Westlake - Q2 2023
August 3, 2023
Transcript
Jeff Hawley (VP, Investor Relations)
Good morning, everyone, 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'll open the call up to questions.
Today, management is going to discuss certain topics that will contain forward-looking information that is based on management's beliefs, as well as assumptions made by and information currently available to management. These forward-looking statements suggest predictions or expectations, and thus are subject to risks or uncertainties. These risks and uncertainties are discussed in Westlake's Form 10-K for the year ended December 31st, 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'd like to turn the call over to Albert Chao. Albert?
Albert Chao (CEO)
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 volumes 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-$105 million of cost savings in 2023, up from the previous $55 million-$105 million target, after we achieved approximately $25 million cost saving 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. 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 with Steve to provide more detail on our financial results for the second quarter of 2023.
Steve Bender (EVP and CFO)
Thank you, Albert. 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 in integrated margins and lower 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 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 if on the LIFO method. This is only an estimate and has not been audited. Moving to our segment performance, our Performance and Essential Materials segment, 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 and resulting in sales volumes, particularly for PVC, caustic soda, and epoxy resin, and elevated level 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 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, 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 PEM 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 cost, 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, support 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. 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-$105 million of cost savings in 2023, up from the previous $55 million-$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. Let me turn the call over to Albert to provide a current outlook for our business. Albert?
Albert Chao (CEO)
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 will look to expand our sales through differentiated product offerings and innovations with sustainable product to meet our customers' needs, while managing our costs and adapting to the changing market conditions as they unfold. In our PEM segment, we'll leverage our North American feedstock advantage and highly integrated production chain. 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 the Inflation Reduction Act, and favorable demographic trends, all driving demand for PVC resin, caustic soda, polyethylene, and epoxy.
While PEM average selling price ending in June were 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 that support more first-time home buyers 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 adaptability, strength in 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 GreenVin, One-Pellet Solution, and PVC-O innovations in the second quarter as a result of these efforts. Separately, we continue to invest capital to improve our plants, 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 our robust cash flow generation capability, investment-grade credit rating, and strong balance sheet, with net debt below one time 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 the return profiles exceeding our cost 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.
Jeff Hawley (VP, Investor Relations)
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 two hours after the call has ended. We will now take questions.
Operator (participant)
Thank you. We will now conduct the question-and-answer session. As a reminder, to ask a question, please press star one, one on your telephone and wait for your name to be announced. To withdraw your question, please press star one, one again. Please stand by while we compile our Q&A roster. Our first question comes from the line of Joshua Spector from UBS. You may proceed.
Christopher Perrella (Managing Director and Senior Analyst)
Hello, good morning, everyone. It's Chris Perrella on for Josh. I want to follow up on the outlook for the third quarter in the PEM segment. With the volumes being impacted by turnarounds in the second quarter, you know, what is the, the volume improvement that you're looking for sequentially in the third quarter? Are you expecting normal seasonality in the fourth quarter, or what's the outlook there?
Albert Chao (CEO)
Yes, normally, the third quarter, a strong quarter, just like the second quarter, are the two strong quarters for the year. Fourth quarter, typically, seasonally, is the weak or weakest quarter. Assuming the economy continues to be growing, even though at a modest rate, that the volume should improve in the third quarter, pretty much like the second quarter.
Christopher Perrella (Managing Director and Senior Analyst)
What were they doing underlying, I guess, in the second quarter, that you should see something similar in the third quarter, absent the turnaround, the unplanned turnarounds?
Steve Bender (EVP and CFO)
Yeah, Chris, it's Steve. When you think about the both the turnaround planned outages and the unplanned outages, as Albert said, you know, the third quarter tends to be a good, strong quarter, just like a second quarter. Clearly, the second quarter was impacted by both planned and unplanned outages. I do expect that that third quarter should have more normalized sales volumes and production volumes, as we would have expected in the second quarter, not been for those outages. As Albert noted in that fourth quarter, we also see some seasonality impacting both the PEM and the HIP segment, so that typically is lower than the second and third quarter volumes.
Christopher Perrella (Managing Director and Senior Analyst)
All right. Thank you. Then, just to follow up, one quick one on the pricing that, I think Albert called out average PEM pricing at the end of June was below the 2Q average. How, how does it lag through, does your pricing lag, and how quickly can it improve over the course of 3Q?
