Calumet Inc (CLMT) 2014 Q1 法說會逐字稿

Ladies and gentlemen, welcome and thank you all for joining the first-quarter 2014 Calumet Specialty Products Partners' earnings call. My name is Ryan, I'll be the operator on today's event.

(Operator Instructions)

And as a reminder, we are recording the call for replay. And now it's my pleasure to turn the call over to your host, Mr. Noel Ryan, Head of Investor Relations.

Thank you, Ryan, and good afternoon and welcome to the Calumet Specialty Products Partners' first-quarter 2014 results conference call. Appreciate you joining us today. Leading today's call is Jennifer Straumins, our President and COO, who will provide an update on our business during the first quarter and the opportunities for growth as we look ahead to the remainder of the year. Next, Pat Murray, our CFO, will provide detail on our financial performance during the first quarter. At the conclusion of our prepared remarks, we'll open the call for questions.

Before we proceed, allow me to remind everyone that during the course of this call we may provide 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 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 SEC for a list of factors that may effect our actual results and could cause them to differ from our forward-looking statements made on this call.

As a reminder, you may download a PDF of the presentation slides that will accompany the remarks made on today's conference call, as indicated in our press release that we issued earlier today. You may now access these slides in the investor relations section of our website at www.calumetspecialty.com. And with that, I'd like to hand the call over to Jennifer.

Thank you, Noel, and good afternoon to all of you joining us on today's call. Please turn your attention to page 4 of the slide deck for a high-level overview of our first-quarter results. Calumet has started the year on a strong note. We reported a record first quarter adjusted EBITDA of $82.7 million compared to $53.2 million during the fourth quarter of 2013 and $80 million in the first quarter of 2013. Excluding the impact of $89.6 million in nonrecurring debt extinguishment costs, net income for the first quarter 2014 was $39.8 million, or $0.50 per diluted unit.

Our Calumet -- or I'm sorry, our Specialty Products segment had a strong first quarter with total gross profit for the segment up 16% year over year, as increased sales to Calumet's packaged and synthetic products, a category inclusive of the Royal Purple, Bel-Ray, Quantum and TruFuel premium brands, contributed to an improved higher margin product mix. In this category, Royal Purple and TruFuel were the real standouts during the first quarter.

In our Fuel Products segment, nearly 40% -- a nearly 40% year-over-year decline in benchmark refined product margins was partially offset by strong seasonal production of gasoline and diesel at our major fuel refineries. In addition to sequential improvement at our San Antonio refinery, which operated at record rates during the first quarter following the completion of a crude oil unit expansion in December of 2013.

Distributable cash flow nearly doubled during the first quarter 2014 to $49.4 million versus the prior-year period. The year-over-year increase in DCF was driven primarily by an increase in adjusted EBITDA, a decline in turnaround costs and a decline in replacement and environmental capital expenditures, when compared to the first quarter of 2013.

Please turn to page 5 at this point. In 2013, our distribution coverage remained below 1 times, in large part due to planned maintenance conducted at our fuel refineries during the second, third and fourth quarters of last year. With this maintenance behind us, distribution coverage has shown a marked improvement. As our first-quarter distribution coverage ratio approached 1 time supported by a combination of higher adjusted EBITDA and lower required capital spending.

In March, we completed a $900 million senior unsecured notes offering. This offering, which represents the largest notes offering in our history, achieved a 6.5% coupon, the lowest we've ever obtained in an unsecured financing. This offering helped us achieve several objectives. First, it allowed us to redeem $500 million of senior unsecured notes, carrying a much higher coupon of 9 3/8%, which will result in annual interest savings of approximately $9 million.

Second, it helped fund the acquisition of Anchor Drilling Fluids, an accretive acquisition that we expect to bring more than $30 million of incremental specialty products EBITDA to our business each year. And last, but not least, we took the remaining proceeds of cash to the balance sheet, which will help provide supplementary funding to our ongoing slate of organic growth projects. At quarter end, we had $714 million in cash and availability under our revolving credit facility.

