Westlake Corporation

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Chemical Corporation second quarter 2021 earnings conference call. During this 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, August 3rd, 2021. I would now like to turn the call over to today's host, Jeff Hawley, Westlake's vice president and treasurer. Sir, you may begin.

Thank you, Julia. Good morning, everyone, and welcome to the Westlake Chemical Corporation second quarter 2021 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 and 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 will then open the call up to questions. During this call, we refer to ourselves as Westlake Chemical. Any reference to Westlake Partners is to the Master Limited Partnership Westlake Chemical Partners LP, and similar references to OPCO refer to our subsidiary, Westlake Chemical OPCO LP, which owns certain Olofens 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 production capacity and operating rates, Impacts of extreme weather events, the conditions to the closing of Boral, Lasco, and Dymex acquisitions may not be satisfied or the closing of either acquisitions otherwise may not occur. 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 second 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 second quarter results. 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 459-4733. Please note that information reported on this call speaks only as of today, August 3, 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 westlake.com. Now, I would like to turn the call over to Albert Chao. Albert?

Albert Chao Thank you, Jeff. Good morning, everyone. We appreciate you joining us to discuss our record second quarter 2021 results. In this morning's press release, we reported record net income excluding prior one-time tax benefits for the second quarter of 2021 of $522 million, or $4.04 per share, as well as quarterly records for net sales, operating income, and EBITDA. Net income for the quarter increased $507 million from the second quarter of 2020. demonstrating the strength of our business amid the economic recovery and expansion from the impacts of the pandemic. Before we delve into our record results, I just wanted to make some brief comments on our recent acquisitions. Westlake's leading positions in PVC siding, trim and molding, compounds, pipe and fittings, provide our residential and commercial customers with a comprehensive building product portfolio of PVC products and solutions. We have recently announced two acquisitions in the building and construction materials space that will provide exciting new platforms of growth and development for Westlake. In June, we announced we will be acquiring Borough North America's building products business. This acquisition will place Westlake into leading positions in concrete and clay roofing, premium PVC siding, trim and shutters, decorative stone and PVC windows, creating new strategic product platforms complementary to our existing building product business. These products improve the energy efficiency, durability, and value in residential housings, schools, hospitals, and other buildings, while enhancing the everyday lives of countless individuals. Additionally, We announced in July that we will acquire Lasko Fittings, a leading manufacturer of injection molded PVC pipe fittings. The addition of Lasko will further expand our PVC fittings offering footprint into additional markets, serving the plumbing, pool and spa, industrial, irrigation, and retail markets in North America. This product mix is also complementary to our existing product portfolio of PVC pipe and larger diameter fittings. Yesterday, we announced plans to acquire Dimex LLC, one of the largest processors of recycled plastic material in the United States. Dimex is the producer of a variety of consumer products made from processed post-industrial recycled PVC, polyethylene, and thermoplastic elastomer, and sells these consumer products to national retailers for home and commercial uses. We anticipate closing these transactions in the second quarter, in the second half of this year. Look forward to welcoming Borough, LASCO, and Dymex employees to the Westlake family. Now turning to our second quarter results. Our earnings for the second quarter of 2021 reflect the robust demand for most of our products in strong pricing environment. The strength in global demand in PVC and polyethylene resulting from the growth in building and construction and the strength in consumer packaged goods drove price increases and margin expansions across both of our business segments. The 23% year-over-year increase in U.S. housing permits demonstrated the strength in residential construction activity that is driving U.S. demand for PVC, benefiting both of our rhinos and downstream building products businesses. The demographics of the U.S. population in peak household formation ages paired with the lack of housing starts over the last 10 years and limited global PVC capacity additions created secular and structural strengths in demand for PVC and building and construction materials. In our olefin segment, Wesley experienced strong margins as the polyethylene industry experienced strong ongoing global consumer packaging product demand and tight inventory conditions due to lingering effects of the severe winter storm in February. Westlake has made significant progress in our strategic growth plans this year, and with a tight supply-demand picture, we believe our businesses are very well positioned going forward. I would now like to turn our call over to Steve to provide more detail on our financial and operating results for the second quarter.

