Westlake Corp Q2 FY2024 Earnings Call

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Corporation Second Quarter 2024 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 the question-and-answer session. As a reminder, ladies and gentlemen, this conference is being recorded today, August 6, 2024. I would now like to turn the call over to your host, Johnathan Zoeller, 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 2024 results. I am joined today by Albert Chao, our Executive Chairman; Jean-Marc Gilson, 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, and Housing and Infrastructure Products, which we refer to as HIP. Today's conference call will begin with Albert and Jean-Marc, 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 up the call to questions. Today, management is going to discuss certain topics that will contain forward-looking information 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 are thus subject to risks or uncertainties that are discussed in Westlake's Form 10-K for the year ended December 31, 2023, and other SEC filings. We encourage you to learn more about these factors that could lead our actual results to differ by reviewing the 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 on 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, and can be accessed via Westlake's website. Please note that information reported on this call speaks only as of today, August 6, 2024, and therefore, you are 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 accessible on our web page at westlake.com. Now I'd like to turn the call over to Albert Chao.

Thank you, John. Good morning, everyone. We appreciate you joining us to discuss our second quarter 2024 results. I'm pleased to announce that we reported record quarterly results for our HIP segment in the second quarter of 2024, which contributed to year-over-year company-wide earnings growth this quarter. We achieved this despite a slower than expected global macroeconomic recovery following the downturn in macroeconomic conditions that began in the second half of 2022 and the average annual rate of housing starts through June 2024 below the average for 2023. For the second quarter of 2024, we reported net sales of $3.2 billion, EBITDA of $744 million, net income of $313 million or $2.40 per share, which were each improvements from the second quarter of 2023. We benefited from higher volumes across the board in our HIP segment, led by pipe fittings and siding and trim, and also higher volumes across our materials portfolio in PEM, led by PVC resin and caustic soda. Average sales price in both segments was lower year-over-year in the second quarter, primarily due to the decline in PVC resin, caustic soda, and pipe and fitting prices that occurred last year. On a sequential basis, HIP volume rose by 15%, driven by seasonal increases in demand and product cross-selling with stable average sales price. Volume gains sequentially in PEM were 1%, while average sales price rose 4%. For PEM, this was the first sequential increase in average sales price since the destocking cycle that we experienced last year. During the quarter, we continued to see the benefits of our vertical integration strategy as strong demand for pipe and fittings and siding and trim in our HIP segment helped drive PVC sales volumes, improving our PEM PVC sales mix and margins as we were able to shift sales volumes from less attractive export markets. We also saw continued benefits from a portfolio diversification strategy during the quarter, as the slow recovery in PEM margins and earnings due to its continued weak global industrial demand was supported by solid HIP earnings growth and margin expansion from growth in residential housing construction and infrastructure bill related spending. Overall, we are very pleased with the performance of both our segments and the integration benefits of our portfolio of businesses and the value of this strategy delivers to Westlake and our investors. We are happy to welcome Jean-Marc Gilson to the Westlake team with his appointment as our new President and CEO. He is a seasoned industry leader with a proven track record of delivering sustained financial performance with leadership roles in the US, Europe, and Asia, most recently as President and CEO of Mitsubishi Chemical Group. Jean-Marc's appointment is the combination of a thoughtful succession plan that ensures the continuation of a strategy to create long-term value for our shareholders. I would now like to turn the call over to Jean-Marc to provide some initial thoughts.