In late March, we completed the acquisition of Anchor Drilling Fluid for a little over 7 times estimated 2013 EBITDA. Through it's extensive line of drilling and completion fluids, Anchor delivers solutions that reduced drilling and completion time, helped to control reservoir formation pressures and maximize oil and gas production, contributing to improved well economics for end users.

This transaction positions Calumet as one of the leading independent suppliers of drilling fluids to the domestic E&P industry, a sector that continues to enjoy rapid growth due to advances in drilling technology and increased exploration activity in identified and emerging unconventional resource plays.

The addition of Anchor to Calumet's asset portfolio will also serve to increase the Partnership's Specialty Product sales in a business that we expect to generate consistent cash flow with limited ongoing capital investment. We currently sell lubricant and solvent products into the oil field services businesses, so this acquisition helps to further our -- further grow our presence in this market.

Also during the quarter, we acquired United Petroleum, a wholesale supplier and distributor of premium motor oils, coolants and greases. United owns Quantum brand, which is one of the fastest growing lubricant brands in the industry. United currently sells more than 160 Quantum-branded products to more than 50 distributors with sales in 35 states.

Through the Quantum brand, United sells products into the passenger car, heavy duty truck, farming and industrial end use markets through it's distribution partners. The team at United has brought together a highly effective sales and marketing organization that we intend to leverage as we seek to further increase our addressable markets while growing our customer base. The Quantum brand will join the Royal Purple and Bel-Ray lubricant brands to provide our global customer base with a unique fully-integrated product offering.

After completing the 3000-barrel a day crude unit expansion project at our San Antonio refinery in December, our San Antonio refinery operated at record rates during the first quarter of 2014. Once the TechStar pipeline comes on stream later this year, San Antonio will enjoy lower feedstock transportation costs, as it will begin to receive Eagle Ford crude oil supplied by pipeline, a cheaper alternative than having trucks bring crude into the Elmendorf terminal, which is now how the refinery is currently being supplied.

On the packaged and synthetic side of the business, Royal Purple and Calumet Packaging, the maker of TruFuel, both had great quarters. The highlight of the quarter for this area of our business was the launch of Royal Purple into Wal-Mart store network. Thus far, sales into Wal-Mart are tracking ahead of expectations.

And finally with regard to our Dakota Prairie refinery construction in North Dakota, our Missouri esters plant expansion and our Montana refinery expansion, all of these projects remain on schedule. Dakota Prairie is scheduled for completion by year end of this year. Our Missouri plant expansion will be completed by mid-2015. And Montana expansion is still targeted for completion by the first quarter of 2016.

Turning now to slides 6, 7 and 8. Our record first-quarter performance is largely thanks to the underlying strength of our Specialty Products segment. As you can see in the charts on slide 7, the primary reason distributable cash flow more than doubled year over year was the replacement/environmental and turnaround costs declined by more than $20 million in the first quarter of 2014 versus the first quarter of 2013. On slide 8, we see the distribution coverage benefited from this lower capital spending, together with the modest year-over-year increase in adjusted EBITDA.

Turning to slide 9. From a benchmarking perspective, we are currently paying a yield that is more than 300 basis points higher than the Alerian MLP index, which captures 75% of available MLP market capitalization. We also continued to trade at a premium yield versus the variable distribution MLP refining universe.

As we've said in the past, we remain committed to paying a robust cash distribution, much as we have for the last 33 consecutive quarters. We have ample liquidity to help support payment of this distribution and we are well on our way to fully covering the quarterly distribution given improved business fundamentals. Given this backdrop, we believe our Company has significant upside potential, particularly as we begin to layer on approximately $200 million of incremental EBITDA contributions from the organic growth projects online between 2014 and early 2016.

Turning to slide 10. Specialty Products gross profit per barrel was very strong during the first quarter, increasing on both a quarter-over-quarter and year-over-year basis. Specialty Products gross profit increased by $13 million, representing 79% of our total first quarter gross profit, again, an improved product mix drove the bulk of this growth.

Within the Fuel Products segment, both gasoline and diesel crack spreads declined significantly on a year-over-year basis. (Inaudible) expense declined year over year, which was a modest benefit to the Fuel Products' gross profit.

