Westlake Corp (WLK) 2022 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the Westlake Corporation First Quarter 2022 Earnings Conference Call. (Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded, May 3, 2022.

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.

Thank you. Good morning, everyone, and welcome to the Westlake Corporation conference call to discuss our results for the first quarter of 2022. We additionally would like to thank everyone who was able to attend our recent Investor Day, which occurred on April 7. The webcast and presentation from the Investor Day are available in the Investor Relations section of our website for those of you who are unable to attend.

I'm joined today by Albert Chao, our President and CEO; Steve Bender, our Executive Vice President and Chief Financial Officer; Roger Kearns, our Chief Operating Officer; and other members of our management team. We have included an earnings presentation, which we'll reference during our call today, that can be found in the Investor Relations section on our website.

During the call, we will refer to our recently established reporting segments, the Housing and Infrastructure Products segment, which we refer to as HIP; and the Performance and Essential Materials segment, which we refer to as PEM. 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. Albert will then add a few concluding comments and we'll open the call up to questions.

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, 2021, 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 first quarter results. This document is available in the press release section of our website at westlake.com. A replay of today's call will be available beginning today, 2 hours following the conclusion of this call. This replay may be accessed by dialing the following numbers. Domestic callers should dial (855) 859-2056. International callers may access the replay at (404) 537-3406. The access code for both numbers is 4246547.

Please note that information reported on this call speaks only as of today, May 3, 2022, and therefore, you are 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?

Thank you, Jeff. Good morning, everyone. We appreciate you joining us to discuss our first quarter 2022 results. I'm pleased to announce that we reported record results in the first quarter of 2022.

We achieved record quarterly sales of $4.1 billion, record quarterly net income of $756 million and record quarterly EBITDA of $1.3 billion. These record results were driven by the compelling attributes of Westlake we spoke about in our recent Investor Day, including resilient earnings from a specialty portfolio with globally advantaged cost positions, value-added branded products in growing markets and a strong track record of acquisitions creating long-term value. We benefited from these attributes combined with end-market demand trends in industrial and consumer packaging, housing and construction, industrial manufacturing, coatings and wind energy markets.

Strong revenue growth driven by the robust housing and construction activity, the value of our leading brands and the equally strong revenue growth in our specialty portfolio in the PEM segment, driven by gains in polyethylene and PVC as well as caustic soda, all drove record sales. The strength in these markets mitigated the impacts of rising energy and raw material costs as well as supply chain disruptions, driving record EBITDA and strong EBITDA margins in the quarter. I want to thank all of our employees for their hard work and dedication in helping us achieving these results.

We completed our acquisition of Hexion's global epoxies business effective February 1, which has been rebranded Westlake Epoxy. This acquisition adds to Westlake's scale, our differentiated and specialty product portfolio with a globally advantaged feedstock and energy cost position in North America and with a long track record of operational strength. These important attributes enable us to continue to deliver more resilient earnings in a variety of economic environments while positioning us well for the future.

Since mid-2021, we invested $3.8 billion to significantly expand and drive specialization and diversify our portfolio of branded products across our businesses. These new businesses accelerate Westlake's existing capability to continue our growth and execute on our many opportunities with attractive financial attributes, further enhancing Westlake's existing leading positions and scale.

I think it's important to highlight the magnitude of the growth we have already delivered. Supported by our recent acquisitions, total year-over-year first quarter 2022 sales growth in PEM was 63% and in HIP was 99%. Steve will provide further details on our results, the significant contribution to sales, net income and EBITDA of these acquisitions and the magnitude of the transformation we have undertaken since 2021.

We experienced margin expansion in PEM by leveraging our best-in-class cost position driven by vertical integration and a large North American footprint with globally advantaged low-cost raw material and energy. Our leading positions in chlorovinyls contributed significantly to our results this quarter as strength in caustic soda, PVC and specialty PVC markets drove our margins higher. Industrial and consumer packaging demand also drove the strong results of PEM. And our specialty polyethylene, which is over 40% of our polyethylene capacity, made significant contributions this quarter as well. Our focus on these specialty and differentiated products provides a clear margin advantage, and our product mix distinguishes from other commodity producers.

