Westlake Corp

NYSE:WLK

Earnings Call Transcript 2021-Q2

[Operator]

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Westlake Chemical Corporation Second Quarter 2021 Earnings Conference Call. During this presentation all participants will be in a listen-only mode. [Operator Instructions] As a reminder ladies and gentlemen this conference is being recorded today, August 3, 2021.

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, Vice President and Treasurer]

Thank you, Julia. Good morning, everyone, and welcome to the Westlake Chemical Corporation Second Quarter 2021 Conference Call. 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. The conference call agenda will begin with Albert, who will open with a few comments regarding Westlake’s performance and a current perspective on the industry. Steve will then provide a more detailed look at our financial and operating results. Finally, Albert will add a few concluding comments, and we’ll then open the call up to questions.

During this call, we refer to ourselves as Westlake Chemical. Any reference to Westlake Partners is to the master limited partnership, Westlake Chemical Partners LP, and similar references to OpCo refer to our subsidiary, Westlake Chemical OpCo LP, which owns certain Olefins facilities. Today, management is going to discuss certain topics that will contain forward-looking information that is based on management’s beliefs as well as assumptions made by and information currently available to management. These forward-looking statements suggest predictions or expectations and thus are subject to risks or uncertainties. Actual results could differ materially based on many factors, including the cyclical nature of the industries in which we compete, availability, cost and volatility of raw materials, energy and utilities; governmental regulatory actions, changes in trade policy and political unrest; global economic conditions, including the impact of the Coronavirus; industry production capacity and operating rates; impacts of extreme weather events; the conditions to the closing of Boral, LASCO and Dimex acquisitions may not be satisfied or the closing of either acquisitions otherwise may not occur. The supply demand balance for Westlake’s products; competitive products and pricing pressures; access to capital markets; technological developments and other risk factors as discussed in our SEC filings.

This morning, Westlake issued a press release with details of our second quarter results. This document is available in the Press Release section of our web page at westlake.com. We have also posted a presentation on our website to review the second quarter results. A replay of today’s call will be available beginning today, two hours following the conclusion of this call. This replay may be accessed by dialing the following numbers: Domestic callers should dial [phone]. International callers may access the replay at [phone]. The access code for both numbers is 4594733.

Please note that information reported on this call speaks only as of today, August 3, 2021, and therefore, you’re advised that time-sensitive information may no longer be accurate as of the time of any replay. I would finally advise you that this conference call is being broadcast live through an Internet webcast system that can be accessed on our web page at westlake.com.

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

[Albert Chao, President and Chief Executive Officer]

Thank you, Jeff. Good morning, everyone. We appreciate you to joining us to discuss our record second quarter 2021 results. In this morning’s press release reported record net income excluding prior one-time tax benefits for the second quarter of 2021 of $522 million or $4.04 per share as well as quarterly records for net sales, operating income, and EBITDA. Net income for the quarter increased $507 million from the second quarter of 2020. Demonstrating the strength of our business and that the economic recovery to expansion from the impacts of the pandemic.

Before we dive into our record results, I just wanted to make some brief comments on our recent acquisitions. Westlake’s leading positions in PVC siding, trim and molding, compounds, pipe and fittings provide our residential and commercial customers with a comprehensive building products portfolio of PVC products and solutions. We have recently announced two acquisitions in the building and construction materials space that will provide exciting new platforms of growth and development for Westlake.

In June, we announced we will be acquiring Boral North America’s building products business. This acquisition will place Westlake into leading positions in concrete and clay roofing, premium PVC siding, trim and shutters, decorative stone, and PVC windows creating new strategic product platforms, complementary to our existing building products business. These products improve the energy efficiency, durability, and value in residential housings, schools, hospitals and other buildings while enhancing the everyday lives of countless individuals.

Additionally, we announced in July that we will acquire LASCO Fittings, a leading manufacturer of injection-molded PVC pipe fittings. The addition of LASCO we’ll further expand our PVC fittings offering footprint into additional markets, serving the plumbing, pool and spa, industrial, irrigation and retail markets in the North America. This product mix is also complementary to our existing product portfolio, our PVC pipe and larger diameter fittings.

Yesterday, we announced plans to acquire Dimex LLC, one of the largest processors of recycled plastic materials in the United States. Dimex the producer of a variety of consumer products made from processed post-industrial-recycled PVC, polyethylene, and thermoplastic elastomer, and sell these consumer products to national retailers for home and commercial uses. We anticipate closing these transactions in the second quarter – in the second half of this year look forward to welcoming Boral, LASCO and Dimex employees to the Westlake family.

Now, turning to our second quarter results. Our earnings for the second quarter of 2021 reflect a robust demand for most of our products in strong pricing environment. The strengths in global demand in PVC and polyethylene resulting from the growth in building and construction, and the strengths in consumer packaged goods, drove price increases and margin expansions across both of our business segments.

