Calumet, Inc. (CLMT) Q4 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q4 2017 Calumet Specialty Products Partners Earnings Conference Call. 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] As a reminder, this conference may be recorded. I would now like to introduce your host for today's conference, Joe Caminiti, you may begin.

Thank you, Brenda. Good morning, everyone and thank you for joining us today for our fourth quarter and year-end earnings results call. With us on today's call are Tim Go, CEO; West Griffin, CFO; Bill Anderson, EVP of Specialties, Integration and Marketing; and Bruce Fleming, EVP of Strategy and Growth. Before we proceed, allow me to 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 our 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, it's general partner nor management can provide any assurance that these expectations will prove 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 of 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 at calumetspecialty.com. Also, a webcast replay of this call will also be available on our site within few hours and you can contact the Alpha IR Group for Investor Relations support at 312-445-2870. With that, I'd like to pass the call to Tim Go. Tim?

Thanks, Joe. Good morning everyone and thank you for joining us. I am pleased to report that we have successfully turned the corner. We generated our fifth straight quarter of trailing 12-month adjusted EBITDA growth. We called our high-interest senior secured notes today which officially closes the door on what has been one of the toughest periods in our Company's history. And last week, we extended our corporate revolver for a new five-year term, which reflects the confidence on our bankers pass [ph] and the positive steps we have taken to improve the partnership's operational and financial performance. Please turn to Slide 3; as we look back over our last two years, we have come a long way. We first reset the vision of the Company in early 2016 at a time when our head markets were extremely challenged. That new vision allowed us to reach at our culture due to the addition of new experienced leadership and through a stronger executional focus across the organization. As a result, we delivered five straight quarters of trailing 12-months adjusted EBITDA growth and completed the divestiture of two of our non-core assets that will provide over $600 million in proceeds. We had a significantly improved balance sheet that has opened up several strategic options to the Company that were not available when we first outlined our new vision. One of those options we've announced today is the call of our 11.5% senior secured notes; this process will take about a month to complete but when it's accomplished, we will reduce our annual interest expense by $46 million per year. In 2017, we got back to doing what Calumet does best; creating quality premium specialty products. In fact, we have several records within our specialty product segment last year, including record annual throughput at our Cotton Valley refinery which produces specialty solvents; and record sales volume and earnings contributions from our high margin branded products which includes our finished lubricants for a second year in a row. We also entered the next strategy in 2017 and began to think longer term by executing opportunistic growth and innovation projects such as the launch of several new products including our new Group III Synthetic Base Oil and our Uninhibited Transformer Oil, both of which are Calumet's own proprietary technology. As we look back on 2017, I'm extremely proud of our employees and how they executed as an organization. This puts us in a great position to continue to transform the business in 2018 and beyond, and to do so from a position for strength which will provide us with numerous options to drive new holder values and take the next steps towards our vision to become the premier specialty controlling and products company in the world. So let's take a few minutes to discuss our fourth quarter results and please turn to Slide 4. The fourth quarter was strong and adjusted EBITDA increased 117% year-over-year to $60.1 million. These results include $10 million from our ongoing self-help program focused on cost reductions, margins enhancements and new product growth. A favorable non-cash LIFO and LCM impact of $8.7 million was offset by $12.7 million in special charges for ERP expenses and realized hedging losses which West will cover during his discussion. Excluding the impact of these special charges, we delivered $64.1 million in adjusted EBITDA during the period. For all of 2017, adjusted EBITDA more than doubled to $336 million. Self-Help provided $54 million of additional adjusted EBITDA in 2017 which was in-line with our previously increased expectation of $50 million to $60 million for the fiscal year. Since we started the Self-Help program, we've driven a $143 million of incremental earnings which is already close to the low end of our 3-year target of $150 million to $200 million one year earlier than planned. Also supporting our improved results was an ongoing commitment to stronger capital discipline as we reduced our capital expenditures significantly