Calumet, Inc. (CLMT) Q3 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Third Quarter 2019 Calumet Specialty Products Partners Earnings Conference Call. [Operator Instructions]I would now like to hand the conference over to Joseph Caminiti, Investor Relations.

Thank you, Andrew. Good morning, everyone and thank you for joining us today for our third quarter earnings results call. With us on today's call are Tim Go, CEO; West Griffin, CFO; Keith Jennings, EVP and CFO starting January 1, 2020 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 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?

Thank you, Joe and good morning everyone. Calumet delivered strong third quarter financial and operating results and made significant progress toward our transformation and deleveraging goals. The structural changes we have implemented through our Self-Help program enabled us to overcome significant market headwinds this year. I'm proud of the focus and determination of our Calumet employees who are delivering on their commitments, and I'm encouraged by a culture of continuous improvement and growth that we're cultivating to drive this success.Starting on Slide 3, I'll walk through some of Calumet’s key business highlights for the quarter. We realized $76 million of adjusted EBITDA after excluding noncash inventory adjustments. This was a 34% increase over the third quarter of last year. This profitability improvement translated into $64 million of cash flow from operations, a significant step up from the $6 million of negative cash flow from operations in last year's comparable quarter.These improved results were driven in part by ongoing contributions from our Self-Help initiative, which directly contributed to record utilization at our facilities and plant level throughput records at four of our operating sites.These strong financial results also drove further improvements to Calumet’s balance sheet. Our leverage ratio defined as net debt to trailing 12 months EBITDA improved a 4.2 times down from 4.6 times in the second quarter of this year and down from 6.2 times year-over-year. After excluding noncash LCM and LIFO adjustments, our leverage sits at approximately 4.0 times as of quarter end down more than three full turns since last year's third quarter.Deleveraging our balance sheet has been one of Calumet’s most important strategic imperatives over the last three years. We also repurchased $49 million of bonds during the third quarter in the open market, which brought our bond repurchases to $139 million year-to-date. Our stronger balance sheet was recognized by Moody's in July when they upgraded our corporate family credit rating to B3. This has enabled us to obtain improved trade credit terms with our vendors, which has further improved liquidity and helped reduce our networking capital needed to run the business.Finally, we've advanced on three strategic objectives since our last earnings call. First, we refinanced the 2021 notes in the unsecured market, and reduced our total long-term debt by $350 million during 2019. Second, we divested the San Antonio refinery on a credit accretive basis, which will enhance our capital structure while continuing our transition to focus on our core specialty business.And third, we announced plans to transition the responsibilities of the Chief Financial Officer to Keith Jennings, beginning January 1. Keith has experience in the specialty business with Eastman Chemical and will help us complete our turnaround and pivot towards growing our core specialty business.If you look at our earnings release that we issued this morning, you will see some changes to our financial reporting. During the quarter, we went through the process of resegmenting our financials, which we detailed on Slide 4. This change included creating a corporate segment, in addition to our two operating segments, and shifting to market based transfer pricing between segments.We made this change because this is how management views our business and because it provides greater transparency into the earnings power of our operating segments, it aligns our reporting with industry reporting practices, and it enhances our disclosures at a time when we are actively adjusting our asset portfolio to focus on our core specialty products business.The effect of the re-segmentation on our specialty segment is roughly neutral because removing the corporate allocations to specialty is largely offset by the change to market based transfer prices.On the other hand, our fuels business benefits from both the removal of the corporate allocations as well as the transition to market-based inter segment pricing specifically for our Shreveport fuels business. For this earnings call, we have compared our third quarter 2019 results to the re-segmented results from last year to make the results comparable.Turning to Slide 5, we announced yesterday that we sold the San Antonio refinery. The transaction includes the sale of the refinery, our crude oil terminal and pipeline assets to a strategic partner for the sale price of $63 million less an adjustments for networking capital related inventories and some transaction costs. This transaction also eliminates a liability that Calumet carried on its balance sheet of $38 million for the TexStar pipeline commitment.We have been clear that our long-term strategic focus is in our specialty products business. And we have also shown both the ability and the willingness to act on the right opportunities to move in that direction. This transaction fits our strategic criteria, and that it is credit accretive, immediately improving our leverage 0.2 times on a pro forma basis. It improves our future cash flow by eliminating the annual maintenance and turnaround capital associated with the San Antonio refinery. It reduces our exposure to volatile fuels market and it continues our journey down the path of our transformation to specialty products.Turning to Slide 6, I'll cover our financial performance for the quarter. Net income for the third quarter on a GAAP basis was a loss of $4.6 million or $0.06 per unit. Excluding unfavorable noncash charges associated with an impairment in LCM and LIFO adjusted net income was a positive $7.1 million or a positive $0.09 per unit.Our third quarter adjusted EBITDA of $74 million was up significantly a 35% increase over the year ago period. After excluding unfavorable noncash LCM and LIFO adjustments for the quarter, our adjusted EBITDA totaled just over $76 million. Our trailing 12 months adjusted EBITDA performance is shown in the chart at the bottom of the slide. [Indiscernible] the right chart reflects the continued success of our Self-Help program.As you can see our trailing 12 months adjusted EBITDA totaled $318 million a 51% increase compared to the $210 million captured at this time last year. This represents the company record for trailing 12 months profitability, excluding the Superior and Anchor divestments. Over the last few years, we've talked about a number of new records that we've set, but this quarter stood out in terms of our team's execution.We faced a number of significant market headwinds in both of our segments this quarter, which West will detail in a few minutes. But the hard work that our team has done to structurally improve our business overcame these headwinds to deliver these strong results.With that, I will turn the call over to West to talk to the segment results. West?

