Q2 2020 Calumet Specialty Products Partners LP Earnings Call
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If you need any further assistance. Please press star Zero I would now like to have the conference over to your speaker today Mr. Joseph Kamineni with Investor Relations. Please go ahead Sir.
Thank you good morning, everyone and thank you for joining US today first second quarter earnings results call with us on todays call or see more CEO. Peter Jennings fearful first wondering you can view of strategy and growth that's got over my or even a few commercial.
Before we proceed allow me to remind everyone that during the course of this call. We may provide very sport looking statements within the meaning of section 20, Onee Securities Exchange Act is nice and carry for such statements are based on the beliefs or management as well the assumptions made by them and in each case based on information currently available to them.
Although management believes that expectations reflected in such forward looking statements are reasonable.
Partnership it's general partner Norm I can provide any assurances that the expectations will prove to be correct.
Please refer to the Partnership's press release that was issued this morning as well with our latest filings with Securities and Exchange Commission for list of factors that may affect our actual results could have caused them to differ from a forward looking statements made on this call.
As a reminder, you may know download a PDF presentation slides that accompany the remarks made on today's conference call as indicated in the press release, we issued earlier today.
You May access you flies in the Investor Relations section of website at Www Dot Calumet specialty dot com.
Also a webcast replay of this call will also be available on our website within a few hours you can contact Alpha IR group for Investor Relations support a three one to four four or five to wait Stephens your.
With that I'll pass the call Steve Steve.
Good morning, everyone and thank you for joining us.
We will start a presentation on slide three.
The second quarter was one of the toughest caught us by market and also the broader economy in recent history I went up I'm very proud about organization from top to bottom.
We collectively navigated this extreme events to deliver results brought unit holders.
And we did so while driving progress against some of the more important elements the partnership's strategic priorities.
Having now been in the CEO role couple months I wanted to briefly share some for such as we talked about Calumet.
April seems like a very long time ago, and becoming CEO has a very steep learning curve in normal times, but ironically to the scheme. The steep during a time crisis helps accelerate that learning experience.
In my career I've been on teams that successfully manage through multiple commodity market cycles, and I've seen a lot of extreme volatility.
When I began my new role as CEO of Calumet I knew the team well and I was comfortable in knowing that they will both capable and well for Pat.
But I have to say in a time when super hub execution was truly needed. This team delivered.
Most specifically in our business our number one measure of execution is safety and during this time if prices stay directly what was the best it has ever been we also set multiple operational records during the second quarter.
And then make unfold it became a team that don't think must achieve objective of generating positive free cash flow from a business in twentytwenty.
Through a combination of accelerating cost reduction program consistent plant operations decisive hedging and some very agile commercial execution the team and showed the Calumet whether this hundred gets done.
In addition, we've created runway and Optionality through our recent debt exchange and aligned our cost structure for the current level of business activity.
And now shifting unlocking element about focus from execution and risk management back to a long term strategy.
I think it's also important to point out that the shift the remote work has actually gone very smoothly, we've observed clay process improvement and productivity remains high.
At the end of our prepared remarks, I'll talk more about strategy.
Finally in this introduction I think it's very important to recognize each and every member of the Calumet team for their dedication sacrifice an outstanding performance over the last few months I come thank the team at all.
Please turn to slide four.
While we provide a high level snapshot about business highlights for the recently completed quota as well as the year this spot today.
Calumet delivered another solid quarter financial performance with continued execution against our specialty products focused strategy.
During the second quarter Calumet on $41 million in total adjusted EBITDA. This consolidated result was comprised of 56.1 million of adjusted EBITDA from of course specialty products segment and $1.9 million from up you'll segment.
These were partly offset by $17 million <unk> costs and the company's corporate segment.
Corporate costs, there were significant step down compared to the 28.2 million in the prior year quarter and that was led primarily by lower ASP Tonight.
As we talked about last quarter, we remain focused on managing both the commercial and operational sides of our business is a business for the express purpose of generating positive free cash flow.
We achieved that goal during the second quota as we generated over $70 million the cash flow from operating activities.
This helped support our liquidity position, which ended the quarter at roughly $249 million.
Comprised of $105 million of cash on hand, and 144 million of available borrowing capacity on the company's revolving credit facility.
Well down quarter over quarter liquid capital available to the partnership showed a very healthy step up from the liquidity update we provided through April thirtyth.
Part of our enterprise risk management approach has been the model the consequences.
<unk> economic downtime and consciously use diversified sources of liquidity to create a buffer to withstand stressed event.
The events of the last month and less extreme than on stress planning and at this time, we see all liquidity strategy as combat proven.
