Westlake Corp

NYSE:WLK

Q2-2025 Earnings Call

[Operator]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Corporation Second Quarter 2025 Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded today, August 5, 2025.

I would now like to turn the call over to your first speaker today, John Zoeller, Westlake's Vice President and Treasurer. Sir, you may begin.

[Johnathan Zoeller, executive]

Thank you. Good morning, everyone, and welcome to the Westlake Corporation conference call to discuss our second quarter 2025 results. I am joined today by 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 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 Jean-Marc, who will open with a few comments regarding Westlake's performance. Steve will then discuss our financial and operating results after which Jean-Marc will add a few concluding comments, and we will open the call up to questions.

During the second quarter of 2025, we accrued expenses of $123 million and $7 million, respectively, to shut down the company's epoxy facility in Pernis, the Netherlands and temporarily ceased operations at a PVC resin production unit in China at the company's 95% owned Huasu joint venture. We refer to these expense items, which in aggregate were $130 million as the 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 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, 2024, 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 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 in the Investor Relations section on our website. A replay of today's call will be available beginning today, 2 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, August 5, 2025, and therefore, you are 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'd like to turn the call over to Jean-Marc Gilson. Jean-Marc?

[Jean-Marc Gilson, executive]

Thank you, John, and good morning, everyone. We appreciate you joining us to discuss our second quarter 2025 results. For the second quarter of 2025, we reported EBITDA of $350 million on net sales of $3 billion. Compared to the first quarter of 2025, sales and EBITDA increased due to a seasonal increase in sales volume for most of the businesses in our HIP segment. HIP performed very well in the second quarter, delivering solid EBITDA of $275 million on sales of $1.2 billion, representing a strong 24% EBITDA margin. Our results demonstrate that in an operating environment that has grown more challenging with interest rates remaining elevated, a diversified and balanced operating model in HIP offers strategic benefits to help deliver performance in this market.

Pipe & Fittings sales volume growth benefited from increasing demand for municipal water applications, driven in part by spending from the 2021 Infrastructure Act. The significant underspend in water infrastructure in the United States and the funds from the Infrastructure Act should continue to provide a solid foundation for our pipe and fading sales for many years.

HIPs building product sales volume was lower than the second quarter of 2024, reflecting the slowdown in North American residential construction activity. Pent-up demand, nevertheless, is high as people want and need homes. HIPs Building Products business benefits from a balanced portfolio of approximately 50% new construction oriented sales and 50% repair and remodel oriented sales, and this portfolio provides stability in the current housing market.

Turning to PEM. Earnings and margins were pressured by 2 primary factors. First, PEMs volumes were impacted by lower production levels due to a high level of planned turnaround and unplanned auditors, which impacted second quarter of 2025 EBITDA by approximately $110 million. As we discussed on our first quarter earnings call, we began the tie-in of our new VCM capacity at our Geismar site during its planned turnaround. Following the completion of the turnaround in the second quarter, Geismar slowly ramped up its operating rate with production expected to improve during the third quarter.

Second, the cumulative impact of several quarters of soft global manufacturing activity caused growth in global demand for many chemical products to fall short of industry supply additions, primarily in Asia and over that time of that period of time. The resulting global oversupply in some chemical change has created pressure on PEMs average sales price and EBITDA margin.

In response to these factors, we are taking aggressive actions to improve PEMs financial results. Our PEM profitability improvement strategy is 3-pronged. One, improving plant prior reliability. We have challenged the teams at the plans to address reliability and operations, and we are already seeing production improvement during the third quarter. Two, reducing our cost to improve our global competitiveness.

During the first half of 2025, we achieved over $75 million of company-wide cost reductions towards our full year target of $150 million to $175 million. While we are pleased with this progress, given the protracted nature of the current downturn, we are expanding the scope and nature of our cost reduction efforts to target an additional $200 million of cost reductions by 2026. And third, optimizing our footprint, our manufacturing footprint.

During the second quarter of 2025, we announced the planned closure of our Pernis Epoxycite in the Netherlands, which will put our Epoxy business on a path to profitability. So to summarize the quarter, we were very pleased with the continued solid performance of our HIP businesses. Our experienced teams are leading product positions, our broad geographical footprint and a diverse position serving both new construction and repair and remodel to provide valuable earnings stability and cash flow to the company. We also expect a 3-pronged PEM profitability improvement strategy to enhance our globally competitive position and improve PEMs financial results.

I would like to turn the call over to Steve now to provide more detail on our financial results for the second quarter of 2025. Steve?

[M. Bender, executive]

Thank you, Jean-Marc, and good morning, everyone. As a reminder, my comments regarding income from operations, EBITDA, net income and earnings per share all exclude the financial impact of these identified items. Westlake reported a net loss of $12 million or $0.09 per share in the second quarter on sales of $3 billion.

