Q3 2019 Earnings Call
The 19, Calumet specialty products partners earnings Conference call.
At this time all participants are in listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone.
If you require any further assistance. Please press star zero I would now like to hand, the conference over to Joseph came in the Investor Relations.
Thank you Andrew.
Good morning, everyone. Thanks for joining us today for third quarter earnings results call.
Today's call or Tingo, CEO West grouping seeable future earnings <unk> CFO , starting January 1st for each word.
Just wondering <unk> strategy growth.
Before we proceed at Columbia Wind every one of during the course of this call. We may provide various forward looking statements within the meaning of section 21 eating Securities Exchange Act from nothing to report.
Such statements are based on that leaves for restaurants as rolled assumptions made by them and in each case based on information currently available to them.
So were management believes the expectations or buy goods such forward looking statements are reasonable you. The partnership it's general partner no arrangement can provide any assurances that the expectation should prove to be correct.
Please refer to the Partnership's press release, there was issued this morning as older latest filings with the Securities and Exchange Commission for at least two factors that may affect our actual results could cause them to defer more forward looking statements made on this call.
As a reminder, you may know download a PDF presentation slides to accompany the remarks made today's conference call as indicated in the press release, we issued earlier today.
To access the slides any investor relations section of our website at Www Dot Calumet specialty dot com.
Also a webcast replay of this call will also be available oversight within a few hours and you can contact all biographer Investor relations for a three wouldn't you were five to 870.
With that I'll pass the call Tim Tim.
Thank you Joe and good morning, everyone.
Calumet delivered strong third quarter financial and operating results and made significant progress toward our transformation and de leveraging goals.
The structural changes we have implemented through our self help program enabled us to overcome significant market headwinds.
Here.
I'm proud of the focus on determination for Calumet employees.
We're delivering on their commitment.
I'm encouraged by the culture of continuous improvement and growth that we're cultivating to drive this success.
Starting on slide three I'll walk through some was kind that's a key business highlights for the quarter.
We realized $76 million, an adjusted EBITDA after excluding noncash inventory adjustment.
This was a 34% increase over the third quarter last year.
This profitability improvement translated into $64 million of cash flow from operations, a significant step up from the $6 million negative cash flow from operations in last year's comparable quarter.
These improved results were driven in part by ongoing contributions from our self help initiatives, which directly contributed to record utilization at our facilities and plant level throughput records, that's four of our operating side.
These strong financial results also drove further improvements to calumets balance sheet.
Our leverage ratio defined as net debt to trailing 12 month EBITDA improved to 4.2 times.
Down from 4.6 times in the second quarter, this year and down from 6.2 times year over year.
After excluding noncash LLC in LIFO adjustments, our leverage sits at approximately 4.0 times as of quarter end down more than three full terms since last year's third quarter.
Deleveraging our balance sheet has been one okay. That's most important strategic imperatives over the last three years.
We also repurchased $49 million of bonds during the third quarter and the open market, which brought our bond repurchases to $139 million year to date.
Our stronger balance sheet was recognized by Moody's and July when they upgraded our corporate family credit rating to be three.
This has enabled us to obtain improved trade credit terms with our vendors, which has further improved liquidity and helped reduce our networking capital needed to run the business.
Finally, we've advanced on three strategic initiatives objectives since our last earnings call.
First we refinanced the 2021 nodes in the unsecured market and reduced our total long term debt by $350 million during 2019.
Second we divested the things O'neill refinery on a credit accretive basis, which will enhance our capital structure.
Continuing our transition to focus on our core specialties business.
And third we announced plans to transition their responsibilities of the Chief financial Officer to keep Jennings beginning January 1st.
He has experience in the specialty business or Eastman chemical and will help us complete our turnaround and pivot towards growing our core specialty business.
If you look at our earnings release that we issued this morning, you will see some changes to our financial reporting.
During the quarter, we went through the process of re segmenting, our financials, which we detailed on slide four.
This change included creating a corporate segment in addition to our two operating segments.
And shifting to market based transfer pricing between segments.
We made this change because this is how management views our business.
And because it provides greater transparency into the earnings power of our operating segments.
It aligns our reporting industry reporting practices.
And it enhances our disclosures at a time when we are actively adjusting our asset portfolio to focus on our core specialty products business.
The effective the re segmentation on our specialty segment is roughly neutral.
Because we're moving the corporate allocations to specialties is largely offset by the change to market based transfer prices.
On the other hand, our fuels business benefits from both the removal of the corporate allocations as well as they transition to market basis interest segment pricing.
Specifically for our Shreveport fuels business.
For this earnings call, we have compared our third quarter 2019 results to the re segmented results from last year to make the results comparable.
Turning to slide five we announced yesterday that we sold the San Antonio refinery.
The transaction includes the sales of refinery.
Crude oil terminal and pipeline assets to a strategic partner for the sale price of $63 million less an adjustment for networking capital related inventories and some transaction costs.
This transaction also eliminates a liability they came in carried on its balance sheet of $38 million or the texstar pipeline commitments.
[laughter], we have been clear that our long term strategic focus is on our specialty products business and we have also shown both the ability and willingness to act on the right opportunities to move in that direction.
This transaction fits our strategic criteria in that it is credit accretive.
Immediately improving our leverage 0.2 times on a pro forma basis.
