Q2 2021 Westlake Chemical Corp Earnings Call
Good morning, ladies and gentlemen.
Thank you for standing by and welcome to the Westlake Chemical Corporation second quarter 2021 earnings conference call.
During this presentation, all participants will be in a listen only mode. After the Speakers' 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 August 3rd 2021, I would now like to turn the call over to today's host, Jeff Holly Westlake, Vice President and Treasurer, Sir you may begin.
Thank you Julia good morning, everyone and welcome to the Westlake Chemical Corporation second quarter 2021 conference call I'm.
I'm joined today by Albert Chao, our President and CEO, Steve Bender, our executive price, Vice President and Chief Financial Officer, and other members of our management team the.
The conference call agenda will begin with Albert who will open with a few comments regarding Westlake performance and a current perspective on the industry.
Steve will then provide a more detailed look at our financial and operating results. Finally, Albert will add a few concluding comments and we will then open the call up for questions.
During this call we refer to ourselves as Westlake chemical any reference to Westlake partners is to the Master limited partnership Westlake Chemical partners L P and.
And similar references to Opco refer to our subsidiary Westlake Chemical Opco L P, which owns certain olefins facilities.
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 actual results could differ materially based upon many factors, including the cyclical nature of the industries in which we compete availability cost and volatility of raw materials energy and.
<unk>.
Governmental regulatory actions changes in trade policy and political unrest global economic conditions, including the impact of the Corona virus <unk>.
Industry production capacity and operating rates impacts of extreme weather events the conditions to the closing of Boral, Glasgow and diamonds acquisitions may not be satisfied for the closing of either acquisitions or otherwise may not occur.
The supply demand balance for Westlake products competitive products and pricing pressures access to capital markets.
On a logical developments and other risk factors as discussed in our SEC filings.
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 webpage at Westlake Dot Com. We have also posted a presentation on our website to review the second quarter results.
A replay of today's call will be available beginning today 2 hours. Following the conclusion of this call. This replay may be accessed by dialing the following numbers domestic callers should dial 850, 58592056 international callers may access the replay at for zero for <unk>.
<unk> 373 for zero 6.
The access code for both numbers is for a 5.9 for 733.
Please note that information reported on this call speaks only as of today August 3.2021, and therefore, you're advised that time sensitive information may no longer be accurate as of the time of any replay.
I would finally advise you that this conference call is being broadcast live through an internet webcast system that can be accessed on our webpage at Westlake dotcom.
Now I would like to turn the call over to Albert Chao Albert.
Thank you Jeff good morning, everyone.
We appreciate it appreciate you joining us to discuss our record second quarter 2021 results.
In this morning's press release, we reported record net income excluding prior year onetime tax benefits for the second quarter of 2021 on $522 million for $4.04 per share.
As long as quarterly records for net sales operating income and EBITDA.
Net income for the third for the quarter increased $507 million from the second quarter of 2020.
Demonstrating the strength of our business.
Net the economic recovery and expansion from the impacts all depend on Nick.
Before we dwelled into our record results.
Wanted to make some brief comments on our recent acquisitions.
Westlake, leading positions in PVC siding, tremor Modi compounds pipe and fittings.
Provide our residential and commercial customers.
With a comprehensive building products' portfolio on PVC products and solutions.
We have recently announced 2 acquisitions in the building and construction material space.
They will provide exciting new platforms of growth and development for Westlake.
In June we announced we will be acquiring Boral North America building products business.
This acquisition will place Westlake into leading positions in concrete and clay roofing premium P. B C, citing trimmer and shadows decorative stone M. P. B C windows.
Waiting use strategic product platforms complementary to our existing building products business.
These products improve the energy efficiency durability and value in residential housings schools hospitals and other buildings.
While enhancing the everybody lives on countless individuals.
Additionally, we announced in July that we will acquire law school fittings.
A leading manufacturer of injection molded PVC pipe fittings.
Do you have issues of law school will further expand our PVC fittings offering footprint into additional markets.
Serving the plumbing pool, and spa industrial irrigation and retail markets in North America.
This product mix is also complementary to our existing part of portfolio on PVC pipe and larger diameter fittings.
Yesterday, we announced plans to acquire <unk> LLC.
For the largest processors of recycled plastic material in the United States.
<unk> a producer of a variety of consumer products made from processed post industrial recycled PVC.
Polyethylene and thermoplastic elastomer.
And sales these consumer products to national retailers for home and commercial uses.
