Westlake Corp Q2 FY2022 Earnings Call

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Corporation Second Quarter 2022 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, August 2, 2022. I would now like to turn the call over to today’s host, Jeff Holy, Westlake’s Vice President and Treasurer. Sir, you may begin.

Thank you, Dennis. Good morning, everyone, and welcome to the Westlake Corporation conference call to discuss our results for the second quarter of 2022. I’m joined today by Albert Chao, our President and CEO; Steve Bender, our Executive Vice President and Chief Financial Officer; Roger Kearns, our Chief Operating Officer, and other members of our management team. During the call, we will refer to our two reporting segments, the Housing and Infrastructure Products segment, which we will refer to as HIP, and the performance in Essential Materials segment, which we will refer to as PEM. 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, after which 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, 2021, 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 second quarter results. This document is available in the press release section of our website at westlake.com. We have also included an earnings presentation, which can be found in the Investor Relations section of our website. A replay of today’s call will be available beginning today, two hours following the conclusion of this call. This replay may be accessed via Westlake’s website. Please note that information recorded on this call speaks only as of today, August 2, 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 webpage 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 second quarter 2022 results. I’m pleased to announce that we achieved record quarterly results in the second quarter of 2022, including record net sales of $4.5 billion, record EBITDA of $1.5 billion, and record net income of $858 million. These record results were driven by good demand with significant pricing and margin improvements in our chlorovinyls business, strong demand from new housing construction, repair and remodeling activities, and contributions from the acquisitions we’ve completed over the past 12 months. The strength in these markets combined with our integrated operations in North America drove record EBITDA and strong margins in the quarter, offsetting the impact of rising energy and raw material costs as well as ongoing supply chain disruptions. I want to thank all my colleagues at Westlake for their hard work and dedication in helping us achieve these results. During the quarter, we continued to see the benefits of our expanded portfolio driven by the acquisitions that occurred over the past year. Year-over-year sales for the second quarter in our PEM segment grew 45% while achieving strong margins by leveraging our vertically integrated North American operations with our globally advantaged feedstock energy costs. As the global leader in chlorovinyls, these products provided a significant contribution to the year-over-year strength driven by higher prices for caustic soda, PVC resin, and specialty PVC materials. Our focus on specialty and differentiated product portfolios provides a clear margin advantage while our product mix also distinguishes us. Within our HIP segment, we realized significant sales and earnings growth from our Housing and Infrastructure Products offerings in the second quarter. The significant backlogs of orders for new home construction resulting from the momentum in the North American housing market, along with sustained activity in the repair and remodeling markets, which represent approximately 50% of our housing sales enable us to take advantage of our leading market positions and brands in many of our product offerings. Elevated infrastructure spending, which we are now beginning to see associated with the recently passed infrastructure bill, will continue to support demand for our products. This spending will also pull PVC resin across our segments, enabling us to drive additional value from our recently acquired businesses. I would now like to turn our call over to Steve to provide more detail on the financial results for the second quarter 2022.

