Calumet Inc (CLMT) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2012 Calumet Specialty Product Partners LP earnings conference call. My name is Kirstie, and I will be your operator for today.

(Operator Instructions)

I would now like to turn the call over to Mr. Bill Anderson, Vice President of Marketing. Please proceed, sir.

Thank you, Operator. Good afternoon, and welcome to the Calumet Specialty Products Partners investors call to discuss our first quarter 2012 financial results. During this call, Calumet Specialty Products Partners LP will be referred to as The Partnership or Calumet.

Also participating in this call will be Jennifer Straumins, our President and COO; Pat Murray, our CFO; and Bill Grube, our CEO. 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 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 & 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, Bill. We are very pleased with our results for the first quarter of 2012. On net income of $51.9 million, we have reported quarterly adjusted EBITDA of $69.7 million and quarterly distributable cash flow of $39.2 million.

We continue to focus on our operations to meet demand for our specialty products and to better to benefit from the widening crack spreads driven by heavy Canadian and Bakken crude differentials to NYMEX WTI. While this has been beneficial to our profitability, the increased volatility in these differentials has caused us to lose hedge accounting under US GAAP for the crude oil portions of our crack spread hedges for our Superior refinery. Pat Murray will discuss the impact on our income statement later in this call.

Economically, we expect to continue to benefit from these wider differentials in the second quarter of 2012. On April 18, 2012, we declared a quarterly cash distribution of $0.56 per unit for the quarter ended March 31, 2012 on all outstanding units.

The distribution will be paid on May 15th to unitholders of record as -- of the close of business on May 4th and represents a 5.7% increase over the fourth quarter 2011, and a 17.9% increase over the first quarter 2011.

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

Thank you, Jennifer. Net income for the first quarter of 2012 was $51.9 million, compared to $4.2 million for the same period last year. These results include $26 million of non-cash unrealized derivative gains, as compared to $0.4 million of non-cash unrealized derivative losses in the first quarter of 2011.

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 $90.2 million and $69.7 million respectively for the first quarter of 2012, as compared to $26.4 million and $34.7 million respectively for the same quarter in 2011. The Partnership's distributable cash flow for the first quarter was $39.2 million, as compared to $18.2 million for the same period last year.

The increase in adjusted EBITDA quarter over quarter was due primarily to a $37.4 million increase in gross profit, and $9 million of increased realized derivative gains, partially offset by a $7.6 million increase in selling, general and administrative expenses and a $4.5 million increase in transportation expense.

We encourage investors to review the section of our 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 first quarter of 2012 for specialty products and fuel products was $66.5 million and $17.8 million respectively, compared to gross profit of $47.9 million and a loss of $1 million respectively for the same period in 2011.

The increase in specialty products segment gross profit of $18.6 million quarter over quarter was due primarily to a 29.4% increase in sales volume, 9.5% increase in the average selling price per barrel, partially offset by a 12.8% increase in the average cost of crude oil per barrel and higher operating costs, largely repairs and maintenance.

The increase in fuel products segment gross profit of $18.8 million quarter over quarter was due primarily to a 150.8% increase in sales volume, mostly as a result of the Superior acquisition, and a 9.2% increase in the average sales price per barrel, excluding the impact of realized hedging losses reflected in sales, partially offset by a 6.8% increase in the average cost of crude oil per barrel and increased realized losses on derivatives of $24 million recognized in gross profit.

Due to the extremely volatile nature of the pricing differentials between WTI crude oil and both Canadian heavy and Bakken crude oils in the first quarter of 2012, our WTI crude oil swap contracts entered in to hedge the purchase of crude oil at our Superior refinery as part of our crack spread hedging program are no longer closely correlated, and we were required, under US GAAP, to discontinue hedge accounting on these particular derivatives.

As a result, we recorded $27.2 million to realized gain on derivative instruments on the income statement, instead of within gross profit in our fuel products segment due to this loss of hedge accounting under GAAP.

