Q4 2024 Calumet Inc Earnings Call
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Speaker Change: I'd now like to turn the conference over to Jon Komp Kampa Investor Relations for Calumet. Please go ahead.
Speaker Change: Thank you Dave Good morning, everyone. Thank you for joining our call today.
With me on today's call are Todd <unk>, CEO, David Leunen, EVP, and Chief Financial Officer, Bruce Fleming, EVP, Montana, renewables, and corporate development and Scott Obermeier EVP of specials.
Speaker Change: You may now download the slides of the accompanying remarks made on today's conference call, which can be accessed in the IR section of our website at Calumet right. Now also a webcast replay of this call will be available on our site within a few hours.
Speaker Change: Turning to the presentation on slide two.
Speaker Change: Define our cautionary statements I'd like to remind everyone that during this 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.
Tom: As we turn to slide three I'll now pass the call to Tom.
Tom: Thanks, John and thank you for joining the full year 2024 earnings call.
Tom: This past year has been the company's most active and strategically imperative time period as we execute our strategy by converting our company's structure from a master limited partnership to a C Corp funding the Doe loan across two administrations proving out and Derisking the operations of Montana, renewables and widening our competitive moat in the specialty business.
Tom: With a new company structure, and our cash debt service reduced by roughly a third we pulled it forward to a new time in our company with two fully operating competitively advantaged businesses focused on the fundamentals of deleveraging our balance sheet and growing our cash flow.
Tom: The foundation that is now in store provides the ability to pursue these two objectives simultaneously and from where we stand today, we see tremendous value and achieving these concurrent objectives.
Tom: Turning to slide four I'll note that this morning, we announced the sale of our Royal Purple industrial business for $110 million and this accretive deal accomplishes that joined objectives, we just laid out by reducing our debt and fortifying our specialty strategy.
Tom: The industrial role peripheral business is a great business with Fabulous stable, but has an ultra premium synthetic niche it isn't a business that has forced multiplied by Calumet extensive specialties network and thus is a logical step to monetize.
Tom: With this new cash Delever and $80 million of annual cash savings starting last week is our MRO financing for <unk>. We're excited about the start to 2025.
Tom: Now, let's flip to slide five and I'll take a few moments to hit on some of the foundational milestones achieved over the past 12 months.
Tom: Let's start today's look back with day to day business execution.
Tom: Commodity markets will fluctuate volatility trigger based trading will revert to fundamentals and whats DRA behind us its reducing our leverage and continued demonstration of earnings growth that will increase the value of our company.
Tom: We continue to see immense value.
Tom: From advancing our commercial and operational excellence objectives and execution in these areas, particularly in safety and reliability improved noticeably.
Tom: Commercial growth within our specialty business has been a meaningful competitive moat that calumet for decades, and it has widened substantially over the past few years.
Tom: In 2020 for our commercial team sold the most volume that we've seen through our existing portfolio.
Tom: Our specialty products and solutions teams grew volume, 7% year over year or roughly one 4 million barrels.
Tom: You might remember that we integrated our performance brands segment in STS segment into one specialties business two years ago. As we believed there were synergies here both in commercial optionality from integration and leveraging our broader specialty commercial approach.
Tom: In 2024 performance brands volumes grew 22% and delivered $51 million of adjusted EBITDA After adjusting out insurance proceeds.
Tom: Operations is an area that we haven't spent as much time on publicly as some others, but every sees an enormous amount of time here internally and it's a core enabler of our high touch commercial approach.
Tom: Our operations are flexible and integrated and we do a lot of things others want to satisfy our customers and.
Tom: In 2020 for China operations also got safer and more reliable, while simultaneously, reducing our operational cost and capital expenses.
Tom: Last year, our company saw its lowest number of safety renewables with a tier I or a <unk> 47.
Speaker Change: Our number one priority every day here at Calumet is that everyone, who shows up to work goes home safely and last year's major improvement the credits and the team's efforts.
Speaker Change: Good safety performance typically goes hand in hand, with strong operations and we saw that in 2024.
Speaker Change: Going back three years, we announced the capital program aimed at northwest, Louisiana, which was matched with a full court press on adding critical talent.
Speaker Change: We're seeing the benefits of that at Shreveport ran exceptionally well in the second half of last year setting specialty production records in both the third quarter in the fourth quarter.
Speaker Change: This story is not just the Shreveport one now for example, our Princeton facility operated exceptionally and kill US all even more demand for transformer oils source of global power demand.
Speaker Change: Well volumes increase our specialty operations team was able to drive fixed costs down and for the 2020 for full year, our out cost for more than a dollar a barrel less than prior year and 60000 barrels a day plus that substantial improvement.
Speaker Change: We're committed to continuing the progress and we are taking the next level of cost reduction actions that will reduce combined fixed costs in our specialty business by another $20 million compared to 2024.
Speaker Change: Next let's talk about Montana renewables operations.
Speaker Change: The improvement there was both expected and dramatic given the early stage nature of this business and while it took a few more months than we originally planned our Montana renewables ops team ended 2024 by achieving the targets laid out a year ago.
Speaker Change: We began the year operating with the cost structure of about $1 30, a gallon, which improved ratably as our team ran up the learning curve on renewable feeds learn to optimize our pretreatment unit and reduced our output water.
Speaker Change: Water out but by over 70%.
Speaker Change: In December we reached our target cost level of <unk> 70 per gallon.
Speaker Change: Be clear this 70 cents a gallon is fully loaded with SG&A, our insurance commercial team overhead and all costs to run Montana renewables or in that 70.
Speaker Change: On our side op cost we operate in the mid Forty's in cents per gallon and we expect that number will be reduced to <unk> 40, a gallon this year.
