Westlake Corp Q2 FY2023 Earnings Call

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Westlake Corporation Second Quarter 2023 Earnings Conference Call. As a reminder, ladies and gentlemen, this conference is being recorded today, August 3, 2023. 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. Good morning, everyone, and welcome to the Westlake Corporation conference call to discuss our second 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, which we refer to as 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 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 on 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 reported on this call speaks only as of today, August 3, 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 second quarter 2023 results. For the second quarter of 2023, we reported sales of $3.3 billion, net income of $297 million, and EBITDA of $690 million. In our PEM segment, the continuation of soft industrial and construction activity and unplanned maintenance activities drove sales volume declines, particularly impacting PVC resin, caustic soda, and epoxy in North America and Europe. The elevated level of unplanned outages resulted in lost sales that impacted operating income by approximately $50 million. While our PEM segment average selling prices were lower than in the first quarter, we benefited from our strategically located globally advantaged feedstock position in North America, where we saw lower feedstock and fuel costs compared to the first quarter. In our HIP segment, we experienced an increase in sales volumes quarter-over-quarter with the start of the construction season in North America, with housing starts in the second quarter averaging 1.4 million units and repair and remodeling continuing to grow. HIP segment EBITDA margin increased sequentially due to the 13% volume improvement and raw material cost reductions, and its margin remained in line with the record second quarter of 2022 at approximately 22%, reflecting the strength in our branded products and relationships with our customers. While we expect the challenging macro backdrop to continue in the third quarter, we will focus our efforts on operating our assets reliably and reducing costs. To that end, we now expect our cost reduction program to achieve between $75 million to $105 million of cost savings in 2023, up from the previous $55 million to $105 million target after we achieved approximately $25 million of cost savings in the second quarter and $50 million in the first half of 2023. Overall, our second quarter results reflected the weakness in global manufacturing and industrial activity, along with the impact to sales volumes and margins from the planned and unplanned outages, and we continue to take a disciplined approach to managing our operations in this volatile economy and advance our long-term strategic priorities. I would now like to turn our call over to Steve to provide more detail on our financial results for the second quarter of 2023.

