This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk11: Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Corporation's second quarter 2024 earnings conference call. During the presentation, all participants will be in a listen-only mode. After the speaker's remarks, you will be invited to participate in a question and answer session. As a reminder, ladies and gentlemen, this conference is being recorded today, August 6, 2024. I would now like to turn a call over to your host, John Zeller, Westlake's Vice President and Treasurer. Sir, you may begin.
spk03: Thank you. Good morning, everyone, and welcome to the Westlake Corporation conference call to discuss our second quarter 2024 results. I am joined today by Albert Chow, our Executive Chairman, Jean-Marc Gilson, our President and CEO, Steve Bender, our Executive Vice President and Chief Financial Officer, and other members of our management team. During the call, we will refer to our two reporting segments, performance and essential materials, which we refer to as PEM or materials, and housing and infrastructure products, which we refer to as HIP or products. Today's conference call will begin with Albert and John Mark, who will open with a few comments regarding Westlake's performance. Steve will then discuss our financial and operating results, after which Albert will add a few concluding comments, and we will open up the call to questions. Today, management is going to discuss certain topics that will contain forward-looking information that is based on management's beliefs, as well as assumptions made by and information currently available to management. These forward-looking statements suggest predictions or expectations and thus are subject to risks or uncertainties. These risks and uncertainties are discussed in Westlake's Form 10-K for the year ended December 31, 2023 and other SEC filings. We encourage you to learn more about these factors that could lead our actual results to differ by reviewing these SEC filings, which are also available on our investor relations website. 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 website at westlake.com. We have also included an earnings presentation, which can be found on the investor relations section of our website. A replay of today's calls will be available beginning today, two hours following the conclusion of this call. This replay may be accessed via Westlake's website. Please note that information reported on this call speaks only as of today, August 6, 2024, and therefore you are advised that time-sensitive information may no longer be accurate as of the time of any replay. Finally, I would advise you that this conference call is being broadcast live through an internet webcast system that can be accessed on our webpage at westlake.com. Now I'd like to turn the call over to Albert Chow. Albert?
spk10: Thank you, John. Good morning, everyone. We appreciate you joining us to discuss our second quarter 2024 results. I'm pleased to announce that we reported record quarterly results for our HIP segment in the second quarter of 2024. which contributed to year-over-year company-wide earnings growth this quarter. We achieved this despite a slower-than-expected global macroeconomic recovery following the downturn in macroeconomic conditions that began in the second half of 2022 and the average annual rate of housing starts through June 2024 below the average for 2023. For the second quarter of 2024, We reported net sales of $3.2 billion, EBITDA of $744 million, net income of $313 million, or $2.40 per share, which were each an improvement from the second quarter of 2023, as we benefited from higher volumes across the board in our HIP segment, led by pipe fittings and sidings and trim, and also higher volumes across our materials portfolio in PEM, that by PVC resin and caustic soda. Average sales price in both segments was lower year over year in the second quarter, primarily due to the decline in PVC resin, caustic soda, and piping fitting prices that occurred last year. On a sequential basis, HIP volume rose by 15%, driven by seasonal increases in demand and product cross-selling with stable average sales price. Volume gains sequentially in PAM were 1%, while average sales price rose 4%. For PAM, this was the first sequential increase in average sales price since the stocking cycle that we experienced last year. During the quarter, We continue to see the benefits of our vertical integration strategy as strong demand for pipe and fittings and siding and trim in our hip segment helped drive PVC sales volumes, improving our PEM PVC sales mix and margins as we're able to shift sales volumes from less attractive export markets. We also saw continued benefits from a portfolio diversification strategy during the quarter, as the slow recovery in PAM margins and earnings due to continued weak global industrial demand was supported by solid hip earnings growth and margin expansion from growth in residential housing construction and infrastructure bill-related spending. Overall, we are very pleased with the performance of both our segments and the integration benefits of our portfolio of businesses. and the value this strategy delivers to Westlake and our investors. We're happy to welcome Jean-Marc Gilson to the Westlake team with appointment as our new president and CEO. He's a seasoned industry leader with a proven track record of delivering sustained financial performance with leadership roles in the US, Europe, and Asia. Most recently as president and CEO of Mitsubishi Chemical Group, Jean-Marc's appointment is the culmination of a thoughtful succession plan that ensures the continuation of our strategy to create long-term value for our shareholders. I would now like to turn the call over to Jean-Marc to provide some initial thoughts. Jean-Marc?
spk06: Thank you, Albert, and good morning, everyone. It's a pleasure to join Westlake at such an exciting time in the company's history. While I am new to the company, I've been around the chemical industry for many decades in a variety of leadership roles, and I have long admired Westlake for its focus on safe and reliable low-cost operation and its environmental stewardship. I also recognize that shareholders' value Westlake's history of profitable growth through disciplined investments to create long-term value. Since founding Westlake nearly 40 years ago, Albert and James, along with the rest of the board and leadership team, have created an incredible company that improves the lives of so many people around the world and thus it's an honor to be given the privilege to build upon such a successful foundation. While I have only been at the company for a few weeks, I've had the opportunity to meet many of my coworkers, and I wanted to share with you some initial thoughts. First, I look forward to building on the successful strategy and focus on driving value for our customers and shareholders. Second, the current portfolio is a great mix of globally cost advantage materials in PEM and innovative differentiated products with strong brands in HIP. Third, I think both segments complement each other synergistically as demonstrated by the solid second quarter financial results that we reported today. And I think that there is a solid runway to continue to grow the company in these two verticals for the foreseeable future. I look forward to sharing more thoughts with all of you in the near future. I would now like to turn our call over to Steve to provide more detail on our financial results for the second quarter. Steve?
