Westlake Corporation ($WLK)

Hi. Good afternoon. I'm Jeff Zekauskas. It's my pleasure to introduce the management of Westlake. And representing Westlake is Steve Bender, who's the Chief Financial Officer. And I must say it's my honor to introduce Steve. He's been the CFO of Westlake since 2008. So he's done it for 17 years. And he and Albert Chao really built a remarkable business. Steve is retiring. And what they did is they built a polyethylene business from the ground up by building assets and they built an integrated, PVC business that's low cost. And periodically, what they would do is make large accretive acquisitions. They bought Axiall, which was a PVC company in the old days, and they bought Boral in order to build a building products company. And it really was a remarkable value-creating run that these 2 men have had. Albert is now the Chairman and no longer the CEO. So it's my pleasure to welcome Steve, and we'll have a fireside chat format. Steve, would you like to make opening remarks?

No. Jeff, thank you very much for those kind words. But I would say that we've grown the business in a variety of different ways, as Jeff outlined, and really have extended what we call an integrated production chain, obviously, starting on the chemical side of the business, but moving downstream over the course of time. And our starting point when downstream was making pipe and fittings and have grown that, as you noted, in 2011 -- excuse me, 2021 to include non-chemical-related building products, all kinds of roofing materials, all kind of windows, all kinds of exterior cladding. And the strategy really is to recognize that margin moves back and forth across the production chain over time. Obviously, the building products, what we call HIP Housing and Infrastructure Products business is less capital-intensive. And frankly, pricing and margins tend to be stickier than the chemical side of the business. But they both support each other during the course of any business cycle. So we found it to be a very nice integrated business model. Jeff, I'll turn it over to you.

Sure. So, Steve, there have been all kinds of global events that have touched the polyethylene business and have touched the PVC business. Maybe it's simpler first to talk about the polyethylene market, what do you see going on in polyethylene right now? And when the conflict broke out, what did Westlake do? Were there certain steps you took to preserve your competitive advantages or strengthen your business model? Or how did you proceed?

And so it's -- unfortunately, all too often we see events like this arise, whether it is a freeze, whether it is a conflict such as this. But there are times when you see a constrain of supply. And so in this case, you've got bottled up because the Strait of Hormuz closed, you bottled up a fairly significant amount of global capacity, probably north of 20% of the capacity globally of polyethylene. And so with that constrained of polyethylene in that market, you've seen certainly an ongoing demand, at least at this stage. And so therefore, prices had already started to rise pre-conflict. And so to kind of level set a question you asked recently was really at the end of December last year, as is always typical, contract renegotiations start, and there's always a price negotiation as part of that. So the price that we saw in January for polyethylene was really just a recovery of some of the margin we gave up at the end of last year. So no change in pricing in February until we saw the conflict. We've raised prices twice, once for March and once for April, $0.10 for March and $0.15 for April.

Those are your nominations?

Those are nominations for the month. And we'll see if we achieve those prices. So a lot of this is recognizing that the great majority of our assets for Westlake on a consolidated basis are in North America. So we're cracking ethane and using natural gas as a source of fuel for the furnaces. And I would say when you think about our global competitors, largely naphtha-based outside of North America. So the cost structure for them has risen as a result of what's happened in the Gulf. And so as we think about this, it further strengthens our position now in the case of polyethylene, we're already a specialty producer in polyethylene. When you think of the 3 primary grades of polyethylene, we're on the specialty end of low-density, high-clarity, and high-pressure, over 125 grades. When you think of the -- most of our other competitors, yes, they compete in this space, but we're the largest in the Americas in this space, mostly commodity grades, high-density and linear, so 5 or 6 grades each. So when you think of the ability for us to capture this, it's really any movement in price is on margin. So it's allowing us really to capture the value that we see with these price combinations. And if we're able to capture and hold on to some of this, it's just really going to be lining our pockets, to be honest. And so while it's an incredible difficult time for many because of the conflicts, we are seeing the benefits accordingly.

In polyethylene, if you know, what were your operating grades? Or when you think about how you're conducting your business today versus how you were conducting your business pre-war, are your operating grades different?

I think our operating grades are the same. And the reason is because we were already operating at top operating rates pre-conflict. I would say that it's not necessarily the case with some of our more commoditized peers. Some of our more commoditized peers were operating at lower operating rates because of the commodity nature of their business. Again, I think about the high-clarity, high-pressure polyethylene that we produce the low-density, we are operating at full rates. In the case of the commodity end, the linear and the high-density, frankly, probably in the high-80s, low-90s, but we are operating -- our operating rate was well in excess of that. And so for them, they may pick up some volume and price. For us, it's really all margin.

