Q2 2023 Westlake Corp Earnings Call
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 three 2023, 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 good morning.
Everyone and welcome to the Westlake Corporation Conference call to discuss our second quarter 2023 results I'm joined today by Albert Chao, Our President and CEO, Steve Bender, Our executive Vice President and Chief Financial Officer, and other members of our management team.
During the call we will refer to our two reporting segments performance in our central materials, which we refer to as Tim or materials.
And housing and infrastructure products, which we refer to as hip or products. Today's conference call will begin with Albert who will open with a few comments regarding Westlake performance. Steve will then discuss our financial and operating results after which Albert will add a few concluding comments and we'll open the <unk>.
Call up to questions.
Today management is going to discuss certain topics that will contain forward looking information that is based on management's beliefs as well as assumptions made by and information currently available to management.
These forward looking statements suggest predictions or expectations, and thus are subject to risks or uncertainties.
These risks and uncertainties are discussed in Westlake Form 10-K for the year ended December 31, 2022, and other SEC filings. We encourage you to learn more about these factors that could lead our actual results to differ by reviewing these SEC filings, which are also available on our Investor Relations website.
This morning, Westlake issued a press release with details of our second quarter results.
This document is available in the press release section of our website at Westlake Dot com.
We have also included an earnings presentation, which can be found in the Investor Relations section on our website.
A replay of today's call will be available beginning today two hours. Following the conclusion of this call. This replay may be accessed via Westlake website. Please note that information reported on this call speaks only as of today August three 2023, and therefore, you're advised that time.
Sensitive information may no longer be accurate as of the time of any replay.
Finally, I would advise you that this conference call is being broadcast live through an internet webcast system that can be accessed on our webpage at Westlake Dot com now I'd 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 2023 results.
For the second quarter of 2023.
<unk> sales of $3 3 billion.
Net income of $297 million.
EBITDA of $619 million.
In our <unk> segment.
The continuation of soft industrial and construction activity and unplanned maintenance activities drill sales volumes declines.
Particularly impacting PVC resin caustic soda and epoxy in North America and Europe.
The elevated level of unplanned outages.
It resulted in lost sales that impacted operating income by approximately $50 million.
While our Perm segment average selling prices were lower than in the first quarter.
We benefited from our strategically located globally advantaged feedstock position in North America.
Where we saw lower feedstock and fuel costs compared to the first quarter.
And our hip segment, we experienced an increasing sales volumes quarter over quarter with the start of the construction season in North America.
With housing starts in the second quarter, averaging $1 4 million units and repair and remodeling continuing to grow.
<unk> segment EBITDA margin increased sequentially due to the 13% volume improvement in raw material cost reductions.
And this margin remained in line with our record second quarter of 2022 and approximately 22%.
Reflecting the strength in our branded products and relationships with our customers.
While we expect the challenging macro backdrop to continue in the third quarter.
We will focus our efforts on operating our assets reliably and reducing costs.
To that end, we now expect our cost reduction program to achieve between <unk> $75 million to $105 million of cost savings in 2023.
Up from the previous $55 million to $105 million targets.
After we achieved approximately $25 million of cost savings in the second quarter and $50 million in the first half of 2023.
Overall, our second quarter results reflected the weakness.
In global manufacturing and industrial activity.
Along with the impact to sales volumes and margins from.
From the planned and unplanned outages.
And we continue to take a disciplined approach to managing our operations in this volatile economy.
And events, our long term strategic priorities.
I would now like to turn our call to Steve to provide more detail on our financial results for the second quarter of 2023.
Thank you Albert and good morning, everyone.
Westlake reported net income of $297 million or $2 31 per share in the second quarter of 2023 on sales of $3 3 billion net.
Net income for the second quarter of 2023 decreased $561 million from the second quarter of 2022, as a result of lower average selling prices and integrated margins and more production and sales volumes when.
When compared to the first quarter of 2023 net income decreased by $97 million in the second quarter of 2023, primarily to lower average selling prices, particularly for caustic soda and PVC resin due to softer market conditions and unplanned production outages.
The second quarter of 2023, our utilization of the FIFO method of accounting had a negligible impact on pre tax earnings compared to what earnings would have been reported on the LIFO method.
This is only an estimate and has not been audited.
Moving to our segment performance our performance in our Central materials segment second quarter 2023 sales were $2 1 billion with EBITDA of $435 million compared.
