Calumet, Inc. (CLMT) Q2 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q2 2019 Calumet Specialty Products Partners, L.P. 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 for how to participate will follow at that time. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Joseph Caminiti of Investor Relations. Sir, you may begin.

Thank you, Jimmy. Good morning, everyone and thank you for joining us today for our second quarter earnings results call. With us on today's call are Tim Go, CEO; West Griffin, CFO 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's as well as 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 our management can provide any assurances that these expectations will prove to be correct.Please refer to the partnership's press release that was issued this morning as well as our latest filings 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 at www.calumetspecialty.com.Also a webcast replay of this call will also 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'll pass the call to Tim. Tim?

Good morning. During the second quarter of 2019, we again delivered strong consistent progress toward our transformation and deleveraging goals. Calumet employees have worked very hard over the past three years to improve the performance of our assets and our businesses. The bottom line result is higher levels of free cash flow and profitability. I'm extremely proud of everyone on the Calumet team and the culture of continuous improvement in growth that we've put together to drive the success.As shown on Slide 3, that success was again evident this quarter as we delivered $80 million in adjusted EBITDA, driven by strong execution across all of our businesses and quarterly record production volumes at our Shreveport facility and record feedstock runs at our Cotton Valley facility. Cash flow from operations in the second quarter was $62 million and over $89 million year-to-date.The company's improved cash generation is no accident. Our Self-Help efforts and strong execution against our strategies are allowing us to deleverage meaningfully. We repurchased $67 million of our 2021 bonds during the quarter, which brings our year-to-date total to $90 million or 10% of the original maturity. We improved our leverage ratio to 4.6x and our credit rating was upgraded by Moody's to B3 as the rating agency recognized our ability to generate positive free cash flow and improve our credit metrics through strong execution.Rounding out our business highlights for the quarter was further improvement in our liquidity position. Our cash position increased by $21 million to $174 million, even after using $67 million of cash to repurchase bonds. A steady commitment to improving our business efficiency has also been a key focus area and the contributions from each of our businesses this period reduced our working capital and inventory another $16 million.On Slide 4, you will see our headline results for the second quarter. Net income for the second quarter was a loss of $16.8 million primarily due to an asset impairment related to the minority stake we retained from our divestiture of our oilfield services business. Excluding this impairment and other miscellaneous non-cash charges, adjusted net income was positive $16.6 million or $0.21 per unit.Our second quarter adjusted EBITDA was up year-over-year to nearly $80 million, which led to a 46% increase and our trailing 12-month profitability performance on a year-over-year basis as you can see in the chart at the bottom of the slide. Recall this is our up into the right chart as we use it as a report card on our Self-Help efforts to structurally improve our business.With that, I will turn the call over to West to talk through the segment results. West?

