Westlake Corp Q4 FY2021 Earnings Call

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the Westlake Corporation Fourth Quarter and Full Year 2021 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. After the speakers’ remarks, you will be invited to participate in a question-and-answer session. As a reminder, ladies and gentlemen, this conference is being recorded today, February 22, 2022. I would now like to turn the call over to your host, Jeff Holy, Westlake Vice President and Treasurer. Sir, you may begin.

Thank you. Good morning, everyone, and welcome to the Westlake Corporation conference call to discuss our results for the fourth quarter and full year of 2021. I’m joined today by Albert Chao, our President and CEO; Steve Bender, our Executive Vice President and Chief Financial Officer; Roger Kearns, our Executive Vice President and Chief Operating Officer, and other members of our management team. We have included an earnings presentation, which we’ll reference during our call today, which can be found in the Investor Relations section of our website. To begin today’s call, I would like to cover several changes at Westlake we’ve recently announced. Last week, we issued a press release announcing our name change to Westlake Corporation, which we believe better represents the breadth of products we produce and the industries we serve, including housing and construction, automotive and consumer lifestyle, packaging and healthcare. In conjunction with our name change, we also resegmented our business for financial reporting purposes. Our two newly established reporting segments, the Housing and Infrastructure Products segment and the Performance and Essential Materials segment replaced the former Olefins and Vinyls segments. We will begin with discussing our new Housing and Infrastructure Products segment that includes Westlake Royal Building Products, Westlake Pipe & Fittings, Westlake Global Compounds and Westlake Dimex. Our Performance and Essential Materials segment includes Westlake North American Vinyls, Westlake North American Chlor-alkali & Derivatives, Westlake European and Asian Chlorovinyls, Westlake Olefins, Westlake Polyethylene and Westlake Epoxy. You can find additional information on our resegmentation on slide 3 of today’s presentation. 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, including the results of our resegmented business. Roger will then discuss the current perspective and competitiveness of our two businesses. Finally, Albert will add a few concluding comments, and we’ll open the call up to questions. 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, 2020, 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 fourth quarter and full year results. This document is available in the Press Release section of our website at westlake.com. A replay of today’s call will be available beginning today, two hours following the conclusion of this call. That replay may be accessed by dialing the following numbers. Domestic callers should dial (855) 859-2056. International callers may access the replay at (404) 537-3406. The access code for both numbers is 8356311. Please note that information reported on this call speaks only as of today, February 22, 2022, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay. I would finally 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?

Thank you, Jeff. Good morning, everyone. We appreciate you joining us to discuss our record quarterly and annual results. 2021 was a very exciting year for Westlake as we celebrated the 35th anniversary of our founding in 1986, reported record financial results and transformed the business. Westlake businesses benefited from the strong economic expansion and favorable macro conditions as we rebounded from the economic downturn in 2020. We announced four transformational acquisitions that have significantly expanded and diversified our business. For the full year of 2021, we reported several financial records, including record net income of over $2 billion or $15.58 per share and record EBITDA of $3.7 billion, on record sales of $11.8 billion. The dedication of the Westlake team was evident in 2021, as we were able to deliver these record results in spite of numerous disruptions such as Winter Storm Uri, Hurricane Ida, COVID-19 and ongoing global supply chain dislocations. Over the past six months, we’ve invested $3.8 billion to expand and diversify our business in Housing and Infrastructure Products and in Performance and Essential Materials markets. These investments include acquisitions of Boral, North America’s Building Products businesses, which, when combined with our existing building products platform, provide our residential customers with a comprehensive portfolio of leading brands and high-value products and housing solutions that enhance the everyday lives of countless individuals. Dimex, a producer of consumer products made from post-industrial recycled PVC and polyethylene. LASCO Fittings, which complements our existing Pipe & Fittings business, which is one of the nation’s largest pipe and fittings companies. And Hexion’s epoxy business, a leading global producer of epoxy resins used in high-performance materials, composites and coatings. These materials are essential to the lightweighting of products, including wind turbines, electric and other fuel-efficient vehicles and airplanes, reducing their carbon intensity and creating more sustainable products. These acquisitions with attractive financial attributes and market-leading positions strategically fit with Westlake’s leading positions in Housing and Infrastructure Products, adding PVC, polyethylene, caustic soda and chlorine, expanding the depth and breadth of our business and creating a larger and stronger platform for future earnings growth. We will continue to look for opportunities to expand our business while driving value for our shareholders. While Steve will provide greater detail on the results of our strategic realignment and associated resegmentation, I do want to provide some insight behind these investments. As our business profile has evolved over the last decade, accelerated by the significant acquisitions of the past year, we have grown and transformed our business into a more diversified and end product-oriented mix. We believe our name change from Westlake Chemical Corporation to Westlake Corporation better reflects Westlake’s broader lines of businesses. The new segmentation will provide the market with better clarity into our businesses and the exceptional value each segment creates and delivers to our shareholders. The fourth quarter of 2021 continued to benefit from the strong demand drivers across our product portfolio that we experienced in the first nine months of the year. Key markets such as housing, repair and remodeling, new home construction, flexible food, industrial and consumer packaging have remained strong, and our results were driven by broad-based pricing gains. The continuation of the market momentum in construction activity, especially North America housing, along with our leading product positions and brands drove demand for our PVC and building products. Our sales volumes significantly improved as we capitalized on the strong demand dynamics. Our longstanding belief in delivering sustainable value also encompasses our commitment to environmental and social responsibility, which we outlined on slide 4 of our presentation. We have established a goal to reduce our CO2 intensity by 20% by 2030 from our 2016 baseline and have a plan to achieve this reduction. We have a disciplined strategy to decarbonize our assets while growing EBITDA in our attractive end markets as well as delivering sustainability-focused products to our customers. I would now like to turn our call over to Steve to provide more detail on our financial results for the fourth quarter and full year 2021.

