Q2 2025 Calumet Inc Earnings Call
Speaker #1: Good day and welcome to Calumet Incorporated's second quarter 2025 conference call. All participants will be in the listen-only mode. Should you ed assistance, please signal a conference specialist by pressing the star key, followed by zero.
Speaker #1: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one, on a touch-tone phone.
Speaker #1: To withdraw a question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to John Kompa, investor relations for Calumet.
Speaker #1: Please go head.
Speaker #3: Thank you, Steve. Good morning, everyone. Thanks for joining our call today. With me on today's call are John Borgmann, CEO, David Lunin, EVP, and Chief Financial Officer, and Scott Obermeier, EVP of Specialties.
Speaker #3: Please note Bruce Fleming, EVP of Montana Renewables and Corporate Development, has an unavoidable company obligation today. John Borgmann will address questions regarding Montana Renewables in its absence.
Speaker #3: You may now download the slides of the company remarks made on today's conference call, which can be accessed in the IR section of our website at calumet.com.
Speaker #3: 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 will find our cautionary statements.
Speaker #3: 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 findings with the SEC for a list of factors that may affect our actual results and cause them to differ from our expectations.
Speaker #3: As we turn to slide three, I'll now pass the call to John.
Speaker #4: Thanks, John. Good morning and welcome to our second quarter 2025 earnings call. This quarter was one of sound execution, parallel with foundational and supportive steps taken on the regulatory front.
Speaker #4: Both of which we'll walk through on today's call. Calumet earned 76.5 million dollars of adjusted EBITDA with tax attributes during the second quarter. This result was a function of continued execution of our near-term initiatives on reliability, cost discipline, and commercial excellence across the company.
Speaker #4: $8.3 million of our quarterly result was earned in Montana Renewables, which we'll touch on more momentarily. This leaves the lion's share of the quarterly result being earned in our specialty business, despite a full month turnaround at our largest facility in Shreveport.
Speaker #4: Especially margins continue to prove resilient overall, and our product and market diversification has been critical to this, pockets of weakness in the more commoditized paraphernalia loop space, have been more than offset with continued strength across our specialized lines of napthenics, solvents, waxes, and food-grade and pharmaceutical products.
Speaker #4: Further, specialty sales volume within our SPS segment marked the third straight quarter over 20,000 barrels a day. And despite a late start to the outdoor line garden season, our performance brand segment posted its second highest quarterly sales volume in its moderate form, second only to this quarter last year.
Speaker #4: These results are a combination of continued deployment of our integrated specialty strategy in the industrial lubricants and separately rapid growth of our Tru-Peel brand.
Speaker #4: One area we haven't talked about much, when it es to commercial excellence, is the impact of our program outside our core specialty's offering. Specifically, I'll note the results from the change in our approach to our southern asphalt marketing.
Speaker #4: This is a fairly commoditized space, but with three crude-fed refineries in west Louisiana, we have a number of streams to choose from, and have proven the ability to more intentionally blend products and offer a broader offering in a market that changes rapidly between seasons.
Speaker #4: Asphalt sealing improved margins to the tune of $5 million plus per year, which as a singular item isn't a game-changing scale, but represents a great example of the type of continuous optimizations that add up as we deploy the strength of our product diversity and innovative mindset in commercial excellence engine across our business.
Speaker #4: Next, the cost and reliability initiatives rolled out to begin this year continue to track ahead of plan. Company-wide, our ating costs have been reduced 42 million dollars through the first half of the year, versus the first half of last year, despite a 7 million increase in the cost of natural gas and electricity, our largest variable expenses.
Speaker #4: Further, through the halfway point, company-wide production is slightly increased year over year, despite the full month turnaround at our largest plant. I want to thank our teams underground who are leading these efforts and continue to deliver on the challenge to fortify our ation.
Speaker #4: Flexibility and customer centricity don't have to come at the expense of efficiency and reliability. We can be both, and the thousand-plus men, women, and our operations team are proving that daily.
Speaker #4: We believe more is possible when it comes to operational excellence, but the team has strung out of the gate and we look forward to building on the successes thus far.
Speaker #4: Let's turn to slide four and talk more about the recent developments in Montana Renewables, as the second quarter was a busy one on the regulatory front.
Speaker #4: While the renewable diesel industry saw its lowest quarterly index margin today, Montana Renewables was able to generate a positive $8.3 million of adjusted EBITDA with tax attributes.
Speaker #4: Our ability to remain positive in this brutal market is a function of our vantage, feed flexibility, leading staff position, ultra-competitive costs, and the highest throughput volumes we've ieved yet.