It improves our future cash flow by eliminating the annual maintenance and turnaround capital associated with the San Antonio refinery.
It reduces our exposure so volatile fuels market.
And it continues our journey down the path of our transformation to specialty products.
Turning to slide six I'll cover our financial performance for the quarter.
Net income for the third quarter on a GAAP basis was a loss of $4.6 million or six cents per unit.
Excluding unfavorable noncash charges associated with an impairment and LCM in LIFO. Adjusted net income was a positive $7.1 million were positive nine cents per unit.
Our third quarter adjusted EBITDA of $74 million was up significantly a 35% increase over the year ago period.
After excluding unfavorable noncash LCM, our LIFO adjustments for the quarter, our adjusted EBITDA totaled just over $76 million.
Our trailing 12 months adjusted EBIT outperformance as shown in the chart at the bottom of the slide.
This up into the right chart reflects the continued success of our self help program.
As you can see our trailing 12 month adjusted EBITDA totaled $318 million.
51% increase.
Compared to the $210 million captured at this time last year.
This represents a company record or trailing 12 month profitability, excluding the superior anchor divestments.
Over the last few years, we've talked about a number of new records that we said, but this quarter stood out in terms of our team's execution.
We faced a number of significant market headwinds.
In both of our segments this quarter, which west will detail in a few minutes.
That's a hard work that our team has done a structurally improve our business overcame these headwinds to deliver these strong results.
With that I will turn the call over to west to talk to the segment results.
Wes.
Thanks, Jim.
Slide seven shows the adjusted EBITDA waterfall reconciling the third quarter results to last year's comparable quarter.
Starting from the 54.5 million baseline figure from last year's third quarter, you will see the results of 73.5 million improve materially versus the prior year period.
We faced significant market headwinds in the quarter, which was evidenced by the nearly 19 million decrease in our fuels margins.
These margin headwinds were primarily a function of unfavorable WCS and Midland crude differentials.
We also had some small specialty margin weakness due to change in mix as little margin tolling business accelerated right before the termination of the contract.
The most significant positive contributor to EBITDA performance was the increase in volumes across both the specialty and fuels businesses.
Which accounted for $13.5 million, an 11 million year over year, respectively.
We saw a meaningful increase in sales volumes on a year over year basis.
This improvement was driven in part by the absence of turnaround activity at or Princeton facility last year.
Combined with record utilization and plant level throughput records. This year that we mentioned at the top of the call.
Our operating costs decreased 11.5 million, which includes help from small refinery runs exemptions that we received in the quarter.
Our EBITDA improved by four point Fourmillion from lower transportation costs compared to the prior year combined with some minor impairment charges.
DNA cost picked up by 3 million as we continue to support our self help initiatives, but those higher expenses were more than offset by the 6.3 million of additional EBITDA. There was generated through our self help efforts.
As shown on slide eight our core specialty segment generated 51.6 million, an adjusted EBITDA, excluding LCM in LIFO.
Hey, 39% increase in profitability year over year.
These solid results were driven largely by higher sales volumes, which were supported by increased plant utilization and the absence of the downtime at Princeton that occurred in last years period.
Our adjusted EBITDA margin results of 14.5% Mark strong improvement versus last year's results of 11%.
Our margin performance has benefited from a high grading of our sales channels through our SKU rationalization efforts.
NAMIC that we would expect to continue.
Additionally, our improved EBITDA margin saw some contribution from the early recovery that we have observed in the perfect base oil market, which has generally been market headwind to our EBITDA and margin results for much of the year.
Gross profit per barrel of 33.83.
Dollars more solid improvement versus the prior year as well given given in part by though.
Self help efforts in business improvement plans, we have been executing against this year.
Well, we had solid results in the third quarter, we were adversely affected by the end of the brunt catalyst performance at our Sri Port facility, which affected yield product yields during the last days of operations before starting our turnaround at the facility.
While our turnaround in the fourth quarter will impact production volumes. The good news is that the turnaround will restore the plant to started run conditions, which should set us up for good operational performance during 2020.
Slide nine walks you through the year to date results the specialty business compared to the year to date figures from last year.
Starting from a base of 129 million, you'll note that the Resegmented specialty EBITDA for the 2018 period is very similar to the previously reported results.
This.
Is in line with the point that Tim made the removal of the corporate overhead is largely offset by the move to mark.
Market related transfer pricing.
The substantial improvement in year to date results from 129 million to 171 million shows improvements in margins driven by exit of lower margin business increases in volumes driven both by a lighter turnaround schedule as well as higher utilization rates.
And self help benefits largely attributable to our efforts to reduce or low margin business.
Moving to slide 10.
We highlight our fuels business performance.
Our adjusted EBITDA results, excluding non cash LIFO and LCM adjustments totaled nearly 47.7 million.
Roughly 8% compared to the prior year.
Again, our self help efforts continue to bear fruit, particularly on the operational side evidenced by our record utilization and 6.5% increase in production volumes.
These self help projects such as the de bottlenecking projects at Shreveport, and San Antonio at more than overcome the weaker crude differentials in the fuels market.
In the quarter, we realize rins exemptions related to the 2018 obligation.
Which contributed 11 million to our results.
Gross profit per barrel results of $5 in 18 cents, excluding LCM LIFO.