Thanks, Tim. Slide 5 shows the adjusted EBITDA waterfall reconciling the second quarter results to last year's comparable quarter. Starting from the $79.3 million baseline figure from last year's second quarter, you will see that our results this quarter were roughly flat before adjusting for the $11.4 million headwind to our figures represented by non-cash inventory adjustments. Stronger volume in our fuels business was more than offset by the decline in our fuels margins, primarily due to tighter WTI, WCS and Midland WTI crude differentials that were a tailwind to our fuels margin results last year. However, you will see our waterfall contains $22 million attributable to realized hedge gains associated with our fuels business.Unlike others, we saw break hedging from our margin accounting. We hedged a portion of our exposure to WCS, Midland WTI and ultra low-sulfur diesel crack spreads over the last year to protect our profitability. These are not accounted for in our margin performance. But our hedging program effectively serves the utility of protecting our margins from detrimental swings and relevant market prices and spreads.In our specialty segment, we drove a $6 million increase in our EBITDA from capturing greater margins, which does not include additional margin improvement, that's reflected as a portion of the $8 million Self-Help benefit. This was especially noteworthy given that average crude prices rose quarter-over-quarter, placing headwinds on our specialty margins until we adjust prices. Lower specialty volumes accounted for nearly $10 million in headwinds, which was again a function of the ongoing rationalization SKUs in our finished lubricants business as well as the exit of other low-margin products in our other specialty businesses.Additionally, we had planned downtime as we conducted maintenance on the lubes unit at our Shreveport refinery, which also contributed to the volume decline. We faced a $3 million headwind from certain monitoring costs, primarily driven by an $8 million increase in RINs costs and a higher mark-to-market on RINs related liabilities, carried on the balance sheet. This headwind was mostly offset by decreases in transportation-related expenses, which is a portion of the Self-Help benefit.SG&A was $10 million higher as we increase spending on services that are supporting our Self-Help strategies. For example, we incurred $2.6 million in consulting services in our specialty segment to capture our product rationalization efforts and procurement improvements. We also incurred approximately $3 million in better tools and automation to capture our supply chain efficiencies. These are non-recurring investments in our Self-Help Phase II program, which contributed $8 million to EBITDA in the second quarter.Slide 6 details the quarterly results of our core specialty product segment, which produced $47.7 million in adjusted EBITDA, after excluding non-cash inventory adjustments. Our specialty segment results overcame continued weakness in base oil margins as well as a 9% sequential increase in average WTI prices. In addition, our adjusted EBITDA figure includes $2.6 million of non-recurring business improvement expenses related to the execution of our Self-Help initiatives.We continue to see benefits from the strategic profitability plans, our general managers put in place late last year. These efforts are having a positive impact on our margins as evidenced by the improvement to both our gross profit per barrel and our adjusted EBITDA margin.An important aspect of our strategy profitability plan centers on the improvements to how we manage and operate our fixed assets. The early benefits from the structural improvements to our business operations were visible in the second quarter as we set quarterly records for production volumes at our Shreveport refinery as well as a record for feedstock runs at our Cotton Valley solvents facility.You get a better sense for the specialty products adjusted EBITDA margin over time on Slide 7. In the most recent quarter, the specialty segment produced EBITDA margins of 13.9%. That's in line with our historical expected range of 13% to 15%. But as you can see, our trailing 12-month EBITDA margins still have weakness embedded in them from historical turnaround activity. As last year's turnaround impacted quarter's rollout of our trailing financials, we expect our margins to continue to improve.Slide 8 details the quarterly results in our fuels product segment. In this year's second quarter, after excluding the favorable non-cash LCM adjustment, our fuels business captured over $29 million in adjusted EBITDA. This was up 65% from last year's roughly $18 million result. Our improved results were aided by an increase in throughput volume across our refineries, particularly at Shreveport and San Antonio. This increase in production is a result of the debottlenecking projects and the operations excellence initiatives, which are key component of our Self-Help program.Our gross profit per barrel results of $3.10 were down versus last year's comparable quarter, driven primarily by meaningfully tighter crude differentials for WCS and Midland price WTI as well as higher RINs costs. It's worth noting that our second quarter fuels' adjusted EBITDA and gross profit results do not include any benefit from RINs hardship exemptions, which we anticipate having more clarity on in the coming quarter.Turning to Slide 9, we show the discipline we have exercised in capital spending, which totaled roughly $15 million in the second quarter, bringing our year-to-date total to $26 million. We are maintaining our full year guidance range of $80 million to $90 million as our CapEx spending was back-end loaded with our upcoming turnaround at Shreveport, but we anticipate that our full year capital spending will likely come in towards the lower end of that range.Slide 10 bridges our cash position for last quarter. As you can see, beginning with the cash position of $153 million, we finished the quarter with cash on hand of $174 million. We increased our cash balance, despite using roughly $66 million in the quarter to repurchase unsecured notes in the open market. As Tim outlined, our cash flow from operations continues to show meaningful improvement versus prior years as we capture the benefits associated with the structural adjustments to how we manage our business and execute the profitability plans, driven by our general managers.Slide 11 outlines our credit metrics, which are steadily improving dating back to the beginning of 2017. Deleveraging our balance sheet has been our top priority over the past 3 years, and our improved EBITDA results and strong cash flow performance are driving a continued reduction in our leverage, which as of quarter-end was 4.6x or 4.4x, excluding LCM and LIFO adjustments. This number is down from 5.4x in the second quarter of last year or 0.8 of a turn, which is a heck a lot of progress over a 1 year period of time.To date, we have repurchased approximately 10% of the 2021 notes since the beginning of the year. And this will continue as we utilize our excess liquidity to opportunistically buy back notes in the market. Our liquidity position, as measured by undrawn availability on our revolving credit facility and cash on hand, increased to $473 million. This was a $13 million improvement over the first quarter this year, despite utilizing cash for bond repurchases. Additionally, our lenders and rating agencies have taken note of the improving credit outlook and leverage reduction.Calumet recently achieved an upgrade to the company's corporate family rating to B3 as well as an upgrade to the rating on our unsecured notes maturing in 2021. Those are both positive steps forward as we continue on our path to delever our balance sheet. We have immediately taken advantage of this by contacting suppliers, many of whom use a B3 corporate family rating as a threshold to provide additional open trade credit. We have already received positive feedback from suppliers and our open trade credit has already started to increase.With that, I'll turn the call back to Tim to discuss the status of our Self-Help program and our forward outlook for the coming quarter. Tim?

