Yahoo Finance Westlake Corporation (NYSE:WLK) Q4 2023 Earnings Call Transcript
Westlake Corporation (NYSE:WLK) Q4 2023 Earnings Call Transcript February 20, 2024
Westlake Corporation misses on earnings expectations. Reported EPS is $0.72 EPS, expectations were $0.81. Westlake Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Corporation Fourth Quarter and Full Year 2023 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. After the speaker's remarks, you will be invited to participate in a question-and-answer session. As a reminder, ladies and gentlemen, this conference is being recorded today, February 20, 2024. I would now like to turn the call over to today's host, Jeff Holy, Westlake's Vice President and Treasurer. Sir, you may begin.
Jeff Holy: Thank you, Jonathan. Good morning, everyone, and welcome to the Westlake Corporation conference call to discuss our fourth quarter and full year results for 2023. I'm joined today by Albert Chao, our President and CEO, Steve Bender, our Executive Vice President and Chief Financial Officer, and other members of our management team. During the call, we will refer to our two reporting segments, Performance and Essential Materials, which we refer to as PEM or Materials, and Housing and Infrastructure Products, which we refer to as HIP or Products. Today's conference call will begin with Albert, who will open with a few comments regarding Westlake's performance. Steve will then discuss our financial and operating results, after which, Albert will add a few concluding comments, and we'll open the call to questions.
During the fourth quarter of 2023, we recorded a noncash impairment charge of $475 million related to the company's epoxy business, as well as a $150 million charge to fully resolve certain liability claims that are currently not being covered by certain of our excess insurance carriers. We refer to these two charges as identified items in our earnings release and on this conference call. References to income from operations, EBITDA, net income and earnings per share on this call exclude the financial impact of the identified items. As such, comments made on this call will be in regard to our underlying business results using these non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to GAAP financial measures is provided in our earnings release, which is available in the Investor Relations section of our website.
Today, management is going to discuss certain topics that will contain forward-looking information that is based on management's beliefs as well as assumptions made by and information currently available to management. These forward-looking statements suggest predictions or expectations and thus are subject to risks or uncertainties. These risks and uncertainties are discussed in Westlake's Form 10-K for the year ended December 31, 2022, and other SEC filings. We encourage you to learn more about these factors that could lead our actual results to differ by reviewing these SEC filings, which are also available on our Investor Relations website. This morning, Westlake issued a press release with details of our fourth quarter and full year results.
This document is available in the Press Release section of our website at westlake.com. We have also included an earnings presentation, which can be found in the Investor Relations section on our website. A replay of today's call will be available beginning today, two hours following the conclusion of this call. This replay may be accessed via Westlake's website. Please note that information reported on this call speaks only as of today, February 20, 2024, and therefore, you're advised that time-sensitive information may no longer be accurate as of the time of any replay. Finally, I would advise you that this conference call is being broadcast live through an Internet webcast system that can be accessed on our web page at westlake.com. Now I would like to turn the call over to Albert Chao.
Albert?
Albert Chao: Thank you, Jeff. Good morning, everyone. We appreciate you joining us to discuss our fourth quarter and full year 2023 results. Excluding the identified items, for the fourth quarter of 2023, we reported net income of $93 million or $0.72 per share, and EBITDA of $390 million on sales of $2.8 billion. While overall sales revenue was below the year-ago period due to lower average sales prices in the PEM segment, we are pleased that our fourth quarter total sales volume increased 7% compared to the fourth quarter of 2022, with North American demand strength partly offset by lower sales volumes in our international operations. Regionally, our volume and price declines 2023 were most impacted in our European operations, which were pressured by a weak macroeconomic backdrop and imports into Europe from Asia.
The volume and price declines were most felt in our base epoxy business, driven by the very weak economic environment in Europe and China, along with significant new global epoxy capacity additions. These capacity additions, which were primarily in China, were met with weak regional demand, driving a significant increase in Asian exports, Europe and other regions. These Asian export volumes were aggressively priced as some Asian competitors received energy subsidies to stimulate exports, at a time when European energy costs were still relatively high in part due to the ongoing war in Ukraine. As a result of these factors, our European base epoxy resin business experienced a sharp and sudden decline in profitability. To reflect these market changes, along with our current outlook for global operating rates to remain under pressure, we recorded a noncash impairment charge in our base epoxy business in the Netherlands in the fourth quarter.
