Calumet Inc (CLMT) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the first quarter 2013 Calumet Specialty Products Partners LP earnings conference call. My name is [Shansala] and I will be your facilitator for today's call. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference.

(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. Noel Ryan. Please proceed, sir.

Thank you.

Good afternoon, welcome to the Calumet Specialty Products Partners first quarter 2013 result conference call. We appreciate you joining us. Leading today's call is Jennifer Straumins, our President and COO. We'll provide an update on our Business and the opportunities for growth as we look ahead to the remainder of the year and beyond. Next, Pat Murray, our Chief Financial Officer, will provide detail on our financial performance during the first quarter. At the conclusion of our prepared remarks, we will open the call for questions.

Before we proceed, allow me to remind everyone that during the call we may provide various forward looking statements within the meaning of Section 21-E of the Securities and Exchange Act of 1934. Such statements are based on the belief 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 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.

With that, I'd like to hand the call over to Jennifer.

Thank you, Noel.

Our net income for the first quarter was $46 million, a decline from $51.9 million in the year-ago period. Our first quarter results include $24.5 million of non-cash, unrealized derivative gains versus $26 million of non-cash unrealized derivative gains in the first quarter of last year. Adjusted EBITDA is defined by our credit instruments of $80 million for the first quarter of 2013, compared to $69.7 million in the first quarter of 2012. On April 22, we increased our quarterly cash distribution for the 11th consecutive quarter to $0.68 per unit, or $2.72 per unit on an annualized basis for the quarter ended March 31, 2013 on all our outstanding limited partner units.

As we indicated in our press release issued this morning, our first quarter performance was negatively impacted by operational reliability issues at our Shreveport refinery going into our turnaround that we completed there in February. These -- the impact of these issues really account for the majority of the shortfall versus what the street anticipated our earnings being. These issue have been resolved and that facility is currently running on plan during the second quarter. Although we typically do not provide refinery level guidance, we do want to note that Shreveport is operating at more than 40,000 barrels a day, which is slightly above the historical levels for this time of year.

On the Refining side of the business, we continue to benefit from a number of positive macro tailwinds as we transition into the second quarter. The Gulf Coast 3-2-1 crack spread has proven resilient at just over $27 a barrel on a second quarter-to-date basis, while the structural dislocation and the price of WTI versus competing crude oils continues to benefit our strategically located refineries with access to cost advantage crude oils.

For example, although WTI is trading at roughly $10 a barrel discount to Brent through early April, certain crude oils in our feedstock slate, such as WCS, are trading at approximately $20 below WTI and representing a major cost advantage to us. While crude vendor mark up and transportation costs can eat into this differential, we still realize a significant benefit on many of the crudes that we processed. Importantly, our crude slate remains highly versatile given the diverse locations and desired product length of our refining assets.

Today we have access to Gulf Coast, Canadian, Bakken and many different local crude oils. Among them, some of the other volumes are currently being transported between our refineries, as is the case of our Shreveport refinery, which currently receives some Bakken crude from our Superior refinery thanks to the crude by rail project that we completed at the end of 2012.

We want to point out we've talked a lot about this project and while we anticipate ongoing to have about 10,000 barrels a day, going into Shreveport from Superior, that number was substantially less in the first quarter due to crude receipts and turnaround timing. So again, Shreveport was impacted by not realizing the fully loaded impact of that project. We have also started selling Bakken crude out of Superior refinery to third parties in the rail cars that we've leased, and we do currently have around 2,600 rail cars leased in operation to help facilitate our crude oil movements.

Late into the first quarter -- moving to talk about specialty products and pricing and demand, late in the first quarter, we observed a pick up in demand and pricing for our lubricating oils. If you remember at the end of the year, we did talk about lacking demand, and we'd actually delayed some sales of products waiting for pricing to increase. That turned out to be the right thing to do. We went into our turnaround at Shreveport with full tanks, and are now -- have backlogs of orders and pricing has gone up from where it was at the end of the year. We're -- we feel very optimistic about our specialty product pricing going into -- as we're into the second quarter and looking throughout the year.