We anticipate closing these transactions transactions in the second quarter. So in the second half of this year and look forward to welcoming boral lasko on diamond employees to the Westlake family.
Now turning to our second quarter results.
Our earnings for the second quarter of 2021 reflect a robust demand for most of our products and strong pricing environment.
The strength in global demand in PVC, and polyethylene, resulting from the growth in building and construction and the strength in consumer packaged goods.
Drove price increases and margin expansions across both of our business segments.
The 23% year over year increase in U S housing permits.
Demonstrated the strength in residential construction utility debt is driving U S demand for PVC.
Benefiting both Allah vinyls and downstream building products businesses.
The demographics of the U S population in peak household formation ages.
With the lack of a housing starts over the last 10 years and.
And limited global PVC capacity additions create.
Create a secular and structural strength and demand for PVC and building and construction materials.
In our olefins segment, what's the experienced strong margins as the polyethylene industry experienced strong ongoing global consumer packaging product demand and tight inventory conditions due to lingering effects of the severe winter storm in February.
Westlake has made significant progress in our strategic growth plans this year.
And we'll and with a tight supply demand picture, we believe our businesses are very well positioned going forward.
I would now like to turn on Colbert to Steve to provide more detail on our financial and operating results for the second quarter.
Thank you Albert and good morning, everyone I will start with discussing our consolidated financial results and then we'll go into a more detailed review of our vinyls and olefins segment results.
In the second quarter Westlake benefited from the continuing global economic expansion, resulting in healthy demand for a majority of our products.
We reported net income of $522 million, which excluding the onetime tax benefit of 591 million in the fourth quarter 2017 is a quarterly record for Westlake.
In addition, we reported record income from operations of $720 million and record EBITDA of $932 million for the second quarter of 2021.
The $507 million increase in year over year net income as a result of significantly higher sales prices and margins for PVC resin and polyethylene as well as strong earnings in our building and construction materials business.
Second quarter 2021, net income increased by $280 million from first quarter 2021, net income of $242 million.
The increase in net income was largely attributable to the higher sales prices and margins for PVC resin and polyethylene.
And as Albert noted earlier, our higher sales prices and margins for driven by global strong demand in construction and building materials as well as consumer packaged goods are.
Our building and construction materials business also continued to experience strong results as North American housing demand remain robust.
For the first 6 months of 2021, net income was $764 million or $5.91 per share an increase of $604 million from the first 6 months of 2020.
The increase in net income was attributable to higher global sales prices for our major products driven by a rebound in demand for our product offerings.
For 6 months of 2021 did reflect approximately $120 million impact caused by winter storm, Yuri but continued strong demand drove higher product margins for PVC resin and polyethylene as a result of higher prices.
Our utilization of the FIFO method of accounting resulted in a less than $1 million difference compared to what earnings would've been if we reported on the LIFO method. This is only an estimate and has not been audited.
Now, let's move on to discuss the performance of our 2 segments, starting with the Vinyls segment.
The robust global demand for PVC was anchored by strong global construction activity.
Our building and construction materials business continued to benefit from robust North American residential construction and repair and remodeling demand.
These factors drove higher PVC sales price in this segment and we benefited from a strong integrated margins during the quarter.
For the second quarter of 2021, Vinyls operating income was a record $435 million, increasing $415 million from the prior year period as average sales price increased 54%.
Volumes increased 9% driving higher margins for PVC resin.
We also benefited in the second quarter by solid earnings driven by strong sales prices and volumes in our building and construction materials business.
For the second quarter of 2021, Vinyls operating income increased $235 million from first quarter 2021, and was a result of average sales prices being up over 18%.
Higher sales volumes for PVC resin and strong earnings on building and construction materials business driven by higher prices.
In our orphan business robust global demand for consumer product packaging drove polyethylene prices higher in the second quarter and expanded margins.
Industry consultants reported polyethylene price increases in the second quarter of <unk> 19 cents per pound and average sales prices for olefins segment were up 26% in the quarter.
<unk> second quarter 2021, operating income of $277 million increased $252 million from the second quarter of 2020, driven by strong pricing and margins, partially offset by lower sales volumes, resulting from the lingering effects of winter storm Yuri.
And our own planned maintenance activities.
For the second quarter of 2021, olefins operating income increased $97 million from first quarter 2021, primarily due to higher sales prices and margins.
Next let's turn our attention to the balance sheet and statement of cash flows we generated $617 million on cash flows from operations for the second quarter of 2021, resulting in total cash and cash equivalents of $1.8 billion.