Thank you, Albert, and good morning, everyone. It's a pleasure to join Westlake at such an exciting time in the company's history. While I am new to the company, I've been around the chemical industry for many decades in a variety of leadership roles, and I have long admired Westlake for its focus on safe and reliable low-cost operation and its environmental stewardship. I also recognize that shareholders value Westlake's history of profitable growth through disciplined investments to create long-term value. Since founding Westlake nearly 40 years ago, Albert and James, along with the rest of the Board and leadership team, have created an incredible company that improves the lives of so many people around the world. And thus, it's an honor to be given the privilege to build upon such a successful foundation. While I have only been at the company for a week, I’ve had the opportunity to meet many of my coworkers, and I wanted to share with you some initial thoughts. First, I look forward to building on the successful strategy and focus on driving value for our customers and shareholders. Second, the current portfolio is a great mix of globally competitive materials in PEM and innovative differentiated products with strong brands in HIP. Third, I think both segments complement each other synergistically, as demonstrated by the solid second quarter financial results that we reported today. I believe there is a solid runway to continue to grow the company in these two verticals for the foreseeable future. I look forward to sharing more thoughts with all of you in the near future. I would now like to turn our call over to Steve to provide more detail on our financial results for the second quarter.

Thank you very much, Jean-Marc, and welcome to Westlake. Good morning, everyone. Westlake reported net income of $313 million or $2.40 per share in the second quarter on sales of $3.2 billion. Net income for the second quarter of 2024 increased $16 million from the second quarter of 2023, primarily due to higher sales volumes for all product lines in our HIP segment, particularly for pipe and fittings and siding and trim. When compared to the first quarter of 2024, net income increased by $139 million in the second quarter, driven by increased demand from a seasonal pickup in construction activity, cross-selling in the HIP segment, and higher average sales prices in our PEM segment, particularly for PVC resin and polyethylene, reflecting some improvement in the supply-demand picture as the global markets slowly recover. During the second quarter, we continued to make progress on our company-wide cost savings initiative with approximately $50 million of savings delivered during the second quarter. These savings, combined with those achieved in the first quarter, totaled approximately $85 million of long-term cost reductions in the first half of 2024 towards our full-year target of $125 million to $150 million. These efforts build on the $110 million of cost reductions that we delivered in 2023 as we continue our focus on capturing acquisition synergies and improving our reliable, cost-effective business model. For the second quarter of 2024, our utilization of the FIFO method of accounting resulted in a favorable pretax impact of $12 million compared to what earnings would have been reported on the LIFO method. This is only an estimate and has not been audited. Before I discuss the details of our segment results, I want to provide some high-level thoughts on the quarter. In the second quarter of 2024, we saw a continuation of the market trends that we experienced in the first quarter, including building products demand growth, driving sequential sales volume improvement of 15%, and modest improvement in demand for materials in our PEM segment, which supported improvement in PEM's average sales price of 4% during the second quarter. These trends, combined with our cost cutting and synergy attainment efforts, drove record quarterly EBITDA of $336 million and record quarterly EBITDA margins of 28% in our HIP segment, and improvement in our PEM EBITDA margin to 19% from 13% in the first quarter. Notably, the record HIP results are occurring against a backdrop of historically lower levels of residential construction activity, which is necessary to meet society's needs for housing and elevated mortgage rates. This is a testament to our positioning in the market and margin improvement efforts. Combined, the solid growth in HIP and progress towards margin recovery in PEM drove a return to year-over-year quarterly earnings growth for Westlake despite the current global macroeconomic conditions. Moving to the specifics of our segment performance, our Housing and Infrastructure Products segment produced record EBITDA of $336 million on $1.2 billion of sales. EBITDA increased by $92 million year-over-year due to a solid 16% increase in sales volumes, particularly for pipe and fittings and siding and trim. In addition to the sales volume growth, the earnings improvement was supported by lower material costs compared to the prior year period and acquisition synergy and cost-cutting benefits. When compared to the first quarter of 2024, HIP segment sales of $1.2 billion rose by $150 million, driven by a 15% sequential increase in sales volumes and stable average sales prices. HIP's EBITDA margin of 28% set a new quarterly record, and the margin expansion from 22% in the prior year period was primarily due to higher sales volumes and lower material costs. While the sequential improvement from 25% in the first quarter of 2024 was primarily due to higher sales volumes. Moving to our PEM segment, second quarter EBITDA of $391 million was lower than the second quarter of 2023 EBITDA of $435 million due to lower average selling prices, particularly for caustic soda, PVC, and epoxy resins. While lower sales prices drove a year-over-year decline in EBITDA, our sales volumes in all product categories in our PEM segment saw improved customer demand compared to the second quarter of 2023, resulting in an 11% increase in sales volume. On a sequential basis, PEM segment EBITDA of $319 million in the second quarter increased by $138 million from the first quarter of 2024 as a result of higher average sales prices, primarily driven by higher prices for PVC resin and polyethylene. While we are pleased with the progress that PEM has made in recovering margins for most of its products, profitability in our European epoxy business remains challenged, in part due to the adverse impact of low-priced import competition. As a result, after careful consultation with key stakeholders, last week we announced plans to temporarily cease operations and mothball our ECH unit in the Netherlands to improve the profitability of our epoxy business. We expect to incur a tax cost of approximately EUR80 million related to the mothballing of the unit, with substantially all of those costs expected to be recorded in the third quarter of 2024, with cash outflows expected to occur over several years starting in 2025. We expect these actions will materially improve the financial performance of our European epoxy business without any impact on our customers. Our US epoxy antidumping case continues to progress with an expectation that provisional duties will be set sometime later this year. Likewise, the European Union has launched a similar antidumping investigation. Westlake believes in free and fair trade, and thus the antidumping investigations and potential duties to be applied, along with our proactive actions in Europe, we believe will level the competitive markets and restore our epoxy business to profitability. Shifting to our balance sheet, as of June 30, 2024, cash and cash equivalents were $3 billion and total debt was $4.9 billion with the staggered long-term fixed rate debt maturity schedule, including $300 million of maturing debt that we expect to retire in the third quarter of 2024 using our strong liquidity. For the second quarter of 2024, net cash provided by operating activities of $237 million included the cash payment of the litigation charge we took in the fourth quarter of 2023. Our cash-generative business model provides us with a platform to deploy our balance sheet strategically to create long-term value for our stakeholders. Now let me provide some guidance for your models. Based on our current view of demand and prices, we continue to expect 2024 revenue in our Housing and Infrastructure Products segment to be between $4.3 billion and $4.6 billion, with possible upside beyond our EBITDA margin guidance of 22%. We continue to expect our total capital expenditures to be approximately $1 billion, which is similar to our depreciation and amortization run rate. As a reminder, this includes costs for a planned turnaround at our Petro 1 ethylene unit scheduled to begin next month that is projected to last approximately 60 days. We continue to target $125 million to $150 million of company-wide cost savings in 2024, with approximately $85 million already achieved in the first half of this year, including $50 million in the second quarter. For the full year of 2024, we expect our effective tax rate to be approximately 23%, and we expect cash interest expense to be approximately $160 million. Now I'd like to turn the call over to Albert to provide the current outlook for our business.

