Martin Midstream Partners LP (MMLP) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Martin Midstream Partners first-quarter 2011 results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to introduce our host for today, Mr. Bob Bondurant, Chief Financial Officer. Sir, please go ahead.

Thank you, Karen. To let everybody know who's on the call today, we have Ruben Martin, CEO and Chairman of the Board; Wes Martin, VP of Business Development; Joe McCreery, VP of Finance and Head of Investor Relations.

Before we start with the financial and operational results for the first quarter, I need to make this disclaimer. Certain statements made during this conference call may be forward-looking statements relating to financial forecasts, future performance, and our ability to make distributions to unitholders. The word anticipate, estimate, expect, and similar expressions are intended to be among the statements that identify forward-looking statements made during the call.

We report our financial results in accordance with Generally Accepted Accounting Principles, and use certain non-GAAP financial measures within the meanings of SEC Regulation G, such as distributable cash flow, or DCF, and [are] earnings before interest, taxes, depreciation, amortization, or EBITDA. We use these measures because we believe it provides users of our financial information with meaningful comparisons between current results and prior report results. And it can be a meaningful measure of the Partnership's cash available to pay distributions.

Distributable cash flow should not be considered an alternative to cash flow from operating activities. Furthermore, DCF is not a measure of financial performance or liquidity under GAAP, and should not be considered in isolation as an indicator of our performance. We also included in our press release issued yesterday a reconciliation of DCF to the most comparable GAAP financial measure. Both our earnings press release and our first-quarter 10-Q are available at our website, www.martinmidstream.com.

Now I would like to discuss our first-quarter performance. For the first quarter of '11, we had net income of $7.1 million, or $0.30 per limited partner unit. In the first quarter, because of certain commodity and interest rate hedges that did not qualify for hedge accounting, our net earnings were negatively impacted by $0.5 million or $0.02 per limited partner unit. So disregarding this net non-cash impact to our financials, our earnings would have been $7.5 million, or $0.32 per limited partner unit.

As with other MLPs, we believe the most important measure of our performance is distributable cash flow. Our distribution coverage is 1.12 times for a rolling twelve months. However, our distributable cash flow for the first quarter was $12.5 million, a distribution coverage of 0.84 times. Our first quarter DCF was negatively impacted by the timing of maintenance capital expenditures and our annual turnaround costs at our Cross Oil naphthenic lube refinery.

Our combined maintenance capital expenditures and refinery turnaround costs for the first quarter was $7.4 million. So we spent approximately one-half of our budgeted 2011 maintenance capital in the first quarter. In a perfect world, where we would have spent only 25% of our maintenance capital budget in the first quarter, our DCF coverage would have been 1.09 times, and our rolling twelve-month coverage would have been 1.18 times.

As a result of this analysis and our future outlook, our Board felt comfortable slightly increasing our annual distribution by $0.01 annually, or [$0.025] per quarter. Based upon our current 76.25 quarterly distribution and yesterday's closed price of $38.15, our LP units are currently yielding 8%.

Now I'd like to discuss our first-quarter performance by segment compared with the fourth quarter.

In our Terminalling segment, our cash flow, which is defined as operating income plus depreciation and amortization, excluding any gain on sale of assets, was $7.8 million in the first quarter compared to $7.9 million in the fourth quarter. Our shore-based terminals experienced a $200,000 increase in cash flow, primarily as a result of our 13 new shore bases purchased in a drop-down transaction from our general partner.

Our specialty terminals experienced a decrease in cash flow of $300,000 as a result of two separate tank cleanings that were required. These cleanings increased our operating expense in the first quarter when compared to the fourth.

Looking forward to the second quarter, we should experience an increase in cash flow in our Terminalling segment due to increased volume throughput at our shore bases. This volume increase is being driven by a recent acquisition and also is being driven by increased activity in the Gulf of Mexico.

New permits are beginning to be issued by the federal regulatory agency known as [BEMR]. Although we would like to see a quicker pace of permit issuances, we are pleased that the Agency has begun to actually approve drilling permits in the Gulf. This, of course, will benefit our shore-based terminal cash flow. We are also pleased that the major oil companies have sent strong signals that they plan to stay involved in deepwater Gulf of Mexico exploration and production.

Also, our specialty terminal cash flow should increase, as we have our tank cleanings behind us, and the pace of throughput volumes at our asphalt terminals should begin to have an expected seasonal increase. Also, the throughput volume at our Cross refinery continues to remain strong, as naphthenic lube demand is extremely robust.

