Good day, ladies and gentlemen, and welcome to the second quarter 2017 Calumet Specialty Products Partners LP earnings conference call. And at this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. I would now like to introduce your host for today's conference call, Mr. Joe Caminiti. You may begin, sir.

Good morning, everyone. Thank you for joining us today for the second quarter earnings results conference call. With us on today's call are Tim Go, CEO; West Griffin, CFO; Bill Anderson, Head of Specialty Product Sales; and Bruce Fleming who leads our strategy and growth functions. Before we proceed, let me remind everyone that during the course of this call, we may provide various forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Such statements are based on the beliefs of management as well as the assumptions made by them and, in each case, based on the information currently available to them. Although our management believes that the expectations reflected in such forward-looking statements are reasonable, neither the partnership, its general partner, nor management can provide any assurance that these expectations will provide to be correct. Please refer to the partnership's press release that was issued this morning as well as the latest findings with the Securities and Exchange Commission for a list of factors that may affect our actual results and could cause them to differ from our forward-looking statements made on this call. As a reminder, you may now download a PDF of the presentation slides that will accompany the remarks made on today's conference call, as indicated in the press release we issued earlier today. You may access these slides in the Investor Relations section of our website on calumetspecialty.com. Also, a webcast replay of this call will be available on our site within a few hours and you can contact Alpha IR Group for investor relations support at 312-445-2870. With that, I'd like to hand the call to Tim Go. Tim?

Good morning, everyone and thank you for joining us. I will start of the call today with a high-level overview of our second quarter results. Today, I’m excited to announce that we delivered over $100 million in adjusted EBITDA this period. The strategy our transformation is working and core Specialty Product segment continues to serve as the backbone of our business, helping us drive more consistent and improved financial performance. Let's take a moment to discuss some of the key highlights of the second quarter. Please turn to slide three of the presentation. First, we had the improved the margin capture across our Specialty and Fuel segments, which helped drive strong adjusted EBITDA of $102 million during the second quarter and $180 million over the first half of 2017. During the second quarter, we also had positive net income of roughly $10 million, driven in part by our ongoing self-help initiatives and stronger execution. Our specialty segment continues to drive a material portion of our adjusted EBITDA and generated $67 million in the second quarter versus $59 million in the prior-year period and up from $46 million in the prior quarter. I'm pleased to report that this was the highest adjusted EBITDA that the specialty segment has generated in any quarter over the last four years. Additionally, the segment's gross margin per barrel increased roughly 17% compared to the prior-year period and was up 31% sequentially, coming in at $41.87 per barrel for the quarter. This improvement in margin capture was driven by prior price adjustments and tighter supply across the industry for some of our core products, as well as by our own self-help initiatives. Another significant contributor to our improved performance was our Branded and Packaged business, which delivered a second consecutive record quarter in terms of both…

Thanks, Tim. Before getting into the details of our quarterly performance, first, allow me to take a moment to walk everyone through some of the more meaningful metrics regarding our liquidity and leverage. The continued improvement in our adjusted EBITDA figures is starting to be reflected in our current metrics. While there is still much room for improvement, I can safely say that our efforts are slowly, but surely, providing added stability to our business and returning our balance sheet to healthier levels than what you have seen in the recent past. Slide eight shows the substantial improvement in our credit metrics. Our leverage ratio, as represented by our debt to trailing 12-mont EBITDA, has been on a steady decline since last year and now is currently 7.7 times as of the end of the quarter. While we have shown marked improvement in that regard, we remain committed to reducing this leverage metric even further with the ultimate goal of managing our leverage at a level that is far more sustainable for our business in the longer-term. Our fixed charge coverage ratio, as shown on the bottom right side of the slide, has steadily improved over the last three quarters and now sits at 1.5 times. Lastly, our liquidity, as measured by the availability on our revolver plus cash, continues to exhibit the kind of stability that is needed to manage our business effectively. This liquidity has remained stable in spite of the seasonal buildup in inventories to support the asphalt business. Now that we are in the heart of the asphalt season, we should see inventories decline during the next quarter as inventories are converted to cash. Last quarter, we spoke briefly about some of the efforts we were taking to provide stability to our liquidity through an inventory…

