Q1 2021 Calumet Specialty Products Partners LP Earnings Call
Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily until that time your lines will again be placed on music hold thank you for your patience.
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Okay.
Okay.
Ladies and gentlemen, thank you for spending by and welcome to the Q1 2021 Calumet specialty products partners L. P earnings conference call. At this time, all participants lines are in a listen only mode. After the speaker's presentation, there will be a question and answer.
Theyre session to ask a question. During this session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker bread Macmurray of Investor Relations.
Thank you. Please go ahead.
Thanks Louis.
Everyone. Thank you for joining us on our call to discuss our first quarter results on.
I'm joined today by Steve Mora, CEO, Todd Workmen's, CFO, Bruce Fleming, EVP, Montana, renewables and corporate development, Scott Obermeier, EVP specialty products and solutions and marks on Edp performance brands.
Before we proceed allow me to remind everyone that during the course of this call. We may provide various forward looking statements such statements are based on the beliefs of our management as well as assumptions made by them and in each case based on the information currently available for them.
Although our management believes that the expectations reflected in such forward looking statements for reasonable neither the partnership its general partner, nor our management can provide any assurances that the expectations will prove correct.
Please refer to the Partnership's press release that was issued this morning as well as our latest filings with the SEC for a list of factors that may affect our results.
We may also reference to discuss certain non-GAAP measures. Please see the earnings press release and slides for reconciliations to GAAP financial measures.
As a reminder, you may now download a PDF of the slides that will accompany the remarks made on today's call on the Investor Relations section of our website Www Dot Calumet specialty dot com.
Webcast replay of this call will be available on our website within a few hours.
Can contact our Investor Relations Department is needed for support.
With that I'll pass the call Steve Steve.
Good morning, everyone and thanks, Brad it's good to have you on on team.
Like pretty much everyone in similar lines of businesses and geographies. Our first quarter results are dominated by a single onetime events the impact of winter storm year rate and resulting production losses first.
First quarter, adjusted EBITDA was negative $5 $4 million.
Despite these challenges our performance brands on our specialty.
Products on solutions segments maintained or improved unit margins. Despite a dramatic increase in crude prices during this quarter.
This clearly continues to demonstrate our ability to minimize the impact of price volatility and continue to see excellent work demonstrated by our team during 2020.
In late February on Shreveport refinery was successfully safely completing its largest turnaround on the decade.
As we prepared for the restock jewelry bore down on northwest Louisiana.
10 day hard for he's created a humanitarian disaster for the Shreveport area with lots of municipal water roads on possible for most of that time food shortages and power outages.
Go on to that detail to demonstrate the level of challenge presented to our teams at affected locations in Louisiana, and Texas were really proud and appreciative of our colleagues. They work long long hours to fixed hard for you Dan freeze damage, while contending with personal weather driven challenges and in many cases also helping their communities. During this time of Cigna.
Pete.
Nevertheless.
The combined impact of repair cost and volume loss affected our first quarter by in excess of $30 million.
On a freeze on an entirely coal plants presented additional challenges and results in additional damage on additional diagnosis time.
Our forward looking picture is as promising as it has been in many other yet.
Building on my comments on the last call, we continue to be able to sell everything we can make Furthermore, the economy appears to have only strengthened thanks to the vaccine rollout.
On the economy reopening.
Back in late 2020, our team looks forward and terms for 2021 as the year of the price increase.
We expected stress on the input side be a basic feedstock costs or supply chain disruptions and prepared accordingly.
The reality was more pronounced than even we expected, but we've been able to minimize that impact.
Like everyone. We have had at times needed to scramble to source materials and transportation, we've still been able to set records in our performance brands business hitting our first million gallon to fuel sales milestone in the month of January and maintain good unit margins in our specialty products and solutions businesses.
Strategically we continue to make good progress earlier. This week, we launched the process for redeemed $70 million about 2022 unsecured notes. We also completed our business re segmentation process recently filing on 8-K, providing investors more insight and transparency and investor feedback about these actions has been very Pos.
<unk>.
Progress on the Montana Renewables project is more than satisfactory the process of de risking and beginning execution of the project is on track on partner discussions on productive given.
