Calumet, Inc. /DE Q1 FY2023 Earnings Call

Hello, and welcome to the Calumet Specialty Products Partners, L.P. First Quarter 2023 Results. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, today’s event is being recorded. I now would like to turn the conference over to Brad McMurray in Investor Relations. Please go ahead.

Good morning. Thank you for joining Calumet today for our first quarter 2023 earnings call. With me on today's call are Todd Borgmann, CEO; Vince Donargo, CFO; Bruce Fleming, EVP Montana/Renewables and Corporate Development; Scott Obermeier, EVP of Specialty; and Marc Lawn, EVP of Sustainable Products and Strategy. You may now download the slides that accompany the remarks made on today's conference call, which can be accessed in the Investor Relations section of our website. Also, a webcast replay of this call will be available on our site within a few hours. Turning to the presentation, on slide 2 you can find our cautionary statements. I like to remind everyone that during this call, we may provide various forward-looking statements. Please refer to the partnership's press release that was issued this morning, as well as our latest filings with the SEC for a list of factors that may affect our actual results and cause them to differ from expectations. With that, I'll turn it over to Todd. Todd?

Thanks, Brad, and welcome to Calumet's first quarter 2023 earnings call. Let's turn to slide 3. The first quarter was an impactful one at Calumet. We generated strong earnings in our specialty business and achieved new milestones at Montana Renewables as we started up the final two units and are now fully operational. During the quarter, the company generated $77.7 million of adjusted EBITDA, up $14 million from Q4 of 2022 and $52 million versus last year's first quarter. The step change in results we saw last year in our specialty business continued into 2023. Results in our specialty products and solutions business were a combination of a constructive market, strong demand, and ongoing execution. We like to see specialty volumes hovering around a 20,000 barrels per day mark. And in the first quarter, we hit 20,202 barrels per day of specialty product volume, all while specialty unit margins were up 60% versus the first quarter of 2022. Further, Calumet's integrated specialty system continues to run at maximum rates given strong demand and compelling margins. Our performance brands business took the expected major positive step forward in the quarter, in our newly reconfigured and fully operating Montana asphalt plant started the year strong, and we should continue to expect this business to generate stable, strong cash flows. The Montana team somewhat seamlessly eased into operation at the reconfigured plant, and it was nice to see our output being consumed in a local market, even in the winter months when things are typically slower in the Rockies. This will take us further into all of these segments shortly. And before it does, I'll highlight that while Montana Renewables has been getting most of the airtime through the past couple of years, our core specialty business has delivered $444 million of adjusted EBITDA over the past 12 months. We continue to be committed to taking roughly $300 million of debt out of the Calumet system through excess cash flows and MRL monetization. And it's also worth noting that over the past two years, our credit metrics have dramatically improved, even though we just now completed the Montana Renewables project that unlocks the extreme cash flow generation power of that business. We'll talk more about Montana Renewables shortly. And for now, I'll turn the call over to Vince. Vince?

Thank you, and good morning. As Todd mentioned, Calumet had another strong quarter led by our specialty products and solutions business, as shown on slide 5. Our SPS business generated $76.4 million of adjusted EBITDA in the first quarter and this business continues to deliver both operationally and commercially. While margins for specialties and fuels came off from the levels we saw in the back half of 2022, specialty margins increased over 60% and fuel margins increased over 50% versus this time last year. Shreveport, our largest plant, was production-limited early in the quarter as the team made some repairs from December's Arctic freeze, and since then, the plant is running at maximum fuels mode, and we expect to continue in the current strong margin environment. As we look forward into 2023, we continue to see a constructive market for this segment as we enter the summer driving and paving season and our confidence in this segment is reinforced by the 20,000 barrels per day of 2-on-1 crack spread hedges at $27 per barrel. Moving to Slide 7. Our Performance Brands business generated $16.4 million in adjusted EBITDA for the quarter, a marked improvement on our quarterly results in 2022. Input costs have stabilized and that's what drives the expected financial results for performance brands in the quarter. For over two years, the business has been increasing prices and by the time price increases are enacted, input costs had also increased, leaving the business continuously in catch-up mode. The first quarter's margins are more representative of what we should expect in a stable environment. Further, we received a $5 million partial payment for business interruption insurance proceeds that resulted from the Greece supplier Force Majeure that impacted our business throughout 2021 and 2022. Adjusting for that payment, TD still delivered over $11 million in adjusted EBITDA for the first quarter and delivered an adjusted gross profit of $3.95 a gallon, an increase of over 60% versus both fourth quarter and first quarter results of last year. Moving to Montana, on Slide 9. Great Falls produced $4.8 million of adjusted EBITDA in the first quarter. We ramped up both our renewable diesel operations at MRL and experienced our first full quarter of operations at our reconfigured specialty asphalt plant. Both businesses ran to plan during the quarter, and our asphalt plant is gearing up for paving season. Most importantly, with the renewable hydrogen plant, pre-treater, and staff operations up, we are entering a new period in Great Falls and look forward to realizing the cash generation potential of this new business. With that, let's flip to Slide 10, and I will turn the call back to Todd for concluding remarks. Todd?

