Westlake Corporation

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Chemical Corporation Fourth Quarter 2020 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. After the speaker's 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, February 23, 2021. I would now like to turn the call over to today's host, Jeff Hawley, Westlake's Vice President and Treasurer, so you may begin.

Thank you, Joelle. Good morning, everyone, and welcome to the Westlake Chemical Corporation fourth quarter 2020 conference call. I'm joined today by Albert Chow, our President and CEO, Steve Bender, our Executive Vice President and Chief Financial Officer, and other members of our management team. The conference call agenda will begin with Albert, who will open with a few comments regarding Westlake's performance followed by a current perspective on the industry. Steve will then provide a more detailed look at our financial and operating results. Finally, Albert will add a few concluding comments, and we'll open the call up to questions. During this call, we refer to ourselves as Westlake Chemical. Any reference to Westlake Partners is to our master limited partnership, Westlake Chemical Partners LP, and similar references to OPCO refer to our subsidiary, Westlake Chemical Opco LP, which owns certain Olofsen's facilities. 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. Actual results could differ materially based upon many factors, including... the cyclical nature of the industries in which we compete, availability, cost, and volatility of raw materials, energy, and utilities, governmental regulatory actions, changes in trade policy, and political unrest, global economic conditions, including the impact of the coronavirus, industry operating rates, impacts of extreme weather events, the supply-demand balance for Westlake's products, competitive products and pricing pressures, access to capital markets, technological developments, and other risk factors as discussed in our SEC filings. This morning, Westlake issued a press release with details of our fourth quarter results. This document is available in the press release section of our webpage at westlake.com. We have also posted a presentation on our website to review the fourth quarter and full year results, as well as provide an outlook into 2021. A replay of today's call will be available beginning today, two hours following the conclusion of this call. This replay may be accessed by dialing the following numbers. Domestic callers should dial 855-859-2056. International callers may access the replay at 404-537-3406. The access code for both numbers is 308- Please note that information reported on this call speaks only as of today, February 23, 2021, and therefore you're advised that time-sensitive information may no longer be accurate as of the time of any replay. I would finally advise you that this conference call is being broadcast live through an Internet webcast system that can be accessed on our webpage at westlight.com. Now, I would like to turn the call over to Albert Hsiao. Albert?

Thank you, Jeff. Good morning, everyone, and thank you for joining us to discuss our fourth quarter and full year 2020 results. Before we get into our results, let me provide some context as to how we approach dealing with the challenges in 2020. 2020 was clearly an unprecedented year and one where our priorities were to protect the health and safety of our employees, deliver on our commercial commitments, and strengthen the company. I'm very appreciative of employees who continue to work day in and day out, particularly those in our plants and production facilities. Our facilities are a crucial component of the infrastructure that provide key products to our customers who assist in the pandemic response, keeping essential goods and services flowing in support of our economy. We have also made progress this year, developing products and solutions for a more sustainable future while protecting and investing in our people. We look forward to further discussing these products with you later this year. These initiatives reflect our commitment to being a responsible corporate citizen. Let me now turn to review the results. In this morning's press release, we reported net income for the fourth quarter of 2020 of $113 million, or 87 cents per share, and full year 2020 net income of $330 million, or $2.56 per share. Before Steve goes through the fourth quarter and full year results, let me provide some insights into the year. The effects of COVID-19 weighed heavily on the global economy early in 2020. But starting at the end of the second quarter, we saw the beginning of a strong global demand recovery for PVC, polyethylene, and our downstream building products. With a strong rebounding demand, we were able to capitalize on the increasing price environment that drove improving product margins for PVC, polyethylene, and our downstream building products. In August and October, two major hurricanes made landfall in southwest Louisiana. While our plans weathered the storms well, there was extensive damage to the power and utility infrastructure in the Lake Charles area. Once utilities were restored, we worked tirelessly to restart operations. In spite of production constraints caused by the hurricanes, we worked diligently to serve our customers. I'm particularly thankful to our employees for their dedication who were also impacted by these hurricanes while working to restore our operations. While we did experience production constraints in the second half of the year due to the hurricanes, were able to benefit from the continuing growth in global demand. This translated into strong sales volumes for most of our products, driven by strong demand from packaging, housing, and automotive sectors. This was especially true as new housing starts, repair and remodeling activities generated robust demand in our downstream building products business. I would now like to turn our call over to Steve provide more detail on the financial and operating results for the fourth quarter and the full year.

