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Good day, ladies and gentlemen, and welcome to the Second Quarter 2018 Calumet Specialty Products Partners, L.P. earnings conference call. Currently at this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions].
At this time I like to turn the call over to host to Joe Caminiti, Investor Relations. Please go ahead.
Thank you, Dillon. Good morning, everyone. And thank you for joining us today for our second quarter earnings results call. With us on today's call are Tim Go, CEO; West Griffin, CFO; and Bruce Fleming, EVP of Strategy and Growth.
Before we proceed, let me remind everyone that during the course of this call, we may provide various forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Such statements are based on the beliefs of our management as well as assumption made by them, and in each case, based on information currently available to them. Although our management believes that the expectations reflected in such forward-looking statements are reasonable, neither the partnership, it's general partner nor management can provide any assurance that these 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.
As a reminder, you may now download a PDF of the presentation slides that will accompany the remarks made on today's conference call, as indicated in the press release we issued earlier today. You may access these slides in the Investor Relations section of the website at www.calumetspecialty.com. Also, a webcast replay of this call will also be available on our site within a few hours and you can contact the Alpha IR Group for Investor Relations support at 312-445-2870.
With that, please turn to Slide 3 as I pass the call to Tim Go. Tim?
Thanks, Joe. Good morning, everyone. And thank you for joining us. Calumet deliver another strong quarter of performance results. Our core markets remain healthy. We continue to execute well against our strategic priorities and perhaps most importantly our long-term transformation remains on track.
I'm going to spend some time discussing our company wide performance and some operational highlights from the second quarter, and then turn the call over to West to speak specifically to our performance and developments regarding our balance sheet financing and capital spending.
Calumet generated total company adjusted EBITDA of $78.9 million for the most recent quarter. Looking at the performance on an equivalent basis to exclude the assets we saw last year. Our second quarter results represent roughly a 7% improvement to underlying performance year-over-year. These results were driven by healthy markets for our specialty business and improved margin environment for our fuels business and the incremental benefits of our self-help program.
The elimination of our secured notes caused us to incur $58.2 million of debt extinguishment costs as a special charge that directly impacted net income and earnings per unit. Absent this onetime charge our net income and earnings per unit would have been $6.3 million and $0.08 per unit respectively.
Calumet self-help program continues to boost our business performance and in the second quarter we captured an additional $7.8 million in adjusted EBITDA as we've discussed before our self-help program is aim to continuously improving margin capture reducing operating costs and creating quick payback capital investments.
On the margin enhancement side, we put initiatives in place to increase advantage crude opportunities in all three of our fuels refineries. We also initiated and completed two smaller capital projects during the quarter which are already beginning to help our results. We spoke about these projects briefly last quarter, but to elaborate, first, we recently we started up a new isomerate unit at our San Antonio refinery, which has allowed us to sell premium gasoline from that facility for the first time ever. And second, we completed a project at the Great Falls refinery, that upgraded both the quality and market price for our naphtha products.
We also continue to make significant progress with our ERP system implementation, as many of you are well aware, we began implementing a new enterprise resource planning system late last year. The implementation brought some challenges and cost issues with the timely reporting of our quarterly financial information. We have improved the ERP system to the point, that we are now filing without any extensions. As a result you will see us return to a more normal process of announcing our earnings call a few weeks before the call for the third quarter.
Another good time is that we expect our ERP related expenses will come in meaningfully lower than last year's total. We incurred $2.4 million in expenses associated with the implementation during the second quarter bringing the year-to-date total to $6.1 million.
Before I turn the call over to the West, I’d like to point out that after adjusting for divestments, we have now delivered seven quarters of continuous year-over-year improvement, which is a clear indicator that the strategic focus self-help efforts to improve our operations and grow our profitability are working.
With that I will turn the call over to West. West?
Thanks, Tim. Slide 4, shows that our especially products adjusted EBITDA $53 – $53.7 million was down versus last year's quarterly record of $67 – $67.1 million. We had a strong contribution from our higher-margin Finished Lubricants division where we had another record quarter of sales volumes.
