Westlake - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 net sales were $2.84B, up 1% year over year; EBITDA excl. identified items rose 7% to $416M as cost actions offset lower average prices; diluted EPS was $0.06 including a one-time $45M ($0.35/share) Louisiana tax law charge.
• HIP segment delivered 7% volume growth and 9% EBITDA growth YoY; PEM EBITDA improved 9% YoY, but operating income remained negative on lower prices for chlorine, PVC and PE; sequentially, both segments saw price pressure vs Q3.
• FY25 guidance: HIP revenue $4.4–$4.6B, HIP EBITDA margin 20–22%, capex ≈$1B, effective tax rate ≈23%, cash interest ≈$160M; planned ~60-day Petro-1 ethylene turnaround began late January.
• S&P Global consensus estimates were unavailable at the time of analysis; we cannot quantify beat/miss vs Street for Q4 2024. Wall Street consensus from S&P Global was unavailable.

What Went Well and What Went Wrong

What Went Well

• HIP momentum: 7% YoY sales volume growth in Q4 led by Pipe & Fittings and siding & trim; HIP EBITDA margin improved YoY to 19% and FY HIP delivered record $807M operating income and $1.1B EBITDA (24% margin).
• Cost execution: Delivered $50M cost reductions in Q4 and $170M in FY24, exceeding target; management highlighted improved EBITDA from targeted cost actions.
• Prepared remarks tone: “Westlake generated solid sales volume growth in 2024…HIP segment EBITDA increased more than 10% vs 2023…Westlake was able to increase EBITDA by 7% in the fourth quarter through targeted cost‑reduction actions.” — CEO Jean‑Marc Gilson.

What Went Wrong

• Price pressure: Company-wide average prices fell 2% YoY and 5% sequentially; PEM operating loss persisted in Q4 on weaker pricing for chlorine, PVC and polyethylene.
• One-time tax impact: A ~$45M non-cash Louisiana tax law revaluation reduced Q4 EPS by ~$0.35/share; management is engaging with the state to mitigate impacts.
• Inventory accounting headwind: FIFO use created an estimated unfavorable pretax impact of ~$64M in Q4 amid falling prices, pressuring PEM sequential results vs headline price series.

Transcript

Operator (participant)

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Corporation Fourth Quarter and Full Year 2024 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. After the speaker's remarks, you will be invited to participate in a question-and-answer session. As a reminder, ladies and gentlemen, this conference is being recorded today, February the 24th, 2025. I would now like to turn the call over to today's host, John Zoeller, Westlake's Vice President and Treasurer. Sir, you may begin.

John Zoeller (VP and Treasurer)

Thank you. Good morning, everyone, and welcome to the Westlake Corporation Conference Call to discuss our Fourth Quarter and full year results for 2024. 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, Housing and Infrastructure Products, which we refer to as HIP or Products, and Performance and Essential Materials, which we refer to as PEM or Materials. 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 up the call to questions.

During the third quarter of 2024, we accrued $75 million of expenses related to the decision to mothball two units within our European epoxy business. Additionally, during the fourth quarter of 2023, we recorded a non-cash impairment charge of $475 million related to the company's epoxy business, as well as a $150 million charge to fully resolve certain liability claims. We refer to these three charges 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 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 fourth quarter and full year 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 reporting on this call speaks only as of today, February 24th, 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?

Jean-Marc Gilson (CEO)

Thank you, John. Good morning, everyone. We appreciate you joining us to discuss our fourth quarter and full year 2024 results. During the fourth quarter, each of our segments delivered year-over-year sales volume and EBITDA growth, while advancing several key initiatives to improve Westlake's future earnings potential, including continuing construction on a new PVCO pipe to satisfy strong customer demand in our HIP segment. We have taken decisive action in reducing structural costs in our business, such as the mothballing of our ACH and ECH units in Pernis and other company-wide cost-saving initiatives, approximating $50 million in the fourth quarter. This brings total cost savings for the year to $170 million, exceeding our target. Overall, I'm pleased with the progress the team is making to position Westlake for continued earnings growth well into the future.

For the fourth quarter of 2024, we reported sales of $2.8 billion and EBITDA of $416 million, an increase of 7% compared to the fourth quarter of 2023 EBITDA of $390 million. Sales volume increased year-over-year at each of our segments, highlighted by a strong 7% growth in HIP, driven by continued solid demand for pipe and fittings and siding and trim. Meanwhile, PEM sales volume growth of 1% was driven by export market demand and higher polyethylene production levels, with some polyethylene lines setting new production records during the quarter. While PEM grew sales volume year-over-year, average sales price was impacted by capacity increases across the industry. We also delivered on our proactive cost control measures across all of our business, with EBITDA margin improving in each segment in the fourth quarter of 2024 compared to the same period in 2023.

Regionally, North America was a bright spot for us during the fourth quarter, as demand remained relatively strong in both segments. Our performance in North America was aided by our broad product portfolio in HIP, our strong and differentiated portfolio in PEM, and our globally advantaged feedstock and energy position and high degree of vertical integration. Before turning the call over to Steve to review our financial results in more detail, I want to take a few minutes to review some of our key accomplishments in 2024. First, our HIP segment achieved record income from operations of $807 million and a record EBITDA margin of 24%, driven by strong 8% sales volume growth. HIP has now set annual records for income from operations in each of the last five years, demonstrating the consistent solid growth characteristics of its underlying housing products and infrastructure product business.