Given the exceptional nature of this ultra competitive project, Todd and I will get into it in more depth later in our remarks and Bruce will also be here for Q&A, so with that I'll hand over to Todd who will be taking you deeper into our results.
Thanks, Steve.
Moving to slide for I'll discuss our summary financial performance, then we'll dive into the segments a bit further.
As Steve mentioned, we lost $5 4 million on an adjusted EBITDA during the quarter as we battled winter storm here.
Our specialty products and solutions segment bore the brunt of the storm, resulting in a $2 million adjusted EBITDA loss for.
Performance brands generated $16 million for the quarter, and Montana renewables lost $2 million of adjusted EBITDA.
Additionally costs from our corporate segment were just over $17 million for the quarter down from $20 million in the same period a year ago.
This is the first quarterly earnings call for we've been able to reported specialty products and solutions performance brands and Montana renewables as separate segments and we released an 8-K last week, providing full year 2019, and 2020 results recast by segment.
Further we have removed the mark to market impact of Rins from adjusted EBITDA, which aligns with the approach we've taken historically for all other non cash mark to market gains and losses.
The goal of our reporting changes as to generate better financial operational and strategic insight into our business and to display our businesses through the same lens that management uses.
On our last earnings call I mentioned that we would be using the $70 million of proceeds from the Shreveport fuels terminal sale leaseback to pay down debt as soon as we got the Shreveport turnaround comfortably behind us.
It took a little longer than originally planned given the freeze, but shreveport is up and running 49000 barrels a day of feed and we launched that call process. This week.
The process of calling these notes will be complete in early June.
Our liquidity did not change significantly during the first quarter and we continue to have plenty of availability.
Moving to segment financial performance during the quarter, let's turn to slide five and discuss specialty products and solutions.
You already heard about the impact of the Shreveport turnaround in Europe, and the effects for most visible on this segment as year over year production was down 47% in the quarter and early in the second quarter, we've been replenishing inventories throughout our supply chain.
Despite the challenging quarter I want to point out the unit margins being generated in this business.
Steve alluded to it earlier.
<unk> costs increased approximately 30% over the quarter and we had to purchase higher than normal quantities of third party finished materials specialty material margin, we're up over the past two quarters.
Material margin as an operational metric we have established in this segment to provide investors visibility into specialty margins, while also providing clear insight into the volatility that comes from fuels asphalt and intermediates that are made as byproducts of the specialty production process.
We did not receive much financial contribution from fuels in the first quarter, but future cracks are substantially improved from levels, we've seen over the past four quarters.
On slide six you will see more detail underlying the strong growth in our performance brands business and we're excited to now be providing this segment on a standalone basis.
We produced $16 million for adjusted EBITDA in the quarter, which is stronger than the 2020 quarterly average despite a favorable feedstock environment in the middle of last year.
Further the first quarter is traditionally a weaker one than compared to Q1 of 2020, the segment's adjusted EBITDA was up 51%.
In January we had our first million gallon months of <unk> sales and to support growing demand for the brand we've kicked off a small growth project to expand our packaging capacity for larger quantity cans.
<unk> gets a lot of attention, but it is not the only story on his division.
Part of the increase adjusted gross profit on a unit basis is mix related and comes from growth in high margin Royal Purple and Bel Ray sales throughout the quarter.
We're very pleased with the growth we're seeing across all three of the iconic brands in this business.
Let's turn to slide seven.
Our $2 million adjusted EBITDA loss in Montana, renewables was down $8 4 million versus last quarter.
Typical seasonality on the asphalt business combined with the rapid increase in crude price accounted for the majority of this difference.
Pad for US has always been a great place to be a refiner with plenty of seasonality and given recent improvement in cracks asphalt and WCS desk, we're excited to be moving into the spring and summer months.
Let's flip to slide eight slide eight and talk more about our Montana energy transition project.
First let me start by saying that we have an awesome team and great falls and we expect to keep full employment at the site as we convert the refinery.
To explain how I'll provide a short history of this plant at Calumet.
In 2012, Calumet purchased a 10000 barrel a day niche niche specialty asphalt refinery.
In 2016, the company spent $450 million installing an oversized hydrocracker and meddling up the plant with 317 <unk> stainless steel in order to run discount on highway aesthetic feedstocks.
Yes.
