Q2 2022 Westlake Corp Earnings Call
Sending by welcome to the Westlake Corporation second quarter 2022 earnings Conference call.
During the 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 <unk> 2022.
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 Dennis good morning, everyone and welcome to the Westlake Corporation Conference call to discuss our results for the second quarter of 2022.
I'm joined today by Albert Chao, our President and CEO , Steve Bender, Our executive Vice President and Chief Financial Officer.
Roger <unk>, our Chief operating officer, and other members of our management team.
During the call we will refer to our two reporting segments, the housing and infrastructure products segment, which we will refer to as hip and the performance in our central materials segment segment, which we will refer to as Perm.
Today's conference call will begin with Albert who will open with a few comments regarding Westlake performance.
He will then discuss our financial and operating results after which Albert will add a few concluding comments and we'll open the call up to questions.
Today management is going to discuss certain topics that will contain forward looking information that is based on management's beliefs as well as assumptions made by and information currently available demand women.
These forward looking statements suggest predictions or expectations, and thus are subject to risks or uncertainties.
Risks and uncertainties are discussed in Westlake Form 10-K for the year ended December 31, 2021, and other SEC filings.
We encourage you to learn more about these factors that could lead our actual results to differ by reviewing these SEC filings, which are also available on our Investor Relations website.
This morning, Westlake issued a press release with details of our second quarter results. This document is available in the press release section of our website at Westlake Dot Com. We have also included an earnings presentation, which can be found in the Investor Relations section of 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 website.
Please note that information reported on this call speaks only as of today August <unk> 2022, and therefore, you are 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 Dot Com now I would like to turn the call over to Albert Chao Albert.
Thank you Jeff good morning, everyone.
We appreciate you joining us to discuss our second quarter 2022 results.
I'm pleased to announce that we achieved record quarterly results.
In the second quarter of 2022, including record net sales of $4 $5 billion.
EBITDA of $1 $5 billion and record net income of $858 million.
These record results.
Driven by good demand with significant pricing and margin improvements in our Chlor vinyls business strong demand from new housing construction and repair and remodeling activities.
And contributions from the acquisitions, we've completed over the past 12 months.
The strength in these markets combined with our integrated operations in North America drove record EBITDA and strong margins in the quarter.
Offsetting the impact of rising energy and raw material costs as well as ongoing supply chain disruptions.
Want to thank all my colleagues at Westlake for their hard work and dedication.
Helping us achieve these results.
During the quarter, we continued to see the benefits of our expanded portfolio.
Driven by the acquisitions that have occurred over the past year.
All the year over year sales for the second quarter in a pen segment grew 45%.
While achieving strong margins by leveraging our vertically integrated North American operations with our globally advantaged feedstock and energy costs.
As the global leader in Chlor Vinyls. These products provided a significant contribution to the year over year trends drew.
Driven by higher prices for caustic soda PVC resin and specialty PVC materials.
Our focus on specialty and differentiated product portfolios provides a clear margin advantage, while our product mix also distinguishes us.
Within our hip segment, we plot, we realized significant sales and earnings growth from our housing and infrastructure products offerings in the second quarter.
The significant backlogs of orders for new home construction.
Resulting from the momentum in the North American housing market.
Along with sustained activity in the repair and remodeling markets, which represents approximately 50% of our housing sales.
Enable us to take advantage of our leading market positions and brands in many of our product offerings.
Elevated infrastructure spending which are now beginning to see associated with the recently passed infrastructure Bill will continue to support demand for our products.
This spending will also pull PVC resin across all segments.
Enabling us to drive additional value from our recently acquired businesses.
I would now like to turn our call over to Steve.
More detail on our financial results for the second quarter 2022.
Thank you Albert and good morning, everyone.
As Albert stated in his opening remarks, this quarter Westlake reported record sales of $4 5 billion.
Record EBITDA of $1 5 billion.
And record net income of $858 million.
The second quarter of 2022, net income increased $336 million from the second.
Quarter of 2021, as a result of strong price and margin gains in both segments.
