Westlake Corporation (WLK) Q1 2023 Earnings Call Transcript

May 04, 2023 10:56 PM ETWestlake Corporation (WLK)

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Q1: 2023-05-04 Earnings Summary

EPS of $3.09 beats by $0.94 | Revenue of $3.36B (-17.26% Y/Y) misses by $51.05M

Westlake Corporation (NYSE:WLK) Q1 2023 Earnings Conference Call May 4, 2023 11:00 AM ET

Company Participants

Jeff Holy – Vice President & Treasurer

Albert Chao – President and Chief Executive Officer

Steven Bender – Executive Vice President and Chief Financial Officer

Albert Chao

Thank you, Jeff. Good morning, everyone. We appreciate you joining us to discuss our first quarter 2023 results. For the first quarter of 2023, we achieved sales of $3.4 billion, net income of $394 million and EBITDA of $825 million. These solid results reflect significant improvement in volumes, margins and earnings from the fourth quarter of 2022 as customer destocking activity moderated, end market demand improved, and we benefited from lower feedstock fuel and power costs.

As demand improved in the first quarter, we shifted sales volumes from exports to domestic markets, contributing to better sales mix and higher integrated margins. We also benefited from lower feedstock and energy costs compared to the levels of 2022 as our globally advantaged low-cost feedstock and energy position in the U.S. Gulf Coast improved further, but we also saw lower energy costs in Europe as well. Our results for the first quarter also reflected the achievement of approximately $25 million of cost savings in this quarter towards our previously communicated $55 million to $105 million of targeted 2023 cost savings. Each of these factors supported solid improvement in our integrated margins on the fourth quarter of 2022.

Looking at our first quarter financial results, I’m particularly proud of our HIP segment performance, which maintained EBITDA margin of 20%, similar to the first quarter of 2022. These margins were achieved despite a 21% decline in volume when compared to the prior year period, which was driven by the decline in home building activity due to lower affordability from higher mortgage rates.

This demonstrates the benefit of our product mix and strength of our brands. The margin stability of these businesses along with the long-term growth opportunity in the U.S. housing market were key reasons why we invested in the HIP segment in 2021 through the acquisitions of Boral Building Products, LASCO Fittings and Dimex. We continue to have a positive long-term view of the U.S. housing market, driven by the deficit in new housing construction since the Great Recession in 2020 — 2008 and increasing demographic demand.

Turning to our PEM segment. We continue to operate with agility as we navigated the current market dynamics by shifting PVC and polyethylene sales volume back from export markets to rebounding domestic markets, while solid chlor-alkali markets drove higher average selling prices for both chlorine and caustic soda in North America. Lower feedstock energy prices, combined with our cost reduction actions, drove significant improvement in integrated margins from the fourth quarter of 2022. Overall, I’m very pleased with our first quarter performance and the team’s ability to successfully adjust to rapidly changing end market trends.

Steven Bender

Essential Materials sales in the first quarter of 2023 decreased $164 million over the first quarter of 2022, primarily driven by higher average selling prices for caustic soda. As compared to the first quarter of 2022, our earnings were impacted by lower integrated margins for all of our Performance Material products, including PVC, epoxy, polyethylene and lower production and sales volumes across most product lines. These headwinds were particularly — were partially offset by higher average selling prices and Essential Materials along with lower fuel and energy prices.

PEM’s segment EBITDA of $615 million in the first quarter increased $172 million from the fourth quarter of 2022 as a result of 6 key elements. Higher production and sales volumes, particularly in PVC and epoxy resins,

Essential Materials sales in the first quarter of 2023 decreased $164 million over the first quarter of 2022, primarily driven by higher average selling prices for caustic soda. As compared to the first quarter of 2022, our earnings were impacted by lower integrated margins for all of our Performance Material products, including PVC, epoxy, polyethylene and lower production and sales volumes across most product lines. These headwinds were particularly — were partially offset by higher average selling prices and Essential Materials along with lower fuel and energy prices.

PEM’s segment EBITDA of $615 million in the first quarter increased $172 million from the fourth quarter of 2022 as a result of 6 key elements. Higher production and sales volumes, particularly in PVC and epoxy resins,

Michael Sison

Nice start to the year. Albert, I think you mentioned that 2Q tends to be seasonally better than 1Q. As you said — as you look at demand and where integrated margins are for all your businesses, how do you think that plays out this year given things are weakening across the board?

Albert Chao

Yes. We’ve seen inventories destocking run its course and pretty much finished that destocking process. And we believe that customers are reordering as they see the demand. And we believe that the economy has stabilized through the changes in interest rate increase, and it should improve from the bottoms we’ve seen in the fourth quarter of 2022.