Additionally, we had an increase contribution from our Solvents business, which tends to have lower-margins, the contributions from these two businesses were offset by the continued secular increase in crude oil prices, as well as some unplanned maintenance activity in our base oils and white oils businesses. The maintenance activity included a week long power outage at our Shreveport facility as well as maintenance outages at one of our third-party white oils suppliers.
Our gross profit per barrel of $37.12 declined versus $41.87 recorded in the second quarter of 2017, but meaningfully improved versus $33.11 a barrel in the first quarter of the year. The year-over-year performance reflects modest changes in mix as we ramped up for Solvents sales while the sequential improvement reflects normal special seasonality as shown in the next slide.
As you can see in Slide 5, our trailing 12-month adjusted EBITDA margin shows the stability and predictability of the specialty segment across the fullness of the year. While the trailing 12-month margin take down slightly this quarter. This is largely a function of removing the record setting adjusted EBITDA performance from the second quarter of 2017.
Our adjusted EBITDA margin of 14% was down compared to 19.6% in the year ago period, but up sequentially versus the first quarter of the year. We took a number of pricing adjustments in the quarter to offset elevated material costs and we expect the impact of these adjustments to take effect in the third quarter.
Moving to our fuel segment performance in Slide 6, you can see that we produced adjusted EBITDA results of $25.6 million, which was down compared to the second quarter of last year, however excluding the divestiture of the superior asset, our adjusted EBITDA results improved by 320% compared to the underlying performance in the year-ago period. In addition, our great fault refinery captured a quarterly record for throughput volume as we took advantage of favorable WCS discounts.
Our gross profit per barrel of $5.09 for the quarter, was up nearly a 30% compared to $3.92 in the year-ago period. The increase in gross profit was driven by the 28% year-over-year increase in our benchmark Gulf Coast 211 crack spread or $4 per barrel and the $9 per barrel increase in the WTI, WCS basis differential, both of which were somewhat offset by the $3 per barrel increase in LLS pricing versus WTI.
On a sequential basis, the WCS, WTI spread narrowed by an average of $8 per barrel versus the first quarter, adversely affecting the Great Falls refinery and LLS WTI spread widened approximately $2 per barrel adversely affecting the San Antonio refinery.
The WCS discount to WTI remains very attractive and benefits our operations at Great Falls. As we mentioned earlier, our Great Falls facility processed roughly 25, 000 barrels per day of crude priced off of WCS during the quarter. In our PADD 3 refineries at San Antonio and the Shreveport, we mentioned last quarter that we would begin sourcing additional barrels of discounted midland price crude. During Q1, we processed roughly 6,500 barrels per day of midland WTI. In this quarter, we were able to increase that to 10, 500 barrels per day. Further, we achieved to run up to 17,000 barrels per day of midland priced WTI during the month of June and we are expecting to realize the full-quarter benefit of these changes in crude mix during the September quarter.
On Slide 7, we've provided an adjusted EBITDA lot that summarizes the year-over-year drivers of our performance. First, you can see the positive impact that our fuel segment had for the quarter despite the impact of the Superior divestiture. Lower margins and volumes in the specialties business compared to last year with drags. Operating cost increases compared to last year’s second quarter primarily reflecting RIN hardship relief received in the second quarter of 2017. Finally with three other positive contributors as we had lower SG&A, the positive impact of self-help program in $14 million in other, which is partially driven by the decreasing size of the ongoing RINs liability, carried on the balance sheet.
Slide 8 provides a cash bridge for the quarter, where you see that we use $350 million of restricted cash and $96 million of additional cash to redeem our secured notes. We had $25.3 million of cash flow from operations and $14.2 million from proceeds on the sale related to the divestiture of our prior JV in China, which we sold for a modest profit and additional cash consideration related to our previously closed anchor transaction.
Working capital used $28 million of cash in the second quarter as sales rose roughly 26% versus the first quarter, partially due to improved operations, but also due to the higher crude prices leading to higher levels of receivables. Payables also declined somewhat as we finished getting the backlog in the back office to normal levels. Lastly, we had $16.5 million in CapEx during the second quarter, primarily focused on the maintenance and turnaround activity that we talked about later.
