Calumet Inc (CLMT) 2021 Q3 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Calumet Specialty Products Partners Third Quarter 2021 Earnings Conference Call. (Operator Instructions) I would now like to hand the conference over to your speaker today, Brad Murray (sic) [Brad McMurray], Investor Relations. Please go ahead.

Good morning, and thank you for joining us today on Calumet's Third Quarter 2021 Earnings Conference Call. With me are Steve Mawer, CEO; Todd Borgmann, CFO; Bruce Fleming, EVP, Montana Renewables and Corporate Development; Scott Obermeier, EVP, Specialty Products and Solutions; and Marc Lawn, EVP Performance Brands.

Before we proceed, I'll remind everyone that during this call, we may provide various forward-looking statements. 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 cause them to differ from our expectations.

You may now download the slides that accompany the remarks on today's call, which can be accessed in the Investor Relations section of our website, www.calumetspecialty.com. A replay of this call will be available on our website later today.

With that, I'll pass the call to Steve. Steve?

Thank you, Brad, and everyone. Welcome to Calumet's third quarter earnings call. I'd like to start off with a few words about the business backdrop. We all remain hopeful that we're in one of the later innings of the pandemic, and you can see that in the strong earnings we are reporting for Q3. As the pandemic has played out, an economic wave has flowed through the different segments of our business. First, during the maximum lockdown, maximum uncertainty phase, our Performance Brands business was able to capture the tailwinds of low input costs, nesting phenomena, and consumer resilience.

As the vaccine became available, what has become known as a bullwhip recovery manifested, creating exceptional demand and margins for our Specialty Products and Solutions segment. Demand was indeed so good that we were able to expand margins in that segment through one of the sharpest rallies in input costs that any of us have seen in our careers. And now it looks like we're onto the third wave of the recovery.

The tremendous and unprecedented shock of the collapse in transportation fuel demand during lockdown has taken almost a year and a half to rebalance. But with inventories now below-average levels, and Europe and Asia experiencing severe energy deliverability issues, yields margins have got off their low cycle knees and reverted back to mid-cycle, if not better. This should be quite a favorable environment for Calumet.

Specialties margins have likely peaked, but as much as anything, that is because the input cost for specialties at diesel, naphtha, and VGO. And at this moment, we're back in the roughly 80% or so of the time when making your own inputs as we do at our North West Louisiana specialties complex is highly beneficial to Calumet.

While on the topic of COVID, it would be remiss not to recognize the efforts and commitment of our team. This has been an extremely difficult 18 months for the world and for Calumet. Through all of this, with the added challenges of winter storm Yuri, our team has stayed focused, managing through what fate has thrown at us. Their resilience is greatly appreciated.

Among the many things that the pandemic forced on us was a rethink of our corporate strategy and vision. I believe that this hardship, coupled with our strategic review, clarified our path forward and created the opportunity to articulate a tremendously better vision. In that light, although many of you understand much of what we're trying to do, we would like to spend a minute or 2 being more explicit about what our vision is for Calumet and why it can, in our opinion, create significant unitholder value.

But first, let's briefly recap the quarter, and we do that on Slide 3. Earnings for the quarter show the improving trend led by specialties, as I mentioned just now. Adjusted EBITDA for the quarter was $58.8 million. Liquidity remains strong, and our Specialty Products and Solutions segment reported record specialty unit margins. As mentioned earlier, we appear to be back in that roughly 80% or so of the time where our integrated specialty complex in North West Louisiana will outperform nonintegrated specialties production.

Furthermore, Asian and European producers are carrying a very significant burden from the tremendous increase in energy costs there, which should further amplify our competitive position here in North America. Our 2 specialty businesses, Performance Brands, and Specialty Products and Solutions continue to experience very robust demand. The challenge is satisfying that demand due to supply chain disruptions.

In Specialty Products and Solutions, we have been able to navigate that effectively so far, and our main supply chain focus is the day in, day out challenge of a national trucking shortage. Performance Brands results continue to be affected by supply chain issues, limiting our ability to produce the volumes of packaged and bulk lubricants that our customers eagerly demand. In this business alone, we have received 38 force majeure or force majeure extension notices this year. I would stress that the supply chain issues are materially less in our TruFuel, engineered fuels business than in our lubricants, and greases business, but we will go into a little bit more detail on the supply chain story later.

