Westlake Chemical Partners LP (WLKP) 2018 Q2 法說會逐字稿

Good morning, ladies and gentlemen.

Thank you for standing by.

Welcome to the Westlake Chemical Partners Second Quarter 2018 Earnings Conference Call.

(Operator Instructions) As a reminder, ladies and gentlemen, this conference call is being recorded today, August 2, 2018.

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.

Thank you, Candice.

Good morning, everyone, and welcome to the Westlake Chemical Partners Second Quarter 2018 Conference Call.

I'm joined today by Albert Chao, our President and CEO; Steve Bender, our Senior Vice President and Chief Financial Officer and other members of our management team.

The conference call will begin with Albert, who will open with a few comments regarding Westlake Chemical Partners performance in the second quarter as well as the current outlook on our performance and opportunities.

Steve will then provide a more detailed look at our financial and operating results.

Finally, Albert will add a few concluding comments, and then we will open the call up to questions.

During this call, we refer to ourselves as Westlake Partners, Partners or the Partnership.

References to Westlake or Westlake Chemical refer to our parent company, Westlake Chemical Corporation, and references to OpCo refer to Westlake Chemical OpCo LP, a subsidiary of Westlake Chemical and the Partnership, which owns certain olefins assets.

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.

Actual results could differ materially based upon many factors including operating difficulties, the volume of ethylene that we are able to sell, the price at which we are able to sell ethylene, changes in the prevailing economic conditions, actual and proposed governmental regulatory actions, competitive products and pricing pressures, our ability to borrow funds and access capital markets and other risk factors described in our SEC filings.

This morning, Westlake Partners issued a press release which details our second quarter 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 at 3 p.m.

Eastern Time today until 11:59 p.m.

Eastern Time on August 9, 2018.

The 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 is 8897985.

Please note that information reported on this call speaks only as of today, August 2, 2018, and therefore, you’re advised that time-sensitive information may no longer be accurate as at 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 webpage at wlkpartners.com.

Now I would like to turn the call over to Albert Chao.

Albert?

Thank you, Jeff.

Good morning, ladies and gentlemen, and thank you for joining us to discuss our second quarter 2018 results.

In this morning's press release, reported consolidated net income, including OpCo's earnings of $84 million for the second quarter of 2018.

Westlake Partners second quarter net income was $13 million.

On July 31, 2018, we announced distributions of $0.4088 per unit with respect to the second quarter of 2018.

This is a 2.8% increase from the first quarter 2018 distribution and 12% increase from the second quarter 2017 distribution.

This is the 14th consecutive quarterly increase in distributions to our unitholders since our IPO.

For the second quarter 2018, MLP distributable cash flow provided coverage of 1.21x the declared distributions.

On July 2017, 2018 (sic) [July 27, 2018], the Partnership reset the distribution targets, which determine the payments to the incentive distribution rights, or IDRs, with the newer first year established at a quarter distribution of $1.29 per unit from the previous first year target of $0.32 per unit.

This amendment applies to the second quarter 2018 distribution that was declared Tuesday and will be paid later this month.

The effect of this reset would allow the Partnership to increase its quarterly distribution in line with historical growth rates for over 10 years before the next IDR payment is earned and paid.

While distributions to the IDRs were a small portion of Partners cash flows, we wanted to proactively address the investor interests regarding the IDRs in a manner that will be mutually beneficial to both the Partnership and our sponsor, Westlake Chemical.

We believe this transaction accomplishes these goals and provide significant long-term benefit to both the Partnership and Westlake Chemical.

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

Steve?

Thank you, Albert, and good morning, everyone.

In this morning's press release, we reported consolidated net income, including OpCo's earnings of $84 million on consolidated sales of $302 million in the second quarter of 2018.

Westlake Partners' second quarter 2018 net income was $13 million or $0.40 per limited partner unit, and MLP distributable cash flow for the quarter was $16 million or $0.50 per limited partner unit.

For the second quarter 2018, OpCo's production was 99% of its stated capacity, experiencing a 5-day outage in the quarter at one of our units in Lake Charles, Louisiana.

Second quarter 2018 net income for Westlake Partners of $13 million increased by $3 million or $0.04 per limited partner unit compared to second quarter 2017 partnership net income of $10 million.

Second quarter 2018 MLP distributable cash flow of $16 million increased $5 million from second quarter of 2017 MLP distributable cash flow of $11 million.

The increase in net income and MLP distributable cash flow was primarily due to the 5% increase ownership of OpCo as a result of the drop-down transaction that was effective July 1, 2017, and increased production at OpCo.

The Partnership's second quarter 2018 net income for the Partnership of $13 million increased $500,000 from first quarter 2018 net income.

Second quarter 2018 MLP distributable cash flow of $16 million increased $1.5 million from first quarter 2018 MLP distributable cash flow.

Net income and MLP distributable cash flow for the second quarter of 2018 both benefited from higher production at OpCo, partially offset by lower margins on third-party sales.

MLP distributable cash flow for the second quarter of 2018 also benefited from lower maintenance capital expenditures and the elimination of IDR payments due to the recent reset of the IDR target distribution tiers.

