Westlake Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 1, 2024

There are 15 speakers on the call.

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Westlake Corporation First Quarter 2024 Earnings Conference Call. During the presentation, all participants will be in listen only mode. After the speakers' remarks, you will be invited to participate in a question and answer session. As a reminder, ladies and gentlemen, this conference is being recorded today, May 1, 2024.

Operator

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.

Speaker 1

Thank you. Good morning, everyone, and welcome to the Westlake Corporation conference call to discuss our Q1 2024 results. I am joined today by Albert Chao, our President and CEO Steve Bender, our Executive Vice President and Chief Financial Officer and other members of our management team. During the call, we will refer to our 2 reporting segments Performance and Essential Materials, which we refer to as PEM or materials and Housing and Infrastructure Products, which we refer to as HIP or products. Today's call will begin with Albert, who will open with a few comments regarding Westlake's performance.

Speaker 1

Steve will then discuss our financial and operating results, after which Albert will add a few concluding comments and we will open the call up to questions. As a reminder, during the Q4 of 2023, we recorded a non cash impairment charge of $475,000,000 related to the company's epoxy business, as well as a $150,000,000 charge to fully resolve certain liability claims. We refer to these two charges as the identified items 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 items. As such, comments made on this call will be in regard to our underlying business results using non GAAP financial measures.

Speaker 1

A reconciliation of these non GAAP financial measures to GAAP financial measures is provided in 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. 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.

Speaker 1

This morning, Westlake issued a press release with details of our Q1 results. This document is available in the Press Release section of our website at westlake.com. We have also included an earnings presentation, which can be found in the Investor Relations section on our website. A replay of today's call will be available beginning today, 2 hours following the conclusion of this call. This replay may be accessed via Westlake's website.

Speaker 1

Please note that information reported on this call speaks only as of today, May 1, 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 also be accessed on our webpage at westlake.com. Now, I'd like to turn the call over to Albert Chao. Albert?

Speaker 2

Thank you, John. Good morning, everyone. We appreciate you joining us to discuss our Q1 2024 results. For the Q1 of 2024, we reported net sales of $3,000,000,000 EBITDA of $546,000,000 and net income of $174,000,000 or $1.34 per share, Each was an improvement from our Q4 of 2023 results as we benefited from higher sales volume and lower feedstock fuel and power costs. Our results reflected modest improvement from the destocking activity that occurred throughout 2023 as we saw higher sales volumes and pricing in many of our products began to improve.

Speaker 2

Our hip segment performed exceptionally well, generating record Q1 EBITDA and margins, while providing stability to our overall profitability and earnings with an asset light, cash generative business model. HIP sales volume grew an impressive 14% year over year as our leading positions enabled us to capitalize on resilient North American residential construction and infrastructure activity. This solid sales volume growth, combined with lower material costs and favorable sales mix, drove HIP's EBITDA margin to 25% in the Q1 of 2024, up from 20% in the prior year period. While our hip segment continued to perform well, margin to earnings in our parent segment reflected the weak global economic conditions. For the Q1 of 2024, our PAM segment reported lower net sales and margins when compared to the Q1 of 2023, but we are encouraged by the sequential improvement in these metrics when compared to the Q4 of 2023.

Speaker 2

The sequential improvement in pen volumes from the Q4 of 2023 reflects demand beginning to recover and an end to the destocking activities we experienced throughout 2023. With this improvement in demand, we are also seeing some pricing trends improve as we enter the 2nd quarter. Meanwhile, the competitive advantage provided by our low cost feedstock energy positions in the U. S. Gulf Coast expanded during the Q1 of 2024 due to both higher global oil prices and lower U.

Speaker 2

S. Feedstock and power prices, which position us well to compete in export markets. At the same time, we are making progress on our cost reduction actions. And in the Q1 of 2024, we achieved approximately $35,000,000 towards our previously communicated $125,000,000 to $150,000,000 of targeted 2024 cost savings across the company with a focus on improving the global competitiveness of our epoxy and European operations. While we are confident in our ability to reduce our costs to improve our competitiveness, our Foxy's business continued to be pressured by Asian export volumes, priced below market based production costs.

Speaker 2

As a result, on April 3, as a member of the U. S. Epoxy Resin Producers Ad Hoc Comp Coalition, we participated in filing petitions with the U. S. International Trade Commission and the U.

Speaker 2

S. Department of Commerce requesting the initiation of antidumping and countervailing duty investigations regarding imports of certain epoxy resins from 5 Asian countries. We remain proponents of the free and fair trade of goods on a global basis, but we also remain committed to working with trade groups such as the U. S. Epoxy Resin Producers Ad Hoc Coalition to use all the tools at our disposal to ensure a fair and level playing field in all the geographies in which we operate.

Speaker 2

Overall, I'm pleased with the progress that we are making to improve our position, our portfolio of businesses and create value for our shareholders. I would now like to turn our call over to Steve to provide more detail on our financial results for the Q1 of 2024.