But having said that, the Fed just raised interest rates, and they could have repercussions in the economy going forward. But we believe that the U.S. economy is still quite long, domestic demand is quite strong. We’ve seen that in our — both in the PEM segment, polyethylene, PVC as well as in our HIP Building Materials business. So we are cautiously optimistic that we will see some improvements. It doesn’t mean that we’ll go back to 2022 or 2021 high levels before the interest rates start increasing.

Kevin McCarthy

Albert, in your press release, there is a comment that you saw increasing demand for epoxy resins which surprised me a little bit. Can you elaborate on what you’re seeing in the epoxy market with regard to demand and operating rates? And looking ahead, are you seeing any increased stability in the pricing function there?

Albert Chao

Sure, Kevin. Yes, we see epoxy demand improving, primarily in North America, still quite weak in Europe with a high cost position in Europe and also in Asia, it’s relatively weak. But we are seeing signs of improvement and the U.S. economy is still growing. We need more windmill blades and coatings as well as structural products. So we believe that the epoxy business should have a good position going forward, but not as, of course, robust as in 2021, 2022. But we believe the demand is there. And I think when the economy recovers, the increased demand in epoxy, especially in the U.S. with a lower cost position as well.

John Roberts

You noted the increased exports of polyethylene and vinyls. Could you talk about some of the geographic shift that’s going on in epoxy. So we’ve got China epoxies moving into Europe. Are you shifting any of your geographic footprint in our epoxy sales as well?

Albert Chao

Yes. We are reacting to all the dynamics in the very competitive global marketplace. And as I said earlier, the China with its economy has been slowing in the past years or quarters, they exported the epoxy and as well as PVC to places like India and Europe. But we’re seeing that being slowing down the Chinese economy is improving, but things could change. So — but we are very cautious and colleagues and all the activities going on.

Duffy Fischer

Fair enough. And then one of your large competitors in epoxy has talked about doing some pretty significant restructuring of their assets, you’ve had years for about a year. As you look at it, do you have the right footprint, do you think an epoxy — or do you think you need to do some significant restructuring of your asset base as well?

Albert Chao

Yes, certainly, we are new to the epoxy business and have had ownership for a year. We find a lot opportunity to improve. And as we go forward, we’ll try to improve our positions.

Hassan Ahmed

Fair enough. So now on the epoxy side of it Albert, you obviously — the commentary sounded incrementally positive. So is it fair to assume that potentially Q4 and Q1 were the trough and sort of things start cycling up from there. And if that is the case, this inflection, will this be primarily sort of demand driven with sort of China picking up and the like? Or will it be partly demand driven and partly supply driven as well, where sort of — in that sort of positive commentary you’re being in maybe some capacity rationalization in the marketplace. Maybe less disruptive pricing. You talked obviously about China exporting less now. So I’m just trying to figure out supply and demand wise, what you guys have seen there.

Albert Chao

Yes, that’s a very good question. I think for PVC, we think you are right that Chinese demand increasing, especially real estate, which is a big component of the economy and the government tried to stimulate that part as well, that dimension increase of less export and pricing should improve and so as caustic. On the epoxy side, little bit different. It’s not that a big business and the Chinese are building.

Looking for the windmills and windmills are just getting back in China of new construction. Certainly, everybody needs a renewable energy and lower cost. So it takes time for that to come into this place. Meanwhile, as one of the earlier questions that they have been exporting the amount overseas. But as the year progresses in next year, I think next few years, definitely, the demand for epoxy globally will increase improve. But this year is still a — maybe it’s a bottom of the cycle year.

Turner Hinrichs

This is Turner Hinrichs on for Angel. I was wondering if you could give us a little more color on your epoxy business results, specifically how they compare to 1Q ’22 of last year and 4Q ’22 of last year as well. And as part of that, would you say your epoxy business is gaining share in the market? Or how is Westlake’s position evolving in light of the ongoing imports from Asia and strategic moves by one of your peers?

Steven Bender

So good question. So the market was meaningfully stronger in the first quarter of 2022. And so you certainly have seen a change in market dynamic in terms of demand first quarter of 2022. So I’d say that with the energy power circumstance that we have, let’s say, in Europe, European epoxy is in a much better position to be able to compete. But you’re right, there is still imports of Asian epoxy into the European market, though as the Asian markets begin to rebound, less so in terms of the volume of epoxy resins into that market.

When you think of the domestic market for our epoxy resin, as Albert noted earlier, it’s a stronger position that we see there in terms of overall market demand. And so I would say that the troughs that we saw in fourth quarter as everybody was destocking across all product chains, we certainly saw that really come to an end at the end of the fourth quarter.

And so I would say that we see some recovery as we get into ’23 with ’24 and beyond being stronger markets as we see greater demand for wind energy and windmill contracts being led in ’22, ’23 and ’24 and beyond. And those will take time before those windmills are constructed and the demand really gets much stronger. So I’d say ’23 is one of those years we see a strengthening of the market but not fully backed by any means back to the levels that we saw in ’21 and first quarter of ’22.

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