Calumet Inc (CLMT) 2022 Q4 法說會逐字稿

Good morning, and welcome to the Calumet Specialty Products Partners, LP Fourth Quarter and Full Year 2022 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Brad McMurray, Director of Investor Relations at Calumet. Please go ahead.

Good morning. Thank you for joining us today. With me on today's call are Todd Borgmann, CEO; Vince Donargo, CFO; Bruce Fleming, EVP, Montana Renewables and Corporate Development; Scott Obermeier, EVP of Specialties, and Marc Lawn, EVP of Sustainable Products and Strategy. You may now download the slides that accompany the remarks made on today's conference call which can be accessed in the Investor Relations section of our website at www.calumetspecialty.com. Also, a webcast replay of this call will be available on our site within a few hours.

Turning to the presentation. On Slide 2, you can find our cautionary statements. I'd like to 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.

Also, please note that last week, we launched a municipal bond offering for Montana Renewables. That process is ongoing, and as such, we may be limited in regard to questions about the bond offering on this call.

I'll now pass the call to Todd.

Thanks, Brad, and welcome to Calumet's year-end 2022 Earnings Call. 2022 was a breakthrough year for Calumet as Montana Renewables launched operations our specialties business led the company to a record-setting full year adjusted EBITDA of $390 million, a new high for Calumet. The successful start-up of Montana Renewables was our most recent strategic milestone as targeted production levels were quickly reached and we've operated well ever since.

Strategically, our vision has become reality. We now have demonstrated the power of our industry-leading specialty business and has turned a great project into a top-tier renewable diesel business. From this platform, we believe further substantial unitholder value can be delivered.

Talking about strategic progress, let's turn to Slide 3. I Calumet is a company in the final stages of a strategic transformation. And before we get into the financial details, let's pause and take stock of where we are and why we believe Calumet is particularly well positioned.

Two years ago, we announced how a small, highly leveraged company could use the energy transition to transform itself by converting part of our assets to renewable service. We developed some views that were at least at the time, contrary to prevailing wisdom. It's worth a few moments to revisit the most consequential of those core Axioms is it lays the foundation for what we are today.

First, let's talk about decarbonization and the global energy transition. It's always been our thinking that 2 fundamental but conflicting trues exist. One, the transition is important and it will happen. Two, it will be much more lengthy, complicated and expensive than popular consensus.

The best we have made are consistent with that strategic view, and the conventional wisdom seems to be coming into line with our thinking. Our view is fundamental to forming our initial design framework. It was when we confirmed that we could retain significant conventional processing capacity and that's 60% of our Great Falls EBITDA, all while standing up a leading renewables venture. The Montana renewables became a lock.

With the consensus expectation that the industry norm going forward will include under investment and conventional processing, our legacy Great Falls site should continue to generate strong cash flows.

At the same time, we're accelerating the development of sustainable products in our specialties business. Over the past year, we have seen rapid growth in our BioMaX brand. which is a biodegradable brand that doesn't compromise on the first rate performance attributes of Royal Purple.

We also launched the Zero Carbon wax solution called TitanZero, and inbound inquiries are accelerating across our specialty offerings. As our customers look for sustainable solutions.

During today's opening remarks, you heard a new title for Marc Lawn. As Executive Vice President of Sustainable Strategy and Products Marc will dedicate his energy to accelerating our sustainable offering across our specialty business through partnering and innovating with our unique customer base. Technical customer collaboration is a sweet spot for Calumet, and Marc will bring a dedicated executive focus to leveraging Calumet's legacy core capabilities and the renewable product experience we've gained through Montana Renewables to innovate in this fertile area.

The second core differentiator to our Montana renewables strategy was how we thought about the renewable diesel market and margin formation. Our once contentious, strong and stable margin theory has now gone mainstream, as it has subsequently appeared in competitors' marketing decks from here to Italy.

From our view on industry margin information, the concept of CI parity and the importance of our unique geography was born. At one point, feedstock supply was the most popular pushback we receive, and it now feels our competitive advantage to preferentially source feed in Montana is widely accepted. The other frequent challenge we would receive in the early days was concerns have already overbuilt. When we started down this track, it felt like there was an announcement a week, and I don't believe we've seen a new announcement in the U.S. in over a year.