Net income for the second quarter of 2025 and improved by $28 million compared to the first quarter of 2025, primarily due to a seasonal increase in HIP sales volumes and margins partially offset by an approximately $30 million higher impact from planned turnarounds and unplanned outages in PEM. When compared to the second quarter of 2024, net income decreased by $325 million due to higher North American feedstock and energy cost and lower average sales price in each segment.

For the second quarter of 2025, our utilization of the FIFO method accounting resulted in an unfavorable pretax impact of $13 million in our PEM segment 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. Our HIP segment performed very well, and we are very pleased with the stability and resiliency of the portfolio of the business that we have assembled. At the same time, our PEM segment was impacted by production disruptions and the continued global oversupply in some chemical chains, but the profitability improvement strategy that we are implementing should result in better performance with an improved cost position.

Moving to the specifics of our segment performance. Our Housing and Infrastructure Products segment produced EBITDA of $275 million on $1.1 billion of sales. When compared to the first quarter of 2025, HIP segment sales rose 16%, driven by a 14% increase in sales volumes as a result of growth for Pipe & Fittings and a seasonal increase in building products demand. Average sales price increased 2% sequentially, driven by price increase initiatives in building products and global compounds to pass through rising input cost.

The strong sales growth volume drove HIP segment EBITDA margin to a solid 24% from 20% in the first quarter of 2025. When compared to the second quarter of 2024, HIP EBITDA decreased $61 million due to 2% decline in sales volume and a 1% decline in average sales prices. The sales volume decline was driven by lower customer demand in our global compounds and Building Products business units as a result of slower residential construction activity that more than was offset -- that more than offset volume for our Pipe & Fittings business, a result of solid demand for growth in the municipal water applications.

Our HIP strategy is and has remained clear. We're providing our customers with products to address affordability and adapting our product offering and manufacturing footprint as the market evolves.

Turning to our PEM segment. Second quarter sales of $1.8 billion fell by $57 million from the first quarter of 2025 driven by a 6% decline in sales volume as a result of a more significant impact from planned turnarounds and outages as well as export sales volume disruptions created by tariff uncertainty during the second quarter. Average sales price increased 2% driven by higher chlorine, caustic soda and PVC resin prices. PEM segment EBITDA of $52 million in the second quarter decreased by $21 million from the first quarter of 2025 as a result of the 6% decline in sales volume.

On a year-over-year basis, PEM EBITDA of $52 million was below second quarter of 2024 EBITDA of $391 million due to $83 million of higher ethane and natural gas costs, a $67 million higher year-over-year impact from planned turnarounds and unplanned outages and a 2% decline in average sales prices driven by lower polyethylene and PVC resin prices.

As Jean-Marc mentioned, during the second quarter, we announced a plan to close our epoxy site in Pernis in the Netherlands. Since this acquisition in February of 2022, profitability at this site deteriorated significantly as a result of higher European feedstock and energy cost due to the war in Ukraine and low-priced Asian exports entering the global market. As a result, Pernis experienced losses in excess of $100 million a year drove the June site closure announcement. Following the Pernis closure announcement, we believe that our Epoxy business is now on a path to return to profitability in 2026.

Shifting to our balance sheet. As of June 30, 2025, cash and investments were $2.3 billion and total debt was $4.7 billion with a staggered long-term fixed maturity debt schedule. For the second quarter of 2025, net cash provided by operating activities was $135 million, while capital expenditures were $267 million. We continue to look for opportunities to strategically deploy our balance sheet in order to continue to create long-term value.

Now let me provide some guidance for your models. We completed our turnarounds and VCM tie-in at Geismar. However, our integrated for vinyl system is continuing to slowly ramp up production during the third quarter. We expect chlorovinyl production sales volumes to be better in the third quarter and thus, we anticipate the impact to earnings from production disruptions in the third quarter will be less than we experienced in the second quarter.

With the slowdown in North American residential construction activity, since the beginning of the year, we now expect 2025 housing and infrastructure products revenue to be in the range of $4.2 billion to $4.4 billion, with an EBITDA margin between 20% and 22%. We continue to expect total CapEx expenditures for the company to be approximately $900 million. In the first half of 2025, we achieved over $75 million toward our 2025 company-wide savings target of $150 million to $170 million. and we're taking actions to drive an additional $200 million of cost reductions by 2026 as part of our PEM profitability improvement plan. For the 2025 year, we expect cash interest expense to be approximately $160 million.

Now let me turn the call over to Jean-Marc to provide a current outlook for our business. Jean-Marc?

