Martin Midstream Partners LP (MMLP) 2021 Q2 法說會逐字稿

Good day and thank you for standing by. Welcome to the MMLP Second Quarter 2021 Earnings Call. (Operator Instructions) Please be advised that today's conference is being recorded.

I would now like to hand the conference over to Sharon Taylor. 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, our 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, 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 today's call. Please refer to the table in our earnings press release posted in the Investor Relations segment 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 second quarter earnings results. Bob?

Thanks, Sharon. To begin, I would like to say that I'm pleased with our first 6 months of performance in 2021 as it is on pace with our annual projected adjusted EBITDA of between $95 million to $102 million. Also for the first 6 months, we have generated free cash flow of $15.6 million, also in line with our internal free cash flow forecast.

Let's now discuss our second quarter performance by business segment. For the second quarter, our overall adjusted EBITDA was $22.5 million compared to $23.9 million in the second quarter of 2020. The adjusted EBITDA in our Terminalling, Natural Gas Liquids and Transportation Services segment were very similar in this year's second quarter compared to last year's second quarter. The one segment that underperformed compared to a year ago was our Sulfur Services segment, which I will discuss shortly.

Our largest cash flow contributor for the second quarter was our Terminalling and Storage segment, which had adjusted EBITDA of $10.6 million both this year and last year. Even though our Terminalling and Storage cash flow was the same year-over-year, there was some variability within the segment. The cash flow at the Smackover Refinery was down $0.6 million compared to a year ago. This reduction was primarily due to the scheduled contract adjustment to the throughput rate related to capital recovery fees, which became effective January 1 of this year.

Offsetting this was a $0.6 million improvement over last year in our lubricants and specialty products business. Both the supply of packaged lubricants and packaged greases remain very tight coming out of the pandemic, and as a result, we have experienced increasing sales volumes, which reflect current market conditions. We continue to believe this market will remain in tight supply over the near term, which should positively impact the third quarter.

Our next largest cash flow contributor in the second quarter was our Sulfur Services segment, which had adjusted EBITDA of $8.9 million compared to $10.8 million a year ago. We are very pleased with the fertilizer portion of our Sulfur Services segment as it had adjusted EBITDA of $6.9 million in the second quarter compared to $6.8 million a year ago. For the first 6 months, which is the primary earnings period for the fertilizer business, we had adjusted EBITDA of $14 million compared to $11.8 million for the first 6 months of 2020.

Moving to the third quarter, we will see the normal seasonal decline in fertilizer earnings due to reduced demand. As such, we will perform the majority of our fertilizer plant maintenance work to coincide with the reduced seasonal demand for our products. This maintenance work also reduces our normal fertilizer production rates. As a result, we will see a normal decrease in cash flow for the third quarter in our fertilizer business.

In our pure sulfur side of the segment, adjusted EBITDA was $1.9 million in the second quarter compared to $3.9 million a year ago. Our pure sulfur volume was down 12% in the second quarter compared to a year ago. This was driven by reduced production volume from our suppliers compared to the year ago. Since our sulfur distribution system carries a significant amount of fixed cost, this missing incremental production volume from our suppliers has a significant negative impact to our cash flow. Looking to the third quarter, we are anticipating and now seeing improved sulfur volumes from our suppliers, which should allow our pure sulfur business line to produce cash flow more in line with our historical norms.

Our third largest cash flow generator for the second quarter was our Transportation segment, which had adjusted EBITDA of $5 million compared to $4.9 million a year ago. Despite this consistent cash flow performance, there was variability between our transportation business lines when comparing this year's second quarter to last year's.

Our truck transportation business line had adjusted EBITDA of $5.5 million in the second quarter compared to $3.3 million a year ago. We experienced a 19% increase in mileage in this quarter compared to a year ago. Due to the pandemic, last year's PADD 3 refinery utilization was 76% in the second quarter compared to 89% in this year's second quarter. The improvement in refinery utilization was the main driver in the significant recovery in earnings this quarter compared to last year.

Our Marine Transportation segment had adjusted EBITDA of negative $0.5 million in the second quarter compared to $1.6 million a year ago. A year ago, in spite of overall demand reduction for marine transportation due to the pandemic, we still had several inland tows under term contracts at higher term rates. In the second quarter this year, our inland fleet was primarily in the spot market at reduced rates compared to a year ago. However, we are now beginning to experience slowly increasing demand for our marine transportation services as PADD 3 refinery utilization has continued to increase.

We will also see improved cash flow in our offshore marine transportation as the one offshore tow we have had sitting idle since January 1 went into service in late May under a new 6-month contract. As a result of the improvement in both the inland and offshore side of the business, we expect Marine Transportation's adjusted EBITDA to improve in the third quarter compared to the second.

Finally, I would like to discuss our Natural Gas Liquids segment. For the second quarter, we had adjusted EBITDA of $1.7 million compared to $1.6 million a year ago. As a reminder, the second and third quarters are our seasonally weakest quarters for the Natural Gas Liquids as refineries are accessing butane supply, which we move to underground storage using both truck and rail transportation. We then sell this stored butane inventory back to refineries in the fourth and first quarters.

