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

Q2 2012 Earnings Call

August 01, 2012 1:00 p.m. ET

Executives

Bill Anderson – VP – Sales & Marketing

Jennifer Straumins – President & COO

Pat Murray – CFO

Analysts

Cory Garcia – Raymond James

Jerren Holder – Barclays

Michael Peterson – MLV & Company

Eric Seeve – GoldenTree Asset Management

Operator

Good day, ladies and gentlemen and welcome to Q2 2012 Calumet Specialty Products Partners LP Earnings Conference Call. My name is Bhupinder, and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would like to turn the call over to Mr. Bill Anderson. Please proceed, sir.

Bill Anderson

Thank you. Good afternoon and welcome to the Calumet Specialty Products Partners investors’ call to discuss our second quarter 2012 financial results. During this call, Calumet Specialty Products Partners, L.P. will be referred to as the Partnership or Calumet. Also participating in this call will be Jennifer Straumins, our President and COO 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 with the meaning of Section 21E of the Security and Exchange Act of 1934. Such statements are based on the beliefs of our management as well as the assumptions made by them and in each case based on the information currently available to them. Although our management believes that the expectations reflected in such forward-looking statements are reasonable, neither do the Partnership, its general partner nor our management can provide any assurances that such expectations will prove to be correct.

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

I will now turn the call over to Jennifer Straumins.

Jennifer Straumins

Thank you, Bill. We are very pleased with our results for the second quarter of 2012. Our net income of $65.7 million and we’ve reported – we’ve recorded record quarterly adjusted EBITDA of $122.3 million and quarterly distributable cash flow of $94.9 million. We continue to focus on our operations to meet demand for our Specialty Products and it best benefit from the widened crack spreads driven by the Canadian heavy and Bakken crude oil differentials to NYMEX WTI.

As previously announced on July 3, 2012, we completed the acquisition of Royal Purple, for an aggregate consideration of approximately $333 million, excluding certain purchase price adjustments. Royal Purple is a successful formulator and marketer of premium, industrial, and consumer lubricant across several large markets including oil and gas, chemicals and refining, power generation, manufacturing and transportation, food and drug manufacturing and automotive aftermarket.

The Royal Purple acquisition was financed with the net proceeds of approximately $263 million from our 2020 notes offering at June 2012 and cash on hand. On July 20, 2012, we declared a quarterly cash distribution of $0.59 per unit for the quarter ended June 30, 2012 on all our outstanding units. The distribution will be paid on August 14, 2012 to unitholders of record as of the close of business on August 3, 2012 and represents a 5.4% increase over the first quarter of 2012 and a 19.2% increase over the second quarter 2011.

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

Pat Murray

Thanks, Jennifer. Net income for the second quarter of 2012 was $65.7 million compared to a $7.7 million loss for the same period in 2011. These second quarter 2012 results include, $15.3 million of non-cash unrealized derivative losses, as compared to $15.1 million of debt extinguishment costs of which $14.4 million were non-cash and $3.1 million of non-cash unrealized derivative losses in the second quarter of 2011.

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 our debt instruments were $104.1 million and $122.3 million respectively for the second quarter of 2012 as compared to $32.7 million and $40.8 million respectively for the same quarter last year.

The Partnership’s distributable cash flow for the second quarter this year was $94.9 million as compared to $25.4 million for the same quarter in 2011. The increase in adjusted EBITDA quarter-over-quarter was due primarily to a $78.2 million increase in gross profit and $23.6 million of increased realized derivative gains, partially offset by an $11.6 million increase in selling, general and administrative expenses, a $2.3 million increase in transportation expense and $7.9 million of insurance recoveries in the 2011 period with no comparable recoveries in the 2012 period.

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 a discussion and definitions for the 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 second quarter of 2012 for specialty products and fuel products was $88.6 million and $40.2 million respectively compared to gross profit of $58.3 million and a loss of $7.7 million respectively for the same period last year. The increase in specialty product segment gross profit of $30.3 million quarter-over-quarter was due primarily to a 24.7% increase in sales volume and 8.8% decrease in the average cost of crude oil per barrel partially offset by a 1.6% decrease in the average selling price per barrel.

