Q4 2022 Martin Midstream Partners LP Earnings Call
Todays M M. L P fourth quarter 2022 earnings call, we'll be starting momentarily. Please standby. Thank you.
Please wait the conference will begin shortly.
[music].
Ladies and gentlemen, thank you for standing by and welcome to the M. M. L. P fourth quarter 2022 earnings call I would now like to turn the call over to Sharon Taylor CFO . Please go ahead.
Thank you operator, and good morning, everyone with me today are Bob Bonder out to CEO , Randy Tauscher C O L. David Cannon controller, and Danny Cavin director of S. P N a.
Yes.
Before we get started I'll remind you that management may be making forward looking statements as defined by the SEC such.
Such statements are based on our current judgment regarding the factors that could impact the future performance of Martin, but actual outcomes could be materially different you should review the risk factors and other information discussed in our SEC filings and form your own opinions about Martin's future performance.
We'll discuss non-GAAP financial measures on today's call. Please refer to the table in our earnings press release posted in the Investor Relations section of our website to find information regarding those non-GAAP financial measures, including a reconciliation of historical non-GAAP financial measures.
Referenced in today's call to their corresponding GAAP measures and now I will turn the call over to Bob.
Thanks Sharon.
Before I get started with my normal discussion of our operating performance I would like to discuss our thoughts around the recent decision to exit the butane optimization business.
We experienced an EBITDA loss in the fourth quarter of $10 7 million in this line of business.
While we took a noncash write down of butane inventory at market prices at the end of the third quarter on a cash basis, we carried approximately 165 million barrels into the fourth quarter selling season at an investment cost greater than market.
We bought this inventory throughout the late spring and summer, but we did not hedge our inventory as the forward pricing curve was significantly backward dated.
As we approach the fourth quarter selling season, butane pricing did not improve and we experienced losses from the actual volumes sold out of inventory.
Again, the $10 7 million EBITDA loss experienced in the fourth quarter.
As a result of the significant negative financial performance in the fourth quarter of our butane optimization business.
We concluded any future positive cash flow opportunity associated with this business line was no longer with the commodity risk associated with carrying inventory from the summer purchasing season to the winter selling season.
As a result of the decision to exit this particular business line, we will sell the remaining butane inventory in stores with the majority of inventories sold in Q1 and the remaining volume being sold in April and May.
The cash realized from our butane inventory liquidation will be used to pay down our revolving line of credit.
We believe proceeds from this inventory liquidation should approximate $45 million to $50 million.
Going forward our Intel.
It is to operate as a fee based butane logistics business, primarily utilizing our north Louisiana underground storage assets, which have both truck and rail capability.
This logistics business will also utilize our truck transportation assets for fee based product movements.
As a result of this new business model, we will no longer carry any butane inventory going forward.
This will eliminate commodity risk reduced cash flow and earnings volatility and will also substantially lower our working capital requirements.
I would now like to move to a discussion of our fourth quarter operating performance.
For the fourth quarter, we had adjusted EBITDA of $17 8 million compared to $39 7 million a year ago.
The difference between the two quarters is attributable to the butane optimization business.
In the fourth quarter, a year ago, butane optimization made $11 million in EBITDA and this year. It had an EBITDA loss of $10 7 million a negative swing of $21 $7 million.
Excluding the results of the butane optimization business for both fourth quarters, we had adjusted EBITDA of $28 5 million in the fourth quarter compared to $28 7 million a year ago.
For the year Martin Midstream had adjusted EBITDA of $114 9 million compared to $114 5 million a year ago.
This year, we had negative EBITDA of $7 2 million in the butane optimization business compared to positive EBITDA of $22 3 million a year ago, a negative swing of $29 5 million.
Excluding the results of the butane optimization business for both years, we had adjusted EBITDA of $122 1 million compared to $92 2 million a year ago, an increase in cash flow of approximately $30 million for the year.
For the fourth quarter, our largest cash flow generator was our transportation business, which had adjusted EBITDA of $14 7 million compared to $8 8 million a year ago.
Our land transportation improved over last year, as we had $11 3 million of adjusted EBITDA compared to $7 6 million a year ago.