Speaker #4: More simply, Montana Renewables is firmly established itself as one of the competitively advantaged producers in the space. They will take you through these quarterly results shortly, but before that, I'd like to take a moment to hit on a strategic progress we're making around our streamlined max staff 150 project and the regulatory outlook, which came more clearly into focus in the second quarter.
Speaker #4: With the advantaged operational and commercial position of Montana Renewables proven out, the remaining critical steps prior to potential monetization are margin recovery, which requires regulatory clarity, and taking the next step in ur staff leadership journey.
Speaker #4: Starting with our max staff 150 project, we remain on track to start up in the first half of 2026, when we expect to generate 120 to 150 million annual gallons of staff per capital cost of 20 to 30 million dollars.
Speaker #4: With the purchase order for the catalyst placed, and engineering underway, we're cited for this next milestone, and we've begun the staff marketing cycle. Earlier in the quarter, there was plenty of speculation around staff demand, as the one big beautiful bill legislation was negotiated, and we saw a temporary pause as market participants awaited the legislation.
Speaker #4: With that behind us, conversations are now feeling more normal. As we've discussed in the past, the staff market is close to balanced now, and the world is gearing up for the next step in mandated demand that we'll see in international markets in January.
Speaker #4: And voluntary demand continues to feel robust. We don't want to do a public play-by-play of each potential contract for negotiation. But what I can report is that we have active conversations regarding more potential volume than our increased supply can meet.
Speaker #4: We continue see staff premiums, and the previously reported 1 to 2 dollars per gallon over renewable diesel range and our customer slate is very likely to include a diversified portfolio including large middle-market aviation fuelers, as we've had historically, direct airline sales, both large and regional, and even some separated direct sales at scope three and scope one credits.
Speaker #4: As we've done with renewable diesel, our staff portfolio targets a diversified set of geographies, both in the US and Canada, where we can capture maximum value from our location.
Speaker #4: On the renewable diesel front, we continue to be bullish around the return of industry margins, which are temporarily paused as the industry awaits the finalization the RBO, clarity on small refinery exemptions, and choose through the excess rims that were created by imports last year, while the blender's tax credit was still in place.
Speaker #4: At current margin levels, some of the top players in ustry have reported reductions, which tells the empirically what you need to know about the current margin environment being unsustainable.
Speaker #4: At Montana Renewables, we continue to run at full rates as the incremental gallon remains positive, but there's not much room to spare at current margin levels, and we'll continue to make monthly run decisions based on near-term economic signals we receive from the market.
Speaker #4: As we know, renewable diesel margins are largely a function of regulatory outlook, and while not perfect, the fundamental drivers became more clear during the quarter.
Speaker #4: I'm not sure whether not it's gotten easier to predict if we'll see major margin reversal this year or when the new RBO steps up in January, and to carry forward runs from 2024 eliminated, but the regulatory actions taken thus far are supportive on balance.
Speaker #4: Let me highlight a few of these. The first example was the one big beautiful bill act. The most important element of the bill to our industry was the extension of the PTC, highlighting that biofuels continue to receive bipartisan support.
Speaker #4: Of the roughly 20 tax credits established in 2022 IRA legislation, nearly half were cut or reduced in a new bill. However, of the 45Z credit impacting us, not only remained intact, but was extended through 2029.
Speaker #4: Demonstrating the importance of growth in this space to the ad community, the energy transition, and with nearly $7 billion gallons of domestic feedstock produced annually, a meaningful and growing component of American energy dominance.
Speaker #4: This extension through 2029 will mark 25 years of a blender's tax credit or production tax credit for biomass-based diesel. Next in the bill, the 45Z credit is transferable.
Speaker #4: This is important to Montana Renewables, as we're not yet able to use the full credit to offset taxable income in early days. And the credit is a critical part of our margin stack.
Speaker #4: In fact, we have over $50 million worth of PTCs built up on our balance sheet through the first half the year, as the market was waiting for the bill to be finalized to add.
Speaker #4: Upon completion, the market has picked back up. In fact, we just signed a term sheet on about half of our credits, and we look forward to completing the monetization of these and the rest of the credit portfolio in short order.
Speaker #4: Also important was the continued language that imported overseas product and feed won't qualify for the producer's tax credit. This supports domestic ag and highlights the administration's focus on American energy dominance and independence.
Speaker #4: We estimate roughly a billion gallons of imports drove surplus in D4 rins last year, and that surplus has been carried forward this year. But going forward, foreign production will not be incentivized to be dumped here again.