It's actually contrary as we've seen projects canceled or stalled due to cost pressures, financing, legal and permitting challenges. We're seeing that location and feedstock flexibility are lasting advantage in this business and new builds are extremely challenging. The obvious locations have already been announced or already converted.

Further, with consensus being the traditional fuels refining will be more profitable for longer, -- the pressure for less advantaged sites convert has waned. Of course, if the consensus holds, our specialty business is well positioned to benefit from traditional margins being better for longer as well.

The third Axiom for Montana Renewables is SAF. As we've discussed in prior calls, we made a decision to invest in SAF prior to the Inflation Reduction Act. At a time, it looked like a niche largely private market. But similar to the overwhelming positive response, we received early in the RD marketing stage. SAF was highly sought after, and we could sell every drop we could make at margins substantially higher than R&D.

From there, the IRA was a pleasant surprise, and it changed our SAF outlook. The Montana renewables strategy shifted from serving a niche specialty like opportunity to becoming a first mover in a global mega trend.

The U.S. is positioning itself as a SAF leader, and it's fair to say that decarbonization of the rapidly growing aviation market will be a real challenge. It's also the case that SAF is the leader in the aviation decarbonization clubhouse and Montana Renewables is poised to be the largest SAF producer in North America next quarter.

With these early views playing out, we retain our strong expectations around Montana Renewables run rate profitability once the feedstock pre-treater is in place next month. We see immediate upside with the scope addition of SAF and we are increasingly optimistic about the opportunity to potentially double Montana Renewables EBITDA through our MAX SAF expansion, which we'll talk more about later.

Turning to Slide 4. We shift the lens from strategic to execution. 2022 as a year in which strong execution in a favorable market environment, met, generating exceptional results.

With all the energy we see around Montana renewables, it's easy to lose track of the transformation that has occurred within our specialties business. 2022 was a record year and strategically could not have happened at a better time. as the cash performance of this business allowed us to hold on to max equity in Montana Renewables through a time of immense value escalation.

The results were fueled by record operations nearly across the board. Exceptional commercial execution and favorable market forces that look to remain strong in 2023. Our entire organization was nimble through the supply chain disruptions in a highly inflationary environment.

In 3 short years, Calumet's integrated platform has displayed what we mean by advantaged optionality. In COVID, we lowered rates, focused on specialties and generated positive cash flow. In '22, we ran max rights, sometimes even intentionally maximizing fuel yields, and we set an EBITDA record. Over the same time period, our operations teams have also demonstrated their ability.

In 2021, we lost the majority of the year to winter storm year. In December of '22, we encountered a similar challenge, the week of Christmas nonetheless, but with lessons learned from the year prior and well-placed capital early in the year, the result was different.

That storm caused us the last week of the year, which essentially negated all of December's EBITDA, but we still delivered a record fourth quarter and all of our sites are back and fully operating. What a difference a year makes, and I can't thank our teams out of the sites enough for their commitment, skill and agility over the past few years. Montana Renewables and entire business was built and launched in roughly 2 years.

Let's turn to Slide 5 for the current status. As expected, our renewable diesel unit came up in the fourth quarter and has run exceptionally well. Calumet's performance and throughput rates have been as planned as we run up to our hydrogen limit. We took the entire site down in the third quarter and separated into a niche cash flow-generating specialty asphalt refinery plus a world-class renewable diesel and SAF facility. While these businesses are independent and unique, we operate them as one site with one mission.

Delivering this project largely on schedule amidst supply chain challenges and a few shots of intense cold weather has been a gargantuan effort, and the team remains on track to deliver the sequential commissioning. Since start-up, we've been successfully selling to customers and have fully derisked our supply chain, which is incredibly important to suppliers in this industry. Our renewable hydrogen plant commenced startup on March 4, and we're ramping up to 12,000 barrels a day.

Our pre-treater will be mechanically complete in March and running in April.

Last, the SAF scope that we added midway through the project will complete startup in April as well, and we'll be the largest SAF producer in North America next quarter. This takes the commitment of our project teams and operational teams working together, and we're really proud of the tracked team is on.