Speaker Change: As we scale up our facility. These unit cost will decrease further and will compare with the larger plants and industry.
Speaker Change: Further on operations, Montana renewables reliability improved substantially throughout the year as we worked out the Kinks.
Speaker Change: We met our 30 million gallon annual run rate for SaaS in the third quarter and have demonstrated a capacity 60% higher than that.
Speaker Change: The combination of our competitive cost structure unique logistical advantage and our SaaS early mover advantage position, Montana renewables with elastic competitive edge and as the plant in fab capacity growth, we expect disadvantaged to grow alongside <unk>.
Speaker Change: Now I'll turn the call over to David and then I'll come back and close with some more color on our renewable diesel and SaaS markets and our 2025 key objectives.
David: Thanks Todd.
David: I will review our financials by segment and our efforts over the past year have really simplify and derisk our business, while providing an exceptional growth platform going forward.
Turning to slide six our specialty products segment generated $43 4 million of adjusted EBIT during the quarter and $193 6 million for the full year.
David: We continued to see strong volumes, particularly among our more specialty pipelines, reflecting our commercial excellence programs and improving operational reliability.
David: Our commercial excellence programs remain focused on aligning sales procurement and operations to maximize the value of our products and place them into the right markets.
David: Specialty margins were in line with our improved mid cycle expectation at $60 per barrel, reflecting our customer and application diversity as well as the incremental value burn through our integrated networks.
David: Year over year results were hampered by a weakened commodity environment during that day.
David: Driving the decline in the Gulf Coast industry fuel margins, we've seen some improvement already in the first quarter of 2025, which is encouraging.
David: Offsetting the weaker commodity environment with strong sales volume performance, which came in a more challenging market environment that we've seen in the past few years as demand softened in global inventory levels increased.
David: The last time, we saw a commodity price environment like the past years is over five years ago and specialty margins were approximately $20 a barrel lower in that environment.
David: Fannie may remember that at the peak of margins a little over a year ago, We said that half of the improvement was market related and half was our commercial excellence focus and we saw that play out in 2024.
David: Keeping this margin improvement in a tough market is an accomplishment, but also are placing more volume looking ahead, we expect to continue to produce specialty margins over $60, a barrel and our specialty products and solutions segment, even in tougher current market conditions.
David: Moving to slide seven and our performance brands segment.
David: We posted strong quarterly results of $16 $3 million, reflecting a 15% period over period volume growth and continued commercial improvement in the business.
David: For the year, we produced $57 4 billion and adjusted EBITDA.
David: 2024 was the second year of our transformation work in this segment based on a fully integrated specialty strategy and our commercial excellence programs.
David: We're seeing the positive results as volume rose, 22% in 2024 versus 2023.
David: Saw some insurance proceeds throughout the year that contributed a few millions of our full year results and the insurance adjusted EBIT number is roughly $52 million and we expect continued growth in 2025 is at least as we're beginning some supply chain and operational efficiency programs.
David: In addition to our commercial framework.
David: Early in the earlier in the call Todd discussed the sale of our industrial portion of oil purple.
David: The sale was completed at a roughly 10 times EBITDA multiple and we believe through operational and supply chain efficiencies. This transaction Alicia Alicia we'll be able to recapture the majority of the EBIT we've sold over the next two years.
David: On slide eight our.
David: Montana renewable segment.
David: Slash renewable segment generated $10 9 million of adjusted EBITDA in the fourth quarter compared to a negative $25 8 million in the prior year period at $16 7 million for the full year.
David: Our results in the quarter reflected a strategically planned turnaround that was successfully completed on time and on budget in November.
David: Our renewables business drove adjusted EBITDA of $18 2 million attributable to our proportional 86% ownership in the business in the fourth quarter or $21 2 million.
David: Basis.
David: The fourth quarter was unique for a couple of reasons.
David: Results included $20 million of insurance proceeds from the downtime related to our crack steam drug experienced last year.
David: Second the turnaround that we were down essentially all of November. So we lost approximately one third of our production during the quarter.
David: We also essentially did not sell any staff in December as the change in regulation at the end of the year that the SaaS shipped in December and not received until January.
David: Would not be eligible for the environmental credit.
David: Now that the BTC PTC changeover has occurred January 25, SaaS shipments have resumed normally.
David: Yes.
David: Finally, the industry was going through a change as imports were backed out of the market.
David: Imports are no longer eligible for tax credits.
David: This year.
David: Overtime, the switch to PTC from BTC will reward feedstock flexibility and market diversity and product flexibility all of which are the core of Montana will renewables competitive differentiation.
David: In the meantime, the industry weights clarity or the administration on final rules to be implemented.
David: As I reflect on the year, despite challenging market conditions before this our geographic and cost advantage and prove our ability to steadily posted positive EBITDA.
David: And this trough industry environment, we steadily drove our pause downloads from $1 30 to <unk> 30, a gallon at the beginning of 'twenty four 'twenty board to the point, where our Boston firmly stabilized at 70 cents a gallon, but should we expect to maintain going forward in 2025.
David: Although Montana asphalt side the business continued to reflect significant commodity headwinds the WCS differential in Rocky mountain fuel Frac soften during Q4, 2024, reflecting both asphalt and fuels regional seasonality on top of structural softer fuel cracks.
We continue to carefully manage inventories as we move through the winter season as commodity headwinds carried over into 2025 beyond normal seasonal weakness.
Before I turn things back over to Todd I would like to talk about capital spending.
David: Our 2020 for company wide capital spend was $90 million, including $28 million about 10 of renewables.
David: This was lower than the recent history as the Shreveport capital initiative wound down and Montana renewables reached normal operations.
David: As we look forward to 2025, we expect capital spend to be in the $60 million to $90 million for the entire company before accounting for spend related to backstop expansion.