Thank you, Albert, and good morning, everyone. The market trends, which began in the second half of 2020, reflecting the very healthy housing construction and repair and remodeling markets paired with strong demand in food, industrial and consumer packaging continued throughout 2021, driving a record performance from broad-based pricing gains in both segments, along with partial year volume gains from the businesses we acquired in the fourth quarter. This quarter, we reported record results for Westlake including net income of $644 million, income from operations of $873 million, and EBITDA of $1.1 billion on sales of $3.5 billion. Fourth quarter’s $531 million increase year-over-year in net income is a result of the strong market conditions for our materials and products, resulting in solid margins across our portfolio. The strength in both segments this quarter drove records in sales, net income and EBITDA, despite what is typically a seasonally slower period. While I will discuss our segment results in detail in just a moment, both our Housing and Infrastructure Products and our Performance and Essential Materials segments had strong earnings anchored by robust demand in their key markets. We achieved broad-based favorable pricing across our entire product portfolio. For the full year of 2021, we reported record net income of $2 billion and EBITDA of $3.7 billion on sales of $11.8 billion. Strong housing construction activity and increased government infrastructure spending, combined with strong demand for packaging, construction, medical, automotive and industrial end markets drove a favorable pricing environment throughout the year. These positive dynamics more than offset the headwinds we experienced with weather disruptions, COVID-19, supply chain dislocations and inflationary impacts on our costs. The 2021 EBITDA impact of the unplanned weather outages was approximately $215 million. Our utilization of the FIFO method of accounting resulted in an immaterial difference compared to what earnings would have been reported on the LIFO method. I’d now like to discuss the performance of our two segments as compared to prior year periods. Let me begin with slide 6 of our presentation where we detail our Housing and Infrastructure Products segment. Our housing products business continued to benefit from strong repair and remodeling activity and new construction in residential America. Our housing and fittings business also benefited in 2021 from the increase in construction activity and the tight supply conditions for PVC pipe. The recently passed $1 trillion infrastructure bill should provide further demand tailwinds for many years, and the construction activity from this bill is expected to provide very good long-term demand. The strength we have seen in residential housing has driven demand for high-margin offerings in siding, roofing, trim, decorative stone, windows, pipe, fittings and wire and cable compound products throughout 2021, and this has continued into 2022. As noted by industry associations and consultants, including the National Association of Homebuilders and Harvard’s Joint Center for Housing Studies, who publishes the leading indicators of repair and remodeling index, market conditions for remodeling remain strong, and the U.S. Census data reports new housing starts continue to increase year-over-year, resulting in backlog of projects and long-term demand strength driven by future infrastructure spending. The fourth quarter is typically a seasonally slower quarter for Housing and Infrastructure Products, yet for the fourth quarter of 2021, the Housing and Infrastructure Products segment had EBITDA of $162 million, an increase of $63 million from the prior year period on $1 billion of sales. Housing product sales were $843 million in the fourth quarter, reflecting the strength in siding, trim, shutters, roofing and window products, our post-recycled products as well as our pipe and fittings and PVC compounds products servicing the residential markets. Infrastructure Products sales for the fourth quarter were $204 million and our nonresidential pipes and fittings and PVC compounds business. These products serve a variety of sectors, including agriculture, municipal water services, healthcare, transportation industries, among others. Housing and Infrastructure Products EBITDA for the full year of 2021 was $534 million, an increase of $146 million versus prior year results. These solid results were driven by robust residential construction, remodeling, infrastructure and industrial demand. Now, I’ll move on to discuss the results of our performance in the Essential Materials segment, which can also be seen on page 9 of our presentation. Westlake is the world’s leader in chlorovinyls markets. This leading position, combined with strong market fundamentals for PVC, polyethylene and caustic soda, enabled us to deliver record results the quarter. For the fourth quarter of 2021, which is also typically a seasonally slower period, performance in Essential Materials segment delivered EBITDA of $997 million, an increase of $683 million from the prior year period. Performance Materials, which represents PVC and polyethylene had sales of $1.7 billion in the fourth quarter. Essential Materials inclusive of caustic soda, styrene and chlorinated derivatives had sales of $796 million, which increased $711 million and $316 million, respectively, when compared to the prior year period due to improved pricing and strong integrated margins. The solid demand for PVC was anchored by robust year-over-year global growth in PVC end-use markets, including construction and home remodeling, which was evident in our Housing and Infrastructure Products results. These factors drove record PVC sales prices in the segment and strong integrated margins throughout 2021. Polyethylene benefited from the continuing strong demand in key flexible food, industrial and consumer packaging markets, driven by price gains, while volumes declined due to supply constraints attributable to weather events. Additionally, with increasing global industrial activity throughout the year, we saw increasing demand for caustic soda, leading to improved pricing in the second half of 2021. Performance and Essential Materials EBITDA for the full year of 2021 was $3.2 billion, an increase of $2.3 billion versus prior year results, reflecting strong margins across our business. For the full year of 2021, net cash provided by operating activities was $2.4 billion. At year-end, cash and cash equivalents were $1.9 billion and the long-term debt was $5.2 billion. Capital expenditures in 2021 were $658 million. Turning your attention to 2022, let me address some of your modeling questions and provide some guidance for the year ahead. The series of disciplined acquisitions announced in 2021, combined with our leading positions in our business and favorable market outlook position us to continue to drive meaningful growth and value in ’22 and beyond. We expect our capital expenditures to be between $750 million and $850 million, which would support our operations including our recent acquisitions, lower costs and drive efficiencies, including projects to debottleneck VCM, EDC and PVC in several sites and increase our investment in the LACC joint venture to 50%. For the full year of 2022, we expect our effective tax rate to be approximately 23%. We also expect cash interest expense to be approximately $170 million. We ended the year 2021 with higher raw material and energy costs, which have persisted into 2022. Based on our current view of demand and prices, we expect our Housing and Infrastructure Products segment to increase revenue in 2022 by 50% to 60% from the reported revenues of $3.1 billion in 2021. This increase is driven by the continuing strong demand for products and additions of the product portfolio from our recent acquisitions. Now, I’d like to turn the call over to Roger to provide a current perspective and competitive positions of our business.