Albert Chao (CEO)
Well, prices, when it comes down, it comes down pretty quickly. It doesn't lag. When price increase, as we and some industry members have announced price increases in both polyethylene PVC for the third quarter, some of those price increases may have a lag going up.
Patrick Cunningham (Vice President and Senior Equity Analyst)
All right. Thank you very much.
Albert Chao (CEO)
You're welcome.
Operator (participant)
Thank you. One moment, please. Our next question comes from the line of Patrick Cunningham from Citi. You may proceed.
Patrick Cunningham (Vice President and Senior Equity Analyst)
Hi, good morning. Thanks for taking my question. You delivered roughly flattish margins in the HIP segment year-on-year, amidst a pretty steep volume decline. How should we think about, you know, long-term margins through the cycle in that business?
Steve Bender (EVP and CFO)
Yeah. Well, Patrick, as, 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 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've certainly have got a, a branded product that continues to sell through and is a product of selection by our customers. As we think about using that branding and that relationship with our customer base, as we see improvements in starts over, over the horizon, we do expect it will continue to improve the overall margin. I've, 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.
Patrick Cunningham (Vice President and Senior Equity Analyst)
Got it. That's helpful. Then, you know, what's driving the weakness in epoxies, and how do you see demand trending by region for the balance of the year?
Albert Chao (CEO)
Yeah, epoxies applies to many areas, mostly into the industrial coatings and also in windmill blades and lightweighting of vehicles. The windmill blades business is still coming back from a slow demand, especially China. China has one of the largest capacities in the world in epoxy, and China's economy is really not growing much, and there's overcapacity of new plants coming on. The business is very weak and impacted global. We expect U.S. and European epoxy demand to pick up in the coming quarters or years, but it takes a while. China is the main issue we have.
Patrick Cunningham (Vice President and Senior Equity Analyst)
Great. Thank you.
Albert Chao (CEO)
You're welcome.
Operator (participant)
Thank you. One moment, please. Our next question comes from David Begleiter from Deutsche Bank. Your line is now open.
David Begleiter (Research Analyst)
Thank you. Good morning. Howard and Albert and Steve, if you think about PEM sequentially, you'll, you will have lower outages in Q3, but you might be facing lower prices as well, as well as higher feedstock costs. Is PEM still up sequentially in Q3 versus Q2, given those dynamics?
Steve Bender (EVP and CFO)
You know, David, when you think about the strength that we expect seasonally in Q3, given the fact that we don't have the headwinds in our PEM business because of both the planned and the unplanned outages, that volume improvement should pick up. Certainly from a pricing perspective, we exited the end of the quarter at lower average prices than we had over the course of the second quarter. Obviously, as we look forward into the future for ethane pricing, ethane pricing was certainly elevated at the very tail end of the second quarter. If you look out to the second half of the year, we see ethane pricing still staying really in kind of the low-to-mid $20s over the course of the second half of the year.
David Begleiter (Research Analyst)
Very good. Albert, you mentioned some improvement in the global polyethylene market landscape. Can you give a little more color as what you're seeing right now in that market?
Albert Chao (CEO)
Yes. I think the export polyethylene prices, primarily in Asia, have been quite weak, and prices dropped a fair amount over the, over the, the months during the year. We see some kind of bottoming out in polyethylene prices, and demand has picked up in Asia as well. We expect there's some kind of price improvements in the US as a result, as well as the higher feedstock costs that Steve mentioned, we saw at the, the tail end of second quarter, early part of July. With the cost price increase, push, and as well as demand improving globally for polyethylene. We expect some kind of pricing movement in, in the third quarter for polyethylene and PVC.
That's assuming that economy is still going strong, but we see that the ten-year rate is almost approaching 4.2%, so we don't know the impact it will have on general economy and also on housing.
Operator (participant)
Thank you.
Albert Chao (CEO)
You're welcome.
Operator (participant)
Thank you. One moment, please. Our next question comes from the line of Aleksey Yefremov from KeyBanc. Your line is now open.
Aleksey Yefremov (Managing Director, Equity Research Analyst)
Thanks, good morning, everyone. Lately, with some improvements in new residential construction domestically, have you seen any uptick in PVC demand?