Driven by the global economic expansion, we've seen since the onset of the COVID-19 pandemic.
Anchored by broad based strength across manufacturing and construction markets.
Compared with the prior year period, the increase in sales and earnings in the second quarter of 2022 was spread across both segments as year over year sales prices and volumes for Westlake were up 32% and 25% respectively.
We delivered these results in spite of persisting supply chain disruptions inflationary impacts of our cost and the significantly higher global energy prices.
I will now discuss the performance of our two operating segments, beginning with the housing and infrastructure products.
Compared to the second quarter of 2021 hip segment sales for the second quarter of 2022 increased $666 million to $1 4 billion with segment EBITDA, increasing $180 million to $310 million.
EBITDA margins in this segment improved from 18% to 22%.
Housing product sales increased $604 million with pricing gains across all of our products along with contributions from the business. We acquired in the second half of 2021.
Infrastructure product sales were up $62 million from the prior year period with higher sales pricing across multiple end uses including irrigation automotive and medical industries.
When compared to the first quarter of 2022 housing product sales of $1 1 billion increased $144 million.
Reflecting the continued strength in housing across our product offerings.
Infrastructure product sales for the second quarter were $263 million, an increase of $11 million over the first quarter of 2022.
And our performance in essential materials segment, Westlake as a global leader in the Chlor vinyls market with integrated operations in the United States used utilizing north America's advantage feedstock and energy cost position.
Which is complemented by our specialty product portfolio in Europe .
Our manufacturing footprint when combined with the strong market fundamentals for these products enabled us to deliver another record quarter result.
For the second quarter of 2022 P. M segment, EBITDA increased $316 million from the second quarter of 2021 to $1 $2 billion on sales of $3 1 billion.
Second quarter 2022 performance materials sales of $2 1 billion increased $519 million from the second quarter of 2021.
The central material sales of $1 billion in the second quarter of 2002 increased $439 million over the second quarter of 2021.
Although operations and sales volumes in our European business for both Tim were impacted by the conflicts in Ukraine European market dynamics and solid fundamentals in North America allowed us to capture significant global pricing gains in our Chlor vinyls and <unk> businesses.
The second quarter was also the first full quarter since the acquisition of the epoxy business, which contributed to earnings with particular strength in North America.
In spite of the higher natural gas and ethane cost in the United States, Our North American operations retained an advantage cost position when compared to global competitors utilize oil based naphtha feedstocks.
Turning to the balance sheet and cash flows as of June 32022, cash and cash equivalents were $1 3 billion and total debt was $4 9 billion.
Net cash provided by operating activities for the quarter was a record $913 million and capital expenditures for the second quarter were $230 million.
In the second quarter, we retired $250 million of debt, thereby lowering interest expense run rate by about $9 million per year.
Furthermore, we returned approximately $80 million to shareholders in the form of dividends and share repurchases.
<unk> balance sheet is well positioned for all phases of the market cycle with trailing 12 month net debt to EBITDA leverage below one times and nicely staggered long term debt maturity.
During the second quarter. We also completed the renewal of our revolving credit facility, increasing the commitment size to $1 $5 billion for five years to 2027.
During the first half of 2022, we were able to identify and launched several debottleneck projects in our core vinyls business.
As such we are revising our 2022 capital expenditure forecast to 900 to $1 billion to $1 billion.
Which shall support operations lower our cost and drive efficiencies, while preparing capacity for the next economic expansion cycle.
While these de bottlenecks will take place at several of our sites main project will be an expansion of our site in Geismar, Louisiana, adding 110000, ecu's membrane based chlor alkali and 600 million pounds of ECM to support increased PVC production.
This will improve the material balance of our guidance per site and drive efficiencies in our network of core vinyl plants with a capacity starting in late 2024.
Let me provide some guidance for your models.
Our utilization of the FIFO method of accounting provides a benefit in periods of rising cost as compared to what our results would be reported on a LIFO method.
As a result of the cost environment in the second quarter of 2022, we had a favorable FIFO benefit of $52 million compared to what earnings would have been reported on a LIFO method with approximately 70% of the benefit related to the <unk> segment, and the remainder benefiting housing and infrastructure products.