Mr. Thank you, Albert, and good morning, everyone. I will start with discussing our consolidated financial results, and then we'll go into a more detailed review of our vinyl and olefin segment results. In the second quarter, Westlake benefited from the continuing global economic expansion resulting in healthy demand for a majority of our products. We reported net income of $522 million, which excluded the one-time tax benefit of $591 million in the fourth quarter of 2017, is a quarterly record for Westlake. In addition, we reported record income from operations of $720 million and record EBITDA of $932 million for the second quarter of 2021. The $507 million increase in year-over-year net income is a result of significantly higher sales prices and margins for PVC resin and polyethylene as well as strong earnings in our building and construction materials business. Second quarter 2021 net income increased by $280 million from first quarter 2021 net income of $242 million. The increase in net income was largely attributable to the higher sales prices and margins for PVC resin and polyethylene. As Albert noted earlier, our higher sales prices and margins were driven by global strong demand in construction and building materials, as well as consumer packaged goods. Our building and construction materials business also continued to experience strong results as North American housing demand remained robust. For the first six months of 2021, net income was $764 million, or $5.91 per share, an increase of $604 million from the first six months of 2020. The increase in net income was attributable to higher global sales prices for our major products, driven by a rebound in demand for our product offerings. The first six months of 2021 did reflect approximately $120 million impact caused by winter storm URI, but continued strong demand drove higher product margins for PVC resin and polyethylene as a result of higher prices. Our utilization of the FIFO method of accounting resulted in a less than $1 million difference compared to what earnings would have been if we reported on the FIFO method. This is only an estimate and has not been audited. Now let's move on to discuss the performance of our two segments, starting with the vinyl segment. The robust global demand for PVC was anchored by strong global construction activity. Our building and construction materials business continued to benefit from robust North American residential construction and repair and remodeling demand. These factors drove higher PBC sales prices in the segment, and we benefited from strong integrated margins during the quarter. For the second quarter of 2021, finals operating income was a record $435 million, increasing $415 million from the prior year period as average sales prices increased 54% and sales volumes increased 9%, driving higher margins for PBC residents. We also benefited in the second quarter by solid earnings driven by strong sales prices and volumes in our building and construction materials business. For the second quarter of 2021, vinyl's operating income increased $235 million from first quarter 2021 to as a result of average sales prices being up over 18%, higher sales volumes for PVC resin, and strong earnings in our building and construction materials business, driven by higher prices. In our orphans business, robust global demand for consumer product packaging drove polyethylene prices higher in the second quarter and expanded margins. Industry consultants reported polyethylene price increases in the second quarter of 19 cents per pound, and average sales prices for Oliphant's segment were up 26% in the quarter. Oliphant's second quarter 2021 operating income of $277 million increased $252 million from the second quarter of 2020, driven by strong pricing and margins that were partially offset by lower sales volumes resulting from the lingering effects of winter storm Yuri and our own planned maintenance activities. For the second quarter of 2021, Oliphant's operating income increased $97 million from first quarter 2021, primarily due to higher sales prices and margins. Next, let's turn our attention to the balance sheet and statement of cash flows. We generated $617 million in cash flows from operations in the second quarter of 2021, resulting in total cash and cash equivalents of $1.8 billion. Second quarter 2021 capital expenditures were $129 million. We maintain a long-dated debt maturity profile with a weighted average debt maturity of 13 years while maintaining strong credit metrics, anchoring our investment-grade balance sheet. Now, to address some of your modeling questions, we expect our effective tax rate for the full year of 2021 to be approximately 23% and a cash tax rate of approximately 20%. Our capital expenditures forecast for the year is expected to be between $750 and $850 million. We are planning for a turnaround of our Petro II ethylene unit to begin in September of this year. We expect this turnaround and associated outage to last approximately 60 days. With that, I'll now turn the call back to Albert to make some closing comments. Albert? Thank you, Steve.