Thank you, Albert, and good morning, everyone. Westlake reported net income of $297 million or $2.31 per share in the second quarter of 2023 on sales of $3.3 billion. Net income for the second quarter of 2023 decreased $561 million from the second quarter of 2022 as a result of lower average selling prices and integrated margins and more production and sales volumes. When compared to the first quarter of 2023, net income decreased by $97 million in the second quarter of 2023, primarily due to lower average selling prices, particularly for caustic soda and PVC resin due to softer market conditions and unplanned production outages. For the second quarter of 2023, our utilization of the FIFO method of accounting had a negligible impact on pre-tax earnings compared to what earnings would have been reported on the LIFO method. Moving to our segment performance. Our performance in Central Materials segment's second quarter 2023 sales were $2.1 billion with EBITDA of $435 million compared to EBITDA of $1.2 billion in the second quarter of 2022 due to lower average selling prices, particularly for Performance Materials in addition to lower sales volume, largely in PVC and epoxy. PEM segment EBITDA of $435 million in the second quarter decreased $180 million from the first quarter of 2023, largely due to lower average selling prices for both Performance Materials and essential materials, particularly for caustic soda, epoxy resins, and polyethylene. Lower demand has resulted in sales volumes, particularly for PVC, caustic soda, and epoxy resin, and elevated levels of unplanned outages that impacted both sales volumes and integrated margins. Turning to our Housing and Infrastructure Products segment, second quarter sales were $1.1 billion with EBITDA of $244 million, which declined $66 million when compared to the record second quarter of 2022. The decrease in EBITDA was due to an 18% decline in segment sales volumes driven by lower housing starts and completions we've seen over the past year. Despite the volume decline year-over-year, HIP segment EBITDA margin of 22% in the second quarter of 2023 was unchanged as lower raw material costs and resilient pricing offset the impact of the lower sales volumes. When compared to the first quarter of 2023, HIP segment EBITDA of $244 million increased $39 million. Housing product sales of $918 million in the second quarter of 2023 increased $100 million due to solid sales volume growth supported by seasonal North American construction trends that more than offset slightly lower average selling prices. This housing product sales volume improvement was widespread with significant gains in most product lines. Infrastructure product sales of $197 million in the second quarter of 2023 increased $8 million from the first quarter of 2023 and primarily due to growth in sales volume of infrastructure products serving fresh and wastewater applications. The overall higher HIP segment sales in the second quarter of 2023 drove an improvement in EBITDA margin to 22% from the 20% in the first quarter. Overall, we were pleased with HIP segment sequential volume improvement and solid margin performance. Our financial results, particularly in our PIMS segment reflected globally slow demand and production outages. As we enter the third quarter, macroeconomic conditions remain sluggish as evidenced by recently published manufacturing indices. We're adjusting our market conditions by taking a disciplined approach to managing inventory, reducing our costs, matching production levels to demand, and adapting our business to the evolving market conditions. Our strong financial position, supported by an investment-grade credit rating, supports our long-term objectives. As of June 30, 2023, cash and cash equivalents were $2.7 billion and total debt was $4.9 billion with a staggered long-term fixed-rate debt maturity schedule. For the second quarter of 2023, net cash provided by operating activities was $555 million, while CapEx expenditures were $240 million, resulting in free cash flow of $315 million which reflects our strong cash generative business model. We continue to look for opportunities to strategically deploy our balance sheet in a manner to create long-term value. Now, let me provide some guidance for your models. Based on our current view of demand and prices, we expect second half of 2023 revenue in our housing and Infrastructure Products segment to be between $2 billion and $2.2 billion, with EBITDA margins in the high teens. We expect our company-wide cost reduction program to achieve between $75 million to $105 million of cost savings in 2023, up from the previous $55 million to $105 million target after we achieved approximately $50 million of savings to date in 2023. 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. For the full year of 2023, we expect our effective tax rate to be approximately 23% and 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. Looking ahead, with continued high interest rates and a slowing economy, we're expecting a challenging environment in the second half of this year. However, we remain confident in our long-term growth plans, the strength of our business portfolio, and our disciplined approach to creating long-term value. We look to expand our sales through differentiated product offerings and innovations with sustainable products to meet our customers' needs on managing our costs and adapting to the changing market conditions as they unfold. In our PEM segment, we will leverage our North American feedstock advantage and highly integrated production chain. We remain positive on the outlook for our PEM segment, driven by increased consumer activity and demand for clean, fresh water, electrification, and renewable energy benefits from the Infrastructure Investment Act and Inflation Reduction Act, and favorable demographic trends, all driving demand for PVC resin, caustic soda, polyethylene, and epoxy. While PEM average selling prices ended in June below the average selling prices of the second quarter, in the last few weeks, we have seen some signs of improvement in both PVC resin and polyethylene markets from tightening export markets with unprofitable high-cost international producers curtailing production and lower industry inventory levels. As a result, we remain constructive on the outlook for our PEM segment from recent levels. We also remain positive on the outlook for our HIP segment supported by the structural undersupply of homes in North America, improving demographics to support more first-time homebuyers over the coming decade, and potential benefits to our infrastructure product sales volumes from spending related to the Infrastructure Investment Act. We will continue to offer a broad portfolio of branded products and deliver value through innovation and service to meet our customers' needs. Over the past several quarters, our HIP business has demonstrated that it can adapt to the changing market conditions and its results over this period reflect this capability, strengthen branding, and its capital-light characteristics. Sustainability and environmental stewardship remain critical to our strategy at Westlake. We continue to invest in developing and commercializing innovative new products to meet our customers' sustainability challenges. We are proud to report increased customer adoption of our green bean one-pellet solution and PVCO innovations in the second quarter as a result of these efforts. Separately, we continue to invest capital to improve our plans to reduce our carbon and emissions intensity and have made significant progress towards our 20% by 2030 reduction goal. 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 our shareholders. With a robust cash flow generation capability, investment-grade credit rating, and strong balance sheet, with net debt below one times trailing 12 months EBITDA, we see significant opportunities to create value for our shareholders through multiple avenues, including returns of capital through dividends and share buybacks, organic expansions in high-returning quick payback investments, and synergistic acquisitions with return profiles exceeding our cost of capital as these opportunities present themselves. 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'd like to remind listeners that our earnings presentation is available on our website and a replay of this teleconference will be available 2 hours after the call has ended. We will now take questions.

Thank you. Our first question comes from the line of Joshua Spector from UBS. You may proceed.