[Jean-Marc Gilson, executive]

Thank you, Steve. Against the backdrop of soft macroeconomic conditions and slower North American construction activity, our HIP team is delivering sales similar to prior year levels. by being a supplier of church with faster-growing building product customers. Sales volume growth for our pipe and filling is driven by megatrends in water and supported by municipal infrastructure investment as well as the growing use of PVC pipe, a municipal infrastructure as compared to competing materials such as concrete and ductile iron.

HIP total margins also remain solid and are indicative of the strong value of our brands and the significant value that our service-oriented business model delivers to our customers. While the long-term outlook for the housing market remains favorable driven by demographics and the undersupply of homes we recognize the current volatility and uncertainty, and we will continue to execute our winning HIP strategy in a disciplined manner to enhance the value of our business.

Longer term, we remain very positive on the outlook for our HIP business to organically grow at a 5% to 7% compound annual growth rate. We expect this growth to come both from market growth, such as the need for home building to recover from 10-plus years of under building and our position as a leading supplier to the faster-growing customers in the market. We also continue to evaluate opportunities to grow our HIP businesses through acquisitions to broaden our product portfolio and deepen our relationship with our key customers. Overall, we continue to see a very bright future for HIP.

Turning to our PEM segment. Near-term macroeconomic conditions show signs of demand stabilizing, albeit at lower levels than we would like. ISM Manufacturing Index readings in the U.S., Europe and China have fluctuated in a relatively narrow range at or slightly below 50, nearly every month this year. As we look ahead to the second half of 2025, we are seeing stable demand for our PEM materials which combined with improved production rates should lead to an increase in our PEM sales volumes compared to the first half of 2025.

We are responding to the business environment in our PEM segment and implementing our 3-pronged PEM profitability improvement strategy to improve plant reliability, accelerate cost reductions, reduction plans to improve our global competitiveness and optimize our manufacturing footprint. These actions will meaningfully improve our PEM segment profitability and cash flows.

Before I open the call to your questions, I want to close by reminding you of Westlake's foundational strength, which serve us really well. These strengths include a diversified and complementary portfolio of businesses, our vertically integrated business model, a globally advantaged feedstock and energy position in the U.S. and our investment-grade balance sheet with $2.3 billion of cash and securities. As we progress through 2025, we will continue to lean on and improve these attributes to continue to create value for our shareholders.

Thank you very much for listening to our second quarter earnings call, and I will now turn the call back over to John.

[Johnathan Zoeller, executive]

Thank you, Jean-Marc. 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.

Gerald, we will now take questions.

[Operator]

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

[Patrick Cunningham, analyst]

A question on the HIP guidance. I think previously, you had some price mix headwinds that have you pointing to the lower end of the margin range. And now the sales guide is lower, but the margin guidance is intact. Should we still expect margins on the low end? Or have some of those mix headwinds normalized versus your prior expectations?

[M. Bender, executive]

Yes, it's a good question Patrick. And as we think about the guidance we're providing, we're simply reflecting the realities we see in the building -- residential building and construction markets. And so I'd still guide you to the rain that we provided of 20% to 22%. Obviously, we delivered a strong quarter this year, and I would expect we'll continue to see continue to see results as we go through the stronger periods of 2Q and 3Q in the construction year, but our guidance still remains really in that 20% to 22% range.

[Patrick Cunningham, analyst]

Great. And for my follow-up, the biggest change in the tariff regime has been fresh tariffs on Brazil, the threat of retaliatory tariffs, how should we think about the risk to both chloro vinyls and caustic soda and given this has been such an attractive export market for the industry and for Westlake?

[M. Bender, executive]

Yes. So Patrick, a good question on exports, let's say, caustic and to Brazil, as you raised. Our sales are direct to customers in the alumina and paper markets. And those markets really export markets. So there's an opportunity for them to access duty drawback. And so we haven't seen really an impact really in that -- in those tariffs at this point in time. We'll continue to monitor the situation, but we believe that we're well positioned with those customers.

[Operator]

Our next question comes from Duffy Fischer from Goldman Sachs.

[Patrick Fischer, analyst]

I want to go back to HIP if we could. So you talked about earlier, some areas of HIP that we're seeing pricing pressure, all of the low gauge pipe. Could you go through, I guess, 2 questions there. What percent of the portfolio do you think is actually seeing kind of excessive competitive pricing versus what part is holding stable? And then just the second part, at the midpoint, your revenue is now down 5%. But again, the margins are stable. So why isn't there a decremental margin degrading. Is there a mix shift improvement in there? Just kind of versus first quarter to today, why don't margins change?