Thanks, West. As I wrap up the prepared remarks for our earnings call, I'd like to leave you with our outlook for the third quarter on slide 13. First, we expect continued strength from our core Specialty Products segment on a year-over-year basis, driven in part by continued growth in our Branded and Packaged division and our ongoing self-help initiatives. All of these factors will be partially offset as the industry recovers from the outages that we have seen in the first half of the year. We expect typical seasonal patterns within the markets of our fuel segment, with more meaningful contribution from our asphalt business, partially offset by the tighter WCS crude differentials we have seen of recent. We anticipate year-over-year revenue growth in our Oilfield Services segment, supported by continued improvement in the fundamentals underlying that business. We expect to achieve between $50 million to $60 million in benefits, stemming from our self-help initiatives for the full year. And lastly, it continues to be our expectation that we will find and execute on new ways to de-risk our business, improve our liquidity, and lessen our debt burden over the long-term. That concludes our prepared remarks. So, Kevin, we can go ahead and open the line for questions at this time.

[Operator Instructions]. Our first question comes from Roger Read with Wells Fargo.

Yeah. Good morning. And congratulations on the quarter here.

Thanks, Roger. I guess, maybe let's get in a little bit to what really helped you on Specialty. I know this is a business where crude prices dropping as they did in the second quarter should help. If you were to give us maybe some indication of how that played into it versus the underlying self-help, the improvement in the packaged, branded margins, just maybe give us a little more of a refinement on the quarter?

Yeah. Sure, Roger. This is Tim. We're very pleased with the results of our Specialty segment. We've been talking over the last couple of quarters of how we were falling behind on crude price and we were implementing price changes and adjustments in order to keep up with the cost of the higher raw materials. We did, as we talked about last quarter, implement those changes and, of course, we were able to see a full quarter of those changes in the second quarter. As crude prices came down a little bit, I would say, really look at TI, it was down maybe $4. Specialty margins themselves were up $10. So, maybe a little bit of a feel for the relative impact of crude versus all of the other self-help initiatives that we had going on in our specialties department. I would also tell you that, given the tightness in the industry right now on base oils that we've seen a lot of strength in those prices and in the market itself as supply is pretty tight right now.

Okay, great. And along the lines, the Group III Base Oil market move here, so you mentioned launch May 1, you were waiting for certification. What's sort of the process on that and when can we expect the volumes of that product actually be sold?

Yeah. Roger, we're excited about Group III as we talked about last quarter and we've seen a lot of interest and a lot of excitement in the market for us entering into this new product. There are a lot of certifications that are required in order to get into the formulations and blendings of these products. We have one additive maker that had certified us through – all the way 5W 30 blends last quarter and we expect the final approval into the 0W blends here this month. We have another additive company that certified us the same way into the 5W blends here in the second quarter and we expect to continue to make progress with them, to get the final certifications. In the meantime, we have our customers getting samples, testing them in their formulations and getting to the point where they can understand how they can use this in their specific blending formulations and we feel confident that, in the third quarter, we're going to be able to get that going in a meaningful way.

Okay, great. Thanks for that. And then just to step back and take a little look at the bigger picture, you mentioned at the end of the summary there, kind of de-risk, lower debt profile over the longer-term, any thoughts or updates on that? I know none of your debt is due in any sort of near-term timeframe, but – let's call it – a balloon payment does loom at some point. How you're thinking about approaching that process?

Yeah. I'll let West jump in on that.

Sure. No, that's a great question. So, we continue to look at our capital structure and, obviously, we're looking at a wide range of different options, but we don't have anything per se to announce here in the short run. What we are focused on is getting the company to live within cash flow. And in this quarter, it's interesting to note that we generate positive cash flow to the tune of about $16 million. So, if you take the adjusted EBITDA, you take out any non-cash effects associated with less of a cash interest expense and CapEx, it was positive $16 million. That’s something that’s very positive from our standpoint. It was offset, and the reason why you don't see a bigger impact in our total liquidity is because we utilized a portion of that cash flow to – portion of our liquidity to post up LCs for some crude that had better pricing associated with it, and so we felt that the additional margins worth the utilization of that liquidity. But we are turning the corner here and we have positive cash flow. That is the first and primary focus associated with the management team right now.

Okay, great. And if I can just sneak in one more, with the inventory financing packages, does that affect at all your ability to hedge crude going forward? I know you’ve talked previously about hedging some WCS barrels.