Hello. Good morning, everyone. It's Chris Perrella standing in for Josh. I want to follow up on the outlook for the third quarter in the PEM segment. Given that volumes were affected by turnarounds in the second quarter, what volume improvement are you anticipating sequentially in the third quarter? Additionally, are you expecting normal seasonality in the fourth quarter? What does that outlook look like?

Yes. Typically, the third quarter along with the second quarter are the two strongest periods of the year. The fourth quarter is usually the weakest seasonally. Assuming the economy continues to grow at a modest pace, we anticipate that volumes will improve in the third quarter similarly to the second quarter.

What were they doing in the second quarter that suggests we might see similar results in the third quarter, excluding any unexpected interruptions?

Yes, Chris, it's Steven. When you think about the both the turnaround planned outages and the unplanned outages, as Albert said, the third quarter tends to be a good strong quarter, just like the second quarter. The second quarter was impacted by both planned and unplanned outages. I do expect that the third quarter should have more normalized sales volumes and production volumes as we would have expected in the second quarter, absent those outages. As I noted, the fourth quarter also typically sees some seasonality impacting both the PIM and the HIP segments. So that typically is lower than the second and third quarter volumes.

All right. I have a quick follow-up on the pricing. I believe Albert mentioned that the average PEM pricing at the end of June was below the 2Q average. How does your pricing lag and how quickly can it improve over 3Q?

Well, prices when they come down, come down pretty quickly, but when prices increase, some of those price increases may have a lag going up. You’re welcome.

Thank you. Our next question comes from the line of Patrick Cunningham from Citi. You may proceed.

Hi. Good morning. Thanks for taking my question. You delivered roughly flattish margins in the HIP segment year-on-year. It's a pretty steep volume decline. How should we think about the long-term margins through the cycle in that business?

Yeah. Well, Patrick, as you can see, even in these markets where we're seeing home starts in the neighborhood of 1.4, which was the average for the second quarter, we continue to see real resiliency in pricing. Certainly, even though we've seen the challenges in volume, if you think about year-over-year, we certainly have a branded product that continues to sell through and is a product of selection by our customers. So as we think about using that branding and that relationship with our customer base, as we see improvements in starts over the horizon, we do expect we'll continue to improve the overall margin. We've not given the high-end range of margins. But you can see, we still expect to see some headwinds in the second half of this year. I've guided to the high teens range for the second half of this year. Nevertheless, we think there’s certainly with the innovative products, the branding that we have and the relationships that margins should improve as the market improves.

Got it. That's helpful. And then what's driving the weakness in epoxies and how do you see demand trending by region for the balance of the year?

Yes. Epoxies apply to many areas, mostly into the industrial coatings and also in windmill blades and lightweighting of vehicles. The windmill blade business is still coming back slow demand, especially in China. China has one of the largest capacities in the world in epoxy and its economy is really not growing much and there's overcapacity of new plants coming on. So the business is very weak and impacted globally. We expect US, European demand to pick up in the coming quarters or years, but it takes a while. China is the main issue we have.

Great. Thank you.

You're welcome.

Thank you. Our next question comes from David Begleiter from Deutsche Bank. Your line is now open.

Thank you, good morning. Albert and Steve, if you think about PEM sequentially, you will have lower volumes in Q3, but might be facing lower prices as well as well as higher feedstock costs. So is PAM still up sequentially in Q3 versus Q2 given those dynamics?

So David, considering the seasonal strength we anticipate in Q3, and the absence of headwinds in our PEM business from both planned and unplanned outages, we expect improvement in volume. We ended the quarter with lower average prices compared to the second quarter. However, looking ahead to ethane pricing, it was notably high at the end of the second quarter. For the second half of the year, we expect ethane pricing to remain in the low to mid-20s.

Very good. And Albert, you mentioned some improvements in the global polyethylene market landscape. Can you give a little more color on what you're seeing right now in that market?

Yes. I think the export polyethylene prices, primarily in Asia, have been quite weak, and prices dropped a fair amount over the months during the year. We see some kind of bottoming out in polyethylene prices and demand picked up in Asia as well. So we expect there's some kind of price improvements in the US as a result of this, as well as the higher feedstock cost, as Steve mentioned, we saw at the tail end of the second quarter and early part of July. So with the cost price increase push and as well as demand improving globally for polyethylene, we expect some kind of pricing improvement in the third quarter for polyethylene and PVC, but that's assuming the economy is still going strong.

