continue to perform well in both sides of the hip business.

Speaker 4

And then you noted merchant chlorine volume was up Q over Q, was that largely greater availability given the weakness in vinyls? Or was demand actually strong in chlorine?

Speaker 2

In the summertime, there's a pickup for water treatment activity in chlorine, and so that's part of that story, John.

Speaker 1

Okay. Thank you.

Speaker 6

You're welcome.

Speaker 3

Thank you. One moment. Our last question comes from the line of Hassan Ahmed from Albaix Global Advisors. Please proceed.

Speaker 5

Good morning, Albert and Steve.

Speaker 10

Good morning, Hassane.

Speaker 5

A question around ECU pricing. Operating rates globally seem to be quite depressed. Yet, I know caustic soda pricing has come down But on an ECU basis, pricing relative to history continues to be quite strong. So my question really is how sustainable are those pricing levels?

Speaker 1

Well, demand for Chlorine derivatives are still strong. PVC, we mentioned globally, even though it has come Global prices has bottomed out. We believe it will improve. And housing demand, we think both new construction and Repair and remodeling R and R is still pretty strong. And global demand in India is coming out of the monsoon demand coming So I think chlorine demands are relatively strong, but I won't say that it's really peaking, but it's coming back from the bottom.

Speaker 1

I think caustic has really followed the general industrial activity. I think U. S. So far, we still have positive GDP. And I think most of the countries in the world Having positive GDP in Europe and Asia, but at low levels.

Speaker 1

So as they improve, I think the demand will go strong. And more so, as mentioned earlier, there's very little new capacity being added around the world as demand continue to grow, hence, makes the Supply demand tighter going forward.

Speaker 5

Understood. Very helpful. And just sort of following up where you On sort of chlorovinell supply demand dynamics. Look, one of the virtues, I guess, or positives of The chlorovinal story was lack of investment, undersupply call it, right? And one of your large competitors Lee has talked about considering sort of chlorovino's investments in Texas in particular.

Speaker 5

So how do you see the supply demand story with that announcement out there now? Do you still feel that in the medium to longer term that market We'll be sort of undersupplied and will continue to sort of tighten.

Speaker 1

Well, as I said earlier, globally, there's undersupply. So one plant will not make much difference. But as you know, this the Vinyl business, unlike the Olefins business, other business, It's very much integrated. You need a lot of investments, whether it's chlorine, power plants or renewable power, Ethylene plants and DCM, EDC and PVC, it's very complete, very heavy investment and very seasonal business. So we are looking purely on the return investments.

Speaker 1

So as I mentioned earlier, we're looking at organic growth and find out which will give us adjusted return above on a long term basis above our cost capital. So we're not looking at short term returns only, it's really on a long term basis. On a long term basis, this business has been, as you know, challenging in the past, and China is one of the major issues. And That's a big like anything in our industry, what China does has a huge impact. And China going through its own review of Double control energy, global warming, which area they want to allow for investments and phasing out of some high energy industries.

Speaker 1

So all that is going on and it's all uncertainty going on. Time will tell.

Speaker 5

Very helpful, Albert. Thank you so much. Yes, we

Speaker 3

are. Thank you. At this time, I'm showing no further questions. And I would now like to turn the conference back to Jeff Holly for closing remarks.

Operator

Thank you. Thank you, everyone, for participating in today's call. We hope you'll join us again for our next conference call to discuss our Q3 2023 results.

Speaker 3

Thank you.

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Earnings Conference Call
Westlake Q2 2023
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