Martin Midstream Partners LP (MMLP) 2015 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Martin Midstream Partners second quarter 2015 earnings conference call. At this time, all participant lines are in a listen-only mode to reduce background noise. But later, we will conducting a question-and-answer session, and instructions will follow at that time. (Operator Instructions) As a reminder, this conference is being recorded.

I would like to turn the call over to your first speaker for today, Bob Bondurant, Chief Financial Officer. You have the floor, sir.

Thank you Andrew and to let everyone know who's on the call today, we have Joe McCreery, our VP of Finance and head of Investor Relations and Was Martin, Vice President of Corporate Development.

But before we get started with financial and operational results for the second 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.

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 earnings before interest, taxes, depreciation, amortization, or EBITDA, and we also use adjusted EBITDA.

We use these measures because we believe it provides users of our financial information with meaningful comparisons between current results and prior reported results, and it can be a meaningful measure of the Partnership's cash available to pay distributions.

We also included in our press release issued yesterday a reconciliation of EBITDA, adjusted EBITDA, and distributable cash flow to the most comparable GAAP financial measure. Our earnings press release is available at our website, MartinMidstream.com.

Now I'd like to discuss our second quarter 2015 performance compared to the first quarter of 2015. For the second quarter, we had adjusted EBITDA of $45 million compared to $50.4 million in the first quarter, an 11% decrease totaling $5.4 million. As will be discussed in more detail later, this decline was primarily driven by seasonality in some of our businesses and secondly, by maintenance costs in some of our businesses.

Our distributable cash flow for the second quarter was $31.9 million, a distribution coverage of 0.96 times based on our distributions of $33.4 million paid out in the second quarter. This second quarter distribution paid in May of 2015, also included IDR distributions of $3.9 million. Our six-month DCF has been $69 million, a distribution coverage of 1.04 times, based on total distributions of $66.6 million paid this year.

Now I'd like to discuss our second quarter performance compared to the first quarter, by segment. In our terminalling segment, our second quarter EBITDA was $15.9 million compared to $17.7 million in the first quarter, a decrease of $1.8 million. This decrease was entirely associated with the fee based portion of our terminalling segment, which includes our specialty and shore based terminals and the Cross Refinery.

These fee-based terminals had a cash flow of $13.7 million compared to $15.5 million in the first quarter. The decline in cash flow from the fee-based portion of our terminalling segment was due entirely to an increase in operating expenses, primarily maintenance related.

Looking toward the third quarter, the increase in operating expenses should reverse and trend back to normal expense levels, resulting in improved overall fee-based terminal cash flow.

Our margin based package lubricant business provided cash flow of $2.2 million for both the first and second quarters. Although margins have generally been good, we have been below our planned volume forecast in this business due to generally reduced demand for our packaged lubricants. Looking toward the back half of the year, we see an improvement in cash flow beginning in the fourth quarter.

We are in the process of continuing to rationalize costs in our plastics and blending plants, which will help lower our fixed cost structure. Also, our new rail rack at the lubricant plant will be finished in Q4. This will give us access to paraffinic lubricants by rail, which will help lower our overall delivered lubricant feedstock costs.

In our natural gas services segment, our second quarter EBITDA was $17.2 million compared to $16.8 million in the first quarter of 2015. The increase in cash flow was from our NGL margin business. Although the propane side of our NGL business experienced its normal seasonal cash flow decline, our butane business more than offset that decline.

Our NGL railcar unloading facility in north Louisiana became operational June 1st. This new asset helped our butane business performance in the second quarter and should be very strategic in allowing continued growth in our NGL margin business.

Also in our natural gas services business, Cardinal Gas Storage had EBITDA of $11.1 million in both the first and second quarters, demonstrating the consistency of its cash flow from its firm contracting business model.

In addition to the cash flow generated in our natural gas services segment, we received a $2.3 million distribution from our west Texas LPG pipeline joint venture in the second quarter of 2015, bringing our six month distribution total from WTLPG to $4.4 million. Additionally, WTLPG raised their tariff rates, effective July 1, 2015. Now depending on actual throughput volume, we believe these higher tariff rates will provide an increase in annual distributions we will receive from WTLPG $4 million to $6 million on an annual basis.