Declined modestly versus last year.
Given by the significant tightening of crude differentials the drove results in the comparable period.
The WCS WCS WTI averaged differential across the quarter tightened by $16 in 27 cents per barrel.
While the average middle and W.G.I. differential tightened by $13.73 per barrel compared to last year.
Looking forward, we will implement an additional crude debottlenecking project to Trimboard as well as part of the turnaround in the fourth quarter, which will further reduce that I'm, sorry that will further improve our production capability.
On slide 11, we provide a year to date comparison of our fuels business profitability versus the prior year.
First we would like to point out the increase in the re segmented adjusted EBITDA versus the previously reported results for 2018.
This step up reflects both the removal of the corporate expenses that were allocated the fuel segment as well as the improvement in results by moving to market transfer prices.
You should note that the market transfer price really is just an adjustment between specialties to Shreveport fuels.
Since grateful has no interaction with our core specialty business in San Antonio has very little interaction the effective market based transfer pricing is largely a shreveport effect.
Freeport isn't integrate asset and as we talk about our core business moving forward, we will talk to start talking more about Polish report.
Starting with the Resegmented as adjusted EBITDA results for the nine months ending September 2018 of 155.3 million.
The adjusted EBITDA results of 155.5 million through the first nine months of the year are essentially flat to last year.
The year over year decline in fuels margins was driven in large part of the significantly tighter crude differentials and totaled more than 37 million.
This was offset by the nearly 38 million of uplift from the increased fuels volumes.
Function of Debottlenecking efforts at some of our production and wider turnaround activity at the tree port and great Great Falls refineries.
Higher operating costs represented a $38 million headwind as the value of the Rins exemptions received in 2019 is far less than the value of the exemptions received last year.
LCM in LIFO adjustment store inventories contributed over 23 million to our headline results, while the structural uplift to our profitability from self help in operations excellence of contributed 13.6 million.
On slide 12, we detail or capital spending year to date.
It has been 54 million on a combination of both maintenance and growth projects, we're maintaining our full year guidance for capital spending with expectations that we will be within the range of $80 million to $90 million, but anticipate that we may be at the higher end of the range as we've expanded the scope for this report turnaround in the fourth quarter.
With the objective of minimizing downtime during 2020.
Turning to slide 13, we bridge or cash position gives this year sequential quarter.
Starting with a cash position of 173.5 billion as of the end of the second quarter.
We generated nearly 38 million in operating cash flow.
And so on additional release of working capital of just under 37 million.
About a third of this improvement in working capital is due to improvements in trade credit.
As you know we've been repurchasing our bonds in the open market this year and used roughly $49 million of cash on hand to redeem bonds and reduce our debt levels in the quarter.
We saw roughly a $15 million draw down in our cash principally due to our third party inventory financing provider.
Additionally.
We spent approximately $21 million in growth and maintenance capital during the quarter, bringing our cash position to 164.2 million as of quarter. It.
Slide 14 bridges, our cash flow from operations on a trailing 12 month basis.
As you can see our trailing results at this point last year had to produce negative cash flow from operations of nearly 53 million.
Our improved earnings results contributed roughly 130 million to our trailing 12 months total as structural improvements have generated improved results across both of our business segments.
We've captured roughly 22 million of uplift versus the prior year through reduced interest costs a function of the significant amount of debt reduction we have executed by buying back or bonds.
On top of that we've seen a significant reduction in working capital of over 160 million.
As changes to our operations means less cash tied up in the net working capital through lower inventory builds combined with improved trade credit compared to last year.
Slide 15 outlines our credit metrics, which continued to show steady improvement dating back to the beginning of 2017.
Deleveraging our balance sheet has been our top priority over the past three years in our improved EBITDA results and strong cash flow performance has driven the continued reduction in our leverage.
Debt to trailing 12 month EBITDA as of quarter end was 4.2 times or 4.0 times, excluding LCM LIFO adjustments.
This number is down from 6.2 times in the third quarter of last year and more than three full turns after excluding the non cash inventory adjustments.
Previously we spoke to the 49 million of 2021 notes that we bought back in the quarter and the 139 million that we have repurchased since the beginning of year.
Utilizing improved cash flow in excess liquidity to reduce our debt burden and improve our balance sheet.
Notably, we successfully refinanced 550 million of the 2021 notes and the unsecured market.
A meaningful step down from the 900 million of those we originally issued driven by the debt repurchases, we have conducted year to date.
Our lenders and rating agencies have acknowledged this improving credit outlook and leverage reduction.
Came at recently achieved an upgrade to the company's corporate family rating to be three in July .
This upgrade has been helpful. In our efforts to increase trade credit with suppliers and vendors, which in turn is helping boost our liquidity position.
Our available liquidity of 438 million measured as cash on hand in availability on our revolving credit facility.
There's 32 million higher than last year's comparable quarter in spite of our repurchasing $139 million of bonds over that period of time.
On slide 16, we give you a snapshot of power interest burden has materially improved over the past three years.
The chart on the left hand side Cios are annual interest costs two years ago, we carried an annual interest burden to more than $180 million, which has declined by roughly $40 million today after redeeming the senior secured notes.
20 April 2018, and our repurchasing 2021 notes through.
Throughout 2019.