Turning to slide 11, while our growing portfolio of global lubricant brands remain a fraction of our overall business, the opportunity for increased market share in these higher margin premium products markets are significant. As I mentioned earlier, Royal Purple and TruFuel both had strong quarters. The teams joining us from United Petroleum and Bel-Ray are still being integrated into the business, but we expect them to be positive contributors this year as well, particularly given their ability to help us cross-sell our entire portfolio of products on a more global scale. We are capitalizing on the ability to target customer relationships at a holistic level, identifying realtime opportunities to sell a wider range of products to our key accounts.

And turning to slide 12, here we provide an overview of some of our recent capital market-related activities. As I mentioned to you earlier, we completed our largest notes offering in history in March, which really helped to further bolster our cash position exiting the first quarter. Also in March, we announced the $300 million at the market equity issuance program. This program is not only a more cost effective way of raising equity than a traditional overnight equity offering, it also allows us an orderly transition of small volumes of units into the market as conditions warrant. Importantly, this program is used by many MLPs and should be viewed as one of many potential funding options available to us.

During the first quarter of 2014, we did not sell any units under the program. And given our current liquidity position have no immediate need to sell units under this program, although we reserve the right to use this program at our discretion. As of March 31, 2014, we had more than $530 million of availability under our revolver and $180 million in cash. The combination of which we believe provides us significant liquidity paid to the distribution and fund the organic growth projects and working capital requirements.

And now turning to slides 13 and 14, we can discuss our acquisition of Anchor Drilling Fluids and what it means for Calumet. From a strategic perspective, this acquisition positions us as one of the leading independent producers and marketers of drilling fluid solutions in the United States. During the past decade, North America has witnessed a shortage in oil and gas production supported by the application of advanced drilling techniques in unconventional resource plays.

Anchor's market-leading position as an established independent producer of drilling fluids, coupled with its deep base of established customers and expansive distribution network, position it as a key beneficiary of the trend toward increased exploration and production spending. We believe the execution of a vertical integration strategy, one that puts us closer to our crude oil suppliers and customers, represents a long-term competitive advantage for the Partnership. As a key supplier of drilling fluids to oil and gas producers in the field, the Anchor acquisition helps to further expand our relationships at the well head.

One of the potentially overlooked aspects of this transaction is how it helps us expand our growing portfolio of logistics assets. Prior to this transaction, Calumet owned 12.5 million barrels of crude and product storage capacity spread across more than 1,300 tanks. We lease approximately 2,700 railcars and we own crude loading terminals in Montana and North Dakota, and we also own a fleet of trucks. Anchor augments this expanding list of logistics assets to include multiple domestic facilities, many of which serve as distribution and storage centers.

Looking ahead, I'm pleased with the momentum evident in our business. Our fuel plants are operating on plan, demand for our product is stable to growing in many of our core markets. Our organic growth projects remain on schedule and we remain well capitalized to support the future growth of the business. Overall, we are well positioned for a profitable growth during 2014. With that, I'll hand the call over to Pat Murray, our CFO.

Thanks, Jennifer. Let's all turn our attention to slide 16 for a discussion of adjusted EBITDA. We believe the non-GAAP measure of adjusted EBITDA is an important financial performance measure for the Partnership. Adjusted EBITDA, as defined under our financing instruments, increased to $82.7 million for the first quarter of 2014, up from $80 million in the same quarter last year. As illustrated in the chart on slide 16, the bulk of the year-over-year increase in adjusted EBITDA was due to increased Specialty Products average selling prices per barrel, favorable product mix and increased package and synthetic Specialty Product sales.

Fuel Product margins, despite increased hedging gains, declined on a year-over-year basis. Higher natural gas costs and increased crude oil sales to third parties contributed to higher operating and transportation costs respectively. 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.