Additionally, we have successfully extended the maturity on $200 million the debt that was set to mature in 2022, pushing that out that obligation to additional years to 2024.
Another key highlight I want to touch on is the continued improvement in margin performance within our core specialty products segment.
During the quarter, we captured adjusted EBITDA margins of 24.1%, that's up 440 basis points versus the first quarter. Adjusted gross profit per barrel results of 44 52 also grew meaningfully up 7.7% versus first quarter results.
These results reflect much of the hard work, we have undertaken to improve the profitability of alcohol segment combined with focused actions through the pandemic to specifically manage the business a margin enhancement and we'll touch later on the call on that.
What makes this particularly gratifying is that this margin performance took place during one of the fastest rallies in crude prices on record.
Between late April and the end of June W.P.I. prices increased by almost $25 a barrel that is the largest two month increase in the frac from a feedstocks since 2011.
So to be able to sustain specialty margins during the confluence of such a rally and a weak demand period is a pleasing results.
On a year to date basis, Calumet has generated $124.7 million adjusted EBITDA.
Oh that especially segment has delivered $120.6 million, an adjusted EBITDA, which is up 6% compared to the first six months of 29 team.
Thus far in Twentytwenty I'll focus on execution and cost management has produced $22 million a cumulative free cash flow a key focal point of our strategy.
This cash flow performance is being supported by year over year outperformance in our consumer facing specialty products, but some of our product lines continued to grow through the crisis.
We also continue to advance our strategic review process, but the great both refinery.
While the global pandemic, it's definitely not made the logistics of a strategic review process any easier we have made solid progress given the considerations that need to be Matt. While also maintaining safe can help about team facility.
We look forward to providing a more comprehensive update as we got closer to the conclusion of that process.
Finally on a year to date basis, we have seen on margin profile and I'll call specialty business grow meaningfully as we capture the benefits of commercial and operational execution against our specialty focused strategy specialty adjusted EBITDA margin for the first property it was 21.6%.
530 basis points versus the first half of 2019, while our adjusted gross profit apparel results of 40 to 81 grew more than 18% versus the same period last year.
This margin expansion.
It's being driven largely through the uplift associated with <unk> ongoing sales mix enrichment assets.
So with that I'll now turn the call over to key.
Who will give a more detailed look at our financial results for the quarter Keith.
Thank you Steve.
Slide five reflects a headline consolidated results for the second quarter.
Given the nature of economic environment created by the pandemic My comments on our results will primarily focus on sequential comparisons.
We are using the sequential comparisons because it is more appropriate to focus on the current environment management decisions and actions.
For the quarter revenue and adjusted EBITDA were 453 point Sevenmillion.
41 million respectively.
Revenues declined 34% versus the prior quarter.
Specialty revenues declined 29% and fuels 40%.
These results primarily reflect the two major impacts first.
That make related softening in demand for industrial specialty products that more than offset growth in consumer specialties.
Second.
Second early week transportation fuel cracks that began late in the first quarter and persisted through the second quarter as demand for fuel was declined to record low levels.
The 34% decline in revenues fell through to our consolidated adjusted EBITDA results, which were down 50% compared to the prior quarter.
Adjusted loss per unit.
For the second quarter was 25 cents.
Versus the adjusted net earnings of 14 cents and 28 cents.
Net earnings in the prior quarter.
The decline in adjusted earnings was driven by the exclusion of favorable net impact related to non cash LCM inventory adjustments.
On slide six we bridge over consolidated adjusted EBITDA results relative to the prior quarter.
The primary driver in the quarter record decrease in adjusted EBITDA was a meaningful margin compression in our fuels business, where a gasoline and diesel crack spreads declined significantly.
Margin performance, you know core specialty business grew by over 2 million in a very difficult quarter, driven by or consumer specialties.
The 24.1 million headwind from specialty volumes declining reflected industrial production slowing.
And customers working to managing their inventories.
We continue to align our corporate expenses with the changing environment.
We were able to reduce operating costs by over 26 million driven by lower.
Cost across all operating sites.
<unk> operating cost savings were partially offset by higher rents mark to market cost.
Our cost reduction efforts yielded an additional 6 million of various corporate expenses, including transportation modes savings and a 7 million onetime property tax.
Agreement.
Reflected here in the all the category.
Further tightening in corporate costs contributed 3.9 million savings from lower as DNA.
These focused management actions brought our consolidated adjusted EBIT totals for the quarter to 41 million.
Slide seven.
Reflects the results of our core specialty segment.
Our second quarter adjusted EBITDA result, up 56.1 million reflects growth of 2% compared to the prior year and down 13% versus the sequential quarter.
Specialty adjusted EBITDA margins of 24.1% were very strong results were businesses on an absolute and relative basis.
