Westlake Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 6, 2024

There are 15 speakers on the call.

Operator

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

Operator

As a reminder, ladies and gentlemen, this conference is being recorded today, August 6, 2024. I would now like to turn the call over to your 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 Q2 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 Albert and Jean Marc, 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 up the call to questions. Today, management is going to discuss certain topics that will contain forward looking information that is based on management's beliefs, as well as assumptions made by and information currently available to management. These forward looking statements suggest predictions or expectations and thus are subject to risks or uncertainties. These risks and uncertainties are discussed in Westlake's Form 10 ks for the year ended December 31, 2023 and other SEC filings.

Speaker 1

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

Speaker 1

This replay may be accessed via Westlake's website. Please note that information reported on this call speaks only as of today, August 6, 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 Albert Chao. Albert?

Speaker 2

Thank you, John. Good morning, everyone. We appreciate you joining us to discuss our Q2 2024 results. I'm pleased to announce that we reported record quarterly results for our hip segment in the Q2 of 2024, which contributed to year over year company wide earnings growth this quarter. We achieved this despite a slower than expected global macroeconomic recovery following the downturn in macroeconomic conditions that began in the second half of twenty twenty two and the average annual rate of housing starts through June 2024 below the average for 2023.

Speaker 2

For the Q2 of 2024, we reported net sales of $3,200,000,000 EBITDA of $744,000,000 net income of $313,000,000 or $2.40 per share, which were each an improvement from the Q2 of 2023 as we benefited from higher volumes across the board in our hip segment, led by pipe fittings and sidings and trim and also higher volumes across our materials portfolio in PEM led by PVC resin and caustic soda. Average sales price in both segments was lower year over year in the Q2, primarily due to the decline in PVC resin, caustic soda and pipe and fitting prices that occurred last year. On a sequential basis, hip volume rose by 15%, driven by seasonal increases in demand and product cross selling with stable average sales price. Volume gains sequentially in PAM were 1%, while average sales price rose 4%. For PEM, this was the 1st sequential increase in average sales price since the destocking cycles that we experienced last year.

Speaker 2

During the quarter, we continue to see the benefits of our vertical integration strategy as strong demand for pipe and fittings and siding and trim in our hip segment help drive PVC sales volumes, improving our PEM PVC sales mix and margins as we're able to shift sales volumes from less attractive export markets. We also saw continued benefits from our portfolio diversification strategy during the quarter as the slow recovery in PAM margins and earnings due to continued weak global industrial demand was supported by solid hip earnings growth and margin expansion from growth in residential housing construction and infrastructure build related spending. Overall, we are very pleased with performance of both our segments and the integration benefits of our portfolio of businesses and the value of the strategy delivers to Westlake and our investors. We're happy to welcome Jean Marc Gilson to the Westlake team with appointment as our new President and CEO. He is a seasoned industry leader with a proven track record of delivering sustained financial performance with leadership roles in the U.

Speaker 2

S, Europe and Asia, most recently as President and CEO of Mitsubishi Chemical Group. Xiaomark's appointment is the combination of a thoughtful succession plan that ensures the continuation of our strategy to create long term value for our shareholders. I would now like to turn the call over to Jean Marc to provide some initial thoughts. Jean Marc?

Speaker 3

Thank you, Albert, and good morning, everyone. It's a pleasure to join Westlake at such an exciting time in the company's history. While I am new to the company, I've been around the chemical industry for many decades in a variety of leadership roles and I have long admired Westlake for its focus on safe and reliable low cost operation and its environmental stewardship. I also recognize that shareholders value Westlake's history of profitable growth through disciplined investments to create long term value. Since founding Westlake nearly 40 years ago, Albert and James, along with the rest of the Board and leadership team, have created an incredible company that improves the lives of so many people around the world and thus it's an honor to be given the privilege to build upon such a successful foundation.

Speaker 3

While I have only been at the company for a few weeks, I've had the opportunity to meet many of my coworkers and I wanted to share with you some initial thoughts. First, I look forward to building on the successful strategy and focus on driving value for our customers and shareholders. 2nd, the current portfolio is a great mix of globally cost advantage materials in PEM and innovative differentiated products with strong brand

Speaker 1

in hip.

Speaker 3

3rd, I think both segments complement each other synergistically as demonstrated by the solid second quarter financial results that we reported today. And I think that there is a solid runway to continue to grow the company in these two verticals for the foreseeable future. I look forward to sharing more thoughts with all of you in the near future. I would now like to turn our call over to Steve to provide more detail on our financial results for the Q2. Steve?

Speaker 3

Thank you very much Jean Marc and welcome to Westlake

Speaker 1

and good morning everyone. Westlake reported net income of $313,000,000 or $2.40 per share in the 2nd quarter on sales of $3,200,000,000 Net income for the Q2 of 2024 increased $16,000,000 from the Q2 of 2023, primarily due to higher sales volumes for all of our product lines in our hip segment, particularly for pipe and fittings, siding and trim. When compared to the Q1 of 2024, net income increased by $139,000,000 in the 2nd quarter, driven by an increase in demand from a seasonal pickup in construction activity, cross selling in the hip segment and higher average sales price in our PEM segment, particularly for PVC resin and polyethylene, reflecting some improvement in the supply demand picture as the global markets slowly recover. During the Q2, we continue to make progress on our company wide cost savings initiative with approximately $50,000,000 of savings delivered during the Q2. These savings combined with those achieved in the first quarter totaled approximately $85,000,000 of long term cost reductions in the first half of twenty twenty four towards our full year target of $125,000,000 to $150,000,000 These efforts build on the $110,000,000 of cost reductions that we delivered in 2023 as we continue our focus on capturing acquisition synergies and improving our reliable cost effective business model.