Thank you, Steve. Overall, we are pleased with the performance in the second quarter of 2024, despite a challenging macro environment. As we look ahead to the remainder of the year, we remain cautiously optimistic and will continue to manage our production and inventory levels to customer demand. While order books remain solid, unusually wet and hot weather conditions in many parts of North America, combined with a recent slowdown in US housing start remodeling activity, could impact our sales volume in the second half of 2024. ISM readings in the US and Europe slipped during the second quarter, while similar metrics in China also reflect slowing conditions, which could translate into a slowing demand for some of our PEM products. Overall, while the pace of global economic growth remains unclear, we are encouraged by the trend of solid year-over-year volume growth in HIP and volume and margin recovery in PEM delivered in the second quarter of 2024. As we look beyond this year, we expect each of our segments to continue to improve. As per our June HIP teach-in event, we expect HIP sales to organically grow at a 5% to 7% long-term compound annual rate with a large pool of attractive inorganic growth opportunities. We expect this growth to be supported by the structural undersupply of homes in North America, aging housing stock, and spending related to the Infrastructure and Jobs Act. We will continue to invest in our brands, capabilities, and our people to continue creating value over the cycle for our investment. Turning to PEM, we remain positive on the outlook for long-term growth, driven by increasing global consumer activity and demand for clean water, electrification, housing, transportation, and renewable energy, favorable demographic trends and our new product innovations, including our sustainability offerings. We expect these trends to support a better balance between global supply and demand for our products in our PEM segment. With our strong focus on our cost structure and productivity, we are well positioned to leverage volume growth when the market returns to normalized growth rates. Turning to our balance sheet, we continue to look for opportunities to put our $3 billion cash balance to work in a disciplined manner that will create long-term value for our shareholders. This includes both identifying acquisition candidates that can exceed our risk-adjusted cost of capital and returning cash to shareholders through both dividends and share repurchases. Finally, we continue to advance our sustainability efforts. During the second quarter, adoptions of our innovations to address customers' sustainability requirements increased, including significant growth in our PVCO pipe, GreenVin PVC resin, and Pivotal post-consumer resin for flexible polyethylene packaging. The market reception for our PVCO pipe product has been strong, and thus, we announced plans to expand our capacity with a new plant at our Wichita Falls, Texas site to meet growing customer demand. As a reminder, we launched PVCO pipe in North America in 2021, and we have seen strong customer appreciation of PVCO sustainability attributes since they are lighter in weight, easier to install and provide increased performance compared to standard PVC pipe. Looking forward, we will continue to invest appropriately to bring new products like PVCO to the market and expand our production capabilities for existing products to help our customers address their sustainability needs. Thank you very much for listening to our second quarter earnings call. I will now turn the call back over to John.

