Title

Presentation

Operator: Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Corporation Fourth Quarter and Full Year 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, February 21st, 2023. I would now like to turn the call over to today’s host, Jeff Holy, Westlake’s Vice President and Treasurer. Sir, you may begin.

Jeff Holy: Thank you, Justin. Good morning, everyone, and welcome to the Westlake Corporation conference call to discuss our fourth quarter and record full year results for 2022. I’m joined today by Albert Chao, our President and CEO; Steve Bender, our Executive Vice President and Chief Financial Officer; Roger Kearns, our Chief Operating Officer; and other members of our management team. During the call, we will refer to our two reporting segments, Performance and Essential Materials, which we refer to as PEM 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’s performance. Steve will then discuss our financial and operating results.

After which, Albert will add a few concluding comments, and we will 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 to management. These forward-looking statements suggest predictions or expectations, and thus, are subject to risks or uncertainties. These risks and uncertainties are discussed in Westlake’s Form 10-K for the year ended December 31st, 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 fourth quarter and full year results. This document is available in the press release section of our website at westlake.com. We have also included an earnings presentation, which can be found in the Investor Relations section on our website. A replay of today’s call will be available beginning today two hours following the conclusion of this call. This replay may be accessed via Westlake’s website. Please note that information reported on this call speaks only as of today, February 21st, 2023. And therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay. Finally, I would advise you that this conference call is being broadcast live through an Internet webcast system that can be accessed on our web page at westlake.com.

Now I would like to turn the call over to Albert Chao. Albert?

Albert Chao: Thank you, Jeff. Good morning, everyone. We appreciate you joining us to discuss our fourth quarter and full year 2022 results. For the full year of 2022, we reported record net income of over $2.2 billion or $17.34 per share and record EBITDA of $4.2 billion on record sales of $15.8 billion. While 2022 was a record year, it was also a challenging year as we experienced energy volatility, rapidly rising interest rates, evolving COVID policies impacting Asian demand and market dislocations due to the war in Ukraine. As these obstacles evolved and drove more difficult economic conditions in the second half of the year, Westlake took proactive actions to navigate a slower GDP growth with cost savings initiatives. These broad-based 2022 initiatives included reductions in overhead and energy costs, synergies from acquisitions and investments in digital and automation that lowered our cost by approximately $50 million and also drove operational efficiencies.

Thanks in part to these actions and despite the challenging external environment. For a second consecutive year, we achieved records for sales, EBITDA and net income, with EBITDA almost doubling from the previous cycle high in 2018. I want to take a few minutes to review several of our major accomplishments in 2022. We generated record cash from operations of $3.4 billion. This significant level of cash flow allowed us to return $270 million to investors in the form of dividends and share repurchases, retire $250 million in debt, deploy $1 billion to improve the reliability of our plants and grow our production capacity to meet customers’ needs, close $1.4 billion in acquisitions and grow our ending cash balance by $300 million. The evolution and integration of our business continued in 2022 as we closed the Epoxy acquisition and increase our ethylene integration with the additional investment into our LACC Ethylene joint venture.

Integrating these businesses into Westlake, as we have with Boral, DASCO and Dimex acquisitions which closed in 2021, drove synergies in 2022. We are committed to investing and delivering strong risk-adjusted returns across the economic cycle as we prioritize higher return, lower risk and faster payback investments. Our deployment of growth capital in 2022 included several organic projects, including debottleneck work that increased our chloride capacity by 120,000 ECUs in addition to a number of cost-reduction initiatives. The evolution of our business through both acquisitions and organic growth efforts drove the need for added clarity, which is provided by resegmenting the company into the Performance and Essential Materials segment, PEM; and Housing and Infrastructure Product segment, HIP.

Our new segmentation emphasizes the higher-value chemical and building products we manufacture. This evolution of our business spurred the changing of our name from Westlake Chemical to Westlake Corporation, which better represents the significant breadth of the products we produce and industries we serve. Decarbonizing our assets and drive sustainability remain important initiatives and growth opportunities for Westlake. As part of our sustainability efforts, we established a carbon reduction goal to reduce our Scope 1 and Scope 2 emission intensity by 20% by 2030. I’m happy to report that by the end of 2022, we were already approaching a 15% reduction. As part of that commitment, we continue to pursue new and innovative materials, technologies and leverage our nine global R&D centers to advance and commercialize specialty sustainable products such as our polyethylene one pellet solution and GreenVin chloral vinyl product lines, among others.

Taken together, I’m very proud of our 2022 accomplishments. And I would like to thank our 16,000 team members for their hard work and dedication that contributed to these accomplishments and record results. I would now like to turn our call over to Steve to provide more detail on our financial results for the fourth quarter and full year of 2022.

