Martin Midstream Partners LP (MMLP) 2021 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the MMLP First Quarter 2021 Earnings Conference Call.

(Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to Ms. Sharon Taylor, Chief Financial Officer. Please go ahead.

Thank you, operator, and good morning, everyone. I'm joined by Bob Bondurant, President and CEO; Randy Tauscher, Chief Operating Officer; David Cannon, Controller; and Danny Cavin, Director of FP&A.

Before we get started with our 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 the COVID-19 pandemic, that 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 today's call. Please refer to the table in our earnings press release posted in the Investor Relations section of our website to find information regarding those non-GAAP financial measures, including a reconciliation of historical non-GAAP financial measures referenced in today's call to their corresponding GAAP measures.

And now I will turn the call over to Bob for his remarks on our first quarter earnings results. Bob?

Thank you, Sharon. I would like to start the call off by saying I was very pleased with our cash flow performance in the first quarter as we exceeded our internal guidance in spite of the extreme freeze caused by Winter Storm Uri. As we all know, this winter storm had significant impact to the Gulf Coast refineries and also had significant impact to our land transportation business. Again, in spite of the impact to us by this winter storm, we exceeded our internal guidance by more than 10%.

Our first quarter adjusted EBITDA for 2021 was $30.9 million compared to $31 million for the first quarter of 2020. However, including last year's first quarter EBITDA was $2.7 million of nonrecurring business interruption insurance proceeds that were related to our priller silver ship loader casualty loss, which occurred in May of 2019. Also, last year's first quarter included $0.5 million of EBITDA from Mega Lubricants, which was sold in December of 2020.

So without business interruption insurance proceeds, and the cash flow contribution of the Mega Lubricants business, last year's first quarter adjusted EBITDA would have been $27.8 million compared to this year's adjusted EBITDA of $30.9 million.

Now first, let me begin the operating performance discussion by focusing on our natural gas liquids segment, which was our largest cash flow contributor in the first quarter. This segment contributed adjusted EBITDA of $12.2 million compared to $5.5 million a year ago. This cash flow improvement was primarily a result of the strong performance of our butane logistics business. Driving our butane logistics performance was the strong Mont Belvieu price of butane for the first quarter, which averaged $0.88 in January, $0.94 in February and $1.02 in March. These prices were significantly above our inventory carrying costs. We do have approximately 50% of our first quarter butane sales covered with financial hedges at prices less than the average first quarter market prices but still greater than our fourth quarter hedge prices. As a result, our butane adjusted EBITDA was $10.3 million in the first quarter compared to $3.4 million a year ago and compared to $1 million in the fourth quarter of 2020.

So as we think about the butane selling season of the fourth quarter of 2020 and the first quarter 2021, we had combined adjusted EBITDA of $11.3 million. This includes butane hedge losses of $1.7 million in the first quarter of 2021 and $8.1 million in the fourth quarter of 2020. As a result of these hedge losses, we experienced a negative impact in our butane logistics business for the selling season of $9.8 million. This is opportunity costs we experienced in order to protect our downside risk. Obviously, financially, we would have been better off by not hedging our inventory of this particular butane selling season. However, going forward, we will continue to hedge some level of our butane inventory in storage in order to continue to protect the downside risk of this business line.

Our second largest cash flow generated in the first quarter was our terminalling segment. This segment had adjusted EBITDA of $10.6 million in the first quarter compared to $11.5 million a year ago. This segment also included $0.5 million of adjusted EBITDA from our Mega Lubricants business in last year's first quarter. So factoring that out of last year's cash flow, our terminalling segment's cash flow was down approximately $0.4 million from a year ago. This reduction was primarily driven by the scheduled contract adjustment to the per barrel throughput rate related to capital recovery fees at our Smackover Refinery, which became effective January 1, 2021.

As we look toward the second quarter, we should continue to see similar cash flow in our terminalling business due to the primarily fee-based contractual structure of this segment. Any cash flow variability in this segment usually comes from our margin-based Martin Lubricant business. However, the outlook for Martin Lubricants remained strong due to the tight supply of package lubricants in Greece, combined with increasing demand for our product as the country recovers from the pandemic.

Now I'd like to discuss the 2 business segments that have been affected by the pandemic and were also affected by Winter Storm Uri, mainly due to reduced refinery utilization on the Gulf Coast. These 2 segments are our Sulfur Services segment and our transportation segment. Before I get into detailed discussions of these 2 segments, I want to lay out how PADD 3 refinery utilizations was impacted by Winter Storm URI. For the first 6 weeks of the quarter, PADD 3 refinery utilization averaged 84%, still down from the pre-COVID norms of approximately 95%. Due to the impact of Winter Storm Uri, for the next 4 weeks, refinery utilization averaged 59%, recovering to an average of 82% for the last 3 weeks of the quarter.