Steve Bender (EVP and CFO)
Yeah, 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, and you see this really in the announcements that many of our competitors have announced, as well as we in PVC pricing. We have price announcements out for August and September. That is reflective of what, what we're seeing in strength, and you may have seen that we've also seen export prices also begin to rise in PVC in overseas markets. That strength that we've seen in the construction markets pulling through in volume, but also pricing nominations reflecting that strength, both domestically and we're seeing, as I mentioned, in the export markets.
Aleksey Yefremov (Managing Director, Equity Research Analyst)
Thanks, Steve. Second question on, on M&A. How does your pipeline look today? Do, do you find more or, or, or fewer attractive deals, and, how would you characterize your kind of, level of engagement on M&A right now?
Steve Bender (EVP and CFO)
There is 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. 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.
Aleksey Yefremov (Managing Director, Equity Research Analyst)
Thanks a lot, Steve.
Steve Bender (EVP and CFO)
You're welcome.
Operator (participant)
Thank you. One moment, please. Our next question comes from the line of Kevin McCarthy with Vertical Research Partners. You may proceed.
Kevin McCarthy (Research Analyst)
Yes, good morning. Just to follow up on PVC, you know, 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 you think the move might be? Do you think it will be enough for PVC producers to raise the U.S. domestic contract price in August? I believe you and others have a proposed increase on the table there.
Steve Bender (EVP and CFO)
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, as you can see from our remarks, we see a number of them have really lowered operating rates because of the margin challenge they're facing with, with their feedstocks. If you use Brent as a benchmark in the mid-$80s, you know, those, those producers are seeing margin challenges, and that really is supportive of that driver for rising prices in the market.
I think 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, 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.
Kevin McCarthy (Research Analyst)
That's helpful. Then as a second question, Albert, I, I would appreciate any updated thoughts you might have on China. Generally speaking, we've seen demand from China languish, you know, across many commodity chemical markets. In the markets where you compete, are, are you seeing any, any signs of improvement there following recent efforts to stimulate, or for that matter, any improvement on the supply side dynamics in China?
Albert Chao (CEO)
Yeah, China is the elephant in the room. It has the largest capacity to produce many of the chemicals and plastics, as well as one of the largest market for it. As we all know, that China did not recover much since the Chinese New Year, people expected after coming out of the pandemic. The economy is still quite weak. As a result, polymers and chemical market prices has dropped a lot and impact global prices as well. Not only that, they used to import products, and now they're being exporting products. All that impacted global prices for those products. As we all read, that the economy, especially for unemployment, for young people, is has risen quite surprisingly high. It's recently, the Chinese government have made a statement.
They are coming out with policies to stimulate, but those statement has not come out with concrete action, specific action plans yet. I think Chinese, I presume leadership in China is very aware of the issues, and central government is still quite well off. They have a lot of firepower to do things. We believe that, that over time, the Chinese economy will improve, and they talk about targeted 5% GDP growth for the near term coming years. Time will tell, but meantime, as Steve mentioned, the spot price has really bottomed out in China. We see, coupled with some plant issues, with turnaround or that, that, the prices have stopped moving up last several weeks.
We hope that will be sustained, especially during the, the third quarter, which is usually a busy quarter. Time will tell, but we think China should improve over time.
David Begleiter (Research Analyst)
Very good. Thank you so much.
Albert Chao (CEO)
You're welcome.
Operator (participant)
Thank you. One moment, please. Our next call comes from the line of Michael Leithead from Barclays. You may proceed.
Michael Leithead (Director, Equity Research Analyst)
Great. Thank you. Good morning, guys.
Albert Chao (CEO)
Mike.
Michael Leithead (Director, Equity Research Analyst)
My first question on PEM, and maybe sticking on the last topic, your, your slides talk about competitively, competitively priced exports out of China for Epoxy. When you sort of do the back of the envelope math, it, it seems like producers there are selling export product below cash break even levels. How do you think this dynamic or down cycle plays out, and, and does it change at all, how you approach the Epoxy market?
Albert Chao (CEO)
Certainly, some of the Chinese, depending on what industry, definitely in, in the integrated ethylene to polyethylene, our information shows that integrated plants in China, based on Naphtha cracking, are losing cash. Whereas the U.S. integrated players are still based on ethane feedstock ethylene, we still have very good cash margin. But in business like Epoxy, where they have built additional capacities, some of the Chinese plants are running below 50%, and some new plants have not started up, but are idle than starting up. I think, companies are adjusting to the new dynamics, and over time, they should make the, the right decisions, what to do with their businesses.
