Calumet Inc (CLMT) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2008 Calumet Specialty Products Earnings Conference Call. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of today's conference.

(OPERATOR INSTRUCTIONS).

I will now turn your call over to Jennifer Straumins, Senior Vice President. Please proceed.

Thank you, operator. Good afternoon and welcome to the Calumet Specialty Products Partners investors call to discuss our first quarter 2008 financial results. During this call, Calumet Specialty Products Partners will be referred to as the Partnership for Calumet. Bill Grube, our president and CEO, will lead off the call in a summary discussion of the business. Pat Murray, our CFO, will then discuss 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 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, none of the Partnership as 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 our latest filings with the Securities and Exchange Commission for a list of factors that may affect our actually results and would 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. Historically high crude oil prices have certainly posed significant challenges for Calumet during the past two quarters. We have implemented multiple rounds of specialty product price increases to customers during this volatile period and would expect to continue to do so as conditions warrant.

We expect the recent announcements by other major suppliers to reduce or cease productions of certain specialty products, especially paraffinic lubricating oils and waxes, should have a favorable impact on Calumet's success in placing the additional specialty products volumes in the market from our Shreveport refinery expansion project, which is on line. As we will discuss in this call, in addition to the Shreveport refinery expansion project that was completed in early May 2008 and the continued successful integration of this year's Penreco acquisition, we are working diligently on other strategic initiatives including increased hedging and specialty products, input prices and working capital reductions.

That being said, this remains a very difficult operating environment for all refiners and Calumet is no exception. All we outline in our earnings release and will discuss on this conference call the actions we are taking to mitigate the adverse impact of this environment on our operating results. We can provide no assurances as to the timing or magnitude of any improvement in our operating results and, to the extent we experience continued rapid escalation of crude oil prices, our operating results could be adversely affected. As of early May 2008, the Shreveport refinery expansion project is operational. We invested approximately $87.6 million in capital expenditures at the Shreveport refinery in the three months ended March 31, 2008 of which $65.8 million relates to the Shreveport refinery expansion project.

From December 31, 2005 through March 31, 2008, the partnership has invested approximately $413 million in the Shreveport refinery, of which $320.2 million relates to the Shreveport refinery expansion project. The Shreveport expansion project is expected to increase this refinery's throughput capacity by 35.7% from 42,000 barrels per day to 57,000 barrels per day. As part of this project, we have enhanced the Shreveport refinery's ability to process sour crude oil.

As of early May, we are processing approximately 16,000 barrels per day of sour crude oil at the Shreveport refinery and will continue to increase these rates up to operational limits. This current throughput is an increase of at least 3,000 barrels per day over our previously estimated sour crude oil throughput rate upon project completion. In certain operating scenarios where overall throughput is reduced, we expect we will be able to increase our sour crude oil throughput capacities by up to 25,000 barrels per day.

We estimate that the total cost of the Shreveport refinery expansion project will be approximately $350 million, an increase of $50 million from our previous estimate. This increase is primarily due to increased construction labor costs caused by further delay in startup of the project. The $350 million aggregate cost estimate of the expansion project significantly exceeds the Partnership's original estimate.

On January 3, 2008 the Partnership closed on the acquisition of Penreco for a purchase price of approximately $269 million. Penreco was owned by ConocoPhillips Company and M.E. Zukerman Specialty Oil Corporation. Penreco manufactures highly-refined products and specialty solvents, 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 Company. 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.

Since the acquisition, Calumet has implemented multiple price increases for these various specialty product lines to attempt to keep pace with rising feedstock costs. In addition, we have implemented a pricing policy that we believe is more responsive to rising feedstock prices to limit the time between feedstock price increases and product price increases to customers. Calumet is also implementing operational strategies, including using various existing refinery -- or Calumet refinery products as feedstocks in the acquired Penreco plant operations, reducing headcount -- and reducing headcount by approximately 50 employees.

In addition to the completion of the Shreveport refinery expansion project and the acquisition of Penreco, the partnership plans other strategic initiatives to improve upon adjusted EBITDA and distributable cash flows. Included -- increased crude oil price hedging for specialty products segment, working capital reductions and operating cost reductions. The Partnership remains committed to an active hedging program to manage commodity price risk in both our specialty products and fuel products segments.

Due to the current volatility in the crude oil price environment and the impact such volatility has had on our short-term cash flows while our product pricing is adjusted, we are implementing modifications to our hedging strategy to increase the overall portion of input prices for specialty products we have hedged. Specifically, we are targeting to hedge crude oil prices for up to 70% of our specialty products production. We continue to believe that a shorter-term time horizon of hedging crude oil purchases for three to nine months forward for the specialty products segment is appropriate given our ability to increase specialty products prices within this timeframe.

