Calumet Inc (CLMT) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2014 Calumet Specialty Products Partners, L.P. earnings conference call. My name is Glenn and I will be your event manager for today. At this time all participants are in listen-only mode, and later we will facilitate a question-and-answer session. (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, Vice President of Investor Relations. Please proceed.

Thank you, Glenn. Good afternoon and welcome to the Calumet Specialty Products Partners third-quarter 2014 results conference call. We appreciate you joining us today. Leading today's call are Jennifer Straumins, our EVP of Strategy and Development; and Pat Murray, our EVP and Chief Financial Officer. 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 course of this call we may provide various forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and such statements are based on the beliefs of our management as well as assumptions made by them and in each case based on 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 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 list of factors that may affect our actual results and could cause them to differ from our forward-looking statements made on this call.

As reminder, you may download a PDF of the presentation slides that will accompany the remarks made on today's conference call, as indicated in the press release we issued this morning. You may access the slides in the Investor Relations section of our website at CalumetSpecialty.com.

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

Thank you, Noel. Good afternoon to all of you joining us on today's call. Please turn your attention to slide 3 of the slide deck for a high-level overview of our third-quarter results.

Calumet generated adjusted EBITDA of $107.5 million during the third quarter compared to $38.3 million in the prior-year period. From an EBITDA perspective the third quarter was it strongest quarter in more than two years. Incidentally, it also represents the first full quarter in more than a year and a half we didn't have any meaningful planned maintenance at one of our major production facilities. Our largest fuels refineries, including Superior, Montana, San Antonio, and Shreveport refineries all operated at or above historical rates during the third quarter, each having completed extended plant turnarounds during 2013 and 2014.

Importantly, our third-quarter financial performance proves out our standing thesis that Calumet's core existing businesses are more than capable of generating sufficient EBITDA to cover our quarterly cash distributions even before accounting for significant EBITDA contributions we expect from a slate of organic growth projects that are scheduled for completion during the next 15 months. To that end, Calumet's distribution coverage ratio is nearly 1.4 times for the third quarter of 2014 and was 0.7 times for the first nine months of the year.

Our specialty products segment performed well during the third quarter due to contributions from our recently acquired oil filters businesses and increased plant reliability. Within our fuel products segment solid demand for gasoline and jet fuel, coupled with a sharp decline in the average cost of crude oil per barrel, helps us to support favorable fuel refining economics.

Please turn to slide 4. We have more than 50,000 investors in Calumet and a bevy of talented sell-side analysts covering us. However, as with any company of our size, we have a small minority of detractors whose principal criticism of Calumet has been the sub one times distribution coverage registered in a handful of quarters during the past two years and, moreover, how we reconcile our fixed distribution MLP model with such performances. Our response to this criticism has been to highlight that in seasons of planned refinery maintenance during which our facility is not operating optimally we expect coverage to be impacted. Nevertheless, short-term variance in coverage does not impact our commitment to paying a consistent quarterly cash distribution, given ample liquidity on our balance sheet.

Temporary bouts of sub one times coverage are not a symptom of structural weaknesses in our market. Rather, they are directly tied to the timing of planned maintenance cycles.

As of May 2014, Calumet had officially exited its once-every-five-year planned maintenance cycle at each of our key fuel refineries and as a result it is well-positioned to cover its distribution in normal operating environments, much as we did this past quarter. Our long-term distribution coverage target of 1.2 to 1.5 times remains intact, as does our continued commitment to the fixed distribution MLP model. Our business is performing well and we believe that we have begun to reap the benefits of recent investments in planned maintenance.

And as much as year-over-year growth in adjusted EBITDA helps to support strong distribution coverage during the third quarter, it also contributed to a significant improvement in our leverage profile. The partnership trailing 12 month adjusted EBITDA as of September 30, 2014 was six times, well below the 7.5 times registered as of June 30, 2014. This improvement was primarily due to an increase in adjusted EBITDA and lower turnaround cost as debt levels remained relatively static. Longer term, we continue to target a leverage ratio of below four times.

Please turn to slide 5. Taking a look at the factors driving the variance in distributable cash flow during the third quarter of 2014 versus the prior-year period we see that on combined basis replacement, environmental, and turnaround capital expenditures declined by more than 75% year-over-year or approximately $25 million. This decline in capital spending together with the year-over-year increase in adjusted EBITDA resulted in higher distributable cash flow during the third order when compared to the year ago period.