Slide 9 shows that our working capital spending is tracking lower full-year guidance of $80 million to $9 million. The second half of the year will include heavier maintenance activity across our assets. We had a partial turnaround at our Princeton facility that we just completed and we will be starting the partial turnaround of Great Falls later in the quarter. Considering that we have spent only $34 million through June, we expect that our full-year capital spending totals will come in towards the bottom of the $80 million to $9 million range. Calumet will remain judicious in how we spend our capital.
Slide 10 provides a snapshot of the hedges we have in place as of the end of the second quarter. We added to our diesel WCS hedges during the quarter and also started to hedge our midland WTI crude runs. The purpose of these hedges is to reduce our volatility of the flat price of crude and capture the attractive market differentials to help ensure that we deliver the cash flows from our fuels business. Some of you may not be familiar with this format, but the percent of the WTI hedges shown in the upper left hand box were put in place during the quarter to hedge the ULSD/WCS differential.
Assuming today’s WTI prices, the hedges provide roughly a $49 to $51 per barrel crack spread. In addition, we’d put in place a midland WTI hedges depicted in the lower chart, which helped lock in an incremental differential to the crack spread, which benefits our Shreveport refinery, which is running approximately 17,000 barrels per day of midland price WTI. We will continue to evaluate our hedging activity as the year progresses.
Before I turn the call back to Tim, allow me a moment to speak specifically to our credit metrics, which will – you will find on Slide 11. As we have noted previously, early in the quarter, we fully regained our senior secured notes in an effort to reduce the burden on our cash flow stemming from heavy interest payments as well as to remove the restricted covenants required by the secured notes.
In May, S&P upgraded our senior unsecured notes to be minus. You will see that our available equity of $382 million as of the end of the quarter, relative to the $458 million we had available to us at the end of the prior quarter. As a reminder, the $458 million excludes the $350 million held in NASGRO [ph] for the redemption of the secured notes.
Given that we used approximately $96 million beyond the amount of NASGRO [ph] to retire secured notes. On an apples-to-apples basis, we had $362 million of liquidity last quarter after giving effect to the extinguishment of the secured notes versus $382 million in this quarter, indicating that our liquidity in our core business actually improved $20 million during the second quarter.
Lastly, the redemption of our notes also had a modest impact on our leverage as measured by our net debt to trailing 12-month adjusted EBITDA. We remain committed to improving our leverage by increasing our adjusted EBITDA through our self-help program while incrementally growing our liquidity levels.
With that, I’ll turn the call back to Tim for some final remarks.
Thanks West, turning to Slide 12. You will see the results of our self-help program. As I mentioned at the top of this call, the program helped Calumet produce $7.8 million in adjusted EBITDA for the quarter, much of those gains coming from our efforts to capturing more value within our supply chain, as well as contributions from the expense [ph] of our Finished Lubricants production capacity. We have captured roughly $16 million of adjusted EBITDA through self-help efforts this year and we continue to expect between $40 million to $50 million in adjusted EBITDA results by year end.
Self-help is not simply an operational initiative, but inherently strategic as well. It is clear that our commitment to lowering our costs, and enhancing our margins through self-help has been a significant contributor to the success we have seen over the last seven quarters of continuous improvement adjusting for divestments. But in fact, our result this quarter represent the third highest quarter we’ve had in the last three years as reported even without the contributions of the assets we divested last year.
On Slide 13, we detail our outlook for the upcoming quarter. In our core specialty products business, we expect a typical seasonal outlook, somewhat offset by higher crude prices and planned maintenance at our Princeton facility, which will wrap up this week. We expect continued strengthening of demand and our Solvents business from increased oilfield activity.
In our fuel business, we expect continued benefits from attractive crude differentials offset somewhat by planned turnaround activity at our Great Falls refinery. We will continue processing as much discounted crudes through our refineries as we can efficiently source with expectations that we process roughly 24,000 barrels a day of heavy Canadian crude at Great Falls and 17,000 barrels a day of Midland WTI at our Gulf Coast refineries during the second half of the year.
With that, I would like to turn the call over to the operator to open up the line to our analysts for Q&A. Dillon?
