Calumet Inc (CLMT) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2017 Calumet Specialty Products Partners Earnings Conference Call. (Operator Instructions) As a reminder, this conference may be recorded.

I would like to introduce your host for today's conference, Joe Caminiti. You may begin.

Thank you, Glenda. Good morning, everyone, and thank you for joining us today for our fourth quarter and year-end earnings results call. With us on today's call are Tim Go, CEO; West Griffin, CFO; Bill Anderson, EVP of Specialties, Innovation and Marketing; and Bruce Fleming, EVP of Strategy and Growth.

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 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 information currently available to them. Although our management believes that these expectations reflected in such forward-looking statements are reasonable, neither the partnership, its general partner nor our management can provide any assurance 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.

As a reminder, you may now 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 earlier today. You may access these slides in the Investor Relations Section of our website at calumetspecialty.com.

Also, a webcast replay of this call will also be available on our site within a few hours. And you can contact Alpha IR Group for Investor Relations support at (312) 445-2870.

With that, I'd like to pass the call to Tim Go. Tim?

Thanks, Joe. Good morning, everyone, and thank you for joining us. I'm pleased to report that we have successfully turned the corner. We generated our fifth straight quarter of trailing 12-month adjusted EBITDA growth. We called our high interest senior secured notes today, which efficiently closes the door on what has been one of the toughest periods in our company's history. And last week, we extended our corporate revolver for a new 5-year term, which reflects the confidence our bank group has and the positive steps we have taken to improve the partnership's operational and financial performance. Please turn to Slide 3.

As we look back over our last 2 years, we have come a long way. We first reset the vision of the company in early 2016 at a time when our end markets were extremely challenged. That new vision allowed us to reset our culture through the addition of new experienced leadership and through a stronger executional focus across the organization. As a result, we delivered 5 straight quarters of trailing 12-month adjusted EBITDA growth and completed the divestiture of 2 of our noncore assets that will provide over $600 million in proceeds.

We have a significantly improved balance sheet that has opened up several strategic options to the company that were not available when we first outlined our new vision. One of those options we've announced today is the call of our 11.5% senior secured notes. This process will take about a month to complete, but when it's accomplished, we will reduce our annual interest expense by $46 million per year.

In 2017, we got back to doing what Calumet does best: creating quality, premium specialty products. In fact, we set several records within our specialty products segment last year, including record annual throughput at our Cotton Valley refinery, which produces specialty solvents; and record sales volume and earnings contributions from our high-margin branded products, which includes our finished lubricants, for a second year in a row.

We also entered the next leg of our strategy in 2017 and began to think longer term by executing opportunistic growth and innovation projects such as the launch of several new products, including our new Group III synthetic base oil and our uninhibited transformer oil, both of which are Calumet's own proprietary technology.

As we look back on 2017, I'm extremely proud of our employees and how they executed as an organization. This puts us in a great position to continue to transform the business in 2018 and beyond and to do so from a position of strength, which will provide us with numerous options to drive unitholder value and take the next steps for our vision to become the premier specialty petroleum products company in the world.

So let's take a few minutes to discuss our fourth quarter results, and please turn to Slide 4. The fourth quarter was strong as adjusted EBITDA increased 117% year-over-year to $60.1 million. These results include $10 million from our ongoing self-help program, focused on cost reductions, margin enhancements and new product growth. A favorable noncash LIFO and LCM impact of $8.7 million was offset by $12.7 million in special charges for ERP expenses and realized hedging losses, which West will cover during his discussion. Excluding the impact of these special charges, we delivered $64.1 million in adjusted EBITDA during the period.

For all of 2017, adjusted EBITDA more than doubled to $336 million. Self-help provided $54 million of additional adjusted EBITDA in 2017, which was in line with our previously increased expectation of $50 million to $60 million for the fiscal year. Since we started our self-help program, we've driven $143 million of incremental earnings, which is already close to the low end of our 3-year target of $150 million to $200 million 1 year earlier than planned.