Speaker 1

For the Q2 of 2024, our utilization of the FIFO method of accounting resulted in a favorable pre tax impact of $12,000,000 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. In the Q2 of 2024, we saw a continuation of the market trends that we experienced in the Q1, including building products demand growth, driving sequential sales volume improvement by 15% and modest improvement in demand for materials in our PIM segment, which supported improvement in PIM average sales price of 4% during the Q2. These trends combined with our cost cutting and synergy attainment efforts drove record quarterly EBITDA of $336,000,000 and record quarterly EBITDA margins of 28% in our HIP segment, an improvement in our PEM EBITDA margin to 19% from 13% in the 1st quarter.

Speaker 1

Notably, the record HIP results are occurring against a backdrop of historically lower levels of residential construction activity that is necessary to meet society's needs for housing and elevated mortgage rates. This is a testament to our positioning in the market and margin improvement efforts. Combined, the solid growth in hip and progress towards margin recovery in PIM drove a return to year over year quarterly earnings growth for Westlake despite the current global microeconomic conditions. Moving to the specifics of our segment performance. Our Housing and Infrastructure Products segment produced record EBITDA of $336,000,000 on $1,200,000,000 of sales.

Speaker 1

EBITDA increased $92,000,000 year over year due to a solid 16% increase in sales volumes, particularly for pipe and fittings and siding and trim. In addition to the sales volume growth, the earnings improvement were supported by lower material cost compared to the prior year period and acquisition synergy and cost cutting benefits. When compared to the Q1 of 2024, HIP segment sales of $1,200,000,000 rose by $150,000,000 driven by a 15% sequential increase in sales volumes and stable average sales prices. Housing product sales of $1,000,000,000 in the Q1 increased 15% due to solid sales volume growth in each major product category. Infrastructure product sales of $184,000,000 in the 2nd quarter increased 12% from the Q1 of 2024, primarily due to higher demand for a larger diameter municipal pipe for water applications.

Speaker 1

HIP's EBITDA margin of 28% set a new quarterly record and the margin expansion from 22% in the prior year period was primarily due to higher sales volumes and lower material cost, while the sequential improvement from 25% in the Q1 of 2024 was primarily due to higher sales volume. Moving to our PIM segment, 2nd quarter EBITDA of $391,000,000 was lower than the Q2 of 2023 EBITDA of $435,000,000 due to lower average selling prices, particularly for caustic soda and PVC and epoxy resins. While lower sales prices drove a year over year decline in EBITDA, our sales volumes in all product categories in our PIM segment saw improved customer demand compared to the Q2 of 2023, resulting in a 11% increase in sales volume. On a sequential basis, PIM segment EBITDA of $391,000,000 in the 2nd quarter increased by $138,000,000 from the Q1 of 2024 as a result of higher average sales price, primarily driven by higher prices for PVC resin and polyethylene. While we are pleased with the progress that PIM has made in recovering margins for most of its products, profitability in our European epoxy business remains challenged in part due to the adverse impact of low priced import competition.

Speaker 1

As a result and after careful consultation with key stakeholders, last week we announced plans to temporarily cease operations and mothball our ECH unit in the Netherlands to improve the profitability of our epoxy business. We expect to incur pre tax cost of approximately €80,000,000 related to the mothballing of the unit, with substantially all of those costs expected to be recorded in the Q3 of 2024 with cash outflows expected to occur over several years starting in 2025. We expect these actions will materially improve the financial performance of our European epoxy business without having any impact on our customers. Our U. S.

Speaker 1

Epoxy anti dumping case continues to progress with an expectation that provisional duties will be set sometime later this year. Likewise, the European Union has launched a similar anti dumping investigation. Westlake believes in free and fair trade and thus the anti dumping investigations and the potential duties to be applied along with our proactive actions in Europe, we believe will level the competitive markets and restore our epoxy business to profitability. Shifting to our balance sheet. As of June 30, 2024, cash and cash equivalents were $3,000,000,000 and total debt was $4,900,000,000 with a staggered long term fixed rate debt maturity schedule, including $300,000,000 of maturing debt that we expect to retire in the Q3 of 2024 using our strong liquidity.

Speaker 1

For the Q2 of 2024, net cash provided by operating activities of $237,000,000 included the cash payment of the litigation charge we took in the Q4 of 2023. Our cash generative business model provides us with a platform to deploy our balance sheet strategically in order to create long term value for our stakeholders. Now let me provide some guidance for your models. Based on our current view of demand and prices, we continue to expect 2024 revenue in our Housing and Infrastructure Products segment to be between $4,300,000,000 side beyond our EBITDA margin guidance of 22%. We continue to expect our total capital expenditures to be approximately $1,000,000,000 which is similar to our depreciation and amortization run rate.

Speaker 1

As a reminder, this includes cost for a planned turnaround at our Petro-one ethylene unit scheduled to begin next month that is projected to last approximately 60 days. We continue to target $125,000,000 to $150,000,000 company wide cost savings in 2024 with approximately $85,000,000 already achieved in the first half of this year, including $50,000,000 in the Q2. 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 I'd like to turn the call over to Albert to provide a current outlook for our business. Albert?

Speaker 2

Thank you, Steve. Overall, we are pleased with the performance in the Q2 of 2024 despite a challenging macroeconomic environment. As we look ahead to the remainder of the year, we remain cautiously optimistic and we will continue to manage our production and inventory levels to customer demand. While our order books remain solid, unusually wet and hot weather conditions in many parts of North America, combined with a recent slowdown in U. S.