While we issued our new unsecured 2025 notes at an interest rate of 11%, reflecting the current conditions in the unsecured high yield market.
We didn't materially stepped down the amount of debt we needed to refinance.
Resulting in our total interest expense forecast for 2020 being almost the same as is forecast for 2019.
As you can see on the table on the right hand side of the page we forecast our cash interest costs will be a 138 million next year, a number only slightly higher than what we will pay in 2019.
Joe.
Thanks.
Turning to slide 17.
Calumet captured $6.3 million and EBITDA through our self help efforts in the third quarter, bringing our year to date totaled $27.8 million.
This uplift came through our continued focus on operational excellence and small high returning capital projects.
Specifically in Shreveport.
We realized higher volumes you this due to the crude and PVA debottlenecking projects and better margin and mixed performance and our fuels and specialty businesses, including higher margin lower local rack sales for our fuels business and improve yields for various specialty products.
Combined these efforts are helping drive greater gross profit per barrel performance as evidenced by the chart on the top left hand side.
As Wes mentioned improvements to how we manage our inventories and working capital continue to contribute to our profitability visible through the continued decline in our finished goods inventory.
We've made significant changes to how we manage our asphalt business and we have instituted much improved coordination between our production and our sales team in order to produce right product in the right amount at the right time to accurately meet demand and preserve our.
Margins.
Additionally, we continue to benefit from improvements across our supply chain.
As our ERP system and the enhanced capabilities that it offers is helping identify opportunities to capture greater efficiencies.
This in turn has resulted in lower freight costs as well as lower storage and railcar costs.
Again these are long lasting sustainable performance improvements and we look forward to keeping you updated as we execute against our self help phase two goals.
Slide 18 covers our outlook for the coming quarter.
Please remember our interest expenses balance sheet and asset portfolio are impacted by the refinancing of our 2021 notes and the San Antonio divestment.
And we expect to continue capturing benefits from our cell health program in the quarter.
In our core specialty business the fourth quarter is a historically we quarter for demand in the fourth quarter will also be impacted by our Shreveport turnaround.
However, after completing the turnaround we will benefit from improved yields and product quality as we reset to start of run conditions within new catalyst.
We will further rationalize low margin skews from our finished lose and chemicals business and we are ending a third party tolling agreement that all together add up to 2000 barrels per day of rationalized low margin business in the fourth quarter.
In our fuels business the fourth quarter is typically a weaker quarter for margins.
Additionally, last year's fourth quarter benefited from favorable crude differentials and while we were seeing the current WCS VTI gifts widen back to rail takeaway economics, we do not expect to experience the same tailwinds as the prior year.
We will implement another small crude debottlenecking project at our Sri Port facility during this turnaround.
Setting up next year for improved throughput and utilization.
And finally, we continue to prepare for IMO 2020, and the impacts in our fuels and specialty businesses.
Before I close my prepared remarks, I want to take a minute to acknowledge west as this will be his last earnings call with Calumet.
I want to thank west for his many contributions.
Wes has played an instrumental role in our turnaround journey in the past three years and as west prepares to leave we look forward to pivot to the next phase of the company, which is a focus on growing our core specialties business.
Keith Jennings will take over as CFO , starting January Onest, and we'll take a company on the next leg of our Gerry.
I would like to introduce kids, you now and asking to say a few words.
Thank you Tim I'm excited to be apart the Calumet team and look forward to meeting of many of you Andrew investors as possible for the coming months.
Hi, this transformation clearly gaining momentum as evidenced by the recent refinancing continued earnings growth and portfolio rationalization, such as the San Antonio sale.
I look forward to contribution to the company, becoming the world's premier specialty agility and cost company.
Jim.
With that I would like to turn the call over to the operator and open up the line through our analysts for Q in a Andrew.
Thank you as a reminder to ask a question you will need to press star one on your telephone.
Withdraw your question press the pound key please standby, while we coupled to Q1 a roster.
Yes.
Thanks.
No first question comes from the line of Roger read with wheels from Wells Fargo.
Okay.
Pardon me Roger read your phone might be on mute.
Our next question comes from the line of Neil Mehta with Goldman Sachs.
Good morning. This is carlyon for Neal Thanks for taking my question on the first one is just around specialties margins gross profit per barrel is down quarter over quarter and you mentioned a couple of Calumet specific factors on that those just curious if there's anything else macro or industry related driving that Delta and then can you also touch on.
You are seeing so far have here in fourq.
Yes, Carly this is Tim.
Especially margins were.
Were lower sequentially, which I think is what you're referencing versus second quarter of this year, but if you look at it year over year specialty margins of $34 per barrel were actually up.
Versus the third quarter of last year, I think as more of a seasonal effects. Currently the first two quarters of a year or generally are stronger quarters and so we're.
Positive on the specialty margins and feel like that continues to.
Support our strategy of rationalizing low margins he is getting our especially margins up you'll see that in the EBITDA margin that percentage was up.
This quarter versus both last quarter and a year ago quarter.
So we feel positive about that currently in the fourth quarter I would tell you that we've talked about the baseball margins.
All year and how that has been a headwind for for our business. So far in the fourth quarter we've seen.
We've seen crude prices dropped a little bit more.
Versus at least last year, and and we've seen product prices holding but I will tell you as we get into the fourth quarter, it's typically a weaker.