Westlake's customer-focused product portfolio this well-positioned continued benefit on the strong demand environment we are experiencing. This quarter's results illustrate the earnings capacity of Wesley and highlights the value of our products and our high level of integration, which extends through the value chain from natural gas, liquids, and other feedstocks through to consumer building products. As supply chains and manufacturing fully recover to meet the global the globally strong demand for consumer and industrial products, Westlake is well positioned to continue to deliver strong results. We see PVC supply demand fundamentals remaining favorable, with a growth in demand more than offsetting the limited global supply additions. We also believe that rebounding manufacturing activity will drive caustic supply demand fundamentals to improve. We see the global strength in construction, especially in North America, residential construction and repair and remodeling activity continuing to drive demand for our building and construction materials. In our elephants business, demand remains robust as essential everyday products such as consumer packaging and healthcare drive polyethylene volumes. The strategic acquisitions of Borough of North America and LASCO provide Westlake the springboard to significantly leverage our participation in this strong housing and repair remodeling market by adding to our current product portfolio. Housing starts increased again in May and are projected to continue to rise. The secular strength in housing and repair remodeling supported by limited supply of single-family homes due to a decade of underbuilding on compelling demographics of home buyers in the U.S. The proposed $1 trillion infrastructure bill would also significantly benefit our building and construction materials business and drive construction demand for many years. Our ongoing growth initiatives are driving expansion of complementary products to our existing portfolio which, when coupled with strong market growth, will deliver value for our shareholders. We will continue to look at opportunities that both further our strategy of adding complementary assets as well as increasing our vertical integration capabilities in all of our business segments to deliver good returns to our shareholders. We'll do this through the lens of being a good corporate citizen by applying the tenets of ESG as part of a commitment to building a more sustainable future. As discussed last quarter, a part of our green initiatives includes the introduction of green caustic soda, known as Green Vein, which has a reduced CO2 impact of more than 30% compared to conventional caustic soda. The planned acquisition of Dymax adds to our green portfolio of products, and we will continue to develop products that are in line with our sustainability goals while meeting the needs for greener products and deliver value to our shareholders. We are dedicated to our core tenets, namely to protect the health and safety of our employees, deliver on our value commitments to our customers, and be an environmentally and socially responsible corporate citizen while strengthening all aspects of our company. Anchored by these values, we're confident Westlake is well positioned to serve the growing worldwide needs of our customers while maintaining financial discipline, which combined with the strong fundamentals of our business enables us to deliver long-term value to our shareholders. Thank you very much for listening to our second quarter earnings call. Now I'll turn the call back over to Jeff.

Thank you, Albert. Before we begin to take 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. Julia, we will now take questions.

As a reminder, if you would like to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of David. Big lady.

Thank you. Albert and Steve, have your July polyethylene contracts settled yet? If they did, where do they settle?

Yes, we believe the July polyethylene contracts will be up five cents a pound.

Very good. And the consultants are calling for some erosion over the next... four to five, six months here. Do you agree with that conclusion, or do you think we'll see a little more stability and resiliency in polyethylene pricing?

As we said, the demand for polyethylene is still very strong, and some of the industry players have done further price increases in August. And we believe with a global recovery economy, even though we know there's a delta variant that's been quite contagious, but we believe the demand for our product is still very strong. The industry and customers' inventories are not that high. We're not back to the pre-pandemic levels yet, so we believe with strong demand, and there's some capacity coming up, but it's near the end of the year or next year, and globally, so we believe that prices will be good. Now, will it go down a bit? Probably, but the prices are very good today, and industry can can weather some of the price of volatility.

Thank you.

You're welcome. Your next question comes from Hassan Ahmed from Alamix Global.

Good morning, Albert and Steve.

Good morning, Hassan.

