Westlake Corp

NYSE:WLK

Earnings Call Analysis

Record Earnings and Cost Efficiency Drive Growth

Westlake reported robust second-quarter 2024 results with net income of $313 million, up $16 million from last year, on $3.2 billion in sales. This increase stems primarily from higher volumes in the HIP segment. Their cost-saving initiatives delivered $50 million in Q2, contributing to $85 million for the first half of the year towards a full-year target of $125-$150 million. Notably, HIP segment sales surged 15%, driving record EBITDA margins of 28%. The company aims for 2024 revenue between $4.3 billion and $4.6 billion for its Clean and Infrastructure Products segment. The appointment of Jean-Marc Gilson as new CEO boosts optimism for continued growth.

Exceptional Financial Performance

Westlake reported outstanding financial results for the second quarter of 2024. Net income reached $313 million, which equals $2.40 per share, driven by robust activity across all major product lines in the Housing and Infrastructure Products (HIP) segment. Sales for the quarter totaled $3.2 billion, up from previous periods, indicating substantial growth even amid persistent global economic challenges .

Seasonal Demand & Strategic Pricing

Sequentially, net income saw a significant increase of $139 million from the first quarter, thanks to seasonally high demand in construction, effective cross-selling strategies in the HIP segment, and increased prices in the Performance and Essential Materials (PEM) segment, particularly for PVC resin and polyethylene. This growth underscores a successful adaptation to shifting market conditions .

Cost Savings Initiatives

Westlake has made commendable progress in its cost-saving endeavors, delivering approximately $50 million in savings during Q2 alone. Cumulatively, $85 million of long-term cost reductions were realized in the first half of 2024, aligning well with the full-year target of $125 million to $150 million. This follows $110 million in cost reductions achieved in 2023, reflecting a robust push towards a more efficient operational model .

Record Performance in HIP Segment

The HIP segment reported record quarterly EBITDA of $336 million on $1.2 billion in sales, driven by a 16% increase in sales volumes. These gains were primarily due to heightened demand for Pipe & Fittings and Siding & Trim. The segment's EBITDA margin also reached a new high of 28%, up from 22% in the previous year and 25% sequentially, demonstrating strong margin improvements on the back of increased volumes and reduced material costs .

PEM Segment Recovery

Although the PEM segment saw a year-over-year EBITDA decline to $391 million from $435 million in 2023 due to lower average selling prices, there were signs of recovery. On a sequential basis, EBITDA rose by $138 million, thanks to higher average sales prices for PVC resin and polyethylene. Despite ongoing challenges, the company anticipates continued stabilization and potential price improvements moving forward .

Strategic Operational Adjustments

In response to competitive pressures, particularly from low-cost imports, Westlake decided to temporarily cease operations at its ECH unit in the Netherlands, expecting a related expense of approximately EUR 80 million. This strategic move aims to enhance the profitability of the European epoxy business without disrupting customer needs. Such proactive steps, combined with ongoing anti-dumping investigations, are set to improve the financial health of the segment .

Guidance and Future Outlook

Westlake has provided revenue guidance for the Clean and Infrastructure Products segment between $4.3 billion and $4.6 billion for 2024, with EBITDA margins expected around 22%. The company continues to anticipate capital expenditures of approximately $1 billion, in line with its depreciation and amortization rate. With a solid cash position of $3 billion and total debt of $4.9 billion, Westlake is well-positioned for disciplined growth and value creation through potential acquisitions and sustained operational improvements .

Leadership Transition

Jean-Marc Gilson has joined Westlake as the new President and CEO. He brings extensive industry experience, having held leadership roles across the U.S., Europe, and Asia. His appointment aligns with Westlake’s strategic vision of long-term value creation and will likely infuse fresh perspectives into the company's existing growth-oriented strategies .

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Corporation Second Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded today, August 6, 2024.

I will now like to turn the call over to your host, Johnathan Zoeller, Westlake's Vice President and Treasurer. Sir, you may begin.

[Johnathan Zoeller, executive]

Thank you. Good morning, everyone. Welcome to the Westlake Corporation conference call to discuss our second quarter 2024 results. I am joined today, Albert Chao, our Executive Chairman; Jean-Marc Gilson, our President and CEO; Steve Bender, our Executive Vice President and Chief Financial Officer and other members of our management team. During the call, we will refer to our 2 reporting segments, performance in [indiscernible], 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 and Jean-Marc, 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 up the call to questions. Today, management is going to discuss certain topics that will contain forward-looking information that is based on management's assumptions as well as assumptions made by and [indiscernible] currently available to management.

These forward-looking statements as predictions or expectations and thus are subject to risks or uncertainties. These risks and uncertainties [indiscernible] in Westlake's Form 10-K for the year ended December 31, 2023, and other SEC filings. We encourage you to learn more about these factors that could lead our actual results to differ by reviewing the SEC filings which are also available on our Investor Relations website. This morning, Westlake issued a press release with details of our second quarter results. This document is available in the press release section of our website at westlake.com.

We have also included an earnings presentation which can be found on the Investor Relations section of our website. A replay of today's call will be available beginning today, 2 hours following the conclusion of this call. They may be accessed via Westlake's website. To note that information reported on this call speaks only as of today, August 6, 2024, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay.

Finally, I would like to remind 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'd like to turn the call over to Albert Chao. Albert?

[Unknown Executive]

Thank you, John. Good morning, everyone. We appreciate you joining us to discuss our second quarter 2024 results. I'm pleased to announce that we reported record quarterly results for our HIP segment in the second quarter of 2024, which contributed to year-over-year company-wide earnings growth this quarter. We achieved this despite a slower-than-expected global macroeconomic recovery following the downturn in macroeconomic conditions that began in the second half of 2022. And the average annual rate of housing stock through June 2024 below the average for 2023.