The increase in fuel products segment gross profit of $47.9 million quarter-over-quarter was due primarily to an 82.9% increase in our sales volume for fuel products mostly as a result of the Superior acquisition and 14.6% decrease in the average cost of crude oil per barrel, partially offset by a 5.3% decrease in the average sales price per barrel, excluding the impact of those realized hedging losses reflected in sales and increased realized losses on derivatives of $25.8 million, due primarily to the extremely volatile nature of the pricing differentials between NYMEX WTI and Canadian heavy and Bakken crude oils during 2012. Certain of our derivative instruments were not accounted for as hedges. As a result, we recorded a gain of $21.2 million to realized gain on derivative instruments instead of within gross profit in the unaudited condensed consolidated statements of operations for the second quarter of this year.

Total loss on settled derivative instruments reflected in gross profit and realized gain on derivative instruments combined was $32 million for the second quarter of 2012 an increased loss of $2.2 million quarter-over-quarter.

Selling, general and administrative expenses increased $11.6 million quarter-over-quarter to $22 million. This increase was due primarily to additional employee compensation costs, driven partially by the Superior, Missouri and TruSouth acquisitions, higher incentive compensation costs based on our performance and higher professional fees.

Interest expense increased $7.8 million quarter-over-quarter, due primarily to a higher interest rate associated with our 2019 senior unsecured notes as compared to our term-loan that was repaid in full in April 2011 and was extinguished in connection with the issuance of our 2019 senior unsecured notes as well as additional outstanding long-term debt in the form of our 2019 senior notes issued to partially fund our Superior acquisition.

As of June 30, 2012, total capitalization consisted of Partners’ capital in the amount of $881.7 million and outstanding debt of $863 million, comprised primarily of $857 million of senior notes due 2019 and 2020, which is net of discount of $17.9 million. The $152.8 million increase in Partner’s capital from December 31, 2011 was due primarily to $149.7 million of net proceeds from the – our May 2012 public offering and net income of $117.6 million, partially offset by a $58.3 million in distributions to unitholders and $56.6 million in other comprehensive loss.

On June 30, 2012, we had availability of $388.4 million under our revolving credit facility, based on a $564 million borrowing base and a $175.6 million in outstanding standby letters of credit. We believe that we will continue to have sufficient cash flow from operations and borrowing availability under our revolver to meet our financial commitments, quarterly distributions to our unitholders, debt service obligations, contingencies and anticipated capital expenditures.

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

Jennifer Straumins

Thank you, Pat. This concludes our remarks and we’ll be happy to take any questions you may have. Operator, can you confirm if there are any questions?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) First question is from the line of Cory Garcia from Raymond James. Please go ahead Cory.

Cory Garcia – Raymond James

Good afternoon, folks. Great quarter first off and I had just a few quick questions for you mostly related to your crude slate up. First off, can you guys disclose the actual levels of the Canadian heavy’s or Bakken barrels that you are currently running through your system and sort of following after that provide maybe an update on your railcar project. I know you guys are planning on bringing – bringing barrels down into your Shreveport refinery, sort of targeting an early 2013 type of startup, is that still – still the way you are thinking about it right now?

Jennifer Straumins

Sure, in regards to your first question, we don’t routinely give you all the – oil feedstock information. When we did the Superior acquisition, there we did give some information regarding that. And it’s about a 50-50 split between Canadian heavy and the North Dakota Bakken barrels at that point in time and we’re not really running the facility any differently today. So, it’s safe to assume it’s still that 50-50 type of ratio. The rail projects are going – are ongoing, Shreveport will be ready to receive additional railcars here in the next several weeks and Superior will be ready to ship railcars early in the fourth quarter.

Cory Garcia – Raymond James

Got you. And is there any turnaround at any of your facilities that we need to be aware of over the next six to twelve months?

Jennifer Straumins

We do have a turnaround. Well, at all of our specialty facilities we do take turnarounds once a year. Only parts of the facilities are shutdown and very rarely do you see an impact to total throughput because we do have make up capacity. Superior will be coming down in the late first quarter, early second quarter of next year and they will be down for three to four weeks, the whole plant will be.

Cory Garcia – Raymond James

All right. That’s helpful. Thank you.

Jennifer Straumins

Thank you.

Operator

Thank you. Next question is from the line of Jerren Holder from Barclays. Please go ahead.

Jerren Holder – Barclays

Good afternoon. I was just a bit curious, the Enbridge Line 14 does that affect you guys in anyway?

Jennifer Straumins

The issue that’s outlined is past where we are.

Jerren Holder – Barclays

Okay.

Jennifer Straumins

It did not impact us.

Jerren Holder – Barclays

Okay. And can you guys talk a little bit more about your, I guess, your hedging strategy swap contract? Looking at implied crack spreads that you guys have listed on your release, those implied spreads or cracks seem really attractive and is it more of a case of hedging near-term barrels and leaving more opened for later or are there some other dynamics in play that you guys are looking at?