Second quarter 2021 capital expenditures were $129 million.
We maintain our long dated debt maturity profile with a weighted average debt maturity of 13 years, while maintaining strong credit metrics anchoring our investment grade balance sheet.
Now to address some of your modeling questions. We expect our effective tax rate for the full year of 2021 to be approximately 23%.
Cash tax rate of approximately 20%.
Our capital expenditures forecast for the year is expected to be between 750 and $850 million.
We are planning for a turnaround of our Petro 2 ethylene unit to begin in September of this year, we expect this turnaround and associated outage to last approximately 60 days.
With that I'll now turn the call back to Albert to make some closing comments Albert.
Steve.
Westlake customer focus for the portfolio is well positioned continue to benefit from the strong demand environment, we are experiencing.
This quarter's results illustrate the earnings capacity of Westlake.
And highlights the value of our products and on a high level of integration.
Which extends through the value chain from natural gas liquids and other feedstocks through to consumer building products.
Our supply chain and manufacturing fully recover to meet the global globally strong demand for consumer and industrial products.
Westlake is well positioned to continue to deliver strong results.
We see PVC slot supply demand fundamentals remaining favorable.
With the growth in demand more than offsetting the limited global supply additions.
We also believe debt rebounding manufacturing activity.
Drive caustic supply demand fundamentals to improve.
We see the global strength in construction, especially North America residential construction and repair and remodeling activity.
Continuing to drive demand for our building and construction materials.
On the olefins business demand remains robust as essential everyday products, such as consumer packaging and health care drive polyethylene volumes.
The strategic acquisitions of.
For North America, and Lasko provide westlake the springboard.
To significantly leverage our participation in the strong housing and repair and remodeling market.
By adding to our current product portfolio.
Portfolio.
Housing starts increased again in may and are projected to continue to rise.
Secular strength in housing and repair and remodeling supported by a limited supply of single family homes due to a decade of under ability on.
On compelling demographics of homebuyers in the U S.
The proposed 1 trillion dollars of infrastructure Bill would also significantly benefit our building and construction materials business and.
And drive construction demand for many years.
Our ongoing growth initiatives are driving expansion of complementary products to our existing portfolio, which when coupled with strong market growth will deliver value for our shareholders.
We will continue to look at opportunities that both further our strategy of adding complementary assets as well as increasing our vertical integration capabilities in all of our business segments to deliver good returns to our shareholders.
We will do this through the lens of being a good corporate citizen by applying the tenants of ESG as part of our commitment to building a more sustainable future.
As discussed last quarter, a part of our Green initiatives includes introduction of Green caustic soda normally S Green bean.
Which has reduced seal to impact of more than 30% compared to conventional caustic soda.
The planned acquisition of <unk> adds to our green.
Green portfolio of products.
And we will continue to look.
We will continue to develop products. They are in line with our sustainability goals, while meeting the needs for greener products and deliver value to our shareholders.
We are dedicated to our core tenants, namely to protect the health and safety of our employees deliver on our value commitments to our customers.
Environmentally and socially responsible corporate citizen.
While strengthening all aspects of our company.
Handcuffed by these values were.
Confident Westlake is well positioned to serve the growing worldwide needs of our customers.
While maintaining financial discipline, which combined with the strong fundamentals of our business enables us to deliver long term value to our shareholders.
Thank you very much for listening to our second quarter earnings call now I'll turn the call back over to Jeff.
Thank you Albert.
Before we begin to take questions I would like to remind you that a replay of this teleconference will be available 2 hours. After the call has ended.
We will provide that number again at the end of the call Julia will now take questions.
As a reminder, if you would like to ask a question Press Star then the number 1 on your telephone keypad.
We'll pause for just a moment to compile the Q&A roster.
Your first question comes from the line of David <unk>.
Okay.
Thank you Alan.
Albert and Steve.
Rely on polyethylene contracts settled yet.
Do they settle.
Yes, we believe the July polyethylene contracts will be up on <unk>.
<unk> a pound.
Very good.
The consulting for calling for some erosion on over the next.
For a 5.6 months here.
Agree with that conclusion on do you think you will see a little more stability and resiliency in polyethylene pricing.
As we said the demand for polyethylene is still very strong and some other industry players is down further price increases in August.
And we believe with a global.
Recovery in economy, even though we know there's a delta variant.
It's been quite a contagious, but we believe the demand for our product is still very strong the industry and customers' inventories on the other tie that back to the pre pandemic levels, yet so we believe with strong demand.