The 23% year-over-year increase in U.S. housing permits demonstrated the strength in residential construction activity that is driving U.S. demand for PVC. Benefiting both our Vinyls and downstream building products businesses. The demographics of the U.S. population in peak household formation ages paired with a lack of housing stock over the last 10 years, and limited global PVC capacity additions create a secular and structural strengths in demand for PVC and building and construction materials.

In our Olefins segment Westlake experienced strong margins as the polyethylene industry experienced strong ongoing global consumer packaging product demand, and tight inventory conditions due to lingering effects of the severe winter storm in February. Westlake has made significant progress in our strategic growth plans this year, and will – and with a tight supply demand picture we believe our businesses are very well positioned going forward.

I will now like to turn our call over to Steve to provide more detail on our financial and operating results for the second quarter.

[Steve Bender]

Thank you, Albert, and good morning everyone. I will start with discussing our consolidated financial results. And then we’ll go into a more detailed review of our Vinyls and Olefins segment results. In the second quarter, Westlake benefited from the continuing global economic expansion resulting in healthy demand for a majority of our products. We reported net income of $522 million, which excluded the one-time tax benefit of $591 million in the fourth quarter 2017, is a quarterly record for Westlake.

In addition, we reported record income from operations of $720 million in record EBITDA of $932 million for the second quarter of 2021. The $507 million increase in year-over-year net income is a result of significantly higher sales prices and margins for PVC resin and polyethylene, as well as strong earnings in our building and construction materials business. Second quarter 2021 net income increased by $280 million from first quarter 2021 net income of $242 million. The increased net income was largely attributable to the higher sales prices and margins for PVC resin and polyethylene.

As Albert noted earlier our higher sales prices and margins were driven by global strong demand in construction and building materials as well as consumer packaged goods. Our building and construction materials business also continue to experience strong results as North American housing demand remained robust.

For the first six months of 2021, net income was $764 million, or $5.91 per share an increase of $604 million from the first six months of 2020. The increased net income was attributable to higher global sales prices for our major products driven by a rebound in demand for product offerings. For six months of 2021 did reflect approximately $120 million impact caused by winter storm Uri, but continued strong demand drove higher product margins for PVC, resin and polyethylene as a result of higher prices. Our utilization of the FIFO method of accounting resulted in less than $1 million difference compared to what earnings would have been if we reported on the LIFO method. This is only an estimate and has not been audited.

Now, let’s move on to discuss the performance of our two segments starting with a Vinyls segment. The robust global demand for PVC was anchored by strong global construction activity. Our building and construction materials business continue to benefit from robust North American residential construction and repair and remodeling demand. These factors drove higher PVC sales price in the segment, and we’ve benefited from strong integrated margins during the quarter.

For the second quarter of 2021 Vinyls operating income was a record $435 million, increasing $415 million from the prior year period as average sales prices increased to 54%, and sales volumes increased 9% driving higher margins for PVC resin. We also benefited in the second quarter by solid earnings driven by strong sales prices and volumes in our building and construction materials business. For the second quarter of 2021 Vinyls operating income increased $235 million from first quarter 2021 as a result of average sales prices being up over 18%. Higher sales volumes for PVC resin and strong earnings are building and construction materials business driven by higher prices.

And our Olefins business, robust global demand for consumer product packaging drove polyethylene prices higher in the second quarter and expanded margins. Industry consultants reported polyethylene price increases in the second quarter of $0.19 per pound, and average sales prices for Olefins segment were up 26% in the quarter.

Olefins second quarter 2021 operating income of $277 million, increased $252 million from the second quarter of 2020 driven by strong pricing and margins are partially offset by lower sales volumes resulting from the lingering effects of winter storm Uri and our own planned maintenance activities. For the second quarter of 2021, Olefins operating income increased $97 million from first quarter 2021 primarily due to higher sales prices and margins.

Next, let’s turn our attention to the balance sheet and statement of cash flows. We generated $617 million in cash flows from operations in the second quarter of 2021, resulting in total cash and cash equivalents of $1.8 billion. Second quarter 2021 capital expenditures were $129 million. We maintain a long dated debt maturity profile with a weighted average debt maturity of 13 years while maintaining strong credit metrics, anchoring our investment grade balance sheet.

Now to address some of your modeling questions, we expect our effective tax rate for the full year of 2021 to be approximately 23% and a cash tax rate of approximately 20%. Our capital expenditures forecast for the year is expected to be between $750 million and $850 million. We are planning for a turnaround of our Petro II ethylene unit to begin in September of this year. We expect this turnaround and associated outage to last approximately 60 days.

With that, I’ll now turn the call back to Albert to make some closing comments, Albert?