Margin quarter, and we expect that to hold true this season as well.
Great. Thanks, that's helpful color and then the follow up visits are on Capex is there any early read you can provide on 2020 capital spend and then perhaps how much you expect to be allocated towards to self help.
Yes, so that has a great question.
We're going to spend about the same amount. This next year as we.
Our spending this year. So it will be in the same sort of $80 million to $90 million or range.
What you're going to see US do however, with the sales San Antonio is that's going to with and also with a lighter turnaround year quite honestly.
We're going to spend a little bit more money on our self help projects.
And in have a little bit more focused on growth opportunities.
In 2020 relative to 2019.
Got it great. Thanks, guys congrats on a good quarter.
Thank you.
Thank you. Our next question comes from the line of Roger read with Wells Fargo.
Hey, good morning, and hopefully you can hear me this time.
We can hear your additive.
I don't know little challenged on my side, I guess, where the mute button or some kind of.
Anyway I missed some of the prior question. So if I do repeat this I apologize but.
I just wanted to understand I think.
The comment it's on you mentioned a couple times certainly at the end there or you introduced Keith bridge on slide three the preparing for growth in specialty products.
Could you give us a little more clarity on what that exactly means I understand the de bottlenecking you've done so far obviously the mix changes.
And while Q2 Q3 volumes were up in specialty year over year specialty volumes are essentially flat and they're down kind of over the last year too. So just curious how should we think about growth where would it come from and what do you anticipate sort of the margin impacts and cash flow impacts from that today.
Yeah. Roger this is 10.
And on specialty volumes, let me just point out a couple of things stars.
We publish production volumes.
Versus the detailed sales volumes and so while the third quarter you're showing.
We're seeing a little bit lower production volumes, we actually had a very strong specialty sales.
Volume quarter.
We've talked all along about reducing.
Working capital and inventories and so we've been able to have stronger sales as we continued at a rate reduce the working capital.
Okay, and then I would say is we've talked about SKU rationalization in particular and our finished goods business.
And.
You'll notice in the production volumes that we do publish that finished moves volumes are showing down about 600 barrels a day and that is exactly what we would have expected and what were intending to happen as we continue to.
That drives our.
Our our SKU rationalization program and drive higher margins.
The other thing I would tell you is.
There is the other category.
Our specialty volumes is a is down about 700 barrels a day.
That was a reflection of the turnaround activity that we had last year.
And some of the intermediates and especially business that was an outcome of those turnarounds, we would not expect to see those volumes continue in the in the future and those are lower margin.
Intermediate products as well so so those are intended and then the last thing I'll mention is.
In the fourth quarter of this year I talked about it in my prepared remarks, we are taking some further rationalization steps we had a third party tolling arrangement.
That was in those production numbers, it's about 1500 barrels a day and we are ending that relationship in the fourth quarter and you'll see those volumes lower starting in the first quarter. So that's the point here is don't use production volumes as a gauge of our specialties business.
We will continue to drive.
Growth on a on a volume basis, but it's going to be reset from a position where we've taken out these low margin.
Products and and.
And and.
Right on a stronger platform of higher margin business now when you ask about where is that growth going to come from.
Excited to talk about again that pyramid of growth that we that we continue to show in our appendix.
Starts with operational excellence at the back on the bottom of the pyramid, we've talked a lot about operational excellence and self help program from that standpoint.
The next layer is.
Small high margins capital projects high return capital projects and I'm pleased that beta we are continuing to.
Flex that.
That more and more west talked about our Capex program for next year is still in that $80 million to $90 million range, but thats without San Antonio and Thats with a somewhat lighter turnaround here and so the reason that it's still in that 80 to 90 million range as because we have identified.
More specialty growth projects that we're going to be implementing at our facilities Shreveport Princeton current city all of our specialty sites are part of this program and we're going to continue to see more of these low cost.
At high return projects, continuing to drive growth and you're going to see growth and.
Volumes from the new base, you're going to see growth in margins and then you're going to see growth in what we are.
By re segmenting, our we're going to be refocusing on our DNA and you're going to see growth as we continue to drive that DNA down as well.
Okay, maybe as a follow up on that we as we think about these high return capital projects next year.
Give us an idea of kind of what you would anticipate the returns to be on that or a cash payback period are these the.
Investing it in February and your cash payback in six months kind of real high impact projects or are we talking about something is takes a little longer and then my other follow up question based off your comment about having sold down some of the things from inventory as we look at slide 14 is probably for us.
The net working capital contribution of 160 million can you give us an idea of how much of that was the sale down of these access volumes or inventory volumes versus what was just an improvement in working capital as a result, or the other efforts you've put through.
Yes, I'll take that capital project question first and then I'll turn it over to west for the working capital on projects, we're targeting two year payback returns.
Projects or.
Roughly 30% are those in the type of targets.
We're going after Roger.
Of course, there all individually and we will make individual decisions on it so thats the target range, we're looking at.
Yes, and Roger with respect to the net working capital.
Hundred 60 million that you see there.
Thats driven in part by.
Some of the recovery that we had post implementation of our.
Of our ERP system as you know we've got.
In.
Some of our inventories and accounts receivable and various things out of whack.
So we.
