Calumet Inc (CLMT) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Fourth Quarter 2010 Calumet Specialty Products Earnings Conference Call. My name is Karma and I'll be your coordinator for today. At this time all participants are in a listen only mode.

(Operator Instructions)

Later we will conduct a question and answer session. I would now like to turn the call over to your host for today, Mr. [Derrick Daniels], Communications Director. Please proceed?

Thank you, operator. Good afternoon and welcome to the Calumet Specialty Products Partners-Investors' Call to discuss our Fourth Quarter 2010 Financial Results. During this call, Calumet Specialty Products Partners L.B. will be referred to as The Partnership, or Calumet.

Also participating in this call will be Bill Grube, our CEO and Vice Chairman, Jennifer Straumins, our President and COO, and Pat Murray, our CFO. Following the presentation we will hold the line open for questions 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 that our management -- 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 the expectations will prove to be correct.

Please refer to the partnership's Press Release that was issued this morning, as well as our 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 very pleased with our results of the Fourth Quarter. Our specialty products production levels and gross profits significantly improved in the Third and Fourth Quarters of 2010 compared to the first half of the year.

With our specialty products production reaching the highest point in our history for any fourth quarter. We continue to focus on increased run rates to meet higher demand for our specialty products, and to benefit from current fuel production crack spreads.

Finally, as announced on January 14, 2011, the partnership declared a quarterly cash dividend of $0.47 per unit for the quarter which ended December 30, 2010 on all outstanding units. The distribution was paid on February 14, 2011, to unit holders of record as of the close of business on February 4, 2011. This distribution represents an increase of $0.01 per unit from the Third Quarter of 2010. I will now turn the call over to Pat Murray for a review of our financial results.

Thank you, Derrick. Net income for the Fourth Quarter of 2010 was $9.5 million compared to net income of $8.2 million for the same period in 2009. The $1.3 million improvement in our net income quarter over quarter was due primarily to an increase of $20.7 million in gross profit partially offset by decreased realized derivative gains of $4.7 million and higher transportation expense of $3.8 million due to increased sales volume.

These results were also impacted by an increase in non-cash unrealized derivative losses of $8.1 million which may or may not be realized in the future as the derivatives are settled. 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 $34.1 million and $40.8 million respectively for the Fourth Quarter of 2010 as compared to $32.2 million and $26.8 million respectively for the same quarter in 2009.

The Partnership's distributable cash flow for the Fourth Quarter of 2010 was $31.5 million as compared to $18.4 million for the same period last year. The increase in adjusted EBITDA quarter over quarter was due primarily to higher gross profit partially offset by decreased realized gains on derivatives and increased transportation expense associated with increased sales volume.

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

Gross profit by segment for the Fourth Quarter of 2010 for specialty products and fuel products was a profit of $56.7 million and a loss of $1.4 million, respectively, compared to gross profit of $27.5 million, and $7.1 million respectively for the same period in 2009.

The increase of $29.2 million in specialty product segment gross profit quarter over quarter was due primarily to an increase of 19.4% in the average selling price per barrel, while the average cost of crude oil for barrel increased only by 13.7%. Also specialty product sales volume increased 20.3% due primarily to improvements in overall specialty products demand under improved economic conditions, and from the addition of sales volumes under our specialty products agreements with Huston Refining, L.P., a wholly owned subsidiary of LyondellBasell, which became effective during the Fourth Quarter of 2009.

The decrease of $8.5 million in fuel products segment gross profit quarter over quarter was due primarily to a 12% decrease in fuel products sales volume as a result of lower overall throughput rates at our Shreveport refinery due to the scheduled turn around of various fuel processing units during the Fourth Quarter, as well as a net $10.3 million decrease in derivative gains on our fuel products crack spread cash flow hedges.

Partially offsetting this decrease was a slight improvement in crack spreads as the average selling price per barrel of our fuel products increased by $17.5 million -- 17.5% rather, driven by market conditions while the average cost of crude oil per barrel increased by 14.1%.

Selling general and administrative expenses increased $3.4 million or 39% to $12.3 million in the three months ended December 31, 2010 from $8.9 million in the same period in 2009. This increase is primarily due to the write off of the remaining costs related to the proposed offering for sale of senior unsecured notes in July 2010 which we opted not to -- opted not to complete, as well as increased incentive compensation costs.

