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Martin Midstream Partners LP (NASDAQ:MMLP)

Q2 2014 Results Conference Call

July 31, 2014 – 9:00 AM E.T.

Executives

Bob Bondurant – EVP, CFO

Joe McCreery – VP of Finance and Head of IR

Wes Martin – VP of Corporate Development

Ruben Martin – President, CEO

Analysts

Darren Horowitz – Analyst

TJ Schultz – RBC Capital Markets

Operator

Good day, ladies and gentlemen, and welcome to the Martin Midstream second-quarter 2014 earnings conference call. [Operator Instructions]. And as a reminder, this conference is being recorded.

Now I will turn the conference over to your host, Chief Financial Officer Bob Bondurant. Please begin.

Bob Bondurant

Thank you, Tyrone. And to let everyone know who is on the call today, we have Ruben Martin, our President and Chief Executive Officer; Joe McCreery, Vice President of Finance and Head of Investor Relations; and Wes Martin, Vice President of Corporate Development.

Before we get started with the financial and operational results for the second quarter, I need to make this disclaimer. Certain statements made during the conference call may be forward-looking statements relating to financial forecasts, future performance, and our ability to make distributions to unit holders.

We report our financial results in accordance with Generally Accepted Accounting Principles, and use certain non-GAAP financial measures within the meanings of the SEC Regulation G, such as distributed cash flow, or DCF; and earnings before interest, taxes, depreciation, and amortization, or EBITDA; and, also, adjusted EBITDA.

We use these measures because we believe it provides users of our financial information with meaningful comparisons between current results and prior reported results, and it can be a meaningful measure of the Partnership's cash available to pay distributions.

We also included in our press release issued yesterday a reconciliation of EBITDA, adjusted EBITDA, and distributable cash flow to the most comparable comparable GAAP financial measure. Our earnings press release is available at our website, www.martinmidstream.com.

Now I would like to discuss our second-quarter performance. For the second quarter, we had adjusted EBITDA of $31.9 million compared to $38.8 million in the first quarter of 2013. Our total distributable cash flow, or DCF, for the second quarter was $19.2 million, a distribution coverage of 0.88, times based on the distributions we paid in the second quarter. This coverage ratio does not include any IDR payments to the General Partner as we have suspended IDR payments until a cumulative suspension of $21 million is met. At June 30, 2014, our cumulative suspension amount was $14.2 million.

Now, as we foreshadowed on our previous earnings call, our second-quarter DCF was negatively impacted by heavy maintenance capital expenditures, and heavy marine repairs and maintenance expense, as a result of the completion of our lubricant refinery turnaround and the completion of our required Coast Guard offshore vessel dry-dockings.

Total second-quarter maintenance capital expenditures and turnaround costs were $6.4 million; and for the year, have been $12.9 million. Additionally, total offshore marine repair and maintenance expense for the quarter was $4 million; and for the year, has been $5.1 million. This offshore marine repair and maintenance expense had a significant negative effect on both EBITDA and net income in the second quarter.

Looking toward the last half of the year for the entire Partnership, we continue to forecast remaining maintenance capital expenditures of approximately $5 million. Therefore, over 70% of our maintenance capital expenditures have been spent in the first 6 months, so we will see significant improvement in both maintenance capital expenditures and repair and maintenance expense in the last half of the year.

Now I would like to discuss our second-quarter cash flow by segment compared to the first quarter of 2014. In the terminalling segment, our second-quarter EBITDA – which is defined as operating income, plus depreciation and amortization, but excluding any gain or loss on sale of assets – was $18.5 million in the second quarter compared to $18.1 million in the first quarter.

Our specialty terminals EBITDA was $13.6 million in the second quarter compared to $13.4 million in the first quarter. This increase was driven by a growth in cash flow at our Corpus Christi crude terminal of $0.9 million, as a result of a 19% increase in crude throughput volume to 167,000 barrels per day.

Looking toward the third quarter, we are currently experiencing average throughput volume greater than our second-quarter throughput volume. Also, our specialty terminal group experienced increased cash flow from our lubricant refinery of $0.8 million. This increase brought our refinery cash flow to its more normal quarterly level of $3.4 million, as crude volume throughput averaged 7100 barrels per day. The lower refinery revenue we realized in the first quarter was based on our contracted minimum throughput of 6500 barrels per day, due to the refinery turnaround which occurred in the first quarter.