With our market-leading positions in HIP, we realized significant earnings growth from our value-added strong brand name product offerings with attractive secular growth trends. In the first quarter, we were able to reap the benefits of the continuation of the momentum from 2021 in North American housing and construction activity with our leading product positions and brands. These factors drove robust demand for our PVC resin and building products, and our sales volumes significantly improved as we benefit from the strong demand dynamic. We are continuing to integrate the acquisitions we have made over the past year and are capturing the benefits these businesses have brought to our greatly expanded portfolio.

I would now like to turn our call over to Steve to provide more detail on our financial results for the first quarter 2022.

Thank you, Albert, and good morning, everyone. The market trends we experienced in the second half of 2021 continued in the first quarter. Healthy housing construction and repair and remodeling markets, which when paired with strong demand in industrial and consumer packaging and industrial manufacturing activity, drove record performance from broad-based pricing gains in both segments, along with volume gains from the businesses we acquired in 2021 and the first quarter of 2022.

This quarter, we reported record results for Westlake, including sales of $4.1 billion, net income of $756 million, income from operations of over $1 billion for the first time ever and EBITDA of $1.3 billion. The first quarter of 2022 net income increased $514 million from the first quarter of 2021 as a result of the healthy market conditions and solid margin gains across PEM and HIP portfolios.

There are several key components that contributed to these results. With a global footprint and North American cost advantages, Westlake captured the benefit of a vertically integrated production chain with globally competitive ethane, power, natural gas and salt; a North American manufacturing footprint well situated to serve strong domestic demand, which also provides low-cost advantages to serve export markets; and leadership in a growing portfolio of specialty higher-margin value-added branded products.

Both of our segments had solid earnings with strong margins anchored by robust demand in packaging, housing, construction, medical, automotive, industrial markets. First quarter 2022 year-over-year average sales prices and volumes for Westlake were up 46% and 26%, respectively, driven by very strong demand across product portfolios and contributions from our acquisitions. The strong demand and pricing initiatives more than offset the persisting supply chain disruptions and inflationary impacts of our cost. Our utilization of the FIFO method of accounting resulted in favorable impacts of $48 million compared to what earnings would have been reported if we'd used the LIFO method of accounting.

I will now discuss the performance of our 2 segments. We will begin with Housing and Infrastructure Products. The HIP segment EBITDA of $258 million in the first quarter of 2022 increased by $153 million from the first quarter of 2021. EBITDA margins in the quarter improved to 21% versus 17% in the first quarter of 2021. HIP segment sales for the first quarter of 2022 were $1.2 billion, an increase of $609 million from the first quarter of 2021 and a $177 million increase over the fourth quarter of 2021.

In Housing Products, sales were $972 million in the first quarter of 2022, $129 million higher than the fourth quarter of 2021, reflecting the strength across our product offerings, including building products, pipe and fittings and our post-industrial recycled products servicing the residential markets. Our Housing Products business continued to benefit from strong repair and remodeling activity and new construction in the residential markets in North America.

Our Pipe & Fittings business has benefited from the increase in housing construction activity and the tight supply conditions for PVC pipe. The strength we have seen in residential construction has been driven by higher-margin offerings in our building products, pipe and fittings as well as wire and cable compounds. Industry consultants, including the National Association of Homebuilders and the Harvard Joint Center for Housing Studies indicate continued strong market conditions for remodeling, while the U.S. Census data reports new housing starts continuing at elevated levels, reflecting strong demand for single- and multifamily construction spending.

Now turning our attention to infrastructure products. Sales for the first quarter were $252 million, an increase of $48 million over the fourth quarter of 2021. Infrastructure products benefited from strength in our larger-diameter pipe fittings businesses servicing the nonresidential markets. These products serve a wide variety of sectors, including agriculture, municipal water services, health care, transportation industries, among many others. We expect the infrastructure investments and Jobs Act will provide further demand strength as states and municipalities begin to develop and start construction projects to address our nation's long-neglected infrastructure needs.

Now I will move to discuss the results of our Performance and Essential Materials segment. Westlake is a global leader in chlorovinyls markets with an integrated manufacturing chain in the U.S., which has an advantaged feedstock cost position and a specialty product portfolio in Europe. When paired with the strong market fundamentals for these products, we delivered another quarter of record results. For the first quarter of 2022, PEM segment delivered EBITDA of $1.1 billion, an increase of $613 million from the first quarter of 2021 on $2.8 billion of sales. PEM's segment sales increased due to strong demand and favorable market conditions.

