Calumet Inc (CLMT) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter Calumet Specialty Products earnings conference call. My name is Jeremy and 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 towards the end of the conference. (OPERATOR INSTRUCTIONS).

I would now like to turn the call over to your host, Ms. Jennifer Straumins. Please proceed, ma'am.

Thank you, operator. Good morning and welcome to the Calumet Specialty Products Partners investors call to discuss our quarter and year ended December 31, 2006.

During this call, Calumet Specialty Products Partners will be referred to as "the Partnership" or Calumet, and Calumet Lubricants, the predecessor to the public entity, will be referred to open as "the 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 then discuss the 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 21-E of the Securities Exchange Act of 1934. Such statements are based on our belief of the management as well as assumptions made by them and in each case based on information currently available to them. Although our management believes 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 its latest filings with the Securities and Exchange Commission, for a list of factors that may affect our actual results and could cause them to differ from our forward-looking statements made on this call.

Now, I would like to turn the call over to Bill Grube, the 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 pleased with the results for the fourth quarter and year ended December 31, 2006. Calumet's operating performance for the quarter allowed us to declare our fourth-quarter distribution of $0.60 per unit, a 9% increase from the third-quarter distribution. This distribution equates to an annualized distribution of $2.40 per unit.

As previously announced, we have commenced a major capital-improvement project at our Shreveport refinery, which we still expect to be completed and operational in the fourth quarter--in the third quarter of 2007, and should increase this refinery's throughput capacity by approximately 40% over current levels from 42,000 barrels per day to approximately 57,000 barrels per day.

We have now either acquired or contracted for the purchase of all key operating equipment for the expansion project and have spent a total of $65.5 million in capital expenditures related to the project for the year ended December 31, 2006. After the receipt of all required permits, we commenced construction on the expansion project at the end of the fourth quarter of 2006. We still estimate that total cost for the Shreveport refinery expansion project will be approximately $150 million.

The following is a summary of our quarter-over-quarter and year-over-year sales volumes, by segment. Total Specialty Products segment sales volume for the fourth quarter of 2006 was 20,473 barrels per day, as compared to 24,266 barrels per day for the same period in the prior year, a decrease of 3793 barrels per day or 15.6%. This decrease was due primarily to higher than historical demand in the fourth quarter of 2005 from the effect of the September 2005 Hurricane activity all on specialty products supply. Total Specialty Products segment sales volume for the year ended December 31, 2006 was 25,009 barrels per day as compared to 24,385 barrels per day for the same period in the prior year, an increase of 724 barrels per day or 3%. This increase was primarily due to increased volume for lubricating oils and solvents.

Oil and Fuels product segment sales volume for the fourth quarter of 2006 was 26,933 barrels per day, as compared to 27,007 barrels per day in the same period for the prior year, a decrease of 74 barrels per day or 0.3%.

Total Fuels Product segment sales volume for the year ended December 31, 2006 was 25,236 barrels per day, as compared to 22,568 barrels per day for the same period in the prior year, an increase of 2668 barrels per day or 11.8%. This increase was attributable to the ramp-up of Fuels operations at the Shreveport refinery during the first quarter of 2005.

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

Thank you, Bill.

We'd now like to offer a brief review of the financial results for the quarter and year ended December 31, 2006, for Calumet. All comparisons to the prior year are to the Predecessor.

Net income for the three months ended December 31, 2006 was 31.5 million compared to 32.1 million for the same period in 2005. Net income for the three months ended December 31, 2006 was positively impacted by a decrease in selling, general and administrative of costs of 4.6 million due to lower incentive compensation costs and a decrease in interest expense and debt-extension costs of 11.9 million on a combined basis. These increases were offset by decreased gross profit of 1.9 million as compared to the quarter ended December 31, 2005, and a decrease in gains on derivative instruments of 16.8 million.

Beginning April 1, 2006, the Partnership began accounting for the majority of its derivatives related to fuel products frac 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 accumulated other comprehensive income, a component of Partners Capital, rather than in current-period earnings. Upon recording the hedge transaction, the derivative 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 income statement.

Net income for the year ended December 31, 2006 was 93.9 million, compared to 11.3 million in 2005. Net income for the year ended December 31, 2006 was positively impacted by increased gross profit of 62.9 million, compared to 2005, as well as decreases in interest expense and losses on derivative instruments of 13.9 million and 6.7 million, respectively.

