Westlake Chemical Partners LP (WLKP) 2019 Q2 法說會逐字稿

Good morning.

Thank you for standing by.

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

(Operator Instructions) As a reminder, this conference is being recorded today, August 6, 2019.

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.

Good morning, everyone, and welcome to the Westlake Chemical Partners Second Quarter 2019 Conference Call.

I'm joined today by Albert Chao, our President and CEO; Steve Bender, our Senior Vice President and CFO; 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 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 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're 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 and access capital markets and other risk factors in our SEC filings.

This morning, Westlake Partners issued a press release with details of our second 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.

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 is 2199232.

Please note that information reported on this call speaks only as of today, August 6, 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 web page at wlkpartners.com.

Now I'd 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 2019 results.

In this morning's press release, we reported consolidated net income, including OpCo's earnings of $80 million for the second quarter of 2019.

Westlake Partners second quarter net income was $14 million.

In the first quarter of 2019, we dropped down an incremental 4.5% interest of OpCo into the Partnership.

And through the second quarter, we continued to reap the benefits of this transaction, anchored by strong second quarter production volumes.

I think it's important to emphasize that we are continuing to evaluate all opportunities available to us, including growth through acquisition and margin expansion as the means to further grow our cash flows and maintain a path toward long-term distribution growth to our unitholders.

On July the 31, 2019, we announced distributions of $0.4579 per unit with respect to the second quarter of 2019.

This is a 2.9% increase from the first quarter of 2019 distribution and 12% increase from the second quarter of 2018 distribution.

This is the 18th consecutive quarterly increase in distributions to our unitholders.

For the 12-month ending June 30, 2019, MLP distributable cash flow provided coverage of 1.07x to declared distributions.

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 $80 million on consolidated sales of $270 million for the second quarter of 2019.

Westlake Partners second quarter 2019 net income was $14 million or $0.39 per limited partner unit.

The Partnership had MLP distributable cash flow for the quarter of $16 million or $0.47 per limited partner unit.

Second quarter 2019 net income for Westlake Partners was $14 million, and it increased by $1 million compared to second quarter 2018 Partnership net income of $13 million.

This increase was primarily due to the 4.5% increase in ownership interest of OpCo.

MLP distributable cash flow of $16 million for the second quarter of 2019 was unchanged from the second quarter of 2018 MLP distributable cash flow.

The distributable cash flow for the quarter was impacted by certain onetime items related to the March 2019 drop-down of the incremental interest in OpCo as well as the acceleration of select maintenance capital items.

Based on this, we would expect normalization of our SG&A cost and a reduction of maintenance capital spending in the second half of 2019.

The Partnership's second quarter 2019 net income of $14 million decreased $1 million from the first quarter 2019 net income of $15 million, while second quarter 2019 MLP distributable cash flow of $16 million decreased $2 million from the first quarter 2019 distributable cash flow of $18 million.

The decrease in net income and MLP distributable cash flow in second quarter '19 are primarily due to onetime cost and higher interest expense associated with the acquisition of the incremental cost in OpCo, partially offset by higher production at OpCo.

For the first 6 months of 2019, net income for the Partnership was $29 million, increased $4 million from the first 6 months of 2018 net income of the Partnership of $25 million.

MLP distributable cash flow of $34 million increased $4 million from the first 6 months of 2018's distributable cash flow of $30 million.

Increased net income and MLP distributable cash flow were primarily due to the 4.5% interest -- ownership interest in OpCo as a result of the drop-down transaction that was effective January 1, 2019, and partially offset by lower third-party sales margins.

The benefit from the long-term Ethylene Sales Agreement with our sponsor, Westlake Chemical, was a short -- who was 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 a 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, which is an investment-grade rated company, 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 second quarter, we had consolidated cash of $17 million in cash invested with Westlake Chemical through our Investment Management Agreement of $141 million.

The $141 million in cash invested through that investment agreement includes cash generated from operations throughout the quarter and the reserve for turnaround expenditures.

Our next turnaround is at our Petro 2 facility in Lake Charles, Louisiana, which is currently scheduled for 2020.

We'll provide more details on the specific timing and the length of the turnaround as we complete our planning.

Long-term debt at the end of the quarter was $400 million, of which $377 million was at the Partnership and $23 million was at OpCo.

For the second quarter of 2019, OpCo spent $13 million in capital expenditures.

On July 31, 2019, we declared a quarterly distribution to unitholders of $0.4579.

This was our 18th consecutive increase in quarterly distributions to unitholders.

This distribution will be paid on August 26, 2019, to unitholders of record on August 12, 2019, a yield of approximately 8.1% based on yesterday's close.

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

Albert?

Thank you, Steve.

Two days ago, we marked the fifth anniversary of our IPO.

