Q3 2022 Calumet Specialty Products Partners LP Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Okay.
Hello, and thank you for standing by and welcome to the Q3 2022, Calumet specialty products partners L. P earnings Conference call.
At this time all participants are in a listen only mode.
After the speaker presentation, there will be a question and answer session to ask a question. During this session you will need.
Need to press Star one one on your telephone.
It is now my pleasure to introduce head of Investor.
Accretionary.
Yeah.
Good morning.
Thank you for joining us today for our third quarter 2022 earnings call with me on today's call are Todd <unk> CEO Vincent in Argo CFO , Bruce Fleming EVP, Montana renewables.
Corporate development, Scott Obermeier, EVP specialty products and solutions, Mark Lawn EVP of performance brands and Steve <unk> Executive Chairman.
You may now download the slides that accompany the remarks made on today's conference call, which can be accessed in the Investor Relations section of our website at Www Dot Calumet specialty dot com.
Additionally, a webcast replay of this call will be available on our site within a few hours.
Turning to the presentation on slide two you can find our cautionary statements I'd like to remind everyone that during this call. We may provide various forward looking statements.
Please refer to the Partnership's press release that was issued this morning as well as our latest filings with the Securities and Exchange Commission for a list of factors that may affect our actual results and cause them to differ from expectations as we turn to slide three I'll pass the call to Todd Todd Thanks, Brad.
<unk> welcome and thank you again for joining the call.
Calumet continues to demonstrate that our strategic vision of creating two leading highly competitive businesses becoming reality.
Our specialty business is performing superbly and proving its capability.
Montana renewables is in completion in growth mode, and we will provide a detailed update of our SaaS renewable hydrogen and renewable diesel launch in a few minutes with respect to the third quarter lets turn to slide four.
Our third quarter adjusted EBITDA of $127 million is the second best quarter, we've seen our Calumet, Despite our Montana plant, taking a planned turnaround for most of the quarter.
Of course, the commissioning of Montana renewables marks a significant milestone for Calumet as our vision of becoming a reality.
As our vision becomes a reality and we enter the renewable diesel business.
Since our last earnings call. We've also expanded our MRM product offering by adding sustainable aviation fuel to the mix.
Our SaaS as quickly contracted and not only are these sales at a premium to renewable diesel but once our engineering modifications are complete in early 2023, <unk> should be the largest producer in North America.
It was less than one year ago that we announced the initial funding of Montana renewables and we're proud of what the team has accomplished here in such a short amount of time.
And the time that it took to standup MRO our specialty team has redefined what this unique business is capable of.
This year alone the business has generated $330 million of adjusted EBITDA and produced the best two quarters in company history.
This is a combination of a favorable market, our competitively advantaged business and a step change in execution across the board.
One way, our ops and commercial teams have maximized the value of Optionality that sets our integrated platform apart.
The heart of our advantages, our northwest, Louisiana, especially complex and specifically our Shreveport facility.
Here, we produce products for third party sale, we make feedstock for our solvents division base oils, and waxes sharp Enrico Unparallel logics brands lubricants for a performance brand segment, and we gather intermediates throughout the system and upgrade them into finished fuels.
In the third quarter, we processed over 51000 barrels of feed per day through this facility, a 40% improvement versus 2021 and more than 10% higher than any annual period, we've seen.
Further the northwest Louisiana team has now delivered two turnarounds this year, one at Shreveport, and one at Princeton, both on time and on budget.
This step change and execution has been fundamental to advancing the key strategic initiatives of deleveraging organically at the same time, Montana renewables was advancing.
At this time last year, our debt to EBITDA ratio was over 10 times at the end of the third quarter. It was four times.
Not where we want to ultimately be but we're on pace to reach our destination quickly.
I think the Shreveport team for their tireless commitment they developed a plan to change the culture and prove our capability and invest capital wisely.
Early in the year, we talked about capital investment in northwest, Louisiana, We've been thrilled with these investments so far and we'll continue to do that in a disciplined way as we further integrate and widen our competitive moat, that's underpinned by industry, leading flexibility and optionality.
Montana renewables has quickly become a reality.
Amira 355 days ago, we secured project funding from Oaktree and formally launched what's become known as MRO.
Over the past year, we formed a strong partnership with Warburg Pincus and turn that project into about the business and a growth platform positioned for the future.
During this time, we've seen our hypotheses tested and we've learned a lot.
Alright processes regarding the advantages of location. The yogurt competed and increasingly expensive market for ACO likelihood that canola with gain EPA approval and how Rd margins. Ultimately worked we're all viewed as outside the mainstream a year ago.
But now they are being proven out and even becoming conventional and in the case of MRO. They provide unique competitive advantage.
We've overcome other challenges to like everyone. We scheduled materials through the peak of the global supply chain crisis manage through a tight labor market and fight inflation across the board.
Our project timeline has been aggressive and we ultimately commissioning units within a few weeks of the planned date.
I'd like to recognize the tenacity of our team that has made this a reality.
Levering our schedule driven project in this environment is a tremendous accomplishment from here. Our focus is pointed towards operating the new unit and completing the hydrogen plant and pre treater, which provide the scale and feedstock flexibility that underpin our economics.
As excited as we are about renewable diesel the growing energy around SaaS provides the new added growth platform.
In a few short months, we've pivoted to take advantage of this rapidly emerging opportunity.
In the first quarter of next year will be the largest fast supplier in North America.
We have contracted 2000 barrels a day or 30 million gallons a year to a blue chip off taker and that volume is contracted at margins substantially higher than renewable diesel.
<unk> experience demand for SaaS was oversubscribed and interestingly enough. This deal was in the works prior to the infrastructure reduction Act being signed into law a few months ago.