Thank you sir. [Operator Instructions] Our first question comes from Roger Read with Wells Fargo. Please go ahead.
Yes, thank you, good morning. I guess diving in here, things look pretty good certainly margins overall track and fairly well execution, I guess maybe my biggest question, we look back over the last year some things not your fault like the hurricane, some things maybe self-inflicted like the ERP implementation. Some unplanned downtime here in Q2, is it something that you can recapture as we go forward, I know mix is going to be mix, but I’m just trying to understand if volumes get recaptured, and it’s a temporary effect or is it something where you lose to the broader industry, and it doesn’t get recaptured. And then can you give us an idea maybe the volume impact from the planned turnaround at Princeton this quarter.
Yes, Roger, this is Tim. Good morning to you. Yes, we’re – overall we’re pleased with the margin, you mentioned that earlier in our rising crude environment, we know specialty margins will be lagging and chasing that rising crude, and that’s certainly what we’ve seen over the last really couple years, but if you – as you’ve pointed out especially margins are actually pretty strong in fact probably one of the higher, margin per barrel in this type of rising crude environment, which gives us confident that we are keeping up and maybe in catching up to the rising crude prices. In terms of execution, in the first quarter, we had a planned downtime at Tier 4 [ph] which currently impacted our volume in our production in the first quarter.
In the second quarter it was primarily unplanned as you mentioned at Shreveport, most of it was associated with an external power outage that ended up taking the plant down for about a week. Unfortunately Roger that’s lost barrels production, and so we’re not going to get that back and we call that lost opportunity that we track and continue to focus our efforts on in terms of minimizing that.
We also had some third party, supplier outages, Roger that resulted in lost production that also is not going to come back in the future, but it’s unfortunate we’ve been working with our supplier to continue to improve their reliability, but all in all we would probably characterize those lost opportunities at about $8 million for the quarter.
Okay.
Your question about Princeton. In Princeton, we are just finishing up the turnaround right now, it was about a 30-day turnaround at Princeton it was partial. We continue to run crude, but our hydro processing facility was down for turnaround, so our impacts will be a partial impact on third quarter results.
Okay, great. Changing gears a little bit, longer term we’ve been talking about maybe restructuring the company and various ways some of which obviously we’ve seen the sale superior. As you look at both acquisitions and/or divestiture here, how do we – how should we think about the fuel products in the specialties business. We add both from here, we take away from one there’s the market look more or less favorable for either side?
Yes, Roger on restructuring, I’ll take a shot at this and then Bruce you can jump in if you’d like. We continue to look at all our opportunities whether they be on the specialty side or the fuel side, we continue to look at divestments, we continue look at acquisitions, so all of those remain in play. What I would tell you is, we’re probably not going to grow in the fuels area that’s something that we signaled to you guys last year. We are looking to continue to grow in specialties area as demonstrated by our acquisition of Biosynthetic last quarter. But just because we’re not going to add more assets in the fuels business, doesn’t mean that that fuels business isn’t still important to Calumet.
And so I just want to emphasize for example, Shreveport, which we talked about before continues to be a core asset for Calumet and have both specialties and fuels exposure. We’ve been working and focus very hard on improving the overall profitability of Shreveport both on the specialty and fuel side. And in particular, we’re very encouraged by the current Midland Cushing WTI differentials that we’re going to able to take advantage of the Shreveport.
So, you look at great Falls and with the strong WCS differentials that we’re seeing here going into the third quarter. Again, we’re very pleased with the outlook for those facilities. And then when you think about the overall IMO 2020 impacts and how that’s going to continue to strengthen the diesel cracks in the market. We think Calumet, are well positioned, our facilities are well positioned to take advantage of not just the crude differentials, but also the higher demand in the higher margins associated with the IMO 2020 in the shift.
If you think Roger about just overall, how Calumet specialties and fuels businesses are stacked up. We make about 30% of our production, ULSD and jet, so call that a distillate mix, we make another 8% or 9% in Solvents, which will directly be impacted by the IMO 2020 and that we make another 10% to 11% in base oils, which we also think will be helped by the IMO 2020 initiatives. So overall, our product suite is exposed roughly 50% the rising diesel cracks that we’re starting to see here and look to in future.