Speaker #4: One regrettable component of the bill was the staff PTC, whose formula is now equal to the renewable diesel PTC formula. Whereas previously, staff generated a larger PTC than renewable diesel, it's now the same.
Speaker #4: For Montana Renewables, this means the value of the PTC associated with our staff production will be reduced by approximately 40 to 50 cents per gallon at our current carbon intensity.
Speaker #4: While we do expect that this will influence the staff premium, we continue to see strong premiums to renewable diesel in the ketplace, which remain within our historically discussed 1 to 2 dollars per gallon range.
Speaker #4: Interestingly, the changes to tax credits for staff may also have the unintended consequence of reducing future supply, and a market which looks solidly into deficit as global mandates ramp up.
Speaker #4: Next, let's switch from the one big beautiful bill act to the Renewable Volume Obligation. We received the first insights into the 2026 RVO from the Trump era.
Speaker #4: I'll start by saying the new administration at the EPA inherited a real mess. Between the six-year backlog of unresolved SREs, combined with a 2023 to 2025 RBO that's decimating the biodiesel industry.
Speaker #4: After some initial confusion, around a demand generated by the RBO proposal, most now expect the proposed RBO, which equates to roughly $4.5 billion gallons of biomass-based diesel.
Speaker #4: This is a nice 30% increase from the approximately 3.5 billion gallon D4 RBO that exists today. And industry margins should react positively, as industry capacity utilization increases.
Speaker #4: We see the impact of these levels to the chart on the right, where we combine a D4 RBO just discussed with roughly $1 billion gallons of additional D4 demand that's required to meet the D6 rent shortage to arrive at a total expected biomass-based diesel demand both at today's and the proposed levels.
Speaker #4: What this chart does not include is the one-year carry-forward rins from the 2024 surplus, which practically offsets significant 2025 demand. The massive shutdowns we've seen in biodiesel and even some renewable diesel are a direct result of the 2023 to 2025 RBO being set too low.
Speaker #4: That all being said, we believe the new RBO should be much higher. North America is capable of producing roughly 7 billion gallons of biomass-based diesel feedstocks, and including biodiesel production, there's at least 7 billion gallons of industry capacity to process this domestic feed into product.
Speaker #4: This idea that 1 billion gallons of foreign feed will be required to generate the mandated rent count is not supported by the data. In fact, we're exporting nearly 1 billion gallons of soybean oil alone.
Speaker #4: In addition to that, and specifically to China exports, we're exporting over 22 million tons of soybeans, that get crushed into well over a billion gallons of potential feed offshore.
Speaker #4: We have enough feed right here at home to dramatically increase the supply to our growing industry today, and in addition, for a future crush investment here in the US, that will serve a future step up.
Speaker #4: The mandate can be increased to match capacity as we've done historically every year until the 2023 set rule under the Biden administration. The open comment period on the Trump EPA set two rule closes today, and we hope the D4 RBO level will be revisited to incentivize a continued growth of American energy, American jobs, and the American farmer.
Speaker #4: With that, I'll turn the call over to David to take us into the quarterly results. David?
Speaker #5: Thanks, Todd. It's great to see progress in Montana on all fronts as monetization of that asset continues to be the final step in our deleveraging strategy.
Speaker #5: Before I go through each of the segments, I'd like to highlight some recent activity as our deleveraging and maturity management strategy continues to unfold.
Speaker #5: Last week, we announced a refresh of our Shreveport terminal assets financing which was a nice optimizer within our broader plan. We had previously sold these assets to Stonebriar for 70 million back in 2021, and given the improvements in Shreveport production, the Trump grunt and related assets value increased to 120 million.
Speaker #5: Instead of repurchasing the asset in year and a half, we were able add 80 million of new cash to the existing 40 million of principal and call another 80 million of our 2026 notes reducing the outstanding balance to a manageable 124 million.
Speaker #5: Add this to the accretive royal purple monetization and deleveraging that occurred earlier this year, and we now will have called 230 million of the 2026 notes in the last few months.
Speaker #5: With our revolver capacity and approximately 50 to 60 million of cash flow expected in the restricted group through the rest of the year, we shift our near-term strategic focus to broader deleveraging and managing the 2027 notes.
Speaker #5: With improving cash flows from the business, and the renewable regulatory industrial asset outlook solidifying, we remain confident in our plan to reach our ultimate goal of 800 million of restricted group debt.
Speaker #5: Further, the broader strategic activity that we've mentioned previously continues to progress well, and we'll use that more at an appropriate time. Turning to slide six, our Specialty Products and Solutions segment generated $66.8 million of adjusted EBITDA during the quarter.