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. Jacinda, we will now take questions.

Our first question comes from Patrick Cunningham at Citi.

Maybe my first question just on the sales and margin guide for HIP that you maintained, but mentioned there's potential upside within that. What do you see as the biggest potential sources of upside there? And does the current guide assume materials costs go up or hold relatively stable in the second half and maybe some modest price declines there?

And yes, as we think about the outlook for the HIP segment, strong results this quarter and our guidance really was to see that there is potential upside to the guidance of 22% that we've provided. We've seen an increase in materials costs and PVC resin, and we continue to think that there will be a reasonable level of construction activity. We’ve seen guidance from a number of research firms like NAHB and others that show housing starts could decline later this year. And so as we think about that, we still think the cross-selling and capability to continue to push forward with value propositions for our products remains, which is why we provided some potential upside in that guidance.

Are you anticipating any sequential improvement in the PEM segment? I understand there has been some softness in the industrial sector, but it seems there should be ongoing pricing strength in polyethylene and PVC. What can we expect in terms of the PEM segment sequentially?

Certainly, we have been able to achieve price increases in both polyethylene and PVC, and export prices have also been rising. We are seeing some stabilization of prices, and the destocking phase is over. This is particularly relevant in light of the global economic conditions moving forward. Additionally, with the potential reduction in interest rates by the Fed, this should support both the US and global economies in the upcoming quarters and into next year.

Can you help break down some of the success areas on your margin expansion that you are seeing in the HIP business? And maybe how much of that is driven by your PVC pipes and compounds business and how much is the rest of the Building Products platform?

And you see that we called out specifically our siding and trim business and our pipe and fittings business as strong contributors to the quarter's results. And so those two subsegments of HIP were very strong contributors to siding and trim and our pipe and fittings business, made good contributions this quarter.

Could you share your latest thoughts on ethane? With prices at historical lows, this is clearly advantageous for Westlake. We also noticed a price increase for polyethylene in July. Please provide your short-term outlook on both of these.

As you think about the ethane prices, you’ve seen the average price for ethane has trended lower since the second quarter. And while we don't know what the third quarter will average out to be looking at the forward curve, ethane does look like it will trend somewhere between $0.03 to $0.05 lower if you look at the forecast from many of the consultants in the forward curve for ethane, which should be constructive for our value.

I guess my first question is about PEM as we move into the third and fourth quarters. The outlook for ECU margins seems somewhat sluggish based on the consultants' insights. How do you anticipate the progression will unfold if demand remains at these levels in the second half?