Thank you, Albert, and good morning, everyone. I will start with discussing our consolidated financial results and then go into a more detailed review of our vinyls and open segment results. Let me begin with our consolidated results. Westlake continued to benefit from the improving market dynamics for most of our products beginning late in the second quarter of 2020, with strong demand and increasing prices for most of our major products. The effects of the two hurricanes, including the idling of our facilities, impacted our business beginning late in the third quarter due to lower production and sales volumes and increased maintenance expense as a result of the hurricanes. For some units, these outage stretched into November. While we have fully resumed operations following the hurricanes, we estimate the impact to our fourth quarter pre-tax earnings from the lost sales, increased costs, and higher maintenance expense resulting from the storms to be approximately $120 million, or 96 cents per share. Of this $120 million estimate, approximately 75% was related to our vinyl segment with a balance affecting our olefin segment. The full-year impact of both storms on our results was approximately $220 million. For the fourth quarter of 2020, we reported net income of $113 million, or 87 cents per share, compared to net income of $72 million for the fourth quarter of 2019. These results are inclusive of the hurricane impact of approximately 96 cents per share from the hurricanes I just mentioned. The $41 million fourth quarter year-over-year increase in net income is a result of higher sales prices and margins for polyethylene and PVC resin and higher earnings resulting from robust demand in our downstream building products business. Partially offsetting these increases for lost sales and lower production volumes and other costs related to the two hurricanes we previously mentioned, as well as lower sales prices for caustic soda. Fourth quarter 2021. 2020 net income increased by $56 million from third quarter 2020 net income of $57 million. The increase in net income was largely attributable to higher prices and margins for polyethylene and PVC resin, as well as lower restructuring charges. Offsetting these increases were lower sales volumes resulting from the impacts of the hurricanes, lower cost of soda prices, and higher fuel cost. Our utilization of the FIFO method of accounting resulted in an unfavorable pre-tax impact of approximately $18 million, or 11 cents per share, compared to what earnings would have been if we reported on the FIFO method. This is only an estimate and has not been audited. Let me now move on to review the performance of our two segments, starting with the vinyl segment. Throughout the fourth quarter, we saw strong global demand for PVC anchored by increasing global construction activities. Our downstream building products businesses continue to see strong consumer demand driven during the fourth quarter. This robust PVC demand was driven by global residential construction, automotive, medical, and appliance industries. While the effects of the hurricanes impacted our production of PVC and limited our PVC sales, we benefited from strong margins during the quarter. For the fourth quarter of 2020, Vinyl's operating income of $166 million increased $98 million from the prior year period, primarily as a result of higher sales and margins for PVC resin and higher earnings in our downstream building products business, which were partially offset by lower sales volumes and the lost production resulting from hurricanes, lower sales prices for caustic soda, and higher fuel costs. For the fourth quarter of 2020, vinyl's operating income increased $124 million from the third quarter of 2020, primarily as a result of higher sales and margins for PVC resin and lower restructuring costs partially offset by lower sales volumes resulting from the hurricanes, seasonally lower sales in our downstream building products business, and higher fuel costs. Now let me turn to our olefins segment. In our olefins business, robust global demand for packaging and non-durable products expanded our margins in polyethylene. As the effects of the hurricanes limited our production and sales volumes for both ethylene and polyethylene, our fourth quarter 2020 operating income of $22 million decreased $27 million from the fourth quarter of 2019. For the fourth quarter 2020, Oliphant's operating income decreased $29 million from third quarter 2020, primarily due to lower sales volumes as a result of the hurricanes, and was partially offset by our sales prices and margins for polyethylene. Next, let's turn our attention to the balance sheet and statement of cash flows. We generated $1.3 billion in 2020 in cash flows from operations, resulting in cash and cash equivalents of $1.3 billion with capital expenditures and other investments of $509 million in the business to strengthen the company for the future. We completed the refinancing of the GoZone and iZone revenue bonds, lowering our debt cost and drove our average interest rate to 3.5%, extending our weighted average debt maturity to 14 years while strengthening our strong investment-grade balance sheet. This solid liquidity position coupled with a long-dated debt maturity schedule allows us to operate confidently in today's environment. Now let me address some of your modeling questions. Our effective tax rate for the full year of 2020, excluding the effects of the CARES Act, was approximately 20%, and we expect 2021 to be approximately 22%. For 2021, we expect cash interest expense to be approximately $130 million, and our capital expenditures to be between $700 and $800 million. We are planning for a turnaround of our Petro-2 ethylene unit to begin in September, Their turnaround and associated outage is expected to last approximately 60 days. Last week, extreme winter weather across much of Texas and Louisiana caused widespread power outages and disrupted feedstocks, raw materials, and utilities to many plants in our industry, including some of our plants. As a consequence, several of our facilities experienced disruption to their operations. While we are still assessing the impact of the storm, Our estimate for lost margins from sales and repair expenses are approximately $120 million. Approximately $100 million will impact our first quarter 2021 results, with the remainder falling into the second quarter. With that, I will now turn the call back to Albert to make some closing comments. Albert? Thank you, Steve.