Speaker #5: We continue to see strong performance particularly among our specialty product lines reflecting our commercial excellence program, in fact, this was the third consecutive quarter that our specialty products posted sales volume exceeding 20,000 barrels per day reflecting our customer and application diversity and improved reliability.
Speaker #5: Further, we saw margins in our specialty products increase to more than $66 per barrel. These accomplishments were made despite a full month turnaround at Shreveport in June.
Speaker #5: The team also successfully managed through a major disruption in service from a key rail provider that had issues across their network. The rail service provider is a major transporter for our network, and Calumet incurred meaningful costs as the team went above and beyond to arrange alternative logistics to keep our customers supplied.
Speaker #5: Thankfully, the railway is reporting that the worst of that is now behind us and we're eing service normalize. Regardless, Calumet will always do everything we can to deliver service to our valued customers.
Speaker #5: Looking ahead, we continue to expect to operate at mid-cycle margins even amidst an industry backdrop that is below mid-cycle. Highlighting our commercial advantage. Our operational improvement trend also continued in the second quarter as we reduced our fixed costs by approximately 10 million in the first half of 2025 compared the prior year.
Speaker #5: Interestingly, strong operations not only increased volume and reduces costs, but increases margin as well as it allows our commercial team to place more volume to secure contracted homes at higher margins rather than keeping volume available for the spot market.
Speaker #5: With the downtime associated with the turnaround, our quarterly results included only 11 million dollars of total restricted group adjusted EBITDA plus tax attributes in June.
Speaker #5: The plan is now back online and successfully generating full revenue. Looking ahead, we expect and already have begun to see the unwind of approximately 30 million dollars in the third quarter of 2025 from working capital bill associated with the turnaround.
Speaker #5: As we have no more turnarounds planned for the rest of the year and are running at full rates. Finally, as tariffs have been topical again, I wanted to remind our shareholders that we do not believe they are impactful to our specialty's business considering our US-based manufacturing and feedstock supply footprint, customer base, product diversity, and the fact that nearly all of our sales and feedstock are domestic or protected by USMCA.
Speaker #5: Moving to slide seven, in our Performance Brand segment, we are now firmly in the third year of our revised strategy that leverages commercial excellence and integration optionality across our specialty business.
Speaker #5: We posted strong quarterly results of 13.5 million reflecting continued volume growth and ongoing commercial improvements in the business. As a reminder, we completed the sale of the industrial portion of the Royal Purple business, and this is the first quarterly period to not include Royal Purple industrial results following the estiture.
Speaker #5: Our second quarter results reflected strong volumes and margins across the business, particularly for our Tru-Peel brand. Moving to slide eight, our Montana/renewables segment adjusted with tax attributes generated 16.3 million in the second quarter compared to 8.7 million in the prior year period.
Speaker #5: Montana Renewables specifically generated adjusted EBITDA with tax attributes of 8.3 million, making the 87% attributable portion to Calumet, worth 7.2 million. Montana Renewables continues ability to generate positive EBITDA with tax attributes even in the lowest industry margin we've ever seen is representative of our competitive position and reflects our unique assets logistical advantage and strong customer relationships.
Speaker #5: In addition, as we previously disclosed, we continue to expect to monetize the value of the production tax credits. And as Todd mentioned earlier, our monetization efforts are in advanced stages of discussion.
Speaker #5: Despite the worst margin environment, the primary driver of the year-over-year improvement in this segment continues to be with the tremendous cost savings we've made in the business and rovements in operations.
Speaker #5: You can see in the lower right-hand side of the renewable slide, we've reduced top cost and SG&A down well north of a dollar to current leverage, with a dollar a gallon to current levels.
Speaker #5: Focusing just on operating costs, we recorded 43 cents a gallon, this represents our seventh consecutive quarter of operational cost improvement trend excluding the turnaround in the fourth quarter of 2024.
Speaker #5: When factoring in our lean SG&A position, we posted operating plus SG&A costs of approximately 51 cents per gallon also a record low for the business and proves our low-cost position in the industry.
Speaker #5: Our plans also remain on track for a max staff expansion as we expect to bring on 120 to 150 million gallons of annual staff production in the second quarter of 2026 for an investment of 20 to 30 million.
Speaker #5: So there's no change what prequel was previously announced, and we're excited to continue this exciting step. On the Montana asphalt side, the business saw a 6.5 million year-over-year improvement.
Speaker #5: The same discipline and rigor that we've deployed with MRLs is also being applied in the asphalt side on costs and is generating these improved results.
