Westlake Corp Q2 FY2025 Earnings Call

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Corporation Second Quarter 2025 Earnings Conference Call. Please be advised that today's conference is being recorded today, August 5, 2025. I would now like to turn the call over to your first speaker today, 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 2025 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 Jean-Marc, who will open with a few comments regarding Westlake's performance. Steve will then discuss our financial and operating results after which Jean-Marc will add a few concluding comments, and we will open the call up to questions. During the second quarter of 2025, we accrued expenses of $123 million and $7 million, respectively, to shut down the company's epoxy facility in Pernis, The Netherlands, and temporarily cease operations at a PVC resin production unit in China at the company's 95% owned Huasu joint venture. We refer to these expense items, which in aggregate were $130 million, as the identified items in our earnings release and on this conference call. References to income from operations, EBITDA, net income and earnings per share on this call exclude the financial impact of the identified items. As such, comments made on this call will be in regard to our underlying business results using non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to GAAP financial measures is provided in our earnings release, which is available in the Investor Relations section of our website. 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, 2024, and other SEC filings. We encourage you to learn more about these factors that could lead to our actual results differing 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, 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, August 5, 2025, 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 that can be accessed on our web page at westlake.com. Now I’d like to turn the call over to Jean-Marc Gilson. Jean-Marc?

Thank you, John, and good morning, everyone. We appreciate you joining us to discuss our second quarter 2025 results. For the second quarter of 2025, we reported EBITDA of $350 million on net sales of $3 billion. Compared to the first quarter of 2025, sales and EBITDA increased due to a seasonal increase in sales volume for most of the businesses in our HIP segment. HIP performed very well in the second quarter, delivering solid EBITDA of $275 million on sales of $1.2 billion, representing a strong 24% EBITDA margin. Our results demonstrate that in an operating environment that has grown more challenging with interest rates remaining elevated, a diversified and balanced operating model in HIP offers strategic benefits to help deliver performance in this market. Pipe and fittings sales volume growth benefited from increasing demand for municipal water applications, driven in part by spending from the 2021 Infrastructure Act. The significant underspend in water infrastructure in the United States and the funds from the Infrastructure Act should continue to provide a solid foundation for our pipe and fitting sales for many years. HIP's building products sales volume was lower than the second quarter of 2024, reflecting the slowdown in North American residential construction activity. Pent-up demand, nevertheless, is high as people want and need homes. HIP's Building Products business benefits from a balanced portfolio of approximately 50% new construction-oriented sales and 50% repair and remodel-oriented sales. This portfolio provides stability in the current housing market. Turning to PEM, earnings and margins were pressured by two primary factors. First, PEM sales volumes were impacted by lower production levels due to a high level of planned turnarounds and unplanned outages, which impacted the second quarter of 2025 EBITDA by approximately $110 million. As we discussed on our first quarter earnings call, we began the tie-in of our new VCM capacity at our Geismar site during its plant turnaround. Following the completion of the turnaround in the second quarter, Geismar slowly ramped up its operating rate with production expected to improve during the third quarter. Second, the cumulative impact of several quarters of soft global manufacturing activity caused growth in global demand for many chemical products to fall short of industry supply additions, primarily in Asia. Over that period of time, the resulting global oversupply in some chemical chains has created pressure on PEM's average sales price and EBITDA margin. In response to these factors, we are taking aggressive actions to improve PEM's financial results. Our PEM profitability improvement strategy is three-pronged: first, improving plant reliability. We have challenged the teams at the plants to address reliability and operations, and we are already seeing production improvements during the third quarter. Second, reducing our cost to improve our global competitiveness. During the first half of 2025, we achieved over $75 million of company-wide cost reductions towards our full year target of $150 million to $175 million. While we are pleased with this progress, given the protracted nature of the current downturn, we are expanding the scope and nature of our cost reduction efforts to target an additional $200 million of cost reductions by 2026. Third, optimizing our manufacturing footprint. During the second quarter of 2025, we announced the plant closure of our Pernis epoxy site in the Netherlands, which will put our epoxy business on a path to profitability. To summarize the quarter, we were very pleased with the continued solid performance of our HIP businesses, our experienced teams, our leading product positions, our broad geographical footprint, and a diverse position serving both new construction and repair and remodel to provide valuable earnings stability and cash flow to the company. We also expect our three-pronged PEM profitability improvement strategy to enhance our globally competitive position and improve PEM's financial results. I would like to turn our call over to Steve now to provide more detail on our financial results for the second quarter of 2025. Steve?