[M. Bender, executive]

And so Duffy, as you think about the commentary we provided, you've seen really the broad portfolio offering that we have and addressing and adapting to the market conditions within the Building Products business. continue to call out the strength in our water business going into our Pipe & Fittings business, but continue to recognize that as a large diameter for water and that business is really being supported by the Infrastructure Act as well as state cities and counties.

But certainly, I would say that we've certainly had to position the business and adapt with our compounds business, our building products, exterior building products business and our Pipe business to the conditions that we see. So the range of the products we think and the depth of the product we think continue to be able to be addressing this changing and evolving market.

[Patrick Fischer, analyst]

Great. And then if we just go back from the less downtime in Q3 versus Q2 from the ramp-up of the plant. Roughly how much less hit do you have from that and what were operating rates chlorovinyls Q2 to Q3, how much do we actually get to improve operating rates?

[M. Bender, executive]

As you can see in our prepared remarks that we continue to see improvements quarter-over-quarter in the third quarter. But you could also see that we're continuing to ramp up our core vinyl businesses in the third quarter. So while I see some improvement. We won't be fully clear of this in the third quarter.

[Operator]

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

[Unknown Analyst]

This is Adam on for Arun. If we were to dig a little bit more into bridging into the second half of the year, assuming by the end of the year, some of the planned and unplanned turnarounds are backed out. Do you have any other major turnarounds planned at this time? And of that $110 million impact, approximately how much of that was planned versus unplanned?

[M. Bender, executive]

Yes. As you can see, we've taken a huge effort in the first half of the year with planned outages, but obviously, we've had some of these unplanned outages. And so the great majority of this was the planned turnarounds. As you recall, we had an ethylene turnaround as well as the VCM tie-ins in Geismar. The majority of this was obviously in the planned arena. As we look into the back half of '25, we really have gotten beyond the major turnaround activity in '25. And so I don't expect a continuance of these planned events for the back half of this year.

[Unknown Analyst]

Okay. And looking at your additional $200 million cost improvement for next year, how much of that -- is that all Pernis included in that, the $100 million improvement from that? And what would the balance be made up of? Is that primarily going to be additional footprint rationalization? Or is there some other head count reduction included in that as well?

[M. Bender, executive]

Yes. Thank you for the question. These are really cost reduction initiatives that are across the entire PEM footprint. And so as we think about that, it allows us to address cost in all areas, whether they are in contract labor, whether it's in maintenance and a wide variety of other areas. But this is across the entire PEM footprint and not really targeted solely in the actions that we've taken in our Pernis location. This is really on top of the actions that we've already taken.

[Operator]

Our next question comes from John Roberts of Mizuho.

[John Roberts, analyst]

On M&A, could valuations become cheap enough in PEM opportunities that you would acquire something significant there? Or is your M&A focus exclusively over on the HIP side?

[M. Bender, executive]

John, it's a good question. We continue to look across the broad spectrum of opportunities, whether they're in the HIP segment or in the PEM segment. And that really is the opportunity is really driven by the valuation opportunity we see in one or the other segment. So there isn't necessarily a strong bias one or the other. It's really where the most opportunities present themselves. The strongest side of our business clearly is on the HIP side of the business. But clearly, should there be value opportunities that we see in chemicals, we'll certainly act on those opportunities as well.

[Operator]

Our next question comes from Vincent Andrews of Morgan Stanley.

[Vincent Andrews, analyst]

In PEM, as part of the initiatives to improve plant reliability, will there be a CapEx component of that, either onetime in nature? Or is there any risk that your maintenance CapEx needs to be revised higher?

[M. Bender, executive]

No, Vincent, we fully expect that the capital programs we have in place address this is not an issue that requires a large capital outlay. So nothing incrementally beyond the capital programs that we've been discussing all year.

[Vincent Andrews, analyst]

Okay. And then if I could just ask you in terms of HIP, is it a fair assessment from the answers already that we'll see a similar margin in 3Q as we saw in 2Q and then sort of the swing factor where you wind up for the full year is going to be how soft 4Q is?

[M. Bender, executive]

Yes. The fourth quarter is always uncertain because of seasonal matters. And so we've seen periods of time where we continue to build through October and November. So it really is a function of the weather and the demand picture, of course, on top of that, but typically the strongest quarters are the second and third quarters, and we continue to see continued construction activity carrying us through July and August now. And so I have still an expectation that third quarter will continue to be that seasonal pattern that we've discussed historically.

[Operator]

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

[Frank Mitsch, analyst]

As someone who probably ought to go back and take a class on tariff impacts 101. I'm wondering if you could elaborate on the comment about your caustic exports to Brazil and the fact that some of that is being processed there and then you'll have a duty drawback. So just conceptually, how much -- of the amount that you're exporting of caustic to Brazil, how much is subject to this duty drawback. And if you could just elaborate on what exactly that all means.