Demand for PEM products is pretty stable, and I mentioned that demand for polyethylene and PVC is quite good, especially in the export market, and we have been able to raise prices. On caustic and chlorine, the demand is stable and the price is more or less stable. There are a few dollars up and down depending on which quarter it goes. But I think the demand is stable in the US, especially as the destocking is pretty much over. it's reflecting the true economy's demand for various products.

And then just a follow-up on pipe and fittings. It sounds like that business continues to show really good strength. Do you think growth will be as good in the second half? And then I was just curious about profitability. You have a competitor that shows margins well above yours. Any reason why your profitability wouldn't be sort of similar to theirs, kind of that 50%, 60% range in operating margin?

Well, Mike, I think when you look at the strength we're seeing in our materials in our pipe and fittings business, we’re continuing to see really good value in both the pipe and fittings application. We’re one of the few players that are truly integrated in the pipe and fittings solution business. Our focus is really on driving value for those customers and delivering value for our integrated stakeholders in this process. Our objective is to ensure that the solutions we have provide real value. We get focused on the value rather than the volume in this business.

I would like to follow up on the previous question, Albert. Regarding the stability of demand in PEM, the price increases, and the lower raw material costs, it seems we are anticipating a flat to slightly improved third quarter in PEM, possibly impacted by the Petro 1 turnaround. I'm interested to know if my understanding is correct and what level of impact you expect the Petro 1 turnaround, beginning in September, will have on the third and fourth quarters.

Certainly, the Petro 1 turnaround will have some impact. But I want to remind you that Westlake is a net buyer of ethylene. And even though ethane price has reduced, which is great, it helps our 4-point some billion pounds of ethylene capacity as our net buyers; we were paying higher ethylene prices. We also mentioned that we are booking the mothballing of our plants in the Netherlands, which also, even though it’s not a cash outflow in the third quarter, we are booking those costs in the third quarter. So those accounting costs will impact our third quarter results.

It's great that you're emphasizing the mothballing costs since most companies would categorize that differently and exclude it from EBITDA, which I believe the market will adjust for on its own. Albert, could you share your thoughts on your future role at Westlake now that Jean-Marc has taken over? How involved do you expect to be in the next year or two?

Certainly we are going through a transition. As Jean-Marc mentioned, he’s been here only a few weeks. And even though he’s a seasoned veteran in our business globally, there's still a lot of Westlake nuances he has to understand and also visiting plants, visiting customers and so on. We have over 100 facilities around the world that he will be spending some time visiting some of the people. As I move up to the Chairman position, I will do what my brother has done, James, and try to follow his first steps, even though he's still a Senior Chairman. I will look over my shoulder to make sure I'm doing a good job. It's a team effort. Westlake is really where our team works together closely. We’ve done well and Jean-Marc will continue the culture that Westlake established over the last 40 years, and it's our goal. So I will learn a lot from Jean-Marc and also learn from you in the chance to meet you all and communicate Jean-Marc's view of Westlake strategy going forward, which is in line with our history, but we bring a lot of new ideas and insights into our business.

Albert, could you tell us how you approach the search for Westlake's new CEO? You could have focused on a candidate with building products experience, commodity chemicals experience, and Jean-Marc's bio suggests significant experience in international specialty chemicals. So should we read anything into this?

Well, the Board, along with James and I and some of the key people has done a very thorough search for the right candidate to be the new CEO. It's not an easy task. As you mentioned, we have a very different portfolio from a typical chemical company and our global position. We're very glad to find Jean-Marc, who has tremendous global experience and a technical background. I think the PEM business and the HIP business will be a little bit newer to Jean-Marc, but he has been involved in building homes and understands the importance of housing to people around the world. I believe that will be a tremendous driver for demand for chemical products and our homebuilding products. Our HIP business is primarily North American based. So we have good technology, and we will identify opportunities to apply our technology to other parts of the world.

And then turning to the current business, the margin upside this year in HIP. Are you surprised yourselves or perhaps you kind of recognize you were too conservative? And if you are surprised, what do you think went better this year than expected?