Also supporting our improved results was an ongoing commitment to stronger capital discipline as we reduced our capital expenditures significantly for the second year in a row. In fact, the $80 million of CapEx that we incurred in 2017 was below our previously reduced guidance of $85 million to $95 million. This approach to capital discipline will remain critical as we have a heavier maintenance schedule and turnaround activities to complete over the next 2 years. We have instituted the best practice, front-end loading process for capital project development, which allows us to deploy capital more efficiently without sacrificing growth.

Also, during the fourth quarter, we completed the divestitures of both our Superior Refinery and Anchor Drilling Fluids USA. As a result, our leverage ratio or net debt to EBITDA is down to 4.5x, which is 65% lower year-over-year and is at the lowest level we've seen in over 2 years.

Slide 5 outlines our specialty segment results. Before I talk through Q4's results, I'd like to remind our investors that the third quarter had a number of challenges. First, the hurricane significantly disrupted the supply chain starting in the month of September, in particular, those associated with our higher-margin branded products. In addition, the implementation of our ERP system caused a number of other supply chain challenges for our teams. So our strong performance in the fourth quarter shows that we're getting back to our normal run rate and that we've recaptured several of the lost opportunities from the third quarter. This drove a 38% increase in adjusted EBITDA year-over-year during the quarter, and gross profit per barrel came in at $33 versus $25 in the fourth quarter of last year, driven by healthier market dynamics and better sales mix such as the growth in our higher-margin branded products categories. What makes this performance even better was that it was accomplished in the face of some fairly stiff headwinds as the price of crude increased over 17% in the fourth quarter.

For the year, specialty product volumes were down roughly 4%. However, that was primarily a result of the earlier supply chain disruptions. 2017 total adjusted EBITDA came in at $194 million, which was up 3% compared to 2016, driven by stronger market conditions, record volume and profit performance in our branded products group and record production in Cotton Valley. As we look forward, the supply chain is nearly back to normal run rates, but we have still been working off some Q3-related backlog within our specialties business, including our branded products division.

Lastly, we continue to position our specialties business for long-term growth. First, we completed the expansion projects for both our Royal Purple and TruFuel facilities last quarter, which will allow us to keep up with customers' growing demand for those high-margin products. Second, we're looking forward to continued growth across all of the new products that were introduced in 2017.

Slide 6 discusses our fuel segment performance in the fourth quarter, where adjusted EBITDA increased over sixfold year-over-year to $22 million during the period. This was despite the fact that we completed the sale of our fuel refinery in Superior, Wisconsin, roughly halfway through the quarter.

Gross profit per barrel was $5.29 for the quarter compared to $1.19 in the fourth quarter of 2016, driven by a 41% improvement in our benchmark Gulf Coast 2/1/1 crack spread and a number of self-help initiatives that we delivered in 2017, including running more of our fuel sales directly through our loading racks as well as upgrading product quality like selling more premium gasoline, which carries higher margins.

For the year, fuels products had adjusted EBITDA of $139 million compared to a $10 million loss in fiscal 2016. These strong results were driven by a number of records across the organization, including record WCS crude runs, record premium gasoline sales and record throughput at the Great Falls refinery. Overall volumes did decline, but that was primarily due to the sale of the Superior Refinery during the quarter.

I'd also like to highlight another driver of strong results in 2017, and that was improved profitability at our Shreveport, Louisiana refinery. As you all know, that refinery is primarily focused on supporting our specialty products business, but it will always have a component that produces fuel products as well. As a result, many of our self-help efforts have been focused on improving our fuels performance at the plant. That included accessing a new crude pipeline into the plant that is allowing us to source lower-priced crude. We've also made substantial operating improvements at the plant resulting in better reliability, yields and product upgrades. For example, Shreveport was a strong contributor to our record premium gasoline sales in 2017.