The Partnership is implementing strategies to minimize inventory levels across all of our facilities to reduce working capital needs, especially given the impact of increased crude oil prices on inventories. As an example, effective May 1, 2008, Calumet has entered into a crude oil supply agreement with an affiliate of our general partner to purchase crude oil used at our Princeton refinery on a just-in-time basis which will significantly reduce crude oil inventory historically maintained at this facility of approximately 200,000 barrels.

As discussed during the first quarter of 2008, the Partnership experienced recent adverse financial conditions associated with historically high crude oil prices, while -- which negatively affected specialty products gross margins. Also contributing to these adverse financial conditions have been significant cost overruns and delays in the startup of the Shreveport refinery expansion project. Compliance with the financial covenants pursuant to the Partnership's credit agreements is tested quarterly and, as of March 31, 2008, the Company was in compliance with all financial covenants.

As we have covered on this call, the Partnership is taking steps to ensure that it continues to meet the requirements of its credit agreements and currently forecasts that it will be in compliance in future periods. While assurances cannot be made regarding our future compliance with these covenants, the Partnership anticipates that our product pricing strategies, completion of the Shreveport refinery expansion project, continued integration of the Penreco acquisition and the other strategic initiatives we have previously discussed on this call will allow us to maintain compliance with such financial covenants and improve the Company's adjusted EBITDA and distributable cash flows.

Failure to achieve our anticipated financial results may result in breach of certain of the financial covenants contained in our credit agreements. If this occurs, we will enter into discussions with our lenders to either modify the terms of the existing credit facilities or obtain waivers of non-compliance with such covenants in the event the Partnership fails to comply with a financial covenant. There can be no assurances of the timing of the receipt of any such modification or waiver, the term or costs associated therewith or our ultimate ability to obtain the relief sought.

The Partnership's failure to obtain a waiver of non-compliance with certain of the financial covenants or otherwise amend the credit facilities would constitute an event of default under its credit facilities and would permit the lenders to pursue remedies. These remedies could include acceleration of maturity under the credit facilities and limitation or elimination of the Partnership's ability to make distributions to its unitholders.

The following is a summary of our quarter-over-quarter sales volume by segment. Total specialty products segment sales volume for the first quarter of 2008 was 32,088 barrels per day as compared to 23,022 for the same period in the prior year, an increase of 9,066 barrels per day or 39.4%, primarily due to incremental sales volume associated with our Karns City and Dickinson facilities. The total fuel products segment sales volume for the first quarter of 2008 was 27,319 barrels per day as compared to 20,378 barrels per day in the same period for the prior year, an increase of 6,941 barrels per day, or 34.1%.

As announced on April 23, 2008, the Partnership declared a quarterly cash distribution of $0.45 per unit on all outstanding units for the three months ended March 31, 2008. This distribution represents a 29% decrease from the $0.63 per unit distribution to unitholders paid on February 14, 2008. Our general partner determined this reduction was prudent given the Partnership's current financial condition. The distribution will be paid on May 15, 2008 to unitholders of record, close of business on May 5, 2008. 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 March 31, 2008 for Calumet. Net loss for the three months ended March 31, 2008 was $3.4 million compared to net income of $28.2 million for the same period in 2007. As Bill discussed, the Partnership's financial performance for the first quarter of 2008 as compared to the same period in the prior year was negatively impacted by lower gross profit in both our specialty products and fuel products segments. Net income was also negatively affected by increased interest expense, due primarily to increased debt levels from financing the Penreco acquisition.

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 $12.2 million and $14.9 million respectively for the three months ended March 31, 2008 as compared to $32.7 million and $32.5 million respectively for the same period in the prior year.

The Partnership's distributable cash flow for the three months ended March 31, 2008 was $13.2 million. Adjusted EBITDA for the quarter ended March 31, 2008 compared to the same period in the prior year was negatively impacted by decreased specialty product segment gross profit and fuel product segment gross profit. Gross profit decreased $20.2 million or 36.7% to $34. 8 million for the three months ended March 31, 2008 from $55 million for the three months ended March 31, 2007.

Gross profit by segment for the three months ended March 31, 2008 for specialty products and fuel products was $22.3 million and $12.5 million respectively compared to $40.8 million and $14.2 million respectively for the same period in 2007. The $18.5 million decrease in specialty products gross profit is primarily the result of the rising cost of crude oil outpacing increases in the selling prices, partially offset by increased sales volume of our specialty products.

