Calumet Specialty Products Partners L.P. Q1 2023 Earnings Call
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Hello, and welcome to the Calumet specialty products partners L. P. First quarter 2023 results all participants will be in listen only mode.
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Good morning. Thank.
Thank you for joining Calumet today for our first quarter 2023 earnings call with me on today's call are Todd Workman, CEO , Vince Denardo, CFO , Bruce Fleming, EVP, Montana, renewables and corporate development, Scott Obermeier, EVP specialties, and Marc lore, and EVP of sustainable products and strategy you may now download the slides that accompany their remarks.
On today's conference call, which can be accessed in the Investor Relations section of our website at Www Dot Calumet specialty dot com.
Also a web cast 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 SEC for a list of factors that may affect our actual results and cause them to differ from expectations.
Yes.
With that I'll turn it over to Todd Todd Thanks, Brad and welcome to Calumet first quarter 2023 earnings call, let's turn to slide three.
The first quarter was an impactful one at Calumet, we generated strong earnings in our specialty business and achieved new milestones at Montana renewables as we signed up the final two units and are now fully operational.
During the quarter the company generated $77 $7 million of adjusted EBITDA up $14 million from Q4 of 2022 and $52 million versus last year's first quarter.
The step change in results, we saw last year in our specialty business continued into 2023.
Results in our specialty products and solution business, where a combination of a constructive market strong demand and ongoing execution we.
We like to see especially volumes hovering around a 20000 barrel per day, Mark and in the first quarter. We had 20202 barrels per day, especially product volume all while specialty unit margins were up 60% versus the first quarter of 'twenty two.
Further Calumet is integrated specialty system continues to run at Max rates, given strong demand and compelling margins.
Our performance brands business took the expected major positive step forward in the quarter and our newly reconfigured and fully operating Montana asphalt plant started the year strong and we should continue to expect this business to generate stable and strong cash flows.
The Montana team somewhat seamlessly ease into operations at the reconfigured plant and it was nice to see our output being consumed in the local market even in the winter months when things are typically slower and Rockies.
Vince will take us further into all of the segments shortly and before he does I'll highlight that while Montana renewables has been getting most of the airtime through the past couple of years, our core specialty business has delivered $444 million of adjusted EBITDA over the past 12 months.
We continue to be committed to taking roughly $300 million of debt out of the Calumet system through excess cash flows in MRO monetization and its also worth noting that over the past two years, our credit metrics have dramatically improved even though we just now completed the Montana renewables project that unlocks the extreme cash flow generation power of that business.
We will talk more about Montana renewable shortly and for now I'll turn the call over to Vince Vince.
Thank you and good morning, as Todd mentioned Calumet had another strong quarter led by our specialty products and solutions.
As shown on slide five.
Our Sps business generated $76 4 million of adjusted EBITDA in the first quarter and this business continues to deliver to deliver both operationally and commercially while margins for specialties and fuels came off from the levels. We saw in the back half of 2022.
That's the same margins increased over 60% and fuel margin increased over 50% versus this time last year Shreveport, our largest plant production and limited early in the quarter as the team made some repairs from december's Arctic freeze and since then the plant is running at <unk>.
Maximum fuels mode, and we expect to continue in the current strong we expect that to continue in the current strong margin environment.
As we look forward into 2023, we continue to see a constructive market for that segment as we enter the summer driving and paving season and our confidence in this segment is reinforced by the 20000 barrels per day of 211 crack spread hedges at $27 per barrel.
Moving to slide seven our performance brands business generated $16 4 million and adjusted EBITDA for the quarter a marked improvement on our quarterly results in 2022.
Input costs have stabilized and thats what drives the expected financial results performance brands in the corner.
For over two years, the business has been increasing prices and by the time and price increases are enacted input costs had also increased leaving the business continuously in catch up mode.
The first quarter's margins are more representative of what we should expect in a stable and bar environment fair.
Further we received a $5 million partial payment for business interruption insurance prestige that resulted from the Greif supplier force Missoula that impacted our business throughout 2021 and 2022 and.