Now turning to slide 17. Fuels refining economics declined significantly on a year-over-year basis during the first quarter. The benchmark Gulf Coast 2/1/1 crack spread averaged $19 per barrel during the first quarter of 2014 compared to $30 a barrel in the same period of last year. The year-over-year decline in the 2/1/1 crack spread was driven primarily by a sharp drop in the gasoline crack and to a lesser degree the diesel crack. Crude oil price differentials remained volatile throughout the quarter, a factor which further impacted gross profit in the Fuel segment. The narrowing in Canadian crude oil differentials such as WSC and Bow River, was a drag at the margin during the first quarter of 2014. However, these differentials have both stabilized at still elevated levels early into the second quarter of 2014.

And now turning to slide 18. For the three months ended March 31, 2014, our total cost to purchase RINs was $7.9 million versus $11.8 million in the first quarter of 2013. Despite higher RINs prices and higher volumes of fuels produced on a year-over-year basis, we were able to blend away a larger percentage of our obligation during the first quarter of this year.

The Partnership currently expects its gross estimated annual RINs obligation, which includes both RINs that are required to be secured through either blending or through the purchase of RINs in the open market, to be in the range of 90 to 95 million RINs for the full year. The Partnership records its outstanding RINs obligation as a balance sheet liability. And this liability is mark-to-market on a quarterly basis to reflect the market price of RINs on the last day of each quarter.

Turning to slides 19 and 20. Exiting the year, we remain very well capitalized, while overall leverage, though elevated, remains at manageable levels. We expect leverage to decline as we cycle out weaker turn around impacted quarters from 2013 with improved quarterly performances in 2014. Including both cash and availability under our revolver as of March 31, 2014, we had $714 million in available liquidity, up from $593 million at December 31, 2013.

Turning to slide 21. Looking ahead to the remainder of 2014, we have hedged approximately half of our anticipated fuels production. In a year of heavy capital spending on growth projects, we believe this is a prudent way to help derisk our 2014 results. For 2014, we have locked in 3.7 million barrels of gasoline at an average price margin of $14.53 per barrel, 4 million barrels of diesel at an average margin of $27.57, and just under 1 million barrels of jet fuel at an average margin of $24.82. To continue our efforts to minimize crack spread volatility, we intend to continue to hedge up to 75% of our anticipated fuels production as far as four years out.

Finally turning to slide 22. We are maintaining our full-year 2014 capital spending forecast. We project that total replacement, environmental, turnaround and growth-related capital spending will be in the range of $340 million to $385 million in 2014 compared with $243 million in 2013. The bulk of the year-over-year increase in CapEx is attributable to work related to the North Dakota refinery construction and the Montana refinery expansion projects.

Outside of our growth CapEx, which remains discretionary, we anticipate a 35% to 45% decline in replacement, environmental and turnaround costs in 2014 versus 2013. With the heavy turnaround year well behind us, annualized turnaround costs is expected to be in the $20 million to $30 million range until our next major turnaround cycle in 2018. And with that, I'll turn the call over to the Operator so that we may begin the Q&A session. Operator?

(Operator Instructions)

Theresa Chen, Barclays.

The Specialty margins. The $0.42 and $0.22 level even beyond the long-term guidance of $0.30 to $0.40, do you think that's sustainable for the rest of the year given the better asset mix from the acquisitions or were there temporary factors that boosted the number in Q1?

No, I think that's going to be very sustainable going forward, given that the acquisitions that we've done and the higher margin businesses that we've put into that segment.

Perfect, thank you. And then thinking about third-party acquisitions in the Specialty segment, clearly, these tuck-in acquisitions are an integral part of your growth story. And I was wondering if you could give us a sense of what's the size of the acquisition opportunity out there under your current assessment or beyond?

We are currently actively looking at probably half a dozen acquisitions and given the nature of our customer base with over 6000 Specialty Products customers, we have limitless acquisition targets available to us.

Okay, that's helpful. And then lastly, as you return closer and closer to full distribution coverage, how do you think about balancing distribution growth versus getting back to one-time coverage? Would you only be comfortable growing the distribution once you get back to 1 times, or would you be comfortable doing it beforehand?

Well, obviously that's a decision that's made by our Board every quarter based on information available to them at that point in time and market fundamentals. In my opinion, I would like to see us hold the distribution steady until we start to realize some of the cash flow from the organic growth projects.

Great. Thank you very much.

