Westlake Corporation Q2 FY2025 earnings call

Management Statement and Operational Highlights

• HIP Performance: HIP performed well in the second quarter with solid EBITDA and sales growth. The pipe and fittings business benefited from infrastructure spending, and the building products business maintained stability through its balanced portfolio.
• PEM Challenges and Strategies: PEM was pressured by production disruptions and global oversupply. The three - pronged profitability improvement strategy includes: 1) Improving plant reliability, with production improvements seen in the third quarter; 2) Reducing costs, having achieved over $75 million in cost reductions in the first half of 2025 and aiming for an additional $200 million by 2026; 3) Optimizing the manufacturing footprint, such as the closure of the Pernis epoxy site to put the epoxy business on a path to profitability in 2026.
• Company Strengths: The company has a diversified and complementary portfolio of businesses, a vertically integrated business model, a globally advantaged feedstock and energy position in the U.S., and an investment - grade balance sheet with $2.3 billion of cash and securities.

Segment Performance

• Housing and Infrastructure Products (HIP): In the second quarter of 2025, HIP generated EBITDA of $275 million on sales of $1.1 billion. Compared to the first quarter of 2025, HIP segment sales rose 16% due to a 14% increase in sales volumes for pipe and fittings and a seasonal uptick in building products demand. Year-over-year, HIP EBITDA decreased by $61 million as a result of a 2% decline in sales volume and a 1% drop in average sales prices. The pipe and fittings business benefited from increased demand in municipal water applications, while the building products business faced lower volumes due to a slowdown in North American residential construction but maintained stability via its balanced portfolio of new construction and repair/remodel sales.
• Performance and Essential Materials (PEM): Second - quarter sales of PEM were $1.8 billion, a decrease of $57 million from the first quarter of 2025, driven by a 6% decline in sales volume due to planned turnarounds, unplanned outages, and export sales disruptions. PEM segment EBITDA was $52 million in the second quarter, down from the first quarter and significantly lower than the second quarter of 2024. This was due to higher ethane and natural gas costs, increased impact from planned turnarounds and outages, and a 2% drop in average sales prices. The segment also announced the closure of its epoxy site in Pernis, Netherlands, which had been incurring significant losses.

Guidance

• Production Expectations: The integrated fluorovinyl system is slowly ramping up production in the third quarter, and the impact of production disruptions on earnings in the third quarter is expected to be less than in the second quarter.
• HIP Revenue and Margin: HIP 2025 revenue is expected to be in the range of $4.2 billion to $4.4 billion, with an EBITDA margin between 20% and 22%.
• Capital Expenditures: Total capital expenditures for the company are expected to be approximately $900 million.
• Cost Savings: Over $75 million of cost reductions were achieved in the first half of 2025 towards the 2025 company - wide savings target of $150 million to $175 million, and an additional $200 million of cost reductions are targeted by 2026 as part of the PEM profitability improvement plan.
• Cash Interest Expense: Cash interest expense for 2025 is expected to be approximately $160 million.

Risks

• Tariff Uncertainties: There are concerns about tariffs on exports, such as caustic soda to Brazil, and the impact on export - related sales. However, the company believes it is well - positioned with customers as some exports may be eligible for duty drawback.
• Macroeconomic Volatility: Soft macroeconomic conditions and slower North American construction activity can impact business performance. Uncertainties in the housing market and seasonal variations in construction activity also pose risks.
• Production Disruptions: Planned turnarounds and unplanned outages in the PEM segment can affect sales volumes and EBITDA, as seen in the second quarter.

Question and Answer

Q: A question on the HIP guidance. I think previously, you had some price mix headwinds that have you pointing to the lower end of the margin range. And now the sales guide is lower, but the margin guidance is intact. Should we still expect margins on the low end? Or have some of those mix headwinds normalized versus your prior expectations?

