Westlake Q3 2024 Earnings Report

Westlake EPS Results

• Actual EPS: $1.41
• Consensus EPS: $2.21
• Beat/Miss: Missed by -$0.80
• One Year Ago EPS: $2.20

Westlake Revenue Results

• Actual Revenue: $3.12 billion
• Expected Revenue: $3.31 billion
• Beat/Miss: Missed by -$188.07 million
• YoY Revenue Growth: +0.10%

Westlake Announcement Details

• Quarter: Q3 2024
• Date: 11/5/2024
• Time: Before Market Opens
• Conference Call Date: Tuesday, November 5, 2024
• Conference Call Time: 11:00AM ET

Westlake (NYSE:WLK) Corporation engages in the manufacture and marketing of performance and essential materials, and housing and infrastructure products in the United States, Canada, Germany, China, Mexico, Brazil, France, Italy, Taiwan, and internationally. The company operates through two segments: Performance and Essential Materials and Housing and Infrastructure Products. The Performance and Essential Materials segment offers ethylene, polyethylene, styrene, chlorinated derivative products, ethylene dichloride, vinyl chloride monomer, polyvinyl chloride (PVC), epoxy specialty resins, and base epoxy resins and intermediaries, as well as chlor-alkali, such as chlorine and caustic soda. The Housing and Infrastructure Products segment provides residential PVC sidings; PVC trim and mouldings; architectural stone veneers; windows; PVC decking; PVC films for various inflatables, wallcovering, and tape and roofing applications; polymer composite and cement roof tiles; PVC pipes and fittings for various water, sewer, electrical, and industrial applications; PVC compounds used in various housing, medical, and automobile products; and consumer and commercial products, such as landscape edging; industrial, home, and office matting; marine dock edging; and masonry joint controls. It offers its products to chemical processors, plastics fabricators, small construction contractors, municipalities, and supply warehouses for use in various consumer and industrial markets, including residential construction, flexible and rigid packaging, automotive products, healthcare products, water treatment, wind turbines, and coatings, as well as other durable and non-durable goods. The company was formerly known as Westlake Chemical Corporation and changed its name to Westlake Corporation in February 2022. Westlake Corporation was founded in 1986 and is headquartered in Houston, Texas. Westlake Corporation operates as a subsidiary of TTWF LP.

Westlake Q3 2024 Earnings Call Transcript

Key Takeaways

• Westlake reported Q3 2024 net sales of $3.1 billion, EBITDA of $580 million and net income of $183 million (or $1.41 per share), excluding a $75 million after-tax charge to mothball two European epoxy units.
• The Performance & Essential Materials (PEM) segment saw flat Q3 sales versus Q2 but EBITDA fell from $391 million to $297 million due to $120 million in maintenance outages and higher ethylene costs; record specialty polyethylene volumes were driven by strong demand for the Pivotal post-consumer recycled product.
• Housing & Infrastructure Products (HIP) delivered EBITDA of $262 million on $1.1 billion of sales, with volumes down 8% sequentially due to wet weather and hurricanes, but margins held at 24% thanks to integration and $120 million of year-to-date cost savings.
• Westlake ended Q3 with a cash balance of $2.9 billion against $4.6 billion of debt, generated $254 million of free cash flow and has achieved $120 million of cost reductions toward a $125–150 million target for 2024.
• For Q4, management expects typical seasonal softness in HIP, improving PEM costs now that outages are behind them, full-year HIP revenues of $4.3–4.6 billion, ~$1 billion of capex, a 25% tax rate and continued optimism on global recovery from pending rate cuts and China stimulus.

Presentation

[Operator]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Corporation Third Quarter 2024 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 the question and answer session.

[Operator]

As a reminder, ladies and gentlemen, this conference is being recorded today, November 5, 2024. I would now like to turn the call over to today's host, John Zeller, Westlake's Vice President and Treasurer. Sir, you may begin.

[Johnathan Zoeller, VP & Treasurer at Westlake]

Thank you. Good morning, everyone, and welcome to the Westlake Corporation conference call to discuss our Q3 2024 results. I am joined today by Albert Chao, our Executive Chairman Jean Marc Gilson, 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 Jean Marc, who will open with a few comments regarding Westlake's performance.

[Johnathan Zoeller, VP & Treasurer at Westlake]

Steve will then discuss our financial and operating results. After which Jean Marc will add a few concluding comments, and we will open the call up to questions. During the Q3 of 2024, we accrued $75,000,000 of after tax expenses in the Performance and Essential Materials segment related to the previously announced decision to mothball 2 units within our European Epoxy business to reduce our costs and allow our manufacturing footprint to align with changing global conditions. We refer to this charge as the identified item in our earnings release and on this conference call. References to income from operations, EBITDA, net income and earnings per share on this call exclude the financial impact of the identified item.

[Johnathan Zoeller, VP & Treasurer at Westlake]

As such, comments made on this call will be in regard to our underlying business results using non GAAP financial measures. A reconciliation of these non GAAP financial measures to GAAP financial measures is provided on our earnings release, which is available in the Investor Relations section of our website. 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, 2023 and other SEC filings.

[Johnathan Zoeller, VP & Treasurer at Westlake]

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 section on our website. A replay of today's call will be available beginning today, 2 hours following the conclusion of this call.

[Johnathan Zoeller, VP & Treasurer at Westlake]

This replay may be accessed via Westlake's website. Please note that information reported on this call speaks only as of today, November 5, 2024, 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'd like to turn the call over to Jean Marc Gilson. Jean Marc?