Michael Leithead (Director, Equity Research Analyst)
Great. That's super helpful. Then maybe just to follow up on HIP, could you maybe talk through the different product lines or categories within the segments? We can obviously fairly decently track from the outside, the moving pieces within PEM, but just within HIP, what areas perform, say, better or worse relative to the overall segment this quarter?
Steve Bender (EVP and CFO)
Yeah. We saw broad strength across really the, the, the portfolio. Strength really in our businesses, such as stone, siding, roofing, of course, pipe for storm and wastewater applications. A broad application, really, in what we would call the Westlake Royal Building Products business, as well as our pipe and fittings businesses. Broad, broad strength in all of those businesses within the HIP business, really made nice contributions in the second quarter.
Michael Leithead (Director, Equity Research Analyst)
Okay. Thank you.
Steve Bender (EVP and CFO)
You're welcome.
Operator (participant)
Thank you. One moment, please. Our next call comes from the line of Matthew DeYoe from Bank of America. Please proceed.
Matthew DeYoe (Managing Director and Senior Equity Research Analyst)
Morning, everyone. What, what % of China's PVC production do you suspect they're exporting right now?
Albert Chao (CEO)
Yeah, China used to be a importer of PVC. I think they have been exporting. That export is, you know, 80% of Chinese PVC are produced from calcium carbide process, and usually, so the quality is not that great. I think India has put a VCM, a free VCM monomer, level upon on import PVC, and some of the Chinese producers are not able to meet it. I think the PVC export volume has reduced from China, but nevertheless, it does have an impact on, on those markets. They're primarily exporting to towards South Asia, and South Asia as a main market.
Matthew DeYoe (Managing Director and Senior Equity Research Analyst)
Do you have a number, I guess, to Steve? When we've talked in the past, I think you had said you expected it to be or you thought it was around 20%. I'm assuming to Albert's comments, it's less than that now. Is it 10? Is it five? Is it 15? Do you have any idea?
Steve Bender (EVP and CFO)
No, Yeah, it's meaningfully lower than that 20%.
Matthew DeYoe (Managing Director and Senior Equity Research Analyst)
Understood. If I can, what was your mix of import versus exported products shipped for caustic and PVC in the quarter? Do you expect it to change meaningfully next quarter with when you get your capacity back?
Steve Bender (EVP and CFO)
Yeah. When you think of the exports that we have, both in caustic and PVC, the industry is exporting kind of in the 20 range, and we're, we're just below that kind of a number. From a PVC perspective, the industry has been exporting historically in the 30s, we're also below that kind of a threshold number as well, because, remember, PVC is going into our building products business, so we, we have a pretty good domestic consumption number internally for our own PVC.
Matthew DeYoe (Managing Director and Senior Equity Research Analyst)
Understood.
Operator (participant)
Thank you. One moment, please. Our next question comes from the line of Matthew Blair with TPH. You may proceed.
Matthew Blair (Managing Director of Refiners, Chemicals, and Renewable Fuels Research)
Hey, good morning, Albert and Steve.
Albert Chao (CEO)
Good morning.
Steve Bender (EVP and CFO)
Good morning, Matthew.
Matthew Blair (Managing Director of Refiners, Chemicals, and Renewable Fuels Research)
Could you share any more color on the $50 million outage impact in PEM in Q2? What assets did that impact? Were they fully back up and running by, by July 1st, or do you expect anything to roll into Q3? Also, are there any planned turnarounds for Q3 or Q4 that we should be keeping in mind?
Steve Bender (EVP and CFO)
Yeah, so in terms of the, the, the businesses within PEM, it was in our core vinyls business. I would say that, you know, we obviously took corrective action that in the second quarter, and I think those issues are behind us as we are into the third quarter at this stage.
Albert Chao (CEO)
As far as turnaround concerned, there are always small turnaround going on, but nothing major.
Steve Bender (EVP and CFO)
Yeah.
Matthew Blair (Managing Director of Refiners, Chemicals, and Renewable Fuels Research)
Okay, sounds good. Albert, I think you mentioned that you're matching up 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?