[M. Bender, executive]

Yes, Frank, it isn't really our ability to see in detail how much the paper and alumina business is exported out of Brazil. But I would say the great majority of it is, as we understand from our customers. So these are direct sales into those individual customers. And as we understand the regulations and opportunities in Brazil, if those products are reexported out of Brazil, they have the ability to have duty drawback.

And so as long as they're exporting some portion or majority of the portion as we understand, they are able to then have that duty drawn back and be insulated from that portion of the export. That's our understanding from our customers.

[Frank Mitsch, analyst]

So that would go -- it would go to 0. So if Brazil throws on a 50% tariff on caustic as long as the customer buys your caustic and reexport out the product, that 50% goes to 0. Is that how we should think about it?

[M. Bender, executive]

That is how the duty drawback process works in Brazil, correct, as long as those products are exported.

[Frank Mitsch, analyst]

Terrific. Very helpful. And Jean-Marc, just curious, you made the comment that you're already seeing plant reliability improvement here in the third quarter. Any color or any examples that you could provide on that?

[Jean-Marc Gilson, executive]

Yes, thank you for the question. The -- as Steve said, we've had quite a lot of planned and unplanned outages in the first part of the year. And a lot of them, I mean, the big, big ones were primarily over the first 3, 4 months of the year, and since then, we had additional unplanned outages that have slowed down actually the ramp-up of the plants. But we have started to see, I would say, sequential increase on a month-by-month basis, starting probably around late April, early May.

So -- and that's really what we're expecting to continue in the third quarter. And by the end of the year, we will have pretty much everything behind us.

[Operator]

Our next question comes from Aleksey Yefremov from KeyBanc Capital Markets.

[Aleksey Yefremov, analyst]

I wanted to go back to hit margins. You revised your sales guidance down by 7%, but maintain the margin. So could you discuss what is going better than expected, such that there's no negative operating leverage in this segment.

[M. Bender, executive]

Yes. So Aleksey, the broad and deep portfolio offering we have allows us to address the affordability issues that we see in our customers and our end customers. And so as we've addressed that with our exterior building products, the portfolio has allowed us to improve that positioning the strength that we're also seeing in the infrastructure side of our Pipe & Fittings business, this is the larger diameter business that is really addressing state county and city needs for infrastructure.

So continuing to see strength in demand and that infrastructure water requirements. And so that's really where we're seeing the continued ability to deliver good results this quarter.

[Aleksey Yefremov, analyst]

And I was hoping you could give us some sense of monthly trends in HIP orders. Have you seen a negative from the flection or are things steady as you went through the summer?

[M. Bender, executive]

Well, clearly, we've seen some reduction in overall construction activity over the course of the year. So going back to first and second quarter, we've seen housing starts trend lower relative 2024. And so I would say the level we're at today, which is roughly 1.3 million starts continues to be that level that we're seeing through the second quarter, and we do expect the seasonal effect to play through in the end of the year and fourth quarter, but I would expect that demand level to continue to persist in the third quarter.

[Operator]

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

[Kevin McCarthy, analyst]

If we rewind the clock 3 months, it seems to me that Wall Street analysts generally underestimated the industry operating rates in the ethylene chain, for example, and perhaps also for Westlake. And listening to you today, it sounds like those operating rates and the trade flows are in the process of normalizing.

So I was wondering if you could comment on how much harder you might be able to run your crackers and your polymer assets in the third quarter relative to the second quarter. Is it a low single-digit uplift or a high single-digit percentage uplift or somewhere in between? Any guidance on that operating leverage dynamic would be very helpful.

[Jean-Marc Gilson, executive]

Yes. So I will take that question. So if you look at our cracker, since we went through the major turnaround beginning of the year, these crackers have been -- all of our crackers have been running at full capacity. So -- and as you know, we're a little bit short in ethylene, but they're running at full capacity. If you look downstream on our polyethylene, we're running at pretty high rates, too, since we finished some of the turnarounds. The issue has been for us more on the chlorovinyl side and Epoxy, I mean Epoxy, we said we addressed the problem. And by shutting down the site and basically buying liquid epoxy resin now from the market. and are supplying from our sales from the U.S.

But if you look at the chlorovinyl chain. The problem is -- I mean, the demand is certainly not as high as we would like it to be, but there is demand in the market and it's pretty stable. And it's for us to capture that demand and by increasing our throughput. So how and where it's going to stabilize, I don't know. But we certainly have some leverage by bringing most of our chlorovinyl operating units back to what we consider as normal reliability.

