Martin Midstream Partners LP (MMLP) 2020 Q3 法說會逐字稿

Thank you for standing by, and welcome to the third quarter 2020 earnings conference call and webcast. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Mr. Bob Bondurant, Chief Financial Officer. Thank you, sir. Please go ahead.

And thank you, Polly. And good morning, everyone. On the call today, we have Ruben Martin, President and CEO; Randy Tauscher, Chief Operating Officer. Also joining us is Danny Cavin, Director of Financial Planning and Analysis, and David Cannon, Director of Financial Reporting.

The one person missing today is Sharon Taylor, Director of Finance and Investor Relations. Sharon currently has a significant personal situation with her daughter, Charlie, who is in a devastating head-on collision last week. Appropriately, Sharon will not be with us on the call today as she is being a mother to her daughter, who has had numerous surgeries over the past few days. Please pray for healing for Charlie and support, comfort and peace for Sharon.

Now before we get started with the partnership comments, I'll remind you that management may be making forward-looking statements as defined by the SEC. Such statements are based on our current judgments regarding the factors that could impact the future performance of Martin, including facts and assumptions related to the impact of COVID-19, but actual outcomes could be materially different. You should review the risk factors and other information discussed in our SEC filings and form your own opinions about Martin's future performance.

We will discuss non-GAAP financial measures on the call today. Please refer to the table in our earnings press release posted in the Investor Relations section on our website to find information regarding those non-GAAP financial measures, including a reconciliation of historical measures referenced in today's call to their corresponding GAAP measures.

Now let's discuss our performance in the third quarter. As was the case with our second quarter earnings call, we will not be comparing our third quarter performance to third quarter guidance by segment, as we previously pulled our quarterly guidance due to the uncertainty around COVID-19. However, we have given adjusted EBITDA guidance range of $95 million to $107 million for 2020. To the 3-month -- or excuse me, for the 3 quarters of 2020, we have realized adjusted EBITDA of $77.5 million compared to $72.8 million for the first 3 quarters of 2019.

Now for the third quarter, which is always our seasonally weakest quarter, our adjusted EBITDA was $22.5 million compared to $22 million for the third quarter of '19. The third quarter's adjusted EBITDA performance of $22.5 million exceeded our internal nonpublic guidance in spite of frequent Gulf Coast hurricane activity and the continued negative impact of COVID-19 on refinery utilization.

I would now like to compare our third quarter performance by segment in 2020 to last year's third quarter and also provide some limited outlook for the fourth quarter.

Our Terminalling and Storage segment was our largest cash flow provider in the third quarter, as adjusted EBITDA was $14.2 million compared to $13.3 million a year ago. While the fee-based portion of our Terminalling segment cash flow for the third quarter was marginally better year-over-year, the majority of the cash flow increase was primarily driven by improved performance in our packaged lubricant business. Although our third quarter volume was slightly less this year compared to last, we experienced better margins due to lower supply and production cost.

Now looking toward the fourth quarter, we believe our overall Terminalling cash flow will be less in the third quarter due to anticipated seasonal decline in customer demand of our packaged lubricants, which primarily occurs during the slower sales season between Thanksgiving and New Year.

Now our second largest contributor to cash flow in the third quarter was our Transportation segment, which had adjusted EBITDA of $5.5 million compared to $8.2 million a year ago, a decline of $2.7 million. The majority of this year-over-year decline for the third quarter occurred in our Marine Transportation business as its cash flow fell $2.3 million. Our inland marine utilization fell from 96% a year ago to 65% in the third quarter this year. This decline is a direct result of continued reduced refinery utilization, which has been negatively impacted by COVID-19. Refinery utilization was also impacted in the third quarter by hurricane activity this year, including Hurricane Laura and Beta, which had significant impact to the Lake Charles area refineries and, to a lesser extent, Beaumont area refineries.

Our truck transportation was down $0.3 million compared to a year ago, primarily due to the impact of Gulf Coast hurricane activity, which significantly lowered our daily load count in late August and early September.

Now looking toward the fourth quarter, we believe Marine Transportation utilization will remain similar to the third quarter, while we believe our average daily truck transportation load count should increase as a result of an increase in butane demand from refineries and from wholesale propane customers. We should also have no hurricane disruption in the fourth quarter.

