Martin Midstream Partners LP (MMLP) 2017 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the third quarter 2017 earnings conference call webcast. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Bob Bondurant, Chief Financial Officer. You may begin.

Thank you, Kim. To let everyone know who's on the call today, we have Ruben Martin, our CEO; Joe McCreery, our VP of Finance and Head of Investor Relations; and Scott Southard, VP of Commercial Development.

Before we get started with the financial and operational results for the third quarter and the year, 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, tax, 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, distributable cash flow and quarterly adjusted EBITDA guidance to the most comparable GAAP financial measure. Our earnings press release and our 10-Q, which was also filed yesterday, are available at our website, martinmidstream.com.

Now, I would like to discuss our third quarter performance compared to the second quarter, and also discuss our third quarter performance compared to our third quarter guidance. For the third quarter, we had adjusted EBITDA of $27.1 million compared to $33 million in the second quarter. Our distributable cash flow for the third quarter was $9.9 million, which provided a quarterly distribution coverage of 0.51x on our distribution paid in the third quarter. This actual DCF coverage ratio was the same as our guidance for our historically seasonally weakest quarter, the third quarter.

Also for the third quarter, our adjusted EBITDA of $27.1 million compares to guidance of $30.3 million. And for the first 9 months, our actual adjusted EBITDA of $106.9 million compared to guidance of $109.2 million, a slight decrease over guidance of $2.3 million. For the quarter, we missed guidance by $3.2 million, primarily a result of Hurricane Harvey, repair and maintenance cost plus associated business interruption from Harvey, which when combined negatively impacted cash flow by $2 million.

Now by segment, I would like to discuss our third quarter operating performance compared against the prior quarter and discuss our operating performance compared to our segment guidance. In our Natural Gas Services segment, our third quarter adjusted EBITDA was $14.4 million, compared to $10.9 million in the second quarter. There was no adjustment in unrealized mark-to-market derivative gains or losses in the third quarter compared to $0.2 million in unrealized mark-to-market gains in the second quarter. These derivative instruments are used to hedge our NGL inventory.

Also included in adjusted EBITDA was $1.7 million in distributions from West Texas LPG in the third quarter, compared to $1.3 million in distributions from West Texas LPG in the second quarter. The significant portion of the increase in cash flow between quarters for our Natural Gas Services segment was primarily from our butane logistics business. In the third quarter, primarily in September, our butane logistics business began selling its seasonal build of inventory in order to adequately supply our customers' demand. This will continue in the fourth quarter of this year and carry over to the first quarter of 2018.

As a result of beginning to sell our inventory, our cash flow for our butane logistics business increased $4.6 million between quarters. Despite our September sales during the quarter, we had seasonal growth in our butane working capital of $45 million, which explains the increase in our revolver debt balance between the second and third quarter.

Beginning in the fourth quarter, carrying over to the first quarter of 2019 -- excuse me of '18, we'll see our revolving debt balance significantly decrease by the cash generated from the liquidation of our butane working capital, which totaled $89 million at the end of the third quarter.

Compared to our third quarter guidance, our Natural Gas Services segment exceeded forecast by $1.8 million. Our butane logistics business exceeded guidance by $2.7 million. Refinery demand for butanes was higher in September than originally forecasted. So our butane sales volume and margin in September was greater than forecasted. Also, Cardinal Gas Storage exceeded forecast by $0.9 million due to stronger interruptible revenue than originally forecasted. Partially offsetting the performance in these 2 areas was the underperformance of our legacy NGL business and a shortfall in our forecasted distribution from West Texas LPG.

Our legacy NGL business missed forecast by $0.7 million, primarily as a result of 2 major customers being down for a significant time as a result of Hurricane Harvey. In addition to this shortfall, our distribution from West Texas LPG missed forecast by $0.9 million. We had anticipated resolution from the Texas Railroad Commission on West Texas LPG's dispute over market rates by the third quarter, but this has not happened. However, there finally is a formal hearing set before the Railroad Commission on December 5. Hopefully, this hearing will bring a positive resolution to this matter and West Texas LPG can begin to charge appropriate market rates for its pipeline transportation system, which runs from the Permian basin to Mont Belvieu.

