Westlake Corporation (NYSE:WLK) Q2 2023 Earnings Call Transcript

Westlake Corporation (NYSE:WLK) Q2 2023 Earnings Call Transcript August 3, 2023

Westlake Corporation misses on earnings expectations. Reported EPS is $2.31 EPS, expectations were $2.83.

Operator: Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Westlake Corporation Second Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded today, August 3, 2023. I would now like to turn the call over to today’s host, Jeff Holy, Westlake’s Vice President and Treasurer. Sir, you may begin.

Jeff Holy: Thank you. Good morning, everyone, and welcome to the Westlake Corporation conference call to discuss our second quarter 2023 results. I’m 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 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, 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.

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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, 2022, 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 in the Investor Relations section on our website. A replay of today’s call 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 3, 2023. And therefore, you’re 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 web page at westlake.com. Now I would like to turn the call over to Albert Chao. Albert?

Albert Chao: Thank you, Jeff. Good morning, everyone. We appreciate you joining us to discuss our second quarter 2023 results. For the second quarter of 2023, we reported sales of $3.3 billion, net income of $297 million and EBITDA of $690 million. In our PEM segment, the continuation of soft industrial and construction activity and unplanned maintenance activities drove sales volume declines, particularly impacting PVC resin, caustic soda and epoxy in North America and Europe. The elevated level of unplanned outages resulted in lost sales that impacted operating income by approximately $50 million. While our PEM segment average selling prices were lower than in the first quarter. We benefited from our strategically located globally advantaged feedstock position in North America, where we saw lower feedstock and fuel costs compared to the first quarter.

In our HIP segment, we experienced an increase in sales volumes quarter-over-quarter with the start of the construction season in North America with housing starts in the second quarter, averaging 1.4 million units and repair and modeling continuing to grow. HIP segment EBITDA margin increased sequentially due to the 13% volume improvement and raw material cost reductions. And its margin remained in line with the record second quarter of 2022 at approximately 22%, reflecting the strength in our branded products and relationships with our customers. While we expect the challenging macro backdrop to continue in the third quarter, we will focus our efforts of operating our assets reliably and reducing costs. To that end, we now expect our cost reduction program to achieve between $75 million to $105 million of cost savings in 2023, up from the previous $55 million to $105 million target after we achieved approximately $25 million of cost savings in the second quarter and $50 million in the first half of 2023.

Overall, our second quarter results reflected the weakness in global manufacturing and industrial activity, along with the impact to sales volumes and margins from the planned and unplanned outages, and we continue to take a disciplined approach to managing our operations in this volatile economy and advance our long-term strategic priorities. I would now like to turn our call over to Steve to provide more detail on our financial results for the second quarter of 2023.

Steve Bender: Thank you, Albert, and good morning, everyone. Westlake reported net income of $297 million or $2.31 per share in the second quarter of 2023 on sales of $3.3 billion. Net income for the second quarter of 2023 decreased $561 million from the second quarter of 2022 as a result of lower average selling prices and integrated margins and more production and sales volumes. When compared to the first quarter of 2023, net income decreased by $97 million in the second quarter of 2023, primarily to lower average selling prices, particularly for caustic soda, PVC resin due to softer market conditions and unplanned production outages. For the second quarter of 2023, our utilization of the FIFO method of accounting had a negligible impact on pre-tax earnings compared to what earnings would have been reported on the LIFO method.

This is only an estimate and has not been audited. Moving to our segment performance. Our performance in Central Materials segment’s second quarter 2023 sales were $2.1 billion with EBITDA of $435 million compared to EBITDA of $1.2 billion in the second quarter of 2022 due to lower average selling prices, particularly for Performance Materials in addition to lower sales volume, largely in PVC and epoxy. PEM segment EBITDA of $435 million in the second quarter decreased $180 million from the first quarter of 2023, largely due to lower average selling prices for both Performance Materials and essential materials particularly for caustic soda, epoxy resins and polyethylene. Lower demand and resulting in sales volumes, particularly, for PVC, caustic soda and epoxy resin, and elevated level of unplanned outages that impacted both sales volumes and integrated margins.