Transportation expenses increased $3.8 million, or 20.9% to $22 million in the three months ended December 31, 2010 from $18.2 million in the same period in 2009. This increase is primarily due to increased sales volumes of lubricating oils, solvents, and waxes.

Interest expense decreased $0.2 million or 3% to $8 million for the quarter ended December 31, 2010 from $8.2 million for the same quarter in the prior year primarily due to lower balances being carried on the revolver in term loan and lower interest rates during the Fourth Quarter as compared to the same period in 2009.

As of December 30, 2010 total capitalization consisted of partners' capital in the amount of $398.3 million and outstanding debt of $369.3 million comprised of borrowings of $367.4 million under the term loan facility, with a non-amortized discount of $10.7 million on the term loan. Borrowings of $10.8 million under the revolving credit facility, and a long term capital lease obligation of $1.8 million.

The $87.1 million decrease in partners' capital from December 31, 2009 was primarily due to a $65.7 million of distributions to our partners, and a $40.3 million decrease in other comprehensive income, primarily due to a decrease in the fair market value of our derivative instruments, as well as the settlement of derivative instruments designated as cash flow hedges partially offset by net income of $16.7 million.

We finished the Fourth Quarter of 2010 in compliance with all of the financial covenants pursuant to our credit agreements which are measured quarterly. While assurances cannot be made regarding our future compliance with these covenants, we believe that we'll continue to maintain compliance with all of the covenants in our credit agreements.

On December 31, 2010, Calumet had availability of $145.5 million under our revolving credit facility based on a $247 million borrowing base, $90.7 million in outstanding standby letters of credit, and outstanding borrowings of $10.8 million. We believe that we will continue to have sufficient cash flow from operations and borrowing capacity to meet out financial commitments, minimum quarterly distributions to unit holders, debt service obligations, contingencies, and anticipated capital expenditures.

On February 14, 2011 we satisfied the last of the earnings and distribution tests contained in out partnership agreement for the conversion of all 13.066 million outstanding subordinated units held by the owners of our general partner and their affiliates into common units on a one for one basis. The last of these requirements was met upon payment of the quarterly distribution on February 14, 2011. Effective as of today, all of the subordinated units converted to common units. Please note that since our inception, these subordinated units have been paid quarterly distributions equivalent to our common units. And now I'll turn the call back over to Jennifer Straumins?

Thank you, Pat. Thank you very much. Operator, we'd be happy to take any questions.

(Operator Instructions)

. Please

Good afternoon. The 2-1-1 crack spread has blown out dramatically so far here in the first quarter. And it's clearly benefiting your fuel product spreads I would imagine to a greater extent than what you realize during the fourth quarter. So I'm curious, now that you're half way through the first quarter, how is your fuel product segment gross profit tracking versus the same quarter last year?

Well, it's like -- I mean, you know what our hedge barrels are. So we'd be realizing the the crack spread that we're hedged out for those barrels. And then any incremental production we would be selling at that Gulf Coast 2-1-1 crack spread plus a slight local market premium.

And that spread, Jennifer, right now -- or well the 2-1-1 is what -- about $26?

That's correct.

And remind me again what your -- what your premium is?

I mean, it's pennies of -- it's, you know, less than $1 a barrel.

Okay. How much has the -- the differential between WTI and [Brent] altered your profitability either on fuel products, or on specialty products?

It has certainly helped us. We've got a lot of competitors who -- who do buy crude off of Brent based formulas. And a lot of -- a lot of our crude contracts are off of WTI formulas. We do -- we have seen some of the local barrels that we purchase to run at Shreveport. Those differentials have increased surprise more along the lines of Brent than WTI. So we're not realizing that -- that huge spread on all of the barrels that we use.

Okay. But can -- can you quantify maybe a rough percentage on the barrels that you use where you are realizing that spread? I'm just trying to get a sense.

About 25,000 barrels a day at Shreveport is -- is priced off of WTI. And then all of our Princeton and Cotton Valley production we price off of WTI.

Okay. Okay. Can you just give us a little bit more color around how you expect to increase your run rates to meet a lot of this demand. I mean, maybe it's a situation where you can, you know, further rationalize cost or -- or enhance capacity utilization at Shreveport or Princeton. But any additional color would be helpful.

