Q2 2024 Calumet Inc Earnings Call
Speaker Change: Thank you.
Operator: Good morning everyone and welcome to the Calumet, Inc.'s second quarter 2024 results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on a touch-tone phone. To withdraw your question, please press star then 2. Please also note that today's event is being recorded. At this time, I'd like to turn the floor over to John Kompa, Investor Relations for Calumet. Sir, please go ahead.
Speaker Change: Good morning, everyone, and welcome to the Calumet, Inc.'s second quarter 2024 results conference call.
Speaker Change: All participants will be in a listen-only mode.
Speaker Change: Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions.
Speaker Change: To ask a question, you may press star, then 1 on a touch-tone phone.
Speaker Change: To withdraw your question, please press star then 2.
John Kompa: Please also note, today's event is being recorded. At this time, I'd like to turn the floor over to John Kompa, Investor Relations for Calumet. Sir, please go ahead.
John Kompa: Thanks, Devlin. Good morning, everyone.
John Kompa: Thanks Devlin. Good morning everyone. Thank you for joining us today for our second quarter 2024 earnings call. With me on today's call are Todd Borgmann, CEO , David Lunin, EVP and Chief Financial Officer, Bruce Fleming, EVP, Montana Renewables and Corporate Development, and Scott Obermeier, EVP of Specialties.
John Kompa: Thank you for joining us today for our second quarter 2024 earnings call. With me on today's call are Todd Borgmann, CEO, David Lunin, EVP and Chief Financial Officer, Bruce Fleming, EVP, Montana Renewables and Corporate Development, and Scott Obermeier, EVP of Specialty You may now download the slides that accompany the remarks made on today's conference call. These can be accessed in the Investor Relations section of our website at calumet.com.
Speaker Change: You may now download the slides that accompany the remarks made on today's conference call. These can be accessed on the Investor Relations section of our website at calumet.com. Also, a webcast replay of this call will be available on our site within a few hours.
John Kompa: Also, 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 the call, we may provide various forward-looking statements. Please refer to our 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 our expectations. With that, I'll now pass the call to Todd. Thank you.
Speaker Change: Turning to the presentation on slide two.
Speaker Change: You can find our cautionary statements. I'd like to remind everyone that during the call, we may provide various forward-looking statements. Please refer to our 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 our expectations. With that, I'll now pass the call to Todd.
Todd Borgmann: Thank you, John, and welcome to the first earnings call of our new Calumet Inc. Since our last call, 99% of our voting unit holders elected to convert Calumet Specialty Products Partners LP to a C corporation, and on July 10th, Calumet Inc. commenced trading on NASDAQ.
Todd: Thank you, John , and welcome to the first earnings call of our new Calumet, Inc.
Todd: Since our last call, 99% of our voting unit holders elected to convert Calumet Specialty Products Partners LP to a C-corporation, and on July 10th, Calumet Inc. commenced trading on a NASDAQ.
Todd Borgmann: Thank you to all of our former unit holders and current shareholders for your support. And one last thanks to the former General Partner and Conflicts Committee for a thorough and thoughtful process. Now to the second quarter. Let's turn to slide 16. Calumet generated $66.8 million of adjusted EBITDA in the second quarter.
Todd: Thank you to all of our former unit holders and current shareholders for your support. And one last thanks to the former General Partner and Conflicts Committee for a thorough and thoughtful process. Now to the second quarter. Let's turn to slide three.
Todd: Calumet generated $66.8 million of adjusted EBITDA in the second quarter. Before we dive into the numbers, I'd like to touch on Calumet's overall strategy and the substantial progress our team has made since our last discussion.
Todd Borgmann: Before we dive into the numbers, I'd like to touch on Calumet's overall strategy and the substantial progress our team has made since our last discussion. The most important element of our strategy is safe and reliable operations. In the second quarter, we achieved the highest company-wide production levels that have been seen since we brought down our former Montana plant a few years ago to begin the renewables conversion. Specifically, the Montana Renewables team achieved record throughput in SAF production, and our specialties business saw the highest quarterly sales volumes in over five years. Pivoting to our broader strategy, we have three primary objectives, all of which were executed on this past quarter. Let's turn to the next slide.
Todd: The most important element of our strategy is safe and reliable operations.
Todd: In the second quarter, we achieved the highest company-wide production levels that have been seen since we brought down our former Montana plant a few years ago to begin the renewables conversion.
Todd: Specifically, the Montana Renewables team achieved record throughput in SAF production and our specialties business saw the highest quarterly sales volumes in over five years.
Todd: Pivoting to our broader strategy, we have three primary objectives, all of which were executed against this past quarter. Let's turn to the next slide.
Todd Borgmann: First, we continue to demonstrate the uniqueness of our specialties business. Commodity markets were not helpful in the second quarter, but this business continues to prove that its market optionality, product flexibility, and advantage integration allow it to succeed in any environment. Our commercial organization and customer commitment continue to be a core differentiator, and we saw that in Q2 as record specialty production volumes were placed into the right market. Providing a world-class customer experience matters here, and I know Scott, who's on the call with me, would love to answer any questions about how we maximize the customer experience and the tremendous feedback that we receive from our customers.
Todd: First, we continue to demonstrate the uniqueness of our specialties business.
Todd: Commodity markets were not helpful in the second quarter, but this business continues to prove that its market optionality, product flexibility, and advantage integration allow it to succeed in any environment.
Todd: Our commercial organization and customer commitment continue to be a core differentiator, and we saw that in Q2 as record specialty production volumes were placed into the right markets.
Todd: Providing a world-class customer experience matters here and I know Scott who's on the call with me would love to answer any questions about how we maximize the customer experience and a tremendous feedback that we received from our customers.
Todd Borgmann: A little over a year ago, we began the process of carefully studying the connection points between our performance brands and SPS segments, and where it made sense, we more closely began integrating them through our commercial excellence engine. In the second quarter, we saw 30% growth in volumes and performance brands, much of which is in the industrial markets where we can leverage our system most effectively.
Scott: A little over a year ago we began the process of carefully studying the connection points between our performance brands and SPS segments and where it made sense we more closely began integrating them through our commercial excellence engine.
Scott: In the second quarter, we saw a 30% growth in volumes and performance brands, much of which is in the industrial markets where we can leverage our system most effectively.
Todd Borgmann: Our second strategic objective is to execute operationally at Montana Renewables and demonstrate, through our geographic advantage, feedstock and customer access, and focus on sustainable aviation fuel, that we have built a best-in-class renewables business. In the second quarter, we achieved operational records across the board. We ran at planned production levels, and our procuretor allowed us to choose from a full slate of feeds. We produced roughly 7 million gallons of SAF, and we continue to see our costs become more efficient as reliability and utilization increase. For the second quarter, the team delivered significant operating unit cost reductions, and we're well on track to achieve our operating cost objective of 70 cents per gallon by the end of this year.
Scott: Let's flip to slide 5.
Scott: Our second strategic objective is to execute operationally at Montana Renewables and demonstrate through our geographic advantage, feedstock and customer access, and focus on sustainable aviation fuel, that we have built a best-in-class renewables business.
Scott: In the second quarter, we achieved operational records across the board.
Scott: We ran at planned production levels. Our pre-tutor allowed us to choose from a full slate of feeds. We produced roughly 7 million gallons of SAF, and we continue to see our costs becoming more efficient as reliability and utilization increase.
Scott: For the second quarter, the team delivered significant operating unit cost reductions and we're well on track to achieve our op cost objective of 70 cents per gallon by the end of this year.
Todd Borgmann: Last, commercial flexibility remains a key advantage, and roughly 40% of our product is SAF or finding its way into Canada. As we demonstrate steady-state operations, Montana Renewables contributed over $7 million of adjusted EBITDA in the second quarter, despite the trough margin conditions that the renewable industry faces. Let me take a minute to address today's trough industry margin condition. Many others have recently weighed in on the expected timing of renewable diesel margin recovery, and we too are optimistic that our industry has multiple positive catalysts ahead, some of which are occurring already. On the supply side, these include declining ag commodities prices and incremental biodiesel capacity closure.
Scott: Last, commercial flexibility remains a key advantage, and roughly 40% of our product is SAF or finding its way into Canada.
Scott: As we demonstrate steady-state operations, Montana Renewables contributed over seven million dollars of adjusted EBITDA in the second quarter, despite the trough margin conditions that the renewable industry faces.
Scott: Let me take a minute to address today's
Scott: Many others have recently weighed in on the expected timing of renewable diesel margin recovery, and we, too, are optimistic that our industry has multiple positive catalysts ahead, some of which are occurring already.
Scott: On the supply side, these include declining ag commodities prices, incremental biodiesel capacity closure,
Todd Borgmann: Reduction of Imports, RD Capacity Cannibalized into SAF, and even Renewable Diesel Capacity Reversed back to Crude Oil Service. On the demand side, notable catalysts include CARB LCFS acceleration, additional LCFS geographies opting in, growing state and global mandates and incentives, legislative response on behalf of the ag sector, and the EPA increasing its non-ethanol RVO. From a timing perspective, the change to the producer's tax credit at year-end is expected to reduce imports as they become disadvantaged by $1 per gallon.
Scott: reduction of imports, RD capacity cannibalized into SAF, and even renewable diesel capacity reversed back to crude oil service.
Scott: On the demand side, notable catalysts include carb LCFS acceleration, additional LCFS geographies opting in, growing state and global mandates and incentives, legislative response on behalf of the ag sector, and the EPA increasing its non-ethanol RVO.
