Calumet Inc (CLMT) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2012 Calumet Special Products Partners, L.P. Earnings Conference Call. My name is Erin and I'll be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer toward the end of today's conference.

(Operator Instructions)

As a reminder this conference is being recorded for replay purposes.

I will now turn the presentation over to your host for today's conference, Mr. Bill Anderson. Please proceed, sir.

Thank you, operator. Good afternoon, and welcome to the Calumet Specialty Products Partners Investor's Call to discuss our Third Quarter 2012 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 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 the 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, that 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 pleased with our results for the third quarter. On net income of $42.4 million we've reported quarterly adjusted EBITDA of $121.4 million and quarterly distributable cash flow of $92.5 million. We continue to focus on our operations to meet the demand for our Specialty products, the best benefit from widened crack spreads driven by Canadian heavy and Bakken crude oil differentiates to NYMEX WTI, and effectively manage our working capital requirements.

I previously announced on October 1, 2012, we completed the acquisition of Montana Refining Company for aggregate consideration of approximately $184.8 million, net of cash acquired and excluding certain customary purchase price adjustments. Montana Refinery produces gasoline, middle distillates and asphalt, which our market is primarily into local markets in Washington, Montana, Idaho and Alberta, Canada.

The Montana Refinery acquisition was funded primarily with cash on hand with the balance through the borrow -- through borrowings and our revolving credit facility. I'd also like to announce that we have completed the crude loading project at our Superior, Wisconsin, Refinery. We will be loading Bakken crude into railcars for delivery into Shreveport. I'd like to thank all the people at Superior that contributed to that project.

And on October 16, 2012 we declared a quarterly cash distribution of $0.62 per unit for the quarter ended September 30, 2012 on all outstanding units. The distribution we paid on November 14, 2012, to unitholders of record, as of the close of business on November 2, 2012 and represents a 5.1% increase over the second quarter of 2012 and a 24% increase over the third quarter of 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 third quarter of 2012 was $42.4 million, compared to $19.6 million for the same period in 2011. The third quarter 2012 results included $22.1 million of non-cash unrealized derivative losses as compared to $20.3 million of non-cash unrealized derivative losses in the third quarter of 2011.

We believe the non-GAAP measures of EBITDA, adjusted EBITDA and distributable cash flow are important financial measures for the Partnership. EBITDA and adjusted EBITDA, as defined by our debt instruments, were $91.4 million and $121.4 million, respectively, for the third quarter of 2012, as compared to $47.1 million and $70.5 million respectively for the same quarter in the prior year.

The Partnership's distributable cash flow for the third quarter was $92.5 million as compared to $50.5 million for the same period last year. The increase in adjusted EBITDA quarter-over-quarter was due primarily to a $61.8 million increase in gross profit, partially offset by $6.3 million of increased realized derivative losses, and an increase in selling and transportation expenses.

We encourage investors to review the section of our earnings press release found 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 reconciliation 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 $90.6 million and $67.8 million respectively, compared to gross profit of $87.8 million and $8.8 million respectively for the same period last year. The increase in specialty product segment gross profit of $2.8 million quarter-over-quarter was due primarily to a 32.6% increase in sales volume and lower operating cost, partially offset by 7.2% decrease in the average selling price per barrel.

The increase in fuel product segment gross profit at $59 million quarter-over-quarter, was due primarily to a 76.4% increase in sales volume mostly as a result of the Superior acquisition, a 5.9% decrease in the average cost of crude oil per barrel and a 0.7% increase in the average sales price per barrel, excluding the impact of those realized hedging losses reflected in sales, partially offset by increased realized losses on derivatives was $7.4 million.

Due primarily to the extremely volatile nature of the pricing differentials between NYMEX WTI and Canadian heavy and Bakken crude oils during 2012, certain of our derivatives instruments were not accounted for as hedges. As a result we recorded a loss of $10.2 million to realize gain loss on derivatives instruments instead of within gross profit in the unaudited condensed consolidated statements of operations for the third quarter.

Total loss on settled derivatives instruments reflected in gross profit and realized gain loss on derivatives instruments combined was $51.9 million for the third quarter of 2012, an increased loss $13.8 million quarter-over-quarter.

