Westlake Corp Q1 FY2023 Earnings Call

Good morning, everyone, and thank you for joining us. Welcome to the Westlake Corporation First Quarter 2023 Earnings Conference Call. This call is being recorded today, May 4, 2023. I will now hand it over to your host, Jeff Holy, Westlake's Vice President and Treasurer. Please go ahead.

Thank you. Good morning, everyone, and welcome to the Westlake Corporation conference call to discuss our first quarter 2023 results. I'm joined today by Albert Chao, our President and CEO; Steve Bender, our Executive Vice President and Chief Financial Officer; and other members of our management team. During the call, we will refer to our two reporting segments: Performance and Essential Materials or PEM or Materials; and Housing and Infrastructure Products, which we refer to as HIP or Products. 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 will 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, 2022, 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 that are also available on our Investor Relations website. This morning, Westlake issued a press release with details of our first 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, 2 hours following the conclusion of this call. This replay may be accessed via Westlake's website. Please note that information reported on this call speaks only as of today, May 4, 2023. And therefore, you're advised that time-sensitive information may no longer be accurate as of the time of any replay. Finally, I would 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 first quarter 2023 results. For the first quarter of 2023, we achieved sales of $3.4 billion, net income of $394 million and EBITDA of $825 million. These solid results reflect significant improvement in volumes, margins and earnings from the fourth quarter of 2022 as customer destocking activity moderated, end-market demand improved, and we benefited from lower feedstock fuel and power costs. As demand improved in the first quarter, we shifted sales volumes from exports to domestic markets, contributing to better sales mix and higher integrated margins. We also benefited from lower feedstock and energy costs compared to the levels of 2022 as our globally advantaged low-cost feedstock and energy position in the U.S. Gulf Coast improved further, but we also saw lower energy costs in Europe as well. Our results for the first quarter also reflected the achievement of approximately $25 million of cost savings in this quarter towards our previously communicated $55 million to $105 million of targeted 2023 cost savings. Each of these factors supported solid improvement in our integrated margins on the fourth quarter of 2022. Looking at our first quarter financial results, I'm particularly proud of our HIP segment performance, which maintained EBITDA margin of 20%, similar to the first quarter of 2022. These margins were achieved despite a 21% decline in volume when compared to the prior year period, which was driven by the decline in home building activity due to lower affordability from higher mortgage rates. This demonstrates the benefit of our product mix and strength of our brands. The margin stability of these businesses along with the long-term growth opportunity in the U.S. housing market were key reasons why we invested in the HIP segment in 2021 through the acquisitions of Boral Building Products, LASCO Fittings and Dimex. We continue to have a positive long-term view of the U.S. housing market, driven by the deficit in new housing construction since the Great Recession in 2008 and increasing demographic demand. Turning to our PEM segment. We continue to operate with agility as we navigated the current market dynamics by shifting PVC and polyethylene sales volume back from export markets to rebounding domestic markets, while solid chlor-alkali markets drove higher average selling prices for both chlorine and caustic soda in North America. Lower feedstock energy prices, combined with our cost reduction actions, drove significant improvement in integrated margins from the fourth quarter of 2022. Overall, I'm very pleased with our first quarter performance and the team's ability to successfully adjust to rapidly changing end market trends. I would now like to turn the call over to Steve to provide more detail on our financial results for the first quarter of 2023.