Richard Roberts, Howard Weil.

Good afternoon, folks, and congrats on the quarter here. Couple for me. Jennifer, maybe first, you mentioned some of the logistic assets that came along with the Anchor acquisition, and as we look at some of your independent refining peers, the trend here recently has certainly been to create an MLP for their logistics assets. I'm curious, since you certainly have other assets in your portfolio that would meet that criteria, I'm wondering if something like that would make sense for you, given that you already trade at a multiple that's much higher than the C corp refiners?

That's a great question and that's something that we talk about quite often. The logistics assets that we acquired as part of the Anchor acquisition would include distribution facilities and a line of trucking assets. Some of the things that I've thought about over time would either be a logistics MLP and/or looking at our fuels refineries and putting -- dropping them into a variable distribution MLP and holding our Specialty assets inside a traditional MLP. And that's something that we continue to work with our bankers and our advisors on as we move forward.

Okay, great. And maybe if I could risk this one, if you could give us any sense maybe of the size of logistics assets portfolio that you have, either in terms of EBITDA potential or any way you categorize it?

We've -- I would say at this point in time, we've probably got at least $50 million to $75 million of EBITDA coming from logistics assets. Could take a page out of [Dellic's] notebook and take our tank farms and move those into a logistics type of MLP and have transfer pricing going back and forth with the refineries and the logistics MLP. So people -- other logistics MLPs out there have gotten very creative and we continue to watch and learn from what others are doing and we'll implement the strategy that's right for us.

Okay, great, thanks. Maybe one more to switch gears a little bit. On Dakota Prairie, and correct me if I'm wrong, but as I understand it, the plan for some the bottoms production out of the North Dakota refinery is to send those barrels over to Montana, I guess potentially as hydrocracker feed. I'm wondering if that is the case, a, what do you do with the bottoms in between the work at Montana being finished, I guess that year lag between the two projects being done? And then secondly, do the economics of those barrels show up in the projections for either North Dakota or Montana that you have out there currently?

They show up in the projections for both Manhattan and North Dakota because there would be transfer prices going back and forth between the JV and Calumet. And this is a very fungible product that can be sold on the Gulf Coast at any point in time to any of the refineries on the Gulf as really cat cracker feed. So that's where it will go during the year, between North Dakota coming online and Montana coming online. We've just got better logistics, sourcing internally after that point in time.

Got it. Thank you very much.

Steve Sherowski, Goldman Sachs.

First question, I want to make sure I heard this correctly. Did you say that you're currently generating $50 million to $70 million in EBITDA from your logistics assets?

I think you could certainly find a way to get to that number based on rail rates and trucking fees and pipeline fees and then tank rental, or terminal late fees if we were to drop -- if we were to put our tank farms inside of a logistics MLP.

Okay, thanks. And I'm wondering, did you see any benefit from your asphalt marketing agreements this quarter, or is that most likely going to come through during the second half of this year?

That will all be second half of this year. We spent the majority of the first quarter filling up those assets with asphalt and then we have started to sell product out of those terminals as we've moved into the second quarter.

Got you. And a final quick question, for the Shreveport planned maintenance in the second quarter, can you gauge the likely economic impact of that?

We have not disclosed what that economic impacts going to be and we'll talk more about that in the second quarter.

Okay. All right, that's it for me. Thank you.

Edward Westlake, Credit Suisse.

Yes, yes, couple of questions actually. So on the Specialties, following up, I mean, if you look at that margin expansion, obviously I hear you that a lot was due to the acquisitions, but anything else going on beyond the acquisitions? It still feels like a bigger jump than I guess folks would have expected.

No, it's driven exclusively by the acquisitions.

Okay, that's helpful color. Just on the Eagle Ford -- sorry, the San Antonio, Eagle Ford logistical switch, how much savings do you think you get for the change in logistics?

We'll be much better prepared to speak to that number after that pipeline is operational. We're still negotiating with some crude suppliers for barrels going into San Antonio. So I'm not in a position to disclose that.

