Earnings Call Transcript - CLMT Q1 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2021 Calumet Specialty Products Partners, L.P. Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Brad McMurray of Investor Relations. Thank you. Please go ahead.

Brad McMurray, Investor Relations

Thanks, Elise. Good morning, everyone, and thank you for joining us on the call to discuss our first quarter results. I'm joined today by Steve Mawer, CEO; Todd Borgmann, CFO; Bruce Fleming, EVP, Montana Renewables and Corporate Development; Scott Obermeier, EVP, Specialty Products & Solutions; and Marc L., EVP, Performance Brands.

Steve Mawer, CEO

Good morning, everyone, and thanks, Brad. It's good to have you on our team. Like pretty much everyone in similar lines of businesses and geographies, our first quarter results are dominated by a single one-time event, the impact of winter storm Uri and resulting production losses. Our first quarter adjusted EBITDA was negative $5.4 million. Despite these challenges, our Performance Brands and our Specialty Products & Solutions segments maintained or improved unit margins despite the dramatic increase in crude prices during this quarter. This clearly continues to demonstrate our ability to minimize the impact of price volatility and continues the excellent work demonstrated by our team during 2020. In late February, our Shreveport refinery was successfully and safely completing its largest turnaround in a decade. As we prepared for the restart, Uri bore down on Northwest Louisiana. A 10-day hard freeze created a humanitarian disaster for the Shreveport area with loss of municipal water, roads impassable for most of that time, food shortages, and power outages. I'll go into that detail to demonstrate the level of challenge presented to our teams at affected locations in Louisiana and Texas. We're really proud and appreciative of our colleagues. They worked long, long hours to fix hard freeze damage while contending with personal weather-driven challenges and, in many cases, also helping their communities during this time of significant need. Nevertheless, the combined impact of repair costs and volume loss affected our first quarter by an excess of $30 million. A hard freeze on an entirely cold plant presents additional challenges and results in additional damage and additional diagnosis time.

Todd Borgmann, CFO

Thanks, Steve. Moving to Slide 4, I'll discuss our summary financial performance then we'll dive into the segments a bit further. As Steve mentioned, we lost $5.4 million in adjusted EBITDA during the quarter as we battled winter storm Uri. Our Specialty Products & Solutions segment bore the brunt of the storm, resulting in a $2 million adjusted EBITDA loss. Performance Brands generated $16 million for the quarter, and Montana Renewables lost $2 million of adjusted EBITDA. Additionally, costs from our Corporate segment were just over $17 million for the quarter, down from $20 million in the same period a year ago. This is the first quarterly earnings call where we've been able to report Specialty Products & Solutions, Performance Brands, and Montana Renewables as separate segments, and we released an 8-K last week providing full year 2019 and 2020 results recast by segment.

Steve Mawer, CEO

Thanks, Todd. So let's turn to Slide 9 with our summary and outlook. As you can see and Todd talked about, we made significant progress on the Montana Renewables project, both in terms of speed to market and further verification of its exceptional position as a leading renewable diesel conversion project. At the very highest level, the best de-risking of any investment is to have an asset that performs well through any and all cycles, and we believe that the Montana project certainly does that. The project competes either as a stand-alone renewables project or as a dual conventional renewable train where the conventional site can provide an additional count to cyclical high cash flow risk minimum. Over the short term, we further de-risked by high speed to market at low capital investment. Over the medium term, we de-risk through our modular approach to implementation, which makes the execution easier and cheaper and spreads out the investment ramp over time. Finally, our existing metallurgy means that the transition to multi-feed processing appears to be immediately practical, if not inevitable, and that's at low cost and in pretty short order.

Operator, Operator

Your first question comes from the line of Gregg Brody with Bank of America.

Gregg Brody, Analyst

Hopefully, you can hear me okay.

Steve Mawer, CEO

We can.

Gregg Brody, Analyst

Maybe I could start with a follow-up on the renewables project. You've outlined a plan that suggests by April of next year, after the catalyst change, you'll achieve 5,000 of capacity and 10,000 in the second half. How will the refinery need to be offline before the April 2022 catalyst change to prepare for that first phase?

Bruce Fleming, EVP, Montana Renewables and Corporate Development

Gregg, it's Bruce. The answer is no. April is a scheduled refinery-wide turnaround, that's what makes it the right time to get into the hydrocracker for the catalyst switch and final separation of the oil moving activities on the site, but there's no pre-shut down.

Gregg Brody, Analyst

Got it. And this quarter, the Montana refinery looks to be a bit weaker than a year ago. I see you mentioned the Canadian differentials being a driver. Maybe you can walk us a little bit through what you expect out of that business going for the rest of this year and where we could see some improvements in margin?

Bruce Fleming, EVP, Montana Renewables and Corporate Development

Yes. So Gregg, one of the reasons we put the Rockies crack spread environment into the slide deck is to highlight that this is well within the range of normal market volatility. The refinery ran full through this quarter, and it's simply external price environment. There's no trends to that. The chart we put in shows a $40 crack spread environment generally in the Rockies. And I can tell you, if you extended that chart back for 13 years, you would get the same $40, no trend line. So that's the external condition, but you're going to see a lot of volatility to it. And I think that's all that we are experiencing.

Gregg Brody, Analyst

Do you think it's fair that this refinery is not recovering like others right now? I see that cracks are up, but I would have expected this quarter to perform better in that business. You mentioned volatility, but is that starting to ease? What are you observing in the first month of the year?