Speaker 3

Thank you, Albert, and good morning, everyone. Westlake reported net income of $174,000,000 or 1 point 3 $4 dollars per share in the Q1 on sales of $3,000,000,000 Net income for the Q1 of 2024 decreased $220,000,000 from the Q1 of 2023. The year over year decline in net income was primarily due to lower average sales prices and margins in PIM, particularly in caustic soda, PVC resin, epoxy resin, which were partially offset by improved sales volumes, lower materials cost and lower restructuring cost in hip. When compared to the Q4 of 2023, net income excluding identified items increased by $81,000,000 in the first quarter, primarily due to higher sales volumes, driven by an uptick in seasonal demand and strong market growth. Our cost saving actions and lower restructuring cost.

Speaker 3

For the Q1 of 2024, our utilization of the FIFO method of accounting resulted in a favorable pre tax impact of $31,000,000 compared to what earnings would have been reported on the LIFO method. This is only an estimate and has not been audited. Before I discuss the details of our segment results, I want to provide some high level thoughts on the quarter. The record Q1 results in our HIP segment demonstrate the progress we have made in integrating and optimizing the acquisitions of the last few years. HIP's strong 14% year over year volume growth in the Q1 in part reflects the benefits of the broad branded product set combined with a much wider geographical footprint, driving cross selling of our products through nationwide distributors going into home construction and remodeling.

Speaker 4

The record

Speaker 3

Q1 EBITDA margin of 25% was supported by our cost savings initiatives, production optimization activities and lower materials cost. These cost savings go well beyond typical acquisition synergies as we implement our efficiency focused manufacturing culture and increase automation within our operations. Overall, we are very pleased with HIP's asset light cash generative business model and solid EBITDA margin. We hope that you will join us on June 13 as we host a hip focused investor teach in event in New York to share more about the exciting progress and opportunities we're seeing in this important segment. Turning to our PIM segment, our first quarter results reflect the challenging global industrial and manufacturing macroeconomic environment.

Speaker 3

That said, we are encouraged by the improving trends for both sales volumes and pricing as we enter the 2nd quarter. We took proactive steps to improve the financial performance of this segment, including progress toward our company wide $125,000,000 to $150,000,000 cost savings target for 2024 and our efforts to halt the flood of low priced Asian imports in certain product categories. Moving to the specifics of our segment performance, our Housing and Infrastructure Products segment produced record 1st quarter EBITDA of $264,000,000 on $1,000,000,000 of sales. EBITDA increased $59,000,000 year over year due to a solid 14% increase in sales volumes, improved product mix into higher margin products, lower materials costs and acquisition synergy and other cost savings benefits. Notably, HIP achieved an important milestone this quarter with trailing 12 month EBITDA exceeding $1,000,000,000 for the first time.

Speaker 3

This achievement is a testament to the hard work of our hip colleagues and the synergies achieved across our businesses. When compared to the Q4 of 2023, HIP segment sales of $1,000,000,000 rose 10%, driven by a 12% sequential increase in sales volume, which more than offset a 2% decrease in average sales prices. Housing product sales of $879,000,000 in the quarter increased $84,000,000 due to solid sales volume growth, particularly in pipe and fittings and siding and trim. Infrastructure product sales of $165,000,000 in the Q1 of 2024 increased $14,000,000 from the Q4 of 'twenty 3 due to double digit sales volume growth in our compounds resin business. HIP's EBITDA margin of 25% set a record for the Q1 and was the 2nd highest for any quarter.

Speaker 3

Margin expansion from 20% in the prior year period was primarily due to lower materials cost and higher sales volumes, while the sequential improvement from 18% in the Q4 of 2023 was due to higher sales volume, improved sales mix and lower restructuring cost as we optimized our manufacturing footprint. Moving to our Penn segment, 1st quarter EBITDA of $253,000,000 was below 1st quarter of 2023 EBITDA of $615,000,000 due to lower average selling prices, particularly for caustic soda and PVC and epoxy resins. On a sequential basis, PEM segment EBITDA of $253,000,000 in the Q1 increased by $52,000,000 from the Q4 of 2023 as a result of higher sales volumes, particularly for PVC and epoxy resin, lower feedstock, fuel and power cost and our cost savings actions. As Albert mentioned, as we enter the Q2, we are encouraged by the improvement in recent pricing trends and sequential sales volumes growth, reflecting an end of the destocking we experienced in 2023 and reduced competition from low priced Asian imports in Europe as a result of shipping disruptions in the Red Sea. Shifting to our balance sheet, as of March 31, 2024, cash and cash equivalents were $3,100,000,000 and total debt was $4,900,000,000 with a staggered long term rate debt maturity schedule.