In total, these efforts contributed over 25% of the company's self-help benefits this past year. The team has done a great job there, and I look forward to seeing them continue to become even stronger contributors as we move forward.

I'll end my initial remarks on Slide 7, which is a great measuring stick on our execution against the strategic framework that we set in 2016. I'm pleased to say that all of these efforts have resulted in 5 straight quarters of trailing 12-month adjusted EBITDA growth.

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

Thanks, Tim. You can see the improving year-over-year performance across each of our segments that Tim discussed on Slide 8. In terms of our Anchor business, or our prior oilfield services segment, you'll now find it in discontinued operations within our press release and financial filings as we officially sold the business on November 21.

Our specialty segment provides stable adjusted EBITDA margins on a trailing 12-month basis, as shown on Slide 9. On a quarter-to-quarter basis, there are variations in our margins, driven by seasonal effects as well as changes in crude prices. But overall, we tend to have stable margins over trailing 12-month basis that range around 15%. That consistency and reduced volatility will provide for a much more stable operating environment as we move forward as we'll have less exposure to the cyclical fuels in oilfield services side of the historical business. That stability of our trailing 12-month specialty adjusted EBITDA margin shows you that over time, we are able to adjust our pricing fairly effectively. We believe this is important to start talking more like a specialty chemicals company moving forward, and thus, you'll see this review from us going forward.

Strong margins and healthier operating environments across all 3 of the businesses contributed positively to our growth over the last fourth quarter, as shown on Slide 10. This was further supported by $10 million in self-help, as Tim mentioned, as well as a net $8.7 million favorable impact from LCM and LIFO impacts. Offsets to these positive contributions include $37.1 million in higher operating costs, which reflects the fact that we got RINs hardship exemptions in the fourth quarter last year that did not repeat this fourth quarter. Those RINs exemptions related to the calendar year 2015, as a reminder. Volumes were lower and led to a $12.1 million degradation, and we had $9 million in offsets related to divestitures. Lastly, SG&A costs came in $4.6 million higher, primarily related to our ERP implementation and higher bonuses this year versus 2016.

Slide 11 walks through a similar exercise for the fiscal adjusted -- fiscal year adjusted EBITDA walk. The 2 biggest drivers of our strong growth were stronger fuels performance and the contribution of our self-help efforts, which added $54 million in incremental adjusted EBITDA. More broadly, as we compare the drivers for our 112% increase in adjusted EBITDA in 2017, you can see that they were driven by higher fuels and oilfield service margins; lower annual operating costs; the sale of the North Dakota Prairie asset, which had negative EBITDA in early 2016; a favorable net LIFO and LCM adjustment; and the positive impact of hedging. Offsetting those were lower total volumes and higher SG&A, again, primarily related to our ERP implementation. It is important to note that the lower specialties volume were driven primarily by supply chain disruptions caused by the hurricane and the short-term effects from our ERP implementation.

Slide 12 provides our traditional review of our leverage profile, liquidity and fixed charge coverage ratios over time. As you can see, we've made great progress here as we collected significant proceeds from the sale of both Superior and Anchor during the fourth quarter. The good news for our unitholders is that we have structured those transactions in such a way that despite a net $172 million gain on sale, most of our owners should not have a tax obligation this year. It's also worth noting that we have now completed the post-closing calculations of working capital, inventories and services for both transactions that's provided for in their respective purchase agreements. In total, we expect to receive approximately $63 million more than the previously announced consideration. Almost all of this additional cash will be received in 2018 but has not been reflected in our liquidity chart.

When coupled with another quarter of strong adjusted EBITDA contribution, we were able to reduce our leverage ratio or net debt to adjusted EBITDA to 4.5x. This is the lowest level in over 2 years. Historically, the company had suggested that 4x leverage was an appropriate goal, but we'd like to be a little more conservative than that, and we'll look to target a lower number. Our liquidity improved to $415 million, and our fixed charge coverage ratio also stepped up to a comfortable 1.8x as of 12/31.