[Albert Chao, President and Chief Executive Officer]

Thank you, Steve. Westlake’s customer focus product portfolio is well positioned to continue to benefit from the strong demand environment we are experiencing. This quarter’s results illustrated earnings capacity of Westlake and highlights the value of our products and our high level of integration, which extends through the value chain from natural gas liquids and other feedstock’s through to consumer building products.

As supply chains and manufacturing fully recover, to meet the global, the globally strong demand for consumer and industrial products, Westlake is well positioned to continue to deliver strong results. We see PVC supply demand fundamentals remaining favorable, with a growth in demand more than offsetting the limited global supply additions. We also believe that rebounding manufacturing activity will drive caustic supply demand fundamentals to improve. We see the global strengths in construction, especially North America residential construction and repair, remodeling activity continuing to drive demand for our building and construction materials. In our Olefins business demand remains robust as essential everyday products such as consumer packaging, and healthcare, dry polyethylene volumes.

The strategic acquisitions of Boral North America and LASCO provide Westlake the springboard to significantly leverage our participation in this strong housing and repair, remodeling market by adding to our current product portfolio. Housing starts increased again in May, and are projected to continue to rise. The secular strengths in housing and repair, remodeling supported by a limited supply of single family homes due to a decade of under building on comparing demographics of homebuyers in the U.S.

The proposed $1 trillion infrastructure bill would also significantly benefit our building and construction materials business and drive construction demand for many years. Our ongoing growth initiatives are driving expansion of complimentary products to our existing portfolio, which, when coupled with strong market growth will deliver value for our shareholders. We will continue to look at opportunities that goes further our strategy of adding complementary assets, as well as increasing our vertical integration capabilities in all of our business segments to deliver good returns to our shareholders. We’ll do this through the lens of being a good corporate citizen by applying the tenets of ESG as part of a commitment to building a more sustainable future.

As discussed last quarter, a part of our green initiatives includes the introduction of green caustic soda, known as GreenVin, which has a reduced CO2 impact of more than 30% compared to conventional caustic soda. The planned acquisition of Dimex adds to our green portfolio of products and will continue to – we will continue to develop products, they are in line with our sustainability goals while meeting the needs for greener products and deliver value to our shareholders.

We are dedicated to our core tenets, namely to protect the health and safety of our employees, deliver on our value commitments to our customers and be an environmentally and socially responsible corporate citizen, while strengthening all aspects of our company. Anchored by these values, we’re confident Westlake is well positioned to serve to growing worldwide needs of our customers, while maintaining financial discipline, which combined with the strong fundamentals of our business, enables us to deliver long-term value to our shareholders.

Thank you very much for listening to our second quarter earnings call. Now, I’ll turn the call back over to Jeff.

[Jeff Holy, Vice President and Treasurer]

Thank you, Albert. Before we begin to take questions, I would like to remind you that a replay of this teleconference will be available two hours after the call is ended. We’ll provide that number again at the end of the call. Julia, we’ll now take questions.

[Operator]

[Operator Instructions] Your first question comes from the line of David Begleiter [Deutsche Bank].

[David Begleiter, Deutsche Bank]

Thank you, Albert and Steve, have your July polyethylene contracts that’ll be yet did. Where do they settle?

[Albert Chao, President and Chief Executive Officer]

Yes. We believe the July polyethylene contracts will be up $0.05 a pound.

[David Begleiter, Deutsche Bank]

Very good. And the consultants are calling for some erosion over the next four or five, six months here. Do you agree with that conclusion or do you think we’ll see a little more stability and resiliency in polyethylene pricing?

[Albert Chao, President and Chief Executive Officer]

As we said, the demand for polyethylene is still very strong. And some of the industry players says down further price increases in August. And we believe with a global recovery in economy, even though we know there’s a Delta variant that’s being quite contagious. But we believe that the demand for our product still very strong, the industry and customers, eventually is not at high with that back to the pre-pandemic levels yet. So, we believe with strong demand, and there’s some capacity coming up, but – so end of the year, or next year, and globally. So, we believe that prices still be good. Now, will it go down a bit probably? But now the prices are very good today. And industry can find whether some of the price volatilities.

[David Begleiter, Deutsche Bank]

Thank you.

[Albert Chao, President and Chief Executive Officer]

You’re welcome.

[Operator]

Your next question comes from Hassan Ahmed from Alembic Global.

[Hassan Ahmed, Alembic Global]

Good morning Albert and Steve.

[Albert Chao, President and Chief Executive Officer]

Hi, good morning Hassan.

[Hassan Ahmed, Alembic Global]

A question around – and a two part question, one is basically Olefins [ph] obviously be one of the largest producers out in North America has been talking about working away from lower return business. Right. So with that in mind and as they doing that they’re looking into sort of getting into sort of region extending contract moving on to launch the contract in the line. So there are two questions I have around that, are you sort of reconsidering your contracted trial. I understand large amount of story [indiscernible] but you do some dimension market as well. So that’s one side. The second side, it seems that there is a good mobility in the pricing of story and it seems that may have over the next couple of years, how do you see the PVC cost curve changing with that in mind? And how do you – Westlake positioning in this evolving world?