spk02: Thank you very much, Jean-Marc, and welcome to Westway. And good morning, everyone. Westlake reported net income of $313 million or $2.40 per share in the second quarter on sales of $3.2 billion. Net income for the second quarter of 2024 increased $16 million from the second quarter of 2023, primarily due to higher sales volumes for all of our product lines in our HIP segment, particularly for pipe and fittings, siding and trim. When compared to the first quarter of 2024, net income increased by $139 million in the second quarter, driven by an increase in demand from a seasonal pickup in construction activity, cross-selling in the HIP segment, and higher average sales price in our PIM segment, particularly for PVC resin and polyethylene, reflecting some improvement in the supply-demand picture as the global markets slowly recover. During the second quarter, we continue to make progress on our company-wide cost savings initiative with approximately $50 million of savings delivered during the second quarter. These savings combined with those achieved in the first quarter total approximately $85 million of long-term cost reductions in the first half of 2024 towards our full-year target of $125 to $150 million. These efforts build on the $110 million of cost reductions that we delivered in 2023 as we continue our focus on capturing acquisition synergies and improving our reliable, cost-effective business model. For the second quarter of 2024, our utilization of the FIFO method of accounting resulted in a favorable pre-tax impact of $12 million compared to what earnings would have been reported on the LIFO method. This is only an estimate and has not been audited. Before I discuss the details of our segment results, I want to provide some high-level thoughts on the quarter. In the second quarter of 2024, we saw a continuation of the market trends that we experienced in the first quarter, including building products demand growth, driving sequential sales volume improvement by 15%, and modest improvement in demand for materials in our PIMS segment. which supported improvement in PIM average sales price of 4% during the second quarter. These trends, combined with our cost-cutting and synergy attainment efforts, drove record quarterly EBITDA of $336 million and record quarterly EBITDA margins 28% in our HIP segment and improvement in our PIM EBITDA margin to 19% from 13% in the first quarter. are occurring against a backdrop of historically lower levels of residential construction activity that is necessary to meet society's needs for housing and elevated mortgage rates. This is a testament to our positioning in the market and margin improvement efforts. Combine the solid growth in HIP and progress towards margin recovery in PIM drove a return to year-over-year quarterly earnings growth for Westway despite the current global microeconomic conditions. Moving to the specifics of our segment performance, our housing and infrastructure products segment produced record EBITDA of $336 million on $1.2 billion of sales. EBITDA increased $92 million year-over-year due to a solid 16% increase in sales volumes. particularly for pipe and fittings and siding and trim. In addition to the sales volume growth, the earnings improvement was supported by lower material cost compared to the prior year period and acquisition synergy and cost-cutting benefits. When compared to the first quarter of 2024, HIP segment sales of $1.2 billion rose by $150 million, driven by a 15% sequential increase in sales volumes and stable average sales prices. Housing product sales of $1 billion in the first quarter increased 15% due to solid sales volume growth in each major product category. Infrastructure product sales of 184 million in the second quarter increased 12% from the first quarter of 2024, primarily due to higher demand for a larger diameter municipal pipe for water applications. HIP's EBITDA margin of 28% set a new quarterly record, and the margin expansion from 22% in the prior year period was primarily due to higher sales volumes and lower material cost, while the sequential improvement from 25% in the first quarter of 2024 was primarily due to higher sales volume. Moving to our PIMS segment, second quarter EBITDA of $391 million was lower than the second quarter of 2023 EBITDA of $435 million due to lower average selling prices, particularly for caustic soda and PVC and epoxy resins. While lower sales prices drove a year-over-year decline in EBITDA, our sales volumes in all product categories in our PIMS segment saw improved customer demand compared to the second quarter of 2023, resulting in an 11% increase in sales volume. On a sequential basis, PIM segment EBITDA of $391 million in the second quarter increased by $138 million from the first quarter of 2024 as a result of higher average sales price, primarily driven by higher prices for PVC resin and polyethylene. While we are pleased with the progress that PIM has made in recovering margins for most of its products, profitability in our European epoxy business remains challenged in part due to the adverse impact low-priced import competition. As a result, and after careful consultation with key stakeholders, last week we announced plans to temporarily cease operations and mothball our ECH unit in the Netherlands to improve the profitability of our epoxy business. We expect to incur pre-tax costs of approximately 80 million euros related to the mothballing of the unit. with substantially all of those costs expected to be recorded in the third quarter of 2024, with cash outflows expected to occur over several years starting in 2025. We expect these actions will materially improve the financial performance of our European epoxy business without having any impact on our customers. Our U.S. epoxy anti-dumping case continues to progress with an expectation that provisional duties will be set sometime later this year. Likewise, the European Union has launched a similar anti-dumping investigation. Westlake believes in free and fair trade, and thus the anti-dumping investigations and the potential duties to be applied, along with our proactive actions in Europe, we believe will level the competitive markets and restore our epoxy business to profitability. Shifting to our balance sheet, As of June 30, 2024, cash and cash equivalents were $3 billion, and total debt was $4.9 billion, with a staggered long-term fixed-rate debt maturity schedule, including $300 million of maturing debt that we expect to retire in the third quarter of 2024 using our strong liquidity. For the second quarter of 2024, net cash provided by operating activities of $237 million fell included the cash payment of the litigation charge we took in the fourth quarter of 2023. Our cash generative business model provides us with a platform to deploy our balance sheet strategically in order to create long-term value for our stakeholders. Now, let me provide some guidance for your models. Based on our current view of demand and prices, we continue to expect 2024 revenue in our housing and infrastructure product segment to be between $4.3 and $4.6 billion, with possible upside beyond our EBITDA margin guidance of 22%. We continue to expect our total capital expenditures to be approximately $1 billion, which is similar to our depreciation and amortization run rate. As a reminder, this includes cost for a planned turnaround at our Petro-1 ethylene unit scheduled to begin next month that is projected to last approximately 60 days. We continue to target 125 to $150 million of company-wide cost savings in 2024 with approximately $85 million already achieved in the first half of this year, including $50 million in the second quarter. For the full year of 2024, we expect our effective tax rate to be approximately 23% and we expect cash interest expense to be approximately $160 million. Now I'd like to turn the call over to Albert to provide the current outlook for our business. Albert? Thank you, Steve.