Thank you, Albert, and good morning, everyone. As Albert stated in his opening remarks, this quarter Westlake reported record sales of $4.5 billion, record EBITDA of $1.5 billion, and record net income of $858 million. The second quarter of 2022 net income increased $336 million from the second quarter of 2021, as a result of strong price and margin gains in both segments, driven by the global economic expansion we’ve seen since the onset of the COVID-19 pandemic, anchored by broad-based strength across manufacturing and construction markets. Compared with a prior year period, the increase in sales and earnings in the second quarter of 2022 was spread across both segments, as year-over-year sales prices and volumes for Westlake were up 32% and 25% respectively. We delivered these results in spite of persisting supply chain disruptions, inflationary impacts on our costs, and the significantly higher global energy prices. I will now discuss the performance of our two operating segments, beginning with the housing and infrastructure products. Compared to the second quarter of 2021, HIP segment sales for the second quarter of 2022 increased $666 million to $1.4 billion, with segment EBITDA increasing $180 million to $310 million. EBITDA margins in the segment improved from 18% to 22%. Housing product sales increased $604 million with pricing gains across all of our products along with contributions from the business we acquired in the second half of 2021. Infrastructure product sales were up $62 million from the prior year period, with higher sales pricing across multiple end users, including irrigation, automotive, and medical industries. When compared to the first quarter of 2022, housing product sales of $1.1 billion increased $144 million, reflecting the continued strength in housing across our product offerings. Infrastructure product sales for the second quarter were $263 million, an increase of $11 million over the first quarter of 2022. In our Performance and Essential Materials segment, Westlake is a global leader in the chlorovinyls market with integrated operations in the United States, utilizing North America’s advantageous feedstock and energy cost position, which is complemented by our specialty product portfolio in Europe. Our manufacturing footprint, when combined with the strong market fundamentals for these products, enabled us to deliver another record quarter result. For the second quarter of 2022, PIM segment EBITDA increased $316 million from the second quarter of 2021 to $1.2 billion on sales of $3.1 billion. Second quarter 2022 performance material sales of $2.1 billion increased $519 million from the second quarter of 2021. Essential Materials sales of $1 billion in the second quarter of 2022 increased $439 million over the second quarter of 2021. Although operations and sales volumes in our European business for both PIM were impacted by the conflicts in Ukraine, European market dynamics and solid fundamentals in North America allowed us to capture significant global pricing gains in our chlorovinyls and epoxy businesses. The second quarter was also the first full quarter since the acquisition of the epoxy business, which contributed to earnings with particular strength in North America. In spite of the higher natural gas and ethane costs in the United States, our North American operations retained an advantaged cost position compared to global competitors utilizing oil-based naphtha feedstocks. Turning to the balance sheet and cash flows, as of June 30, 2022, cash and cash equivalents were $1.3 billion and total debt was $4.9 billion. Net cash provided by operating activities for the quarter was a record $913 million, and capital expenditures for the second quarter were $230 million. In the second quarter, we retired $250 million of debt, thereby lowering interest expense run rate by about $9 million per year. Furthermore, we returned approximately $80 million to shareholders in the form of dividends and share repurchases. Westlake’s balance sheet is well positioned for all phases of the market cycle with trailing 12-month net debt EBITDA leverage below one times, and a nicely staggered long-term debt maturity. During the second quarter, we also completed the renewal of a revolving credit facility, increasing the commitment size to $1.5 billion for five years to 2027. During the first half of 2022, we were able to identify and launch several debottleneck projects in our chlorovinyls business. As such, we are revising our 2022 capital expenditure forecast to $900 million to $1 billion, which shall support operations, lower our costs, and drive efficiencies while preparing capacity for the next economic expansion cycle. While these debottlenecks will take place at several of our sites, the main project will be an expansion of our site in Geismar, Louisiana, adding 110,000 ECUs membrane-based chlor-alkali and 600 million pounds of VCM to support increased PVC production. This will improve the material balance of our Geismar site and drive efficiencies in our network for chlorovinyls plants with capacity starting in late 2024. Let me provide some guidance for your models. Our utilization of the FIFO method of accounting provides the benefit in periods of rising costs as compared to what our results would be reported on a LIFO method. As a result of the cost environment, in the second quarter of 2022, we had a favorable FIFO benefit of $52 million compared to what earnings would’ve been reported under a LIFO method, with approximately 70% of the benefit related to the PEM segment and the remainder benefiting housing and infrastructure products. For the full year of 2022, we expect our effective tax rate to be approximately 23%, and interest expense to be approximately $170 million, with depreciation and amortization expense to be approximately $1 billion. Based on a current view of demand and pricing, we are also reaffirming our earlier guidance for HIP’s revenue in 2022 to increase by 50% to 60% from 2021, with full-year revenue for 2022 expected to be between $4.5 billion and $5 billion. Now I’d like to turn the call over to Albert to provide some current outlook for our business.

