Westlake Chemical Partners LP (WLKP) 2019 Q1 法說會逐字稿

Good morning, ladies and gentlemen.

Thank you for standing by.

Welcome to the Westlake Chemical Partners First Quarter 2019 Earnings Conference Call.

(Operator Instructions)

As a reminder, ladies and gentlemen, this conference is being recorded today, May 2, 2019.

I would now like to turn the call over to your host today, Mr. Jeff Holy, Westlake Chemical Partners' Vice President and Treasurer.

Sir, you may begin.

Thank you, Sherry.

Good morning, everyone, and welcome to the Westlake Chemical Partners First Quarter 2019 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 first quarter as well as the current outlook on our strategy 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 or the Partnership.

References to Westlake of 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 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 discussed in our SEC filings.

This morning, Westlake Partners issued a press release with details of our first quarter financial and operating results.

This document is available in the press release section of our web page at wlkpartners.com.

A replay of today's call will be available beginning 2 hours after the conclusion of this call until 11:59 p.m.

Eastern time on May 9, 2019.

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 for both numbers is 8880296.

Please note that information reported on this call speaks only as of today, May 2, 2019.

And therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay.

I would finally advise you that this conference call is being broadcast live through an Internet webcast system that can be accessed on our 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 first quarter 2019 results.

In this morning's press release, we reported consolidated net income, including OpCo's earnings of $78 million for the first quarter of 2019.

Westlake Partners' first quarter net income was $15 million.

This was a significant quarter for Westlake Partners as we completed our third drop-down transaction since our IPO in July of 2014, with MLP acquiring a 4.5% interest in OpCo.

This transaction was effective as of January 1, 2019, and brought total Partnership ownership of OpCo to 22.8%.

The transaction was immediately accretive to unitholders and continues our path of ratable and sustained distribution growth.

I think it's important to emphasize that we will continue to pursue additional opportunities that will increase earnings and cash flows while providing for long-term distribution growth to our unitholders.

OpCo has a number of growth options, and we'll pursue these opportunities to provide value to our unitholders.

On April 30, 2019, we announced distributions of $0.4452 per unit with respect to the first quarter of 2019.

This is a 2.9% increase from the fourth quarter of 2018 distribution and 12% increase from the first quarter 2018 distribution.

This is a 17th consecutive quarterly increase in distributions to our unitholders.

For the 12-month ending March 31, 2019, MLP distributable cash flow provided coverage of 1.12x the declared distributions.

I would now like to turn the call over to Steve to provide more detail on the financial operating results for the first 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 $78 million on consolidated sales of $299 million for the first quarter 2019.

Westlake Partners' first quarter 2019 net income was $15 million or $0.46 per limited partner unit.

Partnership had record MLP distributable cash flow for the first -- for the quarter of $18 million or $0.54 per limited partner unit.

First quarter 2019 net income for Westlake Partners of $15 million increased by $3 million or $0.10 per limited partner unit compared to first quarter 2018 Partnership net income of $12 million.

MLP distributable cash flow of $18 million for the first quarter of 2019 increased $3 million from first quarter 2018 MLP distributable cash flow.

The increased net income and MLP distributable cash flow was primarily due to the 4.5% increase in ownership interest of OpCo.

The Partners' first quarter 2019 net income of $15 million increased $3 million from fourth quarter 2018 net income of $12 million or first quarter 2019 MLP distributable cash flow of $18 million increased $3 million from fourth quarter 2018 distributable cash flow of $15 million.

The increase in both net income and MLP distributable cash flow for the first quarter 2019 was primarily due to the increased ownership interest in OpCo partially offset by higher maintenance capital.

The benefit from the long-term ethylene sales agreement with our sponsor, Westlake Chemical, who is short of 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 the Westlake Chemical incentivizes us to continue to look for opportunities to increase capacity and operating rates.

Turning our attention to the balance sheet and cash flows.

At the end of the first quarter, we had consolidated cash balance of $85 million and cash invested with Westlake Chemical through our Investment Management Agreement of $277 million.

The $277 million in cash invested through our Investment Management Agreement includes cash generated from operations throughout the quarter, the reserve for turnaround expenditures, and a portion of proceeds from the drop-down transaction of OpCo.

Our next turnaround is at our Petro 2 facility in Lake Charles, Louisiana, which is currently slated for the first half of 2020, and we'll provide more details on the length of the turnaround once we complete our planning.

Long-term debt was $601 million, of which $377 million was for the Partnership and $224 million was at OpCo.

For the first quarter of 2019, OpCo spent $12 million in capital expenditures.

On April 30, 2019, we declared a quarterly distribution to unitholders of $0.4452 per unit.

This was our 17th consecutive increase in quarterly distribution to unitholders, the distribution we paid on May 28 to unitholders of record May 13, 2019.

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

Albert?

Thank you, Steve.

We have seen an exciting commencement to 2019 with growth of the Partnership through the first drop-down transaction of OpCo coupled with strong operational and financial performance.

We will continue to benefit from 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, including: organic expansions of our current ethylene facilities; continuation of periodic drop-downs of OpCo into the MLP; acquisitions of other qualified income streams, either directly or jointly with our sponsor Westlake Chemical; and finally, negotiating a higher fixed margin fee in our Ethylene Sales Agreement with Westlake.

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

We can deliver this through the contribution of Westlake's current interest in a 2.2 billion pound ethylene joint venture with Lotte Chemical.

We expect the plan to start up in the second quarter of this year.