Selling expenses increased $12.2 million quarter-over-quarter to $15 million. This increase was due primarily to increased amortization expense primarily related to the recording of intangible assets associated with our Missouri, TruSouth and Royal Purple acquisitions, additional employee compensation costs driven partially by the TruSouth and Royal Purple acquisitions as well as increased advertising expense.

General and administrative expenses increased $1.5 million quarter-over-quarter to $12.8 million. This increase was due primarily to additional employee compensation cost, driven partially by the Superior, Missouri and TruSouth acquisitions, higher incentive compensation costs based on our results, and higher professional fees, partially offset by a $6.3 million gain related to the curtailment of certain benefits and benefit plans covering employees at our Superior Refinery.

Interest expense increased $11.7 million quarter-over-quarter to $24.3 million, due primarily to additional outstanding long-term debt in the form of our 2019 and 2020 senior unsecured notes issued to partially fund our Superior and Royal Purple acquisitions.

As of September 30, 2012 total capitalization consisted of Partners' capital in the amount of $848.3 million and outstanding debt of $863.3 million, comprised primarily of $857.6 million of senior notes due 2019 and 2020, which is net of discount of $17.4 million. The $119 million increase in Partners capital from December 31s, 2011, due primarily to net income of $160 million, and $149.7 million of net proceeds from the May 2012 public offering -- equity offering, partially offset by $94.2 million in distributions to our unitholders, and $97.2 million in other comprehensive loss.

On September 30, 2012, we had availability of $477.8 million under our $850 million revolving credit facility, based on a $658.5 million borrowing base, and $180.7 million in outstanding standby letters of credit.

We believe that we will continue to have sufficient cash flow from operations and borrowing availability under our revolver to meet our financial commitments, minimum quarterly distributions to our unitholders, debt service obligations, contingencies and anticipated capital expenditures.

And now, I'll turn the call back over to Jennifer.

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 any questions?

(Operator Instructions)

Your first question comes from the line of Michael Peterson from MLV & Company. Please proceed.

Hi, good afternoon, folks. I have a question with regards to your distribution coverage. The coverage is a testament, I would argue, to the Partnership's business model, but it leads to questions with regard to delivering value to the unitholder. If you could, clarify you're perspective in terms of distribution growth, acquisitions, other venues that would enable the unitholder to tap into the strong earnings that you've been delivering in the last couple of quarters?

Sure. Our distribution policy has always been very conservative and we recognize that at this point in time being a mid-continent refiner, we are in a period of outrageous crack spreads.

And we prefer to take those -- take the extra cash that we have been generating and continue to grow the Company through both organic and -- organic growth and acquisition, so that when these crack spreads and these margins return to more normal periods, we will be able to sustain the distribution that we have, and not have to lower it, so that we are not considered to be a variable distribution MLP, which we are certainly not.

Okay. That's helpful, Jennifer, thank you. If I were to paraphrase that, would it be fair to say, that your most recent increase is something you view to be sustainable over the next number of years?

Yes.

Okay. Could you clarify, upon the completion of the Shreveport Rail Refinery, what impact that's going to have on your rail fleet? It looks to me kind of back of the envelope, like you probably require about a unit train every other day, and maybe turnaround times of about 1 week. Does that foot with what the utilization would be?

What we've done, when we acquired Superior, we ordered 400 new railcars, and plan on loading about 15 cars a day -- loading about between 10 and 15 cars a day at Superior for delivery down to Shreveport. These are not unit train facilities, these are manifest train facilities.

Okay. And, last question. Do you have any kind of an update, any news flow on the GTL pilot project that you announced?

We are continuing to gather all requirements for that project, we are working with our partners, Ventech, Velocys and Haldor Topsoe, designing that project, and we expect to have a cost estimate by the end of the year.

Okay. That's helpful. Thank you for your insight, and congratulations, on a nice quarter.

Thank you.

And your next question comes from the line of Cory Garcia from Raymond James. Please proceed.

I appreciate it. Great quarter, guys, and I do appreciate some of the color you guys went into with regard to the selling and G&A cost. I was wondering what sort of run rate should we be modeling on this? It's been a pretty significant bump up in the last several quarters, given the number of acquisitions you guys have been able to accomplish. Just curious as to where you guys see that playing out on more of a normalized run rate basis.