Thank you, Jean-Marc, and good morning, everyone. As a reminder, my comments regarding income from operations, EBITDA, net income, and earnings per share all exclude the financial impact of these identified items. Westlake reported a net loss of $12 million or $0.09 per share in the second quarter on sales of $3 billion. Net income for the second quarter of 2025 improved by $28 million compared to the first quarter of 2025, primarily due to a seasonal increase in HIP sales volumes and margins, partially offset by an approximately $30 million higher impact from planned turnarounds and unplanned outages in PEM. When compared to the second quarter of 2024, net income decreased by $325 million due to higher North American feedstock and energy costs and lower average sales price in each segment. For the second quarter of 2025, our utilization of the FIFO method of accounting resulted in an unfavorable pretax impact of $13 million in our PEM segment 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. Our HIP segment performed very well, and we are very pleased with the stability and resiliency of the portfolio of the business that we have assembled. At the same time, our PEM segment was impacted by production disruptions and the continued global oversupply in some chemical chains, but the profitability improvement strategy that we are implementing should result in better performance with an improved cost position. Moving to the specifics of our segment performance, our Housing and Infrastructure Products segment produced EBITDA of $275 million on $1.1 billion of sales. When compared to the first quarter of 2025, HIP segment sales rose 16%, driven by a 14% increase in sales volumes as a result of growth for pipe and fittings as well as a seasonal increase in building products demand. Average sales price increased 2% sequentially, driven by price increase initiatives in building products and global compounds to pass through rising input costs. The strong sales growth volume drove HIP segment EBITDA margin to a solid 24% from 20% in the first quarter of 2025. When compared to the second quarter of 2024, HIP EBITDA decreased by $61 million due to a 2% decline in sales volume and a 1% decline in average sales prices. The sales volume decline was driven by lower customer demand in our Global Compounds and Building Products business units as a result of slower residential construction activity, more than offsetting volume for our pipe and fittings business, a result of solid demand for growth in the municipal water applications. Our HIP strategy is and has remained clear: We’re providing our customers with products to address affordability and adapting our product offerings and manufacturing footprint as the market evolves. Turning to our PEM segment, second quarter sales of $1.8 billion fell by $57 million from the first quarter 2025, driven by a 6% decline in sales volume as a result of a more significant impact from planned turnarounds and outages as well as export sales volume disruptions created by tariff uncertainty during the second quarter. Average sales price increased 2%, driven by higher chlorine, caustic soda, and PVC resin prices. PEM segment EBITDA of $52 million in the second quarter decreased by $21 million from the first quarter of 2025 as a result of the 6% decline in sales volume. On a year-over-year basis, PEM EBITDA of $52 million was below the second quarter of 2024 EBITDA of $391 million due to $83 million of higher ethane and natural gas costs, a $67 million higher year-over-year impact from planned turnarounds and unplanned outages, and a 2% decline in average sales prices driven by lower polyethylene and PVC resin prices. As Jean-Marc mentioned, during the second quarter, we announced a plan to close our epoxy site in Pernis in the Netherlands. Since this acquisition in February of 2022, profitability at this site deteriorated significantly due to higher European feedstock and energy costs resulting from the war in Ukraine and low-priced Asian exports entering the global market. As a result, Pernis experienced losses in excess of $100 million a year, which drove the June site closure announcement. Following the Pernis closure announcement, we believe that our epoxy business is now on a path to return to profitability in 2026. Shifting to our balance sheet as of June 30, 2025, cash and investments were $2.3 billion and total debt was $4.7 billion with a staggered long-term fixed maturity debt schedule. For the second quarter of 2025, net cash provided by operating activities was $135 million, while capital expenditures were $267 million. We continue to look for opportunities to strategically deploy our balance sheet in order to continue to create long-term value. Now let me provide some guidance for your models. We completed our turnarounds and VCM tie-in at Geismar. However, our integrated fluorovinyl system is continuing to slowly ramp up production during the third quarter. We expect fluorovinyls production sales volumes to be better in the third quarter, and thus, we anticipate the impact to earnings from production disruptions in the third quarter will be less than we experienced in the second quarter. With the slowdown in North American residential construction activity since the beginning of the year, we now expect 2025 Housing and Infrastructure Products revenue to be in the range of $4.2 billion to $4.4 billion, with an EBITDA margin between 20% and 22%. We continue to expect total capital expenditures for the company to be approximately $900 million. In the first half of 2025, we achieved over $75 million toward our 2025 company-wide savings target of $150 million to $175 million, and we're taking actions to drive an additional $200 million of cost reductions by 2026 as part of our PEM profitability improvement plan. For the 2025 year, we expect cash interest expense to be approximately $160 million. Now let me turn the call over to Jean-Marc to provide a current outlook for our business.