We have begun to implement actions to reduce our costs and improve the profitability of our European businesses. The cost savings we're expecting across our company-wide cost reduction programs are $125 million to $150 million in 2024, after achieving 2023 cost savings of $110 million. Before turning the call over to Steve to review our financial results in more detail, I want to take a few minutes to review our accomplishments in 2023. Our HIP segment achieved record income from operations of $710 million, and a record EBITDA margin of 23% as we further integrated and achieved synergies from the Boral, Lasco and Dimex acquisitions. We are very pleased with the evolution of this segment, which produced back-to-back record results over the past two years, even with the economic challenges in the residential building market.
These record results provide stability to our overall earnings in 2023 with an asset-light, cash-generative business model, with leading positions in North America. Our constant focus on cash flow generation enabled Westlake to generate $2.3 billion of cash from operations, and $1.3 billion of free cash flow after investing over $1 billion to maintain and improve our plants and equipment. The solid cash flow generation, strengths of our business and confidence in the company's future allowed us to return approximately $250 million to shareholders in 2023, including the increase of our quarterly dividend by 40% to $0.50 per share, which demonstrates our commitment to rewarding shareholders. We finished the year with a solid investment-grade rated balance sheet, highlighted by $3.3 billion of cash and equivalents, providing flexibility to pursue opportunities as they present themselves.
Finally, in conjunction with the publication of our 6th annual sustainability report in October, we added five additional feasibility goals to our existing CO2 emissions intensity reduction target. These five new goals address water usage, health and safety, community engagement, diversity and inclusion and the circular economy, and are an important part of our overall approach towards stewardship of our environment and communities. Taken together, I'm very proud of our 2023 accomplishments given the challenging global economic environment. And I'd like to thank our nearly 16,000 team members for their hard work and dedication that enabled these achievements and a record HIP results. I would now like to turn the call over to Steve to provide more detail on our financial results for the fourth quarter and full year of 2023.
Steve Bender: Thank you, Albert, and good morning, everyone. As Albert discussed, our fourth quarter of 2023 financial results were reduced by $475 million as we fully impaired the base epoxy resin business in the Netherlands to reflect a change in the fair value of these assets as a result of the rapid deterioration in global epoxy markets over the past year. Asian and European economies remained weak throughout 2023, and we saw a flood of Asian epoxy imports into European markets as large Asian epoxy capacity additions were completed at a time of persistently elevated power, energy and raw material costs in our European operations. Separately, as we previously disclosed, we reached settlements to resolve certain liability claims.
We recognized a charge of $150 million in the fourth quarter of 2023 to reflect the portion of the total settlement amount that is subject to dispute with some of our insurance carriers. We're pleased to have fully resolved these liability claims while we work with our insurers to resolve the disputed portion of the settlement amount. As a reminder, my comments regarding income from operations, EBITDA, net income and earnings per share all exclude the financial impact of both the noncash impairment and the litigation settlement charges. Westlake reported net income of $93 million or $0.72 per share in the fourth quarter on sales of $2.8 billion. Net income for the fourth quarter of 2023 decreased $139 million from the fourth quarter of 2022 as a result of lower average sales prices and margins in PEM, particularly for caustic soda and epoxy resin and $20 million of restructuring cost as we optimized operations in our HIP segment.
When compared to the third quarter of 2023, net income decreased by $190 million in the fourth quarter due to lower average sales prices in PEM, unfavorable sales mix changes in PEM, and a typical seasonal decline in HIP sales volume. For the fourth quarter of 2023, our utilization of the FIFO method of accounting resulted in an unfavorable pretax impact of $35 million compared to what earnings would have been reported on the LIFO method. This is only an estimate and has not been audited. For the full year of 2023, we reported net income of $1.1 billion, and EBITDA of $2.6 billion on sales of $12.5 billion. Compared to our record 2022 results, net income attributable to Westlake declined by $1.1 billion as growth in HIP's income from operations more than offset by lower PEM earnings, primarily due to lower average sales prices and margins.