Speaker 3

For the Q1 of 2024, net cash provided by operating activities of $160,000,000 was impacted by an increase in working capital as we grew our inventories and accounts receivable resulting from the seasonal uptick in demand I previously mentioned. We will continue to look for opportunities to strategically deploy our balance sheet in order to create long term value. Now let me provide some guidance for your modeling. As we view demand and prices, we continue to expect 20 24 revenue in our Housing and infrastructure product segment to be between $4,000,000,000 $4,400,000,000 with EBITDA margin around 20%. Westlake continues to execute with financial and operational discipline as we invest throughout the business cycle and we expect our total capital expenditures to be approximately $1,000,000,000 in 2024, which is unchanged from our earlier guidance and is similar to our depreciation and amortization run rate.

Speaker 3

As a reminder, this includes cost for planned turnaround of our Petro-one ethylene unit scheduled to begin in the second half of this year that is projected to last approximately 60 days. We will continue to target the $125,000,000 to $150,000,000 of cost savings in 2024, with roughly $35,000,000 achieved in the Q1. For the full year of 2024, we expect our effective tax rate to be approximately 23% and we expect cash interest expense to be approximately $160,000,000 Now let me turn the call back over to Albert to provide the current outlook of our business. Albert?

Speaker 2

Thank you, Steve. Our first quarter results once again demonstrated the value of our vertical integration strategy and the diversity of our segments in reducing the volatility of our overall earnings. Our hip segment continued to perform well, supported by favorable demographic trends, lower material costs, the strong value of brands and our own cost saving and cross selling initiatives. Meanwhile, results in our PEM segment reflected the macroeconomic backdrop of a slow but steady post COVID economic recovery in Asia and mostly improving ISM manufacturing index readings in the U. S.

Speaker 2

And Europe. While recent trends over the past year have been challenging, we continue to have a positive view for long term demand, supported by the growing global need for clean water, transportation, renewable energy, packaging and consumer goods. Our efforts to help our customers achieve their sustainability goals contributed to our sales growth in the Q1. For example, sales volume for our pivotal post consumer polyethylene resin increased sequentially by nearly 30% from the Q4 of 2023, as we are seeing increasing consumer adoption of the product, particularly for consumer trash bags to meet new regulations for post consumer material usage. Our green bean PVC in Europe now representing a significant portion of our European PVC sales, offers customers green PVC products.

Speaker 2

These are just a few examples of innovative products Westlake has developed to improve customers' environmental footprint and support our long term sales growth rate. At the same time, we continue to make investments in our plants and in manufacturing processes to reduce impact on the environment. Before we open the call for your questions, I want to review our thoughts on our current outlook. Overall, global macroeconomic conditions remain sluggish, with restrictive monetary policy in place in many geographies and lingering high rates of inflation weighing on consumer demand. In spite of the challenging backdrop, we have continued to invest in innovative products to meet our customers' needs and deliver product solutions with unique properties and characteristics as the markets evolve.

Speaker 2

Results in our PEM segment are supported by our key strengths, namely our global scale with highly integrated structurally advantaged North American assets that benefit from low cost feedstock and our research and development facilities around the world that are developing products with solutions to meet customer needs. We believe that our hip segment is positioned to perform well in this environment, supported by positive demographic trends and the need to rebuild housing stock and infrastructure in North America following years of underinvestment. These secular tailwinds combined with our strong branded product offerings, nationwide service and cross selling opportunities should continue to drive sales volume growth, while our cost saving and automation initiatives support continued solid margins. While we expect global economic conditions to slowly improve over the course of 2024, We are fortunate to have a strong investment grade balance sheet with net debt below one time trailing 12 months EBITDA and no significant near term debt maturities. We view this solid financial position as a significant asset to create further long term value for our shareholders as we continue to evaluate ways to deploy our balance sheet as opportunities arise.

Speaker 2

Thank you very much for listening to our Q1 earnings call. I will now turn the call back over to John.

Speaker 1

Thank you, Albert. Before we begin taking questions, I would like to remind listeners that our earnings presentation, which provides additional clarity into our results, is available on our website and a replay of this teleconference will be available 2 hours after the call has ended. Liz, we will now take questions.

Operator

Thank you. Our first question comes from Patrick Cunningham at Citibank. Your line is open.

Speaker 5

Hi, good morning. Thanks for taking my questions. How much of the volume gains in HIP for the quarter would you attribute to share gains? How important has cross selling been and increased offering versus maybe your larger homebuilding customers gaining share themselves and you just benefit from that additional volume opportunity?

Speaker 3

Yes, Patrick, it's Steve. We've been able to really participate and grow with our customer base as you can as you I think well understand as we sell into the distribution channel, those distributors are well aligned with those large nationwide homebuilders. And as those nationwide homebuilders continue to gain market share, we're participating with their growth. So we continue to see very good progress really in partnering with those nationwide builders that they continue to gain market share and we're participating in that market share growth along with them. Certainly, the brand offerings that we have also have very good penetration in the repair and remodeling market.

Speaker 3

So it's not entirely all in the new construction arena.