The affected portion of realized gains or losses on crude oil swaps which qualify for hedge accounting are recorded to cost of sales. Our fuel products segment gross profit for the first quarter of 2012, therefore, does not reflect any impacts of our crude oil hedges related to our crack spread hedging program for the Superior refinery.

Selling, general and administrative expenses increased $7.6 million quarter over quarter to $18.1 million. This increase was due primarily to additional employee compensation costs driven partially by the Superior acquisition, which closed on September 30, 2011, with no similar expenses in the comparable period in the prior year, higher incentive compensation costs and higher professional fees during the quarter ended March 31, 2012.

Interest expense increased $11.1 million quarter over quarter, due primarily to a higher interest rate associated with our 2019 senior unsecured 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 well as additional outstanding long-term debt in the form of additional 2019 senior unsecured notes issued to partially fund our Superior acquisition.

As of March 31, 2012, total capitalization for The Partnership consisted of partners' capital in the amount of $622.2 million and outstanding debt of $666.6 million, comprised primarily of $586.6 million of 0.09375% senior notes due 2019, which is net of discount of $13.4 million, and borrowings of $74.2 million under the revolving credit facility.

The $106.7 million decrease in partners' capital from December 31, 2011, was due primarily to $130.1 million in other comprehensive loss and $28.2 million in distributions to unitholders, partially offset by net income of $51.9 million.

On March 31, 2012 we had availability of $343.2 million under our under $50 million revolving credit facility, based on a $641.3 million borrowing base, $223.9 million in outstanding standby letters of credit, and $74.2 million in outstanding borrowings under our revolver.

We believe that we will 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 unitholders, debt service obligations, contingencies and anticipated capital expenditures.

Now I'll turn the call back over to Jennifer Straumins.

Thank you, Pat. This concludes our remarks. We'll now be happy to answer any questions you may have.

Operator, can you please confirm if there are any questions?

Thank you, Jennifer. We do, indeed, have questions for you. Your first question comes from the line of Darren Horowitz from Raymond James.

(Operator Instructions)

Now that you guys have had a bit more time integrating the Superior refinery and have a better feel for the [feed] given the economics around running those heavier barrels, what's your sense of run rate synergies?

Not quite sure what you mean by run rate synergies. Are you talking about --

Well, yes, I thought when you had initially discussed integrating the asset, specifically the refinery, how you were thinking about what feedstocks you would run on a consistent basis not only at Superior, but also at Princeton and at Cotton Valley and at Shreveport. I thought there were going to be kind of some integration targets and some synergies -- cost synergies that were going to be extracted from bolting that asset into the overall profile.

We -- at Superior, we really like the, really the 50/50 crude slate between the sweet and the sour. The one project we are working on is the rail project at Superior, which will allow us to bring some barrels down into the Louisiana refineries, and that could be barrels of whole crude or intermediate or finished products for further upgrading. So, that project is continuing as planned and will be done later this year.

And what's the expected cost on that?

We haven't disclosed that.

Okay.

It goes into that, $25 million of CapEx for the year. So, it's all part of that number.

Okay. And as it relates to the Shreveport refinery, can you just give me a sense for how many WTI-based barrels that asset's running right now?

It's running about 30,000 barrels of WTI-based barrels.

Okay. And that's out of an aggregate of what, about 58 or 60?

No, we're running about 48,000 barrels a day at Shreveport.

Okay. That's all I had. Thank you.

Thanks.

Thank you. Your next question comes from Brian Zarahn from Barclays. Please go ahead, Brian.

Good afternoon.

How you doing, Brian?

Good. Can you talk a little about the contribution of Superior to the first quarter results?

Superior's been a great asset for us. It's run well all winter. It ran, I think, more barrels there this winter than it ever has in its history. And it's, as you can tell from the differentials, it's been a great deal for us. We don't give plant-by-plant economics, though.

Okay. And then in the news a few months ago, there was reports that you were evaluating a JV project in North Dakota. Can you talk a little bit about that?