It does not impact the ability for us to hedge. You'll see in the appendix of the presentation, Roger, we still have about 10,000 barrels a day of WCS hedged right now. Some of that on a fixed price. Some of that on a percentage. So, those will continue to carry through the third and the fourth quarter. But, no, we still have the ability to do that.

Okay, great. Thank you.

Our next question comes from Justin Jacobs with Raymond James.

Okay, thanks. Good morning, everybody. And let me echo Roger's compliments on the improvement you guys have made. But if I could, first question here maybe on working capital. I think, West, you referenced it in your prepared remarks. Just thinking about inventory reductions as we make our way through the second half here, is there the ability to quantify how much reversal of that working capital we might see in the second half here?

Yes. You're going to see us start drafting our inventories, especially with respect to asphalt. And I think, Tom [ph], you indicated that it was about 500,000 barrels. So, you should see that over the course of the third quarter year here. And so, you're going to see a fairly significant improvement in terms of our overall liquidity as we convert the higher level of inventories that we have right now into cash.

Okay, great. That's helpful. Go ahead.

Justin – I would just add, Justin, before you go to your next question that – we talked about this last quarter. We've made a conscious effort to run at lower working capital levels here over the past year. And while our asphalt inventory built in the second quarter on a net basis, we are still about 200,000 barrels on asphalt lower than we were last year as we continue to optimize the way – strategically optimize the way we manage our working capital and our inventories.

Great. That's really helpful. And then maybe thinking on the Montana maintenance deferral, is that just normal timing differences or is it related to maybe some more planning involved to some self-help you’ve got planned in – coming in 2018?

Yeah. No, the deferral is just because we're not ready. We've been really empathizing in our operations excellence efforts that we're going to execute. And in this case, we have a little bit more planning to do before we'll be ready to execute. So, that’s why we're deferring now.

Got it. And then, last one, if I could. Maybe, Tim, I’d appreciate your comments on – you referenced a tighter Canadian heavy differential, especially in 3Q. That's not a terrible surprise, but thinking about things as we head into. It seems like it should get a little tighter, I guess a little loose here when we think about the differential on Canadian heavy, maybe your thoughts as we move into 2018 on that differential?

Yeah, Justin. Your guess is as good as mine, of course. But as we see what is going on in the fundamentals, we know there are some short-term impacts on the WCS/TI differential. Some of the operating issues that have been occurring in Canada, the syn crude outage that occurred, I think, just right at end of the first quarter, those have all created some tightening in the WCS. Of course, the OPEC cuts lately have also put some pressure on the light/heavy differential. But we do see that, at least some of these shorter-term issues will play out. And towards the end of the year, the WCS/TI spread should loosen up, as you say, and maybe get back to more historical levels.

Got it. Appreciate the comments, guys. Thanks.

The next question comes from Mike Gyure with Janney.

Yeah. Good morning, guys. On the Oilfield Services segment, nice turnaround there. Can you talk about, I guess, maybe your expectations as you move into maybe 2018? I guess, what you're looking to do as far as potentially growing that business or kind of what you're, I guess, looking for long-term [indiscernible]?

Mike, we've been extremely pleased with the progress that our Anchor segment has been putting into really over the last year. It's been a hard, long battle, a shout out to the employees out there at Anchor for really never giving up and continuing to fight hard. A year ago, we hit our low in terms of the number of rigs we had in our customer profile. As West said earlier, I think we're up 145% this quarter versus where we were last quarter, so – versus a year-ago quarter. So, hats off to the management and to the employees of Anchor for planning this through, riding through the downtime. And really, their strategy has always been to position themselves for the recovery. And I think they're quick out of the chute here as the activity continues to increase. And if you gauge the feeling of our folks down there, they feel pretty positive in the short term, in the next few months, but also in the long-term. And we're heading in the right direction and positioning ourselves for a long-term recovery. So, I really don’t want to share any other strategy other than that, but we do feel positive about the direction we're going in.

Okay, great. And then just maybe one more on the Fuel business, can you talk a little bit about the RINs liability and the mark-to-market adjustment. I think you typically disclose that in the Q, but maybe if you could let us know what that number is for the quarter here.