Last quarter, we announced the energy transition project, which will convert the same hydro cracker into renewable diesel service, leaving behind the original plan to operate as it used to albeit in a metal up and improved state.
As I mentioned, the hydrocracker is oversized and already contains the metal needed to process highly acidic renewable feedstocks.
From here, we can simply changed the catalyst convert some tanks expand dewatering and will be in service.
We plan to make this catalyst change in April of 'twenty, two and will be producing 5000 barrels a day of renewable diesel thereafter.
Internally, we think of this as the first module, it's straightforward utilize the existing equipment and gives us the margin extremely quickly.
After this module is complete the hydrocracker still is way underutilized remember today. This unit produces over 15000 barrels a day of diesel fuel and has named nameplate capacity of 24000 barrels a day.
But our existing hydrogen plant will be maxed out at 5000 barrels a day mark.
So the second module is constructing a renewable hydrogen plant to unleash more capacity.
This second phase gets us to 10000 barrels a day of renewable diesel production in the second half of 'twenty two.
The renewable hydrogen will will significantly lower the carbon intensity of the products, thus improving overall economics of the project.
So on the fee, which is a question we get asked most about.
We expect to start up next spring on store on soy because it's the fastest lowest risk track.
Discussions with suppliers are ongoing and we are evaluating offers while at the same time balancing strategic partner interest and allowing for feedstock flexibility.
Adding pre treatment to provide Max feedstock flexibility is the third module.
It's one that clearly adds tremendous value and flexibility and it can be done relatively quickly.
Other benefit is that non soy feedstock can be sourced locally.
To be clear all investor materials provided today assume exclusively soy economics, which are by far the most economically the most conservative.
Okay.
I'm going to going to turn it over to Steve to add a little more about the project and wrap up but I would summarize the project both internally and externally and something is moving quickly with great enthusiasm.
The state of Montana as business friendly and this project is great for the local area.
We have an existing facility with the right geography equipment and logistics set us apart on capital costs and speed the market and we're currently evaluating supply and offtake contracts that we're balancing with strategic partnership discussions feedback to you.
Thanks Todd.
Let's turn on slide nine with a summary on outlook.
As you can see on Todd talked about we made significant progress on the Montana Renewables project, both in terms of speed to market and further clarification of its exceptional position as a leading our deconversion project.
At the very highest level the best Derisking of any investment as Tad on asset that performs well through any and all cycles and we believe that the Montana project certainly does that.
The project compete either as a standalone renewables project or the jewel conventional renewable train with a conventional side can provide an additional counter cyclical high cash flow risk mitigate.
Over the short term we.
We further derisked by high speed to market at low capital investment.
Over the medium term, we derisk through our modular approach to implementation, which makes the execution easier and cheaper and spreads out the investment on ramp over time.
Finally.
Our existing metallurgy means that the transition to multi feed processing piece appears to be immediately practical if not inevitable and thats at low cost on im pretty sure for them.
Based on the very significant interest in partnering with US. We're also comfortable that we have substantial takes on a recognition that we have a top notch project.
Pretty much all the projects that just behind us on the competitive stack on proprietary within existing cooperations and will not be available to direct investors. So partnering with Montana renewables is a unique offering and that uniqueness has been recognized.
Building on closing the right partnerships for this project is proceeding nicely.
We really appreciate the investors and analysts interest in this process, but at the same time I doubt the process will be best served by twist on like updates on exactly where we are we remain focused on creating as much value for the unit holders of Calumet as possible.
In that light playing the game with all our cards face up on the table, although it's a lot more interesting for the audience is not medium term value maximizing it.
It may frustrate people it may lose us some short term special situations investors, but to build on the card game analogy. This will be much more like a game of gin rummy than a game of bridge.
Theres a positive significant unit holder value here and that's best served by focus on completing the partnership process and then there will be time for communications.
Rest assured we are moving forward with appropriate haste non.
Access at pace, but with the motivation that this opportunity is central to completion positioning Calumet on an exciting forward trajectory and therefore this is our greatest priority behind the safe operation of our plants.
Moving on more generally.
On outlook the bulk of youri disruption is behind us although on select product lines, we are still rebuilding operating inventories and finishing the stabilization of our supply chain.