[Jean-Marc Gilson, President & CEO at Westlake]

Thank you, John, and good morning, everyone. We appreciate you joining us to discuss our Q3 2024 results. Global macroeconomic conditions in the Q3 were similar to those we saw in the Q2 with relative strength in North America and a slow recovery in Asia and Europe where activity levels remain muted. Demand for materials in our PEM segment generally mirror these trends during the Q3, with revenue comparable to the Q2 on relatively flat sales volume. 3rd quarter EBITDA in our PEM segment would have been similar to the Q2, if not for the $75,000,000 mothball expense and extended maintenance outages at 2 facilities.

[Jean-Marc Gilson, President & CEO at Westlake]

The combined financial impact of these two was $120,000,000 which drove the sequential decline in our EBITDA from the 2nd quarter. Importantly, the necessary repairs have now been completed and each plant returned to service last month and we are applying the lessons learned from these incidents to other facilities to improve the reliability of our plants. For the Q3 of 2024, we reported net sales of $3,100,000,000 EBITDA of $580,000,000 and net income of $183,000,000 or $1.41 per share. Compared to our 2nd quarter results, we benefited from higher caustic soda and polyethylene prices. However, our hip sales volume was impacted by weather events.

[Jean-Marc Gilson, President & CEO at Westlake]

EBITDA margin of 19% in the 3rd quarter was below the 23% we reported in the Q2 of 2024 due primarily to the 2 extended maintenance outages. Our highly integrated manufacturing footprint in North America, combined with our large PVC offtake into our hip segments building product, serving the residential housing and remodeling market has continued to be a strategically advantaged benefit. The significant undersupply of residential housing over the past 15 years and the growth in population over the same time period has created the housing shortage we see in the North American market. With U. S.

[Jean-Marc Gilson, President & CEO at Westlake]

Housing starts in the 3rd quarter averaging $1,300,000 similar to the 2nd quarter. We believe the pent up demand for residential housing will drive future construction activity as expected interest rate reduction unfold into 2025. Despite the disruption to sales volume from 2 hurricanes that made landfall in the Southeastern portion of the U. S, our hip segment sales and margins continue to perform well as a result of our broad portfolio product portfolio with strong brands that make us a supplier of choice for many of the fastest growing large homebuilders. Our concentrated footprint in North America continues to provide globally advantaged energy and feedstock, letting us capture demand and growth we see in the Americas, while we continue to experience a slow economic recovery and growth in demand across international end markets.

[Jean-Marc Gilson, President & CEO at Westlake]

Our global scale with market leading positions combined with our cost advantage footprint has positioned our PEM segment to serve our diverse markets such as needs for housing, clean water, food packaging, electrification and other growing markets. Our energy and feedstock advantage, combined with our integrated manufacturing footprint, true to building products, positions us well to drive growth in our hip segment as we continue to partner with homebuilders to address the significant housing shortage in North America. We have a very broad product offering in our HIP segment that serves the residential housing market with innovative building products, pipe and fittings and PVC compounds for building and construction products. Meanwhile, our investment grade balance sheet with $2,900,000,000 of cash and cash equivalent is a source of strength and a driver of earning growth as we continue to seek ways to redeploy it to create long term value for shareholders. I would like now to turn our call over to Steve to provide more detail on our financial results for the Q3. Steve?

[Steven Bender, CFO & EVP at Westlake]

Thank you, John Mark, and good morning, everyone. Westlake reported net income of $183,000,000 or $1.41 per share in the 3rd quarter on sales of $3,100,000,000 compared to net income of $285,000,000 in the Q3 of 2023. The year over year decrease in net income was primarily due to 2 extended maintenance outages in our PEM segment, which impacted our feedstock and conversion cost. We estimate the combined impact of these two outages on our Q3 2024 pre tax earnings to be approximately $120,000,000 Importantly, as we discussed, we completed the necessary maintenance of each of these plants and have returned them to service last month, so the impact of these outages should not impact subsequent quarters. My comments regarding income from operations, EBITDA, net income and earnings per share all exclude the financial impact of the $75,000,000 mothball expense accrual that occurred in the Q3 of 2024.

[Steven Bender, CFO & EVP at Westlake]

I would also like to remind you that the cash outflows associated with these mothball expenses are expected to occur over several years starting in 2025. During the 3rd quarter, we continued to make progress on our company wide cost savings initiative with approximately $35,000,000 of savings delivered during the quarter. These savings combined with those achieved in the first half of twenty twenty four total approximately $120,000,000 of long term cost reductions from the 1st 3 quarters of 2024 toward our full year target of $125,000,000 to $150,000,000 For the Q3 2024, our utilization of the FIFO method of accounting had a negligible impact on pretax 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. Moving to the specifics of our segment performance.

[Steven Bender, CFO & EVP at Westlake]

Our Housing and Infrastructure Products segment continued to deliver solid results, including EBITDA of $262,000,000 on $1,100,000,000 of sales. HIP's EBITDA margin of 24% continued to benefit from our integration and cost savings actions. As we discussed on the last quarter's earnings call, unusually wet weather conditions in many parts of North America combined with the disruptions created by hurricanes Barril and Helene impacted our 3rd quarter sales by deferring some shipments into the 4th quarter while slowing construction activities in the path of the storms. As a result of these headwinds to our 3rd quarter sales volume, hip segment sales declined 8% compared to the Q2 of 2024, while keeping stable our average sales price resulting in a reduction of $74,000,000 of EBITDA compared to the record 2nd quarter EBITDA of $336,000,000 Housing product sales of $937,000,000 in the quarter decreased 7% due to lower sales volumes in most product categories, while infrastructure product sales of $161,000,000 in the 3rd quarter decreased 13% from the Q2 of 2024, driven largely attributable to lower large diameter pipe demand, primarily due to wetter weather conditions in the United States and lower housing starts in the quarter compared to the 2nd quarter.