Also on the Asphalt side of the Business, this was really the first year that we will have some seasonality in our asphalt results because we did do winter field this year. What that means is you produce asphalt and put it in tanks, storing it for the summer paving season. Last year was superior. We really chose to sell asphalt throughout the year for working capital purposes, given that it was the first year that we had owned the refinery and wanted to learn that market.

So this will be the first, a first quarter that you will see seasonality in our asphalt. We're getting ready to move into the summer paving season. It's been a little bit slow starting up due to the cold spring and the weather issues throughout the United States, but we expect demand and pricing for asphalt and those related products to increase as we finish off the second quarter and move into the third quarter.

As we have previously announced, we began a plant-wide turnaround at our Shreveport refinery beginning in late April that is scheduled to last through mid-May. That turnaround is on schedule and on budget at this point in time. Again, we've been impacted somewhat by some severe weather in the Superior area, but are optimistic that we'll come out of this turnaround operating very well.

Ahead of the turnaround we did build fuel inventories at Superior to help make sure that our customers had stable supplies throughout the turnaround. And so that business decision did impact our first quarter adjusted EBITDA out of Superior. But it will help and support Superior's performance during the outage.

Through the full year 2013 our capital spending budget for replacement, environmental, and turnaround costs is approximately $130 million, consistent with our prior forecast. During the next 24 months, we do intend to spend additional capital on a series of organic growth projects, the full scope of which we'll discuss in more detail at our upcoming analyst investor day on June 10. These projects are all very high return -- sorry, these growth projects are all very high-return projects.

Some of the ones that we're looking at doing we'll talk about now. One of the projects that we've talked about some is the construction of a crude oil loading dock off the coast of Lake Superior. We have applied for a permit there and are currently awaiting approval and feedback from the regulatory agencies. And this project would allow us to take barrels off of the Enbridge pipeline system and ship them to markets in the Great Lakes region, eastern Canada, and on the east coast of the United States and possibly even down into the Gulf Coast via the Mississippi River.

We also continued to evaluate a major capacity expansion at our Montana refinery. The primary focal point of this effort involves a hydro trigger expansion and a new crude unit that will allow us to increase capacity from 10,000 barrels a day to in excess of 20,000 barrels a day at that facility. We believe that we do have the markets available to continue to market locally all of the fuel and asphalt product produced with this expansion.

At our San Antonio refinery, we are very focused on upgrading the product slate to sell into higher margin products including finished gasoline. We knew when we acquired this asset that it was somewhat of a work in process. The gas blending project that we've talked with you guys about is slated to be done later this summer. That will increase the economics of that facility. The first step of that's about 3,000 barrels a day of finished gasoline at today what would be a $20 a barrel upgrade to what we're selling at. Very important that we get this project done as timely as possible.

We're also looking at different products that we could produce out of this facility. And again, we'll be talking more about this project as we move through the engineering and economic development phases of the project.

Then finally, with regard to our Greenfield, North Dakota, diesel refinery joint venture with MDU Resources, construction is moving forward according to schedule. All construction permits have been received, which is a significant achievement in itself. Currently we're working on the construction of tank foundations, the control room, and security building. Ventech, our contractor on the project, has more than 100 engineers working on this project at the moment. We anticipate this project will be done early in the fourth quarter 2013. At our upcoming analysts day, we intend to provide more information on the costs, the estimated completion time, and expect EBITDA contributions from these projects.

Before I hand the call over to Pat, we want to address how the renewable fuel standards may affect our Company from a cost perspective over the near term. As you recall, refineries are required to sell mandated volumes of renewable fuels based on their production. If renewable sales do not meet volume requirements, refineries must purchase RINs to cover the shortfall. As a result, we currently expect Calumet will purchase between $8 million and $10 million worth of RINs on a quarterly basis to cover our projected shortfalls. We've recorded an estimated liability of $11 million for the RINs we will need to purchase in relation to our first quarter 2013 activity.