We had a 28% increase in our load count in the fourth quarter of this year compared to last year, primarily driven by a corresponding increase in our driver count.
Also our revenue per mile improved over the prior year, which helped absorb the inflationary cost increases we have been experiencing.
Our marine Transportation business also saw an improvement compared to the fourth quarter of last year.
Adjusted EBITDA was $3 4 million compared to $1 2 million a year ago.
Our average day rate was approximately 30% greater in the fourth quarter compared to a year ago, and our utilization improved 10% compared to a year ago.
For the year, our transportation segment had adjusted EBITDA of $54 9 million compared to $24 1 million a year ago.
An increase of $38 million.
We saw significant improvement in our land transportation business as it had adjusted EBITDA of $45 5 million compared to $23 9 million a year ago.
Our load count increased 25% compared to a year ago, primarily driven by the increase in our driver count in response to growing customer needs and our expansion in central Florida.
We also were able to manage overall inflationary cost increases by improving our revenue per mile compared to last year.
For the year and our Marine transportation business, we saw an increase of $9 2 million in adjusted EBITDA from 0.2 million a year ago.
$9 4 million in 2022.
We had an overall, 20% increase in both inland barge utilization and day rates in 2022 compared to 2021 as we continue to experience a very tight tank barge market for refined products.
Our second strongest cash flow generator in the fourth quarter was our terminalling and storage business.
Which had adjusted EBITDA of $10 5 million compared to $11 million a year ago.
On the positive side, our shore based terminals had an increase in cash flow zero point $5 million compared to a year ago as we amended the throughput contract with our general partner, which improve throughput pricing.
We believe the new contract pricing will enable our shore based terminals to have approximately $1 million of adjusted EBITDA per quarter going forward.
Offsetting the shore base cash flow improvement were both specialty terminals and our packaged lubricant and grease business.
Specialty terminals cash flow was down approximately 0.8 million compared to a year ago, primarily due to inflationary operating cost increases.
A significant amount of our specialty terminal contracts as CPI adjustments. So our revenue should increase in the near term to catch up with the inflationary costs, we have been experiencing.
Our packaged lubricant and grease adjusted EBITDA was down 0.6 million, primarily due to margin compression compared to a year ago.
For the year, our Terminalling and storage segment had adjusted EBITDA of $47 3 million compared to $43 5 million a year ago, an increase of $3 8 million.
While our packaged lubricant and grease business improved $4 7 million to $21 4 million in 2022, as we were able to expand our margins compared to 2021.
Our shore based business saw increased cash flow of <unk> 5 million, primarily due to the new contract pricing with our general partner, which became effective October one 2022.
For the year, our specialty terminals had a decrease in cash flow of $1 2 million, primarily due to overall inflationary cost increases.
Again, a significant majority of our customer contracts in our specialty terminal business have CPI adjustments, which will benefit us in 2023.
Now I would like to discuss our sulfur services segment.
We had adjusted EBITDA of $5 7 million in the fourth quarter compared to 11 4 million a year ago.
Increase of $5 7 million.
Our fertilizer business had adjusted EBITDA of $2 7 million in the fourth quarter compared to $7 8 million a year ago.
Kris a $5 2 million.
The decline in cash flow can primarily be attributed to the timing of our customers' purchases as total volumes sold in the fourth quarter was down 35%.
A year ago in the fourth quarter, our customers held a view that prices would be rising throughout the spring. So they sped up some of their normal Q1 purchases into Q4.
This year, our customers delay normal Q4 purchases into Q1 of 2023 as they now hold a belief that there is downside pressure in pricing power.
However, based on the strong forecast for corn acres to be planted. This spring we believe an increase in demand for our fertilizer products will begin in the spring of this year.
Our pure sulfur side of this segment had adjusted EBITDA of $3 1 million compared to $3 5 million a year ago, a decline of <unk> 4 million.
This decline is fully explained by the sale of our stock in sulfur processing facility, which closed in October of 2022.
For the year, our entire sulfur services segment had adjusted EBITDA of $30 7 million compared to $34 3 million a year ago, a decrease of $3 5 million.
Our fertilizer business had adjusted EBITDA of $21 6 million in 2022 <unk>.
Compared to 24 million a year ago, a decrease of $2 4 million.
