Westlake Corporation

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Chemical Corporation third quarter 2021 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 the question and answer session. As a reminder, ladies and gentlemen, this conference is being recorded today, November 2nd, 2021. I will now like to turn the call over to your host, Jeff Hawley, Westlake's Vice President and Treasurer. Sir, you may begin.

Thank you. Good morning, everyone, and welcome to the Westlake Chemical Corporation third 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'll 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 Olyphant'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 can 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 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 third 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 third quarter. 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 249-5584. Please note that information reported on this call speaks only as of today, November 2, 2021. And therefore, you are 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 Chow. Albert? Thank you, Jeff.

Good morning, everyone. We appreciate you joining us to discuss our record quarterly results. In this morning's press release for the third quarter of 2021, we reported another quarter of record net income of $607 million, or $4.69 diluted share, as well as quarterly records for net sales, operating income, and EBITDA. Net income for the quarter increased $550 million from the third quarter of 2020, reflecting the continued strong demand for most of our products, driving a strong pricing environment. I'm very proud of the Westlake team for delivering these results, despite the impact from Hurricane Ida on our operations in the third quarter, as well as global supply chain constraints on our building products business. Strong demand dynamics in PVC, caustic soda, and polyethylene created a healthy pricing dynamic which contributed to our expanding margins. The strong and broad market momentum in global construction driven by tight supply demand balances across our key products drove higher earned pricing and strong margins year over year in both our vinyls and building products businesses. Our olefin segment benefited from a continuation of strong margins and solid volume gains year over year as the polyethylene industry experienced robust global consumer packaging product demand and tight inventories. This momentum in margins also continued from the second quarter into the third quarter in spite of a planned maintenance outage. The strong long-term prospects of the U.S. housing market and favorable demographics supporting continued housing growth along with broad demand in U.S. repair and remodeling expenditures provide for the compelling growth opportunities in our building products business. Our recently completed acquisitions in building products greatly expands our product offering with leading brands to meet these market opportunities. In August, we completed the acquisition of Lasco Fittings, a leading manufacturer of injection molded PVC pipe fittings. Lasco brings additional markets serving the plumbing, pool and spa, industrial, irrigation, and retail markets in North America, and is complementary to our existing product portfolio of PVC pipe and larger diameter fittings. In September, we acquired Dymax, one of the largest processors of post-industrial recycled plastic material in the U.S. This acquisition further expands Westlake's product portfolio to include a variety of consumer products made from processed post-industrial recycled PVC, polyethylene, and thermoplastics elastomer, and sells these consumer products throughout the nation in big box home improvement retailers and online through nationally known e-commerce platforms. In October, we completed the acquisition of Borough North America's building products business. This acquisition places Westlake into industry-leading positions, serving the housing market in concrete and clay roofing, premium siding trim and shutters, decorated stone and vinyl windows. These transactions transform our existing building products business into new strategic product platforms which offer market innovative leading brands of exterior building products designed to enhance customers' satisfaction. These products improve the energy efficiency, durability, and value in residential housing, schools, hospitals, and other buildings. We are pleased to welcome our new fellow employees from Borough Dimex, and Lasco to Westlake. These transactions are transformative and bring significant value benefits to Westlake through their attractive financial attributes and market-leading product platforms serving the housing markets. The acquisition of Dimex introduces recycled plastic products that serve the consumer markets. Approximately 50% of our building products business is oriented to the repair and remodeling markets, which have proven to be more stable and predictable over the long term. These newly acquired products and brands, when compared with Westlake's existing leading positions in PVC siding, trim and molding, compounds, PVC pipe and fittings, now provide our residential customers with a comprehensive portfolio of products and solutions which enhance the everyday lives of countless individuals. We continue to look for opportunities to expand our business while driving value for our shareholders. Westlake has made significant progress in our strategic growth plans this year, and with a strong demand picture and leading positions in building products, PVC, caustic soda, and polyethylene. 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 third quarter.