HIP's EBITDA of $1.1 billion in 2024 and operating income of $807 million contributed 85% of our total segment's operating income in 2024. These record results provided stability to our overall earnings in 2024, with an asset-light cash-generative business model with leading market positions in North America. Second, we began construction on a new PVCO manufacturing plant in Wichita Falls in Texas to support the continued strong customer adoption of this innovative product that improves the municipal pipe installation process with a reduced environmental footprint. Third, we returned approximately $325 million to shareholders through dividends and share repurchases, which demonstrates our commitment to rewarding shareholders and our value-based approach to share repurchases while we grow the company. Finally, we finished the year with a solid investment-grade rated balance sheet highlighted by $2.9 billion of cash and cash equivalents, providing flexibility to pursue growth opportunities.

Taken together, I'm very proud of our 2024 accomplishments, and I would like to thank our nearly 16,000 team members for their hard work and dedication that enabled these achievements and the record HIP results. I would now like to turn our call over to Steve to provide more detail on our financial results for the fourth quarter and full year of 2024. Steve?

Steve Bender (EVP and CFO)

Thank you, Jean-Marc, and good morning, everyone. As a reminder, for comparison purposes, my comments regarding income from operations, EBITDA, net income, and earnings per share all exclude the financial impact of the $75 million mothball expense accrual that occurred in the third quarter of 2024, as well as the non-cash impairment charge of $475 million related to the company's epoxy business and the $150 million charge to fully resolve certain liability claims that occurred in the fourth quarter of 2023. Westlake reported net income of $7 million or $0.06 per share in the fourth quarter on sales of $2.8 billion. Net income for the fourth quarter of 2024 included a one-time non-cash charge of approximately $45 million or $0.35 per share for the revaluation of state deferred tax assets and deferred tax liabilities caused by recent legislative changes in Louisiana.

We are in dialogue with the state to address solutions to mitigate the impact of this recent legislation. Fourth quarter EBITDA of $416 million increased $26 million from the fourth quarter of 2023 as a result of higher sales volumes, particularly in HIP, and our targeted cost savings actions. For the fourth quarter of 2024, our utilization of the FIFO method of accounting resulted in an unfavorable pre-tax impact of $64 million or $0.36 per share compared to what earnings would have been if we reported on the LIFO method. This is only an estimate and has not been audited. We delivered $50 million of cost reductions in the fourth quarter, achieving a $170 million of total cost reductions in 2024, exceeding our target of $125 million-$150 million. For the full year of 2024, we reported net income of $677 million and EBITDA of $2.3 billion.

Compared to our 2023 results, 2024 sales of $12.1 billion declined 3%. The lower full year of 2024 sales were the result of solid 7% growth in sales volumes, particularly in pipe and fittings and core vinyls, that was offset by a 10% decline in average sales price, particularly for core vinyls and epoxy resin. Turning to our segment results, HIP sales in the fourth quarter rose year-over-year, driven by a 7% increase in sales volume. Volume growth was strongest in our pipe and fittings business, in part due to orders from the third quarter being shipped in the fourth quarter as a result of the wet weather and hurricane impacts that we called out in our last earnings call.

HIP's EBITDA margin of 19% in the fourth quarter of 2024 improved from the prior year period as cost reduction efforts more than offset the impact of lower average sales price. HIP income from operations of $807 million was the new annual record in 2024. HIP's earnings growth in 2024 was driven by a strong 8% sales volume growth, with particular strength in pipe and fittings. The record EBITDA margin in 2024 of 24% was driven by higher sales volumes, better product sales mix, and our cost reduction actions. HIP's record earnings demonstrate the earnings capability of our business and also illustrate the benefits of our vertical integration strategy. As we begin 2025, HIP sales volumes growth continues to look solid ahead of the start of the spring building season.

Moving to our PEM segment, fourth quarter EBITDA of $220 million increased by $19 million from the fourth quarter of 2023. The year-over-year increase in EBITDA was the result of higher sales volumes, particularly for polyethylene, driven by increased customer adoption for recent product innovations, such as our One-Pellet Solution. Sales volumes grew 1% year-over-year, driven by growth in export demand and increased production as a result of improved plant reliability. PEM's fourth quarter EBITDA margin of 12% improved from 11% in the fourth quarter of 2023, driven by our cost reduction efforts. EBITDA of $1.2 billion for full year 2024 was lower than 2023 results, primarily due to lower global sales prices and margins as a result of softer demand created by weaker global economic conditions and our two extended maintenance outages that occurred during the third quarter of 2024.

Turning to the balance sheet and cash flows, as of December 31, 2024, cash and cash equivalents were $2.9 billion, and total debt was $4.6 billion. Our balance sheet continues to be well-positioned with a 15-year average debt maturity life. For the fourth quarter of 2024, net cash provided by operating activities was $434 million, while capital expenditures were $285 million, resulting in free cash flow of $149 million. During 2024, we returned approximately $325 million to shareholders, and in the fourth quarter, we returned approximately $125 million to shareholders in the form of dividends and share repurchases. We continue to look for opportunities to strategically deploy our balance sheet in order to continue to create long-term value for our shareholders. Turning our attention to 2025, let me address some of your modeling questions and provide some guidance for the year ahead.

Housing industry consultants forecast that housing starts for 2025 will be similar to 2024 at $1.3 million. The depth and breadth of our portfolio of building products and broad geographical reach across North America provides a platform for continued growth in our HIP segment in these market conditions. Thus, based on our current view of demand and prices, we expect revenue in our housing and infrastructure product segment to be between $4.4 billion and $4.6 billion, with an EBITDA margin of 20%-22%. We expect our total capital expenditures for the company to be approximately $1 billion, similar to our depreciation run rate. This includes costs for a planned turnaround at our Petro 1 ethylene unit, which began at the end of January and is projected to last approximately 60 days. For the full year of 2025, we expect our effective tax rate to be approximately 23%.

We also expect cash interest expense to be approximately $160 million. Now, let me turn the call back over to Jean-Marc to provide a current outlook for our business. Jean-Marc?