Scott: From a timing perspective, the change to the producer's tax credit at year-end is expected to reduce imports as they become disadvantaged by $1 per gallon.
Todd Borgmann: Today, these imports are flowing at roughly 1 billion gallons annually. And we note bipartisan support, and we remain optimistic that the EPA will correct the RVO rather than forcing additional capacity to close and delay the energy transition. It's hard to predict exactly how these will play out in the very near term, especially during an election season.
Scott: Today, these imports are flowing at roughly 1 billion gallons annually, and we note bipartisan support and we remain optimistic that the EPA will correct the RVO rather than forcing additional capacity to close and delay the energy transition.
Speaker Change: It's hard to predict exactly how these will play out in the very near term, especially during an election season, but Montana Renewables continues to differentiate itself, focus on competitive advantage, generate positive EBITDA even during the chaff, and when these changes take hold, we'll be positioned to capture the upside.
Todd Borgmann: But Montana Renewables continues to differentiate itself, focus on competitive advantage, and generate positive EBITDA even during the trough. And when these changes take hold, we'll be positioned to capture the upside. Looking ahead, SAF continues to be a focal point and an advantage for Montana Renewables. RSAP production continues to increase. We produced nearly 7 million gallons in the second quarter. And MRL currently has 30 million gallons per year of contracted
Speaker Change: Looking ahead, SAF continues to be a focal point and an advantage for Montana Renewables.
Speaker Change: Our SAF production continues to increase. We produced nearly 7 million gallons in the second quarter, and MRL currently has 30 million gallons per year of contracted SAF sales.
Todd Borgmann: We look forward to the next steps of SAF for Montana Renewables, which will be the MaxSAF expansion at the culmination of the DOE process. Given the advanced nature of this process and the magnitude of it to Calumet's strategy to launch MaxSaf and replace expensive project financings at Montana Renewables, we're going to limit our comments on the DOE process today. The DOE has been an extremely thoughtful and professional group to work with throughout, and we're excited to get started on the next steps of building on Montana Renewable's first-mover advantage and fortifying our country's vision as a global SAP leader. Turning to slide six.
Speaker Change: We look forward to the next steps of SAF for Montana Renewables, which will be the MaxSAF expansion as a culmination of the DOE process.
Speaker Change: Given the advanced nature of this process and the magnitude of it to Calumet's strategy to launch MACSF and replace expensive project financings at Montana Renewables, we're going to limit our comments on a DOE process today.
Speaker Change: The DOE has been an extremely thoughtful and professional group to work with throughout, and we're excited to get started on the next steps of building on Montana Renewable's first-mover advantage and fortifying our country's vision as a global SAP leader.
Todd Borgmann: We see the third leg of our corporate strategy is progressing a host of corporate initiatives targeted at driving shareholder value. The first item on this list is the successful execution of our corporate conversion in the second quarter. We're excited about the future of the C Corp, the benefit of passive indices, adding Calumet, and institutional investors being able to invest in a company at this crucial time as we complete our transformation. The first significant passive index adds will come in September, as the S&P and CRSP indices rebalance.
Speaker Change: Turning to slide six, we see the third leg of our corporate strategy is progressing a host of corporate initiatives targeted at driving shareholder value.
Speaker Change: The first item on this list is the successful execution of our corporate conversion in the second quarter.
Speaker Change: We're excited about the future of the C-Corp, the benefit of passive indices adding Calumet and institutional investors being able to invest in a company at this paramount time as we complete our transformation.
Speaker Change: The first significant passive index ads come in September as the S&P and CRSP indices rebalance, and this process should replicate itself over the coming year.
David Lunin: And this process should replicate itself over the coming year. In addition, we received news of our most recent successful step in the small refinery exemption litigation, in which the Washington, D.C., District Court deemed the EPA's denial of the SRE as arbitrary and capricious. As a small business critical to the communities in which we exist who produces fuels as a byproduct to lower the total cost of goods on our specialty products we make on purpose, we're pleased to see the courts continue to protect the intent of the Clean Air Act and the Small Refinery Exemption. With that, I'll turn the call over to David to take us through the quarterly financials. David. Thanks, Todd.
Speaker Change: Further, we received news of our most recent successful step in a small refinery exemption litigation in which the Washington, D.C. District Court deemed the EPA's denial of the SRE as arbitrary and capricious.
Speaker Change: As a small business critical to the communities in which we exist, who produces fuels as a byproduct to lower the total cost of goods on our specialty products we make on purpose, we're pleased to see the courts continue to protect the intent of the Clean Air Act and the small refinery exemption.
Speaker Change: With that, I'll turn the call to David to take us through the quarterly financials. David?
David Lunin: Thanks, Todd. Now we'll review our segment results. Across our specialty businesses, which comprise both specialty products and solutions and performance brands, we achieved the highest production volume in the last five years. Operations were strong during the quarter as we benefited from reliability and the progress we've made over the past few years fortifying our operations. That said, we continue to see additional opportunities.
David: Thanks, Todd. Now we'll review our segment results.
David: Across our specialty businesses, which comprise of both specialty products and solutions and performance brands, we achieve the highest production volume in the last five years.
Speaker Change: Operations were strong during the quarter as we benefited from reliability and the progress we've made over the past few years fortifying our operation.
Speaker Change: That said, we continue to see additional opportunities.
David Lunin: The specialty product segment generated $65.8 million of adjusted EBITDA during the quarter, an increase of approximately 8% compared to the prior year period. Quarterly results were driven by strong volumes across products and the application diversity of our products, strong customer relationships, and our integrated network. Strong sales volume and financial results were offset by a weakened commodity environment where we saw a $7.00 a barrel decline in the Gulf crack 2-1-1 crack spread over the year.
Speaker Change: In the specialty product segment generated 65.8 million of adjusted EBITDA during the quarter, an increase of approximately 8% compared to the prior year period.
Speaker Change: Quarterly results were driven by strong volumes across products and the application diversity of our products, strong customer relationships, and our integrated network.
Speaker Change: Strong sales volume and financial results were offset by a weakened commodity environment where we saw a $7 a barrel decline in the gulf crack 2-1-1 crack spread over the year.
David Lunin: The resilience of our performance underscores the specialty's business ability to succeed across all commodity cycles. In the chart on the bottom right, I'd like to highlight our specialty products margin, which has been resilient in the $60 to $70 per barrel for the last few quarters, despite declines in fuels and asphalt margins. This success in specialty products has been driven by the continued execution of commercial excellence programs and the realization of progress made over the last few years.
Speaker Change: The resilience of our performance underscores the specialty's business ability to succeed across all commodity cycles.
Speaker Change: In the chart on the bottom right, I'd like to highlight our specialty products margin that has been resilient in the $60 to $70 per barrel for the last few quarters despite declines in fuels and asphalt margins.
Speaker Change: This success in specialty products has been driven by continued execution of commercial excellence programs.
David Lunin: Delivering product capabilities for our customers, top-notch service, and delivering products to its highest margin areas are all part of the strategy that's been playing out in our results. Despite strong production results, we know there's more opportunity available and reliability. In early July, our power supply was cut as the remnants of Hurricane Bethel knocked out local power, and a portion of July was spent with our Shreveport site operating at reduced rates.
Speaker Change: and the realization of progress made over the last few years. Delivering product capabilities for our customers, top-notch service, and delivering products to its highest margin area are all part of the strategy that's been playing out in our results.
Speaker Change: Despite strong production results, we know there's more opportunity available and reliability. In early July , our power supply was cut as the remnants of Hurricane Bethel knocked out local power, and a portion of July was spent with our Shreveport site operating at reduced rates.
David Lunin: Today, Shreveport is back operating at full rate, and we continue advancing progress on improving reliability. Moving to the performance brand segment, where we drove year-over-year volume growth of 30%, again, reflecting strong execution by our commercial team, as well as operational reliability. These operating results allowed the segment to deliver its highest volume quarter since the first quarter of 2019, reflecting strong demand across all our brands. We were able to successfully leverage the integration of our northwest Louisiana network of upstream manufacturing sites and our performance brand CALPAC facility.
Speaker Change: Today, Shreveport is back operating at full rate and we continue advancing progress on improving reliability.
Speaker Change: Moving to the performance brand segment where we drove year-over-year volume growth of 30% again reflecting strong execution by our commercial team as well as operational reliability.
Speaker Change: These operating results allowed the segment to deliver its highest volume quarter since the first quarter of 2019, reflecting strong demand across all our brands.
Speaker Change: We were able to successfully leverage the integration of our Northwest Louisiana network of upstream manufacturing sites and our performance brand CALPAC facility.
David Lunin: We use the integration to drive volumes to in-demand products, as well as improve margins, while delivering materials to high-value advertising brands such as Bell Ray and our private label industrial business, both of which have remained resilient. Second quarter 2023 adjusted EBITDA increased 16% to $14.1 million, or up nearly $2 million year over year.
Speaker Change: We use the integration to drive volumes to in-demand products, as well as improve margins.
Speaker Change: while delivering materials to high-value ad brands such as Bell Ray and our private label industrial business, both of which have remained resilient.
Speaker Change: Second quarter 2023 adjusted EBITDA increased 16% to $14.1 million or up nearly $2 million year-over-year.