During the second quarter, we expect to achieve our run rate EBITDA, which we have previously guided to be in the mid-250s with growth from there.

With that, I'll turn it over to Vince to take you further into segment level results. Vince?

Thank you, Todd, and good morning. As Todd mentioned, Calumet had an exceptional year as shown on the financial summary table on Slide 6. The strong margin environment and operational performance carried through into the fourth quarter, as you can see in both our quarterly and full year results. We exceeded our financial metrics and targets for 2022. Before I take you through the segment, I wanted to highlight our continued focus on the balance sheet. Delevering has been at the heart of Calumet's strategy for many years, and we took a transformational step in 2022.

12 months ago, our net debt was 10x our trailing 12-month adjusted EBITDA. And by the end of 2022, we improved to 4x. Our delevering mission is not yet complete, but it has progressed meaningfully, and we now have a clear path to achieving our goal of gaining access to competitively priced capital.

Of course, these marks were achieved while Montana Renewables was in construction, and we expect this new business will essentially double the company's steady state EBITDA output when the pre-treater is up and running.

Turning to Slide 8. Our Specialty Products & Solutions business generated $95.7 million of adjusted EBITDA in the fourth quarter. While the margin environment for specialties and fuels came off slightly from the record third quarter levels, they continue to be quite strong through the end of the year.

The SPS team continued their focus on commercial excellence and the benefits of that focus shows in our results. However, the Arctic freeze that hit most of the U.S. in late December did have an adverse albeit small impact on our quarterly results as we had to shut down several of our facilities right around year-end. Those plants quickly returned to normal operations and have been running full out to start 2023.

For the full year 2022, our SPS business delivered $379 million of adjusted EBITDA. And -- we have continued to see the constructive margin environment early in 2023. And while we do not expect this extremely strong margin environment to remain forever, we do believe that the commercial excellence initiatives, reliability improvements and integration all contribute to an elevated bar that we call the new normal.

Moving to Slide 10. Our Performance Brand business generated $2.7 million in adjusted EBITDA for the fourth quarter and $20.1 million for the full year. As I mentioned on the last quarter's call, back in November, the fourth quarter is typically the weakest for Performance Brands, and we saw even more seasonal impact this quarter than we typically do as big box retailers focused on inventory control going into year-end.

We talk a lot about the benefits of our integrated business model and how tailwinds experienced in SPS can often turn into headwinds for Performance Brands. This trade-off is welcome at Calumet as we produce 20x more specialty products in SBS than we consume in Performance Brands.

However, not all of the anomalies of this business experienced in 2022 are directly offset by SPF. To name a few, the supply chain crisis hit this business more than others in the Calumet portfolio. We worked through a force majeure from our largest additive supplier, which was lifted near year-end. As we have discussed previously, we lost all supply from our largest Greece supplier and sourcing alternative Greece supply in a tight market has increased our input costs and limited our ability to meet demand in some of our highest growth areas.

And lastly, we continue trying to offset this inflationary environment. One example of how inflation is more acute and Performance Brands is a roughly $17 million of increased can cost over the past 2 years. This takes time to pass along. Near the end of the year, we saw steel prices revert to some semblance of normalcy. And so far in 2023, we have seen big box consumer demand pick up.

We are optimistic that the financial results of our Performance Brands segment will match the strength of its underlying brands as we start to normalize in 2023.

Moving to Montana. Our business had another busy quarter with the planned turnaround and renewable diesel conversion. We are very pleased that we were able to start the renewable diesel plant and begin to serve our customers so smoothly last quarter. Todd has already discussed our progress on the RD and SAF front in Montana.

So let's turn to Slide 12 to discuss the quarter. Fourth quarter adjusted EBITDA of negative $13.1 million was a result of several onetime factors that impacted us throughout the second half of the year. Most significantly, the plant was in turnaround for a significant portion of the fourth quarter. That means there was no crude throughput and no production.

