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Executives

Jennifer G. Straumins - Senior Vice President

F. William Grube - President and Chief Executive Officer

R. Patrick Murray - Chief Financial Officer

Analysts

Darren Horowitz - Raymond James

Adrayll Askew - Hartford Investment Management

Calumet Specialty Products Partners, LP. (CLMT) Q1 2009 Earnings Call May 6, 2009 1:00 PM ET

Operator

Good afternoon ladies and gentlemen welcome to the first quarter 2009 Calumet Specialty Products’ earnings conference call. My name is Camie, and I’ll be your coordinator for today. (Operator Instructions). I would now like to turn the presentation over to your host for today’s call, Ms. Jennifer Straumins, Senior Vice President.

Jennifer G. Straumins

Good afternoon, and welcome to the Calumet Specialty Products Partners investors call to discuss our first quarter 2009 financial results. During this call, Calumet Specialty Products Partners will be referred to as the partnership or Calumet. Also participating in this call will be Bill Grube, our President and CEO; and Pat Murray, our CFO. 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 assumptions made by them, and in each case, based on 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 our 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.

Despite reporting our highest quarterly net income in our history, we’ve been facing many challenges due to the current worldwide economic environment. As we’ve always explained to our investors, we experienced pricing lags on our specialty products, both as feedstock costs rise and fall. During the first half of 2008, we experienced a rapid increase in feedstock costs and experienced lower earnings as our specialty products prices lagged. During the last part of 2008 and into the first part of 2009, crude oil prices fell rapidly, which allowed us to experience higher margins on our specialty products as the pricing for these products did not fall as quickly as our feedstock costs drops.

During this environment, we’ve continued to proactively manage our business. As the worldwide economy has weakened, we’ve seen demand for some of our specialty products weaken. Many of our products are feedstock for products that are usually automotive and construction industry and we have seen reduced demands for these products over the last several months. We are attempting to offset the impacts of this weaker demand by broadening our marketing efforts and focusing on Specialty Product development.

All of our plans ran well during the first quarter, we managed our production levels to meet demand, to manage working capital, and to control operating cost. We are continuing to increase throughput rates at our Shreveport refinery to more fully utilize its expanded capacity as market conditions dictate. We’ve also continuing our fuel products and our crude oil hedging program to help protect us against rapid changes in pricing levels, both for fuel products and crude oil. We believe all of these efforts will help us to enhance our liquidity.

Compliance with the financial covenants pursuant to our credit agreements is measured quarterly based upon performance over the most recent four fiscal quarters, and as of March 31, 2009, we continued to be in compliance with all financial covenants under our credit agreements and achieved improvement in our financial covenant performance metrics compared to the fourth quarter of 2008. While assurances cannot be made regarding our future compliance with these covenants and being cognizant of our general uncertain economic environment, we believe that we will continue to maintain compliance with such financial covenants and continue to improve our liquidity.

As announced on April 16, 2009, the partnership declared a quarterly distribution of $0.45 per unit for the quarter ended March 31, 2009, on all outstanding units. The distribution will be paid on May 15th to unit holders of record at the close of business on May 5, 2009.

I would now like to turn the call over to Pat Murray for a review of our financial results.

R. Patrick Murray

Net income for the three months ended March 31, 2009, was $75.6 million compared to a net loss of $3.4 million for the same period in 2008. Partnerships’ performance for the quarter ended March 31, 2009, increased by $79 million due primarily to an increase of $44.1 million in gross profit and increased derivative gains of $30.6 million. The increase in gross profit was primarily due to the significant decline in crude oil prices leading up to and sustained during the first quarter of 2009 as compared to the rapidly rising crude oil price environment in the first quarter of 2008.

The increased derivative gains of $30.6 million are comprised of changes in both non-cash gains of $36.2 million and cash losses of $5.6 million. The increase in non-cash derivative gains is primarily related to our fuel products segment and such gains either may not be realized or may be realized in different amounts upon settlement. These non-cash derivative gains are not included in our adjusted EBITDA of $50.1 million for the first quarter.