David Lunin: In addition to the volume growth in the quarter, performance brands continue to gain momentum and deliver strong margin results. In particular, our high-value brand, Royal Purple, continues to deliver reliable growth every year while maintaining and building on its exceptional margin profile. Going forward, we expect these trends to continue as we remain focused on growing our high-performance products, as well as our core integrated industrial business lines, particularly focused on mining, power, and marine and market applications. Moving to Montana, the second quarter for our Montana asphalt business was slower than normal due to a combination of commodity headwinds and a little later start to the heavy paving season than normal.
Speaker Change: In addition to the volume growth in the quarter, performance brands continue to gain momentum in delivering strong margin results. In particular, our high-value brand, Royal Purple, continues to deliver reliable growth every year while maintaining and building on its exceptional margin profile.
Speaker Change: Going forward, we expect these trends to continue as we remain focused on growing our high-performance products as well as our core integrated industrial business lines, particularly focusing on mining, power, and marine and market applications.
Speaker Change: Moving to Montana. The second quarter for our Montana asphalt business was slower than normal due to a combination of commodity headwinds and a little later start to the heavy paving season than normal.
David Lunin: We expect improving sequential results in the third quarter due to wider WCS and WTI differentials, a stronger Rocky Mountain fuel market, and incremental retail asphalt volume. I'd also note that the Retail Asphalt Rack opened mid-quarter, and despite broader fuel cracks remaining much lower than they have been in the past couple years, we are seeing the normal seasonal local market premiums reappear in the Rockies as we get into the summer months. On the renewable side of Montana, we are pleased to report the business generated $6.1 million of adjusted EBITDA representing Calumet's 86% ownership or $7.1 million of adjusted EBITDA at 100% consolidated.
Speaker Change: We expect improving sequential results in the third quarter due to wider WCS and WTI diffs, stronger Rocky Mountain fuel market, and incremental retail asphalt volume.
Speaker Change: I'd also note that the Retail Asphalt Rack opened mid-quarter, and despite broader fuel cracks remaining much lower than they have been in the past couple years, we are seeing the normal seasonal local market premiums reappear in the Rockies as we get into the summer months.
Speaker Change: On the renewable side of Montana, we are pleased to report the business-generated $6.1 million of adjusted EBITDA representing Calumet's 86% ownership, or $7.1 million of adjusted EBITDA on a 100% consolidated basis.
David Lunin: Through improved operations, we were able to drive financial results despite trough conditions for industry index margins during the period. As Todd mentioned, the second quarter represented a clean quarter of operations as a result of our team's focus on driving steady state execution, and we are seeing this in our performance.
Speaker Change: Through improved operations, we were able to drive financial results despite trough conditions for industry index margins during the period.
Speaker Change: As Todd mentioned, the second quarter represented a clean quarter of operations as a result of our team's focus on driving steady state execution. We are seeing this in our performance. We successfully delivered on our operating plan, processing 12,000 barrels a day of renewable feedstock.
David Lunin: We successfully delivered on our operating operating plan, processing 12,000 barrels of renewable feedstock daily, including 1,700 barrels per day of sustainable aviation fuel. In closing, we've highlighted the key catalysts along with our near-term strategies intended to generate shareholder value. First, we are pleased to complete our C-Corp conversion in July. Despite the recent share price volatility, we believe shareholders will ultimately be rewarded as we introduce a broader institutional investor base that can now own the stock, in addition to the technical demand anticipated from the index edition.
Todd: including 1,700 barrels per day of sustainable aviation fuel.
Speaker Change: In closing, we've highlighted the key catalysts along with our near-term strategies intended to generate shareholder value.
David Lunin: Second, we believe the second quarter was a critical milestone in demonstrating the competitive advantage of our Montana renewables business, driven by our superior logistics advantage and location. With a clean operating quarter, the site is producing on-plan and is solidly profitable, while we wait for more favorable conditions to return that support a normal index margin level. We look forward to completing the DOE loan, which supports the final investment decision on our Max SaaS expansion project.
Speaker Change: First, we are pleased to complete our C-Corp conversion in July . Despite the recent share price volatility, we believe shareholders will ultimately be rewarded as we introduce a broader institutional investor base that can now own the stock in addition to the technical demand anticipated from index additions.
Speaker Change: Second, we believe the second quarter was a critical milestone in demonstrating the competitive advantage of our Montana renewables business, driven by our superior logistics advantage and location.
Speaker Change: With a clean operating quarter the site is producing on plan and solidly profitable while we wait for more favorable conditions to return that support a normal index margin level.
Speaker Change: We look forward to completing the DOE loan, which supports the final investment decision on our MaxSaf expansion project.
David Lunin: I'd also note we remain committed to reducing our debt levels, as evidenced by the $50 million reduction in our 2025 notes during the quarter. As we've said before, we believe we have a number of actionable levers to achieve this in the near term, which we're excited to shed more light on in the not-too-distant future. In addition, cash generation for the quarter was strong. We delivered $66 million of cash flow for operations, highlighting the capabilities of our two advantaged businesses.
Speaker Change: I'd also note we remain committed to reducing our debt levels, as evidenced by the $50 million reduction in our 2025 notes during the quarter. As we've said before, we believe we have a number of actionable levers to achieve this in the near term, which we're excited to shed more light on in the not-too-distant future.
Speaker Change: Further, cash generation for the quarter was strong. We delivered $66 million of cash flow for operations, highlighting the capabilities of our two advantaged businesses.
Operator: Operator, that concludes our prepared remarks. We'd now like to open the line for questions. If you can remind the pollers of those instructions,
Speaker Change: Operator, that concludes our prepared remarks. We'd now like to open the line for questions.
Operator: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been answered and you would like to withdraw it, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question today comes from Roger Read of Wells Fargo. Please go ahead.
Speaker Change: If you can remind the callers of those instructions. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys.
Speaker Change: If at any time your question has been addressed and you would like to withdraw it, please press star then 2. At this time we will pause momentarily to assemble our roster.
Speaker Change: Our first question today comes from Roger Read of Wells Fargo. Please go ahead.
Roger Read: Yeah, thank you. Good morning. Morning Roger. And let me say congrats on getting over to a C-Corp and on the quarter-inch performance here. Um, I guess I'd like to start off maybe something not even operational, but the whole deal with the SRE and the EPA, you know, being told to go back and look at this, from sort of a maybe let's call it high, mid, low case of, you know, the 200 plus million of you know, kind of RFS obligations on the balance sheet, what's the right way for us to think about how, you know, an SRE for you could work out?
Speaker Change: Yeah, thank you. Good morning.
Speaker Change: Morning Roger. And let me say congrats on getting over to a C-Corp and on the quarter-inch performance here.
Speaker Change: I guess I'd like to start off maybe something not even operational, but the whole deal with the SRE and the EPA, you know, being told to go back and look at this.
Speaker Change: From sort of a, maybe let's call it high, mid, low case of the 200 plus million of RFS obligations on a balance sheet, what's the right way for us to think about how an SRE 4U could work out?
Bruce Fleming: Hey, Roger, it's Bruce. I'll let David take the balance sheet question if he wants to build on this, but I think the first part of it was a little bit of interest in the legal impact. Look, the Clean Air Act provides small refinery exemptions in the law. That's not subject to agency interpretation. The agency wanted to interpret it, and the courts told them not to.
Bruce: Hey Roger, it's Bruce. I'll let David take the balance sheet question if he wants to build on this, but I think the first part of it was a little bit of interest in the legal impact.
Speaker Change: Look, the Clean Air Act provides small refinery exemptions in the law. That's not subject to agency interpretation.
Bruce Fleming: So, you know, I think this is cut and dried. The impact on the balance sheet is that we've backed up all the way to 2018, in terms of our accounting, and that's all said in there. So, you know, I. Given any assumption on future rinse prices, you know, that balance sheet number moves around a lot. And in my opinion, we're not helping our shareholders understand our real position. So, you know, we're gonna be examining that.
David: The agency wanted to interpret it, and the courts told them not to. So, you know, I think this is cut and dried. The impact on the balance sheet is we've backed up all the way to 2018.
David: In terms of our accounting and that's all sitting there. So, you know
Speaker Change: given any assumption on future rinse prices you know that that balance sheet number moves around a lot and in my opinion we're not helping our shareholders understand our real position so you know we're going to be examining that
David Lunin: Yeah, you know, thanks, Roger, for the question. We were always thoughtful about how we account for things. So we have to provide clarity to shareholders. I think as the legal process continues to move forward, we'll, you know, evaluate, with our auditors at Grant Thornton, how we represent the balance sheet, and, you know, we'll make changes as appropriate, as the legal process plays out.
Speaker Change: Yeah, you know, thanks Roger for the question. You know, we're always thoughtful about, you know, how we account for things, so we have provide clarity to shareholders.
Speaker Change: I think as the legal process continues to move forward, we'll evaluate with our auditors at Grant Thornton how we represent the balance sheet and we'll make changes as appropriate.
Speaker Change: As the legal process plays out.
Roger Read: Okay, thanks. We'll just keep an eye on that. And then just to make sure I understood your comments on kind of Q2 being a weak asphalt market, and Q3 looking better. I mean, we know that you build asphalt in the winter; you sell it in the summer. Was it, I guess, just a weather issue? And so, as you look at Q3, have you seen the catch-up here, or is there anything else we need to really be paying attention to in terms of seasonal factors?
Speaker Change: Okay, thanks, yeah, we'll just keep our eye on that.