Jennifer Straumins

Our policy is to have a rolling hedging book, going out a couple of years and we’re more or less as hedged as we’re going to be for the balance of 2012. 2013 we’re still continuing to layer on hedges. And we tend to – we intend to do so in 500 barrels to 1000 barrel a day increments, just allows us to average in at prices that we feel are attractive. And we’ve begun building our 2014 book. Today, $25 looks great. When we took the $12 hedges on that we had in 2011 and 2012, we thought those looked great too and turned out not to be so great. So, our policy is to hedge about half of our production and to do so on a rolling two-year basis.

Jerren Holder – Barclays

Okay. That’s it for me. Thank you.

Jennifer Straumins

Thank you.

Operator

Thank you. Next question is from the line of Michael Peterson from MLV & Co. Please go ahead.

Michael Peterson – MLV & Company

Hi. Good afternoon, folks. Now that the Royal Purple acquisition has closed, can you share some perspective on how this integration as well as that of TruSouth and Hercules shape you outlook for additional vertical integration opportunities?

Jennifer Straumins

We will continue to focus on integrating those assets into the Calumet portfolio, obviously as we continue to grow we have a lot more opportunities out there as we continue to do well, the ability to raise capital becomes easier and easier, so therefore growing becomes easier and easier. Through the Royal Purple acquisition, we’ve become introduced to a few – a few opportunities that we probably wouldn’t have known about, if it weren’t for that acquisition. So we are actively continuing to pursue growth opportunities.

Michael Peterson – MLV & Company

That’s helpful. Thank you, Jennifer. If I can put one more in redirect the outage of the Exxon pipeline that delivers feedstock to Shreveport, do you have an update as to when that’s expected to return to service or what the status of that is?

Jennifer Straumins

Exxon is saying that they are still testing the line, what we have done is we’ve just tried to be conservative and assume that that line is not going to be available to the Shreveport refinery in the foreseeable future and we’ve had plenty of railcars coming in with the rail projects at the Superior. So we’ve taken those railcars and we are bringing in rail barrels into Shreveport. Shreveport is running at 100% sweet crude at this point in time and will be for the foreseeable future and will be running in that high 30,000 to low 40,000 barrel a day, crude rate until the Superior project comes online in the early fourth quarter.

Michael Peterson – MLV & Company

Okay, okay. Can you disclose the cost differential between the alternative means of supply? Is that something you’re comfortable with?

Jennifer Straumins

We do not disclose that.

Michael Peterson – MLV & Company

Okay, okay. Thank you for your help and congratulations on fine quarter.

Jennifer Straumins

Thank you.

Operator

Thank you. The next question is from the line of Eric Seeve from GoldenTree Asset Management. Please go ahead.

Eric Seeve – GoldenTree Asset Management

Hi. I’ve a got a few questions. The first is on working capital, could you talk a little bit about what drove the big working capital draw this quarter and what we should expect going forward? Thank you.

Pat Murray

Yeah. I think generally speaking across, there were several pluses and minuses across the two segments in both AR and inventory. I think the one area where generally we saw a decrease was in accounts payable and part of that is a function of just lower crude price, but one of the things that we did at the end of the quarter was timed out some of the payments of – for crude and substituted some payments for letters of credit. So we’ve reduced our LCs outstanding at the end of the quarter because we had cash on the balance sheet.

So I think that was a prudent use of cash at least in – certainly in a short-term basis to limit the cost of our LCs, which is about 2% per year. Otherwise, we saw some AR going up across some segment – one segment down, and another just kind of – there is a lot plus and minus in the story. We would expect to see certain categories of inventory continue to decrease. We continue to see some asphalt decrease over the course of the year, but we’re looking at just all of our inventory levels in general and always sort of rationalizing what we have on hand, but there is no one huge driver in the working capital change this quarter except for what I mentioned earlier, which was, I think more of an opportunistic use of cash in substitution for letters of credit.

Eric Seeve – GoldenTree Asset Management

Is your inventory – obviously the price of oil and their products are going to fluctuate, but in terms of the barrels of inventory you hold, did that end the quarter at about a normal level or was it at a very high-level or do you not think about the business in that way?

Pat Murray

Well, I think we do think about the business in that way, I’d say it was a fairly normal level based on where demand is today and where our production is, but again there is always, we’re always analyzing what levels of inventory we need to have on hand to service the business.

Eric Seeve – GoldenTree Asset Management

Okay. Thank you. Just to make sure I had this clear, can you repeat what was the impact the realized derivative gain or loss that was reported within gross profit?