Thank you, Steve. Against the backdrop of soft macroeconomic conditions and slower North American construction activity, our HIP team is delivering sales similar to prior year levels by being a supplier of choice with faster-growing building product customers. Sales volume growth for our pipe and fitting is driven by megatrends in water and supported by municipal infrastructure investment as well as the growing use of PVC pipe in municipal infrastructure as compared to competing materials such as concrete and ductile iron. HIP total margins also remain solid and are indicative of the strong value of our brands and the significant value that our service-oriented business model delivers to our customers. While the long-term outlook for the housing market remains favorable, driven by demographics and undersupply of homes, we recognize the current volatility and uncertainty, and we will continue to execute our winning HIP strategy in a disciplined manner to enhance the value of our business. Longer term, we remain very positive on the outlook for our HIP business to organically grow at a 5% to 7% compound annual growth rate. We expect this growth to come both from market growth, such as the need for homebuilding to recover from the 10-plus years of underbuilding, and our position as a leading supplier to the faster-growing customers in the market. We also continue to evaluate opportunities to grow our HIP businesses through acquisitions to broaden our product portfolio and deepen our relationship with our key customers. Overall, we continue to see a very bright future for HIP. Turning to our PEM segment, near-term macroeconomic conditions show signs of demand stabilizing, albeit at lower levels than we would like. ISM manufacturing index readings in the U.S., Europe, and China have fluctuated in a relatively narrow range at or slightly below 50 nearly every month this year. As we look ahead to the second half of 2025, we are seeing stable demand for our PEM materials, which combined with improved production rates should lead to an increase in our PEM sales volumes compared to the first half of 2025. We are responding to the business environment in our PEM segment and are implementing our three-pronged PEM profitability improvement strategy to improve plant reliability, accelerate cost reduction plans to improve our global competitiveness, and optimize our manufacturing footprint. These actions will meaningfully improve our PEM segment profitability and cash flows. Before I open the call to your questions, I want to close by reminding you of Westlake's foundational strengths, which serve us really well. These strengths include a diversified and complementary portfolio of businesses, our vertically integrated business model, our globally advantaged feedstock and energy position in the U.S., and our investment-grade balance sheet with $2.3 billion of cash and securities. As we progress through 2025, we will continue to lean on and improve these attributes to continue to create value for our shareholders. Thank you very much for listening to our second quarter earnings call, and I will now turn the call back over to John.

Thank you, Jean-Marc. 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 the call has ended. Gerald, we will now take questions.

Our first question comes from Patrick Cunningham of Citi.