Speaker #5: Thank you for your time today. With a strong quarter, being full progress on the regulatory front, thoughtful maturity management, and a clear expectation of meaningful free cash flow generation in the business, we look forward to the major value-creating opportunities that rest ahead for our areholders.
Speaker #5: With that, I'll turn the call back to the operator for questions.
Speaker #1: Thank you. We will now begin the question and answer session. To ask a estion, you may press star, then one on our touchstone phone.
Speaker #1: If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time a question has been addressed and you would like to withdraw your estion, please press star, then two.
Speaker #1: At this time, we will pause momentarily to assemble our ter. The first question comes from Alexa Petrich with Goldman Sachs. Please go head.
Speaker #6: Good morning, team and thank ou for taking our estion. The first one, wanted to ask on renewable diesel. We appreciate we're in a challenging macro right now just given the uncertain regulatory environment, but would love your updated thoughts on what mid-cycle earnings looks like for the business and then what do we need to see in the industry to get to more normalized earnings.
Speaker #7: Hey, Alexa, it's Todd. good question. you know, like you said, it's it's obviously a a tough environment out there right now, and we think the driver of that is is really just the market waiting for news on the permanent RBO and the SRE to respond.
Speaker #7: Plus, you know, working through that backlog of of rents that was carried forward, from 2024. So, so I I point to those as as kind of the key drivers.
Speaker #7: For for recovery, you ow, we provide that that chart every quarter that talks about the supply stack, the biomass-based diesel supply stack. And and basically what we see is, you know, at at the proposed RBO levels, you should see, you know, D4 demand, of basically five and a half billion gallons or so, which which would suggest that you need you ow, a good chunk of biodiesel run to run and and meet that demand.
Speaker #7: that puts you in that 150 to 2 dollar a gallon index margin range. you know, we're a ays away from that right now, but but really that's the range that we've seen throughout history.
Speaker #7: Up until kind of the 2023 RBO, change things. So at those levels, you know, I think we put some information out in the past that says, at $1.50 a gallon, you know, index margin, Montana Renewables should be making around $140 million to $150 million a year of adjusted EBITDA with tax attributes.
Speaker #7: So, so I kind of point to that. And then obviously as you increase back up to the historic 2 dollar a allon level a year, your you ow, meaningfully higher than that.
Speaker #7: That's that's at our yields. The the other thing I'd point out is is adding the staff flexibility that we are really provides a a meaningful kick to those margin numbers.
Speaker #7: You know, when you're talking an ra dollar to 2 dollar a allon premium, on, you know, an incremental 90 to 100 million gallons or 120 million gallons of of staff, it's a pretty meaningful bump in margin, which is why we're why we're so excited to be able to streamline this max staff 150 project and and move that forward.
Speaker #7: You know, you talk about a dollar a gallon plus on, you know, 100 million gallons obviously that's the math and and we stack that on top of the the core renewable diesel EBITDA that we we just talked .
Speaker #6: Okay, that's great. And then my follow-up just on the balance sheet, it's nice to see the partial redemption of the 26 notes. Can you talk about the path to further debt pay down and then particularly what considerations do you guys think for potential future divestitures?
Speaker #7: Yeah, good question. Like David said, you know, there's not too much remaining on the 2026s after we, you know, called the $230 million so far this year.
Speaker #7: So it's a really nice progress on that front. I ink you you look at that and you can say we have enough availability and and free cash flow in the second half of the year.
Speaker #7: to manage that in itself. So, so we kind of look forward and say, you know, what next on a 2027s. We've talked about potential strategic asset sales.
Speaker #7: Don't want to get too far into that, but but I can tell you that's that's that's certainly an option. we're ecting meaningful cash flow next year and throughout the rest of this year.
Speaker #7: And and then also you have the Montana Renewables monetization, which we continue to expect is is the ultimate step to reach our you ow final deleveraging target of 800 million dollars.
Speaker #7: So, so those are kind the three you ow I'd say large steps there. There's other things that can be done as well. and kind of the just the maturity management mode.
Speaker #7: But, as far as ultimate deleveraging, that's really what we're looking at.
Speaker #6: Okay, thank you. I'll turn it .
Speaker #7: Thank ou.
Speaker #1: Thank you. The next question comes from Connor Fitzpatrick with Bank of America. Please go head.
Speaker #8: Hi, ybody. this was another quarter where OpEx per gallon reduced in the renewables business. cost reductions have had momentum for a while now, but I think it would help us to explain the types of improvements and changes you've made in your operations year to date that are driving these cost reductions.
Speaker #8: Thanks.