Adjusting for that payment P. B still delivered over 11 million and adjusted EBITDA for the first quarter and delivered an adjusted gross profit of $3 95, a gallon and increased over 60% versus fourth.
Fourth quarter and first quarter results of last year.
Moving to Montana on slide nine great Pos produced $4 8 million of adjusted EBITDA in the first quarter, we ramped up both our renewable diesel operations at MRO and experienced our first full quarter of operations at our reconfigured specialty asphalt plant.
Both businesses ran to plan during the quarter and our asphalt plant is gearing up for paving season.
Most importantly, with the renewable hydrogen plant pre treater and SaaS operations up we are entering a new period in great styles and look forward to realizing the cash generation potential of this new business.
With that let's flip to slide 10, and I'll turn the call back to Todd for concluding remarks Todd.
Thank you Vince.
For two years, our quarterly calls I've included progress reports on Montana renewables and to now report that all units are operating is a huge accomplishment.
As our focus shifts from construction and startup to delivering the full cash flow potential of MRO I'll take a few minutes to remind listeners that the key operational milestones announced over the past few months.
First initial renewable diesel operations commenced late last year.
Then in Q1, the renewable hydrogen plant was commissioned to increase the feedstock rate from 5000 barrels a day to 12000 barrels a day our hydrogen system is unique and then it lowers the carbon intensity of our end product by creating renewable hydrogen as opposed to more traditional gray hydrogen plants that are fed by fossil fuels.
Previously we've talked about our expected Mac SaaS expansion, which could increase rates to at least 18000 barrels a day in.
An additional hydrogen plant will be required to achieve that next step and it's nice to have our existing plant fully operating and derisked, making the future projected low risk venture.
In the meantime, our engineers are hard at work figuring out how to creep up rates on our existing unit.
Next our free trader, which is started up in April is the single biggest driver value at Montana renewables.
The pre treater opens up all of the regional logistically advantaged feedstock that is so key to the lasting competitive advantage that sets Montana renewables apart.
As we gain experience in a renewable feedstock market, we've reinforced our initial hypotheses regarding the large advantages that both our geography and free trade or provide.
To put the value in the perspective, we can currently buy regional untreated feed approximately 80 cents a gallon more cheaply than traded feed.
As we transition into our steady state operation, we expect to process. The majority of our existing safety stock of clean feed this quarter clearing the flight to receive the full financial benefit of our pre treater in Q3.
The last milestone into Montana renewables project was producing sustainable aviation fuel.
SaaS was added to the project and our team confirmed the significant premium this product demands in the marketplace.
As a boutique high margin product the SaaS value chain more closely resemble the specialty product than a fuel and Calumet was very comfortable in this environment.
Since the inflationary reduction act was announced the outlet for SaaS has exploded.
As the only proven scalable solution the Decarbonising air travel it has turned into one of the hottest topics in energy and as of last week, Montana renewables is the largest producer of sustainable aviation fuel in North America.
With all units running we also recently reconfirmed, Montana, Montana renewables EBITDA expectation with a clear line of sight into the cost of untreated feedstocks. The economies of scale enabled by our renewable hydrogen plant and margin uplift from SaaS, We recently reconfirmed our run rate EBITDA expectation of $1.
25 to $1 45 per gallon, which we expect to hit when we were processing all dirty feed.
Montana renewables has evolved from an idea in 2022 and operating leading renewable business in a very short amount of time.
During that time $2 7 million man hours were worked on site with no lost time incidents.
This is quite an accomplishment and thank you to the team and our partners that have made Montana renewables a reality.
As we look forward our strategy is clear and it remains unchanged priority number one is to demonstrate the cash earnings power of this new business.
In parallel we will continue to engineer the potential Mac staff expansion.
Last we expect to progress down the path of an ultimate IPO of Montana renewables as we believe the competitively advantaged peer play staffing our renewable diesel business with the growth profile of ours is extremely valuable and.
And of course, we will continue to remain flexible and opportunistically engaged with potential partners along the way.
With that I'll turn it to the operator for questions operator.
Thank you at this time, we will begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the he's just try your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
And the first question comes from Neil Mehta with Goldman Sachs.