Now moving to our Terminalling and Storage segment, our third quarter adjusted EBITDA was $13.2 million, compared to $14.4 million in the second quarter, a decline of $1.2 million. This decline between periods was primarily from the negative effect of Hurricane Harvey. Our repair and maintenance cost from Harvey was $0.9 million, split evenly between our specialty and shore-based terminals. We also had a $0.5 million negative impact from business interruption in our Terminalling segment as a result of Harvey. We anticipate that we have approximately $3.7 million left to spend on hurricane repairs in this segment. The majority of this will be spent in the fourth quarter with some carry-over to the first quarter. Some of these costs will be offset by a delay in our forecasted maintenance capital expenditures, which will ultimately carry over to the first and second quarters of next year.

Now compared to third quarter guidance, our Terminalling and Storage segment missed forecast by $2.4 million. The negative impact from Hurricane Harvey between repair costs and business interruption in this segment was $1.4 million. The balance of our guidance missed in the Terminalling segment was from a onetime contract adjustment credit of $0.4 million issued to a long-term customer that will be collected back by us through increased minimum volume commitments in 2018.

Additionally, Martin Lubricants missed forecast by $0.2 million due to weaker margins than forecasted and our asphalt throughput volume for the quarter was less than forecasted, negatively impacting cash flow by $0.3 million.

Now in our Sulfur Services segment, our third quarter adjusted EBITDA was $2.6 million compared to $9.2 million in the second quarter. Our fertilizer business had a decrease in adjusted EBITDA of $6.1 million between quarters, while our pure sulfur byproducts business adjusted EBITDA fell $0.5 million. The decrease in our fertilizer adjusted EBITDA was primarily from a 27% decrease in sales volume between quarters. This was a result of the anticipated decline in demand from our customers due to the seasonality of the fertilizer business.

Also, we had normal annual plant turnarounds at our ammonium thiosulfate plant in Beaumont and our ammonium sulfate plant in Plainview in the third quarter. These turnarounds resulted in a 48% production decline in ammonium sulfate and a 62% decline in ammonium thiosulfate production. This means we had a large amount of unallocated fixed manufacturing costs that did not get capitalized into inventory production in the third quarter, resulting in increased cost of goods sold on per-ton basis. Again, this is normal for our fertilizer business in the third quarter.

The decline in cash flow in our pure sulfur byproduct business was entirely a result of interruption, as sulfur production from several of our key refinery producers were shut down for most of September as a result of Harvey.

Now compared to third quarter guidance, our sulfur segment missed forecast by $1.4 million. Our fertilizer group missed forecast by $0.6 million, and our pure sulfur byproduct business missed forecast by $0.8 million. The fertilizer group missed guidance, primarily a result of an approximate $8 decrease in margin compared to our forecasted margin per ton. Our margin per ton was less than forecasted as a result of longer-than-planned turnaround downtime at our Plainview ammonium sulfate plant. Additionally, the pure sulfur byproduct business missed forecast primarily as a result of business interruption from Hurricane Harvey.

Now in our Marine Transportation segment, we had adjusted EBITDA in the third quarter of $1.1 million compared to $2 million in the second quarter. The cash flow from our inland side of the business was down $0.6 million between quarters as a result of a 6% reduction in utilization and a 5% reduction in our average day rates. In the offshore side of the business, our cash flow decreased $0.3 million between quarters as our offshore tow was in the shipyard for 20 days.

When compared to guidance, Marine Transportation missed forecast by $0.8 million. Of this, $0.5 million was from the inland side of the business due to reduced utilization and lower day rates when compared to our forecast. Additionally, our offshore Marine Transportation business missed guidance by $0.3 million as a result of 20 days of unforecasted shipyard downtime.

Finally, our partnership's unallocated SG&A cost excluding noncash unit compensation expense was $4.3 million in the third quarter compared to $3.5 million in the second quarter. Our guidance for each of the second and third quarters was $3.9 million. So over the course of the last 2 quarters, on a cumulative basis, we have hit our unallocated SG&A forecast. Our maintenance capital expenditures and turnaround costs for the third quarter totaled $5.2 million and has totaled $14.1 million for the first 9 months. We also continue to carry $13.8 million in assets held for sale on our balance sheet.

Now I would like to turn the call over to Joe to discuss our balance sheet, working capital, covenant ratios and our recent announcement regarding expansion of our West Texas LPG Pipeline.