The increase of specialty product sale volume was primarily due to volume associated with the Karns City and Dickinson facilities, which were acquired on January 3, 2008 as part of the Penreco acquisition as well as scheduled turnaround activities at our Shreveport and Princeton refineries in the first quarter of 2007 with no similar activities in the first quarter of 2008.

The $1.7 million decrease in fuel products segment gross profit is primarily due to a decline in fuel refining margins as market prices for our fuel products did not keep pace with the rising cost of crude oil, partially offset by increased fuel product sales volume. The increase in fuel product sales volume was primarily due to scheduled turnaround activities at our Shreveport refinery in the first quarter of 2007 with no similar activities in the first quarter of 2008. Total gross profit was also positive impacted by $9.1 million of LIFO inventory gains resulting from the liquidation of lower cost layers of inventory.

Selling, general and administrative expenses increased $2.9 million to $8.3 million for the quarter ended March 31, 2008 from $5.4 million for the same period in the prior year. This increase is primarily due to additional selling, general and administrative expenses associated with the Penreco acquisition, which closed in January -- on January 3, 2008 with no similar expenses in the comparable period in the prior year.

Transportation expenses increased $10.3 million for the quarter ended March 31, 2008 to $23.9 million as compared to $13.6 million for the same period in the prior year. This increase is primarily related to additional transportation expenses associated with the Penreco acquisition, which we acquired on January 3, 2008 with no similar expenses in the comparable period in the prior year. Further increases in transportation expenses resulted from increased sales volume from the first quarter of 2007 to the first quarter of 2008 on specialty products sold at our other facilities.

Interest expense increased $4.2 million to $5.2 million for the quarter ended March 31, 2008 from $1.0 million for the same period in the prior year. This increase was primarily due to an increase in indebtedness as a result of the new senior secured first lien term loan facility which closed on January 3, 2008 and includes $385 million term loan partially used to finance the acquisition of Penreco.

This increase was partially offset by an increase in capitalized interest as a result of increased capital expenditures on the Shreveport refinery expansion project. As of March 31, 2008, total capitalization consisted of partners capital in the amount of $319.5 million and outstanding debt of $370.4 million comprised of borrowing for $384 million under the term loan facility with an unamortized discount of $16.5 million on the term loan facility and a long-term capital lease obligation of $2.9 million.

The $80.1 million decrease in partners capital from December 31, 2007 is primarily due to the distribution to partners of $21.7 million and a $54.9 million increase in other comprehensive loss as a result of a decrease in the fair market value of our derivative instruments. On January 3, 2008, the Partnership closed on a new $435 million senior secured first lien term loan facility which includes a $385 million term loan and $50 million prefunded letter of credit facility to support our crack spread hedging program. The proceeds of the term loan were used to finance a portion of the acquisition of Penreco, fund the anticipated growth in working capital as well as remaining capital expenditures associated with the Shreveport refinery expansion project and to refinance the existing term loan.

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 May 1, 2008, the partnership had outstanding borrowings of $384 million under the term loan facility and outstanding borrowings of $64.8 million under the revolving credit facility with availability for borrows of approximately $143.6 million under the revolver. I'll now 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 will come from the line of Darren Horowitz of Raymond James. Please proceed.

Good afternoon. Thank you. Bill, in the prepared remarks, as it relates to liquidity, you noted that your forecast is for the partnership to remain in compliance in future periods. Can you just give us a little bit more color and outline the assumptions that drive that conclusion?

Darren, I'll answer that question. Given that we don't give guidance, we can't say too much about it. We can just assure you that if we feel like we're not going to be in compliance, we will be issuing press releases to that effect. We feel like that we've got a lot of very strong initiatives underway. We've entered into a lot more hedges for the second and third quarter of 2008 to cover our specialty products production up to 75%. We are undergoing many different working capital initiatives to lower our working capital and finally the agreement with our related party to take ownership of the crew that we run at Princeton and that will take 2,000 barrels of inventory off of our --

200,000

200,000 barrels of inventory off of our balance sheet.

Okay. That's helpful, Jennifer. I appreciate it. Let me ask a follow-up question on something that you just mentioned. When we look at working capital and the operating cost reductions that you've outlined, obviously the need for working capital has grown with the Shreveport expansion and the Penreco acquisition now up and running. So how much in reality of that cost line can you really control from existing levels?

We're basically doing a lot to reduce working capital and we're pulling our inventory levels down to kind of minimum inventory situation.

Penreco had a lot of excess inventory and we're working very -- we're working closely with operations and marketing in hopes of carrying the minimum inventory levels. I mean, that's just a smart thing to do in this environment.