Well generally like all of you. We're excited about the reopening of our economy and the level of intense demand response that we are experiencing.
We ask ourselves is how and when this eases, but in the meantime, this brings benefits to us in both demand and margins across our entire product line, both specialties and fuels the cost and efficiency measures. We implemented in 2020 together with our decision to not make distressed asset sales during the pandemic.
Nick should give us additional operating leverage to this upside situation.
Additional crude prices book eminently possible and although the second half of 2020 on the first quarter show that generally we're able to mitigate the price lag effect that you can see in specialties. This issue will retire will require continuous vigilance.
The other challenge that comes with strong economic activity is that supply chain issues also don't look like they're going away we.
We started prioritizing this issue back in 2020 building more system redundancy in auctions, but a big part of managing this as a real time responsive on dedicated and hardworking team, who do a great work every day, making things happen for Calumet on our customers.
That concludes our remarks, thank you very much for joining us today and thank you for your interest in and support of Calumet, So with that I'd like to turn the call over to the operator to open up the lines for Q&A.
Again, if you would like to ask a question. Please press Star then the number one on your telephone keypad well pause for just a moment to compile the Q&A roster.
Yeah.
Okay.
Yeah.
To ask a question. Please press Star then the number one.
Yes.
Yes.
Yes.
Your first question comes from the line of Greg <unk> with Bank of America.
Good morning, guys hopefully you can hear me okay.
We can good morning, Greg.
Good morning, Thanks for.
For the comprehensive update.
Maybe I can start just follow up on the renewables project.
You've laid out a path for slot for.
It looks like by April of next year.
After the catalyst change will help.
Five tier for capacity.
10-K by the second half.
It will refinery has to go offline for April 'twenty, two channel was changed.
To prepare for the for that first phase.
Hey, Greg good morning, its gross.
The answer is no.
April is a scheduled refinery wide turnaround that's what makes it the right time to.
Get into the hydrocracker for the catalyst switch and <unk>.
Final separation of the oil moving activities on the site.
But theres no pre.
Pretty shut down.
Got it and.
This quarter.
The Montana refinery well almost go.
A bit weaker on a year ago.
I see you mentioned the Canadian Speaker driver.
If you could walk us a little bit through what you expect out of that business going for the rest of this year and where we could see some improvements in margin.
Yeah. So so Greg one other reasons, we put the Rockies crack spread environment into the slide deck is to highlight that business within easily within the range of normal market volatility.
The refinery ran fall through this quarter.
It's simply external price environment, there is no trend to that.
The chart, we put in shows a $40 crack spread environment.
Generally in the Rockies.
I can tell you if you extended that chart back for 13 years, you get the same $40 no trend lines. So.
That's the external condition, but youre going to see a lot of volatility to it and I think that's all that we were experiencing.
Do you think it's fair that.
And just for clarity experiencing the recovery than others on its furniture right now I see the cracks up but I'll just go to a softer quarter would've been a little better for that particular business.
You mentioned volatility, but I guess is that abating.
What are you seeing through the first first months of the year.
Yes.
Yes, I think if you if you pulled the price series that you guys use in your model.
Youre going to find its ticked up sharply just in the last six weeks.
A portion of normal seasonal component and a portion of the commodity complex lifting we do have the WCS diff moving favorably toward us but still below.
<unk>.
WCS differential average.
Historically.
Got it.
And then coming back to our specialty products and solutions.
We saw the majority of those 30 million impact.
This quarter is that is there any residual this this quarter or is that is that all behind us.
Yeah.
The plants up and running Greg. This is Todd. Thanks for the question. So the plants are up and running now have been running fairly well this quarter.
We did have a little bit of inventory rebuilding in supply chain building in April so.
Probably a little bit of delay early in the quarter getting all those sales out to the customers and recognized but the good news is we are up and running fully.
As of May here should be should be recognizing full quarters.
Got it so this quarter, we will have some impact but.
That's for sure.
I don't worry about it so we'll.
We'll see how much we can make up.
We're producing as hard as we can and in.
Strong demand out there have quite a backlog of orders. So we're not expecting just to get inventories replenished youre going to keep oil moving out the door as best we can.
But it'll take a couple of months to work through that whole process.
Okay. That's helpful.