For the full year of 2022, we expect our effective tax rate to be approximately 23%.
And interest expense to be approximately $170 million and depreciation and amortization expense to be approximately $1 billion.
Based on our current view of demand and pricing. We are also reaffirming our earlier guidance for hips revenue in 2022 to increase by 50% to 60% from 2021 with full year revenue for 2022 expected to be between $4 $5 5 billion.
Now I would like to turn the call over to Albert to provide some current outlook for our business Albert.
Thank you Steve.
In addition to the record results for the second quarter of 2022, we are proud of all we have accomplished over the past 12 months.
With strategic acquisitions in both of our operating segments.
Reposition westlake into new markets and industries.
Looking forward to the second half of the year <unk>.
We recognized uncertainty surrounding the macroeconomic environment, including high inflation interest rates potential slowdown economic roes or possible recession.
And volatility in energy and power prices.
While these factors will have some impact on our business.
We believe we are very well positioned to take advantage of the opportunities in the market over the business cycle.
We continue to see solid demand across both our segments in North America, while the reopening of China from the COVID-19 related Lockdowns, Lewisburg, pent up demand and economic growth.
In the second half of the year.
Our performance in essential materials, we believe we have a durable cost advantage compared with our global competitors.
Is the difference between North American gas based feedstock and oversee oil based naphtha cost continues.
While affordability and rising interest rates have recently lowered new housing starts which may affect our sales volume in the second half of the year there.
There will be continued investments in housing as.
As the U S is structurally under supplied to meet current market demand, which will continue to grow.
Even as new housing starts softened from their recent highs.
We expect new construction to remain an editor at elevated levels.
As the market returns to a normalized 50 year average from the 200 to 2007 to 2008 housing downturn.
The low number of new homes available to market.
Also encouraged people to invest in their current homes.
Sparing demand for our products will repair and remodeling activity.
These factors compared with an aging housing stock across the country.
Provide a strong foundation for repair and remodeling market.
Which anchors many of our products.
<unk> approximately half of our housing sales.
The recently passed infrastructure Bill.
Lowest proposed legislation such as the inflation reduction Act may.
<unk> may spur new demand for both of our segments.
As a pipe and fittings products are well suited to refurbish America's aging water infrastructure.
While on the proxy.
Toxic materials are critical in alternative in alternative energy production.
We will also continue to benefit from the integration of the recently acquired businesses and product innovations.
Allowing us to cross sell products improve operations generate efficiencies and increase the vertical integration of our operations.
Westlake has a strong commitment to sustainability and advancing our ESG initiatives.
With a focus on our core tenants of operating safely.
The environment and delivering value products that enhance daily lives of people around the world.
As we work towards our goals, while reducing our carbon intensity.
We are also continuing our work.
In developing a wide range of sustainable products.
Such as lower carbon based caustic soda and PVC.
Bio based solutions for building materials, lower carbon footprint PVC pipe.
And consumer products using recycled plastic materials.
Our product innovation pipeline will continue to introduce new and sustainable products to meet the needs of society.
Our premium materials.
<unk> are very well positioned in the market to address consumer needs, while our innovative product pipeline and hip.
We'll continue to support evolving consumer tastes.
And support future growth and housing demand.
Our strong balance sheet is well positioned to support our business today and into the future. Thank.
Thank you very much for listening to our second quarter earnings call I will now turn the call back over to Jeff.
Albert 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 Dennis We will now take questions.
Yes.
Thank you at this time I would like to remind everyone in order to ask a question simply press Star then the number one on your telephone keypad.
And your first question is from the line of John Mcnulty with BMO capital markets. Please go ahead.
Hi, good morning attitude towards needed in potash in the diaper John Congrats on the record quarter.
With respect to.
Our revenue outlook for the hip segment Youre, calling for roughly a $450 million reduction in Spain in the second half versus first half could you could you add some color on how that is broken down in your expectations in volumes versus pricing and then and then what steps do you plan to take to kind of protect the strong margins.