I think -- obviously the fourth quarter, or the third quarter run rat, but for the Montana acquisition, would give you some indication of kind of where we think we are going to be.

Yes, I would mention that in some of the expense increase in this current quarter, as we mentioned, it's non-cash-related to amortization of intangible assets associated with some of the acquisitions that we've done recently. So I think that might be a good place to kind of start, is look at the third quarter and if you're trying to get to true cash expenses it will offer some color of that, probably in the Q.

Okay. That would be great. I guess with regard to your Great Falls acquisitions you guys just closed. Any more detail on the amount of synergy you guys are expecting? Clearly, there's not this sort of real opportunity down from Superior to Louisiana refineries. Is there still sort of that opportunity on the Great Falls standpoint? Is there integration between Great Falls and Superior? How should we look at this asset within your overall Midwest portfolio?

Yes. I think there is some asphalt marketing synergies between Shreveport, Great Falls and Superior. Certainly, we acquired this asset because of its niche location and the products produced out of it. There are no SG&A synergies or anything like that, we are not reducing headcount, or pulling any corporate functions into Indianapolis at this point in time. So, really it's just additive to what we are already doing and there will be crude synergies, perhaps, in the future, but certainly the asphalt marketing will be what we take care of first.

That's helpful. Thank you.

Thank you.

And your next question comes from the line of Kelly Krenger from Bank of America-Merrill Lynch. Please proceed.

Hi. Thanks. Just a couple of questions -- one on the crude loading project that you have completed. What does that due for your, I guess, cost of crude or your crude slate, particularly down in Superior -- not Superior, Shreveport?

We are running all [three] at Shreveport right now, and we've been running some Bakken at Shreveport but we've bringing it in from North Dakota and paying higher premium for those barrels than what we should have to, bringing it out of the Superior Refinery.

And part of that discount will be based on what the WTI Bakken spread is. The transportation is about $7 to $8 a barrel to get it from Superior down into Shreveport. And we are anticipating between $7 and $10 of reduced base -- of reduced crude costs on those barrels at the Shreveport base on what we had in running prior to the Exxon pipeline going down.

Okay. So you are not running -- at Shreveport, you haven't being running any Brent-based -- not necessarily, Brent, but Brent-based crude pricing like LLS or anything like that?

The majority of our Shreveport barrels are priced off the WTI.

Okay.

And we've not been running any imported crude at Shreveport since April when the ExxonMobil pipeline went down.

Okay. And then you noted that you paid most for the Montana refinery primarily with cash. But can you give us a sense for -- as we sit here today, I don't know if today is a good day relative to kind of your normal cash cycles or your credit facility drawing cycles; but was that -- I mean, I noted you had $190 million of cash on the balance sheet at the end of the quarter, was that mostly paid for with cash? Or, how much did you draw down on the revolver to close that acquisition?

Yes. I mean, we did the cash on the balance sheet and like we said, we -- it's probably a 95%/5% split between the two. We'll probably provide a little more color in our Q on that, but the lion share of the cash that was available was used for that.

Okay.

And then ongoing we see -- and we do see some working capital synergies based on kind of where their balance sheet was at the time of acquisition, where we think we can go with it going forward. But we've got to work all that out over the coming quarters.

Okay. And then, I mean it looks like you had the good working capital quarter. Was there anything --

Yes --

-- unusual in the quarter or what should we expect kind of going forward?

I think it's important to contrast this end of the second quarter and the end of the third quarter. Ones -- that the biggest jump really is in the payables and we spent little bit a time I think on the last conference call talking about what we've done at the end of the second quarter in order to save LC cost, because of the amount of cash we had on the balance sheet.

We ended up sort of using, limiting the number of LCs that we've had and kind of altering the crude payment cycle slightly at the end of the quarter. And then given that we closed on Royal Purple and utilized that cash, [we] came back at the end of this quarter and created more of the normal payable cycle for ourselves and we increased these -- letters of credit.

We also have been enjoying increased credit lines from suppliers so that has allowed us to get payables higher. Those -- that was the main driver in this working capital change. I mean, I think going forward, our working capital tends to stay fairly stable across a certain crude oil price range, we do see -- of course, now with the addition of Superior and Montana we will see a little bit of [winter field build] in the asphalt, but nothing extraordinary.