Thanks, Bob. I'll start with a normal walk-through of our debt components of the balance sheet, our bank ratios and then provide a brief discussion of the West Texas LPG expansion and capital spending through the remainder of 2017. On September 30, the partnership's balance sheet reflected total long-term funded debt of approximately $830 million. Our balance sheet funded debt is shown before unamortized debt issuance and unamortized issuance premiums, as actual funded debt outstanding was $838 million. Reconciling this amount at quarter-end, our revolving credit facility balance was $463 million, and the notional amount of our senior unsecured notes was $375 million. Thus, the partnership's total available liquidity under our revolving credit facility on September 30 was $201 million, based on our $664 million revolving credit facility.

For the quarter ended September 30, our bank compliant leverage ratios, defined as senior secured indebtedness to adjusted EBITDA and total indebtedness to adjusted EBITDA, were 2.83x and 5.12x, respectively. Our total leverage increased by approximately 45 basis points from the June 30 level, which is typical given the seasonal working capital swings we normally experience during the second and third quarters, pertaining in large part to our butane business.

During the third quarter of 2017, we completed our inventory build of butane of approximately 2.5 million barrels. Based on the current NGL price environment, our carrying value is approximately $8.50 per barrel higher than compared to last year. Nonetheless, as we mentioned during the second quarter earnings call, we believe we are well positioned for strong cash flow over the next 2 quarters. And on a year-over-year comparative basis, the partnership is still showing a leverage -- an improved leverage ratio even in the current higher price NGL environment.

Our bank compliant interest coverage ratio, as defined by adjusted EBITDA to consolidated interest expense, was 3.68x. Looking at the balance sheet specifically, total debt to total capitalization on September 30 was 73.5%, approximately 3.5% higher than the second quarter, again reflecting the working capital increases. In all, on September 30, 2017, the partnership was in full compliance with all banking covenants, financial or otherwise.

Monday, after market close, we announced that the West Texas LPG Pipeline joint venture, of which we own a 20% interest with Oneok owning the remaining 80% and operating the line, will construct a 120-mile lateral extension with 110,000 barrels per day capacity into the core of the prolific Delaware Basin as well as additional infrastructure to increase the existing capacity of the West Texas LPG system.

In all, approximate total project cost is $200 million. This project is supported by dedicated NGL production from 2 third-party planned natural gas processing plants in northern Reeves County, one of the most active areas in the Delaware Basin. The expansion will be supported by long-term volume dedications, estimated to be up to 40,000 barrels per day. We expect the project to be in service in the third quarter of 2018 and estimate the total construction cost will range 4 to 7x cash flow.

Now let's discuss our capital expenditures during the quarter and expected expenditures during the fourth quarter of 2017. Starting first with our growth capital expenditures, year-to-date, we've spent approximately $37 million. This is inclusive of the Hondo drop-down acquisition. Looking forward to the fourth quarter, we estimate minimal spending of just an additional $1 million for a revised total of approximately $38 million for 2017. Looking at our maintenance capital expenditures, based on lower-than-anticipated spending of $5.2 million during the third quarter, we are again modestly revising our full year maintenance CapEx guidance downward, as we now expect maintenance capital expenditures of approximately $6 million in the fourth quarter and thus our full year guidance total will be approximately $20 million.

Bringing our cash flow guidance full circle, and as shown in the actual performance to guidance slide comparison issued with our press release yesterday, we enter the fourth quarter having earned $106.9 million or about 2% behind adjusted EBITDA guidance of $109.2 million through 9 months. On a distributable cash flow basis, however, the partnership continues to track positively towards its goal of achieving a 1.2x distribution coverage ratio, having achieved a 1.27x coverage ratio over the last 12 months and knowing that our fourth quarter results have historically been strong.

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

(Operator Instructions) Your first question comes from the line of TJ Schultz from RBC Markets.

On West Texas LPG, the 4 to 7x returns you are expecting. What does that assume on utilization? Is that just on those dedicated volumes? Or what are the expectations for utilization to ramp over time?

Yes, that is on the expected volumes that were shown, the baseload of up to 40,000 a day. Obviously, we're building it larger than that thinking that there is potential for growth there, which -- in fact, it would buy down that multiple.

Okay. What are the plans for and when do you need to finance your portion of that project?

That capital spend is weighted to the early part -- say, the first 2 quarters of next year. And so we'll be looking to raise capital probably at that point in time. Obviously, we have capacity under revolving credit facility to start the project, but given where leverage is and where leverage has been tracking, it's reasonable to assume that we'll be looking to raise capital in the first 2 quarters of next year.