Finally, on this slide, we continue to be more than happy with our progress on standing up an exceptionally competitive Renewable Diesel business in Montana, be that our partnering discussions, which are well advanced or the technical permitting and construction side of the project. Our unique feedstock access, given our location, has become much more apparent and understood outside of Calumet. The concept that our business sits in the heart of the temperate oil seat belt, unlocking a new and huge supply of feedstock has resonated well and it's gratifying that this important component of our vision is becoming well understood and supported.

Speaking of vision, let's move to Slide 4. All of us here spend a lot of time with our heads down in the weeds, planning and executing. We may not lose track of the big picture, but we risk losing track of communicating the big picture. We have a clear vision for Calumet, and we have been implementing it, be it through the resegmentation of our businesses at the beginning of the year or the standing up of arguably the best renewable diesel conversion project in North America. We would contend that the creation and implementation of this vision can and should create significant unitholder value above and beyond the roughly 1,000% appreciation in the units since April 2020.

At its heart, our vision is simple. Calumet currently consists of a highly leveraged hybrid business, and our vision is to both dehybrid and delever. The 2 businesses we end up with, as the vision plays out, are our Specialties business, consisting of 2 segments: fast-growing performance brands, delivering exceptional quality premium products, often direct to consumers; and the Specialty Products and Solutions segment, which we believe has material investment and growth potential. Specialty products and Solutions is further distinguished by the tremendously diversified array of customers and products in the portfolio.

And then we have renewable diesel. As I believe I've told you on more than one occasion, we and many others believe that this is an exceptional asset in the renewable diesel space, definitely first quartile, arguably first decile. Evolving this into a separate business can create significant unitholder value, and that is our plan. Other than niche projects, access to renewable diesel companies is not pure play. You have to bring along some fossil exposure or some biodiesel exposure or some other exposures. It seems to us and many other interested parties that there is investment demand for pure-play renewable diesel. Within the energy transition space, it's much more tangible, more immediate, and lower risk than most other energy transition investments.

Furthermore, the fact that Montana sits right at the top of the competitive stack, generating strong cash flows in almost all imaginable scenarios also makes this a tremendous growth platform, be it to build a broader pure-play RD business, or backwards integration into the now well-known temperate oil seat belt, providing low carbon intensity feedstocks right in our backyard.

Additionally, our green renewable hydrogen plant will further lower the CI value of our products. Montana is a dream location from a product marketing standpoint and not just for all the core and soon-to-be-added RD markets, but also sustainable aviation fuel. The Vancouver, Seattle, Portland, transpacific flight corridor has the second biggest burn demand on the West Coast after LAX. We can serve that market at low additional CapEx and with logistical superiority as and when the interest that we are experiencing turns into actual demand.

So that's our vision, separate these businesses into 2 best of breeds, both with appropriate leverage. Simple but worth stating more clearly.

With that, I will hand over to Todd, who will take you deeper into the quarter's results.

Thank you, Steve. Let's start with our Specialty Products and Solutions segment on Slide 5. Our brands in this business are specifically designed for the unique requirements of the industries we serve, and they are relied upon by our best-in-breed customer base across a diverse set of end markets. Our ability to develop such a broad range of solutions is enabled by the combination of deep technical expertise in an extremely integrated and flexible asset base, which is unique in our industry and underpins Calumet's competitive advantage.

In Steve's opening remarks, he alluded to the resiliency of this business, and our brand and product diversity lies at the heart of that strength, whether it's performing through the depths of the 2020 pandemic or delivering record margins during the recovery. In the third quarter, these specialty brands delivered margins that were 20% higher than last quarter's record, and we'll turn to Slide 6 to go deeper into the segment.

Clearly, our Specialty Products and Solutions business had a nice quarter, generating $46.3 million in adjusted EBITDA versus $31.8 million in the second quarter. The tremendous specialty margins that drove the quarterly performance were a combination of exceptional market demand and the continuation of our commercial initiatives.