for the second year in a row. In fact, the $80 million of CapEx that we incurred in 2017 was below our previously reduced guidance of $85 million to $95 million. This approach to capital discipline will remain critical as we have a heavier maintenance schedule and turnaround activities to complete over the next 2 years. We have instituted a best practice front-end loading process for capital project development which allows us to deploy capital more efficiently without sacrificing growth. Also, during the fourth quarter we completed the divestitures of both, our Superior Refinery and Anchor Drilling Fluids USA. As a result, our leverage ratio or net debt to EBITDA is down to 4.5x which is 65% lower year-over-year and is at the lowest level we've seen in over 2 years. Slide 5 outlines our specialty segment results. And before I talk to Q4 results, I'd like to remind our investors that the third quarter had a number of challenges. First, the hurricane significantly disrupted the supply chain starting in the month of September, in particular, those associated with our higher margin branded products. In addition, the implementation of our ERP systems caused a number of other supply chain challenges for our teams. So our strong performance in the fourth quarter showed that we're getting back to our normal run rate and that we recaptured several of the lost opportunities from the third quarter. This drove a 38% increase in adjusted EBITDA year-over-year during the quarter and gross profit per barrel came in at $33 versus $25 in the first quarter of last year driven by healthier market dynamics and better sales mix such as the growth in our higher margin branded products categories. What makes this performance even better was that it was accomplished in the phase of some fairly stiff headwinds as the price of crude increased over 17% in the first quarter. For the year, specialty product volumes were down roughly 4%, however that was primarily a result of the earlier supply chain disruptions. 2017 total adjusted EBITDA came in at $194 million, which was up 3% compared to 2016 driven by stronger market conditions, record volume and profit performance in our branded products group and record production in Cotton Valley. As we look forward, the supply chain is nearly back to normal run rates but we have still been working option for Q2 related backlog within our specialty's business, including our branded products division. Lastly, we continue to position our specialties business for long-term growth. First, we completed the expansion projects for both our Royal Purple and TruFuel facilities last quarter which will allow us to keep up with customers growing demand for those high margin products. Second, we're looking forward to continued growth across all of the new products that were introduced in 2017. Slide 6 discusses our fuel segment performance in the fourth quarter where adjusted EBITDA increased over six fold year-over-year to $22 million during the period. This was despite the fact that we completed the sale of our fuel refinery in Superior Wisconsin roughly halfway through the quarter. Gross profit per barrel was $5.29 for the quarter, compared to $1.19 in fourth quarter of 2016 driven by a 41% improvement in our benchmark Gulf Coast 2-1-1 crack spread and a number of Self-Help initiatives that we delivered in 2017, including running more of our fuel sales directly throughout [indiscernible], as well as upgrading product quality by selling more premium gasoline which carries higher margins. For the year, fuels product had adjusted EBITDA of $139 million, compared to a $10 million loss in fiscal 2016. These strong results were driven by a number of records across the organization including record WCS crude runs, record premium gasoline sales, and record throughput of a Great Falls refinery. Overall, volumes did decline but that was primarily due to the sale of the Superior Refinery during the quarter. I'd also like to highlight another driver of strong results in 2017 and that was improved profitability at our Shreveport, Louisiana refinery. As you all know, that refinery is primarily focused on supporting our specialty products business but it will always have a component that produces fuel products as well. As a result, many of our Self-Help efforts have been focused on improving our fuels performance in the plant. That included accepting a new crude pipeline into the plant that is allowing us to source lower priced crude. We've also made substantial operating improvements in the plant resulting in better reliability, yields and product upgrades. For example; Shreveport was a strong contributor to our record premium gasoline sales in 2017. In total, these efforts contributed over 25% of the Company's Self-Help benefits this past year. The team has done a great job there and I look forward to seeing them continue to become even stronger contributors as we move forward. I'll end my initial remarks on Slide 7 which is a great measuring stick on our execution against the strategic framework that we set in 2016. I'm pleased to say that all of these efforts have resulted in five straight quarters of trailing 12-month adjusted EBITDA growth. With that, I'll turn the call over to West.