During the quarter, our new epoxy business contributed to our earnings with higher sales prices and strong sales volumes. For the first quarter of 2022, PEM experienced strong price momentum across the portfolio. Performance Materials, which includes PVC, polyethylene and epoxy, had sales of $1.9 billion. This was an increase of $725 million over the first quarter of 2021 and increased $265 million when compared to the fourth quarter of 2021. The solid demand for PVC was anchored by continued robust economic activity in end-use markets, including construction and home remodeling, which was evident in our HIP results that I just discussed.

These factors drove strong PVC sales prices in the segment and strong integrated margins. Polyethylene benefited from the robust demand in industrial and consumer packaging markets driven by price gains, while volumes were hampered due to logistical constraints. Elevated energy prices continue to drive epoxy demand in the wind energy markets, while some markets in Europe and Asia, such as automotive, slowed in our epoxy intermediates business.

Turning to Essential Materials, which includes caustic soda, styrene and coronated derivatives, it had sales of $903 million and was an increase of $365 million compared to the first quarter of 2021 and increased $107 million when compared to the fourth quarter of 2021. Our caustic soda business, largely based in North America, saw continued pricing gains in the first quarter of this year as global industrial manufacturing activities improved over 2021 as industrial production in Europe and Asia faced significant energy price increases.

Net cash provided by operating activities was robust at $700 million for the quarter. As of March 31, cash and cash equivalents were $1.1 billion and total debt was $5.2 billion. Westlake has given notice to redeem $250 million of debt on May 14, 2022. Capital expenditures for the first quarter were $263 million. We are maintaining our forecast for cap expenditures to be between $750 million and $850 million, which will support our operations, including our recent acquisitions, lower our cost and drive efficiencies, including projects to debottleneck VCM, EDC and PVC in several sites. This also includes spending to increase our investment in the LACC joint venture to 50%, which was completed in the first quarter.

For the full year of 2022, we expect our effective tax rate to be approximately 23%. We also expect cash interest expense to be approximately $170 million. Annual depreciation and amortization is expected to be approximately $1 billion. And based on our current view of demand and pricing, I'm also maintaining our earlier revenue guidance for HIP's revenue in 2022 to increase by 50% to 60% from the reported revenues of $3.1 billion in 2021.

Now I will turn the call back over to Albert to provide a current outlook for our business. Albert?

Thank you, Steve. The U.S. housing and remodeling repair markets are both performing well. The U.S. Census housing data and Harvard's leading indicator of remodeling activity support outlook for continued growth in housing and construction-related spending in 2022.

Industry consultants note that inventories of new homes available for sale remain low, and the amount of underbuilding over the last 15 years has left a deficit of 5 million to 6 million homes. Homebuyer demand fundamentals are being driven by home upsizing, historic underbuilding and more people working from home in spite of the recent rise in mortgage interest rates. Remodelers continue to report solid demand for whole home renovation projects as consumers anticipate remaining in homes over a longer period and spending more time at their houses. New housing starts remain elevated and the leading indicator of construction activity, including rising housing permits and historically low unemployment, are forecasting sustained growth over the next several years.

The value of our premium brands and breadth of our products provides Westlake the leverage to expand our reach in the housing market with higher value-added specialty products while driving strong resilient earnings power in our HIP segment. In PEM, growth in urbanization in global economies and population keep the outlook remaining favorable as performance materials using everyday products, such as housing, packaging, health care, automotive and wind energy, drive our polymer demand for PVC, polyethylene and epoxy.

Westlake's value-added specialty polyethylene portfolio, combined with our globally advantaged cost position in North America, drives higher margin and more resilient profitability. Increasing industrial manufacturing demand for Essential Materials, such as caustic soda and chlorine, is expected to materially exceed supply additions in the coming years, supporting a robust outlook. Epoxy extends Westlake's end market exposure to higher growth sustainability-oriented markets, such as wind energy as well as automotive and aerospace light-weighting. As a leading producer of these performance and essential materials, we are well positioned over the next decade to benefit from secular demand growth driven by the needs for the application of formulated, differentiated and specialty products.

We view all aspects of our business under a strategic lens and keep our capital discipline focused on accretive initiatives. Our ongoing digital initiatives and innovations further refine and optimize operations and provide incremental savings. We have saved tens of millions of dollars each year by investing in these kinds of innovations. We invest in opportunities that further our strategy of product expansion and increases of our vertical integration and sales channel capabilities to meet the needs of our customers.