How do you do price discovery? What you said was we're going to do $0.10 for March and $0.15 for April. Where do you get that number from?

So as you would imagine, we're in regular dialogue and touching all of our customers on a very regular basis. And so it's the constant dialogue that we have in terms of where we think that is. And of course, our prices are not established really in this market. They're established in the export market. So we're looking really at what is happening in the export market. When you think about today in the polyethylene space, the export market for North American producers is about 50% of the capacity here in North America. And so those producers who built capacity destined for the export market are really pushing that product into the export market. So we're looking at product being shipped around the world in the export market and saying, where is that export price? And what are the economics behind each one of those products out there in the marketplace. So we're looking at what makes sense in terms of the export price and how do you translate that into the domestic market. So our prices of $0.10 in March and our price nomination of April for $0.15 is simply reflecting the price that we're seeing in the export market. Of course, dialoguing with our customers to say, does that -- of course, the answer is always no. But the question is, does that make sense? No one might see prices. But I would say early in the year, we saw a lot of our converter customers raise prices on a percentage basis. So we feel like they understand that prices were in the process of rising anyway. And if these prices become stickier, they will no doubt have to raise prices yet again.

So $0.25 a pound is a lot in that maybe in the offshore markets, polyethylene is up $300 a ton. So maybe that's $0.15. So -- but the markets can change?

Well, and when you think about it, Jeff, good question. But when you think about where we are today, we have been in a price decline in polyethylene going back to the back-half of 2022. And so when you think about the price that we've talked about between the $0.05 in January, the $0.10 in March, and $0.15 in April, it's $0.30. But when you think about that increase of $0.30 so far this year and compare it to what -- where we were in '24, we're actually getting back to where we were in '24. And so yes, you're right? There is an effect clear price shock really when you put that volume of price into the market in that shorter time period. But really, when you think about what has happened to the industry over the course of the last 4 years, it's been nothing, but everyday lower prices. And so therefore, what we're really trying to do is get back to a price level where we experienced back in the '23, '24 time period.

Now maybe I'd put things a little bit too negatively because naphtha values are much higher than polyethylene prices have moved up. So there's room. Maybe you could talk about the PVC markets now because those are more subtle and what happened in PVC in the United States in January and February? And what might happen in March and why?

Well, and I think part of the dynamic here, and it's important to draw a comparison between what's happening in the PVC market and what's happening in the polyethylene market. Before we fully switch over to PVC, I would just note that there's still ample capacity yet announced to come in polyethylene over the course of the next several years. When you think about just capacity between the end of last year and the end of '27, just in China, there is supposed to be in the neighborhood of 20 billion to 25 billion pounds of additional capacity added. Think about that, that 6 to 7 world-scale plants in the next 3 years. Do we really need 6 to 7 world-scale plants in the next 3 years in polyethylene? So the market in polyethylene is likely to be long for the next number of years. When you think about the vinyls market in PVC, the vinyls market is in a completely different shape. On a global basis, there's very little capacity being added anywhere in the world. You think about the European market and the North American market, consolidation and rationalization happening. In the European market, you've got over 10% of the PVC market being shuttered already. You have about 6% of the chlorine-caustic market in Europe shuttered. And we, Westlake last year shuttered 1 billion pounds. So when you think about the consolidation and rationalization that's happening in the vinyls market and the fact there is little-to-no capacity being announced in vinyls at this stage, the 2 markets between PVC and polyethylene could not be more different. So what you see is a closing of the supply-demand dynamic that you see in vinyls where you don't yet see that in polyethylene. So that's why I think the 2 industries here, both the polyethylene industry and the PVC industry are in fundamentally different shape. So structurally, I think the vinyls market and its drivers are really more constructive medium to long term in the vinyl space. They are in the polyethylene space.

So I find that a surprising commentary. And what I mean by that is shorter-term polyethylene prices, whether they're going to go up $0.10 or $0.25 or $0.30, they're going up a lot because the Mid East is a large shipper of polyethylene and it ships naphtha. In PVC, the Mid East doesn't really make very much. And in China, they use the carbide process. So they don't have the same inflationary effects. And you're right to say that the supply-demand dynamics are different, the amount of capacity that's being added. But I was wondering today, what are the upward -- what's the upward movement in the PVC market since it's not really stressed by Mid East shipments and it's not really pushed up by naphtha prices.