Thanks. Tim. You can see the improving year-over-year performance across each of our segments that Tim discussed on Slide 8. In terms of our Anchor business or our prior Oilfield Services segment, you will now find it's a discontinued operations within our press release and financial filings as we officially sold the business on November 21. Our specialty segment provides stable adjusted EBITDA margins on a trailing 12-month basis as shown on Slide 9. On a quarter-to-quarter basis, there are variations in our margins driven by seasonal effects as well as changes in crude prices, but overall, we tend to have stable margins over trailing 12-month basis that range around 15%. That consistency and reduced volatility will provide for a much more stable operating environment as we move forward as we'll have less exposure to the cyclical fuels in oilfield services side of the historical business. That stability of our trailing 12-months specialty adjusted EBITDA margin shows you that overtime we're able to adjust our pricing fairly effectively. We believe that is important to start talking more like a specialty chemicals company moving forward and thus you will see this review from us going forward. Strong margins and healthier operating environments across all three of the business contributed positively to our growth over the last fourth quarter as shown on Slide 10. This was further supported by $10 million in Self-Help as Tim mentioned, as well as the net $8.7 million favorable impact from LCM and LIFO impacts. Offsets to these positive contributions include $37.1 million in higher operating costs which reflects the fact that we got twins [ph] hardship exemptions in the fourth quarter last year, that did not repeat this fourth quarter. Those winds exemptions related to the calendar year 2015 as a reminder. Volumes were lower and led to $12.1 million degradation and we had $9 million in offsets related to divestitures. Lastly, SG&A costs came in $4.6 million higher, primarily related to our ERP implementation and higher bonuses this year versus 2016. Slide 11 walks through a similar exercise for the fiscal year adjusted EBITDA Wall. The two biggest drivers of our strong growth were stronger fuels performance and the contribution of our Self-Help efforts which added $54 million in incremental adjusted EBITDA. More broadly, as we compared the drivers for 112% increase in adjusted EBITDA in 2017. You can see that they were driven by higher fuels in Oilfield Service margins, lower annual operating costs, the sales of the North Dakota prairie asset which had negative EBITDA in early 2016, favorable net LIFO and LCM adjustment and the positive impact of hedging. Offsetting on those were lower total volumes and higher SG&A, again, primarily related to our ERP implementation. It is important to note that the lower specialties volume were driven primarily by supply chain disruptions caused by the hurricane and the short-term effects from our ERP implementation. Slide 12 provides our traditional review of our leverage profile liquidity and fixed charge coverage ratios overtime. As you can see, we made great progress here as we corrected significant proceeds from the sales of our Superior and Anchor during the fourth quarter. The good news for our unit holders is that we have structured those transactions in such a way that despite a net $172 million gain on-sale, most of our [indiscernible] should not have a tax obligation this year. It's also worth noting that we have now completed the post-closing calculations of working capital inventories and services for both transactions is provided for in their respectively purchase agreements. In total, we expect to receive approximately $63 million more than the previous re-announced consideration. Almost all of this additional cash will be received in 2018 but has not been reflected in our liquidity charts. When coupled with another quarter of strong adjusted EBITDA contribution, we were able to reduce our leverage ratio for net debt to adjusted EBITDA to 4.5x, this is the lowest level in over 2 years. Historically, the company had suggested that 4x leverages wasn't appropriate goal but we'd like to be a little more conservative and we look to target a lower number. Our liquidity improved to $415 million and our fixed charge coverage ratio also stepped up to a comfortable 1.8x as of December 31. As Tim noted, we've called our high interest senior secured notes. In 2017, we had $173 million in cash interest charges and that will be reduced by roughly 25% when those notes are eliminated. As we look forward to life after the secured notes, as expected our annual cash interest obligation to be approximately $128 million per year. We also successful extended our ABL and other five years and improved the terms of the facility which provides us with greater flexibility to run our business. And lastly, the sum of all this hard work was validated by the fact that S&P ratings agency raised our outlook from negative to stable last week and placed our senior unsecured notes on positive outlook. So it's good to see that multiple outside parties are recognizing our improving financial position. Slide 13 shows the capital cost discipline we've exercised in our capital spending. In 2017, we had $80 million in capital spending which declined 34% compared to 2016, and came in below our previously set target range of $85 million to $95 million. As we look forward to the next few years, we do have a fair amount of maintenance and turnaround activities to complete and we'll spread that work overtime to optimize the activity and minimize the impact on the total business. We also have had some small maintenance related to downtime at Great Falls in Q1. Both, Great Falls and Princeton will have additional turnaround activity later in the year. Despite that activity, we still expect to keep our capital spending fairly flat and thus we're forecasting a range of $80 million to $90 million for 2018. Slide 14 offers some perspective on our pro forma SG&A excluding both of the divestitures from the total figures. First, I'd like to point out that our total, that our comps discipline has allowed us to remove roughly 7% of our SG&A cost over the last two years at the base level. Of course, we paid limited bonuses in 2016. Given the tough market conditions we faced at year and that's why the base is much lower that year. I'd also like to touch on our ERP implementation cost as we've broken them out on the slide for you. The fourth quarter was clearly a peak in terms of spending as we stabilize the system and that we spend an average of just over $2 million a month over the quarter. As we start to shift from stabilization to optimization of the ERP system, we should see these costs decline substantially as we progress through the year. Overall, I'd expect total ERP cost to come in below 2017 levels. To help those of you seeking to model our business, Slide 15 breaks out a few key pro forma items. Again, this removes the sales and adjusted EBITDA impacts from the divestment of both the Superior Refinery and Anchor Drilling. With the sales of Anchor and Superior, our net debt to adjusted EBITDA increases from our reported number of 4.5x to approximately 6.3x. Still, below the 6.6x that we reported at the end of the third quarter. As we make further progress in our Self-Help initiatives, we expect to drive this leverage ratio further south. This also shows you how our potential RIN obligation will change the superior historically, carried approximately $40 million of renewable volume obligations or RVOs. Moving forward, should carry a total of company obligation of approximately $85 million RINs but we also maintain the ability through RIN mitigation and blending to reduce that obligation by roughly half. And lastly, in terms of the use of cost advantage heavy Canadian crude, you can see that our system-wide potential is reduced by the superior sale from roughly 40,000 to 45,000 barrels a day to a level of about 25,000 barrels a day which is the full main plate capacity of our Great Falls refinery. Now with that, I'll turn it back to Tim.