From a distribution coverage perspective the bottom chart on slide 5 gives you a good indication of what coverages look like when we are in periods of planned maintenance versus when the system is fully online and operating an optimal results. Between the first quarter 2013 and the third quarter 2014, only the first quarter and third quarters of 2014 were unaffected by planned maintenance at our fuels refineries. Incidentally, these were the very same quarters Calumet was near one times coverage. This should be food for thought, particularly considering that our next planned fuels turnaround begins in 2018.

Turning to slide 6, as you can see in the top chart, specialty products margins have been relatively static this year, much as we would expect from this business. Our second-quarter 2014 gross profit per barrel reflects the impact of the planned outage at Shreveport. The upshot here is that we should expect Shreveport gross profit per barrel to be relatively range bound, assuming normal demand and utilization levels that are specialty products facilities.

As we turn to the bottom chart we see that both specialty products and fuel products EBITDA increased on a year-over-year basis during the third quarter as lower crude oil prices and stronger demand for the specialty and fuel products helped contribute to a strong performance in the period. As this area of our business remains subject to heightened commodity volatility, we remain actively engaged in hedging significant portions of our fuels production, which Pat will speak to shortly.

Please turn to slide 7. On October 7, 2014, the EPA granted both the Shreveport and San Antonio refineries a small refinery exemption from the RFS for the full year 2013 as provided by the Clean Air Act. According to the EPA it was determined that for the full year 2013 compliance with RFS would represent a disproportionate economic hardship for those two refineries. Therefore, under the 2013 exception granted by the EPA, both Shreveport and San Antonio are not subject to the requirements of an obligated party for fuels produced at the refineries between January 1, 2013, and December 31, 2013.

As a result of the exemption, the Company's requirements to purchase RINs for 2013 compliance were reduced by approximately 39 million RINs or approximately one-third of our total company obligation in 2013, the vast majority of which are D6 ethanol RINs. Any gains from these exemptions will be recorded in the fourth quarter 2014, the period in which we received exemption. The partnership is in the process of an assessment to determine which of its fuels refineries could be eligible for economic hardship exemptions for the full year 2014.

Please turn to slide 8. Our site of organic growth projects remain on track and largely on budget. The Dakota Prairie refinery is expected to reach mechanical completion toward the end of 2014. We anticipate DPR will begin generating cash flows from operations beginning in the first quarter 2015, probably later in the first quarter, given some time for startup, which is in line with our prior guidance. The final estimated cost of Dakota Prairie is currently expected to be approximately $365 million, slightly higher than the prior estimate of $350 million, due in part to elevated labor expense.

Our other two growth projects that come online in mid-2015, including the San Antonio Solvents project and the Esters plant expansion, both remain on track. As does the $400 million Montana expansion scheduled for the completion during the first quarter of 2016.

Looking ahead to the fourth quarter, we see typical seasonality within our fuels refining business as demand and margins have tapered off exiting the summer months. The distillate crack remains relatively strong although the gasoline crack has illustrated some weakness during October and early November, as would be expected this time of year.

On the specialty products side we see normal demand for our products. Although the spread between domestic and international base oils has widened in recent months, with domestic prices being much stronger than some foreign markets, given that more than 90% of our specialty product sales are into the domestic market, we are somewhat insulated from this pricing disparity.

Our key fuels and specialty products refineries are operating on plan early into the fourth quarter and are running at rates commensurate with seasonal demand. The sharp drop in crude oil prices continues to benefit our business into the fourth quarter as well as the aforementioned benefit associated from the 2013 RFS exemption granted to our Shreveport and San Antonio refinery. Overall, the second half of 2014 is shaping up to be measurably stronger than the first half of the year.

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

Thank you, Jennifer. Let's all turn our attention to slide 10 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 instrument increased by $69.2 million to $107.5 million in the third quarter of 2014 versus the prior-year period. As indicated on this slide, the primary drivers of the year-over-year increase included increased contributions from our fuel and specialty products segments including contributions from recent acquisitions such as that of Anchor and SOS. Notably, results from operations during the third quarter 2013 were impacted by a one-month-long planned outage at our Montana refinery, whereas no such maintenance occurred in the third quarter 2014.