For the second quarter 2024, we reported net sales of [ $0.2 ] billion, EBITDA of $744 million, net income of [ $313 ] million or $2.40 per share, which were each an improvement from the second quarter of 2023, as we benefited from higher volumes across the board in our HIP segment led by pipe fittings and siding and trim and also higher volumes across our materials portfolio in PEM led by PVC resin and caustic soda. Average sales price in both segments was lower year-over-year in the second quarter, primarily due to the decline in PVC resin, caustic soda and Pipe and fitting prices that occurred last year.

On a sequential basis, HIP volume rose by 15% driven by seasonal increases in demand and product cross-selling with stable average sales price. Volume gains sequentially in PEM were 1%, while average sales price rose 4%. For PEM, this was the first sequential increase in average sales price since the destocking cycle that we experienced last year. During the quarter, we continue to see the benefits of our vertical integration strategy as strong demand for Pipe & Fittings and Siding & Trim In our HIP segment helped drive PVC sales volumes improving our PEM PVC sales mix and margins as we're able to shift sales volumes from less attractive export markets.

We also saw continued benefits from a portfolio diversification strategy during the quarter as the slow recovery in PEM margins and earnings due to continued weak global industrial demand was supported by solid HIP earnings growth and margin expansion from growth in residential housing construction and infrastructure bill related spending. Overall, we are very pleased with the performance of both our segments and the integration benefits of our portfolio of businesses and the value of this strategy delivers to Westlake and our investors.

We are happy to welcome Jean-Marc Gilson to the Westlake team with appointment as our new President and CEO. He is a seasoned industry leader with a proven track record of delivering sustained financial performance with leadership roles in the U.S., Europe and Asia, most recently as President and CEO of Mitsubishi Chemical Group. Jean-Marc's appointment is the combination of a thoughtful succession plan that ensures a continuation of a [indiscernible] to create long-term value for our shareholders.

I would now like to turn the call over to Jean-Marc to provide some initial thoughts. Jean-Marc?

[Jean-Marc Gilson, executive]

Thank you, Albert, and good morning, everyone. It's a pleasure to join Westlake at such an exciting time in the company's history. While I am new to the company, I've been around the chemical industry for many decades in a variety of leadership roles, and I have long admired Westlake, it's focus on safe and reliable, low-cost operation and its environmental stewardship.

I also recognize that shareholders value Westlake's history of profitable growth through disciplined investments to create long-term value. Since founding Westlake nearly 40 years ago, Albert and James, along with the rest of the Board and leadership team, have created an incredible company that improves the lives of so many people around the world. And thus, it's an honor to be given the privilege to build upon such a successful foundation. While I have only been at the company for a week, I had the opportunity to meet many of my coworkers and I want to share with you some initial.

First, I look forward to building on the successful strategy and focus on driving value for our customers and shareholders; second, the current portfolio is a great mix of globally cost advantage materials in PEM and innovative differentiated products with strong brand; third, I think both segments complement each synergistically as demonstrated by the solid second quarter financial results, that we reported today.

And I think that there is a solid runway to continue to grow the company in these 2 verticals for the foreseeable future. I look forward to sharing thoughts with all of you in the near future. I would now like to turn our call over to Steve to provide more detail on our financial results for the second quarter. Steve?

[M. Bender, executive]

Thank you very much, Jean-Marc, and welcome to Westlake, and good morning, everyone. Westlake reported net income of $313 million or $2.40 per share in the second quarter on sales of $3.2 billion. Net income for the second quarter of 2024 increased [ $16 ] million from the second quarter of 2023, primarily due to higher volumes for all of our product lines in our HIP segment, particularly for Pipe & Fittings and Siding & Trim.

When compared to the first quarter of 2024, net income increased by $139 million in the second quarter, driven by a demand from a seasonal pickup in construction activity, cross-selling in the HIP segment and higher average sales price in our PEM segment, particularly for PVC resin and polyethylene, reflecting some improvement in the supply-demand picture as the global markets slowly recover.

During the second quarter, we continue to make progress on our company-wide cost savings initiative with approximately $50 million of savings delivered during the second quarter. These savings, combined with those achieved in the first quarter totaled approximately $85 million of long-term cost reductions in the first half of 2024 towards our full year target of $125 million to $150 million. These efforts build on the $110 million of cost reductions that we delivered in 2023 as we continue our focus on capturing acquisition synergies and improving our reliable, cost-effective business model.

For the second quarter of 2024, our utilization of the FIFO method of accounting resulted in a favorable pretax impact of $12 million compared to what earnings would have been reported on the LIFO method. This is only an estimate and has not been audited. Before I discuss the details of our segment results, I want to provide some high-level thoughts on the quarter. In the second quarter of 2024, we saw a continuation of the market trends that we experienced in the first including building products demand growth, driving sequential sales volume improvement by 15% and modest improvement in demand for materials in our PEM segment, which supported improvement in PEM average sales price of 4% during the second quarter.

These trends, combined with our cost cutting and synergy attainment efforts drove record quarterly EBITDA of $336 million and record quarterly EBITDA margins, [ 28 ]% in our HIP segment an improvement in our PEM EBITDA margin to 19% from 13% in the first quarter. Notably, the record HIP results are occurring against a backdrop of historically lower levels of residential construction activity that necessarily is necessary to meet society's needs for housing and elevated mortgage rights. This is a testament to our positioning in the market and margin improvement efforts.

Combined, the solid growth in HIP and progress towards margin recovery in PEM drove a return to year-over-year quarterly earnings growth for Westlake despite the current global macroeconomic conditions. Moving to the specifics of our segment performance. Our Housing and Infrastructure Products segment produced record EBITDA of $336 million on $1.2 billion of sales. EBITDA increased $92 million year-over-year due to a solid 16% increase in sales volumes, particularly for Pipe & Fittings and Siding & Trim.