A question on the HIP guidance. I think previously, you had some price mix headwinds that have you pointing to the lower end of the margin range. And now the sales guide is lower, but the margin guidance is intact. Should we still expect margins on the low end? Or have some of those mix headwinds normalized versus your prior expectations?

Yes, it's a good question, Patrick. And as we think about the guidance we're providing, we're simply reflecting the realities we see in the residential building and construction markets. Thus, I'd still guide you to the range that we provided of 20% to 22%. Obviously, we delivered a strong quarter this year, and I would expect we'll continue to see results as we go through the stronger periods of Q2 and Q3 in the construction year. But our guidance still remains really in that 20% to 22% range.

Great. And for my follow-up, the biggest change in the tariff regime has been fresh tariffs on Brazil, and the threat of retaliatory tariffs. How should we think about the risk to both chlorovinyls and caustic soda, given this has been such an attractive export market for the industry and for Westlake?

Yes. So Patrick, a good question on exports, let's say, caustic into Brazil, as you raised. Our sales are direct to customers in the alumina and paper markets. And those markets are really export markets, so there's an opportunity for them to access duty drawback. We haven't seen a significant impact from those tariffs at this point in time. We'll continue to monitor the situation, but we believe that we're well positioned with those customers.

Our next question comes from Duffy Fischer from Goldman Sachs.

I want to return to HIP if we could. Earlier, you mentioned some areas of HIP that are experiencing pricing pressure, specifically with all the low gauge pipe. Could you elaborate on two questions regarding this? First, what percentage of the portfolio do you believe is facing excessive competitive pricing compared to what part is remaining stable? Secondly, at the midpoint, your revenue has decreased by 5%, but your margins are stable. Why aren't there any declining margins? Is there an improvement in the mix shift? In comparison from the first quarter to today, why haven't margins changed?

So Duffy, reflecting on the commentary we provided, you can see the extensive portfolio we have and how we are adapting to market conditions within the Building Products sector. I want to highlight the strength of our water business, particularly in our pipes and fittings segment, while also noting that our large diameter water pipes are supported by the Infrastructure Act, as well as by states, cities, and counties. We've made adjustments in our compounds, exterior building products, and pipe businesses to align with the current market conditions. We believe the range and depth of our products will continue to address the changing and evolving market.

Great. And then if we just go back from the less downtime in Q3 versus Q2 from the ramp-up of the plant, roughly how much less hit do you expect from that? And what were operating rates chlorovinyls Q2 to Q3, and how much do we actually get to improve operating rates?

As you can see in our prepared remarks, we continue to see improvements quarter-over-quarter in the third quarter, but you can also see that we're continuing to ramp up our chlorovinyl businesses in the third quarter. So while I see some improvement, we won't be fully clear of this in the third quarter.

Our next question comes from Arun Viswanathan from RBC Capital Markets.

This is Adam on for Arun. If we were to dig a little bit more into bridging into the second half of the year, assuming by the end of the year some of the planned and unplanned turnarounds are backed out, do you have any other major turnarounds planned at this time? And of that $110 million impact, approximately how much of that was planned versus unplanned?

Yes. As you can see, we've taken a huge effort in the first half of the year with planned outages, but obviously, we've had some unplanned outages. The great majority of this was the planned turnarounds. As you recall, we had an ethylene turnaround as well as the VCM tie-ins in Geismar. Most of this was obviously in the planned arena. As we look into the back half of '25, we really have gotten beyond the major turnaround activity in '25. So I don't expect a continuation of these planned events for the back half of this year.

Okay. Looking at your additional $200 million cost improvement for next year, how much of that is included from Pernis, specifically the $100 million improvement? What will the remainder consist of? Will it primarily involve additional footprint rationalization, or is there also some headcount reduction included?

Yes. Thank you for the question. These are really cost reduction initiatives that are across the entire PEM footprint. As we think about that, it allows us to address cost in all areas, whether it's in contract labor, whether it's in maintenance, and a wide variety of other areas. But this is across the entire PEM footprint and not really targeted solely in the actions that we've taken in our Pernis location. This is really on top of the actions that we've already taken.

