Calumet Specialty Products' Management Discusses Q1 2013 Results - Earnings Call Transcript

May. 8.13 | About: Calumet Specialty (CLMT)

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

Q1 2013 Earnings Call

May 8, 2013, 2013 1:00 pm ET

Executives

Noel Ryan - Director, Investor Relations

Jennifer Straumins - President & COO

Pat Murray - CFO

Analysts

Brian Zarahn - Barclays

TJ Schultz - RBC Capital Markets

Cory Garcia - Raymond James

Jason Smith - Bank of America Merrill Lynch

Michael Peterson - MLV & Co.

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2013 Calumet Specialty Products Partners, L.P Earnings Conference Call. My name is Shanteley and I will be your facilitator for today’s call. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (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. Noel Ryan. Please proceed sir.

Noel Ryan

Thank you, Shanteley. Good afternoon everyone and welcome to the Calumet Specialty Products Partners first quarter 2013 results conference call. We appreciate you joining us. Leading today’s call is Jennifer Straumins, our President and COO will provide an update on our business and the opportunities for growth, as we look ahead to the remainder of the year and beyond. Next Pat Murray, our Chief Financial Officer will provide detail on our financial performance during the first quarter. At the conclusion of our prepared remarks, we will open the call for questions.

Before we proceed allow me to remind everyone that during the call, we may provide various forward-looking statements within 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 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 management can provide any assurances that the 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.

With that, I would like to hand the call over to Jennifer.

Jennifer Straumins

Thank you, Noel. Our net income for the first quarter was $46 million, a decline from $51.9 million in the year ago period. Our first quarter results include $24.5 million of noncash unrealized derivative gains versus $26 million of noncash unrealized derivative gains in the first quarter of last year.

Adjusted EBITDA as defined by our credit instruments was $80 million for the first quarter of 2013 compared to $69.7 million in the first quarter of 2012. On April 22nd, we increased our quarterly cash distribution for the 11th consecutive quarter to $0.68 per unit or $2.72 per unit on an annualized basis for the quarter ended March 31, 2013 on all our outstanding limited partner units.

As we indicated in our press release issued this morning, our first quarter performance was negatively impacted by operational reliability issues at our Shreveport refinery going into our turnaround that we completed during February. The impact of these issues really accounts for the majority of the shortfall versus what the Street anticipated our earnings being. These issues have been resolved and that facility is currently running on plan during the second quarter. And although, we typically do not provide refinery level guidance, we do want to note that Shreveport is operating at more than 40,000 barrels per day, which is slightly above the historical level for this time of the year.

On the refining side of the business, we continue to benefit from a number of positive macro tailwinds as we transition into the second quarter. The Gulf Coast 3/2/1 crack spread has proven resilient and just over $27 of barrel on a second quarter to-date basis. While the structural dislocations and the price of WTI versus competing crude oils continues to benefit our strategically located refineries with access to cost advantage crude oils.

For example, the WTI is trading at roughly $10 a barrel discount to Brent through early April certain crude oils in our feedstock slate such as WCS are trading at approximately $20 below WTI and representing a major cost advantage to us.

And while crude vendor markup and transportation costs can eat into this differential we still realize a significant benefit on many of the crudes that we process. Importantly our crude slate remains highly versatile given the diverse locations and [the desired] [ph] products life the refining assets. Today, we have access to Gulf Coast, Canadian, Bakken and many different local crude oils. Among them some of the other volumes are currently being transported between our refineries as is the case of our Shreveport refinery, which currently receives some Bakken crude from our Superior refinery thanks to the crude by rail project that we completed at the end of 2012.

We do want to point out we talked a lot about this project and while we anticipate ongoing to have about 10,000 barrels a day going into Shreveport from Superior that number was substantially less in the first quarter due to crude received and turnaround timing. So, again Shreveport was impacted by not realizing the fully loaded impact of that project. We have also started selling Bakken crude out of the Superior refinery to third parties in the railcars that we leased and we do currently have around 2600 railcars leased in operation to help facilitate our crude oil movement.

Late into the first quarter moving to talk about Specialty Products and pricing and demand late in the first quarter, we observed a pickup in demand and pricing for our lubricating oils. If you remember at the end of the year, we did talk about lacking demand and we would actually delayed some sales of products waiting for pricing to increase that turned out to be the right thing to do. We went into our turnaround at Shreveport with full tanks and are now have backlogs of orders and pricing has gone up from where it was at the end of the year. So, we feel very optimistic about our Specialty Products pricing as we are into the second quarter and looking throughout the year.