In addition to the sales volume growth, the earnings improvement was supported by lower material costs compared to the prior year period, acquisition synergy and cost-cutting benefits. When compared to the first quarter of 2024, HIP segment sales of $1.2 billion rose by $150 million, driven by a 15% sequential increase in sales volumes and stable average sales prices. Housing products of $1 billion in the first quarter increased 15% due to solid sales volume growth in each major product category. Infrastructure product sales of $184 million in the second quarter increased 12% from the first [indiscernible] 2024, primarily due to higher demand for larger diamond and municipal pipe for water applications. HIP's EBITDA margin of 28% set a new quarterly record and the margin expansion from 22% in the prior year period was primarily due to higher sales volumes and lower material cost.

While the sequential improvement from 25% in the first quarter of 2024 was primarily due to higher sales volume. Moving to our PEM's segment. Second quarter EBITDA of $391 million was lower than the second quarter of 2023 EBITDA of $435 million due to lower average selling prices, particularly for caustic soda and PVC and epoxy resins. While our sales prices drove a year-over-year decline in EBITDA, our sales volumes in all product categories in our PEM's segment saw improved customer demand compared to the second quarter of 2023, resulting in an 11% increase in sales volume.

On a sequential basis, PEM's segment EBITDA of [ $319 ] million in the second quarter increased by $138 million from the first quarter of 2024 as a result of higher average sales price primarily driven by higher prices for PVC resin and polyethylene. We are pleased with the progress that PEM has made in recovering margins for most of its products profitability in our unipoxy business remained challenged in part due to the adverse impact of low-priced import competition. As a result, and after careful consultation with key stakeholders, last week, we announced plans to temporarily cease operations off ball our CH unit in the Netherlands to improve the profitability of our epoxy business.

We expect to incur a tax cost of approximately EUR 80 million related to the mothballing of the unit, with substantially all of those costs expected to be recorded in the third quarter of 2024 with cash outflows expected to occur over several years starting in 2025. We expect these actions will materially improve the financial performance of our European epoxy business without having any impact on our customers. Our U.S. epoxy antidumping case continues to progress with an expectation that provisional duties will be same time later this year.

Likewise, the European Union has launched a similar antidumping investigation. Westlake believes in free and fair trade and thus the antidumping investigations and the potential duties to be applied along with our proactive actions in Europe, we believe will level the competitive markets and restore our epoxy business to profitability. Shifting to our balance sheet. As of June 30, 2024, cash and cash equivalents were $3 billion and total debt was $4.9 billion, with this long-term debt maturity schedule, including $300 million of maturing debt that we expect to retire in the third quarter of 2024 using our strong liquidity.

For the second quarter of 2024, net cash provided by operating activities of $237 million included the cash payment of the litigation charge we took in the fourth quarter of 2023. Our cash generative [indiscernible] this provides us with a platform to deploy our balance sheet strategically in order to create long-term value for our stakeholders. Now let me provide some guidance for your models. Based on our current view of demand and prices, we continue to expect 2024 revenue in our Clean and Infrastructure Products segment to be between $4.3 billion and $4.6 billion, with possible upside beyond our EBITDA margin guidance 22%.

We continue to expect total capital expenditures to be approximately $1 billion, which is similar to our depreciation and amortization run rate. As a reminder, this includes cost for a planned turnaround at our Petro 1 ethylene unit scheduled to begin next month that is projected to last approximately 60 days. We can target $125 million to [ $130 ] million of company-wide cost savings in 2024 with approximately $85 million already achieved in the first half of this year, including $50 million in the second quarter.

For the full year of 2024, we expect our effective tax rate to be approximately 23%, and we expect cash interest expense to be approximately $160 million. Now I'd like to turn the call over to Albert to provide a current outlook for our business. Albert?

[Unknown Executive]

Thank you, Steve. Overall, we are pleased with the performance in the second quarter of 2024, and despite a challenging macro environment. As we look ahead to the remainder of the year, we remain cautiously optimistic and we will continue to manage our production and inventory levels to customer demand. While our order books remain solid, unusually wet and hot weather conditions in many parts of North America, combined with a slowdown in U.S. housing start remodeling activity, could have an impact on our sales volume in the second half of 2024. ISM readings in the U.S. and Europe slipped during the second quarter while similar metrics in China also reflects slowing conditions, which could translate into a slowing demand for some of PEM products.

Overall, while the pace of global economic growth remains unclear, we are encouraged by the [indiscernible] year-over-year volume growth in HIP and volume and margin recovery in PEM delivered in the second quarter of 2024. As we look beyond this year, we expect each of our segments to continue to improve. As with regards to [indiscernible] HIP teaching event, we expect HIP sales to organically grow at a 5% to 7% long-term compound annual rate with a large pool of attractive inorganic growth opportunities. We expect this growth to be supported by the structural undersupply of homes in North America and aging housing stock and spending related to the infrastructure and Jobs Act.

We will continue to invest in our brands, capabilities and our people to continue creating value over the cycle for our investment. Turning to PEM. We remain positive on the ultimate long-term growth, driven by increasing global consumer activity and for clean water, electrification, housing, transportation and renewable energy, favorable demographic trends and our new product innovations, including our sustainability offerings. We expect these trends to support a better balance between global supply and demand for our products in our PEM segment. With our strong focus on our cost structure and productivity we are well positioned to leverage volume growth when market returns to normalized growth rates.

Turning to our balance sheet. We continue to look for opportunities to put our $3 billion cash balance to work a disciplined manner that will create long-term value for our shareholders. This includes both identifying acquisition candidates that can exceed our risk-adjusted cost of capital and returning cash to shareholders through both dividends and share repurchases. Finally, we continue to advance our sustainability efforts. During the second quarter, adoption of our innovations to address customers' sustainability requirements increased, including significant growth in our PVCO pipe green being PVC resin and pivotal post-consumer resin for flexible polyethylene packaging.

The market reception for our PVC pipe product has been strong. And thus, we announced plans to expand our capacity with a new plant at our [indiscernible], Texas to meet growing customer demand. As a reminder, we launched PVCO pipe in North America in 2021, and we have seen strong customer appreciation, PVCO sustainability attributes since they are lighter in weight, easier to install and provide increased performance to standard PVC pipe. Looking forward, we will continue to invest appropriately to bring new products like PVCO to the market and expand our product capabilities for existing products to help our customers address their sustainability needs. Thank you very much for listening to our second quarter earnings call. I will now turn the call back over to John.