Compared to EBITDA of $1 2 billion in the second quarter of 2022 due to lower average selling prices, particularly for performance materials. In addition to lower sales volume largely in PBC and <unk>.
Tim segment EBITDA of $435 million in the second quarter decreased $180 million from the first quarter of 2023, largely due to lower average selling prices for both performance materials and essential materials, particularly for caustic soda PVC resins and polyethylene.
Lower demand and resulting sales volumes, particularly for PVC and caustic soda and our policy resin and elevated level of unplanned outages that impacted both sales volumes and integrated margins.
Turning to our housing and infrastructure products segment second quarter sales were $1 1 billion with EBITDA of $244 million, which declined $66 million when compared to the second to the record second quarter of 2022.
The decrease in EBITDA was due to an 18% decline in segment sales volume was driven by lower housing starts and completions, we've seen over the past year.
Despite the volume decline year over year hip segment EBITDA margin of 22% in the second quarter of 2023 was unchanged as lower raw material costs and resilient pricing offset the impact of the lower sales volumes.
When compared to the first quarter of 2023 hip segment EBITDA of $244 million increased $39 million.
Housing product sales of $918 million in the second quarter 2023 increased $100 million.
Due to solid sales volume growth supported by seasonal North American construction trends that more than offset slightly lower average selling prices.
This housing products sales volume improvement was widespread with significant gains in most product lines.
Infrastructure product sales of $197 million in the second quarter of 2023.
Increased $8 million from the first quarter of 2023, primarily due to growth in sales volume of infrastructure products, serving fresh and wastewater applications.
The overall higher hip segment sales in the second quarter of 2023 drove an improvement in EBITDA margin to 22% from the 20% in the first quarter.
Overall, we were pleased with hip segment sequential volume improvement and solid margin performance.
Our financial results, particularly in our <unk> segment reflected globally slow demand and production outages.
As we enter the third quarter macroeconomic conditions remained sluggish as evidenced by recently published manufacturing indices.
We are adjusting our market.
Justin our market conditions by taking a disciplined approach to managing inventory, reducing our cost matching production levels to demand and adapting our business to the evolving market conditions.
Our strong financial position supported by an investment grade credit ratings support our long term objectives.
As of June 32023, cash and cash equivalents were $2 7 billion in.
And total debt was $4 9 billion with a staggered long term fixed rate debt maturity schedule.
For the second quarter of 2023 net cash provided by operating activities was $555 million.
Capital expenditures for $240 million, resulting in free cash flow of $315 million, which reflects our strong cash generative business model.
We continue to look for opportunities to strategically deploy our balance sheet in a manner to create long term value.
Now let me provide some guidance for your models.
On our current view of demand and prices, we expect second half of 2023 revenue and our housing and infrastructure products segment to be between 2 billion and $2 2 billion with EBITDA margins in the high teens.
We expect our companywide cost reduction program to achieve.
Between $75 million to $105 million of cost savings in 2023 up from the previous $55 million to $105 million target. After we achieved approximately $50 million of savings to date in 2023.
We continue to expect total capital expenditures for 2023 to be approximately $1 billion, which is unchanged from our earlier guidance and is similar to our depreciation and amortization run rate.
For the full year of 2023, we expect our effective tax rate to be approximately 23% and cash interest expense to be approximately $160 million.
Now, let me turn the call over to Albert to provide our current outlook for our business Albert Thank.
Thank you Steve.
Looking ahead.
With continued high interest rates and a slowing economy.
We're expecting a challenging environment in the second half of this year.
However, we remain confident in our long term growth plans the strength of our business portfolio and our disciplined approach to creating long term value.
We will look to expand our sales through differentiated product offerings and innovations.
With sustainable product to meet our customers' needs.
While managing our costs and adapting to the changing market conditions as they unfold.
And our payment segment, we will leverage our north American feedstock advantage and highly integrated production chain.
We remain positive on the outlook for <unk> segment, driven by <unk>.
Increased consumer activity and demand for clean freshwater electrification and renewable energy.
Benefits from the infrastructure investment Act.
And inflation reduction Act.
And favorable demographic trends.
All driving demand for PVC resin caustic soda polyethylene and our policy.
While average selling price.
Ending in June we are below the average selling prices after the second quarter in the last few weeks, we are seeing some signs of improvement in both PVC resin and polyethylene markets from tightening the export markets.
And profitable high cost international producers curtailing production and.
And lower industry inventory levels.
As a result.
We remain constructive on.