We carried a fair amount of inventory over from the third quarter and what turned out to be a falling price environment. So we spent the back half of the quarter processing expensive inventory upon restart of operations. And finally, Great Falls was not immune from the extreme winter weather even by Montana standards. Temperature at times fell below minus 30 degrees Fahrenheit, making it for impossible working conditions and extremely expensive natural gas. In all, we estimate the impact of these onetime items to have cost us from $40 million to $45 million of adjusted EBITDA in the second half of 2022.

Despite these challenges, Montana still delivered $75.9 million (sic) [$75.8 million] of adjusted EBITDA in 2022, and we look forward to 2023, and as the legacy specialty Asphalt plant is fully operational and Montana Renewables is close to achieving run rate EBITDA with the pre-treater coming online in April.

With that, let's flip to Slide 13. And I will turn the call back to Todd for concluding remarks. Todd?

Thanks, Vince. In 2023, we expect to close the turnaround chapter Calumet for good. We have a few critical near-term items to accomplish that will allow us to enter this next phase of the Calumet story. First and foremost, we must continue to operate safely and reliably. Major steps were taken in 2022, and we expect to continue on this trajectory.

Early last year, after spending entire 2021 recovering from Winter Storm Uri , we commenced a 3-year capital plan focused on modernization reliability and integration of our Northwest Louisiana assets. We are extremely pleased with the first year of that program. And while our liability is a function of a lot more than capital, our specialties business saw a 30% year-over-year volume growth which is worth well north to $100 million in adjusted EBITDA. We intend to keep the operating improvements recognized last year, and we expect to spend $125 million to $145 million of capital in our legacy business in 2023. We also have a nice portfolio of small to midsized low-risk growth capital that we have not approved but could pursue as the year develops.

As exciting as those opportunities are, all discretionary capital will be evaluated using an extremely high internal hurdle rate as we compare those investments against allocating capital towards the purchase of our own securities in the marketplace.

Further, we believe we have room to add differentiated integration without capital as well. Earlier, we talked about the new sustainable specialties mission that Marc is leading and Scott will pick up Performance Brands as we look to leverage each segment's strength and positioning.

We'll continue to report SPS and Performance Brands separately as they're very different businesses, but we'll operate as a single specialty business with one unified vision. Next, we'll complete the Montana Renewables pre-treater that we've talked about so frequently. As we've mentioned before, good logistics and access to advantaged feed are fundamental to making money in renewable diesel, and Montana Renewables is ideally positioned to achieve both with the pre-treater in place. We expect to get that unit stood up shortly, work out of any normal kinks and process our remaining clean feed in the next month or so.

With that, we expect to be delivering run rate type EBITDA by middle to the end of the second quarter.

Upon completion of the pre-treater we are in the next phase of Montana Renewables, which is an increasingly exciting one. We believe we have a number of game-changing options available to us. And like the past couple of years, we'll navigate them to achieve the maximum risk-adjusted return for our unitholders.

Let me frame how we think about our planning case as it serves as a guidepost from which we try to add value. First, we're well in process with 2 exciting financing opportunities. The first is the municipal bond offering announced last week. Further, we recently received news that we've been accepted into the second phase of the DOE process. While it's no guarantee that we'll ultimately receive the DOE support, progressing into Phase II as a major hurdle that a relatively small percent of applicants are able to clear.

We've mentioned DOE opportunity before and we believe renewable hydrogen, renewable diesel and SAF are right down the fairway of what this program was developed to support.

Next, we expect to work towards an IPO of Montana renewables at a time when the unique earnings power of the operation has coolly demonstrated and markets are receptive. It's quite possible that before then we turn the high level of strategic interest into an additional minority partner is our entire plan since inception is to partner thoughtfully in a ways that deliver unitholder value. We did that with Warburg Pincus roughly 6 months ago, and we couldn't be more pleased with that relationship.

We're working with a sharp experienced group of professionals who share a vision for the ultimate potential of Montana Renewables. As always, we remain focused on unitholder value and we'll keep our options open as we look for ways to enhance the base plan. Last, it's difficult to talk about the ultimate potential of Montana renewables without talking sustainable aviation fuel or what we call MAX SAF. We continue to gain conviction that SAF is a tremendous opportunity with the same or maybe even more geographic advantages that exist in our renewable diesel business.