You know, a question around the Tory market and a two-part question. One is basically, you know, Moley, obviously being one of the largest producers out in North America, has been talking about walking away from, you know, lower-income business, right? So with that in mind... And, you know, as they're doing that, they're looking into sort of getting into sort of re-taking certain contracts, moving on to certain long-term contracts and the like. So the two questions I have around that are, are you sort of re-adhering to your contracts as well? I understand, you know, a large chunk of your story is in the journey. but you do sell it to the merchant market as well. So that's one side of it. And the second side of it is that it seems that there is upward mobility in the pricing of jewelry and it seems that may happen over the next couple of years. How do you see the PVC cost curve changing with that in mind? And how do you deter Westlake positioning in this evolving world? Certainly,

Yes, as you know, that Westlake is well integrated downstream to our PPC business. So we look through the value chain as well as to maximize our optimized return to our company and to our shareholders. And we have contracts. We certainly honor contracts. And when contracts come in due, we certainly would work with our customers. Many of them are very long-term customers. And to get value where the market dictates. So we have a lot more avenues to integrate our chlorine versus some of competitors with limited avenues. As you know, the PVC margin today is very, very good, and suddenly we're trying to maximize the PVC value chain. So absolutely, I think all the companies, everybody's doing the best for the company and also looking out the interest for their long-term customers. So we'll balance those two needs.

Understood. Understood. And moving towards the ethylene, polyethylene side of things, you know, one of the largest producers of polyethylene in North America recently went on record talking about how, you know, the consultant view is that between now and 2025, there is an expectation of around 31 million tons of polyethylene capacity to come online. And this company's view is that 6 to 15 million tons of those 31 million tons may either get delayed beyond 2025 or canceled. So I'd love to hear the Westlake view about that.

Certainly there's a lot of capacity being announced, especially Asia, especially in China, as well as some few ethylene plants that's being announced but haven't gotten into final stages of building, starting breaking grounds yet. So we are aware of all these projects, but we believe that Time will tell whether all these announced projects will go ahead. As we know that China, even though they're the largest consumer market for polyethylene, they're still a net importer of polyethylene. And I think the U.S. is still a large exporter of polyethylene. So what China does has a big bearing on the future supply-demand dynamics for polyethylene globally.

Very helpful, Albert. Thank you so much.

You're very welcome.

Your next question comes from the line of John McNulty from BMO Capital Markets.

Hi, Albert and Steve. It's Havash for John. A quick question on Dimax. One of the comments made in your press release was that Dimax is one of the largest processors of recycled plastics in the country. Can you provide some details the overall market for recycling? How do you see it growing? And then how the margins are for the existing platform?

Yeah, you know, Dimex is, as we said in the release, one of the largest players in this recycled materials business. And we see this business as a growing opportunity. You can see that they recycle and reuse and manufacture products coming from PBC, polyethylene, and TPE. So we continue to see this as a growing, important market, and certainly the opportunity is there. You know, you saw in the release that we said their business is over $100 million in size, and we certainly see very good margins in that business going forward. And that's the basis behind, I think, a very good investment, and we expect to see good returns in the investment in Dymax.

Got it. Between your buildings... You're cutting out. Can I get you to repeat that question? You were cutting out during parts of the question. This is a question around the building product platform. Are you still seeing issues around supply chains and logistics constraints in the country? And if you are, how much of the earning potential of the platform is being subdued because of this?

Well, I would say certainly, you know, there have been some challenges really given the logistics and supply chains. Some of these are additives and plasticizers and such. But we have multiple suppliers that allow us to be able to jockey through those kinds of challenges. Certainly we've seen some opportunities continue to grow the business and the ability to continue to meet this growing market demand. So those challenges, while they are sometimes there, we've been able to adjust and adapt with our multi-sourcing approach in meeting the needs of our customers by sourcing with alternative suppliers, if need be, for some of those additives and plasticizers.

Okay, and just one final question. When did PBC prices close for July?

Yeah, I think PBC was flat. Flat for the month before July. You were asking for July? Flat for July.

Okay, awesome. Thank you so much. You're welcome. You're welcome.

Your next question comes from the line of Steve Byrne from Bank of America.

Thank you. I hope you can hear me. The echo on our end is terrible. So I recently complained to Jeff Holley about the cost of some PVC fittings that were in the $10 a pound range, not the dollar a pound range on your slide 13. All I got from Jeff was a smile. But perhaps you can comment on how much of that $10 a pound is your margin versus Home Depot, or maybe more broadly, how would you characterize the margins in your building products business versus, you know, the rest of the vinyls?