Also, on the asphalt side of the business, this was really the first year that we will have some seasonality in our asphalt results because we [do want to fill] [ph] this year and what that means is you produce asphalt and put it in tanks storing it for the summer paving season. Last year with Superior, we really chose to sell asphalt throughout the year for working capital purposes given that it was first year that we owned the refinery and wanted to learn that market.

So, this will be our first quarter that you will see seasonality in our asphalt. But we are getting ready to move into the summer paving reason. It’s been a little bit slow starting that due to the cold spring and the weather issues throughout the United States, we expect demand and pricing for asphalt and those related products to increase as we finish off the second quarter and move into the third quarter.

As we have previously announced, we began a plant wide turnaround at our Shreveport Refinery beginning in late April that is scheduled to last through mid-May. That turnaround is on schedule and on budget at this point in time. Again, we have been impacted somewhat by some severe weather in the Superior area but we are optimistic that we will come out of this turnaround operating very well.

Ahead of the turnaround, we did build fuel inventories at Superior to help our customers - to help make sure that our customers had stable supply throughout the turnaround. And so that business decision did impact our first quarter adjusted EBITDA out of Superior but it will help and support Superior’s performance during the outage.

For the full year 2013, our capital spending budget for replacement, environmental and turnaround cost is approximately $130 million consistent with our prior forecast. During the next 24 months, we do intend to spend additional capital on a series of organic growth projects the full scope of which we’ll discuss in more detail at our upcoming Analyst Investor Day on June 10th. And these projects are all very high return - growth projects are all very high return projects; some of the ones that we are looking at doing we’ll talk about now.

One of the projects that we talked about some is the construction of a crude oil loading dock off the Coast of Lake Superior. We have applied for permit there and are currently awaiting approval and feedback from the regulatory agencies. And this project will allow us to take barrels off of the Enbridge Pipeline System and ship them to markets in the Great Lakes region, Eastern Canada and on the East Coast of United States and possibly even down into the Gulf Coast via the Mississippi River.

And we also continue to evaluate a major capacity expansion at our Montana refinery. The primary focal point of this effort involves a hydrotreated expansion and a new crude unit that will allow us to increase capacity from 10,000 barrels a day to an excess of 20,000 barrels a day at that facility. We believe that we do have the markets available to continue to market locally all the fuel and asphalt products produced with this expansion.

At our San Antonio refinery, we are very focused on upgrading the product slate to sell into higher margin products including finished gasoline. We knew when we acquired this asset that it was somewhat of a work in process it does - the gasoline blending project that we talked with you guys about, it’s slated to be done later this summer and that will increase the economics of that facility. The first step of that is about 3000 barrels a day of finished gasoline and today it would be about a $20 a barrel upgrade to what we’re selling at. So, very important that we get this project done as timely as possible.

We’re also looking at different products that we can produce out of this facility and again we’ll be talking more about this project as we move to the engineering and economic development phases of the project.

And then finally with regard to our Greenfield North Dakota Diesel Refinery joint venture with MDU Resources, construction is moving forward according to schedule. All construction permits have been received which is a significant achievement in itself. Currently we’re working on the construction of tank foundations, the control room and security building. Ventech, our contractor during the project has more than 100 engineers working on this project at the moment and we anticipate this project will be done early in the fourth quarter 2014. At our upcoming Analyst Day, we’ve intended to provide more information on the cost, the estimated completion time and expected EBITA contributions from these projects.

Before I hand the call over to Pat, we want to address how the renewable fuel standards may affect our company from a cost perspective over the near term. As you recall refineries are required to sell mandated volume of renewable fuels based on their production. If renewable sales do not meet volume requirements, refiners must purchase rents to cover the shortfall. As a result, we currently expect Calumet will purchase between $8 million and $10 million worth of rents on a quarterly basis to cover our projected shortfall. We’ve recorded in an estimated liability of a $11 million for the rents we will need to purchase in relation to our first quarter 2013 activity.

And finally for those of you that might have missed it please note that in early April, we provided an assessment of the EPA’s proposed regulation that gasoline contain no more than 10 parts per million of sulfur on an annual average basis starting January 1, 2017. Calumet's current facilities which produce gasoline do so in accordance with the current regulatory standards and the Partnership intends to fully comply with any updated standards.