The decrease in annual cash flow in our fertilizer business can again be explained by the delayed buying activity of our customer base in the fourth quarter of 2022 compared to 2021.
For the year, our pure sulfur side of the business had adjusted EBITDA of $9 1 million.
Paired to $10 2 million a year ago, a decrease of $1 1 million.
Both years were negatively impacted by unique events.
In 2022, we had a write down in the value of our sulfur inventory of $3 three in the third quarter.
Affecting sulfur cash flow for the year.
In 2021, our pure sulfur business was negatively impacted by decreased refinery utilization and corresponding decline in sulfur production from winter storm here in Q1 of 2021, and Hurricane Ida, which impacted the Beaumont Lake Charles area refineries in Q3 of 2000.
'twenty one.
Going forward under normal refinery operating conditions, the annual adjusted EBITDA for the pure sulfur side of the business should approximate $12 million.
Now I would finally like to discuss the performance of our NGL segment.
For the fourth quarter, we had adjusted EBITDA of negative $9 1 million compared to $12 8 million a year ago and negative EBITDA swing of $21 9 million.
This significant decline in cash flow can be fully explained by the previously discussed butane optimization business.
Without the butane optimization business included in the fourth quarter results. Our NGL segment had adjusted EBITDA of $1 7 million in the fourth quarter compared to adjusted EBITDA of $1 8 million a year ago.
For the full year, our NGL segment had adjusted EBITDA of negative $1 3 million compared to $28 $4 million in 2021.
A negative swing of $29 7 million.
Again, the significant decline in cash flow can be explained by the performance of the butane optimization business.
Without the butane optimization business included in the annual results. Our NGL segment had adjusted EBITDA of $5 9 million compared to adjusted EBITDA of $6 1 million in 2021.
This concludes my discussion of our performance by business segment for both the fourth quarter and the year.
Now I would like to turn the call back over to Sharon to discuss our balance sheet capital resources, and our 2023 guidance.
Thank you Bob.
As always I'll begin with our balance sheet metrics and liquidity discuss capital expenditures in the fourth quarter review the note offering and revolver Amendment completed in February and conclude with a discussion of 2023 financial guidance.
At December 31, 2022, the total of our long term debt outstanding was $516 million.
<unk> of $31 million from the last quarter.
Outstanding debt consisted of $171 million drawn on our $275 million revolving credit facility $54 million of secured one five lien notes due 2024 and.
$292 million of secured second lien notes due 2025.
Total available liquidity was approximately $84 million under our revolving credit facility on December 31, 2022.
The Partnership's bank compliant adjusted leverage ratio at the end of the quarter was $4 two seven times, which includes a $29 7 million that carve out attributed to our seasonal NGL inventory build when the inventory has been either forward sold or hedged.
During the fourth quarter, we incurred $5 $4 million and maintenance capital expenditures for a total of $24 3 million for the year.
Of that number $5 2 million was attributable to turnaround cost at our fertilizer plants and maintenance at the snack of a refinery.
Gross Capex was $1 4 million for the quarter and $6 9 million for the year.
Full year total includes approximately 218000 and expenditures related to the DSM joint venture.
Turning to the new capital structure that was closed and funded in February of 2023.
We have been communicating about our debt refinance for some time now and had hoped to initiate a transaction in late third quarter early fourth quarter at 2022.
Internally, we worked on a few different avenues that we're focused on our high yield offering.
Timing of which did not materialize for us until January .
On January 30, we announced the proposed senior secured second lien note offering of $400 million, along with a cash tender for our outstanding one five and two lien notes at that time, we also announced an amendment to our revolving credit facility that would be effective with the closing of the note offering.
On January 31, we announced the pricing of the offered $400 million in senior secured notes, which closed and funded on February eight.
The issued notes priced at 11, 5% interest with an original issue discount of 3% and will mature in 2028.
The revolving credit facility amendment and creates a lower commitment from 275 million to $200 million.
A further step down to $175 million on June 32023 to coincide with cash proceeds received from liquidating the remaining inventory related to the butane optimization business.
And one further reduction to $150 million on June 32024.
The facility does not include a working capital sub limit carve out for purposes of leverage calculation since that is no longer a concern with the exit of the butane optimization business.
