Calumet Inc (CLMT) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 Calumet Specialty Products Partners, L.P. Earnings Conference Call. My name is Jennifer and I'll be your operator for today. At this time, all participants are in listen-only mode, and later we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Derek Daniel, Director of Communications. Please proceed.

Thank you, Operator. Good afternoon, and welcome to the Calumet Specialty Products Partners investors call to discuss our third quarter 2011 financial results. During this call, Calumet Specialty Products Partners, L.P. 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 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 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 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. I will now turn the call over to Jennifer Straumins.

Thank you, Derek. We are very pleased with our results for the third quarter of 2011. We had net income of $19.6 million and have reported a record quarterly adjusted EBIDTA of over $70 million. We also had a record quarterly distributable cash flow of $50.5 million. We have noted improvements in both our Specialty Products and our Fuel Products segments and continue to focus on strong operations to meet demand for our specialty products and to better benefit from the current fuel products crack spread. We're also very pleased to add the Superior refinery employees and assets from the Murphy Oil Corporation and our recently closed acquisitions and are working diligently on integration. As we previously announced on September 30, 2011, Calumet completed the acquisition of a Superior, Wisconsin refinery and associated operating assets, inventories, and related businesses for the aggregate consideration of approximately $411 million, excluding certain customary post-closing purchase price adjustments. The Superior refinery produces gasoline, diesel, asphalt and specialty petroleum products that are marketed primarily in the Midwest region of the United States, including the surrounding border states and Canada. The Superior acquisition was financed by combination of net proceeds of $193.6 million from our September 2011 public offering of common units; net proceeds of $180.3 million from the September 2011 private placement 9% senior notes due May 1, 2019; and finally borrowings under our revolving credit facility. We believe the Superior acquisition provides greater scale and geographic diversity and the developments potential of our refining business. As our current total refining throughput capacity has increased by approximately 50% to 135,000 barrels a day. On October 11, we declared a quarterly cash distribution of $0.50 per unit for the quarter ended September 30, 2011 on all outstanding units. The distribution would pay on November 14, 2011 to unit holders of record as of the close of business on November 4, 2011. This distribution represents an increase of0.05 per unit increase from the second quarter of 2011. I'll now turn the call over to Pat Murray for a review of our financial results.

Thanks, Jennifer. Net income for the third quarter of 2011 was $19.6 million compared to $21.2 million for the same period in 2010. These results include $20.3 million of non-cash unrealized derivative losses and $2.1 million of acquisition expenses related to the Superior acquisition, as compared to $1.9 million of non-cash unrealized derivative gains in the third quarter of 2010. 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 debt instruments were $47.1 million and $70.5 million respectively for the third quarter of 2011, as compared to $44 million and $44 million respectively for the same quarter in 2010. The partnership's distributable cash flow for the third quarter of 2011 was a record quarterly $50.5 million as compared to $30.9 million for the same period last year. The increase in adjusted EBITDA quarter-over-quarter was due primarily to a $34.5 million increase in gross profit. 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 third quarter, for Specialty Products and Fuel Products was $87.8 million and $8.8 million respectively, compared to $60.9 million and $1.2 million respectively for the same period in 2010. The increase in Specialty Products segment gross profit of $26.9 million quarter-over-quarter was due primarily to a 30.5% increase in the average selling price per barrel, partially offset by a 23.4% increase in the average cost of crude oil per barrel, a 5.2% decrease in sales volume, and higher operating costs, primarily repairs and maintenance. The increase in Fuel Products segment gross profit of $7.6 million quarter-over-quarter was due primarily to a 13.8% increase in sales volume and a 43.8% increase in the average selling price per barrel, excluding the impact of realized hedging losses, partially offset by increased realized losses on derivatives of $38.9 million in our fuel products hedging program, a 25.1% increase in the average cost of crude oil per barrel, and higher operating costs, again primarily maintenance. Selling, general, and administrative expenses increased to $6.7 million quarter-over-quarter to $14.1 million. This increase is due primarily to increased accrued incentive compensation costs of $3.5 million in 2011 compared to 2010 and $2.1 million of acquisition costs related to the Superior Acquisition with no comparable expenses in 2010. Interest expense increased $4.8 million quarter-over-quarter to $12.6 million, due primarily to higher interest rates associated with the our 2019 senior and secured notes as compared to our term loan that was repaid in full in April 2011 and extinguished in connection with the issuance of our 2019 senior unsecured notes. As of September 30, 2011, total capitalization consisted of partners' capital in the amount of $548.9 million and outstanding debt of $643 million, comprised of $586 million of 9 3/8% senior notes due 2019, which is net of a discount of $14 million, borrowings of $56 million under the revolving credit facility and long-term capital lease obligations of $1 million. The $150.6 million increase in partners' capital from December 31, 2010 was due primarily to $287.9 million of net proceeds from the March 2011 and September 2011 public equity offerings and the net income of $16.2 million, partially offset by $66.7 million increase in other comprehensive loss and $56.4 million in distribution to unit holders. On September 30, 2011, we had availability of $271.5 million under our $850 million revolving credit facility based on a $535.5 million borrowing base, $208 million in outstanding standby letters of credit and outstanding borrowings of $56 million. We believe we'll continue to have sufficient cash flow from operations and borrowing availability under our revolving credit facility to meet our financial commitments, minimum quarterly distributions to our unit holders, our debt service obligations, contingencies, and our anticipated capital expenditures. w I'll turn the call back over to Jennifer.