Albert Chao (CEO)
Depending on the products and markets and pricing, certainly we would look out for all these areas. Right now, the PVC demand is being a construction season that is stronger and caustic demand is a bit weaker. Caustic price has been coming down globally and as every month, gradually. As until the industrial activity picks up, economy picks up, the caustic is coming to become weaker.
Matthew Blair (Managing Director of Refiners, Chemicals, and Renewable Fuels Research)
Okay. Are, are you running to, to meet all of that chlorine demand? I, I guess the implication is, would that, would that mean-
Albert Chao (CEO)
Yeah.
Matthew Blair (Managing Director of Refiners, Chemicals, and Renewable Fuels Research)
That the caustic side is oversupplied?
Albert Chao (CEO)
It's, it's combination. We have plants that are integrated to, to chlorine PVC, and we have plants that are not integrated. Depending where they are and the market situation in those areas, we adjust.
Matthew Blair (Managing Director of Refiners, Chemicals, and Renewable Fuels Research)
Okay, sounds good. Thank you.
Albert Chao (CEO)
You're welcome.
Operator (participant)
Thank you. One moment, please. Our next question comes from the line of Arun Viswanathan from RBC Capital Markets. Your line is now open.
Arun Viswanathan (CFA)
Great, thank you for taking my question. Hope you're well. Just wanted to look into the PVC side. You know, you noted some weakness maybe in PEM, driven by epoxy and PE. What are your comments on PVC as you head into the rest of the year? Is that affecting PVC? Similarly, you know, building products and the housing environment, what's your outlook for PVC market this, this half?
Albert Chao (CEO)
Sure. As we said earlier, PVC market has turned tighter. Export prices improved, demand being a seasonal quarter, has increased domestically and internationally. There's price announcements for both August and September, domestically in the U.S. If you look at the consultants' view of pricing, they think it is pretty, pretty much flat from now, maybe a little increase in third quarter, down a little bit in the fourth quarter. They're also looking at prices improving next year. I think just from general view of the market, it seems PVC is stabilized and is improving going forward.
Arun Viswanathan (CFA)
Just wanted to also ask about the compounding in European side. Are there any nuances that you'd add to your comments as it refers to that part of the business? Thanks.
Steve Bender (EVP and CFO)
Yeah. Arun, you know, the compounding business has been a nice business. We, as, as you know, the markets that we're addressing really are the wiring cabling business, the medical and auto businesses. That business continues to perform well. You know, as we think about some of the contributions they've been making really in the wiring cabling business, you know, we've mentioned the, the strength we've seen really in the infrastructure bill, and part of that is internet connectivity. Certainly, we also see that wiring cabling going into the construction markets as we see housing starts. Of course, the auto business, the medical businesses have their own cycles, but continue to be good markets at this stage, and so we're pleased with that compounding business, both domestically as well as in Europe.
Arun Viswanathan (CFA)
Thanks.
Operator (participant)
Thank you. One moment, please. Our next question comes from the line of Vincent Andrews from Morgan Stanley. You may proceed.
Turner Hinrichs (Analyst)
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 U.S. 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 than non-residential exposure, so any color and potential sizing of the opportunity would be helpful.
Steve Bender (EVP and CFO)
Yeah, when you think of our infrastructure products business, our pipe and fittings business, you know, we are seeing the majority of that going into residential construction. Certainly, there is a significant portion, not 50%, but a significant portion, nevertheless, that is a larger diameter pipe that is well suited for the infrastructure bill that we see. That's $55 billion that is sizable, that will address the infrastructure needs the country has. We think we're very well positioned to be able to address those needs for counties and municipalities.
Albert Chao (CEO)
We are, we are one of the largest, large diameter pipe for water and sewer, as mentioned, as Steve mentioned, municipalities, but also, our, our epoxy business is, a bigger supplier for, for coatings, for any, infrastructure, bridges and, and structures. As those, funds are getting, sent to the municipalities and, and, and government, state governments, we'll see more demand for both, PVC and as well as for epoxy.
Turner Hinrichs (Analyst)
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?
