Calumet Inc (CLMT) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2007 Calumet Specialty Products conference call. My name is Towanda, 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 towards the end of the conference.

(OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Ms. Jennifer Straumins, Senior Vice President.

Please proceed, ma'am.

Thank you, operator. Good afternoon and welcome to the Calumet Specialty Products Partners investors call to discuss our third quarter 2007 financial results. During this call, Calumet Specialty Products Partners will be referred to as the Partnership or Calumet.

Bill Grube, our President and CEO, will lead off the call in a summary discussion of the business, including an update on our previously announced acquisition and internal growth projects. Pat Murray, our CFO, will then 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 21(E) 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 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 the factors that may affect our actual results and could cause them to differ from our forward-looking statements made on this call.

I'd now 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. Calumet's operating performance for the quarter has allowed us to declare our distribution for the third quarter of $0.63 per unit. This distribution equates to an annualized distribution of $2.52 per unit.

As previously announced, Calumet has signed a definitive purchase and sale agreement to acquire Penreco for approximately $240 million in cash, subject to customary purchase price adjustments.

Penreco, which had sales of approximately $432 million in 2006, manufactures highly refined petroleum products and specialty solvents. We are pleased to add Penreco's high quality products to our portfolio, which we expect will provide operational and marketing synergies with our current business.

We expect the acquisition to close in the fourth quarter of 2007.

Progress continues on the major capital capacity expansion project at our Shreveport refinery, which we still expect to be substantially completed in the fourth quarter of 2007, with production ramping up during the first quarter of 2008.

Crude oil capacity is expected to increase approximately 35%, or 32,000 barrels per day, to 57,000 barrels per day. We have spent a total of $192 million related to the project with $126 million spent in the nine months ended September 30, 2007.

We estimate the total cost of the Shreveport refinery expansion project will be approximately $220 million, an increase of $20 million from our previous estimate. This increase is primarily due to the continued escalation of material and labor costs, which has been an ongoing trend in the industry.

The following is a summary of our quarter-over-quarter sales volumes by segment. Total specialty products segment sales volume for the third quarter 2007 was 22,791 barrels per day as compared to 26,380 barrels per day for the same period in the prior year, a decrease of 3,589 barrels per day, or 13.6%, primarily due to lower production because of incremental refinery economics associated with the rising cost of crude.

Total fuels product segment sales volume for the third quarter of 2007 was 26,317 barrels per day as compared to 24,783 barrels per day, the same period for the prior year, an increase of 1,534 barrels per day, or 6.2%.

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

Thank you, Bill.

Now, we'll provide a brief review of the financial results for the quarter ended September 30, 2007, for Calumet. Net income for the three months ended September 30, 2007 was $9.5 million compared to net income of $36.1 million for the same period in 2006.

Net income decreased compared to the same period in the prior year primarily due to decreased gross profit. Net income was also negatively affected by an increase of $19.2 million in unrealized loss on derivative instruments to a loss of $2.4 million for the quarter ended September 30, 2007, from a gain of $16.8 million for the same period in 2006.

The increased loss was primarily due to a favorable market change in third quarter of 2006 for derivatives not designated as cash flow hedges as compared to the same period of 2007.

Net income for the nine months ended September 30, 2007, was $75.1 million compared to net income of $63.5 million for the same period in 2006. Net income increased compared to the same period in the prior year primarily due to improvements in both specialty and fuel products margins per barrel, as well as the increased sales volumes of fuel products, partially offset by a decrease in sales volume of specialty products.

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, both as defined by the Partnership's credit agreements, were $14.7 million and $20.3 million, respectively, for the three months ended September 30, 2007, as compared to $40.7 million and $25.7 million, respectively, for the same period in 2006. Partnership's distributable cash flow for the three months ended September 30, 2007, was $17.2 million.

Adjusted EBITDA for the quarter ended September 30, 2007, compared to the same period in the prior year was negatively impacted by decreased volume of specialty products and less favorable specialty products margins, partially offset by increased sales volume of fuel products. Adjusted EBITDA was also positively affected by a decrease in realized losses on derivative instruments, a portion of which are included in sales and cost of sales.

EBITDA and adjusted EBITDA for the nine months ended September 30, 2007, were $90 million and $96.3 million, respectively, as compared to $82.8 million and $81.2 million, respectively, for the same period in 2006.

The Partnership's distributable cash flow for the nine months ended September 30, 2007, was $83.5 million. Adjusted EBITDA for the nine months ended September 30, 2007, compared to the same period of the prior year was positively impacted by more favorable specialty products margins, partially offset by decreased sales volume for both segments.

We encourage investors to review the section of the earnings press release found at our Web site, 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 decreased $13.7 million, or 26.5%, to $37.9 million for the three months ended September 30, 2007, from $51.6 million for the three months ended September 30, 2006. Gross profit by segment for the three months ended September 30, 2007, for specialty products and fuel products was $21.7 million and $16.2 million, respectively, compared to $39.3 million and $12.3 million, respectively, for the same period of 2006.

The $17.6 million decrease in the gross profit of our specialty products segment for the three months ended September 30, 2007, as compared to the same period of the prior year was primarily due to decreases in specialty product sales volume. Specialty products gross profit was also negatively affected by the rising cost of crude oil, outpacing increases in the selling price per barrel of our specialty products.

The $3.9 million increase in gross profit in our fuels product segment for the three months ended September 30, 2007, compared to the same period in the prior year is due to increases in the sales volume of fuel products, offset by the rising cost of crude oil, outpacing the increase in the selling price per barrel of our fuels products.