Then -- okay, kind of related, just given the equity yield, what's your view on current levels of distribution? We've seen others in the space with similar yields recently cut distributions just with the comment that they do not want to pay that out if the market is not going to credit them for the payoff. So just your general thoughts on financing and that environment going forward in your distribution level right now?

Yes, I think we're still comfortable at $2 or $0.50 per quarter, pertaining to some sort of equity issuance. Certainly we don't like the cost -- the elevated cost where we're trading. So I think we would have to look at alternative financing solutions perhaps the preferred market, which we've seen has been active again, given as yields have tracked upward. So we're exploring all options, but I think we're comfortable at $2.

Yes, I believe we've set good coverages. We'll be having our guidance early next year, and so our plans are to stay where we are.

Your next question comes from the line of Matt Schmid from Stephens.

Just looking at the Terminalling and Storage segment, obviously there is a good amount of noise from Harvey this quarter. On the OpEx, it moving from, I think, $15 million in the second quarter to $25 million in third quarter. How should we think about that, going forward? And...

Yes, this is Bob. That is definitely a onetime blip. We accrued -- just so you can understand the accounting, we accrued -- well we spent $1 million in actual repair and maintenance cost and then we accrued another $4 million that will be paid out -- I think, it's actually $3.8-or-so million over the next 2 quarters, majority in the next quarter. So that's 1 piece of the incremental increase.

The second was we accrued an asset retirement obligation for a shore-based terminal that we are exiting in the future. And that was a noncash charge that went through operating expense, and that was almost $6 million. So effectively, you had $6 million plus roughly $4 million, about $10 million of noncash accruals hitting in that expense line. So I would trend back to the normal operating expense prior to this quarter.

Okay. Perfect. And maybe just a bit on asset sales. Saw that I think you said $13.8 million held for sales, is that tracking to close in the fourth quarter? Or just any general update on sales?

Yes. So I am going to knock on wood here. The person buying about half -- there is 1 large asset in there, and we're expected to close on that, we think, early next week. That'll raise about $6.8 million of the $13.8 million and the balance of the assets, which are a bunch of odds and ends, we're continuing to market. We have good indication probably on $3.5 million of that, but I don't expect the incremental $3.5 million to close in this calendar year. I think it could leak into next year.

Your next question comes from the line of Mike Gyure from Janney.

Can you talk a little bit on the fertilizer side of the business, maybe your outlook as you move into 2018. Kind of, what you think, maybe, some market opportunities are there?

Well, just so you understand, on our guidance going forward, we'll fully tell the market that in January. The early -- we're actually having our budget meetings next week. I think, the early read was -- I actually took them to lunch yesterday, Ruben and I actually did. And it feels like it's going to be a similar, kind of, cash flow year, early read, in '18 compared to '17. I think they have some opportunities on the supply cost side that we're talking about yesterday that will help margins. I think the [ATM] market remains strong for us. Other than that, Ruben, you have any other color?

No, it's business as usual. We haven't seen a decline in volumes, margins and things that should be about the same.

And just to educate, with -- the Hurricane Harvey did have an impact on some of our competitors on the ammonium sulfate side, which is byproduct production on the Gulf Coast. So I think, we can take a bit of benefit there. And just so everybody understands fully, our fertilizer business is -- it is a niche, kind of low volume, high margin world that we live in. And so if other fertilizer companies on a larger scale are having some issues. we are really not seeing that in our niche level side of the business, if that makes sense?

Yes. That's great. And then maybe on the asphalt side of the business. Can you talk a little bit -- I think, you said that the volumes were a little bit lower than you originally estimated. Can you talk what's going on with the integration?

Yes. We've had an interesting year this year on asphalt. It has been a lower volume throughput. But where we're -- I think, there is a lot of projects that weren't done this year, I think, from weather impact from Harvey, et cetera, that will carry over to next year. The State of Texas is -- has a large spend over the next 3 years beginning in October of '18. The voters of Texas have passed infrastructure bills that, I think, the increase is roughly $2 billion, is that right, Joe? $2 billion, that will begin in October of '18, so -- and we're well positioned with our Hondo terminal to get a lot of that growth in Central Texas the Austin, San Antonio area.

So the big picture point is, yes we've had an impact this year. But I think a lot of projects have gotten delayed effectively because of weather and the fact that big spend is beginning next year. So although we're down this year, I think we're confident that, that's going to go back to normal-type-of numbers beginning next year.

