Calumet Inc (CLMT) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the fourth quarter 2012 Calumet Specialty Products Partners L.P. earnings conference call. My name is Taisha and I will be your operator for today. (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. Pat Murray, Chief Financial Officer. Please proceed.

Thank you, operator. Good afternoon and welcome to the Calumet Specialty Products Partners investors call to discuss our fourth-quarter 2012 financial results. During this call, Calumet Specialty Products Partners will be referred to as the Partnership or Calumet. 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 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'd now like to turn the call over to Jennifer Straumins, President and COO.

Thank you, Pat. We were pleased with our results for the fourth quarter. On net income of $45.7 million, we have reported quarterly adjusted EBITDA of $91.3 million and quarterly distributable cash flow of $54.6 million. We continue to benefit from the Canadian heavy crude differentials at both our Superior and Montana refineries. On January 14, 2013, we declared a quarterly cash dividend of $0.65 per unit for the quarter ended December 31, 2012 on all outstanding units. The distribution will be paid on February 14, 2013, to unitholders of record as of the close of business on February 4, 2013. This represents a 4.8% increase over the third quarter of 2012 and a 22.6% increase over the fourth quarter of 2011.

We would like to comment at this point on some of the items in our earnings release today. We'd like to talk about our specialty products segment. We have -- during the fourth quarter of last year we saw some weakness in our specialty products segment from both a volume and a margin standpoint. Primarily this was in our paraffinic lube oil segment as we've seen some additional production come online and some imports coming into the market that impacted our margins late during the fourth quarter. Saw a lot of our customers working on targeting low inventories for the year end and given that we did not have year-end inventory targets, we chose to wait until the beginning of 2013 for pricing to move up, rather than trying to sell a lot of volume at lower margins.

This has really paid off for us. We've seen demand come back in these segments. We've seen increased activity in all of our oilfield services segments, as well as a lot of our consumer product segments as well. So, we are feeling a lot more confident about our paraffinic lube business at this point in time than we were towards the end of the year. As we've spoken with a lot of you there is a lot of new production coming into the market. People are trying to make sure that they've got their production placed for 2013 as the market settles down. So, things are settling down.

While there were some price decreases early in the year, we are starting to see prices stabilize and begin to increase in that paraffinic segment. And just one point, this is a very small part of our overall specialty segment. The types of products that we are talking about only account for about 3000 barrels a day of our total specialty segment. Everything else has been performing very well.

We are very pleased with our Royal Purple acquisition. A lot of great opportunities going on in that segment in 2013. Our solvents remain very strong. All of our food grade white oils and petrolatum products remain very strong. Also want to remind you the seasonality of our asphalt business. Given the asphalt production at Superior, Shreveport and Montana, we do a lot of winter fill. So, those sales volumes are just a lot lower during the fourth quarter and the first quarter as we participate in the paving markets, which are stronger of course during the summer months.

I'd also like to talk about how pleased we are with the San Antonio refinery acquisition from NuStar. This has been an asset that Calumet has been interested in for quite a long time and we are very pleased that it's finally part of our asset base. There are a lot of exciting growth projects going on there. We'll be spending about $20 million of growth CapEx at that facility this year. We've got a lot of other growth opportunities that we are looking at from an organic standpoint this year.

2012 was a year of acquisition growth for Calumet and these were all very well performing assets, very strong financially performing assets, so it didn't take a lot of time to work on integration and optimization. And things are slowing down a little bit at this point in time that we're in a great position to do that. We're looking at a major expansion at our Montana refinery. We're looking at a major expansion at our Louisiana Missouri synthetic esters plant. And we are optimizing the relationship between the Superior refinery and the Shreveport refinery with the rail product projects that we've been able to do at both of those sites during -- that finalized in the fourth quarter of last year. That's been very successful for us.

We are not only moving crude and rail cars to our own facilities, we are selling them to third parties and continuing to grow that business. We've announced that we are exploring a barge crude opportunity out of Superior and that's a project that will continue to develop over the course of the year but, again, that could be a great project for us to move either Canadian or Bakken crude out of Superior to really a lot of East Coast refineries or Gulf Coast refineries.

One project -- another project that we are excited about that we announced late last week is the North Dakota diesels topping plant that we are going to be building with MDU. That's been a great relationship for us over the last year and we look forward to breaking ground in the next several months and moving forward on that project. That will be a substantial project for Calumet that will take a lot of our time and resources.