Speaker #7: Hey, Connor. It's Todd again. Thanks for that question. And and you're right. You know, it's it's fundamental really to our success, particularly in this tight market.
Speaker #7: what we've been able to do on costs and and really you ow establish ourselves as one of the top leaders in this space, which stacked on top of you know our geographic advantage and and feedstock flexibility and and ability to generate staff were were quite excited about.
Speaker #7: Specifically, I'd say there are you know the the primary the improvement that we've made on cost is real minimization of water. We've spent a lot of time and effort understanding water treatment, you know reducing or the amount of water we have to treat in general.
Speaker #7: that's been a major step down. And then you know with with smaller amounts you can obviously treat it more efficiently as well. In fact, you ow we put out something not too ago that said as part of the the expansion in the future, we you know highlighting that you know on treatment, on-site treatment of water is is a piece that plan, which which hasn't changed.
Speaker #7: That's always been the case. So water treatment's the the primary improvement. We've also just got more efficient with the operation. You know, you learn a lot and we've come up the learning skill really ickly in Montana over the past couple of years.
Speaker #7: But you know we had a number of folks on-site, third-party contractors, etc., to to just help us with the learning curve over the last year.
Speaker #7: And we've had a meaningful contractor reduction on-site this year. and obviously the numbers, the production numbers and the cost numbers we see that you know we didn't need them.
Speaker #7: So the team's really done a spectacular job of getting up to speed, familiarizing themselves with the assets, and keeping costs down.
Speaker #8: Great. That's clear. and then as a follow-up, it looks like there's a few regions to play for SAF in the United States. The West Coast has LTFS programs, and Trans-Pacific voluntary and mandatory markets.
Speaker #8: The Gulf Coast has voluntary and mandatory markets in Europe. There are several U.S. Midwest states that have purchasers or producers tax credits. Additionally, SAF prices nationally trade at a premium due to incremental voluntary demand versus R&D and conventional jet.
Speaker #8: so how would you characterize the attractiveness of the different regions from where you sit and do you ink the proximity to the Midwest will win out versus other regions over time or at least provide a more stable end market?
Speaker #8: Thanks.
Speaker #7: Yeah, great question. The Midwest is is a really interesting market just because of the state tax credit, right? So you know I think you use the word you know just stability or kind of stabilize the the whole outlook.
Speaker #7: That tax credit goes a long way to do that. So so yeah, that'll be a piece the solution. you ow California is obviously a big piece as well.
Speaker #7: you know Oregon, Washington, we've talked about all of these areas. Honestly, just like renewable diesel, we're pretty flexible on our output and we take it to whatever areas we're we're geographically advantaged in.
Speaker #7: that's what we're doing now with with our ners at Shell and that's what we expect to do in the future as we as we add to the you know portfolio that we're building on the marketing side.
Speaker #7: The other thing I wouldn't forget about is is Canada. You know we're right the border there and there's some real ability to partner with the right people in Canada blend our product and and service that market.
Speaker #7: And there's a pretty meaningful SAF premium still in Canada. So like always at Montana ewables, the the key to our advantage or one of the keys to our advantage is really that in-market flexibility and sitting right there on the on the NSF, you know we can go east to Minnesota and Illinois we can go west to California, Washington, Oregon, and we can even you know truck north to to Canada.
Speaker #7: So very flexible, and I'd expect all of those to be part of the solution.
Speaker #8: Great. Thank you.
Speaker #7: Thank ou.
Speaker #1: The next question comes from Greg Brody with Bank of America. Please go head.
Speaker #9: Hey, od morning, guys. I'm a nice quarter. it's nice to see the the operations coming ether and and specialty.
Speaker #7: Thanks, Greg.
Speaker #9: I was the you you gave a couple of numbers there that I on the restricted group that I wanted to run through just to make sure I it's clear.
Speaker #9: So you I think you said the second half of '25, you expect 50 to 60 million of cash flow. and then you also mentioned the the unwind of some of some working capital, of 35 million.
Speaker #9: Is that part of that number or is that an addition to that?
Speaker #7: Yeah, it's it's part of that number. So
Speaker #9: Got it.
Speaker #7: we're already seeing some of that unwind. It's going to from the working capital, just related to the turnaround and timing of building inventory in advance.
Speaker #9: Got it. And then you you've you you suggested that you can deal the remaining 125 million of the '26s this year. Is so the the 50 to 60 million is from restricted group.
Speaker #9: Should we expect cash from anything from the renewable diesel business to be sent out or is is the the rest going to be solved for with possibly strategic?
Speaker #9: alternative.
