Calumet Inc (CLMT) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2008 Calumet Specialty Products Earnings Conference Call. My name is Carissa and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this call.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Ms. 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 third quarter 2008 financial results. During this call, Calumet Specialty Products Partners will be referred to as the partnership of Calumet. Also participating in this call will be Bill Grube, our President and CEO; Pat Murray, our CFO; and Bill Anderson, our Vice President of Marketing. Following the presentation, we will open the lines for a question-and-answer session.

During the course of this call, we may 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 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 this morning, 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.

We are pleased to announce a record quarterly adjusted EBITDA performance for the third quarter and that we were able to successfully manage through this period of unprecedented crude oil price volatility. In order to continue to achieve improved results from operations, to further enhance liquidity and for continued compliance with the financial covenants in our credit agreement, we will continue to focus on maintaining lower inventory levels, increasing the Shreveport refining throughput, as well as continuing to integrate Penreco. Although our current economic and capital market conditions are challenging and can impact all businesses in ways we cannot currently anticipate, we believe that the completion of our Shreveport expansion project, the acquisition of Penreco and improved margins in our specialty products have positioned us to continue to improve our operating results and distributable cash flow.

The Shreveport refinery expansion project was completed and operational in May of 2008. The expansion project has increased this refinery's throughput capacity from 42,000 barrels per day to 60,000 barrels per day. For the three months ended September 30, 2008, the Shreveport refinery had total feedstock throughput of approximately 39,000 barrels per day, which represents an increase of approximately 4,000 barrels per day, from the first quarter of 2008, which was prior to the completion of the expansion project.

We experienced a lower than expected increase in total throughput through the quarter, due primarily to the lower crude oil supply due to the hurricanes Ike and Gustav, as well as unscheduled downtime at the Shreveport refinery due to Hurricane Ike and reduced production rates due to incremental refining economics associated with the higher cost of crude early in the third quarter.

As a result of the expansion project, we have enhanced the Shreveport refinery's ability to process our crude oil. During the third quarter, we processed approximately 13,000 barrels per day of sour crude at the Shreveport refinery. And after the completion of planned turnaround activities on certain operating units in November 2008, we anticipate processing up to 19,000 barrels per day of sour crude at the Shreveport refinery. In certain operating scenarios, where overall throughput is reduced, we expect we could be able to increase sour crude throughput to approximately 25,000 barrels per day.

We remain committed to an active hedging program to manage commodity risk in both our specialty products and fuel products segments. Due to current volatility of the price of crude oil and the impact such volatility can have on our short-term cash flows, we have implemented modifications to our hedging strategy to increase the overall portion of input prices for specialty products we may hedge. Specifically, we have targeted the use of derivative instruments to mitigate our exposure to changes in crude oil prices for up to 75% of our specialty products production, when conditions warrant. We continue to believe that a shorter time horizon of hedging crude oil purchases from three to nine months forward for specialty products is appropriate, given our general ability to manage prices in the shorter term.

During the third quarter of 2008 and early in the fourth quarter of 2008, we have also focused on limiting our cash losses related to the derivatives, as a result of the significant decrease in crude oil prices during the period. For example, we have purchased 1.2 million barrels of crude oil put options that will expire in November of 2008 to limit the derivative losses, as well as to minimize the requirements to provide credit support to our hedging counter parties in the form of cash margin or standby letters of credit, which -- and these reduce our liquidity. We will determine if additional downside protection is needed, at which time we may purchase additional crude oil put options with expiration terms beyond November 2008.

We have implemented strategies to minimize inventory levels across all of our facilities to reduce our working capital needs and are now maintaining these reduced levels to minimize borrowing needs. As an example, effective May 1, 2008, we entered into a crude oil supply agreement with an affiliate of our general partner to purchase the crude oil used at our Princeton refinery on a just-in-time basis, which has significantly reduced our crude oil inventory historically maintained for this facility by approximately 200,000 barrels.

Excluding the inventory related to the Penreco acquisition, we have reduced our inventory levels by approximately one million barrels or 46% during the nine months ended September 30, 2008.

As previously discussed, we have experienced recent adverse financial conditions primarily attributable with historically high crude oil cost, which negatively affected specialty products' gross profit for the three quarters ended June 30, 2008. Also contributing to these adverse financial conditions were the significant cost overruns and delay in the startup of the Shreveport refinery expansion project. Compliance with the financial covenants pursuant to our credit agreements is tested quarterly based upon performance over the most recent four physical quarters and as of September 30, 2008, we were in compliance with all financial covenants under our credit agreement. And we continue to take steps to ensure that we meet the requirements of our credit agreements and currently forecast that we will be in compliance for all future measurement dates.