And there is some capacity coming up but so good end of the year or next year.
And globally. So we believe that price is still be good now would it go down a bit probably but the prices on a very good today and industry can can weather some of the price volatilities.
Thank you Johan.
Youre welcome.
Yes.
Your next question comes from Hassan Ahmed from <unk> Global.
Good morning Albert.
Hey, good morning for some.
A question around the <unk>.
Laurie.
And a 2 part question.
1 is basically.
No.
Obviously, a day being 1 of the largest non.
Medicaid has been talking about walking away from.
Lower range annually for that business right. So so with Diavik 9.9.
Can we guide Saturday Cherokee, Okay interest sort of getting into sort of rejiggering checking for.
Our drag.
Moving on moving on to the long term on the on traction.
So 2 questions I have around debt are you.
Just sort of Reconfiguring your contracts on trial as well I understand.
Thank you on volume.
But I think you.
Operating margin.
So that's 1 side.
And then sorry, just as it is.
It is.
Okay.
And the price Laurie.
Thanks very much.
How do you see the CE volume change.
J&J, we dug in.
Hi.
Hi.
How would you how would you every day.
Westlake positioning in this day.
Good day.
Suddenly.
Yes.
No that.
Westlake is well integrated downstream to our PPC business. So we look through the value chain as well as to maximize on.
Our optimized we turned to our company and to our shareholders.
And we have contracts, we suddenly on a contract and when contracts coming due we suddenly would work with our customers. Many of them all day long term customers and to get value where the market dictates.
So we have a lot more avenues to integrate our flooring business from our competitors with limited avenues and as you know the PVC margin today is very very good and suddenly.
We tried to maximize the PVC value chain.
So absolutely I think all of the company's day everybody is doing.
The best for the company and also looking out on the interest for the law for their long term customers. So we'll balance those 2 needs.
Understood understood.
Moving towards the ethylene polyethylene side of things.
1 of the largest sort of your data center for polyethylene that North America recently went on record.
Im talking about.
On the consultant for you.
Between now and when we might be 5.
There is an expectation of around 1.1 on guidance.
On the <unk> capacity to come on line 1 line and this company's view is for you.
215 million got it.
I'll start checking wanted maybe on John and John May either GAAP.
On the lead to the on demand for 25 organic.
So I'd love to hear.
Without net about.
Suddenly there is a lot of capacity being announced especially Asia, especially in China.
As well as some.
On a few ethylene plants, that's been announced but hasn't.
The other into final.
State yourself building.
Starting breaking grounds, yet so we are aware of all these.
Project, but we believe that.
Uh huh.
Time will tell whether all these.
Those projects will go ahead, as we know that China, even though they are the largest.
Consumer market for polyethylene, there's still a net importer of polyethylene and I think U S is still net large export all polyethylene.
What China does has a big bearing on the future supply demand dynamics.
For polyethylene globally.
Very helpful. Thank you so much for so much you're very welcome.
Yeah.
Your next question comes from the line of John Mcnulty.
BMO capital markets.
Hi, Albert on <unk>.
Thanks, John.
A quick question on guidance.
1 of the comments made on your press release.
1 of the largest losses.
Okay.
Can you provide some day.
The overall market.
How do you see going moving.
Then how the margin.
The existing platform.
Yes, <unk> is as we said in the release a 1 of the largest players in this recycled materials business and we see this business as a growing opportunity you can see that they recycle and reuse and manufactured products coming from PBC polyethylene and TBE. So we continue to see.
This is a growing and important market and certainly the opportunity is there.
You saw on the release that we set their businesses over $100 million in size and we certainly see very good margins in that business going forward and that's the basis behind I think a very good investment and we expect to see good returns in the investment in <unk>.
Got it.
Thank you for building.
Good morning, Brian.
Are you speaking.
Like for instance.
Great.
And if I could.
Could be.
For the next day.
And just on that platform.
You'd be on the bookings.
Youre cutting out can I get you to repeat that question you were cutting out during parts of the question.
Uh huh.
Question for on the buildings.
That's for them.
On a scale.
It was around at light speed.
And I'll just speak for campaign.
And if you on.
How much of the enchilada platform.
Because of this.
Well I would say certainly you know there have been some challenges really give on the logistics from supply chain. Some of these are additives and plasticizers and such but we have multiple suppliers that allow us to be able to jockey through those kinds of challenges certainly we've seen some.
