Calumet Inc (CLMT) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2007 Calumet Specialty Products earnings conference call. My name is Angelique. I will be your coordinator for today.

At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session toward the end of this conference.

(OPERATOR INSTRUCTIONS).

I would now like to turn the presentation over to your host for today's call, Miss Jennifer Straumins.

Please proceed.

Thank you, operator. Good afternoon, and welcome to the Calumet Specialty Products Partners investors call to discuss our second quarter 2007 financial results.

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 as Predecessor.

Bill Grube, our President and CEO, will lead off the call in a summary discussion of the business, including our internal growth projects. Pat Murray, our CFO, will follow with a discussion on 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 the information currently available to them. Although our management believes that the expectation reflected in such statements are reasonable, neither the Partnership nor the general partners nor management can provide any assurances that those 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 to cause them to differ from our forward-looking statements today on this call.

And now, I'd 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 second quarter of 2007. Calumet's operating performance for the quarter was strong and has allowed us to increase our distributions for the second quarter to $0.63 per unit. This distribution equates to an annualized distribution of $2.52 per unit.

Progress continues on the major expansion project at our Shreveport refinery, which we still expect to be substantially completed in the third quarter of 2007, with production ramping up during the fourth quarter of 2007. Crude capacity is expected to increase from approximately 42,000 barrels per day to 57,000 barrels per day, an increase of 40%.

We have spent a total of $155 million on the project to date, with $90.2 million spent in the first six months of 2007. We continue to estimate the total cost of the expansion project will be approximately $200 million.

Following is a summary of our quarter-over-quarter sales volumes by segment. Total specialty products segment sales volume for the second quarter of 2007 was 24,692 barrels per day as compared to 26,813 barrels per day in the prior year, a decrease of 2,121 barrels per day, or 7.9%. This was primarily due to unscheduled downtime on certain operating units at the Shreveport refinery during the second quarter of 2007.

Total fuels products segment sales volume for the second quarter of 2007 was 25,044 barrels per day as compared to 23,934 barrels per day in the same period for the prior year, an increase of 1,110 barrels per day, or 4.6%, primarily due to increased sales of byproducts as well as an increase in sales of purchased products resulting from unscheduled downtime of certain operating units at the Shreveport refinery during the second quarter of 2007.

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

Thank you, Bill.

We'll now provide a brief overview of the financial results for the quarter ended June 30, 2007 for Calumet. Net income for the three months ended June 30, 2007 was $37.4 million compared to net income of $23.5 million for the same period in 2006. Net income increased compared to the prior period in the prior year primarily due to improvements in both specialty and fuel products margins per barrel partially offset by decreased sales volume of specialty products.

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

Generally, when settled, the derivatives hedging purchases and sales are recorded as 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 statement of operations.

Net income for the six months ended June 30, 2007 was $65.6 million compared to net income of $27.4 million for the same period in 2006. Net income increased compared to the prior year primarily due to improvements in both specialty and fuel products margins per barrel, partially offset by decreased sales within the specialty products. Net income was also positively impacted by decreased losses on derivative instruments of $10.2 million during the six months ended June 30, 2007.

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 $42.5 million and $43.5 million, respectively, for the three months ended June 30, 2007 as compared to $28.7 million and $29.4 million, respectively, for the same period of 2006.

The Partnership's distributable cash flow for the three months ended June 30, 2007 was $37.9 million. EBITDA and adjusted EBITDA for the six months ended June 30, 2007 were $75.3 million and $75.9 million, respectively, as compared to $42.2 million and $55.5 million, respectively, for the same period of 2006.

The Partnership's distributable cash flow for the six months ended June 30, 2007 was $66.2 million.

Adjusted EBITDA for the quarter ended June 30, 2007 compared to the same period in the prior year was positively impacted by widened fuel products margins partially offset by decreased sales volume of specialty products.

We encourage investors to review the section of the earnings press release found on our website, titled, "Non-GAAP Financial Measures," and the attached table 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 3.4% to $60.5 million for the three months ended June 30, 2007 from $58.5 million for the same quarter in the prior year. Gross profit by segment for the three months ended June 30, 2007 for specialty products and fuel products was $40.6 million and $19.9 million, respectively, compared to $40.9 million and $17.6 million, respectively, for the same period in 2006.

The $0.3 million decrease in the gross profit of our specialty products segment for the quarter ended June 30, 2007 as compared to the prior quarter in 2006 was primarily due to decreases in specialty product sales volume offset by increases in sales prices for certain lubricating oils outpacing decreases in the cost of crude.

The segment was also negatively affected by increased derivative losses on crude oil and natural gas cash flow hedges. The $2.3 million increase in gross profit in our fuel products segments for the three months ended June 30, 2007 compared to the same period in 2006 is due primarily to increases in sales prices for gasoline and diesel outpacing decreases in the cost of crude offset by increased derivative losses of crude oil and fuel products cash flow hedges. The segment was also negatively affected by a less favorable product mix due to increased sale of byproducts in the segment.