The outlook for our <unk> segment from recent levels.
We also remain positive on the outlook for this segment.
Supported by the structural under supply of homes in North America.
Improving demographics.
To support more first time homebuyers over the coming decade.
And potential benefits to our infrastructure product sales volumes from spending related to the infrastructure investment Act.
We will continue to offer a broad portfolio of branded products and deliver value through innovation and service to meet our customers' needs.
Over the past several quarters.
<unk> business has demonstrated that it can adapt to the changing market conditions.
And its results over this period, we reflect this have capability strengths in branding and it's capital light characteristics.
Sustainability and environmental stewardship.
Remain critical to our strategy at Westlake.
We continue to invest in developing and commercializing innovative new products to meet our customers' sustainability challenges.
We are proud to report increased customer adoption of our green Bean, one pallet solution and PVC innovations in the second quarter as.
As a result of these efforts.
Separately, we continue to invest capital to improve our plans to reduce our carbon emissions intensity.
We've made significant progress towards walk towards our 20% by 2030 reduction go.
Finally, we continue to look for opportunities to redeploy our well capitalized balance sheet.
In a disciplined manner that will create long term value for our shareholders.
With our robust cash flow generation capability.
Investment grade credit rating and strong balance sheet with net debt below one time trailing 12 months EBITDA.
We see significant opportunities to create value for shareholders through multiple avenues, including returns of capital through dividends and share buybacks.
Clinic expansions in high returning quick payback investments.
And synergistic acquisitions, where the return profiles exceeding our cost of capital as these opportunities present themselves.
Thank you very much for listening to our second quarter earnings call.
I will now turn the call back over to Jeff. Thank.
Thank you Albert before we begin taking questions I would like to remind listeners that our earnings presentation is available on our website at.
A replay of this teleconference will be available two hours after the call has ended.
We will now take questions.
Thank you we will now conduct a question and answer session. As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced soon.
Your question. Please press star one again, please standby, while we compile the Q&A roster.
Our first question comes from the line of Joshua Spector from UBS you May proceed.
Yes.
Hello, Good morning, everyone, It's Chris Perrella on for Josh.
I want to follow up on the outlook for the third quarter in the <unk> segment.
With the volume being impacted by turnarounds in the second quarter.
What is the volume improvement that you are looking for sequentially in the third quarter and then are you expecting normal seasonality in the fourth quarter.
What's the outlook there.
Yes, normally the third quarter.
Strong quarter, just like the second quarter of two strong quarters for the year.
Fourth quarter typically seasonally is the weaker weakest quarter.
So.
Assuming the economy continues to be.
Growing even though at a modest rate that the volume should improve.
In the second quarter in the third quarter pretty much like the second quarter.
But what were they doing underlying I guess in the second quarter that you should see something similar in the third quarter absolutely.
The turnaround.
<unk> turnarounds.
Chris It's Steve and so when you think about the both the turnaround planned outages in the unplanned outages as average said in the third quarter tends to be a good strong quarter, just like the second quarter clearly the second quarter was impacted by both planned and unplanned outages and so I do expect that that third quarter should have more normalized sales volumes and production.
<unk> volumes as we would've expected in the second quarter not been for those outages.
As Albert noted in that fourth quarter, we also see some seasonality impacting both the Pam and the hip segment. So that typically is lower than the second and third quarter volumes.
Alright. Thank you and then just a follow up one quick one on the pricing that I think Albert called out average Perm pricing at the end of June was below the <unk> average.
How does it lag.
<unk>.
How do your does your pricing lag and how quickly can it improve over the course of <unk>.
Well.
<unk> prices when it comes down it comes down pretty quickly or does it.
But when price increase.
Yes.
Some industry members have announced price increases in both polyethylene and PVC for the third quarter. Some of those price increase may have a lag.
Going up.
Alright, Thank you very much you.
Youre welcome.
Thank you one moment please.
Our next question.
Comes from the line of <unk>.
Cunningham from Citi You May proceed.
Hi, Good morning, Thanks for taking my question you delivered roughly flattish margins in the hip segment year on year amidst a pretty steep volume decline how should we think about long term margins through the cycle in that business.
Yes, Patrick as you can see even in these markets, where we're seeing home starts in the neighborhood of one four which was the average for the second quarter, we continue to see real resiliency and pricing and certainly even though we've seen the challenges in volume. If you think about year over year, we've certainly have got a branded <unk>.
That continues to sell through.