Okay. And then anything new or different to note in the specialty side of the business? Is demand still good, or is that business still kind of going as it has been for most of the year?

Yes. It is. Yes, demand is still good. Our plants are running very well. We expect to finish the year strong.

Okay. And one last one on hedging. For 2013 -- or, I guess can you just give us sense for how you feel about your hedge book kind of beyond this year, kind of for '13 and '14?

Yes. We're very pleased with the numbers we are hedge that. We are hedge in the mid-20s for 2013 and '14. We are laying some hedges on for 2015 already. So, we are -- feel great about being able to lock in 2 or 3 years of very strong earnings.

From a volume standpoint for next year, it looks like you got about 21,000 barrels a day hedged. Is that where you're comfortable or do you want to layer more, or are you thinking about that?

It just depends on the opportunities. We are seeing some very strong diesel cracks right now, so we will continue to layer those in. Our policy -- let's us hedge up to about 70% of our plant production. And I don't know that we will go that high, but I'd certainly be comfortable going higher than we are at right now.

Okay. Thank you.

Jennifer Straumins; Thanks, Kelly.

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

Hi, guys. A few questions if these were asked, please just skip over them -- my apologies, as I've been having some phone problems. But it looks like in the specialty segment, sequentially volumes were a little bit weaker if you backed out the new line item, which I think represents Royal Purple, which is packaged and synthetic specialty products. Can you just comment a little bit on what you are seeing in that market? And do I have that right that they're packaged in synthetic specialty products, represents the Royal Purple?

That's Royal Purple and the esters business out of Missouri and TruSouth. So, it will be those 3 facilities. And the -- some of the specialty volumes are down just because we have been earning some reduced crude rates at Shreveport due to crude availability, and the completion of the rail project at Shreveport and at Superior. So it wasn't -- it was more plant-related than demand-related.

So, should I expect a pickup into Q4?

A little bit of a pickup into Q4. The big pickup will come in the -- in Q1. I mean, we are just now getting that rail project. Today is the first day, we are loading cars, so by the time they get down there and unloaded and processed, it will be the end of the month. And then things always slow down -- 4 or 5 weeks a year with some -- a lot of customers' plant turnaround activities, so I would expect the increase to come in the first quarter.

Okay. Great. And with respect to the rail --

(Inaudible) an increase.

Sorry. And with respect to the rail project, it doesn't necessarily look from -- at lease the screens that I see which I am sure are a lot less sophisticated than what you see that -- buying crude -- shipping crude for [$7, $8] from the Bakken down to Shreveport is really much better than buying WTI.

So, it doesn't seem like today anyway, the rail project would make up -- would be highly economic to run. Am I missing something?

The barrels that replacing our Brent price barrels.

So, how many -- roughly what proportion of production in Shreveport have been sort of Brent linked?

About 15,000 barrels a day.

Okay. And in terms of the impact of the improved profitability resulting from this, is it mostly Q1 as well or should we see some in Q4?

It will be mostly Q1 as well.

Okay. Okay. Thank you. Can you talk a little bit about -- you've been active in the M&A front, going forward are you digesting things now, or you're still out there are looking? And if you're looking, strategically, what are the things that you're thinking about?

We are always looking, because there are always good opportunity. You know, continue -- really our business is two-fold, we are continuing to look at niche refining assets, and we are continuing to look at specialty products opportunities. So it won't be -- our acquisition strategy is no different than it's been through all of 2012.

Okay. Great. Thank you.

Thank you.

And just, lastly, with respect to Montana, it sounds like, strategically, you are not going to operate it a heck of a lot differently and it's been operating, and there is not a lot of integration or synergy opportunities, but more it's -- another [peach] for the portfolio.

Can you give us a little color on what normal CapEx is for that refinery? Are there any big CapEx requirements in the next few years? And obviously, it's benefiting right now from terrific spreads in some of the North American crude prices, but longer term, what do you think is a sort of sustainable mid-cycle EBITDA level for that?

We really don't break out EBITDA by plant, so I can't really speak to that. But, obviously, they are benefiting right now with the -- they are running the Canadian heavy barrels. So they are benefiting from the wide Canadian and WTI kinds of spreads. But also, they're a niche refiner; they serve their local market. So, they've always benefited from higher margins than lower crude cost, so don't foresee that really changing in the coming years.