Sure, Mike. We had a negative impact on the RINs mark-to-market this quarter. As you know, RINs prices bottomed out in the first quarter at a fairly low price. That mark-to-market impact was about $10.5 million negative for earnings in the second quarter. So, I don’t know, West, you want to chime in there?

Yeah. I think the key message here is that, if you can't take the big step back and look at the fuels business, if you pull out all of the RINs effects, exemption, mark-to-market, the incurrence for all the production of our fuels, et cetera, during the quarter, so all of it in the short run is all sort of non-cash. The effect of everything was about a $7.8 million positive effect on the $34 million of adjusted EBITDA for the quarter.

Great. Thanks very much, guys.

Thanks, Mike.

Ladies and gentlemen, we have time for one more question. And our last question comes from Sean Sneeden with Guggenheim.

Good morning. Thank you for taking the questions.

Hi, Sean.

Tim or West, I guess, just maybe bigger picture on the CapEx deferral, how should we be thinking about spending levels for next year? Is it kind of reasonable to pencil in similar levels of spend as this year or how should we kind of be thinking about that holistically?

Sean, we haven't put out any official guidance yet on next year, but the way you think about that, I would say, is – we're going to have a heavier turnaround year. So, we're going to have some additional costs associated with turnarounds. On the other hand, we had some heavy capital costs this year associated with our ERP project that would not be in there next year. So, for now, I would probably say, as you kind of mentioned earlier, that we're probably in still about a similar kind of range that we gave you this year for next year, with higher turnaround cost being offset by lower capital costs.

Okay. That makes sense. And just to perhaps clarify a bit, but all the turnaround that you'll be doing, is that all on the fuel side?

There is a lot of activity on the fuel side, but we do have turnaround at Shreveport as well, which is a lubes facility.

Okay, that's helpful. Should we generally be thinking about – kind of the central tenet of – you're more or less trying to spend within cash flows. That's generally how you're going to craft the plan?

That is our objective, yes. The most important thing from my perspective is to be generating positive cash flow. And so, the notable point about this quarter is that we are positive cash flow and our intent is to, the best of our ability, maintain that positive momentum.

Okay, that's helpful. I guess, West, just perhaps another kind of clarification on the inventory financing that you guys are doing, is the borrowing base that you guys have, are you guys getting credit for, I guess, the inventory that's pledged in that financing or should we be thinking about really the collateral for the borrowing base is kind of a net number?

Yeah, it really is sort of a net number. So, the way to think of it is the inventory that we sold to Macquarie, the banks no longer have the benefit of that in terms of the borrowing base. So, you just pull out that and replace it Macquarie.

Okay.

It's either in one of the two buckets, right? It's either Macquarie has it or the banks have it.

Okay. And then, is the inventory financing, I guess, is that included in the debt calculations that you guys have in the back of the slide deck there? And, I guess, and I forgot if you put in the release, but, I guess, how much is outstanding under that facility at this point?

Yeah. In the slide, it’s the long-term debt. And we don't include the inventory financing in the long-term debt calculation. As of the end of June, the total amount outstanding of the inventory financing was $103 million.

Okay, that's helpful. And then, just one last one, but maybe, Tim, kind of bigger picture. I think you touched upon this on the previous question. When you think about kind of the – trying to de-risk the business, and I know you talked about this in the past, but are there any things, I guess, away from asset sales and the cost reduction initiatives that we've talked about it in prior calls that you guys are contemplating at this point or have you kind of more or less narrowed it down to some iteration of that?

Yes, Sean. When we talk about options of de-risking the business, we're looking at all options, Sean. We've not narrowed it down to any particular items. We continue to think of what is in the best interest of our shareholders. As we strengthen our core business, I think more options become available to us. I think West may have said this on his first call. If there is an idea out there, we probably already thought about it and we probably already started analyzing it. And what I can tell you is we've had a lot of those options that are out there that we're looking and we're just looking for the right one and we'll do the best for the shareholder.

Okay. I appreciate the commentary.

Ladies and gentlemen, that concludes today's question-and-answer portion. I would now like to turn the call back over to Tim for closing remarks.

Well, thank you again for your time today and your continued support. We look forward to seeing many of you at the investor conferences we have coming up over the next few months. Thanks very much.

Ladies and gentlemen, that concludes today's presentation. You may now disconnect and have a wonderful day.