<unk> is a product of selection by our customers and so as we think about using that branding and that relationship with our customer base as we see improvements in starts over over the horizon. We do expect it will continue to improve the overall margin we've not given the high end range of margins, but you can see we.
Still expect to see some headwinds in the second half of this year I've guided to the high teens range for the second half of this year, but nevertheless, we think there is certainly with the innovative products. The branding that we have and the relationships that margins should improve as the market improves.
Got it that's helpful and then what's driving the weakness in our park season, and how do you see demand trending by region for the balance of the year.
Proxies applies to many areas mostly into the industrial coatings and also in.
We mill plates and light weighting of vehicles and the windmill blades business is still coming back slowly.
Slow demand, especially.
Especially in China, and the China has one of the largest capacities in the world and proxy and China's economy is really not growing much and there's overcapacity.
<unk> you.
Plans coming on.
So the business is very weak and impacted global.
We expect U S and European policy amended pick up in the <unk>.
<unk>.
Quarter four years, but it takes a while but China is the main issue we have.
Great. Thank you.
Youre welcome.
Thank you one moment please.
Our next question comes from.
David Begleiter from Deutsche Bank. Your line is now open.
Thank you good morning, Howard Albert and Steve If you think about Pam sequentially Youll, you will have lower outages in Q3, we might be facing.
Sure prices as well as higher feedstock costs. So.
Pam fill up sequentially in Q3 versus Q2, given those dynamics.
So David when you think about the the strength that we.
Specced seasonally in Q3 that and given the fact, we don't have the headwinds in our perm business because of both the planned and the unplanned outages that volume improvement should should pick up.
Certainly from a pricing perspective, we exited the end of the quarter at lower average prices and we had over the course of the second quarter, but obviously, we as we look forward into the future for ethane pricing ethane pricing was certainly elevated.
At the very tail end of the second quarter and if you look at.
To the second half of the year, we see ethane pricing still staying really and kind of the low to mid <unk> over the course of the second half of the year.
Very good and Albert you mentioned some improvement in the global polyethylene market landscape can you give a little more color on what you see.
Right now in that market.
Yes, I think.
Export polyethylene prices, primarily in Asia, being quite weak and prices dropped a fair amount over the over the months during the year, but we see some kind of bottoming out in polyethylene prices and demand has picked up in Asia as well.
And so we expect some kind of pricing improvements in the U S. As a result, as well as the higher feedstock costs as Steve mentioned, we saw at the tail end of second quarter early part of July.
So with the cost price.
Increased push.
And as well as demand improving globally for polyethylene, we expect some kind of a pricing movement.
In the third quarter for polyethylene and PVC.
But that's assuming that economy is still going strong, but we see that.
The 10 year rate is almost approaching four 2%.
So we don't know the impact will have.
On general economy, and also on housing.
Thank you.
Youre welcome.
Thank you one moment please.
Our next question comes from the line of Olesky Youre My math from Keybanc. Your line is now open.
Thanks, and good morning, everyone.
So lately.
Some improvement in new residential construction domestically have you seen any uptick in PVC demand.
Yes.
So let's see when you think about the strength that we've seen in the construction materials business pulling through into pipes and siding and trim I would say that and you see this really in the announcements at many of our.
Competitors have announced as well as we in PVC pricing. So we have price announcements out for August and September.
So that is reflective of what we're seeing in strength and you may have seen that we've also seen export prices.
<unk> also began to rise in PBC in overseas markets. So that strength that we've seen in the construction markets pulling through in volume, but also pricing nominations, reflecting that strength, both domestically and we're seeing as I mentioned in the export markets.
Thanks Steven.
Question on M&A.
Lifeline look today.
Do you find more or fewer attractive deals.
How would you characterize your kind of level of engagement on M&A right now.
Yes. So there is always an active dialogue amongst ourselves and others for opportunities in the market both on the materials side as well as on the building products side.
It's all about really looking for the right kind of value opportunity that we see in the marketplace, but I would say there is still a good number of opportunities deploy capital. It's just about finding the right value added opportunity for both parties obviously.
Thanks, a lot.
Welcome.
Thank you one moment please.
Our next question comes from the line of Kevin Mccarthy with vertical Research partners you May proceed.
Yes, good morning.
To follow up on PVC, and we've seen the export prices come up appreciably over the last three to four weeks can you speak to what is driving that how sustainable you think the move might be.
And do you think it will be enough for PVC producers to raise the U S domestic contract price.
