Release Date: August 06, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Westlake Corp (WLK, Financial) reported record quarterly results for its Housing and Infrastructure Products (HIP) segment in Q2 2024, contributing to year-over-year company-wide earnings growth.
- Net sales for Q2 2024 were $3.2 billion, with EBITDA of $744 million and net income of $313 million or $2.40 per share, showing improvements from Q2 2023.
- The company benefited from higher volumes across its HIP segment, particularly in pipe fittings, siding, and trim, as well as higher volumes in its Performance and Essential Materials (PEM) segment, led by PVC resin and caustic soda.
- Westlake Corp (WLK) achieved approximately $50 million in cost savings during Q2 2024, contributing to a total of $85 million in long-term cost reductions in the first half of 2024.
- The company continues to see benefits from its vertical integration strategy, which helped improve sales volumes and margins by shifting sales from less attractive export markets to more profitable domestic markets.
Negative Points
- Average sales prices in both the HIP and PEM segments were lower year-over-year in Q2 2024, primarily due to declines in PVC resin, caustic soda, and pipe and fitting prices.
- The global macroeconomic recovery has been slower than expected, impacting overall market conditions and demand.
- Profitability in the European epoxy business remains challenged due to low-priced import competition, leading to the decision to temporarily cease operations in the Netherlands.
- The company faces potential impacts from unusually wet and harsh weather conditions in North America, which could affect sales volumes in the second half of 2024.
- There are concerns about the slowdown in US housing starts and remodeling activity, which could negatively impact the HIP segment's performance in the latter half of the year.
Q & A Highlights
Q: Hi, good morning and congratulations and welcome to Jean-Marc. Maybe my first question, just on the sales and margin guide for HIP that you maintained. But you mentioned there's potential upside within that. What do you see as the biggest potential sources of upside there? And does the current guide assume materials costs go up or hold relatively stable in the second half and maybe some modest price declines there? Thank you.
A: Yes, good morning, Patrick. And yes, you know, as we think about the outlook for the HIP segment, strong results this quarter and our guidance really was to see that there is potential upside to the guidance of 22% that we've provided. We've seen increases in materials costs and PVC resin, and we continue to think that they'll continue to be a reasonable level of construction activity. We've seen the guidance from a number of research firms like NHB and others that show housing starts could decline later this year. And so as we think about that, we still think the cross selling and the capability to continue to push forward in value proposition for our products remains, which is why we provided some potential upside in that guidance.
Q: Understood. Very helpful. And then based on that or are you anticipating any sequential improvement in the PEM segment? I know you cited some industrial softness there, but it looks like there should be continued pricing strength and polyethylene and PVC, so what should we expect in terms of the PEM segment sequentially?
A: Yes, certainly as we are able to achieve price increases in both polyethylene, PVC and export prices has also been moving up. So we are seeing some stabilization of prices and prices are moving up. The destocking we believe is over. So is what the global economic conditions look like going forward and with potential of reduction in interest rate by the Fed should be a boost for the US economy and global economy for the future quarters into next year.
Q: Yes, hi. Good morning. Can you help break down some of the success areas on your margin expansion that you are seeing in the HIP business. And maybe how much of that is driven by your PVC pipes and compounds business and how much is the rest of the building products platform?
A: Yes. It's a good question. And you see that we called out specifically our siding and trim business and our pipe and fittings business as strong contributors in the quarter's results. And so those two subsegments of HIP were very strong contributors to say, sidings and trim, and our pipe and fittings business made good contributions this quarter.
Q: And then maybe if you could share your latest views on ethane here, if prices are at the historic lows clearly good for Westlake. We also saw polyethylene prices, price hike go through in July. Just a sort of view on both of those, please?
A: Yes, and so as you think about the ethane prices, you have seen, the average price for ethane has trended lower since the second quarter. And while we don't know what the third quarter will average out to be. Looking at the forward curve, ethane does look like it will trend somewhere between $0.03 to $0.05 lower if you look at the forecast from many of the consultants in the forward curve for ethane, which would be constructive for our value.
Q: Nice quarter and welcome to Jean-Marc, and I guess my first question, when you think about PEM, sequentially into the third and the fourth. I think the outlook for ECU margins are kind of sluggish, I guess, from the consultants. Do you think I mean how do you think the progression there should unfold if demand stays around these levels for the second half?
A: Yes. Demand for PEM products are pretty stable, and I mentioned, actually, demand for polyethylene PVC being quite good, especially in the export market, and we are able to raise prices on caustic and chlorine, the demand is stable. And the price is more or less stable. There's a few dollars up and down, depending on which quarter it goes. But I think the demand in the US, especially, it's stable, and I said, the restocking pretty much over it's reflecting the true economies demand for various products.
Q: Got it. And then just a follow-up on pipe and fittings. It sounds like that business continues to show really good strength. Do you think growth will be as good in the second half? And then I was just curious on profitability. You have a competitor out there that shows margins well above yours. Any reason why your profitability would be sort of similar to theirs kind of that 50%, 60% range in operating margin?
A: Well, Mike, I think when you look at the strength we're seeing really in the materials that we see in our pipe and fittings business, again, we're continuing to see really good value really in both the pipe and the fittings application. And we're one of the few players that really are in that integrated pipe and fittings solution business. Certainly, our place really in the large municipal water solutions, both fresh and storm water is a big driver for the value proposition we bring forth. And it really is a focus of driving value for those customers and looking for value for our integrated stakeholders in this process. So it really is looking to make sure that the solutions that we have both in our pipe and our fittings solutions provide real value. We get focused really on the value rather than the volume in this business.
Q: Thank you and good morning. And let me also add my congrats to Jean-Marc. If I could just follow up on that last question and answer, Albert. In terms of the stability of demand in PEM, and the price increases and the lower raw materials, it sounds as if we're looking at reading between the lines, it sounds as if we're looking at a flat to up third quarter in PEM perhaps somewhat moderated by the Petro I turnaround. So just curious if I'm thinking about that in the proper context and or perhaps what sort of level of impact do you believe the Petro I turnaround which starts in September will have on 3Q and 4Q?
A: Yes. Certainly, the Petro I turnaround will have some impact. But I just want to remind that Westlake is a net buyer of ethylene. And even though ethane price has reduced, which is great, it helps our 4.5 billion pounds of ethylene capacity that were net buyers were paying higher ethylene prices. And also I mentioned that we are booking the mothballing plants in the Netherlands which also, even though it's not a cash outflow in the third quarter, we are booking in the third quarter. So those accounting costs will impact our third quarter results.
Q: Thank you. Jean-Marc, wish you best of luck as the CEO. And Albert, could you tell us how you approach
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