David: We've already disclosed that Max out Capex in 2025 is expected to be $40 million to $60 million with 45% of that to be funded by Montana renewable operating cash flow and the other 55% to be drawdown from the <unk> loan.
David: Also as we look to 2025, we are considering changes to how we report adjusted EBITDA to better reflect true operations of our business.
David: One change, we will be including it add back related to Rins in Paris, we continue to prevail in the ports.
David: Successfully in both the fifth circuit and DC circuit regarding our small refinery exemption.
David: The treatment. The current treatment has been a confusing point for investors and showing the cash flow better and showing the adjusted cash flow better reflects the generation capability of the business.
David: Similarly, the changeover from BGC to PTT has slightly different treatment. It's our intention as show in 2025, the value of the PTC generation adjusted EBITDA, Although it will be sold to third parties for cash as we are currently not as we are currently not a cash taxpayer.
David: Turning things back over to Todd Alright.
Todd: Alright, Thanks, Dan.
Todd: Looking ahead to 2025 Calumet key value creation priorities as you've heard a few times today are deleveraging and demonstrating the next level of cash flow generation in Montana renewables.
Todd: Both of these initiatives were recently catalyzed by the funding of our <unk>.
Todd: This was the first loan closed and the new Trump administration, and a clear Testament to the bipartisan support for our business, let's turn to slide nine I'll remind us of the elements of this transaction.
Todd: First a couple of weeks before the funding Guy Matt made a cash investment into Montana renewables to satisfy the $150 million equity requirement.
Todd: When we received a $782 million on February 18.
Todd: First thing that was done with the proceeds with repurchasing our assets from some prior and removing the expensive project financing debt that had been put in place back during the construction.
Todd: In total the interest rate on the outgoing instruments, roughly 13% and they've been replaced with 15 year four 8% paper.
Todd: Maybe even more importantly, the old project financings required roughly $80 million of annual cash to make principal and interest payments.
Todd: That's been reduced to zero under our loan for the next four years, while the Max shaft project is underway.
Todd: The next thing we do with the cash at MRO was to repay $188 million of intercompany due to Calumet.
Todd: This leaves roughly $350 million of intercompany remaining on January levels, which will generate cash flow for Calumet in one of two ways.
Todd: First approximately $27 million per year of cash interest is expected to be paid from MRO. The calumet on the intercompany.
Todd: In fact these are the only cash interest payments MRO will have with its new balance sheet.
Todd: The other potential options that we have the ability to raise Perry secured debt at Montana, renewables, which could pay down the inter company more rapidly.
Todd: The last use of proceeds was simply leaving the cash on the memorial balance sheet.
Todd: In total we have roughly $190 million of cash on hand, and Montana renewables, which funds operations. In addition to funding any necessary reserves.
Todd: Having reduced our annual cash debt charges by roughly a third this transaction greatly increases the free cash flow available for both total company deleveraging and investing in our Max outgrowth project.
Todd: With an exciting project like this and a high level of interest in underlying renewable diesel and SaaS, let's turn to slide 10 and review these markets.
Todd: First let's start with a quick review of the fundamentals of the renewable diesel industry.
Todd: We've discussed this before but as a quick summary, this graphic use an assortment of industry data to group the types of producers create E for Biobased brand in fact and by relative breakeven industry index margin levels.
Todd: The breakeven relative to the industry index margin, which is soy base is a function of operating cost product mix actual teams like yield loss and transportation costs.
Todd: At the current RVO, which is roughly equivalent to $4 5 billion gallons of annual biomass based diesel today's margin setting mechanism would be large biodiesel producers.
Todd: This group has an estimated average breakeven index margin of roughly $1 50 per gallon.
Thus if everyone had the same long term expectations producers with a higher breakeven would be expected to lose money and rationalized production and anyone with a breakeven index margin below $1 50 would earn a profit.
Todd: However, we saw industry index margins well below the fundamental level throughout most of last year.
Todd: The reason is that the market is not shut down enough capacity and balance the market and imports were flooding the country take advantage of the blenders tax credit.
Todd: It's more than enough before rens were produced to satisfy the RVO requirement. So the price of the deepwater and did not have to increase to incentivize production.
Todd: Similarly, with feedstock runs high the price of the feed to not have to decrease to incentivize production.
Todd: These dynamics are changing.
Todd: At the end of last year, we saw index margins increase as the market new importance would need to dry up given they don't qualify for the tax credit in 2025.
Todd: In fact, the industry index margin ended the year at exactly $1 50 per gallon.
Todd: However that quickly and we believe temporarily reversed in early 2025 as uncertainty exists in the PTC.
Todd: Many suppliers expect the BTC to come back into play and thus had been less willing to reduce prices because they have inventory room and are willing to bet that a change in the rouble keeping prices high.
Also there was not over production last year, but a little bit of room carryover exists. So the rent prices a temporary shock absorber until until fears buildup is a carryforward is not enough. Thus index margins decline as feedstock prices have not decreased enough yet to offset the difference in a dollar a gallon BTC and smaller P. T C.
Todd: But last week things changed when the January rent data was release, which showed January production of 297 million gallons of biomass based diesel which is a 34% decline from the 453 million gallon monthly average of 2024.
Todd: Further biodiesel production decreased 63% and reached the lowest levels observed in years and <unk> ports were nonexistent.
Todd: Interestingly on a run rate basis, 297 million monthly gallons, we lead the industry with nearly 1 billion gallons short of its annual RVO mandate.
Todd: At these levels before RIN prices would be.
Todd: <unk>.
Todd: Just to carry the margin loan and we would expect that as vegetable oil inventories increase.
Todd: Four we received clarity around the PTC that we would see feedstock prices contributing to return to industry index margin level supported by fundamentals.