Thank you, Pat. This concludes our remarks. We now would be happy to answer any questions you may have. Operator, can you please confirm if there are any questions?

(Operator Instructions)

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

Jennifer, with the acquisition of Superior refinery now complete, can you give us a little bit more color and possibly quantify on what you expect the run rate synergies to be?

Sure. They're getting ready to go into the fourth quarter. It's wintertime there. So we plan on taking the next four to five months to work closely with them, develop some engineering plans, and some real good capital estimates on what our plans are going to be. We'll plan on running about between 34,000 and 37,000 barrels a day there for the next several months as we get these plans in place.

We are moving forward with one project that had already been contemplated. And that's a crude unloading rail project. So that's going to be our first [great] project that we're doing there. And what that will allow us is some flexibility in crude oil choices, and we'll be able to bring it to even more disadvantaged priced crude into that refinery by the middle of next year.

So we'll have a lot more to tell you I think during our year-end conference call as exactly what those plans have been. We've been more or less focused on the accounting and HR integration over the last four weeks that we've owned the refinery.

At this point, is it too early to tell what that cost is going to be and exactly how many barrels you think you'll be able to unload in Superior?

We plan on being able to unload between 5,000 and 8,000 barrels a day. And that cost changes every month. They're opportunistic purchases.

And of the 34,000 to 37,000 barrels that you plan on running there the next couple months, what's the composition of those barrels, because I know that refinery can run several different grades?

Sure, right now we're running a little bit more sweet than they have in the fast just because the crack spreads are so strong that, as we get into the winter, gasoline demand falls off in that area. So we'll move over, and we'll be running it a little bit more weighted towards the heavy barrel. But again, it's close to 50-50, 60-40. So there's not all that much swing between those Canadian and the North Dakota barrels.

Okay. Shifting gears, I wanted to go back to a comment that you had made earlier in the call and also on the prepared commentary when you were discussing positioning yourselves to better benefit from fuel products crack spreads. How do you plan on doing this? Is it going to be a shift in fuels mix, or is it something from an initiative perspective that you can kind of de-bottleneck? Or how are you thinking about achieving that goal?

Really, it's just running more barrels at Shreveport. Shreveport can run up to 55,000 - 60,000 barrels a day, and we are hedged close to 20,000 barrels a day. So what it is is really just running more overall barrels there as economics allow, and that allows us to be able to sell more unhedged fuel barrels into the market.

Okay, that makes sense. So speaking of Shreveport and the [feed slate] there, you guys are running about 33,000 barrels benchmarked at WTI, and when we last spoke, you were working on getting up to around 10,000 barrels a day of pure WTI by the end of the September. Did you hit that mark?

We're running about 6,000 barrels a day there now. The plant has the capability to do it, and we're working on the supply. There have been supply line constraints.

Okay. Last question for me, and again, this is driven off of something that was in the prepared commentary, but you stated a part of the consideration for the quarterly distribution increase was due to your outlook. And I'd just like a little bit more color on that, especially as it relates to your thoughts on the trend of the 2-1-1 crack spread through the fourth quarter, which obviously, as we've seen, has declined relative to where it was in September.

I'm sorry could you repeat that?

Yes. In your prepared commentary you said that part of the rationale behind raising your distribution to $0.50 a unit was driven by the improvements in your operations and quote-unquote your outlook.

Correct.

And I'd just love some more color on your outlook, especially given that the 2-1-1 spread has declined through October.

Again, focusing on the specialty side of the business, the 2-1-1 on the fuel side is still very, very strong. The plants are running very well. We've got, if you remember, we had several small growth projects that we had been working on this year. Those are all underway and finished now. So we'll be recognizing the earnings from those, and our specialty segment remains very strong. Demand for our products is good, and our margins are good. So I think we're superior in the mix now going forward. We've got pretty good outlook for those earnings are going to be.