Hey, guys. Good morning, Thanks for taking the time this is nicolette cluster on for Neil Mehta.
So the first question here is I'm on renewables and I understand you guys recently reconfirmed the go forward EBITDA guidance.
25 to $1.45 per gallon can.
Can you just talk us through the drivers between the lower and the upper end up the range and then kind of where you might see one skewing one way or the another later this year.
And then Bruce Fleming.
We're simply giving a range.
You know that's.
A market condition, there is a little bit of volatility we've published a lot of.
Yeah look back end gross margin information and that's simply captures what's going on out there.
Alright helpful. Thank you and then my follow up here is on performance brands and seems like that business. It's.
It's been in flexing and obviously a stronger quarter here can you just talk about are the performance trends inflection.
When pace pace for the rest of the year. Thank you.
Yeah, Great. This is Scott Obermeier.
As Vince alluded to during the day.
During the commentary earlier, you know I think we've finally caught up the market is stabilized we've been talking for the past 18 months about rising costs and and a lag in our price increases and I think what you saw in the first quarter and what we saw in the first quarter was our price our pricing finally catching up to the rising.
Cost structure.
Structure as well as solid demand in the market. So we would expect that to continue to move forward.
Great. Thank you.
Thank you and the next question comes from Amit Dayal with H C. Wainwright.
Hey, good morning, guys. Thank you for taking my questions first of all congrats on delivering against all these milestones in a timely manner.
Ziv.
Just in terms of.
How are you up now thinking about potentially managing the debt side of the story you know what are you are you know.
Priorities from for the cash flow that now you are set up to sort of generate with this a new.
Hello.
Yeah, Hey, Matt It's Todd.
Reducing leverage continues to be a strategic priority I think we've been pretty consistent about that we have a number of ways to do it you mentioned operating cash flow for Montana renewables. That's certainly one we also expect monetization proceeds at some point in the not too distant future.
Montana renewables, that's another I think when you look out at quantum of that.
We're not we're not pretty decent position right now when you look at our current EBITDA versus our kind.
Kind of restricted that were coming in at a at a three point out ratio, which which is actually a pretty reasonable level that being said, we think that in the long run we want to take $300 million more off the table.
Give or take so so the plan is to do that with with operating cash flow, our Montana renewables monetization.
Okay. Thank you and then you know what.
Already focused on sort of.
<unk> SaaS capacity.
18000 barrels per day.
Once we get to that level, we capped out at this.
Facility.
Or is there room for further capacity expansion in Montana.
Amit Bruce Fleming.
The natural limits to our existing facility are something that we're gonna discover we're gonna be creeping capacity without a project anyway. The guys in the field are already you know finding finding small wins.
And.
As we get the project online, we'll find out 18000 barrels a day renewable feedstock is kind of a guideline figure we may do better than that.
But there will be some ultimate limit to the single train operation there. So at that point, we think that with the competitive advantages. We have with every study that we've gotten any bank or consultants need to do for us.
We've simply got the best machine out there and that puts us in a really good position.
As the industry structure continues to unfold around us to be the aggregator in this space. So we're looking forward to rotate into some pretty conventional M&A activity.
Understood. Thank you for that that's very helpful.
And just last one for me guys. You know there's talk about a potential recession et cetera, given what the macro environment is are you seeing sort of any adjustments from customers or industry players around demand et cetera.
Keeping in mind that type of scenario.
Yep.
This is Scott here.
So overall demand remains solid.
We've seen it become a little choppy or in certain areas within the consumer and retail space.
Hum.
And I think we've seen the published cracks out there start to taper down to slightly more normalized levels. Although overall, we're we're bullish on the go forward plan, we've been through over the past three or four years, the extreme ups and downs and I think that the business has performed well where we're resilient we're diversified.
And we feel good about where we're at.
Thank you guys. That's all I have.
Thanks, Matt.
And last question comes from Gregg Brody with Bank of America.
Hey, good morning, guys.
Hey, Greg.
So you you highlighted the actually on the press release, something you've been talking about is amongst a bunch of alternative plans does.