spk10: Overall, we are pleased with the performance in the second quarter of 2024, despite the challenging macroeconomic environment. As we look ahead to the remainder of the year, we remain cautiously optimistic, and we will continue to manage our production and inventory levels to customer demand. While all the books remain solid, unusually wet and hot weather conditions in many parts of North America, combined with a recent slowdown in U.S. housing starts and remodeling activity, could have an impact on our sales volume in the second half of 2024. ISM readings in the U.S. and Europe slipped during the second quarter, while similar metrics in China also reflect slowing conditions, which could translate into a slowing demand for some of our PEM products. Overall, while the pace of global economic growth remains unclear, we're encouraged by the trend of solid year-over-year volume growth in HIP and volume and margin recovery in PEM delivered in the second quarter of 2024. As we look beyond this year, we expect each of our segments to continue to improve. As with August, as are June, HIP teaching event, we expect HIP sales to organically grow at a 5% to 7% long-term compound annual rate with a large pool of attractive inorganic growth opportunities. We expect this growth to be supported by the structural undersupply of homes in North America and aging housing stock and spending related to the infrastructure and jobs act. We will continue to invest in our brands, capabilities, and our people to continue creating value over the cycle for our investors. Turning to PEM, we remain positive on the outlook for long-term growth, driven by increasing global consumer activity and demand for clean water, electrification, housing, transportation, and renewable energy. favorable demographic trends, and our new product innovations, including our sustainability offerings. We expect these trends to support a better balance between global supply and demand for our products in our PEM segment. With our strong focus on our cost structure and productivity, we are well positioned to leverage volume growth when market returns to normalized growth rates. Turning to our balance sheet, we continue to look for opportunities to put our $3 billion cash balance to work in a disciplined manner that will create long-term value for our shareholders. This includes both identifying acquisition candidates that can exceed our risk-adjusted cost of capital and returning cash to shareholders through both dividends and share repurchases. Finally, we continue to advance our sustainability efforts. During the second quarter, adoptions of our innovations to address customers' sustainability requirements increased, including significant growth in our PVC-O pipe, green bean PVC resin, and pivotal post-consumer resin for flexible polyethylene packaging. The market reception for our PVCO pipe product has been strong and thus we announced plans to expand our capacity with a new plant at our Wichita Falls, Texas site to meet growing customer demand. As a reminder, we launched PVCO pipe in North America in 2021 and we have seen strong customer appreciation of PVCO's sustainability attributes since they are lighter in weight, easier to install, and provide increased performance compared to standard PVC pipe. Looking forward, we will continue to invest appropriately to bring new products like PVCO to the market and expand our production capabilities for existing products to help our customers address their sustainability needs. Thank you very much for listening to our second quarter earnings call. I will now turn the call back over to John.
spk03: Thank you, Albert. Before we begin taking questions, I would like to remind listeners that our earnings presentation, which provides additional clarity into our results, is available on our website, and a replay of this teleconference will be available two hours after the call has ended. Jacinda, we will now take questions.
spk11: Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster.
spk13: Our first question comes from Patrick Cunningham at Citi.
spk15: Hi, good morning and congratulations and welcome to Jean-Marc. Maybe my first question just on the, you know, sales and margin guide for HIP that you maintained, but, you know, mentioned there's potential upside within that. You know, what do you see as the biggest potential sources upside there? And does the current guide assume materials costs go up or hold relatively stable in the second half and maybe some modest price declines there? Thank you.
spk02: Yeah, good morning, Patrick. And yes, you know, as we think about the outlook for the HIP segment, strong results this quarter, and our guidance really was to see that there is potential upside to the guidance of 22% that we've provided. We've seen increases in materials cost in PVC resin, and we continue to think that they'll continue to be a reasonable level of construction activity. We've seen the guidance from a number of research firms like NIHB and others that show housing starts could decline later this year. And so as we think about that, we still think the cross-selling and capability to continue to push forward in value propositions for our products remains, which is why we provided some potential upside in that guidance.
spk15: Understood. Very helpful. And then are you, you know, based on that, are you anticipating, you know, any sequential improvement in the PEM segment? You know, I know you cited some industrial softness there, but, you know, it looks like there should be continued pricing strength in polyethylene and PVC. So what should we expect in terms of the PEM segment sequentially?
spk10: Yes, certainly we have been able to achieve price increases in both polyethylene and PVC. And export prices are also increasing. be moving up. So we are seeing some stabilization of prices and prices are moving up. Stocking, we believe, is over. Then more so is what the global economic conditions look like going forward. And with potential reduction in interest rate by the Fed should be a boost for the U.S. economy and global economy for the future quarters into next year.
spk13: Thank you. Welcome.
spk11: Thank you. One moment for our next question. Our next question comes from Babish Lodhyat at BMO Capital Markets.
spk16: Hi, good morning, Albert and John, and welcome, John.
spk05: Good morning.