[Johnathan Zoeller, executive]

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 2 hours after the call has ended. Jacinda we will now take questions.

[Operator]

[Operator Instructions] Our first question comes from Patrick Cunningham at Citi.

[Patrick Cunningham, analyst]

Congratulations and welcome to Jean-Marc. Maybe my first question just on the sales and margin guide for HIP that you maintained, but I mentioned there's potential upside within that. What do you see as the biggest potential sources of upside there? And does the current materials costs go up or hold relatively stable in the second half and maybe some modest price declines there?

[M. Bender, executive]

And yes, as we think about the outlook for the HIP segment, strong results this quarter, and our guidance really was to see that there is potential upside to the guidance of [ 22 ] that we've provided. We've seen increase in materials cost and PVC resin and continue to think that they'll continue to be a reasonable level of construction activity in the guidance from a number of research firms like NAHB and others that show housing starts could decline later this year. And so as we think about that, we still think the cross-selling and capability to continue to push forward propositions for our products remains, which is why we provided some insights in that guidance.

[Patrick Cunningham, analyst]

Understood. Helpful. And then are you -- based on that, are you anticipating any sequential improvement in the PEM's segment. I know you cited some industrial softness there, but it looks like there should be continued pricing strength in polyethylene and PVC. So what do you expect in terms of the PEM segment sequentially.

[Jean-Marc Gilson, executive]

Yes. Certainly, there has -- we are able to achieve price increases in both polyethylene and export prices has also been moving up. So we are seeing some stabilization of prices and prices are moving up, is stocking with is over then more so is what the global economic conditions look like forward and with potential reduction in interest rates by the Fed should be a boost for the U.S. economy and global for the future quarters into next year.

[Operator]

Our next question comes from Bhavesh Lodaya of BMO Capital Markets.

[Bhavesh Lodaya, analyst]

Can you help break down some of the success areas on your margin expansion that you are seeing in the HIP business. And maybe how much of that is driven by your previously pipes and compounds business and how much is the rest of the Building Products platform?

[M. Bender, executive]

Yes. It's a good question. And you see that we called out specifically our Siding & Trim business and our Pipe & Fittings business as strong contributors in the quarter's results. And so those 2 subsegments of HIP were very strong contributors to say, citing the trim and our Pipe & Fittings business made good contributions this quarter.

[Bhavesh Lodaya, analyst]

And then maybe if you could share your latest views on ethane here. If prices are at the historic lows clearly good for Westlake. We also saw polyethylene prices, price hike go through in July. Just a sort of view on both of those, please.

[M. Bender, executive]

Yes. And so as you think about the ethane prices, you have seen, the average price for ethane has trended lower since the second quarter. And while we don't know what the third quarter will average out to be looking at the forward curve, ethane does look like it will trend somewhere between $0.03 to $0.05 lower if you look at the forecast from many of the consultants in the forward curve for ethane, which would be constructive for our value.

[Operator]

Our next question comes from Michael Sison at Wells Fargo.

[Michael Sison, analyst]

Nice quarter and welcome to Jean-Marc and I guess my first question, when you think about PEM, sequentially into the third and the fourth. I think the outlook for ECU margins are kind of sluggish, I guess, from the consultants. Do you think I mean how do you think the progression there should unfold if demand stays around these levels for the second half?

[Jean-Marc Gilson, executive]

Yes. Demand for PEM products are pretty stable, and I mentioned, actually, demand for polyethylene PVC being quite good, especially in the export market, and we have able to raise prices on caustic and chlorine, the demand is stable. And the price is more or less stable. There's a few dollars up and down, depending on which quarter it goes. But I think the demand is in the U.S., especially, it's stable and I said, the restocking pretty much over it's reflecting the true economies demand for various products.

[Michael Sison, analyst]

Got it. And then just a follow-up on Pipe & Fittings. It sounds like that business continues to show really good strength. Do you think growth will be as good in the second half. And then I was just curious on profitability. You have a competitor out there that shows margins well above yours. Any reason why your profitability would it be sort of similar to theirs kind of that 50%, 60% range in operating margin?

[M. Bender, executive]

Well, Mike, I think when you look at the strength we're seeing really in the materials that we see in our Pipe & Fittings business, again, we're continuing to see really good value really in both the pipe and the fittings application. And we're 1 of the few players that really are in that integrated Pipe & Fittings solution business. certainly, our place really in the large municipal water solutions, both fresh and storm water is a big driver for the value proposition we bring forth. And it really is a focus of driving value for those customers and looking for value for our integrated stakeholders in this process. So it really is looking to make sure that the solutions that we have both in our pipe and our fittings solutions provide real value. We get focused really on the value rather than the volume in this business.

[Operator]

Our next question comes from Frank Mitsch at Fermium Research, LLC.

[Frank Mitsch, analyst]

And let me also add my congrats to Jean-Marc. If I could just follow up on that last question and answer, Albert. In terms of the stability of demand in PEM, and the price increases and the lower raw materials, it sounds as if we're looking at reading between the lines, it sounds as if we're looking at a flat to up third quarter in PEM perhaps somewhat moderated by the Petro 1 turnaround. So -- just curious if I'm thinking about that in the proper context and -- or perhaps what sort of level of impact do you believe the Petro 1 turnaround which starts in September we'll have on 3Q and 4Q?

[Unknown Executive]

Yes. Certainly, the petrol [ 1 ] turnaround will have some impact. But I just want to remind that Westlake is a net buyer of ethylene. And even though ethane price has reduced, which is great, it helps our [ 4-point ] -some billion pounds of ethylene capacity that were net buyers were paying higher ethylene prices and mentioned that we are booking the more sparing of our plants in the Netherlands which also, even though it's not a cash outflow in the third quarter, we are booking in the third quarter. So those accounting costs will impact our third quarter results.