In our Natural Gas Services segment, we had operating income before asset sales of $3.3 million in the first quarter compared to $2.5 million in the fourth quarter. In the first quarter, we had a $177,000 non-cash commodity hedging mark-to-market loss compared to a $150,000 non-cash mark-to-market loss in the fourth quarter. So excluding the non-cash mark-to-market adjustments, we had operating income of $3.5 million in the first quarter compared to $2.6 million in the fourth quarter.

Complementing our Natural Gas Services is our cash flow from our unconsolidated entities, which is primarily our 50% owned operating interest in the Waskom Gas Processing Plant. For the first quarter, our cash flow generated from our unconsolidated entities in the form of distributions was $2.6 million compared to $2.9 million in the fourth quarter. So, excluding the impact of non-cash mark-to-market adjustments, and including our distributions from unconsolidated entities, and adding back DNA, our Natural Gas Services cash flow for the first quarter was $7.5 million compared to $6.9 million in the fourth quarter.

During the first quarter, our average processing volume at the Waskom plant was 272 million cubic feet per day compared to 296 million cubic feet per day in the fourth quarter. This processing volume was down for the quarter as we had downtime on a particular Inlet gas pipeline feeding Waskom. This had a slightly negative impact to the first quarter EBITDA results. Maintenance capital expenditures to improve the line also reduced our distribution from Waskom. This pipeline is now online effective April 1.

Waskom's current processing contract mix is 44% of liquids; 34% fee-based; 20% percent of proceeds; and 2% [key pole]. We currently have 46% of our 2011 volumes hedged and 35% of our 2012 volumes hedged. For 2011, when factoring in current hedge volumes, a $1 change in natural gas pricing affects our cash flow $400,000 per year, and a $10 change in oil pricing affects our cash flow $700,000 per year.

Looking to the remainder of '11, we still anticipate a strong performance for the remainder of the year. We, of course, have some seasonal softness in our wholesale propane segment of the Natural Gas Services business in the second and third quarter, as heating demand for propane during these quarters is soft.

Also, we still expect our Waskom expansion from 285 million cubic feet per day to 320 million cubic feet per day to be completed by October. Also, our railcar loading facility at Waskom should be complete by the fourth quarter as well. This rail rack will give us access to NGL markets in Canada and on the East Coast, where NGL pricing is currently much stronger than our local markets.

In our Sulfur Services segment, our cash flow was $9.6 million in the first quarter compared to $10.6 million in the fourth quarter. Our cash flow on the fertilizer side of the business was $5 million in the first quarter compared to $5.4 million in the fourth quarter. Although our first-quarter fertilizer volume was up slightly, our gross margin per ton fell approximately 12%. This reduced gross margin per ton was the result of the mix of fertilizer sold in the first quarter.

Our new ammonium sulfate plant came online March 15. Its production rates have been better than projected, and our margins have been stronger than projected. As a result, we believe our second-quarter cash flow for the fertilizer group will be significantly stronger in the second quarter when compared to the first.

On the pure sulfur side of the Sulfur Services segment, cash flow for the first quarter was $4.7 million compared to $5.2 million in the fourth quarter. We experienced a higher cash flow in the fourth quarter, or the previous quarter, as a result of a $65 per ton sales price increase in the quarter. As mentioned on a previous call, we have significantly reduced price risk volatility out of the pure sulfur side of the business, as we have restructured our largest sales contract to pass through actual sulfur cost plus of margin. This contract became effective January 1. This should significantly reduce cash flow volatility in this segment.

In our Marine Transportation segment, we had cash flow of $4 million in the first quarter compared to $6 million in the fourth quarter. The decrease in cash flow was primarily on the offshore side of the business, as two of our offshore vessels were off-charter for the full first quarter. These vessels were previously employed in the BP oil spill cleanup.

Our inland cash flow was flat at $3 million each quarter, while the offshore cash flow fell $2 million as a result of these two offshore toes not working. One of the offshore toes was in drydock in the first quarter and had maintenance capital dollars spent on it as well. This vessel has begun to have commercial interest for either ethanol transportation to Florida or crude oil transportation out of Corpus Christi to markets in Louisiana. The second offshore toe is smaller, but we are receiving some interest for Corpus Christi crude oil transportation as well for this toe.

On the inland side of the business, we continue to see stronger rates and opportunities. We believe our cash flow from the inland side of the business will increase over the next few quarters.

Now I'd like to turn the call over to Joe McCreery, who will speak about our liquidity and capital resources, and our recent growth initiatives.

Thanks, Bob. Let's start by walking through debt components and Partnership's balance sheet. I'll then highlight recent acquisitions, talk about our capital markets activities, followed by a discussion of opportunities that lie ahead for MMLP.