Speaker 5

Got it. And then just on the sales and margin guide for hip that you maintained, it seems a bit light just in the context of the particularly strong Q1. And are there additional sort of price cost headwinds which you're baking into that outlook? And maybe what's your outlook for volumes for the year?

Speaker 3

Yes. So as certainly we're all well aware that we still have an elevated interest rate environment and certainly we understand that many of these nationwide homebuilders are providing sales incentives, a variety of sorts. So as we see the year progress, if we see the improvements in interest rate outlook and continue to see the strength that many of these homebuilders speak to, we'll continue to assess really the kind of guidance that we provide. But right now, we think that this is prudent, but we do think that we are off to a wonderful start and really look forward to continuing the trajectory that our hip business is progressing on.

Speaker 5

Great. Thank you so much. I'll pass it on.

Operator

The next question comes from Frank Mitsch from Fermium Research. Your line is now open.

Speaker 6

Yes. Hi, good morning. If I could just follow-up on that last question in terms of maintaining the guide on hip, How would you describe the visibility on your order books in that business? Do you have it through the Q2? Is it into the Q3?

Speaker 6

How would you describe your visibility there?

Speaker 3

Yes, Frank, good question. We do have good visibility into the Q2 and I would say the backlog continues to remain quite strong. We see it not only in our Siding and Trim business, but also in our Pipes and Fittings business, which are very good leading indicators in terms of the strength that we expect to see as we get into the Q2 with that hip business. Of course, as we see a pull on pipe and fittings that as I say is really good indicator of the construction activity we see in new construction going forward into the second quarter.

Speaker 6

Terrific. Looking forward to the, what is it, June 13 date there. And then, if you could talk a little bit about the impact that the Red Sea shipping challenge had on your European operations. What sort of benefits did you see and how sustainable do you think those benefits are? If you could talk about Europe a little bit, that would be helpful.

Speaker 6

Thank you.

Speaker 2

Yes. I think the Europe, the Red Sea situation improved somewhat. And while it is during the Q1, we did see a slowdown of imports to Europe. But the situation still goes on, and I think the attack on shipping vessels continues.

Speaker 6

So the benefits for your localized European production units should continue through the Q2 at this point, correct?

Speaker 2

Yes. I think the volume, especially Q2 is usually the best quarter or second and third quarter, the best quarter of the year. So we should see some volume improvement as well.

Speaker 6

Thank you so much.

Speaker 2

You're welcome, Frank.

Operator

Please stand by for the next question. The next question comes from Turner Henricks with Morgan Stanley. Your line is now open.

Speaker 3

Hi. It's actually Vincent Andrews from Morgan Stanley. If I could ask

Speaker 6

you about the PEM outlook for the Q2, it looks like you're anticipating sort of a flattish outcome. Could you help us understand what your expectations are on volume and price and in particular to the caustic soda market? Are you not anticipating any improvement? It looks like there was a price increase for April though some of the trade presses contextualize that as maybe not being durable. So I would love to hear your outlook here.

Speaker 2

Yes. I think, again, because of the increased demand in construction PVC in general, generally, globally, there's more cost available. So as we move into the second and third quarter, we will see a leveling of the price increases we had. As we mentioned, between the 1st 4 months, probably $35 a ton of in the U. S.

Speaker 2

Of price increases, and we see export price improving globally somewhat. So we think that price will be more or less flat. I think some of the consultants are saying that depending how the general global economic conditions fares out in the second half of the year, if that improves then the caustic price will improve. Otherwise, it will be pretty stable at today's levels.

Speaker 6

Okay. And then as a follow-up, Albert, just on the M and A environment, you obviously have a big pile of cash there. And anybody else that might want to buy something is still facing unattractive borrowing rates and who knows how long those borrowing rates will stay where they are. But I'm just wondering if we're getting through a period of time where maybe you're really advantaged as a buyer being able to be a cash buyer. Are you seeing anything opening up for you on the M and A front

Speaker 2

as we move through the

Speaker 3

balance of this year? Yes, Vincent, I would say that as we continue to look at opportunities across both the chemical side and the building product side of our business, we're going to continue to be very thoughtful about how we deploy capital. Certainly, we're very focused at the return. And as you know very well, we've been very focused at making sure that through the cycle, any investment we're making is going to give us that risk adjusted rate of return. So yes, we do think that the capital position, the strong balance sheet we have provides us really good opportunities, but it doesn't really change how we think about investing over the cycle in the businesses.

Speaker 3

But we'll continue to have a very, very, I think, pragmatic and very thoughtful approach looking at both sides of the business to continue that investment thesis.

Speaker 7

Okay.

Speaker 4

Thanks, everyone. Welcome.

Operator

Please standby for the next question. The next question comes from us to Aleksey Yefremov with KeyBanc. Your line is open.

Speaker 8

Thanks and good morning everyone. Albert or Steve, on Slide 6, you list the key categories of your products, siding, trim, pipe, etcetera. Do you just provide sales performance commentary? Do any of the categories stand out to you so far this year as particularly strong or not?