Finally, for those of you that might have missed it, please note that in early April we provided an assessment of the EPA's proposed regulations that gasoline contain no more than 10 parts per million of sulfur on an annual average basis starting January 1, 2017. Calumet's current facilities which produce gasoline do so in accordance with the current regulatory standards and the partnership intends to fully comply with any updated standards.

In the final analysis, our assessment has concluded that the proposed updated standards are not expected to have material financial impact on our Company. Further, our preliminary assessments indicate that capital spending requirements, if any, will be immaterial to comply with the proposed updated standards.

Looking ahead, we are pleased with the momentum evident in our Business during the second quarter. Refining economics remain strong, demand and pricing for our products are strong and above levels that we've experienced earlier in the year. And we continue to evaluate a high number of capital projects that should contribute to profitable growth during the next two to three years. We're also seeing significant strength in our Royal Purple brand and our package products coming out of our packaging facility in the Shreveport area.

Given the strength of cash flows generated from our operations, as well as our access to liquidity through our revolving credit facility and other financing sources, we continue to evaluate potential acquisitions in both the fuels and specialty product markets that complement our existing portfolio of assets. While there are tack-on acquisition opportunities in both the public and private markets that could make sense for us, we are committed to growing the business in a way that maintains balance sheet discipline while providing for continued, steady growth and quarterly cash distributions to our unit holders.

With that, we'll turn the call over to Pat.

Thanks, Jennifer.

We believe the non-GAAP measures of adjusted EBITDA and distributable cash flow are important financial performance measures for the partnership. Adjusted EBITDA is defined by our debt instruments with $80 million for the first quarter of 2013 as compared to $69.7 million for the same quarter last year. The partnership's distributable cash flow for the first quarter was $26.4 million as compared to $39.2 million for the same period in 2012.

The increase in adjusted EBITDA quarter over quarter was due primarily to a $50.2 million increase in gross profit, partially offset by $22.8 million of increased selling, general, and administrative expenses, $6.2 million of which was non-cash amortization expense, and an $18 million decrease in realized derivative gains. We encourage investors to review the section of our earnings press release found on our web site 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 2013 for specialty products and fuel products was $63.2 million and $71.2 million respectively, compared to gross profit of $66.5 million and $17.7 million respectively for the same period in 2012. The decrease in specialty product segment gross profit of $3.3 million, or 5% quarter over quarter, was due primarily to a decrease in the average sales price per barrel of lubricating oils and lower sales volumes for lubricating oils, solvents, and waxes. These reductions to gross profit were partially offset by additional gross profit generated from our Montana and Royal Purple acquisitions.

The increase in fuel segment gross profit of $53.5 million quarter over quarter was due primarily to incremental gross profit generated from the Montana and San Antonio acquisitions, access to cost advantage crude oil, and regional strength in fuel products crack spreads. These increases in gross profit were partially offset by lower sales volumes in our legacy operations during the period. Legacy Calumet operations provided $34.8 million of gross profit, while newly acquired operations provided gross profit of $18.7 million in the first quarter. Our total loss and settled derivative instruments reflected in gross profit was $11.9 million in the first quarter of 2013.

Selling expenses increased $11.4 million quarter over quarter to $15.9 million. This increase was due primarily to increased amortization expense which is non-cash, primarily related to the recording of intangible assets associated with the Royal Purple acquisition, as well as additional employee compensation costs driven primarily by the Royal Purple acquisition and increased advertising expense.

General and administrative expenses increased $11.4 million quarter over quarter to $25.1 million. This increase was due primarily to increased incentive compensation costs, higher professional fees, and additional employee compensation costs driven primarily by our Royal Purple, Montana, and San Antonio acquisitions. Interest expense increased $6.2 million quarter over quarter to $24.8 million, due primarily to additional outstanding long-term debt in the form of our 2020 secured -- senior unsecured notes issued to partially fund the Royal Purple acquisition.