Mr. Thank you, Albert, and good morning, everyone. In the third quarter, Westlake benefited from the continuing global economic expansion, resulting in healthy demand with leading market positions for our products resulting in our record performance. This quarter, we reported quarterly net income of $607 million, which is a record for Westlake. In addition, for the third quarter of 2021, we reported record income from operations of $861 million and record EBITDA of $1.1 billion. Third quarter's year-over-year $550 million increase in net income as a result of significantly higher sales prices and margins for most of our major products. Third quarter 2021 net income increased by $85 million from second quarter 2021 net income of $522 million. The increase in net income was largely attributable to higher sales prices and higher margins in PVC and polyethylene, as well as improving caustic pricing. Our building products business We continued to experience strong results as North American housing demand remained robust, while the supply of building products inventories remained tight. Sales volumes in our vinyls and olefin segments in the third quarter were lower, reflecting weather-related impacts, plan maintenance, and logistics constraints. Our utilization of the FIFO method of accounting resulted in a $30 million benefit compared to what earnings would have been if reported on the LIFO method. This is only an estimate and has not been audited. Let me provide some details on our segments, starting with our vinyls segment. As the second largest global producer of PVC and the second largest global producer of caustic soda when combined, Westlake is the world leader in core vinyls markets. The leading position with strong market fundamentals in PVC and caustic soda enabled us to deliver strong results in the quarter. The solid demand for PVC was anchored by robust year-over-year global demand growth and solid, strong PVC end markets, including construction and home remodeling. Our building products business continued to benefit from healthy North American residential construction and repair and remodeling demand. These factors drove higher PVC sales prices in this segment, and we benefited from strong integrated margins during the quarter. For the third quarter of 2021, vinyl segment operating income was a record $601 million, increasing $559 million from the prior year period due to significantly higher sales prices and margins, as well as increased earnings in our building products business. Driven by higher sales prices across our major products, Vinyl's operating income in the third quarter increased $166 million over our second quarter 2021 results. These increases were partially offset by lower volumes resulting from weather-related outages. In our olefins business, the continuing robust global demand for consumer product packaging drove polyethylene prices higher in the third quarter and expanded our margins. Oliphant's third quarter 2021 operating income of $281 million increased $230 million from the third quarter of 2020 as a result of strong pricing and expansion of margins. For the third quarter of 2021, Oliphant's operating income increased $4 million from the second quarter of 2021, primarily due to higher sales prices and margins while volumes were impacted by planned maintenance events. Next, let's turn our attention to the balance sheet and statement of cash flows. We generated $755 million in cash flows from operations in the third quarter of 2021. Third quarter 2021 cap expenditures were $144 million. Our solid balance sheet and our commitment to keeping our strong investment grade financial metrics provided us the ability to raise $1.7 billion in the third quarter at an average maturity of 26 years with an average coupon of 2.7 percent. A portion of these proceeds were used to fund our acquisitions in the second half of this year. We continue to maintain our long-dated debt maturity profile with a weighted average debt maturity of 17 years while keeping strong credit metrics anchoring our investment-grade balance sheet. Now, to address some of your modeling questions, we entered the third quarter experiencing higher raw material and energy costs which could persist through the fourth quarter. We expect our effective tax rate for the full year of 2021 to be approximately 23% and a cash tax rate of 21%. Our capital expenditures forecast for the year is now expected to be between $600 and $650 million. The turnaround of our Petro II ethylene unit is currently underway and expected to be completed in December. With that, I'll now turn the call back over to Albert to make some closing comments. Albert? Thank you, Steve.

