WESTLAKE CORP Q1 FY2025 earnings call

• Focused on rightsizing operations, including optimizing the manufacturing footprint and assessing the asset portfolio.
• Raised the cost reduction target for 2025 to a new range of $150 million to $175 million, building on the $40 million of cost reductions achieved in the first quarter.
• Reduced the capital spending forecast for 2025 by 10% to $900 million to support cash generation.
• Successfully completed the Petro 1 ethylene plant turnaround and the new VCM tie-ins at the Geismar plant during their turnarounds, improving operational reliability.

The Housing and Infrastructure Products (HIP) segment produced EBITDA of $203 million on $1 billion of sales. EBITDA decreased $61 million year-over-year due to a 2% decline in sales volumes and a 3% decline in average sales prices. The Performance and Essential Materials (PEM) segment's first quarter EBITDA was $73 million, which was below the first quarter of 2024's $253 million. This was primarily due to significant higher North American feedstock and energy costs, including a 59% increase in natural gas cost and a 42% increase in ethane cost, as well as planned turnarounds and unplanned outages.

• Expect HIP segment 2025 revenue and EBITDA margin to be towards the low end of the previously communicated range of $4.4 billion to $4.6 billion in revenue with EBITDA margin between 20% and 22%.
• Lowered the total cap expenditures for the company by 10% to $900 million as part of optimizing the business.
• Targets $150 million to $175 million of company-wide savings in 2025, with roughly $40 million achieved in the first quarter.
• Anticipates an effective tax rate of approximately 23% in 2025 and cash interest expense of approximately $160 million.

• Global trade tensions, including the impact from recent tariff announcements.
• Volatility in commodity prices and currency rates that may impact the PEM segment.

Q: Hi, good morning, Jean-Marc and Steve. I guess maybe I want to just start off on the HIP, specifically on price cost. It seems like more margin degradation is implied. Can you first remind us the typical time line for price realization there and your level of confidence in passing through inflation?

A: Yes, Patrick, this market is much more -- this HIP market is much more stable in pricing dynamics, unlike the PIM segment, which moves on a monthly and sometimes more frequent basis. And so I would say in the HIP segment, we see more stability in price nominations. And so certainly in an environment where we see dynamic in some of the input cost, we're able to actually provide more price stability there. That doesn't mean we're not exposed to some of the changes in the market conditions, but it's much more stable in price across the entire change.

Q: Thanks very much. Can you let us know how the PVC industry performed in the first quarter? Were volumes up or down or by how much?

A: Yes. So Jeff, the industry continues to in the first quarter see a bit of a build in inventory in anticipation of the construction season. So I would say that operating rates for the industry were probably in the 80s in that range. Of course, the construction season doesn't really start until we get it really into the late portions of the first quarter and into the second quarter. So they would typically be in the low to mid-80s.

Q: Thank you. I think a driver for HIPs was gaining share at distributors because of your ability to fill more of an order than competitors that have more narrow product lines. How's that going? And does this kind of environment make it harder to gain share because it's more competitive or is it easier to gain some share here?

A: So John, I would say that and you can see from our prepared remarks that we expect to continue the revenue growth in our business. And I think that speaks directly to the question you're asking. I think the broad offering that we offer in our HIP segment has allowed us to continue to gain share in that market. Our focus is really meeting the needs of the customer's customer, which is the homebuilder. And in those dialogues that we have with the home builders, the nationwide builders, we find that there is really good selection and of those product offerings and that allows us to have that penetration into our distributor customers. And so we do see good growth in the range of product offerings with our distributors and ultimately going to our end customer.

Q: Thanks. Good morning, team. First, can you talk more about the mix shift impact that you're calling within HIP? Just what businesses are generating above average margin that maybe you're seeing a disproportional slowdown here?

A: Yes, good question. So in the fourth quarter, because of some of the weather, we did see a pull forward of some of the pipe and fittings businesses in the fourth quarter. And of course, with some of the winter season, we saw and because of the temperatures, it's harder to put some of that material into the ground. The ground is frozen in parts of the northern portions of the United States and Canada. And so let's pull on that in the early stages of the first quarter. Of course, that was backfilled with some of the volumes we saw in our exterior building products business as well as in compound. So it was really the pull forward of some of our pipe and fittings business in fourth quarter.

Q: Good morning, everyone. You mentioned mix in your HIP sales in Q1. Could you comment on what's happening in pricing in specific categories? And I was wondering pipe and fittings, were prices flat or up? And is there any difference between large and small diameter products?