As we look ahead, the strength in global demand in polyethylene and PVC that was prevalent in the second half of 2020 is continuing into 2021. We're also seeing continued strength in our downstream building products business, driven by repair, remodeling, spending, as well as new housing stocks. The highly integrated nature of Westlake, which extends from natural gas liquids and salt feedstocks through to consumer building products, combined with our operations sitting on the lower end of the global cost curve, enables us to drive long-term value throughout the business and investment cycles in our industry. Our business fundamentals remain very strong. An improving economy should also have a positive impact on our business into 2021. In our final segment, the PPC market continues to experience strong demand from our customers, especially in the residential construction, automotive, and appliance industries. The robust residential construction market is also driving strong durable goods demand, benefiting our full product offering in our downstream building products business. In our olefins business, the chain margins reflect a significant benefit which has been driven by the rising polyethylene prices we have earlier discussed. We foresee the solid demand for polyethylene that we experienced in the second half of 2020 to continue into 2021. This is driven by continued end-use demand in the essential everyday products, such as consumer products packaging, healthcare, hygiene, and food service markets. During the last two years, we expanded PVC capacity by approximately 800 million pounds, which positions us to meet this growing global PVC demand in 2021. Westlake remains focused on the priorities we value, namely to protect the health and safety of our employees, deliver on our commercial commitments, and strengthen the company in all aspects. We are confident that Westlake is well positioned to serve the growing needs of our customers while maintaining financial discipline, which combined with the strong fundamentals of our business enable us to deliver long-term value to our shareholders. Thank you very much for listening to our fourth quarter 2020 earnings call. I will now turn the call back over to Jeff.

Thank you, Albert. Before we begin taking questions, I would like to remind you that a replay of this teleconference will be available two hours after the call has ended. We will provide that number again at the end of the call. Joelle, we will now take questions.

Thank you. To ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Bob Court with Goldman Sachs. Your line is now open.

That's actually Mike here sitting in for Bob. Just had a question around the PBC margins. It looks as if the EBITDA margins leaving the fourth quarter, mid single digits, I mean low, sorry, mid-double digits. I was just wondering, how do you see that playing out for the first half of 21?

Yes. According to IHS in the report, since June of 2020, the industry is able to increase prices in 2020 by 20 cents a pound in PVC. And in 2021, industry pass-through price increases or 4 cents a pound in January and 3 cents a pound in February. And also price announcements made for March with a price increase of 7 cents a pound. So this represents not only the growing domestic demand, but also export demand. And actually export prices since June has increased even higher than domestic demand. And today's export price netback is higher than domestic prices for some customers. So we see as a really a global demand strength for PPC.

Okay, thanks. And just as a follow-up, you mentioned the supply-demand outlook is pretty tight right now for PPC. Just in terms of outlook, when do you see that perhaps loosening up? Does that carry through the first half or perhaps longer into 2021?

Well, so long as interest rates continue to stay low and so long as consumers have money, the housing demand, the 50-year average residential housing construction is about 1.5 million units a year. And since the housing meltdown in 2007-2008, last year we were close to climbing back to 1.4 million units a year. and this year we hope to average above $1.5 million, and that's just the 50-year U.S. residential housing construction average for 50 years. So long as, as I said, the economy is strong and interest is low, I think the demand will continue to increase. Okay, thanks for the call. You're welcome.