Well, I would say that when you think about the price dynamics in polyethylene, you've got $0.30 that's been announced or implemented since the beginning of the year in polyethylene. Remembering that PVC uses just half as much ethylene as polyethylene. So no surprise, the PVC prices that we've announced are $0.15, not the $0.30 that's been announced in polyethylene. So the correlation in price movement in PVC is half of what's been announced in PE, which makes sense when you think about the ethylene dynamic. So it's not just China really in the production. And you're right, about 70%, 75% of the China PVC production is carbide-based. And yes, increasingly, they're using more ethylene rather than acetylene in their process. And so as they increasingly move into the ethylene-based versus acetylene-based process, the dynamic in naphtha is becoming increasingly more important. And as I talk to our Asian leaders this morning about what was happening in the markets in China as it relates to PVC, we are seeing a bit of a price difference between carbide-based PVC and ethylene-based PVC. I'd say there's still about $50 to $75 price differential between the 2. Per ton -- metric ton. But I would say that nevertheless, there is a huge movement in price, nevertheless. And so I wouldn't correlate necessarily just the fact that it is carbide-based, acetylene-based as really just being the cap really on the ability to move prices higher given the fact that they're moving increasing more toward an ethylene-based product. And so as we see that price dynamic move, the export price today that we're reflecting in our PVC prices are reflective of the export prices because not all that product coming out of the -- into the market and the export market is really coming out of China. If you think about what is happening in the European market, as I mentioned, we have a number of plants being shuttered in Europe, and we have 3 big players in Europe who are in strong financial distress today in vinyl. And so I think when you think about the constraints we're seeing in production capacity in a profitable manner, that is really what is supporting the increased price that we've talked about.

What's the PVC nomination for March in the United States?

We've announced $0.10.

And is there a nomination for...

In April, it's $0.15 -- in April, it's $0.07. I'm sorry, for PVC, I'm going to correct myself. For PVC, it's $0.05 -- and for April, it's $0.07. The $0.10 was polyethylene -- so it's $0.05 and $0.07...

$0.07...

And then $0.03 achieved in between January and February. Okay. So that's the $0.15.

So there is some PVC where pre-war, there was PVC capacity addition planned for India. And China has continued to export at very high levels. But India is constrained because it's not getting its liquefied natural gas shipments. And it may be that its industrial sector can't produce as much material as it's produced pre-conflict. And so do you think that what's driving the PVC market is the difficulties that India is having?

It's part of that, but not entirely that. I would say, certainly, when you think of the -- what's driving this really is a combination of demands we're seeing kind of around the globe and not just only silo really and what's happening in India. I would say, certainly, the demands we're seeing in Latin America, North American market, the Eastern Med, and I would say also in India and China are all driving this. So I wouldn't necessarily focus on just one particular marketplace. India has had protections around it in terms of imports. And so to support its domestic construction of PVC capacity. And so I would say that -- and this gets back to Westlake's strategy of really looking and reassessing our export desires. And this is why we shuttered these 6 plants that I mentioned this past year, shuttering 4 domestic plants that were core vinyls -- excuse me, 3 domestic plants that were core vinyls and a fourth plant that was styrene as well as an epoxy plant and a PVC plant in China. So all of those plants were export-oriented. And so we were really asking ourselves, do we really think that long term, an export-oriented market is a market that you want to be targeting. We believe that regional supply is going to be a much more sustainable strategy over the medium to long term than being positioned on the low end of the cost curve and exporting to markets and while you may on paper be supported economically. We're seeing some producers work against that same equation. You've seen China and others sell below even variable cost.

If I can ask you the same operating rate question in PVC. Now that we're in a somewhat different environment, will your operating rates change? Or will you be running the business differently than you were running it before?