Steve Bender (EVP and CFO)
No, I think what you've seen is the very resilient capabilities of the business to scale based on market conditions. You can see the, I think, the performance in this market, where we have housing starts at about 1.4 averaging over the course of the second quarter, with still margin, EBITDA margins in the 22% range. When you think of the business and its ability to scale, we think it's a very good business, and certainly has an ability to perform well beyond the kind of margins we're delivering, even in this market condition. Given the strength of the product brands that we have and the customer relationships and the innovation that comes out of that business, because it's very brand oriented, as you would guess, we think has good upside to it.
We have not given specific guidance of margins beyond the current guidance we've been providing, but I would say that we do see good, solid upside in that business.
Turner Hinrichs (Analyst)
Great. Thank you.
Steve Bender (EVP and CFO)
You're welcome.
Operator (participant)
Thank you. One minute, please. Our next question comes from the line of Michael Sison from Wells Fargo. You may proceed.
Michael Sison (Managing Director, Senior Equity Analyst)
Hey, good morning. Albert, when you think about your HIP portfolio, after the Boral transaction, are there any other product lines or, or sort of areas you'd like to do acquisitions to sort of, you know, continue to expand that business and, and, longer term?
Albert Chao (CEO)
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 as these, in these nine platforms, as well as potential integration, vertically adjacencies, so on and so forth. As Steve mentioned, we are in constant dialogue with various parties, looking opportunities, as well as we are doing a lot of internal studies on debottlenecking, where we have opportunity in the markets, and also reducing our costs. Cost reduction is a major... Continuous improvement is a major part of our internal initiatives and reliability. We are working on all these areas, but certainly, outside, inorganic growth is something we're also looking at.
Michael Sison (Managing Director, Senior Equity Analyst)
Got it. Then just as a follow-up, if, if China continues to recover, will, will China end up importing PVC again? If, if they do start importing PVC, what do you think or how do you think that affects the margins here in the US, and how much-
Albert Chao (CEO)
Right.
Michael Sison (Managing Director, Senior Equity Analyst)
where could it go from here?
Albert Chao (CEO)
Well, I think so long China stop exporting PVC, that'll be very good. As you know, I think in our investor investment investor slides, we show that global additions of chlor-alkali and PVC capacities are below the GDP growth. Typically, we're looking at about around the GDP growth as a measure. As for many years and for objects going forward, the capacity additions are below GDP growth. We believe that the, the, the business and also there's a lot of energy needed to make ethylene, to make chlor-alkali, and U.S. is by far the lowest energy cost producer in the world. Keep having a piece of advantage and energy advantage makes us much more competitive anybody, anybody else in the world in making PVC and chlor-alkali.
With the lack of new investment and with our cost position, we can really have a very good position globally in our business.
Michael Sison (Managing Director, Senior Equity Analyst)
Thank you.
Albert Chao (CEO)
You're welcome.
Operator (participant)
Thank you. One moment, please. Our next question comes from the line of Frank Mitsch from Fermium Research. You may continue.
Frank Mitsch (President and Senior Analyst)
Thank you, and good morning. I guess the pronunciation was close enough. I noticed that the 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 and so on. Can you talk about some of the factors there, and what we should be expecting to see happen on that line?
Steve Bender (EVP and CFO)
Yeah. Frank, good morning. You're right, you know, because of some of the both planned and unplanned outages, inventory did come down because obviously we were not producing during those outages, but we were selling. Naturally, that has an impact on inventories. When you think of where, as we think about where producers are, you know, we're continuing to address and adjust our production levels, to meet market demand conditions. I would say that as we think about it, you know, inventory levels are over the course of the second half of the year, should be kind of in the medium level. As we think about it, both vinyl as well as, polyethylene.
Frank Mitsch (President and Senior Analyst)
Okay, thank you. You know, one of the features of, I think, the last conference call was speaking of inventories, was talking about customer destocking, et cetera. 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?
Steve Bender (EVP and CFO)
Yeah, I'd say, Frank, that, you know, the destocking really started almost a year ago in, in this business, and so accelerated at the very end of last year. I would say that, you know, we're at a point in time where our customers' inventory levels are at, I would say, low to low medium levels. I would not say that we've continued to see any destocking. That's that's behind us at this stage.
Albert Chao (CEO)
This is Frank. I just want to add also that, with high interest rates and uncertainty in the economy, our customers are very careful. They only order when they need to.