[Kevin McCarthy, analyst]

Okay. And then as a follow-up, can you provide an update on your polyethylene resin pricing outlook, for example, have you settled any July contracts in the U.S.? And how much pricing are you seeking for August?

[M. Bender, executive]

Yes. So Kevin, when you think of polyethylene, we -- pricing for July has not yet settled, but there are a number of price initiatives out for July and for August. So we have in the industry between $0.06 to $0.07 announced for July and for August, their announcements range of between $0.05 and $0.08 for August.

We've seen demand begin to recover really starting earlier this year. But for the month of July, prices have not yet settled. There remains certainly an elevation in ethylene, as Jean-Marc just earlier noted. And so certainly, we're looking to recognize that with those elevated ethylene prices, we need to see some of these increases work your way through the system.

[Operator]

Our next question comes from Michael Sison from Wells Fargo.

[Michael Sison, analyst]

You noted that volumes would be better in the third quarter. Can you talk about where you think industry margins sort of ended 2Q? Should they be better sequentially in the various chains, chlor-alkali, polyethylene and such in the third quarter versus the second quarter?

[M. Bender, executive]

Yes. So Mike, as you think about the comment I just added in polyethylene, we certainly have price announcements out in polyethylene. We have not settled July. We'll see if we get some of those nominations settled in July and into August. And I would say in PVC, July did settle flat for the month. but there are nominations out for later this quarter. In August, there's a nomination of $0.03 in the industry.

So as we think across the PEM and PVC chains, we certainly have seen some announcement action. But obviously, we're still waiting to see if those prices take action and take traction.

[Michael Sison, analyst]

Okay. And then what do you think about seasonality. Typically, the fourth quarter for you all is the weakest quarter it's been an unusual year. So how do you think about the normal seasonal trends as we head into the fourth quarter, given -- you've had some tough turnarounds in the second, maybe those don't -- those all go away by the fourth and just directionally how you see that unfolding for the second half.

[M. Bender, executive]

So as we think about -- and I'll start maybe with the PVC side, the reason we have price nominations out for August to address construction needs. As I mentioned earlier, July settled flat. We'll see if we are able to get any traction on pricing Again, ethylene pricing is up, so we're trying to push some of that higher feedstock cost through in our PVC chain. We need to see some of those price seminations get traction to gain margin growth.

As I mentioned earlier, July for polyethylene has not yet settled, and we have price nominations out for polyethylene as well. When we think about the cost side of the equation, we're reaching the peak of demand for chlorine here in mid-summer. And so as we think about the fourth quarter, to your question, will begin to ramp down chlorine requirements as we reach the end of the fourth quarter, and that will tighten up production of both chlorine and caustic soda.

So really to summarize -- yes, to summarize the pricing environment, we've got a number of nominations out there, but we've obviously got some pressures on feedstocks.

[Operator]

Our next question comes from Josh Spector of UBS.

[Joshua Spector, analyst]

First, I wanted to follow up on HIP, and you've talked about this in various ways. But if I look at your updated guidance, in the first half in HIP sales, you were down around 3% year-on-year. Your second half HIP outlook is about up 3% year-on-year. So curious if you could talk to 2 things there. I mean, one, the visibility by the markets.

And then two, how you think we should think about your performance relative to housing, considering the outlook has gotten worse, but maybe your second half outlook has gotten a little bit better or maybe even unchanged?

[M. Bender, executive]

When you think about the outlook we have, as you clearly can see, adjusted our revenue guidance down. But I would say the product mix that we have allows us, and I'd say the product mix we have is a little bit different product mix to the others with our Pipe & Fittings and compounds businesses.

The demand that we're seeing really in the infrastructure water business, this is coming from the infrastructure at past several years ago, allows us to be able to address those needs in cities and counties. And I think that is as you could see a nice contributor in the second quarter, and we'd expect that to provide a tailwind over time. Certainly, in our exterior building products business, we've continued to adjust our portfolio and adapt to the affordability issues you hear much discussed.

So again, recognizing that the back half of the year should begin to trail off depending on weather as we end the third quarter and into the fourth quarter, it's very weather dependent in terms of how volumes and margins unfold. So this is why we've really adjusted our revenue guidance but continue to stick to the margin guidance of 20% to 22% that we provided already.

[Joshua Spector, analyst]

Okay. And then just one other clarification just around the Pernis shutdown. So $100 million drag on a trailing basis, do you get a benefit in the second half versus first half from the shutdown? Or is that more of a 2026 effect?

[M. Bender, executive]

It's largely a '26 impact. There will be some benefit as we begin to wind down and bring the plant fully down later this year. But the biggest benefit really is a '26 benefit.

[Operator]

Our next question comes from Bhavesh Lodaya from BMO.