Our next question comes from John Roberts of Mizuho.

On M&A, could valuations become cheap enough in PEM opportunities that you would acquire something significant there? Or is your M&A focus exclusively over on the HIP side?

No, John, it's a good question. We continue to look across the broad spectrum of opportunities, whether they're in the HIP segment or in the PEM segment. The opportunity is really driven by the valuation opportunity we see in one or the other segment. There isn't necessarily a strong bias one or the other; it's really where the most opportunities present themselves. The strongest side of our business clearly is on the HIP side, but should there be value opportunities that we see in chemicals, we'll certainly act on those opportunities as well.

Our next question comes from Vincent Andrews of Morgan Stanley.

In PEM, as part of the initiatives to improve plant reliability, will there be a CapEx component of that either one-time in nature? Or is there any risk that your maintenance CapEx needs to be revised higher?

No, Vincent, we fully expect that the capital programs we have in place address this, and this is not an issue that requires a large capital outlay. So nothing incrementally beyond the capital programs that we've been discussing all year.

Okay. And then if I could just ask you in terms of HIP, is it a fair assessment from the answers already that we'll see a similar margin in Q3 as we saw in Q2 and then sort of the swing factor of where you wind up for the full year is going to be how soft Q4 is?

Yes. The fourth quarter is always uncertain because of seasonal matters. We've seen periods of time where we continue to build through October and November. It really is a function of the weather and the demand picture on top of that. But typically, the strongest quarters are the second and third quarters, and we continue to see continued construction activity carrying us through July into August now. I still have an expectation that the third quarter will continue to follow the seasonal pattern that we've discussed historically.

Our next question comes from Frank Mitsch from Fermium Research, LLC.

I'm curious if you could provide more details about your caustic exports to Brazil, specifically regarding the processing there and the duty drawback. What proportion of your caustic exports to Brazil is affected by this duty drawback? Additionally, could you explain what that entails?

Yes, Frank, it isn't really our ability to see in detail how much the paper and alumina business is exported out of Brazil, but I would say the great majority of it is, as we understand from our customers. These are direct sales into those individual customers. As we understand the regulations and opportunities in Brazil, if those products are re-exported out of Brazil, they have the ability to have duty drawback. So as long as they're exporting some portion or a majority of that, as we understand, they're able to have the duty drawn back and be insulated from that portion they export. That's our understanding from our customers.

If Brazil imposes a 50% tariff on caustic, as long as the customer buys your caustic and exports the product, that tariff effectively becomes zero. Is that the correct way to interpret it?

That is how the duty drawback process works in Brazil, correct, as long as those products are exported.

Yes, thank you for the question. As Steve mentioned, we experienced several planned and unplanned outages in the early part of the year, with the most significant ones occurring in the first three to four months. Since then, we have encountered additional unplanned outages that have hindered the ramp-up of the plants. However, we've begun to observe a month-by-month increase since late April or early May. We expect this trend to continue into the third quarter, and by the end of the year, we anticipate having most issues resolved.

Our next question comes from Aleksey Yefremov from KeyBanc Capital Markets.

I wanted to go back to HIP margins. You revised your sales guidance down by 7%, but maintain the margin. So could you discuss what is going better than expected such that there's no negative operating leverage in this segment?

Yes. So Alex, the broad and deep portfolio offering we have allows us to address the affordability issues that we see in our customers and our end customers. As we’ve addressed that with our exterior building products, the portfolio has allowed us to improve that positioning. The strength that we're also seeing in the infrastructure side of our pipes and fittings business is really addressing state, county, and city needs for infrastructure. We continue to see strength in demand in that infrastructure water requirements, which is really where we're seeing the continued ability to deliver good results this quarter.

And I was hoping you could give us some sense of monthly trends in HIP orders. Have you seen a negative inflection or are things steady as you went through the summer?