Speaker Change: And then, just to make sure I understood your comments on Q2 being a weak asphalt market, Q3 looking better.
Speaker Change: Um...
Speaker Change: I mean, we know that you build asphalt in the winter, you sell it in the summer. Was it, I guess, just a weather issue? And so as you look at Q3, you've seen the catch-up here? Or is there anything else we need to really be paying attention to in terms of seasonal factors?
Bruce Fleming: Hey Roger, Bruce again. I don't think we meant to suggest it was a weak market at all. Let me clarify that. We operate the Great Falls asphalt business in two channels, a wholesale channel and a retail one. The wholesale channel runs year-round. The retail channel, which is important but seasonal, begins when the weather allows the paving jobs to start, and it ends when the weather shuts down the paving jobs. So whether that's four, five, or six months in a given year, exactly when it starts and stops is the weather-dependent part.
Speaker Change: Hey Roger, Bruce again. I don't think we meant to signal it was a weak market at all. Let me let me clarify that
Speaker Change: We operate the Great Falls Asphalt business in two channels, a wholesale channel and a retail one. The wholesale channel runs year-round. The retail, which is important but seasonal,
Speaker Change: begins when the weather allows the paving jobs to start and it ends when the weather shuts down the paving jobs.
Speaker Change: So whether that's four or five or six months in a given year, exactly when it starts and stops.
Speaker Change: is the weather dependent part, but we don't we don't see weakness. Our pricing, our retail margins above crude, and in particular our polymer modified asphalt margins above ordinary retail are all typical.
Bruce Fleming: But we don't see weakness. Our pricing, our retail margins above crude, and, in particular, our polymer-modified asphalt margins above ordinary retail are all typical. So, we're signaling that the opening of those local paving jobs began mid-quarter this time.
Speaker Change: We're signaling that that opening of those local paving jobs began mid-quarter this time.
Roger Read: Okay, thank you. I didn't mean to misinterpret. That was just kind of the way it came across to me.
Speaker Change: Okay, thanks. Yeah, I didn't mean to misinterpret. That was just kind of the way it came across to me. I'll hand it back. Thanks.
Operator: I'll hand it back. Thanks. Thank you. The next question comes from Saumya Jain of UBS, please go ahead.
Speaker Change: Thank you. Thank you. The next question comes from Saumya Jain of UBS. Please go ahead.
Saumya Jain: Hey, congrats!
Soumya Jain: Hey, congrats guys. I guess quickly, I just want to clarify, is the old high-priced inventory still playing out in RD earnings? And then also separately, how are you guys seeing RIN prices and refining cracks playing out this quarter?
Todd Borgmann: Hey, Saumya. I'll start and then hand it over to Bruce.
Todd Borgmann: Yeah, the old high-priced inventory that we talked about last year is working its way through the system. Of course, there's always a little bit of price lag in this business. You know, that can be positive or negative because, you know, there are a couple of weeks of supply chain movements between when you buy a feedstock and when you receive it. So, that's kind of always there. But we don't think that's a major contributor to this quarter, and kind of the old high-priced inventory that we had talked about historically that built up in the second half of last year is absolutely all ran through the system and just drills with the team to have as efficient a quarter as we did.
Soumya Jain: Hey, Saumya, I'll start and then hand it over to Bruce.
Bruce: Yeah, the old high-price inventory that we had talked about last year is worked through the system.
Bruce: Of course, there's always a little bit of price lag in this business, you know, that can be positive, that can be negative, because...
Bruce: You know, there's a couple of weeks of...
Bruce: of supply chain movements between, you know, when you buy a feedstock and when you receive it. So that's kind of always there, but we don't think that's a major contributor.
Bruce: to this quarter and kind of the old high-priced inventory that we had talked about historically that built up in the second half of last year.
Bruce: is absolutely all ran through the system.
Speaker Change: and Just Drilled with the team.
Todd Borgmann: You know, we've been waiting for this quarter for a bit now and obviously got set back a little bit last year. But we feel like the plan's really operating on all cylinders now, doing what it's designed to do, and, you know, going forward should be a pretty straightforward system. And hopefully, we're done talking about that old high-priced...
Speaker Change: to have as an efficient of a quarter as we did.
Speaker Change: You know, we've been waiting for this quarter for a bit now and obviously got set back a little bit last year, but...
Speaker Change: We feel like the plant's really operating on all cylinders now, doing what it's designed to do, and, you know, going forward, should be a pretty straightforward system, and hopefully we're done talking about that old high-price feed.
Bruce Fleming: Saumya, Bruce, in terms of where Wrens are headed, that's going to be unusually volatile through the end of the year. We've got a major change coming up where the importers, of particularly bio-based diesel products, are going to lose a blender's tax credit that they currently enjoy. How much of that offshore volume hits and when is going to introduce market volatility that knocks on the rinse price because, basically, that's a major volume portion of the balance. So, you know, our forecast is an awful lot of volatility. And then somewhere around year-end, going into 2025, a much more predictable market.
Speaker Change: That's going to be unusually volatile through the end of the year. We've got a major change coming up where the importers
Speaker Change: Um...
Speaker Change: of particularly biobased diesel products.
Speaker Change: are going to lose a blenders tax credit that they currently enjoy. How much of that offshore volume hits and when is going to?
Speaker Change: introduce market volatility that knocks on to the the RINs price because basically you know that's a that's a major volume portion of the balance
Speaker Change: So, you know, our forecast is an awful lot of volatility, and then somewhere around year-end, going into 2025, a much more predictable market.
Speaker Change: Got it, thank you.
Neil Mehta: Our next question comes from Neil Mehta of Goldman Sachs. I'd love your perspective of where we are in the renewable diesel cycle. In your comments, you indicated we kind of troughed in June or May, and June was sequentially better. Has that improvement sustained into Q3, and how do you see us moving from here as we look out and try to figure out the path to mid-cycle profitability at this business?
Speaker Change: Our next question comes from Neil Mehta of Goldman Sachs.
Neil Mehta: Please go ahead. Yeah. Good morning, Todd and team. Just, I'd love your perspective of where we are in the renewable diesel cycle in your future.
Speaker Change: Comments he indicated we kind of troughed in June and
Neil Mehta: May and June was sequentially better. Has that improvement sustained into Q3, and how do you see
Speaker Change: Moving from here, as we look out and try to figure out, you know, the path to mid-cycle profitability at this business.
Bruce Fleming: Annale, Bruce. So I think that's a two-parter. The timing part is uncertain but near-term, right? So we've got real changes year-end. We've got a whole bunch of responses in the market. Todd went through 10 points, on either the supply or the demand side, where people are reacting to the current environment.
Speaker Change: Hey Neil, Bruce. So I think that's a two-parter. The timing part is uncertain but near-term, right? So we've got rule changes year-end. We've got a whole bunch of response in the market. Todd went through ten points.
Speaker Change: on either the supply or the demand side, where people are reacting to the current environment. How material and how fast those reactions are is the answer to the next six months.
Bruce Fleming: How material and how fast those reactions are is the answer to the next six months. But if I pop up above the color, let's be clear: the push for renewables. The statutory push under the law is, by and large, supporting a domestic farm industry.
Speaker Change: But, if I pop up above the color, let's be clear, the push for renewables
Speaker Change: The statutory push under the law is by and large supporting a domestic
Bruce Fleming: And, you know, the mispositioning has damaged that. But it's going to be corrected. The market participants will correct it through their actions, and we see a lot of push, bipartisan push, on the Hill to correct it there. It's difficult to anticipate what form that takes when, but we feel like it's all quite near term. You know, when the large quantity of biodiesel imports dry up at year end, that's going to be a step change.
Speaker Change: Farm Industry, and you know the mispositioning has damaged that, it's going to be corrected. The market participants will correct it through their actions, and we see a lot of push, bipartisan push, on the Hill to correct it there.
Speaker Change: It's difficult to anticipate what form that takes when, but we feel like it's all quite near term.
Speaker Change: You know, when the large quantity of biodiesel imports dries up at year-end, that's going to be a step change. You've got people switching from renewables back to crude.
Bruce Fleming: You've got people switching from renewables back to crude, which is kind of stunning. You've got a bunch of renewable diesel being diverted over to SAF with projects that are, you know, in the hands of very credible operators. And so we're counting on those projects in our balance at Diamond Green and P66. All of that is clustered around year end. So short-term volatility and uncertainty and then a much more appropriate market structure.
Speaker Change: which is kind of stunning. You've got a bunch of renewable diesel being diverted over to SAF.
Speaker Change: with projects that, you know, in the hands of very credible operators. And so we're counting on those projects in our balance at Diamond Green and P66. All of that is clustered around year-end.
Speaker Change: So, short-term volatility and uncertainty and then a much more appropriate market structure.
Todd Borgmann: Yeah, Neil, I'll just pile on a bit. I think... You know, it's interesting to watch how the markets are reacting to the current environment. And I think in a normal time, without so many of the potential catalysts that Bruce mentioned, you know, looming in the near future, you'd have seen a much faster shutdown. You know, we've talked before about how the current RVO supports, you know, roughly four and a half billion gallons of biomass-based diesel.
Speaker Change: Yeah, and Neil, I'll just pile on a bit. I think...
Neil: You know, it's interesting to watch how the markets, you know, reacting to the current environment. And I think in a normal time, without so many of the potential catalysts that Bruce mentioned, you know.