As always, we are continuing to look at other outside acquisition opportunities and would never turn down the opportunity to explore anything that would be qualifying income for us. The one project that we've put on hold at this point in time is the GTL project at Karns City, at our Karns City, Pennsylvania facility. We've been working very closely with our technology partners, Velocis and Ventech and Halder Topsoe on this project.

We've come to the conclusion over the last couple of weeks that while on paper this is fantastic technology, we are not sure we want to be first to market. So, we're going to take some time and we're going to do some more engineering analysis up front and make sure that this is the right project for us to do. We feel very strongly about the economics of the project and we feel strongly that the technology works on paper. We just want to make sure that we engineer it a little more thoroughly before we give the final go or no go decision. So, that's a project that we'll be slow playing over the course of the year.

As we look at our maintenance and environmental CapEx for 2013 we've got very significant expenditures. Between our turnarounds and our maintenance and environmental CapEx, we'll be spending about $130 million in 2013, which is substantially higher than we have historically spent, given our consent decrees with the EPA, both in Wisconsin and Louisiana. We're moving a lot of control rooms. We are moving a lot of office buildings outside of [that sense], we are doing a lot of mechanical upgrades at our facilities to make them more compliant from a EH&S standpoint.

And also have a very significant turnaround at are Superior refinery in late April, early May, and that's a once-every-four-year turnaround that we'll spend a substantial amount of money on. We feel very confident that we'll be very successful in all these projects and we'll go from there. At this point in time, I'd like to turn the call over to Pat Murray to review our financial results.

Thanks, Jennifer. Net income for the fourth quarter of 2012 was $45.7 million compared to $26.9 million for the same period last year. These fourth-quarter 2012 results include $7.6 million of non-cash unrealized derivative gains, as compared to $13.5 million of non-cash unrealized derivative gains in the fourth quarter of last year. We believe the non-GAAP measures of adjusted EBITDA and distributable cash flow are important financial performance measures for the partnership. Adjusted EBITDA, as defined by our debt instruments, was $91.3 million for the fourth quarter of 2012 as compared to $65 million the same quarter in 2011.

The Partnership's distributable cash flow for the fourth quarter was $54.6 million as compared to $33.1 million for the same period last year. The increase in adjusted EBITDA quarter over quarter was due primarily to a $61.6 million increase in gross profit, partially offset by $18.8 million of increased selling and general and administrative expenses, $6.3 million of which on the selling expenses side was non-cash amortization expense. And an $8.9 million increase in realized derivative losses.

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 fourth quarter of 2012 for specialty products and fuel products was $63 million and $78.8 million, respectively, compared to gross profit of $4.7 million and $15.4 million, respectively, for the same period in 2011. The slight decrease in specialty products segment gross profit of $1.7 million or 2.6% quarter over quarter was due primarily to a decrease in sales volumes for solids and waxes, as well as a decrease in the average sales price per barrel of lubricating oils, which declined more than the average cost of crude oil.

These reductions to gross profit were substantially offset by the additional gross profit generated from our 2012 acquisitions. The increase in fuel products segment gross profit of $63.3 million quarter over quarter was due primarily to a 23.3% increase in our sales volume, mostly as a result of the Montana acquisition, as well as higher sales volume from our legacy operations and a 113% increase in gross profit per barrel due to increased crack spreads.

Legacy Calumet operations provided $50 million of the increase in gross profit, while newly acquired operations provide a gross profit of $13.3 million in the quarter. Total loss on settled derivative instruments reflected in gross profit, as discussed, and realized loss on derivative instruments was $27.3 million for the fourth quarter of 2012, an increased loss of $2.5 million quarter over quarter. Selling expenses increased $10.9 million quarter over quarter to $14.9 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 primarily by the TruSouth and Royal Purple acquisitions and increased advertising expenses.

General and administrative expenses increased $7.9 million quarter over quarter to $19.6 million. This increase was due primarily to higher professional fees and additional employee compensation costs driven primarily by the Superior, Missouri, TruSouth and Montana acquisitions. Interest expense increased $6.2 million quarter over quarter to $24.3 million, due primarily to additional outstanding long-term debt in the form of 2020 senior unsecured notes that we issued in 2012 to partially fund the Royal Purple acquisition.

As of December 31, 2012, total capitalization consisted of Partners' capital in the amount of $889.8 million and outstanding debt of $863.5 million, comprised primarily of $858 million of senior notes due 2019 and 2020 which is net is discount of $17 million. The $160.9 million increase in Partners' capital from December 31, 2011 was due primarily to net income of $205.7 million and $149.7 million of net proceeds from our May 2012 public equity offering, partially offset by $132.4 million in distributions to our unitholders and $64 million in other comprehensive loss.