As a result, our current estimate for distributions from WTLPG should be $13 million to $15 million for 2016, with our investment being the $133.9 million made in May of 2014.

Overall, Cardinal and WTLPG continue to provide us consistent stable fee-based cash flow each quarter, lessening the impact of seasonal cash flow variability in some of our other businesses. The strongest cash flow quarters for our company will continue to be the first and fourth quarters, but the seasonal reductions of cash flow we historically experience in the second and third quarters should be less extreme in the future.

Again, our primary reason for the dampening of the seasonal variability going forward is the large stable cash flow provided by our Cardinal Gas Storage assets and our investment in WTLPG.

Now moving to our Sulphur Services segment, our EBITDA was $9.9 million in the second quarter compared to $11.7 million in the first quarter of 2015. Our fertilizer EBITDA was $6 million in the second quarter compared to $7.6 million in the first quarter. This decrease between periods was primarily the result of a 16% decline in our fertilizer volumes sold. This decline was characteristic of the fertilizer seasonal cycle.

Looking forward, as most of you know, the third quarter is always the weakest in our fertilizer business, as it is harvesting season for the US farmer. So we expect our fertilizer cash in the third quarter to experience its normal seasonal decline due to low volume sales. However, we continue to anticipate a rebound in our fourth quarter fertilizer EBITDA as farmers should begin their fertilizer and winter field programs.

Now in the pure sulphur side of the business, second quarter EBITDA was $3.9 million compared to $4.1 million in the first quarter of 2015. This slight decrease in cash flow was primarily driven by reduced prilled volume sales at our West Coast terminal.

In our Marine Transportation segment, we had EBITDA of $4 million in the second quarter compared to $6.1 million in the first quarter of 2015. We experienced a decline in cash flow of $1 million in the inland side of the business, as our line haul revenue was down $0.5 million and our repair and maintenance costs were up $0.5 million.

We had 4 inland barges and 6 inland tugs in the shipyard in the second quarter, impacting both our revenue and maintenance costs. We also experienced a decline in cash flow of $1.1 million in the offshore side of the business, as our offshore NGL barge came off long-term charter in the second quarter. We are currently in the market, looking to place this vessel under contract.

Our Partnership's unallocated SG&A costs, excluding non-cash unit compensation expense, was $4.1 million in the second quarter compared to $4.4 million in the first quarter of 2015. This cost decrease was the result of decreased professional fees and diligence costs.

We continue to hold a $15 million note receivable due from Martin Energy Trading, an affiliate of our General Partner. This investment generated $600,000 of interest income in each of the first and second quarters of 2015 and should continue at that rate throughout 2015. We have amended our bank definition of EBITDA to include this interest income as EBITDA.

Our maintenance capital expenditures and turnaround costs for the second quarter were $3.7 million and have been $6.9 million for the first six months. For the year, we continue to forecast a total of $14 million to $15 million of capitalized maintenance and turnaround costs.

Now I would like to turn the call over to Joe McCreery, who will speak on our balance sheet, our liquidity and provide midyear comparison to guided forecast.

Thanks Bob. I'll start with our normal walk-through of the debt components of our balance sheet and our bank ratios, then I'll provide some midyear benchmarks against the cash flow guidance we gave in early 2015 and then discuss the Partnership's growth outlook.

On June 30, 2015, the Partnership's balance sheet reflected total long-term funded debt of approximately $840.2 million. This balance sheet debt level is now net of unamortized debt issuance and unamortized issuance premiums, as actual funded debt was $850 million.

As quarter end, our revolving credit facility balance was $450 million and the notional amount of our senior unsecured notes was $400 million, thus the Partnership's total available liquidity under the revolving credit facility on June 30, 2015 was $450 million.

For the second quarter 2015, our bank-compliant leverage ratios, defined as senior secured indebtedness to adjusted EBITDA, and total indebtedness to adjusted EBITDA, were 2.46 times and 4.64 times, respectively. Coincidentally, our bank-compliant interest coverage ratio is defined by adjusted EBITDA to consolidated interest expense, was 4.64 times.