Further, we saw fuels margins return to mid-cycle type levels near the end of the quarter. This is a welcome change as we emerge from pandemic lows, and we expect this scenario to continue as the global energy shortage further develops. Steve referenced some of the supply chain impacts in our business, but I'd like to reiterate that for SPS, supply chain issues were mainly chucking availability, and they are largely behind us. The logistics team manages that challenge well, and for the most part, we are not experiencing the depth of challenges in this segment that we've seen elsewhere in our business and across industry.

Moving to Slide 7, and transitioning over to our Performance Brands segment. We show some graphics to highlight and summarize our 3 high-performance brands, including the large container sizes that were introduced this year in response to growing demand. On Slide 8, we provide our third quarter results for the Performance Brands segment. This business generated $6.8 million of adjusted EBITDA for the quarter, compared to $7.3 million in the second quarter. This is a business where we have most acutely felt the ongoing industry-wide supply chain challenges. Last quarter, we mentioned the development of a grease shortage as one of the largest suppliers in the industry suffered a full plant loss. We ultimately have been able to answer the challenge and source alternate grease supply, albeit at a cost that's 28% higher than the price we were paying pre-shortage.

Additionally, one of the industry's largest additive manufacturers has been offline for most of the year, which has created an industry-wide additive shortage and posed a huge challenge in the third quarter, in particular, as demand is booming. Similar to our grease response, our team has been working tirelessly to fill demand. Also like greases, we will not sacrifice our extremely high product quality standards by sourcing cheaper, untested alternatives. Making top-tier products requires top-tier inputs, and we have had to source expensive alternative additives, which, in a short term, can eat into margins and even slow down shipments, but our customers know that we will not compromise on quality, and we will not waver on our commitment to produce the highest performance products even in these challenging conditions.

The other issue impacting performance brands, and we've spoken about this before, is the ongoing rising price environment. As we covered in the Specialty Products and Solutions segment, we've seen record base oil margins, which are great for Calumet as a whole, but a challenge to this segment. We've also seen the price of steel increase nearly 3x versus 2020, and we know that getting increases through in this consumer business takes a little time. Last quarter, I mentioned that price increases were in motion, and we did see product prices increase in the third quarter as expected, but raw materials continue to rise as well. And with the inherent price lag in this business, we'll be temporarily squeezed when feedstocks rise quickly and will benefit when costs plateau and reverse.

Despite these challenges, the underlying fundamentals of our Performance Brands segment are exciting, and we continue to see strong demand throughout the third quarter. However, because of the supply constraints, we were not able to satisfy all the demand growth. And as a result, our order backlog grew at $20 million during the quarter, which is twice its normal size. We also had to reject new demand in order to service historical customers to the best of our ability. As industry works through its supply chain challenges, we're confident that we'll convert the backlog to shipments and return to a more normal growth environment. In the meantime, protecting our premium brands by serving our customers with world-class products continues to be the top priority for this business.

Moving to Montana. On Slide 9, you can see a few pictures taken during the quarter. Steve referenced the Montana governor visiting our facility for ribbon cutting ceremony, which was a great event pictured here. You can also see the renewable diesel tank farm that's being constructed. The project is progressing nicely, and we've received key permits ahead of schedule, which allow us to get into construction sooner than expected. We're taking advantage of that and pulling forward work to lessen the risk of supply chain delays.

On Slide 10, you can see that Great Falls had solid performance in the quarter. Margins have steadily improved through the year, and the third quarter's $24.4 million of adjusted EBITDA is up $11.6 million versus the second quarter. As you know, PADD IV is a great place to be a refiner, and we saw the normal strong summer refining environment play out this quarter, although we did see some headwind from price lag in the Asphalt business. The asphalt producing Great Falls acts a lot more like a specialty product than a fuel, and a majority of our product goes to premium retail asphalt markets that price well before shipment as opposed to the wholesale asphalt markets that are more volatile. This asphalt niche is a meaningful competitive advantage for Great Falls.

Last, that we can't overlook it, we're pleased to deliver these results in the midst of all the prep work and construction that's happening at the site. And we are thankful for the phenomenal teams we have running our business and delivering our transformational renewable diesel project safely.

