Calumet Inc (CLMT) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Third Quarter Calumet Specialty Products Earnings Conference Call. My name is James and I will be your operator for today. [OPERATOR INSTRUCTIONS] I would now like to turn the call over to Ms. Jennifer Straumins, Vice President of Investor Relations. Please proceed.

Thank you, operator. Good afternoon and welcome to the Calumet Specialty Products Partners Investors Call to discuss our quarter ended September 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 and a summary discussion of the business including our internal growth projects. Pat Murray, our CFO, will follow discussing the financial results. Following the presentation, we will be 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 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 the information currently available to them. Although our management believes that the expectations reflected in such forward-looking statements are reasonable neither the Partnership, its general partner nor our management can provide any assurances that such expectations will prove to be correct. Please refer to the Partnership's press release that was issued yesterday as well as the latest filings with the Securities and Exchange Commission for relative factors that may affect our actual results and could cause them to differ from our forward-looking statements.

Now, I'd like to turn the call over to Bill Grube, our President and CEO.

Thank you, Jennifer. Again, we would like to welcome you to the earnings call for Calumet Specialty Products Partners. We are pleased with the results for the third quarter of 2006. Calumet's operating performance for the quarter has allowed us to declare our third quarter distribution of $0.55 per unit, a 22% increase from the second quarter distribution per unit. This distribution equates to an annualized distribution of $2.20 per unit. We are continuing to focus on the capacity expansion project at our Shreveport refinery which is expected to be completed and operational in the third quarter of 2007 and should increase this refinery's crude oil throughput capacity by approximately 40% over the current levels.

As previously announced, to help fund this expansion project, we completed a follow-on equity offering in July of 2006 of 3.3 million common units with net proceeds of $103.5 million. During the third quarter of 2006, we continued to purchase some of the key pieces of operating equipment for the project. We have made capital expenditures of 3.5 million related to this project as of the end of the third quarter of 2006. We have now either acquired or contracted for the purchase of all key operating equipment for the expansion project. We currently estimate the total cost of the project to be approximately $150 million. The increase in the estimated cost of the expansion project is primarily due to escalation in construction costs.

The following is a summary of our quarter-over-quarter sales volumes by segment. Total Specialty Product segment sales volume for the third quarter of 2006 was 26,368 barrels per day as compared to 25,151 barrels per day in the prior year, an increase of 1,217 barrels per day or 4.8%. Total fuel segment sales volume for the third quarter of 2006 was 24,778 barrels per day as compared to 23,691 barrels per day, the same period for the prior year, an increase of 1,087 barrels per day or 4.8%.

I would now like to turn the call over to Pat Murray for a review of our financial results.

Thank you, Bill. We would now like to offer a brief review of the financial results for the quarter ended September 30, 2006 for Calumet. All comparisons to the prior year are to the Predecessor. Net income for the three months ended September 30, 2006 was 35.7 million compared to net loss of 39.4 million for the same period in 2005. This was significantly impacted by an unrealized gain on derivative instruments of 16.8 million in 2006 as compared to an unrealized loss of 52.0 million for the same period in 2005. Further, net income for the three months ended September 30, 2006 was positively impacted by increased gross profit of 12.4 million as compared to the quarter ended September 30, 2005.

Beginning April 1st, 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 instruments on the income statement.

Net income for the nine months ended September 30, 2006 was 62.4 million compared to a net loss of 20.8 million for the same period in 2005 and was significantly impacted by an unrealized loss on derivative instruments of 0.1 million in 2006 as compared to an unrealized loss of 48.4 million for the same period in 2005.

Further, net income for the nine months ended September 30, 2006 was positively impacted by increased gross profit of 64.8 million compared to the same period in 2005, offset by increased transportation costs of 11.0 million. We believe the non-GAAP measures that EBITDA, adjusted EBITDA and distributable cash flow are important financial performance measures for the Partnership. EBITDA and Adjusted EBITDA as defined by the Partnership's credit agreements, were 40.3 million and 25.7 million, respectively, for the three months ended September 30, 2006 as compared to negative 30.1 million and 23.3 million, respectively, for the same period in 2005. The Partnership's Distributable Cash Flow for the three months ended September 30, 2006 was 22.2 million.

EBITDA and Adjusted EBITDA for the nine months ended September 30, 2006 were 81.7 and 81.2 million, respectively, as compared to 3.4 and 57.6 million, respectively, for the same period in 2005. The Partnership's Distributable Cash Flow for the nine months ended September 30, 2006 was 66.9 million. Adjusted EBITDA for the quarter ended September 30, 2006 was positively impacted by widened specialty products margins partially offset by less favorable fuel products margins and increased transportation expenses resulting from both higher rail service prices and higher sales volume.

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 a discussion and definitions of EBITDA, Adjusted EBITDA and Distributable Cash Flow Financial Measures and reconciliations of these non-GAAP measures to the comparable GAAP measures.

Gross profit increased 32.0% to 51.1 million for the three months ended September 30, 2006 from 38.8 million for the same period in the prior year. Gross profit by segment for the three months ended September 30, 2006 for Specialty Products and Fuel Products was 38.8 million and 12.3 million, respectively, compared to 13.0 million and 25.8 million, respectively, for the same period in 2005. The 25.9 million increase in the gross profit of our Specialty Products segment for the three months ended September 30, 2006 as compared to the same period in the prior year was primarily due to increases in sales prices for certain lubricating oils products outpacing increases in the cost of crude oil offset by a less favorable product mix due to increased sales volume of asphalt and by-products as well as net derivative losses on crude oil cash flow hedges recorded through costs of sales in the current year but not in the prior year.