Thanks, Jennifer. I appreciate it.

Thank you.

Your next question comes from the line of Kelly Krenger from Bank of America. Please proceed.

Hi, thanks for taking my question. On the volume front for both your -- more so on your legacy assets, should we expect some more volumes in the fourth quarter relative to the third quarter for specialty and fuel products? Or are you going to be run more fuel products? Is that seasonal at all down in Shreveport?

We may run a little bit more at Shreveport. We'll run what's our models tell us to run, and as long as we can economically run a barrel, we will be running more than we ran in the third quarter. And that's the case today. So - but the -- our other facilities you'll see very consistent run rates with what we've shown in the third quarter.

Okay. So, specialty we should expect to be similar to the third quarter.

At Shreveport we made about 40% specialty products and about 60% fuel. So as we run more Shreveport, we'll have more both fuels and specialty.

Okay. And then on the - with the Superior acquisition closed, I think the hedging that you noted in the press release, I think that was as of September 30, which I think is the date that you closed Superior. Have you guys layered in incremental hedges based on owning Superior or is there -- ?

We have, and there will be some more color on that in the Q.

Yes, Kelly at the very back of the press release, we did add -- at the end of that, we showed positions that we've added subsequent -- about 15,000 barrels a day for 2012, and 6,000 barrels a day for the fourth quarter of this year. So we have started executing on those strategies.

Okay, thanks. And also it seems some $70 million of EBITDA was higher than my estimate and certainly a big improvement over the second quarter. Was there anything in the quarter that was usual on the positive side, I guess? Or is that a reasonable run rate based on the margin environment we saw in the third quarter for those assets?

No, our Specialty Products marketing group did a phenomenal job. We had great margins on our Specialty Products and then also great gasoline margins. So, those were the two driving forces behind the increase in earnings.

But there weren't any, I don't know --

There's no one-time --

Reversals or accruals or anything like that?

There were no one-time deals or anything.

Okay. Okay and then I know you've only had Superior for a month, but any comment that you can provide on that in terms of the operations of it or anything that's good, bad or different about it, relative to what you thought when you purchased it?

I think it's pretty much what we thought when we purchased it. The people have been really great to work with, and it's a great asset. We look forward to exploring a lot of opportunities up there.

Okay. Thank you.

Thanks, Kelly.

Your next question comes from the line of Brian Zarahn from Barclays. Please proceed.

Good afternoon.

Hello.

Obviously, Specialty Products margins were very high in the third quarter. What's your view on the sustainability of these really high margins?

We've seen some weakening as we go into the fourth quarter. We think that's more or less related to people managing year-end inventories and just some of the things going on globally from a political and economic standpoint. One of things that did help our third quarter look so strong was crude prices felt substantially. And, again, it helped to reinforce our story of our specialty prices are sticky for a period of time following a decrease in crude. And so that, again, that played out to be the case. So, I think we'll see some weakness in the fourth quarter, but should still be very, very strong.

Looking into 2012, you'll have a full year contribution from Superior. Do you have any initial thoughts as to distribution growth prospects?

Nothing, but we're -- we've not visited with our Board on that at this point in time, so nothing there. We can -- our plan is to be prudent and conservative in our distribution growth.

Thank you.

Thanks.

(Operator Instructions)

Your next question comes from the line of Eric Udoff from Appaloosa. Please proceed.

Hi. I just wanted to get a better understanding, You had mentioned earlier the hedging loss. I wanted to get an understanding on what your EBIDTA would have been if you were unhedged for the quarter?

Well, we recognize basically $38 million, roughly $39 million of realized hedging losses in the quarter. So results would have been about $40 million better if we had not been hedged at all.

Right. And then if I understood through the commentary, SG&A was about $5 million higher than normal because of, what was it, compensation and -- is that right? So should I back another $5 million there?

Yes, well, I mean, that's part of EBITDA as calculated.

And then, because obviously it didn't include any Superior EBITDA in the results, how should I be thinking about the third quarter's results for Superior on a -- if I were to think of how the company should be operating going forward? Would I be expecting it to be significantly higher than the second quarter?

When we publish the Superior's audited results, they had about $80 million of EBITDA. So I think that's a minimum level of what we would - before any synergies or anything, of what we would expect on a go-forward basis.

When we file our Q, also, we'll be reporting pro forma financial informations, limited pro forma financial information, which would include Superior as well for the quarter. So that will give you some insight.

About when will that be coming out?

We are expecting to file that late this week.

Okay. And could you maybe just walk me through distributable cash flow if you were pro forma for, I guess, the hedging and also superior, just rough order of magnitude what that change would have been?