As of March 31, 2013, total capitalization consisted of Partners capital in the amount of $1.1 billion, and outstanding debt of $893 million, comprised primarily of $858.5 million of senior unsecured notes due 2019 and '20, which is net of discount of $16.5 million and $29.2 million of borrowings under our revolving credit facility. The $171.1 million increase in Partners capital from December 31, 2012, was due primarily to $179.2 million of net proceeds from our January 2013, public equity offering common units and net income of $46 million, partially offset by $44.5 million in distributions to our unit holders and $5.1 million in other comprehensive loss.

On March 31, 2013, we had availability of $482.9 million under our $850 million revolving credit facility based on a $695.2 million borrowing base, $183.1 million in outstanding standby letters of credit, and $29.2 million of borrowings. 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 distribution to our unit holders, our debt service obligations, contingencies, and anticipated capital expenditures.

With that I'll turn the call back over to the operator so that we can begin the question-and-answer session.

(Operator Instructions)

Brian Zarahn, Barclays.

Hi, everybody. It's Brian. Given the impact of Shreveport in the first quarter and then RINs for the remainder of the year, any thoughts on distribution coverage in 2013?

Yes, our distribution target coverage ratio has not changed. It's still 1.2 to 1.5 times. And even given some of the weakness in this quarter, we are at 1.6 times on a trailing 12-month basis. So we will -- our policy is to have our Board of Directors look at our forecast and look at our actual results every quarter and make those decisions. At this point in time, our strategy has not changed.

And then on the -- switching to the North Dakota refinery, seems like it's been making good progress. Any updates to your cost estimates or any potential earlier in-service date in the fourth quarter of 2014?

No. We just broke ground at the end of March. About 80% of the project is a fixed bid. So I would anticipate that if there were cost over runs they would come at the very end of the project.

And then you still, timing is --

Timing is still early fourth quarter of 2013.

Okay.

2014, I'm sorry.

Then on Royal Purple, it's making, obviously, good contributions, can you talk about the growth opportunities you see at Royal Purple?

We see a tremendous amount of growth opportunities at Royal Purple. We have about 15 open sales positions there right now. We're really trying to expand our geographic diversity, we're trying to expand internationally. We are working with Wal-Mart to put our products in all the Wal-Mart's in the United States later this year, early next year. And the cross selling opportunities between Royal Purple and the products coming out of Calumet Packaging down in Shreveport are phenomenal. We're barely beginning to touch on some of those.

Thanks, Jennifer.

Thank you.

TJ Schultz, RBC Capital Markets.

Hi, good afternoon. On the crude by rail out of Superior, beyond what you want to get to Shreveport, where are you heading to third parties and what type of volumes? And going forward, is it going to make more sense for you to take crude down to Shreveport or to other destinations?

I think long term it may make more sense to go to other destinations. We're heading east with those barrels and we're not going to disclose who our customers are. But going east, the turn time on the rail car is several days shorter than it is going to Shreveport. We're treating the Shreveport refinery like a third-party customer at this point in time. Based on the output of our LP model and our other incremental crude opportunities for Shreveport, that's how we make the decision as to whether we sell the barrels to third parties or use them internally. We do have some contracts with third parties for barrels, and then sell some on a spot basis to third parties as well.

Can you talk about any traction you're getting with potential more midstream-focused projects, whether it be the potential for crude sourcing in the Bakken or utilizing some of the excess storage capacity at Elmendorf?

We're working on both those things. We'll have a lot more to say about that, I hope, if everything goes according to our plan in June at our analyst day. We're coming very close to having some defined projects in that space. If you can just bear with me a little while longer.

Not a problem. On the RIN estimate, I think you said $8 million to $10 million per quarter. What price does that assume for the RINs and what are you seeing out there right now on RIN pricing?

That assumes around $1 per RIN. And they've been trading anywhere from $0.80 to $1.20.

Okay. Thanks, Jennifer.

Thanks.

Cory Garcia, Raymond James.

Good afternoon. I appreciate all the color you guys have given on the subject. I know it's a little bit, a little bit touchy now. But did in fact -- I apologize if I missed this. Did you actually recognize a cost for the RINs credits during this past quarter?

11.

Okay. It was $11 million. And is there -- taking a step back, you looking at any blending or marketing initiatives maybe going further downstream that would maybe mitigate some of this RIN exposure?