Thanks, West. I'd like to take a few minutes to talk through our priorities for 2018. And I think it's important to start in our ongoing commitment to our Self-Help program. Turning to Slide 16, we originally set a program goal of $150 million to $200 million by 2018 and we've already achieved a $143 million of that. 2017 saw nice contributions from work that was completed at Shreveport to improve our profitability capture at that plant. As we look to 2018, we are setting a goal of $40 million to $50 million for the year which will drive us towards the top end of the 3-year goal. This will continue to be driven by cost discipline, margins enhancements and opportunistic growth projects. This includes two new projects that will drive results in 2018 and UI summer unit as our San Antonio facility to increase our high octane gasoline fares and a naphtha project at the Great Falls plant that will improve the quality and market price of our naphtha. The main takeaway for our investors is continuous improvement will remain a part of our culture. We expect to provide you with a new long-term goal beyond 2018 down the road as we believe there is a lot more we can do to become a truly high performing organization. Finally, I'd like to announce the launch of our new Product Innovation Center here in Indianapolis. Turn to Slide 17; we have our grand opening for the center in October and it's a highly advanced state-of-the-art R&D facility which has already helped us develop new products like our Group III Synthetic Base Oil and our Transformer Oil. One of the keys to our success has been the ability to develop the products and formulations for our customers to solve their specific needs. These can be very niche products but they can be critical to our client success. For example; our product may help a client's cosmetic line, provide superior moisturizing properties or ensure another clients how he engineered industrial equipment as the right kind of lubrication that can work efficiently in a damp environment. That's again what makes our products very sticky as one phase all the complex meeting for our partner client, this solution cost can be high. This new center will help us provide critical support for our customers, build proprietary brand formulations and develop new innovative products and solutions. We've already had some great feedback from those of our customers who had a chance to tour the facility and we currently have additional new products and product line extensions in various stages of testing now in the center and expect to launch some of them later in the year. I'd like to leave you with our outlook for the first quarter on Slide 18. First, we expect volumes to be impacted in the specialty segment based on the lose turnaround we've just completed at Shreveport. Offsetting some of that pressure will be three things. First, we've recently implemented price adjustments to align with rising crude prices. Second, we also continue to reduce the third quarter related backlog and last, we should see some continued growth in our branded products portfolio as those new line expansion started to work. On the fuel side, we expect typical seasonal patterns within the markets but we'll continue to focus on capturing as much of the benefit under widening in WTI to WCS differential that we can in Great Falls. Sales volume will be down slightly with the 2018 turnaround activity we have at Great Falls and Shreveport. And additionally, with the sale of a Superior refinery, our asphalt business will be much simpler now and will not require the kind of inventory note that we've historically had in the winter. On a corporate wide level, we remain focused on delivering $40 million to $50 million in net freights [ph], standing from our Self-Help initiatives for the year and lastly, retiring our senior notes and continuing to look for other avenues to de-risk our business and improve our liquidity over the longer term. 2017 was all about execution and 2018 will be focused on continuing to transform our business. While we clearly turn the quarter, and we are now heading in the right direction, we still have a lot of work to do to build a high performance company that our unit holders expect and our employees deserve. That concludes our prepared remarks. So operator, we can go ahead and open the line of questions at this time.