Offsetting the $1.7 million combined increase in EBITDA from our Corpus Christi crude terminal and our refinery was a $1.5 million decrease in cash flow in our lubricant packaging business. The decline in cash flow from our lubricant packaging business was primarily driven by competitive pressure in some of our economy product lines. Naphthenic base oils have historically made up a bit more than 50% of our feedstocks, but they have become uncompetitive compared to paraffinic base oils. This price dynamic is being driven by new base oil supplies coming out of the US Gulf Coast, driving down the price of these paraffinic base oils relative to naphthenic base oils.

As a result, we are reformulating many of our products that have used naphthenic base oils in the past to take advantage of this market shift. We expect these new formulations to begin filling our supply chain in mid-August. This reformulation will make us more competitive, as we believe the market for paraffinic base oils will continue to trade significantly below naphthenic base oils for many years. Once this change is made, we should see improvement in cash flow from the lubricants packaging business.

Now, on the shore-based side of the terminal business, EBITDA was $4.9 million compared to $4.7 million in the first quarter. This improvement in cash flow was driven by increased activity in our marine shore bases, as deepwater drilling activity in the Gulf of Mexico continues to grow. Looking toward the third quarter, our overall terminal cash flow should be similar to the second quarter.

In our sulfur services segment, our cash flow was $11.2 million for both the first and second quarter. On the pure sulfur side of the business, EBITDA was $5.1 million in the second quarter compared to $3.8 million in the first quarter. This increase was driven by a 7% growth in sales volume, and a 29% increase in our sulfur margin. Looking toward the third quarter, we believe our cash flow from our pure sulfur side of the business will be slightly less than the second quarter, as a result of more normal sulfur margins.

Our fertilizer EBITDA in the second quarter was $6.2 million compared to $7.4 million in the first quarter. This decrease between periods was primarily a result of a 13% decline in our average fertilizer margin per ton. This was primarily driven by the mix of our products sold, as more of our higher-margin products were sold in the first quarter compared to the second quarter.

Looking forward, as most of you know, the third quarter is always the weakest in our fertilizer business, as it is harvesting season for the US farmer. So we expect our fertilizer cash flow in the third quarter to experience its normal seasonal decline. However, we continue to anticipate a rebound in our fourth-quarter fertilizer EBITDA as compared to the third, as farmers should begin their fertilizer winter field programs.

In the natural gas services segment, we had EBITDA of $5.5 million compared to $9.1 million in the first quarter. The decrease was primarily a result of the normal, seasonal decline in our wholesale propane business due to less heating demand in the second quarter. Overall, our total NGL volume and margins each declined 19%, primarily due to seasonality. Looking forward to the third quarter, our natural gas services segment EBITDA should be similar to the second quarter.

However, the fourth quarter should experience a significant increase in cash flow when compared to the second and third quarter, as winter heating demand increases; and, most importantly, refinery demand for refinery-grade butane will begin, as gasoline vapor pressure rules are relaxed, beginning October 1.

Also during the second quarter, on May 14 we purchased a 20% ownership interest with 50% voting rights in West Texas LPG Pipeline LP for approximately $135 million from Atlas Pipeline Partners. Since our cash flow from this business is generated through cash distributions from West Texas LPG Pipeline, we did not realize any cash flow from this business in the second quarter.

Also, because we only owned this investment for one half of the second quarter, we anticipate the distribution paid to us in the third quarter will only be between $900,000 and $1 million. This should increase to approximately $2 million with the distribution payment we will receive in the fourth quarter, reflecting our 20% ownership for the entire third quarter.

Now, in our marine transportation segment, we had EBITDA of $0.8 million in the second quarter compared to $4.5 million in the first quarter. The decrease was driven by poor performance in our offshore marine business, due to required Coast Guard dry-docking repair and maintenance expense for 3 offshore tows. For the second quarter, our offshore repair and maintenance expense was $4 million. For the first 6 months of 2014, our offshore repair and maintenance expense has been $5.1 million, and our offshore maintenance CapEx has been $0.9 million.

In order to understand the magnitude of these costs relative to other periods, and understand the large negative impact of the marine business so far this year, our offshore repair and maintenance expense for the same six-month period last year was only $0.9 million, and maintenance CapEx was only $0.5 million. So, total expenditures between repair and maintenance expense, and maintenance capital expenditures for the offshore fleet in the first 6 months of 2014 has been $6 million compared to $1.4 million for the first 6 months of 2013, a negative DCF impact of $4.6 million period-over-period.

However, as we look forward to the last half of the year, the good news is our total EBITDA from marine transportation should approximate $6 million for both the third and fourth quarters, as offshore repair and maintenance costs should return to normal levels, due to the completion of these required Coast Guard dry-dockings. Also, the next round of required Coast Guard dry-dockings for these same 3 offshore tows will not be for another 3 years.