Steven Bender: Thank you, Albert, and good morning, everyone. Westlake reported net income of $232 million or $1.79 per share in the fourth quarter on sales of $3.3 billion. Net income for the fourth quarter 2022 decreased $412 million from the fourth quarter of 2021 as a result of lower production and sales volumes in each segment adjusted for the acquisition of Epoxy, lower performance materials average selling prices in PBC, polyethylene and Epoxy and higher feedstock fuel and energy costs, particularly in Europe. When compared to the third quarter of 2022, net income decreased by $169 million in the fourth quarter due to customer destocking, seasonal demand trends and sales mix shift to export markets. Looking back, there were many challenges in the fourth quarter, but three stand out.

First, geopolitical conflict continue to drive high energy costs in Europe throughout 2022, pressuring our margins and impacting economic and industrial activity in the region. In response to this environment, we lowered operating rates at our European epoxy and vinyl plants during the fourth quarter and continue to serve our customers from our global footprint. Second, we saw customers becoming more cautious in response to weaker macroeconomic conditions, resulting in a destocking of customer inventories and slowing new orders, which impacted our sales volume. This destocking was most impactful for us in housing-related products in our HIP segment as well as PVC resin demand within our PEM segment. Third, this weaker demand caused us to shift more of our North American polyethylene and PVC resin sales volumes to export markets, where pricing and netbacks were lower than our traditional domestic market channels.

This sales mix shift to greater export volumes negatively impacted our average selling prices and margins for PVC and polyethylene within our PEM segment. Taken together, we experienced lower sales volumes, lower average selling prices and tighter margins for PVC and polyethylene when compared to the fourth quarter of 2021. For the fourth quarter 2022, our utilization of the FIFO method of accounting resulted in an unfavorable pretax impact of $45 million compared to what earnings would have been reported if we’ve been on the LIFO method. This is only an estimate and has not been audited. For the full year of 2022, we reported net income of $2.2 billion and EBITDA of $4.2 billion on sales of $15.8 billion. Industry supply chain and product availability constraints increased our order backlogs and average selling prices in the first half of the year, leading to high operating rates and profitability.

However, in the middle of 2022, in response to softening macroeconomic conditions, sales volumes began to weaken moving selling prices lower in PVC and polyethylene within Performance Materials while driving a sharp reduction in Housing and Infrastructure Products sales volumes. As the second half of the year progressed into the fourth quarter, weaker end-use demand along with elevated customer destocking activity drove sharply lower sales volumes in epoxy and polyethylene within PEM and nearly every product line within HIP. As a result, PEM volumes fell 3.5% while HIP sales fell 24% in the fourth quarter compared to the third quarter. We also saw average selling prices for PVC and polyethylene fall sharply, driving PEM average selling prices lower by 9.4% in the fourth quarter compared to the third quarter along with a larger export product mix in Performance Materials.

One notable exception was chlor alkali, where average selling prices for both caustic soda and chlorine continue to improve as 2022 progressed. At the same time, it maintained average selling prices in the fourth quarter compared to the third quarter with some gains in our exterior building products, offset by declines in PVC compounds. Moving to our segment performance. Our performance in Essential Materials segment fourth quarter 2022 EBITDA of $443 million decreased $554 million from the fourth quarter of 2021. As compared to the prior year period, Performance Materials sales in the fourth quarter decreased $378 million largely driven by lower selling prices, particularly PVC resin as customer inventory destocking led domestic sales volumes to decline much greater than end-use demand levels.

Meanwhile, Essential Materials sales in the fourth quarter 2022 increased $279 million over the fourth quarter of 2021 primarily driven by higher average selling prices for caustic soda. As compared to the fourth quarter of 2021, our earnings were impacted by lower integrated margins for all of our products in our Performance Materials business, especially in global PVC markets, lower production and sales volumes for chlor-alkali and PVC resin particularly in Europe, higher feedstock, fuel and power costs and higher turnaround activity. These headwinds were partially offset by higher production and sales volumes for polyethylene and higher sales prices for caustic soda, where the global supply demand balance tightened as a result of lower global core vinyl’s operating rates.

PEM’s segment EBITDA of $443 million in the fourth quarter decreased $118 million from the third quarter of 2022. This sequential decline in EBITDA is a result of lower integrated margins for our Performance Materials particularly PVC and lower production sales volumes for polyethylene, chlorine, caustic soda, VCM and epoxy resins, partially offset by higher sales prices for caustic soda. Turning to our Building Products business. Building and construction markets were particularly impacted by rising interest rates with housing starts declining by approximately 22% year-over-year in December. Against this backdrop, HIP segment EBITDA for the fourth quarter 2022 decreased $29 million to $133 million when compared to the fourth quarter of 2021.