Speaker 3

Yes, I would say, Alexey, that those that I spoke to really were, as I say, the pipe and fittings and the siding and trim are those that we continue to perform very, very well in this business. They're, I think really strong positioned in the marketplace with the competitors. We have strong positioning in our fittings business and on our pipes business and of course siding and trim. We continue to see really good improvement in the Boral business as that brought roofing materials and windows as well as decorative stones. So I would say that acquisition has really continued perform well.

Speaker 3

And then you can see from the results that those branded products continue to really be good selling points with our nationwide customer base. But I would say those that we called out specifically in this quarter, the siding and trim and the pipe and fittings were those that really strongly performed.

Speaker 8

Understood. And then maybe more of a big picture question on your hip business. You're obviously looking for additional product line acquisitions, but you talked before about potential opportunities to unlock the valuation discounts for the business. As you think about those options, is this stock merger was another sort of publicly traded or another large building products company, an option that would separate the chemical business from the building products?

Speaker 3

Yes. I mean, as we think about opportunities to build out the businesses, looking at acquisition currencies, whether they're cash or equity based are all issues that would be well considered. It's just a matter of what the value proposition is and really what is of interest to the other side. So those considerations and that kind of currency are freely available to us. It's just a matter of what is interesting and value oriented to the other side of the table.

Speaker 8

Thanks a lot. You're welcome.

Operator

The next question comes from Hassan Ahmed with Alembic Global Advisors. Your line is now open.

Speaker 9

Good morning, Albert and Steve. Good morning, everyone. Just wanted to touch on the sort of qualitative points that you talked about with regards to your guidance and maybe sort of turn that into a bit of a quantitative side of things as well. I mean, you guys did $546,000,000 in EBITDA in Q1. And from the sounds of it, you're talking about destocking being behind you.

Speaker 9

Obviously, we're going into a period of seasonal strength and the like. And it seems that there is volume and pricing momentum as well. So, is it fair to assume that I mean $546,000,000 annualized $2,200,000,000 So, 2024 it appears like at the very least, you'll make north of $2,200,000,000 Is that kind of the right way of thinking about things?

Speaker 3

Hassane, as we think about guidance, as you know, we don't provide kind of the consolidated company guidance, though we do provide it for the Building Products business. And I think as you can see from our prepared remarks, that pricing seems to have stabilized at this point across the chain. And that's, I think, very important. But as we think about the outlook, the questions still remain in terms of how we see the pricing trends in the back half of this year and volume trends. So we have a constructive outlook as you can see, but we're not providing any numerical guidance for Westlake on a consolidated basis.

Speaker 9

Fair enough. Fair enough. And just changing gears to the epoxy side of the business. One of your competitors that actually separately discloses their Epoxy results, from those results it appeared that Epoxy is kind of turning a corner, EBITDA turned positive for the first time in a couple of quarters there. So could you talk a bit about what you guys are seeing in terms of the market dynamics there, the supply demand fundamentals there in a sort of business going the way it's going scenario as well as in a scenario where these antidumping cases that are being brought about actually go through.

Speaker 2

Yes. We are seeing a slight improvement in epoxy prices through all the regions in U. S, Europe and Asia. And we are seeing some demand improvement as well. And it's also we're seeing a bit less imports into U.

Speaker 2

S. And Europe. So things are looking better, but I think the dynamics still a lot happens on Renew Energy with windmills and with coating, which associate with construction infrastructure. So I think the general economy globally would impact on the global demand for epoxy. So we are seeing some little bit of signs of improvement.

Speaker 2

Again, the dynamics, the different Asia is weakest and then Europe is a little better and the U. S. Is the better region, generally speaking, for these three regions. But things could change. As Steve mentioned, we don't know the second half with so much uncertainty from inflation, interest rate, geopolitics and as well as elections.

Speaker 2

So but I think longer term basis, we are very optimistic on both hip and PEM segment, as we alluded to in our comments. And we work to reduce our costs, strengthen our positions in all these products, including M and As, and we are open to all ideas on M and As as well. And our goal is to really earn above our cost capital and with our financial asset base, we can do deals that make sense to us.

Speaker 9

Very helpful, Albert and Steve. Thank you so much.

Speaker 2

You're welcome. Thank you.

Operator

One moment for the next question. And the next question comes from Mike Harris at Goldman Sachs. Your line is now open.

Speaker 7

Good morning. Pinching for Duffy this morning. And I have a question on hip. On Slide 6 in the earnings deck, you show a U. S.

Speaker 7

TAM of roughly $40,000,000,000 dollars And looking at the current annual hip sales, it suggests that even though you have a number 1 or number 2 market position for the most part, you still only serve about 10% of that TAM. If so, how should we think about the other 9%? I Can you pick up meaningful market share with the current portfolio? Or would it require more M and A? And if more M and A, how would you rank your interest in the listed growth opportunities?