Finally, our unallocated SG&A costs were $4.6 million in the second quarter compared to $4.7 million in the first quarter. We should average between $4 million and $5 million per quarter in unallocated SG&A costs.

In addition to our 4 business segments, we own 100% of Redbird Gas Storage, which now owns a 42.2% interest in Cardinal Gas Storage. We did not receive a distribution from Cardinal in the second quarter. For the first quarter, we had a distribution from Cardinal of $0.2 million. Although we did not receive a distribution in the second quarter, please remember that Cardinal has significant EBITDA, but it is currently being used to pay down its non-recourse project finance debt.

Also, our $15 million preferred stock investment in Martin Energy Trading, an affiliate of our General Partner, yielded a distribution of $0.6 million for both the first and second quarters of 2014. We anticipate receiving total distributions from this investment of $2.3 million for all of 2014.

Now I would like to turn the call over to Joe McCreery, who will speak about liquidity, capital resources, and recent Partnership activities.

Joe McCreery

Thanks, Bob. Good morning, everyone. I'll start with our normal walk-through of the debt components of our balance sheet and our bank ratios. I will then highlight some of the Partnership's financing growth and other activities during the quarter.

On June 30, 2014, the Partnership had total long-term funded debt of approximately $692 million. This consisted of approximately $400 million of senior unsecured notes, and $290 million drawn under our recently upsized $900 million revolving credit facility. Thus, the Partnership's available liquidity on June 30, 2014, was $610 million.

For the second quarter ended 2014, our bank compliant leverage ratios – as defined as senior secured indebtedness to adjusted EBITDA, and total indebtedness to adjusted EBITDA – were 1.95 times and 4.66 times, respectively. Additionally, our bank compliant interest coverage ratio, as defined by adjusted EBITDA to consolidated interest expense, was 2.89 times.

Looking at the balance sheet, our total debt to total capitalization at June 30 was 64.2%, an improvement compared to the quarter ended March 31, 2014, as a result of the Partnership's follow-on offering during the second quarter, offset by seasonally higher working capital balances associated with our natural gas liquids business.

In all, on June 30, 2014, the Partnership was in full compliance with all banking covenants, financial or otherwise. Reconciling our current revolver balance to the quarter ended June 30, our current outstandings are $280 million, thus $620 million of Partnership available liquidity.

Now I'd like to highlight our significant acquisition during the quarter. As Bob mentioned, on May 14, 2014, the Partnership acquired effective 20% interest in the West Texas LPG pipeline – which I will call WTLPG – for cash of approximately $134.4 million, subject to certain post-closing adjustments. WTLPG is an approximate 2200-mile common carrier pipeline system that transports NGLs from New Mexico and West Texas production areas to Mont Belvieu, Texas, for fractionation. WTLPG is operated by the Chevron Pipeline Company, which also owns the remaining 80%.

This investment in the growing NGL production of West Texas, and other basins along the WTLPG pipeline, makes MMLP a strategic provider of NGL delivery access to key fractionation points along the Gulf Coast. The transaction also positioned the Partnership for further potential investment, and creates a strategic platform for the continued development of NGL infrastructure.

As a general comment, we continue to be bullish on the short- and long-term fundamentals underlying this investment. Along with long haul capacity at full utilization, we have already seen short-haul volume improvements; and believe that the 2015 guidance regarding distributable cash flow from this investment, as previously provided, will prove to be conservative, even without further investment.

Further, we believe that WTLPG has significant upside potential for incremental cash flow generation through potential expansion and other revenue-enhancing measures.

Also during the quarter, at the end of May we successfully completed a small dropdown of certain natural gas liquids storage assets from Martin Resource Management Corporation. This acquisition of $7.4 million provides an added level of storage security necessary to execute our natural gas liquids business.

Next, let's move to capital raises during the second quarter of 2014. On the equity side, we successfully completed a follow-on offering of 3.6 million units in May, in conjunction with the 20% stake in WTLPG. Net proceeds to Partnership are $143 million.

Also on the equity side, we tapped our at-the-market equity issuance program and successfully placed units on 15 trading days during the second quarter, for total net proceeds of $11.8 million.

Proceeds from both the follow-on offering and the ATM program were used to pay down outstanding amounts under the Partnership's revolving credit facility. As of June 30, we have issued aggregate equity of $17.1 million under the Partnership's ATM program this year.

On the debt side of the balance sheet, we redeemed all the remaining $175 million of 8.875% senior unsecured notes, due in 2018 on April 1. Concurrent with that option redemption, we completed a lower coupon add-on issuance of $150 million to our existing 7.25% notes, due February 2021. Also during the quarter, as previously mentioned, we upsized our revolving credit facility from $637.5 million to $900 million, with a syndicate of 25 lenders. This amended credit facility matures March 2018.