Housing product sales decreased $85 million, which reflects the significant destocking I mentioned earlier, compared to the fourth quarter 2021 driven by the 22% volume declines across our product offerings. Infrastructure products sales fell $24 million from the fourth quarter 2021 as a result of broad-based volume declines, particularly in a large diameter PVC pipe. These volume declines were only partially offset by higher prices, both in housing and infrastructure businesses. When compared to the third quarter 2022, HIP segment EBITDA of $133 million decreased $121 million. Housing product sales of $758 million in the fourth quarter 2022 decreased $260 million, while infrastructure product sales of $180 million in the fourth quarter of 2022 decreased $47 million from the third quarter of 2022.

The lower sales and earnings were the result of lower sales volumes across all lines in our HIP business due to both seasonal trends and slowing U.S. housing construction activity. Now turning to the balance sheet and cash flows. Westlake’s cash flow generated reflects our strong continued focus on operational and financial discipline matters. For the full year of 2022, net cash provided by operating activities was a record $3.4 billion while capital expenditures were $1.1 billion, resulting in free cash flow of $2.3 billion. In 2022, we retired $250 million in debt, renewed our committed line of credit of $1.5 billion for five years. We closed on $1.4 billion of acquisitions that were fully funded by cash on hand. As of December 31, 2022, cash and cash equivalents were $2.2 billion, and total debt was $4.9 billion with our net leverage remaining below one turn of EBITDA.

We maintain a strong balance sheet with a staggered long-term fixed rate debt schedule. We will look to strategically deploy our balance sheet for value-creating opportunities as they become available. Turning our attention to 2023. Let me address some of our modeling questions to provide some guidance for the year ahead. Based on our current view of demand and prices, we expect 2023 revenue in our HIP segment to be between $4.3 billion and $4.8 billion with EBITDA margin in the high teens. We expect total capital expenditures to be approximately $1 billion, similar to our depreciation run rate. For 2023, we are prioritizing quick return projects while also allocating appropriate amounts to maintain and operate our facilities safely. This includes the planned turnaround at our Calvert City ethylene unit scheduled to begin in May, that is projected to last approximately 30 days.

For the full year of 2023, we expect our effective tax rate to be approximately 23%. We also expect cash interest expense to be approximately $160 million. Now let me turn the call back over to Albert to provide the current outlook of our business. Albert?

Albert Chao: Thank you, Steve. During the fourth quarter, we saw deteriorating economic conditions that led to inventory destocking, resulting in lower demand for our products in well-supplied markets. Since year-end, we have seen modest improvements early in the first quarter in demand for polyethylene and PVC with improving feedstock and energy costs providing some margin tailwinds. The large market for epoxy in Asia and Europe reflect sluggish demand as China begins its economic recovery and Europe continues to address its own economic and energy challenges. Looking ahead, while uncertainties remain in the macroeconomic outlook, we believe there are some positive trends appearing. Energy costs have improved, particularly in Europe, albeit still at elevated levels.

Forecast for U.S. housing starts ranging from 1.1 million to 1.3 million units over the next two years, which will be a 20% decline from the 2021, 2022 levels. Even with the strength in housing construction that occurred over the past two years, annual new housing construction largely remained below the 50-year average of 1.5 million units. Therefore, we continue to have a deficit from underbuilding that occurred since 2007. As a leading producer of building products, Westlake is well positioned to benefit from the eventual recovery of U.S. new home construction back to a normalized level that supports the strong demographic and household formation trends that are taking place. In the meantime, although new construction growth has recently stalled, repair and remodeling or R&R spending, which comprises approximately half of our building product sales, is forecasted by industry consultants to continue to grow in 2023.

We are cautiously optimistic on the future as there have been some recent positive economic signals. However, inflation and geopolitical tensions continue to weigh on consumer spending and industrial activity. Thus, we remain focused on actions that are within our control to grow shareholder value, including prioritizing quick payback capital projects, progressing our sustainability goals, including continued support for new innovations such as GreenVin caustic soda and PVC polyethylene one-pallet solutions and PVCO pipe, maintaining our investment-grade credit rating and strong balance sheet, which had $2.2 billion of cash at the end of 2022, using our strong balance sheet with ample liquidity look for attractive opportunities, to deploy our robust cash generation in a disciplined manner, including returning cash to shareholders through both dividends and share repurchases and identifying acquisition candidates that can exceed our cost capital while extending the breadth and reach of our product portfolio.

Given the dynamic economic environment, we will continue to take a business-by-business approach to manage our operations and address to market conditions. This begins by maintaining a low cost to serve our customers, by operating our plants safely and efficiently, reducing overhead costs and increasing productivity with our automation and digital investments. With this in mind, we are working on a number of initiatives that are expected to deliver an additional $55 million to $105 million of annualized savings in 2023. Thank you very much for listening to our fourth quarter earnings call. I will now turn the call back over to Jeff.