[Frank Mitsch, analyst]

It's admirable that you're highlighting the mothballing costs since 99.9% of companies would put that in other structuring or what have you. And strip it out from EBITDA, which I suspect the Street will do on its own. And Albert, if I could just ask you, now that Jean-Marc is in place, and obviously, we'll take them a little bit of time to get up the learning curve. What do you -- how do you view your future involvement within Westlake over the next year or 2? What sort of level of involvement, if I be asking that question.

[Unknown Executive]

Certainly. Certainly, we are going through a transition as Jean-Marc being here only a few weeks for his seasoned veteran in our business globally. There's still a lot of Westlake nuances he has to understand and also visiting plants, visiting customers and so on and so forth. We have over 100 facilities around the world that we will be spending some time visiting some of the people. But as moving up to the -- I will do what my brother has done, James, trying to follow his first step, even though he's still a Senior Chairman. So looking over my shoulder, make sure I'm doing a good job.

But it's a team method. Westlake is really where our team works together closely. And we and Jean-Marc will continue the culture that Westlake established over the last 40 -- almost 40 years. And it's our goal. I will learn a lot of Jean-Marc from experience globally. And I also learned a lot from you guys a chance to meet you and look forward to going with Jean-Marc to lead the key investors, analysts to communicate and learn from you and to March 4 and communicate what Jean-Marc's view of Westlake strategy going forward be, which is in line with our history, but we bring a lot of new ideas and insights into our business.

[Operator]

Our next question comes from Aleksey Yefremov at KeyBanc.

[Aleksey Yefremov, analyst]

Jean-Marc, wish you best of luck as the CEO. And Albert, could you tell us how you approach the search for Westlake's new CEO. You could have focused on a candidate with an commodity chemicals experience and John Mark's bio, sugesting have significant experience in international specialty chemicals. So should we read anything into this?

[Unknown Executive]

Well, we -- the Board and along with James and I and some of our key people has done a very so search for the right candidate to be the new CEO. It's not an easy task. As you mentioned, we have a very different portfolio from typical chemical company and also with our global position, so we're very glad to find Jean-Marc, who has, as I mentioned, a tremendous global experience and has a technical background. And so I think the PEM business will be a little bit newer to Jean-Marc, but he has been involved in building homes and all that.

So he understands the importance of housing to people around the world. And I think that will be a tremendous driver for demand for chemical products and our homebuilding products. As you know, our HIP business are primarily North American based. So we have good technology that we mentioned and we will find opportunities we can apply our technology to other parts of the world.

[Aleksey Yefremov, analyst]

And then turning to the [indiscernible] and business. the margin upside this year in HIP. Are you surprised yourselves or perhaps you kind of recognize you were too conservative. And if you are surprised, what do you think went better this year than expected?

[Unknown Executive]

Well, the demand -- we mentioned the volume was strong, stronger than 2023 as stronger than first quarter 2024. Even though, as Steve mentioned, the holding starts projected by NHH I think it's 1.4 million units last year, projecting 1.3 million units this year. It's a reduction, and we're hearing about the various companies reported on the housing construction business. But I think going forward, with the [ VAT ] reduction interest rate and 10-year interest rate has dropped to 3.8% from 4.5 or something just a few months ago.

It should really be very helpful for the housing industry going forward, maybe not right away, but that's the trend that will help not just how the industry help the U.S. economy as a whole, and that will also help the global economy as a whole with lower interest rate. So as Steve and Jean-Marc mentioned, we are positioning ourselves to be ready for it. But the third quarter usually also is a good quarter from a volume point of view, but fourth quarter will be seasonally slow, that's normal. And -- so depending on how fast the Fed drops rates and the economy in general, we cannot predict what volume growth or changes will be in the short term.

But we believe on a longer-term basis in the next few several years with lower interest rate should be definitely positive for the U.S. economy and for our industry.

[Operator]

Our next question comes from Josh Spector at UBS.

[Joshua Spector, analyst]

I want to go back to the pipes and fittings piece for a moment here. I guess I understand the point about value over volume, and that's driving some of the things for Westlake. But I guess when we look at some of the smaller regional players, I mean, EBITDA margin spreads are up very meaningfully 2, 3x versus a few years ago. So it's not just Westlake. So I'm just curious of your view if you can maybe comment at all on one. I mean, is your pipes and fittings margins is materially higher than the HIP segment average today versus where it was? And then two, the sustainability of that spread; and three, has something changed structurally supply that would justify a much higher spread than the downstream part of the business.

[M. Bender, executive]

Yes. So Josh, good question. And I think what you've seen us do is really focus really on an integrated solution. And what I mean by that is solution that provides not only pipe, but also things that go bad. Recent acquisition we undertook 2 years ago was the -- was a fittings business. This is the Alaska acquisition I'm referring to. -- where we have not only larger diameter fittings in our portfolio, but this transaction allowed us to fill out that portfolio offering.

So what attributes, I think, the improved value proposition that I think we provide is being able to provide an integrated solution to our customers. That is not only providing the pipes that are necessary, but also the elbows, arms, fittings that go with those wide variety of sizes in pipes so that integrated of pipes and fittings is important. We're the only player that really provides an integrated solution in North America of pipes and fittings. I think whether you're selling it as individual components at a job site or selling it as an integrated pipe and fitting solution of jobs, that's really where the value proposition, I think, has come through. On top of that, you've also seen capital begin to flow to [indiscernible], which is adding volume to the business. And this business with that added volume certainly provides scale. So that allows us to really drive real value for that Pipes & Fittings business, which is why we called it out the last couple of quarters as really value drivers for the results of each quarter.

[Joshua Spector, analyst]

Okay. But I guess maybe to follow up is that when I look at peers that are smaller and don't have those advantages reporting margins of 50% to 60%, I'm not sure if you can comment on why that would be the case. I guess, from my view about it in the context, if Westlake is overearning to some context there? Or if you'd say, hey, your margins are much less than that, what I just said, that it gives us some degree of comfort that maybe it's at a more manageable level going forward?