Yeah, building product business is doing quite well, and we are passing – Our resident price increases, the cost increases along. Sometimes there's a time lag, but we are, by and large, able to pass through some price increases. And depending on the products, sometimes we expand the margin as well. And we see very strong demand for all our downstream building products for the rest of the year and some of them into next year.

And so as you build out this platform, are you at the point where you have some negotiating leverage with the home centers and the specialty construction distributors where you can offer them a broader portion of the shelf space and thus have some negotiating leverage, or are you not there yet?

No, you're absolutely right. Part of our synergy is we are much more important to distributors and retailers for our products. We have more products to offer. And today, in the building products area, having supply is more important to customers. So we are almost literally hand to mouth in terms of deliveries. And I think the other gentleman talked about logistics. Sometimes it's hard to find truck drivers, and some cause delivery delays. But by and large, we are getting, become more important to our customers, and we like it. We like to be more important to them, and they like us to, we've been working with them for many, many years, and they like us to become the, and more relevant to their business. So I think it's a win-win for both parties.

Thank you.

You're welcome.

Your next question comes from the line of Kevin McCarthy from Vertical Research.

Good morning. With regard to your building products business, can you speak to your medium to long-term strategy? How do you think this business will be different in three to five years relative to 2021? Also, can you speak to your capability to integrate three pending acquisitions, and what does your future pipeline look like? Is three enough for now, or does it remain quite active?

So, Kevin, as we think about the building construction materials business, you can see that we continue to see a very good outlook both in the residential construction and certainly in some of the commercial construction opportunities, and we look forward to really participating with our distributors for the products to expand that portfolio offering that Boral and Lasko certainly bring. You know, as you think about the three transactions that we've recently announced, the answer is, of course, we are very comfortable that we can integrate these businesses into the broader Westlake, and we Look forward to welcoming all those employees into the family of Westlake. Certainly there will be a lot of activity in terms of that involvement, but you can see that there is the chemical side of the business that we'll continue to look for opportunities to invest in. We have been investing organically, as you know well, over the last couple years with expansions in PVC and investments in the LACC ethylene joint venture. And we'll continue to look for opportunities to invest on the chemical side as well. And so I'm very confident that the leadership team and the fellow employees will be able to well integrate these three transactions. The opportunity to grow the business is something that we've done over time, and I'm comfortable that we can continue to look for opportunities going forward.

And how would you describe the future pipeline?

I think the opportunity set is out there. I think the answer always is looking for the right value set that we see. Clearly our focus is generating a bottom line return, risk adjusted, and certainly we're very comfortable that we can find the synergies in these transactions to achieve that return and bring these values to our shareholders. So when you think of the pipeline of opportunities out there, there are a number of interesting opportunities, but it's always a function of is the value proposition to our shareholders what we believe it should be. So that's really where we get very focused to making sure the value for any opportunity is going to drive long-term, sustainable value for all of our stakeholders.

Male Speaker 2. Understood. Thank you very much. Male Speaker 3.

Kevin, I just want to add also that we are looking for more recycled plastic. As you know, there are a lot of plastic waste out there in the world. And with the introduction of Dymax, we will plan to add more recycled plastic materials into our consumer products. And also with our green bean, we'll plan to introduce more lower carbon products into our building products material as well. So I think talking about next five years, I think the whole industry, the world is marching towards lower carbon emission products and lighter weight energy efficiency. So that's the plan we plan to move towards too.

That makes sense. Thank you.

Your next question comes from the line to Mike Sisson from Wells Fargo.

Hey, nice quarter.

Thank you.

Do you think you can grow vinyls, EBITDA, and 22x acquisitions?

So, Mike, when you think of the opportunity set to do that, remember we added significant capacity in PVC in late 19, and as we think about the full run rate, Into next year, this year, we've begun to ramp that up with sales of those incremental pounds. As we started in late 19, 2020 was a challenge, as we all know, with COVID. But as we think about the run rate from 21 into 22, we continue to see good volume growth opportunities. And we've talked about those in Geismer and those in Germany that have expanded our vinyl footprint. but we continue to look for the completion of several smaller de-bottlenecks as well in the United States in the vinyl space. So we continue to see solid demand, and that allows us to put those incremental pounds into the marketplace.