Now I'll turn the call back over to Steve for a few final remarks before Q&A.

Thanks, Todd. I'll keep it brief. Progress on multiple fronts. A good quarter, improving macro backdrop, uncertainty around additive supply, clarification about direction. With that, we can open up the call for questions.

(Operator Instructions) Our first question comes from Amit Dayal with H.C. Wainwright.

Just in terms of -- I know you touched on it, Steve, a little bit in your commentary, but do you think some of these margin trends will remain intact for you guys for the next few quarters? On the specialty side, I know you're saying margins have peaked, but just wanted to get a sense of how we should be thinking about contribution from Performance Brands picking up, et cetera., that could continue to support these strong margins.

Yes. Well, thanks for joining us, Amit. It's great to have H.C. Wainwright's Clean Tech team initiate coverage. So welcome to the call. Well, I think across businesses, like we said, if you look at SPS, I think the specialty side of it, the margins in the quarter were phenomenal, difficult to maintain. So we do think that piece has topped, but we do think that one of the reasons it's topping is because the input into that is the distillate VGO and the naphtha. And clearly, we're moving into a much stronger refining cycle from that perspective and a lot of the pure-play refining companies I think have covered that extensively in the call. So that would kind of cover that, and that would probably cover Montana. I think on Performance Brands, maybe it will be good if I get our EVP, Marc Lawn, who's here to talk a little bit about his thoughts on margin outlook going forward.

Amit, nice to have you on the call. So as Steve sort of alluded to, we've been going through these challenges, and we see supply chain challenges probably easing into the first part of 2022. What we're seeing though is that the demand isn't waning. And as we mentioned on the call already that we're having to turn away demand. So we're expecting that strong pull for the business to continue. And once the supply chain normalizes and the -- and all of our price increases have been passed through to the end markets, which generally take up to 60 to 90 days, thinking of our retail partners, we expect then that, that will take us back to what I would call normalized growth trajectory, in line with expectations that we've looked at previously. We're not seeing anything at this stage that would take us away from that. So think of it and hold it in that context would be my suggestion.

Okay. And then maybe a question for Todd. D4 RIN values were higher for the quarter compared to the previous quarter. Just wanted to understand the mark-to-market gains during this quarter versus losses during the prior quarter. Do you think for the fourth quarter balance sheet are expected to yield a gain again for you guys? Just wanted to see how that should -- how we should think about that.

Yes. No, good question. And like everybody else said, thank you for joining. It's great to have you on the call. So first, let me clarify what's in adjusted EBITDA because there's no mark-to-market gain in adjusted EBITDA. And I know you know that. I'm just kind of reemphasizing that. So we don't see mark-to-market kind of driving the strong adjusted EBITDA or anything like that. We did have a mark-to-market improvement from decrease in RIN prices flowing through the net income of $66 million for the quarter. So you'd probably recognize that it's been a while since we've posted a positive net income quarter and a lot of the driver for that was kind of the mark-to-market of RINs nicely be back in that area.

Okay. Yes, I'll take my follow-up on this off-line. Just -- and then finally, just last one for me, if you will. On the renewable diesel side, it looks like you have started some work. Can you give us any additional timelines in terms of milestones, et cetera, that we should expect to look forward to?

Amit, it’s Bruce Fleming. So the information that we have put out on cost and schedule is unchanged. We're holding the line there. We've got kind of a sequence pre-commissioning that gets us to full-rate by late in next year.

Okay. And Bruce, how much have we already sort of -- how much are we looking to invest in 2021? And then how much are we looking to invest in 2022 towards this effort?

Yes. The guidance for -- this is in our Q, which just came out this morning. The guidance is $65 million to $75 million of spending this year and the balance will be next year. We've not disclosed the total. We have given a dollar per capacity barrel chart that's in the appendix. And you can also see that sequence, the pre-commissioning ramp-up in the appendix.

Okay. I'll take a look at that. That's all I have for now. I'll take one other question offline.

Well, thank you. I appreciate the clean coverage.

Our next question comes from Carly Davenport with Goldman Sachs.