[Steven Bender, CFO & EVP at Westlake]

Moving to the PEM segment, 3rd quarter sales of $2,000,000,000 were in line with the Q2 of 2024. Sales volumes declined 1% sequentially, driven by lower core vinyl export shipments. Average sales prices increased 1% compared to the Q2 of 2024 led by higher caustic soda and polyethylene prices, which were partially offset by lower epoxy and styrene prices. Our polyethylene business had record specialty and differentiated product sales volumes in the 3rd quarter, driven in part by continued customer adoption of our innovative Pivotal post consumer recycled polyethylene product. Pivotal's continued strong sales volume growth is a great example of how our focus on addressing customers' sustainability needs not only helps the environment, but also helps Westlake's bottom line.

[Steven Bender, CFO & EVP at Westlake]

While domestic PVC volumes slowed sequentially due to weather and construction activity, our energy and feedstock advantage in North America continued to provide a competitive edge in other attractive export markets. PEM's 3rd quarter EBITDA of $297,000,000 was lower than Q2 of 2024 EBITDA of $391,000,000 primarily due to the 2 extended maintenance outages, which resulted in increased operating cost and increased ethylene feedstock cost. As I mentioned, we estimate the combined impact in the 3rd quarter of pre tax earnings to be approximately $120,000,000 which consists of 3 factors: increased third party ethylene feedstock purchases due to our LACC joint venture ethylene cracker undergoing necessary maintenance for the entire quarter lost chlorine and caustic soda production due to a disruption at our Plaquemines Louisiana chlor alkali plant and unabsorbed fixed cost and maintenance expenses to complete the necessary repairs. PEM's 3rd quarter EBITDA margin of 15% was lower than the Q2 of 2024 due to the impact of these outages. Had it not been for the outages, we estimate that EBITDA margin would have improved sequentially due to the 1% increase in average sales prices.

[Steven Bender, CFO & EVP at Westlake]

Compared to the Q3 of 2023, PIM's EBITDA of $297,000,000 declined by $42,000,000 as a 6% increase in sales volume led by chlor alkali and epoxy was more than offset by the impact of the outages and the 3% decrease in average sales price, driven primarily by lower caustic soda and chlorine prices. Profitability in our epoxy business, both in Europe and North America, continue to be impacted by imports of low priced products from Asia. During the Q3, the U. S. Department of Commerce announced preliminary countervailing duties at a rate of approximately 100% on epoxy exports from some Chinese and Indian producers and at a lesser rate on certain imports of epoxy resins from Taiwan.

[Steven Bender, CFO & EVP at Westlake]

We are hopeful that the Commerce Department will rule in favor of preliminary antidumping duties on a broader set of Asian producers when it announces its preliminary findings later this month. The Commerce Department and the International Trade Commission will make final determinations of dumping, subsidies and material injury by mid-twenty 25. Meanwhile, our epoxy resin trade case in Europe continues to progress through its administrative channels with an expectation that provisional duties will be set in early to mid-twenty 25. Separately, in addition to the expected cost benefits of mothballing our AC and ECH units in Pernice that were already announced, we are continuing to further reduce fixed costs in the business to improve our results and transform the business into a profitable component of PEM. Shifting to our balance sheet.

[Steven Bender, CFO & EVP at Westlake]

As of September 30, 2024, cash and cash equivalents were $2,900,000,000 and total debt was $4,600,000,000 after redeeming $300,000,000 of senior notes during the quarter. Our balance sheet continues to be well positioned with a staggered long term fixed rate debt maturity. For the Q3 of 2024, net cash provided by operating activities was $474,000,000 while capital expenditures were $220,000,000 resulting in free cash flow of $254,000,000 We continue to look for opportunities to strategically deploy our balance sheet in order to create long term value for our shareholders. Now let me provide some guidance for your models. Based on our current view of demand and prices, we continue to see upside potential for our full year 2024 Housing and Infrastructure Products EBITDA margin guidance of 22%. The impacts of Hurricane Burrell, Helene and Milton impacted sales in 2024 and we expect HIP revenue to remain in the range of $4,300,000,000 to $4,600,000,000 We continue to expect our total capital expenditures to be approximately $1,000,000,000 which is unchanged from our earlier guidance and similar to our depreciation and amortization run rate. We continue to target $125,000,000 to $150,000,000 of company wide cost savings in 2024 with approximately $120,000,000 already achieved year to date, including the $35,000,000 achieved in the Q3. For the full year of 2024, we now expect our effective tax rate to be approximately 25%, up from our prior guidance of 23%, due to the tax treatment of the $75,000,000 of mothball expense in the 3rd quarter. And we continue to expect cash interest expense to be approximately $160,000,000 Finally, we now expect the turnaround of our Petro-one ethylene cracker in Lake Charles, Louisiana to begin at the end of January 2025 and for it to last approximately 55 days, which will have an impact on our ethylene production and cost during the quarter of 2025.

[Steven Bender, CFO & EVP at Westlake]

Now I'd like to turn the call back over to Jean Marc to provide a current outlook of our business. Jean Marc?