Got it. And do you think PVC margins could continue to improve in the second half and into 2022?

So we've seen significant strong demand in this marketplace. I know the consultants show some seasonal weakening because of the seasonal demand that you see during the construction season. But as you have noted, over the last couple of years, we've actually had a construction season that extended well into the latter quarters of the year and well into the traditional slow season for construction activities. So as long as we see the strong demand that we currently see continuing, and we do, the issue is more of a weather-driven issue than it is anything else. The market remains relatively snug from a materials perspective and inventory level. Demand remains pretty strong. And so it's really a function, does weather cooperate with us, and can we continue to have a construction season well into the winter season as we have over the last two years?

Yeah, and IHS, the English consultant... IHS and industry consultant are forecasting the average price for next year 2022 PPC higher than the average for 2021 by about 3 cents a pound.

Thank you. Thank you.

You're welcome.

Your next question comes from the line of Frank from Fermium Research.

Good morning and congrats on the record results. Thank you. Good morning. As I look at the second quarter to the third quarter, could you size the negative impact of turnaround and unplanned outages by segment in the second quarter? and talk about what you anticipate the expected negative impacts are here in 3Q from turnarounds on plant outages. Obviously, you have the Petro 2 turnaround. I'm just trying to get a sense of the order of magnitude from 2Q to 3Q from this.

Yeah, Frank, it's Steve. And so we don't have any other major turnarounds other than the Petro turnaround occurring in the third quarter. And so it's really just that adage that we expect for 60 days occurring starting in September. And so the other units, we don't have any what I would call significant turnaround activity in Q3 other than starting that turnaround in September for the Petro unit. Okay.

And when is the expected closing of Boral, Lasko, and Dymex?

We expect those to close in the second half of this year. It's somewhat a function of getting HSR, Hart-Scott-Rodino approval. It's hard to know when the government will clear those, and so our best view is in the second half of this year. But we certainly look forward to closing them as promptly as possible so that we can move forward with integrating these businesses into our own. Terrific.

Terrific.

Thank you.

Thank you.

Your next question comes from the line of John Roberts for UBS.

Good morning. Matt Brown for Beyond for June. Congratulations on the diamond acquisition. Thank you. Following this and the other acquisitions, can you remind us what your target leverage is and what your capital allocation priorities are going forward?

Sure, so it's been quite clear for a very long time that Westlake's target for leverage is really those that are established by the agencies, SB, Moody's, and Fitch. We've seen over the years they change their targets, so rather than being fixated on a particular number, we focus on what the expectations are of the rating agencies to remain strongly investment grade. Today we're triple B, flat, stable outlook or equivalent with each one of those three, and believe our metrics are even stronger than those ratings. And so our focus is really to stay strongly rated by all three agencies, and as I just mentioned, our credit metrics are even stronger than the current rating assigned by all three agencies. From a capital allocation perspective, we focus on using that free cash flow to maintain the plans and have them run reliably, consistently, looking at a taking that free cash flow beyond that maintenance activity, and if we can find projects that we believe have compelling returns, risk-adjusted above-the-cost capital, to deploy that that way. We'll also reward investors through distributions in the form of dividends as well as share buyback. So we certainly look for the opportunities to deploy that capital across that spectrum.

Thank you for that. And then, Albert, you touched on it a bit before, but can you comment on your customer polyethylene inventories and when you expect customer inventory levels to get back to more normalized levels?

Thank you. Yes, as I mentioned, we got inventory back to pre-URI, this pre-winter storm February of this year. We haven't got inventory back to pre-pandemic time yet. And so we believe that both customers and produce inventories are between low and median, depending on the grades, and probably will be by the end of the year when things get back to more normal.

Thank you.

You're welcome.

Your next question comes from the line of Alex from KeyBank.