This quarter's record highlights the earnings power of our products and our high level of integration, which extends through the value chain from natural gas liquids and other thick stocks through to consumer building products. We are very excited about the new products and brands that Boral, Lasco, and Dymex bring to Westlake. These leading products and brands will continue to drive our earnings power. As we look forward, with global supply chains and manufacturing beginning to normalize, we are well situated to continue to meet the global strong demand for consumer and industrial products as the U.S. continues to have globally advantaged feedstock, and energy positions, with ethane natural gas versus high-priced oil-based feedstock utilized by our following competitors. We see PVC supply-demand dynamics remain favorable, with a strong growth in demand, more than offsetting the limited global capacity additions. We see continued strength in our PVC and chlorophyllite business, with healthy demand in classic soda and chlorine. The strength in global construction and in manufacturing outlook should also be supportive of strengths in the downstream building products business. In our olefins business, demand remains favorable as essential everyday products such as consumer packaging and healthcare drive polyethylene volumes. However, They are global capacity additions in coming quarters. The strategic acquisitions of both North America, LASCO, and Dimex expands our building product platform to significantly leverage our participation in a strong housing and repair and remodeling markets. The proposed U.S. infrastructure spending bill would significantly benefit our other building products business and drive construction demand for many years. Our ongoing growth initiatives in chemicals and building products are driving new and complementary products to our existing portfolio, which, when coupled with strong market growth, will deliver long-term value for our shareholders. We will continue to look at opportunities that both further our strategy of adding complementary products as well as increasing our vertical product and sale channel capabilities in all of our business segments to deliver strong financial performance. Our continued focus on ESG activities led us to make significant improvements in our operation and supply chain process. for the betterment of our communities and where our products serve vital and valuable purposes. We are also developing products to build a more sustainable future as part of our green initiatives, including the introduction of a green caustic soda known as Green Wing. In Canada, we have commercialized and are now selling our PVC-oriented pipe, referred to as PVCO, which allows us to create a PVC pipe that uses less material while delivering the enhanced strength and capabilities of our current PVC pipes. In addition to these new products and those of Dymax, which are derived from post-industrial recycled plastic, we expect to continue to bring back to bring to market products that will further our sustainability goals while meeting the needs of our customers and delivering value to our shareholders. In September, we published our 2020 sustainability report. And among many accomplishments, we noted that we have achieved meaningful annual improvements in our carbon footprint over the past five years. This has been accomplished through applying technology and optimizing operations, resulting in our CO2 emissions falling by 8.7% from 2016 to 2020, and have ongoing efforts to continue to decrease our emissions. We are confident that 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. Before I conclude, I want to take a moment to mention that in September, we celebrate our 35-year anniversary. We have grown significantly since 1986, And I want to thank all of the Westlake employees who made this possible. Thank you very much for listening to our third quarter 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. De Tamara 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. Your first response is from Mike Sisson of Wells Fargo. Please go ahead.

Hey, good morning, guys. Congrats on 35 years, Albert. Thank you.

Good morning.

In terms of vinyls, you've... It seems like every quarter you've got a new record EBITDA margin. Any thoughts on the sustainability of that when you look to the fourth quarter and the first half of 2022? It looks like most consultants see pretty favorable sort of margins for the industry over the next couple of quarters. Just kind of any thoughts on the next year or so in terms of profitability for vinyls?

Thank you. The basic fundamentals for the vinyl business are very strong. As we mentioned, there are very limited capacity additions coming on the world and actually being reductions in supply, not only from weather-related, but from capacity reductions both in North America and in Asia and some in Europe. So the demand, however, is going to be very strong. Vinyl is one of the best products for construction-related applications, whether it's in the infrastructure, pipe, and fittings for water and sewer all around the house, inside or outside the house. And with the strong U.S. feedstock advantage through its low-cost power compared with power costs in Europe and Asia, low-cost energy and a low-cost ethane-based ethylene feedstock, we have one of the lowest cost position to supply the growing demand for the vinyl business. That including Cossack Soda as well. As the world economy recovers, Cost of soda demand is increasing, and there's again limited capacity available to supply, and hence we have a strong pricing power. Now I just want to mention that as we head into the fourth quarter, that's typically a seasonally weaker quarter because the winter season, that construction typically slows down. However, since this year, there's a lot of demand disruptions were weather-related or capacity reductions. Inventory is very low throughout the industry, both from the produce side and customer side. So there could be industry inventory building even during the fourth quarter. So we will see, but we believe the near term and the longer term going forward, our vinyl business outlook is very positive.

And then a quick follow-up with your new building products portfolio altogether now. What do you think the growth rate should look like next year?

So, Mike, it's Steve. And so as we think about giving more transparency, we'll be spending more time discussing that. You know, we've just closed these three transactions just over the period of several months, and certainly we want to give more transparency to that business in terms of its financial performance. and giving more specific understanding of how that business is expected to perform. So hang with me a little bit. We do expect to give more transparency to that in the very near term.

Great.

Thank you.

You're welcome. You're welcome.

Thank you. Your next response is from Arun Vishwanathan with RBC Capital Markets.

Great. Thanks for taking my question. Congrats on a great quarter and good outlook here. So I'm just curious, you just noted first off on caustic soda, there has been some improvement. You've also seen some closures within the industry. Where do you stand on kind of replacement costs, if you could help us with that? Do you think that just given the increases in chlorine as well, that were anywhere near, you know, investment coming into the industry, or are we still quite a ways away from that?

