Q2 2023 Martin Midstream Partners LP Earnings Call
Please wait the conference will begin shortly.
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Good morning, My name is Adrienne and I will be your conference operator today at this time I would like to welcome everyone to the M. M. L. P Q2 earnings call today's conference is being recorded.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press the star key followed by the number one on your telephone keypad.
If you would like to withdraw your question Press Star one again.
At this time I would like to turn the conference over to Sharon Taylor Chief Financial Officer. Please go ahead.
Thank you operator, and good morning to everyone, who has joined the call with me today are Bob laundry CEO , David Cannon controller, and Danny Cavin director of that CNA.
I'll begin with our cautionary statements.
During this call management may be making forward looking statements as defined by the SEC.
<unk> are based upon our current beliefs as well as assumptions and information currently available to us.
Please refer to our press release issued yesterday afternoon, as well as our latest filings with the SEC for a list of factors that could impact the future performance of Martin and cause our actual results to differ from our expectations.
We'll discuss non-GAAP financial measures on today's call such as adjusted EBITDA distributable cash flow and free cash flow.
In addition, we will refer to adjusted EBITDA after giving effect to the exit of the butane optimization business.
You'll find a reconciliation of these non-GAAP measures to their nearest GAAP measures in our earnings press release posted on our website.
Now I will turn the call over to Bob to discuss second quarter results by segment.
Thanks Sharon.
Before I speak to the performance of our continuing operations I want to briefly discuss the final liquidation and exit of our butane optimization business.
We sold the remaining butane inventory in stores during the month of April using the proceeds to pay down our revolving line of credit.
However, because butane prices continued to fall during the month of April we realized negative EBITDA of $6 3 million in the second quarter and for the six months, we had negative EBITDA and butane a $15 1 million.
Finally for the trailing 12 months, we had negative EBITDA and butane optimization of 27 4 million.
These losses are not included in our bank leverage test as we have exited the butane optimization business.
However, we will continue to operate our underground NGL storage facility in North, Louisiana, which has both truck and rail access utilizing a fee based volume driven business model. The result of our underground storage facility are included in the Terminalling and storage segment.
I would now like to discuss the performance of our ongoing operations comparing the actual results of the second quarter to our second quarter guidance.
Excluding the losses of the butane optimization business, we had adjusted EBITDA of $31 8 million compared to our second quarter adjusted EBIDTA guidance of $32 2 million a difference of 1%.
For the trailing 12 months, excluding the results of the butane optimization business, we had adjusted EBITDA of $111 3 million through the second quarter of 2023.
For the second quarter, our largest cash flow generator was our transportation segment, which had adjusted EBITDA of $12 1 million compared to guidance of $11 6 million.
Within this segment our land transportation business had adjusted EBITDA of $8 7 million compared to guidance of $8 8 million.
Our actual line haul revenue was approximately $1 2 million less than forecasted as we missed our mileage forecast by 4%.
This revenue Miss was offset by the associated reduction in our variable costs from fewer miles driven and also from reduced fixed costs, which were less than our second quarter forecast.
Our marine transportation business had adjusted EBITDA of $3 5 million compared to guidance of $2 8 million.
For the second quarter, we exceeded our average daily tow rate forecast by approximately 11%.
These improved day rates are reflective of the strong supply demand fundamentals in the inland barge market.
Looking forward, we believe that rates should continue to strengthen and we should also continue to have very strong utilization of our barge fleet.
Our second strongest cash flow generator in the second quarter was our Terminalling and storage segment, which had adjusted EBITDA of $9 6 million compared to guidance of $8 3 million.
The biggest contribution to the excess cash flow compared to guidance in our Terminix segment, which reduced operating costs. The majority of which were reduced natural gas cost at the smack over refinery when compared to forecast looking.
Looking forward based on current natural gas pricing fundamentals, we should continue to see reduced natural gas costs relative to our original forecast the remainder of the year.
Now I would like to discuss our sulfur services segment, which was our third largest cash flow provider in the second quarter.
This segment had adjusted EBITDA of $8 million compared to guidance of $10 6 million.
The cash flow Miss in our guidance was driven by the underperformance in our fertilizer group, which had adjusted EBITDA of $4 9 million in the second quarter compared to guidance of $7 7 million.
For the second quarter began we were still optimistic our fertilizer group would meet our volume projections and ultimately cash flow projections for the quarter.
However, during the quarter poor weather conditions, which include a drought in the southwest and winter weather continuing into spring in the Midwest negatively impacted farmer demand for fertilizer products.
As a result, our forecasted sales volumes were off 17%.
Additionally, because of overall reduced agriculture demand in the U S due to poor weather conditions.