A: Yes, there is more value really in the larger diameter business. As you might recall, we're the only player with really the pipe and the fittings combination. And so I would say that that's really where we're seeing the strength. I would say that when we think about price, it does vary across the country and so it's hard to quote an overall price. But I would say that with some of the push through in PVC resin, there's sometimes a bit of a lag in getting that all the way through in our pipe and fittings applications. And so you have seen, therefore, some margin compression in that pipe and fittings business. That's more of a lag than an inability to ultimately get that pricing of that resin through. But the value proposition that we see in the larger pipe business is really why we continue to stay so very focused in that business. There are so many players and it's a much more fragmented market in the much smaller diameter forms of pipe. That's where we play a much smaller role because frankly it's a smaller value-added segment of the business.

Q: Hey, good morning. Thanks for taking the questions. First, I wanted to ask, how much of the $80 million of outage costs were planned versus unplanned in the first quarter? And could you size the expected costs associated with these outages in the second quarter?

A: Yes. And so, Pete, the planned outages for the turnarounds is about 2/3r of that $80 million. And so, as you heard me in my prepared remarks say that we're ramping up now to meet demand for the turnaround that we took for both the Petro 1 unit that was in turnaround as well as our Geismar VCM tie-ins. So those units are ramping up over the course of April and May. I expect them to be in fuller rates by in May.

Q: Great. Thank you and good morning. Could you talk about the M&A pipeline, market weakness shaking anything loose or is M&A just not really a consideration right now?

A: Matthew, the acquisition opportunities has always been an important element in the growth of our business. And I would say the dialogues that we have across both segments continue to be good. And I would say we're always thoughtful about how we deploy capital to an acquisition, but I would say there are opportunities in the marketplace and we'll assess those and the value those bring on an ongoing basis. But in markets such as this, there are always good opportunities and we'll look at those and act on those if those are good opportunities. We have a strong balance sheet and an investment grade rated balance sheet. So with the cash and the under-leverage position we have, we see good opportunities. We'll be able to act accordingly.

Q: Yes. Thank you and good morning. As you look across your portfolio, do you see any examples of businesses where you think volumes are being negatively affected by the international trade chaos in say April or May? Or is that not the case and the volume experience is on par with what you would normally expect seasonally?

A: No, I'd say, Kevin, that there has been cautiousness, I would say, by customers for exports. And so therefore, I'd say that's caused some just cautiousness across the spectrum in many of our products. And so I would say that we're watching and then dialogue with the customer base that we have across all of our product spectrums. It's affecting not only our chemical customer base, but also our building products customer base with some of the uncertainty. And so that's why我'd say that as we look forward, we're building plans to deal with a macroeconomic situation in both sides of our business.

Q: Great. Thanks for taking my question. Hope you guys are well. I guess, first off, just on caustic, I guess, there's been some stability, some strength. Do you expect that to continue? And I guess are you guys kind of operating maybe slightly below the market just given some of the maintenance or where would you kind of characterize industry in your own operating rates?

A: So when you think of where we are, we've seen price traction in the first quarter that will carry over into the second quarter from a caustic perspective. And as I mentioned, we've had some turnaround activity with the VCM tie-ins that we had planned in the first quarter in Geismar. And so our operating rates in the first quarter were unusually low because of that turnaround -- that planned turnaround activity. But as we expect that the construction season will begin to pick up, the pull-on chlorine will go into water treatment and into the construction materials. So we had I do expect some further pull-on PVC. So I do expect operating rates for ourselves and for the industry to lift from where they were in the first quarter.

Q: Thank you. Good morning and long-time no speak. Hey, Steve, I want to come back to the hit margin question. I'm not sure if I'm understanding this correctly, so would appreciate elucidation here. So, I thought I heard you say that, some of the higher margin pipes and fittings was sold in the was pulled forward into the fourth quarter. So that would lead to a negative mix effect in the first quarter. And so, yes, you posted 20.4% EBITDA margins. And so with that negative mix effect in 1Q, one would suspect that we'd probably get a lift in 2Q in terms of margins. So it will be some number above the 20.4%. And so as part and parcel of that, the full year guide in terms of margins was guided towards the low end of 20% to 22%. So is there some sense of conservatism here? Am I misunderstanding? Should we not expect margins in hip to be better in 2Q versus 1Q? Any help will be appreciated.

A: Yes. So Frank, as we think about the -- and you outlined the dynamics that I described in the first quarter quite well. And I would say as we think forward about the guidance we providing in margin, there is, of course, some degree of conservatism built into that forecast because I think the outlook that we see in interest rates and some of the dynamics really are unclear at this stage. So as you could see, we are seeing growth in share. You see that through the growth in revenue. And it's really unclear in terms of really how that will progress through the course of the year in terms of margin. We certainly will be looking to gain the share back in our higher value-added products and pipe and fittings are one of those. But I would say that as we look forward, there is some conservative view built into that margin guidance.