As Tim noted, we've called our high interest senior secured notes. In 2017, we had $173 million in cash interest charges, and that will be reduced by roughly 25% when those notes are eliminated. As we look forward to life after the secured notes, I'd expect our annual cash interest obligation to be approximately $128 million per year.

We also successfully extended our ABL another 5 years and improved the terms of the facility, which provides us with greater flexibility to run our business. And lastly, the sum of all this hard work was validated by the fact that S&P ratings agency raised our outlook from negative to stable last week and placed our senior unsecured notes on positive outlook. So it's good to see that multiple outside parties are recognizing our improving financial position.

Slide 13 shows the capital cost discipline we've exercised in our capital spending. In 2017, we had $80 million in capital spending, which declined 34% compared to 2016 and came in below our previously set target range of $85 million to $95 million. As we look forward to the next few years, we do have a fair amount of maintenance and turnaround activity to complete, and we'll spread that work over time to optimize activity and minimize the impact on the total business. We also have had some small maintenance related to downtime at Great Falls in Q1. Both Great Falls and Princeton will have additional turnaround activity later in the year. Despite that activity, we still expect to keep our capital spending fairly flat and, thus, are forecasting a range of $80 million to $90 million for 2018.

Slide 14 offers some perspective on our pro forma SG&A, excluding both of the divestitures from the total figures. First, I'd like to point out that our total -- that our cost discipline has allowed us to remove roughly 7% of our SG&A costs over the last 2 years at the base level. Of course, we paid limited bonuses in 2016 given the tough market conditions we faced that year, and that's why the basis is much lower that year.

I'd also like to touch on our ERP implementation costs as we've broken them out on the slide for you. The fourth quarter was clearly a peak in terms of spending -- as we stabilized the system in that we spent an average of just over $2 million a month over the quarter. As we start to shift from stabilization to optimization of the ERP system, we should see these costs decline substantially as we progress through the year. Overall, I'd expect total ERP costs come in below 2017 levels.

To help those of you seeking to model our business, Slide 15 breaks out a few key pro forma items. Again, this removes the sales and adjusted EBITDA impacts from the divestment of both the Superior Refinery and Anchor Drilling. With the sale of Anchor and Superior, our net debt to adjusted EBITDA increases from our reported number of 4.5x to approximately 6.3x, still below the 6.6x I reported at the end of the third quarter. As we make further progress in our self-help initiatives, we expect to drive this leverage ratio further south. This also shows you how our potential RIN obligation will change as Superior historically carried approximately $40 million of renewable volume obligations, or RVOs. Moving forward, we should carry a total company obligation of approximately $85 million RINs, but we also maintain the ability through RIN mitigation and blending to reduce that obligation by roughly half.

And lastly, in terms of the use of cost-advantaged heavy Canadian crude, you can see that our systemwide potential is reduced by the Superior sale from roughly 40,000 to 45,000 barrels a day to a level of about 25,000 barrels a day, which is the full nameplate capacity of our Great Falls refinery.

Now with that, I'll turn it back to Tim.

Thanks, West. I'd like to take a few minutes to talk through our priorities for 2018. And I think it's important to start with our ongoing commitment to our self-help program. Turn to Slide 16.

We originally set a program goal of $150 million to $200 million by 2018, and we've already achieved $143 million of that. 2017 saw nice contributions from work that was completed at Shreveport to improve our profitability capture at that plant. As we look to 2018, we are setting a goal of $40 million to $50 million for the year, which will drive us toward the top end of the 3-year goal. This will continue to be driven by cost discipline, margin enhancements and opportunistic growth projects. This includes 2 new projects that will drive results in 2018: a new isomerate unit at our San Antonio facility to increase our high octane gasoline sales and the naphtha project at the Great Falls plant that will improve the quality and market price of our naphtha. The main takeaway for our investors here is continuous improvement will remain a part of our culture. We expect to provide you with a new long-term goal beyond 2018 down the road as we believe there is a lot more we can do to become a truly high-performing organization.