On December 31, 2012, we had availability of $355.1 million under our $850 million committed revolving credit facility, based on a $577.5 million borrowing base and $222.4 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, our debt service obligations, contingencies and our anticipated capital expenditures. Now I'll turn the call back over to Jennifer.

Thanks, Pat. This concludes our prepared remarks. We'd now be happy to answer any questions that you guys have. Operator, can you confirm if there are any questions?

(Operator instructions). Michael Peterson, MLV & Co.

Couple of questions, I'll try to make them brief. First of all, Jennifer, if you could confirm that the shortfall in specialty product volumes in the fourth quarter was self-imposed and due to what you viewed as a weak year-end pricing environment, which has since rebounded to some degree?

That's correct. The majority of it was self-imposed. We also encountered -- had a little bit of operating issues at both our Shreveport refinery and the Lyondell refinery that produces some of the naphthenic lubricating oils that we market. They had some product that ended up being off spec, so we were unable to sell it.

Okay, so we'll probably see a larger than normal amount of volumes recovered in -- or, sold in the first quarter but maybe not the full allocation because there were some operational concerns?

That's correct.

Okay, okay. Second question. In terms of your announcement in early January regarding the Superior barge project, can you talk at all about market reception in terms of other interested parties that have indicated interest or responded at all to your press release?

We can't mention any names. We have had some positive interest. I will say what has surprised me more than anything is the community interest in Superior has been a lot more positive than we anticipated. It's been decades since anyone has shipped crude oil on the Great Lakes and Wisconsin is a very environmentally friendly state, so we were a little concerned about public perception. But I think our plant manager up there did a very nice job of explaining the project to the public and all the safety precautions that we will be taking. And it's actually been very, very well-received by the public.

Interesting. That's helpful. Thank you, Jennifer. Lastly, if I could. If you can speak a little bit to your outlook on fuel products differentials, particularly in light of the San Antonio facility, which is going to be incremental in the first quarter, as well as the announced Dakota Prairie volumes. I'd like to hear your thoughts in particular on how you expect your differential to diesel benchmarks to change, and what impact you might see in terms of jet fuel relative to volumes that are no longer on a contract with the US government.

I'm not sure what you mean about jet fuel contracts and the US government, but anytime we do our economic analysis, we always just use the forward strip. We feel like if we were smart enough to predict where crack spreads were going to go, we would all be doing something else. These crack spreads have stayed stronger and look to be stronger for longer than we would have said a year ago, so we're -- we usually try and shy away from saying what we think margins are going to be doing from that standpoint.

Okay.

If you want to expand a little bit on the jet fuel and the government contracts, I'll try and answer that question a little bit better for you.

My understanding that your jet fuel realizations being below benchmark for jet prices, some of that was due to a term contract that you had with the Air Force, and that that relationship over the long term, because of the way the price environment changed, was slow to catch up with rising prices. With regard to diesel, what I was thinking was -- and you noted this with the Dakota Prairie announcement that your expectation is that that market is underserved for diesel, and so not only are you going to be capturing advantageous feedstock prices but you're also going to be selling into a growing and undersupplied product market as well. And so would expect that your diesel realizations relative to kind of benchmark diesel prices would be higher than what we've seen over the last number of quarters.

Yes, you're right about that. North Dakota local market for diesel is very strong and assuming that the Bakken prices hold where they're at, we will have low feedstock costs and high product prices at the refinery in North Dakota. I think our contracts with the government are ongoing and they are all based off of published jet prices, so what you may be seeing is some of our hedging losses flowing through revenue.

Okay, okay. That's helpful. All I have this morning. Thank you for your help.

Jerren Holder, Barclays.

Thank you for the 2013 maintenance CapEx guidance. Excluding the turnaround in second quarter and given your recent acquisitions, what is an appropriate maintenance CapEx run rate going forward?

I think after we get out of this year and it's -- I would say about $40 million a year after we get past the big spend this year. And that would not include any turnaround activity. That would just be the maintenance and the environmental CapEx.

Right. Got it. And the Superior refinery, that's probably going to be down for like 30 days or so?

That's about right.

Okay. And also on the SG&A, given all the tick up related to acquisition activity and professional fees and whatnot, what's a good run rate for that?

I would annualize where we were at in the fourth quarter.

Okay, thank you. That's all I had.