And the second quarter.
Margins grew by 440 basis points of margin of growth relative relative to the strong first quarter.
First quarter gross profit for about results of $44.52 per barrel marked a meaningful improvement growing by 7.7% compared to the sequential quarter.
Turning to slide eight we bridge or second quarter specialty adjusted EBIT up to the prior quarter.
Specialty margin continue to expand driven by focused execution in both specialty oils and waxes and our finished lubricants business units, both offsetting challenges from rising feedstock costs and base oil consultants.
Well this 2 million of EBITDA margin growth was more than offset by the 24 million earnings decline from net lower volumes across all specialty business units.
Continued growth of Trufuel and the recovery before candle wax is contributing meaningfully to stemming the decline.
Plant operating costs across the business.
Increased quarter over quarter by 7.4 million.
Which was primarily attributed to a reduction fixed costs and actions taken to align staff and with the demand environment.
These lower operating expenses combined with the 6.1 million improvement other and SGN, a brought or first quarter adjusted EBITDA tool to 56.2 million.
This commendable performance across our specialty business was driven by a number of factors.
Well, let's specialty volumes declined sequentially, we benefited from strong sales volume drove higher margin consumer facing specialties, particularly in our engineered fuels business, which was which has delivered record sales and margin performance year to date.
New customer growth, which has been catalyzed by our investments in merchandising and enhanced brand awareness.
Strong margin management as we aligned order feeling we don't broader margin uplift strategy.
I know a baseline business, which was EBITDA was down both year over year and sequentially given its exposure to a number of industrial focused end markets.
Business unit was actually able to offset some of that declined by drilling in new nish end markets, such as agriculture and water treatment.
Turning to slide nine.
We are providing a bit more information on this occasion to add a bit more context or performance in the quarter and or specialty transition.
Year to date or adjusted gross profit by our results more than 18% higher when indexed to the average gross profit per barrel margins in 2019.
Applying the same index approach volumes were in line with 2019 through Q1, but are now on a cumulative year to date basis, roughly 14% below 2019, and 10% on a pro forma basis.
April and May volumes declined as we bid and we believe trough as the impact of the pandemic work through economic activity in our end markets.
As local economies across the U.S. began to reopen our sales volumes began rebounding in June and our margins leveled off.
We recently implemented price adjustments across multiple specialty product lines in response to improving demand as well as the rapid rise in crude costs.
These pricing adjustments of health so far therefore further positioning the business to produce strong unit margins as volumes rebound.
We believe our multiyear strategy to improve the unit margins of specialty product portfolio braced our performance in Q2, and we'll continue to deliver for us going forward.
I would like to commend the specialty segment employees for their strong execution that is reflected in year to date adjusted EBITDA results of 6% growth versus 2019.
Slide 10 highlights or fuel segment's results.
Adjusted EBITDA results of 2 million, reflecting a decrease of greater than 95% when compared to both the prior year and sequential quarters driven by the significant decline in crack spreads.
Production volume averaged 61600 barrels per day throughput, which was the decline of 4.8% compared to the prior quarter.
The year over year decline in production volumes as a function of the divestment of over San Antonio refinery, which was sold at the end of October in the prior year.
This negative impact them volumes from divesting some Antonio was partially offset by improved throughput at both great falls in Shreveport, reflecting investments made in Hans utilization across our assets.
Gross profit per barrel results with negative $3.69 per barrel for the second quarter reflected the week margin environment.
We have realized value for more increased hedging activity and locked in values for crude differentials and part of crack spreads at levels more attractive than the spot market.
This is somewhat offset by significant tightening of key crude differentials, specifically WCS, Doug to Wi Fi.
On slide 11, we bridge to fuel to adjusted EBITDA performance to the prior quarter.
Most significant driver or lower quarter over quarter performance was 47.2 million declining fuel product margins.
Even primarily by the tighter WCS differential combined with the significant declining crack spreads for diesel and gasoline during the quarter.
This week market environment for fuels was partially offset by maintaining utilization under applies to absorb fixed costs and maintaining fuels volume sales as we managed to current to continue placing product into our niche local markets.
Captured a $2 million tailwind of lower operating costs, which primarily reflects the net impact of lower.
Fixed plant level expenses, partially offset by higher rins mark to market costs.
Compared to the prior quarter.
Additionally, recaptured almost 8 million improvement through cost management and a property tax.
Settlement.
These operational improvements combined with marginal SGN a reductions for the segment rounds out our total adjusted EBITDA results to a positive 1.9 million for the quarter.
Given these market circumstances. This is a competitive outcome.
Despite our fuel segment reporting a negative gross profit as a whole well great falls refinery maintained solid profitability during the quarter.