One more here before I hop into queue back in the queue.
So obviously the Supreme Court arguments started last week with respect for the small refinery exemption.
On case that.
We're waiting on interest say to current results from.
In the event that.
Obviously, if the Supreme Court reverses that.
Great for you.
If they do if they if they maintain their ROI.
How does that play out with respect to your your options.
For.
For.
From that point in terms of having to pay it and can you talk about how you would have to fund it if it did.
It really went against you.
Yes.
Well, Greg I think this is like this.
There's multiple questions in there with kind of hypothetical building on hypothetical.
So.
I think for real.
Just to make it simple because.
That's the simple question is if you if you have this liability.
It really goes against you how do you deal with that liability is there is there cash do you need to post sooner than later on or their appeals there I recognize.
The case may be.
Just trying to understand how to think about that liabilities.
Yes, Greg it's for US remember <unk> theyre not money for ins or quantity.
Demonstrated blending.
<unk>.
None of these are doing yet the EPA has extended all of the timelines.
So.
There is there is a long road.
And there is a.
Net of court activity. Besides the narrow one around Holly frontier Thats in front of the Supreme Court. So thank.
I think it's not bimodal as you parse it yet I guess.
It's a ticket and we see a couple of ways through but.
Yes.
I direct you to the fact that the renewable diesel project more than covers.
The issue that you are breaking up.
And I appreciate that I'm, just wondering if there is a cash need.
Between the time that comes on line and we go.
On this one.
Greg We don't believe that's the case.
I think whatever the Supreme Court rules. It is just the beginning even though the Supreme Court would appear to be the final voice.
At the beginning of a process both ways.
Alright, I appreciate that I'll go back in for you guys. Thanks for them for that.
On.
Your next question comes from the line of Neil Mehta with Goldman Sachs.
Hey, Good morning, guys. First question is just on gross margins at the specialty products business, they seem pretty durable in the first quarter. Despite the rising crude price environment can you just talk to us about how do you think about the gross margin sustainability.
Prices continue to grind higher.
It's Neil Scott Obermeier, Thanks for the question.
I would probably make a few comments and to your question. The first would be as you know Neal we've talked a little bit about the past year or two we've been really focused commercially on improving our skills and our mindset on extracting the full value and implementing.
Pricing and various commercial excellence activities and so I think the team has come a long way in the past couple of years I think that's shown in our results Neil and we've been we've been stress tested if you will last year as crude.
Spiked up and then in the Q1 and so we feel that the business is resilient demand is strong and we've got the right execution in place to handle frankly any type of feedstock volatility on market volatility at this time.
Yeah. Neil This is Steve this is Steve if I could add I mean, so so we've we've read on the market from.
Minus 42, plus 65 on <unk>.
Crude with reasonable success so far.
Demand remains good.
I think so so I think we are comfortable with our macro ability like Scott said to manage it.
And then there's always going to be some mix effect at the margin.
And I think we think between Q1 Q for the mix effect was kind of neutral there was some positives to make some negatives for the mix, but I really think that that kind of the macro works and then occasionally there's some mixed noise around it.
Thank God I appreciated your comments around Shreveport and <unk>.
Hopefully your team was able to stay safe and make it through this strong.
And as we think about the <unk> EBITDA at specialty that was obviously softer than expected largely because of volumes.
Can you talk about what the lost opportunity profit or was from the downturn. If you have that number.
Yes, I think yes.
This is Todd.
We said, we said the freeze cost us $30 million.
Turnaround probably cost us 10 on top of that and.
Mostly in loss of opportunity. So we haven't broken it out specifically, we have internally between loss opportunity than an actual specific volume charges, but I think it would be safe to say.
You know $25 million to $30 million of that is well I Shouldnt say that it's lost volume, there's another $10 million on top of that that's roughly lost opportunity.
The 35 to 40, and that's a pretax number.
Correct EBITDA.
EBITDA E P.
Thank you.
Again, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
Star one.
Okay.
Yes.
Okay.
Okay.
And at this time there are no further questions.
I'd now like to turn the call back over.
So Brad Macmurray for any closing remarks.
Okay.
Thank you everybody for your time and have a good weekend goodbye.
Yes.
That does conclude today's conference. We thank you for participating you may now disconnect.
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