Todd: Next let's turn to slide 11, and have a look at the current and expected growth of the SaaS market, which is one that is somewhat opaque and one that we're quite excited about.
Todd: <unk> has been supply limited market, which is one of the reasons, we have seen a meaningful premium in addition to the generally favorable credit structure relative to renewable diesel.
Todd: Historically, most have demand has been voluntary demand.
Todd: In addition to that we've seen global mandates start in 2025.
Todd: These mandates ramp up to roughly 2 billion gallons by 2030, which far past as most supply expectations, even before considering future mandates under discussion large airline commitments and otherwise growing voluntary demands.
Todd: The graphic on this slide conservatively pegged base 2020 for voluntary demand has remained constant throughout the next six years to illustrate the point that its mandates that will drive this market and voluntary demand as an upside scenario not the other way around.
Todd: That being said as expected in 2025, the market is more balanced than it has been historically.
Todd: SaaS infrastructure takes time to develop as it grows one airport at a time, so and 400 million gallons of new production comes online. It takes some time for the logistics, serving the domestic voluntary demand to ramp up.
Todd: This is the first year for the new EU and U K volume mandates and a generally match the amount of this new supply, which means the market is essentially balanced.
Todd: Of course, those mandates increase each year, so without additional projects are largely balanced market today will develop into a larger shortfall each year.
Todd: Tanner renewables look forward to stepping into that growing deficit is our expansion ramps up controllably.
Todd: With a $1 or $2 per gallon SAP premium an incremental 100 million plus gallons in 2026, and an additional 150 million gallons after that when the full project completes is a tremendous amount of additional margin, which would sit on top of the renewable diesel fundamentals, we just spoke about.
With <unk> complete and no near term third party debt servicing growth and cash flow directly correspond to deleveraging.
Todd: So we're not simply counting on improving margins in future SaaS the lever.
Todd: Let's flip to slide 12 and review.
Todd: Our holistic path pretty sure to deleveraging.
Todd: Fundamentally this plan consists of three general areas.
Todd: First of all free cash flow available to Calumet will be used to pay down debt.
Todd: On a deal closing analyst call. We held on January 13, we reviewed the normalized free cash flow generation ability of our business at current debt levels in 2025 Capex in those slides in the appendix of this deck.
Todd: We expect that our restricted group assets, which is largely our specialties business generates $95 million to $115 million of mid cycle free cash flow available for deleveraging and the current interest and capex levels.
Todd: Well fuels asphalt margins are bit below mid cycle at the moment midterm fundamentals suggest with very little new refining capacity coming online mid cycle margin expectations more than supported.
Todd: Second Montana renewable should generate 65% to $85 million of cash annually at $1 50 per gallon index margin.
Todd: Of course, this cash flow levels before we consider an increase in industry index margins to historic norms or an increase in south point.
Todd: The depth that previously was absorbing $80 million per year cash flow has been reduced to zero and EBITDA generated at MRO is now available to grow our SaaS strategy and pay down debt.
Todd: Free cash flow isn't the only tool will be relying upon to reduce debt.
Todd: We previously said, we're willing to explore non strategic accretive asset sales, if it's someone else's strategy better than our own and we demonstrated that today with the royal Purple industrial announcements.
Todd: When that deal closes we'll be paying down some of the 2026 notes it stepped down to par in May and we also expect to be terminating the ATM program that was announced last month in connection with the bond tacked on.
The ATM was never used.
Todd: Another restricted debt reduction tool available to us as Perry to edit Montana renewables, which has allowed for to do.
Todd: This will provide the ability to accelerate the repayment of the intercompany and as we mentioned earlier in any event, Montana renewables will be paying intercompany interest to Calumet.
Todd: Last and what we expect will be the final tool to achieving our $800 million debt target is monetizing Montana renewables.
Todd: This is a plan that we've discussed at length and with operations fully derisked the balance sheet restored and our mat Southland funded the stage is set to demonstrate the EBITDA potential of this asset as the market recovers.
Todd: As more clarity comes to the PTC BTC situation in the market restarts itself.
Todd: Next year's RVO is reset.
Todd: All of the required boxes to take the next monetization step.
Todd: But our priority is clear for 2025, we are positioned to execute.
Todd: Last year Calumet completed setting the foundation for our long term success. The company structure change allows for new investors that <unk> reduced our cash debt service by a third and funds exciting growth and that along with today's royal purple announcements kick starts or concurrent deleveraging and growth strategy.
Todd: With that I'll turn the call the operator for questions.
Todd: We will now begin the question and answer session.
Todd: I ask a question you May press Star then one on your Touchtone phone.
Todd: If you are using a speakerphone please pick up your handset before pressing the keys to.
Todd: To withdraw your question. Please press Star and then two.
Todd: At this time, we will pause momentarily to assemble our roster.
Roger Read: Our first question comes from Roger read with Wells Fargo. Please go ahead.
Roger Read: Yeah, Thank you and good morning, gentlemen.
Roger Read: Can you hear me all right.
On a cell phone so I never know for sure about my connectivity, but Tom.
Speaker Change: I guess.
Speaker Change: There's so much to go after here, but maybe Todd some of your comments towards the end there specifically as we think about balance sheet structure. Once you get everything where you want it to be.
Speaker Change: Prior to any monetization of MRO and then you mentioned the ATM I mean is that something we can now consider you know and it's truly.
Speaker Change: Rearview mirror theirs.
Speaker Change: No.
Speaker Change: Or interest in exercising anything with that.
Speaker Change: Yeah, I think the ATM was.
Speaker Change: Of the debt refinancing we had to show that we had a clear path to pay off our 2026 days I think with today's Royal Purple announcement.
You know the need for that was replaced with with something better. So so we're going to go ahead and terminate that.