Thanks, West. Moving to Slide 12. Calumet delivered $8 million in EBITDA from our Self-Help Phase II program and nearly $22 million year-to-date. The projects we started up last year are continuing to drive better performance this year, including the debottlenecking projects of our crude unit and propane de-asphalting unit Shreveport, the new Isom unit at San Antonio and the new packaging lines in our finished lubricants and chemicals business. We are also capturing value through a new quick hit business improvement projects. For example, our raw material projects has led to record feedstock runs in our Cotton Valley plant and more Permian crude runs at our San Antonio plant. Our operations excellence projects have delivered higher yields of base oils and waxes at Shreveport, more fuel sales across our own Shreveport truck rank, which commend higher margins and optimization of our octane pools at San Antonio.Finally, our supply chain continues to be more efficient, driven by the enhanced capabilities of our new ERP system. Global procurement initiatives in the second quarter captured several million dollars of lower annualized cost in our finished lubricants business and across our 3 larger fuels plants. I'll talk more about transportation efficiencies and lower inventories on the next slide.Given our strong performance in the first half of the year, we've raised the lower end of our Self-Help guidance for 2019 from $25 million to $40 million to $30 million to $40 million. Slide 13 provides a little more insight into the structural business improvements that our Self-Help program and our commitment to continuous improvement are having on our performance. Again, these are long-lasting repeatable performance improvements and our historical success in driving these gives us great confidence that we'll be able to capture the additional $78 million goal from the Phase II of the Self-Help program.First, the chart on the left shows our improved trend in gross profit per barrel across the last 13 quarters. While our gross profit margins on a per barrel basis may fluctuate with market swings on a quarterly basis, our profitability has shown a strong multi-year trend upward as our Self-Help efforts have taken hold. The center chart shows the trend in our transportation expenses. The key takeaway here is that we have made significant progress in controlling our transportation costs, especially this last quarter. The last chart shows the structural changes we have made to reduce our inventories. Through better coordination between our sales and production teams as well as our approach to better managing asphalt, we have seen a steady decline in the inventories required to run our business. These are just a few examples of how our Self-Help efforts are impacting our bottom line results.Slide 14 covers our outlook for the coming quarter. Historically, the third quarter represents the peak of our liquidity in the year due in part to seasonally stronger cash flows and we will look to reduce our debt burden further through opportunistic open-market purchases of our bonds. We expect to continue capturing benefits from our Self-Help program as we work towards our increased goal of $30 million to $40 million for the year. In our core specialty business, we have delayed our previously planned turnaround activity at Shreveport into the fourth quarter. While base oil margins remain weak, the market saw some recovery at the end of the quarter. In our fuel business, we expect to see the WCS/WTI crude differentials widen as the market returns to rail economics. We also expect the market to begin preparing for the IMO 2020 regulatory change. Overall, we see IMO 2020 that's something that will benefit both of our fuels and specialties businesses.Finally, we expect to have more clarity on the status of our 2018 RINs hardship applications.With that, I would like to turn the call over to the operator to open up the line to our analysts for Q&A. Jimmy?

[Operator Instructions]. Our first question comes from Neil Mehta with Goldman Sachs.