Speaker 7

Thank you.

Speaker 3

Yes. Mike, good question. The answer is you've seen that we are continuing to look at broadening the overall portfolio in our hip segment. The acquisition of Boral and Alaska are really good examples of ways we're adding to that portfolio. This broad total addressable market is one that we think has got good opportunity.

Speaker 3

In our prepared remarks, we spoke about the underinvestment in both infrastructure and in housing. And when you think of the housing market being probably a 40 year age average, it has great opportunity to continue a need for both repair and remodeling and new construction activities. And of course, the infrastructure bill provides great opportunities for us to continue to invest and opportunities to grow in that area. So as you think about the way where we can grow and address this large market, the answer is we can address that with our current portfolio, but I would expect we'll want to add additional pieces to the portfolio to address the growing needs that we see in the overall marketplace. So this is why when we think about acquisition orientation, we're looking to add important pieces to the overall building products portfolio that we have in hip.

Speaker 7

Okay. Thank you very much.

Speaker 3

You're welcome, Mike.

Operator

One moment for the next question. The next question comes from Kevin McCarthy at Vertical Research Partners. Your line is open.

Speaker 10

Yes. Thank you and good morning everyone. In your hip segment, did your first quarter EBITDA margin of 25% come in better than you would have thought 3 months ago or on par? If it was better, what were the most important drivers of the upside margin variance?

Speaker 3

Yes, but it was stronger than I would have guessed that we had a very strong start to the year. And I would say in the Q1, the strength that we saw in markets beginning to kind of restock levels and the construction activity in the Q1 continue to be quite strong. As I mentioned, we've seen many of our partners that are these nationwide homebuilders and while we service them through distribution channels, continue to have them grow market share and we're participating in that market share growth with them. And so given the strength that we're seeing in their growth and our ability to participate in that growth with them, I think that speaks to the strength that we've seen in the overall business and the business strategy of penetrating these markets with our branded products. So I would say, yes, we had a very strong quarter and stronger than I would have guessed if you'd asked me earlier in the Q4.

Speaker 10

Okay. And then if I may shift gears to your chlor alkali and vinyls business. Can you comment on your operating rates in the Q1? And as you look ahead to the Q2, how do you think those operating rates might trend relative to normal seasonal patterns in those businesses?

Speaker 2

Yes. I think chlor alkali in the Q1 probably in the high 70s and there were also turnarounds going on. And partially, one of the question earlier was that when the turnaround is over, the operating rates will be higher and hence there's more supply. So depending on the global demand for products, as you know, U. S.

Speaker 2

Exports around 20 percent -odd of its products. So the operating rates we tend we will expect to be higher in the Q2 than the Q1.

Speaker 10

Thank you very much.

Speaker 2

You're welcome.

Operator

And the next question comes from Michael Sison at Wells Fargo. Your line is open.

Speaker 11

Hey, guys. Nice start to the year. For polyethylene, there's some price increase announcements out there for April. And I guess for May potentially as well. How do you feel about supply demand for polyethylene these days?

Speaker 11

Do you think those price increases can be supported?

Speaker 2

Yes. We had price increase earlier in the year, and I think the industry looking for $0.03 price increase in April, as well as $0.03 price increase in May. The demand has been quite good domestically and for export in the U. S. And April is not over yet.

Speaker 2

So well, in terms of negotiating for pricing, so we'll tell in a few days how that goes.

Speaker 11

Got it. And then for PEM in total on a sequential basis in 2Q, I just want to make sure I understand, you are seeing sort of that seasonal lift into the 2nd quarter sort of in total? And then, I mean, do you think your volumes will still will continue to grow year over year as it did in the Q1?

Speaker 3

Yes. So Mike, as we were mentioned in our prepared remarks, yes, we're continuing to see the volume strength that we saw in the Q1 continue on into the 2nd quarter. And certainly that is very supportive of our outlook as we go into the year, but it's hard to see what will transpire in the back half of the year. But I would say that as we enter the Q2 here and see the volumes continue to be constructive and pricing has certainly across whether it be in polyethylene or caustic or in PVC. We've seen price traction in the Q1, which continues to be positive in terms of overall results as we look into Q2.

Speaker 3

But it is hard to then look that far forward into the back half of twenty we do see positive signs at this stage for the Q2.

Speaker 11

Great. Thank you.

Speaker 3

You're welcome.

Operator

Please stand by for the next question. The next question comes from Josh Spector at UBS. Your line is open.

Speaker 12

Hi. Thanks for taking my question. I wanted to ask specifically on the hip margins and looking at Q2, typically margins are up sequentially and understand the prudence on the year. I just wanted to check to make sure there wasn't anything or see if there's anything discrete that we should be thinking about either PVC pricing adjustments or something else that will lead to an abnormal sequential movement in margins and headwind?