Looking at the balance sheet, total debt to total capitalization at June 30, 2015 was 65.2%. Our funded debt fell during the quarter, in part due to reduced working capital associated with our natural gas liquids and lubricant businesses.

I note the Partnership's leverage profile has improved in consecutive quarters, as we make progress in achieving our stated goal of 4.5 times total debt to EBITDA. In all, on June 30, 2015, the Partnership was in full compliance with all banking covenants, financial or otherwise.

As the Partnership had no capital raises during the second quarter, we elected not to issue equity under our ATM program in this environment, nor access the debt capital markets. We did, however, execute a small amendment to our revolving credit facility with our banking syndicate, which was previously disclosed in an 8-K filing back in June. This amendment allows for a small adjustment in the way we calculate EBITDA and grants us the ability to purchase our debt in equity securities in the public market, provided the Partnership meets certain leverage parameters.

Now let me discuss our current performance. As Bob mentioned, the Partnership's adjusted EBITDA after unallocated SG&A was $45 million for the second quarter 2015, representing a 37% increase over the second quarter last year. Through six months in 2015, EBITDA after unallocated SG&A was $95.4 million, an increase of 33% over last year's first six months.

That being said, however, recall that in March, we provided full year 2015 guidance before unallocated SG&A. So now that we've reached the midyear, I'd like to review our performance through six months compared to the guidance we provided in early 2015. For comparative purposes, I'm going to assume 50% of our EBITDA is generated in each half of the calendar year.

On a Partnership wide basis, our EBITDA before unallocated SG&A was $103.6 million on June 30th. This compares favorably to the $101.4 million level guided to at midyear. Looking at our four segments, terminalling and storage earned $33.5 million compared to guidance of $36 million for the first six months.

Virtually all of our business on the traditional tanking and storage side and the Smackover Refinery, met or exceeded our planned cash flow. One exception, however, was our Martin Lubricants platform, down approximately 40% through six months, having encountered similar issues to last year's fourth quarter, weaker demand for our products and lower than anticipated margin, arising from base oils abundantly oversupplied.

The natural gas service segment earned $38.4 million before SG&A during the first half, compared to a target level of $40.6 million. Although optically it would appear we're slightly lagging here, combined cash flow from last year's acquisitions, West Texas LPG and Cardinal Gas Storage have exceeded expectations. Further, our NGL business is well positioned to capture incremental levels of EBITDA in the second half of 2015, based on our new rail terminal operations.

Additionally, we should benefit from the revised tariff structure on the west Texas LPG pipeline system during the second half of 2015.

Moving to sulfur services, this segment significantly outperformed year to date, earning $21.6 million of EBITDA before SG&A, compared to guidance of $13.7 million. This is primarily attributed to a strong fertilizer market and the extended application period this year that went well into the second quarter. Our pure sulfur business also performed well, benefiting from increased inventory values and better than forecasted margin on our molten sulfur handling business.

And finally, our marine transportation segment. Remember, for this segment, we gave guidance of $22.2 million of EBITDA, after deducting the marine only SG&A of $7.1 million. So comparatively speaking, for the first six months of 2015, after subtracting marine only SG&A, we earned $10.1 million of EBITDA compared to an estimate of $11.1 million. This $1 million shortfall is primarily attributed to the higher than anticipated repair and maintenance expenses we incurred during the first half of the year.

For your convenience, a slide with all the numbers I've just provided, highlighting our year to date performance versus full year guidance has been posted to our website.

Now let's talk about the partnership's growth. First the Arcadia Rail terminal. As Bob mentioned, we successfully completed construction and commenced commercial operations at our Arcadia, Louisiana natural gas liquids rail terminal adjacent to the Partnership's natural gas liquids storage facility.