Jeff Holy: Thank you, 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 the information again at the end of the call. Justin, we will now take questions.

Operator: And our next question comes from Aleksey Yefremov from KeyBanc Capital Markets. Your line is now open.

Unidentified Analyst : Great, thanks guys for taking my question. It’s Ryan on for Aleksey. I guess first question I would ask you is you talked about the mix in polyethylene PVC during the quarter with higher exports. Can you maybe talk about what you’ve seen so far in 1Q and what you might expect for the rest of the year?

Roger Kearns: Hi, Aleksey this is Roger. Good question. Thank you for that. Certainly, I would say the destocking that we talked about, we felt it pretty hard in polyethylene and PVC, both on the domestic market in the U.S. And — so we shifted a tremendous amount of our material in Q4 to the export markets in both of those. And what we’re seeing in Q1 is, I would say, a return to a bit more normal numbers that we would see. So I think through January and February so far, we’re seeing a little bit of a rebound on the domestic side, which is allowing us to get back to what I would consider more normal.

Unidentified Analyst : And then, I guess, just as a follow-up, you mentioned the cost-cutting initiatives you guys are looking into for this year. Can you provide some color on what exactly you guys are looking into doing next? Thanks.

Steven Bender: Sure. This is Steve. Good morning. As you could see that we’ve already accomplished in 2022 a meaningful initiative with about $50 million recognized in ’22, and we’re building on that as we look at ’23. And so of that $55 million to $105 million that Albert spoke to, about 80% of that relates to improvement in logistics and procurement initiatives. And the other 20% is really additional synergies that we see coming from the opportunities from the acquisitions that we took.

Operator: And our next question comes from Kevin McCarthy from Vertical Research. Your line is now open.

Kevin McCarthy: Yes, good morning. Steve, your cash flow from operations came in a bit higher than we had forecast. And so could you comment on your working capital experience in 2022 and how you would expect working capital to trend in ’23?

Steven Bender: Yes, Kevin, good question. And so as you can see, we continue to see the growth in the business. And with the elevated pricing that we saw in the first half of 2022, in the latter half of 2022, we continue to collect those higher dollar value receivables. And of course, as prices continued to decline during the second half of 2022, those were replaced with lower value dollar receivables. So a strong cash flow year in 2022. As you can see from Roger’s comments earlier, we’ve seen some pickup in demand and that mix of — that product shift into — back to more of a domestic weighted business where we have better pricing and better margins, I would expect to continue to see a strong and robust cash flow as you mentioned that we had in ’22. Obviously, as we go forward, we’ll see where prices trend. But I still expect that we’ll still see strong cash flows in ’23 we march forward.

Kevin McCarthy: And then secondly if I may, in the segment information that you provide, corporate and other is usually an expense. And if I’m reading this quarter correctly, it looks like it swung to a $40 million source of income. Is that correct? And if so, what is driving that swing?

Steven Bender: Yes, Kevin, that is correct. And so we had kind of a non-recurring item that I would characterize. It was a release of a PVC-related reserve. And so it’s kind of a non-recurring item. You’re right. We typically have a headwind there between $10 million and $15 million in the quarter. But this quarter, we certainly had a benefit this quarter.

Kevin McCarthy: Thanks very much.

Operator: And our next question comes from Mike Leithead from Barclays. Your line is now open.

Michael Leithead: Great, thanks. Good morning, guys. First question, just on energy prices in Europe, obviously, they’ve come down quite a bit in the past few months. Have you started to pick back up your utilization rates in Europe? Or does it still not make much sense? I guess can you speak to just the relative economics that maybe supplying Europe from U.S. or other areas versus kind of domestic production as we sit here today?

Roger Kearns: Yes, Mike, thanks. It’s Roger. Certainly, we saw with the extremely high energy prices in Europe, Europe was in a situation where it could not be competitive at all in the world. And so we had production rates down very low in — late in Q4. And I think what we’re seeing now with the lower energy rates is we can compete. And we can even do some exports from Europe, which is helping us get the operations back up. I would not say we’re back to full speed, but we’re significantly better now in Q1 than we were in Q4, I would say. And that’s both the Epoxy business and the Vinyls business that we have there.

Michael Leithead: Great. That’s helpful. And then second, I know you kind of touched on a little bit about some pickup in demand as we started the first quarter. Can you speak to China? I guess it’s early days, but just kind of what you’ve seen coming out of winter New Year there and from the demand standpoint in that region.

Albert Chao: Yes. This is Albert. Certainly, China’s — the COVID event seems it’s gone in China, where people are going back to work and people going to the streets. But the economy is still weak. I think it takes a while for economic pickup. And the government is doing a lot to try to stimulate the economy. So we expect sometime in the end of the first quarter, beginning of the second quarter, things will improve a lot more than today.