We've seen some reduction in overall construction activity over the course of the year. So going back to first and second quarter, we have seen housing starts trend lower relative to 2024. At the level we are at today, which is roughly 1.3 million starts, we continue to persist at that level into the second quarter, and we do expect the seasonal effect to play through in the end of the year and fourth quarter, but I would expect that demand level to continue to persist in the third quarter.

Our next question comes from Kevin McCarthy of Vertical Research Partners.

If we rewind the clock 3 months, it seems to me that Wall Street analysts generally underestimated the industry operating rates in the ethylene chain, for example, and perhaps also for Westlake. Listening to you today, it sounds like those operating rates and trade flows are in the process of normalizing. So I was wondering if you could comment on how much harder you might be able to run your crackers and your polymer assets in the third quarter relative to the second quarter. Is it a low single-digit uplift or a high single-digit percentage uplift, or somewhere in between? Any guidance on that operating leverage dynamic would be very helpful.

Yes. So I'll take that question. If you look at our cracker since we went through the major turnaround beginning of the year, all of our crackers have been running at full capacity. As you know, we're a little bit short on ethylene, but they're running at full capacity. If you look downstream on our polyethylene, we're running at pretty high rates, too, since we finished some of the turnarounds. The issue has been for us more on the chlorovinyl side and epoxy. If you look at the chlorovinyl chain, the problem is the demand is certainly not as high as we would like, but there is stable demand in the market. It is for us to capture that demand by increasing our throughput. How it’s going to stabilize, I don’t know, but we certainly have some leverage by bringing most of our chlorovinyl operating units back to what we consider normal reliability.

Okay. And then as a follow-up, can you provide an update on your polyethylene resin pricing outlook? For example, have you settled any July contracts in the U.S.? And how much pricing are you seeking for August?

Yes. So Kevin, when you think of polyethylene, we have not yet settled pricing for July, but there are a number of price initiatives out for July and for August. We have in the industry between $0.06 to $0.07 announced for July, and for August, there are announcements ranging between $0.05 and $0.08. We've seen demand begin to recover really starting earlier this year. There remains certainly an elevation in ethylene, as Jean-Marc noted earlier. We need to see some of these increases work their way through the system.

Our next question comes from Michael Sison from Wells Fargo.

So for them, you noted that volumes would be better in the third quarter. Can you talk about where you think industry margins sort of ended Q2? Should they be better sequentially in the various chains, chlor-alkali, polyethylene, and such in the third quarter versus the second quarter?

Yes. So Mike, as you think about the comment I just added in polyethylene, we certainly have price announcements out in polyethylene. We have not settled July. We'll see if we get some of those nominations settled in July and into August. I'd say in PVC, July settled flat for the month, but there are nominations out for later this quarter. In August, there's a nomination of $0.03 in the industry. As we think across the PE and PVC chains, we certainly have seen some announcement action. But obviously, we're still waiting to see if those prices take action and traction.

Our next question comes from Josh Spector of UBS.

First, I wanted to follow up on HIP, and you've talked about this in various ways. If I look at your updated guidance, in the first half, HIP sales were down around 3% year-on-year. Your second half HIP outlook is about up 3% year-on-year. So curious if you could talk to two things there. One, the visibility by the markets? And then two, how you think we should think about your performance relative to housing, considering the outlook has gotten worse, but maybe your second half outlook has gotten a little bit better or maybe even unchanged?

When considering our outlook, it’s clear that we’ve revised our revenue projections downward. Our product mix, particularly with our pipe and fittings and compounds divisions, is somewhat distinct from others. The demand we are experiencing in the infrastructure water segment is fueled by the Infrastructure Act enacted a few years ago, which enables us to meet the needs of various cities and counties. We anticipate this will create positive momentum in the long run. In our Exterior Building Products segment, we have been modifying our portfolio to address affordability challenges. Looking ahead, we expect that the latter half of the year may see a decline depending on weather conditions as we conclude the third quarter and enter the fourth quarter; this situation is highly influenced by weather in terms of volume and margin fluctuations. This is the reason behind our revenue guidance adjustment, yet we remain committed to our margin guidance of 20% to 22%.

