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Calumet Specialty Products Partners, L.P (NASDAQ:CLMT)

Q4 2012 Earnings Call

February 13, 2013, 01:00 pm ET

Executives

Pat Murray - VP & CFO

Jennifer Straumins - President & COO

Analysts

Michael Peterson - MLV & Co.

TJ Schultz - RBC Capital

Edward Rowe - Raymond James

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2012 Calumet Specialty Products Partners, L.P Earnings Conference Call. My name is Tahisha, and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Pat Murray, Chief Financial Officer. Please proceed.

Pat Murray

Thank you, operator. Good afternoon. And welcome to the Calumet Specialty Products Partners investors’ call to discuss our fourth quarter 2012 financial results. During this call, Calumet Specialty Products Partners will be referred to as the Partnership or Calumet. Following the presentation, we will hold the line open for a question-and-answer session.

During the course of this call, we will make various forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Such statements are based on the beliefs of our management, as well as the assumptions made by them and in each case based on the information currently available to them.

Although, our management believes that the expectations reflected in such forward-looking statements are reasonable, neither the Partnership, its general partner nor our management can provide any assurances that such expectations will prove to be correct.

Please refer to the Partnership’s press release that was issued this morning, as well as our latest filings with the Securities and Exchange Commission for a list of factors that may affect our actual results and could cause them to differ from our forward-looking statements made on this call.

I would now like to turn the call over to Jennifer Straumins, President and COO.

Jennifer Straumins

Thank you, Pat. We are pleased with our results for the fourth quarter. Our net income of $45.7 million, we reported quarterly adjusted EBITDA of $91.3 million and quarterly distributable cash flow of $54.6 million. We continue to benefit from the Canadian heavy crude differentials of both our Superior and Montana refineries.

On January 14, 2013, we declared a quarterly cash dividend of $0.65 per unit for the quarter ended December 31, 2012 on all outstanding units. The distribution we paid on February 14, 2013 to unit holders of record as of the close of business on February 4, 2013. This represents a 4.8% increase over the third quarter of 2012 and a 22.6% increase over the fourth quarter of 2011.

We would like to comment a good point on some of the items in our earnings release today. We would like to talk about our Specialty Products segment. We have during the fourth quarter of last year we saw some weakness in our Specialty Products segment from both the volume and a margin standpoint. Primarily, this was in our paraffinic lube oil segment as we've seen some additional production come online and some imports coming into the market that impacted our margins late during the fourth quarter. So a lot of our customers working on targeting low inventories for the year end and given that we do not have year end inventory targets, we chose to wait until the beginning of 2013 for pricing to move up rather than try and sell a lot of volumes at lower margins.

This has really paid of for us. We've seen demand come back in these segments. We've seen increased activity in all of our oil field services segment as well as a lot of our consumer product segments as well. So we are feeling a lot more confident about our paraffinic lube business at this point in time than we were towards the end of the year as we've spoken with a lot of you there is a lot of new production coming into the market; people are trying to make sure that they have got their production placed for 2013 as the market settles down. So things are settling down there.

While there were some price decreases early in the year, we're starting to see prices stabilize and begin to increase in that paraffinic segment and just more, it is a very small part of our overall specialty segment, the types of products that we're talking about only account for about 300,000 barrels a day of our total specialty segment.

So everything else has been performing very well. We are very pleased with our Royal Purple acquisition. A lot of great opportunities going on in that segment in 2013. Our solvents remain very strong. All of our crude grade oils and that a lot of products remained very strong. Also I want to remind you the seasonality of our asphalt business, given the asphalt production at Superior throughput and Montana, we’ve been (inaudible), those sales volumes are just a lot lower during the fourth quarter and the first quarter as we participate in the paving market, which are stronger of course during the summer months.

Also I like to talk about how pleased we are with the San Antonio refinery acquisition for NuStar. This has been an asset that Calumet’s been interested in for quite a long time and we are very pleased that it's finally a part of our asset base. There are a lot of exciting growth projects going on there. We will be spending about $20 million in growth CapEx at that facility this year.

