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Calumet Specialty Products Partners LP. (NASDAQ:CLMT)

Q3 2009 Earnings Call

November 4, 2009; 1:00 pm ET

Executives

Jennifer G. Straumins - Senior Vice President

William Grube - President and Chief Executive Officer

Patrick Murray - Chief Financial Officer

Analysts

Darren Horowitz - Raymond James

Adrayll Askew - Hartford Investment Management

Cynthia Marino - Boise

Ray Suzabi - AIG

Operator

Good day ladies and gentlemen and welcome to the third quarter 2009 Calumet Specialty Products earnings conference call. My name is Erica and I will 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, please proceed.

Jennifer Straumins

Thank you, operator. Good afternoon and welcome to the Calumet Specialty Products Partners investors call to discuss our third 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 21(NYSE:E) 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 comments are reasonable, neither the Partnership, its general partner nor our management, can provide any assurance 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 & 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.

Increasing crude oil prices along with continued economic weakness weighed on our result in this quarter. While our production levels continue to be below capacity we’ve seen an increase in our production rate versus prior period. We plan to continue to work on controlling costs and completing smaller short term payback projects to improve our results.

We’ve also continued our fuel products current spread hedging and our crude oil hedging programs to help protect us against rapid increases in pricing levels for both fuel products and crude oil.

Compliance with the financial covenants pursuant to our credit agreement is measured quarterly based upon performance over the most recent four fiscal quarters, and as of September 30, 2009, we continue to be in compliance with all financial covenants under our credit agreements.

While assurances cannot be made regarding our future compliance with these covenants, and being cognizant of general uncertain economic environments, we believe that we will continue to maintain compliance with such financial covenants.

As announced on October 20, 2009, the Partnership declared a quarterly cash distribution of $0.45 per unit for the quarter ended September 30, 2009, on all outstanding units. The distribution we paid on December 13th to unit holders of record as of the close of business on November 3rd.

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

Patrick Murray

Thank you, Jennifer. Net income for the three months ended September 30, 2009, was $4.0 million compared to a net loss of $12.5 million for the same period in 2008.

Partnership’s performance for the quarter ended September 30, 2009, as compared to the same period in the prior year increased by $16.5 million, due primarily to decrease derivative losses of $43.1 million, $26.4 million of which represents decreased non-cash derivative losses.

Decreased selling, general and administrative expenses of $4.6 million and decreased interest expense of $2.4 million. Partially offsetting these increases in net income was lower gross profit of $35.8 million. Non-cash derivative losses are not included in our adjusted EBITDA of $42.5 million for the third quarter of 2009.

We believe the non-GAAP measures of EBITDA adjusted EBITDA and distributable cash flow are important financial performance measures for the Partnership. EBITDA and adjusted EBITDA, as defined by the Partnership’s credit agreements were $27.7 million and $42.5 million respectively for the three months ended September 30, 2009, as compared to $13.6 million and $51.6 million respectively for the same period in 2008.

The Partnership’s distributable cash flow for the third quarter of 2009 was $30.2 million as compared to $41.3 million for the same period of 2008. Adjusted EBITDA quarter-over-quarter was negatively impacted by decreased gross profit offset by lower realized losses on derivatives, lower interest expense and lower selling, general and administrative expenses 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 third quarter of 2009 for specialty products and fuel products was $33.5 million and $7.7 million respectively compared to $66.1 million and $10.9 million, respectively, for the third quarter of 2008.

Specialty products segment gross profit quarter-over-quarter was primarily impacted by lower overall specialty product selling prices in relation to crude oil prices from the 2008 quarter due to lower demand resulting from the economic downturn. In addition, gross profit was negatively impacted by lower sales volumes in lubricating oils, solvents and waxes due to economic conditions impacting product demand.

The decrease in fuel product segment gross profit quarter-over-quarter was also due primarily to decreased selling prices as compared to the average cost of crude oil as fuel products crack spreads declined significantly quarter-over-quarter. These losses were partially offset by increased gains on derivatives recorded in gross profit of $17.5 million and lower cost of sales of $10.3 million from the liquidation of lower cost inventory layers in 2009.

Selling, general and administrative expenses decreased $4.6 million, or 38% to $7.4 million in the three months ended September 30, 2009, from $12.0 million in the three months ended September 30, 2008. The decrease is primarily due to reduced incentive compensation costs in 2009 as compared to the prior year and higher bad debt expense in the prior year of approximately $1.3 million.