Our new facility is designed to expand the geographical sourcing of NGLs for the storage asset. Since becoming operational, the facility has run at near full capacity, handling and storing primarily refinery grade butane, which is typically in excess supply during the summer months. Cash flow uplift from the facility will be realized during the withdrawal season, which typically begins in the fourth quarter and carries through the end of the year into the first quarter next year.

We anticipate incremental cash flow between $4 million and $6 million from the rail terminal on an annual basis.

Now let's discuss Corpus Christi. We continue to work closely with our potential customers for additional tankage as previously discussed, but have yet to finalize a contractual agreement. Upon the execution of a contract, the Partnership will provide market information, highlight the project and a revised cash flow projection for the Corpus Christi terminals.

Next, I'd like to discuss positive developments pertaining to our West Texas LPG natural gas liquids pipeline investment. As we announced yesterday and Bob mentioned, the Partnership anticipates meaningfully increased cash flow distributions from our 20% interest in the West Texas LPG system. We expect distributions to increase by $4 million to $6 million per year. This is attributable to tariff revisions that became effective on July 1, 2015.

The actual distribution increases realized will depend primarily on throughput and the number of incentive rate plans executed by shippers on the system. However, the revised cash flow guidance from West Texas LPG does account for a nominal amount of customer attrition, based on our new rate structures.

Andrew, this concludes our prepared remarks this morning. We would now like to open the lines for Q&A.

(Operator Instructions) Shneur Gershuni, UBS.

I was wondering if we can go through the West Texas LPG assets? The guidance that you're giving on the July 1st rate change, that's now incremental of almost $6 million a year? Is that the way to read that?

The guidance that we gave all along was to expect distributions of $9 million. That was the value when we purchased. And incremental to that will be an incremental increase of $4 million to $6 million. Therefore, in total, on an annual basis for 2016, we should receive $13 million to $15 million in distributions.

I guess my follow-up question with respect to that project. There was an expectation to invest capital with your partner on a go-forward basis to grow it. Is it still on track, are there capital calls that are occurring and so forth? I was wondering if you can give us a little bit more color with respect to that?

I'll attack that first and if anybody wants to add, feel free to. Currently, there have been no capital calls. I think One Oak, who's the operator of the business, a primary focus was the tariff increase, so they did a lot of work figuring out what the increases need to be. And so now that that's been done, there may be some capital calls going forward, but I know of none at this date.

Wes, you have any further color?

I would just say, to add to that, we had previously discussed nothing in 2015, I think that's still the case. I think more of us out there are saying the same thing. I think any capital that would be a small amount really into early 2016 and then I think additional capital, we'd come to the market with additional information, but meaningful capital probably won't be spent until I'd say probably the second half of 2016.

And in terms of when you look back and you look at what we talked about at our Analyst Day presentation, we haven't heard anything different from One Oak, in terms of total potential capital there, but that's obviously out into the future, nothing really imminent at this point.

Is it fair to assume that you guys agreed to a timeline? I realize the commodity market has changed in the last six to nine months, but did you agree to some sort of a timeline with respect to growing that asset? Is that still the case and they haven't changed anything and it always was supposed to be incremental capital in second half of 2016?

I'm really giving basically the same comments that they've given our publicly. I think internally we continue to work with them, in terms of forecasting. But nothing has been approved internally from the Partnership level, so at this point, this is very, I'd call it 50,000 foot level information.

Charles Marshall, Capital One Securities.

I want to talk about distributions going forward. Recognizing your efforts to reduce leverage and lower your cost of capital, but I'm curious as to what catalyst might prompt you to reinstate distribution growth going forward and generally speaking if there are any soft items in terms of timing, when we could expect additional distribution growth?

Chuck, we're primarily in coverage mode right now to get back and above 1 to 1, which we've now succeeded to do on a TTN basis. So that was big for the Board and for management, to get our head above water first.

I think now we've done that and we've got some clarity on what appears to be a good second half of 2015. I think we'll assess at that point in time. We have been in coverage mode an we finally now have succeeded, as I said, on a TTN basis to be over 1 to 1 again.

Looking at Corpus Christi volumes for the first half of the year, you're averaging right at 175,000 barrels a day, which I guess was your previous guidance for the year. Looking to the back half of this year, any expectations where that could trend? Is 175,000 for the average for the year still good guidance number?