Well, the demand was strong, stronger than in 2023 and stronger than in the first quarter of 2024. Even though, as Steve mentioned, the housing starts projected by NAHB, I think it's 1.4 million units last year, projecting 1.3 million units this year, it’s a reduction, and we're hearing various companies reporting on the housing construction business. But I think going forward, with the Fed’s reduction in interest rates and the 10-year interest rate dropping to 3.8% from 4.5% just a few months ago, it should be very helpful for the housing industry going forward, maybe not right away, but that's the trend that will support not just the housing industry but the US economy as a whole, which will also help the global economy. So, as Steve and Jean-Marc mentioned, we are positioning ourselves to be ready for it. But the third quarter usually is a good quarter from a volume point of view, but the fourth quarter will be seasonally slow—that's normal. Depending on how fast the Fed drops rates, we cannot predict what volume growth or changes will occur in the short term. But we believe on a longer-term basis, in the next few years, lower interest rates should be positive for the US economy and for our industry.

I want to go back to the pipes and fittings piece for a moment here. I understand the point about value over volume, and that’s driving some of the things for Westlake. But when we look at some of the smaller regional players, I mean, EBITDA margins and spreads are up very meaningfully—2, 3 times versus a few years ago. So it's not just Westlake. So I’m curious about your view on whether your pipes and fittings margins today are materially higher than the HIP segment average versus where it was, and whether the pricing and spreads would be sustainable.

I think what you've seen us do is really focus on an integrated solution. And what I mean by that is a solution that provides not only pipe but also fittings that go with that. The recent acquisition we undertook two years ago was a fittings business—this is the LASCO acquisition—which allowed us to fill out our portfolio offering. The improved value proposition we provide is the ability to offer an integrated solution to our customers. We provide not only the pipes that are necessary but also the elbows, arms, and fittings that go with a wide variety of pipe sizes. This integrated solution of pipes and fittings is important. We're one of the few players offering that integrated solution in North America. We also see capital beginning to flow in from the infrastructure bill, which is adding volume to the business. With added volume, we can drive real value in the pipes and fittings business, which is why we emphasized that as a value driver for our results.

But when I look at peers that are smaller and don’t have those advantages reporting margins of 50% to 60%, any thoughts on why that would be the case? I’m wondering whether Westlake is overearning or if you’d say that margins are a more manageable level moving forward.

Well, I can't speak to others' margins in the business, that’s something you'd have to discuss with them. What I can say is I believe the value proposition we're providing through the integrated solution of resin and PVC going into our pipes and solutions is long-term sustainable. These are good margins we’re providing, and I don't believe we're overearning in a period such as this. As Albert noted, when taking a look at housing starts, we're still well below the numbers needed for construction activities in North America. Even if looking at starts that we've seen, even this past quarter, about 1.3 million starts per US census numbers, NAHB shows a downward trend by the end of the year. I would say we're not really overearning because I think we're providing real value through our building products, the HIP side of our business as well as the integrated value for our resin across to our HIP segment.

First question regarding the nearly $3 billion in EBITDA achieved in Q2. I appreciate Steve's comments on how the company isn't overearning in certain areas. Based on the current business environment, it seems you're significantly below normal earnings, with potential for improvement as conditions normalize. Given this context, how should we view the $3 billion annualized figure in relation to what normal earnings would be? Is there considerable upside to that amount in a typical business environment?

I would say we still see headwinds, and we called out some of the indices, the ISM indices, both here in the US as well as in Europe and in Asia. While there is operating leverage in the business, we are still at price points well below those seen in 2023 and 2022. While we expect that we're seeing better supply-demand due to pricing initiatives in several of our PEM products, we're still not at pricing levels back in 2023 and 2022. There is certainly operating leverage on the PEM side of the business.