Also, our wholesale propane sales were minimal in the second and third quarter due to the warm weather during these months. Therefore, as a result of continued lack of significant seasonal demand in the third quarter for both butane and propane, we should see similar cash flow performance in the third quarter relative to the second quarter.

This concludes my operating performance discussion. So I will now turn the call over to Sharon to discuss our balance sheet, liquidity and capital resources.

Thanks, Bob. At quarter end, the total of our long-term debt outstanding was $526 million, which consisted of: $180 million drawn on our revolving credit facility; $54 million of secured 1.5 lien notes due 2024; and $292 million of secured second lien notes due 2025. As of June 30, 2021, our first lien leverage ratio and adjusted leverage ratios were 1.6x and 5.31x, respectively. As the second quarter begins our seasonal NGL inventory build, I want to remind everyone that our debt ratio includes adjustments from the working capital carve-out supplement, which allows us to exclude debt attributed to the NGL inventory build from the total debt portion of our leverage calculation if the volumes are either forward sold or hedged.

Looking back at the end of the first quarter, adjusted leverage was impacted positively through the inventory working capital carve-out by a reduction to debt of $8.5 million. That carve-out increased to $30 million at the end of the second quarter as inventory volumes increased along with forward sales and hedges. This results in a reduction in adjusted leverage from 5.44x to 5.31x, even as total debt increased slightly.

Looking forward to the third quarter, which is historically our lowest cash flows due to the seasonality of our butane and fertilizer businesses, we anticipate leverage to increase slightly as we continue to build NGL inventory, and our trailing 12-month EBITDA still includes quarterly earnings that were significantly impacted by COVID-19. However, our forecasted year-end 2021 results in a significant reduction in leverage year-over-year as we continue to focus on reducing debt through free cash flow generation to reach our goal of 3.7x adjusted leverage.

Our distributable cash flow for the second quarter of 2021 totaled $7.3 million and $20.1 million for the first half of the year. Reducing that number for growth capital expenditures and capital lease payments results in calculated free cash flow of $6 million for the quarter and $15.6 million for the first 6 months of 2021.

Turning to capital expenditures. Maintenance CapEx was approximately $2.4 million, and growth capital was $1.1 million for the second quarter. And for the year, maintenance capital totaled $8.1 million, including $1.5 million in turnaround costs at the Smackover Refinery. Growth capital totaled $2 million for the year, with the majority related to trailer conversions in the land transportation group.

Yesterday, along with earnings, we announced the amendment of our revolving credit facility. Due to rising commodity prices, along with the continued negative impacts of COVID-19, we felt it appropriate to address anticipated tightness around our forecasted total leverage and interest coverage ratios, specifically in the third quarter, as our working capital requirements are forecasted to be significantly above the working capital supplement maximum due to elevated commodity prices. In addition to addressing certain ratios, we reduced the commitments from $300 million to $275 million in order to rightsize the borrowing facility while still retaining ample liquidity.

Our 2021 guidance remains the same and is outlined on Page 6 of the slide deck in our press release. EBITDA is still expected to be between $95 million and $102 million, with no changes to our forecast of $17 million to $19 million in maintenance CapEx, which includes the refinery turnaround, and growth CapEx remains between $4 million and $5 million. This calculates to distributable cash flow of $29 million to $34 million and adjusted free cash flow of $22 million to $26 million, all on an annual basis.

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

(Operator Instructions) And your first question is from Selman Akyol of Stifel.

Can you talk maybe a little bit about -- you said your supplies of sulfur were down this quarter, which I would have thought was a function of refinery utilization. And then obviously, you noticed -- you noted transportation was up due to higher utilization at the refinery. So can you maybe just talk about those 2 pieces?

Sure. This is Randy, Selman. Thanks for the question. So regarding the sulfur, sulfur, at the beginning of COVID, obviously took -- refinery utilization went down with sulfur -- deliveries into Beaumont declined significantly. And then we went through the hurricanes, and we went through the winter storm. And even in the second quarter, when you look at the first half of the year, deliveries into Beaumont, it was well below. Even with the increase in utilization in the second quarter, it was well below historical. And so that's just an issue the sulfur business has had to overcome.

The good news is in the first 3 weeks of July, the sulfur deliveries into Beaumont have increased significantly from where they were in the first half of the year, plus 20% up into Beaumont. So the refineries, as they're getting back to their low 90-ish percentile, in our area, I haven't spoken with them, but I'm surmising they've upped their sulfur content in the crude a little bit. And so we've seen the sulfur deliveries increase significantly. And so that's good news for the sulfur business going forward.

As far as MTI, that's driven by a lot of things, the refineries included, but also petrochemicals is big for the MTI business. They haul a lot of lubricants out of that [of more] lubricant processing plant. So that -- MTI is driven by a lot of things on top of the refinery, where we have seen a lot of the strength in that business.

Got it. And then just in Marine Transportation, you talked about in offshore, tow went into service for 6 months. Any thoughts on how that would be recontracted? I mean does it just go back to being idle? Or do you think you're seeing a pickup and you'd anticipate that being recontracted longer term?