That we are seeing in the second quarter hotel.
Yes.
Yes. So this is Steve good morning, and so when you think about the very strong contra.
Contribution that we saw within hip.
Very clearly we saw very strong pricing pick up as well as volume pickup as you might.
Well the second quarter is a strong quarter in the construction of the housing construction markets. So we saw nice contributions both on the volume front as well as on pricing front nice contributions on both ends.
Okay.
The next question if I could.
That's on the polyethylene business a bit so we saw contract prices <unk> <unk> lower in July .
The next transaction five years steadily 10, tenths, lower which I understand was accounting for like the 12 the year can.
Can you comment on what your realized <unk> 12 loss for the month of July and if you could please share your thoughts what do you expect for the next maybe one or two quarters.
Yes. Thanks. This is Roger just quick comment on that we did see the market settle down <unk>.
And I think we are at a bit of a turning point on inventory adjustments.
But as we look forward, we see our polyethylene business now, we're almost 45% of our businesses specialty and differentiated which really means that we've got some.
Price stickiness, if I would put that way.
And so that's really going to ice of insulate us a little bit I think from the turn as the inventories readjust.
Thank you.
Your next question comes from the line of Kevin Mccarthy with vertical Research partners. Please go ahead.
Yes, good morning.
How much did your average realized caustic soda price.
Increase if it did increase in the second quarter versus the first quarter.
And how would you expect that number to trend moving into the third quarter. Please.
Yeah.
Hey, this is Roger again, yes, I would say, we're seeing quite continued good strength in chlor alkali in general on both sides of the issue in fact caustic and chlorine both.
So certainly we saw price appreciation in Q2 actually expect that to continue right on into Q3.
On the chlorine side of the molecule as well so you can see.
Several of the industry analysts have continued to report increased pricing on both cost again flooring and we're certainly seeing that.
Okay and then.
Secondly, perhaps for Steve.
You made a lot of progress on deleveraging in the quarter.
It seems to me that net debt declined more than half of $1 billion.
And so in that context, what are your updated thoughts on capital allocation you mentioned, the Geismar expansion project and how would you weigh additional expansions versus what youre seeing in the private market at this point.
Yes, so Kevin good question and you can see that we did raise our capital expenditure guidance for.
For the second half or for the full year at this midpoint of the year because of those organic opportunities that I mentioned and so we do see really good opportunities to be able to debottleneck a number of these sites and we will continue to look internally to see if there are other good value added opportunities to do further debottleneck.
And those that we've talked about today and of course as you know we've always taken a look at opportunities external to the company to see are there acquisitions that could be nice bolt ons or added opportunities and certainly given the growth that we've seen in the strong balance sheet and cash flows. We think we have the ability to execute both on those internal opportunities and potential.
<unk> those external opportunities if they provide the right kind of value proposition to us.
Thank you very much.
Welcome.
Your next question is from the line of Mike Whitehead with Barclays. Please go ahead.
Great.
Good morning, guys.
One question.
Good morning first question I guess, if we look at your second quarter results either sequentially or year over year whatever is easiest.
They're a way to help us quantify.
The benefit from acquisition to be your top line or EBITDA versus let's say, how your underlying business performed in the quarter.
So Mike when you think about the the contributions we've had from the acquisitions I guess I would say that they all performed very nicely over the course of the second quarter of course, the <unk> business was the first full quarter of a full three months contribution in the quarter.
But as you think about the other contributions that we've had they all contributed very nicely and I would say that given the runway run rate that we experienced in the second quarter. They are contributing mid teens return on the investments that we've made over the last 12 months. So we think of have been very nice contributions.
Got it is there a way to quantify that or I guess, it's just hard to talk to a great year actual underlying performance because of you.
Organic moving pieces, yes, so I guess, what I was trying to get at is as you think about the investments that we've made and you think about a mid teens return that gives you a good sense of what the EBITDA contributions for those for those four acquisitions might contribute.
The majority of the earnings gang second quarter really came from our legacy businesses.