Well, as you know, caustic soda is using the electrolysis process, and a lot of copper and materials are used for construction. And as we've seen in recent months or year, that commodity price such as copper has really increased a great deal. So replacement cost has also increased for building caustic soda plants, in our opinion.

Okay.

And I guess on olefins, we have seen some pullback in polyethylene pricing over the last, spot polyethylene pricing in the last month or so. Is that because inventories are now normalized, or how would you kind of rate the supply-demand and inventory picture in the olefins chain?

Yes, as weather-related issues have returned back to normal, some of the plants that were impacted by the weather have come back to operation. As we mentioned, also there are additional capacity that's coming online in the next few quarters. So I think the inventory balance has become much better than in the past year when there was a lot of tightness in inventory for the polyethylene business.

And then lastly, I'm sorry, if I may, just real quickly on your balance sheet, obviously still very healthy. Are you still in a position where you are pursuing further M&A, or how are you thinking about using the cash that you generate from here on?

So, Ruan and Steve, and so the answer is we're always looking for opportunities, certainly those that provide real bottom-line value, And as you know, we always have had a very active corporate development team looking at opportunities, both internal growth opportunities and acquisition growth opportunities. And so as we think about putting the capital we have to work, that's really where we're focused is really kind of the bottom line cycle average returns that we're looking for. So, yeah, there's always an opportunity to put that capital to work, but we're always looking to make sure it provides that real long-term sustainable return risk-adjusted returns. So there's an active role, both now but always has been, in putting that capital to work. So we'll, as I say, as we move forward, stay tuned, but we certainly have not changed our focus at driving long-term sustainable bottom-line value. Thanks. You're welcome.

Thank you. Your next response is from Kevin McCarthy with Vertical Research.

Good morning. Albert, we've seen cold temperatures Coal prices rise appreciably in China, and of course the government there is also implementing its so-called dual control environmental goals. I'd be curious to hear your thoughts as to what impact that is having on PVC production and the PVC market regionally and globally, if you think it's significant.

Certainly, as you may know, that China has a significant market share of coal, PVC capacity in the world, close to about 50%. But 80% of that is coal-based. And what's happening with not only the high price of coal, but a lack of coal has impacted the production capability of these plants. And some of the coal PVC-based plants that are not integrated back to coal are forced to shut down. Further, with the due control, some of the provinces that has exceeded their that you control the greenhouse gas emissions to GDP ratio, and they were forced to shut down the industries to reduce emissions. And we have planting in China, and we have been impacted also. Those provinces, and they said the U.S. shut down for several weeks to reduce emissions. So even though the government has put a cap on coal prices, and coal prices come down from the lofty heights, is still quite expensive and going forward the energy demand in China is still growing so we will see how China would re-control the industries and whether the coal-based industry will allow to continue to grow or they will be frozen in the capacities or even shut down in some of the highly polluting plants, older plants.

Thank you for that. And then as a follow-up, I guess I'd be curious to hear your near-term outlook for PVC resin prices. We've seen U.S. export prices rise in recent weeks and months. I'm curious as to your view there for the fourth quarter and also on U.S. domestic contract pricing. Do you have any proposed increases on the table for November?

Certainly. As we said, we're heading to the fourth quarter in the northern hemisphere. Typically, it's a weaker cyclical quarter with construction slowing down. However, the U.S. is the largest exporter of PVC around the world, and the world demand for PVC is still growing as their economy recovers from the pandemic. But because of the high energy costs in China and Europe, some of their production either curtailed or very high cost position. So U.S. by far is the most advantageous location to supply the rest of the world's need for PVC. So we see continued strong demand for PVC and hence profitability. Now you mentioned pricing. The industry, IHS, has announced that industry announced a five cents a pound price increase for November and Even though we're heading into the fourth quarter winter season, we believe there's a strong demand and such price increase will be able to pass through in the U.S., especially when U.S. prices are below the export price industry is seeing in other countries around the world.

Perfect. Thank you so much.

You're welcome.

Thank you. Your next response is from Mike Lighthead of Barclays. Please go ahead.

Great. Thanks. Good morning, guys. Good morning. Question on polyethylene. I think IHS is calling for a sizable polyethylene margin cut going into 4Q. Two of your main public competitors have offered a more upbeat, less bearish expectation for 4Q. So I guess what camp do you guys fall in here?

