Q2 2023 Westlake Chemical Partners LP Earnings Call

Yeah.

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 question and answer session.

As a reminder, this conference is being recorded today August three 2023, 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 afternoon, everyone and welcome to the Westlake Chemical partners second 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 referred to our parent company Westlake Corporation and references to Opco referred to Westlake Chemical Opco L. P. A subsidiary of Westlake and the partnership which owns certain olefins assets additional.

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 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.

This morning, Westlake partners issued a press release with details of our second quarter 2023 financial and operating results.

Argument is available in the press release section of our webpage at W. Okay partners Dot com.

A replay of today's call will be available beginning two 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 three 2023, and therefore, you're 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 W. L. K partners Dot Com now I would like to turn the call over to Albert Chao Albert.

Thank you Jeff good afternoon, everyone.

And thank you for joining us to discuss our second quarter 2023 results.

In this morning's press release.

Reported Westlake Partners' second quarter 2023, net income of $12 million.

34 cents per unit.

As planned these financial results were impacted by the 30 day planned maintenance turnarounds.

At Calvert City that was completed in May.

As a result of our Calvert city turnaround a prodrug.

And sales volumes were below the levels of both the first quarter of 2023, and the second quarter of 2022.

Consequently, our second quarter of 2023 sales net income and distributable cash flow were below both the prior quarter and prior year levels.

Shortly the Calvert 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.

Expect financial results to improve in the third and fourth quarter of 2023 from second quarter levels.

The stability of Westlake partners business model has consistently demonstrated.

Through our fixed margin ethylene sales agreement, which minimises market volatility and other production risks.

The high degree of stability and cash flow when paired with the profitability of our business has enabled us to deliver the long history of reliable distributions and coverage.

This quarters distribution is a 36 consecutive quarterly distribution things.

Since our IPO in July of 2014 without any reductions.

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

Steve.

Thank you Albert and good afternoon, everyone.

In this morning's press release, we reported Westlake Partners' second quarter 2023, net income of $12 million or 34 cents per unit.

Consolidated net income, including <unk> earnings was $75 million on consolidated net sales of $264 million.

The partnership had distributable cash flow for the quarter of $15 million or <unk> 43 per unit.

Second quarter 2023, net income for Westlake partners of $12 million decreased by $4 million compared to second quarter 2022 partnership net income of $16 million.

Compared to the second quarter of 2022, the partnership was impacted by lower production levels due to the planned Calvert city turnaround and higher interest expense distributable.

Distributable cash flow of $15 million for the second quarter of 2023 decreased by $5 million compared to second quarter 2020 to distributable cash flow of $20 million due to the $4 million decline in net income and lower depreciation expense.

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 million.

Long term debt at the end of the quarter was $400 million of which $377 million was at the partnership and the remaining $23 million was that up.

In the second quarter of 2023, Opco spent $5 million on capital expenditures.

We maintained our strong leverage metrics with a consolidated leverage ratio of approximately one time.

On August one 2023, we announced a quarterly distribution of 40 714 cents per unit with respect to the second quarter of 2023.

Since our IPO in 2014, the partnership has made 36 consecutive quarterly distributions to unit holders and we have grown distributions, 71% since the partnership's original minimum quarterly distribution of $27.05 per unit.

The partnerships second quarter distribution, we paid on August 25, 2023 to unit holders 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.

Looking back since our IPO in July of 2014, we've maintained a cumulative distribution.

Distributable cash flow coverage in excess of one one 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.

Our next planned turnaround is at our Petro one ethylene facility in Lake Charles Louisiana, which is currently planned for the second half of 2024, and we will provide additional details on the turnaround once we complete our planning.

Like to turn the call back over to Albert to make some closing comments Albert.

Thank you Steve.

The partnerships financial performance in the second quarter.

It was consistent with our expectations.

And historical performance is doing.

During quarters, when a plant turnaround occurred.

Similar to dose historical precedents, we expect financial performance to recover in the coming quarters now that a plant turnaround is behind us.

Our ethylene sales agreement, which provides a predictable fee based cash flow structure.

From a take or pay contract with Westlake or.

95% of op cost 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 have.

Maintaining a strong balance sheet with conservative financing financial and leverage metrics.

As we continue to navigate market conditions.

Evaluating opportunities.

There are four levers of growth in the future, including increases our ownership interest of Opco.

Acquisitions of other qualified income streams.

Any growth opportunities such as expansions of our current ethylene facilities.

A negotiation of a higher fixed margin ethylene sales agreement with Westlake.

We remain focused on our ability to continue to provide long term value and distributions to our unit holders.