Prior to the IRI SaaS as a niche market supported largely by private jet demand.
The IAA creates an incentive for producers to develop new technologies and generate more supply to meet increasing demand from commercial airlines.
We believe this will create a growth trajectory similar or better than we've seen in renewable diesel and we're perfectly positioned to be a first mover in a high growth west coast and Canadian markets.
The similarities between Rd, and SaaS don't stop there.
Many in the industry have adopted our view that the RV market should see relatively steady margins overtime.
Diesel volumes are necessary to meet market demand, even if all announced projects for bill and renewable diesel has an eight yield and cost advantages relative to biodiesel.
We believe that in order to ultimately meet long term industry SaaS demand new expensive technologies are going to be required.
Like biodiesel those technologies require financial and technical certainty to get off the ground.
One can deduce that the IRS belt projects, whether it's enabling incentives might be.
With our technology SaaS can be manufactured more economically than through these new technologies.
Rd producers that are invested in the ability to produce fast could expect a lasting advantage in Montana renewables is expected to have an additional transportation cost advantage relative to its golf coast competition.
<unk> Pincus, our partners in MRO had been even more impactful than we expected.
And just a few short months, they've helped us expand our thinking and their experience and de carbonization continues to be a force multiplier.
We believe this alliance with such a strong and global partner helps to cement our position as the leading independent SaaS and renewable diesel producer in North America.
We continue to work with Lazard as they evaluate inbound investor interest specifically from strategics and increasingly with regard to SaaS.
Later, we will talk a bit more about the SaaS opportunity, but before we go there I will turn the call over to Vince to walk us through the segments.
<unk>.
Thank you Todd.
Let's turn to slide six our specialty products and solutions business generated a record $131 7 million of adjusted EBITDA in the third quarter. This type of performance requires a combination of a strong market exceptional execution and advantaged underlying business our specialty Ms.
<unk> margin of $93 93 per barrel as the highest ever which is a combination of rapidly falling feedstock prices and continued focus on executing commercially adil.
Additionally, we continue to see strength and appeal of market, especially for <unk>. Our integrated platform allows us to ramp up diesel fuel production in environments like these and at the same time sell a large percentage of our specialty products and two markets that are highly correlated to diesel fuel.
Providing a commercial optionality that is highly valuable.
Ultimately in order to capitalize on this margin environment, we have to run well, which we did we had great operational performance and production across our Sps facilities during the quarter and Todd hit on some specific examples earlier.
But the whole network turned in exceptional production.
Our discretionary capital investments within this segment and specifically Street part continue we are experiencing the benefits of these low risk high reward investments improved efficiency reliability and optionality that increases our advantage going forward.
Moving to slide eight our performance brands business generated $8 5 million and adjusted EBITDA for the quarter.
Performance brand is beginning to see a turnaround from the headwinds we have faced for more than a year now.
Our price increases are gaining traction.
As we have discussed in previous quarters, we are finally, starting to see our raw material costs stabilize.
Costs still increased versus the prior quarter, but the magnitude of the increase was less than pricing, especially late in the quarter.
Our supply chain is not perfect, but there too we continue to trend in the right direction. This quarter, our largest supplier lifted a force majeure that had been a fact for 18 months.
At this point, our largest ongoing supply challenges, Greece, which is a significant growth opportunity for us, but given the multiple challenges of the past year narrowing narrowing it to Greece is a welcome step forward.
We expect to see some normal seasonality in the business as we head into the winter months, but we are excited at least for the time being to see a semi returned to normalcy for this business.
Moving to slide 10, our Montana business had a busy quarter with the planned turnaround and renewable diesel conversion.
As Todd mentioned, we are excited to have moved into the operating mode at MRO, even with the plant being in turnaround for much of the quarter, we did generate $11 3 million and adjusted EBITDA.
Due to the ongoing improvements we have been seeing this year and differentials for heavy Canadian crude as WCS <unk> discount was approximately $20 per barrel in the quarter and partly due to the exceptional product margin environment that continues to be strong even by pad.
<unk> high standards.
The legacy plant is fully running at 12000 barrels per day and as we have stated we expect this reconfigured facility to generate approximately 60% of the adjusted EBITDA of the historical plant performance, even though we are running at 40% of its capacity.
With that I will turn the call back to Todd talk in more detail about MRO and for concluding remarks Todd.
Todd.
Now lets get deeper into Montana renewables on slide 11.
Our feedstock is sourced our plants commissioned the throughput expansion that renewable hydrogen provides is expected shortly and our pre treater and will open.
The full universe of feedstocks.
Our plants full of feedstock and we will quickly turn that to cash.
At one point feedstock availability was the most frequently asked question we received.
Since then <unk> feedstock advantage has proven to be a massive differentiator and we believe that's the last thing advantaged feeds.
<unk> feedstock for initial startup where secured months ago local suppliers like the idea of shortening their supply chains with a high security offtake or like MRO.
Our supply chain has been proven as trans loading sites are working and railcars returning.
Many of the same suppliers, who are providing treated feedstocks now will be supplying the untreated feeds when our free trader is complete in a few months.
And the pending approval of canola further differentiates MRO as theres enormous volumes in our backyard there incrementally exports to Asia.
Something we haven't discussed much as the emerging potential camelina oil.
Camelina is high on our radar, it's a non crude feedstock that is currently grown in Montana.
Camelina has intrinsic value to farmers as rotation will cover crop.
It also has an extremely low carbon intensity and the crop continues to gain momentum as the future juggernaut and renewable fuels feedstock space for.
For Montana renewables that couldnt happen in a better place.
As mentioned earlier, we've contracted 2000 barrels per day of SaaS, which is part of our initial yield and that makes us the largest north American staff producer.