Well, as you know, polyethylene prices has moved a lot of things June of last year, and With newer capacity as we discussed coming up and more plants returning, the inventory balance is much better and hence there's a discussion of prices dropping starting the month of October and through December and possibly into early part of next year. The degree of drop really depends on the supply demand and also depends on our foreign competitor who use primarily oil-based feedstock, NAFTA, that's come from oil refining, as a feedstock. As you know, oil price is quite high now, and depending on the winter and temperature, there's talk about oil price even going even higher, depending how cold winter will be and how high natural gas will be in overseas markets. So that would put a floor as to how low the U.S. price would come down. So I think the trend is that the price is coming down from the highs we have achieved, but as to how much it will drop depends on several things. As I mentioned, one is based on oil price.

Got it. Fair enough. And then I wanted to circle back to capital deployments. I guess one of your upstream peers decided to buy in their MLP last week, and their logic for that was it's trading at a 9% yield, and they just felt the market isn't willing to appropriately value this kind of drop-down growth story that it historically was. And I look at Westlake Partners. It's operationally performed very well, but it's trading at 7%, 8% yield, fairly similar cheap EBITDA multiple to Westlake. I guess, would you contemplate buying back in your MLP, or are you still committed to keeping this public for the long term?

Mike, I think you'll continue to see that the performance of the partnership, and you saw the results this morning, continue to be very robust and very strong in the face of a number of weather-related challenges over the course of the last year or so. And so I think the model that we have performs well. It's something that I think the market has appreciated and the price has stayed right in there. And I think if you look at the cycle average trading value of Westlake Chemical and the cycle average trading value of the partnership, it has traded at a premium valuation. It is clear that being able to exercise that arbitrage in size has been challenged over the last couple of years, but I still remain optimistic that the underlying value proposition remains, and that's something that we'll continue to assess on an ongoing basis. So we're, you know, we're pragmatic. We'll look at this on an ongoing basis, but the value proposition still remains.

Thanks, guys.

You're welcome.

Thank you. Your next response is from Frank Mitch of Hermium Research. Please go ahead.

Good morning, and congrats on the record results in 35 years. You faced some negative impacts from Hurricane Ida in the third quarter. Can you size what that financial impact was?

Yeah, so Frank, you're right. It's been a challenging period of time between the various events that we've had over the course of time, whether it's been Hurricane Ida or even some unplanned outages. And so, you know, order of magnitude in the third quarter, it was between $80 and $90 million between the unplanned outages and Ida.

between the unplanned outages and Ida, a total of 80 to 90 million EBITDA impact? Correct. Great. And you guys have been on force majeure on VCM and PBC. Where does that stand? When do you think you'll be back up if you're not already back up?

Yeah, we are coming out of the force majeure, and we're trying to apply to regular supply to our customers' needs. Okay, so the force majeure has been ended, correct? Yes, but we're trying to come back as much as we can. We're still building inventory back as well as a balance. Gotcha. Thank you so much. You're welcome, Frank.

Thank you. Your next response is from Angel Castillo with Morgan Stanley. Please go ahead.

Hi, good morning, and thanks for taking my question. Just, Albert, curious on, you know, with your integrated business, you're able to look at the entire process from Coca-Cola to Vinyl. Curious how you're seeing the profitability in the merchant market, you know, and kind of the upstream side versus downstream and how that has evolved over the last six to 12 months as, you know, we've seen rationalizations and also just strong demand downstream and how you compare those.

Certainly. With the recovery of the economy, typically chlorine-related, which is PVC, would lead to economic recovery. And we have seen that caustic soda price was lagging behind for quite a while as PVC prices and margins started to improve. As demand for PVC products, whether it's infrastructure or housing-related activities, demand has really grown very fast. But now, as the global economy is recovering and expected to recover even next into 2022, demand for caustic, which lags behind the GDP, now is picking up. And we are seeing price increases in caustic as well. So I think we are seeing an all-time high for ECU values. But among the chlorine derivatives, even given the high chlorine price, the best value for chlorine still goes to PVC. So we are fortunate that, as Steve mentioned, we are number two globally in PVC in capacities and also number two in caustic. So combined, I think we are the leading chloral vinyl with PVC, chloral vinyl business in the world. So we're enjoying the benefit. And going forward, we see this continue as limited capacities adding on. It's expensive to add all these integrated capacities. And we are fortunate that we are in a good position to capitalize on the up cycle on this segment of the business.