A: Yes, it's a good question, Patrick. And as we think about the guidance we're providing, we're simply reflecting the realities we see in the building -- residential building and construction markets. And so I'd still guide you to the range that we provided of 20% to 22%. Obviously, we delivered a strong quarter this year, and I would expect we'll continue to see results as we go through the stronger periods of 2Q and 3Q in the construction year. But our guidance still remains really in that 20% to 22% range.

Q: I want to go back to HIP if we could. So you talked about earlier some areas of HIP that we're seeing pricing pressure, all of the low gauge pipe. Could you go through, I guess, 2 questions there. What percent of the portfolio do you think is actually seeing kind of excessive competitive pricing versus what part is holding stable? And then just the second part, at the midpoint, your revenue is now down 5%. But again, the margins are stable. So why isn't there a decremental margin degrading. Is there a mix shift improvement in there? Just kind of -- versus first quarter to today, why don't margins change?

A: And so Duffy, as you think about the commentary we provided, you've seen really the broad portfolio offering that we have and addressing and adapting to the market conditions within the Building Products business. I continue to call out the strength in our water business going into our pipes and fittings business, but continue to recognize that as large diameter for water. And that business is really being supported by the Infrastructure Act as well as state cities and counties. But certainly, I would say that we've certainly had to position the business and adapt with our compounds business, our building products -- exterior building products business and our pipe business to the conditions that we see. So the range of the products we think and the depth of the products we think continue to be able to be addressing this changing and evolving market.

Q: If we were to dig a little bit more into bridging into the second half of the year, assuming by the end of the year, some of the planned and unplanned turnarounds are backed out, roughly how much less hit do you have from that? And what were operating rates chlorovinyls Q2 to Q3, how much do we actually get to improve operating rates?

A: As you can see in our prepared remarks that we continue to see improvements quarter - over - quarter in the third quarter, but you could also see that we're continuing to ramp up our chlorovinyl businesses in the third quarter. So while I see some improvement, we won't be fully clear of this in the third quarter.

Q: On M&A, could valuations become cheap enough in PEM opportunities that you would acquire something significant there? Or is your M&A focus exclusively over on the hip side?

A: No, John, it's a good question. We continue to look across the broad spectrum of opportunities, whether they're in the HIP segment or in the PEM segment. And that really is -- the opportunity is really driven by the valuation opportunity we see in one or the other segment. So there isn't necessarily a strong bias one or the other. It's really where the most opportunities present themselves. The strongest side of our business clearly is on the HIP side of the business. But clearly, should there be value opportunities that we see in chemicals, we'll certainly act on those opportunities as well.

Q: In PEM, as part of the initiatives to improve plant reliability, will there be a CapEx component of that either onetime in nature? Or is there any risk that your maintenance CapEx needs to be revised higher?

A: No, Vincent, we fully expect that the capital programs we have in place address this, and this is not an issue that requires a large capital outlay. So nothing incrementally beyond the capital programs that we've been discussing all year.

Q: As someone who probably ought to go back and take a class on tariff impacts 101, I'm wondering if you could elaborate on the comment about your caustic exports to Brazil and the fact that some of that is being processed there and then you'll have a duty drawback. So just conceptually, how much -- of the amount that you're exporting of caustic to Brazil, how much is subject to this duty drawback? And if you could just elaborate on what's exactly that all means.

A: Yes, Frank, it isn't really our ability to see in detail how much the paper and alumina business is exported out of Brazil, but I would say the great majority of it is, as we understand from our customers. So these are direct sales into those individual customers. As we understand the regulations and opportunities in Brazil, if those products are reexported out of Brazil, they have the ability to have duty drawback. And so as long as they're exporting some portion or a majority of the portion, as we understand, they're able to then have that duty drawn back and be insulated from that portion they export. That's our understanding from our customers.