[M. Bender, executive]

I can't speak to others' margins in the bid, something that you'd have to have a dialogue with them about what I can say is I believe that the value proposition we're providing through the integrated solution of resin, PVC resin going into our pipes and solutions are long-term sustainable. These are really good margins we're providing, and I don't believe we're overearning in a period such as this. As Albert noted, when you take a look at the housing starts, we're still well below the numbers that we need for the construction activities here in North America.

And even if you look at the starts that we've seen even this past quarter, about 1.3 million starts per the U.S. census numbers. In AHP shows it's trending lower in the -- by the end of the year. But nevertheless, I'd say we're not really overearning because I think we're really providing real value, both through the building products, the HIP side of our business as well as the integrated value we get by providing that resin across to our hip segment.

[Operator]

Our next question comes from Hassan Ahmed at Alembic Global Advisors.

[Hassan Ahmed, analyst]

And congratulations, Jean-Marc, on the new role. First question around just -- look, I mean, you guys did on an annualized basis, almost $3 billion in EBITDA in Q2. And I obviously appreciate the comments that Steve just made about how you guys aren't over-earning in certain segments. If I were to venture a guess, I mean, just looking at the business environment, you guys are well below normal with significant upside to hitting normal business conditions. So now with that said, how should we think about this annualized $3 billion number that you just reported relative to where normal earnings should be. I mean, is there significant upside to that number in a normalized business environment?

[M. Bender, executive]

Well, Hassan, thank you for the question. But I would say we certainly still see headwinds and we called out some of the indices, the ISM indices, both here in the U.S. as well as similar indices in Europe and in Asia. And so while I would say there is significant operating business, we certainly are still at points of price points well below those we saw in '23 and '22, and so while we do expect that we're seeing a better supply demand given the pricing initiatives, we've seen a number of our PEM products. We're still not to a point where we're back to those levels of pricing back in '23 and in '22. But there certainly is operating leverage in the end of the business.

[Hassan Ahmed, analyst]

Understood. Very helpful. And as a follow-up, maybe I understand it the first couple of weeks for Jean-Marc in his new role. So maybe this is a question both for him and for Steve as well. and obviously, Albert, I'm just trying to get a sense of, obviously, the portfolio has changed a fair bit over the last couple of years. And as you guys are very well aware in here as analysts, One of the things they're looking for is a valuation multiple rerating, right? So how sort of as you went through the whole interview process, Albert, what was the thought process with regards to that? And maybe Jean-Marc can give us here sort of high level with regards to what we think in terms of potentially getting that valuation rerating and making the market sort of see this portfolio change that, that has transpired.

[Unknown Executive]

Yes. Well, as you know, Jason, that we look at investments that bring risk-adjusted return above our cost of capital and also holistic on when we want to buy companies or whatever it takes to agree on the deal. So -- but we have been building a HIP business segment, as Steve mentioned, both from the HIP to PEM side as well as within Hip. So a lot of post-selling opportunities to come along, and we will continue to pursue those opportunities as they arise. So our job really is to bring you to our investors, how the Street see us as multiple uptick or whatever that's out of our contract all we do is to bring sustained return to our shareholders. And on a long-term basis, that's the key and not for short-term gains. And we hope that the market will see the value that we bring, but it's out of our control.

[Operator]

Our next question comes from Mike Leithead at Barclays.

[Michael Leithead, analyst]

Can you speak to your -- can you speak to your chlor-alkali operating rates currently? I would assume they're running fairly hard just given PVC strength and integration. But just where are they running today?

[Unknown Executive]

I think the industry -- some of the industry players were impacted by hurricane not long ago and recovering from those sets. But I think, as you said, the operating rates has been fairly good after the hurricane and the demand for both the PVC and caustic are pretty strong. So the rate has been doing very [indiscernible]. But there will be turnarounds coming up in the third quarter around various plants. So -- and we don't know this is still early in the game of August versus hurricane season, which ends at the end of November. So we are very careful about our inventories and production and so on and so forth.

[Michael Leithead, analyst]

Great. And then your HIP segment volumes were up 16% in the quarter. Can you help us better understand what categories are growing faster than that? And what categories are growing slower than that? And just a clarification, is product mix effect reported through price or volume for Westlake?

[M. Bender, executive]

Yes. So Mike, when you think of the value contributors here, we certainly see the as I've called out, kind of the Pipe & Fittings and the Siding & Trim business really contributing very well to the hip segment results. Our Windows business is our smallest subsegment within the HIP business. And so I would say that it's the smallest contributor still real in terms of play. It plays in the tech market and kind of the southeast market. So therefore, probably the weakest contributor in that. But I would say we're continuing to see good cross-selling, which is why you saw the volumes pick up.

And given the strength, I think, branding that you see in that business, I think the cross-selling is attributable to the efforts by our HIP team to understand and push through the brand value that we see in all the product categories that we have. So I'd say that cross-selling was a nice contributing factor to the volume pickup that we saw in the quarter.

[Operator]

Our next question comes from Arun Viswanathan at RBC Capital Markets.

[Arun Viswanathan, analyst]

And welcome Jean-Marc as well. So I guess a couple of questions. So first off, in HIP, obviously, some really strong performance out of Pipe & Fittings. Maybe you can discuss maybe the margin profile there? And then also for global compounds and Royal Building Products, how are those businesses performing? And do they have a margin profile maybe was less than piping fittings in this quarter or higher you describe those 2 businesses?

[M. Bender, executive]

Yes. And so I would say on compounds business, that is a business that has a pretty stable and steady margin business, but it would be in the middle range of middle to lower range of the range of margins that we see on the HIP side of our business. I would say that the to subsegments that I mentioned, which are the Pipe & Fittings business and our Siding & Trim businesses were the stronger performers during the quarter. And I called those 2 out in the first quarter as well of consistently stronger performing in that space.