Thank you, Steve. In addition to the record results for the second quarter of 2022, we are proud of all we have accomplished over the past 12 months. With recent acquisitions in both of our operating segments, we’ve repositioned Westlake into new markets and industries. Looking forward to the second half of the year, we recognize uncertainty surrounding the macroeconomic environment, including high inflation, interest rates, potential slowdown in economic growth or possible recession, and volatility in energy and power prices. While these factors will have some impact on our business, we believe we are very well positioned to take advantage of the opportunities in the market over the business cycle. We continue to see solid demand across both our segments in North America, and the reopening of China from the COVID-19-related lockdowns will spur pent-up demand and economic growth in the second half of the year. For Performance and Essential Materials, we believe we have a durable cost advantage compared with global competitors as the difference between North American gas-based feedstock and overseas oil-based feedstocks continues. While affordability and rising interest rates have recently lowered new housing starts, which may affect our sales volume in the second half of the year, there will be continued investments in housing as the U.S. is structurally undersupplied to meet the current market demand, which will continue to grow. Even as new housing starts soften from their recent highs, we expect new construction to remain at elevated levels as the market returns to a normalized 50-year average from the 2007 to 2008 housing downturn. The low number of new homes available to market also encourages people to invest in their current homes, sparking demand for our products for repair and remodeling activity. These factors, combined with an aging housing stock across the country, provide a strong foundation for the repair and remodeling market, which anchors many of our products and represents approximately half of our housing sales. The recently passed infrastructure bill, along with proposed legislation such as the Inflation Reduction Act, may spur new demand for both of our segments as our pipe and fittings products are well suited to refurbish America’s aging water infrastructure. While proxy materials are critical in alternative energy production, we will also continue to benefit from the integration of the recently acquired businesses and product innovations, allowing us to cross-sell products, improve operations, generate efficiencies, and increase the vertical integration of our operations. Westlake has a strong commitment to sustainability and advancing our ESG initiatives with a focus on our core tenets of operating safely, protecting the environment, and delivering value products that enhance the daily lives of people around the world. As we work towards our goals for reducing our carbon intensity, we are also continuing our work in developing a wide range of sustainable products, such as lower carbon-based caustic soda and PVC, bio-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. Our premium materials in offering in PEM are very well positioned in the market to address consumer needs, while our innovative product pipeline in HIP will continue to support evolving consumer tastes and support future growth in housing demand. Our strong balance sheet is well positioned to support our business today and into the future. Thank you very much for listening to our second-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 a replay of this teleconference will be available two hours after the call has ended. We will provide that information again at the end of the call. Dennis, we’ll now take questions.

Thank you. Your first question comes from John McNulty with BMO Capital Markets. Please go ahead.

Hi, good morning, Albert and Steve. This is Bhavesh dialing in for John. Congrats on the record quarter. With respect to your revenue outlook of the HIP segment, you’re calling for roughly a $450 million reduction in sales in the second half versus the first half. Could you add some color on how that is broken down in your expectations in volumes versus pricing? And then what steps do you plan to take to kind of protect the strong margins that we are seeing in the second quarter right now?

Yes, so, this is Steve. Good morning. And so when you think about the very strong contribution that we saw within HIP, very clearly we saw a strong pickup in pricing as well as volume. As you might know well, the second quarter is a strong quarter in the construction and housing construction markets. So, we saw nice contributions from both the volume front as well as the pricing front. So, nice contributions on both ends.

And for the next question, if I could touch on the polyethylene business a bit? So, we saw contract prices settle $0.03 lower in July. The next transaction price settled $0.10 lower, which I understand was anticipated throughout the year. Can you comment on what your realized price drop was for the month of July? And if you could please share your thoughts on what you expect for the next one or two quarters, please?