Turning to our Housing and Infrastructure Products segment. Second quarter sales were $1.1 billion, with EBITDA of $244 million, which declined $66 million when compared to the record second quarter of 2022. The decrease in EBITDA was due to an 18% decline in segment sales volumes driven by lower housing starts and completions we’ve seen over the past year. Despite the volume decline year-over-year, HIP segment EBITDA margin of 22% in the second quarter of 2023 was unchanged as lower raw material costs and resilient pricing offset the impact of the lower sales volumes. When compared to the first quarter of 2023, HIP segment EBITDA of $244 million increased $39 million. Housing product sales of $918 million in the second quarter of 2023 increased $100 million due to solid sales volume growth supported by seasonal North American construction trends that more than offset slightly lower average selling prices.

This housing product sales volume improvement was widespread with significant gains in most product lines. Infrastructure product sales of $197 million in the second quarter of 2023, increased $8 million from the first quarter of 2023 and primarily due to growth in sales volume of infrastructure products serving fresh and wastewater applications. The overall higher HIP segment sales in the second quarter of 2023 drove an improvement in EBITDA margin to 22% from the 20% in the first quarter. Overall, we were pleased with HIP segment sequential volume improvement and solid margin performance. Our financial results, particularly in our PIMS segment reflected globally slow demand and production outages. As we enter the third quarter, macroeconomic conditions remain sluggish as evidenced by recently published manufacturing indices.

We’re adjusting our market — adjusting our market conditions by taking a disciplined approach to managing inventory, reducing our cost, matching production levels to demand and adapting our business to the evolving market conditions. Our strong financial position supported by an investment-grade credit rating to support our long-term objectives. As of June 30, 2023, cash and cash equivalents were $2.7 billion and total debt was $4.9 billion with a staggered long-term fixed rate debt maturity schedule. For the second quarter of 2023, net cash provided by operating activities was $555 million, while CapEx expenditures were $240 million, resulting in free cash flow of $315 million which reflects our strong cash generative business model. We continue to look for opportunities to strategically deploy our balance sheet in a manner to create long-term value.

Now, let me provide some guidance for your models. — based on our current view of demand and prices, we expect second half of 2023 revenue in our housing and Infrastructure Products segment to be between $2 billion and $2.2 billion with EBITDA margins in the high-teens. We expect our company-wide cost reduction program to achieve between $75 million to $105 million of cost savings in 2023, up from the previous $55 million to $105 million target after we achieved approximately $50 million of savings to date in 2023. We continue to expect total capital expenditures for 2023 to be approximately $1 billion, which is unchanged from our earlier guidance and is similar to our depreciation and amortization run rate. For the full year of 2023, we expect our effective tax rate to be approximately 23% and cash interest expense to be approximately $160 million.

Now let me turn the call over to Albert to provide a current outlook for our business. Albert?

Albert Chao: Thank you, Steve. Looking ahead, with continued high interest rates and a slowing economy we’re expecting a challenging environment in the second half of this year. However, we remain confident in our long-term growth plans, the strength of our business portfolio and our disciplined approach to creating long-term value. We look to expand our sales through differentiated product offerings and innovations with sustainable products to meet our customers’ needs on managing our costs and adapting to the changing market conditions as they unfold. In our PEM segment, we will leverage our North American feedstock advantage and highly integrated production chain. We remain positive on the outlook for our PEM segment, driven by increased consumer activity and demand for clean, fresh water, electrification and renewable energy benefits from the Infrastructure Investment Act and Inflation Reduction Act and favorable demographic trends, all driving demand for PVC resin, caustic soda, polyethylene and epoxy.

While PEM average selling price ending in June were below the average selling prices of the second quarter, in the last few weeks, we have seen some signs of improvement in both PVC resin and polyethylene markets from tightening export markets with unprofitable high-cost international producers curtailing production and lower industry inventory levels. As a result, we remain constructive on the outlook for our PEM segment from recent levels. We also remain positive on the outlook for our HIP segment supported by the structural undersupply of homes in North America, improving demographics to support more first-time homebuyers over the coming decade and potential benefits to our infrastructure product sales volumes from spending related to the Infrastructure Investment Act.