Neil: Blooming in the near future. You'd have seen a lot faster shutdown. You know, we've talked before about how the current RVO supports, you know, roughly 4.5 billion gallons of biomass-based diesel.
Todd Borgmann: And I think a big part of the reason that you haven't seen as much capacity shutdown as you normally might expect is, you know, the general optimism around not only the quantum of catalysts that exist out there but, you know, just the magnitude of them, particularly with the RVO rebalance in front of us, and the PTC coming in at the end of the year. So I just had that comment.
Neil: And I think a big part of the reason that you haven't seen as much capacity shut down as you normally might expect.
Neil: is, you know, the general optimism around, you know, not only the quantum of catalysts that exist out there.
Bruce Fleming: And then Pat and Bruce, so the buck 20 you saw in June, do you have a mark to market on where the industry indicator is right now?
Speaker Change: And then Pat and Bruce, so the buck 20 you saw in June , do you have a mark to market on where the industry indicator is right now?
Bruce Fleming: It's range-bound. We've seen it at the high spot recently. We've seen it sitting more like 95 cents to $1.10, while all of this clearing activity sets up to...
Speaker Change: It's range-bound. We've seen it, that's a high spot recently, we've seen it sitting more like 95 cents to a buck ten while all of all of this clearing activity sets up to rebalance.
Operator: Great. And then that's the follow-up, which is that gives us a good sense of where margins are and, hopefully, are troughing. Talk about the cost side of the equation. You've talked about trying to drive this to 70 cents or below to sustain that positive in tougher conditions. So what are the steps that you're taking beyond just volume improvement? And what is the progress that you're making?
Speaker Change: Great and then that that's the follow-up which is that gives us a good sense of where margins are and hopefully troughing. Talk about the cost side of the equation you've talked about trying to drive this to 70 cents or below.
Speaker Change: to sustain that positive EBITDA in tougher conditions. So what are the steps that you're taking beyond just volume improvement? What's the progress that you're seeing?
Bruce Fleming: Sure, I'll start that. It's Bruce again.
Bruce Fleming: You know, one of the fascinating parts about entering into a new margin ad activity in the field is the learning curve that the team can run up. You know, there is a ton of discrete activity, discrete project activity. These are all small and tactical.
Speaker Change: Sure. I'll start that. It's Bruce again. You know, one of the fascinating parts...
Speaker Change: About entering into a new margin ad activity in the field is the learning curve that the team can run up.
Speaker Change: You know, there is a ton of discrete activity, discrete project activity. These are all small and tactical. They lead to, for example, higher utilization, higher stream factor. They lead to driving out particular incremental costs.
Bruce Fleming: They lead to, for example, higher utilization and higher stream factor. They lead to driving out particular incremental costs. One of the largest ones that I'll point to is that we, by design... are temporarily clearing some of our produced renewable water off site. That sounds funny, but I'm going to say it again.
Speaker Change: One of the largest ones that I'll point to is we by design
Speaker Change: are temporarily clearing some of our produced renewable water off-site. That sounds funny, I'm going to say it again. The feedstock has so much oxygen, which we turn into water in our hydrotreating, that we have a renewable water yield and that's got to go somewhere.
Speaker Change: Since it's an industrial product, you know, it's subject to a lot of regulation. The long-term game there is to have a local water treatment facility, but that's actually linked to our max staff expansion. So we're waiting.
Speaker Change: to get that design in. While we're waiting, you know, we've got a fairly expensive logistics cost outbound. So, you know, there's that's a longer term but a more impactive example. Here's a tactical one just to give you a little more color.
Bruce Fleming: So, you know, that's a longer-term, but a more impactful example. Here's a tactical one, just to give you a little more color. We have a pre-trader that can take any feedstock from anywhere in the world.
Speaker Change: We have a pre-trader that...
Bruce Fleming: And it's got a lot of flexibility, and it's got a lot of redundancy. But due to a tactical design mistake by the EPC contractor, we had to shut it down once a week to switch and exchange your bank, which is crazy. And that cost us all $500,000 to fix once we figured it out. That added seven utilization points to the pretreater throughput. That's a large, longer range and a small tactical in-hand accomplishment. The team has got 78 elements on their worksheet in various stages of completion. So we're pretty optimistic that we're going to drive those costs back down to the range Todd gave you by later this year.
Speaker Change: can take any feedstock from anywhere in the world.
Speaker Change: and it's got a lot of flexibility and it's got a lot of redundancy.
Speaker Change: by the EPC contractor.
Speaker Change: We had to shut it down once a week to switch and exchange our bank, which is crazy.
Speaker Change: And that cost us all $500,000 to fix once we figured it out. That added 7 utilization points to the pre-treater throughput. That's a large longer range and a small tactical in-hand accomplishment.
Speaker Change: The team has got 78 elements on their worksheet in various stages of completion. So we're pretty optimistic that we're going to drive those costs back down to the range Todd gave you by later this year.
Bruce Fleming: That's great, Collar. Thank you so much, Bruce.
Speaker Change: That's great, Collar. Thank you so much, Bruce.
Operator: The next question comes from Amit Dayal from H.C. Wainwright. Please go ahead.
Speaker Change: The next question comes from Amit Dayal from H.C. Wainwright. Please go ahead.
Amit Dayal: Hey, good morning, guys. Thank you for taking my question. So with respect to the specialty products and preferred, sorry, performance brands, you have previously mentioned that you have not been able to focus resources on these as much given the RD and SAF expansion going on. You know, how is that going to change going forward, so you can extract sort of better margins and growth from these segments?
Amit Dayal: Hey, good morning guys. Thank you for taking my question. So, with respect to the specialty products and preferred, sorry,
Amit Dayal: Performance Brands. You have previously mentioned that you have, you know, not been able to focus resources on this as much given the RD and SAF expansion going on. You know, how is that going to change going forward where you can extract sort of better margins and growth from these segments?
Todd Borgmann: Hey, man. It's Todd. The Let me kind of replay, restate your question and see if we got it. You're breaking up a tad bit coming in.
Amit Dayal: Hey, man. It's Todd.
Speaker Change: Let me kind of replay, restate your question and see if we got it. You're breaking up a tad bit coming in.
Todd Borgmann: I think you're asking, hey, as we now exit the kind of the Montana Renewables construction period, or the commissioning period, and transition into more, you know, just the normal way of business, how are we going to start featuring the specialty business more? And I just want to be real clear that the specialty business has been, has always been, a critical focus of ours. It's improved dramatically over the last 5 years, and maybe in a 2nd, Scott can give a little more color on that.
Speaker Change: But I think you're asking, hey, as we now exit the kind of the Montana Renewables construction period or in commissioning period and transition into more, you know, just normal way of business.
Speaker Change: You know, how are we going to start featuring the specialty business more? And I just want to be real clear that the specialties business has been, has always been a critical focus of ours. It's been improved dramatically over the last five years, and maybe in a second Scott can give a little more color on that. But when you look at the increase in material margin, you know, the progress that we're making on reliability and throughput, it's pretty substantial, really. Now we haven't talked about it as much over the last couple years as we'd probably like.
Todd Borgmann: But when you look at the increase in material margin, the progress that we're making on reliability and throughput, it's pretty substantial. Really, we haven't talked about it as much over the last couple of years as we'd probably like, simply because of just the magnitude of Montana Renewables during a pretty critical time, you know, with construction, commissioning, et cetera. It was just such a big deal, but especially business is, is a core business, always has been, always will be, and it's something that we've done a heck of a lot to improve over the last few years. So, you know, I don't Scott, what would you do?
Speaker Change: simply because just the magnitude of Montana renewables.
Speaker Change: during a pretty critical time, you know, with construction, commissioning, etc. was was just such a big deal.
Speaker Change: But the specialty business is the core business.
Scott: Always have been, always will be, and it's something that we've done a heck of a lot to improve over the last few years. So, you know, I don't know, Scott, what would you add? Yeah, I would just add on, you know, we've made tremendous improvement in the specialties business, starting with the specialty products and solutions segment.
Scott Obermeier: Yeah, I would just add, you know, we've made tremendous improvement in the specialties business, starting with the specialty products and solutions segment. As Todd alluded to, we've had five years in a row of growth, and we did that through really all business cycles. We then made the decision at the start of 2023 to incorporate the performance brand segment into a more broader-based specialties approach as we think commercial excellence, where we can further integrate, unlock value, etc. So it's been extremely successful, and we're looking forward to the future as we continue to work on our balance sheet and invest in the specialties business, both organically and inorganically. And I had one more thing.
Scott: As Todd alluded to, we've had five years in a row of growth and we've done that through really all business cycles.
Speaker Change: We then made the decision at the start of 2023 to incorporate the performance brand segment.
Speaker Change: into a more broader-based specialties approach, as we think commercial excellence.
Speaker Change: where we can further...
Speaker Change: Integrate, Unlock, Value
Speaker Change: etc. So it's been it's been extremely successful.
Speaker Change: Um...
Speaker Change: And we're looking forward to the future as we continue to work on our balance sheet and invest in the specialties business organically and inorganically. And I'd add one more thing, Amit.
Scott Obermeier: And I'd add one more thing, Amit. You know, we have kind of a centralized group of folks in operations excellence and commercial excellence, and as we stood up Montana Renewables, obviously, that's been a major, major drain on just shared resources. So, when you look at, you know, a lot of the finance resources in Indianapolis, they're focused on analyzing Montana Renewables and the spending over the last couple of years and learning a new space.