Finally, I'd like to announce the launch of our new product innovation center here in Indianapolis. Turn to Slide 17. We had our grand opening for the center in October, and it's a highly advanced, state-of-the-art R&D facility, which has already helped us develop new products like our Group III synthetic base oil and our transformer oil. One of the keys to our success is the ability to develop bespoke products and formulations for our customers to solve their specific needs. These can be very nichey products, but they can be critical to our clients' success. For example, our product may help a client's cosmetic line provide superior moisturizing properties or ensure another client's highly engineered industrial equipment has the right kind of lubrication that can work efficiently in a damp environment. That, again, will make our products very sticky as one phase saw the complex need for our partner client, the switching costs can be high.

This new center will help us provide critical support for our customers, build proprietary brand formulations and develop new innovative products and solutions. We've already had some great feedback from those of our customers who've had a chance to tour the facility, and we currently have additional new products and product line extensions in various stages of testing now in the center and expect to launch some of them later in the year.

I'd like to leave you with our outlook for the first quarter on Slide 18. First, we expect volumes to be impacted in the specialty segment based on the lubes turnaround we've just completed at Shreveport. Offsetting some of that pressure will be 3 things. First, we recently implemented price adjustments to align with rising crude prices. Second, we also continued to reduce the third quarter-related backlog. And last, we should see continued growth in our branded products portfolio as those new line expansions started to work.

On the fuel side, we expect typical seasonal patterns within the markets, but we'll continue to focus on capturing as much of the benefit of the widening WTI to WCS differential that we can at Great Falls. Sales volumes will be down slightly with the 2018 turnaround activity we had at Great Falls and Shreveport. And additionally, with the sale of the Superior Refinery, our asphalt business will be much simpler now and will not require the kind of inventory build that we've historically had in the winter.

On a more corporate-wide level, we'll remain focused on delivering $40 million to $50 million in benefits, stemming from our self-help initiatives for the year; and lastly, retiring our senior notes and continuing to look for other avenues to derisk our business and improve our liquidity over the longer term.

2017 was all about execution, and 2018 will be focused on continuing to transform our business. While we clearly turn the corner and we are now heading in the right direction, we still have a lot of work to do to build the high-performance company that our unitholders expect and our employees deserve.

That concludes our prepared remarks. So operator, we can go ahead and open the line for questions at this time.

(Operator Instructions) And our first question comes from the line of Mike Gyure from Janney.

Can you talk maybe a little bit about, specifically in the fourth quarter, some of the barrels per day volumes coming out of the specialty comp. The lubes was down significantly year-over-year. Can you talk about, I guess, sort of the impacts? I think a lot of that was probably due to some of the hurricane-related stuff that sort of rolled from the third quarter to fourth quarter. Can you touch on kind of the volumes and some of the throughput that went out in the quarter there?

Sure, Mike, this is Tim. Thanks for the question. Yes, the fourth quarter showed lower specialty volumes. Some of that was associated with some of the supply chain disruptions that we talked about. But primarily, we had a lubes hydro refiner downtime at Shreveport that resulted in lower lube sales. That was really the main driver for that. You'll see the branded products division through the press release numbers rationally back to normal levels. And really, our -- we view our business as continuing to be strong, recovering through the supply chain disruptions that we had, and we see 2018 to be continued strength in our specialties business. What I will also mention, we said this in our prepared remarks, we also had a Shreveport unit down in the first quarter, which will also impact volumes in the first quarter for our specialties business. But as we've talked about over the last few years, we've been trying to spread out our turnarounds so that they don't concentrate in a particular quarter or on a particular year. And so we've done a pretty good job of doing that here over the last year to try to make sure that we don't hit the books all in 1 quarter. So, Mike, hopefully, that will give you a little better feel for what's going on.