For the 6 months of 2018, net income for the Partnership of $25 million increased $5 million from the first 6 months of 2017 net income to the Partnership of $20 million.

MLP distributable cash flow of $30 million increased $8 million from the first 6 months of 2017 distributable cash flow of $22 million.

The increase in net income and MLP distributable cash flow was primarily due to the 5% increased ownership interest in OpCo as a result of the drop-down transaction that was effective July 1, 2017, and increased production at OpCo, partially offset by third-party sales margins.

This increase in production includes the additional capacity from the 100 million pound per year ethylene expansion at our Calvert City facility completed in April 2017.

The benefit from the long-term Ethylene Sales Agreement with our sponsor, Westlake Chemical, who is short ethylene for their derivative production is a stable fee-based cash flow to the Partnership.

This take-or-pay agreement is 95% of our ethylene sales and protects the Partnership's cash flows from the margin volatility that can be associated with the ethylene business.

This sales agreement, which is structured, to generate a net margin of $0.10 per pound of ethylene to the Partnership, along with the take-or-pay provisions with Westlake Chemical incentivizes us to continue to look for opportunities to maintain our historical high operating rates.

Turning our attention to the balance sheet and cash flows.

At the end of the second quarter, we had consolidated cash balances of $28 million and cash invested with Westlake Chemical through our Investment Management Agreement of $144 million.

The next planned turnaround is at our Petro 2 facility in Lake Charles, Louisiana which is currently scheduled for the second half of 2019.

The funds for this turnaround have already been reserved and funded at OpCo.

We’ll provide more guidance on the specifics of this turnaround later in the year.

Long-term debt was $478 million, of which $224 million was at OpCo and $254 million was at the Partnership.

For the second quarter of 2018, OpCo spent $7 million in capital expenditures.

On July 31, 2018, we declared a quarterly distribution to unitholders of $0.4088 per unit.

This was our 14th consecutive increase in quarterly distributions to unitholders, and is a 12% increase when compared to the second quarter of 2017 and a 2.8% increase over the first quarter 2018 distribution.

Second quarter 2018 MLP distributable cash flow of $16 million provided coverage of 1.21x the declared distribution.

As Albert mentioned earlier in the call, on July 27, we amended the partnership agreement to reset the target distribution tiers.

This amendment was effective immediately so there will not be a distribution associated with the IDRs for the second quarter of 2018.

The first -- the new first tier in which IDRs received 15% of the distributions has been reset to a quarterly distribution of $1.29 per unit from the previous target of $0.32 per unit.

The 50% tier have been reset to a quarterly distribution of $1.69 per unit from $0.41 per unit.

This reset at the target distribution tiers will allow the partnership to increase its distribution per unit at low double-digit growth rates for over 10 years before the next IDR payment is earned and paid.

We believe these new targets provide a number of benefits to the Partnership.

First, since the Partnership did not pay any consideration, the reset is immediately accretive to the unitholders.

Next, removing the IDR cash flow burden reduces the frequency and size of the capital needs of the Partnership, allowing it to more opportunistically access the capital markets as well as improving the Partnership's cost to capital.

Being relieved of the IDRs for the foreseeable future, Partners is better positioned to pursue accretive investment such as Westlake's joint venture ethylene cracker in Lake Charles, currently being built with Lotte Chemical that is expected to start up in 2019.

Finally, the IDR reset highlights the significant strategic alignment between the Partnership and its sponsor, Westlake Chemical.

The ability of the Partnership to be a long-term cost advantage source of equity capital for Westlake Chemical is a strategic asset that has been and will continue to play significant role in Westlake's plans to continue its growth.

Now I’d like to turn the call back over to Albert to make some closing comments.

Albert?

Thank you, Steve.

The stable fee-based cash flow generated by the fixed margin take-or-pay Ethylene Sales Agreement with Westlake Chemical, along with the 4 levers of growth, formed the foundation for us to deliver long-term growth in distributions to our unitholders.

We continue to evaluate all of the levers of growth available to us to increase our earnings and cash flows, including: organic expansions of our current ethylene facilities; periodic drop-downs of OpCo into the MLP; acquisitions of other qualified income streams either directly or jointly with our sponsor, Westlake Chemical; and negotiating a higher fixed margin in our Ethylene Sales Agreement with Westlake.

Looking forward, we plan to continue to deliver low double-digit growth per year in distributions to our unitholders.

The recent ethylene expansions in Lake Charles and Calvert City have added to our production capacity and cash flows to fund these distributions.

Our most recent drop-down in the third quarter of 2017, highlights the ability of these accretive transactions with OpCo to fund earnings and distribution growth.

OpCo has a large drop-down capacity, and the Partnership plans to increase its ownership of OpCo in the future.

The new Gulf Coast ethylene cracker joint venture that Westlake and Lotte are constructing could be considered an opportunity for acquisition after its completion in 2019.

Finally, we’ll evaluate all 4 levers of growth to optimize our earnings, cash flows and value to our unitholders.