Speaker Change:
Speaker Change: So I think you can think about that in the rearview mirror of course whenever.
Speaker Change: Never.
Speaker Change: He used it.
Speaker Change: Right and then what is the right way to think about the structure of our balance sheet, when you're set and done with this in other words. The funding has come in from the D. O. The sombrero herself is taken care of what is the actual pace of the reduction of other debt like can we just consider that as.
Speaker Change: Fully replace now or we've got to wait for.
Speaker Change: Certain events to occur or or.
Speaker Change: Any other restrictions on the ability to retire the other debt.
Speaker Change: Yeah, No I don't think there's any other restrictions.
Speaker Change: As stated in our way.
Speaker Change: You could ask the question in two different ways.
Speaker Change: Doug.
Speaker Change: Next year is that which I think is as you know pretty simple unclear given that we did the tack before just had the transaction today hasn't closed.
Speaker Change: Have.
Speaker Change: Free cash flow expected through the rest of the year, but let's focus more on kind of our ultimate plan to reach the $800 million target that we have so when you do that you know you start with the Perry.
Speaker Change: Our or Montana renewables.
Speaker Change: Our company, so there's $350 million, there and we're working against that $800 million deficit between today's.
Speaker Change: Roughly $1 $6 billion of restricted debt and the $800 million ultimate targets. So you got to assume that 350 million Bucks is going to come back pay down the intercompany.
Speaker Change: That gets you to the one point too.
Speaker Change: We talked about free cash flow, though we would expect over the next couple of years, particularly in an improving market at Montana renewables, that's a few hundred million dollars.
Speaker Change: We talked about the parity as an option to help accelerate.
Speaker Change: The intercompany.
Speaker Change: We have the asset sales we've talked about this morning.
Speaker Change: $100 million and that kind of fits us within striking distance with a clear.
Speaker Change: Clear, Montana renewables monetization to reach the ultimate target as soon as we.
Speaker Change: Check those boxes that we mentioned on the earnings call right so or.
Speaker Change: The if you rewind the clock about a year, we said in order to ultimately achieve our objective with the MRO monetization, we need to prove out their operations, we've done that we had.
Speaker Change: On the D O N fixed the balance sheet, we've done that.
Speaker Change: A little longer than any of us expected or wanted but that's done and we're thrilled about that.
Speaker Change: So now we have a proper balance sheet.
Speaker Change: Fully operating asset hit our operating cost target in our SaaS target.
Speaker Change: And now we're just waiting on the market to recover so we're waiting on BTC PTC clarity, we think that gets us to the levels. The fundamental levels, we talked about on today's call.
Speaker Change: And then we will see an RVO reset and you know.
Speaker Change: We think that will be in place to go.
Speaker Change: To go back out and explore and work on that opportunity itself.
Speaker Change: We look forward to taking that step, where we're not sitting around waiting to optimize that forever at.
Speaker Change: At the same time, we're not going to be forced to go.
Speaker Change: Sell something out.
Speaker Change: In a downturn environment, because we have plenty of.
Speaker Change: Absent to deal with kind of the near term maturity. So as soon as the market recovers and we check those boxes I just talked about will be laser focused on monetizing Montana renewables and hopefully that sooner than later.
Speaker Change: Yes, I appreciate that just one final kind of a follow up on.
Speaker Change: Monetization of MRO is there anything with the D O E loan.
Speaker Change: <unk>.
Speaker Change: Inhibits any any version of monetization or financing is financing and 10, it wouldn't really matter who it came from you can you can proceed in SAP.
Speaker Change: What's best for Calumet Tomorrow.
Speaker Change: Hey, Roger it's Bruce.
Speaker Change: So I'll remind everybody that the loan guarantee agreement is filed in an 8-K.
Speaker Change: <unk>.
Speaker Change: The Doe loan guarantee is financing.
Speaker Change: The.
Speaker Change: The scenarios around who can come in and an equity position or our signaled in their daily basically wants to know who it is now if.
Speaker Change: If you think about the size of the transaction is going to be an HSR filing.
Speaker Change: If it touches a foreign player it's gonna be associates filing so the conformance conformance with the current administration's priorities in that regard will be part of the equation, but we're certainly not blocked from bringing in equity they want us to.
Speaker Change: It was the essence of this.
Speaker Change: This arrangement that they have.
Speaker Change: It was about half as financing, 55% as David said and we provide the rest is equity.
Speaker Change: Thank you.
Speaker Change: And the next question comes from Jason gave women with TD Cowen. Please go ahead.
Jason: Yeah, Hey, good morning, Thanks for taking my questions.
Speaker Change: A couple on MRO margin outlook.
Speaker Change: The PTC rule as it's written seems to Disincentivize use of canola oil I know that ones.
Speaker Change: Key kind of feedstock.
Speaker Change: Makeup of your feedstock diet can you talk about how the limitations on canola or the economic disadvantage on canola plays into.
Speaker Change: Your outlook for margins over the next year and the ability to maybe backfill that.
Jason: Yeah, So Jason as Bruce B.
Speaker Change: The reality is we're feedstock agnostic.
Speaker Change: And there's clear evidence that all of these speeds are arms together on their Ci parity.
Speaker Change: So it doesn't matter.
Speaker Change: You know there is the idea of a paid shortage is long gone, it's not like canola loans it still be in the fee pool for the industry.
Speaker Change: If it's not then you got the weird shuffle, where the Canadians are exporting canola oil if somebody's re importing something else in the same volume so.
Speaker Change: Quite frankly, the way that the.
Speaker Change: PTC greets model puts their thumb on the scale has started to pick winners and losers in the feed Google ads.
Speaker Change: Adds to complexity adds to optimization incentive for somebody like us that can run any of these feeds and hit six different rules in six different geographies that are adjacent to it so I I.