Got it makes sense and then just on a coffee obviously, there's a lot of moving pieces can you just broadly help us understand where unit margins are today relative to when you first acquired the business and where you think both trends in the back half of this year.
Yes. This is Roger I would say we are seeing in our parks see kind of three different worlds across the different regions, China is quite slow and where pricing has become quite difficult.
A pretty small position there of Europe has been I would say moderate.
Moderate demand, but the pricing has actually increased to offset the raw material costs. So we've actually managed to maintain margins.
And then in the U S a.
Demand is still reasonable and so I.
I think we'll continue to watch as China restarts, we're hoping as China restarts there'll be reinvestment certainly in wind energy with their their push to try to restart the economy and hopefully we can start to see China come back.
Great. Thank you.
Your next question is from the line of Frank Mitsch with Fermium Research. Please go ahead.
Hi, guys, it's aziza on for Frank.
<unk>.
Could you guys, maybe quantify or explain some of the financial impacts from the Chlor alkali forced majorities in the quarter.
Yes, we haven't really given specific guidance on the force matures, but as you know we've had.
A number of horse matures throughout the course of this year and certainly we also had a very significant turnaround going on in one of our facilities in Louisiana.
So these are the turnaround is a normal operating activity as you know well, but the force measures are just really a reflection of the events that we've seen occur across the entire industry. This past year or two years.
Got it and I think you guys also highlighted that that specialty PVC business was positively impacting margin.
Could you also discuss the outlook there.
Yes. This is Roger just in general I would say on the specialty PVC business those margins tend to be less volatile than the commodity side I would say heavily in Europe is where we have those products out of our ventilate subsidiary.
I'd say on the positive side, we continue to see touches on construction continues on the negative side on that the war in Ukraine has an impact on that business and so we've been able to say be moderate on that but those products generally have better margins and less volatile than the suspension PVC.
Got it thank you so much.
Your next question is from the line of Hassan Ahmed with Alembic Global. Please go ahead.
Good morning, Albert and Steve.
Good morning Allison.
Question around polyethylene.
Obviously higher crude oil prices since the beginning of the year and the like and when you read consultant reports and talk to industry folks at least in the first half of the year, everyone was talking about supply demand tightness. So to me at least that meant that it was a very conducive environment for.
Dave.
Price escalation and I, just don't think pricing followed the trajectory of oil prices right.
So my question really is dead.
All of these little clubs that we're seeing in terms of logistics and shipping issues and the like.
Currently in a situation where from being a global market, we've kind of become a regional market and as the sort of supply chain issues and shipping issues get resolved and maybe potentially some project cancellations happen on the back of the.
The variances in energy prices will actually go back to being a global market, there's sort of lots of capacity that we are seeing in the U S, which was meant for the export market starts, making its way out and all of a sudden than pricing for polyethylene start following whats up.
Global cost cuts tell us.
Yes. This is a good question.
Absolutely right.
Capacity coming in China, and also there's still capacity coming on in the U S.
Despite the.
The logistic issues.
Year to date June .
Polyethylene industry, as a whole, including HUD and senior loan and LDP export about 36% of the.
The sales so this export going off course.
With the new capacity coming in the U S to probably export is probably expect to increase more than that.
So I think it's really a supply demand issue.
Now because of its COVID-19, lockdowns demand is quite weak and as a result, with the new capacity coming on China, they have excess capacity as well.
Separately.
<unk>.
Polyethylene business is not a big business for Westlake is less than 50%, 15% of our sales. So while it's a very important business for us.
It is a less impact than a call vinyl business, which is our largest segment of our business.
Fair enough fair enough and just as a follow up changing gears a bit on the epoxy side of things.
Some comments were made earlier in the call about that business I'm, just trying to get a better sense.
You guys talked about Europe kind of being located in North America kind of being okay. Obviously, lockdowns impacting China I mean should we think about that business as a business that kind of ebbs and.
Flaws with the Chinese market, meaning my understanding is almost half of global demand comes from China. So so I mean, if one way to assume that the Chinese lockdown start easing up I mean should we start seeing upward momentum in that business pretty immediately thereafter.