We’ve got a lot of other growth opportunities that we're looking at from an organic standpoint this year. 2012 was the year of an acquisition growth for Calumet and these are all very well performing assets, very strong financially performing assets; it didn’t take a lot of time to work on integration, optimization and things are slowing down a little bit at this point in time. We are in a great position to do that. We are looking at a major expansion at our Montana refinery.

We are looking at a major expansion at our Louisiana, Missouri synthetic esters plant and we are optimizing the relationship between the Superior refinery and the Shreveport refinery with the rail projects that we have been able to build both on those sites and were finalized in the fourth quarter of last year. That’s been very successful for us; we are not only moving prudent railcars to our own facilities, we are selling them to third parties and continuing to grow that business.

We have announced that we are exploring a barge crude opportunity out of Superior and that’s a project that we will continue to develop over the course of the year, but again that could be a great project for us to move either Canadian or Bakken crude out of superior to really allow our East Coast refineries or Gulf Coast refineries.

One project, another project we are excited about that we announced late last week is the North Dakota, diesel’s topping plant that we are going to be building with MDU; that’s been a great relationship for us over the last year and we will explore it to breaking ground in the next several months and moving forward on that project that will be a substantial project for Calumet that will take a lot of our time and resources. As always we are continuing to look at other outside acquisition opportunities and would never turn down the opportunity to explore anything that would be qualifying income for us.

The one project that we put on hold at this point in time is the GTL project at Karns City, at our Karns City, Pennsylvania facility. We have been working very closely with our technology partners Velocys and Ventech and have their talks on this project. We come to the conclusion over the last couple of weeks that while on paper this is fantastic technology, we are not sure we want to be first to market, so we are going to take some time and we are going to do some more engineering analysis upfront and make sure that this is the right project for us to do. We feel very strongly about the economics of the project and we feel strongly that the technology works on paper, we just want to make sure that we engineer it almost thoroughly before we give a final go or no decision, so that’s the project that we’ll be speaking over the course of the year.

As we look at our maintenance and environmental CapEx for 2013, we have got very significant expenditures. We, between our turnarounds and our maintenance and environmental CapEx, we’ll be spending about a $130 million in 2013 which is substantially higher than we’ve historically spend, given our consent decree with the EPA both in Wisconsin and Louisiana, we are moving a lot of control rooms and moving lot of office buildings outside the (inaudible), we are doing a lot of mechanical upgrades that are still needs to make them more compliant from [EH&S] each standpoint and also have a very significant turnaround at our Superior refinery in late April, early May, and that's a once every four years turnaround and we will spend a substantial amount of money on. So very confident that we’ll be very successful in all these projects and go from there.

At this point in time, I would like to turn the call over to Pat Murray to review our financial results.

Pat Murray

Thanks, Jennifer. Net income for the fourth quarter of 2012 was $45.7 million compared to $26.9 million for the same period of last year. This fourth quarter 2012 results include $7.6 million of non-cash unrealized derivative gains as compared to $13.5 million of non-cash unrealized derivative gains in the fourth quarter of last year.

We believe the non-GAAP measures of adjusted EBITDA and distributable cash flow are important financial performance measures for the partnership. Adjusted EBITDA as defined by our debt instruments was $91.3 million for the fourth quarter of 2012 as compared to $65 million for the same quarter in 2011. The partnership’s distributable cash flow for the fourth quarter was $54.6 million as compared to $33.1 million for the same period last year. The increase in adjusted EBITDA quarter-over-quarter was due primarily to a $61.6 million increase in gross profit partially offset by $18.8 million of increased selling, general and administrative expenses; $6.3 million of which on the selling expenses side was non-cash amortization expense and an $8.9 million increase in realized derivative losses.

We encourage investors to review the section of our earnings press release found on our website entitled non-GAAP financial measures and the attached tables for discussion and definition as EBITDA, adjusted EBITDA and distributable cash flow, financial measures and reconciliations of these non-GAAP measures to the comparable GAAP measures.