The first one is just on the potential separation of renewables and specialties that you talked about. I guess, can you just flush that out a little bit in terms of how you see potential timing shaking out key gating factors we should be thinking about? And ultimately, how you see the optimal corporate structure at Calumet, whether that's MLP versus C Corp?

Carly, this is Bruce. I'm going to leave the last one for my boss. But in terms of the sequencing, we've got Montana slash renewables. We're simply going to remove the slash as we get the business stood up, and we'll have an additional reporting segment there. Timing will be linked to our partner selection. So that's still pending, as Steve mentioned. Then in terms of where that might take Calumet in the future, Steve or Todd?

Yes. Adding to that, I think that looking at the way to maximize unitholder value, then our belief, but we don't -- we can't confirm exactly what the path is it coming right now. I believe is that the renewable ends up as a completely separate entity. And then as far as the corporate structure question, I'm afraid I'm going to give you is kind of the same answer that I always do, which is if you look at it, the dehybriding of the business and the delevering of the business, which is what we're working on, creates a huge amount of unitholder value.

And so that's our priority is to do all those things, reset, see how the capital market feels about that and then make future incremental decisions from that. As I think I've also mentioned before, I've actually had a number of investors reach out and say, given the huge gap in valuation between where you are now and where you will be, once you have a stood-up RD business, please do not convert in the short-term because otherwise, the company can be snapped all up by someone. So I think we need to get through those big structural changes, and then we'll pause and regroup, and then we'll make the logical economic decisions, Carly.

Great. And then the follow-up is just on the renewable side. So we've talked a lot about renewable diesel, but we've also seen a lot of headlines recently around the sustainable aviation fuel. So on that point, just curious in terms of scope on Great Falls, if that would allow for any SAF production? And then, I guess, second, how you're thinking about the economics around SAF at the current kind of structure?

Hey, Carly. Thank you. Bruce, again. So yes, we will have -- besides the renewable diesel, we're going to have renewable hydrogen, renewable nat gas, renewable LPG, renewable gasoline blend stock, and yes, renewable SAF. The economics for us right now are to leave the sustainable av fuel in the renewable diesel. I think there's a lot of wildcards in the budget process, like a jet blender's tax credit, which may change that. And when we're confident, we will first extract that contained SAF and make it discretely available. So that's easy enough. And we're talking to the airlines about that now. The scale of our operation is well suited, as I think Steve already mentioned, to serving the local players. We've had one airline give us a list of 8 sites. They would like it, for example, around us. Now the real pivot is for a subsequent investment, we can go about 85% SAF. We can pivot the renewable diesel into jet. So if we get a sustained economic signal to do so, we're one project away from a really large amount of jet for that transpac route out of the North West.

Our next question comes from Jim Gabelman (sic) [Jason Gabelman] with Cowen.

This is Jason Gabelman from Cowen. I wanted to ask another one on the renewable diesel project in Montana -- or I guess 2 on that project. Firstly, as we think about the Phase 1 start-up, can you talk about if it's economic to run that Phase 1 asset right now in the current environment, just given refined bean oil is trading at such a premium to soybean oil? And then secondly, on that project, is there a data which you really feel you need to get a partner in the door buy? I'm thinking, as you start to ramp up spend on Phase 2, you'd like to have some outside capital supporting that spend. Am I thinking about that correctly? Or are you comfortable spending that upfront and then securing a partner maybe further down the road before the project actually starts up? And I have a follow-up.

So this is Bruce. Maybe I'll take those in reverse order. We're not under the gun for a partner. At the same time, the reason we told the market last March that we want one is we would not want to strip the rest of the company of resources for the excellent growth projects that are available to Marc Lawn and to Scott Obermeier. So the partner is part of our intention to separate the renewables business. Since the discussions are going well, we're not concerned about timing. The question of the market, and this is -- again, I'll draw everyone's attention to a slide in the appendix, but we're going to -- the operational intention is to start-up on clean refined soybean oil, like everybody else has in our industry, but not to stay on that too terribly long. It is less economically attractive. Is it underwater at this time? No.