Fertilizer prices continued to fall throughout the second quarter.
This negatively impacted our margins as we destock higher cost inventory.
As a result, our margin per ton was 27% less than forecasted in the second quarter.
While the performance in our fertilizer group was disappointing it was not unique to us.
Most if not all fertilizer producers will likely report reduced earnings in the second quarter.
Results of these poor market conditions.
Looking towards the remainder of the year, we have reduced our fertilizer guidance by approximately $1 million, primarily due to high industry inventory levels caused by slow fertilizer sales.
For the full year when considering the actual results to forecast we've brought annual guidance for the fertilizer business down by $6 6 million.
The pure sulfur side of our sulfur services segment had adjusted EBITDA of $3 2 million in the second quarter compared to guidance of $2 9 million.
In the second quarter, we saw an increase in sulfur production from area refineries.
As a result, the sulfur we handled in the quarter was approximately 16% greater than our forecast.
This volume increase was the primary driver of our outperformance in the pure sulfur side of the business.
Now I would like to discuss the performance of our specialty products business segment.
In this segment, excluding the impact of our exit of our butane optimization business, we had adjusted EBITDA of $5 9 million compared to guidance of $6 million.
Oh, you had strength in our NGL and propane groups, which both outperformed guidance.
Continued weakness in our packaged lubricant business.
This particular business has significant exposure to the agriculture market, which provided weak product demand in the second quarter.
This weak agricultural demand was primarily driven by the same poor weather conditions that impacted our fertilizer business.
Looking forward, we see some continued weakness in the agriculture markets in the third quarter.
And as a result of reduced our packaged lubricant guidance in the third quarter by $1 million.
Our $2 3 million for the entire year.
Now, let me take a moment to summarize.
From our ongoing operations, we Miss second quarter guidance by zero point $4 million.
However, if we exclude the guidance Miss from our two business lines that has significant agriculture exposure.
With fertilizer and packaged lubricants.
We would have exceeded guidance by $3 3 million.
Using the same thought process of excluding fertilizer and packaged lubricants for the first six months instead of missing guidance by $1 2 million, we would have exceeded guidance by $5 7 million.
I am making this point to demonstrate the strength of our performance in the majority of our business line, which we believe will continue in the last half of the year.
Regarding our two lines of business, having significant agriculture exposure.
Subject to unusual negative weather events, we believe the agriculture market should begin to recover and we should see more normal performance from these two business lines, most likely beginning in the fourth quarter.
This concludes my thoughts and I would now like to turn the call over to Sharon to discuss our balance sheet capital resources and further revisions to our 2023 guidance.
Thank you Bob.
As always I'll begin with our balance sheet metrics and liquidity, then I'll discuss 2023 guidance revisions within our four operating segments.
At June 30 of 2023, the total of our long term debt outstanding was $460 5 million, which is a reduction of $39 5 million from the end of last quarter.
The outstanding debt consisted of $65 million drawn on our $175 million revolver that matures in 2027 and $400 million of senior secured second lien notes due 2028.
At June 30th per the credit agreement lender commitments to the revolver steps down from 200 million to $175 million.
Liquidity increased from approximately 40 million at March 31 to approximately $56 million at June 30th as we were able to reduce not only our credit facility borrowings, but also our outstanding letters of credits that were issued to support the butane optimization business.
By using the proceeds from the liquidation of our butane inventory to significantly reduce borrowings under our revolver. We reduced total bank compliant leverage of 414 times at the end of the second quarter compared to four to five times at the end of the first quarter.
Further on June 30th our first lien leverage ratio was five four times, our interest coverage ratio to one six times and the partnership was in compliance with all covenants banking or otherwise at the end of the quarter.
Capital expenditures for the quarter were a total of $9 8 million of which $7 9 million with maintenance Capex and $1 9 million with growth Capex.
Maintenance Capex was forecasted to be $11 9 million for the quarter, a difference of $4 million and growth with forecasted to be $5 3 million a difference of $3 3 million.
And while year to date, we're below our forecasted capital expenditure totaled we still intend to complete maintenance capex of $26 6 million and gross capex of $17 5 million this year.
Distributable cash flow for the quarter calculated using adjusted EBITDA after giving effect to the exit of the butane optimization business was $9 7 million and free cash flow was $7 8 million.
Progress continues to be made regarding the DSM semi chem joint venture or Elsa facility <unk> being an acronym for electronic level sulfuric acid.
Included in the $1 $9 million of growth Capex that I referred to earlier in this call is approximately one 4 million related to the install of an OEM tower at our plain view location, which will provide feedstock to the <unk> facility.
The facility is still forecasted to be online in the first quarter of 2024.