Your next question comes from the line of James Spicer from Wells Fargo.

Just wondering, outside of West Texas LPG, what other types of organic growth opportunities may be out there for you in 2018? I don't know if there are specific example just, sort of, what kind, what segments, you think might provide the most opportunity at this point?

Yes, this is Ruben. We are constantly reviewing the markets. We do have several projects that we're looking at in the NGL segment that we're looking at projects and we're looking at projects in storage, gas storage and a lot of these different aspects of the company. And so we have several working at this time, but again with our cost of capital and so forth, we're having to evaluate each one of them, and we'll review accordingly, but there is lot of activity out there.

Okay. And then secondly, I know you spent a lot of time in the past talking about your focus on the balance sheet and leverage. You know, wondering if you can just comment on, sort of, where you are today versus where you want to be and if there is still more work to be done on that side? Or if -- just any general commentary will be helpful?

Yes, James. This is Joe again. I think, with respect to balance sheet and leverage specifically, we're probably 20 basis points higher than we thought we'd be at this point in time as for the leverage basis. But again, I think, that's directly attributable to the fact that we've got more NGL stored this year than ever before at a higher cost really than we anticipated on a year-over-year basis. So that is tracking well from a delevering perspective. And as Bob said in his comments, we think we've got 2 good sales quarters of butane ahead of us. So that should effectively normalize our leverage.

But again, we've still got work to do, right? We've given the market guidance that our goal is 4.25x, and so from that perspective, there has to be an equity element to the equation here. But we need to let this play out from cash flow earnings perspective, really, the next 2 quarters, let's call it. We know we've got spend, as we've talked about with respect to growth capital and the West Texas LPG expansion. So that comes in the equation. But we've got some work to do, there is no doubt about it.

Your next question comes from the line of Kyle May from Capital One Securities.

I realize that you haven't given us official guidance for '18 yet. But just wondering if you could, maybe, give us some bookends or a rough idea of how the budget could look next year, given the incremental $40 million that you're going to contribute from West Texas LPG?

Yes, I'll start, then others can add in. This is Joe. So as we think about 2018, obviously we know, we've got some contracts that come up at Cardinal, it's a pretty favorable asset. So we're working on that from a cash flow perspective. We know we've got additional cash flow coming on late in the year with respect to the West Texas LPG expansion. I would say, that would be perhaps offset by reduced throughput, maybe in the Marine shore-based terminals that we can, kind of, see, kind of, looking ahead in the crystal ball.

I think, kind of, the pluses and minuses is if I had to handicap it now, Kyle, I think our guidance would be in the 1.1 to 1.2x currently from a distribution coverage ratio perspective. But you got a lot of pluses and minuses as the true portfolio effect, and Ruben is right with respect to a full year of cash flow coming in our specialty terminals group from the Hondo drop-down. We'll have that positive impact. So there is a lot of pluses and minuses, I say, with respect to the overall business. But we'll firm that up for everybody and come out with our guidance, really, about 6 weeks earlier than we ever have. We're tracking for late January this year -- or next year, rather.

Okay. Got it. And maybe 1 more. In the Q that was filed yesterday, I believe it mentioned the Hondo terminal was substantially complete at the end of September. What kind of expectations do you have for Hondo in the fourth quarter? And then kind of pushing into the beginning of '18?

Yes, this is Bob. I'll take that. Basically, the way the throughput contract is structured, it should be an incremental 1,250,000 every quarter. It's for a total of 5 million on an annual basis. Now if minimum volumes -- I think our minimum volume was 100,000 tons. There is some opportunity to go over 100,000 tons, but we would not realize that if -- probably until late next year. So if you were modeling, I would plug it in about a 1.25 million every quarter.

(Operator Instructions) There are no further questions at this time. I turn the call back over to the presenters.

I want to thank everybody for being on the call today and taking the time to dig into our company. We -- at Martin, we feel like we're well positioned in the fourth quarter and like I said, we'll have our 2018 cash flow earlier than we normally do. We've got strong coverage on a trailing 12-months basis of 1.27, and we've got several good projects, including the WTLPG line, the new line there that we're really looking forward to and get going. So we appreciate everybody's time. Thank you.

Ladies and gentlemen, this concludes today's conference. You -- thank you for your participation, and have a wonderful day. You may now disconnect.