And then just one other clarification just around the Pernis shutdown. So $100 million drag on a trailing basis. Do you get a benefit in the second half versus the first half from the shutdown? Or is that more of a 2026 effect?

It's largely a 2026 impact. There will be some benefit as we begin to wind down and bring the plant fully down later this year. But the biggest benefit really is a 2026 benefit.

Our next question comes from Bhavesh Lodaya from BMO.

Can you provide an overview of the municipal water applications market within the HIP segment? What is the total market size, what is the growth rate, and who are the main competitors in this space?

Yes. The large players in this market are largely private players. This is the larger diameter PVC business. You see that players such as Diamond Plastics is one of the larger players and JM Eagle is also one of the other larger players in this business. These are the key players in the larger diameter PVC space. The market continues to organically grow very nicely, in the neighborhood of 5% to 7% over time. As we think about the overall business of our pipe and fittings business, we're the only producer producing not only pipes but also fittings to provide the entire integrated kit to meet needs that we see in the water business, addressing municipal requirements to solve water issues.

Got it. And as a follow-up, within this pipe and fittings subsegment, I believe you mentioned pricing was down year-over-year, but obviously, your overall pricing is up 2% sequentially for the HIP segment. Would you say the pricing pressures we have seen in pipes and fittings are behind us? Or are you still seeing sequential pricing headwinds there?

No, I'd say we're continuing to deal with market issues day-to-day. This is something that we deal with in each discrete market in which we operate, whether it is in our pipe and fittings business or in our building products business. You have to be competitive, and in that competitive market, you have to meet competition. As you’ve seen, resin prices have drifted lower, we've seen prices drift in pipe as well.

Our next question comes from Hassan Ahmed from Alembic Global Advisors.

A question around chlor-alkali supply, particularly within North America. Over the last couple of quarters, there's been some fear in the marketplace that there's been some new projects announced. As I look at it, it seems that there is one expansion on the table and, call it, two greenfield projects. One of those two greenfield projects doesn't even have an FID. And the expansion project, the number out there seems to be higher than eventually where it'll end up. So just would love to hear your views on what the supply picture looks like through the end of the decade. And should it be worrisome or not?

No. I mean, I will take the question. If you look into the market, I think we see some stability going forward. I think probably by the end of the decade, we're going to start seeing some uplift in the end market demand. That's the way we look at it right now.

Understood. And just in terms of the products that you produce, be it on the ethylene, polyethylene side, be it on the chlorovinyl side of it, what rumblings are you hearing in terms of rationalization of those capacities in China in particular?

That's an interesting question. When you look at the prices currently that you see in China, you would expect that there would be some restructuring. We haven't seen them. We haven't seen too much restructuring. I cannot predict what's going to happen in the future. For us, as far as Westlake is concerned, we need to adapt and make sure that we can operate in an environment like that and make money in all of our segments in that environment. Some are running really close to the edge. You would expect that there would be some restructuring. We haven't seen many yet.

Yes. And I would just add that the NDRC has made some announcements here. But as Jean-Marc said, we haven’t seen any actions yet, but that will take time.

Our next question comes from Peter Osterland from Truist Securities.

So first, I just wanted to ask what percentage of your volumes in PEM were sold into export markets during the second quarter? And how does that compare to what you see as normal? And how would you expect that mix between domestic and export sales to change in the third quarter?

Yes. So Pete, when we think about our normalized exports, it varies a little bit by product. But if you look at all those products combined, it's in the mid-30s but does vary by product. When you think about a normalized number, we were not selling as many pounds in the export market because of our planned and unplanned outage issues in the second quarter.

A follow-up question I had, just on the $200 million of incremental cost savings that you announced today, do you have an estimate you can share for the incremental cash outlays that you expect in order to realize these new cost savings?

Yes. These actions, we believe, are reasonable actions that we don't think require a lot of cash outlay. These actions are really going to deliver really largely in 2026. As you can see, we have initiatives already underway, but it's not a large cash outlay.