spk16: Hi, can you help break down some of the success areas on your margin expansion that you are seeing in the HIP business? And maybe how much of that is driven by your PVC pipes and compounds business and how much is the rest of the building products platform?
spk02: Yeah, it's a good question. And you see that we called out specifically our siding and trims business and our pipe and fittings business as strong contributors in the quarter's results. And so those two subsegments of HIP were very strong contributors to say siding and trim and our pipe and fittings business made good contributions this quarter.
spk16: And then maybe if you could share your latest views on ethane here. Prices are at historic lows, clearly good for Westlake. We also saw polyethylene prices, price hike go through in July. Just a short-term view on both of those things.
spk02: Yeah, and so as you think about the ethane prices, you have seen the average price for ethane has trended lower since the second quarter. And while we don't know what the third quarter will average out to be, Looking at the forward curve, ethane does look like it will trend somewhere between 3 to 5 cents lower if you look at the forecast from many of the consultants on the forward curve for ethane, which would be constructive for our value.
spk11: Thank you. One moment for our next question.
spk13: Our next question comes from Michael Sisson at Wells Fargo.
spk17: Hey, guys. Nice quarter, and welcome, Jean-Marc. I guess my first question, when you think about PEM sequentially into the third and the fourth, I think the outlooks for ECU margins are kind of sluggish, I guess, from the consultants. Do you think How do you think the progression there should unfold if demand stays around these levels for the second half?
spk10: Yeah, demand for PAM products are pretty stable, and I mentioned actually demand for polyethylene PVC being quite good, especially in the export market, and we have been able to raise prices. On caustic and chlorine, the demand is stable. And the price is more or less stable. There's a few dollars up and down depending on which quarter it goes. But I think the demand is in the U.S. especially. It's stable and the stock is pretty much over. It's reflecting the true economy's demand for various products.
spk17: Got it. And then just a follow-up on pipe and fittings. Sounds like that business continues to show really good strength. Do you think growth will be as good in the second half? And then I was just curious on profitability. You have a competitor out there that shows margins, you know, well above yours. Any reason why your profitability wouldn't be sort of similar to theirs? You know, kind of that 50, 60% range in operating margins?
spk02: Well, you know, Mike, I think when you look at the strength we're seeing really in the materials that we see in our pipe and fittings business, again, you know, we're continuing to see really good value really in both the pipe and the fittings application. And we're one of the few players that really are in that integrated pipe and fittings solution business. You know, certainly our place really in the large municipal water solutions, both fresh and stormwater, is a big driver for the value proposition we bring forth. And it really is a focus at driving value for those customers and looking for value for our integrated stakeholders in this process. So it really is looking to make sure that the solutions that we have both in our pipe and our fitting solutions provide real value. We get focused really on the value rather than the volume in this business.
spk13: Thank you.
spk21: You're welcome.
spk11: Thank you. One moment for our next question. Our next question comes from Frank Meach, Afrinimum Research, LLC.
spk08: Thank you and good morning, and let me also add my congrats to Jean-Marc. If I could just follow up on that last question and answer, Albert, in terms of the stability of demand in PEM and the price increases and the lower raw materials, it sounds as if we're looking at, reading between the lines, it sounds as if we're looking at a flat to up third quarter in PEM, perhaps somewhat moderated by the Petro-1 turnaround. So just curious if I'm thinking about that in the proper context, or perhaps what sort of level of impact do you believe the Petro-1 turnaround, which starts in September, will have on 3Q and 4Q?
spk10: Yeah, certainly the petrol won't turn around. It will have some impact. But I just want to remind that Westlake is a net buyer of ethylene. And even though ethylene price has reduced, which is great, it helps our 4.7 billion pounds of ethylene capacity. But we're net buyers. We're paying high ethylene prices. And also we mentioned that we are booking the mothballing of our plants in the Netherlands, which also, even though it's not a cash project, outflow in third quarter. We're booking in the third quarter. So those accounting costs will impact our third quarter results.
spk08: It's admirable that you're highlighting the mothballing costs since 99.9% of companies would put that in other or restructuring or what have you and and strip it out from EBITDA, which I suspect the street will do on its own. And Albert, if I could just ask you, now that Jean-Marc is in place, and it obviously will take him a little bit of time to get up the learning curve, how do you view your future involvement within Westlake over the next year or two? What sort of level of involvement, if you mind me asking that question?
spk10: Oh, certainly, certainly. We are going through a transition. As John Mark mentioned, he's been here only a few weeks. And even though he's a seasoned veteran in our business globally, there's still a lot of Westlake nuances he has to understand and also visiting plans, visiting customers, and so on and so forth. And we have over 100 facilities around the world that he'll be spending some time visiting some of the people. But as... Moving up to the chairman position, I will do what my brother has done, James, and try to follow his footstep, even though he's still a senior chairman. So looking over my shoulder, make sure I'm doing a good job. But it's a team effort. Westlake is really where our team works together closely. And we've done well. And John Mark will continue the culture that Westlake established over the last 40, almost 40 years. And it's our goal. So I'll learn a lot from Jean-Marc from experience globally. And I also learned a lot from you guys. A chance to meet you and look forward to going with Jean-Marc to meet our key investors, analysts to communicate and to learn from you and to march forward and communicate what Jean-Marc's view of Westlake strategy going forward, which is in line with our history, but we bring a lot of new ideas and insights into our business.
spk08: Terrific. Thank you so much.
spk10: You're welcome.
spk11: Our next question comes from Alexey Efremov at KeyBank.