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

revenue that's approaching the Oliphant segment, are you considering splitting that out as a new segment and or bolting on some more businesses into that building product services business?

Yeah, Steve, we've been very pleased with the performance and the strength that you've seen in the overall market, and as I mentioned, a strong performance by that downstream building products business. And we'll continue to assess, you know, the opportunities to give more clarity in that space. But you're right, it has performed very, very well, and as you can see from our prepared remarks, we expect to continue to see it continue well. And we'll continue to assess the ability to give more clarity to everyone about its – its abilities, but it is certainly an area that we want to continue to grow.

And would you consider bolting on some downstream products that are sourced from polyethylene, such as PEX? The reason I bring it up is PVC pipe in Home Depot sells for about a dollar a pound, not too much different than resin. But those fittings are as much as $10 a pound. And I don't know whether you're capturing that margin or some people capturing that margin, but it's really healthy.

Yes, Steve, it's not been an area that we've looked at, and our continued area of focus has really been on the downstream vinyl side, as you see us continue to add businesses that have been very constructive to the strength of that business. And we continue to see the ability to add bolt-on opportunities as opportunities present themselves And we find that an interesting area of focus.

Yes, Steve, I just want to also add that we are one of the few companies in North America that sell pipe and fittings together. So we have a very well-known brand, and our fitting business is doing quite well, as you said.

And any plans to do more de-bottlenecking in your chloralkali business?

Well, we always look at opportunities to grow in all our businesses. And as we mentioned, we had the last two years about 800 million pounds of PVC capacity. And with that also, certainly we need more chlorine and chlorophyll and our downstream business thinks business is so strong in construction. We're also looking at the bottlenecking of capacities to serve the needs of our customers. Thank you. You're welcome.

Thank you. And our next question comes from Jeff Zakowskis with JPMorgan. Your line is now open.

Thanks very much. You disclosed the trend in chlorine prices through the year, or you quoted IHS, and it seems that they picked up in the fourth quarter. What do you make of that, and is there a trend there?

Certainly, as you know, half of PVC is feedstock, is chlorine, the other half is ethylene. So as PVC demand is strong globally, the draw on chlorine is very high. And hence, chlorine price, that chlorine also go to other finished products, not necessarily PVC, but in water treatment, in TiO2 and urethane and many other applications. So chlorine, because of the high value of chlorine into PVC, chlorine price also increased to reflect the strong demand for the product.

Okay. And your operating cash flow as a percentage of EBITDA was more than 100% in 2020, and maybe it was above 90% in 2019. historically it used to be as a percentage in the high 60s or 70s or low 80s. Why is the percentage so much higher now, and how do you see that going forward? Do you have a target for operating cash flow as a percentage of EBITDA?

Well, Jeff, it's certainly operating leverage, which has really leveraged that growth in cash flows. And certainly as we look at, opportunities to continue to build on the business. We'll continue to look for opportunities that provide that kind of operating leverage. As Albert noted, we'll look at opportunities across the spectrum. But we don't have a particular target per se, but you can certainly imagine we're focused on opportunities that provide a high degree of operating leverage that allow us to do so with minimal investment of capital.

Should you have a positive law? What's your estimation of the deferred tax benefit in 2021? I'm sorry? What's your estimate of the benefit from deferred taxes to your cash flows in 2021?

Yeah, I'm not going to quote you a number, but certainly there will be some significant benefits as we see moving forward. And certainly we had, as you may recall, and I made reference to this throughout 2020, we did also have some benefits because of the CARES Act. And because of our large investment in LACC, we also were able to benefit from the net operating loss. So a variety of opportunities to leverage our tax positions, be they the NOLs or the deferred taxes. Okay, great.

Thank you, Simba.

You're welcome.

Thank you. And our next question comes from John McNulty with BMO Capital Markets. Your line is now open.

Hi, good morning. This is Bhavesh for John. Good morning. Regarding the disruptions caused by the Texas freeze, clearly unprecedented event. So when you compare that to typical weather events or, say, hurricanes, Could you help us with how different is the process to bring the plants back online? And what is the risk of negative surprises which could end up kind of extending the downtime for the industry?