Jean-Marc Gilson (CEO)

Thank you, Steve. Sustainability and environmental stewardship remain critical to our mission at Westlake. I want to take a moment to recognize some of our key accomplishments in 2024 to advance our sustainability efforts. Examples include Westlake being recognized by the Polymers for Europe Alliance as the winner of the decarbonization category of the 2024 Polymer Producer Awards for its efforts to reduce CO2 emissions. Also, beginning a pilot program with a leading U.S. hospital chain to source post-consumer recycled PVC material, and also investing in Universal Matter, which has pioneered and patented a technology that transforms carbon waste streams into high-quality graphene for use in industrial products. These are just a few examples of ways that Westlake is working to increase the sustainability of our products and improve the environment.

Before we open the call for questions, I want to provide some closing thoughts on 2024 and our current outlook for 2025. 2024 was another record year for our HIP segment, which did an amazing job growing sales and earnings. Our demonstrated strength in our brand offerings of building products and broad geographical position across North America, serving our customers with an innovative product pipeline, are reasons that support a constructive outlook for this segment in 2025. This provides overall stability to Westlake earnings and cash flows while exemplifying our disciplined capital deployment track record. Turning to PEM segment, we see continued demand growth in our end markets such as packaging, coatings, lightweight materials, and construction.

Our differentiated product portfolio, combined with our globally advantaged feedstock and energy position, and our high level of vertical integration, provides us a strategic advantage to deliver value to our end market customers and remain globally competitive. While we recognize the global macroeconomic backdrop as some uncertainties overhanging demand growth in 2025, we are focusing on actions that are within our control and which improve our businesses. We have taken proactive steps to reduce our cost structure and right-size our European epoxy asset footprint and reinforce our long-term competitiveness throughout the cycle. We expect to deliver $125 million-$150 million in cost reductions in 2025 and will maintain a disciplined and balanced approach to the allocation of capital. We will continue to optimize our business to drive operational performance and reduce our cost.

Finally, as 2025 unfolds, we will look for new opportunities to redeploy our solid investment-grade balance sheet, where our net debt is less than one time our trailing EBITDA. We continue to view our solid balance sheet with its ample borrowing capacity as a strategic advantage, with industry-leading financial flexibility to opportunistically pursue growth options. Our focus in 2025 will be upon being disciplined stewards of shareholder capital, as you have come to expect of us. Thank you very much for listening to our fourth quarter earnings call. I will now turn the call back over to John.

John Zoeller (VP and Treasurer)

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 two hours after the call has ended. We will provide that information again at the end of the call. Tawanda, we will now take questions.

Operator (participant)

Thank you. Ladies and gentlemen, to ask a question, please press star one one on your telephone, then wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of John McNulty with BMO Capital Markets. Your line is open.

John McNulty (Managing Director and Chemicals Analyst)

Yeah, good morning. Thanks for taking my question. So I guess the first one would just be on the HIP margins. It looks like you're looking for a little bit of margin degradation as we look to 2025. I guess, can you help us to think about the dynamics behind that, especially in what looks to be a growth environment for you, at least for your platform?

Steve Bender (EVP and CFO)

Yeah, good morning, John, Steven. So as you think about the guidance we provided from revenue, you can see that we do expect to see growth in our products. But I'd say the guidance that we're providing in our margin and the EBITDA margin is really more of a product mix shift that we're expecting to see. As you can see, we have a broad array of products, and we do expect there'll be a slight change in that mix, which might have some impact. That's the guidance in our margin.

John McNulty (Managing Director and Chemicals Analyst)

Got it. Okay. Thanks for the color on that. And then on the $125-$150 of cost cuts that you're looking for this year, it sounds like a lot of it's going to be in the PEM segment, but can you just confirm kind of roughly how you see that mix playing out by division?

Steve Bender (EVP and CFO)

Yeah, I'd say there will be continued efforts in both sides of our business, but I would say that areas such as in logistics and procurement are going to be areas that are going to be big contributors. Those do impact not only the PEM side, but also the HIP side of the business, so there are efforts to really look to optimize the footprint of the business, and in doing so, there'll be opportunities to get benefits both in logistics, procurement, and then overall SG&A and just managing our budgets much tighter and tightening that belt.

John McNulty (Managing Director and Chemicals Analyst)

Got it. Thanks very much for the call.

Operator (participant)

Thank you.

Steve Bender (EVP and CFO)

You're welcome.

Operator (participant)

Please stand by for our next question. Our next question comes from the line of Patrick Cunningham with Citi. Your line is open.

Patrick Cunningham (VP and Senior Analyst)

Hi, good morning. We've heard over the last few weeks a bit of a tougher outlook for some of the home builders, maybe some suggestions of a more hawkish Fed. Any concerns this leads to further volume pressure on your end, or is this sort of what you're kind of seeing in your mixed declines? And maybe if you could comment on the areas of strength, whether it's R&R, public infrastructure, benefits from PVCO that kind of gives you confidence in that 5%-7% target for the year.

Steve Bender (EVP and CFO)

Yeah, we do continue to see some growth, and you can see that we're looking at consultants. We see 1.3, which was similar to starts in 2024 being similar to what we expect in 2025. Certainly, I think that is the commentary you're hearing from many of the builders. But I would say that we have confidence in the team, and you can see that we're guiding to really have a growth in market penetration in this space. And so as we think about having the opportunity to grow our overall platform geographically and from a product perspective, we continue to think that we'll see good growth in overall revenues.

As I mentioned earlier in my comments, I do think there'll be some product mix that could cause some compression in the delivery margin that we had in 2024, but certainly, we're working very diligently to see what we can do to keep that margin as strong as possible given the market dynamics.