[Albert Chao, President and Chief Executive Officer]

Certainly, yes as, that Westlake is well integrated downstream to our PVC business. So, we look through the value chain as well as to maximize our optimized return to our company and to our shareholders. And we have contracts, we certainly on our contracts. And when contracts coming do, we certainly would work with our customers, many of them are very long-term customers, and to get value of where the market dictates. So, we have a lot more avenues to integrate our chlorine versus some of our competitors with limited avenues. As, the PVC margin today is very, very good. And certainly, we try to maximize the PVC value chain. So absolutely, I think all the companies that everybody’s doing the best for the company, and also looking out for the interest for the long-term customers. So, we’ll balance those two needs.

[Hassan Ahmed, Alembic Global]

Understood. And moving towards the ethylene, polyethylene side of thing, one of the largest sort of producers of polyethylene in North America recently went on record talking about, how the consultant you view is that between now and 2025, there is an expectation of around 31 million tons of polyethylene capacity to come online. And this company’s view is that 215 million tons of those 31 million tons. You may either get delayed beyond 2025 more channels. So, I’d love to hear when Westlake be above that?

[Albert Chao, President and Chief Executive Officer]

Certainly, there’s a lot of capacity being announced, especially Asia, especially in China, as well as some few ethylene plants that’s being announced, but hasn’t gotten into final stage yourself building, starting breaking ground yet. So, we are aware of all these projects. But we believe that time will tell whether all these announced projects will go ahead. As we know that China even though they’re a largest consumer market for polyethylene, they’re still a net importer of polyethylene. And I think U.S. is still net as a large exporter of polyethylene. So what China does has a big bearing on the future supply demand dynamics for polyethylene globally.

[Hassan Ahmed, Alembic Global]

Very helpful, Albert. Thank you so much.

[Albert Chao, President and Chief Executive Officer]

You’re very welcome.

[Operator]

Your next question comes from the line of John McNulty from BMO Capital Markets.

[John McNulty, BMO Capital Markets]

Hi, Albert and Steve.

[Albert Chao, President and Chief Executive Officer]

Hi, John.

[John McNulty, BMO Capital Markets]

So quick question on Dimex. One of the comments made in your press release about the Dimex is one of the largest process about recycled plastic in GreenVin [ph]. Can you provide some detail about the overall market will be affected, how do you see growing and then how the margins are works with the existing platform?

[Steve Bender]

Yes, Dimex is, as we said, in the release, one of the largest players in this recycled materials business, and we see this business as a growing opportunity, you can see that they recycle and reuse, and manufacture products coming from PVC, polyethylene and TPE. So, we continue to see this as a growing important market. And certainly the opportunity is there. You saw in the release that we said their businesses over $100 million in size, and we certainly see very good margins in that business going forward. And that’s the basis behind I think, a very good investment. And we expect to see good returns in the investment in Dimex.

[John McNulty, BMO Capital Markets]

Got it? Within your building products project, are you still seeing around [Technical Difficulty].

[Steve Bender]

You’re cutting out? Can I get you to repeat that question, you were cutting out during parts of the question?

[John McNulty, BMO Capital Markets]

Repeat the questions around the buildings platform? Are you still seeing issues around supply chain and logistics constrained with concrete? And if you are, how much of the earnings potential of the platform submitting subdue because of that?

[Steve Bender]

Well, I would say certainly, there have been some challenges really given the logistics and supply chain. Some of these are additives and plasticizers and such, but we have multiple suppliers that allow us to be able to jockey through those kinds of challenges. Certainly we’ve seen some opportunities continue to grow the business and the ability to continue to meet this growing market demand. So, those challenges while they are sometimes, there we’ve been able to adjust and adapt with our multi sourcing approach in meeting the needs of our customers by sourcing with alternative suppliers of maybe for some of those additives and plasticizers.

[John McNulty, BMO Capital Markets]

Okay. And just one final quick question. If PVC prices are still flat?

[Albert Chao, President and Chief Executive Officer]

Yes, I think PVC was a flat.

[Steve Bender]

You’re asking for July, flat for July?

[John McNulty, BMO Capital Markets]

Okay, thank you.

[Albert Chao, President and Chief Executive Officer]

You’re welcome.

[Operator]

Your next question comes from the line of Steve Byrne of Bank of America.

[Steve Byrne, Bank of America]

Yes. Thank you. I hope you can hear me that the echo on our end is terrible. So, I recently complained to Jeff Holy about the cost of some PVC fittings that were in the $10 per pound range not the dollar or pound range on your Slide 13. All I got from Jeff was with a smile, but perhaps you can comment on, how much of that in dollar pounds remark people behaving more broadly, how would you characterize the margin when you’re building products business versus, the rest of the Vinyls?