Well, hurricanes sometimes cause more damage to equipment and buildings than the freeze. Freeze is usually instrumentation boiler that can be more readily fixed. The risk is when plants go down, sometimes hard crash. Hurricane, you know it's coming, you prepare, you shut down orderly. But the freeze, sometimes you're caught off guard, your boiler got tripped, and you're out of steam, and the plant's crashing down. And some of those plants will have suffered equipment damage from the hard crash. And you only know more about it when you restart the plant to find out some things are working properly. That's the risk of of unknowns out there.

Correct. And then your estimate for the $120 million hit from lost sales, does that assume prices for the commodities stay at current levels? And if so, roughly how much of that will be offset if the industry gets the nominated $0.14 price hikes over the next couple of months?

Yeah, and so it does contemplate the price environment that we're in, and it also includes not only a lost margin on sales, but also some repair cost as well. And so we'll just have to see if we're successful in some of the price nominations we made for February and for March and how that sustains itself through the course of the rest of the quarter. You can see that a big portion of this will impact the first quarter. We said... $100 million for an impact first quarter, and the rest of it will impact Q2. Got it.

Thank you.

You're welcome. You're welcome.

Thank you. Our next question comes from David Begleiter with Deutsche Bank. Your line is now open.

Thank you. Good morning, Albert and Steve. Morning, David. Just on polyethylene, it looks like February will likely go through or is going through on the 7th sense. How are you thinking about the March increase and the prospects of that increase?

Well, several of the polyethylene producers announced the $0.07 price increase with tightness, but not all the producers have announced price increases. So time will tell whether that $0.07 will be pushed through. But the issue now with all the freezers, 100% of Texas, as of yesterday, 100% of Texas ethylene plants are offline, and 75% of total U.S. ethylene plants are offline. So the availability of ethylene, as well as mentioned earlier, the risk of restarting may impact availability and prices of ethylene, which will impact prices of polyethylene as well. So we don't know yet to what extent the ethylene shutdown will impact prices of polyethylene going forward.

Very good. And just on the $100 million forecast for the weather impact in Q1, how many weeks of production lost does that assume, and how much production does that assume as well?

So, David, we expect that we'll have those operations up here over the course of the next several weeks. I'm not going to quote a number of pounds, but over the next several weeks, we expect to have ourselves more fully restored.

Thank you very much.

You're welcome.

Thank you. And our next question comes from Mike with Barclays. Your line is now open.

Great. Thank you. Good morning, Albert and Steve. Good morning. I guess I did want to follow up on that last point about restarting. And I just want to get a better sense of maybe where you are in the restart. Is it largely just on right now Westlake restarting its facilities? Or are you still kind of waiting either for suppliers or logistics? Are there any kind of gating items that are preventing you from starting up at this point?

Yeah, I think depending on the plants and locations, some plants are running. We have not declared force majeure for polyethylene as some other industry companies have. And just depending on location, the sites, and how much inventory you have to serve your customers. Got it. Okay.

And I did want to change topic. I wanted to ask on caustic soda. It feels like obviously that's been weak for a couple quarters now. I wanted to get a sense if you feel like we're at or near bottom here or just what your outlook for caustic soda would be over the next, say, couple quarters here.

That's a good question. Usually PVC, because of its vast connection with construction industry, with low interest rate, So PVC usually is a leading economic indicator on the cycle coming back. And usually caustic is either concurrent or a little bit lagging indicator. So as the economy improves, caustic demand will increase more, and hence the price will improve. And looking at both domestic and international prices, we see that the caustic prices start moving up from the bottom. We saw early end of last year and early this year. We believe that we've seen the bottom of caustic prices.

Great. Thank you.

You're welcome.

Thank you. Our next question comes from Mike Sisson with Wells Fargo. Your line is now open.

Hey, good morning, guys. Sorry, Cleveland weather made it down to Houston. But, hey, when I take a look at the vinyls EBITDA margin in the fourth quarter, 21%, You know, pretty close to what you guys are seeing in, you know, 17, 18. If you think about the price increases that IHS is forecasting and then, you know, kind of margins for the year, should the rest of 21 be kind of in that level or higher, excluding the impact of the first quarter winter storm URI hit?