Yes, thanks. This is Roger. Just a quick comment on that. We did see the market settle down $0.03, and I think we are at a bit of a turning point on inventory adjustments. But as we look forward, we see our polyethylene business. Now, we’re almost 45% of our businesses, specialty and differentiated, which really means that we’ve got some price stickiness, if I would put it that way. And so that’s really going to insulate us a little bit, I think, from the turn as the inventories readjust.

Your next question comes from the line of Kevin McCarthy with Vertical Research Partners. Please go ahead.

Yes, good morning. How much did your average realized caustic soda price increase, if it did increase in the second quarter versus the first quarter? And how would you expect that number to trend moving into the third quarter, please?

Hey, this is Roger again. Yes, I would say we’re seeing quite continued good strength in chlor-alkali in general on both sides of the ECU, in fact, caustic and chlorine, both. So certainly we saw price appreciation in Q2, and we actually expect that to continue right on into Q3 and on the chlorine side of the molecule as well. So, you see several of the industry analysts have continued to report increased pricing on both caustic and chlorine, and we’re certainly seeing that.

Okay. And then secondly, perhaps for Steve, you made a lot of progress on deleveraging in the quarter. It seems to me that net debt declined more than $0.05 billion. And so in that context, what are your updated thoughts on capital allocation? You mentioned the Geismar expansion project. How would you weigh additional expansions versus what you’re seeing in the private market at this point?

Yes. So Kevin, good question. You can see that we did raise our capital expenditure guidance for the second half, or for the full year at this midpoint of the year, because of those organic opportunities that I mentioned. And so we do see really good opportunities to be able to debottleneck a number of these sites, and we’ll continue to look internally to see if there are other good value-added opportunities to do further debottlenecks beyond those that we’ve talked about today. And of course, as you know, we’ve always looked at opportunities external to the company to see if there are acquisitions that could be nice bolt-ons or added opportunities. Certainly, given the growth that we’ve seen and the strong balance sheet and cash flows, we think we have the ability to execute both on those internal opportunities and potentially those external opportunities if they provide the right kind of value proposition to us.

Your next question is from the line of Mike Leithead with Barclays. Please go ahead.

Great. Thanks. Good morning, guys. Good morning. First question, I guess if we look at your second quarter results, either sequentially or year-over-year, or whatever’s easiest, is there a way to help us quantify the benefit from acquisitions to either your top line or EBITDA versus just say how your underlying business performed in the quarter?

So Mike, when you think about the contributions we’ve had from the acquisitions, I guess, I would say that they all perform very nicely over the course of the second quarter. Of course, the epoxy business had its first full quarter of a full three-month contribution in the quarter. But as you think about the other contributions that we’ve had, they all contributed very nicely. And I would say that given the run rate that we experienced in the second quarter, they’re contributing mid-teens returns on the investments that we’ve made over the last 12 months. So, we think that would’ve been very nice contributions.

Got it. Is there a way to quantify that? Or you’re not willing to disclose? I guess it’s just hard to gauge your actual underlying performance because of the inorganic moving pieces.

Yes. And so I guess what I was trying to get at is, as you think about the investments that we made and you think about a mid-teens return, that gives you a good sense of what the EBITDA contributions for those four acquisitions might contribute.

But the majority of the earnings in the second quarter really came from our legacy businesses.

Yes.

Got it. Makes sense. And then, and just on epoxy, obviously there’s a lot of moving pieces. Can you just broadly help us understand where unit margins are today relative to when you first acquired the business and where you think they’ll trend into the back half of this year?

Yes. This is Roger, I would say we’re seeing an epoxy kind of three different worlds across the different regions. China is quite slow, and where pricing has become quite difficult. We have a pretty small position there. Europe has been, I would say, a moderate demand, but the pricing has actually increased to offset the raw material costs. So, we’ve managed to maintain margins. And then in the U.S., actually demand is still reasonable. And so I think we’ll continue to watch as China restarts. We’re hoping as China restarts, there’ll be reinvestment certainly in wind energy with their push to try to restart the economy. And hopefully, we can start to see China come back.

