Westlake Corporation

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

Westlake Corporation is a global manufacturer of materials and innovative products, offering a wide range of solutions across different industries using materials such as polyethylene, vinyl, and specialty chemicals.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Westlake Corporation (WLK) operates in two main segments: Performance and Essential Materials and Housing and Infrastructure Products. The Performance and Essential Materials segment focuses on the manufacturing and sale of polyethylene, chlorine, and caustic soda. These are essential components in various industries. The Housing and Infrastructure Products segment, on the other hand, encompasses products such as PVC pipe and fittings, siding, and other building products. These products are mainly used in construction and infrastructure development.

  • Revenue Distribution:
    • Performance and Essential Materials: A chemical business, making the building blocks for plastic, and often used in other chemical compounds.
    • Housing and Infrastructure Products: A downstream building and construction business.
    • Geographically, a significant portion of WLK’s revenue is derived from North America, followed by Europe and Asia.

  • Industry Trends:

    • Volatile Pricing: The industries WLK operates in is highly commoditized, prone to cyclical trends. Price swings are expected in this area as demand for many products depends on the economy.
    • Sustainability: As governments and consumers emphasize sustainability, companies like WLK are under pressure to develop more environmentally friendly products and processes.
    • Global Supply Chain Issues: International supply chains continue to be strained and unpredictable. This is something that has hurt margins for all companies in this space in the last couple of years.
    • Infrastructure Spending: Infrastructure development drives a strong demand for many of WLK’s products such as pipes and other building materials.
    • Housing Market: Given that the company produces many products for the building market, a lot of their sales are linked to the housing market performance.
  • Margins:
    • Historically, the company’s margins have been solid, particularly in the Performance and Essential Materials segment due to its strong position as a low-cost producer. It has, however, seen more volatility in the Housing and Infrastructure Products segment, which has seen more competition.
    • Margins were down due to increased raw material prices and logistics costs.
  • Competitive Landscape:
    • WLK operates in highly competitive markets with many global producers of plastics and building materials.
    • Pricing and customer loyalty are important factors that companies compete on.
    • Mergers and acquisitions have recently led to fewer but larger players.
  • What Makes the Company Different:
    • A leading global player in PVC production.
    • Their vertically integrated production provides a cost advantage, especially in the Performance and Essential Materials segment, by using their own basic materials in other products.
    • Strong brand recognition for “Westlake” and related brands in the construction and chemicals sector.
    • The Company has been actively pursuing acquisitions to grow scale.
    • Has global manufacturing and distribution capacity.
    • In a recent earnings call, the company talked about using new tech and AI to increase revenue and optimize efficiency and production. They were able to reduce expenses by automating repetitive tasks.
    • Company is working on its strategic objective to “decarbonize” production.

Financial Analysis

Latest Quarter Results (Q3 2023):

  • Net Sales: $3.2 billion
  • Net Income Attributable to Westlake: $258 million
  • Adjusted EBITDA: $626 million
  • Sales Decline: Performance & Essential Materials saw a drop in sales of $446 million year-over-year (YoY) and $101 million compared to the last quarter.
  • Earnings Decline: Performance and Essential Materials experienced a YoY decline in operating profits from $608 million to $379 million and Housing & Infrastructure Products saw a fall to 190 million from $224 million YoY.
  • High Interest Expense: Has an interest expense of $170 million in Q3 compared to a lower interest expense of 100 million the previous year.
  • Cash Flow: While the company generated about $742 million in cash from operating activities, and $1.6 billion YTD, Capital expenditures also increased in the quarter to $1.6 billion YTD.
  • Net Debt: 900 million YTD.
  • Guidance: Weakness is expected in the European markets for the rest of the year.

Balance Sheet Health Rating: 4 / 5

  • Liquidity: The company has a healthy balance sheet with substantial cash and marketable securities, making it resilient to short term volatility. However, given high levels of spending and acquisition, this may be a cause of concern in the future if the economy slows.
  • Debt: The company’s debt levels are moderate, but this is still in an industry that is sensitive to interest rates.
    • Net Debt to Capitalization: 0.3, which is in a manageable region.

Understandability: 2/5

  • The company’s operations span across multiple business sectors, including manufacturing chemicals and manufacturing building and construction materials.
  • It also has complex business relationships through its various JVs and partnerships, and different operating locations which can sometimes increase costs.
  • It can be difficult to understand what impact new developments in technology, government regulations, tariffs, trade agreements, and other geopolitical issues have on the company’s performance. The same also goes for product pricing.
  • The company also uses various accounting practices related to impairment and goodwill that can make its financials hard to understand.

Legitimate Risks

  • Cyclicality: WLK is sensitive to economic conditions. A downturn in the economy could lead to a lower demand for its products, affecting revenue and profitability.
  • Competition: There is a lot of competition in this space from both large and small players, both domestically and abroad, and this can squeeze margins as companies compete on pricing. Also, new entrants can steal market share in some industries they compete in.
  • Volatile Raw Materials: The company uses many raw materials including polymers, chlorine, and caustic soda and these prices are volatile and unpredictable.
  • Technological Changes: Fast-paced technological advancements could disrupt the production process and make older technologies obsolete. In the past, many chemical and plastic companies were disrupted as new technologies became widespread, and the same may happen to the company.
  • Regulatory Issues: Many of the business lines of WLK, such as in chlorine production, are subject to increasing regulatory and government oversights. If regulations become overly harsh, the company may struggle to maintain production or profitability.
  • Geopolitical Factors: WLK does have worldwide operations and is subjected to volatile geopolitical situations in many regions. Any turmoil in those areas can cause supply chain disruptions and hurt profitability in general.
  • Acquisition Risk: Company uses mergers and acquisitions to grow the business. But these actions may not always lead to the success that is planned for by the management. There is a risk that returns on acquired companies will not fully materialize or they might not be integrated correctly, thus, destroying value instead of creating it.
  • Inflation: Inflation affects business costs negatively, and as noted in previous sections, it is already eroding company margins at the moment. This will probably continue to hurt the company in the short to medium term.

Summary

Westlake Corporation is a global chemical and building materials company that benefits from several factors including having established moats in certain product lines, having the benefit of scale, and also having a low-cost operation for their production of base materials. These characteristics can help it maintain its profitability in the long term, provided it is not severely affected by the numerous risks it faces in its operating business. It is a company that seems to be well-positioned to benefit from growing infrastructure needs in many regions and the growth in the chemical industry. However, the many complexities that the business operates under, along with various financial intricacies, makes it quite difficult for a layperson to fully understand the company.