Westlake Chemical Partners Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 3, 2023

Key Takeaways

  • Westlake Partners reported Q2 2023 net income of $12 million (or $0.34 per unit) and distributable cash flow of $15 million (or $0.43 per unit), with results lowered by a planned 30-day Calvert City turnaround that was completed in May.
  • Production, sales and cash flow rebounded to expected levels in June, and with no further planned turnarounds in 2023, management expects improved financial performance in Q3 and Q4.
  • The partnership achieved its 36th consecutive quarterly distribution since its 2014 IPO—growing distributions 71% from the original minimum—and maintained a cumulative distributable cash flow coverage above 1.1× without issuing new equity.
  • At quarter end, Westlake Partners held $154 million in cash, $401 million in long-term debt and a ~1.0× consolidated leverage ratio, and is evaluating growth via four levers: OpCo dropdowns, acquisitions, organic expansions and margin negotiations.
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Earnings Conference Call
Westlake Chemical Partners Q2 2023
00:00 / 00:00

There are 7 speakers on the call.

Operator

Good afternoon. Thank you for standing by. Welcome to the Westlake Chemical Partners Second Quarter 2023 Earnings Conference Call. During the presentation, all participants will be in a listen only mode. After the speakers' remarks, you will be invited to participate in a As a reminder, this conference is being recorded today, August 3, 2023.

Operator

I would now like to turn the call over to today's host, Jeff Holy, Westlake Chemical Partners' Vice President and Treasurer. Sir, you may begin.

Speaker 1

Thank you. Good afternoon, everyone, and welcome to the Westlake Chemical Partners' 2nd quarter 2023 conference call. I'm joined today by Albert Chao, our President and CEO Steve Bender, our Executive Vice President and CFO and other members of our management team. During this call, we refer to ourselves as Westlake Partners or the Partnership. References to Westlake refer to our parent Company, Westlake Corporation and references to OpCo refer to Westlake Chemical OpCo LP, a subsidiary of Westlake and the Partnership, which owns certain olefins assets.

Speaker 1

Additionally, when we refer to distributable cash flow, we are referring to Westlake Chemical Partners' MLP Distributable cash flow. Definition of these terms are available on the partnership's 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. We encourage you to learn more about these factors that could lead our actual results to differ by reviewing the cautionary statements in our regulatory filings, which are also available on our Investor Relations website.

Speaker 1

This morning, Westlake Partners issued a press release with details of our Q2 2023 financial and operating results. This document is available in the press release section of our webpage at wlkpartners.com. A replay of today's call will be available beginning 2 hours after the conclusion of this call. The replay can be accessed via the partnership's website. Please note that information reported on this call speaks only as of today, August 3, 2023, And therefore, you're advised that time sensitive information may no longer be accurate as of the time of any replay.

Speaker 1

I would finally advise you that this conference call is being broadcast live through an Internet webcast system that can be accessed on our webpage at wlkpartners.com. Now I would like to turn the call over to Albert Chao. Albert?

Speaker 2

Thank you, Jeff. Good afternoon, everyone, and thank you for joining us to discuss our Q2 2023 results. In this morning's press release, we reported Westlake Partners' 2nd quarter 2023 net income of $12,000,000 or $0.34 per unit. As planned, these financial results were impacted by the 30 day Plant maintenance turnaround at Calvert City that was completed in May. As a result of our Calvert City turnaround, our production And sales volumes were below the levels of both the Q1 of 2023 and the Q2 of 2022.

Speaker 2

Consequently, our Q2 of 2023 sales, net income and distributable cash flow We're below both the prior quarter and the prior year levels. Importantly, The Cover City turnaround was completed as planned and volumes, sales and cash flow returned to expected levels in June. Looking forward, with our only planned turnaround for the year behind us, we expect financial results to improve In the 3rd Q4 of 2023 from 2nd quarter levels, the stability of Westlake Partners' business model It is consistently demonstrated through our fixed margin ethylene sales agreement, which minimizes market volatility And other production risks. The high degree of stability in cash flow, when paired with the The credibility of our business has enabled us to deliver the long history of reliable distributions and coverage. This quarter's distribution is a 36th consecutive quarterly distribution since our IPO in July of 2014 without any reductions.