[Albert Chao, President and Chief Executive Officer]

Yes. Building product business is doing quite well. And we are passing resin price increases and cost increases along, sometimes there’s a time lag. But well, by and large, you’re able to pass through some price increases. And depending on the products, sometimes we expand the margin as well. And we see very strong demand for all our downstream building products for the rest of the year, and some of them into next year.

[Steve Byrne, Bank of America]

And so as you build out the platform, are you at the point where you have some negotiating leverage with the home centers and the specialty construction distributors, where you could offer them a, broader portion of the shelf space, and thus have some negotiating leverage, or you’re not there yet?

[Albert Chao, President and Chief Executive Officer]

No, you’re absolutely right. And part of our synergy is, we are much more important to distributors and retailers. For our products, we have more products to offer. And today, in the building products area, having supply is more important to customers. So, they are almost literally hand to mouth in terms of deliveries. And I think the other gentleman talk about logistics, sometimes it’s hard to find truck drivers, and some costs, delivery delays. But by and large, we are getting become more important to our customers. And we like it, we would like to be more important to them. And they like us to be working with them for many, many years. And they like us to become the larger and more relevant to their business. So, I think it’s a win-win for both parties.

[Steve Byrne, Bank of America]

Thank you.

[Albert Chao, President and Chief Executive Officer]

You’re welcome.

[Operator]

Your next question comes from the line of Kevin McCarthy from Vertical Research.

[Kevin McCarthy, Vertical Research]

Good morning. With regard to your building products business, can you speak to your medium to long-term strategies? That is, how do you think this business will be different in three to five years relative to 2021? Also, can you speak to your capabilities to integrate free pending acquisitions? And what does your future pipeline look like? Is three enough for now? Or does it remain quite active?

[Steve Bender]

So Kevin, as we think about the building construction materials business, you can see that we continue to see a very good outlook, both in the residential construction and certainly in some of the commercial construction opportunities. And we look forward to really participating with our distributors for the products to expand that portfolio offering that Boral and LASCO certainly bring. As you think about the three transactions that we’ve recently announced, the answer is, of course, we are very comfortable that we can integrate these businesses into the broader Westlake. And we look forward to welcoming all those employees into the family of Westlake.

Certainly, there’ll be a lot of activity in terms of that involvement. But you can see that there is the chemical side of the business that will continue to looked for opportunities to invest in we have been investing organically as well, over the last couple years with expansions in PVC and investments in the LACC, ethylene joint venture. And we’ll continue to look for opportunities to invest on the chemical side as well. And so I’m very confident that the leadership team and the federal employees will be able to will integrate these three transactions. The opportunity to grow the business, it’s something that we’ve done over time, and I’m comfortable that we can continue to look for opportunities going forward.

[Kevin McCarthy, Vertical Research]

And how would you describe the future pipeline?

[Steve Bender]

I think the opportunity set is out there. I think the answer always is looking for the right value set that we see. Clearly our focus is generating the bottom-line return risk adjusted. And certainly we’re very comfortable that we can find the synergies and these transactions to achieve that return and bring these values to our shareholders. So, when you think of the pipeline of opportunities out here, there are a number of interesting opportunities, but it’s always a function of is the value proposition to our shareholders, what we believe it should be. So that’s really where we get very focused to making sure they, the value for any opportunity is going to drive long-term sustainable value for all of our stakeholders.

[Kevin McCarthy, Vertical Research]

Understood, thank you very much.

[Albert Chao, President and Chief Executive Officer]

Kevin, just want to add also that we are looking for more recycled plastic, as you know, the lot of plastic waste out there in the world. And with the introduction of Dimex we’ll plan to add more recycled plastic materials into our consumer products. And also, with our GreenVin we’ll plan to introduce more lower carbon products into our building products material as well. So, I think talking about next five years, I think the whole industry, the world is marching towards lower carbon emission products, and lighter weight energy efficiency. So that’s the plan we plan to move towards too.

[Kevin McCarthy, Vertical Research]

That makes sense. Thank you.

[Operator]

Your next question comes from the line of Mike Sison from Wells Fargo.

[Mike Sison, Wells Fargo]

Hey, nice quarter.

[Albert Chao, President and Chief Executive Officer]

Thank you.

[Mike Sison, Wells Fargo]

Do you think you can grow Vinyls EBITDA in 22x acquisitions?