Transportation expense decreased $2.8 million for the quarter ended September 30, 2007, to $13.2 million for the same period of the prior year. This decrease is primarily due to the decreased sales volume in our specialty products segment. The majority of our transportation expense is reimbursed by our customers and is reflected in sales.

Other expenses increased $1.9 million to $2.2 million in the three months ended September 30, 2007. This increase was primarily due to certain environmental expenses incurred in conjunction with the Company's Shreveport refinery expansion project.

Interest expense decreased $0.4 million to $1.3 million in the quarter ended September 30, 2007, from the same quarter in the prior year. This decrease was primarily due to increased capitalized interest related to the capital expenditures for the Shreveport refinery expansion project, offset by certain fees incurred as a result of an amendment to the credit agreement with no similar fees during the same period in 2006.

Interest income decreased $1.1 million to $0.3 million for the three months ended September 30, 2007, compared to the same period in the prior year. This decrease was primarily due to a larger average investment balance during the third quarter of 2006 as compared to the same period in 2007 due to the utilization of cash for the Shreveport refinery expansion project.

As of September 30, 2007, total capitalization, consisting of Partners capital in the amount of $328.9 million and outstanding debt of $67.8 million, comprised of borrowings of $30.2 million under the term loan facility, a long-term capital lease obligation of $3.6 million, and borrowings of $34.0 million under the revolving credit facility.

The $56.3 million decrease in Partners capital from December 31, 2006, is primarily due to a [$74.3 million] decrease in other comprehensive income as a result of a decrease in the fair market value of derivative instruments, as well as $57.2 million of distributions to Partners, offset by net income of $75.1 million for the nine months ended September 30, 2007.

As of October, 31, 2007, the Partnership had outstanding borrowings of $30.2 million under the term loan facility and outstanding borrowings of $39.8 million under the revolving credit facility with availability for borrowings of approximately $97.9 million under the revolver.

The Partnership will pay its quarterly distribution to unit holders for the quarter ending September 30, 2007, on November 14 to unit holders of record on November 2.

Now, I'll turn the call back over to Bill.

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)

Your first question comes from the line of Darren Horowitz with Raymond James.

Please proceed.

Good afternoon. Thank you.

Bill, my first question is for you on the Penreco acquisition. Can you provide any update for us as to maybe the historical EBITDA run rate or associated maintenance CapEx or depreciation. I looked at the 8-K but didn't see anything in there on it.

We can't do that at this point in time.

Okay. Let me ask if maybe --

We'll be filing an 8-K very soon with the pro forma financials for Penreco.

Okay. So, then, I guess my next question about operational synergies would be off grounds, as well? Let's move to the quarterly performance then. Based on what we've talked about before, when you're looking ahead to the fourth quarter and assuming that maybe that four-to-six week lag from when you can realize cost increases and pass them through to the end user, assume that applies again.

Given that we're in a higher spot crude environment versus the third quarter and you guys last increased your prices, I believe, in September, has anything changed on that front, i.e. have you made any headway in trying to mitigate margin erosion by advancing that cost pass through or maybe by issuing a new price increase?

Absolutely. We, and September was not the last time we raised prices. We raised prices for every product line in October and the second round of price increases has been announced in the last several days. It will be implemented over the next, beginning on Friday and throughout the next week. It varies by product line.

Okay. So, what type of run rate should we assume then for your entire price book to be on this new price increase? Will it all be done over the next week or is it going to be more of a gradual progression throughout the quarter?

It's a gradual progression throughout the quarter.

Is it safe to assume that everybody could be on the new price book by the end of the year?

We don't give guidance and we don't know what crude is going to be at the end of the year, so we can't really -- any answer we'd give you at this point in time probably would not be accurate.

Well, then, from an operational standpoint, there was a bit of a hiccup on some select product lines in terms of volumes. How do things stand right now for you guys? We can all look at the tape and see where spot crude is today so we know what's going on with pricing, but can you give us a bit of an update on throughput?

Sure, Darren. Our throughput in the third quarter was actually, the plants ran well, there were no unscheduled downtimes at all. We did have a catalyst change early in the fourth quarter at Shreveport, so we're running very strong there right now. And the downswing that you see involved mostly our solvent product line for our specialty products segment and this is due to -- what we do, we take some jet fuel from Shreveport and process it in Cotton Valley to make additional solvents.

However, jet fuel pricing has been so strong, the incremental (inaudible) economics say to sell that barrel as jet fuel and not process it as a solvent. So, you'll see that our fuel volume has been up while our solvents volume is down. It has nothing to do with how well the plants are running. It's purely management's decision on how to make the most money in the environment.

Okay. And then, just as a point of reference, can you remind me again where your capacity utilization is on both Princeton and Cotton Valley?

About 200%.

Okay, okay. Good.

And the other, another point to make, another reason some of our move oil volume was off. We were preparing for a shipment that shipped early in the fourth quarter and we were building inventory in order to serve that order.

Okay. Thank you, Jennifer. I appreciate it.

Sure. Thanks, Darren.

(OPERATOR INSTRUCTIONS)

At this time, there are no additional questions in the queue. I would now like to turn the call back over to Ms. Jennifer Straumins with the closing remarks.

Thank you. This concludes our earnings conference call for our third quarter results. Thank you very much for participating this afternoon. And we just want to remind you that this teleconference will be available for replay using the instructions contained in our press release.

Have a great afternoon, everyone.

Ladies and gentlemen, that concludes your presentation. You may now disconnect.

And have a wonderful day.