Speaker Change: I see as upside now final comment is.
Speaker Change: None of that matters, if we take Canadian canola and make Canadian renewable diesel SaaS.
Speaker Change: Yes.
Speaker Change: Good point and actually a segue to my next question.
Speaker Change: Peers, British Columbia is going to restrict use of international renewable diesel to make our to meet the provinces.
Speaker Change: <unk> targets can you talk about how that update maybe impacts your outlook for margins given.
Speaker Change: Theres been you've you've discussed.
Speaker Change: Advantages of selling gear of renewable diesel into Canada.
Speaker Change: Yeah that'll that'll raise margins, let me walk you through it.
Speaker Change: Canada has a federal requirement the balances and they say.
Speaker Change: We'll pull in all of the Canadian biodiesel.
Speaker Change: And that's not going to work.
Speaker Change: It doesn't work in the winter.
Speaker Change: But even if it did now you've created a higher cost structure for the country of Canada, but by making this trade flow go westward into BC mill.
Speaker Change: No problem, we'll backfill the rest of Canada.
Speaker Change: So I tried to address that.
Speaker Change: Self evident.
Speaker Change: What's worth, noting though and this is this is actually.
Speaker Change: Thank a good signal for where we feel the intermediate term.
Speaker Change: Opportunities in developments are going to play out, but I'll give you two examples so BC and tidewater are pretty tight.
Speaker Change: We liked the Tidewater guys, we talked to them a lot and this makes perfect sense, if you're sitting inside the province, and you're thinking about that.
Speaker Change: The equivalent of national competitive advantage.
Speaker Change: Second example, I'm going to draw your attention to greater Minneapolis, St. Paul SaaS hub same thing.
Speaker Change: So when you make rules within the local geography that are collectively advantage in your local economy that actually it makes perfect sense. We're all used to read in the paper and thinking about it at the national level, but quite frankly in SaaS and now in R&D with this be seen news reactions local.
Speaker Change: Everybody that figure all this out and had all the great spreadsheets and.
No exactly where this was going 12 months ago, Mr, Illinois, and Minnesota. So now all of this asset in North America is getting pulled into the great Lakes region.
Speaker Change: So there's going to be a lot of dynamics, we see a lot of.
Speaker Change: Yeah, you know complexity, we see a lot of optimization opportunities and I'm going to go back to the map and say, we're best positioned to take advantage of all of that just look where we are look where the rules are look we're at the high speed high freight capacity railroad scope and we kind of like all.
Speaker Change: All of this.
Speaker Change: Got it great and if I could just sneak one more in I know you've talked about the 45% equity funding at MRO funded from cash flow.
Speaker Change: But I'm wondering if you know the the asset doesn't generate the cash flow that you are expecting for whatever reason what are the alternative avenues that Calumet has.
Speaker Change: To meet the required equity funding level.
Speaker Change: The.
Speaker Change: I don't I don't think we have to go to kind of the Calumet side of that the.
Speaker Change: When you.
Speaker Change: We've got $190 million of cash on the balance sheet.
Speaker Change: Montana renewables.
Speaker Change: But I think the more important point is.
Speaker Change: The.
Speaker Change: When do you kind of look at.
Speaker Change: EBITDA at Montana renewables generated even in kind of trough industry environments late last year.
Speaker Change: That's more than enough.
Speaker Change: To pay for the 45% of the small amount of capital that we're talking about over the next year.
Speaker Change: Got it alright, great. Thanks for the answers I'll leave it there.
Speaker Change: Thank you.
Neil Mehta: And the next question comes from Neil Mehta with Goldman Sachs. Please go ahead.
Neil Mehta: Thanks, Pat and team first question is just around Royal Purple can you talk a little bit about.
Neil Mehta: How that asset sale came together.
Neil Mehta: How you identified it as kind of noncore or is there other opportunities for divestiture and you gave us a revenue number but we're trying to figure out what the EBITDA multiple is just round out the royal purple discussion.
Neil Mehta: Okay.
Neil Mehta: Hey, Neal.
Neil Mehta: <unk> here.
Neil Mehta: I think for background and context to your question, we've been making a lot of progress overall within the performance brands business Todd touched on it during the call.
Neil Mehta:
Neil Mehta: Not just the EBITDA and the results more than doubling but really understanding the business our right to win and how we can maximize value within the business.
Neil Mehta: And so as we think about the last call. It 667 months, we thought about the business now has been running well and we turned our attention forward around our future planning.
Neil Mehta: The business how pieces of the business fit and what our strategy is really centered on an integration within the overall specialties business.
During that time I would say deal we've gotten some inbound call I think a lot of people out in the industry understand the value of the brands within the business and the growth opportunities that exist.
Neil Mehta: So with these inbound calls we are number one priority is taking them off deleveraging as a company.
Neil Mehta: So we consider it a lot of these a lot of interest out there how it fits into the strategy how much value that it will generate for us.
Neil Mehta: We have pieces within that theres been a scent that integrate very well with our specialty strategy. They carry a high volt valley for Kelly Matt.
Neil Mehta: But then we've got some other pieces such as the Royal Purple industrial that might not fit our integrated strategy and that have rallied more by others. So ultimately that deal just made a lot of sense for both buyer and for Calumet overall.
Neil Mehta: Yeah.
Todd Alright: Neil It's Todd.
Neil Mehta: I'll add a little bit.
Neil Mehta: David noted earlier, the multiple is about 10 times.
Neil Mehta: For the deal so it accretive accretive transaction, we're super excited about it for all the reasons, Scott said and I think one of the things that excites me more than.
Neil Mehta: Just the.
Speaker Change: Just the price and the ability to immediately pay down.