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 second quarter 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 two hours. After the call has ended Stacy.

Stacy will now take questions.

Thank you we will now conduct a question and answer session. As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced.

To withdraw your question. Please press star one again, please standby, while we compile the Q&A roster.

Our first question comes from Matthew Blair with Tpa Matthew. Please go ahead with your question.

Hey, good morning, Albert and Steve.

Hi, Matthew Herring.

Thank you.

Could you share with us your current thoughts on.

Hence the restarting distribution growth.

As well as resuming asset drops from Opco.

Yeah, 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 or the value proposition to both the partnership and of course, the CCAR parent. So we'll continue to look at those.

And if those make sense, a dropdown transaction within occur which would generate that cash flow to then restart distributions.

It's something that we'll consider NSS at all points.

And what do you think would be the limiting factor today.

Just looking at the valuation.

MLP is around an eight 3% yield is that is there.

That's still a headwind in your mind do you see MLP investor.

Appetite for.

For more equity issuances any thoughts there.

Matthew it's an attractive yield to any yield oriented investor and I would say that the trading multiple continues to be reflective of a nice arbitrage relative to our parents C Corp. Westway Corporation. So it's just finding the right attractive transactional value for a dropdown to make the transaction accrete.

Dave to both the partnership and of course, our C Corp parent.

Great. Thank you very much youre welcome.

And standby for our next question.

Our next question comes from James <unk> with Aviation Advisory Services. James Go ahead with your question.

Good afternoon.

Quick questions, if I may 1st of all.

And I was just doing a very rough calculation. It appears if you look at the year on year results, both for the second quarter and the <unk>.

First half.

Sales in percentage terms of sales to third parties have declined more sharply than the sales to Westlake.

Am I correct and if so why is that.

Yes, you are correct in the third party sales are a 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 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 10%.

Net margin for the first six months of the year.

So in other words, because the margins are lower you just don't want to you don't want to be.

Bothered selling as much.

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.

And so if those prices are lower and that's reflective of the lower value, we get to that 5% of sales.

Oh, okay.

And the other question I have is.

Total debt on the balance sheet does not seem to have changed but the interest expenses more than doubled year on year.

I believe that that is all owned.

<unk> Westlake.

What are the terms of that why is the interest rate expense gone up so much.

It's a floating rate and.

<unk> floating rate interest rate on that facility and so that is a long term multi year 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.

Okay.

Thank you very much Youre welcome.

Standby for our next question.

Our next question comes from Stephen Byrne with Bank of America Securities. Please.

Please go ahead with your question.

Steven do you have a question.

Yes, hi, sorry about that.

Hi, guys I've got a couple of questions about your your cracker operations, one being what are you what are you seeing.

Recent years about the costs for turnarounds.

With labor rates and equipment and material inflation and so forth.

Has that trended.

Unfavorably and how are those costs absorbed by the partnership.

So Steve the way we.

Think about those costs and of course with 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 cost are built into the charges that are charged to the parent on a monthly basis. So we charged the parent on a monthly basis, those expected cost and they accumulate and the cash balances that <unk>.

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 is some of that cash balance is designed to be able to address those those costs.

Okay that makes sense and the cracker is also generate hydrogen as a byproduct, but I was just curious how.

How the partnership is incentivized to pursue.

Higher value opportunities for that hydrogen.

So we constantly assess what is the right.

<unk> mix or certainly as we think about that Steve and so certainly to the extent that there is a credit associated with the co products or byproducts. The partnership will see the associated benefits accordingly.

And then just lastly.

The.

Continuous improvements on on Cracker operations could potentially lead to some incremental production rate.

I'll, maybe nothing like what it would take if you added on additional furnaces, but is there are incentives in place for the partnership to two to pursue those operating.

Advances as well.

Yes, there is Stephen so when you think about the opportunity to Debottleneck and we've undertaken a number of de bottlenecks since the IPO of the partnership.

And there is naturally an incentive to increase the production of the <unk>.

Helene units, because we have the partnerships able to achieve that increased.

Volume with that margin that is associated with those increased pounds that allows us therefore to grow the cash balances grow they distribute this 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 a debottleneck of one so there is one out there.

Very good thank you youre.

Youre welcome.

At this time Q&A session has now ended I will turn the call back over to Jeff Holly.

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 2023 results.

Thank you for participating in today's Westlake Chemical Partners' second quarter 2023 earnings Conference call. As a reminder, this call will be available for replay beginning two hours. After the call has ended and may be accessed until 11 59 PM Eastern time on the 17th 2023.

The replay can be accessed via the partnership website Goodbye.

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