Our third largest contributor to cash flow was our Sulfur Services segment, which had adjusted EBITDA of $4.2 million compared to $3.1 million a year ago. Our pure sulfur side of the Sulfur Services segment had adjusted EBITDA of $3.5 million compared to $1.3 million a year ago. This year's third quarter cash flow is normal. Last year, our sulfur ship loader was out of service due to a windstorm casualty loss which occurred in May of 2019, causing last year's third quarter cash flow in this business to be weaker than normal.

Our fertilizer business had cash flow of $0.6 million in the third quarter compared to $1.9 million a year ago. We had longer downtime due to our annual third quarter plant turnarounds this year compared to last year. As a result, our production levels at Plainview and Neches were significantly less than they were a year ago, causing a negative impact to cash flow this quarter. However, all facilities have been producing fertilizer products in the fourth quarter, and we should be able to maximize production in anticipation of the annual first quarter demand for our fertilizer products.

Now moving to our Natural Gas Services segment. Our adjusted EBITDA of $2.8 million in the third quarter compared to $1.6 million a year ago. In September of this year, we saw a significant increase in butane demand from some of our refinery customers relative to a year ago, accounting for the increase in cash flow this quarter. Now looking toward the fourth quarter, we anticipate we will sell a significant portion of our butane inventory currently in storage and realize anticipated cash flow performance for this business. Our butane inventory volume is currently 2/3 hedged.

Now I'd like to discuss our recent bond exchange, balance sheet and liquidity. I'll begin with a recap of the settlement of the exchange and cash tender offer for our 2021 notes, which was effective on August 12. With the closing, we have extended the maturities of the majority of our senior notes out to 2025 with a minimal balance of the 2021 notes due in February, which I will discuss further in a moment. The transaction was accounted for as a debt modification under U.S. GAAP, and thus, the partnership was required to recognize an $8.5 million loss primarily related to the expensing of nonlender-related costs incurred with the debt restructuring. The transaction allowed us to extend our debt maturities, reducing the outstanding commitments of our revolving credit facility from $400 million to $300 million and adjust our total leverage, senior leverage and interest coverage covenants so that they flex down as we work through our deleveraging plan to a total leverage ratio of less than 3.75x.

Under the new indenture, while the total leverage ratio is greater than our target leverage ratio, the partnership can use 25% of any excess free cash flow to reduce the obligation under the 2025 note indenture by making annual offer to all holders of the 2025 notes at 100% of the principal amount. However, there is no obligation upon any of the noteholders to accept this offer.

Now on September 30, the partnership's balance sheet reflected approximately $573 million of both long term and current installments of funded debt. This was an increase of approximately $28 million from June 30 and is primarily attributed to the inventory build associated with our butane optimization business. As I mentioned earlier, the current installment amount includes the remaining tranche of our senior unsecured notes due February 2021 that were not tendered during the recent exchange and also includes current capital leased obligations. The untendered balance remaining of the 2021 notes totals approximately $29 million, and this balance will be funded with proceeds from the revolving line of credit when the notes mature in February. Long-term debt relates to our revolving credit facility and the new senior notes due in February 2024 and '25. Our balance sheet funded debt is shown before unamortized debt issuance cost of $10 million as actual funded debt outstanding was $551 million.

Reconciling this amount at quarter end, our revolving credit facility was $205 million. The notional amount of our senior secured second-lien notes due in '25 was $292 million and the notional amount of our senior secured 1.5% lien notes due in '24 was $54 million. Our total available liquidity on September 30 reduced by outstanding letters of credit of approximately $17.4 million was $78 million based on our current $300 million revolving credit facility.

At quarter end, our bank compliant ratios of senior secured leverage and total leverage were 1.81x and 4.87x, respectively. On September 30, we had $31.2 million of debt assigned to the working capital carve out, which is directly attributed to the seasonal NGL inventory build where the partnership has either forward sold or hedged inventory. Accordingly, this amount of debt was carved out from the total debt for the total leverage calculation. And finally, our interest coverage ratio was 2.8x, and all the partnership was in full compliance with all covenants at quarter end.

Capitalized spending in the quarter included $2 million of expansion capital. In addition, in 2020, we have spent approximately $3 million related to the Neches ship loader replacement and $10.7 million over the entire project. This expenditure amount was offset by net proceeds from insurance recoveries of $10.3 million, with $5 million received in 2019, $1.8 million received in the first quarter, and the balance was received in the third quarter. Amounts related to the ship loader are not included in our expansion CapEx guidance numbers.