Turning to our revisions to our 2023 guidance as you heard Bob say earlier, we made downward revisions in our sulfur and specialty products segments due to headwinds in the fertilizer and lubricants businesses as challenges in the agriculture industry from weather events that impacted the pricing.
<unk> and margin stability resulted in lower than anticipated cash flows.
These downward revisions are offset by stronger outlook in both the transportation and Terminalling and storage segment.
As a result of these positive and negative variance here is the overall 2023 guidance of $115 4 million and adjusted EBITDA after giving effect to the exit of the butane business remains unchanged.
Turning to slide four of the second quarter earnings summary presentation released along with our earnings yesterday evening I'll quickly walk through the changes by segment.
In the transportation segment, we have increased guidance by $3 7 million largely because of the marine business is benefiting from both higher rates and increased utilization of the fleet.
Guidance for the Terminalling and storage segment has been increased by $3 5 million.
A majority of the increase in this segment is that our snack over refinery and as a result of decreased operating costs, mostly from projected natural gas prices.
As has already been discussed guidance for the sulfur services segment is being reduced by $1 million in the third quarter and consideration of high inventories throughout the fertilizer industry.
For the full year the segment guidance is being reduced by $5 8 million, which takes into account the actual results of the first and second quarters.
The specialty products segment guidance, not including results for the butane optimization business is also being reduced by $2 million for the full year to allow for weakness in the lubricants business related to the agriculture industry.
Finally, SG&A expenses have been lower than forecasted for the first six months of 2023 and those actually results are reflected in our total year forecasted number.
This concludes my prepared remarks, Phil I'll turn the call over to the operator for Q&A.
Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad will pause just a moment.
And we'll take our first question from Selman <unk> at Stifel.
Okay.
Thank you good morning.
Hum.
So I guess first thing I just want to start with you just on the transportation.
And I know you guys talked about higher rates, but you also talked about I think.
The increased mileage and.
Higher production.
<unk>.
Refineries, which also drove so can you maybe discuss just the outlooks going forward.
Yes, so on the all of it hit both pieces on the truck transportation side.
We've done a really good job of.
Keeping rates strong there.
The sulfur production rates, which is a big piece of our business.
And the area primarily on the Gulf Coast.
We had forecasted kind of more in the 3000 tons per day of production, it's been averaging more in the 3500 tonnes a day production.
And we see that going forward, we see a lot of sulfur production both from utilization of the refineries and also I think there are crude slates.
Theyre running.
We are seeing a little bit of softness on the chemical side.
Uh huh.
And then on the lubricant as well.
Which we've been talking about in our prepared remarks related to the AG business. So those are kind of netting out on the trucking side.
So we feel good about our guidance going forward there on the barging side rates are up significantly, especially from where they were a year ago.
Just a tightness in supply of units.
On the inland barge side.
Salary utilization is high.
Seeing our average rate in the second quarter was probably 94 9500, a day with some dougherty barges now getting over $10000 a day and as we rollover contracts, we see upward pressure on those rates. So.
Thats the big piece of why we raised our marine.
<unk> guidance also in the first half of the year, we had several barges that go in for for dry docks, we only have one unit.
In the back half of the year that goes in for dry dock. So utilization will also be a lot higher in the back half of the year compared to the first half of the year.
In relationship to contracting on the barges or <unk>.
Getting any.
Extension in time or duration.
Yes, we now have some barges that are actually off the spot market and in turn they are still mostly three to six months terms spellman, but we are starting to see folks wanting to lock up contracts for a longer period of time.
Got it and I guess longer period of time at higher rates right yes.
Yes, Sir yes, and when we see the market doing that.
We believe they see it continuing to rise so they want to lock it up.
Got it and then do you have a heavy.
Drydocking schedule for 2024, as we look forward.
No. This was a heavy year for us.
It's going to be less next year I can't quote a number of toes, but I know, it's significantly less next year compared to this year.
Awesome and then.
You also had on the transportation side, you had picked up.
A good chunk of business over in Florida, and I was just wondering how that was going but I presume you've seen that slow but just checking.
Yes, that's levered around the.
The fertilizer business down there however.
That has been good it's actually continued to improve.
We saw a lot of different products. In addition to sulfuric acid. There is a lot of what we call a pond water down there that has to move around and as Florida gets rains and water fields up these pits, it's a constant movement upon water.
It's kind of not intuitive data something expose the fertilizer business youre doing really well, but.
Because of that kind of unique nature, we're still very strong in central Florida.
I appreciate that and then.
Remind us.
On the <unk> project.
Total capital to be invested in and what kind of returns are you looking for.
Yes, so the investment in the OEM tower.