We encourage investors to review the section of our earnings press release found on our website entitled non-GAAP financial measures and the attached the tables for discussions and definitions of EBITDA, adjusted EBITDA, and distributable cash flow financial measures and reconciliations of these non-GAAP measures to the comparable GAAP measures.

Turning to slide 11, fuels refining economics improved slightly in the third quarter versus the prior-year period. The benchmark Gulf Coast 2/1/1 crack spread averaged $19 a barrel during the third quarter 2014 compared to $17 a barrel in the same period of 2013. Year-over-year growth in the 2/1/1 crack spread was driven primarily by a significant increase in the gasoline crack, which was partially offset by a marginal drop in the ultralow sulfur diesel crack.

Crude oil price differentials remained volatile throughout the quarter although the spread of Bakken and Bow River grades of crude oil against WTI both widened in the third quarter versus the year-ago period. N

Now turning to slide 12, as we look to sources and uses of cash between the second and third quarters of this year, operating cash flow was clearly the largest source of cash, followed by proceeds from borrowings on the revolver and improvements in working capital. On the debit side of the equation, cash distributions and capital spending were the two most significant good uses of cash. During the first nine months of the year total spending on organic growth projects has been $232 million compared to $94 million in 2013. Next year we expect capital expenditures to decline significantly from 2014 levels, an item I will discuss in more detail shortly.

Turning to slide 13, from a liquidity perspective our $1 billion ABL revolving credit facility remains our primary vehicle that assists us in funding the ongoing growth of the Partnership. Between cash on the balance sheet and revolver availability, we have approximately $565 million in available liquidity as of September 30, 2014. During the third quarter we sold approximately $4 million in LP units under our $300 million aftermarket equity program.

Turning to slide 14, at the end of the third quarter 2014 our total debt to LTM EBITDA improved to six times versus 7.4 times at the end of the second quarter. Looking ahead, we expect improved operational performance out of our key fuels refineries as well as contributions from the Dakota Prairie refinery, the Missouri Esters plant expansion, the San Antonio Solvents plant expansion, and recently completed acquisitions to assist us in making progress in reducing our leverage ratio in 2015.

Turning to slide 15, looking ahead to the fourth quarter of this year we have approximately 2.5 million barrels of our anticipated fuels production including 1 million barrels of gasoline at an average crack spread at approximately $11 per barrel and 1.5 million barrels of diesel and jet fuel in the mid-$20 per barrel range. The gasoline crack hedge is well in excess of the average gas crack on a quarter-to-date basis. Looking ahead to 2015, we have hedged 7.9 million barrels of anticipated fuels production and we will look to continue to layer on positions for 2016 as we progress throughout the coming year.

Turning to slide 16, our capital spending forecast for the full year 2014 remains consistent with prior guidance. Total estimated spending including replacement, environmental, turnaround, and growth spending is forecast to be between $365 million to $410 million for the full year 2014. As of September 30, 2014, we have spent approximately $325 million on the organic growth projects with another $283 million to go between the fourth quarter 2014 and the first quarter of 2016. So we have more than passed the halfway mark from a combined project spending perspective. The slight increase in capital spending at Dakota Prairie referenced earlier does not move the outside of the total expected range of growth capital expenditures spending for 2014.

We expect to provide fulsome comments on our 2015 capital spending in growth project cost assumptions on our year-end 2014 conference call in February. However, at a high level, please note that we expect maintenance, environmental, turnaround, and growth capital spending to be significantly lower in 2015 than it was this year.

With that, I'll turn the call over to the operator so that we can begin the Q&A session. Operator?

(Operator Instructions) Richard Roberts with Howard Weil.

Congrats on the good quarter here. Couple questions on Shreveport, maybe. For one, have you guys identified any specific issues that were driving some of the reliability issues previously that you were able to change here with a good rates in 3Q?

Yes. A lot of the issues at the Shreveport refinery started with the freeze events that we experienced in January 2014. We did extensive turnaround planning for the first half of the year prior to the shutdown, and we did a significant amount of work on some of the from the vacuum towers that we have inside the facility that not only increased reliability, but it improved product quality that we are making of our lube products there.