Westlake has a strong commitment to sustainability and achieving our ESG initiatives with our announced 20% carbon intensity reduction goal by 2030. We see sustainability as an important value driver. We have developed and launched a wide range of sustainable products, including consumer products using recycled plastic material; one pellet solutions, which helps our customers create sustainable products; as well as bio-based solutions for building materials. As part of our sustainability commitment and to meet the needs of society, our product innovation pipeline will continue to introduce new and sustainable products. These are just a few examples of Westlake's efforts in a move towards a more sustainable world while driving earnings growth.

While we see volatility driven by economic and geopolitical factors that could impact our business, current market conditions remain favorable. We remain confident in our business fundamentals, which enable us to deliver more resilient earnings and cash flows in a variety of economic environments.

Thank you very much for listening to our first quarter earnings call. I will now turn the call back over to Jeff.

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. We'll provide that number again at the end of the call. .

Antonia, we'll now take questions.

(Operator Instructions) Our first question comes from Aleksey Yefremov of KeyBanc Capital Markets.

Can you discuss where your current margins in the epoxy business stand in absolute terms or relative to the overall segment? And also, how do you see those margins evolving in the short term sort of in the second quarter versus first? And also, where do these margins stand relative to mid-cycle?

Yes. Thank you, Alex. This is Roger Kearns. A couple of comments on that. I think what we see today in epoxies is a little bit 3 parts of the world with 3 different speeds. We're still seeing quite strong demand in North America, which is supporting good pricing. Europe is a bit of a moderate case. And certainly, with the Russian-Ukrainian impact slowing things a little bit, and then China with the COVID lockdowns, it has slowed down quite a bit. And so we're starting to see, I think, still quite good margins. But over time, with the China lockdown, expecting to see a little bit more exports out of China and more competition coming from China. But today, I would say, overall, able to correct or cover all of the raw material costs that we're seeing globally.

And the second question, also on margins but this time in the HIP segment, you were 21% or so EBITDA margin this quarter. How do you think your overall average would look like for the year?

Yes. I mean I think at our Investor Day, we were talking about our goal was to start to get up into the high teens to the 20%. I think we would still stick with that. We'll see. It depends on a little bit what pricing does as we go on forward on raw materials. But overall, yes, we're happy with the improvement we've made.

And our next question comes from Kevin McCarthy of Vertical Research.

I was wondering if you could comment on your near-term outlook for caustic soda prices. I think through the trade press, I read that you had put forth a proposed increase of $200 per ton. Is that accurate? And how much of that are you realizing in April and May, recognizing that one of your competitors seems to have suffered a significant outage in Louisiana?

Yes. Thank you, Kevin, Roger again. I think we did put out a price increase on caustic, as described. We are seeing continued solid demand for caustic and chlorine both. In fact, both sides of the ECU are quite strong. And we're, especially on the membrane, caustic is quite tight and so we're continuing to see support there and strength, and we'll continue to support the price increases.

Okay. And then on PVC resin, one of your industry peers announced interest in a joint venture structure, or a partnership anyway, whereby they would integrate downstream into PVC resin. What are your thoughts with regard to PVC resin expansions either on your own or as part of a partnership?

Yes. This is Roger again. I'll make one more comment and see if Albert or Steve want to jump in. I mean PVC is very core for us, and so we will continue to follow the growth in that market as needed. We are integrated, as you know, from ethylene through the chain. And so we'll continue to support that. I think talking about what you're reporting there, obviously, to make PVC and it's coming through the chlorine chain, you need EDC. And so that's a component of getting to PVC at the end of the game. But now we'll continue to support the growth in the PVC market as needed.

And our next question will come from Mike Leithead of Barclays.

I mean, first, I want to start with, I think U.S. natural gas is around $8 an MMBtu today. So can you just talk about what you're seeing, kind of what your outlook or expectation there is? And maybe relatedly, Steve, I appreciate it's really early still in the second quarter. But just given the dramatic quarter they have moved to natural gas and, obviously, ethane, any sort of early estimate of what a FIFO tailwind might be if you just assume the price is flat from that?