Thank you. Do you have a view on how much capital costs for new polyethylene and PVC plants might be up this year? And could capital cost inflation result in the delays of new projects approvals this year?

So, you know, certainly we've seen capital costs for equipment continue to rise with some of the inflation. So certainly since, you know, that is certainly going to be a consideration. Certainly those who are investing in new plant equipment certainly watch that constantly and look at a variety of sources to source major pieces of equipment. And it varies quite a bit in terms of whether we're talking bulk materials such as pipes or whether we're talking rotating equipment. but certainly we have seen cost creep into both of those, whether it's the bulk materials or whether it's higher-value rotating equipment. So they certainly have elevated in cost.

And you've talked about favorable supply-demand outlook for PVC. Why do you think PVC export prices have fallen in recent weeks, and do you see that as temporary or temporary?

Yeah, they're having some weakness in China with PVC, but recently, last few weeks, we see prices start moving up on a global basis. Thank you. You're welcome.

Your next question comes from Mike Lighthead from Barclays.

Great, thanks. Good morning, guys. First question on natural gas. Prices have gone up pretty materially the past few months. Can you just give us a rough sensitivity of how to think about rising natural gas prices on your cost structure?

Sure. So when you think about the, you know, the sensitivity on natural gas, you know, a dollar in MMBTU can cause an EBITDA impact of $100 million, and that's mostly in the vinyl side of the business. About 90% of that impact is on the vinyl side of the business. But you've seen as prices have moved that given the strong demand that we've been able to move a lot of those pricing momentums through downstream into our customer base.

Got it. That's helpful. And then second, maybe just a smaller question, but the corporate and other line, I think this quarter EBIT was positive $8 million or so. What drove that?

Yeah, there are some small transactions that occur, whether it is some of the small hedging gains that we take as we hedge activities and such. So there's certainly some interest expense you notice that our cash balances have grown. And so it's a combination of items such as that. Got it.

Thank you.

You're welcome.

Your next question comes from the line of Angel Castello from Morgan Stanley.

Hi, thanks for taking my question. Just, Albert, to expand a little bit more on the diamond acquisition and interest for potential future bulletins, I'm curious if there's any particular area within the ESG sphere that is of particular interest as you look at whether it's technologies or potential expansion down the line.

Yeah, we're looking all the above, reducing greenhouse gas emissions from our plants, recycling water, reducing solid waste, and through the DIMACS, we're trying to able to source and recycle the post-industrial, hopefully going to post-consumer material, recycled material, and produce products. So I think we're different from just recyclers who just recycle and sell the compound of resin. We are making finished consumer products and really going to the circular economy. And we plan to grow that business in a measured way going forward. This is just the beginning.

And is it fair to assume that that's maybe going to be the bigger focus near term as you kind of integrate and complete the acquisitions within building products?

Well, that's right. You know, certainly as we think about the opportunity to take some of this material, this post-industrial product further downstream, and certainly when you think about the integration, there is product integration today in our vinyls products, and certainly this opportunity with Dymex provides opportunities to have further integration directly or indirectly. But we also see, as you've seen us talk about our building materials business, really having some also sales channel integration, which is very important, as Albert noted, to have more products to our customers to be able to offer a much wider product offering is also very important to our customers as well as to Westlake.

Got it. That's very helpful. And then if I could just on all the things, you noted the $0.05 per pound for July. There's some price increases out there for August. I was just wondering if you could contextualize that with maybe what you're seeing from a customer level. It seems like some of the spot availability may be improving across certain grades. So are you seeing any increased pushback from customers to future price increases, any kind of demand destruction, or is, I guess, whether it's feedstock or inventory levels allowing you to continue to push price beyond July?

Yeah, we don't think they demand destructions. There are very little alternative materials that are being used. The demand is very strong, and it's kind of supply. As plants come back, there are quite a few plant problems. And as supply comes back, inventory builds, I think the price, as I said, will be stabilized. We don't expect to grow each month forever. So we expect price to stabilize. But we still believe the margin will be quite good going forward. Very helpful. Thank you. Thank you. You're welcome.