Frank Mitsch (President and Senior Analyst)
That's very helpful. Thank you.
Albert Chao (CEO)
You're welcome.
Operator (participant)
Thank you. One moment, please. Our next question comes from the line of John Roberts, Credit Suisse. You may proceed.
John Roberts (Equity Research Analyst)
Great. Thank you. back to building products, do you have a sense for the divergence between new construction and repair, remo- remodeling activity?
Steve Bender (EVP and CFO)
John, I would say that we did see continued strong demand in both sides of that of that HIP business. Strong demand, really, in repair and remodeling, and given the 1.4 million average start number, you can see, again, a resilient business being able to adjust to lower volumes year-over-year and still continue to perform. I would say both the starts, the new construction activity and repair and remodeling continue to perform well in both sides of the HIP business.
John Roberts (Equity Research Analyst)
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?
Steve Bender (EVP and CFO)
You know, in the summertime, there's a pickup for water treatment activity in chlorine, that's part of that story, John.
John Roberts (Equity Research Analyst)
Okay, thank you.
Steve Bender (EVP and CFO)
You're welcome.
Operator (participant)
Thank you. One moment. Our last question comes from the line of Hassan Ahmed from Alembic Global Advisors. Please proceed.
Hassan Ahmed (Research Analyst)
Morning, Albert and Steve.
Albert Chao (CEO)
Morning, Hassan.
Hassan Ahmed (Research Analyst)
You know, a question around ECU pricing. You know, operating rates globally seem to be quite depressed. Yet, you know, I know caustic soda pricing has come down recently, but, you know, on an ECU basis, you know, pricing relative to history continues to be quite strong. My question really is, how sustainable are those pricing levels?
Albert Chao (CEO)
Well, demand for chlorine derivatives are still strong. PVC, we mentioned globally, even though it has come. Global prices has bottomed out, we believe it will improve. Housing demand, we think, both new construction and repair remodeling, R&R, is still pretty strong. Global demand in India is coming out of the monsoon, demand is coming back. I think chlorine demands are relatively strong, but I won't say that it's really peaking, but it's, it's coming back from the bottom. I think caustic has really followed the general industrial activity. I think U.S. so far, we still have positive GDP, and I think most of the countries in the world are having positive GDP in Europe and Asia, but at the low levels. As they improve, I think the demand will get strong.
More so, as, as mentioned earlier, there's very little new capacity added around the world as demand continue to grow, hence, makes the supply/demand tighter going forward.
Hassan Ahmed (Research Analyst)
Understood. Very helpful. Just, sort of following up, you know, where you left off on, sort of chlorovinyls supply-demand dynamics. Look, one of the, one of the virtues, I guess, or, positives of the, the chlorovinyls story was lack of investment, under supply, call it, right? One of your large competitors recently has talked about considering, sort of chlorovinyls investment in Texas in particular. How do you see the supply-demand story with that announcement out there now? Do you still feel that in the medium to longer term, that market will be in, you know, sort of undersupplied and will continue to sort of tighten?
Albert Chao (CEO)
Well, as I said earlier, globally, there's undersupply, so one plant will not make much difference. As you know, this, the vinyl business, unlike the olefins business, other business, is very much integrated. You need a lot of investments, whether it's chlorine power plants or renewable power, ethylene plants, and VCM, EDC, and PVC. It's very complete, very heavy investment and very seasonal business. We are looking purely on the return on investment. As I mentioned earlier, we're looking at organic growth and find out which one give us a just return above on a long-term basis, above our cost capital. We're not looking at short-term returns only. It's very long, long-term basis. On a long-term basis, this business has been, as you know, challenging in the past.
China is one of the major issues, and as a big, like anything in our industry, what China does has a huge impact. China going through its own review of, you know, dual control, energy, global warming, which area they want to allow for investments and the phasing out of some high-energy industries. All that is going on, and it's a lot of uncertainty going on. Time will tell.
Hassan Ahmed (Research Analyst)
Very helpful, Albert. Thank you so much.
Albert Chao (CEO)
You're you're welcome.
Operator (participant)
Thank you. At this time, I'm showing no further questions. I would now like to turn the conference back to Jeff Hawley for closing remarks.
Jeff Hawley (VP, Investor Relations)
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.
Operator (participant)
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