Thanks, Steve, and hello, everyone. Over the past 35 years, Westlake has built a robust platform for growth based on several key components. We believe these give us resilience going forward. First off, we have a globally advantaged ethane feedstock for our ethylene units and enjoy low-cost natural gas that powers our chlor-alkali facilities as compared to the rest of the world’s high prices of oil and power and the resulting cost of production. As we see oil prices rise, this advantage solidifies. Second, we have significant scale. As Steve mentioned, we are the largest chlorovinyl producer in the world with a global manufacturing footprint. Our recently acquired epoxy business and our low-density polyethylene business have global leadership positions. Our recent acquisitions in our Housing and Infrastructure Products segment give us significant scale in our North American markets. Thirdly, we’re highly integrated. Our vertical integration starts with cost-advantaged ethylene as a key building block for both our polyethylene and our vinyl product lines, and chlorine that supports our PVC, epoxy and downstream businesses. Our integration from feedstocks through finished building products keeps our manufacturing costs low, giving us a very competitive cost position. These three components establish a strong foundation for competitiveness across all of our businesses. Now, we’ve built on this foundation with high-value brands in the housing and building products markets. We focus on delivering innovative product solutions to our customers that drives value added in the commercial relationships that we’ve built. With the continued strong demand for housing, paired with our broad portfolio of housing products, we’re in a solid position to continue to grow our business and our earnings in this sector of the economy with these advantaged branded product positions. Recently, we launched our new Westlake branded building products, including Westlake Royal Building Products and Westlake Pipes & Fittings. The market reception has been very strong. We’re quite excited about the initial brand awareness of our products and the interest we have seen just at the recent International Builder Show in Orlando. The broad suite of products in our Housing and Infrastructure segment will continue to benefit from multiple factors, including government spending on the infrastructure, long-term growth attributable to favorable demographics and recent underbuilding of new homes, which is driving continued growth in the U.S. housing market. The repair and remodeling spend remains very positive. Both our near-term and long-term outlook for this portion of the housing market remains constructive. We are well positioned by our product and brand positions to capitalize on it. Now, throughout ’21 and continuing today, industry consultants have reported strong builder sentiment for repair and remodeling activity and new construction with a majority of home improvement professionals reporting continued increases in project volume and size. Since 2017, industry consultants report the market has seen average annual residential construction spending in excess of $500 billion with over 75% of these dollars in the repair and remodeling space. New housing starts are still on the rise, and the leading indicators for construction activity are positive with new construction spending forecasted to realize growth over the next couple of years. Our Performance and Essential Materials segment is well positioned to capture the strength that we see in market demand within the vinyls and polyethylene industry, which continued to experience robust global demand across their end markets. As mentioned, we’re well positioned in the low end of the cost curve with our globally advantaged power and feedstocks as well as through our integrated manufacturing with dedicated offtake that results in lower fixed costs per unit of production. Our portfolio of products and custom solutions continue to enable us to capitalize on the attractive end market trends. Consumer demand and manufacturing growth is expected to remain robust, driving demand for caustic soda, packaging, continued lightweighting of automotive and aircraft, new home construction and remodeling activity. I’m quite excited about the new acquisitions, the future ahead and how we are uniquely positioned to meet our customers’ needs. I’ll now turn the call back over to Albert.