[Jean-Marc Gilson, President & CEO at Westlake]

Thank you, Steve. So while we are seeing some improvement in activity levels in most of our major geographies, the pace of the recovery from the recent trough remains slow. However, recent actions by the U. S. Federal Reserve and the ECB to loosen their monetary policies as a result of progress in bringing down the rate of inflation have the potential to improve consumer demand for durable goods and housing, including key end markets for us in both our hip and pants segments.

[Jean-Marc Gilson, President & CEO at Westlake]

Additionally, the Chinese government recently took action to stimulate its economy, including significant liquidity injections. These actions will take time to have impact. Stimulus plans in China to boost economic activity signal the Chinese authorities recognize government efforts are necessary for positive momentum for 2025. While our direct sales in China today are limited, we view the policy actions in China as positive for the global supply demand balance for all of the products in our PEM segment. Taken together, we believe the recent trend towards more accommodative monetary policy and stimulative policy actions could accelerate the pace of the global economic recovery.

[Jean-Marc Gilson, President & CEO at Westlake]

As a result, we are optimistic about the macroeconomic backdrop as we end the year and enter 2025. For the Q4 of 2024, we are expecting typical slower seasonal demand in our hip segment due to colder weather. Meanwhile, we expect improvement in PEMPS operating cost as a result of reduced ethylene feedstock purchases and lower maintenance expenses now that we have now that the 2 extended outages that occurred in the Q3 are behind us. Westlake continues to develop innovative products across our business such as PVCO pipe and ABA pipe to sustainably serve our customers in the hip segment. Westlake's innovative ABA multilayer pipe technology utilizes a middle layer comprised of post industrial recycled PVC to reduce waste and provide a sustainable alternative to conventional piping.

[Jean-Marc Gilson, President & CEO at Westlake]

Meanwhile, in our PEM segment, the success of our pivotal post consumer recycled polyethylene product is simply one example of many innovation developed to meet our customer needs and drive growth. During the Q3, we also expanded our efforts to source recyclable PVC resin. These materials are recycled by Westlake Dimax into new products in its portfolio offering, such as consumer and industrial matting, exercise equipment matting and landscape edging products. These are just some of the ways that Westlake is working to increase the circularity of the materials that we produce to reduce global carbon emissions and landfill waste. Westlake continues to take cost reduction actions and take the opportunity to leverage our energy and feedstock advantage in North America, where approximately 85% of our production capacity is located, and a high degree of vertical integration with innovative products such as the examples that I just provided.

[Jean-Marc Gilson, President & CEO at Westlake]

These competitive advantages position well, position us well relative to non integrated global producers by allowing us to operate our PEM plants at higher operating rates to a higher degree of internal sales to our downstream hip businesses and export opportunities. Finally, we continue to look for opportunities to put our nearly $3,000,000,000 cash balance to work in a disciplined manner that will create long term value for our shareholders. This includes both identifying acquisition candidates that can exceed our risk adjusted cost of capital and returning cash to shareholders to both dividends and potential share repurchases. Thank you very much for listening to our Q3 earnings call. I will now turn the call back over to John.

[Johnathan Zoeller, VP & Treasurer at Westlake]

Thank you, Jean Marc. 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 the call has ended. Jacinda, we will now take questions.

[Operator]

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

[Eric Zhang, Assistant Vice President at Citigroup]

Hi, good morning. This is Eric Zhang on for Patrick. On the AC and ECH units that have returned to service, are these plants back to running at full capacity? And do you have any additional planned maintenance for your other plants scheduled this year?

[Steven Bender, CFO & EVP at Westlake]

So just for clarification, the ECH plant and the AC plant that we're mothballing in Perna's is planned for mothballing activity. The items that I mentioned that were out for maintenance for that extended maintenance are LACC ethylene unit as well as our Plaquemines core vinyls site. Both of those are back in service.

[Eric Zhang, Assistant Vice President at Citigroup]

Got it. Thank you.

[Steven Bender, CFO & EVP at Westlake]

You're welcome.

[Operator]

Our next question comes from Duffy Fischer at GS.

[Duffy Fischer, Equity Research Analyst at Goldman Sachs]

Good morning, Caius. Just some questions around the $120,000,000 So one, I believe some of that was planned maintenance and then the maintenance lasted longer. Is that correct? And if so, is the 120 just the lasted longer part of it or could you break it out between what was planned and what ended up kind of being unplanned or longer?

[Steven Bender, CFO & EVP at Westlake]

No, Duffy. Both of those were not planned and so both of those were kind of

[Duffy Fischer, Equity Research Analyst at Goldman Sachs]

how much was foregone production that you didn't have to sell? How much was kind of higher cost because of the increased ethylene price? And then how much was just the actual cost for the repairs? What's the rough breakdown of that?

[Steven Bender, CFO & EVP at Westlake]

Yes, I'm not going to break out those component pieces. It's hard to get into the ethylene price differentials. So I'd rather not get into the details of that because it's really hard to put a fine point on that.

[Duffy Fischer, Equity Research Analyst at Goldman Sachs]

Okay, fair enough. And then just the last one for me. You talked about some Q3 sales getting pushed into Q4. Can you quantify roughly how large that is?

[Steven Bender, CFO & EVP at Westlake]

It's hard to know Duffy. Certainly with the seasonality for hip seen some winter slowdown, we'll achieve some of those and we are seeing a higher shipment volume in October. I do believe we'll achieve all of those sales. It's just a matter of timing. Whether we achieve those in Q4 or they spill into Q1, that's really a function of how the weather continues to play through and whether our customers are able to actually get those homes built during the winter that's approaching.