Transportation expenses decreased $3.1 million or 14.5% to $18.5 million in the quarter ended September 30, 2009, from $21.7 million for the same period in 2008 as a result of reduced sales volume of lubricating oils, solvents and waxes.

Interest expense decreased $2.4 million or 22.7% to $8.2 million for the quarter ended September 30, 2009, from $10.7 million in the three months ended September 30, 2008. As a result of reduced interest rates and lower balance that’s being carried on the revolver and term loan at September 30, 2009, as compared to the prior year.

As of September 30, 2009, total capitalization consisted of Partner’s capital in the amount of $449.6 million and outstanding debt of $429.6 million comprised of borrowings of $372.2 million under the term loan facility with an unamortized discount of $13.6 million on the term loan.

Borrowings of $69.1 million under the revolving credit facility and the long term capital lease obligation of $1.9 million. A $23.6 million decrease in Partner’s capital from December 31, 2008, was primarily due to $44.4 million in distributions to partners and a $32.8 million decrease in other comprehensive income primarily due to a decrease in the fair market value of our derivative instruments offset by net income of $53.6 million.

On September 30, 2009, we had availability on our revolving credit facility of $89.5 million based on a $200.6 million borrowing base, $41.9 million in outstanding standby letters of credit and outstanding borrowings of $69.1 million under the revolver.

We believe that we have sufficient cash flow from operations and borrowing capacity to meet our financial commitments, debt service obligations, contingencies and anticipated capital expenditures. However, we are subject to business and operational risks that could materially or adversely affect our cash flows.

A material decrease in our cash flow from operations or significant sustained decline in crude oil prices would likely produce a corollary material adverse effect on our borrowing capacity under our revolver and potentially our ability to comply with the covenants under our credit facilities.

Substantial decline in crude oil prices if sustained may materially diminish our borrowing base which is based in part of the value of our crude oil inventory which could result in material reduction in our borrowing capacity under the revolver. A significant increase in crude oil prices, if sustained, would likely result in increased working capital funded by borrowings under our revolving credit facility.

I will now turn the call over to Bill Grube.

Bill 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 Darren Horowitz - Raymond James.

Darren Horowitz - Raymond James

A couple of quick questions, Jennifer first, and I recognize this is largely a call on economic demand, but within the specialty product segment are you seeing any improvements in volumes quarter to date?

Jennifer Straumins

We did see improvements in volumes third-quarter versus second and first quarters.

Darren Horowitz - Raymond James

But quarter to date so far through the fourth quarter.

Jennifer Straumins

We don’t give guidance and we are not going to speak as to what’s on in the fourth quarter but we continue to see improvements.

Darren Horowitz - Raymond James

Last quarter I think you talked specifically about trying to expand your product lines within that segment to diversify your product mix and mitigate some concentration risk. Can you give us any update on that? I think you quantified it last quarter and said that you had expected to spend about $10 million, is that still the estimate?

Jennifer Straumins

That’s still estimate and those are 2010 type of activities.

Darren Horowitz - Raymond James

Switching gears over to the fuel product side, based on what you see today, what can you do to offset the impact to fuel products gross margin, more specifically, can you outline how you intend to control cost and quantify the benefit that you are targeting?

Jennifer Straumins

Our hedging program has certainly helped us this quarter as far as our fuel segment gross profit goes. We do allocate some operating costs and some byproduct allocation losses to that segment as well. Going forward, we continue to be active in the hedging markets when it makes sense and we are continuously working to lower operating costs at all plants as well as our fields have produced.

One of the things that we’ve done there over the past couple of quarters is we’ve brought in energy savings consultants and that team has completed their work and they’ve helped us identify quite a few energy savings projects that we’ll be completing in the very short term and we expect to see some operating cost savings through that.

Darren Horowitz - Raymond James

Do you have a rough approximation of the dollar amount that you are targeting on an annualized basis?

Jennifer Straumins

Well, it’s all energy, so it all depends on what you’d assume for natural gas cost. We expect to save about 75,000 MMbtu per month at that plant.

Darren Horowitz - Raymond James

Then finally just one housekeeping question. Can you remind me again what’s your debt to EBITDA threshold is on your covenants, and on a TTM basis your creditors look at adjusted EBITDA, right, so you would get the benefit of the add back of the unrealized gains from market to market accounting, is that right?