Q: Great. Thanks. And then lastly, last quarter as we've seen some buybacks, unfortunately, Mr. Market seems to be giving you another opportunity here. How should we think about Westlake and buybacks in 2Q and beyond?

A: Well, Frank, certainly, as you know, we have authority from the Board to act as we see opportunities to do so and we have liquidity to be able to act. We'll be looking at where we think the best deployment of that capital is. And as you could see, we took those actions recently and we'll assess those opportunities prospectively. We obviously don't guide quarter-by-quarter our activity in the market. But certainly, we'll look at those opportunities and assess is that the best place to deploy our capital. And if it is, we'll certainly act, but there's some other good growth opportunities in our business. I mentioned some of the opportunities through acquisitions. We're also expanding our footprint in PVCO pipe as well in Wichita Falls, Texas. So there are some good opportunities that we see, but we'll also assess are there opportunities in our own stock.

Q: Hi. This is Turner on for Vincent. It would be great to make sure that we're level setting for the $100 million of energy and feedstock headwinds correctly. Was all of this just related to energy markets tightening? Or were there some onetime headwinds related to the winter storms you mentioned that we should back out ahead of accounting for energy costs quarter-over-quarter in the second quarter?

A: No, Turner. It was all related to just really the dynamics that you mentioned in the energy markets, both ethane, ethylene and nat gas.

Q: Okay, great, great. It'd be great to get some color on CapEx as well in light of the $100 million reduction of your full year guide. Can you quantify your maintenance CapEx and what was taken out with this reduction?

A: Yes. So part of that, of course, that was removed is really, as I mentioned earlier, we're looking at our operations in the epoxy arena that we took a charge for in the third quarter of 2024. As I mentioned, we're looking at actions related to our ECH and AC facilities there. So as we think about the charge that we've took in the third quarter of last year. We do expect there'll be diminished capital spending in those operations in the Netherlands, but we'll also look across the entire organization and see are there opportunities to really tighten the belt on some of our operations. So ordinary maintenance in the business runs in the neighborhood of $700 million to $800 million. And so therefore, as I mentioned, safety and reliability would not be those areas where we would be pulling back on capital.

Q: Good morning, Steve and Jean-Marc. We've obviously over the last several quarters been hearing about a fair degree of sort of capacity rationalization happening on the ethylene polyethylene side of things. Could you comment a bit on what你 guys are hearing globally on the PVC side? And part and parcel with that, what the global cost curves are looking like within PVC?

A: Yes. I mean, if you look at the PVC market, it's been a oversupplied market globally. I mean, there is overcapacity certainly in Asia. It's been a market that has tended to rationalize in Europe now. As you remember, Europe used to be an exporter of PVC across the world and because of raw material cost and certainly energy cost that has stopped. So the situation is not yet completely sorted out. There is still some rationalization that needs to take place in Europe. But you also see upstream and on the ethylene side that some of the crackers that are operating in Europe are also not really profitable and you have started seeing some major producer to rationalize some of their production there. So I think there is still some way to go. We are not really exposed in terms of ethylene in Europe. We are buyer of ethylene. So but we are actually have seen a reduction in price in ethylene and I think it's putting pressure certainly on ethylene producer in Europe. So I think there is still some ways to go in terms of restructuring around the world in some of these commodities.

Q: Very helpful, very helpful. And as a follow-up, continuing with sort of the overcapacity theme, obviously we're sort of swimming in oversupply on the epoxy side of things as well. But then there are some glimmers of hope around the whole sort of anti-dumping sort of duties potentially being imposed. So where do we stand on that? And are you guys in the camp that as and when those anti-dumping duties do get imposed, you could see at the very least a return to positive EBITDA there?

A: So, yes, these anti-dumping have been somehow been put in place in the U. S. and in Europe. I think there was an expectation in Europe that prices would start going up. We've seen a little bit of that. We've seen certainly a pickup, small pickup in terms of demand. But the expectation that it's going to dramatically improve profitability, I think it's going to be a little bit difficult to achieve. As a reminder, some of the major producer certainly out of Korea have not been impacted by some of these anti-dumping tariffs. And so that has put a little bit of a damp on our expectations of a quick return to high profitability. I would say that the situation in the U.S. is pretty similar and we've seen certainly better performance in the U.S., but not to the extent where the market has changed dramatically.