[Arun Viswanathan, analyst]

And then in PEM -- and then PEM, just curious, you mentioned some slow improvement, I guess, in polyethylene prices and also PVC resin. So that's helpful. Do you expect those prices to continue to slowly move higher? And what would you say on caustic? And then just curious on the epoxy side, you guys fix some action, do you see some other action and rationalizing assets coming forth? And when would that potentially impact market conditions in epoxies?

[M. Bender, executive]

So Arun, yes, we certainly have seen strength in a variety of these chemical chains. I think you heard us note that we saw strength really in both PVC as well as polyethylene third quarter as well as in the second quarter. So as we -- as Albert noted in his comments, we've continued to see a balanced market in polyethylene, and we saw some price settlements that were positive directed to earnings, both in the second and in the third quarter [indiscernible]. We've also seen the same play out in PVC. As you know well, the second quarter and third quarter tend to be strong markets for PVC, even though we've seen some headwinds on housing starts, certainly, the second and third quarter tend to be stronger and therefore, strength in demand, which pulls on price.

Certainly, the actions that we are taking a wide variety of those mothballing the ECH unit as well as the actions with the European authorities and the U.S. authorities on this antidumping should all contribute to stronger results in the future for our epoxy business. So we look very -- look forward to seeing those actions take hold and deliver better value.

[Arun Viswanathan, analyst]

And just any thoughts on caustic and corn?

[Unknown Executive]

As I mentioned, this is Albert. As I mentioned before, profit and coring demand are pretty stable. U.S. exporting a fair amount of PVC as well as caustic. We still have the lowest cost energy competitive advantage over the rest of the world. And the price has been stable as well. So of course, heading into the fourth quarter, things will slow down a bit around the world. But January, first quarter is also somewhat weak and depending on the economy of the world, the second and third quarter would improve next year.

[Operator]

Our next question comes from Vincent Andrews at Morgan Stanley.

[Turner Hinrichs, analyst]

This is Turner Hinrichs on for Vincent. Can you help us understand what's going on from a cash flow perspective and what you expect from working capital for the year?

[M. Bender, executive]

Yes. As you saw in the second quarter, we did settle out the litigation charge that we took earlier this year. I would expect that with the demands we're seeing really in the activity -- construction activity in our HIP business. We'll continue to have some pull in working capital over the course of the third quarter as we go forward.

Certainly, prices have trended up in our products and certainly to maintain adequate inventories for our customers that will pull on inventories, but the offset to that is we have seen lower prices trending heard my comments earlier about ethane, ethane prices are trending lower. And so that will be the offset to some of that pickup in working capital.

[Turner Hinrichs, analyst]

Great. I appreciate the color there. So hopefully, this isn't redundant prior question. But in the chlor-alkali part of the business, I'm just wondering if you could speak further to relative strength or weakness of chlorine versus caustic soda and whether you see pricing upside for either of these products balance of the year?

[Unknown Executive]

Yes. I think CMA is looking at prices to increasing caustic in the U.S. by $20 a short term, but come down in October, November this year. So it's kind of wash. And chlorine prices are also bobbing up and down a little bit. So I think things are pretty stable. And a lot of chlorine in the U.S. goes in the PVC. As I mentioned, the U.S. also had the PVC prices increased, export price, again, bobbing up and down, has trended upwards from first and second quarter of this year. And U.S. is lowest cost from ethylene and chlorine point of view to export PVC.

[Operator]

Our next question comes from Kevin McCarthy at Vertical Research Partners.

[Kevin McCarthy, analyst]

Alberta has been a pleasure, absolutely. And Marc, I look forward to meeting you. I just wanted to clarify on the polyethylene resin price trend. It does sound like you have positive momentum there. My recollection is that producers were seeking an increase of $0.05 a pound for the July contract. Can you comment on how much of that you were able to realize for low and linear low-density polyethylene?

[Unknown Executive]

Yes, the July price has settled its up $0.05 as the industry announced and there is potential increases at least some of the internet announced price increases for August, October, but time will tell, whether those increases can be effective or not. But I think the main reason for that is export price has gone up and helped to drive up domestic price as well and demand is pretty stable. And as I mentioned, typically second and third quarter, a strong demand quarter for prices as well, polyethylene and PVC. So the July settled up $0.05 a pound.

[Kevin McCarthy, analyst]

Perfect. And then if I may switch gears over to hip, certainly, a very impressive first half of the year with regard to volumes and margins. But I did want to ask about point #3 on your Slide 5, where you call out kind of a trio of challenges in terms of weather slowdown in starts, so remodeling. Can you elaborate on that in the context of seasonality for example, thinking about those headwinds, do you think that it will in the seasonal 2024 where the first half is stronger than the second half or be able to overcome that through some of the things that you talked about earlier in the call? How would you think about the way that this year's seasonal cadence is shaping up in HIP?

[M. Bender, executive]

Yes. So Kevin, good question. And as you think about the weather patterns, it does have an impact really and really when construction activity when housing starts actually start. And so the reason for the call out really is just that certainly, while we see certainly positive trends, certainly, there are clear headwinds and some of the headwinds you note there, and that is really weather patterns.

And certainly, interest rates remain pretty elevated. And so certainly, that is creating some of the concern we all have as we look into the back half of the year. Weather has continued to be an issue that we have to kind of work through throughout much of the country, it's been very, very warm and certainly in portions of the south and southwest -- we've had very, very wet weather, which makes it challenging for those housing starts to actually start and pull on the volume demand we see in our building products. So while we continue to see volumes that we've seen so far in the first half of the year.

Certainly, it is just a, if you will, a watch out for the back half of the year, weather patterns continue to persist, that could be challenges. But again, if you look at the NHBs numbers for the year, they forecast housing starts in the fourth quarter and the third quarter, and they are somewhat lower than the first half of the year. So they do trend down from the peak that we saw in the first quarter, they trended lower in the second quarter in NHB is trending third and fourth quarter somewhat lower. We look at of forecasters. I'm just calling out NHB, it's an indication of directionally where they see their starts going for the rest of this year.

