Westlake Corporation (NYSE:WLK) Q1 2024 Earnings Call Transcript

Westlake Corporation (NYSE:WLK) Q1 2024 Earnings Call Transcript May 1, 2024

Westlake Corporation beats earnings expectations. Reported EPS is $1.34, expectations were $1.09. WLK isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Westlake Corporation First Quarter 2024 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded today, May 1, 2024. I would now like to turn the call over to today’s host, John Zoeller, Westlake’s Vice President and Treasurer. Sir, you may begin.

John Zoeller : Thank you. Good morning, everyone, and welcome to the Westlake Corporation conference call to discuss our first quarter 2024 results. I am joined today by Albert Chao, our President and CEO; Steve Bender, our Executive Vice President and Chief Financial Officer; and other members of our management team. During the call, we will refer to our 2 reporting segments: Performance and essential materials, which we refer to as PAM or materials and housing and infrastructure products, which we refer to as HIP or products. Today’s conference call will begin with Albert, 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 the call up to questions.

As a reminder, during the fourth quarter of 2023, we recorded a noncash impairment charge of $475 million related to the company’s epoxy business as well as a $150 million charge to fully resolve certain liability claims. We refer to these to charges as the identified items in our earnings release and on this conference call. References to income from operations, EBITDA, net income and earnings per share on this call exclude the financial impact of the identified items. As such, comments made on this call will be in regard to our underlying business results using non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to GAAP financial measures is provided in our earnings release, which is available in the Investor Relations section of our website.

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 first 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 in the Investor Relations section on our website. A replay of today’s call will be available beginning today, 2 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, May 1, 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 also be accessed on our web page at westlake.com. Now I’d like to turn the call over to Albert Chao. Albert?

Albert Chao: Thank you, John. Good morning, everyone. We appreciate you joining us to discuss our first quarter 2024 results. For the first quarter of 2024, we reported net sales of $3 billion, EBITDA of $546 million and net income of $174 million or $1.34 per share. Each was an improvement from our fourth quarter of 2023 results as we benefited from higher sales volume and lower feedstock fuel and power costs. Our results reflected a modest improvement from the destocking activity that occurred throughout 2023, as we saw higher sales volumes and pricing in many of our products began to improve. Our HIP segment performed exceptionally well, generating record first quarter EBITDA and margins while providing stability to our overall profitability and earnings with an asset-light, cash-generative business model.

HIP sales volume grew an impressive 14% year-over-year as our leading positions enabled us to capitalize on resilient North American residential construction and infrastructure activity. This solid sales volume growth combined with lower material costs and favorable sales mix drove HIP’s EBITDA margin to 25% in the first quarter of 2024, up from 20% in the prior year period. While our HIP segment continued to perform well, margins and earnings in our PEM segment reflected the weak global economic conditions. For the first quarter of 2024, our PEM segment reported lower net sales and margins when compared to the first quarter of 2023, but we are encouraged by the sequential improvement in these metrics when compared to the fourth quarter of 2023.

The sequential improvement in PEM volumes from the fourth quarter of 2023 reflects demand beginning to recover and an end to the destocking activities we experienced throughout 2023. This improvement in demand, we are also seeing some pricing trends improve as we enter the second quarter. Meanwhile, the competitive advantage provided by our low-cost feedstock energy positions in the U.S. Gulf Coast expanded during the first quarter of 2024 due to both higher global oil prices and lower U.S. feedstock and power prices, which position us well to compete in export markets. At the same time, we are making progress on our cost reduction actions. And in the first quarter of 2024, we achieved approximately $35 million towards our previously communicated $125 million to $150 million of targeted 2024 cost savings across the company with a focus on improving the global competitiveness of our epoxy and European operations.

While we are confident in our ability to reduce our costs to improve our competitiveness our epoxy business continued to be pressured by Asian export volumes priced below market-based production costs. As a result, on April 3, as a member of the U.S. Epoxy Resin Producers had Hoc Coalition, we participated in filing petitions with the U.S. International Trade Commission and the U.S. Department of Commerce, requesting the initiation of antidumping and counterveiling duty investigations regarding imports of certain epoxy resins from 5 Asian countries. We remain proponents of the free and fair trade of goods on a global basis, but we also remain committed to working with trade groups such as the U.S. Epoxy Resin Producers Ad Hoc Coalition to use all the tools at our disposal to ensure a fair and level playing field in all the geographies in which we operate.

Overall, I’m pleased with the progress that we are making to improve our position, our portfolio of businesses and create value for our shareholders. I would now like to turn our call over to Steve to provide more detail on our financial results for the first quarter of 2024.