Speaker Change: Some some debt with it and kick start that as.
Speaker Change: We think through our operational and supply chain synergies that kind of.
Speaker Change: Result from the transaction.
Speaker Change: We can replace most of that EBITDA that we that we gave up over the over the next two years. So we're kind of looking forward to continuing to just optimize.
Speaker Change: Our warehouse facilities are operational facilities in a broader supply chain and and take that theres quite a surprise there.
Speaker Change: To explore as we as we move forward as far as willingness to sell other assets.
Speaker Change: We've said for a long time that we're always willing to sell something that's more valuable somebody else than us and that remains true I think this is this is an example of that.
Speaker Change:
Speaker Change: To Scott's point, you're most likely to find those in places that arent deeply integrated within the business just some of our deeply integrated businesses.
Speaker Change: Hard to imagine that there would be worth more as a bolt on them than they are to us, but but assets like this one.
Speaker Change: What we found was that people are pretty interested and looking at specific pieces of the business that they are really nice strategic bolt ons.
Speaker Change: For them. So so we're certainly open to.
Speaker Change: Exploring other opportunities that would fit those same dynamics.
Speaker Change: Okay.
Anna: Thank you Anna.
Can you just round out the conversation on small refinery exemptions.
Speaker Change: I think I caught your piece about.
Speaker Change: Adding back some of the RFS Costa adjusted GAAP, because I guess of your outlook around.
Litigation, but just remind.
Remind us again.
Speaker Change: How many dollars potentially could be coming back to the organization. If you. If you win the Esri case, where do we stand with that and what gives you the confidence there.
Speaker Change: Yeah. So let me just start and clarify about how we account for rent today and so what we do is we kind of recognize an incurrence for rins costs in our <unk>.
Speaker Change: Cost of goods sold.
Speaker Change: And so you can think about it as kind of a noncash cost and then in our adjusted EBITDA, We don't actually add that back.
Speaker Change: Someone could look on our statement of cash flows and that will get added back, but I think for what we're out there on the road talking to investors and people look at our adjusted EBITDA, There's probably $40 million of cash flow kind of wasn't included there for 2024 and as we've converted to a C Corp and brought.
Speaker Change: At our Investor dialogue is a tough way to start a conversation with a new investor. Let me talk to you for its 40 minutes about what what Iran is at a small refinery exemption and why adjusted EBITDA was $40 million light also that number is getting a lot larger as we've seen kind of rins shoot up as we've talked about kind of on the ambarella.
Speaker Change: Side of things. So yes, we've had success in some of our core cases, and I'll kind of toss it over to Bruce to talk a little bit about that but.
Speaker Change: It's not a change to our.
Speaker Change: Business and how we operate it's a clarification and it simplification. So we can converse with investors in a way that accurately reflects the cash generation of our of our specialty business.
Speaker Change: The asphalt business.
Speaker Change: Bruce.
Speaker Change: Yeah. So Neal part of part of the question if I heard it was how much cash is coming back.
Speaker Change: I Trust, David spoke to that and if we line up our EBITDA with our cash generation from the business. That's that's really the purpose of that metric.
Speaker Change: Fortyish fortyish million for 'twenty 'twenty, four would be the appropriate higher EBITDA tied to cash.
Speaker Change: Cash flow from ops.
Speaker Change: The reason were prevailing in these court cases is pretty simple and you can you can read the very short St rulings from the fifth circuit you can read the rulings from the D C circuit and Yale under the prior administration EPA acted illegally the court said we're not.
Speaker Change: I'll, let you do that.
Speaker Change: So.
Speaker Change: All of our all of our cases are.
Speaker Change: Back to the EPA to have them do it over and I'll have to come up with a new decision.
Speaker Change: Reflected on their website they've moved from denied two pending status.
Speaker Change: You know there are still pending.
Speaker Change: We expect that will get sorted out.
Speaker Change: And in the long run, let's let's just pop back up the national policy for a microsecond.
Speaker Change: <unk>.
Speaker Change: This is domestic energy policy the more renewables, we produce in this country and blend into fuels more independently or are there incremental crude export or sorry crude import.
Speaker Change: Possibly from an unfriendly source. So we're supportive of all of that but the law is clear.
Speaker Change: Can't ask the small guys to bear a disproportionate burden with EPA has structured this as a regressive tax it's the most preposterous thing I've seen so I'm sure that'll get fixed under this administration.
Thanks, Bruce I appreciate the time guys.
Neil Mehta: Thanks Neil.
Gregg Brody: The next question comes from Gregg Brody with Bank of America. Please go ahead.
Gregg Brody: Alright, guys.
Speaker Change: Thanks for all the color.
Speaker Change: Congrats on getting the.
Speaker Change: You're funding in the door.
Speaker Change: My first question relates to the second tranche I think you said you thought.
Speaker Change: Got it till you should have access to this year. This contingencies help us think through how we should think about when you're able to start accessing that.
Speaker Change: And then is.
Speaker Change: Is that does that also imply that the capex at MRO is is is delayed until that's available or at least on the massive spansion.
Speaker Change: Okay, great yeah, thanks for the chance to clear that up because that's.
Speaker Change: Weird interpretations of so, let's let's be crystal clear, there's one loan.
Speaker Change: And we've already drawn on it I can draw on it again tomorrow.
Speaker Change: And the story.
Speaker Change: So the second tranche you have access to now.
Speaker Change: So they have some contingent season.
Speaker Change: Yes, the SAP piece or make sure everything's still current and true.
Speaker Change: Right.
Greg: So do I breakdown, the representations that sorry, sorry, Greg.
Speaker Change: That every draw every drill.
Speaker Change: You bring down all of the representation to make sure Theyre still current and true.
Speaker Change: The loan is now live alone has operated we've drawn drawn number one we can draw drawn number two.