Thank you, Vince. For two years, our quarterly calls have included progress reports on Montana Renewables and to now report that all units are operating is a huge accomplishment. As our focus shifts from construction and start-up to delivering the full cash flow potential of MRL, I'll take a few minutes to remind listeners of the key operational milestones announced over the past few months. First, initial renewable diesel operations commenced late last year. Then in Q1, the renewable hydrogen plant was commissioned to increase the feedstock rate from 5,000 barrels a day to 12,000 barrels a day. Our hydrogen system is unique in that it lowers the carbon intensity of our end product by creating renewable hydrogen as opposed to more traditional gray hydrogen plants that are fed by fossil fuels. Previously, we’ve talked about our expected MAX SAF expansion, which could increase rates to at least 18,000 barrels a day. An additional hydrogen plant will be required to achieve that next step, and it’s nice to have our existing plant fully operating and derisked, making the future project a low-risk venture. In the meantime, our engineers are hard at work figuring out how to creep up rates on our existing units. Next, our pre-treater, which started up in April, is the single biggest driver of value at Montana/Renewables. The pre-treater opens up all of the regionally logistically advanced feedstock that is key to the lasting competitive advantage that sets Montana/Renewables apart. As we gain experience in the renewable feedstock market, we've reinforced our initial hypotheses regarding the large advantages that both our geography and pre-treater provide. To put the value into perspective, we can currently buy a regional untreated feed for approximately $0.80 a gallon more cheaply than treated feed. As we transition into our steady-state operation, we expect to process the majority of our existing safety stock of clean feed this quarter, clearing the slate to receive the full financial benefit of our pre-treater trader in Q3. The last milestone in the Montana/Renewables project was producing sustainable aviation fuel. SAF was added to the project, and our team confirmed the significant premium this product demands in the marketplace. As a boutique high-margin product, the SAF value chain more closely resembles a specialty product than a fuel, and Calumet was very comfortable in this environment. Since the Inflation Reduction Act was announced, the outlook for SAF has exploded. As the only proven scalable solution to decarbonizing air travel, it has turned into one of the hottest topics in energy. And as of last week, Montana/Renewables is the largest producer of sustainable aviation fuel in North America. With all units running, we also recently reconfirmed Montana/Renewables EBITDA expectation, with a clear line of sight into the cost of untreated feedstocks, the economies of scale enabled by our renewable hydrogen plant, and margin uplift from SAF. We recently reconfirmed our run rate EBITDA expectation of $1.25 to $1.45 per gallon, which we expect to hit when we are processing all dirty feed. Montana/Renewables has evolved from an idea in 2020 to an operating leading renewable business in a very short amount of time. During that time, 2.7 million man hours were worked on site with no lost time incidents. This is quite an accomplishment, and thank you to the team and our partners that have made Montana/Renewables a reality. As we look forward, our strategy is clear and it remains unchanged. Our priority number one is to demonstrate the cash earnings power of this new business. In parallel, we will continue to engineer the potential MAX SAF expansion. Last, we expect to progress down the path of an ultimate IPO of Montana/Renewables as we believe the competitively advantaged pure-play SAF and renewable diesel business with a growth profile of ours is extremely valuable. And of course, we'll continue to remain flexible and opportunistically engaged with potential partners along the way. With that, I'll turn it to the operator for questions.

Yes. Thank you. At this time, we will begin the question-and-answer session. And the first question comes from Neil Mehta with Goldman Sachs.

Hey, good morning. Thanks for taking the time. This is Nicole Seltzer on for Neil Mehta. The first question here is on Montana/Renewables. And I understand you guys recently reconfirmed the go-forward EBITDA guidance of $1.25 to $1.45 per gallon. Can you just talk us through the drivers between the lower and the upper end of the range? And then kind of where you might see one skewing one way or another later this year?

Hey, Nick, Bruce Fleming. We're simply giving a range. That's a market condition. There is a little bit of volatility. We've published a lot of look back and gross margin information, and that simply captures what's going on out there.

All right. Helpful. Thank you. And then the follow-up here is just on Performance Brands and it seems like that business has been inflecting, I mean, and obviously, a stronger quarter here. Can you just talk about the performance point of inflection and then pays for the rest of the year? Thank you.