As a reminder, if you would like to ask a question, press star then the number one on your telephone keypad. Your next question comes from the line of Arun Vishwanathan from RBC.

Great. Thanks for taking my question. Just I'll make this quick. So I just want to understand the 22 drivers. You will have the acquisition gains from Boral. Maybe that's $200 million or so. Vinyls, I imagine, should be up just given, you know, assuming that there's not massive supply disruptions and forced returns that you experienced in 21, the first half, and maybe some margin in the ECU as well. So it's really a whole offense whether there's some moderation in margin. Is that the right way to think about 22? Thanks.

Yeah, when you think about, as you said, when you think about the vinyls business, if you look at some of the consultants out there, they're still showing average prices for the course of the year in 22 to be higher than the average price of 21. And you're right, we've had a series of weather-related outages over the course of late 20s. that affected 21, and then, of course, the freeze in early 21. And so with the run that we see in demand in vinyls and the consultants reflecting higher average prices for vinyl, we certainly see strength. And as I mentioned earlier to a question, we certainly have good volumes that will continue to be additive to our sales volumes over the course of 22 from 21. On the vinyl side of the business, certainly, we've seen continued tight inventory situations across the chain. And certainly while there are concerns about demand pulling back, we've certainly continued to see currently a very strong demand picture. And prices certainly, as we've seen before, continue to reflect that strong demand picture. So as we look into 2022, it's a little bit cloudier to be able to give you a price forecast, but I can say that we continue to see a very strong picture from a demand perspective and the demand from the consumer packaged market continues to seem unchecked.

Great, thanks. And then if I could just ask a quick question on Dymax and the recycled market. When you acquired Ventilite, there was some excitement around getting into medical and some other applications that maybe you were interested in. underpenetrated in. Is that part of the situation here as well? Do you see an opportunity to increase your share in some of these attractively growing markets through Dymex? Thanks.

Yeah, we certainly do. I think the opportunity to really take some of the post-industrial materials and put it into a different sales channel that we're not in today and will be post-close is an exciting opportunity for us. It allows us really to have more product relevant to our downstream customers, our distributors. Many of these distributors are similar distributors who we're selling already building product materials to as well. And so when we think about the opportunity that Dymex brings, we're excited about the ability to take this recycled material but also add to the portfolio of products in the overall downstream building products businesses. Thanks.

And your last question comes from the line of PJ Jovicar from Citibank.

Hi, good morning. It's Eric Petrion for PJ. How many pounds of recycling capacity does Dimex have, and how are you looking at scaling that footprint and the associated capex to do so?

Yeah, you know, there's certainly, I think, an opportunity to think about replicating these production capacities in other areas as we think about scaling the businesses. We'll get more into the capacity size and the opportunity set as we get closer to closing this transaction, but certainly as we think about the footprint it has currently in Ohio, there could be opportunities to expand that footprint into other areas. We'll take a look and see the products that make sense and the capital necessary to do that. But as you can imagine, that will be a combination of looking at the product set to put that recycled material into more consumer downstream products, And, of course, making sure that we have the ability to do that cost-effectively for our customer downstream.

Thanks. And as a follow-up question, do you expect to see a benefit in volumes for chlorinated organics in the refrigerant following the passage of the U.S. AIM Act with quota reductions for HFCs?

Well, we'll know more about it going forward. Certainly, with global warming, There's more demand for refrigerants, and we are in a raw material side for the refrigerant business. So as that business grows, we should be benefiting from that as well.

You have no further questions at this time.

Thank you, Julia. Thank you again for participating in today's call. We hope you'll join us again for our next conference call to discuss our third quarter 2021 results.

Thank you for participating in today's Westlake Chemical Corporation second quarter earnings conference call. As a reminder, this call will be available for replay two hours after the call has ended. and may be assessed until 1159 p.m. Eastern Time on Tuesday, August 10, 2021. The replay can be accessed by calling the following numbers. Domestic callers, dial 855-859-2056. International callers may access the replay at 404-537-7000. The access code for both the numbers is 459-4733. Thank you. Have a great evening.