It's -- in the Northern Hemisphere, we get into the construction season right about now. And I would say that when you recognize that vinyl is substantially used in the construction business, when you think of the where the demand is for that vinyl, 60 or so percent of that vinyl is all going into construction applications one the other. So as we get into March and late February, we begin to see the order book build. And I would say that the order book is reflective of this seasonal growth in construction activities. We know it's been quite cold here in the Northeast and of course, in the upper Midwest, it's actually been warm and dry in much of the Sunbelt. And so I would say the order book that we're seeing really in the Sunbelt portions of the country are supportive of that construction activity and recognizing that in our Housing and Infrastructure Products business, about half of that is repair and remodeling. So even though we have an outlook for 2026 of housing starts to be similar to '25. So we're not looking for net growth in starts relative to '25. We did see growth last year and in '24 in our repair and remodeling business. so that R&R business continues to grow year after year. And so the book that we're seeing built continues to reflect what we think that will play out in '26, at least at this stage in that construction number similar -- housing number similar to '25 and growth in the repair and remodeling business.

What about exporting PVC? Is that a new opportunity? Or that's not been a focus of Westlake, and so it's more difficult to pivot to ship to the export market?

Well, we did -- just to remind all, we did shutter 1 billion pounds of export in December of last year with a clear signaling to the marketplace. We don't see that as a long-term value-added proposition in North America. We feel like that having shuttered those assets, we're now selling products in the export market, but a much lower percentage. We're probably in the low 20s percent of our production going into the export market, whereas before we were closer to mid- to high-20s, low-30s percent of our sales going into the export market. But again, our focus really is to really sell into more value-added markets. And so we recognize the export market was not bad. And so recognizing that we really needed to be focused on where we could really add value, which is why we withdrew from that much of the export market.

So if I understand what you've said to me, you're going to have your normal seasonal rise in volumes. But because you've taken a step away from the export markets, it's not something where your volumes are going to quickly rise because it's now going into the export markets.

What we've done is we've taken that product that was being sold in the export market and moved that production to our domestic plants. So we've raised the operating rates of those remaining assets. So those remaining assets are now running at higher rates and because they're running at higher rates, selling that volume, we've been able to reduce our cost per pound for those plants that are running here in North America. That allowed us really to be even more cost competitive, driving better value at the bottom line. So rather than selling products in the export market where we had really no value at the end of the day, negative margin, which is why we shut those plants. We've now taken that volume and said we'll run through our domestic plants, selling it largely more domestically into our HIP side of our business. And that allows us to run those plants at higher operating rates, spreading our fixed cost over more pounds of production, which makes us more competitive.

Do you think that the industry -- the PVC industry in North America in 2026 will significantly increase its exports? Or do you think that, that's not the case?

I think that's not the case. And that is because we're the second largest producer in North America, and then we just shuttered 1 billion pounds. So I don't think that we're going to see the first largest producer, which be Shin-Etsu or Shintech really offset that with incremental volume above and beyond those volumes that we shuttered. They are a large exporter. There is no question, but I would expect that they'd find better value selling products domestically if they can.

So from your point of view, there's no extra pressure on the caustic market from increased PVC production in the United States. That is you think that PVC margins should go in a positive direction but caustic would not get weighed down.

That's what we're seeing at this moment. There is a seasonality to caustic soda, as you know. As you think about the price nominations we have for caustic soda, we have price nominations out there totaling $140 a ton, nomination at $65 and $70 a ton. We're probably seeing $25 to $40 a ton being realized currently in the first quarter. We won't get the full effect of that because it's being layered in, in February and March. But I would say that given the slower construction season, so less PVC produced, less chlorine produced, less caustic produced that you typically have a tighter market in the first quarter and the fourth quarter every year, whereas when construction season ramps up in second quarter and third quarter, you have more chlorine produced, more caustic soda produced and frankly, therefore, weaker pricing typically in second and third quarter. So that's the dynamic that we're seeing currently play through.

When we've looked at the housing statistics, single-family housing is not growing, but multifamily housing is growing. From Westlake's point of view, do you prefer the one or the other in your pipe business?

In our pipe business? Yes. I mean indifferent as it relates to our pipe business because our pipe business really goes into multifamily as well as single-family. When you think of the single-family to the extent that we're providing a larger diameter pipe, this is not the smaller diameter plumbing that you think of. This is the storm water, freshwater and wastewater that you see in neighborhoods. And so the volume here for multifamily versus single-family tends to be the same. If you were in as we are not in, plumbing, it would be a very different story. But the plumbing market is a market that has a much larger number of producers. Typically has much more competitive pressure. Think of the larger diameter market. There are only 3 producers here, ourselves, JM Eagle and Diamond Plastics. So it's a much more rationally behaving market and a market that is not oversupplied in itself, whereas the smaller diameter business is oversupplied.