[Duffy Fischer, Equity Research Analyst at Goldman Sachs]

Perfect. Thank you, guys.

[Steven Bender, CFO & EVP at Westlake]

You're welcome.

[Operator]

Our next question comes from Bhavesh Lodiya at BMO Capital Markets.

[Bhavesh Lodaya, Equity Research - Chemicals, Energy Infrastructure & Midstream at BMO Capital Markets]

Hi, good morning. Thanks for taking my question. You made an overall comment that the 3rd quarter earnings would have been in line with the 2nd quarter except for the one time events. Is that true for the hip segment as well? Or was that 9% sequential drop in volumes?

[Bhavesh Lodaya, Equity Research - Chemicals, Energy Infrastructure & Midstream at BMO Capital Markets]

Was that some of it was? Percent sequential drop in volumes? Was that some of it was like just the end market being weaker as well?

[Steven Bender, CFO & EVP at Westlake]

No, it really is true for both segments. So when you factor in the $75,000,000 mothballing expense that was accrued as well as the impact of the outages of $120,000,000 and think of the impact of the wetter weather that we had from both rains as well as the hurricanes and some of the deferral of that spending activity both HIP and PIM would have been similar to the Q2 of 2024.

[Bhavesh Lodaya, Equity Research - Chemicals, Energy Infrastructure & Midstream at BMO Capital Markets]

Got it. And then a quick follow-up, you also mentioned about the typical seasonality expected in the Q4. Would you say last year was a typical year for you? I think the business the hit business saw around a 47% decline sequentially in EBITDA. Are you talking about the same level of seasonality this year?

[Steven Bender, CFO & EVP at Westlake]

Yes, I am. We saw a similar pattern last year as I expect given the seasonality we've seen so far this year. We don't know how strong winter weather we will have, but as we sit here in early November, October has been a good weather season. And as we look forward, we expect a similar season for the rest of the quarter.

[Bhavesh Lodaya, Equity Research - Chemicals, Energy Infrastructure & Midstream at BMO Capital Markets]

Thank you.

[Steven Bender, CFO & EVP at Westlake]

You're welcome.

[Operator]

Our next question comes from Aleksey Yefremov at KeyBanc Capital Markets.

[Ryan Weis, Equity Research Associate at KeyBanc Capital Markets]

Thanks. Good morning, everyone. This is Ryan on for Aleksey. I want to try and piggyback off of a question asked earlier. So just on the $120,000,000 worth of outages you guys had in 3Q, if I were to think about just kind of the sequential add back for 4Q ex seasonality, do you guys kind of have like an estimate of what that would be?

[Steven Bender, CFO & EVP at Westlake]

Well, again, when you think of the operating rates that we have that the ethylene is going into, whether it is in PVC or into polyethylene, we would have run those plants at those elevated rates. Demand really in PVC and polyethylene are still what I would characterize as good, very good. And so those operating rates would have remained reasonably well elevated. And so as we see it that $120,000,000 impact from both the ethylene outage as well as the coravinyl outage, I think would have been would have given us results very similar to what we saw in the Q2. And as we think about the spill in spill effect into the Q4, I would continue to expect that we'll see typical seasonality in the season for the PIM side of the business as well as for hip.

[Steven Bender, CFO & EVP at Westlake]

But you will see the advantage that we have in feedstock advantage continues to play through and allow us to continue to sell through PVC demand in the construction season even though it's lower. Polyethylene continues to remain a very good market at this stage.

[Ryan Weis, Equity Research Associate at KeyBanc Capital Markets]

Okay, that's very helpful. Thank you. And then just on EBITDA margins in hip this quarter, it looks like margins fell a little bit over 400 basis points sequentially. So I understand there's volume declines, but I think there's also some higher PVC costs that are flowing through. So maybe if you guys could just walk us through the dynamic that's going on kind of in margins there and what you might expect here in 4Q? Thank you very much.

[Steven Bender, CFO & EVP at Westlake]

Yes. And so as it relates to the sequential hit margins, you're right, volume was off about 8.5%, and that was largely driven by weather and slower demand levels in our pipe segment of the hip business. When you think about the average sales price, it was relatively flat, really just up 0.5% sequentially period over period. Again, it was really just product mix. Operator, there's another question.

[Operator]

Yes.

[Operator]

Our next question comes from Frank Mitsch at Premium Research.

[Frank Mitsch, President at Fermium Research]

Hey, good morning. Just a quick clarification. Steve, you mentioned that the 2 units were back up and running last month, at the beginning of the month. Last month was October. So just wanted to make sure that we're looking at a totally clean quarter in terms of operating rates of those two assets in PEM?

[Steven Bender, CFO & EVP at Westlake]

Yes, Frank. They are up and no impact in the Q4 from the outages we had in the Q3.

[Frank Mitsch, President at Fermium Research]

Terrific. And obviously, nice generation of free cash flow despite the difficulties here in the Q3. How are you thinking about free cash flow for the Q4, particularly as it surrounds working capital as a source or as a use of cash?

[Steven Bender, CFO & EVP at Westlake]

Yes. We've seen typically the seasonal trends, as I mentioned earlier in some of the questions. And that usually is a source of working capital during the Q4, Frank.

[Frank Mitsch, President at Fermium Research]

Terrific. Thank you so much.