Thank you, Albert, and good morning, everyone. Westlake reported net income of $394 million or $3.05 per share in the first quarter of 2023 on sales of $3.4 billion. Net income for the first quarter of 2023 decreased $362 million from the first quarter of 2022 as a result of lower average selling prices and integrated margins, particularly for PVC, polyethylene, epoxy resins, and lower production and sales volume in each segment. When compared to the fourth quarter of 2022, net income increased by $162 million in the first quarter of 2023 due to higher production and sales volume in each segment and lower feedstock fuel and power costs in North America and Europe. The key market conditions that we experienced in the fourth quarter of 2022 improved throughout the first quarter of 2023, as destocking abated and North American demand for PVC and polyethylene improved, which allowed us to shift sales volumes back to domestic from export markets in this stronger environment, driving higher netbacks. The customer destocking in our HIP segment that occurred in the second half of 2022 also abated which, along with the seasonal uptick in spring construction activity drove a 10% sequential increase in HIP volumes. Overall, we were pleased with the first quarter 2023 operational and financial results and we are cautiously optimistic about demand trends as we move into the seasonally stronger second quarter. For the first quarter of 2023, our utilization of the FIFO method of accounting resulted in an unfavorable pretax impact of $45 million compared to what earnings would have been reported on the LIFO method. This is only an estimate and has not been audited. Moving to our segment performance. Our performance in the Central Materials segment first quarter 2023 EBITDA of $615 million decreased $456 million from the first quarter of 2022. As compared to the prior year period, Performance Materials sales in the first quarter decreased $647 million, largely driven by lower average selling prices, particularly for PVC resin in addition to lower sales volumes across our portfolio. Essential Materials sales in the first quarter of 2023 decreased $164 million over the first quarter of 2022, primarily driven by higher average selling prices for caustic soda. As compared to the first quarter of 2022, our earnings were impacted by lower integrated margins for all of our Performance Material products, including PVC, epoxy, polyethylene and lower production and sales volumes across most product lines. These headwinds were partially offset by higher average selling prices and Essential Materials along with lower fuel and energy prices. PEM's segment EBITDA of $615 million in the first quarter increased $172 million from the fourth quarter of 2022 as a result of 6 key elements. Higher production and sales volumes, particularly in PVC and epoxy resins, improved Performance Materials sales mix as volumes in polyethylene and PVC shifted to domestic markets, higher Essential Materials average selling prices driven by caustic soda, lower feedstock and energy costs, reduced turnaround activity, particularly in epoxy, and benefits from the cost savings program we previously announced. Turning to our Housing and Infrastructure Products segment. We saw improved demand driven by seasonal uptick compared to the fourth quarter of 2022 as our customers saw improved demand in their markets. HIP segment EBITDA of $205 million for the first quarter of 2023 decreased $53 million when compared to the first quarter of 2022. Housing Products sales decreased $154 million from the prior year period as volumes declined by double-digit rates across all product categories. Infrastructure Products sales fell $63 million from the first quarter of 2022, primarily due to a decline in sales volumes of Infrastructure Products servicing fresh and wastewater applications. The volume decline in Housing and Infrastructure Products were driven by lower housing starts and lower inventories carried by our customers in the first quarter of 2023. These volume declines were only partially offset by higher average selling prices and lower raw materials cost, along with the benefits realized from our cost savings program. When compared to the fourth quarter of 2022, HIP segment EBITDA of $205 million increased $72 million. Housing Products sales of $818 million in the first quarter of 2023 increased $60 million, while Infrastructure Products of $189 million in the first quarter increased $9 million from the fourth quarter of 2022. The higher sales and earnings were the result of lower raw material costs and broad-based increases in sales volumes due to the moderating customer destocking and seasonal construction trends that I previously discussed. The overall macroeconomic backdrop remains uncertain and our customers have kept their inventories rather tight as they look for improvements in economic activity. In our HIP segment, while the first quarter experienced the beginning of the seasonal increase in construction activity in North America, with March housing starts reported at $1.42 million similar to the average level for the second half of 2022, we continue to see our HIP customers remaining cautious in building inventory until they see less uncertainty in the economy. Therefore, we are controlling our cost working closely with our customers to provide the PEM products they demand and supporting our building products customers with the premium brands and products to meet their building and remodeling needs. Turning to the balance sheet and cash flows. As of March 31, 2023, cash and cash equivalents were $2.4 billion and total debt was $4.9 billion for a staggered long-term fixed rate debt maturity schedule. For the first quarter of 2023, net cash provided by operating activities was $512 million in CapEx expenditures were $267 million, resulting in free cash flow of $245 million. We continue to look for opportunities to strategically deploy our balance sheet in a shareholder-friendly manner to create long-term value and reward our shareholders. Now let me provide some guidance for your models. We are reaffirming our earlier guidance for full year 2023 revenue in our Housing and Infrastructure Products segment to be between $4.3 billion and $4.8 billion with an EBITDA margin in the high teens. We continue to target $55 million to $105 million of annualized savings in 2023, with approximately $25 million already achieved in the first quarter. Our significant cash balance and investment grade credit rating position allow us to invest in our business and support our customers. We continue to expect total capital expenditures for 2023 to be approximately $1 billion, which is unchanged from our earlier guidance and is similar to our depreciation and amortization run rate. As a reminder, this includes a planned 30-day turnaround at our Calvert City ethylene unit in the second quarter of 2023. For the full year of 2023, we expect our effective tax rate to be approximately 23%. We also continue to expect cash interest expense to be approximately $160 million. Now let me turn the call over to Albert to provide a current outlook for our business.