In the final analysis our assessment has concluded that the proposed updated standards are not expected to have a material financial impact on our company. Further, our preliminary assessments indicate that capital spending requirements, if any, will be immaterial to comply with the proposed updated standards.

Looking ahead, we are pleased with the momentum evident in our business during the second quarter refining economics remain strong, demand and pricing for our products are strong and above levels that we’ve experienced earlier in the year and we continue to evaluate a high number of capital projects to contribute to profitable growth during the next two to three years. We’re also seeing significant strength in our Royal Purple brand and our packaged products coming out of our packaging facility in the Shreveport area.

Given the strength of cash flows generated from our operations as well as our access to liquidity through our revolving credit facility and other financing sources we continue to evaluate potential acquisitions in both the fuels and specialty products market that complement our existing portfolio of assets. While there are tuck-on acquisition opportunities in both the public and private markets that could make sense for us, we are committed to growing the business in a way that maintains balance sheet discipline while providing for continued steady growth and quarterly cash distributions to our unitholders.

With that we’ll turn the call over to Pat.

Pat Murray

Thanks, Jennifer. We believe the non-GAAP measures of adjusted EBITDA and distributable cash flow are important financial performance measures for the partnership. Adjusted EBITDA is defined by our debt instruments worth $80 million for the first quarter of 2013 as compared to $69.7 million for the same quarter last year. The partnership’s distributable cash flow for the first quarter was $26.4 million as compared to $39.2 million for the same period in 2012. The increase in adjusted EBITDA quarter-over-quarter was due primarily to a $50.2 million increase in gross profit partially offset by $22.8 million of increased selling, general and administrative expenses, $6.2 million of which was non-cash amortization expense and an $18 million decrease in realized derivative gains.

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 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 2013 for specialty products and fuel products was $63.2 million and $71.2 million respectively compared to gross profit of $66.5 million and $17.7 million respectively for the same period in 2012. The decrease in specialty products segment gross profit of $3.3 million or 5% quarter-over-quarter was due primarily to a decrease in the average sales price per barrel of lubricating oils and lower sales volumes for lubricating oils, solvents and waxes. These reductions to gross profit were partially offset by additional gross profit generated from our Montana and Royal Purple acquisitions. The increase in fuel product segment gross profit of $53.5 million quarter-over-quarter was due primarily to incremental gross profit generated from the Montana and San Antonio acquisitions access to cost advantage crude oil and regional strength for in fuel products crack spreads. These increases in gross profit were partially offset by lower sales volumes in our legacy operations during the period.

Legacy Calumet operations provided $34.8 million of gross profit, while newly acquired operations provided gross profit of $18.7 million in the first quarter. Our total loss on settled derivative instruments reflected in gross profit was $11.9 million in the first quarter of 2013.

Selling expenses increased to $11.4 million quarter-over-quarter to $15.9 million. This increase was due primarily to increased amortization expense such as non-cash, primarily related to the recording of intangible assets associated with the Royal Purple acquisition. So additional employee compensation cost driven partially by the Royal Purple acquisitions, and increased advertising expense.

General and administrative expenses increased to $11.4 million quarter-over-quarter to $25.1 million. This increase was due primarily to increased incentive compensation cost, higher professional fees and additional employee compensation costs driven primarily by Royal Purple Montana and San Antonio acquisitions.

Interest expense increased $6.2 million quarter-over-quarter to $24.8 million, due primarily to additional outstanding long-term debt in the form of 2020 senior unsecured notes issued to partially fund the Royal Purple acquisition.

As of March 31, 2013 total capitalization consisted of Partners’ capital in the amount of $1.1 billion, an outstanding debt of $893 million comprised primarily of $858.5 million of senior unsecured notes due 2019 and 2020, which is net of discount of $16.5 million and $29.2 million of borrowings under our revolving credit facility.

The $171.1 million increase in Partners’ capital from December 31, 2012, was due primarily to $179.2 million of net proceeds from our January 2013 public equity offering, common units and net income of $46 million partially offset by $44.5 million in distributions to our unit holders and $5.1 million in other comprehensive loss.

On March 31, 2013; we had availability of $482.9 million under our $850 million revolving credit facility, based on a $695.2 million borrowing base a $183.1 million in outstanding standby letters of credit and $29.2 million of borrowings.