Well, certainly we would like to see those margins at those levels. As you know, the vinyl business has been impacted pretty severely with the COVID-19 downturn earlier in 2020. And we mentioned also our integrated nature into building products and with the strength in building products that has really helped also our vinyl's margin improving. The weakness, as Steve mentioned in his remarks, is that our improvements in earnings offset by the weakness in caustic. And as I mentioned earlier, we believe we hit the bottom in caustic. And the question then is how fast, how soon caustic will improve. So that will be another tailwind in helping the business recovery.

Okay. And then just a quick follow-up on vinyls. Once your facilities are up and running, given what you've mentioned in terms of demand, do you think you'll be running – effectively full out for the remainder of the year?

Yes, we were running full out before until we had problems. But everything we see today, that not only U.S. demand is strong, but global demand is strong. Export price is higher than domestic prices. So long that COVID-19 is the worst is over, hopefully, for the world economy and with the increase the vaccination rates around the world. We believe the economy should improve and with the government stimulus package would help construction infrastructure and definitely will help PVC business and related business.

Great, thank you.

You're welcome.

Thank you. Our next question comes from Frank Mitch with Vermium Research. Your line is now open.

Thank you so much and good morning, gentlemen. Good morning, Frank. Listen, I want to follow up on Deep Freeze, your impact 100 million Q1, 20 million Q2. How are you thinking about that between the two segments? And the 20 million negative for 2Q, I'm assuming that your guys are fully back up and running by April 1. Is that not a right assumption? Is it lost sales from not being able to build inventory? If you could just explain a little bit more about how you came up with those numbers.

Yeah, Frank, I would expect it will be up well before then. And from an impact perspective, I would say that the impact is on a vinyls basis. It's about 80% of that impact is in the vinyls segment, and 20% of that is in the olefins segment. both for Q1 and for Q2 in terms of how they split out between the two segments for the 100 and for the remaining 20 in the second quarter.

And the $20 million for the second quarter, is that your inability to build inventory? How do we think about that?

Yeah, and so, as I say, the second quarter, let me just clarify that. When I said 80% vinyls, that's in total. You know, the impact in the second quarter will be all vinyls. It's really the flow-through of PVC resin and further downstream into our vinyls building products businesses.

All right, very helpful. And thanks for calling out the Petro II turnaround in September. Can we infer that there's no significant turnarounds that you're anticipating to hit the second quarter?

Yeah, that's right. You know, we call out those that are more impactful, and so certainly with all the many units we have both in PVC, caustic, chlorine, and polyethylene, those are spread throughout the course of the year. So I only call out those that are really more impactful, which are the ethylene units, and so that's the only reason for calling that specific one out. All right, terrific. Thanks so much. You're welcome.

Thank you. Our next question comes from Arun Viswanathan with RBC Capital Markets. Your line is now open.

Great. Thanks for taking my question. I hope you're doing well. I guess I just wanted to get your thoughts on the disruptions that are going down in Texas. How do you see that impacting the industry longer term? I know that operations are now starting back up, but do you see inventories where they're already at low levels and so this is going to exacerbate the production a little bit more, or maybe you can just offer your thoughts on the evolution here over the next couple of months.

Yeah, with most of the plants down in Texas, inventory will be coming down, and produce inventory are quite low now. So when the plants come back, they will have replenished inventory first, and so they will curtail sales, whether it's export or domestic, in order to build inventory back to a reasonable level.

And then as far as, you know, feedstocks go, do you see any pressure in the next, say, six to 12 months, you know, from potentially higher ethane costs, or do you see ethane as remaining relatively plentiful?

Well, it depends who you look at. If you look at IHS forecast for ethane, they are looking at – 2021 in the mid to high 20 cents per gallon. But then if you look at the future prices, and 2021 is more of a low to mid 20 cents a gallon range, or mid 20 cents a gallon range. So, they do not forecast a ramp up in effing prices.

Male Speaker 1 And if I could just ask one more follow-up. In the vinyls business, one of your main competitors has changed strategies a little bit and is potentially moving off index for caustic pricing. Has that had any effect, I guess, on overall industry dynamics and the way that you think about maximizing ECU value for your vinyls business? Thanks.