[Steve Bender]

So Mike, when you think of the opportunity set to do that, remember, we added significant capacity in PVC in late 2019. And as we think about the full run rate, into next year, this year, we’ve begun to ramp that up with sales of those incremental pounds, as we started in late 2019, 2020, was a challenge, as we all know with COVID. But as we think about the run rate from 2021 into 2022 we continue to see good volume growth opportunities. And we’ve talked about those in [indiscernible] and those in Germany that we’ve expanded our Vinyl footprint. But we continue to work for the completion of several smaller debottlenecks as well United States and the Vinyls space. So, we continue to see solid demand and that allows put those incremental pounds into the marketplace.

[Mike Sison, Wells Fargo]

Got it. And do you think PVC margins could continue to improve in the second half and into 2022?

[Steve Bender]

So, we’ve seen significant strong demand in this marketplace. I know that consultants show some seasonal weakening because of the seasonal demand that you see during the construction season. But as you have noted over the last couple of years, we’ve actually had a construction season that extended well into the later quarters of the year and well into the traditional slow season for construction activities. So, as long as we see the strong demand that we currently see continuing and we do. The issue is more of a weather driven issue than it is anything else. The market remains relatively snug from a materials perspective and inventory level. Demand remains pretty strong. And so it’s really a function does weather cooperate with us and we can we continue to have a construction season well into the winter season as we have over the last two years.

[Mike Sison, Wells Fargo]

Thank you.

[Albert Chao, President and Chief Executive Officer]

In HIS, the industry consultant – IHS industry consultant are forecasting the average price for next year 2022 PVC higher than the average for 2021 by about $0.03 per pound.

[Mike Sison, Wells Fargo]

Thank you.

[Albert Chao, President and Chief Executive Officer]

You’re welcome.

[Operator]

Your next question comes from the line of Frank Mitsch from Fermium Research.

[Frank Mitsch, Fermium Research]

Good morning and congrats on the good results.

[Albert Chao, President and Chief Executive Officer]

Thank you. Good morning.

[Frank Mitsch, Fermium Research]

As I look at the second quarter to the third quarter, could you size the negative impact of turnaround amounted to by segment in the second quarter and talk about what you anticipate the expected negative negatives are here in 3Q from turnaround plan outages you have in Petro II turnaround, I’m just trying to saw the order of magnitude from 2Q to 3Q from this?

[Steve Bender]

Yes, Frank, it’s Steven. So, we don’t have any other major turnarounds other than the Petro turnaround occurring in the third quarter. And so it’s really just that outage that we expect for 60 days occurring in starting in September. And so the other units we don’t have any what I would call significant turnaround activity in Q3 other than starting that turnaround in September for the Petro unit.

[Frank Mitsch, Fermium Research]

Okay. And when is the expected closing of Boral, LASCO and Dimex?

[Albert Chao, President and Chief Executive Officer]

We expect those to close in the second half of this year, it’s somewhat a function of getting HSR, Hart-Scott-Rodino approval, it’s hard to know when the government will clear those. And so our best view is in the second half of this year, but we certainly look forward to closing them as promptly as possible, so that we’ve moved forward with integrating these businesses into our own.

[Frank Mitsch, Fermium Research]

Terrific. Thank you.

[Operator]

Your next question comes from the line of John Roberts from UBS.

[John Roberts, UBS]

Good morning. Congratulations on Dimex acquisition.

[Steve Bender]

Thank you.

[John Roberts, UBS]

Following in the other acquisition, can you remind your target leverages, and what’s plan to priority going forward?

[Steve Bender]

Sure. So it’s been quite clear, for a very long time that Westlake’s target for leverage is really those that are established by the agencies, S&P, Moody’s and Fitch. We’ve seen over the years, they change their targets. So rather than being fixated on a particular number, we will focus on what the expectations are of the rating agencies to remain strongly investment grade. Today, we’re BBB flat, stable outlook or equivalent with each one of those three, and believe our metrics are even stronger than those ratings. And so our focus is really just a strongly rated by all three agencies. And as I just mentioned, our credit metrics are even stronger than the current rating assigned by all three agencies.

From a capital allocation perspective, we focus on using that free cash flow to maintain the plants and have them run reliably, consistently, looking at taking that free cash flow and beyond that maintenance activity. And if we can find projects that we believe have compelling returns risk adjusted above the cost of capital to deploy that way, we’ll also reward investors through distributions in the form of dividends, as well as share buyback. So, we certainly look for the opportunities to deploy that capital across that spectrum.

[John Roberts, UBS]

Thank you for that. And then Albert, you touched on it a bit before. But can you comment on your customer polyethylene inventory? And when you expect customary inventory levels to get back in more normalized levels? Thank you.

[Albert Chao, President and Chief Executive Officer]

As we mentioned, we got inventory back to pre-Uri, this pre-winter storm, February of this year. We haven’t got inventory back to pre-pandemic time yet. And so we believe that those – customers and produce inventories between low and medium depending on the grade and probably will be by the end of the year, when things get back more normal.

[John Roberts, UBS]

Thank you.