Thank you, Roger. In 2021, we accomplished a series of meaningful milestones. We have transformed our business under one unified Westlake brand in our two market-leading business segments. We delivered record sales, net income and EBITDA and have developed a platform for growth that drives value for our investors. We expect the economic recovery to continue as forecast calls for solid U.S. and global GDP growth in 2022. As Roger outlined, the U.S. housing and repair and remodeling markets are both performing exceptionally well, along with a robust forward outlook. The U.S. Census housing data and Harvard’s leading indicator of remodeling activity supports the outlook for continued robust housing construction-related spending in 2022. Our recent acquisitions in building products greatly expand our premium brands in siding, roofing, stone, windows and outdoor living products. The values of these brands provide Westlake the leverage to expand our reach in the market with higher value-added specialty products and to drive strong, consistent earnings power in our Housing and Infrastructure Products segment. In Performance and Essential Materials, demand remains favorable as performance materials used in everyday products such as housing, consumer packaging, healthcare and lightweighting and wind energy will drive demand for our polymer volumes in PVC, polyethylene and epoxy. Increasing industrial and manufacturing demand for essential materials of caustic soda, chlorine and our chlorinated products continue to outpace supply. As a leading producer of these Performance and Essential Materials, we are well positioned in 2022 and beyond to benefit from the strong demand. We continue to focus capital investments in 2022 on a number of accretive projects. This will include automation of certain processes that will enhance margin as well as alleviate the pressure of current labor constraints. We continue to look at opportunities that further our strategy of product expansion and increase our vertical integration and sales channel capabilities across the organization to meet the needs of our customers. Westlake has a strong commitment to sustainability and advancing our ESG initiatives with our announced 20% carbon intensity reduction goal for 2030 from our 2016 baseline. In 2021, we developed and launched a wide range of sustainable products such as lower carbon caustic soda and PVC, vinyl-based solutions for building materials, lower carbon footprint PVC pipe and consumer products using recycled plastic material. Our product innovation pipeline will continue to introduce new and sustainable products to meet the needs of society. We’ll do this with the focus on our core tenets of operating safely, protecting the environment, and delivering valued products that enhance the lives of people around the world every day. While we see lingering impacts of labor tightness and supply chain constraints, the macroeconomic backdrop remains favorable in 2022. And Westlake is well positioned to serve the growing needs of our customers across the globe while maintaining financial discipline, which combined with the strong fundamentals of our business enable us to deliver long-term value to our shareholders. I would like to remind everyone that we’ll be hosting an Investor Day in New York on Thursday, April 7th. Steve, Roger and I will be joined by other members of the executive leadership team to discuss the Company’s transformation, strategic direction, financial objectives and initiatives. To conclude my remarks, I want to thank all of the Westlake employees for their dedication and efforts. They made this incredible year possible and positioned us to succeed in this year and beyond. Thank you very much for listening to our fourth quarter earnings call. I will now turn the call back over to Jeff.