Great. And then maybe one more. On the specialty products, looks like part of the impairment charge, about $60 million of that, was in the specialty products business. Can you talk about, I guess, what you impaired there, if it's specific facilities or specific assets? Just one more color there would be appreciated.

Yes. So with respect to the impairments, Calumet went on an acquisition spree and CapEx spree a number of years ago. And during that time, it was a relatively high price and margin environment. And so we do a regular review of all of our assets every year, and it's really kind of this time of year that we do it, it's in the fourth quarter. And so as a consequence of that, there were several facilities that -- where we took impairments. And so some of it was over in the specialty, some of it was elsewhere.

And our next question comes from the line of David Troyer from Seaport.

A couple of questions. The first is it's only 2 segments excluding the discontinued operations. I'm having a -- I've had a hard time allocating the ERP costs of $12.7 million between the 2 segments. Can you help me there, please?

Yes. I wouldn't bother really trying to. I mean, because the -- an ERP system is truly an integrated system, and so it's -- it is all sort of one big ball of wax there.

Okay. I mean, what I'm trying to do is focus on the specialty products segment. And if the $194 million, $195 million on a reported basis, if -- or I'm just trying to see if I should get that closer to $200 million or $205 million or 210s and that's really going to be the -- a significant portion of the company going forward. On liquidity, the $252 million of revolver availability that you've talk about at 12/31, can you provide a number pro forma for the new revolver? Is it the same? Or does it change materially?

No -- yes, so at the end of the fourth quarter, so the end of December, we didn't have Superior or Anchor. And so what you have there is what it was or what it is. So that is the actual pro forma.

Okay. And then on the cash flow statement, I see $100 million -- or $100.1 million of proceeds from inventory financing agreements. Can you talk about what that is and whether that created the liability somewhere else in the balance sheet?

Yes. So the inventory finance, we did that -- I think it was in the second and third quarters of the year. We have an inventory finance arrangement with Macquarie where they take ownership of the barrels at the refinery, both crude as well as refined product. We treat this as an on-balance sheet obligation, but they actually technically own title to it. But that's what that is. And it's a relatively attractive piece of financing.

Okay. I apologize, I thought that was a fourth quarter item, I must have missed it previously. Then my final question is -- pertains to the capital structure. So after the call, you won't have any drawn or any material drawn secured debt. You'll have unsecured -- you'll have capacity, obviously, because of the revolver -- or the ability because of the revolver. You'll have some unsecured bonds, some of which are currently callable with 7% handle coupons -- 6% and 7% handle coupons. Is there any thought about further -- and you won't have any prepayable debt or debt that is easily prepayable without penalty. Is there any thoughts about further optimizations of the capital structure in, say, the next 6 months or during 2018?

Yes. I mean, we're always looking to optimize things. One of the things that we also released information this morning and mentioned that we had extended our corporate revolver. And one of the things we did associate with that was there's an additional small piece -- or tranches, I would say, with it that gives us a little more liquidity, $25 million more liquidity associated with it as well as some other benefits. But we're always looking at our capital structure. We have $900 million -- after we call the secured notes, we'll have $900 million of unsecured notes due 2021. We like the interest coupon there. It's very attractive. There's nothing that requires us to do anything there. But we have looked at and we'll continue to look at, potentially at some stage, figuring out what is the right time to refinance a portion of that and reladder the debt structure through a new issuance. But again, that's simply an issue of optimization and figuring out what's the right time and position to do that. We think that we're making huge progress in terms of our debt reduction and improving our metrics. Things are going in the right direction, and so we're not necessarily in a hurry to kind of do anything there.

And that concludes our question-and-answer session for today. I'd like to turn the call back over to Tim Go for closing remarks.

Thank you, Glenda. Thank you for your time today and your continued support. We look forward to seeing many of you at the investor conferences we have coming up over the next few months. I'd also like to thank our board, our management team and all of our employees for their hard work and support over the last 2 years as everyone was critical for us turning the point.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, and you may now disconnect. Everyone, have a great day.