Westlake Chemical Partners - Q3 2023

Transcript

Operator (participant)

Good afternoon, and thank you for standing by. Welcome to the Westlake Chemical Partners 3Q 2023 earnings conference call. During the presentation, all participants will be in listen-only mode. After the speaker's remarks, you will be invited to participate in the question-and-answer session. As a reminder, this conference is being recorded today, November 2, 2023. I would now like to turn the conference over to today's host, Jeff Holy, Westlake Chemical Partners Vice President and Treasurer. Sir, you may begin.

Jeff Holy (VP and Treasurer)

Thank you, Antoine. Good afternoon, everyone, and welcome to the Westlake Chemical Partners 3Q 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. Additionally, when we refer to distributable cash flow, we are referring to Westlake Chemical Partners MLP distributable cash flow. Definitions 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 the 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 3Q 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 may be accessed via the Partnership's website.

Please note that information reported on this call speaks only as of today,2 November, 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 wlkpartners.com. Now, I'd like to turn the call over to Albert Chao. Albert?

Albert Chao (President and CEO)

Thank you, Jeff. Good afternoon, everyone, and thank you for joining us to discuss our 3Q 2023 results. In this morning's press release, we reported Westlake Partners' 3Q 2023 net income of $13 million or $0.37 per unit. Compared to the second quarter, our 3Q sales and earnings benefited from higher production and sales volume following the completion of the Calvert City turnaround in May. The stability of Westlake Partners' business model 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 predictability of our business has enabled us to deliver the long history of reliable distributions and coverage.

This quarter's distribution is the 37th consecutive quarterly distribution since our IPO in July 2014, without any reductions. 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?

Steve Bender (EVP and CFO)

Thank you, Albert, and good afternoon, everyone. In this morning's press release, we reported Westlake Partners' 3Q 2023 net income of $13 million, or $0.37 per unit. Consolidated net income, including OpCo's earnings, was $81 million on consolidated net sales of $322 million. The Partnership had distributable cash flow for the quarter of $14 million or $0.39 per unit. The quarter 2023 net income for Westlake Partners of $13 million decreased by $2 million compared to 3Q 2022 Partnership net income of $15 million. Compared to the 3Q of 2022, the Partnership was impacted by higher interest expense.

Distributable cash flow of $14 million for the 3Q of 2023 decreased by $3 million compared to 3Q 2022 distributable cash flow of $17 million, due to the $2 million decline in net income and higher maintenance capital expenditures. The year-over-year increase in maintenance capital spending in the 3Q is due to a change in timing, as our 2023 capital program is more weighted in the H2 of the year as compared to 2022. Turning our attention to the balance sheet and cash flows, at the end of the 3Q, we had consolidated cash and cash investments with Westlake through our investment management agreement, totaling $150 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 at OpCo. In the 3Q of 2023, OpCo spent $17 million on capital expenditures. We maintained our strong leverage metrics with a consolidated leverage ratio of approximately 1x. On October 31, 2023, we announced a quarterly distribution of $0.4714 per unit with respect to the 3Q of 2023. Since our IPO in 2014, the partnership has made 37 consecutive quarterly distributions to our unit holders. We have grown our distributions 71% since the partnership's original minimum quarterly distribution of $0.275 per unit.

The partnership's 3Q distribution will be paid on 27 November, 2023, to unitholders of record 10, November 2023. The partnership's predictable fee-based cash flow continues to prove beneficial in today's economic environment and is differentiated by the consistency of our earnings and cash flows. Looking back, since our IPO in July 2014, we have maintained a cumulative distributable cash flow of approximately 1x, and with the partnership's stability and cash flows, we're able to sustain our current distribution without the need to access the capital markets. For modeling purposes, our next planned turnaround is at our Petro 1 ethylene unit in Lake Charles, Louisiana, which is currently planned for mid-2024. We'll provide additional details on the turnaround once we complete our turnaround planning.

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

Albert Chao (President and CEO)

Thank you, Steve. We are pleased with the partnership's financial and operational performance in the 3Q. We believe that this performance should continue through the rest of the year. We remain optimistic about the demand fundamentals for our globally cost-advantaged ethylene, driven by steady domestic demand for ethylene derivatives and export opportunities at our parent, Westlake. 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, will 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 financial and leverage metrics.

As we continue to navigate market conditions, we'll evaluate opportunities via our four levers of growth in the future, including increases of our ownership interest of OpCo, acquisition of other qualified income streams, organic growth opportunities, such as expansions of our current ethylene facilities, and negotiation of a higher fixed margin in our ethylene sales agreement with Westlake. 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 3Q earnings call. Now I'll turn the call back over to Jeff.

Jeff Holy (VP and Treasurer)

Thank you, Albert. Before we begin taking questions, I'd like to remind you that a replay of this teleconference will be available two hours after the call has ended. Antoine, we'll now take questions.