Selling, general, and administrative expenses increased $1.2 million to $6.4 million for the quarter ended June 30, 2007 compared to the same period in the prior year. This increase primarily reflects increased employee compensation costs and increased head count, as well as increased costs associated with Section 404 of the Sarbanes-Oxley Act of 2002 compliance.

Transportation expense decreased $0.5 million for the quarter ended June 30, 2007 to $14 million for the same period in the prior year. This decrease is primarily due to the decreased sales volume in our specialty products segment offset by price increases primarily for rail services that became effective during the third quarter of 2006. The majority of our transportation expense is reimbursed by our customers and is reflected in sales.

Interest expense decreased $1.0 million to $1.1 million for the quarter ended June 30, 2007 from the same period of the prior year. This decrease is primarily due to the repayment of outstanding borrowings on the revolving credit facility subsequent to the second quarter of 2006.

Interest income increased $0.5 million to $0.6 million for the three months ended June 30, 2007 compared to the same period of 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, and is reflected in short-term investment.

As of June 30, 2007, total capitalization for the Partnership consisted of Partners capital in the amount of $324.5 million and outstanding debt of $52.8, million comprised of borrowings of $49.3 million under the term loan facility, a long-term capital lease obligation of $3.5 million, and no borrowings under the revolving credit facility.

The $60.8 million decrease in Partners capital from December 31, 2006 is primarily due to an $89.1 million increase and other comprehensible loss as a result of the decrease of the fair market value of derivatives, as well as $37.3 million of distribution to our partners, offset by net income of $65.6 million for the six months ended June 30, 2007.

As of August 4, 2007, the Partnership had outstanding borrowings of $49.3 million under the term loan facility and no borrowings outstanding under the revolving credit facility with availability for borrowings of approximately $146.1 million under the revolver.

The Partnership will pay its quarterly distribution to unit holders for the quarter ending June 30, 2007 on August 14, 2007 to unit holders of record on August 4, 2007.

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, would you please confirm if there are any questions?

(OPERATOR INSTRUCTIONS)

Your first question comes from Paul Sankey of Deutsche Bank.

Please proceed.

Hi. Good afternoon, everybody.

Beyond the Shreveport expansion, it sounds like it's kind of locked and loaded, I guess, to the extent that these things ever are. Could you talk a little bit about your longer term growth potential, where you could see that being driven from? Thanks a lot.

Sure. We've got several internal growth projects at all three of our refineries that we are in various stages of engineering and permitting. We expect to spend between $100 million and $150 million over the next two to three years on these projects. And we also continue to look at acquisitions as they become available.

Okay. And the $150 million is in total?

That's correct.

And would those be -- are those volume? Or, I guess, they'd be predominantly margin improvement projects, would they?

They're a little bit of both. They're predominantly margin improvements, that's correct.

And can we -- Jennifer, can we rate those? Or is that kind of front-end, back-end loaded? Is there going to be a little bit of a [debt] patch here, perhaps, after Shreveport expansion? Or can they just spread it over the coming year?

2008, we'll be seeing the EBITDA enhancement from the Shreveport expansion. Then, starting in late 2009, you'll start to see the [EBITDA] enhancements from some of these other projects if they proceed as we expect.

And is there any kind of indicated growth that you can give from those projects? Or are you not going that far at this stage?

No, we're not going that far.

Right. And on the subject of acquisitions, can you just talk a little bit, to the extent that you can, more about what you'd like to do in that area?

The types of acquisitions that you will probably see as target would expand our specialty products segment. You probably will not see us expand in the fuels area of our business. We like the specialty products. We feel like there are higher margins and they're more representative of our company culture.

Sure. The environment here -- actually, just while we're still on that subject, if you'd like, of the long-term outlook -- is there any other major guidance? Obviously, you've talked about Shreveport. You've just given me a number there for CapEx. Is there any other key guidance with regard to in terms of distribution growth that you could highlight? I'm not sure if there is or isn't, quite frankly, but just in case there is.

Our long-term coverage ratio is, that we are targeting, is 1.3 times. And year to date, we're at 1.9 times. So you'll probably see us increase distributions. We're being hesitant there just trying to get this Shreveport project online. We don't want to over-promise and then not be able to deliver in case something unforeseen were to happen there.

Sure. The environment this past quarter is outrageously strong for almost all refiners, but of course, you're locking in, I guess, as we go along, with the hedges. How much of a step back down, given the way margins have corrected into 3Q, would we expect to see, you think, in this quarter? Is it going to be quite significant?

Again, we're only one month into the quarter and we are around 80% hedged on our volume for the fuel side. Crude increased almost $10 in July, so we did see -- typically, you would expect us to see a crunch on our specialty products margins. And we have announced price increases and we're implementing those as we speak.