[Operator]

Our next question comes from David Begleiter at Deautsche Bank.

[David Begleiter, analyst]

Albert, the cost of price increase you mentioned that CMA has in their estimate is below the proposed increase from you and your competitors. Do you think CMA is being too conservative? Or do you think the market is a little bit weaker than you thought relative to your announced price increases?

[Unknown Executive]

Yes. Well, we -- or the industry can announce price increases than supply/demand negotiated with customers. And some are on a quarterly basis, you don't see the price change right away and some are negotiated some on a monthly basis. So all the prices come all over the place. And I guess, the CMA is just maybe the average or something they announced just an indication that it's going down. That's the indication. How much actually go through time hotel when we finish the [indiscernible] mentioned earlier, whether you are quarterly, monthly on a negotiated basis.

[David Begleiter, analyst]

Very good. And Albert, just on the July polyethylene price increase of $0.05. Do you think it was more of a function of hurricane barrel impact or more of a function of balanced supply-demand fundamentals?

[Unknown Executive]

Yes. Good question. I think it's a combination certainly is an impact from production from barrel. But I think, as I mentioned earlier, the export price has moved up that is the biggest, I think, impact on domestic price. And actually, the -- some of the export prices are pretty close to domestic price that on a netback basis.

So when export price goes up, then people can export it and sell domestically, which allow the domestic price to move up as well. And I mentioned the hurricane season coming up and people may want to have some inventory. So all these factors impact on the price increase that we just settled in July.

[Operator]

Our next question comes from Stephen Byrne at Bank of America Securities.

[Steve Byrne, analyst]

What portion of that 15% sequential volume gain in HIP, would you attribute to just the seasonality of underlying volume growth versus the portion of that 15% that you think you gained from either your efforts to brand or your cross-selling initiatives? And for the portion that's cross-selling, what is it that you're offering the distributor? What's the value proposition to be able to get more shelf space?

[M. Bender, executive]

Yes, Steve, good question. And I'd say the greater portion really is the ability to really have a brand recognition and cross-selling. And while there is some seasonal uplift from 1Q into 2Q, that is certainly part of the equation here. I'd say a meaningful portion of it really is brand recognition and value recognition and that, therefore, cross-selling. And that cross-selling recognizes the portfolio that the Boral acquisition brought to the table with our distributors. As you know, that distributor network has seen increased consolidation.

And they really want to have an ability to work with a limited number of producers who can provide the broadest portfolio and offer that good, better or best range of product offerings, which we do provide. And that increased selling effort that we have now with a broader portfolio offering through these acquisitions in our HIP segment provide us the ability to provide the brand name recognition products that they need in that good, better or best portfolio and that allows us to have the ability to service the customer, our distributors nationwide. And so that takes a little while to really translate since the acquisition of Boral a couple of years ago, but that's what you're seeing coming through today.

[Steve Byrne, analyst]

And just a question about competitive pricing clearly, you would have competitors that don't have the brand loyalty that you have and volumes could be challenging for many. Are you seeing competitive pricing in HIP from your from your smaller competitors and/or you see yourself having some defensiveness against it because of your brand loyalty?

[M. Bender, executive]

Of course, we have to be competitive in our pricing across all markets. And I would say in the building products market, these are smaller -- these are markets where you can't transport product nationwide. So if you're talking about concrete roof tiles, it is a market that is a subset of a nationwide market. These might be markets in maybe a 500-mile kind of radius where you can't transport that product.

So of course, you have to be competitive in those markets. and each market has strengths and weaknesses depending on the construction activity, whether we're talking the California market, the Texas market or the Florida market. Each one of those markets are unique, and we have to be competitive in each one of those markets and deal with smaller or larger competitors as we face them.

[Operator]

Our last question comes from Jeff Zekauskas at JPMorgan.

[Jeffrey Zekauskas, analyst]

What was the PVC contract settlement for July?

[M. Bender, executive]

Yes. PVC, I think, settled [indiscernible] $0.01 a pound,.

[Jeffrey Zekauskas, analyst]

And then Albert, do you have a view of the Chinese PVC market from here over a longer period of time. Do you think the Chinese market has gone through a period of overbuilding and then weakness and continued weakness? Or do you think that there is room for that market to accelerate over the next 2 or 3 years?

[Unknown Executive]

Yes, that's a good question. I think the Chinese PVC business actually is going through a transition. In the past several -- many years, carbide PVC was about 80% of the capacity in China. And now carbide PVC is to about 70-odd percent. So the more ethylene-based PVC plants be built, I think the trend will continue to phase out the high energy and polluting carbide-based PVC as well as they have the mercury catalyst issue. We know there are new gold-based catalysts, which is more expensive, but they can also replace the mercury-based [indiscernible], but still it's a carbide-based process. So I think over time, the Chinese industry, PVC industry will move to all ethylene based, which will lose its competitive advantage.

The wide carbide-base because China is all coal and very cheap PVC cheaply from carbide. It's a switch to ethylene and most of the ethylene in China are naphtha-based oil base, which is less competitive with U.S.-based ethane-based natural gas-based ethylene. So we will see how fast the Chinese PVC industry move into more ethylene-based and what kind of pricing will be -- but even though China, we all know that they have an economic structural problem, especially in housing is still a huge market and business for the Chinese economy and the demand is still huge for income housing and the government to do more of the home housing. But still, every housing they need power, water, electricity and PVC will be a very important and also window frames in China is a PVC window frames. So PDC will be a very important component of the housing demand in China going forward.

[Operator]

This concludes the question-and-answer session. I would now like to turn it back Johnathan Zoeller for closing remarks.

[Johnathan Zoeller, executive]

Thank you again for participating in today's call. We hope you will join us again for our next conference call to discuss our third quarter results.

[Operator]

Thank you for participating in today's website conference call. As a reminder, this call will be available for replay the being 2 hours after the call has ended. The replay can be accessed via Westlake's website. Goodbye.