Steve Bender: Thank you, Albert, and good morning, everyone. Westlake reported net income of $174 million or $1.34 per share in the first quarter on sales of $3 billion. Net income for the first quarter of 2024 decreased $220 million from the first quarter of 2023. The year-over-year decline in net income was primarily due to lower average sales prices and margins in PEM, particularly in caustic soda, PVC resin, Epoxy resin, which were partially offset by improved sales volumes, lower materials costs and lower restructuring costs in HIP. When compared to the fourth quarter of 2023, net income, excluding identified items, increased by $81 million in the first quarter, primarily due to higher sales volumes driven by an uptick in seasonal demand and strong market growth, for our cost-saving actions and lower restructuring costs.

For the first quarter of 2024, our utilization of the FIFO method of accounting resulted in a favorable pretax impact of $31 million compared to what earnings would have been reported on the FIFO 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. The record first quarter results in our HIP segment demonstrate the progress we have made in integrating and optimizing the acquisitions of the last few years. HIP strong 14% year-over-year volume growth in the first quarter in part reflects the benefits of the broad branded product set, combined with a much wider geographical footprint, driving cross-selling of our products through nationwide distributors going into home construction and remodeling.

The record first quarter EBITDA margin of 25% was supported by our cost savings initiatives, production optimization activities and lower materials cost. These cost savings go well beyond typical acquisition synergies as we implement our efficiency-focused manufacturing culture and increased automation within our operations. Overall, we are very pleased with HIP’s asset-light, cash-generative business model and solid EBITDA margin. We hope that you will join us on June 13 as we host a HIP focused investor teaching event in New York to share more about the exciting progress and opportunities we are seeing in this important segment. Turning to our PEM’s segment. Our first quarter results reflect the challenging global industrial and manufacturing macroeconomic environment.

That said, we are encouraged by the improving trends for both sales volumes and pricing as we enter the second quarter. We took proactive steps to improve the financial performance of this segment, including progress toward our company-wide $125 million to $150 million cost savings target for 2024 and our efforts to halt the flood of low-priced Asian imports in certain product categories. Moving to the specifics service segment performance. Our Housing & Infrastructure Products segment produced record first quarter EBITDA of $264 million on $1 billion of sales. EBITDA increased $59 million year-over-year due to a solid 14% increase in sales volumes, improved product mix into higher-margin products, lower materials costs and acquisition synergy and other cost savings benefits.

Notably, HIP achieved an important milestone this quarter with trailing 12-month EBITDA exceeding $1 billion for the first time. This achievement is a testament to the hard work of our HIP colleagues and the synergies achieved across our businesses. When compared to the fourth quarter of 2023, HIP segment sales of $1 billion rose 10% driven by a 12% sequential increase in sales volume, which more than offset a 2% decrease in average sales prices. Housing product sales of $879 million in the order increased $84 million due to solid sales volume growth, particularly in Pipe & Fittings and Siding & Trim. Infrastructure product sales of $165 million in the first quarter of 2024 increased $14 million from the fourth quarter of ’23 due to double-digit sales volume growth in our compounds resin business.

HIP’s EBITDA margin of 25% set a record for the first quarter and was the second highest for any quarter. The margin expansion from 20% in the prior year period was primarily due to lower materials cost and higher sales volumes, while the sequential improvement from 18% in the fourth quarter of ’23 was due to higher sales volume, improved sales mix and lower restructuring costs as we optimized our manufacturing footprint. Moving to our PEM’s segment. First quarter EBITDA of $253 million was below first quarter of 2023 EBITDA of $615 million due to lower average selling prices, particularly for caustic soda and PVC and Epoxy resins. On a sequential basis, PEM’s segment EBITDA of $253 million in the first quarter increased by $52 million from the fourth quarter of 2023 as a result of higher sales volumes, particularly for PVC and Epoxy resin, lower feedstock, fuel and power costs and our cost savings actions.

As Albert mentioned, as we entered the second quarter, we are encouraged by the improvement in recent pricing trends and sequential sales volumes growth, reflecting an end of the destocking we experienced in 2023 and reduced competition from low-priced Asian imports in Europe as a result of shipping disruptions in the Red Sea. Shifting to our balance sheet. As of March 31, 2024, cash and cash equivalents were $3.1 billion and total debt was $4.9 billion, with a staggered long-term rate debt maturity schedule. For the first quarter of 2024, net cash provided by operating activities of $160 million was impacted by an increase in working capital as we grew our inventories and accounts receivable resulting from the seasonal uptick in demand I previously mentioned.