Thank you, Albert. Before we begin taking questions, I would like to remind listeners that our earnings presentation, which provides additional clarity into our results is available on our website. And as Albert just mentioned, we will be hosting an Investor Day on April 7th, in New York, which will also be available virtually. Details and other information regarding this event are available on our website. We hope you can join us, whether in-person or virtually. And a replay of this teleconference today will be available two hours after the call has ended. We will provide that number again at the end of the call. Jonathan, we’ll now take questions.

Certainly. Thank you. Our first question comes from the line of Steve Byrne from Bank of America.

Yes. Thank you. I wanted to drill in a little bit on your view for this new segment, so, the one you’re calling HIP. I assume you are not expecting that to remain kind of a mid-teen fraction of segment EBITDA. And what I wanted to better understand is what is it that you see as the primary drivers to accelerate that or close that gap? Do you expect it to be more acquisitions? Do you find this segment in these bolt-ons to be fairly inefficiently run that you could drive synergies? Do you think it’s cross-selling opportunity? And then, the last bucket that I would hope you could rank these would be by building this assemblage of building products businesses, do you think it will give you more pricing power with distributors like home centers?

Good morning, Steve. It’s Steve Bender. Thank you for the question. As we consider our growth, we’ve just completed one quarter since the acquisition of Boral closed in October. I'm optimistic about the revenue growth potential and its contributions as we expand our business and enhance our earnings capacity. The company has experienced growth both organically and through acquisitions. We had a strong Vinyls Building Products business before adding Dimex, LASCO, and Boral this year. Our growth can be attributed to our history of expansion through these means. The diverse offerings in our HIP segment provide us with extensive geographical coverage across the country and robust products across housing and infrastructure markets. This positions us to offer market-leading brands that appeal to our distributors. We see great potential for further growth in this business, both organically and through acquisition, supported by a strong portfolio throughout the nation. It's a valuable addition, and it’s fulfilling to demonstrate the significant earnings contribution this quarter, with expectations for continued growth moving forward.

I’d like to ask you a question about the new epoxy business. Do you see opportunities to back integrate and produce epoxy from propylene and chlorine, or are there also opportunities to integrate downstream into epoxy-based products that you could drive through this HIP segment?

Steve, this is Roger. Basically, because we are so fundamentally integrated into chlorine, I think we do have opportunities for back integration, if needed. We should be able to look at our footprint globally and to continue to grow backwards, if needed. But I think the other reason to have this business is it does give us a completely new area for growth. Downstream epoxy integration, downstream epoxy acquisitions potentially, even, give us new paths for growth. We think this is a great new platform, especially in the Performance and Essential Materials piece to drive future growth.

Our next question comes from the line of David Begleiter from Deutsche Bank.

Albert and Steve, do you expect HIP to grow faster than the market over the long term? If so, what are the main factors driving that growth expectation?

Yes. I think we are focused on the business. We have built a very broad-based product line. We are focused to make sure our integration goes well and the synergy goes well and create more additional values. We are not really focused on the percent of growth each year. We are more focused on strategically positioning ourselves, delivering value to our customers and creating more sustainable products going forward. If acquisition opportunities come along that fit our strategy, certainly, we’re very interested, but we’re not solely focused on growing for growth's sake.

Very good. And Albert, just on polyethylene, the market has changed quite a bit. What are your expectations for potential price increases in February and March?

Several industry players have announced a price increase of $0.03 a pound in February or March. There is a strong likelihood that we will follow suit due to the global demand being very strong. Although Asia has declined from last year's peak, it has since recovered. Inventory levels are balanced, and with a number of turnarounds scheduled for the first quarter, companies are building up inventory in preparation. This results in an inventory level that may appear higher than usual, but given the upcoming turnarounds, we believe it is quite normal. The global demand for polyethylene remains very robust.

Our next question comes from the line of Arun Viswanathan from RBC Capital Markets.