Speaker 2

Housing starts and remodeling activity, could have an impact on our sales volume in the second half of twenty twenty four. IFM readings in the U. S. And Europe slipped during the Q2, while similar metrics in China also reflect slowing conditions, which could translate into a slowing demand for some of our PAM products. Overall, while the pace of global economic growth remains unclear, we're encouraged by the trend of solid year over year volume growth in hip and volume and margin recovery in PEM delivered in the Q2 of 2024.

Speaker 2

As we look beyond this year, we expect each of our segments to continue to improve. As we discussed as our June hip teaching event, we expect hip sales to organically grow at a 5% to 7% long term compound annual rate with a large pool of attractive inorganic growth opportunities. We expect this growth to be supported by the structural undersupply of homes in North America and aging housing stock and spending related to the Infrastructure and Jobs Act. We will continue to invest in our brands, capabilities and our people to continue creating value over the cycle for our investors. Turning to PAM, we remain positive on the outlook for long term growth, driven by increasing global consumer activity and demand for clean water, electrification, housing, transportation and renewable energy.

Speaker 2

Favorable demographic trends and our new product innovations, including our sustainability offerings. We expect these trends to support a better balance between global supply and demand for our products in our PEM segment. With our strong focus on our cost structure and productivity, we are well positioned to leverage volume growth when market returns to normalized growth rates. Turning to our balance sheet. We continue to look for opportunities to put our $3,000,000,000 cash balance to work in a disciplined manner that will create long term value for our shareholders.

Speaker 2

This includes both identifying acquisition candidates that can exceed our risk adjusted cost of capital and returning cash to shareholders through both dividends and share repurchases. Finally, we continue to advance our sustainability efforts. During the Q2, adoptions of our innovations to address customers' sustainability requirements increased, including significant growth in our PVC oil pipe, green being PVC resin and pivotal post consumer resin for flexible polyethylene packaging. The market reception for our PVCO pipe product has been strong, and thus we announced plans to expand our capacity with a new plant at our Wichita Falls, Texas site to meet growing customer demand. As a reminder, we launched PVCO Pipe in North America in 2021, and we have seen strong customer appreciation of PVCO's sustainability attributes since they are lighter in weight, easier to install and provide increased performance compared to standard PVC pipe.

Speaker 2

Looking forward, we will continue to invest appropriately to bring new products like TVCO to the market and expand our production capabilities for existing products to help our customers address their sustainability needs. Thank you very much for listening to our Q2 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. 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.

Speaker 4

Hi, good morning and congratulations and welcome to Jean Marc. Maybe my first question just on the sales and margin guide for hip that you maintained, but mentioned there's potential upside within that. What do you see as the biggest potential sources of upside there? Does the current guide assume materials costs go up or hold relatively stable in the second half and maybe some modest price declines there? Thank you.

Speaker 1

Yes. Good morning, Patrick. And yes, as we think about the outlook for the Hips segment, strong results this quarter and our guidance really was to see that there is potential upside to the guidance of 22% that we've provided. We've seen increases in materials cost in PVC resin and we continue to think that that will continue to be a reasonable level of construction activity. We've seen the guidance from a number of research firms like NAHB and others that show housing starts could decline later this year.

Speaker 1

And so as we think about that, we still think the cross selling and the capability to continue to push forward in value propositions for our products remains, which is why we provided some potential upside in that guidance.

Speaker 4

Understood. Very helpful. And then are you based on that, are you anticipating any sequential improvement in the PEM segment? I know you cited some industrial softness there, but it looks like there should be continued pricing the

Speaker 2

Yes. Certainly, there has we have able to achieve price increases in both polyethylene PVC and export prices also be moving up. So we are seeing some stabilization of prices and prices are moving up. The stocking we believe is over. And more so is what the global economic conditions look like going forward.

Speaker 2

And with potential reduction interest rate by the Fed should be a boost for the U. S. Economy and global economy for the future quarters into next year.

Speaker 5

Great. Thank you.

Speaker 2

You're welcome.

Operator

Thank you. One moment for our next question. Our next question comes from badeesh Lodiak at BMO Capital Markets.

Speaker 6

Hi, good morning, Albert and John, and welcome, John.

Speaker 2

Good morning. Good morning, Vitesh. Hi.

Speaker 6

Can you help break down some of the success areas on your margin expansion that you're seeing in the hip business? And maybe how much of that is driven by your PVC pipes and compounds business and how much is the rest of the building products platform?

Speaker 1

Yes, it's a good question. And you see that we called out specifically our Siding and Trims business and our Pipe and Fidians business as strong contributors in the quarter's results. And so those 2 sub segments of hip were very strong contributors to say Siding and Trim and our pipe and fittings business, they had good contributions this quarter.

Speaker 6

And then maybe if you could share your latest views on ethane here. Prices are at historic lows, clearly good for Westlake. We also saw polyethylene prices price hike go through in July. Just a short term view on both of those.

Speaker 1

Yes. And so as you think about the ethane prices, you have seen the average price for ethane has trended lower since the Q2. And while we don't know what the Q3 will average out to be looking at the forward curve, ethane does look like it will trend somewhere between $0.03 to $0.05 lower, if you look at the forecast from many of the consultants on the forward curve for ethane, which would be constructive for our value.

Operator

Thank you. One moment for our next question. Our next question comes from Michael Sison at Wells Fargo.