Sure. That project's being done at our GP level so it won't immediately impact the MLP itself. And that project is still continuing. Site selection has taken place, and the general partner of Calumet is working closely with the engineering design firm and engineering consulting firm to make a go/no-go decision on that project here in the next couple of months.

And any reason why a difference between doing the GP versus --

[Timing of] capital. It's probably a two-year project and several hundred million dollars, so we want to be able to match the cash flows out of the business with the capital.

Okay. Last question for me is, you've certainly accelerated your distribution growth rate since acquiring Superior. Can you talk about your thought process around the distribution? Do you think there may be a little bit of a pause, or do you expect to continue to see quarterly bumps?

I think we'll continue to see quarterly bumps as we continue to grow the business. We made it, I thought, pretty clear that, you know, at the end of the year, in February, we didn't do a real large distribution increase because we'd only had Superior for one quarter, and we wanted to make sure that we were realizing the cash flow out of that business that we had projected at the acquisition.

So really, this distribution increase helps catch us up for the contribution of Superior. You know, you're not going to -- I would -- we'll continue to see modest increases. And overall, we're targeting that 1.3 to 1.5 times coverage ratio.

Thanks, Jennifer.

Sure. Thank you.

Thank you. Your next question comes from Kelly Krenger from Bank of America Merrill Lynch. Please go ahead.

Hi there. Just a couple questions. On the fuel products, on the gross profit margin that you show of 17 point -- round numbers -- $8 million, do we need to add back the $24 million in realized losses on derivatives to get a clean number for that? Or, I guess --

It's the realized -- it's the realized number that you want to add back. I believe that number is $27 million.

So if the fuel products as shown -- on the press release, given your current accounting for it, is that $17.8 million, is that kind of the number?

No, because --

Unhedged gross margins number?

Pat, why don't you explain that to him a little?

So when we de-designated the hedges as of 1/1 just on the crude oil side of the business, then the realized loss, I guess, or realized gain on those pieces of the barrel were reclassified to realized gain. So you need to add that number back to get a result of the hedged portion on the segment. So, you add $27.2 million back. I think if you add those pieces --

To 17.8?

Pardon me? Yes.

So 27.2 plus 17.8 gives you - what -- $45 million in the quarter. Is that right?

Right.

That's the hedged gross margin for your products?

That's right. That's right.

Okay. And then on SG&A, can you give us a sense for what you think a proper run rate for that will be going forward? Or, the first quarter of 18 --

Yes. We had some one-time items in that number for the first quarter. I think going forward a good run rate is around $14 million.

Okay. And then just, I know you commented on it a little bit in the press release I think in terms of the specialty products in terms of good demand, but can you just give us a sense for kind of what you're seeing there on the demand side on the specialty products side of the business and in terms of pricing, given kind of what crude's been doing?

Sure. We have raised prices across all of our specialty products lines over the last six weeks, as crude prices ran up over the course of the first quarter. January was a little weak, as exchange rates were still a little tough for the export business. But we've got a great export business going right now. Everything is very strong, and demand's good across all of the products, as it has been, really, for the last -- really since, you know, exiting the recession in 2010.

Okay, so no real --

No real change one way -- no change from anything that we saw from 2011, or the latter part of 2010.

Okay. I think that's all for me. Thank you.

Thanks, Kelly.

Thank you. Your next question comes from Eric Seeve from GoldenTree. Please go ahead.

Hi. Sorry to to ask this again. I just want to make sure I understand it, though. For fuel products, unhedged, I'm trying to understand what earnings would have been from that business. What would unhedged earnings have been?

Unhedged earnings, basically, the cash settlement on the derivatives were about $30 million for the quarter on the fuel segment for the crack spread hedges. So you would need to add 30 back to that.

$30 million to the $17.8 million?

Yes, to the gross profit number.

Okay. So just to be correct, the hedges cost you guys $30 million in the fuel segment in that quarter in terms of the realized hedges.

That's right.