Good morning, team, again on continued progress on EBITDA growth, and deleveraging. I had a couple housekeeping questions and then a big picture question here. The housekeeping questions were around hedges, which were favorable in the quarter. Can you just talk about what drove that and then how we should think about that going forward and then working capital was a benefit as well in the quarter, and any thoughts on whether there would be unwinds of that later this year?

This is Tim. I'll take the hedging question and then I'll ask West to take the working capital question. The way we think about hedging, Neil, is that we hedge the WCS/WTI spread to allow us to capture rail economics in the second quarter. We believe long term -- the long-term supply/demand fundamentals point to rail takeaway economics and the hedging that we had in the second quarter simply represents that. So as the market recovers, and we do see the strip showing are anticipating recovery back to those rail economics and as the hedges roll off, we think the market will return back to the supply/demand fundamentals. West, you want to talk about working capital?

Sure. So Neil, you asked about whether or not we anticipate any give back with respect to working capital as we kind of roll forward here into the third quarter. And the answer to that is, no. We have made some fundamental changes to how we operate our business, especially with respect to asphalt. So we no longer have really big asphalt builders. They're very small one that takes place. And so there may be about 100,000 barrels or so of inventories will be reduced over this next quarter or so, but we don't anticipate a lot of change associated with that.The reality is, we're just operating with lower levels of inventory as a result of our ERP implementation and putting in place general managers in charge of each one of our business units. There is greater coordination between the sales force and the production side of the business, driven by the general managers. We want to make the products that the sales force says that they can sell and that are in demand. And what that's doing is through greater coordination we are no longer building excess inventory. So we're able to run with lower levels of inventory.The other thing that we've done is implemented availability or promise and material resource planning as part of our ERP implementation and what that's doing is enabling the business to have better visibility with respect to what is available, when it's going to be available to supply customers. So all that kind of drives your ability to drive down inventories. Secondly, with respect to accounts payable, trade credit is something that's very important to us. We obviously saw trade credit start to disappear from us when we issued the secured notes.When we retired the secured notes, we started to see some return of trade credit, but with this latest upgrade to B3, we have embarked on a whole strategy of going back to all our crude suppliers to get incremental trade credit. And we've already gotten a total benefit of that, plus some -- doing some other things and tweaks of terms and various other things aggregate of about $13 million to date on that and there is more to get there. We anticipate that we'll continue to see some additional expansion of our trade credit, which will work as a net reduction in our working capital. So we anticipate that there's going to be some further improvements in our working capital.

That's great. And then the follow-up question, if -- one of the things where you have made immense progress on is leverage. If I look back to Slide 19 here, wasn't that long ago, you were at $2 billion of debt. Today, you're at $1.5 billion of total debt. Is there a -- an absolute level that you have in mind getting to, and then the tie into that question is around capital spend, where you are clearly tracking below kind of the full year guide. And so how should we think about CapEx on a go-forward rate or do you expect to stay at these kind of levels till you get that leverage to your absolute target level?

Yes. No. So Neil, the way we sort of look at our leverage is obviously we feel that we're too highly leveraged right now. And so we're driving our leverage down. The company has had a historical leverage target, it's somewhere below 4x and what we're going to do is, as we get closer and closer to 4x, we'll sit down with the board and have some discussions on what is the appropriate leverage target based upon the set of assets that we have at that time.In the meantime, we're really focused on our Self-Help and debt repurchases in the market to drive our leverage down further. Eventually we're going to have our leverage down to a level that we hope that at some point we'll have some sales and some non-core assets, which will drive our leverage well below 4x such that we can basically say we're done with the turnaround of Calumet, and will refocus the business on growing our core specialty business in a responsible way.