Okay. Great. Thanks, Jennifer. And sticking on Shreveport, at the analyst day you talked quite a bit about looking at some strategic alternatives for the asset including a JV or a sale. I would assume if you want to sell the asset it would be nice to have a couple quarters of good results before you try and do that. But then if it's running well then maybe it makes sense to keep it in the portfolio. So I'm wondering -- does it not make sense strategically to have Shreveport within the mix? Or was it more an issue of trying to get rid of a problem child? How would you look at the asset if you were to fix things and keep it running well for a while?

Number one, I don't know that I -- Shreveport is certainly not been without its operational issues. But to call it a problem child is maybe a little harsh. The Shreveport refinery is very integral to the Calumet story. It provides feedstocks to Cotton Valley and our branded and package business as well as our petrolatums and white oil business. It also takes these intermediates from several of our facilities and processes them into fuel products. While each of these facilities can operate on a stand-alone basis, having Shreveport as part of our mix certainly makes operations a lot easier. We are looking at several projects that we can do at that facility to further upgrade our products and make a higher play of specialty products. The asset was never actively on the market.

We will leave it at that. Is there anything else, Richard?

Sorry, got cut off therefore second. Maybe one more -- on the logistics MLP, I came up at the analyst day and I think the comment was, it would be discussed at the Board meeting in September. I'm just curious if you can provide on any update on where you are thinking strategically on that side.

Sure. We are continuing to explore every opportunity. That being said, we anticipate taking the next couple of quarters to finish the growth projects and figure out what is best from a corporate structure standpoint. At this point in time there are no active plans to move forward in 2014 with that project.

Understood. Thanks very much.

Roger Read with Wells Fargo.

Almost our last conference call this season, so we are pretty excited here. Quick questions for you all -- along the lines of specialty oils, base oil pricing, been some stories out in the press of other companies in this business starting to cut. I know some of that is due to lower oil prices starting to filter their way into the system, but we've also seen some capacity increases out there. I was wondering if you could give us any sort of feel for where we are not, what that might mean for margins -- maybe not so much in the fourth quarter but certainly in the first half of next year and how that juxtaposes with your commentary about a much stronger second half of 2014.

To date in 2014 we have seen paraffinic base oil margins perform at or above budgeted levels and at or above historic levels. That being said, Pascagoula, Chevron's Pascagoula facility has come online with additional group 2 base oils. These products are in the market today. Falling crude oil prices has slowed down the export markets because when you put several hundred thousand gallons of oil on a boat that won't get some place for six weeks in a falling crude market environment, people want some price protection.

And quite honestly, Calumet is not a big enough producer of base oils to have to participate in these markets right now. We are still able to place all of our volume domestically with historical long-term ratable customers that we have very strong relationships with. Looking forward to the first half of the year, we think we will see some drop in margin on the paraffinic side. Keeping in mind paraffin-based oils are just a small part of our overall specialty products portfolio that we do not anticipate the impact of any of those margin decreases to be substantially material.

So no filter, no flow through to any other products at this point?

No.

Okay, thanks. And then I'll let somebody else it you later on the projects. But my other question is you look at the RINs -- so indicated to me reading the press release you expect a gain in the fourth quarter. I was wondering if you could give us an idea at least maybe, if not the gain, the cash expected. The reason I'm asking is last year the average RINs price was just over $0.40 for the year average and this year we are at about $0.45. So I'm not really anticipating a significant gain, but I was wondering if we look at the number of RINs and took that price we would be looking at cash somewhere in the $15 million to $20 million range when you sell them. Is that a reasonable assumption?

That's a reasonable assumption.

All right, thank you.

Cory Garcia with Raymond James.

One quick question -- I guess we've noticed some particular tightness in the benchmark Western Canadian heavy differential market and obviously some of that is due to Flanagan line fill and so forth. Just curious to hear your thoughts regarding the overall dynamic there, how that changed going forward and even if you guys have any real color on how your Bow River is making its way into the refinery gate, if those differentials are maybe holding little more historic levels versus what we are seeing more tight today.

In October we did see some weakness in the Bow River differential, like you said, directly related to the Flanagan line fill. We've seen some of those numbers improve as we move into November/December and we would expect to see Bow River and the WCS move back towards historical levels as we move into 2015.

So there's no great difference between what we're look in the benchmark, we are just looking at modeling into your refineries?

That's right. Yes, exactly.

Okay. Appreciate it. Thank you.