Covenants for the new facility includes maximum total leverage at 475 times.
That being down to four five times on March 31, 2025.
<unk> first lien leverage of one five times and minimum interest rate coverage of two times.
The revolver will mature in February of 2027.
Next I'll review, our 2023 guidance, which is included as an attachment to our earnings press release and can be found on our website.
We expect full year 2023, adjusted EBITDA of approximately $115 million.
After giving effect to the exit of the butane optimization business, which we forecast to have negative adjusted EBITDA of $9 9 million.
You will note when reviewing guidance that we have returned to providing guidance by segment by business line instead of the annual range. We have published the last few years.
As management contemplated the exit from our butane optimization business, we determined that our operating segments and the businesses that roll up into them needed to be realigned.
So beginning in 2023.
Martin underground storage will now be reported as part of the Terminalling and storage segment.
Further we have chosen to rename the natural gas liquid segment as the specialty products segment.
The lubricant and grease businesses will now roll up into the specialty products segment, instead of Terminalling and storage.
Reviewing each segments briefly.
For 2023, we anticipate transportation services to generate adjusted EBITDA of $46 million.
Paired to 2022, we expect the marine group to benefit from higher day rates and increased utilization and we are forecasting the land group to have another strong year when compared to 2019 through 2021 that have some contraction from 2020 twos elevated results.
The terminalling and storage forecasted EBITDA is $33 3 million.
The remaining operations in this segment are fee based with contract escalators that will improve results year over year.
The shore base terminals will increase approximately $3 million due to a contract renegotiation that occurred in the fourth quarter of 2022.
And lastly, the segment will benefit from projected earnings related to Martin underground storage that previously reported in the natural gas liquid segment.
The sulfur services segment adjusted EBITDA is projected to be $32 million with the sulfur and fertilizer business is expected to return to more historical margins and volumes those earnings will be offset slightly due to the sale of the Stockton, California sulfur trailer in October of <unk>.
'twenty two.
Last the specialty products segment is forecasted to have $23 1 million in EBITDA after giving effect to the exit of the butane optimization business, which we project to have negative adjusted EBITDA of $9 9 million.
Within this segment the lubricant and grease businesses are projected to have strong results with some margin compression from last year and the natural gasoline and propane businesses remained steady year over year.
For 2023, we are forecasting growth capital expenditures of approximately $17 5 million with $12 7 million for the OEM tower at plane deal, which is part of the capital spend related to the DSM joint venture.
Maintenance capital is anticipated to be approximately $26 6 million for the year.
Some of our larger expenditures included $4 7 million in our marine group related to regulatory inspections on our equipment.
$4 2 million in turnaround costs at our fertilizer plants.
$1 7 million for a 10 year inspection due on a cellphone tank and $1 $5 million in bulk CAD repairs at the Galveston terminal.
Finally for full year 2023, we anticipate distributable cash flow of $23 5 million and free cash flow of $6 million. Additionally, we expect to generate cash for debt repayment of approximately $45 million to $50 million from the liquidation.
Of the butane optimization inventory.
This concludes our prepared remarks, I will turn the call over to the operator for Q&A.
Yeah.
The floor is now open for your questions to ask a question at this time. Please press star one on your telephone keypad, if any point you'd like to withdraw from the queue. Please press star one again.
Youll be provided the opportunity to ask one question and one further follow up questions.
We will now take a moment to render our roster.
Yeah.
Our first question comes from the line of Selman <unk>.
From Stifel. Please proceed.
Thank you good morning all.
Quick question just.
Where does the revolver stand today, how much is on it.
Yeah.
The revolver today has approximately $121 million borrowed.
And so from there you expect to get reduced by an additional $40 million to $50 million.
From the proceeds of the remaining beauty.
It's somewhere probably between 35 and 40 at this time because we have received.
The cash from the sales from January .
Got it okay.
Alright.
And so then should I be thinking about it that is sort of like a.
480 million or so.
Debt outstanding against your $1 15.
Yes, when you think about leverage okay.
And then.
Just flipping over to your JV since we're limited in questions.
I think when I looked at the original press release <unk> talked about <unk> 24 timing is that still good and then it talks about an investment of $20 million.
Which.