Our next question comes from David Begleiter from Deutsche Bank.

Jean-Marc and Steve, of the $110 million of outage impacts in Q2, how much can we add back for Q3?

Yes. As you heard us earlier speak, David, I expect that as we slowly ramp up, we're still going to have some carryover from that. We had $30 million sequentially from Q1 into Q2. So I do expect that you cannot add all of that $110 million back fully in Q3. But I don't have a number to give you today.

Understood. And of the new cost savings of $200 million, how much would you view as permanent or structural? And how much would be temporary relative to when volumes do come back?

No, I expect these to all be structural, David. I expect that $200 million to be structural and really sticky. We obviously have to recognize the inflation in the market, but we think these are structural changes that we’re implementing.

Our next question comes from Matthew DeYoe from Bank of America.

I apologize if you covered this a little bit because I know it's been a bit of a talking point in the discussion today, but you're net short ethylene and have been for a while now. I know you've been comfortable there. But as your peers tie up some of this excess position, prices are moving higher. I know Lyondell is maybe delayed here, but I think they remain committed to Flex 2. So does this change your view on how you want to position the business over the next 5 years? Is there any desire to kind of tie this up?

Yes, I'll take that one. Yes, we're short on ethylene. For us, it's a matter of how much do we want to be short. If we continue to have the opportunity to invest or make some acquisition, we like where we are; however, it’s not to say that it couldn't change in the future if some opportunities present themselves to reduce that short depending on market conditions and if we see the downstream business grow over the next several years. We’re okay for now, but we will look at everything that comes our way if we want to redo that shot.

Okay. And look, HIP had a good quarter. It was definitely better than we were expecting. I don't want to dig too much on it, but the flip side to the stable margins looks like it was an 80% decremental margin. Is this kind of just a mix issue, or are the tough comps obviously part of that?

Yes. The mix you could see was really driven by the building products, not surprisingly, giving lower construction activity. Our compounds and exterior building products businesses, volumes were certainly lower given the reality of the construction activity level. The water demand that we're seeing in the infrastructure business was some of the offset to that, but not fully offsetting some of the weakness we saw in our compounds and building products businesses year-over-year.

Our next question comes from Matthew Blair from TPH.

Just looking at spot PVC prices that are almost approaching all-time lows. Could you talk a little bit about the global supply-demand outlook for PVC? Clearly, the demand side is affected by weak construction trends. But what about the supply side? How much global capacity do you expect to be added in PVC this year and next year? And what are you seeing in terms of operating rates for China PVC plants?

Yes. Matthew, when you think about the situation in PVC, a great majority goes into construction markets. The weakness that you've seen in the Asian markets and the European markets continues to really impact kind of operating rates. The issues we've seen in construction indicate the long-term underbuilding in North America. We think the demand picture here is ripe for change given the demographic demand for housing. As far as the global supply-demand balance, we don't see a significant amount of new capacity coming into the market incrementally from where we sit in 2025. Some of the producers, especially those in Asia, are currently underwater. This is why you're hearing commentary about the Asians and specifically the NDRC talking about some potential rationalization, which could take many years. The market really needs some demand to rebound here in the North American and European markets, but the Asian markets will take longer to recover.

Great. And just looking at the pressures on free cash flow in the quarter, it looked like one pressure was due to another use of working capital. I'm showing a use of working capital year-to-date of almost $400 million. Would you expect that to completely reverse in the back half of the year? And if not, what are the factors that would determine whether you can recover that big use of working capital year-to-date?

Yes. There were a large amount of dollars in the payables side related to the turnaround activity and the unplanned outage activity. On the receivables side, specifically in building products, we saw a buildup in sales and therefore, a buildup in receivables. I do expect that to turn in the second half of this year.

That's the time allotted for our Q&A session. So it has now come to an end. Are there any 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 Corporation Second Quarter Earnings Conference Call. As a reminder, this call will be available for replay beginning 2 hours after the call has ended. The replay can be accessed via Westlake's website. Goodbye.