Perhaps you put in the release indicate any sort of change in your considering all the other things that you talked about in the past.
And is there a potential timing around that appear.
Hey, Greg Bruce let me.
Take what I think was a three parter there.
So.
Our Montana renewables strategic options.
Represents an abundance of riches relate.
And that's going to cascade over to the parent as well and Todd may want to comment on that after them through but.
One of the key pivot points here is going to be what the department of energy decides to do with our loan guarantee application and we will keep you posted but I'll say that.
They're underwriting conversations and their diligence is going well.
<unk>.
That is a material.
Strategic anchor.
So the.
Way that that plays out is with the clean balance sheet. The IPO has enabled the over under from the Bulge bracket banks that we're talking to about that is let's say nine months centered on nine months. It can go quicker.
And so the future speculation is what are the market conditions as we.
As we have that offering available. So we will see you know the last couple of years as Scott Obermeier just mentioned in a different context.
A lot of things thrown at everybody from the macro.
And.
Knock on wood, if if the if the world economy is going to be on a more stable footing and we're gonna have a pretty compelling peer play.
Energy transition offering and it's not a small thing to suddenly be the biggest SaaS producer in North America that nobody ever heard of.
We've just had our head down doing this we're not promoters you know we're not developers.
We're no longer in the business of seeking financing to build a project you projects belt. It's there, it's running where real what is that going to be worth in the market. You know, we all look forward to finding out how to maximize unit holder value off the back of this.
Yeah, maybe I'll pile on a little bit.
I wouldn't read too much into is it a signal of other items.
Like Bruce pointed out there at the end.
What we think about a potential IPO as it's doable, it's doable in the not too distant future. It's extremely accretive so it's not that we won't take any other actions.
Like normal you know by now we will continue to be opportunistic and evaluate options, but what it does mean is that anything that we look at we're going to evaluate in the context of this supportive.
You know immediately supportive of of what looks like a pretty controllable and positive in destination. So that's.
That's kind of the lens, we're looking through if that makes sense Greg.
It does thank you for the clarifications.
It sounded like you're.
Did you see business improving or.
Or at least maintaining or I should say.
Are you seeing any cracks.
And anything that Youre seeing in terms of weakness in the economy and weakness in demand.
Greg Scott commented a little earlier on not too much in specialty we continue to see pretty strong specialty margin. So so kind of what that play from earlier on cracks, obviously, we've seen them come in a little bit so.
Like they should in Q1, we're pretty comfortable with what's our plan.
These levels so.
So we're not saying that we expect cracks to turn around in and reached a level as they were last year or anything like that what we're saying is we can absolutely play out our business plan to current environment supports running Max rates.
And and we've got a little bit of hedges, there too and we put those on last year and a time when we were looking forward and saying Hey.
It could potentially be a volatile market and we want to make sure that our business plan plays out in any environment and isn't it isn't at risk. So that's kind of how we're looking at it.
You know we've planned on the current levels, we're at and I think our plan is still very viable in the current market environment.
Great. That's it for me guys. Thank you for the time.
Thanks, Greg Thank.
Thank you and the next question comes from Jason gave them with TD Cowen.
Yeah.
Hey, guys good morning.
On MRO in the guidance you gave of $1 45 to 165 I think.
Last year when he talked about our base case. It was 185, so $1 85 per gallon.
So the indicative economics are a bit lower than that I'm, just wondering what's going on in the market now different than the base case that you provided last year.
Jason and Bruce I'll I'll start.
So we have put out gross margins and EBITDA margins were.
We're not actually reducing guidance.
A change in frame of reference.
We've talked a lot about.
The location advantage, we've done differentials on.
Our logistics.
Better than the Gulf Coast, and we've put out the constant.
$2, a gallon ish gross margin.
And you know we've we've had people ask us to just simply tell us what we're going to earn so the answer is about 25 to about 45, a gallon fully loaded including SG&A EBITDA.
Based upon gathering enough.
Untreated feedstocks in our local market.
That's that's no change if anything that's probably up a little bit.
From some of the the look backs that we've put out.