I believe you and others have a proposed increase on the table there.
So Kevin there are a number of <unk>.
Asian Asian producers that really are at either of the bottom end or very near the bottom and from a margin perspective and as you can see from our remarks, we see a number that have really lowered operating rates because of the margin challenges they are facing with.
With their feedstocks abuse, Brent as a benchmark in the mid eighties.
Those.
Producers are seeing margin challenges and that really is supportive of that.
That driver for rising prices in the market and I think as we see the seasonal strength in Q3, and the price announcements by ourselves and frankly, others for August for PBC.
My comments about the strength, we're seeing in even at this more muted level for building products continues to pull vinyl through into the construction markets not only here in the north American market, but elsewhere.
That's helpful and then as a second question.
Albert I would appreciate any updated thoughts you might have on China.
Generally speaking, we've seen demand from China languish across many commodity chemical markets.
In the markets, where you compete or are you seeing any any signs of improvement there following recent efforts to stimulate or for that matter.
The improvements on the supply side dynamics in China.
China is the.
The elephant in the room.
It has the largest capacity produce many of the chemicals and plastics as well as one of the largest market for it.
And as we all know that China.
Do not recover much since the Chinese new year people expected.
After coming out of the pandemic and the <unk>.
Economy is still quite weak.
As a result.
Polymer and chemical market prices has dropped a lot and impact global prices as well not only that.
You used to import products and now they're being exporting products.
So OLED impacted global prices for those products.
And as we all read that economy, especially for unemployment for young people.
We didn't quite surprisingly high.
And recently the Chinese government have made.
All statements coming out with policies to stimulate but.
Those statement has not come out with concrete actions specific action plans yet.
But I think.
Chinese I presume leadership in China.
Well the issues.
And the central government is still quite.
Well they have a lot of <unk>.
Firepower to do things.
So we believe that.
That over time, the Chinese economy will improve and they talk about targeted 5% GDP growth.
For the near term in coming years.
So time will tell about meantime.
Steve mentioned.
The spot prices willing bottomed out in China, we see.
Coupled with some planned issue so with turnaround all that debt.
Prices of sub building up the last several weeks, we hope that will be sustained.
Especially during the third quarter, which is usually a busy quarter.
So time will tell but we think China should improve overtime.
Very good. Thank you so much you.
Youre welcome.
Thank you one moment please.
Our next call comes from the line of Michael.
From Barclays You May proceed.
Great. Thank you good morning, guys.
First question on maybe sticking on the last topic your slides talked about competitively competitively priced exports out.
Out of China for our pockets here when you sort of do the back of the envelope math. It seems like producers there are selling export product below cash breakeven levels.
Do you think this dynamic our down cycle plays out and does it change at all how you approach the market.
Suddenly there is.
Some of the Chinese depending on the industry.
Definitely.
In the integrated ethylene to polyethylene.
Our information shows that indeed replace in China based on naphtha cracking are losing cash.
As in the U S.
Integrated players too based on ethane.
Please the ethylene we have still have very good cash margin.
So but.
The business like a proxy.
Where they have built additional capacities some of the Chinese plants are running below 50%.
And some new plants have not started up.
Well the idled in starting up so I think.
Companies are adjusting to the new dynamics.
And over time, they should make the right decisions what to do with their businesses.
Alright Super helpful. And then maybe just a follow up on that.
Could you maybe talk through the different product lines or categories within the segments. We can obviously fairly decently tracking them and moving them, but just within the hip what areas performed better or worse relative to the overall segment this quarter.
Yes, so we saw broad strength across really the the portfolio strength really on our businesses such as stone siding roofing of course pipe for storm and wastewater applications. So a broad application really in what we would call the Westlake Royal building products business as well as our <unk>.
<unk> businesses, so broad broad strength in all of those.
Businesses within the hip business really made nice contributions in the second quarter.
Okay. Thank you youre.
Youre welcome.
Thank you one moment please.
Our next call comes from the line of Matthew Deyoe from Bank of America. Please proceed.
Good morning, everyone.
What.
What percent of China's PVC production do you suspect there exporting right now.
Yes, China is used to be importer of PVC.
And I think they have been exporting that export.
80% of the Chinese PVC produced from our carbide process unusually so the quality is not great and I think India has put a bcm.
<unk>.
The level of volume.
Important PVC and some of the Chinese producers.
To meet that so I think the PVC export volume has reduced from China, but nevertheless, it does have an impact.