And then maybe a mechanical question. Obviously, there was a lower -- as you go and look at the buildup to distributable cash flow, there was a lower reserve for turnaround expense. Do you do it on a full-year average and then divide it by what you think you should do every quarter, or does it peak in years where you have high turnarounds? I'm trying to understand, because obviously last year you had a high number and this year it's lower. It feels like it's more linked to when you actually do the turnarounds.

That's correct. It's linked to when we actually complete the work. So we saw it peak last year. And that's why this year with a lot lower scheduled activity, we always have a little bit of turnaround activity at various plants, but you saw it peak last year. And then we expect to be in this lower realm for the next three to four years and should peak again based on the next cycle, which we believe is 2018.

Right. So obviously less expense on that, more Specialty Products and obviously that will lead to better coverage over time and then at some point you'll change your distribution once you feel the balance sheet is in better shape?

Yes, our stated strategy is to be in the 1.2 to 1.5 realm. It's -- as Jennifer mentioned, it's a discreet decision made by the Board each quarter. I think we're also -- we're focusing on coverage on an LTM basis also and we do expect to see both not only the outright quarterly coverage improve, but also as we trail forward here and drop off some quarters that were, because of the turnarounds last year and the impacts of those, we're not where we would like. We should see some natural improvement over the course of this year in both of those metrics. Not only the discreet quarterly coverage, but also the LTM coverage.

And then on the fuel gross profit, which was perhaps a little bit weaker than the benchmark indicators, is it secondary products in asphalt again or maybe talk through what's going on there.

Yes, it would be asphalt.

Okay. And I guess that's going to depend on oil prices. Any signs that any of these states are going to actually increase asphalt usage to repair some of the roads?

We're seeing some increased demand in our asphalt segment and realistically -- quite honestly, our asphalt margins for the first quarter were substantially higher than they were a year ago and surpassed our internal budget. So we're pleased with where we're at in asphalt right now.

Okay, great. Thanks very much.

T.J. Schultz, RBC Capital.

To follow up on the structural options here, Jennifer, first, how far along are you on those discussions? And maybe Jennifer or Pat, what are some of the hurdles to making that happen really from a financial perspective or a cost perspective more so than anything? And to be clear, the end result that you've laid out or envisioned is two separate entities with the variable rate refining MLP that would be made up solely of your Fuel segment and then the remaining assets staying in the current structure? Want to try to clarify that.

We've looked at several different things. We've looked at those two options. We've also looked at a logistics MLP. And quite honestly, we are in the infancy stages of these discussions. So certainly can't even begin to speak to the costs or timing associated with that.

Okay, fair enough. Thanks.

Cory Garcia, Raymond James.

Very much appreciate some of the incremental data points and detail regarding your synthetics business and recognizing that it's still pretty early days in the whole integration and growth of your small box products. Was hoping to get any more incremental color maybe as it relates to how you guys see a growth target perhaps year end or even into 2015, trying to get a little better gain on the trajectory of that specific business.

That part of our business has been growing at about 20% a year.

You expect it to accelerate at all given you guys are now in Wal-Mart and some of the acquisitions that you guys have had, maybe kick start that a bit higher? Obviously 20% a great number to baseline off of.

I think it will grow higher than 20%. 20% the number that we committed to our Board.

Okay, great. And switching topics over to Anchor, and obviously it broadened out your logistics reach profile. Should we be viewing this as an acquisition, not only complimentary to your existing oil field-related products, but also maybe as a beach head to burrow in a little bit deeper closer to the well head as it pertains to more of a logistics gathering type of footprint?

Absolutely. We've -- if you remember, about a little less than a year ago we bought Murphy Oil's gathering assets in Montana and North Dakota and this has been a stated strategy of ours, to get closer to those -- to the producers and to the well heads and Anchor helps open those doors and provide those relationships.

Perfect. I appreciate the time.

Okay. And we have no other questions, so I'll turn the call back over to Jennifer Straumins for any closing remarks.

Thank you, Operator. And thank you all for joining us on today's call. Should you have any questions, please contact Noel Ryan, our Director of Investor Relations at 317-328-5660. Have a great afternoon.

Wonderful. Thanks for your time and your participation. You may disconnect and enjoy the rest of your week.