On slide 12, we risk we reconcile ore sources and uses of cash year to date, we opened 2020 with 19.1 million up cash in hand, and generated over 90 million from cash operating earnings.
Today, we have seen in approximately 16 million headwind from net changes in working capital you mostly to the significant volatility in crude prices. We saw across the end up the first quarter and into April and its impact on our payables.
We increased net debt by approximately 67 million due to seasonality as we drew down on our revolver to fund operating expenses and Capex earlier in the year.
Capital expenditures, including turnarounds are almost 45 million and we incurred 10.2 million up net cash used for settling the working capital true up a San Antonio divestiture and acquiring pot acquired para logics.
This lease our cash balance at the end of the second quarter at $105.4 million.
Before discussing our credit metrics I want to walk or investors and analysts through the recently completed.
Exchange of debt detailed on slide 13.
We recently closed the transaction to exchange 200 million a principle of our bonds that mature in 2022, thereby improving the partnership's maturity profile.
We exchange 200 million of unsecured notes due in 2022 for 200 million of new secured notes maturing in 2024.
Well annual interest costs will increase by approximately 3 million.
The partnership expects to repay the 150 million of remaining principal for the unsecured notes maturing in 2022, utilizing either future cash on hand proceeds from potential asset divestitures or through a refinancing.
The details of the debt exchange are listed on the slide.
I'd like to thank our 20 to 22 bondholders that participated in the exchange and the holders of the 2025 notes, Wisconsin allowed for the exchange.
I'd also like to thank the professional services providers, such as our banking partners and external legal support was diligence and advice helps ensure the successful exchange.
Slide 14 provides a snapshot of our credit metrics as of quarter end.
Since the start of this pandemic, we have engage in a highly focused strategy to improve and maintain position ample liquidity to maintain our business effectively.
As communicated in our pre announcement on July six 2020, we ended the second quarter with available liquidity up 249 million between the 105 million up cash on hand, and approximately 144 million available borrowing capacity on the partnership's credit facility.
It is worth noting that despite significant softening of demand across our business segments in the second quarter. We have successfully managed through the seasonal low point of our liquidity, which also included debt service payments and significant crude.
Settlements in April and June.
We are operating positive free cash flow charter.
We believe we have ample liquidity to effectively manage our business.
Well within the stress testing limits.
Our leverage and fixed charge coverage ratios pause from continuous improvement driven by the decline in our trailing 12 months adjusts of adjusted EBITDA.
Leverage reduction and balance sheet improvement continues to be a focal point in our strategy with that I'll turn the call back over to Steve.
Thanks Keith.
I'd like to make some comments on calumets outlook and strategy going forward.
Equally before then we've had a lot of questions about.
So rapidly growing market leading.
Engineers fuel product.
So we thought you might be interested.
To go a little deeper into that product slide 15 provides an overview of the engineers fuels market and long term growth strategy.
As the market leader in engineered fields Trufuel continued its recent record of greater than 25% year over year volume growth during the first half twentytwenty.
Trufuel brand has become synonymous with the engineered fuel category.
In engineered deals we up at the consumer a variety of easy to use specially formulated high performance long unlike fuels in multiple package sizes.
This convenience is a complete contrast to the messy dangerous and on pleasurable experience.
Self mixing and the potential for damage too expensive equipment equipment.
So for those of you who have experienced these kind of challenges you will appreciate why we havent incredibly loyal and rapidly growing customer base.
These 25% to 30% growth rates have been driven by our continued working in collaboration with key major retail partners.
Well casinos expand our installed footprint significantly with extensive use of display units shelf space and.
This is generated further awareness and has been supported by our own marketing investment in campaigns across digital and other media for the category and the brand.
Our research shows that we're still in the early stages of market penetration.
Despite factory adoption in small let them on and less consistent you segments of the market. Most equipment sold remains gas powered. Additionally, as uses discovered the performance and convenience benefits of the product through our core market of outdoor power equipment. We believe I shall we will continue to accelerate.
Furthermore, as the product benefits are increasingly understood. We're seeing adoption in large adjacent markets, including first respond to services power sports enthusiasts and some marine applications.
As these continued to expand the addressable market potential for Trufuel can support our existing growth rate rates into the foreseeable future.
We hope that a deeper dive into one of our consumer facing products was interesting and a good demonstration of the commercial acceleration of Calumet.
So turning to slide 16, where we've outlined our updated outlook for the rest of the yet.
And our cost specialty business, we expect that outperformance in growth will generally be in alignment with our end markets.
While we expect to still face headwinds for our volumes in the third quarter and the more industrial sectors. Some of this downside will be mitigated by the underlying diversity, our product and customer mix as well as a wide array of end markets that we serve.