At March 31, 2011, the Partnership had total funded debt of approximately $346 million. This consists of approximately $198 million of senior unsecured notes; $135 million drawn under our $275 million revolving credit facility; a long-term note payable for marine equipment of $7 million; and approximately $6 million of capitalized lease obligations. Thus, the Partnership's available liquidity on March 31 was $140 million.

For the first quarter ended March 31, our bank compliant leverage ratios, as defined as senior secured indebtedness to adjusted EBITDA and total indebtedness to adjusted EBITDA, were 1.43 times and 3.34 times, respectively. Additionally, our bank compliant interest coverage ratio, as defined by adjusted EBITDA to consolidated interest expense, was 3.26 times.

Looking at the balance sheet, our total funded debt to total capitalization was 51% improved when compared to year-end December 31, 2010, primarily as a result of follow-on equity issuance during the quarter. In all, at March 31, 2011, the Partnership was in full compliance with all banking covenants, financial or otherwise.

Now I would like to discuss the Partnership's growth initiatives. As mentioned in the March call, on January 31, 2011, MRMC purchased all the membership interests of L&L Holdings LLC. Simultaneous to that closing, MMLP purchased 13 shore-based marine terminalling facilities and one special terminalling facility from MRMC through an asset drop-down at a cost of $36.5 million.

This acquisition positions MRMC as one of the largest fuel lubricant distributors on the Gulf Coast utilizing MMLP assets. Although during the first couple of months after the acquisition, we realized lower than anticipated throughput volumes, we remain optimistic as offshore drilling permits are slowly beginning to be issued and we see improvements thus far in the second quarter. Further, we typically experience slight seasonality during the winter months with respect to offshore activity.

Similar to our existing assets, our new marine terminals have entered into long-term fee-based throughput contracts with MRMC that will provide incremental cash flow of approximately $5 million annually to the Partnership. Also during the first quarter of 2011 was the mid-March edition of a new ammonium sulfate plant in Plainview, Texas. This asset, mentioned on previous calls, was constructed at a low cost multiple of less than two times. We expect demand output to remain strong as we service the regional Panhandle in West Texas agricultural markets from this new facility.

Now, on to capital raises. As previously mentioned, following the L&L acquisition in February, the Partnership successfully placed approximately 1.9 million units in the equity market, raising approximately $72 million. The proceeds from the offering were used to pay down a revolving credit facility, which was the original source of funds for the L&L asset drop-down.

Last month, we were pleased to announce that MMLP successfully closed a new five-year revolving credit facility. Our new bank agreement was upsized to $350 million, thus providing ample liquidity for organic growth and strategic acquisitions. Current bank market conditions helped us achieve a larger facility with significantly reduced pricing and relaxed covenant structure. We anticipate the reduction in interest expense to benefit distributable cash flow by approximately $2 million going forward on an annual basis. As of today, $140 million is drawn on a revolving credit facility, thus creating availability of $210 million.

In conclusion, you may have seen our press release on Tuesday announcing several key management changes. Let me take a minute to further explain the impact of these changes. First, Don Neumeyer, our former Chief Operating Officer, has now become President of Cross Oil. Given Don's extensive background in refining, we believe it makes perfect sense for Don to oversee the significant expansionary projects at Cross that we've discussed on previous calls.

Next, Randy Tauscher has become our new Chief Operating Officer. Randy was formerly Executive Vice President and head of our Software Service Division. Randy has an extensive background in operational and executive management, having previously been President of Coke Sulfur Products and Senior Vice President of Coke Carbon Company prior to joining Martin.

Finally, we're pleased to welcome Scot Shoup to our management team. Scot comes on as Senior Vice President of Operations, reporting to Randy, with primary responsibility for oversight at the asset level. Scot will be instrumental on our new planned organic growth, which is largely in the form of asset construction. Scot was most recently at a privately held industrial equipment machining company, and additionally has had various roles in coke industries. Scot has experience with many of the petroleum products and petroleum by-products that MMLP processes and handles in our various logistic value chains.

We are excited about each of these management changes, as we continue to grow our asset base and our management team.

Karen, this concludes our prepared remarks this morning. We would now like to open the lines for question and answers. Thank you.

(Operator Instructions). James Wang, Raymond James.

Just a couple of quick questions. First, in regards to your inland fleet, what percent of contracts do you expect to roll over the next year? And do you still expect utilization to track around 95%?

Yes, I think that what's happening in there as far as the contracts and the rollovers, we are getting a lot of requests for longer-term contracts on the vessels. And we are actually negotiating shorter-term contracts because the market is fairly tight. And we're seeing rates in the inland side come up.