On the bottom of slide 12, Youll see these initial volumes all of which had been sold at a premium to renewable diesel.
Immediately we have an option to stretch the current staff output and we will fine tune that as the plant completed its initial performance testing.
Thereafter, we can capitalize for greater saft production, which we and our technology license their estimate could be up to 15000 barrels a day.
Preliminary engineering work has begun on this project and its world class position has generated considerable interest from strategic investors.
On the right half of this slide we see a map of the west coast major airports and SaaS hubs in relation to Montana renewables.
To many of you this might look familiar as we viewed something similar Friday.
Location underpinned so much of our competitive advantage at MRO, whether it's renewable diesel or SaaS and as all of you with refining and transportation fuels knowledge no location is the one competitive advantage that withstands the test of time.
Mris proximity to end product markets as exceptional we serve renewable markets on the west coast with direct be NSF rail access and we're perfectly positioned to support that continuously growing low carbon markets in Canada.
Recently, we've seen that location is more than just advantage freight expense.
The strong stable margins that we see in the Rd business are vulnerable to backwardation for anyone with long supply chains. We believe the same is true for SaaS.
In a highly backward dated market like we're in right now the price received for fuel is significantly less next month that is if you can reach end market in the current month.
We've heard more about this issue recently as backwardation has steepened and with our shorter supply chain, we expect to largely avoid this challenge.
In summary, slide 13 puts everything in one place.
Right now we're focused on ensuring we take the time to understand the nuances of operating our Rd unit that only come with experience well.
We really don't generate much EBITDA until we gain the scale and feedstock flexibility that are coming soon and right. Now the temperature is 30 degrees lower November average in great falls, So we're taking it slow.
From there the focus is on getting the pre treater and hydrogen plants stood up at this point the Montana renewables is expected to deliver financially.
Next year, we'll be focused on operating the full plant optimizing our feedstock advantage and quite possibly finalizing our staff expansion.
All in it's been a busy year.
We're excited about the future we're proud of what's been accomplished thus far and we believe the foundation is set for Montana renewables is a leading growth platform and SaaS and renewable diesel.
With that let's turn it back to the operator for Q&A operator.
Thank you.
Reminder, to ask a question you will need to press star one one on your telephone.
Once again to ask a question Chris.
On the line.
And our first question comes from the line of Carly Davenport with Goldman Sachs.
Hi, This is Nick <unk> on for currently Devin Thanks for taking the time. So the first question would just be on broader capital allocation and how Calumet is thinking about potential for shareholder returns over the coming quarters as you've crossed their continued leverage reduction.
Yes, we're excited about the upward potential.
<unk> of our units obviously.
First things first we're focused on getting this business up and running.
We think and generating cash, which like we said in the call. We think happens kind of early early spring next year.
From there we will continue.
To pursue the.
Strategic Delevering, which has been kind of priority number one now for a long time. So so looking forward, we're trying not to get too far ahead of ourselves we liked its cash generation potential.
The MRM business obviously.
<unk> business continues to to generate a lot of cash and it looks like for.
For the foreseeable future.
Continues to be the case.
We'll manage it accordingly.
Okay, great. Thanks, and then just a follow up there on Montana renewables.
And if you can talk a little bit about what else is kind of outstanding to get the renewable hydrogen.
Plans and pretreatment unit online.
As it relates to the asset.
Hey, Michael this space.
Yes.
Operating on a small site and so from the beginning and we've talked about this.
The sequential commission a lot of the discrete projects was part of our.
<unk> approach to efficient execution.
So weak last summer, we completed the logistics segregation into the two trains that crude oil processing in the renewables.
Definitely commissioning.
Renewable diesel which in the past we've called the hydro cracker, but it was impossible service.
Hydrogen should come up next month, then pretreat or after that.
Basically through the winter.
We're going to finish the complete commissioning and slide 13, which I should note has not changed in a long time.
As telling you what that looks like.
In terms of throughput.
And I'll Echo Todd's sentiments earlier I'm proud of the Calumet team having held the line.
Schedule here that was our metric that's what we set out to do.
Knock on wood.
We're bringing it home.
Okay, great. Thanks for the color there.
Thank you.
And our next question comes from the line of Amit Dayal with H C. Wainwright.
Thank you good morning, guys congrats on the execution.
Just think respecting MRM.
Should we expect that you've indicated for Q4 of them are generating.
It will be flat from an adjusted EBITDA perspective will continue potentially in two one in Q3 as well or we do have some of the scf in R&D starting to contribute already by them.
Bruce or not year on year.
But it sounds like we are.
Mr. Bruce here, he is actually off site so.
I'll take a shot at it.
Yes.
Obviously, there is two steps to cash generation in the first one is scale with the hydrogen plant that happens before the pre trip. So I think you're right. We don't expect full forecast flow.
Until we get both the scale and a pre treater online.
But we will.
We will do a little bit better and we expect to do a little bit better than flat kind of.
Early in the quarter as late in this year kind of early in that early next year as we get kind of hydrogen plant fully turned out well, obviously kind of just like we're doing with with the <unk> creep up learning curve on pre treat.
Those types of things. So I don't think Q1 will be totally flat, but you are right to assume that.
You know the the large earnings power starts after after both Pretreat and hydrogen plant.
Understood. Thank you for that.
Just from the monetization perspective.
This has been out there in terms of the renewable diesel optionality that is on the table.
Specialty.
Sps segment.
<unk> performance brand segment.
Now showing this level of performance have you are you reconsidering some of these options.
<unk> been in discussion previously.
Just the organic cash flow seems pretty strong.
Deleveraging efforts.
Seem to be.
Moving in the right direction does support so just wondering how we should think about the options in front of us from wood.
What you have put out there with respect to the renewable diesel.
Business.