On those market primarily export too.
South Asia Southeast Asia is the main market.
Do you have a number I guess with Stephen we've talked in the past I think you had said you expected it to be or you assume you thought it was around 20% I'm assuming to Albert's comments, it's less than that now but is it 10 is it five is it 15, let's do you have any idea.
Yes, it is meaningfully lower than that 20%.
Understood.
Yeah.
And if I can.
What was your mix of import versus exported product shipped for caustic and PVC in the quarter and do you expect that to change meaningfully next quarter with when you get your capacity back.
And so when you think of the.
Exports. So we have both in caustic and PVC. The industry is exporting kind of in the 20% range and where we're just below that kind of a number and from a PVC perspective, the industry has been exporting.
Historically in the thirties, and so were also below that kind of a threshold number as well because remember PVC is going into our building products business. So we have a pretty good domestic consumption number internally for our own PBC.
Understood.
Thank you one moment please.
Our next.
Question comes from the line of Matthew Blair with Tpa you May proceed.
Hey, good morning, Albert and Steve.
Good morning, good morning, Matthew.
Could you share any more color on the $50 million outage impact.
Q2.
Would that impact and.
Were they fully back up and running by July 1st or do you expect anything to roll into Q.
Q3, and then also are there any.
<unk> turnarounds for Q3 or Q4.
Thanks.
And so in terms of the.
Businesses within Pam It was in our core vinyls business and I would say that we have.
Obviously, we took corrective action in the second quarter and I think those issues are behind us as we are into the third quarter at this stage.
And so I'll turnaround concerned alloy small turnaround going on but nothing major.
Okay sounds good and then Albert I think you mentioned.
And then you are matching our production with demand.
Could you clarify.
When you run your you asked that.
Are you matching up too.
Caustic demand in the market or to Corrine demand in the market.
The paydown of our products and markets and pricing.
Suddenly we would look hard for all of these areas.
Right now the PVC demand is.
Being the construction season.
Stronger.
And caustic demand is a bit weaker caustic price has been coming down globally.
And every months gradually so until the industrial activity picks up the cargo picks up cost is coming to become weaker.
Okay and are you running to meet all of that chlorine demand in I guess.
With that.
Hey, guys its prospects side with oversupply.
It's a combination we have plans to integrate it to two clawing PVC, we have plants that are integrated so depending where they are in the.
The <unk> situation in those areas. So we adjust.
Okay. Okay. Thank you.
Okay.
Thank you one moment please.
Our next question comes from the line of.
Mr <unk> from RBC capital markets.
Your line is now open.
Great. Thanks for taking my question and hope you're wrong.
I just wanted to look into the PVC side.
You noted some weakness maybe in <unk> and <unk>.
<unk>.
Driven by parking EBIT, what are your comments on PVC as you head into the rest of the year.
<unk> been obviously, some volatility on the ethane and ethylene side.
Is that affecting PVC and then similarly.
Building products.
The housing environment.
Our outlook for PVC market with Nacho.
As we said earlier PVC market has turned tighter.
<unk> prices improved demand being a seasonal.
Quarter as increased domestically and internationally.
So this price announcements for both August and September domestically in the U S.
And if you look at the consultants.
View of pricing I think in this pretty pretty much flat all maybe it'll increase in third quarter down a little bit in the fourth quarter.
And.
And then also looking at prices improving.
Next year. So I think just from general view of the market. It seems PVC has stabilized and is improving going forward.
And just wanted to also ask about the compounding and European side.
Are there any new.
Nuances that you would add to your comments as it refers to that part of the business.
Yeah, So arun the compounding businesses.
And a nice business, we as you know the markets that we are addressing really are the wiring cabling business in medical and auto businesses.
Business continues to perform well.
As we think about some of the contributions have been making really in the wiring cabling business. We've mentioned the strength, we've seen really in the infrastructure Bill and part of that is internet connectivity and certainly we also see that wiring cabling going into the construction markets as we see.
Housing starts of course, the auto business the medical businesses have their own cycles, but continue to be good markets at this stage and so we're pleased with that compounding business, both domestically as well as in Europe.
Thanks.
Yeah.
Thank you one moment please.
Our next question comes from the line of.
Vincent Andrews from Morgan Stanley.
Steve.
Hi, This is Henry Exxon for Vincent you commented that Youre optimistic about the longer term opportunity from public and private investments in U S infrastructure and construction can you size. The degree of exposure Westlake has to these medium term tailwind. We generally think of Westlake is having more residential.