Well, again, we would have shown about $40 million more in EBITDA from realized hedging losses. And then as Jennifer mentioned, it'd give you some scale and scope of what Superior might be contributing on a quarterly basis. Those would be the two largest add backs. So...

All right. Thank you.

Thanks. Operator, can you confirm if there any more questions please?

(Operator Instructions)

Operator, you there?

Your next question comes from the line of Lawrence Dobrin from Oppenheimer. Please proceed. Lawrence, your line is open. Your next question comes from the line of Eric Seeve. Please proceed.

Hi, couple of things I want to confirm that I understand correctly. First the revolver draw, excluding LCs at the at the quarter was $56 million and the borrowing base was [535] with availability of [271], and that's all pro forma for the acquisition, because it closed last date of quarter. Is that accurate?

That's right. We included the borrowing base from the inventory purchase in the borrowing base. There were no accounts receivable purchased at closing, so obviously as we go forward and report borrowing base that it'll have accounts receivable include as well.

Okay. Thank you. What was the latest share count, and can you confirm the greenshoe on the latest equity offering was not exercised?

Yes, the number of units outstanding is 51.5 million. That would include greenshoe exercise of 750,000.

So, it was exercised.

Yes, a half of the greenshoe was exercised.

Okay, thank you. And then for Superior, can you just give us a flavor? Maybe can you tell us what Q3 EBITDA was for Superior versus -- and what it was Q3 of last year? I know it sounds like we'll get a little more information when the Q comes out.

Yes, there will be more information when the Q comes out.

Okay. Okay. And then just you spoke a little bit about Q4, and it sounded like what you were saying is because, yes, the oil price is declining interquarter during Q3 that it might have been a little bit stronger than sustainable. And it sounds like in Q4, as I understand you correctly, you say, you've seen margins come off a little bit. And it sounds like demand has been a little bit weak due to destocking, but it sounds like the message was margins have come off a little bit from the strength in Q3, but are still strong relative to historical levels. Is that a - can I just hope you'll give a little more color on that?

Yes. That's -- and what you said is correct. We're still experiencing good demand for our products. We've shifted some export sales to domestic sales, but we are seeing the export market come back pretty strongly at the end of the year here with crudes jumped back up a little bit. When it hit the lows at the quarter, we had a lot of people waiting for price decreases and especially with these export customers. You put product on a boat, and it takes several weeks to get to them. So they were a little more nervous than domestic customers, but now that crude is back in the low to mid 90s, we've seen that demand come back as well, So you certainly you won't see us adjusting run rates at our facility's huge demand.

Okay, great. Thank you. And just, last thing. I just want to make sure I understand one other point. Did you say earlier in the call that the realized losses on hedges in the third quarter was about $38 million? I know on your - if you look at the income statement we only see $3.8 million of realized losses on derivatives, but I presume other $35 million just doesn't get classified for income statement purposes as derivatives that.

It gets classified in gross profit because it's related to the sale of our Fuel Products segment.

Okay. So the vast majority of the realized gain is -- it's not broken out. It's just in its own line. I mean, it's embedded within the gross profit components.

Yes, it's within sales and cost of sales in the Fuel Products segment. We -- in our Q filings we do provide little more color as to specific geography of each component of the hedging gains and losses, but yes it's in gross profit.

Thanks very much.

Thank you.

Your next question comes from the line of [Peter Madsen] from [Jaccar Capital]. Please proceed.

Hi, it sounds like a lot of my questions are possibly going to be answered by the Q, but one or two that probably won't. What kind of ratio, can you kind of just illuminate the concept of the ratio of distributable cash flow to your actual distribution? I know you like to maintain some kind of cushion. I'm just wondering what the min and max are of your coverage ratios with respect to distributable cash flow versus dividends.

Sure. Our stated target is 1.3 to 1.5 times. We were at 1.9 times for this quarter, and for the three quarters so far this year we've been at 1.7 times. And we do have a little bit of seasonality in our business. Our second and third quarters are stronger than the first and fourth quarters traditionally. So first quarter with just right or just under one time and then we've seen those numbers strengthen every quarter, even though we have continued to make distribution increases. So we probably could have increased distributions more this quarter, but we really want to wait and get Superior integrated and get 2011 finished, and we'll see where we were at in February.

Got you. And then Pat had indicated -- there was an earlier question on hedging, and the recent earnings release kind of talks about the hedging for Superior subsequent to September 30. So I guess just on a note of clarification, has there been further hedging since this release, or is that -- is the release a relatively accurate snapshot of Superior hedging at this time?

It is a precise snapshot of where we are today.

