Calumet Inc (CLMT) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2007 Earnings Conference Call. My name is Katie, and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference.

(OPERATOR INSTRUCTIONS)

I would like to now turn the presentation over to your host for today, Ms. Jennifer Straumins. Please proceed.

Thank you, Operator. Good afternoon, and welcome to the Calumet Specialty Products Partners Investors Call to discuss our fourth-quarter 2007 financial results. During the 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 project, he's followed by Pat Murray, our CFO, who will discuss 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 and Exchange Act of 1934. Such statements are based on our 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 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'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. Calumet's operating performance has allowed us to declare our distribution for the fourth quarter of $0.63 per unit. This distribution equates to an annualized distribution (inaudible) per unit.

As previously announced, Calumet closed the acquisition of Penreco, effective January 1, 2008, for a purchase price of approximately $275 million, subject to customary post-closing purchase-price adjustments. Penreco was owned by ConocoPhillips and M.E. Zuckerman Specialty Oil Corporation.

Penreco manufactures and markets highly refined products and specialty solids, including white mineral oils, petrolatums, natural petroleum sulfonates, cable-filling compounds, refrigeration oils, food-grade compressor lubricants and gelled products. The acquisition includes plants in Karns City, Pennsylvania and Dickinson, Texas, as well as several long-term supply agreements with ConocoPhillips.

The transaction was funded through a portion of the combined proceeds from a public-equity offering, and a new senior-secured first lien term-loan facility. We are pleased to add Penreco's high-quality products and dedicated employees to our company, which we expect will provide key operational and marketing synergies with our current business.

Progress continues on the major capital-expansion project at our Shreveport Refinery, which we now expect to be completed in the first quarter of 2008, with production ramping up during the second quarter of 2008.

Crude oil capacity is expected to increase approximately 35% from 42,000 barrels per day, to 57,000 barrels per day. We have spent a total of $250.7 million related to the project, with $185.2 million spent in the 12 months ended December 31, 2007.

We estimate the total cost of the Shreveport Refinery expansion project will be approximately $300 million, an increase of $80 million from our previous estimate. This increase is primarily due to increased labor costs caused by the delay in startup of the project and overtime hours, to prevent further delays in the completion of the project.

The following is a summary of our quarter-over-quarter sales volumes by segment. Total specialty-products-segment sales volume for the fourth quarter of 2007 was 21,674 barrels per day, as compared to 20,473 barrels per day, for the same period in the prior year, an increase of 1,201 barrels per day, or 5.9%.

Total fuel-segment sales volumes for the fourth quarter of 2007 was 26,664 barrels per day, as compared to 26,933 barrels per day, in the same period of the prior year, an increase of 269 barrels per day, or 1%.

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 December 31, 2007, for Calumet. Net income for the three months ended December 31, 2007, was $7.8 million, compared to net income of $32.1 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 of $15.7 million, and a decrease of $9.7 million in unrealized gain on derivative instruments, with a gain of $2.6 million for the quarter ended December 31, 2007, from a gain of $12.3 million for the same period in 2006.

This decrease was primarily due to an unfavorable market change related to the ineffective portion of certain derivative instruments designated as cash-flow hedges in the fourth quarter of 2007, as compared to the same period in 2006.

Net income for the year ended December 31, 2007, was $82.9 million, compared to net income of $95.6 million for the same period in 2006. Net income decreased compared to the same period in the prior year, primarily due to decreases in our specialty products segment gross profit, partially offset by an increase in our fuel products segment gross profit, and lower interest expense, due to interest that was capitalized from the Shreveport refinery-expansion project.

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 $12.7 million and $8.0 million, respectively, for the three months ended December 31, 2007, as compared to $36.7 million and $23.3 million, respectively, for the same period in 2006.

Partnership's distributable cash flow for the three months ended December 31, 2007, was $4.2 million. Adjusted EBITDA for the quarter ended December 31, 2007, compared to the same period in the prior year, was negatively impacted by a decreased specialty products segment gross profit, partially offset by the increase in gross profit in the fuel segment.

EBITDA and adjusted EBITDA for the year ended December 31, 2007, were $102.7 million and $104.3 million respectively, as compared to $119.6 million and $104.5 million respectively, compared to 2006. Partnership's distributable cash flow for the year ended December 31, 2007, was $87.7 million.