We believe that 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 36.1 million and 23.3 million, respectively, for the three months ended December 31, 2006, as compared to 48.2 million and 28.2 million, respectively, for the same period in 2005.

The Partnership's distributable cash flow for the three months ended December 31, 2006 was 19.0 million.

EBITDA and adjusted EBITDA for the year ended December 31, 2006 were 117.9 million and 104.5 million respectively, as compared to 51.6 million and 85.8 million, respectively, for 2005. The Partnership's distributable cash flow for the 11 months ended December 31, 2006 was 85.9 million. Adjusted EBITDA for the year ended December 31, 2006 was positively impacted by widened specialty products margins, offset by less-favorable fuel products margins and increased transportation expenses, primarily from higher rail service prices.

We encourage investors to review the section of earnings press release found on our Web site entitled "Non-GAAP Financial Measures" as well as the attached tables for further discussions and definitions of EBITDA, adjusted EBITDA, and distributed cash flow financial measures and reconciliations of these non-GAAP measures to the comparable GAAP measures.

Gross profit decreased 4.2% to 43.1 million for the three months ended December 31, 2006 from 45.0 million for the same period in the prior year. Gross profit by segment for the three months ended December 31, 2006 for specialty products and fuel products was 35.9 million and 7.1 million, respectively, compared to 22.0 million and 22.9 million, respectively, for the same period in 2005. The 13.9 million increase in the gross profit of our specialty products segment for the three months ended December 31, 2006, as compared to the same period of 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 decreased sales volumes of lubricating oils, and net derivative losses on crude oil cash flow hedges recorded to cost 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, primarily due to lower plant fuel costs, caused by a decrease in natural gas prices.

The 15.8 million decrease in the gross profit in our Fuels Products segment for the three months ended December 31, 2006 is due to increases in cost of crude oil outpacing the increases in sales prices for gasoline, diesel and jet fuel. 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 fourth quarter of 2006 to maintain compliance with certain environmental regulations, partially offset by lower plant operating costs, primarily plant fuel. The Company's usage of these gasoline blendstocks ended in the fourth quarter of 2006, upon determination of the Company's continued compliance with such environmental regulations.

Selling, general and administrative expenses decreased 4.6 million to 5.5 million for the quarter ended December 31, 2006, compared to the same period in the prior year. This decrease primarily results from lower incentive compensation expense in the quarter ended December 31, 2006, as compared to the prior quarter and the prior year.

Transportation expense decreased 0.9 million to 12.4 million for the quarter ended December 31, 2006, compared to the same period of the prior year. This decrease is primarily due to decreased sales volume of both segments of our business, offset by price increases for rail services. The majority of our transportation expense is reimbursed by our customers and is reflected in sales.

Interest expense decreased 5.0 million to 1.2 million for the quarter ended December 31, 2006 from the same period in the prior year. This decrease was primarily due to lower overall debt levels resulting from our paydown of debt with the proceeds from our initial public offering and cash flow from operations.

Interest income increased 1.2 million to 1.3 million in the three months ended December 31, 2006 from the same period in the prior year. This increase was primarily due to the investment of the remaining available proceeds from our follow-on public offering, which closed on July 5, 2006.

Debt extinguishment costs decreased by 6.9 million from 6.9 million in the quarter ended December 31, 2005 to 0 in the same period of 2006 as a result of the repayment of existing credit facilities in the fourth quarter of 2005, using proceeds of credit agreements entered into in that same period with no similar costs in the same period in 2006.

As of December 31, 2006, total capitalization of the Partnership consisted of Partners capital in the amount of 378.7 million, including accumulated other comprehensive income of 52.3 million and outstanding debt of 49.5 million comprised of borrowings of 49.5 million under the term loan facility, and no borrowings under the revolving credit facility. The 339.6 million increase in our Partners capital from December 31, 2005 is primarily due to the combined proceeds of our initial public offering and follow-on public offering of 242.2 million, net income of 93.9 million, and an increase of 51.8 million in accumulated 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 February 9, 2007, the Partnership had outstanding borrowings of 49.5 million under the term loan facility and no borrowings under the revolving credit facility with availability for borrowings of approximately 142.8 million under the revolving credit facility.