And as far as CapEx they do have a turnaround planned in the third quarter that would be around a $10 million turnaround, and then just sustainable ongoing CapEx, between $5 million and $10 billion a year. And we do have some significant growth plans for this facility that we're working on right now and we'll be talking more about in the future.

So $5 million to $10 million of CapEx and extra $10 million in Q3 of '13 for a turnaround?

That's correct.

Okay. And how often do the turnarounds take place?

Every 4 to 5 years.

Okay. Great. Thanks very much.

Thank you.

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

Hey, guys. Great quarter.

Thank you.

Just wanted some clarification. Could you just walk in through what EBITDA would have been if you were unhedged for the quarter?

If we were unhedged, it would have been $50 million higher for the quarter.

So it would have $171 million?

That's right.

Great. That's helpful. And just -- if I missed it, what was the contribution for Royal Purple acquisition in the quarter?

I'm sorry, what was your question -- the contribution of Royal Purple?

Yes. That's right.

We don't disclose disclose plant-by-plant economics. So we don't share that level of detail. There is too many intercompany synergies between all the facilities that we don't break it out like that.

We have filed -- we've got some historical financial statements on file for Royal Purple to give you some frame of reference but, yes, we don't break out our results by facility.

Okay. Great. Well, thank you for answering the questions.

Your next question is a follow up from Eric Seeve from Golden Tree. Please proceed.

Thanks. I see that SG&A has ramped up a little bit from Q1 to Q2 to Q3. I'm just trying to get sense going forward. I don't know if there was a lot of M&A costs embedded in that number, but just trying to get a sense going forward what should investors in the company expect.

Yes. I think that a couple of things are going on there. There are some professional fees in the results. We've also -- with the acquisitions of Royal Purple primarily, there is fair amount of amortization now of intangible assets, and so that kind of ramped up the number a bit. I think ongoing and looking forward, I think maybe it's probably best to take a look at where we are in the third quarter, but for -- some incremental from Montana but probably not a lot -- and look at that as probably an ongoing run rate.

So you've got between selling and G&A, you're just under $28 million added in Q3, and it sounds like going forward it should be, maybe, a little bit higher than that due to Montana. Do I have that right?

Right.

Great. Thank you. And then just -- my last one is just -- I know -- my recollection there have been some thought to maybe breaking out a separate segment for Royal Purple and some of the other sort of non-refining assets as their own segment. Is that still under consideration, or are you guys going to stick with what you've got?

Our provision of the revenue data on that separate line item at this point is where we're going to be. I mean they are -- we consider that at this point, we think that this provides a bit more visibility than we've had in the past, and for now that's where we're going to be with it -- staying in the two segments but giving everybody some additional revenue data on those pieces of the business, in that line item.

And that line item is by virtue of the packaging and synthetic specialty products.

That's correct. As Jennifer mentioned, that includes the esters plant in Missouri, Royal Purple and TruSouth.

Okay. Great. Just an observation from an investor, it seems me that it might be something that the -- if you give more disclosure the market might be able to -- might be easier for the market to attribute a higher valuation multiple to what should be a more stable and less capital-intensive earnings stream associated with that but --

No. We're trying to balance that with our competitive situation. We operate in a very specialty industry with very few competitors. And so, we're trying to weigh the best interests of everybody.

Great. Thanks again for your help.

Thank you.

And your next question comes from the line of Michael Peterson from MLV. Please proceed.

I wonder if I can have just a brief follow-up -- if you can give us an update in terms of the M&A outlook. When we last spoke, you suggested that the likelihood of something to year end was diminishing. Has that changed? And, what's your outlook, in general, in terms of the next number of quarters?

We've talked a little bit on this call about M&A activity. We're always looking for something. We're always trying to put ourselves out there and take advantage of whatever is available. I can't really speak to anything that could or could not -- may or may not happen before the end of the year. When the time is right -- if the time is right, we'll be issuing press releases that we -- we continue to try and be active in the M&A market.

Okay. Thank you.

And I would now like to turn the call over to Bill Anderson for closing remarks.

Thank you, Operator. This concludes the Calumet Specialty Products Partners' Earnings Conference Call, covering the Company's third 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 for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.