There's been a lot of them with the Mississippi River in the shape that it's in and some of the problems that they've had on the distribution systems on the marine vessels, it's extremely tight at this point in time. And so we're making the decisions at what point in time do you go ahead and try to lock in for longer-term, say three years or two years instead of a one-year deal or a spot deal?

But we're still mainly contracted. We're extremely busy in the inland side and expect that to continue. I think refinery utilization and refinery crack spreads are very, very good. And so that's keeping us pretty much at full utilization.

Awesome. Could we also get an update on the Cross refinery upgrade? Is the cost still around $23 million for the vacuum carrier with a completion date of 1Q '12?

That's correct. I believe we're still on schedule if it slips into the second quarter, but yes, the unit itself is being constructed. It's been ordered, everything has been ordered. It is in place. And that's part of the reason that why we put Don into that position with Cross, is to be sure that everything there goes smoothly budget-wise and everything else that it does. But it's still on schedule.

All right. Great. That's it for me. Thank you.

Ron Londe, Wells Fargo.

A follow-up on Cross. Where do you see margins right now and how comfortable are you with margins going forward?

Well, Ron, this is Ruben. The margins, of course, in that type of business are not directly -- not directly tied to fuels margins that you see at other refineries. Now the ancillary things that are in there, concerning some of your diesel fuel production and so forth, are. But basically 70% or so --

Right at 70 -- just a hair below (multiple speakers) --

70% or so of ours goes into, obviously, all the loopholes. So our margins are a little bit [set] from there. They are very good right now because a lot of our competitors are being punished by the Brent/WTI spread. So we are still getting most of our crude at the WTI-type numbers. So we're seeing good margins out.

We fully expect those to shrink if Brent and WTI comes back together or light Louisiana Sweet comes up to Brent-type numbers. Because a lot of our product is also bought on light Louisiana Sweet-type numbers. But the margins are good. We're tying in; we've got contracts as we're going along. We're seeing contracts -- we're really lots driven by the economy and the consumption of the lubricants.

So, right now we're seeing very good margins. And of course, in the -- at MMLP, with most margins are good, production is good. So it's not dependent upon those margins simply because it's contracted with MRMC, and a set margin that allows it to pass through any ancillary costs or anything that it has. But the MMLP is not dependent upon a wider margin or a shrinking margin, so to speak. But capacity is at full strength right now, and which does help the public Company.

Also, maybe you can give us some insight into how you view the competitive situation in the barge business offshore, with regard to the pending merger of Kirby and K-Sea Transportation?

We haven't -- I think it's another positive for the business, obviously. As you see consolidation and so forth, I think it's been a positive. We haven't seen any effect. I don't know that we will see any effect on our offshore. We have pretty specialized pieces of equipment out there. That's why sometimes it's a little bit more difficult to get them busy. But when they do, they're needed.

So with our specialized equipment, I don't see a lot of competition coming in and hurting us too bad in our offshore in the Gulf Coast region at all. And you have to remember, one of our other offshores is dedicated for pressure type LPGs and aromatics. And so it's being utilized on that. There's no other vessel with it.

So we're kind of -- on a couple of our vessels being the sulfur and the LPG, it's pretty much locked in. It's such a special commodities that they're carrying, that there is no real danger on that. The other two being crude oil or asphalt and finished products like, say, ethanol, it can carry things as light as ethanol and gasoline, and light crudes or whatever -- they're a little bit more commodity-driven. But they're on the Gulf Coast and they're kind of specialty. So, so far, we haven't seen anything.

Also, SG&A expense looked like it was up a bit -- anything special in that category?

There was nothing -- I don't know specifically. I do know there was a couple of hundred thousand of kind of one-time fees. But no, there was nothing special. It should normalize.

Some of your fertilizer products go to the Japanese market. Has there been any --?

Well, it used to -- I guess we didn't mention -- we had -- that contract was slowly coming down in volume and then we lost that contract to a Korean company, I believe -- or they actually (multiple speakers) created their own plant in Japan. And so we had lost that contract last year. But it really hasn't had much of an effect, because we were able to utilize the assets to continue some other production. And right now the margins are so good at that, we really haven't missed it at all.

Okay. Thank you.

(Operator Instructions). James Vasser, Wells Fargo.

Just a couple questions. Can you review what you're expecting to see in CapEx for the remainder of the year? And also just talk a little bit about -- I know on the maintenance side, your number was inflated in the first quarter due to the marine equipment workovers.