Speaker 7

Hey, guys. Nice quarter and welcome Jean Marc. And I guess my first question, when you think about PEM sequentially into the 3rd and the 4th, I think the outlook for ECU margins are kind of sluggish, I guess, from the consultants. Do you think I mean, how do you think the progression there should unfold if demand stays around these levels for the second half?

Speaker 2

Yes. Demand for pan products are pretty stable. And I mentioned actually demand for polyethylene PVC being quite good, especially in the export market, and we have able to raise prices. On caustic and chlorine, the demand is stable and the price is more or less stable. There's a few dollars up and down depending on which quarter it goes.

Speaker 2

But I think the demand is in the U. S. Especially, it's stable and said destocking pretty much over. It's reflecting the true economy's demand for various products.

Speaker 7

Got it. And then just a follow-up on Pipe and Fittings. It sounds like that business continues to show really good strength. Do you think growth will be as good in the second half? And then I was just curious on profitability.

Speaker 7

You have a competitor out there that shows margins well above yours. Any reason why your profitability wouldn't be sort of similar to theirs, kind of that 50%, 60% range in operating margin?

Speaker 1

Well, Mike, I think when you look at the strength we're seeing really in the materials that we see in our pipe and fittings business. Again, we're continuing to see really good value really in both the pipe and the fittings application and we're one of the few players that really are in that integrated pipe and fittings solution business. Certainly, our place really in the large municipal water solutions, both fresh and stormwater is a big driver for the value proposition we bring forth. And it really is a focus at driving value for those customers and looking for value for our integrated stakeholders in this process. So it really is looking to make sure that the solutions that we have both in our pipe and our fitting solutions provide real value.

Speaker 1

We get focused really on the value rather than the volume in this business.

Operator

Thank you.

Speaker 2

You're welcome.

Operator

Thank you. One moment for our next question. Our next question comes from Frank Mitsch at Prenimum Research LLC.

Speaker 8

Thank you and good morning. And let me also add my congrats to Jean Marc. If I could just follow-up on that last question and answer, Albert. In terms of the stability of demand in PEM and the price increases and the lower raw materials, it sounds as if we're looking at reading between the lines, it sounds as if we're looking at a flat to up 3rd quarter in PEM, perhaps somewhat moderated by the Petro-one turnaround. So just curious if I'm thinking about that in the proper context and or perhaps what sort of level of impact do you believe that Petro-one turnaround, which starts in September will have on 3Q and 4Q?

Speaker 2

Yes. Certainly, the petrol wind turbine will have some impact. But I just want to remind that Westlake is a net buy of ethylene. And even though ethane price has reduced, which is great, it helps our £4,700,000,000 of ethylene capacity, our net buyers were paying higher ethylene prices. And also we mentioned that we are booking the small following of our plants in Netherlands, which also even though it's not a cash outflow in Q3, we are booking in the Q3.

Speaker 2

So those accounting costs will impact our Q3 results.

Speaker 8

It's admirable that you're highlighting the mothballing costs since 99.9% of companies would put that in other or restructuring or what have you and strip it out from EBITDA, which I suspect that the Street will do on its own. And Albert, if I could just ask you, now that Sean Mark is in place and it obviously will take them a little bit of time to get up the learning curve, how do you view your future involvement within Westlake over the next year or 2? What sort of level of involvement, if you mind me asking that question?

Speaker 2

Certainly, certainly. We are going through a transition. As Jean Marc mentioned, he's been here only a few weeks. And even though he's a seasoned veteran in our business globally, there's still a lot of Westlake nuances he has to understand and also visiting plans, visiting customers and so on and so forth. We have over 100 facilities around the world that he will be spending some time visiting some other people.

Speaker 2

But as moving up to the Chairman position, I will do what my brother has done, James, and try to follow his footsteps, even though he's still a Senior Chairman. So looking over my shoulder, make sure I'm doing a good job. But it's a team effort. Westlake is really our team works together closely and we've done well. And Jean Marc will continue the culture that Westlake established over the last 40 almost 40 years.

Speaker 2

And it's our goal. So I will learn a lot from Jean Marc, from the experience globally. And I also learned a lot from you guys, a chance to meet you and look forward to going with Jean Marc to meet our key investors, analysts to communicate and to learn from you and to march forward and communicate what Jean Marc's view of Westlake strategy going forward being, which is in line with our history, but we bring a lot of new ideas and insights into our business.

Speaker 8

Terrific. Thank you so much.

Speaker 2

You're welcome.

Operator

Our next question comes from Aleksey Yefremov at KeyBanc.

Speaker 9

Thank you. Jean Marc, wish you best of luck as a CEO. And Albert, could you tell us how you approach the search for Westlake's new CEO? You could have focused on a candidate with building products experience, commodity chemicals experience and Jean Marc's bio suggests significant experience in international specialty chemicals. So should we read anything into this?

Speaker 2

Well, we the Board and along with James and I and some of our key people has done a very thorough search for the right candidate to be the new CEO. It's not an easy task. As you mentioned, we have a very different portfolio from typical chemical company and also with our global position. So we're very glad to find Jean Marc, who has, as I mentioned, a tremendous global experience and has a technical background. And so I think the hemp business will be a little bit newer to Jean Marc, but he has been evolving in building homes and all that.

Speaker 2

So he understands the importance of housing to people around the world. And I think this will be a tremendous driver for demand for chemical products and homebuilding products. As you know, our hip business are primarily North American based. So we have good technology that we mentioned, and we will find opportunities we can apply our technology to other parts of the world.