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 anticipated capital expenditures.

And with that I'll turn the call back over to the operator so that we can begin the Q&A session. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Brian Zarahn of Barclays. Please proceed.

Brian Zarahn - Barclays

Hi, everybody it’s Brian. Given the impact of Shreveport in the first quarter and then I guess RINs for the remainder of the year, any thoughts on distribution coverage in 2013?

Jennifer Straumins

Our distribution target coverage ratio has not changed the 1.2 to 1.5 times and even given some of the weakness in this quarter we are 1.6 times on a trailing 12 month basis, so we will - our policy is to have our Board of Directors look at our forecast and look at our actual results every quarter and make those decisions but at this point in time our strategy has not changed.

Brian Zarahn - Barclays

And then on the - switching to the North Dakota refinery seems like it’s making good progress. Any updates to your cost estimates or in any potential earlier in the service date in fourth quarter 2014?

Jennifer Straumins

No, we just broke ground at the end of March and about 80% of the project is a fixed bid project - fixed bids, I would anticipate if they were cost overruns, so it will come at very end of the project.

Brian Zarahn - Barclays

And then is still - the timing is still reflected…?

Jennifer Straumins

Timing’s still early fourth quarter of 2013 – 2014, I'm sorry.

Brian Zarahn - Barclays

Okay. And then on Royal Purple making obviously good contributions, can you talk a little bit about the growth opportunities you see at Royal Purple.

Jennifer Straumins

We see a tremendous amount of growth opportunities at Royal Purple. We are - we’ve got about 15 open sales positions there right now, we’re really trying to expand our geographic diversity we’re trying to expand internationally. We are working with Walmart to put our products in all the Walmarts in the United States later this year, early next year and good cross-selling opportunities between Royal Purple and products coming out of Calumet packaging down the Shreveport are phenomenal and we’re just barely beginning to touch on some of those.

Operator

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

TJ Schultz - RBC Capital Markets

I guess just on the crude by rail out of Superior beyond what you want to get to Shreveport, where are you heading to third parties and what type of volumes. And then going forward is it going to make more sense for you to take crude down to Shreveport or to other destinations?

Jennifer Straumins

I think long term it may make more sense to go to other destinations, and we’re heading east with those barrels and we really - we’re not going to disclose who our customers are but going east the turn time on the railcar is several days shorter than it is going to Shreveport and we’re treating the Shreveport refinery like a third-party customer at this point in time and based on the output of our LP model and our other incremental crude opportunities for Shreveport that’s how we make the decision as to whether we sell the barrels to third parties or use them internally. We do have some contracts with third parties for barrels and then sell some on a spot basis to third parties as well.

TJ Schultz - RBC Capital Markets

Can you talk about any traction you’re getting with potential more midstream focused projects whether it be the potential for crude sourcing in the Bakken or utilizing some of the excess storage capacity at Elmendorf?

Jennifer Straumins

We’re working on both of those things there - we’ll have a lot more to say about that I hope if everything goes according to our plan and in June our Analyst Day we’re coming very close to having some defined projects in that space so if you can just bear with me a little while longer.

TJ Schultz - RBC Capital Markets

Not, a problem. On the RIN estimate I think you said $8 million to $10 million per quarter, what price does that assume for the RINs and what are you’re seeing out there right now on RIN pricing?

Jennifer Straumins

That assumes around $1 per RIN and they’ve been trading anywhere from $0.80 to $1.20.

Operator

Your next question comes from the line of Cory Garcia of Raymond James. Please proceed.

Cory Garcia - Raymond James

I appreciate all the color you guys have given on the subject and I was little bit touchy right now but the - did in fact and I apologize if I missed it, did you guys actually recognize a cost for the RINs credits during this past quarter?

Jennifer Straumins

11.

Cory Garcia - Raymond James

Okay, so $11 million. And is there I guess taking a step back are you looking at any blending or marketing initiatives maybe going further downstream that would maybe mitigate some of this RIN exposure?

Jennifer Straumins

We are looking at that, we do have a bio diesel facility in our Dickinson plant so that will help offset some of the RIN requirements that we’ll have. We’re like everybody else - this took us by surprise and we’re trying to get our plan together.

Cory Garcia - Raymond James

Yeah, absolutely.