Gross profit by segment for the fourth quarter of 2012 for specialty products and fuel products was $63 million and $78.8 million respectively compared to gross profit of $64.7 million and $15.4 million respectively for the same period in 2011. The slight decrease in specialty products segment gross profit of $1.7 million or 2.6% quarter-over-quarter was due primarily to a decrease in sales volume for solvents and waxes as well as a decrease in the average sales price per barrel of lubricating oils which declined more than the average cost of crude oil.

These reductions to gross profit were substantially offset by the additional gross profit generated from our 2012 acquisitions. The increase in fuel product segment gross profit is $63.3 million quarter-over-quarter was due primarily to a $23.3% increase in the sales volume mostly as a result of the Montana acquisition as well as higher sales volume from our legacy operations and 113% increase in gross profit per barrel due to increased tax spreads.

Legacy Calumet operations provided $50 million of the increase in gross profit while newly acquired operations provided gross profit of $13.3 million in the quarter. Total loss on settled derivative instruments reflected in gross profit as discussed and realized loss on derivative instruments was $27.3 million for the fourth quarter of 2012, and increased loss of $2.5 million quarter-over-quarter.

Selling expenses increased $10.9 million quarter-over-quarter to $14.9 million. This increase was due primarily to increased amortization expense, primarily related to the recording of intangible assets associated with our Missouri, TruSouth and Royal Purple acquisitions, additional employee compensation cost driven partially by the TruSouth and Royal Purple acquisitions, and increased advertising expenses.

General and administrative expenses increased $7.9 million quarter-over-quarter to $19.6 million. This increase was due primarily to higher professional fees and additional employee compensation cost driven primarily by the Superior, Missouri, TruSouth and Montana acquisitions.

Interest expense increased $6.2 million quarter-over-quarter to $24.3 million, due primarily to additional outstanding long-term debt in the form of 2020 senior unsecured notes that we issued in 2012 to partially fund the Royal Purple acquisition. As of December 31, 2012 total capitalization consisted of Partners’ capital in the amount of $889.8 million and outstanding debt of $863.5 million comprised primarily of $858 million of senior notes due 2019 and ‘20, which is net of discount of $17 million.

The $160.9 million increase in Partners’ capital from December 31 of 2011, due primarily to net income of $205.7 million and $149.7 million of net proceeds from our May 2012 public equity offering, partially offset by $132.4 million in distribution to our unit holders, $64 million in other comprehensive loss.

On December 31, 2012; we had availability of $355.1 million under our $850 million committed revolving credit facility, based on a $577.5 million borrowing base and $222.4 million in outstanding standby letters of credit.

We believe that we will continue to have sufficient cash flow from operations and borrowing availability under our revolver to meet our financial commitments, minimum quarterly distributions to our unit holders, our debt service obligations, contingencies and our anticipated capital expenditures.

Now, I'll turn the call back over to Jennifer.

Jennifer Straumins

Thanks, Pat. This concludes our prepared remarks. We would now be happy to answer any questions that you guys have. Operator, can you confirm if there are any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Michael Peterson from MLV & Co. Please proceed.

Michael Peterson - MLV & Co.

Couple of questions. I will try to make them some brief. First of all, Jennifer if you could confirm that the shortfall in specialty product volumes in the fourth quarter was self imposed and due to what you viewed as a week year end pricing environment which has since rebounded to some degree?

Jennifer Straumins

That’s correct. The majority of it was self-imposed. We also encountered, had a little bit of operating issues at both our Shreveport refinery and our Lyondell refinery that produces some of the lubricating oils that we market. They had some products that ended up being off deck so we were unable to sell it.

Michael Peterson - MLV & Co.

Okay, so we will probably see a larger than normal amount of volumes recovered in, sold in the first quarter but may be not the full allocation because there were some operational concerns?

Jennifer Straumins

That’s correct.

Michael Peterson - MLV & Co.

Okay, okay. Second question, in terms of your announcement in early January regarding the Superior barge project, can you talk it all about market reception in terms of may be other interested parties that have indicated interest or responded at all to your press release?