[Albert Chao, President and Chief Executive Officer]

You’re welcome.

[Operator]

Your next question comes from the line of Aleksey Yefremov from KeyBanc.

[Aleksey Yefremov, KeyBanc]

Thank you. Do you have a view on how much capital costs for new polyethylene and PVC plans might be out this year? And could CapEx cost inflation result in the delays of new project approvals was here?

[Steve Bender]

So, certainly we’ve seen capital costs for equipment continue to rise through with some of the inflation. So certainly since that is certainly going to be a consideration, certainly those who are investing in new plant and equipment, certainly watch that constantly look at a variety of sources to source major pieces of equipment. And it varies quite a bit in terms of whether we’re talking both materials such as pipes or whether we’re talking rotating equipment. But certainly we have seen cost creep into both of those, whether it’s the bulk materials or whether it’s higher value rotating equipment. So certainly they – they certainly are elevated in cost.

[Aleksey Yefremov, KeyBanc]

And you’ve talked about favorable supply demand outlook for PVC. Why do you think PVC export prices have fallen in recent weeks? And do you see that as temporary? Or started neutral?

[Albert Chao, President and Chief Executive Officer]

Yes, there have been – there has been some weakness in China, with PVC, and – but recently, last few weeks, we see prices start moving up on a global basis.

[Aleksey Yefremov, KeyBanc]

Thank you.

[Albert Chao, President and Chief Executive Officer]

You’re welcome.

[Operator]

Your next question comes from Mike Leithead from Barclays.

[Mike Leithead, Barclays]

Great, thanks. Good morning, guys. First question on natural gas prices have gone up pretty materially in the past few months, can you just give us a rough sensitivity of how to think about rising natural gas prices on your cost structure?

[Steve Bender]

Sure. So, when you think about the sensitivity on natural gas, $1 in MMBtu can cause an EBITDA impact of $100 million. And that’s mostly in the Vinyl side of the business. But 90% of that impact is on the Vinyl side of the business. But you’ve seen as prices have moved, that given the strong demand that we’ve been able to move a lot of that – a lot of those pricing momentums through downstream into our customer base.

[Mike Leithead, Barclays]

Got it? That’s helpful. And then second, maybe smaller question. But the corporate and other line, I think this quarter EBIT was positive $8 million or so, what’s drove that?

[Steve Bender]

Yes, there are some small transactions that occur, whether it is some of the small hedging gains that we take as we hedge on – hedge activities and such. So there’s certainly some interest expense, you notice that our cash balances have grown and so the combination of items such as that.

[Mike Leithead, Barclays]

Got it. Thank you.

[Steve Bender]

You’re welcome.

[Operator]

Your next question comes from the line of Angel Castillo from Morgan Stanley.

[Angel Castillo, Morgan Stanley]

Hi, thanks for taking my question. Just Albert to expand a little bit more on the Dimex acquisition and interests for potential future bolt-on, curiously if there’s any particular area within the ESG is here that is a particular interest that you look at, whether it’s technologies or potential expansion engine down the line?

[Albert Chao, President and Chief Executive Officer]

Yes. We’re looking already both reducing greenhouse gas emissions from our plants to recycling water, reducing solid waste. And through the Dimex we’re trying to able to source and recycle the post industrial hopefully going to post consumer material, recycled material and produce products. So, I think we’re different from just recyclers who just recycle and sell the compound resin. We are making finished consumer products and really going to the circular economy. And we plan to grow that business in a measured way going forward. This is just the beginning.

[Angel Castillo, Morgan Stanley]

And is it fair to assume that that’s maybe going to be the better focus near term as you’re kind of integrated and complete acquisitions for planning resin products?

[Steve Bender]

Well, that’s right, certainly as we think about the opportunity to take some of this material, this post industrial product further downstream. And certainly when you think about the integration, there is product integration today in our Vinyls products. And certainly this opportunity with Dimex provides opportunities to have further integration directly or indirectly. But we also see, as you’ve seen us talk about our building materials business, really having some also sales channel integration, which is very important, as Albert noted to have more products to our customers to be able to offer a much wider product offering is also very important to our customers as well as to Westlake.

[Angel Castillo, Morgan Stanley]

Got it. That’s very helpful. And just a quick – just on Olefins, in order to [indiscernible] for July, there’s some price increases out there for August. I was just wondering if you could contextualize that with maybe what you’re seeing from a customer level. And it seems like some of the spot availability may be improving across certain grades. So, are you seeing any increase in pushback from customers to future price increases in economic demand destruction, or is, what I guess whether it feedstock inventory levels allowing you to continue to push price beyond July?

[Albert Chao, President and Chief Executive Officer]

Yes. We don’t think maybe, demand destructions [indiscernible] automotive materials that used to is very strong. And it’s kind of supply as plant come back, there were quite a few plant problems and as supply come back inventory builds, I think the price as said will be stabilized. We don’t expect to grow each month forever. So, we expect price stabilize and – but we still believe the margin will be quite good going forward.