Michael Leithead: Great. Thank you.

Operator: And our next question comes from Josh Spector from UBS. Your line is now open.

Josh Spector: Hi, thanks for taking my question. Just curious with HIP. Can you talk about — is there a percentage of that segment which has a normal start-of-year pricing reset that we should be considering in our models?

Albert Chao: Yes. I think most of the pricing reset in HIP and also in PEM pretty much started at the — and finished at the end of the year. So maybe some small portion is in the beginning of the year, but mostly, it’s happened in the 2022 year-end.

Josh Spector: Okay. I guess maybe to dig in that a bit more then, so I mean, pricing was pretty stable sequentially, which was a pretty impressive result. I mean, PVC prices are off maybe 10%, 20%. So is that more of a December comment that then rolls into the early part of this year? Or am I just missing it through the noise of other things within the segment? Thanks.

Roger Kearns: Yes, Josh, I would say pricing did remain relatively stable in Building Products. And what we’re seeing in the first of the year is we’ve seen a $0.01 increase in PVC in January. There’s another $0.09 of increases announced for the next two months. So I think that future look of where PVC is going is moderating changes in the building products pricing.

Josh Spector: Okay, thank you.

Operator: And our next question comes from David Begleiter from Deutsche Bank. Your line is now open.

David Begleiter: Thank you. Good morning. Albert, on polyethylene, you got a $0.03 per pound increase in January. I know they’re about — there are $0.06 per pound increase out there for February. What’s potentially think for additional polythene price increases in February, maybe even March?

Albert Chao: Yes. Polyethylene, there has been a lot of price adjustments, year-end adjustments. So the January, we had a $0.03 price increase offset by non-market adjustments. And I think depending which consulting you’re looking at in Chemical Market Analytics, CMA, they are looking at additional $0.03 decrease in May, and that’s flat through the year. However, the industry, we have additional $0.03 to $0.05 a pound price announcements in February and try to recoup some of the price decreases that occurred last year. So time will tell with the strength of China recovering. I think overseas prices are improving. So export price improving overseas, there could be some benefit of increasing the prices in February or March.

David Begleiter: And just on caustic, Albert, do you think caustic price can hold up here in this current environment?

Albert Chao: Yes. That’s a good question. I think caustic prices has really done — performed very well in 2022. And some of the industry consultants are projecting prices to gradually come down this year through the first half and into the third quarter. So — and as the PVC demand increases across the world, there’ll be more production of caustic and more supplier of caustic. So possibly caustic price will ease during the year.

David Begleiter: Thank you.

Operator: And our next question comes from Michael Sison from Wells Fargo. Your line is now open.

Michael Sison: Good morning. I think you all mentioned that demand looks a little bit better first quarter for PVC polyethylene. Are your operating rates going to go up sequentially? And given the lower costs that you’re seeing, should margins or EBITDA improve as we head into the first quarter or the fourth directionally?

Roger Kearns: Yes. It’s Roger. So certainly, I would say we’re seeing in Q1 and based on the North American advantage, both PVC and polyethylene can run strong. So I think the demand kick that we’re picking up in domestic helps us make our balance, as I say, looking much more of a normal mix between export and domestic. So yes, I would say we’ll continue to run our plans strong in the first quarter.

Michael Sison: Okay. And then for HIP, you gave us the range for sales for 2023. There are some folks who think the second half will be more difficult. Some folks think first half might be more difficult. Any thoughts on how the halves sort of work out in your HIP outlook, better first, say, worse second or just any thoughts there?

Steven Bender: Yes. So Mike, it’s Steve. And so I would say that you see that we’ve come down dramatically from the end of the — from over ’22 as we saw a lot of, in effect, pull back because of rising rates. And so as you think about where the Federal Reserve is moving with their move on rates, there is an expectation that those rates begin to kind of slowdown in terms of the level of increases. And there is a lot of market chatter about that slowing towards the end of this year. And I think if there is a sentiment that rates begin to plateau that you could see some more positive sentiment come into the market. I would note that the Mortgage Bankers Association has seen a recent increase in applications. And that tells you that consumers are becoming a bit more confident as they look forward that these rate increases will be less aggressive and home prices become more affordable.

So there is some probably market view that probably the second half is a more constructive half of the year than the first half of the year.

Operator: And our next question comes from Duffy Fischer from Goldman Sachs. Your line is now open.

Duffy Fischer : Good morning. First question is just around the Epoxy acquisition. You’re kind of a year into it now. It’s been at the tough year here. So, can you do an after-action review? I mean, does the industry need to have some structural change? Does your business need to have some structural change? Or is this just really kind of a bad supply-demand setup right now that will fix itself over the next couple of years?