Speaker 3

So Josh, as we push forth into the Q2, you're right, we do have some of those price increases that we achieved in the Q1 being pushed through in products downstream into building products. But at the same time, the Q2 and the Q3 typically are the strongest volume quarters. And so to the extent that we can get traction in volume and we're as I mentioned, we've got a very solid backlog, we hope to be able to push those cost increases through in our product offering. So as I say, we're very constructive as we look forward into the Q2 for the building product side of our business.

Speaker 12

Understood. That's helpful. And just on the infrastructure side of the business, you've had pretty good growth sequentially, that was down year over year. And I mean some of the non res indicators are still up but softening. I guess how do you see that part of that business trending relative to the more housing exposures other part of the segment?

Speaker 3

Yes, I would say the infrastructure side of our business still remains good. The backlog The backlog we're seeing in our piping fittings business still looks very good. And of course, as I mentioned, that's a good indicator for the exterior construction activities of our Westlake Royal businesses. Water and other water and other infrastructure needs that the U. S.

Speaker 3

Has and we're very well positioned to participate in that investment spend by the government. So I think we're with our backlog, we're very have a very positive outlook into the Q2 for our infrastructure business.

Speaker 12

Great. Thank you.

Speaker 9

You're welcome.

Operator

Please standby. We have Bank of America Securities Inc. Your line is now open.

Speaker 13

Yes. Thank you very much. So firstly, I wanted a little bit to understand the dynamics for ship in Q2. I mean, when you look in the past couple of years, it looks like mainly because of XERMALT, you get probably a $30,000,000 or $40,000,000 EBITDA boost in Q2 versus Q1. As we think about this right now and with your strong order backlogs, is this the same should we have the same expectation?

Speaker 13

Or are there or perhaps if there was any pull forward in business in Q1?

Speaker 3

No, I think we've seen kind of a continued strength that we saw at the tail end of the year. So obviously, there's a seasonality to the business that we normally see. I think the Q1 is not a pull forward, but a continuance of the demand picture of the underinvestment, both in infrastructure and in housing. So as I mentioned, the strength that we're seeing with our nationwide homebuilder partners, they're continuing to grow market share and that isn't necessarily a front loading. That's just simply being able to grow with the market as those nationwide homebuilders continue to grow their market share.

Speaker 3

We're participating in that and that's not really a pull forward per se.

Speaker 13

Okay, perfect. And I guess that brings my second question, which is that if we continue to see the positive trends here in Q2 and given what you recorded and that you gave the guidance unchanged for the segment. It looks to us that you should be you're essentially expected to do well below $200,000,000 EBITDA in each of the last two quarters of the year. So that would be a meaningful step down obviously mostly on margin. So what is your expectation would drive that would be a very big volume decline or price cost would narrow significantly?

Speaker 3

Yes. As I mentioned, as we look into the second half of the year, it's harder for us to see the entire 3rd Q4. And as we see that if we do continue to see the strength we've seen so far, we'll assess our guidance going forward. But at this stage, we haven't adjusted our guidance. But as I say, if we continue to see strength in this business, we'll assess the second half of the year as we approach that.

Speaker 3

But I would say, we continue to see good strength into the second quarter as we go through here. The headwind really would be only in being able to push through some of these PVC resin prices and our downstream building products businesses. But given the strength in the backlog we see, we think we'll have good success on that front.

Speaker 13

All right. Thank you very much.

Speaker 8

You're welcome.

Operator

The next question is from Matthew Blair at TPH. Your line is open.

Speaker 4

Thank you and good morning Albert and Steve.

Speaker 3

Good morning.

Speaker 4

Good morning. I want to ask about Slide 5, especially the comment regarding the strong demand you're seeing for large diameter pipe. Are there any numbers you can share around that? And I guess is the implication there that some of these homebuilders are they're starting like brand new developments, putting in the initial infrastructure, but really haven't started on the actual housing construction yet?

Speaker 3

Well, of course the infrastructure leads. And so as we think about the strength that we've seen in our infrastructure business, this is the pipe and fittings business. That continues to be, as I say, good strong backlog and we continue to see that leading the construction going into our exteriors business. This is the Westlake Royal Business. And so certainly given the nice position that we have nationwide with our pipes and fittings business, we think it does perform will continue to perform well it has in the Q1 and we expect that to continue into the second quarter with its backlog.

Speaker 3

While we don't provide specific volumes for each one of these sub segments of the hip business, I would say we're continuing to see very good strength within this segment of the business.

Speaker 4

Sounds good. And then you mentioned that the in hip areas like pipe and fitting as well as sidings were especially strong. What areas are you still looking to catch up on? What areas are a little bit softer right now?

Speaker 3

So certainly as we think about the businesses that have stronger margins, those that we just called out, and I'd say some of the businesses where there is a wider a larger number of players. I'd certainly say the windows business certainly is a bit more challenged than I would say the sucking and trim business, which we called out as having very good strength and pipe and fittings having very good strength.

Speaker 4

Great. Thank you very much.