Recent price increases have been accepted by the market.
And finally, we expect to capture the benefits of continued growth in our consumer facing specialties.
Ill fuels business, we reiterate that outperformance will be supported by the hedging activity we have in place.
We expect to run on grateful to refinery at high utilization rates given that our local niche continues to sustain itself, while and at the Shreveport complex, we continue to optimize in accordance with the fluctuating market signals in this more competitive market.
Concluding our outlook on our strategic front, we will continue to drive free cash flow generation through the remainder of the year.
Furthermore, we expect to continue acting on opportunities to optimize our working capital.
And finally, we will maintain a keen focus on identifying an acting on opportunities to manage our long term balance sheet liabilities in a way the best served us strategically.
So in closing I'd like to add some comments on Calumet strategy going forward.
First we continue to believe that a highly diversified specialty products businesses are cool.
This was further demonstrated in the quarterly results and the resilience that the business has shown in the face of extreme economic diversity as well as headwinds from increasing feedstock costs.
Multiple still does not reflect the fact that the majority of our earnings come from our specialty segment and in total more than one third of our earnings this year have come from consumer facing products.
Indeed, indeed in this consumer facing area earnings are tracking ahead of 2019, despite the economic challenges.
We're now operating a more agile calumet than in the past commercially those efforts be they clear a business strategies.
Step change reductions in quality giveaway.
Hey, you rationalizations mix enhancements inventory management on product development all of these strategies make us more resilience, it's really about a better understanding of what our customers value and leveraging our knowledge of the workings of the markets we serve.
One element of this maturation is that we now also have a clear a picture of how on where we can grow even in periods of weaker demand.
And a lot of that growth potential lies in our consumer facing markets.
As we did the work we surprised ourselves just how much growth potential there isn't calumet, even without setting stretch goals for hoping for a V shaped recovery.
At the same time, we recognize that cobot has slowed the cadence about deleveraging process and made access to capital given our credit ratings much more complicated it's a challenge we're working on.
Our debt exchange was the final step and not dealing with immediate cobot creative execution priorities.
Allowing us to now begin to begin the shift back to a strategic debate on what Calumet can be.
Despite the travel limitations of Cobot leadership team has spent considerable time listening to both our unit holders and bondholders.
These are important to us and we appreciate your willingness to share an advice just as we greatly appreciate you owning our units. Some bonds were also committed to providing a clear a window into Calumet and appreciate the feedback.
Our last few presentations this effort has been noticed and value.
Finally, I wanted to communicate that this is the loss Calumet earnings call that Keith will be on.
These decided to pursue other interest closer to his family in Texas and will be with us through the end of August.
Keep an eye quickly formed a strong and enjoyable working relationship and I'd like to thank him for the major contributions he's made to Calumet.
Most particularly in being a thought leader in helping shape, our strategic vision and in doing an excellent job, creating optionality calumet despite the challenges of cobot.
We'll communicate transition plant the transition plan in due course.
Our last senior executive transition was described by one of our analysts as quote seamless unquote and that's our plan again. This time, Keith we wish you well in your future endeavors.
With that I'd like to turn the call over to the operator to open up the line for Q1, a operator.
As a reminder to ask a question you need to press star one on your telephone to withdraw your question press the pound Keith Please stand by while we compared to Q and a roster.
And your first question comes from the line of Roger read with Wells Fargo.
Hey, Thank you good morning.
Good morning, Roger how are you Roger.
Yes.
Well keep might then a short run, but you can't say it wasn't an eventful one.
What's fun or it is still fun.
Okay.
If we could maybe dig a little bit more into the.
What you did here in terms of restructuring the balance sheet, maybe wish we should think of in some of the longer term debt goals.
Additionally, we expect you to continue to market the process on great falls and presenting what you get added that I would say I would imagine a 100% of those funds go towards debt reduction, but as you move even more and more heavily to the specialty business, what's the right way to for us to think about.
Debt levels that that business could and should sustain over time on going way back to just help us Tim's originals thoughts.
When he would CEO and 18, where you talked about four times, EBITDA, which probably a little too high in this environment.
Just curious what you think obviously right sort of structure this business.
I would say in 20 to 23 timeframe when the world normalizes.
Well, Roger I do hope the world normalizes before that.
But I think in terms of.
Of Calumet, we're taking it one day at a time.
Our first targets at this time is too.
To to get it below four times.
That's.
What we think we would like to get to operationally.
On our own if we are able to execute a.
A transaction on Great falls that will help greatly and maybe then we can even get down to three times. If you look into the public markets for us specialty products and chemical companies I think the average.