Thank you.

You’re welcome.

Thank you. One moment, please. Our next question comes from the line of Aleksey Yefremov from KeyBanc. Your line is now open.

Thanks and good morning everyone. So lately, with some improvement in new residential construction domestically. Have you seen any uptick in PVC demand?

Yeah. And so Aleksey, when you think about the strength that we've seen in the construction materials business pulling through into pipes and siding and trim, I would say that you see this really in the announcements that many of our competitors have announced, as well as we in PVC pricing. So we have price announcements out for August and September. And so that is reflective of what we're seeing in strength. You may have seen that we've also seen export prices also begin to rise in PVC in overseas markets. So that strength that we've seen in the construction markets pulling through in volume but also pricing nominations reflecting that strength both domestically and in the export markets.

Thanks, Steve. For the second question regarding M&A, can you update us on your pipeline? Are you seeing more or fewer attractive deals? Also, how would you describe your current level of engagement in M&A?

Yeah. So there's always an active dialogue amongst ourselves and others for opportunities in the market, both on the materials side as well as on the building products side. It's all about really looking for the right kind of value opportunity that we see in the marketplace. But I would say there's still a good number of opportunities to deploy capital. It's just about finding the right value-added opportunity for both parties, obviously.

Thanks a lot, Steve.

You’re welcome.

Thank you. One moment please. Our next question comes from the line of Kevin McCarthy with Vertical Research Partners. You may proceed.

Yes. Good morning. Just a follow-up on PVC. We've seen the export prices come up appreciably over the last three to four weeks. Can you speak to what is driving that? How sustainable do you think the move might be? And do you think it will be enough for PVC producers to raise the US domestic contract price in August, I believe you and others have a proposed increase on the table there?

So Kevin, there are a number of Asian producers that really are at either the bottom end or very near the bottom end from a margin perspective. As you can see from our remarks, we see a number that have really lowered operating rates because of the margin challenges they're facing with their feedstocks. If you use Brent as a benchmark in the mid-80s, those producers are seeing margin challenges, and that really is supportive of that driver for rising prices in the market. As we see the seasonal strength in Q3 and the price announcements by ourselves and frankly, others for August for PVC, my comments about the strength we're seeing in even at this more muted level for building products continues to pull vinyl through into the construction markets, not only here in the North American market, but elsewhere.

That's helpful. And then as a second question, Albert, I would appreciate any updated thoughts you might have on China. Generally speaking, we've seen demand from China languish across many commodity chemical markets. In the markets where you compete, are you seeing any signs of improvement there following recent efforts to stimulate, or for that matter, any improvement on the supply side dynamics in China?

China is the elephant in the room. It has the largest capacity to produce many of the chemicals and plastics, as well as being one of the largest markets for it. As we all know, China did not recover much since the Chinese New Year. People expected recovery after coming out of the pandemic, and the economy is still quite weak. As a result, polymers and chemical market prices have dropped significantly, impacting global prices as well. Not only that, they used to import products, and now they're exporting products. This all has affected global prices for those products. As we're aware, the unemployment rate for young people in China has been surprisingly high, and recently, the Chinese government has made a statement indicating they are coming up with policies to stimulate, but those statements have not been followed by concrete action plans yet. Nevertheless, we believe that over time, the Chinese economy will improve, and they have targeted a 5% GDP growth for the near term. However, time will tell, but in the meantime, as Steve mentioned, the spot price has really bottomed out in China. Coupled with some planned issues and turnarounds, we see the prices have started moving up these last several weeks. We hope that will be sustained, especially during the third quarter, which is usually a busy quarter. So time will tell, but we think China should improve over time.

Very good. Thank you so much.

You're welcome.

Thank you. One moment, please. Our next question comes from the line of Michael Leithead from Barclays. You may proceed.

Great. Thank you. Good morning, guys. My first question on PEM and maybe sticking on the last topic. Your slides talk about competitively priced exports out of China for epoxy, and when you sort of do the back of the envelope math, it seems like producers there are selling export products below cash breakeven levels. So how do you think this dynamic or down cycle plays out? And does it change at all how you approach…

Certainly, some Chinese producers, depending on the industry, are operating at the lower end or very close to the lower end of margin levels. In the integrated ethylene to polyethylene sector, our data indicates that Chinese producers using naphtha cracking are incurring losses, while US integrated players utilizing ethane feedstock are still experiencing healthy cash margins. However, in the epoxy sector, where they have expanded capacities, some Chinese plants are operating at less than 50% capacity, and several new facilities have not yet begun operations and remain inactive. As a result, I believe companies are adapting to these new dynamics, and over time, they should make sound decisions regarding their operations.