Good morning. Congrats on a very strong year. I guess, maybe a similar question on vinyls and PVC and caustic. It seems like there has been some improvement in ethylene. Would that drive a little bit stronger outlook for your PVC products? And then similarly in caustic, there has been some rationalization in the last year of capacity. Do you see that setting the industry up well for continued price increases? And within your own network, is there any debottlenecking that you look to do in chlor-alkali? Thanks.

Arun, thanks for the question. It’s Roger. Yes. So, what we’re seeing right now is really quite still strong demand in both vinyls and on the chlor-alkali side, so for the caustic piece. The industry has price increase announcements of $0.03 out in either February or March. We’re starting to see a rebound in export pricing. We think there’s good potential in vinyls. On the caustic side, we’ve seen demand there quite robust in Q4. We think there’s still momentum coming into Q1 on the caustic side as well. We continually look at our assets and look for low-cost debottlenecks and where we might be able to squeeze out a bit more. We’ll continue to do that, of course, across the platform of all of our plants. But I think today, we see both, vinyls and caustic with still some nice strong momentum.

Okay. Thanks. And as a follow-up on epoxy. The epoxy industry looks like it really went through a little bit of an inflection point the last couple of years with margins going back in the double-digit range. Do you see that as kind of structurally an improved business? Should the earnings power of the acquired business that you got from Hexion remain at similar levels that which you reported last year? Thanks.

Yes. I would say, overall, we believe that it’s structurally improved. I think 2021 was a very strong year. We’ve seen across the commodity cycle. I’m not sure we can repeat 2021 in every year, but certainly, there’s a structural improvement in that business.

Our next question comes from the line of Kevin McCarthy from Vertical Research.

On slide number 3 at the bottom right, you indicate that the new HIP segment earned an EBITDA margin of 17%. I’d like to ask you how does that level compare to what you would view as a normal or through the cycle average for the segment? And also, how would you assess the future trend as you continue to integrate the acquisitions?

So, Kevin, very good question. As you think about the contribution in 2021, we really only had one quarter for the contribution of Boral’s business. Given the higher value-added product portfolio, this business brings to the table, we do expect it to make a very solid contribution. So, these 2021 numbers really only reflect the contributions in the margins for just that one quarter of Boral.

Okay. So Steve, as you will have a greater contribution from the acquisitions next year, does that exert tension in either direction on the margin?

The margins for the higher value-added portfolio that Boral brings should make better contributions to the bottom line. As we consider this, the broader portfolio they offer, including roofing, decorative stone, windows, and other products, contributes positively to the business's margins. With only one quarter’s contribution in 2021, we see a 17% EBITDA margin for the full year. Boral provides a broader, higher value-added portfolio.

And then, secondly, if I may, I wanted to follow up on PVC pricing. Export prices were very strong in the fourth quarter. I think they’ve generally come down roughly 25%. But lately, we’re hearing of higher offers for PVC coming out of Asia. So, do you think we’re at a bottom for PVC export prices here in late February?

Well, certainly, the winter months usually are the weaker months for construction. In springtime, we see demand increase and usually, globally, prices tend to move up. I know that last year, we had very high prices. I think export price was $1,800 a ton or even higher and the prices dropped lower. Prices have also recovered. We think there is strong global demand, especially when the economy hopefully, when the COVID-19 pandemic severity eases and the demand for economic activity will come back again, we think it will be quite strong.

Our next question comes from the line of Mike Leithead from Barclays.

First question is with the Hexion acquisition now closed, there’s been a steep move in epoxy prices over the past year, and I don’t believe we have recent Hexion epoxy financials since maybe the first half of ‘21. I was hoping maybe you can give a bit more clarity around the current earnings level of the epoxy business that’s coming in and how you would expect that to trend into...

Yes. Thanks, Mike. This is Roger. We’ve owned it now for three weeks. It’s a bit early for us to have all of the knowledge of the business. But you’re right. I would think the first half of this year, we’re going to continue to see epoxy relatively strong. Second half of the year, we’ll have to watch and see whether there’s a little more capacity coming on. In general, I’d say we’re three weeks into it. We’re extremely happy to have it in our portfolio today. I’ll let Steve give a little more details on the value.

Yes. Mike, I would just say that certainly, their financials are out there publicly available for this segment. You can get a sense of how they’ve contributed results historically and through even 2021. As Roger added, we’ve seen a very strong year in 2021 in the epoxy business, and we do see a fundamental shift, though ‘21 was an incredibly strong year.

Our next question comes from the line of David Begleiter from Deutsche Bank.