And Neil, I'll take the CapEx question. So this is Tim. The way we think about our Self-Help program and really our journey on the growth, I'll point you back to that kind of growth pyramid that we had been talking about really over the last 3, 4 years, and the base of that pyramid is operations excellence and really a lot of the things that we're still talking about and still capturing,I would point to that bottom of the pyramid. It's low to no capital, it's roll up your sleeves and capture low hanging fruit that really we've been -- we've been identifying and then going after at each of our sites and in all of our businesses. That is the -- one of the reasons we have low levels of growth CapEx right now compared to 5, 6 years ago, is because there is still a lot of optimization in our base foundation that we're able to capture.However, you're starting to see the middle layer of that pyramid, which was high return capital projects starting to enter into our CapEx spending and we talked about the debottleneck projects, the propane de-asphalting unit at Shreveport, the Isom unit at San Antonio, the Naphtha project at Great Falls, the additional product lines at our finished lubes. You're going to start seeing more of those small, high return, quick hit projects entering into our capital forecast as well. And then I would just say the last part of that pyramid growth was the top, which was the M&A activity and we continue to look out there at good M&A candidates.We haven't stopped looking even though focused on delevering, and when the time comes, when we get to our deleveraging targets and we feel comfortable around our balance sheet, we will be reopening the M&A lever in our [indiscernible] as well. So you should see CapEx starting to grow a little bit as our R&D leverage comes down, but you'll see it in those levels. You'll continue to see operations excellence spending, like for example the $3 million that West talked about of expense spending that actually hit our specialties segment this quarter. We view that light capital around its investment into our Self-Help program. In this case, it was on services as opposed to capital, but you'll continue to see that type of spending as we invest to capture our Self-Help program.

Thank you. And our next question comes from Roger Read with Wells Fargo.

Maybe go along the lines of what Neil was kind of hitting on there on the leverage side. The debt you've been buying back the '21 piece, it's #1 it's the largest, #2 it's also the first to mature. What should we be thinking about over the next roughly 18 months as we hit maturity date on that of some of the things you might want to consider of how to either refinance or continue to pay down in the interim for that particular piece. I know before it was when we've spoken it's been maybe some term links to all this as well as repayment, any updates on that?

Yeah. So we want to refinance our 2021s in the unsecured market. Feel very good about our ability to get that done. If you think about how much it would -- we need to refinance in that market, we have $810 million of 2021's outstanding right now. We've got $473 million of total liquidity. We need to maintain about $250 million to run the business. So that means that we can utilize about $223 million and apply that to reduce the notes. So that would mean $587 million as a sort of a minimum deal size, if you were kind of do something today based upon our June 30 results.That said, if you kind of look at kind of how those equivalent numbers have changed over the last quarter, if I did that same math with last quarter, we had $877 million outstanding. There was $210 million of excess liquidity or $667 million so we knocked it down about $80 million in a quarter. That's a huge amount of progress on this. We're not going to be able to do that on a continued basis, but we're going to continue to drive it down and so it's pretty easy to see that if we have another quarter or so, we're going to take that $587 million into the low-5s pretty easily just through our continued performance in our Self-Help excess cash flow, et cetera.We anticipate that we're not stopping there. We're looking at some other things that will enable us to potentially approach the market, and minimize the size of the offering to be somewhere in the range of perhaps $500-ish million deal and that's kind of the sizing that we'd like to approach to market with it, if we can. And so we're working to get ready and we're watching the market. Today is not the right time to tap the market, but we're going to be ready and we're going to be watching the market and [indiscernible] markets there will take advantage of it.

And Roger, what I would just chime in to say is, a year ago I think the Street was having trouble just thinking about how we were going to tackle the $900 million in the -- of the face value of the 2021 bonds, given the math that West just went through. It's no one would have ever thought we would be looking at more like a $500 million or $600 million type of hill to climb now. And so that's the kind of progress that we anticipate to continue to drive forward here. And cash flow, earnings growth that has been the core rally cry of all of our business teams here over the last year and we're going to continue to do that going forward.

Yes, congratulations on that front. It's been a while to wait for it, but it's quite good to see that it's here. Second question, just getting to, I guess, it's Slide 5, the adjusted EBITDA bridge. If we look at some of the things you've talked about West in terms of bringing down inventories and then some of the things you've mentioned Tim in terms of just the Self-Help and focusing on the products that actually make money versus the products that weren't making much margin. If we look specifically at EBITDA bridge though, we see that the impact of specialty volume decreases was a bigger negative than the specialty margin improvement. I know crude prices were higher, but is it just market conditions that affected that, or is this -- are we seeing something where you might have cut back a little harder and then something comes back in subsequent quarters?