With this background, let's move to the discussion of our Sulfur Services segment. For the first quarter, this segment had adjusted EBITDA of $9.2 million compared to $10.1 million a year ago. In our pure sulfur side of this segment, adjusted EBITDA was $2.1 million in the first quarter compared to $5.2 million in the first quarter a year ago. A year ago, we had $2.7 million of business interruption proceeds that are nonrecurring. So eliminating those proceeds at a comparable basis of a $2.5 million in EBITDA to $2.1 million in the first quarter this year. This minimum cash flow decline was a result of reduced sulfur production due to reduced refinery utilization as a result of Winter Storm Uri.

The other piece of the Sulfur Services segment, the fertilizer business, which had adjusted EBITDA of $7.1 million in the first quarter compared to $4.9 million a year ago. Our fertilizer volume sale in the first quarter was 28% greater this year than last year. Commodity prices for corn, soybeans and wheat have been higher this year compared to last year helping drive increased fertilizer demand from our customers.

In addition, last year's wet weather conditions delayed the planting season, impacting fertilizer sales negatively in the first quarter of 2020. As we look toward the second quarter, we should see improved performance in the pure sulfur side of the business. If, as expected, PADD 3 refinery utilization holds at the current utilization rate of 86% and or improves. Our fertilizer cash flow should continue to be strong in the second quarter, although most likely not as strong as the first quarter. It is our opinion that sales volume will be slightly less in the second quarter as the demand from farmers will be reduced compared to the exceptionally strong first quarter demand.

The final segment that was impacted by the freeze during the first quarter was our transportation segment. The first quarter adjusted EBITDA for both land and marine transportation was $2.7 million compared to $7.9 million a year ago. Our land transportation had adjusted EBITDA of $3.7 million in the first quarter compared to $4.8 million a year ago. Compared to a year ago, our load count was down 17%. Part of this low count reduction was due to the pandemic, but some of it was due to Winter Storm Uri.

During the first quarter, our daily low count averaged 375 in January, dropping to 290 in February as a result of the winter storm, then increased to 384 in March. This reduction in the February daily low count was caused by both the IT roads in our area of operation and from the negative impact of the freeze on refinery utilization on the Gulf Coast. Looking toward the second quarter, we should see improvement in the adjusted EBITDA of land transportation as this market is now very tight due to the supply of trucking capacity compared to increasing customer demand.

As a result, we are beginning to receive rate increases from our customer base. Our marine transportation business had adjusted EBITDA of negative $1 million compared to a positive $3.1 million a year ago. In this segment, the winter storm exacerbated the lack of demand caused by the pandemic from our refinery customers. Our utilization with our inland third-party customers was approximately 60% compared to 86% a year ago. For the fourth quarter of 2020, our third-party inland utilization was only 41%. So there was utilization improvement over the prior quarter. We continue to operate under spot contracts at lower rates compared to operating with a majority of term contracts a year ago.

Looking forward, we continue to believe marine transportation will be weak for at least another quarter before beginning to recover as refinery utilization should improve this summer as a result of the country continuing to overcome the pandemic shutdown. This concludes my operating performance discussion, so I will now turn the call over to Sharon to discuss our balance sheet, capital resources and liquidity.

Thank you, Bob. At quarter end, the total of our long-term debt outstanding was $522 million, which consisted of $176 million drawn on our $300 million revolving credit facilities, $54 million of secured 1.5 lien notes due 2024 and $292 million of secured second lien notes due 2025. During the quarter, $29 million of senior unsecured notes matured and were redeemed using revolver availability, resulting in an increase to the revolver outstandings of $28 million quarter-over-quarter. As of March 31, 2021, our first lien leverage ratio and adjusted leverage ratio were 1.77x and 5.44x, respectively. Our adjusted leverage ratio increased slightly from last quarter even as debt was reduced. This is attributable to the working capital carve out related to our seasonal NGL inventory, which totaled $21 million on December 31, 2020, and $9 million on March 31, 2021. At this time, we expect leverage to remain elevated through the third quarter of 2021 and then begin to lower as fiscal quarters where earnings were impacted significantly October '19, are no longer a component of the leverage calculation. Our distributable cash flow for the first quarter of 2021 totaled $12.8 million. Reducing that number for growth capital expenditures and capital lease payments results in calculated free cash flow of $9.6 million.

Management continues to focus on retaining cash flows to further our debt reduction to reach our goal of 3.75x calculated leverage. As our revolving credit facility covenants restrict us from increasing our distribution from the current $0.02 annually until our leverage drops below that ratio. Capital expenditures for the first quarter were as follows: $4.2 million in maintenance CapEx, $1.5 million in turnaround costs at the Smackover refinery and $800,000 in gross CapEx. We expect the total turnaround cost to be slightly less than budget. As noted in our earnings release, we were able to minimize refinery downtime by beginning turnaround preparation during Winter Storm Uri. Our 2021 guidance remains the same and is outlined on Page 5 of the slide deck linked in our press release.

We expect EBITDA of between $95 million and $102 million, maintenance capital expenditures of between $17 million and $19 million, which does include the refinery turnaround and growth CapEx of between $4 million and $5 million. This leads to distributable cash flow of $29 million to $34 million and adjusted free cash flow of $22 million to $26 million. That is all on an annual basis.