No debt level that the market depreciates.
Type of companies that we are aspiring to be amongst.
I think it's about two to three times and so that is where we're going because that's what the strategy for the type of business we are running.
We will support in the markets will appreciate but we have to be with our reality and get there.
In a stepwise fashion.
Understood. Thanks for that and then.
Looking at the grade fall sales process is there I know this is kind of the strange time in the overall business, but you mentioned that this unit has actually been running it's fairly high levels there was a.
No the refining company that mentioned interest in PADD four over pad to say, we're thinking about M&A.
What if any update on the process.
Thank you can provide on maybe number of companies that are kicking the tires and so forth.
So the process continues well.
We are still than what we consider our round two widower short list.
We've had half the.
Interested parties, so far visit the site and I would say those are the domestic parties. The international parties have not been able to get to the sites given coated and.
Travel restrictions and so forth so we.
You'll have I interest no one has dropped out of the the process.
We are trying to ensure that we maintain the processes such a way that we do not put the.
Business.
Risks because is running well.
Pat for remains to be did a very attractive part of the markets.
Refineries. So we continue to believe that we have a great asset that is delivering value to our unitholders.
May not part of our strategic future, but it's still upgrade asset Nonetheless, Steve.
I didn't really have much to add to that minutes.
You laid out this situation well, we continue to run hot.
In second quarter.
Actually in the second quarter, we ran full barrels a day thats helpful thousand barrels a day, that's full barrels a day less than the first quarter run rate. So we maintain.
Hi levels, Bruce do you want anything.
Yes, I think given where Rogers thoughts are trending.
The.
The industry has been aware for a long time that the Rockies or the pet for region is super place to do business.
And the fact that we could run fall through the pandemic is proof and in the put in.
You can pull whatever crack spread indicators you like to use and you can see that this place is head and shoulders above anywhere else in the country.
In terms of attractiveness for up in place refinery.
Okay, great if I could get one more question just because of your discussion on the consumer facing side and the trees fuels side. So normal in this world you're going to generate maybe 25000 barrels a day within the specialty shag.
As you think about that how much can you really grow true fuels I mean, my understanding is it's relatively small part.
We look at this as 25 plus growth in true fuels or within the 25000.
Seeming thats, a fair kind of volume to use.
Do we think about you moving other products.
At the flexibility to to shift in what you're making AD.
You know go to a better margin product over lower margin product favorable mix shift.
Well I guess I will start by saying that that.
True feel is.
Is integrated with the rest of our specialties business, but it's not hyper integrated so so the way I look at it is true fuel gross it's not the diversion from one specialties market to another tool it's all incremental.
And.
Although.
I mean, the volumes compared to our biggest focused most industrial.
Areas.
Clearly less.
We don't see why that 25% growth rates not sustainable.
For a number of years.
As you know Roger anything it's got a 25% growth rate gets big quickly.
You know, we if you look at the slide what we touch on there is if you define the market as the whole off the whole of based by people, leaving gasoline powered equipment was still below 2% market chat.
So.
I don't know if that's helpful. Scott when viewed would you like to what yet.
Roger Let me just add Scott Obermaier here just to tack on to Steve's point, I mean, Trufuel Ben certainly.
Growth story for Calumet now for multiple years in a row, but just to build on the consumer facing specialties, Roger when we when we talk.
The kind of consumer specialties piece, we've had very good performance. This year as we've looked into the food.
Space and the pharmaceuticals into the personal care right. We can even go down the path of our of our charcoal lighter fluid business et cetera. So so really this is the whole broader consumer specialties segment for Kelly you, Matt has been real success story for US this year and something that we've intentionally pivotal.
Good to over the past couple of years.
Have more focused in that area.
Okay, great. Thank you.
Your next question comes from the line of Neil Mehta with Goldman Sachs.
Hey, good good morning team and keep that it's been a pleasure working with you and wish you well in that in near future endeavors.
Just first.
The first question I had for you guys was just one margins.
We've seen crude tick up here.
And.
City radically.
Over the course last couple of months and how have you been able to sustain your margins at any quantification on specialty side has historically you've talked about a range on a dollar per barrel basis.
How are you tracking relative to that range.
On a real time basis.
Yes.
Well Scott Obermaier, so so just to.
Maybe step stepped back a little bit and tiny if you go back a couple of years ago and you look through our performance has we focused on really driving the value over volume at our specialties.
Business and the the predictability of App.
Really started from a number Neil in the in the upper Twentys per barrel and as you look through the past couple of years, you've seen that continue to climb up within Calumet.
In the low Thirtys and then really the mid Thirtys.
As we look at 2020, so far this year, we have to to your point Neal. We we've received some tailwind with the drop in crude in the first half of the year.