Yes. Great. This is Scott Obermeier. As Vince alluded to during the commentary earlier, I think we finally caught up. The market has stabilized. We've been talking for the past 18 months about rising costs and the lag in our price increases. I think what you saw in the first quarter and what we saw in the first quarter was our pricing finally catching up to the rising cost structure as well as solid demand in the market. So we would expect that to continue to move forward.

Great. Thank you.

Hi. Good morning, guys. Thank you for taking my questions.

Hi, Amit.

Congratulations on achieving all these milestones on time; it's very impressive. How are you now approaching the management of the debt? What are your key priorities for the cash flow that you are equipped to generate with this new setup?

Yes. Hey. It's Todd. Reducing leverage continues to be a strategic priority. I think we've been pretty consistent about that. We have a number of ways to do it. You mentioned operating cash flow from Montana Renewables. That's certainly one. We also expect monetization proceeds at some point in the not-too-distant future from Montana Renewables, that's another. I think when you look out at the quantum of that, we're in a pretty decent position right now when you look at our current EBITDA versus our kind of restricted debt. We're coming in at a 3.0 ratio, which is actually a pretty reasonable level. That being said, we think that in the long run, we want to take $300 million more off the table, give or take. So the plan is to do that with operating cash flow or Montana Renewables monetization.

Okay. Thank you. And then you already focused on sort of expanding SAF capacity to 18,000 barrels per day. Once we get to that level, are we capped out at this facility, or is there room for further capacity expansion in Montana?

Amit, Bruce Fleming. The natural limits to our existing facility are something that we're going to discover. We're going to be creeping capacity without a project anyway. The guys in the field are already finding small wins. And as we get the project online, we'll find out 18,000 barrels a day renewable feedstock is kind of a guideline figure. We may do better than that. But there will be some ultimate limit to the single train operation there. So at that point, we think that with the competitive advantages we have with every study that we've gotten any bank or consultancy to do for us, we've simply got the best machine out there. And that puts us in a really good position as the industry structure continues to unfold around us to be the aggregator in this space. So we're looking forward to rotating to some pretty conventional M&A activity.

Understood. Thank you for that. That's really helpful. And just last one for me, guys. Let's talk about potential recession, et cetera, given what the macro environment is. Are you seeing any adjustments from customers or industry players around demand, et cetera, keeping in mind that type of scenario?

Yes, this is Scott here. Overall, demand remains solid, although it has become a bit uneven in certain parts of the consumer and retail sector. We've noticed some published issues starting to decrease to slightly more normal levels. Despite this, we are optimistic about our future plans. Over the past three to four years, we have experienced significant fluctuations, but the business has performed well. We are resilient, diversified, and feel confident about our current position.

Thank you, guys. That’s all I have.

Thanks, Amit.

The next question comes from Gregg Brody with Bank of America.

Hi. Good morning, all.

Hey, Gregg.

So you highlighted the IPO in the press release and something you've been talking about is amongst a bunch of alternative plans. Does the fact that you're putting in the release indicate any sort of change in your considering all the other things that you had talked about in the past? And is there a potential timing around the IPO?

Hi, Gregg, Bruce. Let me address what I believe was a three-part question. Our strategic options for Montana Renewables are quite promising, and this will also benefit the parent company. Todd might want to add his thoughts after I'm done. A key factor will be the Department of Energy's decision regarding our loan guarantee application, and we'll keep you updated on that. Their discussions and evaluations are progressing well, which is a significant strategic advantage. With a clean balance sheet, we can proceed with the IPO. The timeline we’re seeing from the banks we're in talks with is approximately nine months, but it could happen sooner. The market conditions at that time will be crucial for the offering. Recently, as Scott Obermeier mentioned in another context, we've faced many challenges due to the macroeconomic environment. Hopefully, if the global economy stabilizes, we'll have a strong energy transition offering. It’s significant to note that we are now the largest producer of sustainable aviation fuel in North America, a fact that many are unaware of. We've been focused on our work, not promoting or developing projects, and we no longer need to seek financing to build them. The projects are operational and running effectively. We're eager to see how we can enhance unitholder value from this.

Yeah, maybe I'll pile on a little bit. I wouldn't read too much into, is it a signal of other items kind of like Bruce pointed out there at the end. What we think about a potential IPO is it's doable. It's doable in the not-too-distant future. It's extremely accretive. So it's not that we won't take any other actions. But like normal, you know us by now, will continue to be opportunistic and evaluate options. But what it does mean is that anything that we look at, we're going to evaluate in the context of is this a supportive majorly supportive of what looks like a pretty controllable and positive destination. So that's kind of the lens we're looking through if that makes sense, Greg.

It does. Thank you for all the clarifications. It sounded like you see business improving, or at least maintaining, I should say. Are you seeing any cracks in anything you're seeing in terms of weakness in the economy and demand?