Patrick Cunningham (VP and Senior Analyst)

Understood. And then just a question on tariffs, specifically on PVC. Have you seen any impact on trade flows from some of the existing ADDs and tariffs against the U.S.? And do you expect potential for these tariffs and maybe even retaliatory tariffs down the road to have a negative impact on U.S. exports?

Steve Bender (EVP and CFO)

Yeah, so we're certainly watchful of the potential impact of incremental tariffs that could arise and any retaliatory tariffs that may come from other trading partners, but to your question, we have seen products shift in terms of trade patterns all throughout the course of this past year or so, and I do expect that should there be additional tariffs or countervailing tariffs, that there could be other changes in product flows as well. It's something that we'll just have to continue to monitor and react to as circumstances develop.

Operator (participant)

Thank you. Please stand by for our next question. Our next question comes from the line of Salvator Tiano with Bank of America Securities. Your line is open.

Salvator Tiano (Equity Research Analyst)

Thank you very much. Firstly, I want to go back to your HIP guidance, and you mentioned that the margin issue is mostly a shift in the mix. So firstly, can you elaborate a little bit on what are these products that you expect will gain share versus what may lose share or you may not grow as much? And secondly, last year, I think you started with a similar guidance, perhaps actually even lower on the margin front, and you delivered 24% EBITDA margin. So how conservative, I guess, would be the simple way to ask, is this guidance, and what's the opportunity for upside here as we saw last year?

Steve Bender (EVP and CFO)

Yeah. Well, clearly, as we think about the guidance we provided historically, we've tried to give you some clarity in terms of how we see the year progressing. And at this early stage in February, we do expect that the business will continue to see, as I say, that 1.3 million starts as we've seen from consultants. But I think the guidance we're providing is, I think, in line with a rather conservative approach that we've taken historically. And so certainly, there are mixed products that are in our portfolio that have stronger or less strong portfolio margins in those. And so as we think about the approach that we're taking in the marketplace, we're going to remain competitive.

There is a degree, naturally, of conservatism in our outlook as we look forward into 2025, given the relatively flat housing start numbers we have for this year relative to last.

Salvator Tiano (Equity Research Analyst)

Okay. Perfect. And I also want to ask specifically about pipes and fittings. There was a note in your presentation that there were competitive pressures there, and I believe that has been the main source of margin upside for you in the past couple of years. So can you elaborate a little bit more on what's going on there, whether it's lower demand or increased supply, and what's kind of the outlook for 2024 versus 2025 versus 2024 specifically for this product?

Steve Bender (EVP and CFO)

You can see from our prepared remarks, we called out both pipe and fittings as well as siding and trim as strong contributors in the fourth quarter. Of course, there has been some additional capacity in the marketplace, but we continue to see that our portfolio being broad and deep and having a broad geographical fit allows us to address market demand as market situations in these various geographical markets play through this year. We remain, I think, very constructive in our outlook in the HIP side of the business and think that broad portfolio as well as that broad geographical footprint provides us the opportunity to meet demand wherever it might be, be it on the West or the Southeast, the far West or the Northeast.

Operator (participant)

Thank you. Please stand by for our next question. Our next question comes from the line of David Begleiter with Deutsche Bank. Your line is open.

David Begleiter (Deutsche Bank)

Thank you. Good morning. Just some PEM.

Steve Bender (EVP and CFO)

Good morning.

David Begleiter (Deutsche Bank)

Can you help us with the bridge from Q4 to Q1 given the 5.0 impacts, the Petro 1 outage, higher SA prices, and other drivers?

Steve Bender (EVP and CFO)

Yeah, David, as you think about that, certainly, as we saw some significant headwinds both in feedstocks as well as in overall pricing at the end of this past year and certainly with some of the pricing dynamics we've seen in the first few months of the new year. So clearly, you understand in a falling price environment, we certainly face a headwind given our FIFO approach. And so as we think about the outlook, we continue to see strength really in some of the feedstocks, and we'll continue to see price nominations to address that. You've seen price nominations in many of our product portfolio offerings, polyethylene, PVC, caustic, and others. And these are all designed to address both the demand picture we're seeing as well as some of the input cost pressures we're also seeing.

David Begleiter (Deutsche Bank)

Very good. And just on epoxy, Steve, can you address your performance in Q4 and your expectations for at least maybe the first half of the year?

Steve Bender (EVP and CFO)

Yeah. So I would say, David, that that business continues to see some improvement. I think you're well aware of the actions that we've seen both in Europe and the United States with any dumping provisions. And I would say that we've also seen a result of some of those actions, improvement in overall demand, and I would expect to see that continue into 2025. I don't see certainly the recovery we would like to see until we get beyond 2025, but I do expect the trends will improve.

David Begleiter (Deutsche Bank)

Thank you.

Operator (participant)

Thank you. Please stand by for our next question. Our next question comes from the line of Christina Lowe with JP Morgan. Your line is open.

Jeffrey Zekauskas (Managing Director and Senior Equity Research Analyst)

This is Jeffrey Zekauskas. Can you tell us what the volume and price change was for the year in each of your two segments?

Steve Bender (EVP and CFO)

Yeah, so Jeff, good morning, and so when you think of the volume changes that we saw really in the PEM side, we saw for the year, year over year, about a 6% improvement in volumes in PEM and about an 8% improvement in HIP. Again, this is 2024 versus 2023.

Jeffrey Zekauskas (Managing Director and Senior Equity Research Analyst)

And price?

Steve Bender (EVP and CFO)

Price was down in PEM. It was down about 12% and down about 6% for HIP.

Jeffrey Zekauskas (Managing Director and Senior Equity Research Analyst)

Okay. And the thing about your PEM business is your EBIT was negative. What does that come from? Is that PVC? That is, what businesses inside of PEM had negative EBIT?