Now let's take a look at growth initiatives. First, I'd like to provide an update on our previously announced intention to construct a crude condensate splitter in the Corpus Christi market. Given recently announced developments regarding the ban on crude oil exports, our project as originally contemplated continues to evolve. We continue to work closely with our original potential customer on a conceptual stabilization unit to process condensate to the government's exportable standard through the Corpus Christi market.

Our current discussions continue to be centered around a unit capable of processing up to 50,000 barrels per day. Offtake from the unit would be both an overhead Y-grade stream and an exportable Eagle Ford condensate bottom stream. Initial capital cost estimates associated with the stabilization project are also in the range of $175 million to $200 million. MMLP will not spend any hard dollar capital expenditures until a firm contractual agreement with our counterparties, or potential other counterparties, has been executed.

Next, on the corporate development side, as we mentioned last quarter, we continue to be aggressive in our pursuit of potential third-party or affiliate opportunities, including further investment into the Partnership's joint venture. Additionally, we are continuing discussions with Alinda Capital Partners to evaluate potential drop-down scenarios. As we've said before, there continues to be no timetable or obligation for drop-downs to occur, and third-party transactions continue to take priority in our corporate development efforts.

Finally, the Partnership was pleased to announce another quarterly distribution increase last week. Our Board of Directors approved a $0.005 quarterly increase, or $0.02 annualized. This new annual distribution rate of $3.17 reflects our better-than-forecasted second-quarter financial performance and our positive outlook for strong distributable cash flow in the second half of 2014.

Tyrone, this concludes our prepared remarks this morning. We'd now like to open the lines for question and answers.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. First question is from Darren Horowitz of Raymond James. Your line is open.

Darren Horowitz – Raymond James & Associates

A couple questions, the first regarding the West Texas LPG assets. If you could just roughly quantify what you think the magnitude of EBITDA cash flow outperformance would be, that would be helpful.

And then second, and kind of more importantly, when you start talking about additional revenue opportunities, either organic or bolt-on, you've mentioned before maybe some additional NGL infrastructure at terminal points. Obviously, there's some access points across the Gulf Coast, and maybe some additional acreage at that Neches facility. But how do you think about maybe better utilizing dock capacity, or even possibly getting further downstream with regard to LPG product export?

Wes Martin

Hey, Darren, this is Wes. I'll take the first one, and then maybe put it to Ruben for the second question. With respect to WTLPG, in terms of – I think we were out there saying that we thought about distributions of about $9 million, I believe, in 2015.

Given where we stand today, and just our outlook for what's going on in the Permian, without having to spend significant capital dollars, we think that number could be, call it, 10% to 20% higher in 2015. As everybody generally knows, I think Chevron, who owns the other 80%, is potentially running a process, or are running a process on that. And so some of that growth is uncertain at this point. It just depends on who the partner is; if there is a new partner there, or not.

And so that remains to be determined a little bit, but I think just in general, when we look at the volumes that we see currently in our outlook, with respect to what's going on in the Permian, we could see a material increase in those distributions. And that excludes any sort of capital investment in expansions.

Ruben, do you want to take the second part on the…

Ruben Martin

You were talking, Darren, about – separate from the West Texas LPG line, concerning potential exports out of Beaumont?

Darren Horowitz – Raymond James & Associates

Yes, Ruben, just looking at your existing asset base, there is some complementary assets. So I'm thinking you've got additional acreage at the Neches facility. You've got an underutilized dock. So the way we see it, there could be a lot of synergistic upside to get further downstream, maybe spend a bit more capital and get a higher return on investment.

Ruben Martin

Yes, we're actually evaluating all of those particular situations right now. We have a lot of property in the Beaumont area that is sitting right in the areas of all of the gathering of several pipelines, and major lines that run in there.

We not only have the Neches facility, which has a dock capacity; but we've got Spindletop, which is about 3 miles away from that, that we have a lot of capacity. We're pulling off of TT pipeline there now for distribution of different products. But, no, we are looking at that. We have the dock space; we can add to our dock space very, very easily and cheaply, relative to the rest of the markets. And so, no, we are in that mode right now, trying to figure out exactly how – what we do want to do to expand that.

And we also have additional barge, a little bit shallower capacity at our Stanolind terminal. So we've got basically 3 terminals in that area and we are evaluating it, because we do see that area becoming more and more actively involved in the export market, as we've already seen with some other announcements.