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

(Operator Instructions)

First question comes from Selman Akyol with Stifel.

I appreciate all the detail in the prepared comments. I guess, really if we could just sort of address in terms of think about marketing? And how does that look for the second quarter, prices continue to be strong for the NGLs. And I know it's seasonally usually weaker, but is there any uplift from the stronger prices?

Yes. Selman, this is Randy. I appreciate the question. Second quarter is a slow time for our NGL business because the butane season and the propane season both in February, March time frame, and now we're entering into the part of the season, we're starting to think about building our inventories for the next winter season. So the first quarter, April and May is generally a slow time in building the inventories and that bill starts picking up as we get later into the summer.

For propane sales, that has definitely slowed down significantly, the weather has improved. We still are seeing some butane sales going out in April. We have some demand with what we had in inventory being shipped out. So I think April, we will still see a pretty good number from the butane business. But then after that, I wouldn't expect to see but from the NGL businesses until we get to next fall.

Very good. Appreciate that. And then just thinking about transportation. And again, very appreciated in terms of thinking about sort of daily load counts by month. Can you just say what you're seeing in April so far? And how it's tracking maybe to March? Is it flat with March? Or do you think it might be up?

April looks an awful lot like March. March was very good month for the MTI business, the Martin transport. February, we got caught with, obviously, with the freeze and load count and the mileage and everything for a 2- to 3-week period went real low on us. But March was a good month, April through 21 days has proven to be very good month. Demand is strong for our trucking services right now. And getting stronger, and we think that's going to continue through this summer.

(Operator Instructions)

Can we have a question from Patrick Fitzgerald with Baird.

Could you just clarify -- I think you talked about your leverage at third -- remaining elevated through the third quarter and then dropping. How do you feel with covenant headroom?

I think that as we look at our EBITDA projections of between $95 million and $102 million, we remain within our covenants. As you know, our third quarter is typically our weakest quarter just in terms of the seasonality of our business. So where there is a little bit of tightness, we see that in the third quarter. But again, all of our internal projections show that we are well within our covenants going forward.

Okay. And then in terms of -- you said you were $3.7 million higher than budgeted internally. I'm just wondering, is that -- you gave guidance of $95 million to $102 million, so was that like $3.7 million kind of better than you thought when you gave that guidance? Or was that just kind of based on the quarter obviously had some difficult aspects to it this year.

Yes, there's a lot of -- this is Bob. There's a lot of give and takes on that. I think my comments earlier about the fertilizer business, we probably had some of the benefit there that we probably forecast and maybe a little bit in the second quarter. But we're seeing the trucking business probably running at a stronger than what our internal forecast might have been. But then the marine business may be a little bit weaker than what we had been. So I think as you net-net this all these puts and takes, it's probably feeling somewhat -- somewhere in the midpoint of that $95 million to $102 million at this time.

Okay. And then fertilizer, you said the second quarter is going to be down sequentially, I think. Is that down year-over-year as well?

I don't have the second quarter of last year in front of me. You remember, Randy?

I have it here. Yes. I would anticipate we're going to be down year-over-year from last year. And the reason for that is, is because our sales in the first quarter this year, 2021, were very strong. Our sales volumes. So our inventory that we have available to sell in the second quarter this year are less than what we had a year ago in the second quarter. So we still anticipate a strong second quarter but from the second quarter of 2020, I would expect we will not get that same number.

Okay. And are you guys comfortable with the assets you have currently? Or is there any opportunity do you think to sell at an attractive multiple, any of your smaller segment -- smaller businesses?

I think that as we've discussed, we are open to looking at divesting of some of our noncore assets if the rate is appropriate. I think that during this time of kind of, I don't know if we want to say, post-COVID, but maybe just leveling off of COVID, we still don't think that the multiples are there. But we are exploring, and we continue to look at ways that we can delever a little bit quicker than just relying on our annual earnings.

(Operator Instructions)

Well we do not have any questions at this time. I will turn the call over to Mr. Bondurant.

Thank you. I'd like to thank everyone today who participated on the call. Despite Winter Storm Uri and continued demand destruction from COVID impacting refinery utilization, we had a strong first quarter. As I spoke in our last earnings call, we were highly optimistic around both the butane and fertilizer business, and we were not disappointed as both businesses outperformed expectations. As we look forward, our emphasis remains on optimizing our assets to maximize free cash flow in order to reduce debt and strengthen the balance sheet. Our target of 3.7x leverage remains and know it will take time, we will continue to make this a priority.

Last, I'd like to commend our employees who have been committed to supporting Martin, whether remotely or on location, on a marine vessel or in a truck or wherever they may have been. Last year has been difficult for folks professionally and personally. Our employees have been diligent regarding the health and safety of each other as well as the communities where they're working with. I appreciate how tuff it has been and applaud their dedication and ingenuity to get the job done. Thank you.

This concludes today's conference call. You may now disconnect.