Speaker #7: Yeah.
Speaker #9: Strategic actions?
Speaker #7: It's a good estion. You know, it's it's possible. to have cash out of Montana Renewables. Obviously, the way we plan for it is just the fully controllable in today's market.
Speaker #7: So so the way we plan for things is you know just what can we generate in a restricted group. So so yeah, to our point, you've got the 50, 60 million dollars of cash flow.
Speaker #7: I think you said is that you know all in the business. There'll there'll be an additional to that from the from the 35 million dollars of capital unwind.
Speaker #7: So I don't want you to ink that there's only you know 15 million dollars of of free cash flow generated in the core business in the second half plus that 35 million dollars of of working capital unwind, right?
Speaker #7: So so it's 50 you know plus the rest. So we we are expecting more cash flow in the second half. we do expect some strategic activity to help with that, but I'd also just point to our general liquidity and and revolver balance for for a very small amount.
Speaker #9: Okay. And then just shifting to the PTC monetization, I think you said you had a term sheet about half of it. Sort of two questions there.
Speaker #9: I think you had mentioned a discount. The way I think about it is around 5 to 7 percent versus what the book value is.
Speaker #9: And then just the just remind us if that's if if I'm remembering that right and that's sort of a good way to think about it.
Speaker #9: And then the second part of that is when do you ink you'll you'll address this the other half of the PTCs? And just in general.
Speaker #7: Yeah.
Speaker #9: Based on the way
Speaker #9: market's coming together, should we expect that to be a arterly to be done quarterly radically with what you're you're the actual income is?
Speaker #7: Yeah, we think so. the I 't want to get too too deep into the price obviously. We're we're still working through all of these but you know what I've said we historically you know projected that established tax credit itself for 95, 98 percent of their value and that's what we expected these producers' tax credits to be over time.
Speaker #7: You know new credits, new market, there can be a a small startup discount on the first year but not much. So everything we've learned says should be thinking at 95% range.
Speaker #7: As the normal mental model, and yeah, as far as timing, we've seen the market pick up quite a bit since the, you know, big beautiful bill was signed and provided a little bit more clarity around these PTCs.
Speaker #7: So we do expect to sell them all in the near future. And after we clear that backlog, yes, we expect it be a a quarterly transaction.
Speaker #9: Got it. And you know the one piece of ation I was wondering if you have your liquidity as of today, just or basically what the on the revolver.
Speaker #7: It's just about 200 million.
Speaker #9: Great. All right. Thanks for the time, guys. I appreciate .
Speaker #7: Thank you, Greg.
Speaker #1: The next question comes from Ahmed Dayal. With Etsy Wainwright. Please go head.
Speaker #10: Thank you. Good morning, everyone. you know pretty solid execution despite some you know you know and on that front, Todd, you know are there any particular catalysts we should be you know looking for you know with respect to any remaining sort of macro overhangs you know for you to start hitting your stride, especially with respect to you know Montana Renewables?
Speaker #10: I mean, it looks like on the cost side, you've ready done you know pretty well in terms of bringing costs down. you know if some margin improvements start showing up, I mean, it looks like it looks like there's a lot of operating leverage you could start generating.
Speaker #10: so so any color on you know be you know this topic would be helpful. Thank you.
Speaker #7: Yeah, and I think that's the that's the million-dollar question. You've you've nailed it. Is is when do we see the the reversal in margins?
Speaker #7: You know, we are very comfortable and confident that what the regulatory actions we've seen here in the second quarter, that you know, it's a matter of, you know, when, not if.
Speaker #7: On on these, right? We we talked earlier in Q&A about you ow if I had had a ion-gallon RBO, without an overhang, you're at substantially better volumes than or prices margins than we are today just to you know stay compliant.
Speaker #7: So, we're very bullish on the long-term outlook. I think the big question is just the overhang around when is that RBO going to be finalized?
Speaker #7: You know there are a lot of rumors still flowing around the SREs and how that interacts with the RBO, if at all. And then the market just has to work through this backlog.
Speaker #7: You know there's a year's worth of overproduction from 2024 rents that has been carried into 2025. So the market's not acting like it would in a normal environment.
Speaker #7: When it has those rents that it has to eat through into current year, I'll say just expire. you know that essentially becomes part of the balance.
Speaker #7: And the market doesn't have to, you know, respond to just normal fundamentals like it would. But all of that ends at the end of this year when we step into 2026.
Speaker #7: Those old rents can't be carried forward again. And we see the step up in RBO. So I think the big question in our mind is do we see margin recovery before that as people get more comfortable with you know how strong the outlook looks for 2026 and starts to you ow ramp up production, or rent prices start to respond you ow expecting that there's going to be you know such an increase in 2026.