As a follow-up, I understand it’s early in Jean-Marc's new role. So, this is a question for him, Steve, and Albert. As you know, one of the things we analysts look for is a valuation multiple rerating. As you went through the interview process, Albert, what was the thought process around that? And maybe Jean-Marc can offer his high-level views on obtaining a valuation rerating and ensuring the market sees the portfolio changes that have transpired?

As you know, Hassan, that we look at investments that bring a risk-adjusted return above our cost of capital and remain optimistic about when we want to acquire companies or whatever it takes to agree on a deal. We have been building our HIP business segment, as Steve noted, around synergies both between HIP and PEM as well as within HIP. There are significant cross-selling opportunities, and we will continue to pursue those as opportunities arise. Our primary objective is to provide value to our investors. How the Street perceives us as multiple upticks is out of our control. All we can do is deliver sustained returns to our shareholders. In the long-term, that is our key focus rather than short-term gains. We hope the market will recognize the value we bring, but it is ultimately beyond our control.

Can you speak to your chlor-alkali operating rates currently? I would assume they're running fairly hard, given PVC strength and integration. But just where are they running today?

Yes, I think the industry—some of the industry players were impacted by Hurricane Beryl not long ago and are recovering from those impacts. But the operating rates have been fairly good after the hurricane, and the demand for both PVC and caustic are pretty strong, so the rates have been performing well. However, there will be turnarounds coming up in the third quarter around various plants. We need to be careful about our inventories and production given it's still early in August and hurricane season lasts until the end of November.

Your HIP segment volumes were up 16% in the quarter. Can you help us better understand what categories are growing faster than that, and what categories are growing slower than that? And just to clarify, is product mix effect reported through price or volume for Westlake?

When you consider the value contributors, we see that our pipe and fittings and siding and trim businesses are contributing very well to the HIP segment results. Our windows businesses are the smallest subsegment within the HIP business. Being small and regional, it tends to contribute less. Overall, I would say that the cross-selling efforts and brand recognition led to this volume uptick.

So, I have a couple of questions. For HIP, some impressive performances out of pipe and fittings. Can you discuss the margin profile there? For global compounds and Royal Building Products, how are those businesses performing, and do they have a margin profile that is less than pipe and fittings in this quarter?

In our compounds business, that is a business that has a stable and steady margin but is typically in the middle to lower range of margins that we see in the HIP side of the business. The two subsegments I mentioned—pipe and fittings and siding and trim—are performing strongly and are consistently stronger performers.

In PEM, just curious, you mentioned some slow improvement in polyethylene prices and in PVC resin. Do you expect those prices to continue to slowly move higher, and what would you say on caustic? Do you foresee other actions and rationalizing assets coming forth, and when would those potentially impact market conditions in epoxy?

Yes, we have indeed seen strength in a variety of these chemical chains, confirming strength in both PVC and polyethylene in the second and third quarters. The actions we’re taking, such as mothballing our ECH unit as well as moves with the European and US authorities on antidumping, should lead to stronger results in the future for our epoxy business. We look forward to seeing those actions take hold and deliver better value.

Just any thoughts on caustic and chlorine?

As I mentioned earlier, caustic and chlorine demand are pretty stable. The US is exporting a fair amount of PVC and caustic. We still have the lowest cost energy competitive advantage over the rest of the world. Price stability is expected. Heading into the fourth quarter, the global economic conditions will slow but are anticipated to improve in the coming year.

This is Turner Hinrichs on for Vincent. Can you help us understand what's going on from a cash flow perspective and what you expect from working capital for the year?

In the second quarter, we settled the litigation charge taken earlier this year. I expect that with increasing activity and construction demand, there will be some pull on working capital over the third quarter. Prices have trended upward for our products, leading to the need for adequate customer inventories. However, the reduced prices of ethane will offset some of that working capital pickup.

In the chlor-alkali part of the business, I’m wondering if you could speak further to relative strength or weakness of chlorine versus caustic soda and whether you see pricing upside for either for the balance of the year?