Thank you very much for listening to our second quarter 2018 earnings call this morning.

Now I’ll turn the call back over to Jeff.

Thank you, Albert.

Before we begin taking questions, I would like to remind you that a replay of this teleconference will be available starting today at 2 p.m.

Eastern Time.

We will provide that number again at the end of the call.

Candice, we’ll now take questions.

(Operator Instructions) And our first question comes from Matthew Blair of Tudor, Pickering, Holt.

Steve, did you say that the Q2 utilization was 99%?

And if so, for Q3 and Q4, is there any reason to expect that, that number would be significantly different?

Matthew, I did say we ran at high operating rates.

99% was the right number.

And we anticipate to continue to run our plants as strong as we can.

There is no planned turnaround until 2019.

And I'll give more guidance on the exact timing and period of that planned outage later this year.

Okay.

And then I guess for 2020, any early thoughts on whether there might be a turnaround in that year?

There is nothing currently planned at this stage and as we get closer to thinking about the turnaround for our other crackers we'll give further guidance.

But right now, all we're giving really direct guidance on is that upcoming 2019 outage.

Okay.

And then I guess could you remind us on your max, you talked about potential for future drops.

What is the Partnership's max leverage target?

We’ve tried to think about leverage target at the Partnership in the neighborhood of about 4x EBITDA.

That certainly changes a little bit up and down based on the market conditions and circumstances but it's in that range.

Sounds good.

And then finally, so for the 5% of ethylene market sales, I believe that's more tied to spot ethylene prices than contract prices.

Is that correct?

And can you give a view on how long you think spot ethylene prices will stay depressed?

Matthew, we do not have contracts lined up for those sales.

And so they are -- they are in the market on a spot -- generally, on spot basis.

And certainly, given the capacity additions we've seen in the market we could see prices stay more suppressed for at least through this year and we’ll see what '19 brings.

(Operator Instructions) And our next question comes from Jon Evans of SG Capital.

Can you just address I guess would -- you talked about the 4 pillars that you have or the 4 levers that you have.

I guess what do you guys need to see?

Or what is kind of the sign post that we could look for that potentially you would change the margin?

So Jon, as we think about the margin at the sponsor level, we think of the integrated margin from ethane all the way out to, let's say, polyethylene.

And so while margins for ethylene at the moment are under some pressure because of capacity additions, the parent certainly thinks in terms of the integrated margin.

So as we think about the $0.10 margin today, there isn't necessarily a concern of looking only at the ethylene margin because the parent is looking at integrated margins.

So I think that lever that we've talked about at expanding margin is very viable to -- even in today's environment.

Okay.

And I assume, I mean the strategy the parent is basically short right now, which is good because pricing is coming in, and you want to take on this joint venture or buy a piece of it kind of at the trough to margins and then margins turnaround.

Is that kind of the thought process?

Well, I certainly hope that, that opportunity avails itself to us.

We have the opportunity, we're an investor in the Lotte -- this is the parent, of course.

The parent is invested in the cracker at a 10% level.

And the parent has an option to elect, if it chooses, up to 3 years post the start up to go from 10% all the way up to 50%, if it chooses to.

So it's an opportune time to consider timing and amount of exercise.

But you're quite right; the parent is in need of ethylene today, the requirements would be between 1.8 billion and 1.9 billion pounds.

The parent has also announced some derivative expansions, which would increase the amount of that shortfall once those capacities come on to the market next year.

And so that would cause the parent to be short even -- over 2 billion pounds of ethylene.

So you can clearly see the need for ethylene is critical to the parent, and I think that's an attractive element to the partnership because the partnership therefore has runway, not only with the existing asset base, but further assets such as Lotte to contribute into the partnership to sustain long-term growth.

Got it.

And so if the parent, let's say, buys a bigger piece down the road in the JV, and you end up dropping it down into here.

It will still have the same structure of the $0.10 margin that you have with the existing plants or no?

Yes, we would clearly want to provide a stable earnings stream the Partnership, and so a structured margin similar to the one that we have today would certainly be what we’d want to consider.

And back to your earlier question, should we change the margin from $0.10 to something higher, we can certainly give that same consideration to the asset of Lotte if we contribute that in at some future day.

But what's important to take away is, of course, we provide the same structured manner of earnings stream for that piece of Lotte that could get contributed in.

We'd want to provide a stable income stream.

And then just lastly on the increased target distribution threshold conference call that you had, you laid out this piece with the existing assets that you can increase the dividend 320-plus percent still over time.

So just to make sure, if you bought part of the Lotte or dropped it down that would just increase the runway, correct?

It would.

And recognizing those -- that guidance we gave is just drop-down, not using other levers at our disposal and you mentioned acquisitions or margin expansions could be additive to that runway.

At this time, the Q&A session has now ended.

Are there any closing remarks?

Thank you again for participating in today's call.

We hope you'll join us for our next conference call to discuss our third quarter results.

Thank you for participating in today's Westlake Chemical Partners second 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 11:59 p.m.

Eastern Time on August 9, 2018.

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 is 8897985.

Everyone, have a great day.