Yes, no, that's a good question, Roger. The specialty volumes really were impacted the most by the turnaround we had at Shreveport. It was a catalyst change out in one of our specialties units that had the biggest impact on volumes. We've also been talking about our strategy to rationalize low-margin product businesses, and that also impacted both our lubricating oils, as well as our finished lubes business. The one thing I will point you to though is in the appendix, Roger, and I think it's Slide 17, we show the year-to-date EBITDA bridge on the same basis as Slide 5 for just the second quarter, and you'll see specialty volumes are actually up year-over-year for the first half and that's because overall, we had some turnaround activity in the first quarter of last year whereas this year, the turnaround activity was in the second quarter.So I think you -- a better picture is to look at the first half of the year, instead of on the quarterly basis. And that shows where our specialty volumes are actually improving as we continue to improve the utilization and reliability of our assets and as our commercial strategies are taking place. I think when you combine that, again, you're looking at the specialties business, you combine that with the gross profit per barrel positive trend that you're seeing in specialties as well as the EBITDA margin percent trend that you're seeing in specialties and I think it points to the strategies are working in our specialties business.

Okay, great. And then just one last sort of operational, I guess, regulatory type question. In the fuels business, it sounds like a positive coming on the, SRE, RINs side of the business. And then we have in addition to IMO, the Tier 3 regulation goes into full effect January of 2020. So maybe any update you can offer on the SREs and then on Tier 3, please?

Yes, Roger, on the RINs exemptions applications, the EPA has come out and said that they're ready to publish rulings on the applications here in the next 3 to 4 weeks. We hope that's true. It is certainly overdue in terms of the deadlines that they have. But if it does come out here in the next 3 to 4 weeks, we are optimistic that we would qualify for the RINs program. As far as the Tier 3 MOGAS regulations, we're in good shape at all of our sites. They're all in compliance and in fact, will be in position to actually be long on sulfur credits that we can take advantage of in the market.

And the next question comes from Sean Sneeden with Guggenheim.

West, maybe for you and maybe I missed it, but can you remind us where you stand on your hedge book today. I know it's a decent benefit to you for the first half, and specifically in the quarter. What is, I guess, the [indiscernible] I maybe missed in the slide deck, but could you talk a little bit about that?

Yes. So we have relatively little debt outstanding in terms of hedges. We still have some diesel hedges outstanding. But that's basically it. You'll get the details on that later today when we file our Q.

Got it. And did you guys liquidate any of the hedges that you previously had on WCS or anything like that in the quarter or was the relatively sizable gains that you showed [indiscernible] stuff that you had in place for Q2?

Yes. So it's really sort of half-in-half. We realized a total of about $22 million in hedge benefits in the quarter, offset by the non-cash mark-to-market of unrealized amounts associated with the supply and offtake step out value. And so the effect associated with all that when you kind of bring it all together is that our Montana facility, which where we monetize were our WTI/WCS hedges.Our Montana facility runs roughly 25,000 barrels a day of crude and based upon the hedges that we realized that added about $9.70 or so a barrel to it, which basically brings the current -- that were accrued this that we've had in the quarter, up to rail economics and where we see the market is that the WTI/WCS differential should return to rail economics. And so that's the reason why we had the hedges in place to begin with. And in the quarter, it enabled us to realize effectively what would be sort of what we think is the market clearing value associated with those crude diffs.

Yes. And Sean, this is Tim. The way I would tell you is the way we think about it is, the WCS hedges that we brought forward into the second quarter were already locked on both sides. So there was no additional movement that was going to occur. Regardless of the market changes. So we decided to just go ahead and bring those forward because otherwise it would -- it would just be hanging out there unrealized cash. But the way you should think about it is, as those come forward, the RINs exemption applications that we just talked about with Roger get pushed back and so those are going to be in the third quarter, we hope, but that kind of trade some spots there.And then the other thing that, I think, West alluded to, but we haven't talked about yet in the Q&A is, we were hurt by mark-to-market RINs pricing in the second quarter to a tune of about $8 million. And so that was headwinds, again that was non-cash [indiscernible] with just mark-to-marketing on the RINs pricing that we think in the third quarter between the RINs exemptions and the fact that the RINs pricing has come down a little bit since the second quarter. Those just kind of trade places with the hedge volumes that we brought forward.

