Westlake Corporation Reports Second Quarter 2023 Results

Business Highlights

In the second quarter of 2023, Westlake achieved quarterly net sales of $3.3 billion, quarterly net income of $297 million and quarterly EBITDA (earnings before interest expense, income taxes, depreciation and amortization) of $690 million. Compared to the first quarter of 2023, our HIP segment benefited from a seasonal increase in residential construction demand and lower raw material costs that more than offset lower average selling prices. Infrastructure Products and Housing Products contributed to the HIP segment sequential volume growth helping to improve segment results. Meanwhile, soft global manufacturing and industrial activity drove lower PEM sales volumes and average selling prices, particularly for caustic soda and epoxy. PEM operating income and EBITDA were also impacted by unplanned outages. Overall, the improvement in HIP results were insufficient to offset the declines in PEM performance, resulting in lower net sales, net income and EBITDA compared to the first quarter of 2023.

Performance and Essential Materials average sales prices decreased 6% while Housing and Infrastructure Products average sales prices decreased 2% from the first quarter of 2023. Overall sales prices for the Company decreased 4% sequentially from the previous quarter. When compared to the second quarter of 2022, PEM average selling prices decreased 21% while HIP average selling prices were down slightly resulting in a 15% overall sales price decline for the Company.

Sales volumes for Performance and Essential Materials decreased 4% while Housing and Infrastructure Products sales volumes increased 13% from the first quarter of 2023. Overall sales volumes for the Company increased 1% sequentially from the previous quarter. When compared to the second quarter of 2022, PEM sales volumes decreased 10% while HIP sales volumes decreased 18% resulting in a 13% overall sales volume decline for the Company.

In the second quarter of 2023, PEM's EBITDA margin decreased to 20% from 26% in the first quarter of 2023 while HIP's EBITDA margin increased to 22% from 20% over the same period of time. When compared to the second quarter of 2022, PEM's EBITDA margin decreased to 20% from 37% while HIP's EBITDA margin was unchanged at 22%.

Executive Commentary

"Our second quarter of 2023 results reflected the continuing weakness in global manufacturing and industrial activity that began in the second half of 2022. We did not see a seasonal increase in Performance and Essential Materials demand in the Spring, which led to a continuation of the soft macroeconomic backdrop into the second quarter that combined with unplanned outages which drove sequential and year-over-year declines in our PEM segment EBITDA. Results in our HIP segment, while lower than the all-time record second quarter of 2022, provided stability to our overall earnings with sales volumes, operating income and EBITDA all improving from the first quarter of 2023 levels. The sequential sales volume improvement was widespread across Infrastructure Products and Housing Products," said Albert Chao, President and Chief Executive Officer.

"Looking ahead to the remainder of 2023, in our PEM segment we will focus on improving controllable costs and commercializing innovation that addresses customer sustainability challenges so that we will be well-positioned as market conditions improve. Meanwhile, in our HIP segment we believe that our diverse suite of product offerings with varied price points position us well to help our customers address homebuyer affordability concerns through substitution of materials. Finally, we continue to seek opportunities to redeploy our robust free cash flow and solid balance sheet in ways that enhance shareholder value."

Results

Consolidated Results

For the three months ended June 30, 2023, the Company reported quarterly net income of $297 million, or $2.31 per share, on net sales of $3,251 million. The year-over-year decrease in net income of $561 million from the second quarter of 2022 was primarily due to lower average sales prices and integrated margins in Performance Materials and lower operating rates and sales volumes across almost all product categories. These factors were only partially offset by higher Essential Materials average sales prices.

Second quarter 2023 net income of $297 million decreased by $97 million compared to the first quarter of 2023. The sequential decrease in net income compared to the prior quarter was primarily due to lower average sales prices and margins in our PEM segment, which was only partially offset by higher sales volumes in our HIP segment.

EBITDA of $690 million for the second quarter of 2023 decreased by $766 million compared to second quarter 2022 EBITDA of $1,456 million. Second quarter 2023 EBITDA decreased by $135 million compared to first quarter 2023 EBITDA of $825 million.

Cash and Debt

Net cash provided by operating activities was $555 million for the second quarter of 2023. As of June 30, 2023, cash and cash equivalents were $2,677 million and total debt was $4,894 million. Capital expenditures in the second quarter of 2023 were $240 million. For the second quarter of 2023, free cash flow (net cash provided by operating activities less capital expenditures) was $315 million, a decrease of $368 million as compared to the second quarter of 2022, primarily due to lower net income.

Performance and Essential Materials Segment

Performance and Essential Materials income from operations for the second quarter of 2023 of $215 million decreased by $750 million from second quarter 2022 income from operations of $965 million. This decrease in income from operations versus the prior-year period was due to lower polyethylene and PVC resin average selling prices and integrated margins, as well as lower operating rates and sales volumes, particularly for epoxy, which were only partially offset by higher caustic soda average selling prices and lower feedstock and energy costs. As a result, PEM's segment operating margin declined from 31% in the second quarter of 2022 to 10% in the second quarter of 2023 and EBITDA margin decreased from 37% in the second quarter of 2022 to 20% in the second quarter of 2023.

Sequentially, Performance and Essential Materials income from operations decreased by $188 million as compared to the first quarter of 2023. The sequential decrease was largely due to unplanned outages, lower average selling prices for caustic soda and lower global operating rates and sales volumes for PVC resin and epoxy, which were only partially offset by increased sales volume of polyethylene and chlorine.

Housing and Infrastructure Products Segment

For the second quarter of 2023, Housing and Infrastructure Products income from operations of $190 million decreased by $46 million from second quarter 2022 income from operations of $236 million. This decrease in income from operations versus the prior-year period was the result of lower sales volumes, particularly in Infrastructure Products. Despite the 18% volume decline compared to the prior-year period, HIP's segment operating margin of 17% and EBITDA margin of 22% in the second quarter of 2023 were in line with the second quarter of 2022 as lower raw material costs and sales mix shift to repair & remodel offset unabsorbed fixed costs and lower average selling prices.

Sequentially, Housing and Infrastructure Products income from operations increased by $47 million as compared to the first quarter of 2023. This increase in income from operations versus the prior quarter was the result of seasonally higher sales volume, lower raw material costs and the strong value of our branded products.