We talk about SAF in different ways, so let me clarify. We have 24,000 barrels per day of SAF production coming online in the second quarter, which is a result of the SAF scope add into the original RD project. MAX SAF is a future potential growth case in which we believe we can expand our existing plant capacity to 18,000 barrels a day of throughput and then convert approximately 80% of that throughput or 15,000 barrels a day to SAF.

As we discussed last quarter, we've already purchased the reactor needed to do the MAX SAF expansion to ensure we can move quickly, should we go forward or bring in a partner who wants to progress expeditiously. The reason for the energy around SAF is a combination of the recent inflationary Reduction Act, the enormous potential for the future market size and the current infantile size of supply and the fact that Montana Renewables is already positioned as an early mover and the largest U.S. supplier in 2023.

Some reputable organizations have forecasted a 150 billion-gallon SAF market in the next 30 years. To put that in perspective, today's U.S. production is less than 75 million gallons or 0.05% and MRL in MAX SAF mode could generate more than 200 million gallons annually by itself.

These numbers are staggering and obviously extremely aggressive and early. That being said, we're very fortunate to have a front row seat as an industry leader as this market develops. As soon as our free cheer is complete, will shift our full focus to deeper engineering of the MAX SAF plan as we expect it to be a major component of a potential IPO, and we'll certainly have additional information on this potential next step as we progress throughout the year. With that, operator, we're ready to open up the queue for questions.

(Operator Instructions) The first question comes from Roger Read with Wells Fargo.

Yes, just -- I guess, maybe we could talk real quick about how you see the PTU coming online? And then -- and the reason I'm asking is we've seen a lot of other companies struggle with the whole process. Maybe talk about how it's gone so far, how the PTU fits in and any sort of, let's call it, [teething] pains we might be watching for here over the next 30 to 60 days.

Roger, this is Bruce. The experience that we've had has been very favorable to date. We've got one step left to take, which is the one you asked about with the PTU. If we just back up a second, we took a facility and we did something kind of novel. Everybody else was shutting down and converting. We kept the crude run live and we converted.

So the first project was the logistics separation, and that went well. The second project was turning on the renewable diesel unit that went well. The third project is turning on the renewable hydrogen, which we did about 10 days ago, as Todd indicated, that's going well. And that leaves one more step.

But at the risk of jinxing this, I have to say, I think we got this. The guys in the field are doing a great job. We benefited from some of the industry experience that you referred to. We addressed any known problems, issues, opportunities in our design. We added a couple of things late into the design when we heard about some experiences elsewhere. And all I can say is we haven't had those misfortunes.

Definitely a positive. But yes, it does seem to be kind of an area of focus. I guess the other question I'd like to follow up on also staff related. Going to let's call it, the MAX SAF mode as you labeled it. feedstock-wise, is we've talked before about canola oil as a possibility. would that factor in? Or are there other feedstocks we should pay attention to? And what's your kind of broad line of sight on being able to supply at 18,000 barrels a day.

Bruce again. So I'll remind everybody that we sit in the middle of more like 150,000 barrels a day of feedstock supply. So physical available is never going to be an issue for us. It goes to optimization pretty quickly. We've got 59-point sources of supply. They each have a yield signature in the process. And as we tilt the machine to a high SAF percentage that's going to reorder the seriatim of preferred feeds.

As that happens, real broad brush, the animal side, feed products are preferred to the vegetable side feed products. couple of exceptions to that. But generally, that's one of the reasons why our feedstock supply department is led by an industry veteran trader from the beef tallow side of the street. We don't see any difficulties, Roger.

And I'll remind you also that we started up on 100% [Tallow]. We absolutely overachieved in sourcing on the most preferred feedstock.

The next question comes from Amit Dayal with H.C. Wainwright.

Congrats on the execution so far. With respect to the municipal deal, could you give us any color on the use of proceeds from that financing?

Amit, it's Bruce. We are Montana Renewables is financed. So we're not financing Montana renewables with this. We're going to repay a couple of things that the parent company had put in place in the past. But broadly speaking, that money is going to stay inside the box. This will jump start spending that is already underway on our MAX SAF expansion case.