Specialty Products segment gross profit was also positively affected by lower plant operating costs. The 13.5 million decrease in the gross profit in our Fuels Product segment for the three months ended September 30, 2006 compared to the prior year is due to increases in the cost of crude outpacing increases in sales price for gasoline offset by increased sales volume and lower plant operating costs. In addition, the decrease was due to net derivative losses on crude oil and fuel products cash flow hedges recorded to sales and cost of sales in the current year, but not in the prior year.

Fuel Products segment gross profit was also negatively impacted by costs associated with plant operations due primarily to increases in other material costs from the use of certain gasoline blendstocks in the third quarter of 2006 to maintain compliance with certain environmental regulations, partially offset by lower plant operating costs, including plant fuel and maintenance. The Company does not anticipate that such gasoline blendstock purchases will be required beyond the fourth quarter of 2006.

Selling, general and administrative expenses increased 1.2 million to 4.8 million for the quarter ended September 30, 2006 compared to the same period in the prior year. This increase primarily reflects incremental general and administrative expenses associated with being a publicly traded partnership and increased employee compensation costs.

Transportation expense increased 2.5 million for the quarter ended September 30, 2006 to $16.0 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 second quarter of 2006. The majority of our transportation expense is reimbursed by our customers and is reflected in sales.

Interest expense decreased 5.1 million to 1.7 million in the quarter ended September 30, 2006 from the same period in the prior year. This decrease is primarily due to lower overall debt levels resulting from our pay down of debt with the proceeds from our public offerings and cash flow from operations.

Interest income increased 1.3 million to 1.4 million in the three months ended September 30, 2006 compared to the same period in the prior year. This increase was primarily due to the investment in short-term highly liquid investments of the remaining proceeds from our follow-on public offering, which was closed on July 5, 2006, after the pay down of indebtedness.

As of September 30, 2006, total capitalization consisted of partners' capital in the amount of 329.2 million and outstanding debt of 49.7 million, comprised of borrowings of 49.6 million under the term loan facility and 0.1 million in borrowings under the revolving credit facility. This 290.1 million increase in equity from December 31, 2005 is primarily due to the proceeds from our initial public offering and follow-on offering of 242.2 million, net income of 62.4 million and a 33.8 million increase in other comprehensive income as a result of increases in the fair market value of derivative instruments, offset by distributions to partners of 45.2 million. As of November 4, 2006, the Partnership had outstanding borrowings of 49.7 million under the term loan facility and no borrowings outstanding under the revolving credit facility, with availability for borrowings of approximately 124.5 million under the revolving credit facility.

The Partnership will pay its quarterly distribution to unit holders for the quarter ending September 30, 2006 on November 14, 2006 to unit holders of record on November 4, 2006.

And now, I'll turn the call back over to Bill Grube.

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

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Chi Chow with Petrie Parkman. Please proceed.

Good afternoon, everyone. On the gasoline blendstock issue from what I understand you purchased incremental ethanol alkylate during the quarter. What sort of volumes are we talking about on those products?

In the third quarter we purchased around 2,500 barrels per day of alkylate as well as [inaudible - background noise] ethanol blendings.

Twenty-five - sorry. That was 2,500 barrels a day of alkylate and how much ethanol?

It's about 2,500 total, Chi.

Oh, total, okay. And do you expect that will be the same sort of volumes you're talking about in the fourth quarter?

We're doing about 4,000 barrels a day this month hoping that we won't have to do very much at all in December. We want to make sure that everything is in compliance before the end of the year.

Okay. So 4,000 barrels a day in November and that sort of volume in October as well?

A little bit - about 3,000 barrels a day in October.

Three, okay. And you purchased those at market prices?

That's correct.

Okay. Thanks. And then on the Shreveport project. The prior cost estimate was about 110 million. Is that correct still?

It was 110 million with about a 30% contingency.

Okay.

So around -- we had a range of between 110 and 140.

Okay. And you kept your target the same 3Q '07. Do you anticipate any problems getting the labor to complete the project?

I don't think so. I mean we're prepared to move forward and we think that our contractors are giving us reasonable assurances that that will be okay.

Okay. And one final question. It looks like your transportation costs are kind of ticking up the last couple of quarters. What's a -- sort of a rateable rate going forward here?

Well most of those transportation costs are recaptured in sales. The net affect is there's about 5 million a year that we don't re-bill the customers for whatever reason.

5 million per year?

Yes.

Okay. Okay, great.

If you're going to enter it into your - if you want to increase transportation costs you can put that offset into sales.

Got it. Okay. All right. Thanks a lot.

Sure.

[OPERATOR INSTRUCTIONS] There are no more questions at this time. I would now like to turn the call over to Jennifer Straumins.

This concludes the Calumet Specialty Products Earnings Conference Call covering the Company's third quarter results. Thank you for your participation in this teleconference and please note this teleconference will be available for replay using the instructions contained in our press release. Have a great afternoon.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.