Your next question is from the line of Frank Mitsch with Fermium Research. Please go ahead.

Hi guys. It’s Aziza on for Frank. To begin – could you guys maybe quantify or explain some of the financial impacts from the chlor-alkali force majeure in the quarter?

Yes, Aziza, we haven’t really given specific guidance on the force majeure, but as you know, we’ve had several force majeures throughout the course of this year, and certainly we’ve had a very significant turnaround going on in one of our facilities in Louisiana. So these turnarounds are a normal operating activity, as you know well, but the force majeures are just really a reflection of the events that we’ve seen occur across the entire industry this past year or two years.

Got it. And I think you guys also highlighted that the specialty PVC business was positively impacting margins. Could you also discuss the outlook there?

Yes. This is Roger. Just in general, I’d say on the specialty PVC business, those margins tend to be less volatile than the commodity side. I would say heavily in Europe is where we have those products out of our vinyl subsidiary. I would say on the positive side, we continue to see touches on construction continue, and on the negative side, the war in Ukraine has an impact on that business. And so we’ve been able to say be moderate on that. But those products generally have better margins and are less volatile than the suspension PVC.

Your next questions from the line of Hassan Ahmed with Alembic Global. Please go ahead.

Morning, Albert and Steve.

Good morning.

Question around polyethylene. Obviously, higher crude oil prices since the beginning of the year and the like, and at least, when you read consultant reports and talk to industry folks, at least in the first half of the year, everyone was talking about supply-demand tightness. So to me, at least that meant that it was a very conducive environment for decent price escalation. And I just don’t think pricing followed the trajectory of oil prices. Right? So my question really is that with all these quirks that we are seeing in terms of logistics and shipping issues and the like, are we currently in a situation where from being a global market, we’ve kind of become a regional market? And as these supply chain issues and shipping issues get resolved and maybe potentially some project cancellations happen on the back of the variances in energy prices, we’d actually go back to being a global market, and this sort of glut of capacity that we are seeing in the U.S., which was meant for the export market, starts making its way out? And all of a sudden then pricing for polyethylene starts following global cost curves, tell us?

Yes, this is a good question. You are absolutely right. There are capacities coming in China and also still capacity coming on in the U.S. despite the logistic issues. Year-to-date, June polyethylene industry as a whole, including high density and low-density polyethylene, exports about 36% of their sales. So there are exports going off, of course, with the new capacity coming in the U.S.; probably exports are expected to increase more than that. So, I think it’s really a supply-demand issue in China, because of its COVID-19 lockdowns, demand is quite weak. And as a result, with the new capacity coming on in China, they have access to capacity as well. Separately, the polyethylene business is not a big business for Westlake, less than 15% of our sales. So while it’s a very important business for us, it must have less impact than the chlorovinyl business, which is our largest segment.

Fair enough. Fair enough. And just as a follow-up, changing gears a bit on the epoxy side of things, I know some comments were made earlier in the call about that business. I’m just trying to get a better sense. You guys talked about Europe kind of being okay, North America kind of being okay, and obviously lockdowns impacting China. I mean, should we think about that business as a business that kind of ebbs and flows with the Chinese market? Meaning my understanding is almost half of global demand comes from China. So I mean, if one were to assume that the Chinese lockdowns start easing up, I mean, should we start seeing upward momentum in that business pretty immediately thereafter?

Yes. Hassan, it’s Roger. I think if you look at even the three businesses, if you look at polyethylene, PVC, and epoxy, you’re seeing some similar trends in that, in general, China are importers of those businesses and those products. Normally, with the lockdowns and the slowdown in demand, they have shifted to either neutral or exporting. And so certainly, we expect that as China starts to restart, China is the leader in wind energy and that takes a tremendous amount of epoxies. We would expect that market to take back off as China restarts.