Yes. So Mike, good question. I think if we drew the end of the quarter today -- as you recall in my notes and our comments that we had a $48 million FIFO benefit in the first quarter. And if we drew the end of the quarter today, if you think about it, gas is up, ethane is up, but ethylene is lower. And so it'd probably be similar to where we ended the first quarter if we ended the second quarter today. It's hard to know where things may trend into the month of May and June, but if we ended the quarter today, we'd probably be similar to where we ended in the first quarter.

And just general thoughts on U.S. natural gas outlook?

Well, this is Albert. We're looking at IHS forecast. They are looking at second half natural gas price to drop $2 to $3 and $3 to $4 range rather than at today's elevated price, yes.

Okay. And maybe just finally, Steve, you mentioned there was some debt that you gave notice to earlier. Is there any other debt paydown you think is needed this year? And how should we think about the remainder of the cash flow being spent this year, the excess cash flow, whether M&A versus shareholder return?

So Mike, when we think about the opportunity to deploy that capital, we've talked about our guidance in capital expenditures this year of between $750 million and $850 million. You're right, we've already given notice and expect to retire that debt later this month of $250 million. It was coming due really in July, just accelerated that retirement to 60 days.

And so when you think about the other opportunities, we certainly will continue to look at deployment of the capital to reward our shareholders through share buybacks and dividends and look for ways in which we can be investing accretively in opportunities. Roger mentioned opportunities that we have underway with some of the expansions that we've already talked about in a variety of locations, EDC and PVC, but we'll also look for ways in which we can put capital to work into further debt retirements. So I have some debt that will come due later this year for one of our projects, RS Cogen. And we also have some debt that could be optionally redeemable if it makes sense later this year as well. So we'll look at deploying that capital in the most efficient way that benefits the company and our shareholders.

And our next question comes from David Begleiter of Deutsche Bank.

Albert, I believe, April ethylene contracts are still in negotiation. Can you discuss your thoughts? Or maybe the ethanol today, can you discuss your thoughts on where that might sell out for April?

Yes. The industry have announced price increases for $0.06 a pound for April and for May in polyethylene. And the April polyethylene price have not settled yet, but we think there's a good momentum to have a price increase in April as well.

Very good. And Albert, just your thoughts on the ECU margin holding up from here or maybe even growing higher if housing were to soften and chlorine into PVC were to soften as well. Would that be likely a potential outcome of a higher ECU margin in that scenario?

Yes. As you know, we are moving into the second quarter, and second quarter is typically strong for construction, which is PVC-related and as well is strong for water treatment, and that's chlorine-related. So typically, second quarter is where margins expand for PVC and for chlorine and caustic soda as well as a result.

And our next question comes from Mike Sison of Wells Fargo.

Great start to the year. So I'm just curious, when you think about the margins that you're seeing in PEM, why can't that sort of sustain for the full year? I know industry consultants have it sort of coming down in the second half. But any reason that it couldn't be the new normal, I guess?

Yes. Thank you, Mike. It's Roger. I think if I was to maybe cut the business into 3 pieces, I think on the vinyls side, it's certainly North American vinyls, it's a pretty good outlook, it's a pretty strong outlook. I think for polyethylene, as Albert mentioned, we see first half of the year holding quite good. And then epoxy, as I say, we'll see a little bit what happens in China on epoxy. But overall, I'm not sure that each particular business is going to stay exactly where it is. But when we put it all together, I do think 2022 should still be a reasonable year as far as we can see second quarter and into third.

Got it. And then in terms of seasonality, wouldn't your second quarter be the best quarter for EBITDA for the company and then third quarter maybe comes down a little bit, so sort of that $1.3 billion that you did in the first quarter is kind of a good baseline to think about?

Well, typically, in our industry, in our business, the second and third are the best quarters for construction and demand for packaging and people on vacations and all that. And usually, the first and the fourth quarter are weaker ones. However, I think it also depends on the economy. As you know, the talk about the economy slowing down with high interest rate and again, the oil price is still staying high and U.S. has the lowest cost position to serve not only the needs of the U.S. but global needs for our products. So that's a different combination, and we don't know what the future geopolitical and economic impact would have on the world and on our industry.

And our next question comes from Steve Byrne of Bank of America.

It's actually Matt DeYoe on for Steve. Wanted to ask a little bit on the epoxy business. Kind of where did that flesh out for the end of last year from an EBITDA level and a revenue level, if you can kind of give us a sense for what Hexion ended up doing?