The Partnership paid its quarterly distribution to unitholders for the quarter ended December 31, 2006 on February 14 to unitholders of record on February 4.

Now, I will turn the call back to Bill Grube.

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

(OPERATOR INSTRUCTIONS). Casey Borman, Strome Investments.

Can you give me a scheduling update in terms of expansion coming online? I know you're not giving guidance but maybe some clarity in terms of when we should expect to see distributable cash flow increase as a result of the project?

The project is due to come online in various stages, beginning this summer, with some of the fuel units being the first to come online. The project is expected to be fully up and ramping up during late third quarter. Those increases in cash from those operations we expect to see in the fourth quarter.

But not fully in the fourth quarter.

So the ramp will start in the third quarter and when will it hit maximum?

It will hit maximum run-rate during the first quarter of '08.

Are you still confident with the types of returns that we discussed on your last roadshow?

Yes, we are.

Great. I look forward to that. Thank you.

Matt [Burler], [Ultraweiss] Capital.

Good morning. Two questions, related. First of all, can you give us an update on your hedge situation? Then relatedly, you define your distributable cash flow off of your adjusted EBITDA, which pulls out the unrealized losses and gains, which in this latest quarter were--and full year were gains. I wonder if you could just discuss the--how we should look at that, because my understanding is that you have--those gains are, in effect, offsetting what would have been increased costs embedded in your EBITDA. So should we really be thinking about the EBITDA as a starting point for understanding your distributable cash flow, as opposed to looking at the adjustment if we're trying to really understand the profitability of the operations, including the hedging activity? I have no idea if I'm making sense here but--.

Sure. Well, first let me attack just giving you an update of where we are from a hedging position, which I believe is your first question.

Yes.

We've continued to add hedges on since we reported in the third quarter. We now have hedging; we've continued to lay on hedges in 2008, 2010 and 2011, just really started the process of hedging out into 2011. Primarily the barrels we've added are diesel. We added about 1500 barrels a day of the hedging in 2008 and 2010, and an additional 750 barrels a day hedging in 2011. In all cases, we are able to increase our average crack spread for those years that we've hedged in our future program.

We've got, for 2007, roughly about 19,000 barrels a day of crack spreads hedged at an average price of $12.65, and in 2008, a little over 23,000 barrels a day at about $12.40 on average; 2009, 20,500 barrels at an average of $11.71; and 2010 about 17,000 barrels at (indiscernible) $28; and in 2011 about 1500 barrels a day, around $10. So we are continuing to hedge the volumes consistent with our stated goal to have a long-term program.

With respect to looking at the unrealized gain, the adjustment that we make to EBITDA to get to adjust the EBITDA, we do feel that looking at those adjustments are appropriate. Those gains and losses are really measurements of where the fair market value might be moving on certain derivatives that we don't have designated as cash flow hedges, but they do represent I guess items in the future that may or may not occur, and may or may not end up being cash.

So we think, in order to give people more of a clear picture of what the Partnership is actually earning on a cash flow basis, it still remains an appropriate adjustment. Now, what we've achieved, I think, for the most part, with the adoption of hedge accounting and the designation of most of our crack spread derivatives as hedges, is we're trying to move the results from those activities up into sales and cost of sales, so they're going to show up in the gross profit line.

So can you just give us approximately what percent of your fuel volumes are hedged in '07 and '08?

Approximately 75% of our planned production is hedged during those years.

Including '08 with the full year of the Shreveport expansion?

Yes. We have completed hedging for '08.

Okay. Then if I just understood this correctly, if we were to go through a quarter where the price of crude and finished products, particularly the slate that you buy, did not change at all, then would it be fair to say--and the futures prices didn't change at all--then the unrealized loss or gain from mark-to-market accounting for derivatives activities that you adjust--that you used to adjust your EBITDA would be 0, right?

In the unlikely event that would happen, yes, you're correct.

So then the EBITDA number above that, the unadjusted EBITDA number, really does reflect the hedging that is actually showing up in each quarter, as far as the crack spreads you've locked in? Does that make--?

Yes.

Okay, very good. Thank you.

At this time, there are no further questions.

Well, this concludes the Calumet Specialty Products earnings call covering our fourth quarter and year ended December 31, 2006. 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.

Have a great day, everyone. Thank you.

Thank you for your participation in today's conference. This does conclude the presentation. You may know disconnect. Have a wonderful day.