We will continue to look for opportunities to strategically deploy our balance sheet in order to create long-term value. Now let me provide some guidance for your modeling. As we view demand and prices, we continue to expect 2024 revenue in our housing and Infrastructure Products segment to be between $4 billion and $4.4 billion, with EBITDA margin around 20%. Westlake continues to execute with financial and operational discipline as we invest throughout the business cycle, and we expect our total capital expenditures to be approximately $1 billion in 2024, which is unchanged from our earlier guidance and is similar to our depreciation and amortization run rate. As a reminder, this includes cost for planned turnaround of our Petro 1 ethylene unit scheduled to begin in the second half of this year that is projected to last approximately 60 days.

We will continue to target the $125 million to $150 million of cost savings in 2024 with roughly $35 million achieved in the first 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 let me turn the call back over to Albert to provide a current outlook of our business. Albert?

Albert Chao: Thank you, Steve. Our first quarter results, once again, demonstrated the value of our vertical integration strategy and the diversity of our segments in reducing the volatility of our overall earnings. Our HIP segment continue to perform well, supported by favorable demographic trends, lower material costs, the strong value of brands and our own cost savings and cross-selling initiatives. Meanwhile, results in our PEM segment reflected the macroeconomic backdrop of a slow but steady post COVID economic recovery in Asia and mostly improving ISM manufacturing index readings in the U.S. and Europe. While recent trends over the past year have been challenging, we continue to have a positive view for our long-term demand supported by the growing global need for clean water, transportation, renewable energy, packaging and consumer goods.

Our efforts to help our customers achieve their sustainability goals contributed to our sales growth in the first quarter. For example, sales volume for our pivotal post-consumer polyethylene resin increased sequentially by nearly 30% from the fourth quarter of 2023 as we are seeing increasing consumer adoption of the product, particularly for consumer trash bags to meet new regulations for post-consumer material usage. Our green ring PVC in Europe, now representing a significant portion of our European PVC sales offers customers green PVC products. These are just a few examples of innovative products Westlake has developed to improve customers’ environmental footprint and support our long-term sales growth rate. At the same time, we continue to make investments in our plants and manufacturing processes to reduce impact on the environment.

Before we open the call for your questions, I want to review our thoughts on our current outlook. Overall, global macroeconomic conditions remain sluggish with restrictive monetary policy in place in many geographies and lingering high rates of inflation weighing on consumer demand. In spite of the challenging backdrop, we have continued to invest in innovative products to meet our customers’ needs and deliver product solutions with unique properties and characteristics as the markets evolve. Results in our PEM segment are supported by our key strengths, namely our global scale with highly integrated, structurally advantaged North American assets that benefit from low-cost feedstock in our research and development facilities around the world that are developing products with solutions to meet customer needs.

We believe that our HIP segment is positioned to perform well in this environment supported by positive demographic trends and the need to rebuild housing stock and infrastructure in North America following years of underinvestment. These secular tailwinds combined with our strong branded product offerings, nationwide service and cross-selling opportunities should continue to drive sales volume growth, while our cost saving and automation initiatives support continued solid margins. While we expect global economic conditions to slowly improve over the course of 2024, we are fortunate to have a strong investment-grade balance sheet with net debt below onetime trailing 12 months EBITDA and no significant near-term debt maturities. We view this solid financial position as a significant asset to create further long-term value for our shareholders as we continue to evaluate ways to deploy our balance sheet as opportunities arise.

Thank you very much for listening to our first quarter earnings call. I will now turn the call back over to John.

John Zoeller: Thank you, Albert. Before we begin taking questions, I would like to remind listeners that our earnings presentation, which provides additional clarity into our results is available on our website and a replay of this teleconference will be available 2 hours after the call has ended. Liz, we will now take questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Patrick Cunnigham at Citibank. Your line is open.

Patrick Cunningham : How much of the volume gains been hit for the quarter would you attribute to share gains? How important has cross-selling been and increased offerings versus maybe your larger homebuilding customers gaining share themselves and you just benefit from that additional volume opportunity?

Steve Bender: Yes, Patrick, it’s Steve. We’ve been able to really participate and grow with our customer base as you can — as you, I think, well understand is we sell into the distribution channel. Those distributors are well aligned with those large nationwide homebuilders and as a nationwide homebuilders continue to gain market share, we’re participating with their growth. So we continue to see very good progress really in partnering with those nationwide builders that they continue to gain market share. We’re participating in that market share growth along with them. Certainly, the brand offerings that we have also have very good penetration in the repair and remodeling market, so it’s not entirely all in the new construction arena.