We are looking at that. We do have a bio diesel facility at our Dickinson plant. So that will help offset some of the RIN requirements that we'll have. We're -- like everybody else, this took us by surprise, and we're trying to get our plan together.

Absolutely.

What we're disclosing is worst case scenarios.

Okay. Appreciate the color, guys.

Thanks.

Jason Smith, Bank of America Merrill Lynch.

Hi, good afternoon, everyone. Jennifer, I want to touch on San Antonio again. How's that integration process going, and I know I think, Pat, you gave some numbers around the earnings from the new assets in the quarter. How is San Antonio specifically performing and are you finding any other incremental synergies there since you've had a few months to work on that plant?

San Antonio's more or less break even at this point in time. Their real contribution is going to come when their finished gasoline project is done. Then they've got a small expansion project. We plan on making about 3,000 barrels a day of solvent out of that facility to help augment the solvents produced at three of our other locations. That's really where the big upside is going come from. The synergies, there's some feedstock synergies, more of a marketing synergy story with San Antonio. But we have to be making finished gasoline before we can start to realize that.

Are you still running LOS priced crude there right now?

We're running Eagle Ford there, and Eagle Ford's priced at basically LOS.

And a quick one for Pat. I think the SG&A rate was obviously up this quarter. Last quarter you had guided to an annual run rate of the fourth quarter number annualized. Is that still a good number, or is that inching higher now?

I think there's obviously a little bit of cost in the first quarter related to consulting expense and some professional fees related to acquisition activity. But I still think if you combine the two, this quarter, I think we're in the 35 range. I think that those are still pretty good numbers. We see a little bit of one-time here, but I think it's important to keep in mind that we've added a lot of people. We've added really three new refineries. So those costs in absolute terms are going to certainly be much larger. And Royal Purple is a brand organization. We have a lot of additional selling expenses there and increased advertising. So I still think that these types of numbers that you've seen over the last couple of quarters are still good guide posts.

Okay. I appreciate it. Thank you.

Michael Peterson, MLV and Company.

Good afternoon, everyone. Couple of questions and follow-ups to things that have already been discussed. First one regards cost of sales. Can you provide any more insight into where those costs hit, whether they were by segment or what drove what seemed to be the driver on the negative variance this quarter?

I think the cost of sales variance is really outright crude costs and added sites. On a delivered crude basis, on a site-by-site basis all performed within historical variances.

Okay. Okay. So nothing abnormal within those costs?

No.

Okay, okay. Jennifer, can you give us a little more insight into some of the reliabilities at Shreveport, whether they were equipment process related feedstock or logistics?

It was processing equipment that was due to come down for maintenance. And any time you push a turnaround, maybe a little longer than you should, you can have some issues. And we -- those issues have all now been repaired and Shreveport's running very, very well. We've got a great team of people down there contributing every day to make sure that plant does its best.

Does this event in any way change your expectation on a go-forward basis in terms of maintenance cost? Was this something that should have been done maybe last quarter perhaps, or does it meaningfully change your forward outlook on further maintenance?

It does not. Really what drove it, we had a couple power outages late in the fourth quarter that impacted some equipment that was due to come down for turnaround. It wasn't that the turnaround was a quarter behind. We just had to -- instead of maybe another situation if you were nine months away from a turnaround you would have come down for a little while to fix that equipment, we just went along knowing that we were going to be coming down for turnaround.

Okay. Thank you. That's all I have today.

Thanks.

At this time, there are no further questions in the queue. I would like to turn the call back over for closing. Please proceed.

Thank you. Thank you, Operator. And thank you all for joining us on today's conference call. If you haven't already done so, we do encourage you to RSVP for our upcoming Investor Analyst Day. Calumet's had a great year and a half, and we've got a lot of really positive forward momentum still come. We're excited to see everybody and give you a little more detail on what we're working on. And if you have any additional questions in the meantime, please contact our new Director of Investor Relations, Noel Ryan. He can be reached at 317-328-5660. Have a great day, everybody.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.