So Matt, they did not publish their results for the end of last year when they ended the year because of the series of transactions they had with American Securities. And so all we see publicly reported was the 9 months ended for Hexion as a public entity. So I can't give you a...

Yes, I know. But presumably, you'd know what the 4Q was at this point. But I hear you.

And so I would say the market continued to be quite elevated and so good demand. You heard Roger's outlook in terms of how we see kind of the parts of the world currently in terms of Asia, Europe and the North American markets. But I think it's clear that the epoxy business is performing well given the headwinds we're seeing in Asia and the concerns that we have about headwinds with the economic backdrop. But nevertheless, the business is performing well.

Yes. Understood. And can we flesh out the margin increase in HIP a little bit? I know you said probably it's performing a bit better than maybe what you expect long term, and I'm still, I guess, learning the cadence of the new business. But I don't think about it as a business that should normally be capable of that big of a sequential increase. So is there like some margin expansion and PVC compounding thing that's more commodity? Or is this just good execution or what?

Well, I think, certainly, as you think about -- with the HIP business, you certainly see, again, a strong underlying demand picture really in the construction markets and the infrastructure markets. When you think about what's occurring with the repair and remodeling, we see continued strong repair and remodeling. And even in the face of rising mortgage rates, you see still a fair amount of construction activity even in the face of rising mortgage rates. Certainly, the compounding business, the PVC compounding business, is a good business and continues to perform well. And so I think what you've seen in the guidance that we provided in the HIP side of the business is that high teens, and you see us reaching a 21% margin in the first quarter.

On PEM, PEM continues to perform very well. You heard us speak about some of the strength we're seeing in the business. And we've certainly seen producers with price nominations out both in caustic, PVC and polyethylene. So both segments are performing quite well and I think have very good backdrops.

And our next question comes from Arun Viswanathan of RBC Capital Markets.

I guess I'll try to ask a similar question in a slightly different way. So you guys were up at the $1.3 billion level of EBITDA in Q1. So arguably, the full year could have some seasonality in Q4, but you should have some positive seasonality in Q2 and Q3. So is there any reason to believe that the full year couldn't be better than $5 billion? Are there any discrete items we should know about, whether it be synergies or M&A contribution or anything else, that you see in the next couple of quarters?

Yes. So Arun, we don't see any items that I would call as discrete items at this stage. And certainly, from an EBITDA guidance, as you know, we don't provide forward-looking EBITDA guidance. But I think you see the momentum in the pricing dynamics that we outlined in the PEM side of the business. And from our comments, you could see that the HIP side of the business has still got very strong performance both in construction as well as repair and remodeling. But we don't see any, what I would call, forward-looking discrete items that I would specifically call out.

Okay. And then I guess another question on sustainability. So given that we have seen some pretty serious inflation, are you seeing a little bit better adoption of some of your sustainable products just given that the price differential or price premium for them potentially has narrowed versus virgin plastic and potentially could narrow even further as we go into Q2 and Q3 from the inflation?

Yes. Thanks. This is Roger. Maybe a couple of questions on that. We are seeing actually some nice uptake on some of our low-carbon products. So our GreenVin caustic and GreenVin PVC as well, we're now seeing sales in Europe. We continue to work on our post-consumer recycle in polyethylenes, and those are continuing to be seen quite well from our customers. So I think we'll continue to push that. As far as margins, pricing, we are getting some small premiums on all of our low-carbon products right now. So we are seeing some future potential in that growth as well.

Our next question comes from Hassan Ahmed of Alembic Global.

First question on chlor-alkali prices. I'm just trying to get a sense, I understand demand, like you said, for both chlorine and caustic, particularly in the U.S., is strong. And I also understand chlorine being a fairly local market and caustic kind of being a more global market. I'm just trying to get a better sense of what sort of role in this pricing strength Europe is playing, with natural gas prices where they are in Europe and Europe having a fairly decent-sized chlor-alkali presence.

Yes. Thanks, Hassan. It's Roger again. So we're seeing very high pricing in Europe. With the raw material push that's coming in Europe, we're seeing quite high prices in caustic. The increases in April, in fact, in caustic in Europe were very significant. And so over time, of course, that's going to attract import pressure. So I think we will see Europe starting to have import pressure from both U.S. and Asia in time. But it's the high price point in the world right now.