Darren Horowitz – Raymond James & Associates

What do you think the development of all of those areas would be, just in terms of rough CapEx and the timing to get everything up and running, to where it becomes a vertically integrated point-to-point system?

Ruben Martin

Well, I think you can't do much of anything nowadays in less than a couple of years. And so you're probably looking in an area of a couple of years there, and anywhere from $500 million to $700 million of total development cost.

Darren Horowitz – Raymond James & Associates

Okay. And then last question for me, if I could shift it back a little bit to the discussion around condensate splitting, or now stabilization capacity, at Corpus. What do you think in terms of the timeframe it would take to get a splitter, a 50,000 barrel a day – or, excuse me, stabilization asset up and running? And, more importantly, from a CapEx perspective, does that $175 million to $200 million – does that include any sort of additional dock capacity, or any kind of downstream infrastructure that needs to take place to actually handle stabilized released condensate for export?

Ruben Martin

Yes, we're looking at dock capacity there. We are actually evaluating that situation right now. We've just added another dock. And then due to some circumstances down there, we may be adding another one to that area. But, yes, it's got to have dock capacity. But I don't know exactly what the stabilization numbers were, but I think it was closer to about 18 months, was it, Wes?

Wes Martin

Yes. Yes.

Ruben Martin

Yes, around 18 months to – probably from start to finish there.

Darren Horowitz – Raymond James & Associates

Okay. Thanks, guys. I appreciate it.

Operator

Thank you. [Operator Instructions]. Our next question is from TJ Schultz of RBC. Your line is open.

TJ Schultz – RBC Capital Markets

Last quarter you mentioned that initial discussions on drop-downs had started. Just any update here, and your thoughts on getting something done in 2014?

Wes Martin

Yes, this is Wes. I'll take that, TJ. I think we indicated, I think – and I think maybe you had even asked the question last quarter, in terms of priorities and timing of different things. We are, as Joe alluded to in his earlier conversations, we are looking at, call it, 2 or 3 outside – what I would call outside acquisitions; or, I'd say, non-related drop-down type stuff, relative to the Alinda conversation. So that continues to be out there in terms of timing.

I think we've said, hey, maybe we could see something in 6 months or so develop. I think when you look at what Alinda is doing – they obviously own HFOTCO. I think HFOTCO is generally looking at undergoing some capital improvements there. And I think they are trying to work through those right now, in terms of timing and the financing of those, and really looking at that on a longer-term basis.

So I think we still have some time there. I think with respect to seeing anything definitive, I think probably not by the end of this year. But again, we are having a lot of discussions about when is the right timing, and what size is the right size. But right now we've got a lot on our plate, as we continue to say, with a couple of other transactions that we're looking at, and incremental investments and opportunities. So we continue to be focused on that.

But, I would say, the odds of something happening in 2014 are not high, at this point.

TJ Schultz – RBC Capital Markets

Okay. Can you provide any color on those two to 3 outside opportunities you're looking at? Does that include the other 80% of West Texas LPG? Or what other types of activities are you looking at there?

Wes Martin

Yes, I'll just say with respect to WTLPG, we can't comment on that. With respect to the other opportunities that we speak of, one in particular is an affiliated type transaction that we could look at. That's something that we're working on right now. And I think we can't really necessarily say that it's going to happen. But the way we see things right now, it could be a highly accretive transaction, and hopefully we could get to the finish line on something like that within the next few weeks.

TJ Schultz – RBC Capital Markets

Okay.

Wes Martin

Just in general, there's other opportunities out there; but we are focused on particularly this one, and spending a lot of time right now trying to get that over the finish line.

TJ Schultz – RBC Capital Markets

Okay. Thank you.

Operator

Thank you. There are no further questions at this time.

I'd like to turn the call over to management.

Joe McCreery

Yes, thank you, Tyrone. This is Joe. Just in summary, appreciate everyone's time this morning. As you can see, second-quarter performance was better than we anticipated, and that was able to garner a $0.005 increase in our distribution, payable on August 14. So now, as I mentioned, we're at $3.17 annualized.

And as Bob alluded to, nearly all the marine dry-docking is now behind us. We expect full cash flow recovery in the third and fourth quarters in the marine transportation segment, which of course is higher DCF as it pertains to now. Approximately 70% of our maintenance CapEx for the year is behind us.

And lastly, as Wes mentioned, the acquisition pipeline is robust. And we expect a decision on the highly accretive acquisition he referred to to surface in the very near term, and we continue to evaluate the drop-down opportunities with Alinda.

So, with that, we thank everyone for their time this morning. Have a great day.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.

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