spk19: Thank you. Jean-Marc, wish you best of luck as a CEO. And Albert, can you tell us how you approached the search for Westlake's new CEO? You could have focused on a candidate with building products experience, commodity chemicals experience, and Jean-Marc's bio suggests significant experience in international specialty chemicals.
spk20: So should we read anything into this?
spk10: Well, the board and along with James and I and some of our key people has done a very thorough search for the right candidate to be the new CEO. It's not an easy task. As you mentioned, we have a very different portfolio from typical chemical company and also with our global position. So we're very glad to find Jean-Marc. who has, as I mentioned, a tremendous global experience and has a technical background. And so I think the PEM business, the HIP business will be a little bit newer to Jean-Marc, but he has been involved in building homes and all that. So he understands the importance of housing to people around the world. And I think this will be a tremendous driver for, for demand for chemical products and home building products. As you know, our HIP business are primarily North American based. So we have good technology that we mentioned, and we will find opportunities we can apply our technology to other parts of the world.
spk20: Thank you, Albert.
spk19: And then turning to your current business, the margin upside this year in HIP, Are you surprised yourself or perhaps you kind of recognize you were too conservative? And if you are surprised, what do you think went better this year than expected?
spk10: Well, the demand, we mentioned the volume. The volume was strong, stronger than 2023 and stronger than first quarter 2024. Even though, as Steve mentioned, the housing start projected by NHHB, I think it's 1.4 million units last year, projecting 1.3 million units this year, it's a reduction. And we're hearing about the various companies reported on the housing construction business. But I think going forward with the Fed's reduction interest rate and 10-year interest rate has dropped to 3.8% from 4.5% or something just a few months ago. it should really be very helpful for the housing industry going forward. Maybe not right away, but that's the trend that will help not just housing industry, help the U.S. economy as a whole, and that will also help the global economy as a whole with lower interest rates. So as Steve and Jean-Marc mentioned, we are positioning ourselves to be ready for it. But, you know, the third quarter usually also is a good quarter from a volume point of view, but fourth quarter will be seasonally slow. That's normal. And so depending on how fast the Fed drops rates and the economy in general, we cannot predict what volume growth or changes will be in the short term. But we believe on a longer term basis, the next few several years with lower interest rate should be definitely positive for the U.S. economy and for our industry.
spk20: Great. Thank you, Albert.
spk13: You're welcome.
spk11: Our next question comes from Josh Spector at UBS.
spk18: Yeah, hi, good morning. I want to go back to the pipes and fittings piece for a moment here. I guess I understand the point about value over volume, and that's driving some of the things for Westlake. But I guess when we look at some of the smaller regional players, I mean, EBITDA margins and spreads are up very meaningfully, 2, 3x versus a few years ago. So it's not just Westlake. So I'm just curious of your view, if you can maybe comment at all on one I mean, is your pipes and fittings margins materially higher than the hip segment average today versus where it was? And then two, the sustainability of that pricing and spreads. And three, has something changed structurally supply-wise that would justify a much higher spread in that downstream part of the business? Thanks.
spk02: Yeah, so Josh, good question. And I think what you've seen us do is really focus really on an integrated solution. And what I mean by that is a solution that provides not only pipe but also fittings that go with that. Recent acquisition we undertook two years ago was a fittings business. This is Alaska acquisition I'm referring to, where we have not only larger diameter fittings in our portfolio, but this transaction allowed us to fill out that portfolio offering. So what attributes I think the improved value proposition that I think we provide is being able to provide an integrated solution to our customers. That is not only providing the pipes that are necessary, but also the elbows, arms, fittings that go with those wide variety of sizes in pipes. So that integrated solution of pipes and fittings is important. We're the only player that really provides that integrated solution in North America of pipes and fittings. And I think whether you're selling it as individual components at a job site or selling it as an integrated pipe and fitting solution at a job site, that's really where the value proposition, I think, has come through. On top of that, you've also seen capital begin to flow from the infrastructure bill, which is adding volume to the business. And this business, with that added volume, certainly provides scale. So that allows us to really drive real value for that pipes and fittings business, which is why we've called it out last couple quarters as really value drivers for the results of each quarter.
spk18: Okay, thanks for that. But I guess maybe to follow up is that when I look at peers that are smaller and don't have those advantages, reporting margins of 50 to 60 percent, I'm not sure if you can comment on why that would be the case. And I guess from my view, I'm thinking about it in the context if Westlake is over-earning to some context there, or if you'd say, hey, your margins are much less than that, what I just said, then it gives us some degree of comfort that maybe it's at a more manageable level going forward.
spk02: Thanks. Yeah, I can't speak to others' margins in the business. That's something that you'd have to have a dialogue with them about. What I can say is I believe that the value proposition we're providing through the integrated solution of resin, PVC resin going into our pipes and solutions, are long-term sustainable. These are really good margins we're providing, and I don't believe we're over-earning in a period such as this. As Albert noted, when you take a look at the housing starts, we're still well below the numbers that we need for the construction activities here in North America. And even if you look at the starts that we've seen even this past quarter, about 1.3 million starts per the U.S. Census numbers. NAHB shows it's trending lower by the end of the year But nevertheless, I'd say we're not really over-earning because I think we're really providing real value, both through the building products, the HIP side of our business, as well as the integrated value we get by providing that resonant cross to our HIP segment.
spk13: Okay. Thanks, Steve.
spk11: Our next question comes from Hassan Ahmed at Olympic Global Advisors.
spk00: Morning, Albert and Steve, and congratulations, John Mark, on the new role. First question around just, look, I mean, you guys did on an annualized basis almost $3 billion in EBITDA in Q2. And I obviously appreciate the comments that Steve just made about how you guys aren't over-earning in certain segments. If I were to venture a guess, I mean, just looking at the business environment, you guys are well below normal with significant upside to hitting normal business conditions. So now, with that said, how should we think about this annualized $3 billion number that you just reported relative to where normal earnings should be? I mean, is there significant upside to that number? in a normalized business environment?