Speaker Change: You know, we have kind of a centralized group of folks in operations excellence and commercial excellence.
Speaker Change: And as we stood up Montana Renewables, obviously, that's been a major, major drain on just shared resources. So, when you look at, you know, a lot of the finance resources in Indianapolis, they're focused on analyzing Montana Renewables and the spend over the last couple of years and learning a new space.
Scott Obermeier: Same thing for our operations excellence folks have been out on site helping this new business get set up and making sure we, as an organization, really understand the nuances and the differences. So, I do think that now that Montana Renewables is fully up and running, standing alone, and doing quite well, we will see the benefit. We're going to be transitioning some of those shared resources, you know, back towards Shreveport to help us accelerate some of the reliability initiatives that we talked about on the call today and have been working on for over a couple of years. So I just had to do that.
Speaker Change: Same thing for our Operations Excellence folks who have been out on site helping this new business.
Speaker Change: You know get stood up and making sure we as an organization really understand that the nuances and the differences So I do think that now that Montana Renewables is is fully up and running, you know standing alone doing quite well
Speaker Change: We will see the benefit. We're going to be transitioning some of those shared resources, you know, back towards Shreveport to help us accelerate some of the reliability initiatives that we talked about on the call today and have over the couple of years. So I just add that.
Todd Borgmann: I appreciate that caller guys. You know, with Montana Renewables now sort of running in a more stable fashion, how should we think about, you know, the monetization, you know, that was in play earlier, sort of, you know, came off the table a little bit, um, timeline for something like that or any new plans around, you know, the monetization effort, any color and that would be a help.
Speaker Change: No, I appreciate that caller, guys. You know, with Montana Renewables now sort of running in a...
Speaker Change: in a more stable fashion.
Speaker Change: How should we think about, you know, the monetization, you know, that was in play earlier, sort of, you know.
Speaker Change: came off the table a little bit.
Speaker Change: Timeline for something like that or any new plans around you know the monetization effort any color on that would be helpful thank you
Bruce Fleming: Hey, I'm Ed. It's Bruce. Our strategic positioning..., intention remains the same. You know, we think that the business is very attractive. We think that the expansion project and, particularly, the pivot to max F are compelling. And we would like to find a strategic partner of some sort that would enable that journey to add additional value. And That is a
Speaker Change: Hey, I'm Ed, it's Bruce. Our strategic positioning...
Bruce: Intention remains the same.
Bruce: Um...
Speaker Change: You know, we think that the business is very attractive.
Speaker Change: We think that the expansion project, and particularly the pivot to MaxSaf, is compelling, and we would like to find a strategic partner of some sort that would enable that journey, add additional value, and
Bruce Fleming: Three directional strategies. So prong number one is cleaning up the balance sheet. We've been talking to the DOE about that. And prongs two and three are two sides of a coin.
Speaker Change: That is a...
Speaker Change: three directional strategies. So, prong number one is cleaning up the balance sheet. We've been talking to the DOE about that and
Speaker Change: Prong number 2 and 3 are two sides of a coin. We can either bring on an operating strategic
Bruce Fleming: We can either bring in an operating strategic, and that could be vertical or horizontal integration, or we can IPO the equity. So those choices remain available to us. We're not seeking a particular outcome in a particular time frame as much as we're seeking the right complementary arrangement, a partner who's aligned with us, who thinks strategically about the world the way we do, who adds some kind of value, and who offers a fair proposition for the combination.
Speaker Change: And that could be vertical or horizontal integration, or we can IPO the equity. So those choices remain available to us.
Speaker Change: We're not seeking a particular outcome on a particular time frame.
Speaker Change: As much as we're seeking the right complementary arrangement, a partner who's aligned with us, who thinks strategically about the world the way we do, who adds some kind of value, and who offers a fair proposition for a combination.
Bruce Fleming: Those are always ongoing. You know, if I put on my corporate development hat for a second, we get inbounds around this business all the time. We entertain the ones that are appropriate to be entertained. And we will, post-cleaning up of the capital structure, have a pretty compelling platform.
Speaker Change: Those are always ongoing. You know if I if I put on my corporate development hat for a second, we get inbounds around this business all the time. We entertain the ones that are appropriate to be entertained.
Speaker Change: And we will, post-cleaning up of the capital structure, have a pretty compelling platform.
Bruce Fleming: Thank you, Bruce. Always a good call from you. Appreciate it, guys. That's all I have.
Speaker Change: Thank you, Bruce. Always a good call from you. I appreciate it, guys. That's all I have.
Operator: Our next question comes from Gregg Brody of Bank of America.
Bruce: Thanks, Matt.
Speaker Change: Our next question comes from Gregg Brody of Bank of America. Please go ahead.
Gregg Brody: Good morning, guys, and thanks for the update on everything. Just wanted to follow up on some comments about specialty being down for July or some being on reduced operating rates. Can you just clarify potential volume impacts there, expected to be material this quarter, and then this quarter was above the mid-cycle margin. And I'm just curious what your expectations are, given the volatility in crude, how we should think about that for the third quarter and potentially after.
Gregg Brody: Good morning, guys, and thanks for the update on everything.
Gregg Brody: Just wanted to follow up on, made some comments about specialty being down for July or some being on reduced operating rates.
Gregg Brody: Can you just clarify potential volume impacts there?
Speaker Change: be expected to be material this quarter and then
Speaker Change: This quarter was above the mid-cycle margin. I'm just curious if you, if you, what your expectations are.
Speaker Change: Given the volatility in crude, how we should think about that for the third quarter and potentially after.
Todd Borgmann: Yeah, thanks. Hey, Greg, it's Todd.
Speaker Change: Yeah, thanks. Hey, Gregg, it's Todd. I'll start, and let's see if Scott Pyle's on.
Todd Borgmann: I'll start and let's see if Scott Pyle's on. I think David's comments on kind of the July downtime, we were down for a couple weeks, lost about 500,000 barrels or so with the remnants of Bethel kind of knocked out the local power supply. So I think that's probably what you were referencing during the call. Back up and running now, you know, like David said, it was a great quarter and the second quarter not to have any sort of reliability, downtime, or anything like that.
Speaker Change: I think David's comments on on kind of the the July downtime
Scott Pyle: We're down for a couple of weeks, lost about 500,000 barrels or so with the remnants of Bethel kind of knocked out local power supply. So I think that's probably what you were referencing during the call. Back up and running now, you know, like David said.
Speaker Change: It was a great quarter and a second quarter not to have any sort of reliability, downtime, anything like that. We continue to rebuild the infrastructure and try to add redundancy where we can, and we continue to see the need to do that.
Todd Borgmann: We continue to rebuild the infrastructure and try to add redundancy where we can, and we continue to see the need to do that on the, particularly around the intersections with third-party utilities. So that's something that's kind of in the line of sight going forward, but, you know, I think on the specialty side. Mid-cycle probably is about right. You know, when you look at our specialty margins, you see that where we're at right now is well above historic levels, not quite as high as the last couple years.
Speaker Change: Particularly around the intersections with third-party utilities, so that's something that's kind of in the line of sight going forward, but I think on the specialty side...
Todd Borgmann: And I think we've been pretty clear with that. But Scott and the team have really done a nice job of increasing the returns that we would expect in what we'll call kind of a mid-cycle environment. So, Scott, what would you add? Yeah, I just throw out
Scott Obermeier: Yeah, I just throw out there, Gregg, you know, it feels about like we're in mid cycle. I think the more of the headwind we're seeing is probably a little bit more on the supply side overall across our portfolio, more so than the demand. The demand's maybe been a touch choppy, but all in all, pretty resilient. We've worked hard to grow our specialty customer portfolio, if you will, and our brands. So yeah, we feel we're about midway through the cycle, and that's sort of how we're thinking about Q3 and going forward.
Todd Borgmann: Great. And you made some comments on the call, but I'm going to say them back to you and ask you what else you could say, because I think you said there were some limitations to what you could say right now. So you said you look forward to the DOE loan and the advanced needs of the process. And you also mentioned you would potentially use this to refinance expensive levels of debt. I'm curious what you can say about that.
Speaker Change: You made some comments on the call, but I'm going to I'm going to say them back to you and asked them what else. We can say because I think you said there were some limitations what you can say right now so just.
You said you look forward to T O D. D O you own an advanced nature of the process and you also mentioned you would potentially use this to refinance expensive level debt.
Speaker Change: I'm curious what you can say about that and just one other comment you said you planned on shedding light on your commitment to reduce debt and the not so distant future what else could you tell us about that as well to help us understand how you're thinking about reducing your debt yes, no. Good question.
Todd Borgmann: And just one other comment, you said you planned on shedding light on your commitment to reduce debt in the not-so-distant future. What else could you tell us about that as well to help us understand how you're thinking about reducing your debt?
Todd Borgmann: That was a good question. Got to be careful about getting too deep into the details of the DOE loan, as obviously, we're just in a sensitive phase there and don't want to cross any boundaries, but, I think Bruce said in a previous question, and I just reiterate, you know, the purpose of the loan is to launch MACSAF and to clean up the balance sheet. So, right now, when you look at Montana Renewables' balance sheet, it has, you know, all sorts of expensive project financing from various providers. Calumet's certainly one of those providers.
Speaker Change: Got to be careful about getting too deep into the details of the loan is obviously, we're just in a sensitive phase there and don't want to cross any boundaries, but.
Speaker Change: I think Bruce said in a prior question and I'd just reiterate the purpose of the loan is to launch <unk> SaaS.