Sure. We are looking at some de-bottlenecking projects at Shreveport. And the first of those will be done here in a couple of months. We're -- we've got a couple of units down for turn-around right now. And expect to have optimized results as soon as we come back up in about a week and a half. And looking at our [solvence] production -- we're looking to increase solvence production as well. The drilling fluid market has been very, very strong for us with all of the -- the shale production. That we see both down south as well as up in Pennsylvania.

And Princeton, you know, it -- not a lot of room for expansion there, but that's why we did the line (inaudible) agreement last year. You know, that gives us more market share and more barrels to market there.

Sure.

And so higher demand, while we can increase production some, we're realizing the most potential from higher margins, because demand is so strong.

Okay. And -- and if we were to quantify your -- your de-bottlenecking issue as an aggregate in -- you know, how -- much you think that would cost?

These are very small projects.

Okay. Okay. And then final question from me. Just as it relates to the sequential distributions that we've seen, you know, you -- you bump the distribution by a half penny in the Third Quarter sequentially, and then by a penny in the fourth quarter. And I'm just curious as to the thought process by the increase in that sequential distribution growth. Was it a situation where there was a change in the operational environment that you think is going to lead to sustainably higher cash flow? How should we think about future distribution growth based on your outlook for the operating environment?

Now I think we've -- we've been able to increase distribution several times over the past, you know, few years. I -- it -- it's just the business is a lot healthier than it was a few years ago, and also our reliability in operations continues to get better and better each quarter. And that's really what's driving it.

Okay. So it's not necessarily a situation where you're looking at existing cash flow coverage and you have a target in mind, and are growing a distribution commensurate with that?

Well, we've stated several times that our target distribution coverage ratio is 1.3 times. You know, we were at 1.9 times for the fourth quarter. However, only 1.2 times for the whole year 2010.

So our goal is to continue as our business continues to grow and become more profitable. We'd like to continue to do these small -- small -- I'm sorry small distribution increases every quarter so that we can say we've increased distribution, you know, during the last consecutive X quarters--

Yes. Thank you very --

-- making that 1.3 times coverage ratio.

Sure I appreciate the colors. Thanks, Jennifer.

(Operator Instructions)

And the next question comes from the line of Brian Zarahn from Barclays Capital. Please proceed?

Good afternoon.

Hi.

In especially products, can you give us a sense of where you think margins will be in the first quarter versus the fourth quarter of last year?

Well, we don't really give guidance, but demand has been very strong. And we've -- we've had two -- I'm sorry. We've -- we've increased prices in two of our product segments. And while crude has remained very stable. So you can assume from that that we would anticipate that we would anticipate that they would be stronger than they were in the Fourth Quarter, assuming that March turns out to be as good as February and -- and January have been for us.

Okay. And can you talk a little bit more about how your facility is -- may have been impacted at all by weather or turn-arounds, and how that could affect volumes in the First Quarter?

We had -- had some turn-around activity during the First Quarter. Our -- some of our solvence units have been down for turn-around. So you'll see slightly less volume coming out of that segment. But not -- not substantially less. And then we've -- did a small turn-around at Shreveport, but that really shouldn't -- don't anticipate that impacting production.

On a quarterly basis we'll -- we'll be able to increase rates during the second half of the quarter to make up for that. And we also built inventory prior to the turn-around to take care of that.

Weather impacts -- we've -- we've had some minor outages due to the ice storms in Louisiana. And that will probably impact us more than -- more than our turn-around activity will. We lost power twice during the ice storms in Shreveport, and probably lost about four to five days of production in total from that.

Okay. And then I guess finally in looking, you know, further down the road, how do you think Chevron's planned expansion of its Mississippi refinery to increase base oil production will impact the competitive landscape?

We've -- you know, we've seen around 30,000 barrels of [Group 1 Parafinec] production go out of the market over the last few years. And rally the recession was the only thing that kept that from being a really huge impact on that market. And so we think that we'll continue to see some pressure from additional Group 1 facilities to shut down.

And don't feel like -- we feel like that -- that Chevron expansion is just filling a hole in the marketplace.

Okay. Thank you, Jennifer.

And we have no further questions at this time.

Thank you, operator. This concludes the Calumet Specialty Products Partners' Earnings Conference Call covering the company's Fourth Quarter 2010 results. Thank you very much for participating in the teleconference.

Please note that the teleconference will be available for replay using the instructions contained in our press release.

This concludes the presentation for today. Ladies and gentlemen, you may now disconnect. Have a wonderful day.