Understood. And just sticking to the European theme. Look, I mean, as I take a look at the LNG market in the U.S., it seems there've been 14 terminals that have been approved. And there are some segments of the market that are questioning, longer term, the sustainability of cheap natural gas in the U.S. and, part and parcel with that, the sustainability of, call it, the ethane advantage. So what are you guys thoughts on that?

Well, Hassan, I think U.S., we have a large -- very large shale gas-based natural gas and oil reserves. And I think, if the demand is there, there will be more exploration production of these. The Marcellus has one of the biggest gas fields in the world, and the demand has not been really tapped much because of the low price of gas. If the gas prices move up, you will see much more investments in that area. So we believe that there will be actually more production of gas and oil, there will be more gas liquids, which help more supply of ethane as well.

Our next question comes from Josh Spector of UBS.

I just want to try again on -- one more time. I'd be curious, would you be willing to quantify kind of the contribution to the quarter, either sales, EBITDA or perhaps the run rate sales and EBITDA business today?

Josh, I'm not going to call out any specific business within this segment. But what I would say it has made a nice contribution in the course of the 2 months in which we owned it, having closed in February 1. What I would say is that we do see that business making nice contributions over the course of the year but we aren't calling out the individual contribution in a particular segment per se.

Okay. Fair enough. And just another follow-up kind of on the HIP margin side of things. I mean I think, generally, we see a lot of the downstream businesses pushing through price. Margins move lower. You guys are seeing the opposite. Is there a bit of a change in pricing strategy? Or are you getting more premium for some of your more premium products or something else is going on under the hood? Or is this more of a timing of some of the price cost and maybe some volume leverage in the quarter benefiting you?

I'll let Roger add to the comments here, but I would say that as you saw the acquisition of Boral brought along a large number of higher value-added branded products, and with that range of portfolio of higher value-added branded products really comes associated with improvement in margins. And so when you get a full run rate of a quarter without the inclusion of integration and transaction-related costs we had in the fourth quarter, you get a full run rate of the contribution of those higher value-added branded products. And I think with the backdrop of the strong market conditions we've seen in Q1 in housing and construction, that certainly is a nice tailwind. So I think that the combination of both really contributed to the strong performance of HIP in Q1.

Yes. This is Albert. I want to further add that we are working on automations and digitization that will further reduce our cost both in HIP and in PEM but, more importantly, in HIP, because of the labor content in HIP.

Yes, and improve our production rates. So we're actually trying to leverage more out of the assets we purchased.

Our next question comes from Matthew Blair of TPH.

If I look at the housing starts data, the share of multifamily to total, it's only about 22% year-to-date. Last year, it was around 24%. 5-year average is 29%. Should we think of that as an extra kicker on top of just the baseline strong housing starts numbers?

Yes. I think when you think of the contribution that we see really with starts and, of course, remember, half of our HIP business has benefited from the repair and remodeling and, certainly, the numbers for the first quarter in R&R were also quite strong, so we're seeing strength really from not only the permits and starts that you commented on but also the strength we're seeing in underlying repair and remodeling activity that remains pretty -- provides a nice floor in this business from a demand picture.

And Matthew also, potentially, with rising mortgage rates, there could be more investments in multifamily. And because of the very low unemployment rate and the demand for housing remains there. And we see the age bracket of house-buying is moving towards, for the next 10 years, on the high side. So if people can afford to buy a home, they won't live in apartments. So the construction activity, even if we think that because of the people are upsizing their homes, spending more time in their homes, potentially, the mortgage rates will not impact their choice that much, but they could still move into bigger apartments and all that. So I think the construction activity will continue to be pretty robust in coming years.

Sounds good. And then the release mentioned hydrogen briefly. I was hoping you could expand on that. How far away are you from revenue opportunities in hydrogen?

Yes. It's Roger. I'd just say, I mean, we have revenue today from hydrogen, right, because we make hydrogen in our chlor-alkali units. And so I think as we look forward and hydrogen becomes much more part of a new economy, that's where a premium on hydrogen starts to come in and that's where we have to continue to work. But the hydrogen we make today, we currently sell from a number of our sites where we use it internally for our own burning.

Angel Castillo is our next questioner of Morgan Stanley.

This is Alyssa on for Angel. I'm wondering how much cost inflation you're expecting in 2Q relative to 1Q. And how much were you able to cover in 1Q with price increases versus productivity?