Yes science writer I think if you look at even three businesses. If you look at polyethylene PVC and epoxy youre seeing some similar trends and that in general of China are importers of those businesses in those products normally.
With the Lockdowns and the slowdown demand they have shifted to either neutral or exporting.
And so certainly we expect as China starts to restart China as the leader in wind energy that takes a tremendous amount of proxies, we would expect that market to take back off as China restarts.
Very helpful. Thank you so much.
Youre welcome.
Your next question is from the line of Mike Sison with Wells Fargo. Please go ahead.
Hey, guys nice quarter.
Thank you I guess Albert when you think about.
And <unk> is more on the Chlor alkali PVC side, we have.
Now are the.
Industry has acted during last recession and the mill into a material slowdown.
Going forward, our 'twenty three than any other is not on a lot of new capacity coming on stream, how do you think.
Margins or <unk> PVC margins hold up at this time around that could be different from the past.
That's a good question.
Compared with polyethylene is very limited amount of new capacity coming on stream globally, not just in the U S or China.
As you know China has a moratorium on new PVC capacities.
New qualified capacities they call was mercury catalyst issues. So we believe the demand is still very strong globally for.
Chlorine derivative products.
Such as PVC, but also in Euro thing and many other products and caustic this yesterday to a broad general products that you're using.
Being from water treatment pulp and paper and everything else. So while there is a potential recession high interest rate and global economic slowdown, we're looking over pass through dose.
Disruptions and availability.
Ourselves for the next cycle going up.
Got it and then.
Your outlook for PVC in terms of the second half of the year for you.
Demand and pricing.
Prices.
Well.
Right now China as I said earlier economies very weak they've carbide based PVC that eventually bce's week because construction is.
In fact severely and I think the government is starting trying to do something to stimulate the construction industry, which is the largest probably spending industry.
And the private sector, so, but China has been exporting its carbide based PVC and.
Also it was monsoon in India.
And.
All of these.
Economic impacts and demand our demand is weak so I think.
Industry analysts are forecasting some PVC price weaknesses, which is possible and and also there is some inventory restocking going on but I think Roger said earlier, we believe the.
Industry stocking will be over.
And as the economy recovers I think demand will come back.
Great. Thank you.
Youre welcome.
Your next question is from the line of Arun Viswanathan with RBC capital markets. Please go ahead.
Great. Thanks for taking my question.
The first question I had was.
Just if you think about epoxy I guess the main comment that we've been hearing is that China, hasnt really been buying and there.
A large part of the market Europe also has been weak.
Is it just mainly the lockdowns that are going to improve that market.
Has there been any incremental.
That you could provide on that in the last maybe couple of weeks, if there's been any improvement there or what your outlook is there.
Talking about China.
Yes, yes.
Yes.
Said earlier.
We believe the government is trying to start stimulating the economy.
We know they have.
The party election October they have.
National Congress the Macho next year.
We believe there will be.
Fiscal stimulus from the government coming up.
Having said that our policy business, especially in the U S is rather insulated from the Chinese business with our specialty epoxy.
Applications.
Applications, especially now with infrastructure Bill.
And.
Inflation reduction act, we believe that a lot of demand for our policy in PVC and other materials that will will benefit from those initiatives in the U S.
Okay. So that is.
Another follow up.
You guys have done a terrific job in the past capitalizing on downturns to pick up assets.
Is that something that you.
You're starting to think about as well having deleveraged after year last recent couple of acquisitions and if so what areas are you looking at.
And when we would we expect to kind of see some of that capital being deployed.
Well Arun you can see that we're already acting on some of these organic opportunities and that's why we raised our capital expenditure guidance for the year and we will continue to look at organic opportunities those are easier to understand and get our arms around them, but at the same time as I think you know we look at opportunities externally on a very continuous basis.
And so as we think about those as you've seen that we've made a number of acquisitions in the course of the last 12 months and that level of activity does not really slowdown we continue to have a very active opportunity set across both sides of our business, both Tim and hip and there would be I think good opportunities as we look forward in our system.