Speaker 2

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

Speaker 3

Thank you, Albert, and good afternoon, everyone. In this morning's press release, we reported Westlake Partners' 2nd quarter 2023 net income of $12,000,000 or $0.34 per unit. Consolidated net income, including OpCo's earnings, was $75,000,000 on consolidated net sales of $264,000,000 The partnership had distributable cash flow for the quarter of $15,000,000 or $0.43 per unit. 2nd quarter 2023 net income for Westlake Partners of $12,000,000 decreased by $4,000,000 The Q2 of 2022, the partnership was impacted by lower production levels due to the planned Calvert City turnaround and higher interest expense. Distributable cash flow of $15,000,000 for the Q2 of 2023 decreased by $5,000,000 compared to Q2 2022 cash flow of $20,000,000 due to the $4,000,000 decline in net income and lower depreciation expense.

Speaker 3

Turning our attention to the balance sheet and cash flows. At the end of the second quarter, we had consolidated cash and cash investments with Westlake through our investment management agreement totaling $154,000,000 Long term debt at the end of the quarter was 400 $1,000,000 of which $377,000,000 was at the partnership and the remaining $23,000,000 was at OpCo. In the Q2 of 2023, OpCo spent $5,000,000 on capital expenditures. We maintained our strong leverage metrics With a consolidated leverage ratio of approximately one time. On August 1, 2023, we announced Quarterly distribution of $0.4714 per unit with respect to the Q2 of 2023.

Speaker 3

Since our IPO in 2014, the partnership has made 36 consecutive quarterly distributions to unitholders And we have grown distributions 71% since the partnership's original minimum quarterly distribution of $0.275 per unit. The partnership's 2nd quarter distribution we paid on August 25, 2023 to unitholders of record of August 11, 2023. The partnership's predictable fee based cash flow continues to prove beneficial in today's economic environment is differentiated by the consistency of our earnings and cash flows. Looking back since our IPO in July of 2014, we've maintained a cumulative Distribution distributable cash flow coverage in excess of 1.1 times and the partnership's stability in cash flows, We were able to sustain our current distribution without the need to access the capital markets. For modeling purposes, We have no planned turnarounds during the remainder of 2023.

Speaker 3

Our next planned turnaround is at our Petro-one ethylene facility in Lake Charles, Louisiana, which is Now I'd like to turn the call back over to Albert to make some closing comments. Albert?

Speaker 2

Thank you, Steve. The partnership's financial performance in the 2nd quarter was consistent with our expectations and historical performances during quarters When a planned turnaround occurred, similar to those historical precedents, we expect financial performance to recover in the coming quarters now that a planned turnaround is behind us. Our ethylene sales agreement, which provides a predictable fee based cash flow structure from our take or pay contract with Westlake For 95% of OpCo's production, we'll continue to deliver stable and predictable cash flows through economic ups and downs as well as planned and unplanned turnarounds. Turning to our capital structure. We maintain a strong balance sheet With conservative financing, financial and leverage metrics, as we continue to navigate market conditions, We will evaluate opportunities via our 4 levers of growth in the future, including increases of our ownership interest at OpCo, Acquisitions of other qualified income streams, organic growth opportunities such as expansions of our current ethylene facilities A negotiation of a higher fixed margin in our ethylene sales agreement with Westlake.

Speaker 2

We remain focused On our ability to continue to provide long term value and distributions to our unitholders. As always, We will continue to focus on safe operations along with being good stewards of the environment where we work and live as part of our broader sustainability efforts. Thank you very much for listening to our Q2 earnings call. Now I'll turn the call back over to Jeff.

Speaker 1

Thank you, Albert. Before we begin taking questions, I would like to remind you that a replay of this teleconference Stacy, we will now take questions.

Operator

Thank you. We will now conduct a question and answer session. And wait for your name to be announced. Our first question comes from Matthew Blair with TPH. Matthew, please go ahead with your question.

Speaker 4

Hey, good morning, Albert and Steve.

Speaker 3

Hi, Matthew. How are you? Yes, Matthew.

Speaker 4

Good, good. Thank you. Could you share with us your current thoughts on potentially Restarting distribution growth as well as resuming asset drops from OpCo?

Speaker 3

Matthew, those two transactions are obviously related. And so as we think about a dropdown that would support additional earnings and cash flows to The partnership, we're always looking at opportunities and assessing those for the value proposition to both the partnership and, of course, the C Corp parent. So we'll continue to look at those. And if those make sense, a drop down transaction would then occur, which would generate that cash flow to then restart distributions.

Speaker 4

And what do you think would be the limiting factor today? Just looking at the valuation, I think the MLP is around an 8 point 3% yield, is that still a headwind in your mind? Do you see MLP investor Appetite for more equity issuances, any thoughts there?

Speaker 3

Matthew, it's an attractive yield Any yield oriented investor, and I would say that the trading multiple continues to be reflective of a nice arbitrage relative to our parent C Corp Westlake Corporation. So it's just finding the right attractive transactional value for a dropdown to make the Transaction accretive to both the partnership and of course our C Corp parent.