spk02: Well, Hassan, thank you for the question, but I would say we certainly still see headwinds, and we called out some of the indices, the ISM indices, both here in the U.S. as well as similar indices in Europe and in Asia. And so while I would say there is significant operating leverage in the business, we certainly are still at price points well below those we saw in 23 and 22. And so while we do expect that we're seeing a better supply-demand balance given the pricing initiatives, we've seen a number of our PIM products, we're still not to a point where we're back to those levels of pricing back in 23 and in 22. But there certainly is operating leverage in the PIM side of the business.
spk00: Understood, understood. Very helpful. And as a follow-up, you know, maybe, you know, I understand it's, you know, the first couple of weeks for John Mark in his new role. So maybe this is a question both for him and for Steve as well. And obviously, Albert, you know, I'm just trying to get a sense of, you know, obviously the portfolio has changed a fair bit over the last couple of years. And, you know, as you guys are very well aware, you know, us sitting here as analysts, one of the things that we are looking for is a valuation multiple re-rating, right? So how sort of, you know, as you went through the whole interview process, Albert, you know, what was the thought process with regards to that? And maybe John Mark can give us his sort of high level views with regards to, you know, what he's thinking in terms of potentially getting that valuation re-rating and making the market more sort of see this portfolio change that has transpired.
spk10: Yeah, well, as you know, Hassan, that we look at investments that bring risk-adjusted return above our cost capital and also optimistic when we want to buy companies or whatever it takes to agree on a deal. So, but we have been building... HIP business segment, as Steve mentioned, a lot of synergies, both from the HIP to PAM site, as well as within HIP. So a lot of cross-selling opportunities come along, and we'll continue to pursue those opportunities as they arise. So our job really is to bring value to our investors. How the streets see us as multiple uptick or whatever that's out of our control, All we do is bring sustained return to our shareholders on a long-term basis. That's the key, and not for short-term gains. And we hope that the market will see the value that we bring, but it's out of our control.
spk00: Very helpful, Albert. Thank you so much.
spk13: You're welcome.
spk11: Our next question comes from Mike Lighthead at Barclays.
spk05: Great, thanks. Good morning, guys. Can you speak to your chloralkali operating rates currently? I would assume they're running fairly hard just given PVC strength and integration, but just where are they running today?
spk10: Yeah, I think the industry, some of the industry players were impacted by the borough hurricane not long ago. and recovering from those incidents. But I think, as you said, the operating rates has been very good after the hurricane and the demand for both the PVC and caustic are pretty strong. So the rates has been doing very well. But there'll be turnarounds coming up in the third quarter around various plants. So, and we don't know, you know, Still early in the game, August versus hurricane season, which ends the end of November. So we are very careful about our inventories and production and so on and so forth.
spk05: Great. And then your HIP segment volumes were up 16% in the quarter. Can you help us better understand what categories are growing faster than that and what categories are growing slower than that? And just a clarification, is product mix effect reported through price or volume for Westlake?
spk02: Yeah, so, Mike, when you think of, you know, the value contributors here, we certainly see the, as I've called out, kind of the pipe and fittings and the siding and trim businesses really contributing very well to the HIP segment results. You know, our windows businesses are smallest subsegment within the HIP business. And so I would say that it's the smallest contributor still regional in terms of play. It plays in the Texas market and kind of the southeast market. So therefore, probably the weakest contributor in that business. But I would say we're continuing to see good cross-selling, which is why you saw the volumes pick up. And given the strength, I think, in the branding that you see in that business, I think the cross-selling is attributable to the efforts by our HIP team to understand and push through the brand value that we see in all the product categories that we have. So I'd say that cross-selling was a nice contributing factor to the volume pickup that we saw in the quarter.
spk13: Thank you.
spk11: Our next question comes from Arun Vishwanathan at RBC Capital Markets.
spk12: Hi. Thanks for taking my question. I hope you guys are well. And welcome, Jean-Marc, as well. So I guess... A couple questions. So first off, in HIP, obviously some really strong performance out of pipe and fittings. Maybe you can discuss maybe the margin profile there, and then also for global compounds and royal building products. How are those businesses performing, and do they have a margin profile that maybe was less than pipe and fittings in this quarter or higher? How do you describe those two businesses? Thanks.
spk02: Yeah, and so I would say, Arun, in our compounds business, you know, that is a business that has a pretty stable and steady margin business, but it would be in the middle range of, middle to lower range of the range of margins that we see in the hip side of our business. I would say that the two subsegments that I mentioned, which are the piping fittings business and our siting and trim businesses, are the stronger performers during the quarter. And I called those two out in the first quarter as well of consistently stronger performing in that space.
spk12: And then in PEM, thanks, Steve. And then in PEM, just curious, you know, you mentioned some slow improvement, I guess, in polyethylene prices and also PVC resin. So that's helpful. Do you expect those prices to continue to slowly move higher? And what would you say on caustic? And then just curious on the epoxy side, you know, you guys took some action. Do you see some other action and rationalizing assets coming forth? And, you know, when would that potentially impact market conditions in epoxy? Thanks.