Great. That's super helpful. And then maybe just a follow-up on HIP. Could you talk about the different product lines or categories within the segments? You can obviously fairly finely track the moving pieces, but within the HIP, what areas perform, say, better or worse relative to the overall segment this quarter?

Yes. We saw broad strength across really the portfolio. Strength really in our businesses, such as stone, siding, roofing, and of course, pipe for storing wastewater applications, so a broad application really in what we would call the Westlake Royal building products business, as well as our pipe and fittings businesses. So broad strength in all of those businesses within the HIP business really made nice contributions in the second quarter.

Okay. Thank you.

You’re welcome.

Thank you. One moment, please. Our next question comes from the line of Matthew DeYoe from Bank of America. Please proceed.

Good morning, everyone. What percent of China's PVC production do you suspect they're exporting right now?

Yes, China used to be an importer of PVC, and I think they have been exporting about 80% of the Chinese PVC produced is from a carbide process, usually not high quality. I think India has imposed a VCM, VCM monomer level on import PVC, and some of the Chinese producers are not able to meet it. So I think the PVC export volume has reduced from China. But nevertheless, it has an impact on those markets, primarily with export going to South Asia and Southeast Asia as the main markets.

Do you have a number, Steve? In our previous discussions, you mentioned you expected it to be around 20%. Based on Albert's comments, I assume it's lower now. But is it 10%, 5%, or 15%? Do you have any estimate?

Yeah, it's meaningfully lower than that 20%.

Understood. And if I can, what was your mix of import versus exported product shift for caustic and PVC in the quarter? And do you expect it to change meaningfully next quarter when you get your capacity back?

Yeah. And so when you think of the exports that we have both in caustic and PVC, the industry is exporting in the 20% range, and we're just below that number. And from a PVC perspective, the industry has been exporting historically in the 30 percent range. We're also below that threshold number as well, because remember, PVC is going into our building products business. We have a pretty good domestic consumption number internally for our own PVC.

Understood.

Thank you. One moment please. Our next question comes from the line of Matthew Blair with TPH. You may proceed.

Hey, good morning, Albert and Steve.

Good morning.

Good morning, Matthew.

Could you share any more color on the $50 million outage impact in PEM in Q2? What assets did that impact? And were they fully back up and running by July 1st, or do you expect anything to roll into Q3? And then, are there any planned turnarounds for Q3 or Q4 that we should be keeping in mind?

In terms of the businesses within PEM, it was in our core vinyl business. We obviously took corrective action in the second quarter, and I think those issues are behind us as we are now in the third quarter at this stage.

And regarding our turnaround concerns, there are always more turnarounds going on, but nothing major.

Okay. Sounds good. And then, Albert, I think you mentioned that you're matching production with demand. Could you clarify when you run your ECU assets? Are you matching up to the caustic demand in the market or to chlorine demand in the market?

It depends on the products and markets and pricing. Certainly, we would look out for all these areas. Right now, the PVC demand is in the construction season that's stronger and caustic demand is a bit weaker. The caustic price has been coming down globally and every month gradually. Until the industrial activity picks up, the economy picks up, caustic is becoming weaker.

Okay. And are you running to meet all of that marine demand? And I guess the implication is that would that mean that the caustic side is oversupplied?

It's a combination. We have plans integrated to chlorine PVC, and we have plans not integrated. So depending on where they are, we adjust based on the market situation in those areas.

Okay. Sounds good. Thank you.

You're welcome.

Thank you. One moment, please. Our next question comes from the line of Arun Viswanathan from RBC Capital Markets. Your line is now open.

Great. Thank you for taking my question. I hope you're doing well. I wanted to inquire about the PVC market. You've observed some weakness possibly related to EBIT. What are your thoughts on PVC as we move further into the year? There has been some volatility in the ethane and ethylene markets; does that have an impact on PVC? Also, could you share your perspective on building products and the housing market in relation to the PVC outlook?