Opportunities continue to grow the business and the ability to continue to meet this growing market demand. So those those challenges while they are sometimes there we've been able to adjust and adapt.
With our multi sourcing approach in meeting the needs of our customers by sourcing with alternative suppliers if need be for some of those additives and plasticizers.
Okay, and just 1 final quick.
Good question.
EDC pricing.
Yeah.
Yes, I think PVC was flat flat for the module for July are you asking for July flat for July.
Okay awesome. Thank you for that.
Youre welcome welcome.
Your next question comes from the line of Steve Byrne from Bank of America.
Yes. Thank you I hope you can hear me echo on our end is terrible.
So I recently complained to Jeff Holly.
About the cost us on PVC fittings.
For <unk>.
$10 a pound range.
Not for a dollar a pound range on your slide 13.
Oh I got from Jeff was that was a smile.
But perhaps you can comment on.
How much of that $10 a pound his remarks on versus a home depot or maybe more broadly how would you characterize the margin on your building products for <unk>.
Versus.
The rest of the vinyls.
Yes building product business is doing quite well and we are passing on.
Resin price increases or cost increases along sometimes there's a time lag.
Well by and large we're able to pass through some price increases.
Pending on the products, sometimes we expand the margin as well and.
And we see very strong demand for all our downstream building products.
For the rest of the year and some other into next year.
And so as you build out this platform.
Are you at the point, where you have on some negotiating leverage.
The home centers in the specialty construction distributor.
You can offer them.
You know a broader portion of the order of the shelf space and does have some negotiating leverage or you're not there yet.
No absolutely right part of our synergy is we are much more important to distributors and retailers for our products, we have more products to offer.
And today the building policy area.
Having supply is more important.
To 2 customers.
So.
We are well almost literally hand to hand to mouth.
In terms of deliveries.
The other gentleman talk about logistics, sometimes is hard to find tuck on truck drivers and some costs that delivery delays.
But.
By and large.
We are getting to.
More important to our customers and we like it and we would like to be more important to them and they like us to be working with them for many many years.
And day like us to become the.
Largely on a more relevant to their business. So I think the wing wing for both parties.
Thank you.
Youre welcome.
Your next question comes from the line of Kevin Mccarthy.
Vertical research.
Good morning, Good morning Bill.
<unk> products business.
Can you speak to your medium to long term strategy that is how do you think this business will be different in 3 to 5 years relative to 2021.
Also can you speak to your capabilities to integrate free pending acquisitions.
And what is your future pipeline look like as 3 enough for now or does it remain quite active.
So Kevin as we think about the building construction materials business you can see that we continue to see a very good outlook both in the residential construction and certainly in some of the commercial construction opportunities.
And we look forward to really participating with our with our distributors for the products to expand that portfolio offering that borrow in the Moscow certainly bring.
As you think about the 3 transactions that we've recently announced the answer is of course, we're very comfortable that we can integrate these businesses into the broader Westlake and we look forward to welcoming all of those employees into the family of Westlake.
Certainly there'll be a lot of activity in terms of that involvement but you can see that there is the chemical side of the business that.
We will continue to look for opportunities to invest in we have been investing organically as you know well over the last couple of years with expansions in PBC and investments in the Lacey see ethylene joint venture and we will continue to look for opportunities to invest on the chemical side as well.
And so I'm very confident that the leadership team and the.
Fellow employees will be able to well integrate these 3 transactions the opportunity to to grow the business is something that we've done over time and I am comfortable that we can continue to look for opportunities going forward.
And how would you describe for the future pipeline pipeline.
I think the opportunity set is.
Out there I think the answer always is looking for the right value set that we see clearly our focus is generating the bottomline return risk adjusted and certainly we're very comfortable that we can find the synergies and these transactions to achieve that return and bring these values to our shareholders. So when you think of the pipeline of opportunity.
He is out there there are a number of interesting opportunities, but it's always a function of as the value proposition to our shareholders. What we believe it should be so that's really where we get very focused on making sure. They the value for any opportunity is going to drive long term sustainable value for all of our stakeholders.
Understood. Thank you very much very much having just wanted to add also that we are looking for bold recycled plastic as you know the non op plastic waste all day and world.
With the introduction of <unk>, we will plan to add more recycled plastic materials into our consumer products and also with our Green Bean, we'll plan to introduce more low carbon products into a building parts for too as well. So I think talking about next 5 years I think the whole.
The whole industry. The world is marching towards lower carbon emission products and lighter weight energy efficiency. So that's the plan we plan to move towards too.