Okay got it and then if I just apply that math and use the 80 cents per gallon higher fee that you're running now it implies <unk> you should earn.
You know some amount of EBITDA and what your.
Oh, well you're running at the by the renewable diesel plant is that is that a fair assessment kind of 40 cents per gallon 50 cents per gallon for for <unk>, and then a higher amount from three Q.
As you wrap up use of untreated her feet.
Youre thinking in the right direction.
<unk>.
Rolling from purchased clean speeds to purchased untreated feeds has the compelling advantage that Todd mentioned.
I think that's broadly understood in the market and I think that the startup performance. So some of our peers without a pre treater as you know is going to give you a benchmark for what the industry looks like.
Our pre treaters literally come out in the last couple of weeks or so we announced that as it did so we're going to get a partial.
A partial benefit as we speed up that untreated supply chain.
We've got to work out of the safety stocks to clean inventory that we have on site. How fast we do that is going to be an optimization. So I'd, probably prefer to stay away from tactical guidance quarter over quarter.
We may find that we accelerate the inbound and we hold the safety stocks, we may find the converse, but it's you know it's simply.
Time shifting we're going to eat the clean feeds and they'll be gone.
How fast we do that we're going to try to gain an optimization value.
Yes.
I'll just pile on a bet there.
Our guys have to have to learn this new equipment right.
So far they've done really an exceptional job when you when you look at the track record from from the initial startup of I've already are you in in hydrogen plant now now pretty treat in SaaS, but.
When we talked about the $1 25 to about 45 and in the kind of backed out that 80, we're.
We're talking run rate numbers.
We will give them a little bit of a chance to have a toe stub or two and are in the next couple of months as they learned their equipment, but so far so good we're real proud of of what Theyre doing in the field.
Got it.
And then on the IPO timing.
I think when he talked about the potential IPO last year, you discussed wanting to have some trailing amount of indicative.
Earnings released before.
Going through an IPO process is that still how you think about it because it seems like the first two quarter of earnings will be three Q.
Are you going to want a little more of a track record before you pursue and IP hour or one or two quarters of consistent operations enough.
I think we're going to we're going to have a look at the market.
And let that guide us youre right that I do think.
Hum.
Providing providing the first full quarter run rate of of audited financials.
We can think about that is it's kind of a key a key trigger point in and launching the IPO process I would also say that you know.
The first few months of a process are confidential. So so don't expect too.
It all have to necessarily be in theories, but but I think youre thinking about it the right way.
It's going to make a lot of sense.
We're all going to benefit.
To put the numbers out there let people see.
The bottom line of Montana renewables as a as a stand alone fully operating business and we'll go from there.
Great and then if I could just squeeze one more in which was capex came in.
A little higher than we thought it would for one Q.
What was that related to kind of the completion of the Biofuels plant and if you could give.
Some kind of a total amount of capital costs, but the project ended up costing that would be helpful. Thanks.
Jason and Bruce I'll, I'll start ups and Vince Vince marijuana.
Add some exact figures but.
Three three things are happening here at the end game as we as we go live on our Montana renewables business, we did pile of SaaS.
Opportunistically on top of the program that we first announced two years ago.
That was kind of a mid course correction.
And.
So we've got some expenditures there we've got the expansion ramping up the Montana Renewables Board last fall approved us spending this year on that and you've got some of that starting to run through and then as you indicated the startup slashed one time.
Uh huh.
A consideration in the first quarter you know, we we commissioned a whole bunch of units sequentially in a relatively short period of time, that's not without some teething.
Opportunities and.
We will eventually have a full answer to your.
<unk> on the total cost, but some of that is still running and we literally just came on line with the pre trade or some of the some of the payables are on 30 day terms and that sort of thing so well, we'll do a look back at some point in the future.
Great. Thanks for the color Brad.
Thank you. Thank you and this concludes our question and answer session and I will let trends Harnack, Florida, Brad Mcmorrow for any closing comments.
Yeah on behalf of the executive team here in the room and really the.
Entirety of Calumet, we appreciate your time and your interest. This morning, so thanks, everybody and have a good weekend.
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.