So we moved the M 6000 from the Gulf Coast where it had been employed years ago and have been sitting more in the last couple of years, and it's actually been utilized. We moved it up to the Northeast. So we have it on 6-month contract with a customer in the Northeast. And we're hopeful that goes very well and that we'll continue to operate up in the Northeast with that unit ongoing.

Understood. And then on the CapEx, you talked about it as terms of -- I guess, it sounded like maybe expanding capacity for the Transportation segment. So far, in terms of what you've invested in this year, should we think of the balance of the CapEx -- growth CapEx budget being the same for the same kind of items?

Yes. That was related to some of our trailers. And I think so, I think when we're looking at growth CapEx, we're focused on the land transportation business. We don't have any other large growth CapEx plan for any of the other segments.

(Operator Instructions) And your next question is from Patrick Fitzgerald of Baird.

How is the butane business, given what's going on with pricing, tracking for the fourth quarter of '21 and the first quarter of '22 versus the fourth quarter of '20 and first quarter of '21, given there was some hedging issues last year and the prices have moved up? So any color on that would be helpful.

Okay. This is Randy, Patrick. So when you think about the butane business this year relative to last year, there is a lot of differences. Last year, we went -- crude was much lower last year. Our prices -- inventory prices into the whole were much lower than they are this year.

This year, the -- when you look at the butane to WTI spread, it's about low 70-ish percent, 72%, 73% currently. That's higher than you would typically see this time of year. But there's good reason for that, and that's the fundamentals. We've seen field production for butane very similar year-on-year. And we have seen exports rise significantly year-on-year. Much the same story you see in the propane business applies to the butane business.

So where are we at this year? No, we can't sit here today and give you a forward projection on financially how we're going to do. We have started putting on a hedge position, which is a little bit earlier than we were able to a year ago. We're approximately 1/3 hedged at this point in time. We think the fundamentals are favorable to us, but we're still in the middle of the build season, and we're still several months away from beginning the sell season.

Okay. So any -- I mean, I know there's a lot of moving pieces. But I mean, would you expect it to be up, down from last year or what? Or you just can't say?

Every season in butane is unique. And I really can't give you a projection relative to what we achieved last year.

Okay. Okay. In terms of your -- it sounds like free cash flow, in terms of operating cash flow minus CapEx, is going to be pretty back-end loaded, given the NGL working capital and everything. I mean do you expect free cash flow to be pretty close to your adjusted free cash flow guidance?

Yes, we do. That is coming straight from our projections, those numbers, and we would expect to be right within that range.

Okay. So you have -- like the 1.5 lien notes, I believe they already start -- they're callable soon. And you obviously got an amendment on the revolver. Would you want to take care of kind of the top part of the capital structure before you can deal with the second lien notes? Or how are you thinking about that?

So the second lien notes are callable August of 2022. The 1.5 are callable now at a premium, I think it's 1 03 and next August, it will be 1 02 or 1 01. So as we sit here today and look at the capital markets, we certainly wish that we had the ability to take those 2 Ls out right now. But we don't, we're going to have to sit and wait.

And my thought at the moment is that when we get into that August time frame next year, we're looking at redoing the entire capital structure, the revolver and the 2 Ls at the same time and then if it makes sense, obviously, the 1.5.

(Operator Instructions) Your next question is from Jason Mandel of RBC Capital Markets.

A bunch of my questions were just answered in that last question, but maybe just a quick follow-up on the revolver amendment. So the revolver was amended to give a little bit more room under the covenants for a potentially weak working capital quarter. What is right now the available liquidity? I think last quarter, there was limitations on the availability due to covenants. And obviously, now we have changes. So what is the actual dollar amount that's available right now?

I can say at 6/30, our maximum available would have been $220 million. So we had about $40 million at that time that would have been available.

There are no further questions at this time. I will turn the call back over to Bob Bondurant for closing remarks.

Thank you, Christy. In summary, our outlook for the second half of the year remains positive as our economy continues to recover. Refinery utilization has improved and at this time, is only a small percentage less than historical norms. That improvement is showing up in increased customer demand for our services.

Before concluding, I want to take a moment to discuss the ongoing COVID-19 pandemic, including the Delta variant. While acknowledging that the Delta variant is spreading, we believe that consumer and industrial demand will continue to recover and, while politics is certainly a factor, see no real risk to a countrywide shutdown like we experienced last year. The evidence is overwhelming that those who are vaccinated are highly protected. And if they are diagnosed positive, the severity of their illness and the risk of death is greatly lessened.

While the unvaccinated face an elevated risk, they are a smaller percentage of the U.S. population. So cases for the unvaccinated may continue to rise, but overall, hospitalizations and mortalities should not. So in our view, the economic recovery will continue: folks returning to their offices, increased business and leisure travel and return to what we regard as normal. All this points toward a continued robust increase in demand.

I'd like to thank everyone who listened in on the call today. Looking forward to speaking with you again next quarter. Thank you.

And thank you. This does conclude today's conference call. You may now disconnect.