Q: I wanted to follow up on HIP, and you've talked about this in various ways. But if I look at your updated guidance, in the first half in HIP sales, you were down around 3% year - on - year. Your second half HIP outlook is about up 3% year - on - year. So curious if you could talk to 2 things there. I mean, one, the visibility by the markets? And then two, how you think we should think about your performance relative to housing, considering the outlook has gotten worse, but maybe your second half outlook has gotten a little bit better or maybe even unchanged?

A: When you think about the outlook we have, as you clearly can see, adjusted our revenue guidance down. But I would say the product mix that we have allows us -- and I'd say the product mix we have is a little bit different product mix than the others with our pipe and fittings and compounds businesses. The demand that we're seeing really in the infrastructure water business, this is coming from the Infrastructure Act passed several years ago, allows us to be able to address those needs in cities and counties. And I think that is, as you can see, a nice contributor in the second quarter, and we'd expect that to provide a tailwind over time. Certainly, in our Exterior Building Products business, we've continued to adjust our portfolio and adapt to the affordability issues you hear much discussed. So again, recognizing that the back half of the year should begin to trail off depending on weather as we end the third quarter and into the fourth quarter, it's very weather dependent in terms of how volumes and margins unfold. So this is why we've really adjusted our revenue guidance but continue to stick to the margin guidance of 20% to 22% that we provided already.

Q: Within the HIP segment, can you size up the municipal water applications market for us? Like what's -- maybe what's the total size? How fast is it growing? And if possible, what -- who are the key competitors that you compete with over there?

A: Yes. The large players in this market really are largely private players. This is the larger diameter PVC business. So you see that players such as Diamond Plastics is one of the larger players and JM Eagle is also one of the other larger players in this business. These are the key players really in the larger diameter PVC space. We do compete in -- with other who are non - PVC producers, but these are the large PVC pipe producers. The market continues to organically grow very nicely, I'd say, in the neighborhood of 5% to 7% over time. And so as we think about the overall business of our pipe and fittings business, we're the only producer that is producing not only pipes, but also fittings to provide the entire integrated kit to meet needs that we see in the water business, addressing municipal requirements to solve water issues.

Q: A question around chlor - alkali supply, particularly within North America. I mean, over the last couple of quarters, there's been some fear in the marketplace that there's been some new projects announced. But I mean, as I look at it, it seems that there is one expansion on the table and, call it, 2 greenfield projects. And one of those 2 greenfield projects doesn't even have an FID. And the expansion project, the number out there seems to be higher than eventually where it'll end up. So just would love to hear your views on what the supply picture looks like through the end of the decade. And should it be worrisome or not?

A: No. I mean, I will take the question. If you look into the market, I think that we see some stability going forward. And I think probably at the end of the decade, we're going to start seeing some uplift probably in the end market demand. And yes, that's the way we look into it right now.

Q: Just looking at spot PVC prices that are almost approaching all - time lows. Could you talk a little bit about the global supply - demand outlook for PVC? Clearly, the demand side is affected by weak construction trends. But what about the supply side? How much global capacity do you expect to be added in PVC this year and next year? And what are you seeing in terms of operating rates for China PVC plants?

A: Yes. So Matthew, when you think about the situation in PVC, certainly, a great majority of that does go into construction markets. And certainly, the weakness that you've seen in the Asian markets and the European markets continue to really impact kind of operating rates. The issues that we've seen here in construction, we recognize that the underbuild in North America is just that. It's been a long - term underbuild for over a decade. And we think the demand picture here is ripe for change given the demographic demand for housing. But when you think of the global supply - demand balance, we don't see a significant amount of new capacity coming into the market incrementally from where we sit in 2025. You saw some of the comments or heard some of the comments that we made earlier in terms of some of these markets, some of these producers, especially those in Asia, are currently underwater. And I think this is why you're hearing commentary about the Asians and specifically the NDRC talking about some potential rationalization, which could take many, many years. But nevertheless, I think the market really needs some demand to rebound here in the North American and European markets, but the Asian markets will take longer to recover.