Turning to our segment results. PEM EBITDA of $1.6 billion in 2023 was below our record 2022 results, primarily due to lower global sales prices and margins as a result of softer demand created by weaker global economic conditions and customer destocking at a time when new global capacity additions for polyethylene and epoxy resin entered the market. However, after customer destocking ended as 2023 drew to a close, we saw signs of improvement in our sales volumes, which rose 6% year-over-year in the fourth quarter, with improving signals and demand strength that have carried into the first quarter of 2024 from many of our PEM product categories. On a quarterly basis, PEM's fourth quarter EBITDA of $201 million decreased by $138 million from the third quarter.
The sequential decline in EBITDA was the result of lower average sales prices particularly for caustic soda, which were driven by increased export demand and price changes that occurred from the third quarter. With the lower sales prices, we saw an increase in demand led by caustic soda that drove a 4% sequential increase in our sales volume in contrast to the historic pattern of slower customer orders and sales into year-end. While it's still early in 2024, we have recently seen signs of firming demand after sales prices for most of our major PEM products were relatively stable on a month-to-month basis within the fourth quarter. Moving to our HIP segment. $710 million of income from operations set a new annual record in 2023 despite lower revenue as the strong value of our brands allowed us to remain disciplined in pricing despite lower materials costs contributing to an improvement in EBITDA margin to 23% from 20% in 2022.
These results are a testament to the strength of our brand and the importance of our products to our customers. The strong performance in 2023 illustrates the benefits of our vertical integration and diversification strategy as lower cost materials used by our HIP segment drove solid margins at a time when PEM segment margins were compressed due to lower sales prices. Shifting focus to the fourth quarter results, HIP sales rose year-over-year as our penetration in the markets drove an 11% increase in sales volumes that more than offset lower average sales prices. Volume growth was strongest in our pipe and fittings business, particularly for residential and infrastructure pipe with strong customer orders late in the quarter and continuing into early 2024.
While average sales prices declined 10% year-over-year, this is generally less pronounced than the declines in our materials cost, contributing to the expansion of HIP's EBITDA margin to 18% from 14%, inclusive of the $20 million restructuring cost in the fourth quarter of '23 to optimize our manufacturing footprint. Margin improvement was also supported by the 11% year-over-year sales volume growth and the achievement of over $20 million of additional cost synergies in 2023 on the Boral, Lasco and Dimex acquisitions. Turning to the balance sheet and cash flows. Westlake's cash generation reflects our continued focus on operational and financial discipline. For the full year of 2023, net cash provided by operating activities was $2.3 billion, while capital expenditures were $1 billion, resulting in strong free cash flow of $1.3 billion.
As of December 31, 2023, cash and cash equivalents were $3.3 billion, and total debt was $4.9 billion, with our net leverage remaining below 1 turn of EBITDA. Westlake's debt is at an attractive average fixed rate of 3.2%, and an average maturity of 16 years, which combined with $3 billion in cash and investment-grade rated balance sheet puts Westlake in a financially strong position at this stage of the business cycle. We will look to strategically deploy our balance sheet for value-creating opportunities. Turning our attention to 2024, let me address some of your modeling questions and provide some guidance for the year ahead. Based on our current view of demand and prices, we expect 2024 revenue in our Housing and Infrastructure Products segment to be between $4 billion and $4.4 billion, with EBITDA margin around 20%.
As Albert mentioned, we are targeting $125 million to $150 million of cost savings in 2024, even after our 2023 cost savings of $110 million exceeding last year's target. We expect our total capital expenditures to be approximately $1 billion, similar to our depreciation run rate. This includes cost for a planned turnaround at our Petro 1 ethylene unit scheduled to begin in the second half of the year that is projected to last approximately 60 days. For the full year of 2024, we expect our effective tax rate to be approximately 23%. We also expect cash interest expense to be approximately $160 million. Now I'd like to turn the call over to Albert to provide some current outlook of our business. Albert?
