Calumet Inc (CLMT) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2006 Calumet Specialty Products earnings conference call. My name is Melanie, and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will conduct a question and answer session at the end of this conference. (OPERATOR INSTRUCTIONS). As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Ms. Jennifer Straumins, Vice President of Investor Relations. Please proceed, ma'am.

Thank you, operator. Good afternoon and welcome to the Calumet Specialty Products Partners' investors call to discuss our quarter ended June 30, 2006 financial results. During this call, Calumet Specialty Products Partners will be referred to as the Partnership, or Calumet. And Calumet Lubricants Company, the predecessor to the public entity will be referred to as Predecessor.

Bill Grube, our President and CEO, will lead off the call on a summary discussion of our business, including Calumet's internal growth projects. Pat Murray, our CFO, will then discuss our financial results. Following the presentation, we will hold the line open for a question-and-answer session.

During the course of this call, we will make various forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Such statements are based on the beliefs of our management as well as assumptions made by them and in each case based on information currently available to them. Although our management believes that the expectations reflected in such forward-looking statements are reasonable, neither the Partnership nor its general partner nor our management can provide any assurances that such expectations will prove to be correct. Please refer to our Partnership's press release was issued yesterday as well as the latest filings with the Securities and Exchange Commission for a list of factors that may affect our actual results and cause them to differ from our forward-looking statements made on this call. And now I'd like to turn the call over to Bill Grube, our President and CEO of Calumet.

Thank you, Jennifer. Again we would like to welcome you to the earnings call for Calumet Specialty Products Partners. We are very pleased with the results for the second quarter of 2006. Calumet's operating performance for the quarter was strong and has allowed us to declare our second-quarter distribution at $0.45 per unit. This distribution equates to an annualized distribution of $1.80 per unit.

We are continuing to focus our efforts on the significant past expansion product at our Shreveport refinery which is expected to be completed and fully operational in the third quarter of 2007 and should increase this refinery's crude oil throughput capacity by approximately 40% over current levels. To help fund this expansion project, we completed a follow-on equity offering in July 2006 of 3.3 million common units with net proceeds of $103.5 million.

During the second quarter of 2006 we purchased some of the key pieces of operating equipment for the project that had a total cost of $17.5 million. We have also made significant progress in securing other key operating equipment for the expansion project. In July 2006 we applied for the air quality permit for the project with the Louisiana Department of Environmental Quality. We anticipate beginning construction on the project early in the fourth quarter of 2006.

Following is a summary of our quarter-over-quarter sales volumes by segment. Total Specialty Products segment sales volume for the second quarter of 2006 was 26,813 barrels per day, as compared to 25,473 barrels per day in the prior year, an increase of 1340 barrels per day, or 5.3%. Total Fuel segment sales volume for the second quarter of 2006 was 23,934 barrels per day, as compared to stay 23,604 barrels per day in the same period for the prior year, an increase of 330 barrels per day, or 1.4%. I would now like to turn the call over to Pat Murray for a review of our financial results.

Thank you, Bill. We would like to now offer a brief review of our financial results for the quarter ended June 30, 2006 for Calumet. All comparisons to prior year are to the Predecessor. Net income for the three months ended June 30, 2006 was $23.2 million, compared to net income of $18.7 million for the same period in 2005. Net income for the three months ended June 30, 2006 was primarily impacted by increased gross profit of $27.5 million, as compared to the quarter ended June 30, 2005, offset by an increase in losses on derivative instruments of $22.1 million.

Beginning April 1 of 2006 the Partnership began accounting for the majority of its derivatives related to fuel products crack spreads as cash flow hedges for accounting purposes. As a result, changes in the fair value of these derivatives designated as hedges are recorded in other comprehensive income, a component of Partners Capital rather than in current period earnings.

Upon recording the hedge transactions, the derivatives hedging purchases and sales are recorded to cost of sales and sales respectively. Changes in the fair value of derivatives not qualified as cash flow hedges are recorded within gain or loss on derivative of instruments on the income statement.

Net income for the six months ended June 30, 2006 was $26.7 million, compared to net income of $18.6 million for the same period in 2005. Net income for the six months ended June 30, 2006 was positively impacted by increased gross profit of $52.4 million, compared to the same period in 2005, offset by increases in losses on derivative instruments of $36.8 million.