So the question as it relates to first quarter, you could see from the performance of the underlying businesses that the increases that we saw in pricing activity really were able to overcome the cost creep that naturally has come into the marketplace. And so we actually expanded margins in both segments, and we're able to offset any price pressure that we saw in cost.

Certainly, you see the price nominations out for polyethylene, caustic and PVC, and we see strong picture really in the housing and infrastructure products space as well. So while it's hard to see fully through into the second quarter, certainly, given the strong backdrop in demand and the pricing initiatives that we certainly have announced at this stage, certainly, we hope that we will be able to get some or a portion of all these price nominations that we've announced across product portfolio.

Very helpful. And then I believe you're short about 1 billion pounds of ethylene. Are you thinking about investing in ethylene and potentially expanding your capacity in the future?

Yes. Thanks, Alyssa. This is Roger. I mean we continue to look at opportunities there. As we've talked a little bit earlier today, the margins in ethylene at the moment are quite low, with ethane prices kicking up and ethylene coming down. But fundamentally, we have a belief in integration, and we'll continue to look at opportunities to see if something would make sense over time.

(Operator Instructions) And our next question will come from Kevin McCarthy of Vertical Research.

I had a question on your reported volumes. In the press release, I think you indicated volume growth of 25.8%. I'm imagining that may include some contribution from the deals that you've done. If that's the case, would you comment on the underlying pure volume exclusive of the portfolio changes?

Yes. So Kevin, we did see strength, obviously, volumetrically in the contribution of having the epoxy businesses added into February and March in the first quarter. But the volume increase is obviously in HIP or really, as Roger noted, the strength really is in the HIP side of the business. And that was really given the ramp-up we see in normal construction activity in the first quarter, good weather in the first quarter, and so really ramping up of that activity in the HIP side of the business. Our comments that we made about epoxy is, certainly, they made a nice contribution volumetrically, but we're not calling out specific increases in any of these components of the business segment per se.

Kevin, this is Albert. If you look at our first quarter compared with fourth quarter of 2021, all the HIP business are already in place. So for HIP business, we still have 6.8% volume increase. That's the organic volume increase. And in the PEM business, compared with the fourth quarter of 2021, the first quarter 2022 went up by 11.3% by volume, and the epoxy business is a very small part of it volume-wise.

Okay. And then I wanted to ask you for your updated thoughts on capital deployment. You've done 4 meaningful acquisitions, I don't know, $3.8 billion or so, and yet you're generating a lot of cash and your EBITDA is rising. So your leverage ratios, I suppose, will settle out below 1 turn of 2022 EBITDA. So how are you thinking about potential for additional acquisitions and/or some share repurchases in this market?

So Kevin, as I say, it continues to be an opportunity where we'll look to deploy the capital in the most thoughtful way and most value-added way. And so when you think about the opportunities to deploy it organically, you've seen us talk about some of these expansions in EDC, VCM and PVC, we'll look for other opportunities to organically expand where it makes good sense. Acquisition opportunities are very episodic, and so we'll look for opportunities and continue to pursue those. You're right. We've invested in 4 transactions in the last many months, about $3.8 billion, and we'll look for ways in which we can deploy that in a very cost-effective way. .

But we'll also look to see where we can deploy that capital back to shareholders in the form of dividends or share buyback. And we certainly have authorities from the Board to be able to buy shares. And certainly, we'll continue to pay dividends on a very regular predictable basis and raise those dividends on a regular basis. So I think we're focused on making sure that the shareholder gets rewarded both in share buybacks and dividends but also rewarded through appreciation in value and price by deploying the capital in value-creative ways. So we'll look at all of those. But it's hard to specifically call out timing for any acquisition or any organic opportunity. It's really a function of really finding the right value and putting the capital to work. And that's really been our practice over many years.

Now at this time, the Q&A session has ended. Are there any closing remarks?

Thank you again for participating in today's call. We hope you'll join us again for our next conference call to discuss our second quarter 2022 results.

Thank you for participating in today's Westlake Corporation First Quarter Earnings Conference Call. As a reminder, this call will be available for replay beginning 2 hours after the call has ended and may be accessed until 8:59 p.m. Eastern Time on Tuesday, May 10, 2022. The replay can be accessed by calling the following numbers. Domestic callers should dial (855) 859-2056. International callers may access the replay at (404) 537-3406. The access code for both numbers is 4246547. Goodbye.