Thank you, Steve. Since the fourth quarter of 2022, the economic environment has improved, but with some mixed economic signals. This improvement in the economy drove demand growth for all our products during the first quarter of 2023 as compared to the fourth quarter of 2022. Additionally, lower natural gas, ethane and power costs further improved our structurally advantaged low-cost position in North America. Taken together, the volume improvement and lower cost position drove the improved first quarter results and highlights the strength of our business in the current economic environment. Looking ahead, we are cautiously optimistic that economic conditions have stabilized and believe demand for our products will continue to improve as 2023 progresses. We expect demand from China to continue to improve, which would spur demand for many of our products, improving integrated margins. We also expect demand in the U.S. to improve with increasing industrial and construction activity. In our HIP segment, the overall housing market continues to be impacted by affordability concerns resulting from the higher mortgage rates. Yes, we have seen homebuilders taking action to address these conditions and adjust prices, including increased incentives. Our strong brand and product mix of 50% new construction and 50% repair and remodeling has remained resilient and supportive of margins in these market conditions. Longer term, U.S. housing remains structurally undersupplied due to the homebuilding deficit since 2007, relative to the 50-year average of 1.5 million new homes built annually, and improving demographics support more first-time homebuyers over the coming decade. As a result, we continue to have a very positive outlook on the long-term fundamentals for our building products business. In our PEM segment, growth in global population and continuing urbanization, keeps the outlook remaining favorable as Performance Materials using everyday products such as housing, packaging, health care, automotive and wind energy drive demand for PVC, polyethylene and epoxy. At Westlake, we recognized improving the sustainability of our products and operations remains critical to our future success. In the first quarter of 2023, we continue to make progress towards our goal to reduce our carbon intensity by 20% by 2030. We also made significant progress in the commercialization of many of our sustainable products. These exciting products include our one-pellet solution, an efficient polyethylene solution incorporating post-consumer resin, while maintaining its strength. In our molecularly oriented PVC pipe, or PVCO, which provides a lighter weight and more durable PVC pipe with a lower carbon footprint than any other water main pipe material. Our Dimex business acquired in 2021 is one of the largest recyclers of plastic materials in the United States, processing 100 million pounds of scrap and waste annually, including an increasing amount of scrap from other Westlake businesses. As part of our sustainability focus, we are continuing to introduce products into the market that include recycled and bio-attributed components that satisfy consumer demands. Finally, we continue to look for opportunities to redeploy our well-capitalized balance sheet in a disciplined manner that will create long-term value for shareholders. This includes both identifying acquisition candidates with returns that can see our cost capital and returning cash to shareholders through both dividends and share repurchases. We expect more opportunities to redeploy capital to present themselves as economic conditions stabilize throughout 2023. In the meantime, we continue to benefit from the earnings power and the stability created by the investments we have made in our business and our increasing focus on specialty materials and downstream products. Thank you very much for listening to our first 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 2 hours after this call has ended. We will provide that number again at the end of the call. We will now take questions.

Your first question comes from the line of Michael Sison of Wells Fargo.

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

Yes. We've seen inventories destocking run its course and pretty much finished that destocking process. And we believe that customers are reordering as they see the demand. And we believe that the economy has stabilized through the changes in interest rate increase, and it should improve from the bottoms we've seen in the fourth quarter of 2022. But having said that, the Fed just raised interest rates, and they could have repercussions in the economy going forward. But we believe that the U.S. economy is still quite long, domestic demand is quite strong. We've seen that in our both in the PEM segment, polyethylene, PVC as well as in our HIP Building Materials business. So we are cautiously optimistic that we will see some improvements. It doesn't mean that we'll go back to 2022 or 2021 high levels before the interest rates start increasing.