Richard Verdi with Ladenburg.

Thank you for taking my call. An excellent, excellent quarter all the way around. So most of my questions have been addressed in some sort of manner, and I'm pretty clear on everything. But I do have one question left. So in September to Brookings Institute issued a report calling for the oil export ban to be lifted in the near-term. And I believe Consensus expects a 2017 policy change. Assuming Consensus is correct in the policy change does transpire in 2017, how does something of that nature impact Calumet? I would think all refiners are going to feel the affect in some sort of fashion.

As we look at that the refiners that we have in our system that would be impacted by that would be Dakota Prairie and, to a lesser extent, our Superior refinery. All three of the Shreveport facilities all run local crude barrels that would not be -- people would not contemplate exporting those barrels. So, we feel like that the crude oil export ban would have minor impact on our results.

I think it's important to note that since the majority of our gross profit contribution historically has also come from the specialty products segment, we think that further insulates us from that impact.

Okay. All right, great. And thanks again and great quarter.

Jason Smith with Bank of America Merrill Lynch.

Congrats on the strong results, everyone. So thanks for the color on specialty margins quarter-to-date. Some of your peers have talked about stronger refining margins quarter to date, too, particularly in the northern part of PADD II. So I'm just curious if you can give me an indication as to what you guys are seeing in your markets right now.

We are seeing very strong especially kerosene margins both at Superior and Montana. There are some planned outages of our local competitors in this areas. Exxon Billings has been down, for example. So we are seeing very robust cracks on the diesel and kerosene side.

Got it. And maybe I could just try this. Jennifer, I know you probably want to get through the capital projects first and it's obviously a step in the right direction to see coverage back above one time. What would you guys need to see -- how long do you see coverage above one in order to consider coming back and increasing the distribution?

Obviously, that decision is made by our Board of Directors. Management makes recommendations. Personally, I would like to see the Montana refinery start up before we would begin raising distributions. And that's late 2015/early 2016 type of activity. Just to make sure that we have cleared any hurdles of startup risks. Capital projects tend to go over budget in the last two months versus the first two months so I would like to see a successfully complete that first.

Got it. Thanks. Appreciate the answers.

Theresa Chen with Barclays Capital.

Just a quick one for me. Can you give us an update on the status of the PLR for Anchor?

We don't have an update on that.

How much of that is contributing to the incremental increase in your taxes?

Most of it. Most of it is related to Anchor.

Perfect, thank you.

Jeremy Tonet with JPMorgan.

Congratulations on the very strong quarter. Just one question from me -- on the expansion projects and touching on the point you just mentioned there as far as cost creep, just wondering if you had any updated thoughts for us as far as how things stand with cost inflation. Are you seeing any pressures there and maybe if you could just remind us what amount of the cost are locked in at this point? That would be helpful.

Sure. We have not seen any -- as far as labor rates or material cost escalations, we have not seen any of that in any of the projects we are in the midst of. With Dakota Prairie due to come online very soon, we are keeping our fingers crossed that the weather remains mild out in North Dakota and anticipate that we will not -- should not exceed that $365 million that we are currently projecting, assuming that the weather remains constant. And as far as the other projects, they all remain on budget.

Great. Thank you for the confirmation.

(Operator Instructions) Steve Sherowski with Goldman Sachs.

Just a quick question -- I'm trying to reconcile the specialty product gross margin. If I'm doing my math correctly it looks like recent acquisitions made a larger contribution to the overall margin this quarter. I was just wondering -- can you break out the contribution from each of those assets? And is it a good run rate going forward if we just normalize the third quarter?

We don't break out the acquisitions on an acquisition-by-acquisition basis. And also third quarter -- the Anchor business is in the acquisition number, and the seasonality of the Anchor business results in their third quarter being the strongest quarter of the year. So, I wouldn't be real comfortable telling you to take that and annualize it, but it's not going to be too far off.

Okay. Can you give just a relative magnitude? Is it between $20 million and $30 million or just a general range in terms of seasonality?

No. We don't disclose that level of detail.

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

We have no further questions at this time. I would now like to turn the call over to Jennifer Straumins for closing remarks.

Thank you for joining us on today's call. Should you have any additional questions, please contact our VP of Investor Relations, Noel Ryan, at 317-328-5660.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect, and have a great day.