I guess now Youre investing $12 5 million has anything changed in timing investment wise anything we should be thinking about and then lastly, any idea where you're going to be reporting this app.
Gentlemen.
Good morning.
Good morning has changed from a timing perspective, our target is still in the first quarter of 2024 and nothing has changed.
From the investment capital amount.
To the extent you have more questions feel free to ask questions.
Okay, Alright, I appreciate that so then.
Yes.
You're going to invest $12 5 million and then you still have approximately another $7 5 million to go sometime in 2024.
And then the EBITDA run rate still a $5 million to $6 million, that's still a good estimate out there.
It is what we anticipate.
$13 million or so being spent prior.
Two two facility startup and then upon facility startup we would have the rest of the cash.
Going out at that point to the JV.
The last 7 million ish.
Got it.
I appreciate that and then.
You alluded to.
I guess things look pretty good for marine can you talk about are you seeing any lengthening in contracting there.
Paul.
Well the marine business has come a long way over the last year our rates are.
$2000, a day higher than they were a year ago.
And they're higher in January than they were in December .
So the rates are still continuing to go up as opposed to the.
To answer your term.
Contract, we do have three.
<unk> six months ago, everything except for maybe one.
Tow would've been in the spot market.
Today, we have three to four.
Those that are in more term business, but we're not even talking to here, we're talking $3 six or nine months.
As opposed to a year for longer on the term.
I still consider most of US most of our shows being in this in the spot business or will be.
Spot within a short amount of time.
Got it.
<unk>.
And then I think industry wise they are looking for heavier refinery turnaround season can you, maybe just talk a little bit about that.
<unk>.
What you expect in sulfur.
Yes, that's correct.
And what's going on.
It's going to come at us pretty quickly here as we get to the end of the first quarter and early in the second quarter.
When you think about.
The Beaumont area.
At least for the refineries, we work with there and provide services too.
Trucking and sulfur.
Turnarounds planned to vary in length to varying degrees over the March April maybe early may timeframe.
And that will certainly impact the amount of software we have coming into the site.
And the rest of the business.
But we have all of that.
Dressed in our guidance.
Got it and then.
Hey, I heard you and I have seen certainly articles on higher.
Acres being planted for corn this year.
Certainly it is good for you guys and your need for fertilizer have you seen that started <unk>.
Turn up in either conversations youre, having or any orders that you are seeing is there any sort of confirmation of a stronger market. This year.
The answer to that is no we haven't seen it yet.
Going back to the third quarter, we had as you will recall very slow sales we expected.
The fourth quarter to pick up significantly in the fourth quarter was was on the low end of the range that we would consider normal for the fourth quarter and through the first half of February we were in the same place. So the sales have not picked up significantly even though the USDA is projecting 92 million acres of corn planted which is a big.
Number.
So so.
Is the ammonia price.
<unk> has continued to come down.
And internationally, we are seeing sulfur prices declined just a little bit they're edging down we think the farmers have made the decision to delay their purchases until they need it.
So we do expect that business to pick up and we expect that to pick up soon but we haven't seen it yet.
Got it and then.
Just a last one for me on on the caverns and re leasing.
Hey.
How's that going.
Maybe we get contracts signed.
Is there any update you can kind of just give on this call.
Yes, we just.
Very recently.
Started to approach potential customers.
We'll have some <unk> approach.
And that will all be happening within the month of February and the first couple of days of March and we are.
Really can't comment on that further until we have those meetings.
Understood Alright, thank you very much.
Our next question comes from the line of Patrick Fitzgerald from Baird. Please proceed.
Hey, Thanks, a lot for taking the questions and congrats on the refinancing.
So.
If you wouldn't mind I'm a little bit.
Confused on how your revolver balances so low after.
Given the sources and uses of your bond deal.
<unk>.
And.
They were issued at a discount.
And then there was some.
Is that taking into account all of the redemption of all of the notes.
Yes, yes so.
Because you were expected to have 161 I believe on the on the revolver.
Close of the deal.
That is correct, but we had we closed the deal on February eight the majority of our butane cash proceeds 14 monthly sales or received between the 10th and the 15th of the month. Following the deal close and then two days later, we received approximately.