And we've always said that there is this four-to-six week lag as crude goes up on our specialty products side. So we don't -- not every quarter can be a record quarter.

Yes, so it's going to be something of a correction. But, I guess, with the coverage ratio where it is and the hedging at 80%, we can take a certain amount of comfort at least from that.

That's correct.

I think that's it for me rather than go on. So, thanks, Jen.

Thanks, Paul.

Your next question comes from the line of [Wyatt McCormick] of Raymond James.

Please proceed.

Hi. Thank you. I wanted to know about the status of the unscheduled downtime on the Shreveport refinery. Have the problems been fixed?

Yes, the answer to that incurred on some of our fuel units early in April -- though you would have seen in the news, we had two fires, almost back to back, on our platformers. During that period of time, those problems have been corrected. And during June, we had at a record pace for the plant.

Okay.

Shreveport is performing as expected at this point in time.

Alright. And then onto expansion, just out of curiosity, if you can give any guidance as far as the capacity increase is concerned -- maybe how much time would it take to ramp up to that?

Well, in cases like this, it's hard because you don't know if you're going to have zero problems or if you're going to have two to three weeks of problems. We expect to be fully ramped up by the beginning of 2008, running about 55,000 to 57,000 barrels a day.

Great. Thank you.

Thanks.

(OPERATOR INSTRUCTIONS)

Your next question comes from the line of [James Jenpow] of [Heights Hedge Asset Management].

Please proceed.

My question was answered.

Your next question comes from the line of [Star Spencer] of Platts.

Please proceed.

Hi. I'd like to know where do things stand on your proposal that you might build a refinery in Utah to refine black (inaudible) crude from Rockies producers?

Basically, there's been no movement in that project. We're waiting on our counterparty out there to provide us with some data at this point in time.

Do you think you might get something to report by year end?

It really depends on them. We've got a lot of other projects that are higher on our list of priorities and we're not pushing them. If they were to come to us with the information necessary, we would move forward with some engineering studies as we committed to do. But, at this point in time, like I said, the ball is in their court.

And just for my information, does -- about how much of the expansion in Shreveport is going to be taking some of that crude from Utah?

None of it at this point in time. The expansion at Shreveport will run at (inaudible) crude.

I'm sorry, okay. Thank you.

Thanks.

Your next question comes from the line of [Garrett Nubert], private investor. Please proceed.

Hi, how are you doing today?

Alright. How are you, Garrett?

Great, thanks. I just want to follow up on the $100 million to $150 million of CapEx guidance for the next two to three years. I was just wondering what kind of target of returns you have on that and then the time to pay back?

And then, secondly, I'm not sure if you covered this early in the call, but with regard to some of the off time or some of the volumes with the specialty products, I was wondering if you're now back up and running closer to the levels that you were at a year ago?

I'll answer your second question, first, and that's, yes, we are back up and running at those types of levels. And as far as the CapEx in the next two to three years, we've got several projects that we're considering. They're in various stages of engineering and (inaudible) that engineering work will give us more information on the returns we expected and how we prioritize those projects. So I don't have answers to give at this point in time.

Okay.

And then just one last one. In terms of the, I guess, at this point, on the Shreveport expansion, what are -- I guess, if you can highlight any of the key obstacles that you're sort of coming to where you're now hopefully getting through that will then give you more visibility on where you can get on your targeted coverage ratio and sort of how long will you be up and running before you feel comfortable enough to start moving it closer to [1.3]

I think you had previously given a guidance that you were trying to get to [1.3] coverage by the end of '07 and I was just wondering if that was still a valid target.

I think that's a valid target. And the other thing we have to take into account is where our distributions fall in relation to our general partner split.

Thank you.

There are no further audio questions at this time.

I apologize. We do have a follow-up question from the line of Paul Sankey, Deutsche Bank.

Please proceed.

Yes, hi. Sorry, it's me again. Just on the acquisition potential that you've spoken about, do you have a size range for which you'd be prepared to go? Can you give us a guidance on what kind of size of an acquisition you might make? I'm just kind of feeling my way here towards any kind of viewpoints on what we might be looking at? Thanks.

Sure. We've been told by our bankers that we could handle several hundred million dollars in acquisitions, whether it's one acquisition or multiple smaller ones or internal growth projects. We feel like we've got the capacity for several hundred-million dollars of growth opportunity.

Great. That's interesting. Thanks a lot.

Thank you.

There are no further audio questions at this time.

Thank you, operator.

And this concludes the Calumet Specialty Products earnings call covering our second quarter results. Thank you for your participation in the teleconference and please note that this teleconference will be available for replay using the instructions contained in our press release. Have a great afternoon.

Ladies and gentlemen, this does conclude the presentation. You may now disconnect. And have a great day.