Okay. Thank you. Okay. One accounting question, I see that shareholders equity took a big step down from year-end to March, and it looked like it was due to reduction in comprehensive income. What happened there?

That's basically the change in the market-to-market valuation of the hedging positions as the crack spreads widened out. Our derivative, if you look at our balance sheet, look at what the net derivative assets were at year end and look to where they are today, it's a net derivative liability. There's a pretty big change there. That's driving the change in other comprehensive loss.

Okay. Thank you. With respect to CapEx, you spent almost $10 million in the first quarter. Are you still in the $20 million to $25 million range for the whole year?

We are. We built a biodiesel plant at our Dickinson, Texas, facility and so that was a big part of the growth CapEx. And also, the rail project up in Superior has been very active over the first quarter.

Okay. And so, it's still 20 to 25 is --?

Yes.

Okay.

We've always said too, if we're generating a lot of cash in the business and we have good growth projects that come up, we'll go ahead and do them. So the maintenance and environmental part of that 20 guidance that we've given, that's the maintenance environmental part. So, growth projects are still to be determined based on our results.

Okay. So it sounds like if the environment stays strong, it's probably prudent to assume that that 20 to 25 number might rise throughout the year?

Yes.

Okay. Thank you. And just, lastly, there's -- clearly the business is performing really well and benefiting from differentials -- both the WTI (inaudible) differential, which I guess is really helping Shreveport, as well as the Bakken and Canadian differentials, which are also helping Superior.

You know, there are different schools of thought over when those differentials might subside. But can you just talk a little bit about how you got -- you guys have got to manage a distribution here. How do you think about that when you plan your distribution?

Sure. And that's again why we have the conservative distribution policy. We're also doing a lot of hedging to help mitigate that risk. We've been able to put on some very strong hedges, and the details of those will all be in the earnings release in the queue here in a few days. So, that's how we've really been able to do that.

So when you talk about a conservative distribution policy, is that based on the 1.3 the 1.5 times?

Right.

Okay. Okay, great, thank you. Last question for me is just, you know, depending on where CapEx ends up and depending on where the rest of the year ends up, you ought to have some pretty decent excess cash flow in excess of the distribution. Other than potential CapEx projects, what might you earmark for that?

Paying down the revolver.

Do you have a goal of fully paying down the revolver, or -- ?

I wouldn't even say we have a goal. That's just one of many things that we could do. We're always looking for growth opportunities, acquisition opportunities, so we'll find a way to spend the extra money.

Thank you.

Thank you. We do have another question for you from Kelly Krenger again from Bank of America Merrill Lynch. Please go ahead.

Thanks. Just another quick one on -- I don't think you covered this. You may have covered this. If you did, I apologize. I think you mentioned in your press release that you may have had some down time or turnaround at the various facilities, I think. Just curious, based on that and based on the CapEx that you spent, should we -- I guess from a normalized EBITDA or cash flow standpoint, should we expect a pickup as a result of those things kind of going forward, all things being equal?

Yes, because we did have quite a bit of turnaround spending in our first quarter numbers.

Did that result in reduction in runs or cash flows or anything like that as a result of those, or were you able to kind of manage around the turnarounds?

Our solvents production was down about 1,200 barrels a day from where it had been due to those turnarounds. Our production out of our naphthenic refinery at Princeton, that was also down several hundred barrels a day due to turnaround activity. So, I expect to see run rates pick up in the second quarter.

Okay. And do you have any other meaningful or material turnarounds coming up for the rest of the year?

We do not.

Okay. That's all I had. Thank you.

All right, thanks.

Thank you. We have no further questions for you, so I'd now like to turn the call over to Jennifer Straumins for closing remarks.

This concludes the Calumet Specialty Products Partners earnings conference call covering the Company's first quarter 2012 results. Thank you very much for your participation in the teleconference. Please note that this teleconference will be available for replay using the instructions contained in our press release.

Thank you, Operator.

Thank you. And thank you for your participation in today's conference, ladies and gentlemen. That concludes your presentation. You may now disconnect. Good day.