Speaker 9

Thank you, Albert. And then turning to

Speaker 4

the

Speaker 9

current business, the margin upside this year in hip, are you surprised yourselves or perhaps you kind of recognize you were too conservative? And if you are surprised, what do you think went better year than

Speaker 2

expected? Well, the demand we mentioned the volume. The volume was strong, stronger than 2023 and stronger than Q1 2024. Even though, as Steve mentioned, the housing starts projected by NHHP, I think it's 1,400,000 units last year, projecting 1,300,000 units this year is a reduction and we're hearing about the various companies reported on the housing construction business. But I think going forward with the Fed's reduction interest rate and 10 year interest rate has dropped to 3.8% from 4.5% or something just a few months ago, it should be really be very helpful for the housing industry going forward, maybe not right away, but that's the trend that will help not just how the industry help the U.

Speaker 2

S. Economy as a whole and that will also help the global economy as a whole with lower interest rate. So as Steve and Jean Marc mentioned, we are positioning ourselves to be ready for it. But the Q3 usually also is a good quarter from a volume point of view, but Q4 will be seasonally slow. That's normal.

Speaker 2

And so depending on how fast the Fed drops rates and the economy in general, We cannot predict what volume growth or changes will be on the short term. But we believe on a longer term basis, the next few several years with lower interest rate should be definitely positive for the U. S. Economy and for our industry.

Speaker 9

Great. Thank you, Albert.

Speaker 2

You're welcome.

Operator

Our next question comes from Josh Spector at UBS.

Speaker 10

Yes, hi, good morning. I want to go back to the pipes and fittings piece for a moment here. I guess I understand the point about value over volume and that's driving some of the things for Westlake. But I guess when we look at some of the smaller regional players, mean EBITDA margins and spreads are up very meaningfully 2x, 3x versus a few years ago. So it's not just Westlake.

Speaker 10

So I'm just curious of your view, if you can maybe comment at all on one, I mean, is your Pipes and Fittings margins materially higher than the hip segment average today versus where it was? And then 2, the sustainability of that pricing and spreads? And 3, has something changed structurally supply wise that would justify a much higher spreads in that downstream part of the business? Thanks.

Speaker 1

Yes. So Josh, good question. And I think what you've seen us do is really focus really on an integrated solution. And what I mean by that is a solution that provides not only pipe, but also fittings that go with that. Recent acquisition we undertook 2 years ago it was a fittings business.

Speaker 1

This is the Lascaux acquisition I'm referring to, where we have not only larger diameter fittings in our portfolio, but this transaction allowed us to fill out that portfolio offering. So what attributes, I think the improved value proposition that I think we provide is being able to provide an integrated solution to our customers that is not only providing the pipes that are necessary, but also the elbows, arms, fittings that go with those wide variety of sizes in pipes. So that integrated solution of pipes and fittings is important. We're the only player that really provides that integrated solution in North America of pipes and fittings. And I think whether you're selling it as individual components at a job site or selling it as an integrated pipe and fitting solution at job site, That's really where the value proposition I think has come through.

Speaker 1

On top of that, you've also seen capital begin to flow from the infrastructure bill, which is adding volume to the business. And this business with that added volume certainly provides scale. So that allows us to really drive real value for that pipes and fittings business, which is why we've called it out the last couple of quarters as really value drivers for the results of each quarter.

Speaker 10

Okay. Thanks for that. But I guess maybe to follow-up is that when I look at peers that are smaller and don't have those advantages reporting margins of 50% to 60%, I'm not sure if you can comment on why that would be the case. And I guess from my view, I'm thinking about it in the context if Westlake is over earning to some context there or if you'd say, hey, your margins are much less than that, what I just said, then it gives us some degree of comfort that maybe it's at a more manageable level going forward? Thanks.

Speaker 1

Yes, I can't speak to others' margins in the business. That's something that you'd have to have a dialogue with them about. What I can say is I believe that the value proposition we're providing through the integrated solution of resin PVC resin going into our pipes and solutions are long term sustainable. These are really good margins we're providing, and I don't believe we're over earning in a period such as this. As Albert noted, when you take a look at the housing starts, we're still well below the numbers that we need for the construction activities here in North America.

Speaker 1

And even if you look at the starts that we've seen even this past quarter, about 1,300,000 starts per the U. S. Census numbers NAHB shows us trending lower in the by the end of the year. But nevertheless, I'd say we're not really over earning because I think we're really providing real value both through the building products, the hip side of our business as well as the integrated value we get by providing that resin across to our hip segment.

Operator

Our next question comes from Hassan Ahmed at Alembic Global Advisors.

Speaker 11

Good morning, Albert and Steve, and congratulations, Jean Marc, on the new role. First question around just look, I mean, you guys did on an annualized basis almost $3,000,000,000 in EBITDA in Q2. And I obviously appreciate the comments that Steve just made about how you guys aren't over earning in certain segments. If I were to venture a guess, I mean, just looking at the business environment, you guys are well below normal with significant upside to hitting normal business conditions. So now with that said, how should we think about this annualized $3,000,000,000 number that you just reported relative to where normal earnings should be?

Speaker 11

I mean, is there significant upside to that number in a normalized business environment?

Speaker 1

Well, Hassan, thank you for the question. But I would say, we certainly still see headwinds and we called out some of the indices, the ISM indices both here in the U. S. As well as some of our indices in Europe and in Asia. And so while I would say there is significant operating leverage in the business, we certainly are still at points price points well below those we saw in 2023 2022.