Jennifer Straumins

We can't mention any names. We have had some positive interests let’s say what I have surprised me more than anything is the community interest in Superior has been a lot more positive than we anticipated. It’s been decade since anyone has shipped crude oil around the Great Lakes and Wisconsin is a environmentally friendly state so we were concerned about public perception but I think our plant manager up there did a very nice job of explaining the project to the public and all the safety precautions that we will be taking and it’s actually been very, very well received by the public.

Michael Peterson - MLV & Co.

Interesting, that’s helpful thank you, Jennifer. Lastly, if I could, if you could just speak a little bit to your outlook on fuel products differentials particularly in light of San Antonio facility which is going to be incremental in the first quarter as well as the announced Dakota Prairie in volumes I would like to hear your thoughts in particular on how you expect your differential to diesel benchmarks to change and what impacts you might see in terms of jet fuel relative to volumes that are no longer on a contract with the US government?

Jennifer Straumins

I am not sure what you mean about jet fuel contracts and the US government but anytime we do our economic analysis, we only just use the forward strip, we feel like as we were smart enough to predict where our crack spreads are going to get, we all would be only doing something else. These cracks for us to stay stronger and look to be stronger for longer then we would have said year ago, so we usually try and shy away from saying what we think margins are going to be doing from that standpoint. If you want to expand a little bit on the jet fuel and the government contracts, I am trying to answer that question, it will be better for you.

Michael Peterson - MLV & Co.

My understanding that your jet fuel realizations being below benchmark for jet prices, some of that was due to a term contract that you had with the air force ended that relationship over the long-term because of the way the price environment changed was slow to catch up rising prices, with regard to diesel what I was thinking was you kind of noted this with the Dakota Prairie announcement that, your expectation is that market is underserved for diesel and so not only are you going to be capturing advantageous feedstock prices but you are also going to be selling into growing and under supplied product market as well. And so I would expect that, your diesel realizations relative to kind of benchmark diesel prices would be higher than what we have seen over the last number of quarters?

Jennifer Straumins

Yeah, you are right about that. North Dakota, local market for diesel is very strong and assuming the Bakken prices over there, we will have low feedstock cost and high product prices at the refinery in North Dakota. I think our contracts with the government are ongoing and they are all based up of published jet prices. So what you may be seen is some of our hedging loss flowing through revenue.

Operator

The next question comes from the line of [Jarren Holder] from Barclays.

Unidentified Analyst

Thank you for the 2013 maintenance CapEx guidance. Excluding the turnaround and second quarter and given your recent acquisitions, what is an appropriate maintenance CapEx sort of run rate going forward?

Jennifer Straumins

After we get out of this year, and its I'd say about $40 million a year after we get past the big spend this year. And that would not include any turnaround activity, that would just be the maintenance for me (inaudible) CapEx.

Unidentified Analyst

And the superior refining, that's probably going to be down for like 30 days or so.

Jennifer Straumins

That's about right.

Unidentified Analyst

Also on the SG&A, given all the pick up related to acquisition activity and professional fees and what not, what's the good run rate for that.

Jennifer Straumins

I’d annualize where we are at in the fourth quarter.

Operator

Your next question comes from the line of [Peter Madsen from Jakara]. Please proceed.

Unidentified Analyst

Can I just get a little more, if possible, granularity on the specialty segment in terms of, if I look at it the volumes dipped. I'm looking at it more kind of sequentially versus Q3 and Q2. So volumes are down maybe 2000 to 3000 barrels per day versus Q4 versus Q3, Q2. Margin went down, $4 or $5 and the paraffinic business looks like it’s about 10% of your specialty production. So can you just kind of maybe kind of square that circle a little bit for me in terms of five to six barrel drop in margin, maybe 10% drop in production and 10% of that production being what you cited was somewhat problematic in the quarter.

Jennifer Straumins

Some of our business is seasonal, you got a lot of asphalt in there. As I mentioned we are building winter field asphalt barrels for the paving season. So our sales of asphalt was down and crude prices were up, and we saw some weakness in our specialty products pricing due to an over supply to the market.

Unidentified Analyst

And you’d indicated just to be clear, so you’d indicated that pricing seems to be firming in the first quarter. So I mean at this point is pricing kind of firmer than the fourth quarter or I might have misheard and said maybe it sounded like it dropped a little bit and now its recovering.