Roger Kearns: Yes. Thanks, Duffy, it’s Roger. Maybe a couple of comments there. I think Epoxy business for our first year, we started extremely strong. The first part of the year was a very strong part of the business. But as we move through the year, it certainly got weaker. And by the end of the year, I would say the fourth quarter was really quite weak. I think there’s a couple of things as we look forward. We have seen China announced already in ’23 nearly a doubling of the wind energy installations over ’22. So, we’ll have to watch and see how that plays out. But that should be kind of a nice boost in the markets. As you know, there’s — I mean, there’s a limited number of Western players. We’ll continue to do what we do, which is make our plants run more efficiently, more cost effective.

We’ll copy our Westlake model into those sites. So, I think there’s some self-help work we’ll do, but hopefully as well with aviation, automotive and some wind energy picking up a little bit in ’23, we can get the ’23 looking better than certainly the end of ’22.

Duffy Fischer : Fair enough. And then the stat or the projection you threw in there on remodel and repair at 2.6% for the year, one, is you’re just talking to your customers as you’re looking at your order book, does that feel like kind of the right number? And then maybe like a follow-on to the last question, if that ends up being the right number, how does that look first half versus second half do you think?

Steven Bender: So, Duffy, it’s Steve. And I would say that the tone that we saw at the builder show recently was constructive, and I think it aligns with the tone that we saw from those that visited the builder show. And certainly, there is some expectation that will continue on as we go forward. Typically, when housing starts slow, repair and remodeling show strength. And so, there is a typical investment cycle that homeowners always undertake. And that is they’re either improving their home either to sell to move forward or improving their home because affordability to move on to a new home is too expensive. So, we do think that, that aligns with the tone we’re hearing from our customers and consistent with the contributions we think it will make to the business over the course of ’23.

Operator: And our next question comes from Frank Mitsch from Fermium Research. Your line is now open.

Frank Mitsch: Good morning, and thank you. Steve, you mentioned that you have a big turnaround, I believe, in Calvert City in May. And I was wondering if you could provide a little more granularity. Is that pretty much the only major turnaround that you’re going to be facing this year? Any sort of color there would be very helpful.

Steven Bender: Yes. So, Frank, we do have a turnaround starting in May for 30 days. We certainly have turnarounds in many of our other units all throughout the course of the year. Because these turnarounds will move from quarter-to-quarter and change over the course of the year, we’ve kind of shied away from giving discrete quarter-by-quarter guidance in terms of turnarounds. It will be a slightly busier year in turnaround activity in ’23. But I would say that if you look at prior year’s turnaround activity, it’s consistent with the operating rates that we historically had. But I called out the Calvert City turnaround because it is — turnaround is going to be 30 days in length and because it impacts our ethylene units and the entire site accordingly.

Frank Mitsch: Great. Thank you. And Albert, if I could come back to the comment regarding chlor-alkali and expecting to see higher volumes as we progress through the year, PVC demand improving and then therefore, you get more co-product caustic soda, and so therefore, price might be under some pressure. But of course, we’re ending the year at a higher level than we began 2022. So, I’m just curious how you think about ’23 average pricing in your chlor-alkali business on the essential materials side relative to ’22. Do you think that as we look at the full year, we’re looking at something like a flattish sort of environment? Or do you think the degradation might be even greater than that?

Albert Chao: Well, yes, Frank, that’s a good question. One of the industry consultants, as I said earlier, looking at the gradual decline from January through September. But as we said earlier, interesting that in 2022, prices start low, went up, and then 2023 the forecast is from up and kept it lower. But the average for the whole year for 2023 as embedded by the consultant is not that too much different on the average of 2022. And for that information also, they’re looking at 2024, of course, it’s crystal balling. The average ’24 prices are almost similar again to 2023. So, people are expecting some kind of flat in price. And the demand globally, as you know, caustic really follow GDP as the global economy recovers from COVID and China comes back into more normalized growth.

India is still one of the strongest emerging market economic growth. We will see demand for caustic to improve. And U.S. has the lowest cost producer from a low-cost natural gas, low-cost energy and power. And also, we have available salt nearby. So, I think U.S. chlor-alkali industries will be able to capitalize on any of the demand increase around the world.

Frank Mitsch: Got it. Thank you, so much.

Operator: And our next question comes from Jeff Zekauskas from JPMorgan. Your line is now open.

Jeffrey Zekauskas: Thanks, very much. On Slide 4, you said that you increased your ECUs by 120,000 tons. Where did you do that? And what utilization rate or roughly what utilization rate is it running at?