Got it. And then for PVC and polyethylene, how is China recovering? And is the export market starting to improve here could really shore up domestic operating rates?

Yes. I think China's economy is improving slowly, slower than people expected after the opening from pandemic and after the Chinese New Year celebrations. But we see that the economy is still strong. People are going out about traveling and spending and the stimulus from the government as well, will take some time. We believe that China's economy should be improving.

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

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

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

Okay. And then secondly, your HIP segment margins hung in quite well given the volume decline as you sort of prove out that business through what seems to be a tougher external environment, demand-wise, Albert, do you see opportunities to add to the construction-related portfolio during the current cyclical downturn? It looks like your net debt has declined about $1.6 billion year-over-year, providing you with more financial flexibility. So curious as to your appetite to add via acquisitions to that business?

Kevin, it's Steve. And you're right, we've seen, I think, good performance in the first quarter to be able to maintain very strong margins in that business. And I think it illustrates the strength of the brand and the mix. And as we think about the mix of products that we have and the branding, there are opportunities to add to the portfolio in that building products business. And we continue to be quite interested to look to fill opportunities where we see demand and can satisfy our customers with those branded products and add to that portfolio. So we'll continue to look for opportunities to build out that portfolio where it makes sense. So we are constantly looking and as you would guess and actively in dialogue with folks just finding the right opportunity and the right price.

And our next question comes from the line of Josh Spector of UBS.

I was just wondering where you would say your cost base is now. So with what you reported in the quarter, does that reflect kind of the lower energy feedstock environment or your LIFO adjustments you call out. Is that the right way to think about that? Or is there another tranche that kind of flows through inventory that could help you versus where you are today?

Yes, as a FIFO reporter, you can expect that some of the lower costs will come through as a result. That's why I like to provide insights on the differences between using LIFO and our FIFO approach. Looking forward to the prices for gas or ethane, you'll notice that compared to 2022, the numbers for 2023 will be considerably lower as indicated by the forward curve. We are well positioned with a Gulf Coast North American presence for a large part of our portfolio, and this strong position will continue to benefit us if the forward curve follows the forecast.

I just want to add some more information. As Steve mentioned, the average gas price in 2022 was $6.55 per MMBtu, and the current and forecast estimate for 2023 is $2.95 per MMBtu, which is less than half of that. Additionally, natural gas influences the price of ethane, which is currently fixed for ethylene, and also affects our power price. Our purchasing is aligned with the power and natural gas prices, as natural gas is a significant fuel input for power. Therefore, all of this positively impacts our cost position.

So to give you some sense of the earnings potential here when you think of the sensitivities, we have just to natural gas, $1 in MMBtu on an annualized basis across the entire portfolio of Westlake is $125 million improvement in EBITDA. And so given the fact that Albert was looking at $6.55 for 2022 and the forward curve of $2.95, you've got over $3 of forward value that could play through. So that sensitivity I gave you of $1, to $125 million of EBITDA is a huge potential opportunity for the company to see strengthened earnings this year.

I appreciate all that. And just quickly on the PVC sales mix. I mean you noted it's improved in terms of shifting back to the domestic market. Would you say it's normal in terms of your mix now? Or are you still a little bit more skewed to export than you typically are?

Yes, it is more usual now. At the end of last year, during the fourth quarter of 2022, due to low demand, there was a reduction in inventory. We had to export a significant amount overseas, which resulted in lower prices. As domestic demand has rebounded and the building season is beginning in March, we are observing a substantial increase in demand in the second quarter.

Our next question comes from the line of John Roberts of Credit Suisse.

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

Yes, we are responding to the various dynamics in the highly competitive global market. As I mentioned earlier, the Chinese economy has been slowing down over the past few years, leading them to export epoxy and PVC to regions like India and Europe. However, we are observing a slowdown in those exports as the Chinese economy starts to improve, though circumstances may change. We are proceeding with caution and closely monitoring all ongoing activities.