Congrats on a record end to the year. I wanted to follow up on the Hexion transaction. It actually is adding more to your overall sales than the Boral business. When we had the conference call on Boral, you mentioned some synergy targets there. I was wondering if you had an opportunity to think about Hexion? What potential synergies may you be able to take out of that business?

Yes, thanks, Frank. It’s Roger. We have the integration teams working diligently right now, examining the entire business. As we mentioned earlier, there may be potential synergies in upstream integration if required. Additionally, this business is providing a significantly larger presence in Europe and Asia, which enables us to explore SG&A synergy opportunities in servicing those markets. Another aspect of synergy potential involves our examination of customers and suppliers, where we will identify common customers, and we are actively working to consolidate this information. We’re three weeks into this process, so it’s a bit early to provide a specific figure, but we’re making strong progress.

If I could ask about Hexion after the transaction, I'm interested in your leverage targets and your expectations for depreciation and amortization going forward for Westlake Corporation following this Hexion deal.

Yes. If you look at the financials that were in the back of the press release, you’ll see kind of where we are with the D&A going forward. The leverage targets, you’ve seen us consistently speak to the desire to keep strong investment-grade metrics, giving us good access to capital. We have an ability to deleverage not only this year but in the not-too-distant future as well. Plenty of ability to bring additional firepower from a leverage perspective to the table. As I say, we’ve got an ability to continue to deleverage the balance sheet this year and in the next few years. From a DD&A perspective, we’re running in the kind of the mid-850s range in terms of target at this stage, and that’s on a combined basis.

Our next question comes from the line of Bob Koort from Goldman Sachs.

Yes. This is actually Mike here, sitting in for Bob today. I was just wondering if you could maybe speak to how much cost inflation you saw in the fourth quarter versus the third quarter, and how much we were able to cover with price increases versus productivity?

From a cost push perspective from inflation, you’ve seen that really across the spectrum. Those costs were able to be pushed through across the board. You saw that our comments on the fourth quarter showed that we saw a lot of pricing traction in the fourth quarter. Our expectation is that as long as we see strong consumer demand for our housing and construction products and for our Performance and Essential Materials products, we do expect to be able to take these price increases and push those through to maintain margins.

Okay. Good color. And then also, I think Albert mentioned that you were continuing to look for a growth opportunity. Do you have the current integration bandwidth to do more deals this year, or will there need to be a pause to ensure that you have successful integration percentage traction from the recent acquisitions?

It’s a good question. It is busy when you think about the integration activity we have underway, but if we find the right opportunity for a good fit into the portfolio, there’s ample capability to use the team that we have in any assistance necessary to continue an acquisition, should there be an opportunity that makes sense.

Our next question comes from the line of Angel Castillo from Morgan Stanley.

I want to clarify the margin structure for the HIP business. You mentioned that the Boral acquisition is beneficial to the business. While we may have discussed the numbers on an annual basis, I noticed that in the fourth quarter, the margins for that business decreased from about 19% to roughly 15.5% compared to the fourth quarter of 2021. Could you break down the factors affecting this shift? I assume much of it is related to the percentage. It would be helpful if you could explain how much of the change is attributable to Boral versus the performance of the existing legacy business. Additionally, as we consider the projected 50% to 60% growth for 2022, how much of that is driven by the acquisitions compared to organic volume growth?

Yes. So, a very good question. In the fourth quarter, you’re right, 19% margins in the HIP business. Of course, that included the integration of that business into the portfolio. It did include some nonrecurring costs embedded in that fourth quarter related to HIP. Given my comments earlier, we do continue to see the value-added portfolio contribute strongly as we grow. The revenue projections that I gave of growing the revenues between 50% to 60% is really reflective of the strength we’re seeing in the housing and infrastructure markets.

Maybe just as a quick one, I guess following up on that, how much was the nonrecurring costs? I might have missed if I was to quantify.

Yes, it was less than $10 million.

Okay. And then on CapEx, I think you mentioned some debottlenecking, driving some of the rise, kind of $800 million level of CapEx. As we think about that, I guess, could you quantify, I guess, what areas you’re expanding by roughly how much?

Yes. As we get further into the year, we’ll give some more clarity on those VCM, EDC and PVC expansions, but there are some nice debottlenecking opportunities that we see that are going to be additive to the overall integration that Westlake is well known for. That $750 to $850 guideline is really to support the existing business to add some of that capacity over the next few years.

Our next question comes from the line of Eric Petrie from Citi.

Your free cash flow for the year improved nicely year-over-year to $1.7 billion. Given the guidance that you gave for CapEx and obviously, changes in working capital, what’s a good goalpost for 2022 and going forward?