You’re welcome.

Your next question is from the line of Mike Sison with Wells Fargo. Please go ahead.

Hey guys, nice quarter.

Thank you.

I guess, Albert, when you think about performance materials more on the chlor-alkali, the PVC side. We’ve known how the industry has acted during the last recessions. If it built into a material slowdown going forward or 2023, and there’s not a lot of new capacity coming on stream, how do you think margins or ECU PVC margins hold up this time around that could be different from the past?

That’s a good question. Compared with polyethylene, there is a very limited amount of new capacity coming on stream globally, not just in the U.S. or China. And as you know, China has a moratorium on new PVC capacities; hence new product like capacities that cover mercury catalyst issues. So we believe the demand is still very strong globally for chlorine derivative pulp products such as PVC, but also in anything and other products. And caustic is just a very broad general product that’s used in everything from water treatment, pulp and paper, and everything else. So while there is a potential recession, high interest rates, and global economic slowdown, we are looking past through those disruptions and we’re ready for the next cycle going up.

Got it. And then your outlook for PVC in terms of the second half of the year for demand and pricing prices?

Currently, China's economy is quite weak, particularly impacting the demand for carbide-based PVC due to severe construction downturns. The government is attempting to stimulate the construction industry, which represents the largest segment of private sector spending. In addition, China has been exporting its carbide-based PVC while facing similar economic challenges in India that are also affecting demand, resulting in weak performance for us. Industry analysts predict potential price weaknesses for PVC, and there is ongoing inventory destocking. However, as Roger mentioned earlier, we believe the inventory destocking phase will end, and demand will rebound as the economy starts to recover.

Our next questions are from the line of Arun Viswanathan with RBC Capital Markets. Please go ahead.

Great. Thanks for taking my question. I guess the first question I had was just if you think about epoxy, I guess the main comment that we’ve been hearing is that China hasn’t really been buying, and they’re a large part of the market. Europe also has been weak. Is it just mainly the lockdowns that are going to improve that market? And has there been any incremental update you could provide on that in the last couple of weeks, if there’s been any improvement there or what your outlook is?

Yes. Talk about China? Yes. As I said earlier, we believe the government is trying to start stimulating the economy. As you know, they have the party election in October. They have National Congress, the March of next year. We believe there’ll be a fiscal stimulus from the government coming up. And having said that, the epoxy business, especially in the U.S. is rather insulated from the Chinese business with our specialty epoxy applications in many applications, especially now with the infrastructure bill and the Inflation Reduction Act, we believe a lot of demand for epoxy, PVC, and other materials that will benefit from those initiatives in the U.S.

Okay. Thanks for that. And as another follow-up, you guys have done a terrific job in the past capitalizing on downturns to pick up assets. Is that something that you’re starting to think about as well having deleveraged after your last couple of acquisitions? And if so, what areas are you looking at? And when would we expect to kind of see some of that capital being deployed?

Arun, you can see that we’re already acting on some of these organic opportunities, and that’s why we raised our capital expense guidance for the year. And we’ll continue to look at organic opportunities. Those are easier to understand and get our arms around them, but at the same time, as I think we look at opportunities externally on a very continuous basis. And so as we think about those, as you’ve seen, we’ve made a number of acquisitions in the course of the last 12 months. And that level of activity does not really slow down. We continue to have a very active opportunity set across both sides of our business, both PEM and HIP. And there would be good opportunities as we look forward. And it’s just a matter of do they hit our return expectations, but there’s always an ongoing initiative to look at opportunities that could be good additions to both segments of our business.

Your next question comes from the line of Stephen Byrne with Bank of America. Please go ahead.

Good morning. It’s Matt on for Steve.

Good morning.

Good morning, Matt.