And then secondly, on the Westlake partnership, are you still just waiting for a better value to do more drop downs? And does it make sense at some point to drop the low-take cracker interest into the MLPs?

Yes. We see the potential to leverage our ownership of the ethylene unit at the lower end. The challenge lies in ensuring we have the appropriate valuations and access to capital. If those conditions are met, there is a possibility to move forward.

Your next question comes from the line of Duffy Fischer of Goldman Sachs.

When you look at the vinyl chain chlorine, EDC, VCM into PVC you see significant shifts in the relative contribution between the steps as we go forward this year?

Yes. Well, we looked at the chain economics, and you're right, they do move up and down the chain. Right now, the tolling value is very high. So the chain value is more on the chlor-alkali business lot downstream PVC, but that could change also.

Fair enough. One of your major competitors in epoxy has mentioned undertaking significant asset restructuring, and you have been considering it for about a year. Do you believe your current operations are adequate, or do you think significant restructuring of your asset base is necessary?

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

Our next question comes from the line of Steve Byrne of Bank of America.

This is actually Matt on for Steve. Chinese coal prices have been softening recently. There were expectations that China might reduce some capacity of PVC due to weak margins. Considering the current competitive landscape in Asia with a potentially weaker feedstock market, do you think this will lead to some margin relief for those producers while prices remain stable? Or do you view this as having a deflationary impact on global prices? Can demand absorb these changes?

Yes, that's a great question. I think China, the double control on the carbon emissions environmental impact, dollar or GDP they generate is still much concerned by the government and implementing double control. And with the PVC, 80% of Chinese PVC are produced from the coal-based carbide process, and the non-integrated producers who are not integrated coal mines with low PVC prices cannot really compete and are losing money. So there could be quite a chunk of Chinese non-integrated producers getting out of business. But it doesn't mean that there's also still some expansions announced by the integrated producers. So we'll see how those dynamics play out. But it should improve the global economy when Chinese coal-based PVC producers are shut down or phased out.

Okay. And if I look at the U.S. vinyls like vinyl derivatives, PVC and just merchant chlorine markets, I mean, is there room for these markets to absorb further chlorine prices should caustic weaken and we see the chlorine side of the ECU push further pricing?

That's a good question. I think today, U.S. export is around 30-odd percent of its PVC already. And I think the caustic wise will export around 20-odd percent. So new capacity added on, we're also accessing the export market, which is very volatile. It can be good. It can be bad.

Our next question comes from the line of Matthew Blair of TPH.

The HIP volume improvement of up 9.6% quarter-over-quarter appears quite strong, especially in light of just the weak construction markets. Are you able to break this out into one, what is just the normal seasonal move for HIP in Q1? Two, what was the impact of less destocking? And then three, what was the impact of just underlying demand improvement, if any, in the segment?

Yes, I believe a significant factor is the reduction in destocking due to last year's sharp interest rate increases and high mortgage rates, which significantly diminished home purchases. Many builders exercised caution and utilized their inventory. Nevertheless, even with that context, there was a notable 21% decrease in volume compared to the first quarter of 2022. Yet, compared to the fourth quarter of last year, there has been an improvement. Typically, the second quarter is the strongest for construction, as previously mentioned. Fortunately, we have observed that some homebuilders are offering incentives to boost demand, and recently, they have started to reduce those incentives as demand picks up. The 10-year average treasury rate has declined from over 4% to 3.4%, benefiting mortgage interest rates. While we are seeing some signs of improvement, it is still too early to gauge how the economy will perform in the second half of this year. Most analysts predict that housing will be weaker this year compared to last but will likely improve in 2024 and 2025.

Great. And then it looks like Southeast Asia spot caustic prices are down about 20% versus Q1 levels. Is that mostly a function of weaker industrial demand? And how likely is it that those weaker Asia prices will flow into the U.S. market?

Yes. As Asia was exporting PVC they have more access to caustic. And coupled with a weak economy, generally speaking, in Asia, caustic prices came down. We believe that the export or Asia caustic prices have bottomed out, and we're seeing signs of improvement. The economy in Asia is improving gradually, especially China, that will help. So we think that the demand will absorb some of those excess capacities.