Yes, I think when you look at it very opportunity.
Backwards.
Im sorry, Ed I don't know what happened.
Ahmed.
I'll take the Montana renewables part but.
Invite Todd too also color that a little bit at the at the corporate level.
We set out a year and a half ago to launch this business.
I think there was a series of questions.
<unk>.
Which we addressed along the way from analysts and investors.
As each one of those got satisfied and as the value proposition became more clear.
We.
Shifted our thinking a bit and.
The capstone on that was when Warburg came in and back the venture at a <unk>.
Enterprise value markets two in a quarter billion dollars that was a pre commissioning number. So we were we were pretty happy with that accomplishment.
We need to focus on getting this up safely and delivering what we promised to the market, but at that point, Montana renewables as Standalone itself funding all of the things that we talked about for future growth expansion of SaaS.
Montana renewables can do that on its own. So we don't think that we need to monetize any of our ownership in order to deliver the business plan that makes it optional.
And.
Calumet.
It was founded as a partnership.
The general partner, Thanks in terms of partnerships.
At the moment, we're very interested in the strong inbound that were getting SaaS.
A couple of other strategics, who have been waiting for us to Derisk. This by getting that turned off.
So I think all of that is long way around of saying that we really like our position, but we still think a complementary strategic partner would make a lot of sense. It's in Calumet DNA to operate that way.
Okay.
Okay, maybe I'll just maybe add on there are better I think.
Like we said we look at this very opportunistically at the parent.
We had a process going before with Lazard, we talked about that.
That process ended with what the.
I Shouldnt say fully ended but as far as our process with the deadline date.
That ended with the Warburg deal.
Lazard remains retained they're out there they are very opportunistic like Bruce said, theyre, taking inbound and an inbound honestly has picked up with SaaS. So so we don't feel a rush.
But there could be an opportunistic.
Deal here that we could consider.
And I think I think we'll just take it one step at a time.
Well that's helpful guys. Thank you so much that's all about I'll take my other questions offline. Thank you.
Thank you.
And as a reminder to ask a question you will need to press star one one on your telephone.
At Star one one.
Our next question Koji.
Cogent comes with Bank of America.
Hey, good morning, guys.
Okay.
Just maybe talk a little bit more about what youre seeing on the demand side are you seeing any slowdown on the industrial side.
Sooner or are you seeing resilience.
Hey, Greg Scott Obermeier, I'd say on a macro level, we're aware of a lot of these forward indicators signaling a more challenging economic environment.
And we also are starting to see some typical year end seasonality across both industrial and the consumer side, but all in all Greg I mean, what we're seeing.
Continued pretty solid demand overall.
So I think as we look forward.
We view Q4 into Q1 with overall pretty solid demand I think we will see some of our our prices regress a little bit.
Towards some some normalization, but but we're pretty bullish overall.
Business is running well.
And then you mentioned how how.
Sps benefited from decline in crude I believe in terms of helping your margins could you help us understand how much that.
And.
Since your margins.
Yes, I think if you look at the margin chart. This is Todd Greg.
<unk> chart in a material on the Sps slide you can kind of see.
A pretty steady level over the past four or five months and you saw kind of in Q1, a little bit of a depth when crude ran up about 30 Bucks a barrel and and you saw the exact opposite happened here when crude run down to about 30 Bucks a barrel. So it's hard to quantify exactly but but I think.
The way, we like to look at it is assumed that steady line is kind of the normal we expect to be able to maintain that.
Current market.
Looking forward and I would say.
The pop above that steady line that were seeing and in the third quarter is as a large large part crude related.
Got it.
And then on the performance brand side, you talked about how the force majeure is behind US the one remaining supply sites Greece.
I know you were expecting some delay in terms of being able to improve your pricing relative to improving crude prices. That's obviously come down a bit but I am curious it sounds like youre, telling us what <unk>, what <unk> was a reasonable expectation going forward for what type of EBITDA, we should expect.
But how do we I am I misinterpreting that or should we expect that to improve.
Okay.
Hi, Greg its smartphone.
Couple of things, let me sort of disassemble that question just into a few component parts. So as Vince mentioned.
We're still seeing inflationary pressures on the business, albeit at a reduced rate.
So the speed at which we're catching up with the pricing that we've seen come through that.
Im joined the third quarter Gris Gris is one.
We keep an eye on very carefully we're doing a lot work around trying to stabilize further the grease market demand is strong.
And continues to be remained strong and not set not just a north American issue at sort of a global issue, we shipped which gives us opportunity and as you look forward there isn't any indication in the short range that we're going to see a material change based on what we know at the moment.
Albeit we still think there is.
There's still an element of catch ups that we while we've caught up and element on price lag that's still not all the way through system pricing was still going in to play as late as the second and third week of September for example, so there's still some compounding benefits there that we would expect to see rolling through.
I appreciate that color and just last one for you.
I know theres, some timing around bringing in the proceeds from your different Montana renewable facilities.
Are you providing guidance as to how much how much we should expect to come in from those facilities in the.
Fourth quarter.
In terms of enhancing liquidity down there.
Well I think I think a good rule of thumb is.
We built inventory feedstock.
Inventory was feedstock that was was around 50 million Bucks thats kind of just sitting there and the tanks. So.
The supply and offtake deal and the ABL will combine to to fund the inventory.
And we'd expect that much back here.
As we progressed through the quarter.
Okay. Thanks for the time guys I appreciate it.
Thank you Greg.
Thank you.
I'll now hand, the call back over to head of Investor Relations, Brad Thank Murray for any closing remarks.
Yes. Thanks, so on behalf of the management team here in the room and really all Calumet. Thanks for your time and interest.
Here. This morning, we appreciate your participation on the call.
Everyone have a great rest of the week. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.