[Bhavesh Lodaya, analyst]

Within the HIP segment, can you size up the municipal what application market for us? Like what's -- maybe what's the total size? How fast is it growing? And if possible, who are the key competitors that you compete with over there?

[M. Bender, executive]

Yes. The large players in this market really are largely private players. This is the larger dialer PVC business. So you see that players such as Diamond Plastics is one of the larger players and JM Eagle is also one of the other larger players in this business. These are the key players really in the larger diameter PVC space. We do compete in -- with other who are non-PVC producers, but these are the large PVC pipe producers.

The market continues to organically grow very nicely, I'd say in the neighborhood of 5% to 7% over time. And so as we think about the overall business of our Pipe & Fittings business, we're the only producer that is producing not only pipes, but also fittings to provide the entire integrated kit to meet needs that we see in the water business addressing municipal requirements to solve water issues.

[Bhavesh Lodaya, analyst]

Got it. And as a follow-up, within these pipes and fittings, I would say, subsegment I believe you mentioned pricing was down year-over-year, but obviously, your overall pricing is up 2% sequentially for the HIP segment. Would you say the pricing pressures we have seen in Pipe & Fittings are behind us? Or are you still seeing sequential pricing headwinds there?

[M. Bender, executive]

No, I'd say we're continuing to deal with market issues day-to-day. This is something that we deal with and always deal with day-to-day in each discrete market in which we operate, whether it is in our Pipe & Fittings business or in our Building Products business, which were also nice contributors, but you have to be competitive. And in that competitive market, you have to meet competition. And so there is certainly, as you've seen resin prices have drifted over. We've seen prices drift in pipe as well.

[Operator]

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

[Hassan Ahmed, analyst]

Question around chlor-alkali supply, particularly within North America. I mean over the last couple of quarters, there's been some fare in the marketplace that there's been some new projects announced. But I mean, as I look at it, it seems that there is 1 expansion on the table and, call it 2 greenfield projects. And 1 of those 2 greenfield projects doesn't even have an FID.

And the expansion project, the number out there seems to be higher than eventually where it'll end up. So just would love to hear your views on what the supply picture looks like through the end of the decade? And should it be worrisome them or not?

[Jean-Marc Gilson, executive]

No. I mean, I will take the question. If you look into the market, I think that we see some stability going forward. I think probably at the end of the decade, we're going to start seeing some uplift probably in the -- in market demand. And yes, that's the way we look into it right now.

[Hassan Ahmed, analyst]

Understood. And just in terms of the products that you produce, be it on the ethylene, polyethylene side, be it on the chlorovinyl side of it. what rumblings are you hearing in terms of rationalization of those capacities in China, in particular.

[Jean-Marc Gilson, executive]

That's a -- it's an interesting question. I think that we would -- when you look at the prices currently that you see in China, you would expect that some -- that there would be some restructuring. We haven't seen them. We haven't seen too much restructuring I cannot predict what's going to happen in the future. And for us, as far as Westlake is concerned, I mean we need to adapt and make sure that we can operate in an environment like that and make money in all of our segments in that kind of environment.

So I think some of them are running really close to the edge. You would expect that there would be some restructuring. We haven't seen many yet.

[M. Bender, executive]

And I would just add that the NDRC has made some announcements here. But as Jean-Marc said, we haven't seen any actions yet. But that will take time. That will take time.

[Operator]

Our next question comes from Peter Ostland from Truist Securities.

[Peter Osterland, analyst]

So first, I just wanted to ask what percentage of your volumes in PEM were sold into export markets during the second quarter? And how does that compare to what you see as normal? And how would you expect that mix between domestic and export sales to change in the third quarter?

[M. Bender, executive]

So Pete, when you think about our normalized exports, it varies a little bit by product. But if you look at all those products combined, it's in the 30s, mid-30s. But it does vary by product. But obviously, when you think about a normalized number, we were not selling as many pounds in the export market because of our planned and unplanned outage issues in the second quarter.

[Peter Osterland, analyst]

Yes, a follow-up question I had, just on the $200 million of incremental cost savings that you announced today, do you have an estimate you can share for the incremental cash outlays that you expect in order to realize these new cost savings?

[M. Bender, executive]

These actions, we believe are reasonable actions that we don't think require a lot of cash outlay. These actions are really going to deliver really largely in 2026 as you can see we have initiatives already underway, but it's not a large cash outlay.

[Operator]

Our next question comes from David Begleiter from Deutsche Bank.

[David Begleiter, analyst]

Jean-Marc and Steve, of the $110 million of average impact in Q2, how much can we add back for Q3?