And also the strength of our consumer business.
Having have any impact on our margins I think if we look for the rest of this year, we still expect to have a good continued to generate good predictable profit.
As we look for the rest of the year, we do expect it though neal to start to normalize.
Going forward as crude doubled in Q2.
And as we start to see our industrial business start to ramp back up we do expect our margins start to normalize moving forward for the second half of the year.
Okay.
In any quantification, Scott, how where you are in the dollar per barrel basis, right now or.
Versus the historical range you've talked about.
I would say without without feeling comfortable predicting too far into the future Neil I would just pay in the near term.
I think you'll see numbers above where we finished 2019, but I think you'll again start to see the occurrence.
GP per barrel I think in Q2 was about $47 I think you'll see that come down to two.
Little bit more of a normalized number.
Great I could just that.
Neil not a couple of comments I mean, yes, I think that.
First of all as Scott said.
Every day would take every day as it comes right now in this market, although things a feeling better but if you look at that $47 barrel margin second quarter.
We were really.
We were pleased with that.
I would reiterate that they'd say if you forget about the negative crude price event in April as Justin whatever aberration. It was.
After that contract the may contract expired the market just rallied consistently for the last 65 70 days of the quota.
And that 25 dollar Bauer rally I went back and since the Gulf War, which was lost 30 years ago. So.
The 30 years ago, there's only been three events, where we've had that kind of price acceleration so that amount of rally in a two month period. So so from a feedstock cost pressure standpoint.
This was arguably a worst case scenario.
Managed to maintain margin.
So we're pleased with that.
Just starting to Scott.
Comment I think that as industrial demand comes back.
We expect volumes to increase and the margin on some of those more industrial products is lower than the commercial so I think I would say that we do expect margin to come down as a result of that but total profitability go up right. So we're just going to move to a dip.
One point on the margin times volume curve.
Neil This this is Keith it's hard for us too.
I think about.
What we would say about.
Gross profit for about more and because of the changing mix effects from granted.
So we know that the the crew compression has given us some being dominated amount that has expanded its we know that the that mix effect of the consumer specialties, holding up better and continuing to grow versus the industrial specialties is also contributed to that so we are.
Re looking that we're going from here, but as Steve said.
We don't want to say that the where we are 44 $45 about right now sustainable because we know that once industrial recovers that will.
Compressed, even though absolute dollars will grow.
Yes, no that's great and one of things I know, we've talked about through the years with with your organization is finding ways to improve the trading liquidity of your stock and to attract as a result, a more generalist investor.
Institutional investor and one of the constraints of course has been the MLP structure.
So I'd be curious on your guys thoughts about C Corp conversion, whether there's merit to it what that tax implications could be at that and then.
But that also in the context of we have an election coming up for a lot can change so a lot of moving pieces to it but the the overarching objective I would think would be too.
To get multiple expansion.
To your earlier point through through inviting more shareholders to participate in the story.
Yes, Neal this is Steve.
Totally agree.
What I would say is.
That's sort of thing that as a management team and aboard we were in continuous review and dialogue and I would say that co bid.
Has created some changes to capital markets and so on a simple so.
We have been focused on execution over the last few months.
That was essential to make sure we weathered the storm and we think we whether it's going very effectively.
But.
As you move away from execution the role of management team becomes more strategic in nature, and so I think the kind of questions you're raising a we're going to continue to debate and probably debate level.
Than pre Covance, we're in a different well so we need to understand how we can because this different world.
Thank you so much guys.
Hi, Dan if you like to ask a question I'll make a comment please press star one on your telephone to withdraw your question first the town Keith.
Okay.
Your next question comes from the line of Gregg Brody with Bank of America.
Hi, good afternoon, good morning, guys.
Hey, good.
Q2 book with missteps.
Yes.
That's where do you have.
You know, what you're going to or is it just decided to move back to Texas.
So.
Cobot has changed a lot of dynamics for everyone I think globally.
And it has also changed some of the dynamics in my personal life and found the lights.
And so one of the things that I in my.
Ladies and kids have agreed on is that for me to get back into balance one of the things that needs to happen given this change.
Over then the dynamics around us be tough is that we all need to be platform in Texas.
So I think what Stephen I have done over the past few months that works here with him. While he was on the board and also in the seat as my partner and CEO.
Exchange I think has lowered our.
Refinancing risk profile it has given us to timetable in run rate.
We have strong finance team that we've put into view a material weaknesses and so forth and so it's a good time.
Taking a breather so my personal things allow Stephen opportunity to.
To get to continue the journey. So it was my decision in my decision based upon jus the change in dynamics that affected my family.