So the epoxy business, right, put up strong numbers in 2021. And the general guidance was for a normalization, maybe something like $300 million EBITDA down to $200 million. Are we on that path now? Or are the actions taken by your peers to kind of prop up the markets keeping that elevated longer than maybe you would’ve initially thought?

Well, I think as Matt, as you heard Roger outline, we see kind of a slightly different market in each one of these markets, be it Asia or Europe or the North American market. But I think the guidance that we provided in terms of getting back to kind of a normalized level of earnings is in mind. And I think that if you look across the demand sector and Albert was just talking about kind of the stimulus initiatives that we’re all expecting in China and beginning to see in China, that will spur the demand really on the resins front. And certainly, epoxy will be one of those that we expect to see. And so I think the normalized level of earnings that we would expect out of the epoxy business would be, I think as we’ve always guided, to be not as high as there were in 2020 and 2021, but still a very nice contribution over the cycle. And I think the strength that we’ve seen in the business being restructured over the last couple of years was a good incentive for us to invest in the business earlier this year. So we do have a very constructive view of epoxy this year and into the future.

Okay. And I know the team at Westlake doesn’t love answering hypotheticals, but I’m going to shoot one at you anyway. So, how do you think about the decision to run chlorine volumes in the second half of the year, should PVC markets soften kind of both seasonally and cyclically, right? So caustic values are really good. PVC inventories are pretty high. Does it make sense to keep producing PVC, or would you move some of those molecules into merchant chlorine if that opportunity looks better because caustic is still really good?

Yes. I think Matt, it’s Roger. Just to be honest, we look continuously at where’s the best place to put the chlorine molecule and we monitor that monthly. So we’re at the height kind of a water treatment season right now, which is nice, we got a couple more months of that. And then in respect to that slowing off, we’ll watch what PVC is able to do. Clearly, we come back to some of the logistics questions: how well is the industry able to export? But we watch continuously to see where’s the right place to put the chlorine.

But your question also is that if chlorine demand reduces, there’ll be less production of caustic. And if caustic demand still continues strong globally, there could be pricing pressure on caustic going forward.

Sure. I appreciate that. Thanks, Albert.

You’re welcome.

Your next question is from the line of David Begleiter with Deutsche Bank. Please go ahead.

Thank you. Albert, just back on PVC, the price gap between the U.S. and Asia has widened quite a bit over the last period of time here. How do you see that either reversing or normalizing with maybe U.S. prices being pulled down further by this really wide gap here we have today?

Yes. As I said earlier, because of the lack of construction, Chinese PVC production has been exported and causing Asia PVC prices to drop. As stimulus comes back to China and people recover from COVID-19 lockdowns, many cities in China have been in lockdown mode. We believe demand will increase and hence the pricing pressure will be much less, and the pricing gap between the U.S. and China will narrow.

Understood. Regarding ethane, Albert, with ethylene now around 60, how do you view long-term ethane prices? Is this influenced by fuel value and additional costs?

Sure. I think the ethane price is also related to natural gas prices. As natural gas prices are forecast to slow down, ethane prices will also come down. I think the projections from some of the industry analysts believe that ethane prices will soften all the way into next year. I think in the second half of next year, they’re looking at probably in the mid-30s range.

Sounds good. Thank you very much.

You’re welcome.

Your next question is from the line of Matthew Blair with TPH. Please go ahead.

Hey, good morning. I was hoping you could talk about what kind of operating rates your epoxy assets are currently running at.

Yes. Matthew, it’s Roger. So right now, we’ve got a couple of actual turnarounds, and so our rates are a little bit lower, because we’ve got significant turnaround in the Netherlands and we have one coming later in the year here in the U.S. So in fact, our turnaround schedule is somewhat fortuitous right now with demand softening just a little bit.

Okay. And then could you share any details of any sort of natural gas hedges that you may have on, and what the impact was in Q2 and what that might look like for the back half of the year?