Speaker 1

And so while we do expect that we're seeing a better supply demand balance given the pricing initiatives, we've seen a number of our PEM products, we're still not to a point where we're back to those levels of pricing back in 2023 and in 2022. But there certainly is operating leverage in the PIM side of the business.

Speaker 11

Understood, understood. Very helpful. And as a follow-up, maybe I understand it's the 1st couple of weeks for Jean Marc in his new role. So maybe this is a question both for him and for Steve as well and obviously Albert. I am just trying to get a sense of obviously the portfolio has changed a fair bit over the last couple of years.

Speaker 11

And as you guys are very well aware, us sitting here as analysts, one of the things that we are looking for is a valuation multiple rerating, right? So, how sort of as you went through the whole interview process, Albert, what was the thought process with regards to that? And maybe Jean Marc can give us his sort of high level views with regards to what he is thinking in terms of potentially getting that valuation rerating and making the market sort of see this portfolio change that has transpired?

Speaker 2

Yes. Well, as you know, Hassan, that we look at investments that bring risk adjusted return above our cost capital and also optimistic on when we want to buy companies or whatever it takes to agree on a deal. So but we have been building our hip business segment, as Steve mentioned, and all synergies, both from the hip to PEM side as well as within hip. So a lot of cross selling opportunities come along, and we will continue to pursue those opportunities as they arise. So our job really is to bring value to our investors, how the Street see us as multiple uptick or whatever that's out of our control.

Speaker 2

All we do is to bring sustained return to our shareholders and on a long term basis as the key and not for short term gains. And we hope that the market will see the value that we bring, but it's out of our control.

Speaker 11

Very helpful, Albert. Thank you so much.

Speaker 2

You're welcome.

Operator

Our next question comes from Mike Lighthead at Barclays.

Speaker 1

Great. Thanks. Good morning, guys. Can you speak to your chlor alkali operating rate currently? I would assume they're running fairly hard just given PVC strength and integration, but just where are they running today?

Speaker 2

Yes, I think the industry some of the industry players were impacted by the borough hurricane not long ago and recovering from those incidents. But I think, as you said, the operating rates has been fairly good after the hurricane and demand for both the PVC and caustic are pretty strong. So the rates has been doing fairly well. But there will be turnarounds coming up in the Q3 along various plants. So and we don't know this still early in the game of August versus hurricane season, which ends at the end of November.

Speaker 2

So we are very careful about our inventories and production and so on and so forth.

Speaker 1

Great. And then your hip segment volumes were up 16% in the quarter. Can you help us better understand what categories are growing faster than that and what categories are growing slower than that? And just a clarification, is product mix effect reported through price or volume for Westlake? Yes.

Speaker 1

So, Mike, when you think of the value contributors here, we certainly see the as I've called out kind of the pipe and fittings in the Siding and Trim businesses really contributing very well to the hip segment results. Our windows business is our smallest sub segment within the hip business. And so I would say that it's the smallest contributor still regional in terms of play. It plays in the Texas market and kind of the Southeast market. So therefore, probably the weakest contributor in that business.

Speaker 1

But I would say we're continuing to see good cross selling, which is why you saw the volumes pick up and given the strength I think in the branding that you see in that business, I think the cross selling is attributable to the efforts by our hip team to understand and push through the brand value that we see in all the product categories that we have. So I'd say that cross selling was a nice contributing factor to the volume pickup that we saw in the quarter.

Speaker 2

Thank you.

Operator

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

Speaker 12

Hi, thanks for taking my question. Hope you guys are well and welcome Jean Marc as well. So I guess a couple of questions. So first off, in hip, obviously some really strong performance at a pipe and fittings. Maybe you can discuss maybe the margin profile there.

Speaker 12

And then also for Global Compounds and Royal Building Products, how are those businesses performing? And do they have a margin profile that maybe was less than pipe and fittings in this quarter or higher? Or How do you describe those 2 businesses? Thanks.

Speaker 1

Yes. And so I would say, Arun, in our compounds business, that is a business that has a pretty stable and steady margin business, but it would be in the middle range of middle to lower range of the range of margins that we see in the hip side of our business. I would say that the 2 sub segments that I mentioned, which are the piping fittings business and our siding and trim businesses are the stronger performers during the quarter. And I called those 2 out in the Q1 as well of consistently stronger performing in that space.

Speaker 12

And then in PEM, thanks Steve. And then in PEM, just curious, you mentioned some slow improvement, I guess, in polyethylene prices and also PVC resin. So that's helpful. Do you expect those prices to continue to slowly move higher? And what would you say on caustic?

Speaker 12

And then just curious on the epoxy side, you guys took some action. Do you see some other action in rationalizing assets coming forth? And when would that potentially impact market conditions in epoxy? Thanks.

Speaker 1

So Arun, yes, we certainly have seen strength in a variety of these chemical chains. I think you've heard us note that we saw strength really in both So as we as Albert noted in his comments, So as we as Eric noted in his comments, we've continued to see a better balanced market in polyethylene and we saw some price settlements that were positively constructed earnings both in the second and in the third quarter so far. We've also seen the same play out in PVC. As you know well, the Q2 and Q3 tend to be strong markets for PVC. Even though we've seen some headwinds on housing starts, certainly the second and third quarter tend to be stronger and therefore strength in demand, which pulls on price.

Speaker 1

Certainly, the actions that we're taking, a wide variety of those mothballing the ECH unit as well as the actions with the European authorities and the U. S. Authorities on this antidumping should all contribute to stronger results in the future for our epoxy business. So we look very look forward to seeing those actions take hold and deliver better value.