We will continue to offer a broad portfolio of branded products and deliver value through innovation and service to meet our customers’ needs. Over the past several quarters, our HIP business has demonstrated that it can adapt to the changing market conditions and its results over this period reflect this actability [ph], strengthen branding and its capital-light characteristics. Sustainability and environmental stewardship remain critical to our strategy at Westlake. We continue to invest in developing and commercializing innovative new products to meet our customers’ sustainability challenges. We are proud to report increased customer adoption of our green bean one- pellet solution and PVCO innovations in the second quarter as a result of these efforts.

Separately, we continue to invest capital to improve our plans to reduce our carbon and emissions intensity and have made significant progress towards our 20% by 2030 reduction goal. Finally, we continue to look for opportunities to redeploy our well-capitalized balance sheet in a disciplined manner that will create long-term value for our shareholders. With a robust cash flow generation capability, investment-grade credit rating and strong balance sheet, with net debt below onetime trailing 12 months EBITDA, we see significant opportunities to create value for our shareholders through multiple avenues, including returns of capital through dividends and share buybacks, organic expansions in high-returning quick payback investments and synergistic acquisitions with the return profiles exceeding our cost of capital as these opportunities present themselves.

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

Jeff Holy: Thank you, Albert. Before we begin taking questions, I’d like to remind listeners that our earnings presentation is available on our website and a replay of this teleconference will be available 2 hours after the call has ended. We will now take questions

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Joshua Spector from UBS. You may proceed.

Chris Perrella: Hello. Good morning, everyone. It’s Chris Perrella on for Josh. I want to follow up on the outlook for the third quarter in the PEM segment. With the volumes being impacted by turnarounds in the second quarter, — how — what is the volume improvement that you’re looking for sequentially in the third quarter? And then are you expecting normal seasonality in the fourth quarter? What’s the outlook there?

Albert Chao: Yes. Normally, the third quarter, a strong quarter this like second quarter are the 2 strong quarters for the year. And fourth quarter typically seasonally is the weaker weakest quarter. So assuming the economic continues to be growing even though at a modest rate, that the volume should improve in the second quarter — in the third quarter, pretty much like the second quarter.

Chris Perrella: What — but what were they doing underlying, I guess, in the second quarter that you should see something similar in the third quarter absent the turnaround — the unplanned turnarounds?

Steve Bender: Yes, Chris, it’s Steven. So when you think about the — both the turnaround planned outages and the unplanned outages, as Albert said, the third quarter tends to be a good strong quarter, just like the second quarter. quarterly, the second quarter was impacted by both planned and unplanned outages. And so I do expect that, that third quarter should have more normalized sales volumes and production volumes as we would have expected in the second quarter, not then for those outages. — as I noted in that fourth quarter, we also see some seasonality impacting both the PIM and the hip segment. So that typically is lower than the second and third quarter volumes.

Chris Perrella: All right. And then just a follow-up, one quick one on the pricing that I think Albert called out average PEM pricing at the end of June was below the 2Q average. How does it lag through how do you — as your pricing lag? And how quickly can it improve over the course of 3Q?

Albert Chao: Well, prices when it comes down, it comes down pretty quickly, it does a — but when price increase, as we and some industry members have announced price increases in both polyethylene and PVC for the third quarter. Some of those price increases may have a lag going up.

Chris Perrella: All right. Thank you very much.

Albert Chao: You’re welcome.

Operator: Thank you. Our next question comes from the line of Patrick Cunningham from Citi. You may proceed

Patrick Cunningham: Hi. Good morning. Thanks for taking my question. You delivered roughly flattish margins in the hip segment year-on-year. It’s a pretty steep volume decline. How should we think about the long-term margins through the cycle in that business?

Albert Chao: Yeah. Well, Patrick, as you can see, even in these markets where we’re seeing home starts in the neighborhood of 1.4, which was the average for the second quarter, we continue to see real resiliency in pricing. And certainly, even though we’ve seen the challenges in volume, if you think about year-over-year, we certainly have got a branded product that continues to sell through and is a product of selection by our customers. And so as we think about using that branding and that relationship with our customer base, as we see improvements in starts over the horizon, we do expect we’ll continue to improve the overall margin. We’ve not given the high-end range of margins. But you can see, we still expect to see some headwinds in the second half of this year.