[Operator Instructions] And our first question comes from the line of Mike Gyure from Janney. Your line is now open.

Can you talk maybe a little bit about specifically in the fourth quarter, some of the barrels per day volumes coming out of the specialty lubes was down significantly year-over-year. Can you talk about, I guess sort of the e-impacts; I think a lot of that was probably due some of the hurricane related stuff that sort of rolled from the third quarter to fourth quarter, I think such kind of volumes and some of the throughput that went on in the fourth quarter there?

Yes, the fourth quarter showed lower specialty volumes, some of that was associated with some of the supply chain disruptions that we talked about but primarily we had loops hydro finder [ph] downtime at Shreveport that resulted in lower sales, that was really the main driver for that. You will see the branded products division through the press release numbers were actually back to normal levels and really our -- we view our business as continuing to be strong, recovering further the supply chain disruptions that we had and we see 2018 to be continued strength in our specialized business. We're also mentioning and we said this in our prepared remarks, we also had a Shreveport unit down in the first quarter which will also unpack [ph] volumes in the first quarter for our specialties business. But as we've talked about over the last few years, we've been trying to spread out our turnarounds so that that they don't concentrate in a particular quarter on a particular year, and so we've done pretty good job of doing that here over the last year to try to make sure that we don't hit the books all in one quarter. So Mike, hopefully that will give you a little better feel for what's going on.

And then maybe one more on the -- the specialty products looks like part of the impairment charge, about $60 million of that was in the specialty products business. Can you talk about I guess what you impaired there if it's specific facilities or specific assets? Just one more color there would be appreciated.

Yes, so with respect to the impairments, Calumet went on an acquisition spree and CapEx spree a number of years ago and during that time it was a relatively high price margin environment and so we do a regular review of all of our assets every year and it's really -- kind of this time of the year that we do it, it's in the fourth quarter and so as a consequence of that there were several facilities that -- where we took impairments and so some of them were in specialties, some was elsewhere.

And our next question comes from the line of David [ph] from Seaport. Your line is now open.

A couple of questions. First is, with only two segments excluding the discontinued operations, I'm having a -- I've had a hard time allocating the ERP cost of $12.7 million between the two segments, can you help me there please?

Yes, I wouldn't bother really trying to because in ERP system is accrually an integrated system and so it's -- it is all sort of one big ball of wax there.

I mean, what I'm trying to do is focus on the specialty product segments and if the $194 million or $195 million on a reported basis if -- I'm just trying to see if I should get that closer to $200 million or $205 million or $210 million since that's really going to be the significant portion of the Company going forward. On liquidity, the $252 million of revolver availability that you talk about at $231 million, can you provide a number pro forma for the new revolver? Is it the same or does it change materially?

At the end of the fourth quarter, so at the end of December we didn't have Superior or Anchor and so what you have there is with it was or what it is. So that is -- that's the actual as pro forma.

And then on the cash flow statement, I see $100 million or $100.1 million of proceeds from inventory financing agreements. Can you talk about what that is and whether that created the liability somewhere else in the balance sheet?

Yes, so the inventory finance, we did that -- I think it was in the second and third quarters at the year. We have an inventory finance arrangement with Macquarie where they take ownership of barrels at the refinery, both crude as well as refined product; we treat this as an on balance sheet obligation but they actually technically own title to it but that's what that is and it's a relatively attractive piece of financing.

I apologize. I thought that was a fourth quarter, then I must have missed it previously. Then my final question is, it pertains to the capital structure. So after the call you won't have any drawn or any material drawn secured debt, you will have unsecured -- you will capacity obviously because of the revolver or the ability because of the revolver. You will have some unsecured bonds, some of which are currently callable with 7 handle coupons, 6 and 7 handle coupons. Is there any thought about further -- and you won't have any prepayable debt or pre-debt is easily pre-payable without penalty. Is there any thoughts about further optimizations of the capital structure in say the next 6 months or during 2018?

I mean, we're always working to optimize things. One of the things that we also released information this morning and mentioned that we had extended the corporate revolver and one of the things we did associated with that was to -- in additional small piece of tranche associated with it because it's a little more liquidity, about $25 million more liquidity associated with it, as well as some other benefits but we're always looking at our capital structure, we have $900 million after we recall the secured notes, we've got $900 million of unsecured debts due 2021. We like the interest coupon there, it's very attractive, there is nothing that requires us to do anything there but we have looked at and we'll continue to look at potentially at some stage bringing out what is the right time to refinance the portion of that and relater the debt structure through a new issuance. But again, that's simply an issue of optimization and figuring out what's the right time and position to do that. We think that we're making huge progress in terms of our debt reduction and improving our metrics, things are going in the right direction and so we're not necessarily in a hurry to kind of do anything there.

Thank you. And that concludes our question-and-answer session for today. I'd like to turn the call back over to Tim Go for closing remarks.

Thank you, Brenda. Thank you 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. I also like to thank our Board, our management team and all of our employees for their hard work and support over the last two years as everyone is critical for us.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great day.