Matter of do they hit our return expectations, but there is always an ongoing initiative to look at opportunities that can be good additions to both segments of our business.
Okay. Thanks, a lot.
Youre welcome.
Your next question comes from the line of Stephen Byrne with Bank of America. Please go ahead.
Good morning, its Matt on for Steve.
Matt.
So the epoxy business right put up strong numbers in 2021, and the general guidance was for a normalization, maybe something like $300 million EBITDA down to $200 million are we on that path now or the actions taken by your peers Janet prop up the markets keeping keeping that elevated longer than maybe you would have initially thought.
Well I think as Matt as you heard Roger outlined we see kind of a slightly different market. Each one of these markets be it Asia or Europe , or the North American market, but I think the guidance that we provided in terms of getting back to kind of a normalized level of earnings is in mind and I think.
Ed.
If you look across the demand sector and Albert was just talking about kind of the stimulus initiatives that we're all expecting in China, beginning to see in China that will spur the demand really on the on the.
The resins front and certainly a proxy will be one of those that we expect to see and so I think the normalized level of earnings that we would expect out of the approximate business would be I think as we've always guided to be not as high as they were in 2020, one, but still a very nice contribution.
Over the cycle and I think the strength that we've seen.
In the business being restructured over the last couple of years was a good incentive for us to invest in the business earlier. This year. So we do have a very constructive view of a proxy this year and into the future.
Okay, and I know the team at Westlake doesn't love answering a hypothetical one anyway. So.
Alright, how do you think about the decision to run chlorine.
Volumes in the second half of the year should PVC market soften kind of both seasonally and cyclically right. So.
Caustic values are really good PVC inventories are pretty high does it makes sense to keep producing PVC or would you move some of those molecules into merchant chlorine if that opportunity looks better because caustic is still really good.
Yes, I think Matt its rodger, just just to be honest.
Look continuously at Where's the best place to put the chlorine molecule.
We monitor that monthly.
So we're at the high kind of a water treatment season, right now, which really is a nice we got a couple more months of that and then we expect as that slows off and we will watch what PVC is able to do clearly we come back to some of the logistics questions how wells the industry able to exports but.
But we watch continuously on Where's the right place to put the quarry.
But your question also is that if chlorine demand reduces.
There'll be less production of caustic.
Caustic demand steel continue to be strong globally.
There could be a pricing pressure on cost six going forward.
Sure I appreciate that thanks, so much.
Youre welcome.
Your next question is from the line of David Begleiter with Deutsche Bank. Please go ahead.
Thank you.
Albert just back on PVC, the price gap between the US and Asia has widened quite a bit over the last period of time here.
You bet.
Reversing or normalizing with maybe use pricing being pulled down further by this really wide gap we have today.
Yes, as I said earlier.
Also our local cost structure in China Chinese.
Chinese PVC.
But production has been exported and causing Asia PVC price to drop.
S stimulus come back to China and people recover from COVID-19, Lockdown, So many cities in China.
<unk> been the Lockdown mode, we believe demand will increase and hence the pricing pressure will be much less.
And the gap pricing gap between the U S and China will narrow.
Understood and just on ethane Albert ethane narrower in the sixties around 60.
About longer term ethane prices in the function of a few value any additional cost for transportation analytics.
Sure I think the ethane price is also related to natural gas prices.
Gas prices.
All costs to slow down.
The increase in ethane price of oil also.
Paul would come down and I think the projections from some of the industry analysts I believe that ethane price while software all the way into next year I think second half next year. They are looking at probably in the <unk> mid <unk> range.
Sounds good thank you very much.
Youre welcome.
Your next question is from the line of Matthew Blair with TP H. Please go ahead.
Good morning, I was hoping you could talk about what kind of operating range.
<unk> assets are currently running at.
Yes, Matt its rodger.
So right now we've got a couple of actual turnarounds and so our rates are a little bit lower because we've got a significant turnaround in the Netherlands, and we have one coming later in the year here in the U S. So in fact, our turnaround schedule is somewhat fortuitous right now with as demand softened just a little bit.