I guess you guys have done a pretty good job and certainly highlighted the growth in EBITDA this year just shy of $300 million or so on a trailing basis. I think some of that includes relatively robust WCS spread from Q4, and it sounds like from some of your comments earlier Self-Help and other kind of margin growth that you're looking at, you think that ultimately offsets it when we kind of roll through the balance of the year, is that kind of the right way to think about it?

Yes, Sean, I think that is the right way to think about it. We're already seeing that in the first half of the year. If you look at our specialties business on a year-to-date basis, we're tracking roughly just over $100 million for the first half of the year, which would be on pace with what we would expect this business to produce. And that is despite the headwinds that we've been facing with crude prices going up even in the second quarter. Crude prices were up roughly 9% versus the previous quarter. Some of the strategic cause that we are implementing now as part of the Self-Help, we're having to offset that as part of our implementation process.And of course, the base oil market continues to be on the weak side, which is headwinds, even despite the progress that we're making here in the specialties business. So yes, we think that the core businesses that we have, especially at Shreveport, I will just point out again where the majority of our Self-Help program is focused at is continuing to drive improvements in our core businesses. And so we are not dependent on the WCS/WTI spread, for example, to blow out in the fourth quarter in order to hit our long-term growth targets.

And then I guess just two quick ones maybe for West. Can you remind us how much you have on the inventory financing with Macquarie, I guess, now versus last quarter and then I guess any thoughts around, obviously, focused on the 6.5 is upfront and -- but how do you think about ultimately you're looking at some of the longer, your tenure bonds at a bigger discount?

Right. So the inventory financing is currently on the balance sheet for $125 million. And that's up roughly $20 million from December and so that, it's gone up a little bit, but not too much. And that is simply reflective of the change in commodity price from December to June. And then with respect to taking a look at our bonds and thinking about what the potentially buy back, et cetera. We look at all of our bonds, but obviously we spend more time looking at the 2021s because they are the narrow majority. But we look at all of our bonds and where they're trading and taking advantage of possibility to buyback bonds at a bit of a discount.And then, the way I kind of look at our cap structure right now, the real focus is on getting the 2021s out of the then we'll address the '22s and '23s. Sitting here today, I think it is very probable that over the next 2 to 3 years that we're going to have 1 or more non-core asset sales. So we get rid of the '21s. I'm not sure that we even have to do anything with the '22s and '23s. Between our Self-Help, we're making chopping good amount of wood and if we had 1 or more asset sales, we may just take out the '22s and '23s from proceeds.

And our next question comes from Jason Gabelman with Cowen.

You mentioned the Moody's upgrade on the family rating. Does that change the thought process or does it make it easier to refinance the 2021 notes? Is there another debt agency that could upgrade your notes that would make it even more favorable to wait to upgrade -- sorry to wait to refinance versus doing it in the near term?

Yes, no, that's great perceptive question. We obviously talked to all the rating agencies. S&P was the first one to move about a year ago. And Moody's took a little while, but they were very appreciative of the fact that they upgraded our corporate family rating and our notes. Both Fitch and S&P have our senior unsecured notes rated B-.And so we'll obviously be spending some time with them and seeing whether or not there might be the possibility of yet a further upgrade out there, but you know we're continuing, they've indicated in the past that we need to continue to show improvement in terms of our performance and continued deleveraging.And we are doing that and so I don't think that we're going to really wait to -- for an incremental upgrade from any of the agencies. But that said, obviously if we got an upgrade from, that would be very beneficial, but we're not going to wait. We're going to look at the market. We're going to be ready to tap the market when the markets there. It's just not the right time.

Got it. Understood. Moving to, I guess, non-core asset sales. It seems like your stance on selling something has firmed up a bit and I'm wondering if you are in active discussions, if there is an asset or 2 in particular that you're looking at and how do the metrics on a company basis have to look pro forma after the sale? I guess net debt-to-trailing year EBITDA is kind of the most relevant metric for you guys. Is that kind of -- does the sale have to be accretive on that metric?