We believe the non-GAAP measures of EBITDA, Adjusted EBITDA, and distributable cash flow are important financial performance measures for the Partnership. EBITDA and Adjusted EBITDA, as defined by our credit agreements, were $28.3 million and $29.4 million respectively for the three months ended June 30, 2006, as compared to $26.8 million and $22.9 million respectively for the same period in 2005.

The Partnership's distributable cash flow for the three months ended June 30, 2006 was $26.3 million. EBITDA and Adjusted EBITDA for the six months ended June 30, 2006 were $41.5 million and $55.5 million respectively, as compared to $34.2 million and $35 million respectively for the same period in 2005. The Partnership's distributable cash flow for the six months ended June 30, 2006 was for $44.7 million.

Adjusted EBITDA for the quarter ended June 30, 2006 was positively impacted (indiscernible) Specialty and Fuel Products margins partially offset by increased transportation expenses resulting from both higher rail service prices and higher sales volumes. We encourage investors to review the section of the earnings press release found on our website entitled Non-GAAP Financial Measures and the attached Tables for discussion and definitions of EBITDA, Adjusted EBITDA and distributable cash flow, financial measures and reconciliation of these non-GAAP measures to the comparable GAAP measures.

Gross profit increased 90.2% to $58.1 million for the three months ended June 30, 2006 from $30.5 million in the same period in the prior year. Gross profit by segment for the three months ended June 30, 2006 for Specialty Products and Fuel Products was $40.5 million and $17.6 million respectively, compared to stick $20.6 million and $9.9 million respectively for the same period in 2005. The $19.9 million increase in our gross profit of our Specialty Products segment for the three months ended June 30, 2006, as compared to the same period in the prior year was primarily due to increases in sales prices for certain lubricating oil products, outpacing increases in the cost of crude oil.

The segment was also positively affected by increases in volumes sold, of lubricating oils as well as lower operating costs. The $7.6 million increase in the gross profit in our Fuel Products segment for the three months ended June 30, 2006 is due to increases in sales prices for gasoline and diesel fuel, outpacing increases in the cost of crude oil as well as an improved product mix resulting from decreased sales volumes of asphalted by-products, offset by net derivative losses on crude oil and Fuel Products cash flow hedges. Increased sales volume of jet fuel also positively affected the gross profit of the segment.

Selling, general and administrative expenses increased $0.2 million to $5.2 million for the quarter ended June 30, 2006, compared to the same period in the prior year. This increase primarily reflects incremental general administrative expenses associated with being a publicly traded partnership and increased employee compensation costs partially offset by lower miscellaneous SG&A expenses.

Transportation expense increased $5.3 million for the quarter ended June 30, 2006 to $14.6 million for the same period in the prior year. This increase is primarily due to the increased sales volume for both segments of our business as well as price increases primarily for rail services that became effective during the quarter. The majority of our transportation expense is reimbursed by our customers and is reflected in sales.

Interest expense decreased $2.9 million to $2.2 million in the quarter ended June 30, 2006 from the same period in the prior year. This decrease is primarily due to lower overall debt levels resulting from our paydown of debt with the proceeds from our initial public offering. As of June 30, 2006 total capitalization of the Partnership consisted of Partners Capital in the amount of $161.5 million and outstanding debt of $59.0 million, comprised of borrowings of $49.0 million under the term loan facility and $9.2 million in borrowings under the revolving credit facility.

The $122.4 million increase in equity from December 31, 2005 is primarily due to proceeds from our initial public offering and net income of $26.7 million offset by $22.9 million increase in other comprehensive loss as a result of decreases in the fair market value of derivative instruments. The reduction of our debt is due to a combination of the initial public offering proceeds and improvements in our working capital requirements. As of August 4, 2006 the Partnership had outstanding borrowings of $49.8 million under the term loan facility and no borrowings outstanding under the revolving credit facility, with availability for borrowings of approximately $142.6 million under the revolver.

The Partnership will pay its initial -- its quarterly distribution to unitholders for the quarter ending June 30, 2006 on August 14, 2006, to unitholders of record on August 4, 2006. Now I will turn the call back over to Bill.