spk02: So, Arun, yes, we certainly have seen strength in a variety of these chemical chains. I think you heard us note that we saw strength really in both PVC as well as in polyethylene in the third quarter, as well as in the second quarter. So, as Albert noted in his comments, we continue to see a better balanced market in polyethylene, and we saw some price settlements that were positive and constructive earnings, both in the second and in the third quarter so far. We've also seen the same play out in PBC. As you know well, the second quarter and third quarter tend to be strong markets for PBC. Even though we've seen some headwinds on housing starts, certainly the second and third quarter tend to be stronger and therefore strength in demand, which pulls on price. Certainly the actions that we were taking, a wide variety of those mothballing the ECH unit, as well as the actions with the European authorities and the U.S. authorities on this anti-dumping, should all contribute to stronger results in the future for our epoxy business. So we look forward to seeing those actions take hold and deliver better value.
spk12: And just any thoughts on caustic and chlorine?
spk10: As I mentioned before, caustic and coring demand are pretty stable. U.S. exporting a fair amount of PBC as well as caustic. We still have the lowest cost energy competitive advantage over the rest of the world. And the price is being stable as well. So, of course, heading into the fourth quarter, things will slow down a bit around the world. But it will January first quarter is also somewhat weak, and then depending on the economy in the world, the second and third quarter will improve next year.
spk13: Thanks.
spk11: Our next question comes from Vincent Andrews and Morgan Stanley.
spk01: Hi, thank you for taking my question. This is Turner Hendricks on for Vincent. Can you help us understand what's going on from a cash flow perspective and what you expect from working capital for the year?
spk02: Yeah, so, you know, as you saw in the second quarter, we did settle out the litigation charge that we took earlier this year. I would expect that with the demands we're seeing really in the activity, construction activity in our HIP business, we'll continue to have some pull on the working capital over the course of the third quarter as we go forward. Certainly, prices have trended up in our products, and certainly to maintain adequate inventories for our customers, that'll pull on inventories. But the offset to that is we have seen some lower prices trending. You heard my comments earlier about ethane. Ethane prices are trending lower, and so that will be the offset to some of that pickup in working capital.
spk01: Great, great. Appreciate the color there. So hopefully this isn't redundant to the prior question, but in the chloralkali part of the business, I'm just wondering if you could speak further to relative strength or weakness of chlorine versus caustic soda and whether you see pricing upside for either of these products for the balance of the year.
spk10: Yeah, I think CMA is looking at prices to increase in caustic in the U.S. by $20, short-term but come down in October November this year so it's it's it's kind of wash and chlorine prices also popping up and down a little bit so I think things are pretty stable and and you know a lot of chlorine the u.s. goes in the PVC as I mentioned that the u.s. also have the PVC prices increase the export price again bobbing up and down has trend upwards from first and second quarter of this year. And U.S. is lowest cost from ethylene and chlorine point of view to export PVC.
spk13: Great. Thank you for the color. You're welcome. Our next question comes from Kevin McCarthy at Vertical Research Partners.
spk04: Yes, thank you, and good morning. Albert, it's been a pleasure, absolutely. Good morning. I look forward to meeting you. I just wanted to clarify on the polyethylene resin price trend. It does sound like you have positive momentum there. My recollection is that producers were seeking an increase of five cents a pound for the July contract. Can you comment on how much of that you were able to realize for low and linear low-density polyethylene?
spk10: Yes, the July price has settled. It's up five cents as the industry announced. And there's potential increases for at least some of the industry players announced the price increases for August, October. But time will tell whether those increases can be effective or not. But I think the main reason for that is export price has gone up. and it will help to drive up domestic price as well. And demand is pretty stable. And as I mentioned, typically second and third quarter are strong demand quarters for prices as well, polyethylene and PVC. So the July settled up five cents a pound.
spk04: Perfect. And then... I may switch gears over to HIP, certainly a very impressive first half of the year with regards to volumes and margins. But I did want to ask about point number three on your slide five, where you call out kind of a trio of challenges in terms of weather, slowdown and starts, and also remodeling. Can you elaborate on that in the context of seasonality? For example, Thinking about those headwinds, do you think that it will result in a seasonal pattern for 2024 where the first half is stronger than the second half or be able to overcome that through some of the things that you talked about earlier in the call? How would you think about the way that this year's seasonal cadence is shaping up and happening?
spk02: Yeah, so Kevin, good question. And as you think about the weather patterns, it does have an impact really in really when construction activity, when housing starts, actually start. And so the reason for the call-out really is just an indication that certainly while we see certainly positive trends, certainly there are clear headwinds. And some of the headwinds you note there, that is really weather patterns and certainly interest rates remain pretty elevated. And so certainly that is creating some of the the concern we all have as we look into the back half of the year. Weather patterns continue to be an issue that we have to kind of work through, and you know it. Throughout much of the country, it's been very, very warm, and certainly in portions of the south and southwest, we've had very, very wet weather, which makes it challenging for those housing starts to actually start and pull on the volume demand we see in our building products. So while we continue to see good volumes that we've seen so far in the first half of the year, Certainly, it is just a, if you will, a watch out for the back half of the year if we see weather patterns continue to persist. It could be challenges. But again, if you look at the NAHB's numbers for the year, they forecast housing starts in the fourth quarter and the third quarter, and they are somewhat lower than the first half of the year. So they do trend down from the peak that we saw in the first quarter. They trend lower in the second quarter in NAHB. is trending third and fourth quarters somewhat lower. We look at a variety of forecasters. I'm just calling out NAHB just as an indication of directionally where they see their starts going for the rest of this year.
spk13: Thank you so much. Our next question comes from David Begleder at Dutch Bank.
spk07: Thank you. Albert, the cost of price increase you mentioned that CMA has in their estimates is below the proposed increase from you and your competitors. Do you think CMA is being too conservative, or do you think the market is maybe a little bit weaker than you thought relative to your announced price increases?