Todd mentioned the reactor. You guys have heard us speak about that before, but we bought it in order to essentially accelerate time line. And we've started the engineering work already. We're paying those bills now. So it's a good seed money for that expansion. We'll know in maybe 6 months or so as the engineering progresses, a better estimate for the installed cost. So stay tuned for those updates.

Okay. And just one more from me. Could you give us a sense of how many barrels of already in SAF you may be at by the end of 2023 per day?

Sure. I'll tell you what we're at right now. We have contracted 2,000 barrels a day of SAF, and we've contracted 9,000 barrels a day of renewable diesel. That's the current plan. That's approximately 80% of our permitted capacity, so we expect to exceed that. That's one reason why Todd mentioned a range of SAF production, 2,000 ranging up to 4,000. we're pretty economically incentive to pursue that SAF. And so I expect we'll do better than our conservative promise.

The next question comes from Neil Mehta with Goldman Sachs.

Yes. Thanks, team. I appreciate the time. I wanted to go to Slide 13 and in the year ahead. You provided the '23 CapEx guidance of $125 million to $145 ex-MRL. Can you help us understand the buckets associated with that CapEx? And how should we think about what maintenance or sustaining CapEx is on the business.

Yes. I think -- this is Todd, Neil, and thanks for the question. I think there's largely 2 buckets: turnaround bucket be about $50 million to $60 million in 2023; and then the other bucket, we're calling modernization, reliability and integration focus.

So this group is largely maintenance, but there's also some returns and some positives that come with a lot of that spend as well as we saw last year. So all these projects are very similar to the type of things we did last year. I'll give you a couple of examples.

So we're upgrading our control system in Calumet City. We're in the middle of a large multiyear control system refresh in Shreveport. We have some tank work across the system. We did some of the tank work last year, and we're really able to kind of improve the integration between our plants and network from that. we have the Cotton Valley turnaround, which will come with some reactor improvements and yield upgrades. We have more work to do across our utility systems and utility systems are important.

In fact, most of -- I mentioned $100 million a little earlier. As I look back to the largest improvements that came out of last year, it really was an improvement in the reliability of our utility systems. So we're going to go ahead and continue to push that. Like I kind of said in the scripted remarks, it was really a 3-year plan on both tanks utilities and controls. And so far, so good on that whole program.

Another example of a maintenance type of thing that generates returns, although it's hard to maybe associate a specific number to it. would be an upgraded water system in Shreveport. So when we talk about the freeze impacts in December and January, it was really the loss of water from the city that had the greatest impact. If not for that, we would have been up in a few days. And honestly, the same thing holds for a year ago with Europe. So 2 years in a row, we're not going to let that happen again. We're going to fix that.

So hopefully, that gives a little bit of the flavor of what we mean by kind of modernization, reliability-focused maintenance. Does that help?

That helps. And then as we think about what sustaining CapEx is because there's -- some of those projects do seem more onetime in nature. We're just trying to get a sense of what kind of open free cash flow looks like.

Yes. We think about our long term as kind of an $80 million type run rate I'd say we launched a 3-year plan last year. So we probably have one more year of elevated $120 million type -- $120 million to $140 million type range. But after that, I think about $80 million as the run rate.

Got it. And then the follow-up is just around capital structure. You've done a terrific job getting your net debt to EBITDA now down to 4x from what was very, very elevated levels during the COVID period. If we're in a more uncertain economic environment and things get a little bit tougher, talk about with the resiliency that you've built into the business and financial model to protect downside, the outcomes are better than last time.

Yes. I think in general, you could go a couple of ways with that. In general, we're on record of saying we'd like to take an additional $300 million of debt out of the system over the long run. At the same time, we don't feel that mandatory to survive because remember, we have basically an additional 100% improvement or addition to our EBITDA stream coming in Montana renewables.

So we think we've got to a point where our leverage is on the high end of the range, but it's within a reasonable go-forward [wider] range. I think as you start to see cash flow from operations come in over the long run, we'll see that overall debt load decrease to $300 million.