The increased ownership interest of the Lotte joint -- ethylene joint venture with ability to purchase up to 50% in aggregate Westlake ownership.

And finally, we'll continue to evaluate all 4 levers to grow our earnings and cash flow to drive value to our unitholders.

Thank you very much for listening to our first quarter 2019 earnings call this morning.

Now I will 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'll provide that number again at the end of the call.

Sherry, we'll now take questions.

(Operator Instructions) Our first question comes from Mike Leithead with Barclays.

So with the recent drop-down completed this quarter, how do you think about the runway of distribution growth now ahead of you before another transaction would likely be necessary?

As we think about the drop-down transaction, that should position us well as we go forward.

And certainly, as we've talked about, we want to continue this distribution growth as we've talked about for a long period of time because we have a long runway of capacity for OpCo.

So as we think about it, this drop-down that we achieved in the first quarter provides us a good runway to continue that distribution growth.

Got it.

Okay.

And I think in the past, you've talked about really the unit price not moving despite the distribution growth and the yield continuing to improve there.

Is there any thought to accelerate the distribution growth?

Or how do you guys view achieving or unlocking proper valuation for the Partnership?

Mike, of course, the valuation is always a consideration as we think about the growth and distributions, it has to be a balanced equation between providing value to our unitholders and value to our sponsor.

And so certainly as we think about that, that's certainly something that is on everybody's mind on a regular basis.

Our next question comes from Matthew Blair with Tudor, Pickering, Holt.

Steve, can you share any commentary on volumes in the quarter?

It sounds like the maintenance was more on the derivative side, so can we infer that your cracking volumes were pretty strong?

That's correct, Matthew.

The turnaround that we discussed at our sponsor's conference call was downstream in the polyethylene and other derivatives businesses.

And so the operating assets that we have within the Partnership did run at full operating rates, so very solid production all throughout the quarter.

And that is what our expectation would be as we go forward into the planned 2020 turnaround, and we'll give some guidance in terms of the exact timing and length of that outage as we get finished with our turnaround planning.

But we did operate at similar volumes as we did prior quarters.

Very strong operating rates.

Okay.

Sounds good.

And then, Albert, you walked through -- there's a lot of ways that Westlake LP can grow.

Historically, the main way has been through drops.

And if you look at the stock performance over the past 2 drops, it's actually been down on the news of the drops.

And so I was wondering that is there any thought to simply executing drops going forward at just a lower multiple?

Certainly, we'll look at all the options.

But historically, we have expanded our earnings by drop as well as by organic expansions.

So we have the bottlenecks in our ethylene plant and all that is being accretive to unitholders and to earnings.

Okay.

And then last question.

So in the past you've talked about potential for margin expansion on this $0.10 cash level because you look at the whole polyethylene chain, right?

But the new low Lotte cracker, I think that's really going into your vinyls business to reduce your ethylene purchases as you make PVC.

So is that correct?

Is that the right way to think about it that with your existing business, you can really look at the whole PE chain, but with the Lotte cracker, that's really more of just a cracking margin?

Is that right?

Well, ethylene is fungible.

So whether using in olefins or vinyl, it's either way, but the Westlake were net short of ethylene.

And so Matthew, today we have 3.7 billion pounds of ethylene in the operating company, and we have 2.5 billion pounds of polyethylene.

And so even today, some of that manufactured ethylene is going into our vinyls business as we speak.

Because it only takes 1 pound of ethylene to manufacture a pound of polyethylene.

So some portion of that production of OpCo is already going into the vinyls businesses.

Our next question comes from Jon Evans with SG Capital.

Can you just talk a little bit about your choice for the drop-down?

I guess before you had talked about an ATM and you were going to trickle this into the market.

I guess, what changed?

And then if the stock strengthens, do you still -- will you still use the ATM throughout the year?

Jon, we've -- we did a drop-down back in the first quarter and as a consequence have met the external equity needs we have for the year.

So while the ATM was put in place last year in contemplation of issuing units throughout the course of the year, we have said that we have met the external equity needs for the needs of 2019.

So it remains in place.

But as we think about it, I don't expect that we'll be issuing any new units into the public markets in the calendar year.

Okay.

And then just a question relative to the Lotte assets.

If Westlake exercises their option -- or can you just walk us through -- I guess the potential scenarios would the LP not take on the Lotte assets unless they got the same contract at $0.10?

Or how would that work?

We'd certainly want to make sure that the investor is getting the same benefits of the stable income stream that they're achieving today with the ethylene assets in OpCo.

So any contribution of assets, be it these assets or others, would always be structured in such a manner to provide a stable income stream, void of any commodity risk.

And so if you contemplate, let's say, these Lotte assets being contributed into the business, we'd want to create a similar arrangement to provide stability of earnings around that income stream that the MLP would own.

Okay.

And the last question I have -- I'm sorry for the stupid question.

But from the filing, I couldn't understand the $1.4 million that was purchased, was that by Westlake?

Or was that another Partnership?

Or what was that, that was insider-driven?

Yes.

Those were investments made by TTWF, which is the -- a large shareholder of Westlake Chemical.

Our next question comes from Eric Petrie with Citi.

It looks like Mr. Petrie has disconnected.

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

I will now turn the call back over to Mr. Jeff Holy.

Thank you, Sherry.

Thank you again for participating in today's call.

We hope you'll join us again for our next conference call to discuss our second quarter 2019 results.

Thank you for participating in Westlake's Chemical Partners first quarter's 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 Standard Time on May 9, 2019.

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 8880296.

This will conclude today's call.

Goodbye.