We believe the non-GAAP measures at EBITDA, adjusted EBITDA, and distributable cash flow are important financial performance measures for the partnership. EBITDA and adjusted EBITDA as defined by the partnerships’ credit agreements were $99.7 million and $50.1 million respectively for the quarter ended March 31, 2009, as compared to $12.2 million and $14.9 million respectively for the same period in 2008. Partnerships’ distributable cash flow for the quarter ended March 31, 2009, was $38.9 million as compared to $13.2 million for the same period in 2008.

Adjusted EBITDA for the first quarter compared to the same period in 2008 was positively impacted by increased gross profit as previously discussed. We encourage investors to review the section of the earnings press release found on our website entitled ‘Non-GAAP Financial Measures’ and the attached tables for discussion and definitions of 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 first quarter of 2009 for specialty products and fuel products was $59.9 million and $19.1 million respectively compared to $22.3 million and $12.5 million respectively for the first quarter of 2008. As discussed, the increase in specialty products segment gross profit quarter over quarter was primarily due to the significant decline in crude oil prices, our primary raw material, during the first quarter of 2009. Partially offsetting the impact of lower crude oil prices were lower sales volumes in lubricating oils, solvents, and waxes due to economic conditions impacting customer demand. The increase in our fuel products segment gross profit was due primarily to increased sales volume resulting from higher throughput rates at our Shreveport refinery and increased gains on derivatives offset by lower overall crack spreads in the first quarter of 2009 compared to the first quarter of 2008.

Selling, general, and administrative expenses increased $1.1 million or 13% to $9.3 million for the quarter ended March 31, 2009, from $8.3 million for the quarter ended March 31, 2008. This increase is primarily due to additional accrued incentive compensation costs in the first quarter as compared to the same quarter in 2008. Transportation expenses decreased $8.7 million or 36.5% to $15.2 million in the first quarter of 2009 from $23.9 million in the first quarter of 2008. This decrease is primarily related to reduction in transportation expenses due to lower lubricating oils, solvents, and waxes sales volumes.

Interest expense increased $3.5 million or 67.3% to $8.6 million in the first quarter from $5.2 million in the first quarter of 2008. This increase was primarily due to a decrease in capitalized interest as a result of the completion of the Shreveport refinery expansion project combined with increased borrowings on our revolving credit facility. These increases were partially offset by lower interest rates on our revolving and term loan credit facilities.

As of March 31, 2009 total capitalization consist of partners’ capital in the amount of $512.7 million and outstanding debt of $454.8 million comprised of borrowings of $374.1 million under the term loan facility with an unamortized discount of $14.6 million on the same facility, borrowings of $93.0 million under the revolving credit facility, and a long term capital lease obligation of $2.3 million. The $39.5 million increase in partners’ capital from December 31, 2008, is primarily due to net income of $75.6 million partially offset by a decrease in other comprehensive income of $21.2 million as a result of a decrease in the fair market value of our derivative instruments as well as distributions to our partners of $14.8 million.

On March 31, 2009, we had availability on our revolving credit facility of $69.2 million based on a $182.3 million borrowing base, $20.1 million in outstanding standby letters of credit, and outstanding borrowings of $93.0 million on the revolver. We believe that we have sufficient cash flow from operations and borrowing capacity

***

___ to meet our financial commitments, our debt service obligations, contingencies, and anticipated capital expenditures. However we are subject to business and operational risks that could materially adversely affect our cash flows.

Material decrease in our cash flow from operations or a significant sustain decline in crude oil prices would likely produce a correlated material adverse effect on our borrowing capacity under our revolver and potentially our ability to comply with the covenants under our credit facilities. Substantial declines in crude oil prices if sustained may materially diminish our borrowing base, which is in part based on the value of our crude oil inventory, which could result in a material reduction in our borrowing capacity under our revolver.

Now, I will turn the call over to Bill.

F. William Grube

Thank you, Pat and Jennifer. This concludes our remarks. We will now be happy to answer any questions you may have. Operator, could you please confirm if there are any questions?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Darren Horowitz - Raymond James.

Darren Horowitz - Raymond James

Jennifer, on the specialty products side, are you seeing any stabilization in end-user demand at this point or any sort of improvement sequentially.

Jennifer G. Straumins

We have started to see improvement during the first part of the second quarter, we feel like things have bottomed out and we are starting to see increases in demand.

Darren Horowitz - Raymond James

So, taking that a step further, when you look at, as you discuss broadening your marketing efforts, to focus more on specialty product development; is there a target mix of volumes that you’re looking to achieve on a go-forward basis?