Steve Bender (EVP and CFO)

And so, Jeff, while we don't break down the discrete strategic business units within PEM, I would say that we certainly saw pressures in that core vinyls chain. And so I would say that the biggest pressure was really on the vinyl side of that core vinyls chain, really in the vinyls chain, less so on the caustic chlor-alkali ECU side of that chain.

Jeffrey Zekauskas (Managing Director and Senior Equity Research Analyst)

Okay. Great. Thank you very much.

Steve Bender (EVP and CFO)

You're welcome.

Operator (participant)

Please stand by for our next question. Our next question comes from the line of Aleksey Yefremov with KeyBanc Capital Markets. Your line is open.

Aleksey Yefremov (Managing Director and Equity Research Analyst)

Thanks. Good morning, everyone. Free cash flow in 2024 was relatively modest compared to EBITDA or net income. Could you provide any outlook for 2025, again, as a percentage of EBITDA and net income or any other way?

Steve Bender (EVP and CFO)

Yeah. So actually, I do expect that with the continued strength that we're seeing really in the HIP business and some of the pricing action that we've seen on the PEM side, certainly that will pull some on working capital, and we certainly gave some guidance for CapEx this year. But I do expect a stronger performance really in the free cash flow generation in 2025. We've seen strength continued, as Jean-Marc had in his comments, with a number of years, five years' growth of performance in the HIP side of the business. And as I mentioned earlier, we've seen price initiatives across the product spectrum in our PEM business. And we've certainly seen volume pick up, which is the driver behind the price initiatives. And so certainly, I do expect that we'll see stronger growth in our free cash flow generation in 2025.

Aleksey Yefremov (Managing Director and Equity Research Analyst)

Maybe as a follow-up to that, Steve, as you are growing your HIP business, is that the business that requires more working capital in that? Will it be more capital-intensive and perhaps your free cash flow conversion would be lower as that business grows going forward?

Steve Bender (EVP and CFO)

No, it actually is an asset-light business relative to the PEM side of the house, so it does not require that large on a percentage basis of inventory or working capital relative to the PEM side of the business.

Aleksey Yefremov (Managing Director and Equity Research Analyst)

Great. Thanks a lot.

Steve Bender (EVP and CFO)

You're welcome.

Operator (participant)

Thank you. Please stand by for our next question. Our next question comes from the line of John Roberts with Mizuho. Your line is open.

John Roberts (Managing Director)

Thank you very much. On the PEM 1% volume growth, you mentioned that export polyethylene was up, so presumably the rest of the business had flattened down volume. Epoxy was down. Could you maybe give us some volume commentary on the other parts of the PEM portfolio?

Steve Bender (EVP and CFO)

Yeah. John, we don't usually break out by strategic business unit those components, but it's clear when you think about the contributions that some of the headwinds we saw were in the core vinyls chain, so as I mentioned earlier, to one of the questions really in the core vinyls chain, and that's really where we saw some pressures, not only on price but also in volumes.

John Roberts (Managing Director)

Will the Louisiana tax law change affect the go forward taxes at all?

Steve Bender (EVP and CFO)

No, the guidance I provided of 23% really reflect the changes that were made, and as I mentioned earlier in my prepared remarks, certainly we're in discussions with the state about their allocation, their apportionment allocation, to see what we can do to mitigate the economic impact of those recent legislative changes.

John Roberts (Managing Director)

Thank you.

Steve Bender (EVP and CFO)

You're welcome.

Operator (participant)

Please stand by for our next question. Our next question comes from the line of Michael Leithead with Barclays. Your line is open.

Mike Leithead (Director and Equity Research Analyst)

Great. Thank you. Good morning, team. I wanted to go back to the HIP revenue guidance. At the midpoint, I believe it's about 4% growth year on year. How should we think about the relative price and volume contributors to that? Should we expect price to continue to be a drag and volume to be up above that 4% number, or just how should we think about that?

Steve Bender (EVP and CFO)

Yeah. This business is very much a regional business in terms of how we think about the discrete markets. And so as you can see, we're guiding up on revenues. And the conservatism that you see in our guidance for margin, EBITDA margin, is really reflective of the fact that we see a relatively flat number of starts in 2025 relative to 2024, and likely a change in some product mix given the earlier dialogue that we're having with our distributors who are servicing these builders. So as we think about the outlook, we continue to see really a strong performing business in HIP and expect it to continue to perform quite well in the coming year.

Mike Leithead (Director and Equity Research Analyst)

Okay. But I guess my question was, do you expect price to be negative in 2025 or no?

Steve Bender (EVP and CFO)

No, I think that what you're seeing really is certainly some cost creep coming through on the vinyl side of the business, and we fully expect to be able to handle that through price nominations in our vinyl-related building products. And certainly, some of the other inflationary costs coming through in our other components, I do expect that we'll be able to deal with that and discussions with our distributors for products.

Mike Leithead (Director and Equity Research Analyst)

Okay. Fair enough. And then just bigger picture, you have a very nice building products business that's growing within Westlake Corporation. You highlight the success in a new slide in this deck. But your stock price and your equity valuation today is currently trading cheaper than many of your commodity chemical peers. I guess, how do you think about addressing or closing that valuation discrepancy, such as through buyback, separating the company, or just other means?

Steve Bender (EVP and CFO)

So when you think about the value contribution that our HIP side of the business is delivering, when you think about the overall enterprise value that is there, actually, an investor today is actually getting the PEM side of the business, frankly, for free. And I think, therefore, it reflects the fact that we're really being significantly undervalued as an enterprise. So as you've seen the very strong performance in our business, not only this year in HIP but over the last five years, and you've seen the guidance that we're providing for the current year of 2025. And I think the market is just, frankly, undervaluing the entire enterprise of the business.