[Steven Bender, CFO & EVP at Westlake]

You're welcome.

[Operator]

Our next question comes from John Roberts at Mizuho Group.

[John Roberts, Managing Director at Mizuho Financial Group]

Thank you and welcome Jean Marc. The earnings release indicated that you had some learnings from these outages that might help you mitigate them better in the future. What were those learnings?

[Jean-Marc Gilson, President & CEO at Westlake]

Yes. I mean, the we had a as mentioned with an outage at the LACC that was really coming from some design that was made during construction. And we fixed, I mean, most of the problems that we had there. We learned when we fixed it and we think that the LACC plant is now good to operate the way it is for several years. So really good learning.

[Jean-Marc Gilson, President & CEO at Westlake]

Every plant is designed differently. This one was designed a little bit differently than other ethylene plant that we have. And so we learned a lot and it's back up running at 100%. So in terms of the other outage that we had at Plaquemines, again, problem occurred in a power unit. And again, every plan is designed differently.

[Jean-Marc Gilson, President & CEO at Westlake]

We learned that we probably need to replace some of the equipment that we have there and check at other plants if some of the failure that we've seen at that plant does not repeat. So overall, I mean, good learnings. And again, Plaquemines is back up running at good speed. So good learnings. This is a chemical industry.

[Jean-Marc Gilson, President & CEO at Westlake]

I mean, and you learn and you fix and you improve and I think we're on that trajectory.

[John Roberts, Managing Director at Mizuho Financial Group]

Thank you. That's all I had.

[Operator]

Our next question comes from Michael Ceeson at Wells Fargo.

[Analyst]

Hi, this is Richard on for Michael. Just wondering if you could provide some color in terms of what you're seeing on the PEM pricing side, in terms of polyethylene margins, integrated margins and pricing heading into Q4? And then also on the chlorine, chlor alkali pricing was quite strong in the Q3. So what are you seeing there? And if you expect seasonality heading into the Q4? Thank you.

[Steven Bender, CFO & EVP at Westlake]

Yes, Richard, it's a good question. And I would say that we have not seen settlements yet either in PVC or in polyethylene yet. But to your point, during the as a result of seasonality, it is not unusual to see some slower demand begin to materialize in construction activities. And so that does put some pressure on pricing. And so the consultants are suggesting that we could see some reduction in price in the Q4.

[Steven Bender, CFO & EVP at Westlake]

As I say, October is not settled yet, so we don't know how that will play out in PVC, but the consultants are suggesting we could see a penny reduction in November. As it relates to polyethylene, again, we've seen a market that remains, I think I'd characterize it as a very good market right now. But certainly as we enter the Q4 and we get into the contract negotiation periods and the seasonal period when equipment is undergoing maintenance. There certainly is oftentimes some give back in pricing and the consultants are suggesting we could see some reductions later in the quarter. Again, polyethylene has not settled for October, so I can't comment as to where that will sort its way through.

[Steven Bender, CFO & EVP at Westlake]

But consultants are suggesting we could see some reduction in pricing over the course of the quarter.

[Analyst]

Okay, great. And just a follow-up on the hip segment. I don't know if you actually quantified the EBITDA impact from the hurricane in the Q3, but if you could do that. And then on the revenue side, maintaining the full year guide, so I guess that is assuming some volume in the Q3 will be made up in the Q4. I think you mentioned earlier that it was hard to sort of gauge timing if it's going to come back in the Q4 or early next year, but maybe just some color on that. Thank you.

[Steven Bender, CFO & EVP at Westlake]

Yes. It's hard to completely dissect how much is weather related and how much is related to the slower starts that we saw in the Q3 relative to the Q2, but I'd say it's in the mid-40s $1,000,000 range for the impact combined between those 2, for the hip segment.

[Operator]

Our next question comes from Kevin McCarthy at Vertical Research Partners.

[Matthew Hettwer, Equity Research Associate at Vertical Research Partners]

Hi, this is Matt Hetler on for Kevin McCarthy. Jean Marc, now that you have a few more months at the helm, how have your thoughts evolved as it relates to strategy, market opportunities for Westlake and perhaps capital allocation?

[Jean-Marc Gilson, President & CEO at Westlake]

Yes. I mean, thank you, Matt. Yes, it's been now 4 months and I think I'm really starting to appreciate the integrated model and that we have at Westlake, where basically we sell at every point of the value chain from being, I mean, large producer upstream, ethylene, PVC and then selling PVC at multiple point, multichannel, whether we sell neat resin or through some compounds or through directly into pipe and fittings and siding. So I think that is a key advantage that reduces the volatility in our earnings. And we can always place, I mean, the PVC at different point of the value chain depending on pricing and where we can make margin.

[Jean-Marc Gilson, President & CEO at Westlake]

So that's a key advantage. And I think that if we look into the future, anything that can strengthen that business model that's paying very good dividend to us, we will continue to do. And certainly, we'll continue to do to look downstream into the hip segment as it's really been very beneficial to the results in Westlake.

[Matthew Hettwer, Equity Research Associate at Vertical Research Partners]

Thank you. And then could you just discuss epoxy pricing opportunity in 4Q and beyond in the wake of the duty implementation? And then what do you think the likelihood is that you get additional duties on the exports from some of the other Asian countries outside of China and India in 2025?

[Jean-Marc Gilson, President & CEO at Westlake]

All right. So I think you need to separate right now a little bit the U. S. Market and the European market. So I think it's there is a pretty good certainty that we're going to get some import duties as we mentioned from China and India coming into the U.