Thanks. That’s really a good clarity on that. One last question from me, RINs, I know the prices that you’re seeing just come down quite a bit. A part of that the small refinery exemptions, you would seem to have units that pretty well – at least by paper, wouldn’t seem to qualify, but we haven’t seen anything specific on a small refinery exemption for you. I just wonder if you kind of update us on your approach to that?
Roger, this is Bruce. There is so much opaqueness around the RINs public market that it’s really hard to interpret what some of the relative performance metrics are from our peers. A couple of them have announced exemptions. We tend to footnote those as we – as we’ve received them in the past, there’s really no clear view, where the whole program is headed right now.
Okay, great. Thank you.
Thank you. Our next question comes from Jason Gabelman from Cowen. Please go ahead.
Hey guys. How is it going? I just had a quick question on the Permian crude sourcing. Can you just talk about where you’re sourcing their crude from and how you’re transporting it to your refineries, just try to hold in on what the transportation cost is for you guys?
Yes, Jason. This is Tim. Let me try to explain, we’ve made a lot of efforts and we’ve talked about that earlier on the call to continue to improve our Permian exposure, primarily to the Shreveport refinery. But I can tell you we’re also looking at trying to support and bring some of that over to our advantage to our refinery.
The 17,000 barrels a day that we’ve talked about that we actually got to that run rate here in June and we believe we’re going to be able to continue that through the rest of the year. You can – the way I would model it, Jason, the other way I would think about it is we have full exposure to the midland Cushing WTI differential for 12,000 barrels a day of that 17, it’s via pipeline and contractual arrangements. And it only has an incremental cost of about $0.75 to get that to the refinery. So that 12,000 is in pretty good shape, you will note that West talked about earlier in the call that we’ve hedged a lot of that volume already.
So, if you take those hedges, it’s tracked $0.75 on the incremental cost, you’ll get a feel for what kind of uplift we’re looking for on that 12,000. The additional 5,000 barrels a day, our midland price barrels, but after transportation and other expenses, they net out it a fixed benefit of about $1.50 a barrel for those 5,000 barrels. So that’s kind of how the 17 overall shake out. We’re very pleased with the improvement that that provides in our third quarter outlook and fourth quarter outlook. And we are continuing to look at ways to bring more of Permian crude into our Shreveport and San Antonio refinery.
Great, that’s really clear. If I could just ask a follow-up about the refinery projects that you mentioned the Isomerate unit in San Antonio, the Naphtha upgrading in the Great Falls. What type of contribution are you seeing from those or can you put any metrics beyond the one-year payback period to those projects? Thanks.
Sure, I think we can give a little bit of guidance there. We just completed our initial look back on both projects and the current commodity price environment, we’re around, we’re right at $10 million a year of EBITDA.
Great. That’s all from me. Thanks guys.
Thank you. Our next question comes from Sean Sneeden from Guggenheim Please go ahead.
Hi, good morning and thank you for taking the question. Tim, maybe for you as we’re getting ready to a lot kind of a full year on the ERP implementation, can you talk a little about the opportunities that you see that maybe available whether it’s on the cost side or other synergies that you can share with us?
Yes, this is West. That’s a great question, one of the things that we envisioned when we went live on our ERP system was to consolidate all of our transportation and optimize our transportation costs. And so that was a huge benefit we’re anticipating. Unfortunately, when we went live on the ERP system, we had to disable a lot of that functionality, because we had some bigger issues that we had to deal with. We have since started to roll that out and I think I may have touched on it briefly on the last call.
We have three plants that are currently utilizing that feature, which helps us to coordinate and optimize our pricing on all of our transportation. and we’re rolling it out to our other plants on a program basis, where we think we’ll have almost all of those – all of our plans switched on to it by the end of this year. One of the things you’ll note is our transportation costs have been relatively steady; it’s actually declining a little bit.
And that’s in phase of the market, where you’ve had kind of a secular increase in transportation costs across the board. So, I think while there is more to be done in this area, we think that that’s going to actually be incredibly helpful to us to maintaining our margins and our profitability in spite of some increase costs hitting the overall market.