Thank you, Pat. This concludes our remarks. We will now be happy to answer any questions you have. Operator, could you please confirm if there are any questions?

(OPERATOR INSTRUCTIONS). Chi Chow, Petrie Parkman.

Bill, could you give us your thoughts on the possible distribution increase given the strength on the coverage ratio?

We talked about that at the Board meeting today. And as you are aware, I mean we are significantly over the MQD numbers for the earnings anticipation at this point in time. And I think what we have always kind of felt like that this increase was coming somewhere in the fourth quarter, either for the fourth quarter or for first quarter next year. And as far as amount is concerned, we are not there yet at this point in time. Hopefully over the next several weeks we are going to be formulating what kind of number we need to do because we understand it is needed -- it's going to have to be, I would say, significant but I'm not sure how you define significant at this point in time.

Right. So you're not looking at anything for the third quarter?

No, it won't be the third quarter. I mean we basically said that we were going to do this in the fourth quarter for either -- or the fourth quarter or for the first quarter next year.

Under Specialty Products margin, it looks like you've maintained pretty high margins throughout the first half of the year. What are you seeing so far here in the third quarter?

We are seeing very similar margins to what we have had in the past. So I mean we have had price increases on all Specialty Products to keep up with the crude price increases.

Any push back from customers on passing those costs through?

There is always push back from customers when you have price increases, but definitely no more than normal.

And then it looks like you have procured a lot of the hardware for the Shreveport project. Do you see any increase in the cost of the project (technical difficulty)?

It is hard to say at this point in time, but our latest numbers indicate that we're going to be in the ballpark of what we have been stating, which is in the $110 million range.

Then I have one more. Pat, could you give us some guidance on interest expense and maintenance CapEx expectations (technical difficulty)?

I mean I think interest expense should be pretty much in line with we have $49 -- roughly $50 million in term debt outstanding. We have hedged our 85% of that interest rate at LIBOR, linking that in at just a little bit over 5% and then we pay an incremental 3.5% on top of that. It's basically LIBOR plus 350 and that is -- 85% of that balance is hedged.

And at this stage we don't anticipate any borrowings under the revolver during the quarter just based on our current cash position. I think that number will be pretty close to zero, and we will have a small amount of interest expense related to posted letters of credit on the LCs we have outstanding under the revolver to support some of our crude oil suppliers. We have about $67 million of LCs outstanding there.

And then we will have 350 basis points on prefunded -- $50 million refunded LC that we have to support our crack spread hedging program. So obviously our interest expense will be lower than in past quarters based on the reduced leverage. Somewhat offset by -- well, actually probably net reductions further based on interest income that we have on proceeds of the equity offering that are being held and used as we continue to pay for capital expenditures related to the project.

In terms of maintenance CapEx, I think we're very much in line with the around $7 million of estimate that we gave for the year, so we are looking at seeing it somewhere in the neighborhood of $1.5 million to $2 million per quarter for the rest of the year.

(OPERATOR INSTRUCTIONS). Gentlemen, Ed Gardner, Raymond James.

Just to take you back on Chi's first question. Philosophically, do you guys have like a coverage ratio that you guys would like to be within on the distribution, given that the sensitivity that you guys have to certain input prices, or have you guys not really targeted one at this point?

We have targeted a coverage ratio of 1.3 is what we marketed off during the IPO and the follow-on.

That's all I have. I appreciate it.

We are well above that right now.

Absolutely. Thanks.

Chi Chow, Petrie Parkman.

I'm going to keep going here with one or two more if I could. Do you see any operational issues with [DDU] startup? And went did that startup?

What?

The DDU startup at Shreveport?

[DD] unit?

Yes.

It started up fine and it is fine.

It's operating as planned at this point.

That's correct.

And any changes on your crude feedstock as far --

We are running roughly the same crudes we have always ran.

That's it. Thanks.

(OPERATOR INSTRUCTIONS). Gentlemen, there are no further questions at this time. I would now like to turn the call back over to management for any closing remarks.

Thank you. This concludes the Calumet Specialty Products Partners earnings conference call covering our second-quarter results. Thank you very much for your participation and please note that this teleconference will be available for replay using the instructions contained in our press release. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.