As we said earlier, the PVC market has turned tighter. Export prices improved, and demand has increased domestically and internationally because of this seasonal quarter. There are price announcements planned for both August and September domestically in the United States. When you look at the consultants' view of pricing, they think prices will be relatively flat going forward, with possible increases in the third quarter, a slight decline in the fourth quarter, and improvement expected next year. The general view of the market suggests that PVC is stabilizing and improving as we go forward.

And I just wanted to ask about the compounding and European side. Are there any nuances that you'd add to your comments as it refers to that part of the business? Thanks.

Yeah. So Arun, the compounding business has been strong. As you know, the markets we are addressing really are in the wire and cabling business, the medical, and the auto industries. That business continues to perform well. The contributions we've been making in the wire and cabling segment have gained strength due to the infrastructure bill, part of which involves improving Internet connectivity. We also see demand in cabling for the construction markets as housing starts increase. The auto and medical businesses have their own cycles, but the outlook remains positive at this stage. We are pleased with that compounding business, both domestically and in Europe.

Thank you.

Thank you. One moment, please. Our next question comes from the line of Vincent Mangiere from Morgan Stanley. You may proceed.

Hi. This is Turner Hinrichs on for Vincent. You commented that you're optimistic about the longer-term opportunity from public and private investments in US infrastructure and construction; can you size the degree of exposure Westlake has to these medium-term tailwinds? We generally think of Westlake as having more residential and nonresidential exposure. So any color and potential sizing of the opportunity would be helpful.

Yeah. When you think of our Infrastructure Products business, our pipe business, we are seeing the majority of that going into residential construction, but there is a significant portion, not 50%, but a significant portion that is a larger diameter pipe well-suited for the infrastructure bill, which we see generating $55 billion addressing the infrastructure needs the country has. We believe we're well positioned to meet those needs for counties and municipalities.

We are one of the largest providers of large-diameter pipe for water and sewer while also serving as our epoxy business as a bigger supplier of coatings for any infrastructure bridges and structures. As those funds are being allocated to municipalities and governments, we will see more demand for both PVC and epoxy.

Okay. That makes a lot of sense. Thanks for the color. I was also wondering if you could remind us of your view of HIP's profit margin through the cycle from trough to peak? And has that changed at all with mix?

No. I think what you've seen is the very resilient capabilities of the business to scale based on market conditions. You can see that our performance in this market, where we have housing starts at about 1.4 million averaging over the course of the second quarter, while still maintaining EBITDA margins in the 22% range. When you think of this business, its scalability is strong, and we are confident in the ability to perform well beyond the margins we're delivering even in this market condition. Given the strength of our product brands and the customer relationships of innovation that emerge because it's very brand-oriented, we think there's good upside.

Great. Thank you.

You’re welcome.

Thank you. One moment please. Our next question comes from the line of Michael Sison from Wells Fargo. You may proceed.

Hey, good morning. Albert, when you think about your portfolio after the Boral transaction, are there any other product lines or areas you'd like to do acquisitions to continue to expand that business and longer-term?

Well, we are very pleased with our PEM and HIP business, and we have nine strategic business units. Each one are leaders in the markets around the world, and we can grow organically in these areas, as well as identifying potential vertical integration opportunities. We also look at internal studies on debottlenecking sectors where we have opportunities in the market as well as focusing on cost reduction as a major initiative. However, we are also looking at inorganic growth opportunities.

Got it. And then just as a follow-up. If China continues to recover, will China end up importing PVC again? And if they do start importing PVC, how do you think that affects the margins here in the U.S.?

I think so long as China stops exporting PVC, that will be very beneficial. As we discussed, in our investor slides, we noted that global additions of chlor-alkali and PVC capacities are below GDP growth rates. As we look at projects going forward, those capacities generally lag GDP growth. We believe that our business, alongside significant energy needs to produce ethylene and chloride, positions us as the lowest energy cost producer globally. With minimal new investments and our cost position, we are optimally positioned in this sector.

Thank you.

You're welcome.

Thank you. One moment please. Our next question comes from the line of Frank Mitsch from Fermium Research. You may go ahead.

Thank you and good morning. I guess the pronunciation was close enough. I noticed that inventory levels dropped 9% sequentially. Your inventory levels dropped 9% sequentially, and I assume some of that might be selling out of inventory from the unplanned downtime or lower pricing. Can you talk about some of the factors there and what we should be expecting to see happen on that line?