Roger Kearns: Yes, Jeff. Thanks. It’s Roger. One of the beauties of our footprint is we’ve got a number of different sites. And so, we’re able to low-cost debottlenecks in a number of different sites. And so that 120,000 comes from a couple of different projects mostly across the Gulf Coast. But I would say, in general, for our chlor-alkali assets, we’re going to run them strong. So, if we’re not running them strong is because we’ve had an issue, it’s not because we’re trying to sell them down.

Jeffrey Zekauskas: So, this is all up and running and was added in 2022?

Roger Kearns: Yes. We completed them in 2022.

Jeffrey Zekauskas: Okay. My follow-up, there was the vinyl chloride release in Ohio. Do you think that, that has implications for the chlorovinyl industry? Or do you think that, that will lead to some kind of change? Or do you have any general comment?

Albert Chao: Yes. I think people are waiting for the surface transportation safety board come back with the report. I’m sure there’ll be more government regulation on railroads and possibly on the shippers on safety. These are very important products that ship around the country. So, the demand has to be satisfied. But definitely, we need to increase the safety by the variables primarily. I will think on the equipment, some of them getting old, and we heard new technologies out there to improve the safety aspect of the railroads.

Jeffrey Zekauskas: Thank you, so much.

Operator: And our next question comes from Matthew Skowronski from Credit Suisse. Your line is now open.

Matthew Skowronski: Good morning. Within your Housing Infrastructure Products margin guide, what are you assuming for raw material costs relative to 4Q levels?

Steven Bender: Well, as we think about the margin that you’ve seen in our HIP business, I think you’ve been able to see that we’ve been able to — be able to pass those costs through. And so, as we see prices rise and I think Roger made reference to the price nominations we have for PVC in the first quarter, we and our housing businesses have been able to see good price traction that I think you noted from one of the comments and from one of the slides that we are able to hold prices over the quarter. And so, while we saw reductions in volume, pricing was actually fairly stable. And so, if we see continued pressure on prices coming in on feedstock’s, be it PVC or others, we’ll obviously look to see what we can do to manage that. But if we have to, we’ll pass those through.

Matthew Skowronski: Understood. Thank you, Steve. With regard to M&A, would you consider moving outside of current market verticals you already participate in?

Steven Bender: Well, I think you’ve seen that where we see adjacencies, I would use Epoxy of that. I would use some of our acquisition experiences in ’21, like Boral where we saw some adjacencies. That make good sense. They provide synergies to us and provide an opportunity to extend the integration model that we have, whether it’s a sales integration approach that we’ve taken with our Boral business or whether it is a materials integration strategy that we have with our Epoxy acquisition. So, the answer is as long as we see good synergy and good value, we’ll look at adjacencies to our existing businesses.

Matthew Skowronski: Thank you.

Operator: And our next question comes from Angel Castillo from Morgan Stanley. Your line is now open.

Angel Castillo: Hi. Thanks for taking my question. Just wanted to maybe put the exports question on a little bit and as you think about a shift to more domestic, I think one of the areas that has kind of pressured the industry, both kind of in vinyl but also in areas like epoxy were this idea that, I guess, the exports were seeing a greater degree of pressure from other regions exporting products. What are you seeing in that, I guess, competitive environment? Are you still seeing product come from Asia? Or are you seeing some of that start to stay domestically more? And as you raise — or I guess, raise operating rate, how do you see that kind of evolving in terms of the impact for that market?

Roger Kearns: Yes. Thanks. It’s Roger again. I think what we’ve seen on the export markets for both polyethylene and PVC is a bump up in pricing around the world. So, PVC is up by more than $0.10 a pound on the export side. And so that’s helping us. I would say we’re still, as Albert mentioned, little watch and see on China’s recovery. But India has come out quite strong and has really been, I would say, supporting a lot of the markets heading in that direction. So, we’re seeing improved pricing on exports. And at the same time, that helps a little bit on the — impacts a little bit the pressure or the pricing in the domestic market as well. But so, we’ll — as I mentioned earlier, our U.S. assets have a cost advantage on raw materials, and we plan to run them.

Angel Castillo: Helpful. And then you used to give a sensitivity to natural gas prices. Could you just remind us what I’ve got today, particularly given the volatility of our operating rates whether the lower cost kind of should flow through on a relatively immediate basis or if there’s a little bit of a lag, I don’t know, looking back to consider that.

Steven Bender: Yes. And so, we — the sensitivities that we provided are still appropriate here. When you think of natural gas in our markets, $1 in MMBTU is about $106 million of EBITDA impact. And certainly, when we think of — in our European business, a EUR 10 — 10,000 KWH is about EUR 10 million impact.

Angel Castillo: And that short number should flow quite quickly.

Steven Bender: Right.

Angel Castillo: Got it. Thank you.

Operator: And our next question comes from Eric Petrie from Citi. Your line is now open.