Lee $30 million in proceeds from the butane.
Butane inventory sales.
Okay.
The numbers be pro forma.
September 30th is that true yes. So so we also collected money in the fourth quarter from butane business as well.
Okay Yeah.
That is true.
Okay. So and then so if you expected 40 to 45 of unwinding it.
And you just got did you say 30 so.
10 to 15, more and then youre expected to lose.
$10 million of adjusted EBITDA in the first half so from here, it's kind of.
Neutral or is that is that the wrong understanding of that.
Well I think as <unk>.
First of all the 40% to 45 to Bob's point on the debt side that was pro forma from September 30th number and our $42 $45 million to $50 million left is from December 31st forward. So there is a slight disconnect there.
And then the other it was another piece of your question Patrick.
Sorry.
Yes.
Yes.
How much more how much more cash is going to be released.
By the time, you exit the butane business.
Should be about $80 million left on the revolver at the end of the butane unwind. So total that would be the 400, plus the 80 or $480 million yes.
Okay well.
That's great.
So.
And then.
Is that business that business has just gone no one will pay you a fee to do it anymore, how does that work.
Yes so.
I know you are familiar with that business.
That's what we were taking as we were buying in the summer months in turning around and so in the winter months.
We just are not going to.
Take on the management of that risk from this point going forward. So.
As Bob mentioned in his.
Comments were going to turn that into a fee based business, we have an underground storage in Arcadia, Louisiana.
That has.
We invested in rail assets there in 2014.
We have trucks capabilities there.
Certain refineries.
But we think value having storage there and so our intent is to turn that into.
Service fee based as opposed to the way we were doing it.
And yes, we don't.
If there is somebody out there and we're looking for this person that might be willing to take on the position. We took on we would entertain that we don't know if thats going to happen or not.
Got you okay. Thanks.
In terms of your visibility.
And thank you for providing the <unk>.
Projections, it's very very helpful.
But in terms of your visibility.
In the transportation segment, you kind of have that business declining.
Each quarter for the remainder of the year.
At least in land.
So.
Whats kind of underpinning your your assumptions for that segment then.
Because I believe that's more of a spot market business.
How much risk is there to those forecasts.
Yes, so when you think about the land transportation business and go back to.
The middle of 'twenty one.
Through the end of 'twenty two the environment, we were in was our rates.
Rising quicker than our Opex was rising.
And we know that's not going to happen forever.
The feedback we have received.
From our customers now the refineries, we expect to continue to run strong.
About the year.
Feedback we got from the chemical producers is as we get through the year. They may be they may be selling less pulling back a little bit.
And what they historically have so those those two factors.
We have chosen to.
Two to bring.
The EBITDA contributed from the land transportation down as we work through the year.
Okay.
Thanks.
Now with the butane Don that was always kind of.
<unk>.
Didn't really know what to expect.
Sure.
Each year.
<unk>.
Which business do you feel like is the is the hardest to forecast of yours right now.
With butane dawn.
I think fertilizers, the largest margin based business.
The left.
And over the years, we have.
Same between 14 and.
$24 million ish.
In that business annualized.
And so I think going forward that would be the one we anticipate.
The most volatility in.
Alright, Thanks, a lot guys I appreciate it.
Thank you Patrick.
As a reminder, the floor is now open for your questions to ask questions. At this time. Please press star one on your telephone keypad.
Yes.
It appears there are no.
No further questions at this time.
I would now like to turn the call over to Bob.
Bond drawn for closing remarks.
Thank you mandate.
Thanks to everyone on the call today for your interest in Martin Midstream, we've had a quick start to 2023 as we refinanced our debt pushing the closest maturity out to 2027 and decided to exit the butane optimization business in order to remove a great deal of volatility from our earnings and significantly reduce future working capital.
In a short timeframe, we have substantially lowered the risk profile of our company and.
And we intend to do more by using the cash proceeds from the liquidation of the butane inventory to reduce outstanding debt and further improve our balance sheet in the near future. Thanks.
Thanks again for your time this morning.
Thank you ladies and gentlemen. This concludes today's call. Thank you for your participation you may now disconnect.
Okay.
Please wait the conference will begin shortly.
Yeah.
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Okay.
Sure.
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Yes.