I had the finalization of the recovery associated with that and then the balance of it is really been secular decline in our inventory and how much is needed to really run the business and and we show you some grass in the past but.
Going back to 2017, you had a very very nice steady decline in terms of our total inventories.
The system.
And those are all sort of permanent.
Changes.
I think what you're going to see on a go forward basis, we have had improvements in our trade credit roughly $12 million are so this year and I think theres more to get associated with trade credit I think.
We'll finally end up with no further changes in our.
Credit.
Ratings, I think we'll probably get close to double that amount to over some period of time here.
But.
But I think the changes that you've seen our are good solid structural changes I don't think that you're going to see a tremendous amount more coming out of the reduction in.
Inventories.
I think the bulk of that has already been achieved to date.
We may see some.
Slight continued improvements in terms of our inventories as we.
Get our.
Availability of the promise of them RP.
Elements of the ERP.
Coming on all cylinders, but it's not going to be that.
Thats significant.
On a go forward basis or don't count on this slide this next year, showing a like amount of $160 million reduction that working capital.
No I appreciate the clarity there, thank you and and west. Thank you for your time and effort and all the help along the way here. Good luck in your next steps and Keith Welcome. We look forward to working with you in the future.
Thank you thanks.
Thank you and our next question comes from the line of Sean Sneeden with Guggenheim. Your line is now open.
Hi, good morning, and thank you for taking the questions.
Yes.
Yes, maybe.
On the move to kind of a market based pricing scheme versus kind of cost base for the inner segment transfer pricing can you talk a bit about how we should think about that going forward and I guess.
How do we think about that is in the context of.
As you continue transitioning the business or towards kind of the core specialty.
How do we kind of thinking about back by corporate segment and.
And you kind of contrast that with the prior reporting period was.
Yes, no that's great.
The question so from the specialty side.
We started off the slide talking about the specialties walk by comparing.
The third quarter last year as reported to what we're reporting this period and that that was really to kind of give you good sense that.
The also the change in the Resegmentation really sort of.
Sets things service on the equivalent basis so.
If you're modeling the business while their technical differences.
In that we no longer have the allocation of corporate overhead.
Do you end up basically at the same place.
With the with the new re segmentation with market based transfer pricing.
On a go forward basis, it does provide greater transparency and clarity.
What you're going to see us do in and we've already realized a good chunk of it stay but our S. DNA, obviously is something that we need to continue to focus on overtime and over the last couple of years, we've had a very significant decline of our last year.
Today.
And so going back to 2017.
We reported Gionee total gionee of 138.
139 million 2018 122 million.
Year to date based for the segment results, if you sort of annualize that.
That would imply something around 100 million. This year, so you're going to see a continued secular decline there.
As we focus on our our DNA going forward.
Got it.
Let me circle back on a couple of questions offline, but.
Maybe can you talk a little bit.
San Antonio sale and it looks like.
Kind of pro forma financials or showing that.
The facility was a bit of a drag on on EBITDA.
I guess you should we be thinking that the buyer assumes takes on any kind of additional corporate overhead associated with that facility or is that all going to be reallocated to that remaining assets in the portfolio.
This is Bruce.
Let me, let me help with the framework that it's an excellent question.
We have a couple of things that have changed in San Antonio and so the.
Particular, 12 month pro forma is probably not reflective of a run rate or or even if current performance.
I would I would guide you to nine or $10 million of EBITDA. If you want to think about.
What's the what's the value of the facility.
In service and then in terms of obligations or the the balance sheet side of it.
We're receiving a 63 million dollar cash payment less a couple adjustments.
And then.
We also have on our books, it's basically leveraged.
There are had on our books of capital lease and that was at present value.
Liability at 38 million so the think of the enterprise value as the some of those parts.
Against the run rate.
Yes and inch.
Sure John what I would tell you is.
We had we had some downtime in San Antonio last year with some turnarounds.
We had an impairment.
The net income last year. So the so them trailing 12 month has all that and I would tell you on a run rate basis.
The work that the employees have done this year.
To improve the profitability the plant.
$5.9 million 28 million of cells health that we've talked about this year was at San Antonio and.
The run rate for San Antonio is probably more in that we'll call it $9 million to $10 million EBITDA range that we believe that facility is.
Is producing and driving so that gives you a little bit more color of kind of what's going on in the San Antonio business.
However, there is a turnaround schedule next year thats going to require some additional turnaround capital.
And if you look at some of the projects and we've implemented there over the last couple of years to improve the profitability.
Project that we've talked about before some of the other improvements we've made.
From our standpoint cash flow has been.
Drag for us and this will be a positive impact to us on our cash flow basis.
John back to your.
Other question on transfer pricing in the re segmentation.
What I would tell you is.
If you look at the corporate segment and other run we're also getting used to the new re segmentation and I know that lot of questions are going to be around how do you think of the business and what kind of run rates do you think we are the plugging into our models and I will tell you that we're still we're still working through that ourselves in terms of.
Any additional.
Kind of modeling and the way you think about it.
Corporate segment as Wes talked about we're kind of on a run rate basis of $100 million. That's probably the way you should think about the corporate segment.
On the fuel segment.
We're we're probably thinking we're at 155 million year to date.
Some of that includes and LCM in LIFO health. So what we're thinking about is.
Run rate of basically 150 200 million as what we believe that the fuels.