Speaker 4

Great. Thank you very much.

Speaker 3

You're

Speaker 4

welcome.

Operator

And stand by for our next question. Our next question comes from James Altschul with Aviation Advisory Service. James, go ahead with your question.

Speaker 5

Good afternoon. A couple

Speaker 6

of questions, if I may. First of all, And I'm just doing a very rough calculation. It appears if you look at the year on year results both for the second quarter and the first half, The sales in percentage terms, the sales of third parties have declined more sharply than the Sales to Westlake, am I correct? And if so, why is that?

Speaker 3

Yes, you are correct. And the 3rd party sales Our reflection of lower margins in the merchant ethylene market relative to the ratable margin that We have with Westlake Corporation. So with Westlake Corporation, we have that $0.10 net margin that is attributable to 95% of its Production and of course, the ethylene margins for the merchant market are reflective of market conditions, which have been below that $0.10 net margin for the 1st 6 months of the year.

Speaker 6

So in other words, because the margins are lower, you just don't want to be bothered Selling as much?

Speaker 3

Well, we have a contractual arrangement with our C Corp parent to sell 95% of our production. So that leaves 5% of the production To sell in the merchant market. And so as we sell that 5% of the merchant market, we're exposed to the merchant prices in that market. And so if those merchant prices are lower, then that's reflective of the lower value we get for that 5% of sales.

Speaker 6

Okay. And the other question I have is the total debt on the balance sheet does not seem to have Changed, but the interest expense has more than doubled year on year. Now I believe the debt is all owned to The power to Westlake, what are the terms of the debt? Why is the interest rate interest expense gone up so much?

Speaker 3

It's a floating rate interest rate on that facility, and so that is a long term multiyear facility. But as we all know, interest rates in the marketplace have risen meaningfully over the last 18 months, and so interest expense has gone up accordingly on that floating rate credit agreement.

Speaker 6

Okay. Thank you very much. You're

Operator

welcome. Standby for our next question. Our next question comes from Stephen Byrne with Bank of America Securities. Please go ahead with your question. Steven, do you have a question?

Speaker 5

Yes, I do. Sorry about that. It's on mute. Hi, guys. I've got a couple of questions about your cracker operations.

Speaker 5

One being, what have you seen in recent years about the costs for turnarounds With labor rates and equipment, materials inflation and so forth, has that trended Unfavorably, and how are those costs absorbed by the partnership?

Speaker 3

So Steve, the way we Think about those costs, and of course, with the labor cost rising and materials cost rising, yes, cost per turnaround have trended higher naturally. And so as we think about the fee that the partnership charges the parent on a monthly basis, Those estimated costs are built into the charges that are charged to the parent on a monthly basis. So we charge the parent on a monthly basis those Expected cost and they accumulate in the cash balances that you see on the balance sheet. And as we undertake a turnaround, we use those funds to undertake the cost of the turnaround. So that turnaround reserve that you might think about as some of that cash balance is designed to be able to address those costs.

Speaker 5

Okay. That makes sense. And the crackers also generate hydrogen as byproduct. And I was just curious How the partnership is incentivized to pursue higher value opportunities for that hydrogen?

Speaker 3

So we constantly assess what is the right value mix, certainly, as we think about that, Steve. And so Certainly to the extent that there is a credit associated with the co products or by products partnership, we'll see the associated benefits accordingly.

Speaker 5

And then just lastly, the continuous improvements on cracker operations could potentially Lead to some incremental production rate, maybe nothing like what it would take if you added on additional furnaces. But Is there incentives in place for the partnership to pursue those operating Advances as well?

Speaker 3

Yes, there is, Steve. And so when you think about the opportunity to debottleneck, and we've undertaken a number of debottlenecks Since the IPO of the partnership, and there is naturally an incentive to increase the production of the ethylene units Because we the partnership is able to achieve that increased volume with that margin that is associated with those increased That allows us, therefore, to grow the cash balances, grow the distributable cash flow, which allows us to increase distributions over time. So there is a strong motivation to undertake opportunities that are economically valued for debottleneck if one is so there is one of there.

Speaker 5

Very good. Thank you.

Speaker 3

You're welcome.

Operator

At this time, Q and A session has now ended. I will turn the Call back over to Jeff Holly.

Speaker 1

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

Operator

Thank you for participating in today's Westlake Chemical Partners' 2nd quarter 2023 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 11:59 pm Eastern Time on Thursday, August 17, 2023. A replay can be accessed via the partnership website. Goodbye.

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