Bruce Fleming, EVP, Montana Renewables and Corporate Development

Yes. Yes. I think if you pull the price series that you use in your model, you're going to find it's ticked up sharply just in the last 6 weeks. That's a portion of normal seasonal component and a portion of the commodities complex lifting. We do have the WCS differential moving favorably toward us, but still below WCS differential average, historically.

Gregg Brody, Analyst

Got it. Regarding Specialty Products & Solutions, where we observed most of the $30 million impact this quarter, is there any remaining impact this quarter, or is it completely resolved?

Todd Borgmann, CFO

The plant is up and running, Gregg. This is Todd. Thanks for the question. The plants are up and running now, have been running fairly well this quarter. We did have a little bit of inventory rebuilding and supply chain building in April. So probably a little bit of delay early in the quarter getting all those sales out to the customers and recognized. But the good news is, we are up and running fully. And as of May here, we should be recognizing full quarters.

Gregg Brody, Analyst

Got it. So this quarter, we'll have some impact, but it sounds like you've got to...

Todd Borgmann, CFO

Yes, we'll see how much we can make up. We're producing as hard as we can and strong demand out there. We have quite a backlog of orders. So we're not expecting just to get inventories replenished. We're going to keep oil moving out the door as fast as we can. But it'll take a couple of months to work through that whole process.

Gregg Brody, Analyst

Okay. I have one more question before returning to the queue. The Supreme Court argument regarding the small refinery exemption case began last week, and we are eagerly awaiting the outcome. If the premium quarter is reversed, that would be beneficial for you. However, if the ruling is maintained, how would that affect your options in terms of payment? Could you also explain how you would fund it if you were to lose the case?

Todd Borgmann, CFO

Well, Gregg, I think there's multiple questions in there with kind of hypothetical building on hypothetical. So I think the...

Gregg Brody, Analyst

To simplify, the main question is how you would manage the liability if the ruling is not in your favor. Would you need to secure cash sooner rather than later? Are there any plans for appeals? I'm just trying to grasp the implications of that liability.

Bruce Fleming, EVP, Montana Renewables and Corporate Development

Gregg, it's Bruce. Remember, RINs are not money; RINs are a quantity of demonstrated blending. And none of these are due yet. The EPA has extended all of the timelines. So there's a long road and there is a nest of court activity besides the narrow one around HollyFrontier that's in front of the Supreme Court. So I think it's not bimodal as you posit it. I guess it's a ticket. And we see a couple of ways through, but I might direct you to the fact that the renewable diesel project more than covers the issue that you're bringing up.

Gregg Brody, Analyst

And I appreciate that. I'm just wondering if there is a cash need in between the time that comes online and...

Bruce Fleming, EVP, Montana Renewables and Corporate Development

Gregg, we don't believe that's the case. I think whatever the Supreme Court rules, it's just the beginning. Even though the Supreme Court would appear to be the final voice, it's just the beginning of the process both ways.

Operator, Operator

Your next question comes from the line of Neil Mehta with Goldman Sachs.

Neil Mehta, Analyst

First question is just on gross margins at the specialty products business. They seemed pretty durable in the first quarter despite the rising crude price environment. Can you just talk to us about how do you think about those gross margin sustainability if oil prices continue to grind higher?

Scott Obermeier, EVP, Specialty Products & Solutions

Neil, Scott Obermeier. Thanks for the question. I would probably make a few comments to your question. The first would be, as you know, Neil, we've talked a little bit about it the past year or two. We've been really focused commercially on improving our skills and our mindset on extracting the full value and implementing pricing and various commercial excellence activities. And so I think that the team has come a long way the past couple of years. I think that's shown in our results, Neil. And we've been stress-tested, if you will, last year, as crude spiked up in Q1. And so we feel that the business is resilient. Demand is strong, and we've got the right execution in place to handle, frankly, any type of feedstock volatility or market volatility at this time.

Steve Mawer, CEO

Yes, Neil, this is Steve. I would like to add that we have successfully navigated the market from negative $40 to positive $65 on crude. Demand continues to be strong. I believe we are confident in our ability to manage the macro environment, as Scott mentioned. There will always be some marginal mix effects, but we think the impact between Q1 and Q4 was neutral. There were both positive and negative factors in the mix, but overall, we believe the macro trends are solid, with some minor fluctuations in the mix.

Neil Mehta, Analyst

I appreciated your comments about Shreveport and I hope your team was able to stay safe during the storm. Regarding the 1Q EBITDA at Specialties, it was softer than we anticipated, primarily due to lower volumes. Can you provide information on the lost opportunity profit from the downtime if you have that figure?

Todd Borgmann, CFO

Yes. I think this is Todd. We indicated that the freeze cost us $30 million. The turnaround likely resulted in an additional $10 million, primarily due to lost opportunities. We haven't specifically outlined these figures, but internally we've analyzed the lost opportunity along with the actual specific volume charges. It would be reasonable to estimate that $25 million to $30 million is associated with lost volume, and an additional $10 million is related to lost opportunity.

Neil Mehta, Analyst

So $35 million to $40 million, that's a pre-tax number?

Todd Borgmann, CFO

Correct. EBITDA.

Operator, Operator

And at this time, there are no further questions. I would now like to turn the call back over to Brad McMurray for any closing remarks.

Brad McMurray, Investor Relations

Thank you, everybody, for your time. Have a good weekend. Goodbye.

Operator, Operator

That does conclude today's conference. We thank you for participating. You may now disconnect.