Got it. That's helpful. And then, admittedly, this is a bit early, but on the borrower acquisition, as you think about, you know, getting a closer look at the business now that you've completed that, any sense for positive surprises and negative surprises in how you're thinking about that $35 million in synergies and potential for potentially higher or better synergies in that?

I'll talk to operations and Steve can talk about the financial synergies. We're very happy after... one month of ownership of the borough business. They have very good product leading positions, very good technologies, and also potential for growth. And some of the plans, the equipment, because of the sales process, they were starved of capital and hiring, so the plans were not running at full capacity. And now that we have stabilized and we're looking at opportunities to increase our production, and demand is very strong in housing materials, as you all may know, and also to reduce some of the operating costs with further capital investments and increase production. So very happy with that.

Let's see. Yeah, and so when you think of the run rate, the $35 million of annual cost-related synergies is really where we're still guiding people today, and as Albert noted, there are a number of of opportunities that we see here as you heard us speak to the issue that is significant in economies of scale and diversification of our leading building products business that he outlined earlier. And really we think that it enhances our opportunity to really look for improvements above just that $35 million of cost-related synergies. And so when you think of opportunities beyond that, We'll look for those, of course, but there are going to be opportunities both in the revenue line as well as in the cost line. And as we see those and get comfortable with those, we'll certainly telegraph those to you. Very helpful. Thank you. You're welcome.

Thank you. Your next response is from David Biglighter of Deutsche Bank. Please go ahead.

Thank you. Good morning, and Albert, congratulations as well for the results. Thank you, David. Albert, just on FAA, how do you expect supply and price to evolve over the course of 2022 in FAA?

Yes, certainly the future prices for FAA for 2022 actually is dropping from the highest in the first quarter, which are close to this quarter's price, and dropping down to the mid-low 30s from pricing. I presume that's because of the high oil price and gas price. There's more rigs going to oil and gas fields and more production. Not only people are completing wells, there's duct wells, but also in new drillings. So we are watching the rig counts, which is moving up. So with more production, there will be more ething available.

Very good. And just back on China, do you expect at a very high level less capacity to be added in China across the chemical landscape, given the government's enhanced focus on CO2 emissions going forward?

Yes, I think we're watching China very carefully. They are the largest consuming country for many of the chemicals and plastics, and also a producer. They're mainly an importer rather than an exporter of chemicals, and plastics, and so their appetite will be very important in affecting the global prices for chemicals and plastics.

Thank you.

You're welcome.

Thank you. Your next response is from Hassan Ahmed of Alembic Capital. Please go ahead.

Good morning, Alembic and Steve. Good morning, Hassan. I just wanted to go back to chloralkali and near-term pricing dynamics. Obviously, a bunch of moving parts in the chloralkali market. You've seen rationalizations of late. We've obviously seen the coal price escalation in China, the natural gas situation in Europe. And the commentary that I'm hearing from you both on the chlorine demand and the caustic demand side sounds very positive as you look into Q4 and 2022. Now, with all of that as a backdrop, I see pricing where it is, you know, cost take according to your pricing stack at $8.25 a ton, chlorine at $4.43 a ton. And obviously this is backward looking for Q3 when that gas, you know, averaged $4 a million BTU. So how are you thinking about, A, the sustainability of these pricing levels, or maybe even sort of as you look into 2022, You know, from the commentary, it sounds like there's potentially more upside in pricing.

Yeah, I was just looking at the IHS industry consulting firm forecast. They are looking December and January down $10 a ton for caustic, but April, May, they're going up $10 a ton in caustic. So I think people are forecasting that caustic price will stay at this level throughout next year. And in chlorine prices, they are looking at – another $150 ton price increase in January of 2022. So I think people are pretty positive. So long as the U.S. economy and the global economy continue to recover from the pandemic, demand for caustic and chlorine will be strong, and the derivative products also demand will be strong, and hence pricing would remain favorable going forward.

Very helpful, Albert. And, you know, as a follow-up, just wanted to go back to some of your commentary about China. You know, Selenese on its Q3 call actually made some very interesting comments about how they feel, you know, the capital cost advantage that the Chinese used to enjoy has waned away, how permitting has gotten much sort of harder, and obviously then, you know, we have ESG concerns all over the world. And we all know, obviously, one of the culprits of capacity addition over the last decade was China. But, you know, can you dig a bit deeper into what your expectations for capacity growth or lack thereof is in China, you know, over the next five to ten years?