The conference will begin shortly to raise your hand during Q&A you can dial one one.
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Hello, and thank you for standing by welcome to the Q3 2022, Calumet specialty products partners L. P earnings Conference call.
At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During this session you will need to press star one one on your telephone.
It is now my pleasure to introduce head of Investor.
<unk>.
Yes.
Good morning. Thank.
Thank you for joining us today for our third quarter 2022 earnings call with me on today's call are Todd <unk> CEO , Vincent Argo CFO , Bruce Fleming, EVP, Montana, renewables and corporate development, Scott Obermeier, EVP specialty products and solutions, Mark Lawn EVP of performance brands and Steve <unk>.
Chairman.
You may now download the slides that accompany the remarks made on today's conference call, which can be accessed in the Investor Relations section of our website at Www Dot Calumet specialty dot com.
Additionally, a webcast replay of this call will be available on our site within a few hours.
Turning to the presentation on slide two you can find our cautionary statements I'd like to remind everyone that during this call. We may provide various forward looking statements.
Please refer to the Partnership's press release that was issued this morning as well as our latest filings with the Securities and Exchange Commission for a list of factors that may affect our actual results and cause them to differ from expectations as we turn to slide three I'll pass the call to Todd Todd Thanks, Brad.
<unk> welcome and thank you again for joining the call.
Calumet continues to demonstrate that our strategic vision of creating two leading highly competitive business is becoming a reality.
Our specialties business is performing superbly and proving its capability.
Montana renewables is in completion in growth mode, and we will provide a detailed update of our SaaS renewable hydrogen and renewable diesel launch in a few minutes with respect to the third quarter lets turn to slide four.
Our third quarter adjusted EBITDA of $127 million is the second best quarter, we've seen our Calumet, Despite our Montana plant, taking a planned turnaround for most of the quarter.
Of course, the commissioning of Montana renewables marks a significant milestone for Calumet as our vision of becoming a reality.
As our vision becomes a reality and we enter the renewable diesel business.
Since our last earnings call. We have also expanded our MRM product offering by adding sustainable aviation fuel to the mix.
Our SaaS as quickly contracted and not only are these sales at a premium to renewable diesel but once our engineering modifications are complete in early 2023, MRI also would be the largest producer in North America.
It was less than one year ago that we announced the initial funding of Montana renewables and we're proud of what the team has accomplished here in such a short amount of time.
And the time that it took the stand up MRO our specialties team has redefined what this unique business is capable of.
This year alone the business has generated $330 million of adjusted EBITDA and produce the best two quarters in company history.
This is a combination of a favorable market, our competitively advantaged business and a step change in execution across the board.
One way, our ops and commercial teams have maximized the value of Optionality that sets our integrated platform apart.
The heart of our advantages, our northwest, Louisiana specialty complex and specifically our Shreveport facility.
Here, we produce products for third party sale, we make feedstock for our solvents division base oils and waxes for Penrico in parallel <unk> brands lubricants for a performance brand segment, and we gather intermediates throughout the system and upgrade them into finished fuels.
In the third quarter, we processed over 51000 barrels of feed per day through this facility, a 40% improvement versus 2021 and more than 10% higher than any annual period, we've seen.
Further the northwest Louisiana team has now delivered two turnarounds this year, one at Shreveport, and one at Princeton, both on time and on budget.
This step change and execution has been fundamental to advancing the key strategic initiatives of deleveraging organically at the same time, Montana renewables was advancing.
At this time last year, our debt to EBITDA ratio was over 10 times at the end of the third quarter. It was four times.
Not where we want to ultimately be but we are on pace to reach our destination quickly.
I think the Shreveport team for their tireless commitment they developed a plan to change the culture and prove our capability and invest capital wisely.
Early in the year, we talked about capital investment in northwest, Louisiana, We've been thrilled with these investments so far and we will continue to do that in a disciplined way as we further integrate and widen our competitive moat, that's underpinned by industry, leading flexibility and optionality.
Montana renewables has quickly become a reality.
Amira 355 days ago, we secured project funding from Oaktree and formally launched what's become known as MRO.
Over the past year, we formed a strong partnership with Warburg Pincus and turn that project into about the business and a growth platform positioned for the future.
During this time, we've seen our hypotheses tested and we've learned a lot our hypothesis regarding the advantages of location. The yogurt competed and increasingly expensive market for UCL likelihood that canola with gain EPA approval and how Rd margins ultimately work, we're all viewed as outside the mainstream a year ago.
But now theyre being proven out and even becoming conventional and in the case of MRO. They provide unique competitive advantage.
We've overcome other challenges to like everyone. We scheduled materials through the peak of the global supply chain crisis manage through a tight labor market and thought inflation across the board.
Our project timeline has been aggressive and we ultimately commissioned the units within a few weeks of the planned date.
I would like to recognize the tenacity of our team that has made this a reality.
Levering our schedule driven project in this environment is a tremendous accomplishment from here. Our focus is pointed towards operating this new unit and completing the hydrogen plant and pre treater, which provide the scale and feedstock flexibility that underpin our economics.
As excited as we are about renewable diesel the growing energy around SaaS provides a new added growth platform.
In a few short months, we've pivoted to take advantage of this rapidly emerging opportunity.
In the first quarter of next year will be the largest SaaS supplier in North America we.
We've contracted 2000 barrels a day or 30 million gallons a year to a blue chip off taker and that volume is contracted at margins substantially higher than renewable diesel.
<unk> experience demand for SaaS was oversubscribed and interestingly enough. This deal was in the works prior to the infrastructure reduction Act being signed into law a few months ago.
Prior to the IRI SaaS as a niche market supported largely by private jet demand.
The IAA creates an incentive for producers to develop new technologies and generate more supply to meet increasing demand from commercial airlines.