Okay and then.
Could you share any details of.
Any sort of natural gas hedges that you may have on what the impact was in Q2 and what that might look like for the back half of the year.
Matthew It's Steve.
We will certainly do some hedging around the edges, but certainly we don't undertake significant long dated gas hedges.
In the marketplace, but we do some around the edges, but nothing real long dated and significant volume.
Got it thank you.
Youre welcome.
Your next question is from the line of let's say Youre from Roth with Keybanc capital markets. Please go ahead.
Thanks, and good morning, everyone.
Yes.
Good morning, Albert can you talk about natural gas for power consumption in Europe .
You buy those.
In the continent and also what's your sensitivity if you can talk about it.
Well, certainly natural gas prices very high end power prices even higher.
There is a market price and people are paying those high prices.
As you heard earlier that Roger mentioned, we're able to pass some of those price increases in our product prices.
Today European product prices are the highest in the world for the PVC of policies are polyethylene.
And all of you.
You spoke about potentially weaker demand in the second half.
For new residential construction products, where you're talking about PVC or building products or both.
While suddenly with the.
High interest rate a higher mortgage rate.
See the whole construction and slowdown, but it's still slow down a very high level and we believe that with the pent up demand that will go to the 50 year average, which is in the U S. For residential residential construction is about $1 5 million units plus or minus.
And so we think that pent up demand will still continue to be pretty strong not as highest one eight as we saw earlier on the monthly annualized based on the month space, but we think the stoping quite strong.
Understood. Thanks, a lot.
Your next question is from the line of Josh Spector with UBS. Please go ahead.
Yes, hi, Thanks for taking my question just on hit margins you guys continue to do better than <unk>.
Your own expectations. So I'd just be curious is this kind of a new normal that you would expect margins to remain in the low twenties because of somewhat better performance or is there anything you comment on pricing or supply demand Thats helped you guys.
In this segment over the past couple of quarters. Thanks.
Yes, so Josh we have been guiding to the upper teens.
Mid to upper teens in hip and certainly Youre right over the last couple of quarters, We've had margins 'twenty. One 'twenty, 2% Q1, Q2, so certainly pleased to see that given the strength of the construction numbers, but we're still guiding kind of in that mid to upper teens range.
Premium products that are hip segment produces and so certainly we continue to expect good performance in that area, but we're still guiding to mid to upper teens.
For that segment.
Okay. Thank you.
Youre welcome.
There is a follow up question from the line of Kevin Mccarthy with vertical Research partners. Please go ahead.
Yes, good morning, and thanks for taking my follow up.
So it relates to the acquisitions that you've done you acquired Hexion <unk> business about six months ago.
Boral North American building products, maybe 10 months ago are you taking costs out of those platforms and if so what is the aggregate amount of cost that you've extracted so far and what do you think that number could look like in 2023 versus 2000.
'twenty two.
And so Kevin you are right as we've continued to look at the businesses of our of these acquired acquisitions certainly on the housing.
Side, especially in the case of Boral, we've guided some synergies or cost related synergies in the mid thirties, and certainly we're well on our way to achieving those cost reduction initiatives. Those are under under way at the moment, certainly theyre going to be synergies beyond just cost reduction and we've talked about some of the revenue opportunities that we expect to see.
Youre seeing some of that in some of the margin improvement in the business, but we're still keeping our guidance in terms of the margins, but from a cost reduction perspective, we're still I think on track to achieve that mid <unk> number.
In reductions on the epoxy front, certainly we're evaluating those opportunities and certainly we see some opportunities on that front, we're not yet today ready to quantify it but certainly I think there'll be good opportunities for cost reductions as well.
Okay. Thank you very much.
And at this time the Q&A session has now ended are there any closing remarks.
Thank you again for participating in today's call. We hope Youll join US again for our next conference call to discuss our third quarter results.
Thank you for participating in today's Westlake Corporation second quarter earnings Conference call. As a reminder, this call will be available for replay beginning two hours. After the call has ended the replay can be accessed via Westlake websites Goodbye.
Okay.
Yes.