That's a very good question. I think the Chinese government's five-year plans wish to upgrade industrial values going forward, and they want investments in high-tech areas and high-value areas and not the polluting basic industries. even though they may have labor advantage of building. But the labor cost is going up high every year. The wage increase is going up double digit for many years now. So wage-wise, they cannot compete with Vietnam or other countries who have a pretty good, capable workforce, but at lower rates than in China. So I think the Chinese government are also very conscious of... global warming as we hear even with the COP26 going on. There are various plans and we heard India now also wish to have a, I think, 2070 target of net zero in emissions. So I think the whole world are working towards area and as our industry, our goal also is to reduce, as you mentioned, in our comment on reducing greenhouse gas emissions in our productions as well. So I think this will have impact on new additions on the basic industries in China and around the world.

Very helpful, Albert. Thank you so much.

You're welcome. Thank you.

Thank you. Your next response is from Alex from KeyBank. Please go ahead.

Thank you. Good morning, everyone. Albert, you've always emphasized return on capital over size, but in your current building products, would you like to be significantly larger over the next few years through additional acquisitions? Do you have aspirations to be a bigger building products player?

So, Alex, when you think about the focus that we have in deploying capital, it's not size that really is important. It's the return opportunities that we see. And you can see with the investments that we've made this year, the investments were focused in really putting capital in markets that gave us scale in sales channel, but also brought real compelling value, both in our LASCO acquisition, the Boro acquisition, and the Dymex acquisition. So these were all focused at really making sure that we not only had scale, but value being driven, of course, with that scale. So it's important to us to make sure that as we grow the businesses, we're doing it with always a value focus. So that's our focus. The answer is over time, certainly there'll be additions to both the building products businesses and the various chemical businesses, but it's really focused at making sure they're all contributing the appropriate kind of returns given the risk adjustment to invest in those businesses.

Thank you, Steve. As a follow-up, any way you could size for us the cost increase for your business in Europe? Did you hire energy prices in the fourth quarter?

So as you think about it, you know, you've got, of course, higher energy costs and higher natural gas costs. And so without kind of segmenting out which is applicable in Europe and in North America that you know that our Our sensitivity to higher cost of gas, as an example, is a dollar an MMVTU is about $100 million of EBITDA. But we haven't broken that out necessarily in terms of the contribution or the impact that has on our European versus our North American businesses. But, of course, it's more heavily focused on the North American business because that's where the biggest footprint we have is.

Sorry, just to clarify, Steve, the $100 million includes Europe.

It does.

All right. Thank you.

You're welcome.

Thank you. Your next response is from John Roberts of UBS Union Bank Switzerland. Please go ahead.

Morning. This is Matt Skowronski on for John. Given the recent acquisitions to the Westlake portfolio, should we be expecting a step up in capital expenditures in future years?

And so when you think about our 22 capital program, we'll be giving that a good hard look this year. And as we think about finalizing our 2022 budget, we'll talk about the capital spending budget in our fourth quarter earnings call, which will be in February, and we'll give guidance for that capital number then. But, of course, that business has opportunities to grow and develop the business that we've acquired, both Borough, Alaska, and Dymex. And so certainly you would expect there to be some capital deployed in that But let me wait until we've finished our capital budgeting for 22 to size it for you. Thank you.

You're welcome.

Thank you. Your next response is from P.J. Juvicar of Citi. Please go ahead.

Hi, Eric Petrion for P.J. Good morning, Albert and Steve. Good morning. What does your order backlog look like in building products versus more typical or, you know, historical levels, and does Boral have a similar backlog?

Yes, I think for most of the building products business, inventory is very low and demand is very high. But as I said earlier, we're heading into the fourth quarter of the winter season, and typically orders slow down and manufacturers are producing inventory for the spring season. But because of the shortage of products, there may not be much of a slowdown as typical season would expect. So time will tell. We'll see whether we have a dramatic slowdown or a little bit of a slowdown.

Anything specifically on days inventory? Is it eight weeks versus more normal as four to six?

No, much less than eight weeks. much less than eight weeks. Today, most building product inventories are quite low.

Okay. And then, secondly, on your green vin, the low-carbon caustic soda, how do you see the scale-up of tons? And, you know, what kind of end markets are adopting this first? Is it Illumina or other inorganic or organic end markets?

