Company Overview

Westlake Corporation (WLK) is a vertically integrated global manufacturer and marketer of performance and essential materials, as well as housing and infrastructure products. With a rich history spanning over seven decades, the company has evolved into a diversified chemical conglomerate, commanding leading positions across various end-markets.

Historical Background

Originally known as Westlake Monomers, the company was founded in 1986 and is headquartered in Houston, Texas. It started as a producer of ethylene, a key petrochemical building block, and gradually expanded its operations over the years through a series of strategic acquisitions and investments. In 1990, Westlake acquired a chemical manufacturing complex in Calvert City, Kentucky, which allowed the company to further integrate its operations and expand its chlor-alkali and PVC production capabilities. This acquisition was a significant milestone for Westlake, as it solidified the company's position as a leading producer of chlorine, caustic soda, and PVC resin.

Over the next two decades, Westlake continued to grow both organically and through acquisitions. In 2016, the company made a major move by acquiring Axiall Corporation, a leading manufacturer of PVC, chlor-alkali, and building products. This acquisition significantly expanded Westlake's geographic footprint and product portfolio, making it one of the largest chlor-alkali and PVC producers in the world.

Challenges and Growth

Despite its growth, Westlake faced some challenges over the years. In the late 2000s, the company had to navigate the global financial crisis, which impacted demand for its products. Additionally, Westlake has had to address various environmental and regulatory issues, such as the Calvert City proceedings and the Sulphur Brine Dome incident, which required the company to invest in remediation and compliance measures.

Business Segments

Westlake operates in two principal operating segments: Performance and Essential Materials, and Housing and Infrastructure Products.

The Performance and Essential Materials segment includes several product lines:

Performance Materials primarily consists of sales of PVC, polyethylene, and epoxy. These materials are upgraded into a variety of higher value-added products used in many end-markets such as PVC pipe applications, housing and construction products, food and specialty packaging, industrial and consumer packaging, renewable wind energy, coatings, consumer durables, medical health applications, and mobility and transportation.

Essential Materials primarily consists of sales of caustic soda, styrene, and related derivative materials. These are considered essential materials that are used across various industries.

Westlake is a leading global chlorovinyls producer as the second-largest chlor-alkali producer and the second-largest PVC producer in the world. The company is also a leading supplier of liquid and solid epoxy resins used in industrial coating applications.

The Housing and Infrastructure Products segment is primarily comprised of residential building products, PVC pipes and fittings, and PVC compound products. Sales in this segment are affected by new home construction and home repair/remodeling activity in North America.

Financials

Westlake's financial performance has shown some fluctuations in recent periods. For the most recent fiscal year, the company reported revenue of $12.55 billion and net income of $479 million. Operating cash flow and free cash flow for the same period stood at $2.34 billion and $1.30 billion, respectively.

In the most recent quarter, Westlake reported revenue of $3.12 billion, which was comparable to the prior year quarter. However, net income decreased significantly to $108 million, or $0.83 per diluted share, down from $285 million, or $2.20 per diluted share, in the prior year quarter. This 62% decrease in net income was primarily due to lower product prices across both segments and the accrual of $75 million in expenses related to the mothballing of certain units in Pernis, Netherlands.

Operating cash flow for the quarter was $474 million, with free cash flow of $254 million, both showing declines year-over-year.

Liquidity

Westlake's liquidity position remains robust, with $2.92 billion in cash and cash equivalents as of September 30, 2024. The company has a $1.5 billion revolving credit facility, of which $0 was drawn as of the same date, providing additional liquidity.

The company's financial strength is further highlighted by its healthy balance sheet, with a current ratio of 2.79 and a quick ratio of 2.04 as of September 30, 2024. The debt-to-equity ratio stands at 0.43, indicating a conservative capital structure.

Market Position and Strategy

Westlake's diversified business model and geographic footprint have been instrumental in mitigating the impact of global macroeconomic headwinds. The company operates globally, with approximately 15% of its production capacity located outside of North America, primarily in Europe. This significant presence in North America, coupled with its integrated supply chain and energy-advantaged assets, have helped it navigate volatility in energy prices and supply chain disruptions more effectively than its peers.

However, Westlake is not immune to the broader economic landscape. The company faced several challenges in 2024, including extended maintenance outages at two of its facilities and the decision to temporarily cease operations at its allyl chloride and epichlorohydrin units in Pernis, the Netherlands. These events resulted in additional expenses and impacted the company's profitability in the third quarter of 2024.

The Performance and Essential Materials segment has been impacted by volatility in natural gas and electricity costs, particularly in Europe, as well as in ethane and ethylene prices since the second half of 2022. However, Westlake has seen a decline in natural gas and electricity costs since the second half of 2023.

The Housing and Infrastructure Products segment is expected to benefit from the Infrastructure Investment and Jobs Act of 2021 and the historically low residential housing construction that has resulted in an undersupply of existing housing. However, the current inflationary environment and high mortgage rates are expected to have an unfavorable near-term impact on demand.

Future Outlook

Despite these challenges, Westlake remains cautiously optimistic about the future. The company's management has emphasized the potential benefits of recent policy actions taken by the U.S. Federal Reserve and the European Central Bank to ease monetary conditions, which could stimulate consumer demand and support the company's end-markets.

For the full year 2024, Westlake continues to see upside potential for their Housing and Infrastructure Products segment EBITDA margin to remain in the 22% range. The company now expects HIP revenue for 2024 to remain in the range of $4.3-$4.6 billion.

Westlake continues to expect total 2024 capital expenditures of approximately $1 billion and is targeting $125-$150 million of company-wide cost savings in 2024, with $120 million already achieved year-to-date.

The company now expects their effective tax rate for the full year 2024 to be approximately 25%, up from the previous guidance of 23% due to the tax treatment of the $75 million mothball expense in Q3. Cash interest expense for 2024 is expected to be approximately $160 million.

Looking ahead, Westlake now expects the turnaround of their Petro 1 ethylene cracker in Lake Charles, LA to begin at the end of January 2025 and last approximately 55 days.

Moreover, Westlake continues to focus on innovation, developing sustainable products and solutions to meet the evolving needs of its customers. The success of its PIVOTAL post-consumer recycled polyethylene product is a testament to the company's commitment to addressing environmental concerns and supporting the circular economy.

Conclusion

As Westlake navigates the complex global landscape, the company's diversified business model, financial strength, and strategic investments position it well to capitalize on future growth opportunities. While near-term headwinds may persist, Westlake's long-term prospects remain promising, as it leverages its operational excellence and market leadership to deliver value for its shareholders. The company's ability to adapt to market conditions, focus on cost savings, and invest in sustainable solutions will be crucial in maintaining its competitive edge in the cyclical chlor-alkali and petrochemicals industries.