Speaker #7: So, that's what our eyes are on. I think that's what most folks in the industry are tracking as well. And, you know, long-term we think the changes that occurred in Q2 are quite bullish for the space.
Speaker #7: So looking forward to getting ere.
Speaker #1: Okay, thank you. And this, you know, on the Montana Renewables monetization, it looks like it's still on the table. But, you know, from a timeline perspective, should we expect any movement on that front?
Speaker #1: In 2026 or is this a little bit you ow more sort of a future-type event for the company now?
Speaker #7: Yeah, I don't think 2026 should be thought of as off the table at all. You know, when we rewind the clock a little bit and we say, "What do we have to do at Montana Renewables?" We need to get the DOE loans done.
Speaker #7: We need to prove out our operation commercial position that's done. We needed to you know demonstrate our cost advantage that's done. you know right now we're we're ramping up kind of the the faster cheaper you ow first step into max staff.
Speaker #7: We think that's a a really nice value upside. For for potential buyers. And and then the last thing you need is a little bit outside of our control is is really just you ow demonstrated margins which you ow we kind of just talked .
Speaker #7: So we think that you get a little bit of margin improvement. Your late this year early into next year, you know have a quarter of two of of really strong earnings and and it's a you ow an active conversation.
Speaker #7: Don't want to predict exactly when that happens and and the like. But I I wouldn't 2026 is is off the table by any stretch.
Speaker #1: Understood. Thank you for that. That's all I have, guys. I'll email my other questions offline. Thank you.
Speaker #7: Thank ou.
Speaker #1: The next question comes from Jason Gabelman with TD Coven. Please go ahead.
Speaker #11: Yeah. Hey, good morning. Thanks for taking my questions. I wanted to get your views on the RBO proposal and specifically the part that talks about half rent generation for imported feed or products, and I'm wondering if you have a sense of what that does to the market.
Speaker #11: Does does that essentially just double the value for for rents or is there some offset on on feedstock costs and do you think that is likely to be included in the final RBO?
Speaker #7: Hey, Jason. It's Todd. Great question. You know, Bruce was here to help with it a little bit, but he'll be back this afternoon, and hopefully by the time we connect a little later.
Speaker #7: so chime in more. But you ow the whole the whole half rent concept is an esting one. I I'd say the most important thing is we don't see that imported feed is needed to to basically meet the the RBO as it is.
Speaker #7: You know, four and a half billion gallons of domestic feed is what it calls for in the proposal. And you know we're generating almost 7 billion gallons of domestic feed in North America now.
Speaker #7: So, you know big macro. I would start there and say I don't know how much imported feed's even in the mix. Now, if you go down a little bit, there are certain plants that, you know, just logistically would have a really hard time potentially bringing in or would need to just work on their rail, etc.
Speaker #7: to do more around domestic and I think that's something that can be done in time. But you know they may be in the mix for for a little bit.
Speaker #7: But big picture, we don't think that imported feed is needed to meet the proposed RBO. If it is, if it is temporarily, then I think exactly what you said is right.
Speaker #7: You know, you would look at our supply stack and you would say those folks that are running on imported feed, you ow the rents basically would have to cover that that price.
Speaker #7: You know, the the rent price in order for them to run and meet the B4 requirement would have to adjust so that at a half rent value, you know they'd be incentivized to do that.
Speaker #7: So, either the price of the imported feed has to go down. That's not going to happen because it's a global market that has a floor price to it.
Speaker #7: Or the price of rents would have to react. So, you know, we see that as a potential and, you know, I guess it's an upside possibility.
Speaker #7: But more practically, just don't e that imported feed will be needed to meet the the proposed RBO. And and we're hoping that you know as the as the group there, the EPA studies deeper into it and and and you know closes the comment period today, that that they'll come to the same conclusion and and increase it.
Speaker #1: Got it. Yeah, that's great color. Thanks. And my follow-up is just a clarification on the PTC monetizations. I know you talked about signing some term sheets.
Speaker #1: Is there anything on regulatory front that needs to be finalized in order to convert those term sheets into final deals or is it just normal more normal course working through the paperwork?
Speaker #7: No, I think it's just normal course working through the paperwork. You know, we're in that process now. We haven't come across anything where anybody said that, "Hey, we need to slow down." So I think it's just, you know, the normal process.
Speaker #7: It did get delayed a little bit while rumors were swirling around the PTC and the, you know, the big beautiful bill kind of negotiation.