spk10: Yeah, well, our industry can announce price increases, but supply demand and negotiate with customers. And some are on a quarterly basis. You don't see the price change right away. And some are negotiated, some are monthly basis. So all the prices come all over the place. And I guess the CMA is just maybe the average or something they announced. It's just indication that it's going up, not going down. That's the indication. how much actually goes through, time will tell when we finish, depending on expansion earlier, whether you're on quarterly, monthly, or negotiated basis.
spk07: Very good. And Albert, just on the July polyethylene price, can you increase it five cents? Do you think it's more of a function of hurricane barrel impacts or more of a function of balanced supply-demand fundamentals?
spk10: Yeah, good question. I think it's a combination. Certainly, there's some impact from production from barrel. But I think, as I mentioned earlier, the export price has moved up. That has the biggest, I think, impact on domestic price. And actually, some of the export price are pretty close to domestic price on a net back basis. So when export price goes up, then people can export out and sell domestically, which allow the domestic price to move up as well. And I mentioned the hurricane season coming up, and people may want to have some inventory So all these factors impact on the price increase that we just settled in July.
spk07: Thank you.
spk20: You're welcome.
spk11: Our next question comes from Stephen Byrne at Bank of America Securities.
spk09: Yes, thank you. What portion of that 15% sequential volume gain in HIP would you attribute to just the seasonality of underlying volume growth versus the portion of that 15% that you think you gained from either your efforts to brand or your cross-selling initiatives? And for the portion that's cross-selling, what is it that you're offering the distributor? What's the value proposition to be able to get more shelf space?
spk02: Yeah, Steve, good question. And I'd say the greater portion really is the ability to really have brand recognition and cross-selling. And while there certainly is some seasonal uplift from 1Q into 2Q, that is certainly part of the equation here. I'd say a meaningful portion of it really is brand recognition and value recognition and therefore cross-selling. And that cross-selling recognizes the portfolio that the boral acquisition brought to the table with our distributors. As you know, that distributor network has seen increased consolidation, and they really want to have an ability to work with a limited number of producers who can provide the broadest portfolio and offer that good, better, or best range of product offerings, which we do provide. And that increased selling effort that we have now with a broader portfolio offering through these acquisitions in our HIP segment provide us the ability to provide the brand name recognition products that they need in that good, better, or best portfolio, and that allows us to have the ability to service the customer, our distributors, nationwide. And so that takes a little while to really translate since the acquisition of Boral a couple years ago, but that's what you're seeing coming through today.
spk09: And just a question about competitive pricing. Clearly, you would have competitors that don't have the brand loyalty that you have, and volumes could be challenging for many. Are you seeing competitive pricing in HIP from your smaller competitors? And or do you see yourself having, you know, some defensiveness against it because of your brand loyalty?
spk02: Of course we have to be competitive in our pricing across all markets. And I would say in the building products market, these are smaller, these are markets where you can't transport product nationwide. So if you're talking about concrete roof tiles, it is a market that is a subset of a nationwide market. These might be markets in maybe a 500 mile kind of radius where you can't transport that product. So of course you have to be competitive in those markets. And each market has strengths and weaknesses depending on the construction activity, whether we're talking the California market, the Texas market, or the Florida market. Each one of those markets are unique. And we have to be competitive in each one of those markets and deal with smaller or larger competitors as we face them.
spk13: Thank you. You're welcome. Our last question comes from Jeff Zakowska at J.P.
spk11: Morgan.
spk21: Thanks very much. What was the PVC contract settlement for July?
spk10: Yeah, PVC, I think, settled at up a penny, a pound.
spk21: And then, yes, thank you very much. And then Albert, yeah. Do you have a view of the Chinese PVC market from here over a longer period of time? Do you think the Chinese market has gone through a period of overbuilding and weakness and continued weakness? Or do you think that there's room for that market to accelerate over the next two or three years?
spk10: Yeah, that's a good question. I think the Chinese PVC business or industry is going through a transition in the past several many years carbide pvc was about 80 percent of the capacity in china and now carbide pvc has dropped to about 70 odd percent so the more ethylene based pvc plants be built and i think the train will continue to phase out the high energy and polluting carbide-based PVC, as well as they have the mercury catalyst issue. We know that there are new gold-based catalysts, which is more expensive, but they can also replace the mercury-based catalyst, but still it's a carbide-based process. So I think over time, the Chinese industry, PVC industry, will morph toward ethylene-based which will lose its competitive advantage. The wide carbide base is because China has a lot of coal, and it's very cheap, and you can make PVC cheaply from carbide. If we switch to ethylene, and most of the ethylene in China are NAFTA-based, oil-based, which is less competitive with US-based, ethylene-based, natural gas-based ethylene. So we'll see how fast the Chinese PVC industry morphs into more ethylene-based what kind of pricing will be. But even though China, we all know that they have an economic structural problem, especially in housing. Housing is still a huge market and business for the Chinese economy. And the demand is still huge for lower-income housing. And the government is trying to do more of the low-income housing. But still, every housing, they need power, water, electricity. And PVC will be very important. And also window frames. In China, it's all PVC window frames. So PVC will be a very important component of the housing demand in China going forward.
spk21: Thank you so much. You're welcome. Thank you.
spk11: This concludes the question and answer session. I will now turn it back to John Miller for closing remarks.
spk03: Thank you again for participating in today's call. We hope you will join us again for our next conference call to discuss our third quarter results.
spk11: Thank you for participating in today's Westlake conference call. As a reminder, this call will be available for replay beginning two hours after the call has ended. The replay can be accessed via Westlake's website. Goodbye.
Disclaimer