Mike Leithead (Director and Equity Research Analyst)

Got it. Thank you very much.

Steve Bender (EVP and CFO)

You're welcome.

Operator (participant)

Please stand by for our next question. Our next question comes from the line of Kevin McCarthy with Vertical Research Partners. Your line is open.

Kevin McCarthy (Partner)

Yes. Thank you and good morning. Steve, just to follow up on the comment that you just made, how would you describe the amount of patience that management would have in enduring a highly undervalued enterprise? In the past, I think you've extolled the virtues of integration, right, upstream and HIP and downstream for that matter. But if this sort of valuation disconnect were to persist, might you take action in terms of separating the businesses at some point in the years to come?

Steve Bender (EVP and CFO)

No, Kevin, I understand the question, and when you think about the integration, we see a wide number of benefits of that product integration between the PEM side and the HIP side of the business, and so certainly, we all recognize that the PEM side of the business has been in an extended trough, but you're actually seeing some price initiatives here to address some of the prices that were given up earlier this year and last year, so I think as those demand volumes begin to pick up on the PEM side and our prices begin to reflect that increased demand and, frankly, increased input cost in the form of ethylene and ethane, I believe the market will begin to recognize the real strength and the leverage, the earnings leverage that we have embedded in the PEM side of the business.

I think the HIP side of the business, we expect to continue to perform very well in 2025, but I think the market is underestimating the earnings leverage that we have in the PEM side of the business as we see volumes and pricing action begin to unfold as we would expect in 2025.

Kevin McCarthy (Partner)

Fair enough. I wanted to ask about the recent months. So I appreciate your reporting the fourth quarter results, but here on the 24th of February, I was wondering if you could comment on your recent demand experience in major product lines like polyethylene and PVC in January and February relative to normal seasonality. Is that on par or any better or worse than you might have previously anticipated?

Steve Bender (EVP and CFO)

No, I think it's a good question, Kevin. And so as you think about, and I'll start first with polyethylene, as you think about our polyethylene business, we continue to see good strength in demand on that front. And I think you're aware that we've had price initiatives out in January and February and now March for polyethylene. And while not all of those have yet settled, February has not settled, nor of course March, that is reflective of good demand. Of course, there is some cost creep we're seeing in our inputs, but I think it's also reflective of the export market that we're seeing, and that's really the strength behind these price nominations in polyethylene. Likewise, when you think about our caustic businesses, we've also seen a series of announcements by others as well as our own that will go into effect in April of this year.

You may be aware that we've made some nominations of price. And again, that's based really on the strength we're seeing across the space in the business, but certainly also coming from the alumina side, which is a significant absorption market for caustic soda. So when I think about PVC, you heard my comments around building products, and of course, that's going into pipe and siding and trim, which is pulling on PVC volumes. So we've also made nominations in February and March for price increases in our vinyl resin. And we do think the strength we're seeing downstream should help us with some of those price nominations in vinyl.

Kevin McCarthy (Partner)

Perfect. Thank you very much.

Steve Bender (EVP and CFO)

You're welcome.

Operator (participant)

Please stand by for our next question. Our next question comes from the line of Josh Spector with UBS. Your line is open.

Josh Spector (Executive Director and Chemicals Equity Research)

Yeah. Hi, good morning. Steve, I wanted to ask about the price decline sequentially in PEM. In terms of the way you posted, it seems to be a decent amount lower than some of the headline prices that have been out there. I assume a decent chunk of that is you serve more to the spot market than the contract market as you normally do seasonally. But I'm curious if you could answer, did you sell more into the spot or export markets than you typically do, and how do you expect that to trend over the next couple of quarters? Is that mix in PEM potentially a tailwind over the next couple of quarters?

Steve Bender (EVP and CFO)

No, it's not really a mix between export and domestic sales. It may be more of a product mix than it is necessarily an export versus domestic mix because many of our peers don't have the degree of product mix that we have in our caustic and our core vinyl polyethylene portfolio.

Josh Spector (Executive Director and Chemicals Equity Research)

Okay. Understood. That's helpful, and I could just ask one other on pricing. One of the main consultants did a pretty big adjustment to contract posted prices, and sometimes when this is done, there's some other discounting behind the scenes or some other moving parts. Just curious if you can comment on your realized price on domestic markets and PVC and if that had any impact either in the quarter or as you look at the next couple of quarters?

Steve Bender (EVP and CFO)

So, as we think about, and you've seen the results in the fourth quarter across the space, but I would say prospectively we look forward into the current quarter, we certainly have seen some of these industry consultants really upping their expectations of settlements in February this month and certainly their expectation in March. So, while we and several of our industry peers have got nominations that are higher than what some of these industry consultants are speaking to, I think the fact that they're recently upping their expectations and their forecast signals the strength that we're seeing in these markets as well. So, as we look forward, we're looking forward to settling here at the end of the month in February in all products.

But also, I would say specifically some of the consultants, especially those that are looking at the demand picture, we're certainly seeing that demand picture, which is why we're moving prices in vinyls, epoxy, caustic, and polyethylene all higher.

Josh Spector (Executive Director and Chemicals Equity Research)

Okay. Thank you.

Operator (participant)

Please stand by for our next question. Our next question comes from the line of Michael Sison with Wells Fargo. Your line is open.

Michael Sison (Managing Director)

Hey, good morning. In terms of HIP, the 20%-22% EBITDA margin outlook for 2025, I mean, do you see that as sort of your trough margin, meaning if housing starts finally improve and if the home sales finally improve, does that margin go up from here?