I appreciate that my wife's listening to this conversation on whats going works a little less.
Thanks for that.
Good I completely clearly appreciate that this is useful times.
That's good to hear here.
We were able to.
Kevin personal and it does feel like we're on a run the other side of this.
Maybe I can just a couple of questions. So obviously a lot for non this quarter theres some questions about debt reduction.
Maybe you could just walk us through how you think about addressing the remaining.
Stub stub piece of the 20 twos.
And.
Appreciate the assets on that.
Sure as marketing the refining business, but maybe.
In the sense of timing on that and then if that doesn't go through what are your next steps.
Sure.
So I think that.
You know we're viewing the.
The 150 as manageable.
And the worst case scenario, let's say that the capital markets and high yield markets for debt don't normalize to where our credit profile can access it again.
We think that the 150 is manageable.
Staying current it's going to be very low coupon relative to what could be afforded the market. Even if we were able to refinance it and so it goes out to 2022 and service.
On the other had if.
We continue with the great falls process and the option one of the options play out because it.
It is strategic options right, we never said sale so.
Right. So it's a possibility that that could be option or different option. So whatever options. Great falls brings us allows us to de lever that sense.
You know there also.
Other options.
When we look at our collateral Trust agreement that is supporting the new secured bonds. They do not include Great Falls, Great Falls is actually pledged into the IPO, it's getting an advance rate.
Starting at about 100 million.
And stepping down in a more timing because it's just not that type of asset for that type of structure. So it's under appreciated those terms. So we could structurally move to take rate falls out the IPO, we could put a.
A term loan or secured loan on great falls, which would get a higher level.
Cash flow based make it portable in case, there is a potential buyers that could pick it up and lifted to take it all so it gives us a lot of options.
The second half of off this year.
If the US economy finds a way to manage the vaccine could see improvement in economic activity and that could then return activity to transportation fuels widening spreads and then.
Cash flow starts to roll through fuels again, so we have lots of options. We think we see this as Sps, Steve but something we can move to the back of the mind right. Now if you move back to what are we doing strategically with the portfolio.
In terms of cash flow from your underlying business.
Sure. Thank you can do very much cash flow second half of this year.
We think.
That is our charter our charter is not to add leverage and so far this year, we have not done that we are running this business.
Whereby our thought process is positive to breakeven free cash flow and so far year to date, we're at 22 million positive free cash flow.
Got it.
Im not expecting sniffing gas from the second half.
At this point.
We expect if you look.
The history of this business Q2 in Q3 have been our best seasonal quarters. So we think we're looking for Q3 that should be as strong as over Q2 or even stronger given the things we've done to metro portfolio and in Q4 has always been the seasonal low but.
If it's in a rebound environment than that could be a good good point. So it's we have we're optimistic about the second half, we're not saying, it's going to be a robust year by any means but we think our plan of how to get to 2021 is still intact.
That's helpful. And then if you would take US early as you can get your international.
Parties that are interested.
In the refinery.
Taking them to come see the asset.
When you think that is today.
I think Greg was slightly up when they say, let me support that question, we're not going to we're not going to hazard a guess on the timeline.
Okay.
It is moving onto the refining business.
Concerned about.
There is.
You've talked about a normalized number for the for the fuel products business.
And what's happening with.
With rents and just the movement in class and differentials.
What do you think that is today.
When you say normalized number are you talking about a full year run rate EBITDA for our fuel segment, yes.
Thank you.
Conversely, I think you gave a number 125 to 175 for fuel products.
That was pretty cold it that we frequently.
I think quite enough.
Yes, I mean.
Greg I apologize if it sounds glib, but the world is still abnormal.
Really struggling to give a normalized number not normalized world.
Yes, I can't point.
Hi, guys.
[laughter] I appreciate it complex guide the thing no [laughter].
I appreciate that its.
Kevin a shot.
So instead of me up at this question. So I'll just I'll just ask it on their behalf.
Trying to understand the hedge gain this quarter you have a split between fuel products and specialty segment.
Most of our hedge gains I would say 90, 95% or in the.
The fuels business.
Got it.
Yeah.
I'll leave it there listened Keith good luck I'm glad you're able to take care, which is take care.
We all appreciate that.
Thank you.
Okay.
I think would dumb question.
Operator, we have any more questions out there or.
We do not have any other questions I would like to turn the call back over to Mr., Steve Moore as CEO for closing remarks.
Well. Thank you very much I'm, just going to close the call by thanking everybody for participating and again expressing my appreciation for what the whole Calumet team accomplished in the second quarter.
We met the challenge the pandemic.
I'd like to wish everybody to stay safe and again, thank you have a good day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
I would call.
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