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 definition of EBITDA, adjusted EBITDA and distributable-cash-flow financial measures, and reconciliation of these non-GAAP measures to the comparable GAAP measures.

Gross profit, in total, decreased $15.7 million, or 35.9%, to $28.0 million, for the three months ended December 31, 2007, from $43.7 million, for the three months ended December 31, 2006. Gross profit by segment for the three months ended December 31, 2007, for specialty products and fuel products, was $12.3 million and $15.7 million respectively, compared to $36.6 million and $7.1 million respectively, for the same period in the prior year.

The $24.3 million decrease in specialty products' gross profit is primarily due to the rising cost of crude oil, outpacing increases in the selling price per barrel of our specialty products during the quarter, partially offset by increased sales volume.

The $8.6 million increase in fuel products' gross profit is primarily due to the decrease in other material costs, as a result of the use of certain gasoline blendstocks in the fourth quarter of 2006 to maintain compliance with environmental regulations, with no comparable costs in the fourth quarter of this year.

Total gross profit was also positively impacted by $12 million of LIFO inventory gains, resulting from the liquidation of lower-cost layers of inventory, as compared to current costs. Selling, general and administrative expenses decreased $2.0 million to $3.5 million for the quarter ended December 31, 2007, from $5.5 million for the same period last year.

This decrease is primarily due to decreased annual incentive bonuses to our executive management, as no incentive bonuses were earned by executive management for the 2007 fiscal year. This decrease was offset by increased costs associated with compliance with Section 404 of the Sarbanes-Oxley Act of 2002.

Transportation expense [increased] $0.8 million for the quarter ended December 31, 2007, to $13.2 million, as compared to $12.4 million for the same period in the prior year. This increase is primarily due to the increased sales volume in our specialty products segment. The majority of our transportation expense is reimbursed by our customers, and is reflected in sales.

Interest income decreased $1.2 million, to $0.1 million, for the three months ended December 31, 2007, compared to the same period last year. This decrease was primarily due to a larger average investment balance during the fourth quarter of 2006, as compared to the same period in 2007, due to the capital-expenditure requirements of the Shreveport Refinery expansion project throughout 2007.

As of December 31, 2007, total capitalization consisted of Partners capital in the amount of $399.6 million, and outstanding debt of $39.9 million, comprised of borrowings of $30.1 million, under the term-loan facility, a long-term capital-lease obligation of $2.8 million, and borrowings of $7.0 million, under the revolving credit facility.

The $14.4 million increase in Partners capital, compared to 2006, is primarily due to net proceeds of our second follow-on equity offering of $100.3 million, and net income of $82.9 million for the 2007 fiscal year. These increases were offset by distributions to partners of $77 million, and a $91.9 million decrease in other comprehensive income, as a result of the decrease in the fair-market value of derivative instruments.

On January 3, 2008, Partnership closed a new $435 million senior secured first lien term loan facility, which includes a $385 million term loan, and a $50 million pre-funded letter of credit facility to support crack spread hedging.

Proceeds of the term loan were used to finance a portion of the acquisition of Penreco, fund the anticipated growth in working capital, and remaining capital expenditures associated with the Shreveport Refinery expansion project, refinance the existing term loan, and to the extent available, for general-partnership purposes.

Also, on January 3, 2008, the Partnership amended its existing senior secured revolving credit facility, dated as of December 9, 2005. Pursuant to this amendment, the revolver-lenders agreed to, among other things, increase the total availability under the revolver up to $375 million, and conform certain of the financial covenants and other terms in the revolver to those contained in the new term loan credit agreement, previously discussed.

As of February 8, 2008, the Partnership had outstanding borrowings of $385 million under the term loan facility, and no outstanding borrowings under the revolving credit facility, with availability for borrowings of approximately $186.1 million under the revolver. Partnership paid its quarterly distribution to unit holders for the quarter ending December 31, 2007, on February 14, 2008, to unitholders of record on February 4th.

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, please concern if there are any questions.

(OPERATOR INSTRUCTIONS)

Your first question comes from the line of Darren Horowitz, from Raymond James. Please proceed.

Good afternoon, guys. Good afternoon, Bill.

Good afternoon.

My first question is on the Shreveport expansion. On the incremental $80 million of cost, could you give us a little bit more insight into the composition of those costs, aside from just the labor component?