We believe this will create a growth trajectory similar or better than we've seen in renewable diesel and we're perfectly positioned to be a first mover in a high growth west coast and Canadian markets.
The similarities between Rd, and SaaS don't stop there.
Many in the industry have adopted our view that the Rd market should see relatively steady margins overtime.
Biodiesel volumes and necessary to meet market demand, even if all announced projects for bill and renewable diesel has a net yield and cost advantages relative to biodiesel.
We believe that in order to ultimately meet long term industry SaaS demand new expensive technologies are going to be required.
Like biodiesel those technologies require financial and technical certainty to get off the ground.
One can deduce that the IRS belt projects, whether it's enabling incentives might be.
With our technology SaaS can be manufactured more economically than through these new technologies.
Rd producers that have invested in the ability to produce SaaS could expect a lasting advantage in Montana renewables is expected to have an additional transportation cost advantage relative to its golf coast competition.
We're very pincus our partners in MRO had been even more impactful than we expected.
And just a few short months, they've helped us expand our thinking and their experience and de carbonization continues to be a force multiplier.
We believe this alliance with such a strong and global partner helps us cement our position as the leading independent SaaS and renewable diesel producer in North America.
Jointly we continue to work with Lazard as they evaluate inbound investor interest specifically from strategics and increasingly with regard to SaaS.
Later, we will talk a bit more about the SaaS opportunity, but before we go there I will turn the call over to Vince to walk us through the segments Vince.
Thank you Todd.
Let's turn to slide six our specialty products and solutions business generated a record $131 7 million of adjusted EBITDA in the third quarter. This type of performance requires a combination of a strong market exceptional execution and advantaged underlying business.
Pretty material margin of $93 93 per barrel is the highest ever which is a combination of rapidly falling feedstock prices and continued focus on executing commercially Adele.
Additionally, we continue to see strength in the appeal of market, especially for distillates are integrated platform allows us to ramp up diesel fuel production in environments like these and at the same time sell a large percentage of our specialty products and two markets that are highly correlated to diesel fuel.
Providing a commercial optionality that is highly valuable.
Ultimately in order to capitalize on this margin environment, we have to run well, which we did we had great operational performance and production across our Sps facilities during the quarter and Todd to hit on some specific examples earlier.
But the whole network turned in exceptional production.
Our discretionary capital investments within this segment and specifically Street part continue we are experiencing the benefits of these low risk high reward investments and improved efficiency reliability and optionality that increases our advantage going forward.
Moving to slide eight our performance brands business generated $8 5 million and adjusted EBITDA for the quarter.
Performance brand is beginning to see a turnaround from the headwinds we have faced for more than a year now.
Our price increases are gaining traction.
As we have discussed in previous quarters, we are finally, starting to see our raw material costs stabilize.
Costs still increased versus the prior quarter, but the magnitude of the increase was less than pricing, especially late in the quarter.
Our supply chain is not perfect, but there too we continue to trend in the right direction. This quarter, our largest supplier lifted a force majeure and had been a fact for 18 months.
At this point, our largest ongoing supply challenges, Greece, which is a significant growth opportunity for us, but given the multiple challenges of the past year narrowing narrowing it to Greece is a welcome step forward.
We expect to see some normal seasonality in the business as we head into the winter months, but we are excited at least for the time being to see a semi return to normalcy for this business.
Moving to slide 10, our Montana business had a busy quarter with the planned turnaround and renewable diesel conversion.
As Todd mentioned, we are excited to have moved into the operating mode at MRI <unk>, even with the plant being in turnaround for much of the quarter, we did generate $11 3 million and adjusted EBITDA.
Due to the ongoing improvements we have been seeing this year and differentials for heavy Canadian crude is WCS WCS discount was approximately $20 per barrel in the quarter and partly due to the exceptional product margin environment that continues to be strong even by pad.
<unk> high standards.
The legacy plant is fully running at 12000 barrels per day and as we have stated we expect this reconfigured facility to generate approximately 60% of the adjusted EBITDA of the historical plant performance, even though we are running at 40% of its capacity.
With that I will turn the call back to Todd to talk in more detail about MRO and for concluding remarks Todd.
Todd.
Now lets get deeper into Montana renewables on slide 11.
Our feedstock is sourced our plants commissioned the throughput expansion that renewable hydrogen provides is expected shortly and our pre treater and will open.
The full universe of feedstocks.
Our plants full of feedstock and we will quickly turn that to cash.
At one point feedstock availability was the most frequently asked questions we received.
Since then <unk> feedstock advantage has proven to be a massive differentiator and we believe that the lasting advantage feeds.
Feedstock for initial startup or secured months ago local suppliers like the idea of shortening their supply chains with a high security off taker like MRO.
Our supply chain has been proven as trans loading sites are working and railcars returning.
Many of the same suppliers, who are providing treated feedstocks now will be supplying the untreated feeds when our pre treaters complete in a few months.
And the pending approval of canola further differentiates MRO as theres enormous volumes in our backyard there incrementally exported to Asia.
Something we haven't discussed much as the emerging potential of Camelina oil.
Camelina is high on our radar, it's a non food feedstock that is currently grown in Montana.
Camelina has intrinsic value to farmers as rotation cover crop.
It also has an extremely low carbon intensity and the crop continues to gain momentum as the future juggernaut and renewable fuels feedstock space.
For Montana renewables that couldnt happen in a better place.
As mentioned earlier, we've contracted 2000 barrels per day of SaaS, which is part of our initial yield and that makes us the largest north American staff producer.
On the bottom of slide 12, Youll see these initial volumes all of which have been sold at a premium to renewable diesel.
Immediately we have an option to stretch the current staff output and we will fine tune that as the plant completed its initial performance testing.