Peter Madsen, Drakkar.

Can I get a little more, if possible, granularity on the specialty segment in terms of -- if I look at it, the volumes -- and I'm looking at it more sequentially versus Q3 and Q2. So, volumes are down maybe 2000 or 3000 barrels per day versus -- Q4 versus Q3, Q2. Margin went down $4 or $5. And the paraffinic business looks like it's about 10% of your specialty production. So, can you square that circle a little bit for me in terms of a five, six barrel drop in margin, maybe 10% drop in production and 10% of that production being what you cited was somewhat problematic in the quarter.

Well, yes, some of our business is seasonal. You've got a lot of asphalt in there that, as I mentioned, we are building winter fill asphalt barrels for the paving season. So our sales of asphalt was down and crude prices were up and we saw some weakness in our specialty products pricing due to an oversupply to the market.

Right. And you'd indicated -- just to be clear -- so you'd indicated that pricing seems to be firming in the first quarter. At this point, is pricing firmer than the fourth quarter? Or I might've misheard and said -- maybe sounded like it dropped a little bit and now it's recovering.

It dropped in January and it is now recovering. What people need to remember, and we've been saying this for about 1.5 years now, is we've been enjoying very, very strong specialty products margins. We had some competitors with some operating issues. We had some plant closures back in 2008 and 2009 and 2010 that, while we were in the recession, you didn't really -- that really didn't impact the market. And then as the economy improved in 2011 and 2012, our products have been very tight in the market. Our margins have been very strong. And what you're seeing now is people have done some expansion and are doing some expansions and so margins are returning more towards historical levels.

Okay, that's helpful. So, you think that this -- we should look at these quarters where the specialty products margins were mid-20s as above historical norms, and maybe some of this stuff we're seeing now is back to a more normal run rate or more normal --?

That's right. Yes, you are exactly right.

All right. That's very helpful. Thank you.

T.J. Schultz, RBC Capital.

I guess when we look at some of the growth projects that you all have in front of you, some changes with the diesel refinery JV announced, and then delay in the GTL project, just trying to get an idea for level of growth capital expenditures as we look over the next year or two.

I think if you look in total over the next 24 months, that number is going to be around between $350 million and $400 million.

And how much of that this year?

I'd say a little bit less than half. Between 40% and 50% would be this year.

Okay. Back to the crude loading dock. Maybe if you can talk about how long you expect it to continue gauging customer interest and maybe what your desire would be to partner on that project. And then if you have any kind of framework for the potential scope of the loading capabilities there?

We are not really prepared to talk about the scope of the loading capabilities at this point. Interest has been strong and we are gauging interest at the same time as we are waiting for permits, so I think the permitting process is going to be the driving force behind the timing of the project. If we had a permit today we would be moving forward with the project.

Okay. And on that, are you looking for fee-based loading fees or are you looking at ways to eventually capture some of the spread there or the benefits of the spread?

We are looking to be able to capture the spread.

Okay. On the diesel refinery JV, correct me if I'm wrong, but I thought there was some thought initially to maybe do this at the GP level first. Maybe discuss the thought process to do this particular project at the MLP level, given the lead time?

Where the expenditure came in, it was not so large that it would impede our ability to operate the MLP or to grow distributions. And the timing of the expenditure and the financing that we were able to get from North Dakota to do the project, it just all made -- and given that we were using a lot of MLP resources to work on the project, it felt like it would be better suited to be at the LP level.

Okay. Finally, could you discuss a little more specifically the economics on that JV? How the cash flow comes out of the JV to you all versus what you're putting in?

We are really not prepared to discuss that at this point in time.

We've indicated that the estimate of the investment is $300 million and Calumet's portion is $75 million and there's $150 million from MDU and then the remaining balance is from an expected term loan facility we would anticipate will close here in the first quarter. And Calumet will be servicing the interest costs and principal debt service costs of that project, but it's extremely attractive terms of those term loans and certainly works for us from a cost of capital standpoint.

Okay, thanks.

Edward Rowe, Raymond James.

Given the wide differentials with Canadian heavy, has the composition of crude from Bakken light and heavy Canadian through your facilities changed, or is it pretty much still the same ratio of 50-50?

It's still the same ratio.

All right. That's all I had.

That concludes the Q&A portion. I would now like to turn the conference over to Pat Murray for any closing remarks.

Thank you, operator. This does conclude our earnings conference call covering our fourth-quarter 2012 results. Thanks to everyone for their participation in the teleconference. Please note that this 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.