That makes sense. Thank you. Thank you.
Your next question comes from the line of Mike Sison from Wells Fargo.
Hey, nice quarter.
Thank you.
All vinyls.
EBITDA in 'twenty, 2 X acquisitions.
So Mike when you think of the opportunity set to do that remember we added significant capacity in PVC in late 19, and as we think about the full run rate into next year. This year.
<unk> begun to ramp that up with sales of those incremental pounds. As we started in late late 19.2020 was a challenge as we all know with Covid, but as we think about the run rate from 'twenty 1 into 'twenty..2 we continue to see good volume growth opportunities and we've talked about those in guidance for windows in Germany that worried.
We expanded our vinyl footprint, but we continue to look for the completion of several smaller debottleneck as well in the United States and the vinyls space. So we continue to see solid demand and that'll allow us put those incremental pounds into the marketplace.
Got it and.
Do you think PVC margins.
Could continue to improve in the second half and into 'twenty 2.
So we've seen significant strong demand in this marketplace I know the consultants shows some seasonal weakening because of the seasonal demand that you see during the construction season.
But as you have noted over the last couple of years, we've actually had a construction season that extended well into the later quarters of the year and well into the traditional slow season for construction activities.
So as long as we see the strong demand that we currently see continuing and we do the issue is more of a weather driven issue than it is anything else. The market remains relatively snug from a materials perspective and inventory level demand remains pretty strong and so it's really a function does weather cooperate with us and we can we continue to have a.
<unk> season, well into the winter season, as we have over the last 2 years.
Yeah on IAA.
The index consultant.
It shows the industry consultant.
Forecasting the average price for next year 2022, PVC higher than the average for 2021.
About <unk> of the pump.
Right.
Thank you. Thank you.
Youre welcome.
Your next question comes from the line of Frank.
Fermium research.
Good morning, and congrats on a record withdrawals resolved. Thank you good morning.
Yes.
Look at the.
The second quarter to the third quarter order could you size the negative <unk> <unk>.
On an unplanned outage by segment in the second quarter on quarter and talk about what you anticipate the expected negative impact on.
Our <unk> 3 in Q from turnarounds and unplanned outages, obviously don't have hedged for 2.
2 turnaround I'm, just trying to get an incentive events for the order of magnitude.
From <unk> from the from that.
Yeah, Frank it's Steven So we don't have any other major turnaround other than the petro turnaround occurring and.
In the third quarter and so it's really just that outage that we expect for 60 days occurring in starting in September.
And so the other units we don't have any what I would call a significant turnaround activity in Q3 other than starting that turnaround in September for for the Petro unit.
Okay.
When do we expect the closing.
Overall, lascaux and Diamond IMAX.
We expect those to close in the second half of this year, it's somewhat a function of getting.
HSR Hart, Scott Rodino approval, it's hard to know when the government will clear those and so our best view as in the second half of this year, but we certainly look forward to close on them as promptly as possible. So that we can move forward with integrating these businesses into our own.
Terrific terrific. Thank you.
Your next question comes from the line of John Roberts of UBS.
Good morning morning net.
On for J&J.
Hi.
Congratulations on the Diamond acquisition acquisition. Thank you following.
The other acquisition position can you remind us again target leverage leverage is and what your <unk> minorities.
Org.
Sure. So it's been quite clear for a very long time that Westlake target.
For leverage is really those those that are established by the agencies S&P Moody's and Fitch, we've seen over the years they changed their target so rather than being fixated on a particular number we will focus on what the expectations are of the rating agencies to remain strongly investment grade today were true.
It will be.
Flat stable outlook are equivalent with each 1 of those 3 and believe our metrics for even stronger than those ratings.
And so our focus is really just a strongly rated by all 3 agencies and as just mentioned our credit metric for even stronger than the current rating assigned by all 3 agencies from a capital allocation perspective, we focus on using that free cash flow to maintain the plants and have them run reliably consistently looking at.
Taking that free cash flow beyond that maintenance activity and if we can find projects that we believe have compelling returns risk adjusted above the cost of capital to deploy that that way will also reward investors through <unk>.
Distributions in the form of dividends as well as share buyback. So we certainly look for the opportunities to deploy that capital across that spectrum.
Thank you for that and then Albert you touched on it a bit for.
But can you comment on your customer polyethylene inventories and when you expect customer inventory levels get back issue more normalized levels level.