Jennifer Straumins

It dropped in January and it is now recovering, but people need to remember and we've been saying this for about a year and a half now, we've been enjoying very, very strong specialty products margins. We had some competitors with some operating issues. We had some plant closures back in 2008, ’09 and ’10 that probably in the recession you didn't really, that really didn't impact the market and then as the economy improved in 2011, 2012 our products have been have been very tight in the market, our margins have been very strong and what you see now is people have done some expansion and are doing some expansions and so margins are returning more towards historical levels.

Unidentified Analyst

So you think that this kind of, we should kind of look at these quarters where the specialty products margins were mid-20s as above kind of historical norms and maybe some of the stuff we're seeing now is back to more normal run rate or more normal --.

Jennifer Straumins

That’s exactly right.

Operator

The next question comes from the line of TJ Schultz from RBC Capital. Please proceed.

TJ Schultz - RBC Capital

I guess when we look at some of the gross projects that you have in front of you, some changes with the diesel refinery JV announced and then delay in the GTL project. Just trying to get an idea for kind of level of growth capital expenditures as we look over the next year or two?

Jennifer Straumins

I think if you look in total over the next 24 months, that numbers is going to be around, between $350 million and $400 million.

TJ Schultz - RBC Capital

And how much of that this year?

Jennifer Straumins

I’d say a little bit less than half; between 40% and 50% would be this year.

TJ Schultz - RBC Capital

Just kind of back to the crude loading dock, maybe, if you can just talk about how long you expect it to kind of continue gauging customer interest and maybe what your desire would be to kind of partner on that project, and then if you have any kind of framework for the potential scope of the loading capabilities there?

Jennifer Straumins

We are not really prepared to talk about the scope of the loading capabilities at this point. Interest has been strong and we're gauging interest at the same time as we are waiting for permits. So I think the permitting process is going to be the driving force behind the timing of the project. If we had a permit today we will be moving forward with the project.

TJ Schultz - RBC Capital

Okay and on that are you looking for kind of fee based, kind of loading fees or are you looking at ways to kind of eventually capture some of the spread there or the benefits of the spread.

Jennifer Straumins

We are looking to really capture the spread.

TJ Schultz - RBC Capital

Okay on the diesel refinery JV, correct if I am wrong, but I thought there were some thought initially to may be do this at the GP level first may be just discuss the thought process to do this particular project at the MLP level just given the kind of the lead time.

Jennifer Straumins

Where the expenditure came in it was not so large that it would impede our ability to operate the MLP or to grow distributions, and the timing of the expenditure and the financing that we were able to get from North Dakota to do the project it just all made, and given that we are using a lot of MLP resources to work on the project it felt like it would be better suited to be at the LP level.

TJ Schultz - RBC Capital

Finally can you just discuss a little bit more specifically the economics on that JV, how the cash flow kind of comes out of the JV to you versus what you are putting in?

Jennifer Straumins

We are really not prepared to discuss that at this point in time.

Pat Murray

We have indicated that the estimate of the investment is 300 million and Calumet’s portion is 75 and there is 150 from MDU and then the rating balances from an expected term loan facility we anticipate will close here in the first quarter and Calumet will be servicing the interest cost and principal of that service cost of that project, but its extremely attractive terms of the term loans and certainly it works for us from a cost of capital standpoint.

Operator

Your next question comes from the line of Edward Rowe from Raymond James. Please proceed.

Edward Rowe - Raymond James

Given the wide differentials with Canadian heavy, has the composition of crude from Bakken light and heavy Canadian to your facilities changed or is that pretty much still the same ratio of 50-50?

Jennifer Straumins

It’s still the same ratio.

Operator

That concludes the Q&A portion. I would now like to turn the conference over to Pat Murray for any closing remarks.

Pat Murray

Thank you, operator. This does conclude our earnings conference call covering our fourth quarter 2012 results. Thanks everyone for their participation in the teleconference. Please note that this teleconference will be available for replay using instructions contained in our press release.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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