Yeah. So, Frank, you're correct. Due to the planned and unplanned outages, inventory did come down because, obviously, we were not producing during those outages, but we were selling, which has an impact on inventories. But as we think about where producers are, we're continuing to address and adjust our production levels to meet market demand conditions. I would say that in the second half of the year, our inventory levels should be in the medium range.

Okay. Thank you. And one of the features of, I think, the last conference call was speaking of inventories, was talking about customer destocking, etc. Do you feel that we're at an underlying level of demand throughout all of your businesses, or are there businesses that are still seeing some destocking going on?

Yeah. I'd say the destocking really started almost a year ago in this business and accelerated at the very end of last year. So I would say we're at a point in time where our customers' inventory levels are at low to low-medium levels. We have not continued to see any destocking as that is behind us at this stage.

Frank, I want to add also that with high-interest rates and uncertainty in the economy, our customers are being very careful and they only order when they need to.

That's very helpful. Thank you.

You’re welcome.

Thank you. One moment, please. Our last question comes from the line of John Roberts, Credit Suisse. You may proceed.

Right. Thank you. Back to Building Products, do you have a sense for the divergence between new construction and repair remodeling activity?

So John, I would say that we did see continued strong demand in both sides of that HIP business. There was strong demand really in repair and remodeling. Given the 1.4 million average start number, you can see a resilient business being able to adjust to lower volumes year-over-year and still continue to perform. So I would say both the starts and new construction activity in repair and remodeling continued to perform well in both sides of the HIP business.

And then you noted merchant chlorine volume was up sequentially Q-over-Q. Was that largely greater availability given the weakness in vinyls, or was demand actually strong in chlorine?

In the summertime, there is a pickup for water treatment activity in chlorine, and so that's part of that story, John.

Okay. Thank you.

You’re welcome.

Thank you. One moment. Our last question comes from the line of Hassan Ahmed at Alembic Global Advisors. Please proceed.

Good morning, Albert and Steve.

Good morning.

Question around ECU pricing. Operating rates globally seem to be quite depressed, yet, I know caustic soda pricing has come down recently. On an ECU basis, pricing relative to history continues to be quite strong. So my question really is how sustainable are those pricing levels?

Well, demand for chlorine derivatives are still strong. PVC, we mentioned globally, even though global prices have bottomed out, we believe it will improve. With housing demand, we think both new construction and repair and remodeling remain pretty strong. Global demand in India is coming out of the monsoon season, and demand is returning. Thus, chlorine demand remains robust, but I will say that it's really peaking at the moment. However, demand will strengthen as industrial activity picks up, especially with a positive GDP in the US, where most countries are experiencing positive GDP conditions, albeit at low levels. More importantly, since very little new capacity has been added globally and with demand continuing to grow, we believe that supply-demand factors will remain tighter going forward.

Understood. Very helpful. And just sort of following up where you left off on chlorovinyl supply-demand dynamics. Look, one of the virtues, I guess, of the chlorovinyl story was the lack of investment under supply, I call it, right? One of your large competitors recently mentioned they were considering chlorovinyl investments in Texas, in particular. So how do you see the supply-demand story with that announcement out there now? Do you still feel that in the medium- to long-term, that the market will be undersupplied and will continue to tighten?

As I said earlier, globally, there's undersupply. One new plan would not make much difference. The chlorovinyl business, unlike the olefins business, is very much integrated. You need many investments, including chlorine, power plants, ethylene plants, and VCM, EDC, and PVC. It’s a very comprehensive and capital-intensive business, and it is also very cyclical. Our focus is purely on the return on investments. Again, we're looking at organic growth and evaluating what will provide us with adjusted returns on a long-term basis. However, we also have to consider the challenges this business has faced in the past, especially with China's influence over this market. Overall, everything hinges on the actions of the Chinese leadership regarding energy management, carbon reduction strategies, and various sectors targeted for investment. We believe that as time passes, they will address these challenges appropriately.

Very helpful, Albert. Thank you so much.

You’re welcome.

Thank you. At this time, I'm showing no further questions. And I would now like to turn the conference back to Jeff Holy for closing remarks.

Thank you. Thank you, everyone, for participating in today's call. We hope you'll join us again for our next conference call to discuss our third quarter 2023 results.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.