Patrick Cunningham: And then just on the sales and margin guide for HIP that you maintain. It seems a bit — Why, just in the context of the particularly strong first quarter, are there additional sort of price cost headwinds which you’re baking into that outlook? Maybe what’s your outlook for volumes for the year?

Steve Bender: Yes. So it’s certainly, we’re all well aware that we still have an elevated interest rate environment. And certainly, we understand that many of these national homebuilders are providing sales incentives a variety of sorts. So as we see the year progress, if we see the improvements in interest rate outlook and continue to see the strength that many of these homebuilders speak to, we’ll continue to assess really the kind of guidance that we provide. But right now, we think that this is prudent. But we do think that we have off to a wonderful start and really look forward to continuing the trajectory that our HIP business is progressing on

Operator: [Operator Instructions] The next question comes from Frank Mitsch from Fermium Research. Your line is now open.

Frank Mitsch: Yes. If I could just follow up on that last question in terms of maintaining the guide on HIP, how would you describe the visibility on your order books in that business? Do you have it through the second quarter? Is it into the third quarter? How would you describe your visibility there?

Steve Bender: Yes, Frank, good question. We do have good visibility into the second quarter. And I would say the backlog continues to remain quite strong. We see it not only in our Side & Trim business, but also in our Pipe & Fittings business, which are very good leading indicators in terms of the strength that we expect to see as we get into the second quarter with that HIP business. Of course, as we see a pull on Pipe & Fittings, as I say, is a really good indicator of the construction activity we see in new construction going forward into the second quarter.

Frank Mitsch: Terrific looking forward to the — what is it June 13, date there. And then if you could talk a little bit about the impact that the Red Sea shipping challenge had on your European operations. What sort of benefits did you see? And how sustainable do you think those benefits are? If you could talk about Europe a little bit, that would be helpful.

Albert Chao: Yes, I think the Europe, the Red Sea situation improved somewhat. And while this — during the first quarter, we did see a slowdown of imports to Europe. But the situation still goes out and I think the [tech on shipping] vessel continues.

Frank Mitsch: So the benefits for your localized European production units should continue through the second quarter at this point, correct?

Albert Chao: Yes. I think the volume, especially second quarter is usually the best quarter — or second and third quarter, the best quarter of the year, so we should see some volume improvement as well.

Operator: The next question comes from Turner Henricks with Morgan Stanley. Your line is now open.

Vincent Andrews: It’s actually Vincent Andrews from Morgan Stanley. If I could ask you about the PEM outlook for the second quarter, it looks like you’re anticipating sort of a flattish outcome. Could you help us understand what your expectations are on volume and price and in particular, to the caustic soda market? Are you not anticipating any improvement? It looks like there was a price increase for April, though some of the trade presses contextualize that as maybe not being durable. So I would love to hear your outlook here.

Albert Chao: Yes. I think, again, because of the increased demand in construction PVC in general, generally, globally, there’s more cost available. So as we move into the second and third quarter, we will see a leveling of the price increases we had, as you mentioned, between the first 4 months, probably $35 turn off in the U.S. price increases, and we see export price improving globally somewhat. So we think that the price will be more or less flat. I think some of the consultants are saying depending on how the general global economic condition fares out in the second half of the year, if that improves and the cost of price to improve, otherwise, it will be pretty stable at today’s levels.

Vincent Andrews: And then as a follow-up, Albert, just on the M&A environment, you obviously have a big pile of cash there and anybody else that might want to buy something is still facing unattractive borrowing rates and who knows how long those borrowing rates will stay where they are. But I’m just wondering if we’re getting to a period of time where maybe you’re really advantaged as a buyer being able to be a cash buyer, are you seeing anything opening up for you on the M&A front as we move through the balance of this year?

Steve Bender: Yes, Vince, I would say that as we continue to look at opportunities across both the chemical side and the building products side of our business, we’re going to continue to be very thoughtful about how we deploy capital. Certainly, we are very focused at the return. And as you know, very well, we’ve been very focused at making sure that through the cycle, any investment we’re making is going to give us that risk-adjusted rate of return. So yes, we do think that the capital position, the strong balance sheet we have provides us really good opportunities, but it doesn’t really change how we think about investing over the cycle in the businesses, but we’ll continue to have a very, I think, pragmatic and very thoughtful approach looking at both sides of the business to continue that investment thesis.