[M. Bender, executive]

As you heard us earlier speak, David, I expect that as we slowly ramp up, we're still going to have some carryover from that. As you can see, we had $30 million sequentially from Q1 into Q2. So I do expect that you cannot add all of that $110 million back fully in Q3. But I don't have a number to give you today.

[David Begleiter, analyst]

Understood. And the new cost savings of $2 million how much would you view as permanent or structural? How much would be temporary relative to when volumes do come back?

[M. Bender, executive]

No, I expect these to all be structural, David. And so I expect that $200 million to be structural and really sticky therefore. We obviously have to recognize their inflation in the market. But frankly, we think these are structural changes that we're implementing.

[Operator]

Our next question comes from Matthew DeYoe from Bank of America.

[Matthew DeYoe, analyst]

And I apologize if you covered this a little bit because I know it's been a bit of a talking point in the discussion today, but your net short ethylene and have been for a while now. And I know you've been comfortable there. But as your peers tie up some of this excess position, prices are moving higher. And I know Lyondell is maybe delayed here, but I think they remain committed to Flex, too. So like does this just change your view on how you want to position the business over the next 5 years? Is there any desire to kind of tie this up?

[Jean-Marc Gilson, executive]

Yes, I'll take that one. So yes, you're right. We are short in ethylene. And I think for us, it's a matter of how much do we want to be short. And I think if we -- we always have the opportunity to invest or make some acquisition or do things like that. Right now, I think we like where we are. But it's not to say that it couldn't change in the future if some opportunities present themselves to reduce that short, depending on market conditions and if we see the downstream business grow over the next several years. So I think we're okay for now, but we will not -- we will look at everything that comes our way if we want to redo that chart.

[Matthew DeYoe, analyst]

Okay. And look, HIP had a good quarter. It was definitely better than we were expecting. So I don't want to kind of dig too much on it. But I mean the flip side to the stable margins, it looks like it was an 80% decremental margin. And so is this kind of just a mix issue or wanted to -- or tough comps. Obviously, it might be part of that, but I just want to get a little bit better sense of what's going on with the surface.

[M. Bender, executive]

Yes. So the mix you could see was really -- and again, year-over-year was really driven by the building -- the exterior building products not surprisedly giving lower construction activities. So in our compounds and exterior building products businesses, volumes were certainly lower given the reality of the construction activity level.

So I mentioned the water demand that we're seeing in the infrastructure business with some of the offset to that, but not fully offsetting some of the weakness we saw in our compounds in Building Products businesses year-over-year.

[Operator]

[Operator Instructions] Our next question comes from Matthew Blair from TPH.

[Matthew Blair, analyst]

Just looking at spot PVC prices that are almost approaching all-time lows. Could you talk a little bit about the global supply-demand outlook for PVC? Clearly, the demand side is affected by weak construction trends, but what about the supply side? How much global capacity do you expect to be added in PVC this year and next year? And what are you seeing in terms of operating rates for China PVC plants.

[M. Bender, executive]

Yes. So Matthew, when you think about the situation in PVC, certainly, a great majority of that does go into construction markets. And certainly, the weakness that you've seen in the Asian market and the European markets continue to really impact kind of operating rates. The issues that we've seen here in construction, we recognize that the underbuild in North America is just that. It's been a long-term underbuild for over a decade. And we think the demand picture here is ripe for change given the demographic demand for housing.

But when you think of the global supply/demand balance, we don't see a significant amount of new capacity coming into the market incrementally from where we sit in 2025. You saw some of the comments or heard some of the comments we made earlier in terms of some of these markets, some of these producers, especially those in Asia, are currently underwater. And I think this is why you're hearing commentary about the Asians and specifically the NDRC talking about some potential rationalization, which could take many, many years.

But nevertheless, I think the market really needs some demand to rebound here in the North American European markets. But the Asian markets will take longer to recover.

[Matthew Blair, analyst]

Great. And just looking at the pressures on free cash flow in the quarter, it looked like one pressure was due to another use of working capital. I'm showing a use of working capital year-to-date of almost $400 million. Would you expect that to completely reverse in the back half of the year? And I guess, if not, like what are the factors that would determine whether you can recover that big use of working capital year-to-date.

[M. Bender, executive]

Yes. There were a large amount of dollars really in the payable side related to the turnaround activity and the unplanned outage activity. And of course, on the receivables side, specifically in Building Products, we saw a buildup in sales and therefore, a buildup in receivables. And I do expect that to turn in the second half of this year.

[Operator]

That's the time allotted for a Q&A session. So it has now come to end. Are there any 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 Westlake Corporation Second Quarter Earnings Conference Call. As a reminder, this call will be available for replay beginning 2 hours after the call has ended. The replay can be accessed via Westlake's website.Goodbye.