The nonresidential exposure, so any color and potential sizing of the opportunity would be helpful.
Yes, so when you think of our infrastructure products business, our pipe and fittings business. We are seeing the majority of that going into.
Into residential construction, but certainly there is a significant portion not 50%, but a significant portion of nevertheless that has a larger diameter pipe that is well suited for the infrastructure Bill that we see that's $55 billion.
That is sizeable that will address the infrastructure needs of the country has so we think we're very well positioned to be able to address those needs for counties and municipalities.
So.
One of the largest loss.
I made a pipe for water and sewer.
As mentioned as Steve mentioned with <unk>, but also our proxy business is.
As they get a supplier for for coatings for any infrastructure bridges and structures so as dose.
Funds are getting sent to the municipalities and governments state governments, we are seeing more demand for both PVC and as well as for policy.
Okay that makes a lot of sense. Thanks for the color I was also wondering if you could remind us of your view of the hips.
Profit margin through the cycle from trough to peak and has that changed at all with mix.
No I think what <unk> seen is the very resilient capabilities of the business to scale based on market conditions and you can see the I think the performance in this market, where we have housing starts at about one four.
Averaging over the course of the second quarter, we're still.
Margin EBITA margins in the 22% range and so when you think of the business and its ability to scale. We think it's a very very good business and certainly has an ability to perform well beyond the kind of margins for delivering even in this market condition. So given the strength of the product brands that we have and the customer relationships.
The innovation that comes out of that business, because it's very brand oriented as you would guess we think has good upside to it we have not given specific guidance of margins beyond the current guidance, we've been providing but I would say that we do see good solid upside in that business.
Great. Thank you.
Youre welcome.
Thank you for a minute please.
Our next question.
Comes from the line of Michael <unk> from Wells Fargo. You May proceed.
Hey, good morning.
Albert when you think about your portfolio.
After memorial transaction.
Are there any other product lines or or sort of areas you'd like to do acquisitions sort of continue to expand that business and.
Longer term.
Well, we're very pleased with our payments business and we have <unk> strategic business units each one.
Leaders in the markets around the world.
And we can grow organically.
At least of any slight platforms as well as potential integration vertically adjacencies, so on and so forth. So as Steve mentioned, we are in constant dialogue with various <unk>.
Parties opening opportunities as well as we are doing a lot of internal studies.
Studies on Debottlenecking, where we have opportunity in our markets.
And also reducing our cost and cost reduction is of Asia continuous improvement as a major part of <unk>.
Total initiatives and reliability.
We are working on all of these areas but.
Suddenly.
Outside inorganic growth is something we're also looking at.
Got it and then just as a follow up.
Yes.
Denise to recover.
Will China ended up.
Importing PVC again.
And if they do start importing PVC.
Do you think or.
Or how do you think that affects.
Argentina, and the U S and how much.
Could it come from.
I think so long China.
<unk>.
Exporting PVC that'll be very good.
As you know I think at our Investor investment.
The slides we showed at global additions of.
Chlor alkali and PVC capacities are below the GDP growth and typically we're looking at about relative GDP growth as a measure.
And for many years and projected going forward the capacity additions are below GDP growth. So we believe that the.
Business and also.
There's a lot of <unk>.
And as you needed to make ethylene to make chlor alkali and U S are by far the lowest energy costs.
<unk> in the world So.
Having a piece of bondage energy advantage makes us much more competitive than anybody else in the world and making PVC and chlor alkali so with a lack of new investment and with our cost position.
We can't really.
Have a very good position globally in our business.
Thank you.
Youre welcome.
Thank you one moment please.
Our next question comes from the line of Frank Mitsch.
From Fermium research.
Thank you and good morning, I guess, the pronunciation was close enough.
I noticed that the inventory levels dropped 9% sequentially here inventory levels were up 9% sequentially and I assume some of that might be.
Selling out of inventory from the unplanned downtime or lower pricing and so can you talk about some of the factors there and what we should be expecting to see happen on that line.
Yes, so Frank good morning, and so youre right because of some of the both planned and unplanned outages inventory did come down because obviously, we were not producing during those outages, but we were selling.
And so naturally that has an impact on inventories, but when you think of where.
As we think about where producers are.
We're continuing to address and adjust our production levels.
Market demand conditions, so I would say that as we think about it.