Jennifer Straumins

We’re - what we’re disclosing is worse case scenarios.

Operator

Your next question comes from the line of Jason Smith, Bank of America Merrill Lynch. Please proceed.

Jason Smith - Bank of America Merrill Lynch

Jennifer, I just want to touch on San Antonio again I mean how is that integration process going and I know I think Pat you gave some numbers around the earnings from the new assets in the quarter I mean how is San Antonio specifically performing and are you guys finding other incremental synergies there since you’ve had a few months to work on that plant?

Jennifer Straumins

San Antonio is more or less breakeven at this point in time; their real contribution is going to come when their finished gasoline project gets done. And then they’ve got a small expansion project and we plan on making about 3000 barrels a day of solvents out of that facility to help augment the solvents produced at three of our other locations. So that’s really where the big upside is going to come from.

The synergies you - there are some feedstock synergies there are more of a marketing synergy story with San Antonio but we have to be making finished gasoline before we can start to realize that.

Jason Smith - Bank of America Merrill Lynch

Are you still running LLS price to crude there right now?

Jennifer Straumins

We’re running Eagle Ford there and Eagle Ford priced.

Jason Smith - Bank of America Merrill Lynch

Got you. And a quick one for Pat I think the SG&A rate was obviously up this quarter. Last quarter you had guided to an annual run rate of kind of the fourth quarter number annualized is that still a good number, is that inching higher now?

Pat Murray

I think there is obviously a little bit of cost in the first quarter related to consulting expense and some professional fees related to acquisition activity. But I still think if you combine the two this quarter I think, we’re in the 35 range. I think that those are still pretty good numbers. We see a little bit of onetime here. But I think it’s important to keep in mind that we’ve added a lot of people we’ve added three, really three new refineries so this cost in absolute terms are going to be certainly a much larger and Royal Purple is a brand organization. We’ve a lot of additional selling expenses there and increased advertising. So, I still think that these types of numbers that you have seen over the last couple of quarters are still good guidepost.

Operator

Your next question comes from the line of Michael Peterson of MLV & Co. Please proceed.

Michael Peterson - MLV & Co.

Good afternoon everyone. Couple of questions and follow-up to things that have been already been discussed. First one regards cost of sales, can you provide anymore insight into whether those cost hit whether they would buy segment or kind of what drove, what seem to be the driver on the negative variance this quarter?

Jennifer Straumins

I think the cost of sales variance is really just outright. Crude costs and added site on a delivered crude basis on the site by site basis all performed within historical variances.

Michael Peterson - MLV & Co.

Okay, okay so nothing, nothing abnormal within those cost.

Jennifer Straumins

Yes.

Michael Peterson - MLV & Co.

Okay, okay. Jennifer, can you give us a little more insight into some of the reliabilities at Shreveport whether they were equipment process related feedstock or logistics?

Jennifer Straumins

It was processing equipment that was - that come down for maintenance and anytime you push a turnaround maybe little longer than you should you can have some issues and those issues of all now being repaired and Shreveport is running very, very well. We’ve got a great team of people down there, who are contributing everyday to make sure our plant does assess.

Michael Peterson - MLV & Co.

Does this event in anyway change your expectation on a go forward basis in terms of maintenance cost? Or is this something that should have been done maybe last quarter perhaps or does it meaningfully change your forward out look on further maintenance?

Jennifer Straumins

It does not and really what drove it because we’ve had a couple of power outages late in the fourth quarter that impacted some equipment (inaudible) to turnaround. So, it wasn’t the turnaround was a quarter behind it. It was, we just had to instead of maybe on another situation if you are nine month away from a turnaround you would have come down for a little while to fix that equipment but that we just went along knowing that we were going to be coming down for turnaround.

Operator

At this time, there are no further questions in the queue and I would like to turn the call back over for closing. Pleas proceed.

Jennifer Straumins

Thank you. Thank you operator and thank you all for joining us on today’s conference call. If you haven’t already done so we do encourage you (inaudible) for upcoming Investor Analyst Day. We, Calumet had a great year and half and we’ve got a lot of really positive forward momentum so still to come so we’re excited to see everybody and tell you what I’ll give you a little more detail on what we are working on. And if you have any additional questions in the meantime please contact me or Director of Investor Relations Noel Ryan and he can be reached at 3173285660. Have a great day everybody.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a wonderful day.

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