[Jean-Marc Gilson, President & CEO at Westlake]

S. I think it's going to be extended to a few other countries, albeit at lower import duties. So we feel pretty good in terms of the U. S. Market.

[Jean-Marc Gilson, President & CEO at Westlake]

When it comes to European market, where we have a large part of our sales, it's not a different story, but I think we are a little bit behind what the U. S. Has done. I think it's still likely that there will be some tariffs put in place, but there was an announcement, but so far nothing is firm. And so the pressure that we see on prices, I think will continue in Europe as long as these tariffs are not in place.

[Jean-Marc Gilson, President & CEO at Westlake]

So it's a tale of 2 world. I think ultimately we're going to see some price increase in epoxy on both sides of the Atlantic where we have most of our sales.

[Matthew Hettwer, Equity Research Associate at Vertical Research Partners]

Great. Thank you.

[Operator]

Our next question comes from Joshua Spector at UBS.

[Christopher Perrella, Equity Research Analyst at UBS Group]

Hi, good morning. It's Chris Perrella on for Josh. I wanted to follow-up on hip and the raw material impact of higher PVC and other inputs in the Q3. How did that impact EBITDA sequentially? And then what's the expectation for that into the Q4?

[Steven Bender, CFO & EVP at Westlake]

I think as you look at the results for the quarter for hip, you can see that sales price actually remained pretty healthy. We're able to maintain sales prices. There was some product mix, of course, that shifts that around. But of course, as you think about those flows of higher cost PVC flowing through, we were able to largely push that through and you can see that through our average sales prices, say some product mix flowing through there, of course, but actually quarter over quarter you can see those prices remain relatively flat and stable.

[Christopher Perrella, Equity Research Analyst at UBS Group]

I appreciate that, Steve. And then reaching out to the PVC business in Europe, what's how is Ventilat performing? And I guess what are expectations for margins and profitability in Europe in the quarter in the 4th quarter?

[Steven Bender, CFO & EVP at Westlake]

Certainly, as you might guess, the construction activities in Europe are slower than we've seen here in the North American market. And so the demand for their PVC remains somewhat constrained in terms of an ability to push all this pricing action through. So there are certainly some cost challenges as it relates to the businesses that we have in Europe. But I would say nevertheless, the specialty PVC nature of Vinovits portfolio, I think continues to deliver good results. And so while we have seen years where the results were stronger, I'd say the specialty component, this is the flexible PVC component of Ventilent's business that continues to deliver improving results relative to just being a commodity player in that European market.

[Christopher Perrella, Equity Research Analyst at UBS Group]

Okay. Thank you, Steve. I appreciate it.

[Steven Bender, CFO & EVP at Westlake]

You're welcome.

[Operator]

Our next question comes from Arun Viswanathan at RBC Capital Markets.

[Arun Viswanathan, Senior Equity Analyst at RBC Capital Markets]

Great. Thanks for taking my question.

[Arun Viswanathan, Senior Equity Analyst at RBC Capital Markets]

Hope you guys are well. Maybe I could just try and help you guys frame Q4 for us a little bit. So if you look at Q3, maybe we'll start with that $580,000,000 or so of EBITDA and add back the maintenance charges at $120,000,000 Is typical seasonality maybe, I think it could be in the maybe the 15% to 20% range if you look at Q4. And so maybe that brings you down into the middle 500s. What else would you include as we kind of try to frame up where you guys could be maybe in Q4? Thanks.

[Steven Bender, CFO & EVP at Westlake]

Yes. Arun, there are really no other maintenance planned maintenance activities, turnarounds and such that we have planned in Q4. And so it really is just really the framework around how we think about the dynamics as it relates to pricing over the course of the next several months. So as you think about the seasonality, I think you characterized it well. Volume and demand remains pretty healthy really, I would say, in the PVC and polyethylene market.

[Steven Bender, CFO & EVP at Westlake]

I'd characterize our caustic markets as stable at this level, obviously lower than we've seen in prior years, but nevertheless stable. So it really is just a function of how we see pricing play out over the rest of the Q4 at this stage.

[Arun Viswanathan, Senior Equity Analyst at RBC Capital Markets]

Great. Thanks for that, Steve. And as you look into 'twenty five, we do see some potential optimism around lower rates and maybe you could also see some benefit on the epoxy side from antidumping duties, again potentially some recovery in some of your other markets. So is it fair to assume that you should be you should see some EBITDA growth in 'twenty five as well? And is that more would that be more back half weighted just given the lags that typically are present when rates come down and when that flows through your P and L?

[Arun Viswanathan, Senior Equity Analyst at RBC Capital Markets]

Or are you thinking about some initial thoughts on 2025, if you could share those? Thanks.

[Steven Bender, CFO & EVP at Westlake]

Yes. So certainly interest rates, lower interest rates are going to be stimulative to the economy. As you pointed out, there is a bit of a lag and it's hard to know exactly what the length of that lag is. But lower interest rates are stimulative to not only the building products business, so our hip segment should be benefiting from those lower rates. But I would also say that as we think about the stimulative effect not only in the building and construction trade, but also more broadly in the economy, the North American economy continues to really be characterize it as a good economy.

[Steven Bender, CFO & EVP at Westlake]

And so lower rates will be stimulative as well the broader economy, which would be constructive really to many of the products in our PIM segment. So we continue to have an optimistic view as we look out into 2025, but it's hard to front end or back end weight that I would have to admit because it's hard to know exactly when the Fed will take action to what degree they will take action. There's clearly going to be some lag, but I would say all of that is constructive with lower rates expected in 2025.