Jennifer G. Straumins

Really what we mean by that statement is that our plans are operating basically at capacity. So, we are taking the product that we have available to us and that certain customers demand lag, we are going out and we’re finding new customers or creating new blends of products to market to new applications. The nice thing about our specialty products is that they don’t all just need to go into one end-use application; they can be blended and tweaked and sold to many different applications.

Darren Horowitz - Raymond James

From a hedging perspective; when you take all the derivative instruments at the back of the release into an account, can you give us the approximate percent of 2009 crude that’s hedged?

Jennifer G. Straumins

We’re hedging three months in advance on our specialty products side for the crude oil and we’re hedging at about 60% of our plant production; we’re not going to see all of those in the form of derivative instruments. We chose to build in inventory in the first quarter at very low crude levels. So we feel that that gives us a natural hedge.

Darren Horowitz - Raymond James

On the fuel side?

Jennifer G. Straumins

On the fuel side, we’re about 70% hedged on our fuels product production, and we have had those hedges in place for several years now. We’re continuing to hedge into 2011 at this point in time.

Darren Horowitz - Raymond James

So then, taking all that together; you guys are doing a good job, I think in terms of mitigating a lot of volatility and certainly if this quarter as an example you had greater excess cash flow coverage beyond what you distributed; so what would it take in order to increase the distribution?

Jennifer G. Straumins

As we said several times over the past several quarters, we are as interested in anybody in increasing distributions, but having raised them and then have to lower them; we don’t like to have to ever do that again. So at this point in time, we are more interested in reducing our debt balance and giving ourselves from operational flexibility, and we’ll see how the year goes. We certainly hope to raise distributions if we continue to have favorable operating results.

Darren Horowitz - Raymond James

Is there a target amount of debt that you want to reduce; is it a charge on the term loan or you want to reduce revolver bond?

Jennifer G. Straumins

We want to reduce revolver debt.

Darren Horowitz - Raymond James

So, is it safe to say that after you have moved that $93 million, then hopefully we can look forward to some distribution increases potentially?

Jennifer G. Straumins

I think if we are able to $90 million in debt, we would certainly raise distribution.

Operator

The next question comes from the line of Adrayll Askew - Hartford Investment Management.

Adrayll Askew - Hartford Investment Management

Can you talk about your outlook for CapEx in 2009?

Jennifer G. Straumins

We plan on spending very little CapEx in 2009. We spent a large amount in 2008 on both the Penreco acquisition and the Shreveport expansion. So, at this point in time basically all of our CapEx is required environmental and maintenance CapEx, and we are planning on spending approximately $20 million this year.

Adrayll Askew - Hartford Investment Management

What about your outlook for working capital reduction?

Jennifer G. Straumins

We are really building working capital; we built working capital in the first quarter, we built inventory; we feel like those are at levels that we like right now. So we don’t really anticipate a lot of changes in our working capital.

Adrayll Askew - Hartford Investment Management

So, your demand is down, but you guys build inventories?

Jennifer G. Straumins

We continue to operate our facilities at full rates bill during the first quarter in spite of lower demand in order to build up some inventory that we have lowered at the end of the year, and we feel like we are in balance right now and we see our demand level starting to come back. So we don’t anticipate any changes at this point in time.

Adrayll Askew - Hartford Investment Management

So, you are holding inventory with anticipation of a pick up in demand, but you are just seeing that pick up in demand happen as you are exiting the first quarter.

Jennifer G. Straumins

Our inventories were too low at the end of the year basically. So we rebuild some inventory to adequate operating levels and basically what we’re doing now is we’re selling out production.

R. Patrick Murray

We’re also operating at higher run rates at our Shreveport refinery too which does naturally need a little bit higher inventory level.

Operator

We have no questions at this time. I would now like to turn the call back over to Ms. Jennifer Straumins for closing remarks.

Jennifer G. Straumins

Thank you. This concludes our Calumet Specialty Products Partners’ earnings call covering our first quarter operating results. Thank you for your participation today. Please note that this teleconference will be available for replay using the instructions contained in our press release. Thank you.

Operator

This concludes the presentation for today. Ladies and gentleman, you may now disconnect. Have a wonderful day.

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