Thereafter, we can capitalize for greater saft production, which we and our technology licensor estimate could be up to 15000 barrels a day.
Preliminary engineering work has begun on this project and its world class position has generated considerable interest from strategic investors.
Underwriting half of this slide we see a map of the west coast major airports and SaaS hubs in relation to Montana renewables.
To many of you this might look familiar as we viewed something similar Friday.
Location underpins so much of our competitive advantage at MRO, whether it's renewable diesel or SaaS and as all of you with refining and transportation fuels knowledge no location is the one competitive advantage that withstands the test of time.
<unk> proximity to end product markets as exceptional we serve renewable markets on the west coast with direct be NSF rail access and we're perfectly positioned to support that continuously growing low carbon markets in Canada.
Recently, we've seen that location is more than just advantage freight expense.
The strong stable margins that we see in the Rd business are vulnerable to backwardation for anyone with long supply chains. We believe the same is true for SaaS.
In a highly backward dated market like we're in right now the price received for fuel is significantly less next month that is if you can reach end market in the current month.
We've heard more about this issue recently as backwardation has steepened and with our shorter supply chain, we expect to largely avoid this challenge.
In summary, slide 13 puts everything in one place.
Right now we're focused on ensuring we take the time to understand the nuances of operating our Rd unit that only come with experience well.
We really don't generate much EBITDA until we gain the scale and feedstock flexibility that are coming soon and right. Now the temperature is 30 degrees lower November average in great falls, So we're taking it slow.
From there the focus is on getting the pre treater and hydrogen plants stood up.
Point, the Montana renewables is expected to deliver financially.
Next year, we'll be focused on operating the full plant optimizing our feedstock advantage and quite possibly finalizing our staff expansion.
All in it's been a busy year.
We're excited about the future we're proud of what's been accomplished thus far and we believe the foundation is set for Montana renewables is a leading growth platform and SaaS and renewable diesel.
With that let's turn it back to the operator for Q&A operator.
Thank you.
As a reminder to ask a question you will need to press star one one on your telephone.
Once again to ask a question Chris.
On the line.
And our first question comes from the line of Carly Davenport with Goldman Sachs.
Hi, This is nicole at plus around for currently Devin. Thanks for taking the time. So the first question would just be on broader capital allocation and how Calumet is thinking about potential for shareholder returns over the coming quarters as you cross the continued leverage reduction.
Yes, we're excited about the upward potential.
<unk> of our units obviously.
First things first we're focused on getting this business up and running.
We think and generating cash, which like we said in the call. We think happens kind of early early spring next year.
From there we will continue.
To pursue the.
Strategic Delevering, which has been kind of priority number one now for a long time. So so looking forward, we're trying not to get too far ahead of ourselves, we like the cash generation potential.
The MRO business obviously.
<unk> business continues to to generate a lot of cash and it looks like for.
For the foreseeable future.
Continues to be the case.
We'll manage it accordingly.
Okay, great. Thanks, and then just a follow up there on Montana renewables.
And if you can talk a little bit about what else is kind of outstanding to get the renewable hydrogen.
Plans and pretreatment unit online.
As it relates to the asset.
Hey, Michael other space.
Yes.
Operating on a small site and so from the beginning and we've talked about this.
The sequential commissioning of the discrete projects was part of our.
<unk> approach to efficient execution.
So weak last summer, we completed the logistics segregation into the two trains that crude oil processing in the renewables.
<unk> commissioning.
Renewable diesel which in the past we've called the hydro cracker, while it was impossible service.
Hydrogen should come up next month than pre treater after that.
Basically through the winter.
<unk>.
We're going to finish the complete commissioning and slide 13, which I should note has not changed in a long time.
As telling you what that looks like.
In terms of throughput.
And I'll Echo <unk> sentiments earlier I am proud of the Calumet team, having held the line on.
Schedule here that was our metric that's what we set out to do.
Knock on wood.
We're bringing it home.
Okay, great. Thanks for the color there.
Thank you.
And our next question comes from the line of Amit Dayal with H C. Wainwright.
Thank you good morning, guys congrats on the execution.
Just thank you expecting MRO.
Should we expecting you've indicated Q4 them are Montana and enables us.
Going to be flat from an adjusted EBITDA perspective will continue potentially in <unk> 23, as well or will you have some of the scf.
Already starting to contribute already by them.
Bruce or not year on year.
Okay.
But it sounds like we are.
Mr. Bruce here, he is actually off site so.
I'll take a shot at it.
Yes.
Obviously, there is two steps to cash generation in the first one is scale with the hydrogen plant that happens before the pre trip. So I think you're right. We don't expect full forecast flow.
Until we get both the scale and a pre treater online.
But we will.
We will do a little bit better we expect to do a little bit better than flat kind of.
Early in the quarter as late in this year kind of early in that early next year as we get kind of hydrogen plant fully turned out well, obviously kind of just like we're doing with with the <unk> creep up learning curve on pre treat.
Those types of things. So I don't think Q1 will be totally flat, but you are right to assume that.
You know the the large earnings power starts after after both Pretreat and hydrogen plant.
Understood. Thank you for that.
From a monetization perspective.
This has been out there in terms of the renewable diesel optionality that is on the table.
Specialty.
Sps segment.
<unk> performance brand segment.
Now showing this level of performance have you are you reconsidering.
<unk> some of these options.
<unk> been in discussion previously.
Just the organic cash flow seems pretty strong.
Deleveraging efforts.
Seem to be you know.
Moving in the right direction.
Support so just wondering how we should think about the options in front of us from.
Do you have put out there with respect to the renewable diesel business.
Business.
Yes, I think when you look at it very opportunity.
Backwards.