[Arun Viswanathan, Senior Equity Analyst at RBC Capital Markets]

Great. Thanks.

[Steven Bender, CFO & EVP at Westlake]

You're welcome.

[Operator]

Our next question comes from Michael Leithead at Barclays.

[Michael Leithead, Director - Equity Research at Barclays]

Great. Thanks. Good morning, guys. There appears to be a number of chemical assets in areas you compete in recently up for sale. Would you consider adding further PEM assets or is your inorganic strategy primarily focused on hip right now?

[Steven Bender, CFO & EVP at Westlake]

Yes. So as we think about it, Mike, the answer is we look across the spectrum of assets that we have both in both segments, both PEM and in hip. And as you heard us speak about the integrated manner of our assets, we continue to want to think about running the business to give us high degree of optionality and where those products go in the markets that we serve. So we'll look at all opportunities in spaces that are in our operating space adjacent to that. It really is about the right opportunity and the right value proposition for us as we think about looking at assets and the opportunities they provide.

[Steven Bender, CFO & EVP at Westlake]

So anything that's in our space we'll assess and anything that's adjacent to that we'll assess. It's just a matter of what's the right value proposition to us as we think about those opportunities.

[Michael Leithead, Director - Equity Research at Barclays]

Great. That's helpful. And then any initial thoughts about 2025 in hip? Appreciate it's hard and early to forecast the market, but just given what you have in the pipeline with new customers or your new PVCO plant, just how should we think about your ability to grow volumes above the market next year?

[Steven Bender, CFO & EVP at Westlake]

Well, I think if those that attended our teach in earlier this summer heard that we were continuing to work very closely with some of these nationwide builders. And I would note that looking at research published by John Burns, a well known real estate construction consultant, noted that these large nationwide builders such as Pulte, Lennar, D. R. Horton and others now represent about 55% of starts nationwide. So as we think about our and I'll call it a partnership, our partnership through these distributors into these homebuilders continues to be successful.

[Steven Bender, CFO & EVP at Westlake]

And so we're continuing to win with the winners because they're continuing to gain market share in their home starts and in those construction activities. As I read their commentary and as we talk to them, they continue to be opportunistic in their views about lower interest rates and the forecast that they're putting forth suggests that we should see a more constructive year in 2025 because of lower interest rates and the expectation that they need to build out more homes for the under build that we've seen across North America that's persisted for over 15 years. So we do think that there'll be a continued growth in demand and those homebuilders are well positioned to meet that demand and we think we're incredibly well positioned to support those homebuilders meeting that demand.

[Michael Leithead, Director - Equity Research at Barclays]

Great. Thank you.

[Steven Bender, CFO & EVP at Westlake]

You're welcome.

[Operator]

Our last question comes from Vincent Andrews at Morgan Stanley.

[Turner Hinrichs, Analyst at Morgan Stanley]

Hi. This is Turner Henricks on for Vincent. I was just wondering what drove the lower chlorovinal export shipments in the Q3?

[Jean-Marc Gilson, President & CEO at Westlake]

I think it was mostly related to pricing and export market and there is a point where we see more value, I mean, pushing some of these volumes into, I mean, selling in other point of the value chain. So for us that was the key factor. It's the price for export is relatively low and so we decide not to go and sell it at a price point where we don't think it's advantageous to us.

[Turner Hinrichs, Analyst at Morgan Stanley]

Great. Thanks. That makes a lot of sense. And if I can fit one more in, have you all seen the anti dumping duties affect the PVC market in Europe?

[Jean-Marc Gilson, President & CEO at Westlake]

Yes. We have. It's having a limited impact right now. Demand in Europe, it's still pretty subdued overall. So unless the demand really picks us picks back up, it's not going to have a very favorable impact onto overall business.

[Jean-Marc Gilson, President & CEO at Westlake]

So in Europe, it's a demand problem and which is a problem we don't have in the U. S.

[Turner Hinrichs, Analyst at Morgan Stanley]

All right. Thanks for taking my questions.

[Operator]

This concludes the question and answer session. I would now like to turn it back to John Zeller for closing remarks.

[Johnathan Zoeller, VP & Treasurer at Westlake]

Thank you again for participating in today's call. We hope you will join us again for our next conference call to discuss our Q4 results.

[Operator]

Thank you for participating in today's Westlake Corporation Third Quarter Earnings 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.

Participants

Executives

• Johnathan Zoeller, VP & Treasurer
• Jean-Marc Gilson, President & CEO
• Steven Bender, CFO & EVP

Analysts

• Eric Zhang, Assistant Vice President at Citigroup
• Duffy Fischer, Equity Research Analyst at Goldman Sachs
• Bhavesh Lodaya, Equity Research - Chemicals, Energy Infrastructure & Midstream at BMO Capital Markets
• Ryan Weis, Equity Research Associate at KeyBanc Capital Markets
• Frank Mitsch, President at Fermium Research
• John Roberts, Managing Director at Mizuho Financial Group
• Analyst
• Matthew Hettwer, Equity Research Associate at Vertical Research Partners
• Christopher Perrella, Equity Research Analyst at UBS Group
• Arun Viswanathan, Senior Equity Analyst at RBC Capital Markets
• Michael Leithead, Director - Equity Research at Barclays
• Turner Hinrichs, Analyst at Morgan Stanley