Speaker 12

And just any thoughts on caustic and chlorine?

Speaker 13

As I mentioned, this is Albus. As I

Speaker 2

mentioned before, caustic and chlorine demand are pretty stable. U. S. Exporting a fair amount of PVC as well as caustic. We still had a lowest cost energy competitive advantage over the rest of the world and the price is being stable as well.

Speaker 2

So of course, heading into the Q4, things will slow down a bit around the world. But January, Q1 is also somewhat weak. And then depending on the economy of the world, the 2nd and third quarter would improve next year.

Speaker 12

Thanks.

Operator

Our next question comes from Vincent Andrews at Morgan Stanley.

Speaker 1

Hi. Thank you for taking my question. This is Turner Henricks on for Vincent. Can you help us understand what's going on from a cash flow perspective and what you expect from working capital for the year? Yes.

Speaker 1

As you saw in the Q2, we did settle out the litigation charge that we took earlier this year. I would expect that with the demands we're seeing really in the activity, construction activity in our hip business, we'll continue to have some pull on working capital over the course of the Q3 as we go forward. Certainly, prices have trended up in our products and certainly to maintain adequate inventories for our customers that will pull on inventories. But the offset to that is we have seen some lower prices trending. You heard my comments earlier about ethane.

Speaker 1

Ethane prices are trending lower and so that will be the offset to some of that pickup in working capital. Great, great. I appreciate the color there. So hopefully this isn't redundant to the prior question, but in the chlor alkali part of the business, I'm just wondering if you could speak further to relative strength or weakness of chlorine versus caustic soda and whether you see pricing upside for either of these products for the balance of the year?

Speaker 2

Yes. I think CMA is looking at prices to increasing caustic in the U. S. By $20 short term, but come down in October, November this year. So it's kind of wash.

Speaker 2

And chlorine prices are also popping up and down a little bit. So I think things are pretty stable and a lot of chlorine in the U. S. Goes into PVC. As I mentioned, the U.

Speaker 2

S. Also have the PVC price increase, the export price again bobbing up and down has trend upwards from first and Q2 of this year. And U. S. Is lowest cost from ethylene and chlorine point of view to export PVC.

Speaker 12

Great. Thank you for the color.

Speaker 2

You're welcome.

Operator

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

Speaker 1

Yes. Thank you and good morning. Albert, it's been a pleasure, absolutely. Good morning. And Mark, look forward to meeting you.

Speaker 1

I just wanted to clarify on the polyethylene resin price trend. It does sound like you have positive momentum there. My recollection is that producers were seeking an increase of $0.05 a pound for the July contract. Can you comment on how much of that you were able to realize low and linear low density polyethylene?

Speaker 2

Yes. The July price has settled, it's up $0.05 as the industry announced and there's potential increases for at least some of the industry players announced the price increases for August, October, but time will tell whether those increases can be effective or not. But I think the main reason for that is export prices gone up and it will help to drive up domestic price as well and demand is pretty stable. And as I mentioned, typically, second and third quarter are strong demand quarters for prices as well polyethylene and PVC. So the July settled up $0.05 a pound.

Speaker 1

Perfect. And then, if I may switch gears over to hip, certainly a very impressive first half of the year with regard to volumes and margins. But I did want to ask about point number 3 on your Slide 5, where you call out kind of a trio of challenges in terms of weather, slowdown of starts and also remodeling. Can you elaborate on that in the context of seasonality? For example, thinking about those headwinds, do you think that it will result in a seasonal pattern for 2024 where the first half is stronger than the second half or be able to overcome that through some of the things that you talked about earlier in the call?

Speaker 1

How would you think about the way that this year's seasonal cadence is shaping up in HEP? Yes. So Kevin, good question. And as you think about the weather patterns, it does have an impact really and really when construction activity, when housing starts actually start. And so the reason for the call out really is just an indication that certainly while we see certainly positive trends, certainly there are clear headwinds and some of the headwinds you note there and that is really weather patterns and certainly interest rates remain pretty elevated.

Speaker 1

And so certainly that is creating some of the concern we all have as we look into the back half of the year. Weather patterns continue to be an issue that we have to kind of work through and you know it throughout much of the country it's been very, very warm and certainly in portions of the South and Southwest. We've had very, very wet weather, which makes it challenging for those housing starts to actually start and pull on the volume demand we see in our building products. So while we continue to see good volumes that we've seen so far in the first half of the year, certainly it is just a, if you will, a watch out for the back half of the year if we see weather patterns continue to persist, there could be challenges. But again, if you look at the NAHB's numbers for the year, they forecast housing starts in the Q4 and the Q3 and they are somewhat lower than the first half of the year.

Speaker 1

So they do trend down from the peak that we saw in the Q1. They trend lower in 2nd quarter and NAHB is trending 3rd and 4th quarter somewhat lower. We look at a variety of forecasters. I'm just calling out NAHB just as an indication of directionally where they see their starts going for the rest of this year.

Speaker 3

Thank you so much.

Operator

Our next question comes from David Begleiter at Deutsche Bank.

Speaker 5

Thank you. Albert, the cost of price increase you mentioned that CMA has in their estimates is below the proposed increase from you and your competitors. Do you think CMA is being too conservative or do they do you think the market is maybe a little bit weaker than you thought relative to your announced price increases?

Speaker 2

Yes. Well, we our industry can announce price increases, but supply demand and negotiate with customers and some are on a quarterly basis, you don't see the price change right away and some are negotiated, some are monthly basis. So all the prices come all over the place. And I guess the CMA is just maybe the average or something they announced, it is indication that it's going up and going down. That's indication.