This is going to be.
You ought to be thinking about it that way and the specialty business, we talked about it really hasnt changed.
We've always talked about it as a $200 million business. We continue to believe that Thats. The case, but as we continue to implement these growth projects and as we can continue to implement our self help in the specialties business. We believe a 200 to to 25 range is probably more appropriate.
Now on a run rate base, so hopefully that little bit helpful to you. The one other piece of information that I had I think it's important for you guys I understand Wes made some comments about this in his prepared remarks is that Shreveport fuels that component of Shreveport that produces fuels is in.
The fuel segment.
But as you guys know Shreveport fuels is highly integrated with Shreveport specialties and so even in this resegmentation, we still have the Shreveport fuels component.
In the fuels business and if you want to think about well how do you how do you move at Shreveport fuels component in an add that to the overall specialties business to come up with maybe what you might consider to be the core business. What I can tell you is shreveport fuels contributed about six.
Point $8 million in the third quarter that of the.
Were 47 million or so we reported for fuels.
And year to date Shreveport fuels was about $30 million of the of the total fuels here today. So you really got to take that component and think about that as part of our core business since its highly integrated.
Our specialty.
Hello.
No I think that but that's helpful and I appreciate all the commentary there I guess.
Just for.
Forward into doubt there but.
If you just for instance look at slide 11.
Should we interpret you kind of the move from the prior number like just kind of using a year ago 82 million to quantify is that golf ball.
The kind of Gionee, that's being that was previously burden.
In the segment or or are there other aspects of the machine that bridge.
Yes, Theres Theres two components area Sean.
Corporate.
DNA is just one piece of it.
A market based transfer pricing as a second.
So what you're seeing is and it affects only shrink the market based transfer pricing only effects report.
So what's happening is by moving from a cost basis to a.
To a market based.
We're seeing some of the.
You are seeing some of the margins move from the specialties.
Segment into the Shreveport fuel segment and those two factors combined our web bridges, the 81.8 to 155 going through.
Got it could you just give us a sense of kind of what's the.
Rough breakdown is just for historical comparisons that we kind of hopefully trip our models to that.
Between corporate DNA and kind of the market based transfer pricing.
Yes, we can't break that out Sean, but what I can tell you is again, if you look at the specialties.
A breakdown on slide nine.
Do you see the 128.4 moving to 129.3 and what that is it's a combination of that achieve the removal of DNA.
But offset by the market based transfer pricing of.
Margin moving from specialties to.
Treat port feels okay, sorry, so as you look at your models think about specialties as the gene a health.
Is offset by the market price.
Change and then on fuels the Gionee help plus the market based transfer price health.
On.
Bridges the gap on the fuels and I think as you play around with your models I think you'll be able to fine tune it accordingly.
Okay.
That's fair enough I appreciate that.
I think that's it for me thanks, guys.
Thank you.
Your next question comes from the line of Jason gave women with Cowen.
Yes, thanks for taking the questions.
If I could just has won on the remaining noncore assets and.
I was wondering if you could just provide some color.
On what Youre seeing in the M&A market.
Four.
Remaining noncore asset sales and any.
Talk on timing of those asset sales and then I could just go back to Shreveport.
Can you just provide a bit more detail on this crude de bottlenecking project I guess, what's the impact of throughput and does that add.
Output on fuels side or the or the specialty side.
And then lastly also on to report.
What is if you could provide the impact for throughput on the asset.
In fourth quarter related to maintenance thanks.
Jason This is Bruce again, so I'll I'll try those in reverse order.
The Shreveport de bottleneck and we did two small projects. It it's more of a restoration of capacity, that's 60000 barrels a day an implied plan.
It's been limited in a couple of points and we've addressed those so in two steps, we're getting plus 7000 barrels a day of throughput capabilities. The front end more importantly, we've got this fall the fourth quarter.
Couple of key catalyst change outs and have run. These are units that do have a couple of years Ron.
Service and that's going to come back strong after that so in 2020, we've got zero plant downtime fresh catalyst dental larger facility, that's kind of been our focus.
If I go back to the.
The question on core versus non core we don't really think about portfolio that way.
The family Holdings is is value accretive weve been.
Patient.
Portfolio holders and once in a while somebody comes along two in one of our facilities is worth more than our key value. We're very disciplined about Turkey values. So we've had a couple of.
For today's over the last few years defined that one right buyer, but.
I think we're not.
We're not interested in enforcing this along and so the journey to a specialty products company back to the roots back to the origins of the company is.
As an active patients and value creation.
Yes, I would just I would just tell you.
Jason If you look at how we been approaching our portfolio over the last four years.
We've always talked about right buyer, we've always talked about the right opportunity, we've always talked about the right.
Right decision for the shareholders and if you look at.
Hey moves we've made over the last four years with.
On the Dakota Prairie refinery venue Gaudin superior and then you're going to anchor and now you look at San Antonio.
We found that natural buyer.
For those assets.
It took us some time, we were not in any fire sale or rush to do so we have.
All of those assets were valuable in our portfolio and and had a certain whole value that we needed to be able to compare against to make sure that we made the right decision for shareholders and I can tell you I think you're referencing our rate falls fuels refineries. When you when you ask your question.
Great Falls and has a significant value in our portfolio.
It is as you saw in the fourth quarter last year and has the ability to generate.