Now, this may be an accounting wrinkle, but you take PVC from your PEM business and you send it to your HIP business. And I think last year, you were losing money in PVC or maybe you weren't making money.

We were losing money in PVC...

And sending that margin or sending that cost into your other segment. But now it may be the opposite because PVC prices are rising. So it may be that there's money that you'll make in the PEM segment that you won't make in the HIP segment unless HIP raises its prices to offset the inflation in PVC. Is that fair?

It is fair. But when you think of the leverage that we have in PEM, it's a significant greater multiple. Yes. So when you think about a $0.01 increase on an annualized basis in PVC in PEM, it's $60 million a year of EBITDA. The $0.01 impact in our HIP side of the business is a much smaller component of that. So any pricing that I have an increase in PVC, it's going to have a much bigger multiplier effect in the consolidated results. And if you think about the price increases that we're likely to achieve in '26 with PVC, irrespective of whether we get that $0.15 in total or some portion of that, we will eventually push those costs through. So it's just a matter of what the lag-effect is because as we're selling product to ourselves, we're also selling product to other pipe producers, other fitting producers, other siding producers, and they will want to push those prices through as well. So it's more of a question of what's the lag-effect rather than whether we get it or not. It's just a matter of when do we get it. So I do expect that we'll be able to achieve some of these prices in HIP as we push these prices to finished product, just a matter whether it's 1 or 2, 3 months before we get that price pushed through.

And -- so you'll capture it in HIP over time. And of course, the net benefit will be positive even in the beginning because if PVC prices move up as you expect.

It's a net benefit. It's just a greater net benefit if we get all this pushed through HIP. Admittedly, if we don't get it pushed through immediately, it's a lesser positive benefit. It's still a positive benefit. It's just I have that headwind or I can push it all the way through the building products side of the business.

One of the -- you have a large cost reduction program, restructuring, you have various businesses that are that had turnaround expenses last year and outage that you won't have this year. And I think one of the benefits that Westlake thought it would get is maybe it would earn $100 million more in epoxies. But epoxies is a buyer of propylene. And so when you think of that $100 million -- I mean now there are many ways that Westlake will benefit in the current environment. But is that $100 million target in epoxies harder to reach now?

I don't think so. And the reason I don't think so is that having shuttered our facilities in Rotterdam last year, those losses in Rotterdam were completely clouding the profitable picture that we had in our downstream specialty epoxy businesses. Over the course of the last several months, those downstream epoxy businesses have, in fact, been profitable. And to the extent having shuttered that asset in Rotterdam, we're buying feedstocks and admittedly potentially now higher prices. But given the specialty formulation we have in our downstream businesses, I do believe be able to push those costs through into our specialty businesses further downstream.

Wow, because propylene is meaningful and European propylene values are...

Fortunately, our business is more heavily concentrated in the United States.

Okay. At Westlake, do you play a role in the selection of the next Chief Financial Officer? And what kind of person are you looking for in that from my point of view, Westlake really was more determined by your business approach and Albert's business approach rather than a generic strategy. That is I think the men made more of a difference than the strategy did. Do you think that might be true for the next generation? Or what do you look for, Steve?

So I think as we look at the DNA of Westlake, it's -- and despite the plan that I hope to retire later this year, and I've been trying for years, I would say that the DNA of Westlake won't change, whether it's myself in this role or someone else. I think the DNA has been very well and deeply embedded because of the large shareholder base that we have through the Chao family. So I'm very comforted by the fact that as we go through our search process and find that successor that individual will bring the same kind of background and experience base that we've always had in the organization. I think our focus really is having a focus on really long-term value creation. This has been a foundational element that we think about at Westlake. It's -- as you know and you've heard me say many times before, it's incredibly easy to write the check to make an investment, whether it's an organic investment or an inorganic investment, but it is infinitely harder to get the return. So our focus is the return because as I say, I can always find the money, but it's much harder to find the value. And so our focus really is just exactly that, understanding the business, understanding the business drivers and being focused very much on ROI, ROCE and EVA.

So how do you find a human that has that focus?

Oh, they're out there. They're out there. They're out there. And we're looking for people that bring in new thoughts, new ideas that I haven't thought of, new ideas and fresh blood and someone with strong enthusiasm for the job. And I'm sure we'll find that individual. I have no doubt of that. Okay. Thank you very much. Thank you, Jeff.

Thank you for your attendance today.

Thank you.