Matthew, it’s Steve. We will certainly do some hedging around the edges, but certainly we don’t undertake significant long-dated gas hedges in the marketplace, but we do some around the edges, but nothing real long-dated in significant volume.

Got it. Thank you.

You’re welcome.

You next questions are from the line of Aleksey Yefremov with KeyBanc Capital Markets. Please go ahead.

Thanks, and good morning, everyone. Could you talk...

Good morning.

Good morning, Albert. Can you talk about your natural gas or power consumption in Europe? How you buy those in the continent and also what’s your sensitivity?

Well, certainly natural gas prices are very high, and power prices are even higher. There’s a market price, and people are paying those high prices. As heard earlier, Roger mentioned, we’re able to pass some of those price increases in our product prices. Today, European product prices are the highest in the world, whether it’s PVC, epoxies, or polyethylene.

And Albert, you spoke about potentially weaker demands in the second half for new residential construction products. Were you talking about PVC or building products or for both maybe?

Well, certainly with high interest rates, high mortgage rates, you see the home construction slow down, but it’s still slowed down at a very high level. We believe that with the pent-up demand, it will return to the 50-year average, which in the U.S. for residential construction is about 1.5 million units plus or minus. So we think the pent-up demand will continue to be pretty strong, not as high as 1.8 as we saw earlier on the annualized basis. But we think there’s still quite strong demand.

Your next questions are from the line of Josh Spector with UBS. Please go ahead.

Hi, thanks for taking my question. Just on HIP margins, you guys continue to do better than your own expectations. So I’d just be curious, is this kind of a new normal that you would expect margins to remain in the low 20s, because of somewhat better performance? Or is there anything you could comment on regarding pricing or supply-demand that’s helped you guys in this segment over the past couple of quarters? Thanks.

Yeah. So Josh, we have been guiding to the upper teens to mid-upper teens in HIP, and certainly you’re right over the last couple of quarters we’ve had margins at 21% and 22%, Q1 and Q2. So certainly pleased to see that given the strength of the construction numbers, but we’re still guiding to kind of in that mid to upper teens range. Premium products that our HIP segment produces, and so certainly we continue to expect good performance in that area, but we’re still guiding to mid to upper teens for that segment.

Okay. Thank you.

You’re welcome.

There is a follow-up question from the line of Kevin McCarthy with Vertical Research Partners. Please go ahead.

Yes, good morning. And thanks for taking my follow-up. So it relates to the acquisitions that you’ve done. You acquired Hexion’s epoxy business about six months ago and Boracco's North American building products maybe 10 months ago. Are you taking costs out of those platforms? And if so, what is the aggregate amount of costs that you’ve extracted so far? And what do you think that number could look like in 2023 versus 2022?

And so Kevin, you’re right. As we’ve continued to look at the businesses of our acquired acquisitions, certainly in the case of Boracco, especially on the housing side, we’ve guided some synergies. These are cost-related synergies in the mid-30s, and certainly we’re well on our way to achieving those cost reduction initiatives. Those are underway at the moment. Certainly, there are going to be synergies beyond just cost reduction. And we’ve talked about some of the revenue opportunities that we expect to see. You’re seeing some of that and some of the margin improvements in the business, but we’re still keeping our guidance in terms of those margins. But from a cost reduction perspective, we’re still on track to achieve that mid-30s number in reductions. On the epoxy front, certainly, we’re evaluating those opportunities and certainly we see some opportunities on that front. We’re not yet today ready to quantify it, but certainly, I think there’ll be good opportunities for cost reductions as well.

And at this time, the Q&A session has now ended. Are there any closing remarks?

Thank you, again, for participating in today’s call. We hope you’ll join us again for our next conference call to discuss our third-quarter results.

Thank you for participating in today’s Westlake Corporation second quarter earnings conference call. As a reminder, this call will be available for replay beginning two hours after the call has ended. The replay can be accessed via Westlake’s website. Goodbye.