Okay. I guess I'll check my calculations or we could take it offline because it seems like it's about breakeven now, but that's fine. And then my second question just on WCS dips. Obviously, they've widened out quite a bit recently. Can you just talk about what's going on there? Is that transitory? Is there something structural in the market happening?

Yes. So the Canadian heavy crude diff is correlated with industry utilization and industry utilization is not high or inverse correlated. So it's exactly where our models would put it. And the wildcard is this North American refining utilization tighten up into the 93%, 94% range. The -- if I back up from that comment to your previous question, we are first stop on the Canadian heavy crude pipeline. We're also going to be first stop on the oils from the oilseed crops that grow around us. So when you pull industry data, you're looking at kind of eastern low country soybean spot prices. That's not our feedstock for the long run.

Our next question comes from Gregg Brody with Bank of America.

So just -- I appreciate -- it seems like things are going as planned with the RD facility. But I'm curious if the -- how you're thinking about potential separating the businesses? And it's maybe too early to ask this, but how you would think about doing that? Is it a spin? Is there IPO and you keep a piece of it? And how does that fit in with a JV partner? Just trying to understand how all that fits in. And ultimately, how does that fit into your goals to reduce debt by the amounts you've targeted?

The Delaware LLC for Montana renewables is formed. That's going to be the vehicle. If you want the procedural answer, depending upon the exact partnering agreements, we do expect that, that is discretely separate and visible in our financials, and that will give us a market signal. So the way that -- it's not rocket science, the way that will feed back into the company's capital structure is, of course, first, through the good operating earnings that history would say we'll expect from the renewable diesel. And then secondly, the debt to equity, when we consolidate our share of that is going to be attractive.

Todd, I guess I'm wondering, is -- so what you're talking about is JV bringing capital that will be used to pay down the remaining '22 and part of the '23? Is that still the plan? Or is it possible some of that capital raise? Or would you actually raise capital at this spinout entity to potentially bring in capital to reduce debt?

You should assume that the various scenarios you just identified or simultaneously close.

Got you. And I know you've been either making references to tweeting on this call, but I guess I'll just ask, is there a time frame for thinking about how long this would take now?

So I could say we're not going to tweet about that or I can ask my boss to say we're not going to tweet about that.

Maybe this is the last question for you. So you -- you were talking earlier about Performance Brands. I'm just curious, you've highlighted this cost advantage that you have because of some of your European competitors have higher fuel costs. Is it possible that your margin as a result would be higher than they've historically been in peak conditions? Or are you likely to just be more competitive and probably have greater volumes as a result?

Yes, Gregg. It's Steve. Yes, we may not have communicated well there because the way we are looking at that European Asian advantage is really very much not in Performance Brands so much, but on the refining part of the business in Montana and then the whole of the SPS business primarily through refining. So on the pure-play refiner calls, people have talked a lot about how the fact that the cost of BTU is just so much higher in Europe and Asia, primarily feedback through a combination of hydrogen and utility costs to give us -- give the USA huge refining advantage.

The overlay I would add, and Scott, weigh in on this once I'm done, if you feel like it, is when you think about the huge competitive advantage on hydrogen cost that the U.S. has right now until our friend in Moscow turns the tap back on, right, that huge advantage rolls back significantly into the lubes business furthermore because those next steps to take the VGO and turn it into parafinics, for example, or in the specialty oils, they consume more hydrogen, more hydro treating, hydroprocessing of all forms. So we're cautiously optimistic. I mean, although we think specialties margins will come under pressure, we're cautiously optimistic that we've got a good location advantage. Scott, I don't know, do you want to embellish?

I think that was well said. And Gregg, I don't know if you have any follow-up questions to what Steve just alluded to, though.

No. Thank you for clarifying. It's all helpful. I appreciate the fuel products would benefit. I was just wondering if some of your business is well. So it's all very helpful.

Thank you, and I'm currently showing no further questions at this time. I'd like to turn the call back over to Brad McMurray for closing remarks.

Yes. On behalf of the management team here in the room and really all at Calumet, we appreciate your time this morning and your interest in the company. So thank you for joining, everybody. Have a great weekend.

This concludes today's conference call. Thank you for participating. You may disconnect.