Patrick Murray

That’s right. Our threshold is, the leverage ratio can be no higher than 3.75 to 1, and we do get the benefit of adding back any non-cash derivative gains or losses back into adjusted EBITDA. So, non-cash derivative items do not count towards that calculation.

Operator

Your next question comes from Adrayll Askew - Hartford Investment Management.

Adrayll Askew - Hartford Investment Management

Yes, given the current raw material price environment, how are you sizing up for any capital needs in the fourth quarter? Do you see a material use of cash?

Bill Grube

I think that we are always focused on our working capital need. We are maintaining inventory levels that we think are prudent given the environment. We think we have ample liquidity under our revolver to cover our working capital need. So, we don’t see that as necessarily a risk in the fourth quarter per se.

Adrayll Askew - Hartford Investment Management

Can you speak to the magnitude of inner period working capital swings or how high does your working capital typically go in the current environment?

Bill Grube

Working capital actually says that fairly consistent period over period. We have some changes but nothing that’s extraordinarily significant, plus or minus maybe $20 million from quarter-to-quarter.

Adrayll Askew - Hartford Investment Management

That’s helpful. Let me ask you this, are you currently in discussions with your bankers regarding potential solutions for a covenant breach if leverage continues to go higher?

Bill Grube

No we are not in those discussions, because we expect to maintain compliance with our covenants and have plans designed to do so.

Operator

Your next question comes from [Cynthia Milano – Boise].

Cynthia Milano – Boise

Yes, hi. Just in relation to the impact of a potential substantial drop in crude oil, you said that that would have a material impact on availability, but then I thought you said that if there was a significant increase in crude oil, that it would actually increase working capital and I was under the impression that a substantial increase in crude oil would negatively impact your availability. So can you just shed some light around that?

Bill Grube

An increase in crude oil prices would increase the value of our inventories in our borrowing base. So we would have an availability improvement under our revolver, obviously to maintain similar levels of inventory we would like return to our revolver to finance higher working capital requirements, but part of those requirements would be available under our borrowing base.

At the end of September, we had a $200 million borrowing base. Our facility size on the revolver is $375 million. So an increase in crude oil prices, we’d be able to handle that under the revolver, because our borrowing base would increase.

Cynthia Milano – Boise

So the drop in crude oil would be much more of a concern basically?

Bill Grube

Yes, in terms of vis-a-via borrowing base capacity, yes, that would be more of a concern.

Operator

Your final question comes from Ray Suzabi - AIG.

Ray Suzabi - AIG

Just following up on that last question, perhaps you could elaborate just a little bit more given the increase in crude from second quarter to third quarter, I would have expected the borrowing base to increase, but it looks like it decreased modestly, is that right, and if so could you help explain that?

Bill Grube

Yes. The main reason for the decrease is not a change in the unit value per inventory quantity, it’s more we maintained lower inventory levels at the end of the quarter, so as a result of that less inventory on hand, our working capital would have declined compared to the prior quarter and that is why the borrowing base. So it would just be based on inventory we had on hand. So, we are focused on trying to keep inventories and receivables as well as possible as well.

Ray Suzabi - AIG

Okay, thanks. Just a couple of other quick questions, which crack spread do you use for benchmarking purposes?

Jennifer Straumins

Gulf coast 211.

Ray Suzabi - AIG

And then with regard to asphalt volumes, are you seeing any benefit from stimulus spending or do you see that benefiting you sometime next year?

Jennifer Straumins

We hope to see it benefit us next year. We have not seen any help at this point in time.

Ray Suzabi - AIG

Anything that you are hearing from your customers that would suggest that’s coming.

Jennifer Straumins

They are hoping that next spring that they start to see some flow of funds in that area.

Ray Suzabi - AIG

Then lastly, what is the leverage calculation for the credit agreements?

Bill Grube

It’s measured as adjusted EBITDA compared to over the last 12 months, compared to our consolidated funded indebtedness.

Ray Suzabi - AIG

What was the exact number of as of 930?

Bill Grube

Yes, as of 930 it was approximately 3.3.

Ray Suzabi - AIG

Versus a covenant of 3.75.

Bill Grube

That is right.

Operator

There are no further audio questions at this time.

Jennifer Straumins

Thank you operator. This concludes the Calumet Specialty Products earnings conference call covering our third quarter results. Thank you very much for your participation in the teleconference and please note that this call will be available for replay using the instructions contained in our press release. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. Everyone have a great day.

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