I want to take this time to reflect on the meaningful and value-creating progress the Partnership has made over the past 5 years.

We have completed 3 drop-downs of incremental interest in OpCo, bringing total Westlake Chemical Partners ownership to approximately 23%.

We have also expanded our production capacities at our Lake Charles, Louisiana and Calvert City, Kentucky facilities by 350 million pounds per year.

In addition, this time last year, we reset the tiers for our incentive distribution rights with the new first tier established at a quarterly distribution of $1.29 per unit on the previous first tier target of $0.32 per unit.

This was done with no compensation to our general partner and highlights the long-term strategic alignment with our sponsor, Westlake Chemical.

All these actions have allowed us to considerably grow our distribution to our unitholders, which today is 57% higher than our initial full quarter distribution.

As we navigate the current conditions of the MLP market, we will maintain our focus on delivering long-term value to our unitholders.

The Partnership will continue to benefit from the stable fee-based cash flow generated by the fixed margin take-or-pay Ethylene Sales Agreement with investment-grade rated 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 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.

As an example of an acquisition opportunity at Westlake's is Westlake's 10% interest in a 2.2 billion-pound ethylene cracker joint venture with Lotte Chemical, which recently started up, with option to increase its ownership up to 50%.

We are continuing to evaluate how this asset could be mutually beneficial to both Westlake Chemical and Westlake Partners as well as be part of a long-term growth strategy for the ownership of the asset.

All these levers could provide opportunities to continue to grow our distributions to our unitholders.

In this low-yield environment, where we have demonstrated a history of consistent distribution growth and have a clear ability to provide continued tax-sheltered growth in distributions, we believe and continuation of distribution growth needs to be reflected in our unit price.

Thank you very much for listening to our second quarter 2019 earnings call.

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

Skyler, we will now take questions.

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

I guess, to start, you recently did a drop-down transaction in March.

And if you think about your continued distribution growth you're aiming for, how far do you think your current runway is for distribution growth before you think you need another transaction to extend that runway?

So Mike, as we think about it, we've had, I think, a pretty good history of showing that we have demonstrated capability to grow, and the drop-down transaction that we undertook in the first quarter illustrates the ability to be able to do that.

So as they say, given the various levers that we have, we have an ability to do that either through drop-downs, expansion acquisition or margin expansion.

So we've got an ability to really grow this Partnership's distributable cash flow for a long time.

So as we think about the next opportunity to do that, it's really a function of getting the right valuation for the asset that gets contributed.

And that is always the issue that we've had discussions with the committee about.

So as we think about it, we'll continue to look to do that as long as we can get fair value in that asset as well as fair value in market valuation.

Got it.

That's really helpful.

And then, Albert, you just mentioned, it's been roughly 5 years since the IPO.

And if I just look at the chart, unit prices for Westlake Partners have remained relatively flat the past couple of years despite, as you mentioned, an improving distribution yield and even a declining yield environment.

So I guess when you look at it, what do you think investors are missing today on the Westlake Partners story?

And what can you guys do to get investors to better realize that yield value?

That's a very good question, Mike.

I think that the whole MLP industrial market has had a different outlook over the last 5 years.

And whether people still think that we are just like another MLP, and we've been painted with the same broad brush, that probably is an issue.

And we try to distinguish ourselves from the regular oil and gas MLP or even oil and gas pipeline MLP.

And by the fact that we have a guaranteed income stream for 95% of our sales.

And as Steve mentioned, we've been growing our capacities.

We're doing the drop-downs, as we have said at our IPO.

So we delivered our part of the bargain.

I think that the market needs to deliver their side -- part of the bargain as well.

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

I think coverage was a little low in Q2, and the trailing 12 months number is now 1.07x, which I believe is slightly below your target.

What's the path to improving coverage?

And is there any risk that you might slow your 12% distribution growth in order to protect your coverage?

So Matthew, part of the coverage answer is really driven by the timing of certain expenditures.

And so as we get through the rest of the year, I expect the timing of some of those maintenance expenditures and other kind of onetime costs to really get us back on the path of the targeted 1.1x coverage.

So I wouldn't get too concerned at all with the 1.07x coverage for the LTM period here.

And as Albert noted, our ability to deliver growth and distributions is quite clear given the levers that we have.

But obviously to stay on this trajectory, we need to see a valuation that makes sense in the marketplace.

And those 2, as Albert said, have to go hand-in-hand.

Makes sense.

Given how cheap ethane prices are, have you been buying extra ethane now to run at a future date?

Is that an option that's available to you?

So the way the Partnership works, it would only be exposed to that for its small merchant sales of ethylene.

It is protected for the 95% of its production.

So that question is probably more relevant for Westlake Chemical rather than for the Partnership.