Yeah, the caustic business is very competitive. They are quite competitive. few large and small producers. And because of the big demand for chlorine, every pound of chlorine you produce, you produce 1.1 pound of caustic. So when demand for chlorine is strong, you produce a lot of caustic. The economy is not picking up the demand for caustic at the same pace as PVC or as chlorine. Then you have excess caustic, and it shows the weakness in price. As I mentioned earlier, As the economy improves, that weakness will be absorbed. So it's a very competitive business.

Thanks. You're welcome.

Thank you. Our next question comes from Hasan Ahmed with Olympic Global. Your line is now open.

Morning, Albert and Steve. Morning, Hasan. You know, question around polyethylene sort of supply-demand fundamentals and pricing. I mean, obviously, you know, we were all pleasantly surprised by the strength of utilization rates. You know, in 2020, they continue to be strong. You know, and there are obviously a variety of moving parts there. You know, the sort of strength from the non-durable side of things. And then, you know, oil obviously pleasantly surprised. And now, you know, you have maybe some impact from the weather-related outages. And we're going into a pretty heavy season. turnaround season as well. I mean, my question is, you know, how are you guys, as it pertains to 2021, you know, what are you guys seeing in terms of the sustainability of this tightness, in terms of the sustainability of these high levels of pricing? I mean, and I guess the question really is that would it be a tale of two halves where we see extreme strength in H1 and maybe we see potential cracks in pricing in the second half of the year as A lot of these turnarounds are behind us.

Well, that's one thing we do know is that a lot of things we don't know. We didn't predict the freeze. We didn't predict the two hurricanes that we spent of two months. So a lot of things could happen. But I think the fundamental supply demand, global supply demand, certainly there's a fair amount of polyethylene capacity added globally. But the pandemic with its great demand for internet sales and packaging and with PPEs, and also with the increased demand for solar panels. So a lot of the polyethylene LDP plants have shifted to making EVAs for solar panels. So then the rest of the packaging LDP demand supply has been reduced. So all these changing dynamics is impacting demand side. On the PVC side, very little capacity added around the world, in the last few years. We have, as mentioned, we have added about 800 million pounds capacity in the last two years, and now some of our competitors are announcing new capacity expansions in facing the global demand increase. And yet globally, very few capacity in PVC has been added or being announced. So if you see the global demand dynamics and then with supply, then you can conclude where prices will go. Month to month, sure, it will gyrate depending on inventory, supply, demand, weather, and many other things. It will go up and down. But I think when people are spending billions of dollars building new plants, it's about the confidence that our business long-term should be better.

Fair enough, Albert. Very helpful. And as a follow-up, on M&A, how are you guys thinking about M&A in this market, I mean, obviously, you know, there are some chloro-vinyl assets up for sale, you know, and, you know, A, what are your broader thoughts about M&A? And alongside that, how are you thinking about prioritizing, you know, between the two segments? I mean, would you have a preference if you were to indulge in M&A on the chloro-vinyl side over olefins or vice versa?

So, Hasan, as you well know, we've grown the business both organically and through acquisition over time, and we'll continue to look at opportunities on the acquisition side. We look at opportunities, obviously, directly in our space, but we'll also look at adjacencies. You've seen us continue to expand in our downstream building products businesses, and we'll look even beyond those that make sense to us. And so we'll look at those, but it's always about finding the right fit, the right synergistic opportunity is the kind of thing that we're always looking for. Perfect. Thank you so much.

You're welcome. Thank you.

Thank you. Our next question comes from Jonas with Bernstein. Your line is now open.

Thank you. Looking at your downstream PVC business, I was kind of wondering how much of the benefit you got was driven by margin enhancement from the outages, or from the shortage, I should say, and how much was volume gain from the economy restarting, et cetera. So I was hoping you could help me deconvolute that business a little bit.

Certainly. As we mentioned earlier, early part of last year, when the pandemic hit, many of the municipalities shut down construction. So we had to shut down production of our products. So both the vinyl business and some of the plants impacted, as well as building products. But as soon as the municipality opens up and, as you know, most of the constructions are outdoors, then the demand came back. And as well, there is a movement from urban to suburban areas and constructions. So single-family homes, the construction demands start to increase. And also repair, remodeling people at home with money that are spending on traveling or vacationing, and they're spending money in their homes. So building construction products demand has increased. So our building products, we are practically sold out all the way when the demand has started to improve. And as Steve mentioned, fourth quarter, typically seasonally, because of the cold temperature and snow, then the sales into construction, especially outdoors, will slow down. That's normal. And we build up inventory during that time period, ready for the spring. And now the spring is coming back, and the demand is very strong.