Speaker Change: So are you is it safe to say with respect to the capital being funded and morale by the by the second tranche.
Speaker Change: Is that spread evenly throughout the year at this point is that how we should think about it.
Speaker Change: No I would I would suggest that's back end loaded.
Speaker Change: For example, next week, where we're going through our final.
Speaker Change: Since our technical selection and we've got a good design laid out by our EPC company, but we're still dominated and adjusting.
Speaker Change: That's going to.
Speaker Change: Let's go to spend slower just think construction S curve.
Speaker Change: And we have provided a guidance number of $50 million total.
Speaker Change: <unk>.
Speaker Change: The sort of 28 to the OE.
Speaker Change: <unk> and 'twenty to the us.
Speaker Change: But.
That's going to happen late in the year end.
Speaker Change: If anything that's a that's a reservation that might be on the high side.
Speaker Change: How should we think about.
Speaker Change: The staff additions next year in terms of the incremental production.
Speaker Change: What phase of the year should we expect to start to see that and how should it ramp.
Speaker Change: Yeah.
Greg: That's interesting Greg.
Greg: We've actually got a couple of options technically as to how we can do that.
Greg: And therefore, we have an optimization opportunity.
Greg: We conservatively contracting 30 million gallons to shell we've run at it.
Greg: At a run rate of 50 million gallons. We think we can go up a little bit so.
Greg: We can we can bring more to the market now.
Greg: For that to be long term economic we wanted to add a second reactor see various talk about second reactor goes a couple of ways to do that.
Greg: You know I I can give you.
Greg: Resolution more to a calendar quarter.
Greg: As we complete the licensor selection and pick among our.
Greg: <unk> there, but for the moment I would probably just say, it's going to come online at Notionally 150 million gallon a year capability sometime in 2026, but that's not a big step change once that stand down and we're going to feather into it.
Greg: They spend it in the existing catalyst faster.
Greg: So youre going to youre going to see a ramp into the new hire capability.
Okay.
And then just as we think about sending money out.
Greg: The intercompany loan at MRO. Thank you said the next couple of years should we assume that youre starting to paid.
Greg: The more of a preferred.
Greg: Does that start to kick in.
Greg: No. Those are those are unrelated I appreciate the interest.
Greg: So unless the morale board declared a distribution.
Greg: There's not a.
Greg: Service obligation.
Greg: For the preferred.
Greg: We shouldn't expect for you to declare our distribution while your repayment the company.
Greg: Or is that that's what I'm asking.
Greg: Yeah, so the positive MRI or cash flow is earmarked to go back as the equity component of the project work. So that's the that's the source of the.
Greg: The construction funds on on the company side and D. O is the financing on the OE side.
Greg: So the money stay apart.
Greg: Cash flow.
Greg: You could take it up offline, but cash flow from ops stays in the box, it's not being distributed out.
Greg: Maybe just moving moving onto sort of one of the one of the path to deleveraging that you mentioned the parent debt at MRO.
Greg: Is that something you think we could see near term how should we think about the timing of that and the decision tree as to how you move forward on that.
Greg: Yeah, I think just talk kind of about the whole intercompany and different options you have so so that the amount of inter company, the 350 million roughly outstanding there.
Greg: There's an interest component of that that's just an annual payment back.
Greg: So that's what I was really just a little bit below 30 million Bucks.
Greg: Then you have cash flow from operations that we make at my general <unk> versus point.
Speaker Change: Martin first for the projected anything excess of that.
Greg: Available to to pay that down.
Greg: And then last you have the ability to go raise <unk>.
Greg: George Perry Dan at MRM that would essentially just replace that intercompany from the MRO perspective.
Greg: Replace intercompany debt with.
Greg: Third party debt.
Greg: And the Italian portion would be paid down so so that's something that you know.
Greg: We'll look to explore hit pretty quickly we wanted to get through the the.
Greg: The bow.
Greg: Process, the Royal Purple process year end.
Greg: Probably get a little bit of clarity around around BTC.
Greg: And then and then go explore that market.
Greg: And religious optimized cost of capital.
Greg: That way and an extra that restricted deleveraging.
Speaker Change: So it sounds like you're not quite there yet, but it's something that you are thinking about.
Greg: Maybe just a last one for me.
Speaker Change: Could you walk us through that.
Speaker Change: Pay down to 26 is with what you've received so far.
Speaker Change: I understand the components, how much is trying to be repaid from a deal today or was repaid to us.
Speaker Change: Earmarked to repay with the deal.
Speaker Change: The first tranche that came in.
Speaker Change: Then the bond raise that you did.
Speaker Change: And then today's asset sale.
Speaker Change: Just so I understand how much do you plan on reducing with free cash flow thereafter.
Speaker Change: Yeah. So I think if you if you lump everything together.
Speaker Change: You know that we've done so far obviously any cash that we have does pay down debt immediately just through the revolver.
Speaker Change: And then we have the step down to in May of 2026 notes.
Speaker Change: Is there a strict cost and just the revolver and the interest savings on the 2026 notes would say wait until may to call. Those back I think with with what we pulled in so far you know we'd be looking at about a $200 million call.
Speaker Change: At the SMA step downtime period, and obviously you know, we'll learn a lot more from there as far as.
Speaker Change: BTC in Montana cash flows stepping up and and the like and an increase in America.
Speaker Change: Yeah.
Speaker Change: That's it for me guys. Thanks for the time.
Speaker Change: Thank you.
Speaker Change: This concludes our question and answer session I would like to turn the conference back over to John Humphrey for any closing remarks.
Speaker Change: Thanks, David on behalf of the management team I'd like to thank everyone for their time. This morning, and your continued interest in farmer hungry weekend again.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.