The other key areas that we think there’s going to be a tremendous amount of this help – is that historically prior to the implementation our ERP system, we did not have good visibility with respect to where we were making our money in which products et cetera, in what the overall product profitability was et cetera as well as various market channels.
We have great hopes for that. We’re just now getting the point where we’re going to be getting that information here in the next quarter. And obviously that is a key driver, if you know where you’re making your money and where you’re not, you can then start up massing your business. And so we have not identified exactly kind of what we’re going to be able to realize associated with that, but we have great hopes here in the future and that’s something deserve look at monitors as things progress here over the next couple of quarters.
That’s helpful. So I guess – when you think about at least the transportation impact in that optimization plan we should kind of be anticipating, you guys kind of keeping a relatively consistent cost is kind of head into next year when that sense [ph] kind of fully rolled out, how is your kind of think about that impact?
I wouldn’t dissipate that are whatever increases the market generally has in transportation will realize fuel, is the way I think about it, because of the rollout of the system is going to help us control our cost better.
Got it. That’s helpful. And then I guess just two quick housekeeping questions if you don’t mind. I guess, one on working capital – the use of cash in the quarter, and I think first half, what kind of order of magnitude should we be thinking about as a source of cash in second half and unlock some of a inventory in [indiscernible]?
So the second the second half of the year really non-anticipating too much other than the typical source seasonality. So obviously you have a build up an inventory every year associated with the asphalt season, and obviously this is we’re rolling into the peaks asphalt season, and so there will be liquidating those inventories and you’ll see the working capital decline associated with that.
Got it. And I guess did expectation then is – with some of the benefit from working cap – you should be roughly going to free cash flow positive when you kind of compare that with the CapEx currency you’ve talked about – that sort of fair assumption?
Yes, our key driver since 2017 is to be cash flow positive on an annual basis, and so we’re very, very focused on making sure that we get our debt down and improve our credit metrics, and we want to be driving the company to cash flow positive.
Great. And then just lastly for me. Any kind of new thoughts West on your current balance sheet, obviously you’re picking up a secured notes was a pretty material positive, but how are you guys thinking about the current maturity wall and any plans kind of push that out that beyond where we are today?
Yes. So that’s a great question, we’ve got an obviously $900 million of the 2021 unsecured notes. there is nothing wrong with those notes – there’s – we love the coupon associated with this just there’s a lot of them. And yet at the same time, where we sit today, interest rates over the next two years would have to go up to tremendous amount to justify taking those notes out today versus waiting.
So to certain extent, we’re kind of paid to wait. One of the things that we’ve been doing as you know this is we’ve been working to improve our balance sheet, get our metrics in better shape, talking to the rating agencies and got the upgrade from S&P, Single B minus, we’re continuing to talk to Moody’s and trying to work to improve things as far as that’s concerned. So, we think that there’s a little more runway here in terms of improving our credit metrics as well as potentially seeing some improvement in terms of our ratings. And so that’s what we’re going to be focused on in the short-term before we consider refinancing our debt.
Got it. I appreciate it. Thanks guys.
Yes.
Thank you. And our last question comes from Mike Gyure from Janney. Please go ahead.
Yes. Good morning. Can you guys touch a little bit on your capital expending forecast – any funds for acquisitions or joint ventures or anything like that?
Yes. We don’t include anything in our regular CapEx plans for any acquisitions or JVs or anything of that nature. We don’t forecast acquisitions. And so there has been that in the guide CapEx spend that we provide is simply related to really our organic activities.
Okay. And then maybe secondly on the lower cost of market adjustment, this quarter looks like it was a slight benefit, was that mostly in the fuel segment or in the specialty Products segment?
Yes. It was mostly on the fuel side, Mike.
Great. We read that out in the press release in the different sections of the segments.
Great. Thanks.
Thank you. This concludes our Q&A session. At this time, I’d like to turn the call back to CEO, Tim Go for closing remarks. Please go ahead.
Thank you, again for joining us today and for your continued support. Have a great day.
Thank you, ladies and gentlemen for attending today’s conference. This concludes the program. You may all disconnect. Good day.