With respect to the quarter, a majority of the expansion capital spent was allocated to completing the development of the new Phoenix grease plant and to updates on an underutilized tank at our Tampa terminal. With respect to the new Phoenix grease plant, construction on the facility is complete, and we are awaiting one final inspection and approval, which we anticipate to occur in the next several weeks. And regarding the Tampa terminal, the new tank storage agreement will begin generating revenue no later than December 1.

In all, we anticipate total spending for expansion CapEx to remain in the range of $10 million and $13 million.

Switching to maintenance CapEx. During the third quarter, we spent approximately $3 million for a year-to-date total of $8.5 million. For the balance of 2020, we are estimating a total spend of approximately $1 million to cover the cost of repairs incurred from the recent Gulf Coast hurricanes, and we expect our total maintenance CapEx spend for '22 to remain in the range of $14 million to $16 million.

Now the partnership had distributable cash flow of $8.1 million for the quarter and excess free cash flow of $4.8 million. For 2020, the measurement period for excess free cash flow spans from the month of September through December. To date, approximately $0.3 million can be used as consideration to buy back 2025 notes starting in January of '21.

Finally, regarding adjusted EBITDA for 2020. With the favorable performance from the quarter, we feel comfortable that our performance for the fourth quarter will allow our annual adjusted EBITDA to fall within the previously provided range of $95 million to $107 million. With continued volatility in the economy, specifically within the energy space, we will continue giving guidance by an annual range.

This concludes our prepared remarks for this morning. I will now turn the call back to Polly for the Q&A.

(Operator Instructions) And your first question comes from the line of TJ Schultz with RBC Capital.

I think first. So I know in the past, MRMC's relied in part on MLP dividends to support its capital structure. And now with the cut to the MLP dividend, what's the -- or distribution, what's the expectation that contract terms or rates between the MLP and MRMC may need to change in order to support MRMC? And if you could just quantify what that cash flow impact could be to the MLP or if it would impact maybe MLP result at Smackover potentially?

Yes. The -- when the distribution was cut back in April, there were contract adjustments then, and that has been reflected in our guidance. And we anticipate no further contract adjustments at this time.

Okay. I appreciate that. And then on Marine Transport, I understand there was some hurricane impact in 3Q and then you're pointing to 4Q utilization being similar, I think, to 3Q levels. So I'm just kind of looking for what it takes for utilization in your mind to improve on inland marine there outside kind of weather impacts, if you can speak to refinery utilization there and what may help see that business come back a bit?

Sure. I'm going to ask Randy to kind of attack that question. Go ahead, Randy.

Sure. This is Randy. Yes, Marine had a very up and down year this year, driven by COVID and refinery utilization. Refinery utilization in the PADD 3 dropped to the -- even the high 60s and low 70s and kind of worked its way back up through the summer to the 80% to 85%. And as that happened, the rates and the utilization were pretty decent in July and August. We had pretty good months in Marine in September after the hurricane hit in late August and really did all that damage at Lake Charles. We saw refinery utilization drop again, even today, even with them coming back on and Lake Charles, CITGO starting up this week. For example, we still see refinery utilization in the PADD 3 at just under 70%.

So as long as the refining utilization is low, it sure looks like if somebody is holding a lot of clean toes from hauling gasoline and diesel, that market, I'm not going to call it nonexistent, but there's not much demand for any spot code in that particular market in what we call the dirty market, which is the asphalt. Anything that needs heated barges, it's a little bit better. But it's still well off of where it was early in the year, say $1,000 a day [curtailed] off from where it was, and utilization is lower. So we really -- before the marine rate can start picking up, we need the utilization to pick up. And for the utilization to pick up, we need refineries to run harder than they are today. So any estimate on when that's going to improve for us is really tied to when we find it to begin running harder.

Okay. Makes sense. I'll just leave it there. And my thoughts are certainly with Sharon's daughter and with Sharon.

Thanks, TJ.

(Operator Instructions) Your next question comes from the line of Selman Akyol with Stifel.

A couple of quick ones for me. So first of all, can you talk maybe a little bit about your expectations for the butane blending season, obviously, maybe just thoughts on relative to last year? I know you already got 2/3 hedged. I guess, why not have the other portion hedged as well? And then maybe if you could just talk a little bit about sort of what you expect between 4Q and 1Q?

Yes. Go ahead, Randy.