Speaker Change: To clean up the balance sheet. So right now when you look at Montana renewables balance sheet. It has all sorts of expensive project financing from various providers Calumet is certainly one of those providers.
Speaker Change: We expect to get repaid on that in the near future but.
Todd Borgmann: Calumet certainly expects to get repaid on that in the near future. But, you know, now's not the time to get too far into that and exactly what that means for the broader plan. We want to see this process play out. And, you know, what I can tell you is we have an executable plan that provides both short-term deleveraging at Calumet and removes the 25. So, you know, there are some moving pieces in there, so we want to be careful not to, you know, not to get too far out over our skis.
Speaker Change: Now is not the time to get get too far into that.
Speaker Change: And exactly what that means means for the broader plan, we want to see this process play out and what I can tell you is we have an executable plan.
Speaker Change: That provides both short term deleveraging at Calumet and and removes the 25 so.
Speaker Change: There are some moving pieces in there so we want to be careful not to.
Speaker Change: Not to get too far out over our skis, but yes, when we talked about shedding more light on that in the near future. We do expect it'll be the near future that we'll be able to talk about that plan more publicly but just want to make sure that they understand that there is one that we're excited about it and you know.
Todd Borgmann: But, you know, when we talked about shedding more light on that in the near future, you know, we do expect it will be in the near future that we'll be able to talk about that plan more publicly. But I just want to make sure that you understand that there is one and that we're excited about it. And, you know, it continues to progress well.
Speaker Change: It continues to progress well.
Bruce Fleming: And I'm curious if you can define the near future in terms of a timeline.
Speaker Change: And I'm curious if you can define near future in terms of a timeline.
Bruce: Hey, Greg it's Bruce.
Bruce Fleming: Hey Gregg, it's Bruce. Just to continue and then pivot from the last point, we are, if this is helpful, talking about the MRL balance sheet as a standalone entity because, you know, that's a separately incorporated joint venture. And then we're talking about the parent balance sheet. Obviously, it's partially consolidating at our 86% share. So if we keep those separately in mind, the DOE activity is all around MRL. And in terms of timing.
Bruce: Just to continue and then pivot from the last point we are.
If this is helpful talking about the <unk> balance sheet as a standalone entity because.
Speaker Change: Separately incorporated joint venture and then we're talking about the parent balance sheet, obviously ones, partially consolidating up.
Speaker Change: Yeah, Ed already 6% share.
Speaker Change: So if we keep those separately in mind.
Speaker Change: Activity is all around MRO.
Speaker Change:
Speaker Change: And in terms of the timing.
Bruce Fleming: That is the Department of Energy's remit. We have an agreement with them that if we make any remarks, we're going to let them see those remarks in advance. So I'm just going to leave it at that.
Speaker Change: That is the.
Speaker Change: The department of Energy's <unk>, we have an agreement with them that if we make any remarks, we're going to let them see those remarks in advance so I'm just going to leave it at that.
Bruce Fleming: I will leave it there, and then I'll just transition to, as you know, my favorite topic. Congratulations on getting the RINs rolling. I know that was great news. I'm just curious what you can talk about for next steps there and then maybe just whether you can incorporate into that just whether the SCOTUS decision to overturn the Chevron doctrine has any impact on small refinery exemptions for sort of EPA's ability to make decisions. Just any thoughts you can help us with that we think through here.
Speaker Change: Oh I will.
Ill leave it there and then ill transition to as you know my favorite topic.
Speaker Change: Congrats on the Rins rolling.
Speaker Change: I know that's that was great news I'm just curious what you can talk about for next steps there.
Speaker Change: And then maybe just if you incorporate into that just.
Speaker Change: By the the SCOTUS decision to overturn to Chevron doctrine has any impact on small refinery exemptions for sort of epa's ability to make decisions just any thoughts you can help us with that through there.
Bruce Fleming: Yeah, let me, let me take the second part, and David may have some thoughts around the implications for our accounting and the third piece was, you know, What are the implications for our business operation? I think if I had heard the question.
Speaker Change: Yeah, Let me, let me take the second part and David May have some thoughts around the implications for accounting and.
Speaker Change: Then the third piece was.
You know.
Speaker Change: What are the implications for our business operation I think if I if I heard the question.
Bruce Fleming: So in backwards order, we don't think Chevron's got anything to do with this territory. The small refinery exemption is in the law in the Clean Air Act. That was never a feature of the law that was subject to agency interpretation.
Speaker Change: And backwards order.
Speaker Change: We don't think Chevron has got anything to do with this territory.
Speaker Change: The small refinery exemption is in the law and the clean Air Act that was never a feature of the law that was subject to agency interpretation. It was crystal clear how it works.
Bruce Fleming: It was crystal clear how it worked. It worked very well year over year for quite a long time, and it broke down more recently, but the courts have said it was working fine. Go back to that.
Speaker Change: Worked very well year over year for quite a long time.
It broke down more recently, but the courts have said it was working fine go back to that that's what <unk> means to the fifth circuit in the case of our Shreveport asset and the D. C circuit in the case of most of the rest of the industry cases withdrawal consolidated in there have said.
Bruce Fleming: That's what remand means. So the Fifth Circuit, in the case of our Shreveport asset, and the DC Circuit, in the case of most of the rest of the industry cases, which were all consolidated in there, have said to the EPA, go back and do it over and get it right. So we'll see how that plays out and what form it takes. With respect to the implications for our business, you know, we pretty conservatively charge ourselves in the current period income statement as if we were incurring these expenses.
Speaker Change: Add to the EPA go back and do it over and get it right. So we'll see how that plays out and what form it takes.
With respect to the implications for our business.
Speaker Change: We are pretty conservatively charge ourselves in the current period income statement.
Speaker Change: If we were incurring these expenses so that's a that's a conservative position, but the reality is.
Bruce Fleming: So that's a conservative position. But the reality is, we've qualified on the merits for the small refinery exemption historically. So that's something for our new auditor to think about. And I'll just see if David wants to talk about the balance sheet or any of our accounting thinking.
Speaker Change: We have qualified on the merits for the small refinery exemption historically so.
Speaker Change: That's something for our new auditor to think about it and I'll I'll just see if David wants to talk about the balance sheet or any of our accounting thinking.
David Lunin: Yeah, no detail to get into. You know, as the cases evolve, we'll evaluate how we account for RINs on the balance sheet and income statement as we go forward. But no current change, and we'll just have to work with our auditors to figure out the best way to reflect our operations and our financial reporting.
Yeah, no no detail to get into as the cases evolve we will evaluate how we account for rins on the balance sheet and income statement as we go forward.
Speaker Change: But no current change.
Speaker Change: And we'll just have to work with our auditors to figure out the best way to reflect.
Speaker Change: Our operations in our financial reporting.
Bruce Fleming: This is, the RINs case has been remanded back to the EPA by the D.C. Circuit. What is that, are they giving you any indications as to what this, what's, what's next from the API?
Speaker Change: This is the Rins case has been remanded back to the EPA at least the DC circuit.
Speaker Change: The case is that they given any indications what the what's.
Speaker Change: What's next from each area.
Speaker Change: That starts the clock.
Bruce Fleming: That starts the clock. We have not had any kind of signal from the EPA about what they're going to do.
Speaker Change: We have not had <unk>.
Speaker Change: And they kind of a signal from the EPA, what theyre going to do.
Bruce Fleming: And the clock is running, so, you know, we'll receive their response shortly, or... They will have... some alternative thinking in mind. You know, we remain interested in a conversation that leads to a reasonable outcome for all the parties. We understand that the national interest is pushing renewables into the pool, and we wanna be part of that. But the way we really wanna be part of that is to get MRL up to speed and contributing.
Speaker Change: And.
Speaker Change: The clock is running so well.
Speaker Change: Hello.
Speaker Change: We will receive their response shortly or.
Speaker Change: They will have.
Speaker Change: Some some alternate thinking in mind.
Speaker Change: We remain interested in.
Speaker Change: In a conversation that leads to a reasonable outcome for all the parties.
Speaker Change: We understand that.
You know the national interest is pushing renewables into the pool, we want to be part of that but the way. We really wanted to be part of that is to get <unk> up to speed and contributing so.
Bruce Fleming: So, you know, punishing small refineries who can't afford the capital costs to comply was a known problem, and that's why the law says that small refiners can have an exemption. We just need to stop treating the industry like it's some monolithic, a giant enterprise where everything is the same everywhere you look, because that's not true, and the courts have now said so.
Speaker Change: Punishing small refineries who can't afford.
Speaker Change: The capital cost to comply with a known problem and Thats why the law says that small refiners can have an exemption.
We just need to stop trading the industry like it some model epic.
Speaker Change: Giant enterprise, where everything is the same everywhere you look because that's not true and the courts have now said so.
Speaker Change: I appreciate all the time guys.
Gregg Brody: I appreciate it all the time, guys.
Speaker Change: Right.
Speaker Change: Thank you thank.
Rick: Thanks, Rick.
Operator: The next question comes from Jason Gabelman of T.D. Cohen. Please go ahead.
Rick: The next question comes from Jason <unk> of TD Cowen. Please go ahead.
Jason Gabelman: Yeah, morning. Thanks for taking my questions. I appreciate the slide you have with the potential inclusion in the several indices that you mentioned, and it seems like that could be a pretty big chunk of volume in your stock. Do you have any sense of if you would expect to capture all of that? Is there a right way to think about how much of that inclusion you could actually get in relation to the total amount of shares you show on the slide?