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

Congratulations on the quarter. My first question is about the improving trends you've mentioned in PVC and epoxy. Could you provide more details on those and do you expect sales to continue or possibly accelerate with the easing of tax restrictions?

Well, as I said, PVC demand should be improving from fourth quarter level and into the first quarter and second quarter. But I think some of the consultants, chemical market analytics, are saying that they foresee the rest of the year to be pretty much flat in prices, which shows that this is domestic U.S. price. And they are looking at somewhat improving prices for next year. This is forward-looking. So I think people believe that we've seen the bottom of fourth quarter last year and things will improve gradually as demand improves.

Great. And then maybe you can just update on your thoughts on caustic as you move through the year. You still expect declines? Is there really any stabilization there?

Yes. Caustic prices likely peaked in the first part of last year and early this year. Consultants are forecasting that prices will gradually decline throughout the year and stabilize by the end of next year. However, this situation is closely tied to the U.S. industrial economy, as caustic is widely used across various sectors. Currently, the pulp and paper industry is somewhat weak, which is a reflection of the overall economy. On a positive note, demand for alumina and aluminum is rising, infrastructure construction is expanding, and mining activities, including lithium mining, are increasing as well. Therefore, there is potential for improved demand for caustic. While we cannot predict the future with certainty, it’s worth noting that caustic and chlorine prices are currently at high levels, and we are benefiting from this along with lower power and natural gas costs, which enhances our margins.

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

Albert, we've seen rent oil price drops from the high 80s to the low 70s in the last 3 weeks. And I think about that drop and its impact on both the U.S. cost advantage and your own ethylene chain profitability.

It will definitely have some impact. As you know, most of the world, around two-thirds, uses naphtha as a feedstock for ethylene production. So when oil prices drop, naphtha prices also fall, which improves the economics. However, particularly in Asia, naphtha-based ethylene and polyethylene producers have been operating at a loss when selling polyethylene based on the naphtha price. This situation should benefit them economically. Nevertheless, we remain very competitive with ethane cracking, as our costs are the lowest among all feedstocks, maintaining a significant margin over naphtha cracking.

Very good. And just on the U.S. polyethylene prices, I don't believe the April contract has failed yet. How do you think about Q2 U.S. polyethylene prices has trended in the quarter?

Yes. I think the polyethylene price for April has remained stable. It was settled at a flat rate, and some consultants are predicting a similar flat price for the remainder of the year. The industry has announced a price increase of $0.05 per pound for April, which has now been postponed to May. This indicates that the industry believes demand is improving. Prices have been low compared to last year, having dropped significantly since the latter half of last year, suggesting that there should be some improvements in margins. However, we will have to wait and see if the $0.05 increase, or a portion of it, can be achieved in May or during the second quarter of this year.

Our next question comes from the line of Aleksey Yefremov of KeyBanc.

Albert, can you talk about your utilization in the U.S. PVC assets and chlor-alkali assets? If you can provide any comments about your levels and also relative to industry averages?

Yes, there's some turnaround going on and some planned outages. I think the chlorine running out 80-odd percent and PVC is in the mid-80s operating rates and also reflecting the supply-demand dynamics globally.

Albert, and staying with PVC. How do you see the domestic market if we try to break it down in terms of demand between new housing, R&R and infrastructure? If you do know the kind of the rough percentages between those three buckets?

The infrastructure is the smallest component while housing is the largest, as indicated in our HIP separations where we break down the sales of our Housing and Infrastructure segment. Within housing, approximately two-thirds of the sales are related to repair and remodeling, with new homes making up one-third. There are nearly 100 million homes out there, and we are discussing around 1.5 million to 1.4 million in new home construction. The materials used for repair and remodeling, such as siding, PVC windows, and roofing, involve a significant amount of PVC compared to new construction, though new construction remains a substantial part of our business. For Westlake, our HIP sales are evenly split, with 50% going to new construction homes and 50% to repair and remodeling.