Steve Bender (EVP and CFO)

You certainly have seen what we delivered in 2024, and that was a very strong EBITDA margin. Certainly, as we think about growing this portfolio and growing the recognition of this portfolio, I should say, and recognizing the ability to deliver on time, all the time, is really giving us an opportunity to have a dialogue with our customers and our customer's customer. While the guidance this year for 2025 is more a conservative guidance as we look forward and somewhat a product mix, it's also an expectation we'll continue to grow the business from a revenue perspective and look to work with our partners, our customers, to make sure that we can provide product on time, all the time.

Michael Sison (Managing Director)

Got it. And then as a follow-up for PEM, 2024 looks like a trough year, obviously, and it feels like most folks have said in these areas that 2025 could be another trough year. So do you think anything gets better in terms of the fundamentals for chlor-alkali or polyethylene? And directionally, should EBITDA just be similar in 2025 versus 2024? Is there a potential for improvement? I mean, could it get worse given how the markets are looking?

Steve Bender (EVP and CFO)

So Michael, as you know, we don't provide direct EBITDA guidance for the PEM side of the business, but I do think you've seen from our price nominations here that we're seeing some improvement in overall demand and that price action that we've spoken to earlier in the call have also been reflective of that increased demand. But as you know well, we don't provide direct EBITDA guidance for 2025 in PEM.

Operator (participant)

Thank you.

Michael Sison (Managing Director)

Thank you.

Operator (participant)

Please stand by for our next question. Our next question comes from the line of Hassan Ahmed with Alembic Global Advisors. Your line is open.

Hassan Ahmed (Senior Equity Analyst)

Morning, gents. Just wanted to go back to the question about value recognition, particularly with what you guys are guiding to and have reported within the HIP segment. I mean, one of the interesting lines that I sort of came across in your prepared remarks was how such a large offtake of PVC resin from the PEM segment goes into the HIP segment. So obviously, you have lesser exposure to weaker economies. So obviously, you're benefiting from this dynamic on the PEM side. You're benefiting from the integration on the HIP side of it. I mean, so clearly, separation is out of the question.

So again, going back to sort of getting a bit more granular around what it'll take for value recognition to happen, is it just as simple as quarter after quarter, you guys reporting results which are better than both your PEM and HIP peers and the market eventually waking up to that concept?

Jean-Marc Gilson (CEO)

Yeah. Let me take this one. So it's Jean-Marc here. So I think one of the really good news, I mean, that you heard today is the fact that the HIP business has been growing for five years year on year, continuously. So over the last five years, you've seen the share of that business, both in terms of sales and earnings, to grow in the company. And we expect that to continue in the future. As you can see in the numbers, we now generate about 50% of the EBITDA in the HIP side, and around 85% on the operating income side. So these two businesses, you need to look at them as two siblings in the same family. They share the PVC, certainly, in our company, and it allows us to really sell some of our product at different points in the value chain.

We expect that in the future, you're going to continue to see HIP growing, providing a very stable foundation for the company with significant growth potential and really good EBITDA margin in general. So having said that, I think it was mentioned many times today, the PEM can be seen a little bit in a trough situation right now. We're very strong also in PEM. We have a real cost advantage being where we are situated. We are very careful about our cost, very low SG&A. And so as the business bounces back, you will see that business, which is cyclical, a little bit more in nature, to bounce back and provide really strong cash flow generation and EBITDA generation in the future.

So from where we are, I think we are in a really good position to continue to create value, certainly on the HIP side, and then a bounce back on the PEM side. So we really like where we are. We're going to continue to invest in both segments, but certainly with a little bit of a push on the HIP side to continue that five-year growth that we enjoyed over the last five years.

Hassan Ahmed (Senior Equity Analyst)

Very helpful. And as a follow-up on the PEM side of things, if I could get a bit more specific around chlor-alkali in particular. And I understand, I mean, your exposure obviously is far more on the merchant side to the caustic soda market. But a couple of consultants have come out with fairly negative sort of views on the near to medium-term prospects of chlor-alkali, particularly taking a look at some of the capacity increments that are happening and also where current pricing for the ECU sits relative to the marginal producers. And it seems the ECU price is still significantly higher than marginal producer economics, suggesting maybe downside in pricing. And that, to me, seems a bit divergent relative to the comments you guys are making on caustic soda pricing. So what am I missing over here?

Steve Bender (EVP and CFO)

Hassan it's Steve, I'd say one of the items I tend to pay attention to is really their price outlook. And if you look at their average price for 2025 from one of the larger consultants, they're actually higher than they are for the year of 2024. So while, of course, there is some incremental capacity in the marketplace coming with two domestic producers adding some capacity in the current over the last two years, I'd say that the demand picture that we're seeing is reflective of the price nominations that I spoke to earlier. And if you look at with a close eye on the ending price for the end of this year and the average price for this year, they're actually higher than the average price that we experienced in 2024.

And so as we think about the market that we see every day in the commercial markets, talk to the consultants as well, we actually come away with a view that we think the markets are more constructive than what I heard you ask in your question.

Hassan Ahmed (Senior Equity Analyst)

Very helpful, Steve. And thanks, Steve. And thanks, Jean-Marc.

Operator (participant)

Please stand by for our next question. Our next question comes from the line of Frank Mitsch with Fermium Research. Your line is open.

Aziza Gazieva (VP and Co-Founder)

Hi, guys. Good morning. It's Aziza on for Frank. I had a question on the PVCO pipe plant project. Could you remind us on the timing and associated cost for that construction project?

Steve Bender (EVP and CFO)

Yeah. The plant really is expected to come on next year. We have four lines that will come on as we hope to bring on more volume. This is, Aziza. This facility is in North Texas in Wichita Falls and allows us to really serve a growing market that we see in that marketplace. We're really excited about that. As you may recall, we're already producing PVCO pipe. It's a market that we're seeing really embrace this, I think, unique and sustainable product. As you have heard, it puts through the throughput is a higher incremental volume given the diameter of the pipe. It uses less resin, so it has sustainability. From a market adoption perspective, it's been well adopted and well appreciated, which is why we're adding the capacity. We're looking forward to that startup in 2026.