Pat Murray

Yeah. Within gross profit – here, further there is a table in the press release which we put in, it’s new this quarter, I think it’s helpful and instructive maybe of where the, where it is. So in gross profit for the quarter $53 million loss reflected in gross profit. There was a $21.2 million gain in realized and then there was an unrealized loss of $15.3 million. So the total loss on actual settlements for cash would be about $34 million and we’ve broken that out as a separate line item in that table.

Eric Seeve – GoldenTree Asset Management

Okay. So, the realized loss was $53 million and the realized gain reported below the line was $31.8 million?

Pat Murray

No, realized gain was $21.2 million.

Eric Seeve – GoldenTree Asset Management

Okay, great. Okay, thank you. And, then I’m sorry, you made a comment during the call about SG&A and why it was elevated, what’s your expectation going forward?

Pat Murray

Well, I think generally speaking we would have a few one-time fees in the line item, there is obviously some acquisition cost type levels in here, but I’d say we’re expecting SG&A generally to remain fairly consistent from where it is today.

Eric Seeve – GoldenTree Asset Management

So the Q2 rate is probably a decent run rate?

Pat Murray

Yeah, I think if you back – probably back off a couple million dollars of what we would consider as sort of increased professional fees type charges.

Eric Seeve – GoldenTree Asset Management

Okay, thank you. Okay, great and just lastly can you talk about, it doesn’t – looking at crack spreads, it’s a sort of directional indicator for the outlook for your business. This quarter maybe it wouldn’t have looked maybe as strong as it actually ended up being relative to the previous quarters, can you just talk a little about maybe why that – why that is, what helped this quarter so much and also just talk a little about the outlook that you’re seeing in both of your businesses as we enter the second half of the year?

Jennifer Straumins

Sure. The crack spreads were both driven by very high group III cracks up in the Superior as well as the, the very wide differential between Bakken barrels and WTI and heavy Canadian barrels and WTI and we also had very strong crack spreads down in our, down in the Shreveport refinery too we’ve – the Gulf Coast cracks were higher than they had been over the last several quarters and looking forward – forward markets are all very consistent with what we saw in the second quarter. We think that we’ll continue to see very strong cracks as we head into the fall.

Eric Seeve – GoldenTree Asset Management

Thank you.

Operator

Thank you. Next question is from the line of Peter Madsen from Drakkar Capital. Please go ahead.

Unidentified Analyst

Hi, guys. Can you give just a little more granularity in the – within the specialty products area you had roughly 25% increase in sales volume. Can you elaborate on where – what refineries that came from and kind of just – and to the extent that portions of that was attributable to any of the recent acquisitions? In that I had been under the assumption that a lot of the smaller specialty refineries were running fairly close to capacity. So, maybe you could also just elaborate on where your capacity was on the specialty side?

Jennifer Straumins

On the specialty side, our Cotton Valley, Princeton more or less are running at capacity. We saw some higher production out of the Lyondell facility in the second quarter compared to the first quarter and also had more protection across our solvent facilities. And we produced solvents at the Cotton Valley then also (inaudible) solvents to the few other facilities. So it’s really across the board there and had some higher productions coming out of Princeton.

Unidentified Analyst

Okay. So, none of that increase was attributable? You have the ability to run some specialty through the Superior or that’s not the case?

Jennifer Straumins

You need specialty, well the asphalt from Superior goes – flows through the Specialty segment.

Unidentified Analyst

Right.

Jennifer Straumins

But as far as lubricating oils and solvents, we do not produce any of those products at Superior.

Unidentified Analyst

So, as far as kind of just overall where you are in terms of capacity, do you have scope to have similar type of growth over the next year or two on the Specialty side?

Jennifer Straumins

We do especially out of Shreveport, we’ve always said Shreveport has got a lot more capacity in with this rail project coming online, we will be able to access (inaudible) crude that we’ve not had access to in the past and we look to grow the paraffinic lubricating production and wax production out of Shreveport.

Unidentified Analyst

Okay. Thank you.

Operator

Thank you. We have no further questions in the queue. And as a reminder (Operator Instructions)

Bill Anderson

This concludes the Calumet Specialty Products Partners earnings conference call covering the company’s second quarter 2012 results. Thank you very much for your participation in the teleconference. Please note that this teleconference will be available for replay using the instructions contained in our press release.

Operator

Thank you. Ladies and gentlemen, that concludes you call for today, thank you for joining. You may now disconnect.

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