Male Speaker 1 Okay. Well, I guess the question, though, is how much of the boom in Q4 was temporary versus staying?

Male Speaker 2 Well, the boom actually continues starting from, let's say, May or June. The key point is every month is improving. Actually, Q4 demand sales in the building products slow down because the seasonal weather issues typically for the construction business. And then first quarter, second quarter is a strong season for the building business. But you're seeing on a long-term basis, as mentioned, the U.S. residential construction, 50-year average, about 1.5 billion units. We went from... The high of 2007 or 2006 with a housing meltdown in 2008, it dropped from 2.3 million units or so to 400,000. And from 400,000, we climbed back to about 1.4 million units average last year in 2020. And the 50-year U.S. residential construction average, 50-year average, 1.5 million units. So we just got back close to the 50-year average. And if you believe that with low interest rate and demand continuing to be strong, population in the U.S. certainly has increased over the 50-year average, then the long-term trend and demand for construction will continue to increase.

Okay, thank you. I was also wondering, the losses that you got from the hurricane and the projected losses here from the deep freeze are quite large in relation to your overall EBITDA. Will any of this be recouped by insurance?

Well, some of the damages can be recouped, but let's see.

Thank you for the question. Yeah, we certainly do have insurance, and so certainly as we work through those claims, we'll be able to recover a majority of that damage claim from the hurricanes. And so certainly those are the big issues. On the freeze, we'll still be assessing that and see if there's an opportunity for insurance claims on the freeze.

Okay. Is it like a magnitude of how much you expect to recoup and then time on that?

On the freeze, it's obviously lost margins. So it's very little property damage. On the hurricanes, it was more property damage than it was necessarily lost margins. Okay. different kinds of claim provisions here. So on the freeze, I expect less recovery. On the hurricanes, I do expect substantial recovery.

Wonderful. Thank you.

You're welcome.

Thank you. Our next question comes from PJ Juvicar with Citi. Your line is now open.

Hi. Good morning. This is Eric Petrie. I'm for PJ. Good morning. Could you just talk, Albert or Steve, about how demand in China following Chinese New Year has held up? It looks like PBC prices are above $1,200 per ton. How do you see that going forward? And, you know, caustic soda has been pretty range bound. So any thoughts on those two molecules? Certainly.

Yes, I think after the Chinese New Year, as you may have heard, the government discouraged people to travel to their home for the guest workers during Chinese New Year. And so demand has been very strong, and since Chinese New Year, demand has come back, demand has returned, and actually I think polyethylene price is going up by seven cents a pound one week after the return of Chinese New Year holiday. So it's quite strong. The caustic soda price is mentioned. we believe have broadened, and we see some signs of improvement, even though by small margin increases, but at least it's improving in Asia as well.

Male Speaker 1 Okay, helpful. And then, secondly, on ESG, many chemical companies are investing in recycling technologies or utilizing green or low-carbon electricity. Could you just, you know, talk a little bit about what Westlake is doing in that area?

Certainly, we are very much concerned with ESG issues, and we are part of the Alliance and Plastic Waste and other industry sustainability associations and activities. As we mentioned earlier, hopefully later on this year we will discuss more of the initiatives we are taking on areas that will support ESG. Thank you. You're welcome.

Thank you. At this time, the Q&A session has now ended. Are there any closing remarks?

Yes. Thank you, Joelle. The management team needs to switch over to the Westlake Chemical Partners LP call, so we encourage anyone who has not had time to ask a question on this call to call us afterwards, and we'll be happy to address their questions. Thank you again for your time. And we hope you'll join us again for our next conference call to discuss our first quarter 2021 results.

Thank you for participating in today's Westlake Chemical Corporation fourth quarter earnings conference call. As a reminder, this call will be available for replay beginning two hours after the call has ended and may be accessed until 1159 p.m. Eastern Time on Tuesday, March 2, 2020. The replay can be accessed by calling the following numbers. Domestic callers should dial 855-859-2056. International callers may access the replay at 404-537-3406. Access code for both numbers is 308-9728. This does conclude today's conference call. Thank you for participating, and you may now disconnect.