Sentiment as I mentioned, we got inventory back to pre jewelry. This pre winter storm February of this year, we havent got inventory back to pre pandemic time yet.
And so we believe debt.
Both inland customers and produce inventories.
Between low and medium depend on the grades.
And probably will be.
By the end of the year when things go back to more normal.
Thank you.
Youre welcome.
Your next question comes from the line of Ali Ali.
Is it your Mas from Keybanc.
Thank you. Thank you.
Do you have a view on how much cash.
Capital costs for new polyethylene.
Tvs your plans might be up this year here and could from Capex cost inflation.
And the delays.
New projects approvals this year on year.
So on it.
Certainly we've seen capital costs for equipment continue to rise through with some of the inflation. So certainly since.
That is certainly going to be a consideration certainly those who are investing in new plant and equipment.
Certainly watch that constantly look at variety of sources to source major pieces of equipment and it varies quite a bit in terms of whether we're talking both materials, such as pipes or whether we're talking rotating equipment, but certainly we have seen cost creep into both of those whether it's the bulk materials or whether it's.
Our higher value rotating equipment. So certainly they certainly have elevated <unk> cost.
And you've talked about favorable supply demand outlook for PVC.
Why do you think PUC export price.
All in all in recent weeks do you see that as temporary.
Sure.
Starting on your chart.
Yes, there's something there has been some weakness in China.
With PVC and.
But recently last few weeks, we see prices start moving up.
On a global basis.
Thank you.
Youre welcome.
Your next question comes from Mike <unk> from Barclays.
Great. Thanks, Good morning, guys.
First question on natural gas prices have gone up pretty materially in the past 9 months.
Give us a rough sensitivity on how to think about rising natural gas prices on your cost structure.
Sure. So when you think about the.
Sensitivity on natural gas.
1 dollar and M. M Btu can cause cause on EBITDA impact of $100 million.
And that's mostly in the vinyls side of the business, but 90% of that impact is on the vinyls side of the business, but you've seen as prices have moved that given the strong demand that we've been able to move a lot of that.
Those price momentum through downstream into our customer base.
Got it that's helpful and then.
Maybe.
Smaller question, but the corporate and other line I think this quarter EBIT and EBIT.
$8 million or so.
Drove that drove that.
There are some small transactions that occur whether it is some of this small hedging gains that we take because we hedge on hedge activities and such so on there.
There is certainly some interest expense you notice that our cash balances have grown and so it's a combination of items such as that.
Got it thank you youre.
Youre welcome.
Your next question comes from the line of Angel Castillo from Morgan Stanley.
Hi, Thanks for taking my question.
Other.
To expand a little bit more on the timing question on interest for potential future bolt on curious if theres any particular area within the ESG sphere that is of particular interest as you look at whether it's technologies or other areas.
While expansion margin.
On the lie on the line.
Yeah, we're looking all the above reducing.
Greenhouse gas emissions from our plants.
Recycling water, reducing solid waste.
And through the <unk> were trying to.
Able to source and recycle.
Post industrial hopefully go into post consumer.
2 of recycled material.
Produced products, so I think well different from just recyclers, who just recycled and sell to the component or is it we're making finished consumer products.
And good day going to the circular economy, and we plan to grow that business.
And on a measured way going forward. This is just the beginning.
And is it fair to assume that that's maybe going to be the bigger focus near term as you kind of integrate and complete the acquisitions for fan and broken product designs.
Well, that's right certainly as we think about the opportunity to take some of this material. This post industrial products further downstream and certainly when you think about the integration there is product integration today in our vinyls products and certainly this opportunity with diamond provides opportunities to have.
For further integration directly or indirectly, but we also see as you've seen us talk about our building materials business really having some also sales channel integration, which is very important as Albert noted to have more products to our customers to be able to offer a much wider product offering is also very important too.
To our customers as well as to Westlake.
Got it that's very helpful. And then just on all accounts.
We noted that 5 per pound for July there was some price increases out there for August I was just wondering if you can contextualize that with maybe what youre seeing from a customer level and it seems like some other spot availability may be improving across certain grades.
So are you seeing any increased pushback from customers to future price increases any kind of on demand destruction or.
Is it I guess, whether its feedstock for just inventory levels.
Allowing you to continue to push price beyond July.
Yes.
That day.
Destructions debt very little on.
These are materials that are used for demand is very strong and it's kind of a supply as planes come back quite a few.
<unk> problems and.
And as supply comes back inventory builds I think the price is set will be stabilized.