But certainly, as we think about the opportunities to be opportunistic and do as much as we can to lock in the margins on that 5%, we certainly take those opportunities when we see them.

Sounds good.

And then finally, the release talked about onetime costs associated with the acquisition.

Could you provide a number on that?

Those are the smallest component.

Most of the larger impacts were really related to the maintenance expense.

And so those dollars were in the neighborhood of a couple million dollars related to earlier expenditures for maintenance and some of those onetime costs related to advisers and other legal costs related to the drop-down.

But it is mostly related to the maintenance activity that occurred in the second quarter that normally would be spread over the course of the year.

Our next question comes from Jon Evans with SG Capital.

So Steve, I guess I sense a change of tone this quarter or maybe not just that you guys are pretty frustrated with the stock performance.

Is there anything that you guys think -- in the past, you've talked about the liquidity.

Is there anything that you feel like you guys can do on your side to have the market recognize kind of the power here in this model?

Or no?

Well, I think we'll continue to educate investors about the opportunity to continue to see the growth in distributions and the capability of the company through its levers to be able to do that.

And so certainly, I think as Albert noted earlier in his comments, that I think the market sometimes has lost the visibility on Westlake Chemical separate from some of those that had more, let's say, challenged business models to deliver the growth versus our capability to deliver that growth.

Those 4 levers that we talked about really are there and have the ability to deliver that growth in distribution, and we've really done so over the last 5 years.

I think that the market has been challenged, but mostly by others who had business models that really weren't of the sort that probably should have been in this space in the first place.

So I think we continue to educate the market about the backstop of Westlake Chemical for that 95% offtake, and the ability to provide sustained growth.

But we've got to be rewarded accordingly for that growth.

Do you think also, Steve, potentially that it's kind of like the chicken and the egg?

You've talked about these other potentials for growth, but you haven't seized on them.

And you haven't seized on them because I think you thought you weren't going to get rewarded in the valuation.

But do you think maybe that changes at all?

Like, you raised the margin to $0.11?

Or you buy the Lotte asset in there in a big transaction?

Well, as you noted, we have acted on 2 of those 4. So we've expanded our facilities in Lake Charles and in Calvert City and added about 350 million pounds of ethylene.

So we've expanded our footprint in those sites.

We've also done drop-downs.

The opportunity to acquire some portion of Westlake's ownership of Lotte is just on the cusp of a real consideration because the plant is in ramp-up now.

And that margin, certainly, to expand that margin is available to us and can be thought of as a very real opportunity.

Westlake Chemical looks at the integrated margin, not just the ethylene margin.

So that is a very viable opportunity.

Okay.

And just a last question.

You mentioned in the release that one of the things that hit your quarter a little bit was the margin on the 5%.

I assume there's a delay in when you bring ethane into your facility, relative, right?

So you're probably selling now in that 5% with real cheap ethane as opposed in Q2.

Is that a fair assessment or no?

Yes.

There's probably between -- probably in the neighborhood of 45 days delay in flowing that ethane through cost-to-sales in any period of time.

Our next question comes from Paul Leming with Water Street Capital.

I was wondering if you can just remind me of the timing on the acquisition.

What parameters are in the timing of acquiring -- Westlake Chemical acquiring or moving up to a 50% interest in the Lotte JV?

And then separate from that, is there any color you can give us today on kind of how the Partnership is looking at bringing some portion of that interest, if it should be moved up to 50% down into the Partnership?

So Westlake Chemical is still going through an assessment of the option valued.

And just to refresh your memory, Westlake Chemical has 3 years with which to decide to elect an increased ownership if they choose to from their current ownership all the way up to 50%.

So Westlake Chemical is still on that analysis process and has made no decision, at least at this stage.

In terms of the Partnership acquiring some portion of the ownership of the Lotte cracker that Westlake Chemical currently owns, that's something that certainly can be decided upon based on a determination of value between the Partnership and Westlake Chemical, very similar to a drop-down transaction that Westlake Chemical undertook in the first quarter of this year with the Partnership.

So certainly, that is a viable opportunity and certainly one in which we talk about as being one of the 4 levers, an acquisition, if you will, of qualifying income streams.

And so as we think about that, that certainly -- as we just noted earlier to another investor, is very viable just like the other 3 options are as well.

And if I could ask as a follow-up, is there anything in the agreement between Westlake Chemical and Lotte on the cracker that would make it difficult to structure the same type of fixed margin agreement with the Partnership that exists with all of Westlake's ethylene assets?

Is there anything in that agreement that makes it a little bit more complicated?

We believe it will -- it is actionable.

At this time, I'm showing no further questions.

I'd like to turn the call back over to Jeff for 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.

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 2199232.

This will conclude today's call.