We've actually internally lowered that to 165,000. However, our rate structure is such that those last barrels that go away, lose, if you will, hopefully temporarily, is at a rate that's very low, relative to the whole. It's much less than the average. If you took the volume and took the revenue into that volume. The incremental barrel at the end, I can't disclose the price, but it is very low compared to the average.

If you could, the volumes of West Texas LPG pipeline in Q2?

I believe it was 229,000 barrels a day. Wes, does that sound right?

Yes, that sounds about right; maybe plus or minus 5,000 barrels Bob, but I think that sounds about right.

Selman Akyol, Stifel.

On the terminal side, you guys referenced that operating expenses were up and you expect them to come back down in the third quarter. Can you give a little more color on all the operating expenses there?

They were just repairs to tankage at Corpus and repairs to a pipeline at Cross, so they were kind of one-off, one-month deals that were unanticipated when we did original forecasts. But sometimes when something breaks, you've got to fix it and that's what happened.

Understood. While those were down or while you were doing those repairs, were volumes imp; acted that much and should we see a volume uplift as we go into the third quarter?

At our pipeline at Cross, we got volume in from a different direction, so not really there. At Cross, there was a tank out of service. So what did happen was inbound volume off the Harvest Pipeline on some days had to be curtailed back, because we didn't have the capacity, because we were waiting on a ship to come in.

So instead of having 9 tanks in service, you have 8, so you have 100,000 barrels out of service. There were a few days where the inbound volume had to be slowed down. So slightly yes, on the Corpus side of the equation.

In terms of the West Texas LPG line you talked about that with the higher rates that you guys thought some shippers wouldn't ship. Can you just talk about what your capacity utilization assumptions are for 2016, if you get the additional $4 million to $6 million?

In terms of 2016, we haven't really looked at going forward in terms of the budgeting process. We'll be going through that over the next call it three or four months. But in terms of initial indications in terms of where our volumes are right now, in the call it 220,000 plus or minus barrels range, that's obviously been going on now since the rate change has taken place. We'll have to wait a little bit to see how that plays out over the next few months, as Joe mentioned, and see who signs up on an incentive rate agreement basis.

Right now where we stand in terms of our volume expectations, we're in that 215,000 to 220,000 barrel range.

Can you just remind me of the capacity of the pipe?

It depends on where you slice and dice it, but it's about a 230,000 barrel a day system.

I got your maintenance CapEx number; your full CapEx number for the year on expansion capital?

For 2015, we had previously guided to about $65 million and then there was some upside to that guidance, based upon timing of projects coming up for Board approval. I think we referenced any of corporate's expansion, as well as the asphalt terminal down in South Texas.

Where we're shaking out for 2015 on a budget basis, is going to be closer to call it $55 million to $60 million versus the $65 million. The timing on the asphalt project, we're still looking at bringing that to the Board approval; probably late third quarter. It might slip into early fourth quarter, but hope we get there by late third quarter.

And then with respect to Corpus expansion, that's going to be contingent upon signing up a new deal with a customer or customers and so that's stalled a little bit in terms of our expectations of timing. We still think there's opportunity there for sure, but I would see any expansion approval would probably come closer to the fourth quarter, as well as any capital obviously would then slip, be pushed, primarily into 2016.

Where we are for 2015, in quick summary, is $55 million to $60 million on a CapEx front, with some additional potential capital once we achieve Board approval on the asphalt terminal as well as on the Corpus projects.

(Operator Instructions) This now concludes our Q&A session. I'd like to turn the call back over to management for closing remarks.

Thank you Andrew. To recap; the Partnership did have a solid quarter in Q2, which we're very pleased. From last year's acquisitions, our seasonal cash flow appears to have softened and we believe will be softening going forward. We have hit our performance marks for midyear and are well positioned to exceed our guidance going forward, especially with upside potential in our natural gas services business and our sulfur services business.

Thanks everybody for joining today. We appreciate your interest in our company and your support. Thank you.

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