I'd say it's about 95% labor component, is what it amounts to. I mean, basically, this thing was supposed to be done the end of January -- or the end of February -- end of December, first of January. And we kind of found out from the contractor, late in December, that this thing was taking significantly longer than what we had anticipated. And because there's roughly 800 to 1,000 people there -- I mean, that's like $700,000 a day that our costs are going up.

Okay. At this point, have you had to employ any third-party contract labor to come in, over and above what was initially scheduled to complete the project?

I mean, this is all third-party labor that's there. I mean, these are not our employees.

Okay. Yes. I just didn't know if you had to actually go beyond what was currently contracted, and outsource additional help just to get it done.

What we've seen is we saw the contractor lose some management people and some day-to-day labor people that did not come back from Thanksgiving, did not come back from Christmas, which created some significant problems, both from a quality-of-labor standpoint and an effort standpoint at that point in time.

Okay. I appreciate the insight there. The second part to my question on Shreveport -- given the volume delay, can you give us an idea of how the volume ramp will progress into the second quarter of this year? What I'm trying to do is get a feel for when you think the additional 15,000 barrels a day will entirely be on-line.

We've got that modeled for the majority of it being on-line in April, then the whole incremental 15,000 barrels a day being on-line in May.

Okay. Thank you, Jennifer. I appreciate it. Switching gears over to Penreco for a minute, if I can -- now that the deal is closed, can you give us an idea for incremental [D&A] and maintenance CapEx for the forward year?

We think that the maintenance CapEx for the year for the whole combined company will be around $10 million -- $10 million to $11 million.

This includes Calumet --

Calumet and Penreco.

-- existing, plus Penreco -- so very, very little for existing.

Okay. And for the incremental depreciation associated with Penreco -- that is?

About $10 million.

Okay. Okay. And then, finally, just kind of from a 10,000-foot approach -- when you're looking at crude prices where they stand today -- I know that last quarter, when we spoke, you had discussed implementing a price-book increase in mid-November. And you had hoped that your entire customer base was going to be on the new price book by the end of '07.

First part to the question is, has that increase completely canvassed your entire customer base? And secondly, with crude now over 100, what are your thoughts in terms of either implementing another increase, and/or get more efficient with passing those cost increases to the customer in order to mitigate margin degradation to the best of your ability?

Darren, you've got several questions in there. I'll try to make sure I cover anything, and if I leave something out, just re-ask. We feel like most of our product lines -- we have sustained crude prices in the mid-90s at this point in time. And the one area that we are struggling with -- that everyone is struggling with in the industry -- is asphalt. With everyone running additional sour barrels -- a sour barrel of crude contains a lot more asphalt than a sweet barrel of crude.

So there's quite a bit of asphalt on the market right now, and fourth quarter is typically a very slow quarter for that product line, because a lot of it does go into the paving and the roofing markets, and those are more of summertime -- spring and summertime activities.

We have struggled with that in the fourth quarter, and we continue to struggle with that. We've got some plans that we're working on that could improve that product line over the next several months. And, hopefully, we'll have some more updates for that -- on that next quarter. And as crude hovers around 100, if it were to stay at that level for any period of time, we would be implementing another round of price increases.

And as far as efficiency of implementing price increases, I'm not sure that we can really get much faster. We have to ensure that the level of crude is at a -- the new higher levels for a sustainable period of time. And then it -- we have to give our customers about a two-week notice after we do decide to increase prices. And that's -- those are just standards in the industry.

Okay. And it still takes about four to six weeks from when you realize cost increases, to pass them through the customers -- to the customers. Is that correct?

From the start of the -- so you could say, okay, crude went up $4.50, or whatever it was, yesterday. That would start the clock ticking on that four-to-six weeks.

Okay. And can you just remind me what crude price the last price-book increase you passed through covers?

As I said in the beginning, about mid-90s.

Mid-90s -- okay. Okay, thank you very much. I appreciate the color, guys.

No problem. Thanks, Darren.

Your next question comes from the line of [Arthur Robin] with Citigroup. Please proceed.

Yes. My question related to the price of crude, and you guys answered it, and I want to thank you.

Thank you.

At this time, I'm showing you have no further questions. I would like to now turn the call back over to management for closing remarks.

Well, that concludes our earnings conference call, covering our forth-quarter operating 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. Have a great afternoon, everyone.

Thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect. Have a wonderful day.