Yes. As you noted, very strong cash flows in this past year and as we continue to look at opportunities to grow organically and inorganically. We mentioned, we also have the ability to deleverage some of the balance sheet. We’ve continued to pay, I think, a very nice dividend and continue to look for ways to deploy the capital back through share repurchases. We think there are a wide variety of opportunities to reward shareholders with dividends and share buybacks as well as the opportunity to deleverage the balance sheet. The strong fundamental cash flows that we’ve demonstrated and have a positive outlook on, we believe we can continue that opportunity.

Okay. And secondly, given your acquisitions in the building products space, what is your balance now on PVC? And how much do you expect to export now versus historically?

This is Roger. Traditionally, our industry has exported about a third of its production. However, over the past 18 months, the demand in the domestic market has been so robust that exports have decreased significantly because the entire industry is concentrating on fulfilling domestic needs. Currently, our export levels are approximately half of what they have been historically. We believe that domestic demand remains strong, and as long as that continues, we will prioritize our domestic customers.

Our next question comes from the line of Jeff Zekauskas from JP Morgan.

Thanks very much. When you take product from the Performance and Essential Materials segment and put it in the housing or sell it to the Housing and Infrastructure Products segment, is it sold at market or at cost?

At market, Jeff.

At market. And in the renaming of Westlake from Westlake Chemical to Westlake Corporation, I take it that means that you’re interested in growing both segments organically and inorganically rather than separating off Housing and Infrastructure Products as a separate business.

Jeff, there is a strong interest in continuing to grow in both segments of the business. You’ve seen that through the investments that we’ve made in 2021 and ‘22. With the addition of the epoxy business in February of this year, and of course, the addition of the three acquisitions in our HIP segment, there is continued interest to really grow the portfolio of businesses we have. You’re quite right, with the renaming of the company, it’s reflective of the broad portfolio that we now represent with these two business segments.

Our next question comes from the line of John Roberts from UBS.

Does Hexion still have the site where the U.S. epi plant used to operate? And does Westlake still have the site where Axiall used to operate aromatics? I’m just trying to get at, whether it makes sense to build an integrated epoxy raw material operation with those two sites?

This is Roger. No, we do not have the Axiall phenol, aromatic sites as part of our business. So, we don’t have that.

Yes. That was sold, John, before we acquired the business of Axiall in ‘16.

I believe that at our other locations, we have caustic, chlorine, propylene, and ethylene, which are the raw materials we would need for backward integration if we choose to pursue it.

Okay. And then epoxy is a propylene chain chemistry. Any thoughts of going back to cracking some propane? And how would that impact Westlake Chemical Partners, if you were to crack propane again to help hedge the embedded propylene exposure in the epoxy business?

We have propylene production from our ethane cracking as well. Actually, the amount we produce is pretty much similar to what the epoxy business needs.

Our next question comes from the line of Matthew Blair from Tudor, Pickering, Holt.

You cited a favorable demand environment with encouraging numbers in housing starts and remodeling. How do you think that fares in a rising interest rate environment? When you talk about 50% to 60% growth in HIP, what are you assuming on interest rates going forward?

It’s a good question, Matthew. When you think about the rising rate environment, there’s a big difference between the low-single-digit environment we have today and interest rates that might be twice or greater than that of days in the past. Certainly, as we think about the rising rate environment, it’s quite clear that people are looking at affordability, but we’re very comfortable that the affordability is not going to be an issue from a rising interest rate environment in the near term. We recognize that the administration, as well as the Federal Reserve are very focused at maintaining a good economic outlook. While we may see some trends higher in interest rates, we don’t believe that’s going to be a significant headwind on starts and permits in the strength of the housing markets.

Yes, Matthew, many of the acquisitions in the HIP segment were completed in the closing of the fourth quarter. We don't have the full year results for 2021's revenue, which is also part of the growth mentioned by Steve.

That’s right. We only have one quarter of the results of Boral in 2021. The guidance I provided is reflective of the fact that we only had one quarter of the year in 2021 for Boral.

The FIFO impact around zero. Was that for full year 2021 or just for the fourth quarter, Steve?

That’s the fourth quarter.

Thank you. This does conclude the question-and-answer session of today’s program. I’d like to hand the program back to Jeff Holy for any further remarks.

Thanks. Thank you again for participating in today’s call. We hope you’ll join us again for our next conference call to discuss our first quarter 2022 results.

Thank you, ladies and gentlemen, for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.