We don't expect to grow each month for ever.
We expect price stabilize.
And but we still believe the module will be quiet growth going forward.
Very helpful. Thank you.
From.
As a reminder, for you would like to ask a question Press Star then the number 1 on your telephone keypad.
Your next question comes from the line of Arun.
1 is for.
From RBC.
Great. Thanks for taking my question on question.
Just I'll make this quick I just wanted to understand the 'twenty 2 drivers for us.
You will have the acquisition and the change from Boral, maybe that's 200 miles on yourself.
Dinos I imagine should be given.
Kevin.
Assuming that theres not theres not the supply disruptions are enforced for curious to hear for years experienced in 'twenty 1 on 1 SaaS.
Maybe some margin margin here as well.
So it's really only olefins. So you mean that there is some moderation.
And margin if that's the right way to think about 2002.
Yes, when you think about.
As you said when you think about the vinyls business.
If you look at some other consultants out there there is still showing average prices for the course of the year and 'twenty 2 to be higher than the average price of 21 and you're right we've had.
A series of weather related outages over the course of 'twenty late 'twenty net effect in 'twenty, 1 and then of course the freeze in early 'twenty 1.
And so with the with the run that we see in demand in vinyls and the consultants, reflecting higher average prices for vinyl, we certainly see strength and as I mentioned earlier to a question. We certainly have good volumes that will continue to be additive to our sales volumes over the course of 'twenty 2 from 'twenty 1.
On the vinyls side of the business certainly.
We've seen continued tight inventory situations across the chain and certainly while there are.
Concerns about demand pulling back we've certainly continued to see currently a very strong demand picture and prices certainly as we've seen before continue to.
Reflect that strong demand picture. So as we look into 'twenty, 2 it's a little bit cloudy or to be able to give you a price forecast, but I can say that we continue to see a very strong picture from a demand perspective and the demand for from.
From the consumer packaged market continues to seem unchecked.
Great. Thanks, and then thank you for asking a quick question on <unk>.
And the recycled market.
When you acquired <unk>, there was some excitement around getting into medical and some other applications that maybe you are.
Underpenetrated and is that part of the situation here as well.
You see an opportunity to increase your share on some of these attractively growing marketing through diamond.
Thanks.
Yes, we certainly do I think the opportunity to really take some of the post industrial materials and put it into a different sales channel that we're not in today and will be post close is an exciting opportunity for us. It allows us really to have more products relevant to our downstream customers or distributors.
Many of these distributors for similar distributors, who are selling already building product materials too as well.
And so when we think about the opportunity that Diamond Springs, we're excited about the ability to take this recycled material, but also add to the portfolio of products and the overall downstream building products businesses.
Thanks.
And your last question comes from the line of P. J <unk> from Citibank.
Hi, Good morning, it's Eric Petrie on for P. J.
How many pounds of recycling capacity that <unk> has and how are you looking at scaling that footprint and the associated capex to do so.
Yes, there is certainly I think an opportunity to think about replicating. These these production capacities.
In other areas as we think about scaling the business, we will get more into the capacity size and the opportunity set as we get closer to closing this transaction, but certainly as we think about the the footprint has currently in Ohio, there could be opportunities to expand that footprint into other areas. We will take a look and see that product.
That makes sense and the capital necessary to do that but as you can imagine that it'll be a combination on looking at the product set to put that recycled materials into more consumer downstream products and of course, making sure that we have the ability to do that cost effectively for our customer downstream.
Thanks.
Follow up question do you expect to see a benefit on volumes for chlorinated organic from the refrigerant. Following the passage of the U S with quota reductions for HFC.
Well, we'll know more about it going for totally with global warming theres more demand for refrigerants and <unk>.
We are.
Raw material side for the refrigerant business, so as that business growth, we should benefit from debt as well.
Okay.
Okay.
You have no further questions at this time.
Thank you Julia Thank you again for participating in today's call. We hope you'll join US again for our next conference call to discuss our third quarter 2021 results.
Thank you for participating in today's Westlake Chemical Corporation second quarter earnings Conference call. As a reminder, this call will be available for replay 2 hours. After the call has ended and may be on <unk>.
Till 11, 59 PM Eastern time on Tuesday October sales I'm, Sorry August 10, 2021 day, 1 the replay can be accessed by calling the following numbers.
Mystic colleagues down 855.
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International callers may access the replay.
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<unk> 373 for zero 6 the access code for both the numbers is for 5.9 for 733. Thank you have a great evening.