I think you can kind of broaden that out and talk about capital allocation as a whole, right? And we're really going to just rely on market signals we received throughout the year to guide us on there. I think it's a broader sources and uses question. And as we look about that potential sources of capital, we have cash flow from ops, which I talked about. We have the muni process, which were employed. We have the DOE process, which we mentioned. We have potential equity at Montana Renewables.

That could be a minority equity sale. It could be an IPO. It could be both. It could be a full takeout. We look at uses. We have debt repurchase, which is the heart of your question, we have equity repurchase. We have MAX SAF CapEx. We have repurchase of the $250 million Stonebriar facility and we have specialty growth CapEx.

So with the capital markets kind of deal live, I guess, I probably shouldn't go too much further, but I will say strategically that we do want to continue to delever it . That's fundamental to our thesis, that hasn't changed. And I'll also say the single biggest variable in capital allocation is really the price of Calumet equity. If it remains where it is today, when Montana Renewables is at steady state, it's hard to imagine an investment with a higher rate of return. I guess maybe MAX SAF, but we'll be watching that closely.

Hopefully, that gives a little bit more color to the question. And we're actively pursuing capital. We have a bunch of really great ways to deploy it. Right now, we're focused on completing the pre-treater. And after that, we're going to look to the market to help us deploy our capital most effectively.

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

Just when we think about -- you have a lot of different funding mechanisms potentially at Montana Renewable but there's also a potential capital call that you have this year that would require you to keep cash at that entity. I'm curious, do you anticipate that this muni deal and potentially the DOE deal will allow you to basically send cash out from that entity? Or do you think there'll be some cash that you have to trap or to reserve for capital for CapEx.

Yes, good question. And I assume you're talking about the '24, Gregg?

No, I'm just talking about -- I believe the preferred instrument requires you to keep there's you distributed cash from Montana renewable, you have a capital call potential for the year, and you've decided whether you're going to send money out to Calumet or keep it in. I'm just curious if you're basically trying to get a sense if you feel like you can fund everything at MRL with some of the potential fundraising you're talking about?

Gregg, this is Bruce. Maybe I'll start helping with that and flip it back to Todd for the corporate context. So we do not have a structured capital call in the LLC agreement that we have with Warburg Pincus. There is a minimum return requirement, but we've got 5 years to meet it, and it's a low hurdle at an 8% IRR that was very attractive money, which is one of the reasons we formed that partnership last year.

So as we get the opportunity to prune the capital structure at Montana Renewables, we're going to take it. I imagine if you wanted me to handicap it, that that's going to be evolutionary. We're going to see opportunities present themselves, and we're going to consider them and we're going to take advantage of the ones that make sense.

So right now, we made a great deal of sense to partner with the state of Montana use some of their capacity municipal bond capacity and to take this, what we expect will price next week at an attractive level for us. the Department of Energy is a little further out in time. But that's going to lay in pretty well with what we think is the spin up on the MAX SAF expansion.

So we've got this reasonably paired, but we've been pretty successful in adding a lot of shareholder value by staying flexible and not committing to a particular course of action. The reason for that kind of thinking on our side is this is a fast-evolving new industry segment. It's going to be very interesting to see who's picking their way through smarter and who wins. And we think we're pretty well set up for that because of our geographic location advantage. So now we just need to keep the pedal to the metal and stay ahead of the kind of the developer group, if you will.

And I guess the only thing I'd add is sources and uses, they're all a bit variable. As I look at the potential sources in Montana Renewables, I think they are greater than the uses. So it's quite possible to expect money going up to the partners to us and Warburg in certain scenarios.

But we don't have a capital call. There's not a -- there's not a specific time line that we're looking at that says that we have to accomplish something. But of course, as the pre-treater comes online, we expect to be generating a heck of a lot of cash flow. And that's either going to go to kind of MAX SAF expansion or if we raise additional capital to fund that, it will come to the parent and be used opportunistically.

Got it. I appreciate you maintaining flexibility. Do you have a range of how much growth CapEx could be I know you're weighing other opportunities against that, but I'm curious if you sort of line of sight into how big it can be if you chose to move forward on it.

At the parent (inaudible).

Yes.