And you could see that in the first quarter, repair and remodeling was fairly resilient even though we saw some continued concern in the new start levels, but you could see that repair and remodeling in the first quarter was resilient. There are forecasters that would continue to suggest that repair and remodeling will continue to grow this year, probably at lower rates than last year, but nevertheless, remain resilient to '23.

Our next question comes from the line of Hassan Ahmed of Alembic Global Advisors.

I have a question regarding polyethylene. You mentioned the pricing dynamics, and I notice that a significant amount of capacity is being added this year. However, as I review the various grades of polyethylene, it appears that your exposure is primarily on the LDPE side. The capacity growth for LDPE seems to be much slower compared to other grades. Should we anticipate differing pricing trends among the various grades?

Well, this is Albert. Good question. We always felt that LDPE should be separately priced than something that is low and high density. They're all polyethylene, but different grades serve different segments, but somehow our industry lumped them altogether. And as you said, all the new capacity and those haven't started yet, but have mechanical completion, but having difficulty starting up. Those are primarily high density and linear low density and not LDPE. I think the LDPE has already started. But nevertheless, it has impacted the industry; they lumped together and the pricing ups and downs are linked together.

Understood. Understood.

One point I want to make is that the margins, regardless of whether prices are rising or falling, are significantly better for LDPE compared to the margins for linear low-density or high-density polyethylene. So we are seeing improved margins. Yes. Okay.

Fair enough. So now on the epoxy side, Albert, the commentary seemed incrementally positive. Is it fair to assume that Q4 and Q1 were the lowest points and that things will start to improve from there? If that is the case, will this improvement be primarily driven by demand, with China picking up, or will it also be influenced by supply factors, where there might be some market rationalization involved?

Yes, that's a very good question. I think for PVC, we think you are right that Chinese demand increasing, especially real estate, which is a big component of the economy and the government tried to stimulate that part as well, that dimension increase of less export and pricing should improve and so as caustic. On the epoxy side, little bit different. It's not that a big business and the Chinese are building. Looking for the windmills and windmills are just getting back in China of New construction. Certainly, everybody needs renewable energy and lower cost. So it takes time for that to come into this place. Meanwhile, as one of the earlier questions, they have been exporting the amount overseas. But as the year progresses in the next few years, definitely, the demand for epoxy globally will increase and improve. But this year is still maybe it's a bottom of the cycle year.

Our next question comes from Angel Castillo of Morgan Stanley.

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

So good question. So the market was meaningfully stronger in the first quarter of 2022. And so you certainly have seen a change in market dynamics in terms of demand first quarter of 2022. So I'd say that with the energy power circumstance that we have, let's say, in Europe, European epoxy is in a much better position to be able to compete. But you're right, there are still imports of Asian epoxy into the European market, though as the Asian markets begin to rebound, less so in terms of the volume of epoxy resins into that market. When you think of the domestic market for our epoxy resin, as Albert noted earlier, it's a stronger position that we see there in terms of overall market demand. And so I would say that the troughs that we saw in the fourth quarter as everybody was destocking across all product chains, we certainly saw that really come to an end at the end of the fourth quarter. And so I would say that we see some recovery as we get into '23 with '24 and beyond being stronger markets as we see greater demand for wind energy and windmill contracts being led in '22, '23 and '24 and beyond. And those will take time before those windmills are constructed and the demand really gets much stronger. So I'd say '23 is one of those years we see a strengthening of the market but not fully backed by any means back to the levels that we saw in '21 and first quarter of '22.

That's great color. Another one, could we get a little more color on the export mix picture for PVC and PE, respectively? And can you give any comments on your domestic and export sales mix and mix shifts relative to levels seen in the industry?

Yes. This is Albert. The industry exports for polyethylene are about 41% in March. Year-to-date, about 42%. For PVC, it's about 34% for March and 38% year-to-date. And for Westlake, we export less than the industry average in general.

And there are no further questions at this time. The Q&A session has now ended. I would like to turn it back to Jeff for closing comments.

Thank you. Thank you again for participating in today's call. We hope you will join us again for our next conference call to discuss our second quarter 2023 results.

Thank you for participating in today's Westlake Corporation's first quarter 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.