Eric Petrie: Good morning, everyone. Just going back to the exports. We saw a lot of competitive pressures from China exporting more caustic soda, more PVC. Think PVC prices in China right now are around $0.40 closer to $0.90 here in the U.S. domestic market. So, what are your expectations in 2023? And what have you seen year-to-date out of China?

Albert Chao: Yes. As China’s economy improves and China’s industry wouldn’t have to export low prices. And by the way, I think the PVC pricing quote in the U.S. is a list price, not the actual price. So certainly, U.S. can compete with any PVC producer around the world. And as Roger said that the industry, able to export. And we’re going forward still until the U.S. housing market returns, export will be a big part of the U.S. PVC producers. And China, they have a very high energy cost and even coal, some of the PVC are produced from coal-based technology. But the coal prices are also very high. So, I think China, they were exporting some quantities just to keep the plants running, but as total demand improves, be exporting less.

Eric Petrie: Thank you, Albert. And then maybe a question for Roger on your comment of the doubling of installations in China. What does that do to kind of supply-demand balances in the country? And then how much capacity is China adding this year and kind of what needs to be absorbed from last year?

Roger Kearns: Yes. So, I think wind in China is — China is a big driver of the wind market. And so, they’ve got RFQs out there, say, about double this year what they’ve done last year. That’s a good first step, I think, in really starting to absorb the extra capacity that’s come in as well as avoid the exports, right? So as Albert mentioned, with the China domestic market so slow, the China producers are exporting significant amounts. I think that will turn back inside and be used in China as opposed to hitting the export markets.

Eric Petrie: Thank you.

Operator: And our next question comes from Arun Viswanathan. Your line is now open.

Arun Viswanathan: Thanks for taking my question. Just curious, you made the comment about was well new construction does return. How much of your business really is tied to new construction now? I know within building products, you have some more exposure to repair and remodeling and — but it’s kind of muddy just because there is so many other overlapping factors. So how much of your business would you say is your sales or EBITDA is maybe tied to new construction? Thanks.

Albert Chao: Yes, Arun, our Building Materials business, about 50% is targeted to the new construction market and 50% to the repair and remodeling market. And as you heard earlier, Steve mentioned about the new home construction forecast to be going from 1.5 million units last year to about between 1.1 million, 1.3 million units this year and next year. That’s the forecast, and that’s about a 20% drop. And repair remodeling, as Steve also mentioned, index, they are looking at modest growth this year. So, if it’s 50-50 weighting then 20% drop in new construction, modest growth in repair, remodeling. We foresee potentially a 10% reduction in volume compared to last year. So that’s kind of order of magnitude estimate impact.

Arun Viswanathan: What about PEM? I mean, there is the PVC resin production, but that’s potentially offset by some of your infrastructure exposure there. How would you characterize the new construction exposure within PEM?

Roger Kearns: Yes. So, it’s Roger again. I mean, I think we do have certainly some pull-through on the PEM side through the housing materials construction piece. The second piece we have there that I would say it’s still early on is the impact on the infrastructure part of HIP from the infrastructure, the RRA because we expect still that there will be significant estimates in water systems throughout the U.S. And so, we’re still at the early stages of starting to see that through. So, I think those two pieces will continue to pull PVC through. An exact number, I don’t have an exact number in PEM on new construction, think about that.

Albert Chao: And this is Albert. As what I said earlier, the industry, whatever they cannot supply to domestic market, they will export.

Arun Viswanathan: Okay. Got it. And then just as a quick follow-up, the $1.2 billion closed acquisitions in ’22, would you expect a similar amount in ’23? Or what are your kind of preferences for cash at this point?

Steven Bender: So, Arun, I was chuckling. The answer is we look for value-added opportunities. And so, it’s hard to know exactly whether there’ll be an opportunity to transact in any particular year. But we’ll always look for opportunities that are going to be value added. And so, you’re right, over the last couple of years, it’s been a very busy period of time to really add businesses to the overall portfolio. But those were all businesses that we thought were really great additions to the portfolio that we had compelling synergies, as you could see from the numbers we’ve talked about earlier. So, there’s going to be an ongoing process as there always has been to look for opportunities, but it’s hard to know whether those will play out and materialize in ’23.

Arun Viswanathan: Great. Thanks.

Operator: And at this time, the Q&A session has ended. Are there any closing remarks?

Jeff Holy: Yes. Thank you again for participating in today’s call. We hope you’ll join us again for our next conference call to discuss our first quarter 2023 results. Thank you.

Operator: Thank you for participating in today’s Westlake Corporation fourth quarter and full year earnings conference call. As a reminder, this call will be available replay beginning two hours after the call has ended. The replay can be accessed via Westlake’s website. Goodbye.