Jason, this is Tim. I'll hand you off to Bruce here in a second to talk about how we look at asset sales. But now I would tell you that our view on asset sales hasn't changed. We always look at, I mean, they've been generating -- all of our assets have been generating good cash flow here in the last several quarters and we continue to look to improve all of the assets in our portfolio with the mindset of a long-term view. But we do have a position and a perspective on asset sales and I'll let Bruce talk about that.

Let me nuance it for you a little bit differently though. We're not motivated to sell assets to reduce leverage. And I hope West was clear on that. The -- think about balanced uses instead. The 4x leverage is probably okay for a stable cash flow from a rent collecting business. We've got a couple of portfolio holdings, whose earnings are more volatile than that.And so the calculus is more what's an appropriate leverage given our earnings volatility as opposed to delevering, but having said that, the strategy of growing the business performance has been really spectacularly successful from any kind of percentage improvement lens. And that makes our assets more marketable.So at the end of the day, we're shareholder value creators. If the torque move to somebody else and to us, we will entertain those conversations. I think we did a reasonably good job finding the one right buyer for Dakota Prairie, finding the one right buyer for Anchor Drilling and finding one right buyer for the Superior Refinery. Those were all good shareholder value plays and we'd like to keep it in that way and as opposed to thinking about it as part of the capital structure.

If I could just sneak in a third one, I was wondering, what your general thoughts are. On the base oil market, you kind of touched on it. The market has certainly been weaker in the first half of the year. I'm just wondering your outlook in the second half of the year and into 2020 and how that could impact your specialty margins? Thanks.

Yes. Jason, this is Tim. I'll take that. So we did see some improvement in the base oil industry margins at the tail end of the second quarter. Basically in the month of June, we saw some recovery and that recovery has continued into July. So we're encouraged by that. I think the biggest risk out there of course is the volatility around crude pricing. And so, as we watch the volatility of crude, we just -- we just got to understand that will ultimately impact the base oil margins as well.Despite all of that -- despite the industry margins, I'll point to you again to our gross profit per barrel at the specialties group and our EBITDA margin, which has been able to improve despite the headwinds in the base oil markets themselves and we believe that trend will continue. We also think IMO 2020 is going to benefit not just the fuels business, but also our specialties business as much of the base oil and the solvents businesses are priced off of ULSD crack and so we believe, we'll get some additional benefit there.So we are optimistic that the base oil margins are going to continue to be improving for Calumet and that our specialties business will continue to grow.

Got it. Just to clarify, the first part of that answer. So has the June improvement in base oil margins just been a result of the reduction in crude prices?

Well, it's so -- there are -- I think there are several things going on Jason. Certainly the reduction in crude prices impacts the industry margins, but I think our Self-Help program that's driving again you looked at inventory costs, you saw transportation costs go down, you saw higher volumes coming out of the propane de-asphasting unit for example at Shreveport. So I don't know, it's not just crude prices. I think there is a lot of structural improvements that we're making in our specialty business that we're going to be able to take advantage of it regardless of where crude prices are going.

What I would say on the improvement in the margins, a good portion of what our base oils business has done, has been to work on good ratable sales. Our better customers, they're combined with good ratable production. And the reason that's critically important is, if you are producing exactly the right base oils et cetera and you're at risk of overflowing your tanks, you end up having to discount. And when you discount, you are hurting your margins. And so the real focus has been on making sure we have ratable production and ratable sales, so we minimize any discounts that we discounting the products that we need to do. And so we are making the absolute best out of the potential margins that are there. And so by make -- realizing on that, we're able to actually improve on average our margins.

Thank you. And I am showing no further questions in the queue at this time. I'd like to turn the call back to Tim Go, CEO, for any closing remarks.

Thanks, Jimmy. And thank you again for your time today and your interest in Calumet. We remain intently focused on delivering consistent performance, driving improved profitability and free cash flow, and deleveraging our business. Our transformational efforts are working and building momentum, and we look forward to updating you on our progress in the second half of the year.

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