I would now like to give you a summary of our quarter-over-quarter sales volumes by segment. Total specialty products segment sales volume for the third quarter was 28,467 barrels per day, compared to 22,791 barrels per day for the same period in the prior year, an increase of 5,676 barrels per day or 24.9%. This increase was primarily due to the incremental sales volume associated with our Karns City and Dickinson facilities acquired in the January 2008 acquisition of Penreco, as well as increased lubricating oil sales volumes as a result of the Shreveport refinery expansion.

Total fuel product segment sales volume for the third quarter was 28,587 barrels per day as compared to 26,317 barrels per day in the same period for the prior year, an increase of 2,270 barrels per day or 8.6%. This increase is primarily due to higher diesel production subsequent to the completion of the Shreveport refinery expansion project in May of 2008. As announced on October 15, the partnership declared a quarterly cash distribution of $0.45 per unit on all outstanding units for the three months ended September 30, 2008. The distribution was paid on November 14 to unit holders of record as of the close of business on November 4, 2008.

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

Thanks, Jennifer. Now we will provide a brief review of the financial results for the quarter ended September 30, 2008 for Calumet. Net loss for the three months ended September 30, 2008, was $12.5 million, compared to net income of $9.5 million for the same period of 2007. The partnership's performance for the quarter ended September 30, 2008 compared to the same period in the prior year decreased by $22 million, due primarily to increased unrealized and realized losses on our derivative instruments and the increased interest expense, offset by increased gross profit in our specialty products segment.

The increase in both unrealized loss on derivative instruments of $28.4 million, a non-cash item, and realized loss on derivative instruments of $8.8 million, were due primarily to a decline in the fair market value of certain crude oil derivative instruments not designated as hedges as a result of decreases in crude oil prices. The increased interest expense of $9.3 million was due primarily to higher debt levels from financing both the Penreco acquisition, which closed in January 2008, as well as costs related to the completion of the Shreveport refinery expansion project, which was operational in May 2008.

Offsetting these reductions to net income was a $44.4 million increase in gross profit from our specialty products segment. The increase in specialty products segment gross profit was primarily due to the Penreco acquisition, the Shreveport refinery expansion and the price increases achieved over the last several quarters on the majority of our specialty products implemented in response to the rising cost of crude oil experienced over the last several quarters.

Net income for the nine months ended September 30, 2008, was $25.9 million, compared to net income of $75.1 million for the same period in 2007. The partnership's performance for the nine months ended September 30 as compared to the same period in the prior year was impacted for reasons consistent with the previously discussed activities for the three months ended September 30, 2008.

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 the partnership's credit agreements were $13.6 million and $51.6 million respectively for the three months ended September 30, 2008, as compared to the $14.7 million and $20.3 million respectively for the same period in 2007. The partnership's distributable cash flow for the three months ended September 30, 2008, was $41.3 million, as compared to $17.2 million for the same period in 2007.

Adjusted EBITDA for the quarter ended September 30, 2008, compared to the same period in the prior year, was positively impacted by increased specialty products segment gross profit, as we previously discussed on this call. EBITDA and adjusted EBITDA for the nine months ended September 30, 2008 were $91.3 million and $114.4 million respectively, as compared to $90 million and $96.3 million respectively for the same period in 2007. The partnership's distributable cash flow for the nine months ended September 30, 2008 was $91.4 million as compared to $83.5 million for the same period in 2007.

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 of the 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 $39.1 million or 103.2% to 7$7 million for the three months ended September 30, 2008, from $37.9 million for the three months ended September 30, 2007. Gross profit by segment for the three months ended September 30, 2008 for specialty products and fuel products was $66.1 million and $10.9 million respectively, compared to $21.7 million and $16.2 million respectively for the same period in 2007. The $44.4 million increase in specialty products gross profit is primarily due to price increases on the majority of our specialty products implemented in response to the rising cost of crude oil experienced early in 2008. The $5.3 million decrease in fuel products segment gross profit is primarily due to increased derivative losses of $14.8 million in the third quarter of 2008 as compared to the same period in the prior year. These increased derivative losses were partially offset by price increases on fuel products driven by market conditions and the rising cost of crude oil.

Selling, general and administrative expenses increased $7.8 million to $12.0 million for the quarter ended September 30, 2008, from $4.2 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 on January 3, 2008, with no similar expenses in the comparable period in the prior year.