Im sorry, I don't know what happened.
Ahmed.
I'll take the Montana renewables part but.
I'm going to invite Todd too also color that a little bit at the at the corporate level.
So we set out a year and a half ago to launch this business and.
I think there was a series of questions.
Which we addressed along the way from analysts and investors and.
As each one of those got satisfied and as the value.
<unk> became more clear.
Shifted our thinking a bit and.
The capstone on that was when Warburg came in and back the venture at <unk>.
Enterprise value markets two in a quarter billion dollars that was a pre commissioning number. So we were we were pretty happy with that accomplishment.
We need to focus on getting this up safely and delivering what we promised to the market, but at that point, Montana renewables as standalone itself funding.
All of the things that we talked about for future growth expansion of SaaS.
Montana renewables can do that on its own. So we don't think that we need to monetize any of our ownership in order to deliver the business plan that makes it optional.
And.
Calumet.
It was founded as a partnership.
The general partner, Thanks in terms of partnerships.
<unk>.
At the moment, we're very interested in the strong inbound that were getting on staff.
And a couple of other strategics, who have been waiting for us to Derisk. This by getting that turned on so I think all of that is long way around of saying that we really like our position, but we still think a complementary strategic partner would make a lot of sense. It's in Calumet DNA to operate that way.
Okay.
Yes, maybe I'll, just maybe add on there better met I think.
Like we said we.
Look at this very opportunistically at the parent.
We had a process going before with Lazard, we talked about that.
That process ended with with the.
Shouldnt say fully ended but as far as our process with the deadline date.
That ended with the Warburg deal.
Our remains retain they're out there they are very opportunistic like Bruce said, theyre, taking inbound and an inbound honestly has picked up with SaaS. So so we don't feel a rush.
<unk>.
But there could be an opportunistic.
Deal here that we could consider.
And I think I think we will just take it one step at a time.
Well that's helpful guys. Thank you so much that's all about I'll take my other questions offline. Thank you.
Okay.
Thank you.
And as a reminder to ask a question you will need to press star one one on your telephone.
Star one one.
Our next question.
Cogent comes with Bank of America.
Hey, good morning, guys.
Okay.
Just maybe talk a little bit more about what youre seeing on the demand side are you seeing any slowdown.
On the industrial side of the consumer or are you seeing resilience.
Hey, Greg Scott Obermeier, I'd say on a macro level.
We're aware of a lot of these forward indicators signaling a more challenging economic environment.
And we also are starting to see some typical year end seasonality across both industrial and the consumer side, but all in all Greg I mean, what we're seeing.
Continue.
Solid demand overall.
So I think as we look forward.
We view Q4 into Q1 with overall pretty solid demand I think we will see some of our our prices regress up little bit.
Towards some some normalization, but but we're pretty bullish overall.
Business is running well.
And then you mentioned how how.
Sps benefited from decline in crude I believe in terms of helping your margins could you help us understand how much that.
Yes.
Since your margins.
Yes, I think if you look at the margin sorry. This is Todd Greg.
<unk> chart in a material on the Sps slide you can kind of see.
A pretty steady level over the past four or five months and you saw kind of in Q1, a little bit of a depth when crude ran up about 30 Bucks a barrel and and you saw the exact opposite happened here when crude run down to about 30 Bucks a barrel. So it's hard to quantify exactly but but I think.
The way, we like to look at it is assumed that steady line is kind of the normal we expect to be able to maintain that.
Current market.
Looking forward and I would say.
The pop above that steady line that were seeing and in the third quarter is as a large large part crude related.
Got it.
And then on the performance brand side, you talked about how the force majeure is behind you is the one remaining supply sites Greece.
I know you were expecting some delay in terms of being able to improve your pricing relative to improving crude prices. That's obviously come down a bit but I am curious it sounds like youre, telling us what <unk>, what <unk> was a reasonable expectation going forward for what type of EBITDA, we should expect.
But how do we I am I misinterpreting that or should we expect that to improve.
Okay.
Hi, Greg it's Mark loan.
A couple of things, let me sort of disassemble that question just into a few component parts. So as Vince mentioned.
We're still seeing inflationary pressures on the business, albeit at a reduced rate.
So the speed at which we're catching up with the pricing is a debate that we've seen come through that.
Im joined the third quarter Gris Gris is one.
We keep an eye on very carefully we're doing a lot work around trying to stabilize further the grease market demand is strong and.
<unk> continues to be remained strong and not set not just a north American issue at sort of a global issue.
Which gives us opportunity.
As you look forward.
There isn't any indication in the short range that we're going to see a material change based on what we know at the moment.
We still think there is still an element of catch ups that we while we've caught up and element on price lag that's still not all the way through so some pricing was still going in to play as late as the second and third week of September for example, so there's still some compounding benefits there that we would expect to see rolling through.
I appreciate that color and just last one for you.
I know theres, some timing around bringing in the proceeds from your different Montana renewable facilities.
Are you providing guidance as to how much how much we should expect to come in from those facilities.
The fourth quarter.
Terms of enhancing liquidity down there.
Well I think I think a good rule of thumb is.
We built inventory feedstock.
Inventory was feedstock that was was around 50 million Bucks thats kind of just sitting there and the tanks. So.
<unk>.
The supply and offtake deal and the ABL will combine to to fund the inventory and we'd expect that much back here.
As we progressed through the quarter.
Okay. Thanks for your time guys I appreciate it.
Thank you Greg.
Thank you.
I'll now hand, the call back over to head of Investor Relations, Brad Thank Murray for any closing remarks.
Yeah. Thanks, so on behalf of the management team here in the room and really all of Calumet. Thanks for your time and interest.
Here. This morning, we appreciate your participation on the call and everyone have a great rest of the week.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.