Aziza Gazieva (VP and Co-Founder)

Okay. And Steve, any comments on how costs are trending on that?

Steve Bender (EVP and CFO)

Yeah. Aziza, we've not announced the capital cost for that project.

Aziza Gazieva (VP and Co-Founder)

Okay, and then within the corporate EBITDA line, we saw 2024 kind of increase roughly $30 million year over year. Any comments you can make on 2025 corporate EBITDA?

Steve Bender (EVP and CFO)

On the corporate side, I would say, and you noticed that certainly we do have a significant cash balance. And given the upward-sloping yield curve we see in interest rates, that cash is earning interest until we find a better way to deploy it. And so certainly, I would say that we're looking for ways to add even greater value than just generating interest income on cash balances.

Operator (participant)

Oh, thank you.

Aziza Gazieva (VP and Co-Founder)

Thank you.

Steve Bender (EVP and CFO)

You're welcome.

Operator (participant)

Please stand by for our next question. Our next question comes from the line of Matthew Blair with TPH. Your line is open.

Matthew Blair (Managing Director)

Thank you and good morning. Could you discuss the M&A landscape? I know there are a few comments looking to how you're looking to deploy capital going forward, and you have nearly $3 billion in cash sitting on the balance sheet. Has deal flow picked up, or is it declining? Are you interested in any PEM assets, or would this be mostly in HIP?

Steve Bender (EVP and CFO)

Yeah, Matthew, it's a good question, and I would say that we look at both sides of the business. We look at PEM assets as well as HIP assets, but when you think about those that are going to be able to provide the nearest-term upswing that we see, I would say that looking at opportunities to grow the HIP business would probably be where we would lean in somewhat, but it's all about the right value proposition that any asset brings to the table, so if we're presented with good opportunities on the PEM side, we would certainly look very positively toward that, so we look at both sides of the house, and I would say just the bias in terms of where we see the best upside for the deployment of any asset that's going to generate that free cash flow.

And given the stage of the PEM side of the business, it's more likely to see a more stronger, earlier contribution on the HIP side. But we do look at both sides of the house on a regular basis. I'd say the tone continues to be good. I'd say that the dialogue is constructive with owners of assets that are looking to divest or redeploy their portfolio. And I'd say as we talk to those asset owners, their expectations still probably need to be triangulated in terms of where the market expectations are. But I would say there's very good dialogue between ourselves and those asset owners.

Matthew Blair (Managing Director)

Sounds good. And then the past two years, HIP has had a pretty big quarter-over-quarter improvement in EBITDA margins. If you compare Q4 going to Q1, the starting point this year is 19%. So how likely is it that HIP EBITDA margins in Q1 2025 would actually be higher than your full-year 20%-22% guidance?

Steve Bender (EVP and CFO)

And so, Matthew, part of this is also a function of how the season, weather-wise, plays through. When you think of the weather, typically, the construction season starts in February, late February through March, but it's very weather-dependent. And so I would say that the dialogue that we're having with many of our customers, distributors, but we do talk to the builders directly. I would say they have a positive look to start the year. And so we look forward to that. But it's very somewhat weather-dependent. And as you know, this business is somewhat regional. In northern parts of the country, it will remain cooler. And so there may be areas in the Northeast that remain cooler where areas down in the Gulf Coast or the West or the Southeast may have an earlier construction season.

So we have an outlook that, and you saw my commentary earlier in our prepared remarks, where we see a good start to the construction season at this stage of the spring season.

Matthew Blair (Managing Director)

Great. Thank you.

Operator (participant)

Thank you.

Steve Bender (EVP and CFO)

You're welcome.

Operator (participant)

Please stand by for our next question. Our next question comes from the line of Pete Osterland with Truist Securities. Your line is open.

Pete Osterland (Equity Research Analyst)

Hey, thanks for taking the question. Within HIP, growth into your infrastructure revenue stream turned positive in fourth quarter for the first time in several quarters. What is your outlook for growth into infrastructure during 2025 relative to your overall guidance for HIP?

Steve Bender (EVP and CFO)

Yeah. So when we think about the infrastructure business, certainly our pipes, fittings business, and compounds remains a very good contributor. And so you saw that we saw good contribution in our pipes and fittings business in the fourth quarter. And as we think about this being a leading indicator in the construction business because you're going to put that infrastructure in before you do any other surface work. And so we see this as a strong indicator that we expect that the pipes and fittings business shall continue to move forward in a positive manner. On the compounds business, which is embedded in that infrastructure component of HIP, we continue to see that as a nice contributor. It's performed well. Remember, the markets that we're servicing are wiring, cabling, automotive, and health. And certainly, we're seeing good indicators from a demand picture in all three of those categories.

Pete Osterland (Equity Research Analyst)

All right. I'll leave it at one. Thank you.

Steve Bender (EVP and CFO)

Thank you.

Operator (participant)

Please stand by for our next question. Our next question comes from the line of Arun Viswanathan with RBC Capital Markets. Your line is open.

Arun Viswanathan (Senior Equity Analyst)

Great. Thanks for taking my questions. Hope you guys are well. So I guess maybe I'll just ask about the pricing side again and the demand side. So it sounds like from your comments, you are seeing some potential green shoots, slightly better demand. Maybe you can just elaborate on that in PEM, what you're seeing there. And similarly, I think you noted that price was down 12% in 2024. And I think you noted that you do expect price to finish the year higher in 2025 versus 2024. So would you expect to make up all of that 12% ground?