The CMA is looking at prices increasing caustic in the US by $20 in the short term but coming down in October and November this year. Therefore, we see it pretty stable. A large portion of chlorine in the US is consumed in PVC. We also noted PVC prices have increased, with export prices trending upwards compared to the first and second quarters. The US is the most competitive in terms of ethylene and chlorine to export PVC.

I just wanted to clarify the polyethylene resin price trend as it sounds like you have positive momentum there. My recollection is that producers were seeking an increase of $0.05 a pound for the July contract. Can you comment on how much of that you were able to realize for low and linear low-density polyethylene?

Yes, the July price increased by $0.05 as the industry announced. Additionally, there are potential increases for August, October, but time will tell whether those increases can be effective. The main driver is the export price increase and stable demand. Typically, the second and third quarters have strong demand for polyethylene and PVC, which also supported the July increase.

Switching gears back to HIP, it's been impressive to see the first half of the year regarding volumes and margins. But I did want to ask about the trio of challenges we discussed—the weather, slowdown in starts, and remodeling. Can you elaborate in terms of seasonality? Do you think this will lead to a 2024 that has a stronger first half than the second half, or do you believe this can be overcome?

Thinking about the weather patterns, it impacts construction activity and housing starts. So, while we see positive trends, there are clear headwinds, and some of those challenges are based on weather patterns. This year, significant heat and much rain have led to challenges for housing starts and overall volume demand in our building products. Thus, while we have seen solid volumes in the first half, we still keep a cautious watch for potential challenges in the back half of the year, given this weather pattern could persist.

Albert, you mentioned that the CMA's cost estimate is lower than the proposed increase from you and your competitors. Do you think CMA is being too conservative or do you think the market is somewhat weaker than was perceived?

The industry can announce price increases, and then the supply and demand dynamics will determine the effectiveness of those. Some prices fluctuate based on quarterly or monthly negotiations. CMA serves as an average indication, so when there's an announced increase, it indicates things are at least not trending down.

And just on the July polyethylene price increase of $0.05. Was it primarily a result of Hurricane Beryl, or was it more of a function of balanced supply-demand fundamentals?

It is a combination. Certainly, some impacts from production issues due to Beryl occurred. However, the primary driver of the increase was the upward trend in export prices, which pushed domestic prices upward. With hurricane season approaching, many may be looking to build inventories, further supporting domestic price increases.

What portion of the 15% sequential volume gain in HIP would you attribute to seasonality versus the portion that comes from brand and cross-selling initiatives?

While there is seasonal uplift from Q1 into Q2, a majority of the growth is the result of brand recognition and cross-selling. That cross-selling recognizes the value of our product portfolio that the Boral acquisition introduced to our distributors, allowing us to leverage that integrated approach.

And just regarding competitive pricing, are you seeing competitive pricing in HIP from smaller competitors, or do you have any protection from that due to brand loyalty?

Certainly, we must maintain competitive pricing across all markets, but we have to be mindful that these markets can be localized and can be impacted by regional variability. Therefore, our strategy focuses on maintaining competitive edge and strong brand presence in the areas we service.

Our last question comes from Jeff Zekauskas at JPMorgan.

What was the PVC contract settlement for July?

PVC settled up a penny a pound.

Do you have a view of the Chinese PVC market over a longer period? Has it experienced overbuilding and continued weakness, or do you think there is room for them to accelerate in the next two or three years?

I think the Chinese PVC industry is undergoing a transition. Over the past several years, carbide PVC was about 80% of their capacity; now it’s dropped to about 70-odd percent. The pivot towards ethylene-based PVC is necessary to phase out high-energy and polluting carbide-based PVC. Although China still has economic structural problems, the demand for housing remains significant, with government efforts to support low-income housing promoting future growth in demand for PVC.

This concludes the question-and-answer session. I would now like to turn it back to John Zoeller for closing remarks. Thank you again for participating in today's call. We hope you will join us again for our next conference call to discuss our third quarter results.

Thank you for participating in today's Westlake conference call. As a reminder, this call will be available for replay within 2 hours after the call has ended. The replay can be accessed via Westlake's website. Goodbye.