So on the butane business, that is correct, we are 2/3 hedged. But we're working through October quickly, and we're selling significant volumes in October. And so as we enter November 1, which is just next week, we'll be significantly more hedged than the 2/3 as the volumes move out in October. So our hedge position will be much greater than the 2/3 as we get to November 1. We still won't be 100% hedged. There's still upside and downside to it, but we will be significantly ahead at that point, and we'll have the ability to hedge more if we feel like we -- that's in our best interest in that time.

Relative to last year, I think this year sits up very similarly to last year. And when we think about our butane business, it's kind of in the fourth quarter, we would get about 2/3 of the value generally in the first quarter, about 1/3 of the value of the winter month. That's generally the way it has worked over time, but that could change, depending upon how the sales program end up going.

Appreciate that. And then also just in terms of thinking about CapEx, I mean I understand where you're coming in for this year in terms of expansion, but can you talk maybe a little bit about what you're seeing next year?

Randy, go ahead.

Are you asking about maintenance or growth or...

Well, really, I was thinking about expansion capital.

Expansion capital?

Yes.

So this year, our range, I believe, was $10 million to $12 million for -- in this year. Over the course of the year, we had some. We ended up not doing that we had thought we would -- some investments we thought we'd make at the beginning of the year that we'll end up not making because of what has happened in the marketplace, and we had other investments that we weren't planning on at the beginning of the year such as the Tampa tank that we ended up making over the course of the year because opportunity arose. I would think what we -- and we -- we're planning for that right now for next year, but I don't see a scenario right now where we're going to be planning for more CapEx next year, a greater amount of CapEx in 2021 than we spent in 2020. I don't see that being the scenario right now. It probably even come in slightly less than what we -- has been in 2020.

Got it. And then I know you have the right to ask the bondholders. If you have cash, you can take 25% of it and try to redeem some of those bonds. But they have no obligation to say yes, if I understood you correctly. So then my question is, presuming you have this then, is the goal then just to build cash on the balance sheet?

Well, we will -- the cash that's generated by the company, we'll pay down a revolving line of credit. So you will see the actual absolute debt reduction over time because that's where we'll put the cash.

And at this time, there are no further audio questions. We'll turn the conference back over to Mr. Bondurant for closing remarks.

Thanks, Polly. Overall, we were pleased with our third quarter adjusted EBITDA performance relative to our internal forecast and certainly glad we have our bond exchange behind us.

Now regarding this morning's press release, I'm grateful for the confidence of our Board, and I'm very excited about my new role as CEO of the partnership beginning January 1 of next year. I would like to lay out my near-term vision for the company.

First and foremost, we have to make our partnership attractive again to investors. How do we do that? Number one, we must continue to delever the partnership to our target leverage of 3.75x or less. Number two, we must be more consistent on delivering on expected cash flows, which will provide the fundamental path to our leverage goal. Number three, we must also increase the utilization of our existing asset base through expanding existing commercial relationships and creating new commercial relationships. Number four, we need to become more cost-conscious throughout the entire organization. And finally, number five, we must identify and execute on low-risk organic growth opportunities having returns significantly above our cost of capital.

If we can execute this plan, I believe in the next 12 to 24 months, we can improve our current enterprise valuation multiple of 5.7x reflected in our current equity price. If we can grow our valuation multiple to be more in line with our MLP small-cap peer group, which trades around 7.8x, coupled with growing our equity value through absolute debt reduction, I believe we can deliver strong equity returns for our current unitholders based on our current unit price.

Now finally, I want to thank Ruben for his leadership of our partnership over the last 18 years, and I want to publicly let him know how much I appreciate his mentorship and friendship over the last 38 years. I know you will continue to bring value to our partnership through your business development role and as Chairman of the Board.

Ruben, would you like to share any closing comments?

Thank you, Bob, for those kind words. But I just thought that this was the right time to transition leadership since we recently completed our challenging, to say the least, bond exchange, which sets MMLP up for future financial success. I will remain as President and Chief Executive Officer of the product company and as Chairman of the Board of MMLP. I will also be involved in business development for MMLP as I see this as a very important, given MRMC's significant ownership interest in MMLP. This means I'm not completely exiting the picture, I'm just turning over the leadership and strategic planning to -- of MMLP to Bob. His vision can be the guiding light for MMLP's future. I'm excited for Bob, and I think he's a great choice to lead MMLP into the future.

With that, I want to thank everyone and thank everyone for being on our call today. Anything else, Bob?

No. Polly, this concludes our call. Thank you.

Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.