Jason: Yes. Good morning, Thanks for taking my questions.
Jason: I appreciate the slide you have with the potential inclusion into the several indices, you mentioned and it seems like that could be.
Jason: A pretty big chunk of volume in your stock do you have any sense of if you would expect to capture all of that.
Speaker Change: Is there a right way to think about.
Speaker Change: How much of that inclusion you could actually get.
Speaker Change: In relation to the total amount of shares you saw on the slide.
Speaker Change: Yes.
David Lunin: Yeah, this is David. You know, thanks. Thanks for the question. So, you know, there are some here that are more driven by, you know, rules that can be, you know, more, more, more predicted. And there There's others that you know, like the S&P 600 that you know, it goes to a committee once you're eligible. And so, you know, listen, I think we don't necessarily want to necessarily predict the expected number of shares from demand, but some of the stuff happening in September is probably, you know, more, you know, easier to expect than some of the stuff that goes to committee, as I described.
David: This is David.
David: Thanks for the question so.
Speaker Change #100: There are some here that are more.
Speaker Change #100: You know driven by rules that can be more predicted.
Speaker Change #100: And there.
Speaker Change #100: There is others that like the S&P 600 that as that.
Speaker Change #100: It goes to a committee once you're eligible and so listen I think we don't want to necessarily predict.
Speaker Change #100: <unk> number of shares from demand, but some of the stuff happening in September as is probably more.
Speaker Change #100: Easier to expect then than some of the stuff that goes to committee as I described in this stuff gets kind of rebalanced overtime, but but this is only part really of the incremental demand even more I think could come over time from institutional investors that haven't historically been in the stock and sell.
David Lunin: And this stuff gets kind of rebalanced over time, but this is only part, really, of the incremental demand. Even more, I think, could come over time from institutional investors that haven't historically been in the stock. And so, you know, when you, you know, look at our register, you know, there's a whole bunch of capital out there that's not invested in the business today that, you know, wants to be a part of kind of our two advantage businesses and the upside from MRL.
Speaker Change #100: When you look at our register.
Speaker Change #100: There's a whole bunch of capital out there that's not invested in the business today that.
Speaker Change #100: Wants to be a part of kind of our two advantaged businesses and the upside.
Speaker Change #101: <unk> and so while we're excited about some of this anticipated demand from the index inclusion. We think there is probably even more to come over time from institutional investors in transitioning the registered what you'd see for more of our traditional C Corp peers.
David Lunin: And so, you know, while we're excited about some of this anticipated demand from the index inclusion, we think there's probably even more to come over time from, you know, institutional investors and transitioning the register into, you know, what you'd see for more of our traditional C Corp peers. Yeah, and hey Jason.
Todd Borgmann: Yeah, hey Jason, it's Todd. I'll add a bit. You know, I think we've said historically that... Peers of ours typically have about 20% of their flow kind of held by passive indices, and Calumet was, you know, it's basically zero and continues to be, but obviously, now that can change with the conversion behind us. So, I kind of just highlight, you know, the numbers on this slide aren't meant to be a guarantee or a specific, hey, on It's directional.
Speaker Change #101: Yeah, Hey, Jason It's Scott I'll add a bit I think we've said historically that.
Speaker Change #102: Periods of ours.
Jason: Typically have about 20% of their of their flow.
Speaker Change #103: Bypass of indices and Calumet was.
Scott Pyle: Basically zero and continues to be but obviously now that can change with the conversion behind us. So I can kind of just highlight the numbers on this slide to David's point aren't meant to be a guarantee or a specific hey on this date, we will get exactly this many share it is directional but when you add them up.
Todd Borgmann: But when you add them up, and then you kind of overlay that with, you know, about 20% of our 80Million or so shares outstanding, you kind of get in a general ballpark. I think what's going to be interesting is just the rate of climb. We have a couple of rebalancing's coming here in September. We're excited about that. We're excited to 1, see the impact of the volume, but also just learn a little bit more about how these processes work and, and, you know, and we do that every day. So, I think what we're going to see is kind of just a continued, you know, steady growth of passive ownership over the next year.
Kind of overlaid out with about 20% of of our $80 million or so.
Speaker Change #104: Shares outstanding you're kind of getting a general ballpark I think what's going to be interesting is just the rate of climb we have a couple of rebalancing is coming here in September.
Speaker Change #104: We're excited about that we're excited to one so the impact of the volume, but also just learn a little bit more about how these processes work.
Speaker Change #104: And we're doing that every day, so I think what we're going to see is kind of just a continued.
Speaker Change #104: Steady growth.
Speaker Change #104: Passive ownership.
Speaker Change #104: Over the next year.
Speaker Change #105: Thanks for that color.
Jason Gabelman: Thanks for that, Culler. My follow-up is just on the MACSAF project. And you still sound pretty confident about the DOE loan, which I appreciate. The project seems like it's quite compelling. And given the amount of time that it's taking to get the loan, I wonder if you've contemplated an option B to fund the project.
Speaker Change #106: My follow up.
Speaker Change #106: Is.
Speaker Change #106: Just on the Max SaaS process.
Doe: So I'm pretty confident about the Doe loan, which I appreciate.
Speaker Change #108: The project seems like its quite compelling.
And given the amount of time that.
Speaker Change #109: It's taken to get the loan I wonder if you've contemplated an option b two to fund the project.
Jason Gabelman: Hey, it's Jason. All right, Jason, it's Todd.
Todd Borgmann: Hey, it's Jason. Sorry. Jason.
Speaker Change #109: Hey, it's Jason Alright, Jason It's Todd I'll kick off the <unk>.
Yes.
Todd Borgmann: I'll kick off. We don't plan on spending money, meaningful money, to progress MACSAF until we get the DOE loan. The balance sheet simply won't allow for it. We would love to, don't get me wrong. Phenomenal project. You know, when we see kind of the equity options, you know, open back up, that could be an option in the future, obviously. Bruce talked about partnerships earlier, and obviously, that would go into our thinking.
Speaker Change #110: We don't plan on spending money meaningful money on to progressive Max App until we get the daily loan balance.
Balance sheet simply won't allow for it we would love to don't get me wrong.
Nominal project, when we see kind of the the equity options.
Open back up that could be an option in the future obviously, Bruce talked about partnerships earlier, and obviously that would go into our thinking but right now that's kind of.
Todd Borgmann: But right now, that's kind of... You know, just out there; we're really focused on the primary path, which is kind of the, you know, finishing up with DOE and starting on mat staff down the way we've been public about, but I do want to be clear that we're not spending, you know, meaningful amounts of money to progress MacSaf and could not.
Bruce: Just out there, where we're really focused on the primary path, which is kind of the.
Bruce: Finishing up with DLA and starting on SaaS.
Bruce: The way, we've been public public about but I do want to be clear that.
Bruce: We're not spending.
Todd Borgmann: We're committed to delivering the business. That's our first priority. And, you know, quite frankly, the MacSaf project gives us really a lot of ability to accelerate that deleveraging or increase that deleveraging in the midterm. You know, Montana Renewables is a lot more valuable and a lot more exciting to any partner with MACSAF funded and, you know, progressing than it is standalone. And it's quite, you know, it's quite interesting on a standalone basis.
Bruce: Meaningful amounts of money to progress <unk> SaaS and cut out we're committed to delevering the business, that's our first priority.
Bruce: And quite frankly, the Max AAF project gives us really a lot of ability.
Bruce: To.
Bruce: Expedite that deleveraging or increase that deleveraging in the midterm Montana renewables.
Bruce: There's a lot more valuable.
A lot more exciting to any partner with with Mac SaaS funded and <unk>.
Bruce: Progressing.
Bruce: <unk> stand alone.
Bruce: Quite.
Bruce: Quite interesting on a stand alone.
Todd Borgmann: But we think it kind of all goes together. You know, we do the DOE. We start the project. That increases the value of the entity. We continue to talk about partnership. When the right time comes along, we do that. And that completes the ultimate deleveraging of Calumet, which we still expect to be around $800 million of debt at the parent.
Bruce: We think it kind of all goes together.
Bruce: We did the deal we started the project that increases the value of the entity. We continued to talk about partnership.
Bruce: When the right time comes along we we do that and that completes the ultimate deleveraging of Calumet, which we still expect to be around $800 million of debt at the parent.
John <unk>: This concludes our question and answer session I would like to turn the conference back over to John <unk> for any closing remarks.
John Kompa: This concludes our question and answer session. I would like to turn the conference back over to John Kompa for any closing remarks.
John Kompa: Great. Thanks, Alan. And on behalf of the Calumet management team, I'd like to thank everyone for their time this morning and the continued interest in the company. Have a great weekend. Again, thank you very much.
John: Great. Thanks, Alan and on behalf of the Cabinet management team I would like to thank everyone for your time. This morning, and the continued interest in the company have a great weekend again, thank you very much.
Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Speaker Change #113: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Speaker Change #113: [music].
Bruce Fleming: The feedstock has so much oxygen, which we turn into water in our hydro trading, that we have a renewable water yield, and that's got to go somewhere, since it's an industrial product, you know, it's subject to a lot of regulation. The long-term game there is to have a local water treatment facility, but that's actually linked to our max staff expansion. So we're waiting. To get that design in while we're waiting, you know, we've got a fairly expensive logistics cost out.