Speaker 5

You're welcome.

Operator

The next question is from Arun Viswanathan of RBC Capital Markets. Your line is now open.

Speaker 14

Great. Thanks for taking my question. I guess, I just wanted to understand the sequential ramp here that we should maybe be thinking about Q1 to Q2. So looks like hip was up about 100,000,000 dollars from Q4 to Q1 and PEM was up about $50,000,000 When you think about Q2, I think we're I'm under the impression that maybe, hip is up about 15% sequentially, maybe PEM could be a similar amount, maybe HIP could be a little bit more. How are you thinking about that?

Speaker 14

It seems like volume really drove the quarter and do you still have a similar kind of volume uplift as you look into Q2? Thanks.

Speaker 3

Yes. So Arun, as we think about the building products business, I would say volume continues to be good. As I mentioned several times, we've got very good backlog. We will be looking to try to push through these PVC price increase that we achieved in the Q1 through that chain. And so that remains really the headwind in terms of being able to expand margin as we go forward with this higher volume.

Speaker 14

And what about PEM, sorry, as you go into Q2?

Speaker 3

Yes. Certainly, you've seen the tailwind we've seen in pricing traction both in PVC and polyethylene as well as in caustic. And certainly the strength that we've seen with those price improvements over the course of the Q1, we hope to continue. Prices seems to have stabilized at these elevated levels. And as we look forward, there's really as we see it good reason to think that those prices will remain at these elevated levels now that we've achieved that improvement in pricing across those products.

Speaker 14

And just as a follow-up then, so what is kind of the backlog typical for HIP? Is it in weeks or months or how much visibility do you have? And then along those lines, if you do have a fair amount of visibility, would that would you consider that we should kind of be looking at, say, 20% to 25% as far as EBITDA margin for hip on a more consistent basis? I think you've been above your 15% to 20% range for several quarters now. Thanks.

Speaker 3

So Arun, we can typically look at a couple of months in terms of order in the order books. Of course, at any point in time, they can cancel orders, of course. But the guidance that we provided of approximately 20% is really kind of where we are at this stage. And we'll update that guidance as we progress through the course of the year.

Speaker 6

Great. Thanks a lot.

Speaker 9

You're welcome.

Operator

And we have time for one more question. Please stand by.

Speaker 13

Yes. Thank you very much. I just want to also ask a little bit about the boxes. And if you can refresh a little bit about your exposure to more commodity products versus downstream composites and systems? And how has that changed in the past few years since you made the biggest that the major acquisition, I think it was 3 years ago?

Speaker 2

Yes. I think we're covering most of the epoxy applications, including coatings, electronics, windmill blades as well as aerospace. So all these areas, we are participating both in the more commodity grades as well as more specialty grades. And so I think it's just in the past with the unfair price Asian imports has impacted the margin of European and U. S.

Speaker 2

Markets. But I think, as we said earlier, we're seeing signs of improving pricing and demand coming back slowly. So we're seeing some improvement already.

Speaker 13

Great. Thank you very much.

Speaker 2

You're welcome.

Operator

Final question from David Begleiter at Deutsche Bank. Your line is now open.

Speaker 6

Thank you for taking my question. Alper, Steve, just back on the hip margins. The last 3 years, hip margins have increased from Q1 to Q2. I believe you've also been at various times pushing to higher PVC prices. So why would this year be any different in terms of margins increasing from Q1 to Q2 in hip given the seasonally stronger demand even with pushing through some higher PVC prices?

Speaker 3

So David, as you think about the housing starts that we've seen, we continue to see the homebuilders be constructive in their outlook for starts and we continue to seek positive signals in permits. But we also recognize that affordability remains an issue. And so we're really trying to be thoughtful about making sure that we can get the value for the product we're pushing through, but we recognize there is only certain speed in which we can push through these products downstream into our fabricated products. So it's an issue of the timing of being able to push through these prices and not are we able to push through these prices. It's just a matter of timing.

Speaker 6

Got it. And lastly, Albert, there is some new capacity from PVC coming on stream this year from other players. How do you foresee that impact the market if at all as most of this is geared for the export market? Thank you.

Speaker 2

Yes. I think with the lower peak stock position, both for making ethylene, 50% of PVC is ethylene and 50% is chlor alkali, which is very heavy on power and natural gas feedstock. So with our low fixed costs and power position, I think our industry is well positioned to participate in the global PVC market around the world. And U. S.

Speaker 2

Exports around high 20, low 30 percentage of our production. And I think U. S. Industry with a great top position will continue to participate in the global markets.

Speaker 6

Thank you.

Speaker 2

You're welcome.

Operator

At this time, the Q and A session has now ended. We'll turn it over to John Zeller for any closing remarks.

Speaker 1

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

Operator

Thank you for participating in today's Westlake Corporation First 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.

Powered by Quartr
Earnings Conference Call
Westlake Q1 2024
00:00 / 00:00