SG&A expenses also increased due to additional accrued incentive compensation costs in the three months ended September 30, 2008 as compared to the same period in 2007, based on the partnership's performance.

Transportation expenses increased $8.4 million for the quarter ended September 30, 2008, to $21.7 million, as compared to $13.2 million for the same period in the prior year. This increase is primarily related to additional transportation expenses associated with the Penreco acquisition, which closed in January, with no similar expenses in the comparable period in the prior year.

The interest expense increased $9.3 million to $10.7 million for the quarter ended September 30, 2008, from $1.3 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 term loan facility, which closed on January 3, 2008, and includes a $385 million term loan partially used to finance the acquisition of Penreco, as well as increased borrowings on our revolver as a result of higher than expected capital expenditures to complete the Shreveport refinery expansion project.

As of September 30, 2008, total capitalization consisted of partners' capital in the amount of $329.2 million and an outstanding [debt] of $456.1 million, comprised of borrowings to $376 million under the term loan facility, with an unamortized discount of $15.7 million on the term loan facility, borrowings of $92.9 million under the revolver and a long-term capital lease obligation of $2.9 million. The $70.5 million decrease in partners' capital from December 31, 2007, is primarily due to the distributions to our partners of $51.3 million and the $45 million increase in other comprehensive loss as a result of the decrease in the fair market value of our derivative instruments, offset by our net income of $25.9 million.

As of October 31, 2008, the partnership had outstanding borrowings of $376 million under our term loan facility and outstanding borrowings of $120.7 million under our revolving credit facility, with an availability for borrowings of approximately $105.5 million under the revolver. We believe that we have sufficient cash flow from operations and borrowing capacity to meet our financial commitments, debt service obligations, contingencies and anticipated capital expenditures.

However, we are subject to business and operational risks that could materially adversely affect our cash flows. The material decrease in our cash flow from operations or a significant sustained decline in crude oil prices would likely produce a corollary material adverse effect on our borrowing capacity under the revolver, and potentially our ability to comply with the covenants under our credit facilities. Recent and substantial declines in crude oil prices if sustained may materially diminish our borrowing based on the value of our crude oil inventory, which could result in a material reduction in our capacity under the revolver. Now I will turn the call back over to Bill Grube.

Thank you, Pat and Jennifer. 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 comes from the line of Wyatt McCormick from Raymond James. Please proceed.

Yes, hello. Good afternoon. Congratulations on the quarter. My first question is about the specialty products. Margins were great there and given that the pricing was implemented in a higher crude oil environment and take several weeks before they were enacted, how sticky are those margins in a flat $65 to $70 price environment with possibly reduced demand?

We think the prices are pretty sticky in our mind. I mean, this is something that we have felt for a long time and we have experienced in our business and we feel good about that situation. And I think that the marketplace is bearing that out here into the fourth quarter that these prices are sticky. So I would say that is something that is positive for Calumet.

Okay, great, great. Then switching to the fuel side, you said a lot of the margins were hurt by the derivative losses. And there is a little bit of a volume decline. What are your projections for the coming quarter and the coming year, given previously higher gasoline prices and greater unemployment have led to a little bit of a drop-off in fuel demand?

Basically, our production has not been impacted by fuel demand at all. We had some downtime due to the hurricanes both from a crude oil supply standpoint and some downtime of certain refining units at Shreveport. Again, we don't give forward-looking statements, but we would anticipate after this turnaround in November to run Shreveport at its expansion capacities and the fuel's yield is about 50% coming out of that facility.

Okay, great, great. What is the minimum level of crude inventory that you expect to maintain for your operations or maybe, in other words, how much crude oil should remain to be sold?

About 500,000 barrels a day, total barrels of crude inventory.

All right, excellent. And my last question is, if you could just go over again how your revolver capacity varies with the price of crude?

Sure. It is a pretty standard advance rate, asset-based revolver. So our crude oil, crude oil inventories, we have an advance rate of 75% based on current cost of crude. And on our specialty products, those products have are based on a crude cost component and there is an advance rate of 65% on the specialty products. So those two components, the fuels product, those are based on advanced rates based on selling prices. So that's -- basically, you are going to have some impact. It is going to be to a percentage increase or decrease of changes in, dollar change in the crude oil price.

Okay, then. Thank you.

(Operator Instructions). At this time, there are no further questions in queue. I would like to turn the call back over to management for closing remarks.

Thank you, Operator. This concludes our earnings conference call for the third quarter operating results. Thank you 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 your presentation. You may now disconnect. Good day.