Albert Chao: Thank you, Steve. As we head into 2024, we are well positioned to respond to evolving market trends while executing our strategies. In our HIP segment, the breadth of North American footprint and our leading market positions with a broad product portfolio, supported by strong brands, has increased our penetration with the fastest growing segments of the market. Our exposure to this growing portion of the market should support future HIP segment sales volume growth. Meanwhile, in our PEM segment, we are also a market leader in specialty polyethylene and chlorovinyls, which provides Westlake scale and capabilities to serve our customers' needs and support their growth plans. Furthermore, our globally advantaged energy and feedstock position in North America provides our PEM segment with the flexibility of export sales opportunities.
A key component of our business strategy is to reduce volatility in earnings and cash flow while maximizing earnings growth potential. The integration of our PEM and HIP segments demonstrates the strength of our strategy to capture the value of the cycle whether it moves more to the upstream or downstream portion of the value chain. In 2024, we will continue to deliver on all of our priorities including the safe, reliable operational plans, allocating capital to expand our business portfolio, generating value-added returns and providing top-tier shareholder returns while maintaining a strong investment-grade rated balance sheet. At the same time, we will continue to provide our customers with innovative products that provides a path to achieving their long-term sustainability goals.
Sustainability remains critical to our global strategy, not only because it's the right thing to do for the environment, but also because it provides increasingly profitable market growth opportunities. We continue to look for ways to further integrate our businesses to capture this market growth. As a recent example, our global compounds and Dimex businesses have paired their respective expertise in PVC compounding and recycling to process the Westlake global compounds waste materials, including grinding, shredding, blending and compounding, utilizing Dimex's processing services. As 2024 progresses, we will continue to look for more opportunities to leverage the diverse materials technology and industrial know-how of our portfolio of businesses to reduce our and our customer's waste material to further sustainability goals.
Before I open the call for your questions, I want to provide some closing thoughts on 2023 and our current outlook. The benefits of our diversification strategy were apparent once again in the fourth quarter and the year as a whole as record earnings in HIP provided stability to our overall results at a time when PEM sales prices and margins were at a trough at this stage of the cycle. While the macroeconomic backdrop remains uncertain, I'm more confident in our near-term outlook for a few key reasons. First, customer inventories are at much lower levels, following a prolonged period of destocking activity. As a result, we believe the customer's orders in 2024 will better reflect demand in our end markets with potential upside as our customers begin to restock as demand improves.
Second, in part, due to these low customer inventory levels, we exited 2023 and began 2024 with solid sales volume momentum. Fourth quarter sales volume in our HIP segment rose 11% year-over-year, and the dialogue we are having with our HIP customers support the momentum we have as we enter into 2024. Meanwhile, fourth quarter sales volume for our PEM segment rose 6% year-over-year and 4% sequentially, which was counter to the normal seasonal decline that we typically see towards year-end. Third, the solid sales volume momentum is continuing into 2024, supporting price momentum for most of our products in our PEM segment. Recent disruptions in global trade routes from tensions in the Middle East and lower water levels at the Panama Canal also have the potential to disrupt imports and support our pricing initiatives.
Finally, the Federal Reserve has paused a series of interest rate hikes that depress demand and business confidence in 2023. While the future path of interest rate policy is uncertain, the pause and potential for eventual cuts could create a more favorable macroeconomic backdrop for our businesses in 2024, particularly those portions of our business where demand is more sensitive to interest rates, such as housing, construction, energy and autos. Thank you very much for listening to our fourth quarter earnings call. I will now turn the call back over to Jeff.
Jeff Holy: Thank you, Albert. Before we begin taking questions, I'd like to remind listeners that our earnings presentation, which provides additional clarity into our results, is available on our website and a replay of this teleconference will be available two hours after the call has ended. We'll provide an information again at the end of the call. Jonathan, we will now take questions.
Operator: [Operator Instructions] Our first question comes from the line of Patrick Cunningham from Citi. Your question please. Patrick, you might have your phone on mute.
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