Okay. Switching gears over to Shreveport, on the specialty volume side, I need a little bit of help understanding this. If you -- and you mentioned in your prepared remarks as well as verbally that you hope to benefit from other suppliers, either reducing their output or even ceasing production. If you look at the market from a supply-demand balance and we assume that the market is experiencing price-induced demand destruction, how do you think, I mean, where do you think that that incremental benefit is going to come from? If the demand isn't there to consume that product, whether it's from you or one of your competitors, then that should be a finite, I mean, it should be a fully-reflected market.

Yes, that's not the -- that's not why these competitors are leaving the market. There's several different qualities of paraffinic oil that are produced right now and they're called Group 1, Group 2, Group 2+ and then even up to Group 3. And then you get into your synthetic lubricating oils. And these are -- the majority of these products go into motor oils. And the car manufacturers and additives companies have certain quality specs that you must meet in order to have qualifying products. And these people that are shutting down produce products that are in that Group 1.

And so they're the lower quality products, they're outdated refining technology and they're very expensive plants to run. And that's why they're choosing to leave the market now because they can't put their products into these motor oil blends.

And the plants are ready to be reworked or reworked and they don't really want to spend the money on it and they've got other things to do with their assets.

So for those specific product lines, is what you're saying that they're basically not sensitive to pricing increases, the demand is going to be there regardless?

The demand is there. We've not seen any degradation of demand.

Okay. And then just one quick housekeeping question, if I could. When you look at passing through cost increases as well as price book increases, you mentioned that you're obviously implementing multiple rounds of price increases for specialty products across your customer base. Can you just give us an update of the lag between cost pass-throughs as well as overall price book increases materializing across your entire customer book?

Yes, the lag is still the same. It's that four to eight weeks of lag.

And currently your customers are on what price book reflecting crude oil?

A little bit -- a little -- right around [$115 million] plus or minus a couple of dollars.

Okay.

And we've got other increases out there that will get us to where crude's at today.

Okay.

Those increases haven't been announced. They'll be announced shortly.

Okay. Thank you very much, Jennifer. I appreciate it.

Thank you.

Your next question will be from line of [Ethan Bellamy] of MLP Opportunity Fund. Please proceed.

Good afternoon. Did you consider cutting the distribution on just the subs, which are owned by management to protect the common distribution? I mean, your distributable cash flow in the quarter didn't cover the MQD. And this kind of looks like you're borrowing money to pay the [family] as distribution on the subs just to avoid resetting the sub conversion date.

Our distribution coverage ratio was just under 1.1 times for this period. The decision as to what the dividend would be was made by our board, which consists of three outside board members as well as members of the management team. Working with our -- the holders of our debt as well as taking our equity holders into account. We felt like this was the most responsible thing to do overall, especially -- we've announced our distribution so late in the month of April because we were hoping that crude would stabilize or even come down and we would not have to take the drastic actions that we did. But given the increased volatility, we felt like that was the responsible thing to do.

What was the minimum EBITDA number you needed to achieve in the first quarter in order to remain in compliance with your covenants?

We are in compliance. That's a function of what our debt was and we managed our debt to make sure that our revolver balance is zero in the first quarter. And we were in compliance.

Well, could you walk through the math with us? I mean, we had a number that was in advance of where you guys were for the quarter. I'm just trying to understand what the compliance test would be going forward.

What do you mean in advance of where we were?

Well, we had a number that was roughly about $5 million in advance of your EBITDA number. And it's based on your trailing leverage test of I think four times max.

I don't think you're including the --

Penreco.

-- amount we're allowed to add for Penreco. We can add $7 million in -- for the trailing quarters, $7 million a quarter for our Penreco earnings.

Okay.

Does that make sense?

It does. Okay. Last question.

... [on 21 bid in].

On the refinery. Just the expansion of Shreveport. Just to clarify, your original estimate was $110 million and you're now at $350 million. Is that the final number and where does that put you in terms of multiple cash flow in the incremental EBITDA from the expansion?

We feel like that is the final number. The project has been turned over to the plant. We are running product to all of the units involved in the expansion program. And as we -- again, since we don't give guidance, we can't really tell you what that payback period would be.

Okay. Thank you.

(OPERATOR INSTRUCTIONS). Your next question will be from the line of [Morris Williams] of [Williams & Company]. Please proceed.

Thank you. My question was answered.

And we have no more questions at this time. I'll turn it back to management for closing remarks.

Well, this concludes our first quarter earnings call. Thank you very much for your participation and note that this teleconference will be available for replay using the instructions contained in our press release.

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