Over the course of the remainder of this year and maybe a little into early next year, but primarily this year is roughly $13 5 million.
And then next year next year when the when the project comes online into the JV will invest $6 5 million of.
Of cash into the JV. So net net you have $20 million invested.
We've been telling the market kind of in the midpoint of the range of EBITDA is about between the two pieces is about $6 million.
Got it.
Don't mean to split hairs here, but when you talk about it coming the tower comes online in the first quarter.
And you think about then making an additional investment into the JV should we think of that JV, then ramping up pretty quickly and so youll get a return on that additional $6 million.
Starting in the second quarter or should we think of it that is going to be more like in the third or the fourth quarter.
I would move it towards the back half of the year the distributions from the JV.
I would say.
The contract related to the OEM, we're providing the JV would start in the second quarter.
Okay. That's fair share, yes, and then distributions from the JV towards the back.
The third quarter.
Got it okay. That's very helpful. Thank you.
And then.
In terms of the agricultural market and I know you guys marked it down for Q3.
And then the rest of the year, but I guess is it really waiting until next year to see the improvement.
Yeah, Yeah thinking about it.
I think so now what could happen is in the fourth quarter you do sometimes see if farmers believed the price is going to go up they will start pulling in the fourth quarter intervention that price. So you could say, maybe maybe see some volume in the fourth quarter.
That's hard to predict at this point in time, but.
On a more macro level, you know with the Russia.
Doing their thing and Odessa here the last few days.
Corn bomb in Odessa net port their corn prices are up about 10% in the last three days three or four days so I believe.
Summer demand provided weather cooperates, we'll be really strong next year.
Understood. Okay. Thank you very much.
Well.
Thank you Tom.
And as a reminder, if you would like to ask a question. Please press star one we'll pause again for just a moment.
Sure.
And we will go to Patrick Fitzgerald at Baird.
Yes.
Hi, Thanks for taking the questions I just have.
Just a couple of cash flow questions.
Now that youre through the.
Butane inventory what is working capital look like from here.
I do not have that number in front of me right.
Right at this moment, Patrick I apologize for that.
Ben as you know it has been changing for us since we have been exiting the U K and optimization business. So what I would say historically is not what I would be looking at at the moment.
Okay.
To your questions I'll do a little research you keep asking questions.
And then I just kind of wanted to ask.
A bigger picture question.
So with your.
Capex with your your guidance, which is very helpful.
In terms of EBITDA and your Capex guidance.
And your cash interest now you'll be.
On a run rate to generate about.
I don't know if $15 million of free cash flow annually.
Which is relative to your market cap not not a small amount.
So what's the what's the plan going forward.
Close to your four times leverage target for the end of the year.
What.
Are you just going to keep paying down the revolver.
And take leverage lower or is there something more strategic you can do to kind of get your.
Equity moving.
So a part of the covenants of our credit facility and our note until we reached 375 times leverage we don't have the ability to increase our distributions and there are some.
Some capital constraints that we will have so we will continue to use that free cash flow to get that leverage number down below 375 times and based on our current forecast we get there towards the back end of next year.
And then I guess you or your view is you would just turn the distributions on it at that point.
Well, we'll look at where we are what type of.
As growth projects, we might have.
Should be passed.
The capital required for the Elsa facility at that time that we still have opportunities down in Beaumont nature area with some of our assets down there in the property. So we'll look at what's the best use of that capital do we have anything right now that we're planning on spending that capital on as far as growth projects no nothing.
Elsa, but I hate to say, yes, our entire focus will be on increasing the distributions.
Of course that will be a big one.
But we.
I, just don't want to put us in a box, but yes that is when you look at the priorities and doing something to enhance our unit price and provide value for our unit holders is certainly.
Number one on our minds and to get back to your working capital number the range right now is between 45 and $50 million over the next four quarters.
Awesome, Thanks, a lot.
Thank you.
And there are no further questions at this time I would like to turn the call back over to Bob <unk> for closing remarks.
Thank you Roger.
In summary, we've had a good start to 2023, our diversified refinery services business model has served us well and we anticipate meeting our full year adjusted EBIDTA guidance, even in the face of headwinds in a couple of our businesses.
By exiting the butane optimization business, we expect our future earnings to be less volatile and the reduction of our working capital needs to be significant.
Looking to the future. We believe we have a significant opportunity to improve the success of our partnership with the DSM <unk> joint venture that is scheduled for startup at the end of the first quarter of next year.
And we intend to continue to strengthen our balance sheet by paying down debt and lowering our leverage to below 375 times.
Thanks to everyone, who joined the call I'll look forward to speaking with you again next quarter.
And this concludes today's conference call. Thank you for your participation you may now disconnect.
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