Speaker 2

How much actually goes through, time will tell when we finish depending, as mentioned earlier, whether you're on quarterly, monthly or negotiated basis.

Speaker 5

Very good. And Albert, just on the July polyethylene price increase of $0.05 Do you think it was more of a function of hurricane barrel impacts or more of a function of balanced supply demand fundamentals?

Speaker 2

Yes, good question. I think it's a combination. Certainly, there's some impact from production from barrel. But I think, as I mentioned earlier, the export price on a netback basis. So when export price price on a netback basis.

Speaker 2

So when export price goes up, then people can export and sell domestically, which allow the domestic price move up as well. And I mentioned the hurricane season coming up and people may want to have some inventory. So all these factors that impact on the price increase that we just settled in July.

Speaker 5

Thank you.

Speaker 2

You're welcome.

Operator

Our next question comes from Stephen Byrne at Bank of America Securities.

Speaker 13

Yes, thank you. What portion of that 15% sequential volume gain in hip would you attribute to just the seasonality of underlying volume growth versus the portion of that 15% that you think you gained from either your efforts to brand or your cross selling initiatives? And for the portion that's cross selling, what is it that you're offering the distributor? What's the value proposition to be able to get more shelf space?

Speaker 1

Yes, Steve, good question. And I'd say the greater portion really is the ability to really have brand recognition and cross selling. And while there certainly is some seasonal uplift from 1Q into 2Q, that is certainly part of the equation here. I'd say a meaningful portion of it really is brand recognition and value recognition and that therefore cross selling. And that cross selling recognizes the portfolio that the Boral acquisition brought to the table with our distributors.

Speaker 1

As you know that distributor network has seen increased consolidation and they really want to have an ability to work with a limited number of producers who can provide the broadest portfolio and offer that good, better or best range of product offerings, which we do provide. And that increased selling effort that we have now with a broader portfolio offering through these acquisitions in our hip segment provide us the ability to provide the brand name recognition products that they need in that good, better or best portfolio and that allows us to have the ability to service the customer, our distributors nationwide. And so that takes a little while to really translate since the acquisition of Boral a couple of years ago, but that's what you're seeing coming through today.

Speaker 13

And just a question about competitive pricing. Clearly, you would have competitors that don't have the brand loyalty that you have and volumes could be challenging for many. Are you seeing competitive pricing in hip from your smaller competitors? And or do you see yourself having some defensiveness against it because of your brand loyalty?

Speaker 1

Of course, we have to be competitive in our pricing across all markets. And I would say in the building products market, these are smaller these are markets where you can't transport product nationwide. So if you're talking about concrete roof tiles, it is a market that is a subset of

Speaker 4

a nationwide market. These might be

Speaker 1

markets in maybe a 500 mile kind of radius where you can't transport that product. So of course you have to be competitive in those markets. And each market has strengths and weaknesses depending on the construction activity, whether we're talking the California market, the Texas market or the Florida market. Each one of those

Speaker 4

markets are unique and we have to be competitive in each one of

Speaker 1

those markets and are unique and we have to be competitive in each one of those markets and deal with smaller or larger competitors as we face them.

Speaker 13

Thank you.

Speaker 1

You're welcome.

Operator

Our last question comes from Jeff Zekauskas at JPMorgan.

Speaker 14

Thanks very much. What was the PVC contract settlement for July?

Speaker 2

Yes. PVC, I think settled at up a penny, a pound.

Speaker 14

A penny?

Speaker 2

Would you like?

Speaker 14

Yes. Thank you very much. And then, do you have a view of the Chinese PVC market from here over a longer period of time? Do you think the Chinese market has gone through a period of overbuilding and weakness and continued weakness? Or do you think that there's room for that market to accelerate over the next 2 or 3 years?

Speaker 2

Yes, that's a good question. I think the Chinese PVC business or industry is going through a transition. In the past several many years, carbide PVC was about 80% of the capacity in China. And now carbide PVC has dropped to about 70 odd percent. So the more ethylene based PVC plants we build, I think the trend will continue to phase out the high energy and polluting carbide based PVC as well as they have the mercury catalyst issue.

Speaker 2

We know that there are new gold based catalysts, which is more expensive, but they can also replace the mercury based catalyst, but still it's a carbide based process. So I think over time, the Chinese industry, PVC industry will morph to ethylene based, which will lose its competitive advantage. The white carbide base is because China has a lot of coal and very cheap and you can make PVC cheaply from carbide. As we switch to ethylene and most of the ethylene in China are naphtha based, oil based, which is less competitive with U. S.

Speaker 2

Based, ethane based, natural gas based ethylene. So we'll see how fast the Chinese industry morph into more ethylene based and what kind of pricing will be. But even though China, we all know that they have economic structural problem, especially in housing, housing is still a huge market business for the Chinese economy and the demand is still huge for lower income housing and the government is trying to do more of the low income housing, but still they every housing they need power, water, electricity and PDC will be a very important and also window frames in China is all PDC window frames. So PDC will be a very important component of the housing demand in China going forward.

Speaker 14

Great. Thank you so much.

Speaker 11

You're welcome.

Speaker 2

Thank you.

Operator

This concludes the question and answer session. I would now like to turn it back to John Miller for 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 Q3 results.

Operator

Thank you for participating in today's Wednesday conference call. As a reminder, this call will be available for replay beginning 2 hours after the call has ended. Your replay can be accessed via Westlake's website. Goodbye.

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Earnings Conference Call
Westlake Q2 2024
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