We're still seeing the industry adapting to it. I think A lot goes to the consumer products. As you know, caustics is used a lot in soap and other consumer products. So I think those are probably the easiest to get consumers to be attracted to the green bean. But however, as we see, other industries want to reduce their greenhouse gas emissions. Scope 1, Scope 2, and Scope 3, this will also help.

Thank you.

You're welcome.

Thank you. Your next response is from the line of Steve Barnes of Bank of America. Please go ahead.

Hi, yes, this is Matt on for Steve. Albert, good morning. So you'd been under force majeure in vinyls for a good chunk of 3Q, which kind of presumably hurt your PVC and caustic export tonnage in particular. So if we think about the transition to 4Q, what do you expect to see from, like, a quarter-over-quarter increase in available volumes, given these FMs have lifted? And then what markets would this additional tonnage find itself?

Yes, as we mentioned, that... We are getting over the impact for IDA and other unplanned outages, and so our force majeure has been removed, but we're still moving towards building inventory and provide as much as we can to our customers' needs. Domestically, we have not been exporting much at all, even though the export prices have been better than local U.S. prices, but we want to make sure our domestic contract customers get a benefit first. So as the availability improves, we'll enter the export market.

Okay. Is there any indication on what the... Well, I can ask offline, but conversely, I mean, when we think about the PVC price momentum and the interplay with the global cost curve, right, like so we spoke a bit about China putting caps on coal prices, and we've seen a pretty significant deflation in the Chinese coal market over the last couple weeks. So where do you expect PVC prices to ultimately settle out when production rates normalize, presumably at some point next year? Is this back, if we were to look at the IHS benchmark, is this something that we find ourselves back in the 60 to 70 cents a pound range that we've been at, you know, we were at for most of the last decade, or is it some number that's higher than that?

That's a good question. I'm looking at IHS's forecast for domestic U.S. price. The average price for 2022 will be $112.8, and average price for 2021, current year, is $1.05. So they're looking at a higher average price in 2022 than this year's. On the export side, they are looking at average of 82.6 cents a pound. for 2022, and for this year, looking at average price of 78.2. So the average price for next year is higher than this year. However, October price, they're looking at 91.9 cents for export. So they're expecting next year's price export to be lower. And time will tell whether that will come to fruition or not.

I guess maybe a better question to ask is what do you think the normalized price of PVC is? Is it $112 that IHS is suggesting?

Or do you think it's... Yeah, but these are contract list price. So as you know, depending on the customer's, there could be discounts over these list contract prices. But I think for a ratio comparison, for 2020, the same contract US price was $0.74. You can see there's a large variations. So there's no normal price. I think it's partly feedstock cost, as Steve mentioned. Power costs in the U.S. are impacted a lot by natural gas prices, and natural gas price goes up, power price goes up, and caustic and chlorine cost goes up, and ethylene as well. So PVC, there's no absolute price. It's a matter of what ethylene, power, caustic, all that will lead to the cost basis. And then supply-demand will judge how PVC price would behave and run globally. I think right now, the U.S. and Europe have high prices, but in the past, Europe has the highest PVC price. So it's not only cost basis supply-demand, but also global supply-demand. So all that has to play into what the price would be. So it's very dynamic. Thank you.

Thank you.

You're welcome.

This is from Matthew Blair of Tudor Pickering Holt.

Hey, good morning, Albert and Steve. Good morning. Thank you. I just wanted to check. Is the turnaround lasting a little bit longer than expected? Previous notes I have is, you know, about 60-day turnaround. And then it also looks like your CapEx for 2021 came down by about $150 million. So could you just talk about those dynamics?

Matthew, you're right. The capital expenditure plan is lower than the earlier guidance we gave, and so the guidance here is between $600 and $650 million for the 21-year. And as I said, I'll give some guidance for 22 once we finalize our budgeting plan, and we'll discuss that in February of next year for 22. For the turnaround of Petro II, you're right. It is extended a little bit longer than planned and is expected to be completed in December. Thank you. Thank you.

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

Thank you again for participating in today's call. We hope you'll join us again for our next conference call to discuss our fourth quarter and full year 2021 results.

Thank you for participating in today's Westlake Chemical Corporation third 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, November 9, 2021. 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. To access the code for both numbers is 249-5584. Goodbye.