[Angel Castillo, Morgan Stanley]

Very helpful. Thank you.

[Albert Chao, President and Chief Executive Officer]

You’re welcome.

[Operator]

[Operator Instructions] Your next question comes from the line of Arun Viswanathan from RBC Capital.

[Arun Viswanathan, RBC Capital]

Great, thanks for taking my questions. Just I’ll make this quick. I just wanted to understand that 22 drivers, you will have the acquisition machine from Boral, maybe that’s $200 million or so. Vinyls right now should be just given – assuming that there’s not – the supply disruptions are [indiscernible] experienced in 2021 and maybe can margin were just here as well. So it’s really only Olefins maybe where there is some moderation in margin. That’s way going to think about 2022? Thanks.

[Steve Bender]

Yes. When you think about, as you said, when you think about the Vinyls business, if you look at some of the consultants out there, they’re still showing average prices for the course of the year in 2022 to be higher than the average price of 2021. And you’re right, we’ve had a series of weather related outages over the course of 2020, late 2020 that affected 2021 and then of course to freeze in early 2021. And so with the run that we see in demand in Vinyls, and the consultants reflecting higher average prices for vinyl, we certainly see strength. And as I mentioned earlier to a question, we certainly have good volumes that will continue to be additive to our sales volumes over the course of 2022 from 2021.

On the Vinyls side of the business, certainly we’ve seen continued tight inventory situations across the chain. And certainly while there are concerns about demand pulling back, we’ve certainly continued to see currently a very strong demand picture and prices, certainly as we’ve seen before continue to reflect that strong demand picture. So, as we look into 2022, it’s a little bit cloudy here to be able to give you a price forecast, but I can say that we continue to see a very strong picture from a demand perspective. And the demand from the consumer packaged market continues to seem unchecked.

[Arun Viswanathan, RBC Capital]

Great, thanks. And then if I can just ask a quick question on Dimex and the recycled market. When you acquired Vinnolit there was some excitement around getting into medical and some other applications that maybe you’re under penetrated. And is that part of the situation here as well. You have you see an opportunity to increase your share in some of these attractively growing marketing through Dimex? Thanks.

[Steve Bender]

Yes. We certainly do. I think the opportunity to really take some of the post industrial materials and put it into a different sales channel that we’re not in today and will be post close, is an exciting opportunity for us. It allows us really to have more product relevant to our downstream customers or distributors, many of these distributors or similar distributors who were selling already building product materials to as well. And so when we think about the opportunity that Dimex brings, we’re excited about the ability to take this recycled material, but also add to the portfolio products in the overall downstream building products businesses.

[Arun Viswanathan, RBC Capital]

Thanks.

[Operator]

And your last question comes from the line of P.J. Juvekar from Citibank.

[Peter Yuen, Citibank]

Hi, good morning. It’s Peter Yuen for P.J. How many pounds of recycling capacity does Dimex has and how are you looking at scaling that footprint in the associated CapEx to do so?

[Steve Bender]

Yes. There’s certainly I think an opportunity to think about replicating these production capacities in other areas, as we think about scaling the business. We’ll get more into the capacity size and the opportunity set as we get closer to closing this transaction. But certainly as we think about the footprint it has currently in Ohio, there could be opportunities to expand that footprint into other areas. We’ll take a look and see the products that make sense and the capital necessary to do that. But as you can imagine, that’ll be a combination of looking at the product set to put that recycle material into more consumer downstream products, and of course, making sure that we have the ability to do that cost effectively for our customer downstream.

[Peter Yuen, Citibank]

Thanks. As a follow-up question, do you expect to see a benefit in volumes for chlorinated organics and the refrigerants following the passage of the U.S. [indiscernible] with quarter reductions for HFC?

[Albert Chao, President and Chief Executive Officer]

Well, we’ll know more about it going forward. Certainly, with global warming, there’s more demand for refrigerants. And we are in a material side for the refrigerant business. So as that business growth, we should be benefit from that as well.

[Operator]

We have no further questions at this time.

[Jeff Holy, Vice President and Treasurer]

Thank you, Julia. Thank you again for participating in today’s call. We hope you’ll join us again for our next conference call to discuss our third quarter 2021 results.

[Operator]

Thank you for participating in today’s Westlake Chemical Corporation second quarter earnings conference call. As a reminder, this call will be available for replay two hours after the call has ended and maybe access until 11:59 p.m. Eastern Time on Tuesday, October –sorry, August 10, 2021. The replay can be accessed by calling the following numbers. Domestic callers dial [phone]. International callers may access the replay at [phone]. The access code for both the numbers is 4594733. Thank you. Have a great evening.