Operator (participant)

Thank you. We will now conduct a question-and-answer session. To ask a question, please press star one, one on your telephone and wait for your name to be announced. To withdraw your question, please press star one, one again. Please stand by while we compile the Q&A roster. Our first question comes from Matthew Blair from TPH. Please go ahead.

Matthew Blair (Managing Director)

Hey, good afternoon, Albert and Steve.

Albert Chao (President and CEO)

Good afternoon.

Steve Bender (EVP and CFO)

Afternoon.

Matthew Blair (Managing Director)

I wanted to touch on the planned maintenance expenses that, Steve, I believe you said would be a little bit higher in the back half of 2023. It sounded like this is just a timing issue, but I wanted to see if, if you're seeing any sort of impacts from higher inflation or higher labor costs rolling through, does that mean that your CapEx would be structurally higher going forward? And, and if so, does that present any risk to the current distribution?

Steve Bender (EVP and CFO)

Yeah, that's a very good question, Matthew, and certainly, as we continue our turnaround planning for next year for our ethylene unit, you know, it's something that we're certainly taking into consideration. I do not see it as a risk because, as you may recall, we think about budgeting for the capital expenditures related to the turnaround, and those are billed on a regular basis to Westlake by OpCo. And so should we see inflation, as it relates to manpower or materials, we're able to accumulate that turnaround reserve to be able to offset potentially higher costs in either one of those 2 categories. So we don't see it as a risk to the ability to generate the cash and be able to make a distribution to meet the distribution requirements for a payment to our unitholders.

Matthew Blair (Managing Director)

Sounds good. I'll leave it there. Thanks.

Steve Bender (EVP and CFO)

You're welcome.

Operator (participant)

Thank you. One moment for our next question. As a reminder, if you would like to ask a question, please press star one one and wait for your name to be announced. Our next question comes from Vincent Andrews from Morgan Stanley. Please go ahead.

Vincent Andrews (Managing Director and Senior Equity Analyst)

Oh, hi. How are you guys? Just wondering, just looking at the margin expansion you saw in the housing segment. Just curious if you could talk about... I know that the release talked about lower costs, but, you know, what was the real driver of that? You know, which were the costs and how did that happen? Just seems like a big margin expansion.

Steve Bender (EVP and CFO)

You're talking about in our building products segment?

Vincent Andrews (Managing Director and Senior Equity Analyst)

Yeah, exactly. Yes, exactly.

Steve Bender (EVP and CFO)

Yeah. And so Vincent, the expansion really came from the fact that we saw lower inputs. A lot of those inputs, of course, are PVC related to the building products business, as we buy resin from Westlake and further downstream into our building products business. And certainly we're able to maintain price prices as best that we could in this market. And as a consequence, we did get some margin expansion. You also saw that we were able to improve volumes quarter-over-quarter in the building products division by about 7%. So we've seen strength in volume and certainly challenges in trying to maintain headline price. But because we saw lower input cost, largely PVC resin, we're able to expand that margin in building products.

Vincent Andrews (Managing Director and Senior Equity Analyst)

Okay. And then some of the outlook commentary related to mortgage rates and things like that, you know, none of that stuff's necessarily new, so I just couldn't tell whether you were sort of signaling that you're starting to see sort of a more a greater impact from those from those macro issues, or whether that's just sort of the ongoing, "Hey, this these are overhangs on the demand environment." So any clarity there would be helpful.

Steve Bender (EVP and CFO)

Well, yeah, I think the compounding effect of the rising mortgage rate is certainly having a dampened effect on demand. And certainly, as we know, there's a large macro overdraw or backdrop that is concerning to many homebuyers or potential homebuyers because of the macro uncertainty in the economies. And of course, the compounding effect of nearly an 8%+ mortgage rate on a 30-year mortgage is even a higher hill to climb, if you will, than just 6 months or a year ago. And so I do think that's an issue. And of course, this time of year, we also have a seasonality element that comes into play in terms of just underlying demand.

And so as we think about the effect in the 4Q for building products, certainly continued and higher headwinds related to mortgage rates and interest rates generally, as well as the seasonal slowdown that exists and typically persists through the 4Q and sometimes into Q1 because of seasonal effects on construction demand.

Vincent Andrews (Managing Director and Senior Equity Analyst)

Okay. Thanks very much. I'll pass it along.

Steve Bender (EVP and CFO)

Well, thank you.

Operator (participant)

Thank you. At this time, the Q&A session has now ended. I will now turn the call over to Jeff Holy.

Jeff Holy (VP and Treasurer)

Thank you. Thank you again for participating in today's call. We hope you'll join us for our next conference call to discuss our 4Q 2023 results.

Operator (participant)

Thank you for participating in today's Westlake Chemical Partners 3Q 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 Eastern Time on Thursday, 16 November, 2023. The replay can be accessed via the partnership website. Goodbye.