I think we could invest $100 million, $200 million in the next couple of years at 20%-plus IRRs. Like I said earlier, we're not committed to doing that. That's purely an option. At today's market prices, I don't think that, that would actually pass the hurdle right of what's available to us, it's with our own equity and the like. But -- but yes, I think that we could and will, at some point in time, move forward with those opportunistic growth CapEx choices that we have. It just -- it may or may not be this year.

And you haven't provided in the past, but are you providing capital spend for Montana renewable for the year?

Gregg, it's Bruce again. We have elected not to hold ourselves to a spending metric as you're aware, as you just mentioned. The purpose was to get that business stood up quickly and effectively. We think we've accomplished both of those. The thing I want to circle back on though, to the maybe question. Looks like the options bar is open in the background. Okay, that got muted. Great.

So the MAX SAF expansion is something that we're going to understand the cost of better within 6 months or so as we advance another gate in our project management process. That's going to be -- if you want to talking figure, a couple of hundred million dollars range, we'll see plus or minus a lot of uncertainty right now, but that's a major element.

We've got that pegged as a 100-plus IRR. So when Todd says, we're going to evaluate spending opportunities. It's really from the lens of what is the capital markets telling us to do. company stock, company equity, MRL organic growth. We've got inorganic growth opportunities that are beginning to present themselves. I mean it is a target-rich environment for putting money to work.

And just -- and I appreciate all that. And just one last question. I don't know if I heard you right, but I think you said on the minority partner, you were actually working with a smaller subset potential strategic investors. I don't know if I heard that right, I could just say yes. And then I guess the question is, is there -- does that imply that there's something -- there's a time line for doing something there that might be near term?

I appreciate the question, Bruce again. So look, our plan is to maximize shareholder value. At the end we've turned a lot of options that we've been running into our new base case. That was the Warburg Pincus partnership, very satisfied with that, as Todd mentioned. In 2023, we want to do that again. We want to do it off of the SAF platform now. That's the thing that is changing for us. And that has specifically has caused us to revalue upward our sense of the enterprise value of this new MRL business.

That's off of the SAF and it's off of the IRA legislation. It's off of the access that we're developing to appropriately priced capital, mainly in the form of muni and hopefully, DOE if we succeed in the Part 2 application there.

So our flexible approach has already added a lot of shareholder value. We're not in a hurry. We're not short of people that want to put money into quality businesses like this. So the real selection criteria come down to a partner that makes sense strategically. But if you want to think in terms of potential significant minority investment by strategic leading to an that's consistent with everything we've said. Do we want to put a specific time line on it? We do not.

I know Steve is not tweeting anymore, so I didn't expect you to give me the time line -- appreciate it.

The next question comes from Manav Gupta with UBS.

Can you help us understand how much R&D did you actually produce in 4Q? And what was the actual EBITDA associated with that? I'm trying to get to an EBITDA margin per gallon to benchmark and see this -- you understand is this first quarter you did it we can track the improvement going ahead. So if you could help us understand what the EBITDA margin per gallon was for the project in 4Q.

Amit, it's Bruce. Sorry, Manav, apologies for that. The physical production in 4Q was very limited. Mostly, we put that into tanks as we built inventory, shipments for sale began late in December. So it's not going to be meaningful in 4Q.

What I'll direct you to is the contracts that we have for selling the renewable diesel are all fully priced on the California formula. In other words, car diesel plus blenders tax credit plus LCFS plus 1.7 times D4 RINs. We get 100% of that.

No worries. Coming to the fourth quarter, just trying to understand from the opportunity cost, if you were not down and on those cold figures were not -- did not happen, then what would the refining segment EBITDA probably look like because the margins were great in 4Q and some where the EBITDA reported of minus 13%, Doesn't do justice to that. So I'm just trying to understand if it was not for all the turnarounds and the decrease would be you be reporting a significantly higher number from your refining business?

Yes, we would. That's the $40 million to $45 million that you should add back.

As there are no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Brad McMurray for any closing remarks.

Yes. Thanks. On behalf of the management team here and really all of Calumet. We thank you for your time and your interest this morning. Thank you for joining the call. Everyone, have a great rest of the week.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.