I think Greg and Scott mentioned earlier that there hasn't been much change in specialty, but we are still seeing strong specialty margins. Regarding cracks, we have noticed a slight decline, but we are comfortable with our plan at these levels. We don’t expect cracks to rebound to last year's levels, but we can definitely execute our business plan in the current environment to support operating at maximum rates. Additionally, we have some hedges in place that we established last year, anticipating a potentially volatile market to protect our business plan. Overall, we are focused on the current levels and believe our plan remains viable in today’s market conditions.

Great. That's it for me, guys. Thank you for the time.

Thanks, Gregg.

Thank you. And the next question comes from Jason Gabelman with TD Cowen.

Hey, guys. Good morning. On MRL the guidance you gave of $145 million to $165 million. I think last year, when you talked about a base case, it was $1.85. So the indicative economics are a bit lower than that. I'm just wondering what's going on in the market now different than the base case that you provided last year?

Jason, Bruce, I'll start. So we have put out gross margins and EBITDA and net margins. We're not actually reducing guidance a change in frame of reference. We've talked a lot about the location advantage. We've done differentials on our logistics better than the Gulf Coast, and we've put out the constant $2 a gallon-ish gross margin. And we've had people ask us to just simply tell us what we're going to earn. So the answer is $1.25 to $1.45 a gallon fully loaded, including SG&A, EBITDA based upon gathering of untreated feedstocks in our local market. That's no change. If anything, that's probably up a little bit from some of the look backs that we've put out.

Okay. Understood. If I apply that calculation using the $0.80 per gallon for higher feed that you are currently using, it suggests that in the second quarter, you should generate some EBITDA from the renewable diesel plant. Is it accurate to expect around $0.40 to $0.50 per gallon for Q2, with a higher amount anticipated in Q3 as you increase the use of untreated feed?

You're thinking in the right direction. The rolling from purchased clean feeds to purchased untreated feeds has the compelling advantage that Todd mentioned. I think that's broadly understood in the market. And I think the start-up performance of some of our peers, without a pre-treater is going to give you a benchmark for what the industry looks like. Our pre-treater literally came online in the last couple of weeks or so. We announced that as it did. So, we're going to get a partial benefit as we speed up the untreated supply chain. We've got to work out of the safety stocks, the clean inventory that we have on site. How fast we do that is going to be an optimization. So I'd probably prefer to stay away from technical guidance quarter-over-quarter. We may find that we accelerate the inbound and we hold the safety stocks, we may find the converse. But it's simply time shifting. We're going to eat the clean feeds and they'll be gone. How fast we do that, we're going to try to gain an optimization value.

Got it. And then on the IPO timing, I think when you talked about the potential IPO last year, you discussed wanting to have some trailing amount of indicative earnings released before going through an IPO process. Is that still how you think about it? Because, it seems like the first two quarters of earnings will be 3Q. Are you going to want a little more of a track record before you pursue an IPO or is one to two quarters of consistent operations enough?

I think we're going to have a look at the market and let that guide us. You're right that I do think providing that first full quarter run rate of audited financials, we can think about that as a key trigger point in launching the IPO process. I'd also say that the first few months of the process are confidential. So they don't expect to it all have to necessarily be in series. But I think you're thinking about it the right way. It's going to make a lot of sense. And I think we're all going to benefit from putting the numbers out there. Let people see the bottom line of Montana Renewables as a standalone fully operating business. And we'll go from there.

Great. And if I could just squeeze one more in, which was CapEx came in a little higher than we thought it would for 1Q. Was that related to kind of the completion of the biofuels plant? And if you could give some kind of total amount of capital cost that the project ended up costing, that would be helpful. Thanks.

Jason, it's Bruce, I'll start, and Vince may want to add some exact figures. But three things are happening here at the end game as we go live on our Montana Renewables business. We did pile SAF opportunistically on top of the program that we first announced two years ago. That was kind of a midcourse correction. And so we've got some expenditures there. We've got the expansion ramping up. The Montana Renewables Board last fall approved us spending this year on that. And you've got some of that starting to run through. And then, as you indicated, the startup/one-time is a consideration in the first quarter. We commissioned a whole bunch of units sequentially in a relatively short period of time, that's not without some teething issues. And we will eventually have a full answer to your question on the total cost. But some of that is still running in. We literally just came online with the pre-treater, some of the payables are on 30-day terms and that sort of thing. So we'll do a look back at some point in the future.

Great. Thanks for the color, guys.

Thank you.

And this concludes the question-and-answer session. I'd now like to turn the floor to Brad McMurray for any closing comments.

On behalf of the Executive Team here in the room and really the entirety of Calumet, we appreciate your time and your interest this morning. So thanks, everybody, and have a good weekend.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.