Okay. And then as you've mentioned with regards to Shreveport fuel products, you have roughly 50% of your throughput kind of hedged at these legacy hedge rates, and then obviously you're benefiting from current market spreads on the balance. Is there any thought to increase the hedges on the Fuel Products segment down at Shreveport and kind of lock in relatively robust margins at this point. or is the thought more to just be kind of half hedged and half market?

We've put some more on, so we are a little bit more than half hedged at this point in time. But when you look at - part of our barrels at Shreveport are Brent priced barrel, so when you look at with that Brent crack spread is, it's essentially where we were hedged at. So there's not a huge amount of incentives to be doing a whole lot of extra hedging at Shreveport just because that's not what the basis - the price basis for the barrels are.

Right. Okay, thank you.

Thank you.

Your next question comes from the line of Gary Stromberg from Barclays Capital. Please proceed.

Hi, all of my questions were asked. Thanks.

Thank you.

Your next question is a follow-up question from Kelly Krenger from Bank of America. Please proceed.

Yes, thanks. My follow up was asked and answered as well. Thank you.

Your next question comes from the line of [Tariq Yousuf] from [Steadfast]. Please proceed.

Hi. How you guys think about pro forma Superior, the appropriate capital structure or what the run rate total debt outstanding should be pro forma Superior? And does that any way influence your decision in terms of what the appropriate distribution should be in the next 12, 24 months?

As we've stated, certainly several times, we're certainly committed to a balanced capital structure between debt and equity. I think if you look at the way in which we finance the Superior acquisition, we were roughly at 50-50 between raising equity and debt simultaneously to pay for the roughly $400 million for Superior. I think in terms of the capital structure, vis-�-vis distributions and how we look at that, we certainly look at both components of what our distributable cash flow targets are relative to the cost to service our debt. So I think it's all very much interrelated, but again, we're committed to a balanced capital structure that's roughly half debt and half equity.

Okay. Thank you.

Your next question comes from the line of Eric Seeve from Golden Tree. Please proceed.

Hi. A few more. With respect to Shreveport, it sounds like you guys have been able to improve volumes there, and I know that in previous quarters it had some operational issues which prevented it from gaining its full capacity. Can you just update us there on what it ran at in the third quarter, where it's running now, and where you are hoping to get it?

Sure. Again part of that's driven by economics not just by operational issues that. It ran right over - little over 40,000 barrels a day, 44,000 barrels a day in the third quarter. We're running between 46,000 and 48,000 barrels today and we'll probably finish up the year at about that rate.

Okay.

Operationally it's doing well.

Okay. And so once get to 46,000, 48,000 that's about where it's capacity is, I appreciate it.

And that's -- increment accrued gets pretty expensive. You run a little less barrels as your incremental barrel at that point, and it gets pretty expensive. If the WTI-Brent spread goes back to more traditional levels and you have more of a Sour advantage, you'd run more Sour barrels there and get closer to that 50,000 barrels a day. But given the circumstances of today that's about where we would be.

Okay, thank you. Second, with respect to the timing of the incremental 750,000 shares sold pursuant to the greenshoe, was that during the quarter or after the quarter?

It was after the quarter, and it'll be reported as a subsequent event in our Q.

Okay, great. And then I guess, when I look at the first half of the year there is a huge working capital. It's a huge use of cash, which makes sense because oil prices are rising. And then in the third quarter you guys drew a little bit of that, but if working capital was east of $120 million in the first half year, you only drew $10 million out of it in the third quarter. And I am sure there are a lot of moving parts here other than just oil prices, but should we be expecting a working cap to be a big source of capital on the fourth quarter, or am I thinking about that the wrong way?

Well, we obviously will be bringing on the working capital related to the Superior refinery, so we would expect the receivables to grow. And - but also we would be putting on some decent payables as well to offset part of that. So I mean, I think we would see obviously some working capital increase, but it certainly is the reason we increase the revolving credit facility as well, so --

Let me ask differently. Ignoring Superior, just with respect to the legacy business, is there - were you expecting a big working capital benefit in the fourth quarter or not really?

No. Not really. I mean, we think that inventory levels and everything else should stay pretty similar levels to where they are.

Okay. Thanks again, guys.

Thank you.

There are no further questions. At this time, I will turn the call back over to the presenters. Please proceed.

Thank you, operator. This concludes the Calumet Specialty Products Partners earnings conference call covering the company's third quarter 2011 results. Thank you very much for participating in this teleconference. Please note that the teleconference will be available for replay using the instructions contained in our press release.

Ladies and Gentlemen. that concludes today's conference. Thank you for your participation, you may now disconnect. Have a great day.