Lots of cash flow and we appreciate that and.
View it highly in our.
In our asset portfolio.
Again, we don't comment on M&A.
But if.
There was an opportunity to.
For someone to deny that asset they would have to have a higher value in their portfolio than in our portfolio and that would be a good thing for all the parties involved including the employees in the community. So thats kind of how we view that.
Alright, Thanks, Thats good color I appreciate that just sorry going back to the Great Falls answer.
You said it was 7000 barrels a day throughput.
Increase can you provide the split of the output from about 7000 barrels a day between fuels and Stan specialty products.
Now when you when you think about it now and again the two projects one was implemented in the fourth quarter last year was going to be implemented in the fourth quarter. This year total that seven it's it's it's accrued debottleneck projects, so thats, probably going to be impacting fuels. The most Jason.
We make more biggio that are.
Our loops plants can run so when it will result in excess.
Sales.
With IMO 2020 coming.
We believe that that is going to be profitable for for Shreveport.
In addition win.
You talked about.
Going back to start a run conditions and we're going to have fresh catalyst to the extent and were able to continue to de bottleneck, our specialty plants that excess biggio will be available to go into the specialty plant as.
As margins in demand.
Got it thanks I appreciate answers.
Thank you and our next question comes from the line of Gregg Brody with Bank of America.
Good morning, guys. Thank you for all the details on the on the accounting change.
I think helped us quite a bit there, but just maybe to simplify it did you have.
Quarter number.
That would have reported just if without adjustments just as we think about.
Okay, and our models before today.
Yes, there's just an EBITDA.
No we don't have a third quarter number that.
For specialties versus fuels for the third quarter.
Based upon the old segmentation.
Got it and then.
Thank you Didnt restate.
Historical numbers.
As the Expensed expectation as you won't do that.
No we did restate the previous numbers for all.
Numbers presented so we reported third quarter 2018.
Specialties and fuels breakout corporate segment.
And the Grand total and then that you and then the.
Nine months ending September 2018 in the quarter for 2019 in the year to date for 2019.
It was role there yes. So Greg this is Tim what I would tell you with in the press release.
We ended our slides, we compare that third COVID-19 on the new we segmented basis with the third quarter 18 on a re segmented basis. Okay. So that is an apples to apples you can easily go back to the third quarter 18 press.
Police and see what was reported a year ago and you can see that it hasn't changed much that things were talking about on specialty side, especially number for the third quarter of 18 hasn't changed much which is consistent with what we're showing you on the third quarter year to date. So you can you can do that look up.
Verify that yourself, Greg, but I think thats engine find.
All right. That's helpful. And then you you mentioned that you're seeing some benefit from I'm talking about 2020.
Have you.
If you can you quantify what you think that could add and sort of a ballpark EBITDA number for us next year.
I appreciate that just moving parts, but I'm curious how much you thanks for that too.
Your business.
Yes, Greg and we've not been able to do that.
I know that that this question comes out on a lot of calls as a lot of people are still trying to get their arms around it.
I think we were encouraged to see.
The.
The impact on the high sulfur fuel all market.
It's something that you would expect that to be discounting as a result of IMO 2020 can we were.
Starting to see that here in the second half of the year. So that was good is showing some signs of what we mean, what the thesis is and what people are thinking. The next thing we started seeing that you'll see crack starting to.
Go up and Thats, probably the second step as you would expect to be able to see as part of this IMO 2020 impact and then really we were waiting to see if it's a WCS crude yes would start to widen as a result of again.
Logic or the thought process behind that and in the fourth quarter here, we are starting to see.
The WCS Wi Fi widen as even before.
The pipeline leak, we're starting to see that just starting to widen back out again all of those are we seeing positive indicators that there is going to be an impact on.
On our.
Both our fuels enter specialties business with IMO 2020.
And the only thing I would just point out is between our fuels and specialty product mix, we're about 50% leverage to.
To that you'll us essentially geo market.
Okay.
That's helpful.
Sure Theres a lot of parts.
Just a 50% numbers somewhere.
What's I once I figured out.
Just just.
You mentioned that.
A lot of EBITDA numbers for.
For the San Antonio refinery was there so much capital what's Capex savings there, we should expect going forward.
I mean, its capital as or.
For 2020.
Hi, Greg its Bruce I think.
If you assume up to a high level you strip out the growth Capex, because we didn't put in a couple of good growth projects in the past to get that EBITDA, but I would I would guide you to kind of $7 million to $10 million run rate of Capex specific for next year, including the turnaround that Tim mentioned, which we're we're imagine.
And with would have been late in the year on Airwatch.
That's probably more like a 13 million dollar for 2020.
Capital avoidance.
For us.
That's helpful and I asked US just lastly, west good luck.
Hope you enjoy whenever you do next so we appreciate.
Interest few with the last three years, just before that your predecessor.
Welcome aboard.
Thank you.
Thank you.
I'm showing no further questions at this time ill now turn the call back over to CEO , Tim go for closing remarks.
Thank you again for your time today and your interest and came in.
We are executing our plan.
We remain focused on delivering solid performance driving improved profitability and cash flow and de leveraging our balance sheet.
Our efforts to transform our business are working and gaining momentum.
And we look forward to updating you on our progress next quarter. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.