Inventory levels are over the course of the second half of the year should be kind of in the medium level.
And so as we think about it both vinyl as well as polyethylene.
Okay. Thank you and one of the features of I think the last conference call was speaking in inventories was talking about customer destocking et cetera.
You feel that we're at.
Underlying level of demand throughout all of your businesses or are there.
<unk> that are still seeing some some destocking going on.
Yes, I'd say Frank that the Destocking really started almost a year ago.
This business and so accelerated at the very end of last year. So I would say that we're at a point in time, where our customers inventory levels are at I would say low to low medium levels and so I would not say that we've continued to see any destocking.
That's behind Us at this stage.
As I said on the air.
And also that with high interest rate uncertainty.
In the economy, our customers are very careful the only order where they need to.
That's very helpful. Thank you.
Youre welcome.
Thank you one moment please.
Our next question.
Comes from the line of John Roberts credit.
You May proceed.
Great. Thank you.
Two building products do you have a sense for the divergence between new construction and repair remodeling activity.
So John I would say that we did see continued strong demand in both sides of that that hip business. So strong demand really in repair and remodeling and given the $1 4 million average start number you can see again, a resilient business being able to adjust to lower volumes year over year.
<unk> and still continue to perform so I would say both the starts the new construction activity in repair and remodeling continue to perform well in both sides of the hip business.
And then you noted merchant chlorine volume was up sequentially Q over Q was that largely greater availability given the weakness in vinyls or was demand actually strong inquiry.
In the summertime Theres, a pickup for water treatment activity in Korea, and so that's part of that story John.
Okay. Thank you.
Okay.
Thank you one moment.
Our last question comes from the line.
Hassan Ahmed.
And amex.
Global Advisors. Please proceed.
Good morning, Albert and Steve.
Morning.
A question around <unk> pricing.
Operating rates globally seem to be quite depressed.
Yes.
I know caustic soda pricing has come down recently.
On an <unk> basis.
Pricing relative to history continues to be quite strong. So my question really is how sustainable are those pricing levels.
While demand for.
Chlorine derivatives are still strong PVC, we mentioned globally.
<unk>.
<unk> prices have bottomed out we believe.
Improve at <unk>.
Housing demand, we think both new construction and repair remodeling R&R is still pretty strong.
And global demand.
India is coming out of the monsoon demand coming back.
So I think.
Current events, whether it is strong, but I will say that there's really peaking.
Peaking but is coming back from the bottom I think caustic has really followed the general industrial activity on the U S. So far we still have positive GDP and I think most of the countries of the world.
Having positive GDP in Europe and Asia.
At the low levels, so as to improve I think that EMEA will get stronger and also as mentioned earlier there is very little new capacity added around the world as the bank continued to grow hence.
Hence makes the <unk>.
Supply demand tighter going forward.
Understood very helpful and just sort of following up.
Where you left off on sort of chloro vinyl supply demand dynamics.
One of the virtues, I guess or positives of the chloro vinyl story was lack of investment under supply call. It rate and one of your large competitors recently has talked about considering.
Sort of clarifying those investments in Texas in particular, so how do you see the supply demand story with that announcement out there now do you still feel that in the medium to longer term debt market will.
Will it be in.
Sort of under supplied and we'll continue to sort of tighten.
Well as I said earlier globally the supply so one plan without.
Is that much difference.
As you know this the vinyl business. Unlike the olefins business. Other business is very much integrated you need of all investments, whether it's flooring power plants. So.
Renewable power ethylene.
Ethylene plants in DCM EDC in PVC.
It's very complete very heavy investment.
And a very seasonal business.
So we're looking purely on a return on investment so as I mentioned earlier, we're looking at.
Organic growth and find out which will give us adjusted return above our long term basis above our cost capital so without looking at short term.
Returns only as a long term basis long term basis this business as being as you know challenging in the past.
And China is that one of the major issues.
<unk>.
<unk>.
Like anything in our industry, while China does have a huge impact in China going through its own.
A review of.
Double control energy global warming, which area they want to allow for investments and the phasing out of some high energy industries. So all of that is going on and is it all sort of going on.
Time will tell.
Very helpful. Albert Thank you so much.
We also.
Thank you.
At this time I am showing no further question.
And I would now like to turn the conference back to Jeff Holly for closing remarks.
Thank you thank.
Thank you everyone for participating in today's call. We hope you'll join US again for our next conference call to discuss our third quarter 2020 results.
Okay.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.