Yes, we had two offshore toes -- one in actually in the sulfur division and one in the marine division. And those required dry dockings that come on every -- the big ones are typically every five years, but you do have some interims about halfway through that time period. But they both lined up in this quarter. And some of those two capital expenditures was right at $4 million.

And then on top of that, you had the refinery turnaround, which was right at $2 million. So the $7 million -- $7.4 million we spent, $6 million of it was on those three items -- two offshore toes and then the turnaround. So that's about [seven-point that] -- and then the balance was just some odds and ends. We believe by the end of the year, we will have spent $15 million or $16 million in maintenance CapEx. So as you can see by running the numbers, we spent basically half in the first quarter.

There is one offshore toe that helped the NGL pressure vessel that Ruben talked about earlier. It's in the dry dock and it's coming out soon out of Tampa -- it may have already come out. But that will hit in the second quarter. So you'll also see a little bit of a above-the-line, greater than 25% on an annualized basis hitting in the second quarter, but the back half of the year really falls off. So hopefully, that answered your question.

I might just make the comment too, if you -- James, if you kind of go back to last year, we're far below the average in the [4/5] range, which typical run rate is probably eight or nine, maybe closer to 10. So if you took the two years, '10 and '11, and combined them, you're pretty much going to be year-over-year on a combined basis.

But as we mentioned, those two vessels were working offshore for BP, and there was no reason to pull them off the water at the rates they were earning at that point in time. So it is an exceptional year from a maintenance CapEx perspective and just one we're going to have to deal with.

And to touch on that, I think long-term, our right number is, on an annual basis, $10 million to $11 million. But this year it just happened to fluctuate -- $5 million last year and $15 million this year.

Thanks. That's definitely helpful. And what about on the growth CapEx side for the remainder of the year? What are you expecting there?

Yes, this is Wes. I can take that, James. In terms of what we got for the remaining three quarters, we're roughly looking at $35 million to $50 million. There's a couple of projects in there that may slip in, like the vacuum tower that may hang over into the first quarter, in terms of capital expenditures, growth CapEx.

But overall, you're looking at, call it, $35 million to $50 million. We have a couple of other projects that we're working on that could add significant dollars to the growth CapEx line, but those have not been approved or actually amounts. So we're looking at possibly [$20 million to], say, $30 million of additional growth CapEx that might be added here in short order.

Okay, yes. And that was really my next question -- in terms of organic growth projects, I know you have the NGL rail card loading facility; the Cross vacuum tower, and also the new prilling facility. Is there -- it sounds like there are other projects that you're pursuing as well. Is there anything that you can comment on there?

Yes, we've got a couple of new tugs that are going to be coming out of the shipyard in the back half of this year. We also are, I think, pretty close on the crude terminal in Houston. So those are sort of the other bigger ticket items. There's a couple of smaller $1 million or $2 million projects, but that's pretty much the larger projects there -- the tugs, the priller, the rail rack, the vacuum tower, and then the crude terminal.

Yes, the crude terminal that we're working on, of course, is we've got three terminals in the Corpus area, two shore bases and a ship channel terminal that handles different types of liquid products. So yes, we're spending money there. I think Wes said Houston but he meant Corpus. Isn't that right, Wes?

Yes, sorry.

So, yes, we've got some projects there that we'll be kicking off here. So we've got a lot of things going on -- not anything on a massive scale of some of the other things, but a lot of little things that have better multiples than going out and buying larger things.

Great. And are most of those 2012-type events?

I think it's going to -- like the crude terminal is going to kick in about toward the end of the year and slip into first quarter. So it will probably be about two-thirds/one-third.

Okay. Great. Thanks very much, guys.

Thank you. And I see no further questions in the queue at this time. I'd like to turn the conference back over to our executives for any further remarks.

Okay. Thank you, Karen. This is Ruben. The things that we want to touch on for the Company in the first quarter effect was our cash flow was very good. We're very positive about our cash flow going forward. We realize our maintenance CapEx made our coverages look lower than what we were expecting. But going forward, we've got a lot of good projects that have kicked in here in the first quarter. And we expect our cash flows and coverages going forward to be good with that 50% of our budget there.

We've got the management changes. We're trying to get a little bit more focused at some of the asset levels, in order to be sure that these things come in on budget and on time. And we've got a lot of good organic-type growth. With our asset footprint throughout the Southeast and along the Gulf Coast, we're having a lot of people come to us with opportunities and growth opportunities. And it gives us a chance to try to weed out the really good ones, and go for our growth and our organic growth projects that are at much better multiples than having to go out and trying to buy assets in today's market.

So we appreciate everybody's time on the call and we appreciate your interest in our company. And with that, have a nice day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may now disconnect. Everyone, have a good day.