Thanks Tim.Slide 7 shows the adjusted EBITDA waterfall reconciling the third quarter results to last year's comparable quarter. Starting from the $54.5 million baseline figure from last year's third quarter, you will see that our results of $73.5 million improved materially versus the prior year period. We faced significant market headwinds in the quarter, which was evidenced by the nearly 19 million decrease in our fuel’s margins.These margin headwinds were primarily a function of unfavorable WCS and Midland crude differentials. We also had some small specialty margin weakness due to change in mix as low margin tolling business accelerated right before the termination of the contract. The most significant positive contributor to EBITDA performance was the increase in volumes across both the specialty and fuels businesses which account for $13.5 million and $11 million year-over-year respectively.We saw a meaningful increase in sales volumes on a year-over-year basis. This improvement was driven in part by the absence of turnaround activity at our Princeton facility last year, combined with record utilization and plant level throughput records this year that we mentioned at the top of the call.Our operating costs decreased $11.5 million, which includes from small refinery RINs exemptions that we received in the quarter. Our EBITDA improved by $4.4 million from lower transportation costs compared to the prior year, combined with some minor impairment charges.SG&A cost picked up by $3 million as we continue to support our Self-Help initiatives. But those higher expenses were more than offset by the $6.3 million of additional EBITDA that was generated through our Self-Help efforts.As shown on Slide 8, our core specialty segment generated $51.6 million in adjusted EBITDA excluding LCM and LIFO, a 39% increase in profitability year-over-year. These solid results were driven largely by higher sales volumes, which were supported by increased plant utilization and the absence of the downtime at Princeton that occurred in last year's period.Our adjusted EBITDA margin result of 14.5%, mark strong improvement versus last year's results of 11%. Our margin performances benefit from the high grading of our sales channels through our skew rationalization efforts, a dynamic that we would expect to continue. Additionally, our improved EBITDA margin saw some contributions from the early recovery that we have observed in the paraffinic base oil market, which has generally been the market headwind to our EBITDA and margin results for much of the year.Gross profit per barrel of $33.83 marked solid improvement versus the prior year as well. Even in part by the Self-Help efforts and business improvement plans we have been executing against this year.Well, we had solid results in the third quarter. We were adversely affected by the end of the run catalyst performance at our Shreveport facility, which affected product yields during the last days of operations before starting our turnaround at the facility.While our turnaround in the fourth quarter will impact production volumes. The good news is that the turnaround will restore the plant to start of run conditions, which should set us up for good operational performance during 2020.Slide 9 walks you through the year-to-date results of the specialty business compared to the year-to-date figures from last year. Starting from a base of $129 million, you will note that the resegmented specialty EBITDA for the 2018 period is very similar to the previously reported results.This is in line with the point that Tim made that the removal of the corporate overhead is largely offset by the move to market related transfer pricing. The substantial improvement in year-to-date results from $129 million to $171 million shows improvements in margins driven by exit of lower margin business; increases in volumes driven both by a lighter turnaround schedule, as well as higher utilization rates and Self-Help benefits largely attributable to our efforts to reduce our low margin business.Moving to Slide 10, we highlight our fuels business performance. Our adjusted EBITDA results excluding non-cash LIFO and LCM adjustments, totaled nearly $47.7 million, up roughly 8% compared to the prior year.Again, our Self-Help efforts continue to bear fruit, particularly on the operational side evidenced by our record utilization and 6.5% increase in production volumes. These Self-Help projects such as the debottlenecking projects at Shreveport and San Antonio have more than overcome the weaker crude differentials in the fuels market.In the quarter, we realized RINs exemptions related to the 2018 obligation, which contributed $11 million to our results. Gross profit per barrel results of $5.18 cents excluding LCM and LIFO declined modestly versus last year, driven by the significant tightening of crude differentials that drove results in the comparable period.The WCS/WTI average differential across the quarter tightened by $16.27 per barrel, while the average Midland/WTI differential tightened by $13.73 per barrel compared to last year.Looking forward, we will implement an additional crude debottlenecking project at Shreveport as part of the turnaround in the fourth quarter, which will further improve our production capability.On Slide 11, we provide a year-to-date comparison of our fuels business profitability versus the prior year. First, we would like to point out the increase in the resegmented adjusted EBITDA versus the previously reported results for 2018.This step up reflects both the removal of the corporate expenses that were allocated to fuel segment, as well as the improvement in results by moving to market transfer prices. You should note that the market transfer price really is just an adjustment between specialties to Shreveport fuels.Since Great Falls has no interaction with our core specialty business and San Antonio has very little interaction, the effective market based transfer pricing is largely a Shreveport effect. Shreveport is an integrated asset. And as we talked about our core business moving forward, we will start talking more about all of Shreveport.Starting with the resegmented adjusted EBITDA results for the nine months ending September 2018 of $155.3 million, the adjusted EBITDA results of $155.5 million through the first nine months of the year are essentially flat to last year.The year-over-year decline in fuels margins was driven in large part by the significantly tighter crude differentials and totaled more than $37 million. This was offset by the nearly $38 million of uplift from the increased fuels volumes, a function of debottlenecking efforts at some of our production and lighter turnaround activity at the Shreveport and in Great Falls refineries.Higher operating costs represented a $38 million headwind, as the value of the RINs exemptions received in 2019 is far less than the value of the exemptions received last year. LCM and LIFO adjustments to our inventories contributed over $23 million to our headline results, while the structural uplift to our profitability from Self-Help and operations excellence have contributed $13.6 million.On Slide 12, we detail our capital spending. Year-to-date, Calumet has spent $54 million on a combination of both maintenance and growth projects. We're maintaining our full year guidance for capital spending with expectations that we will be within the range of $80 million to $90 million.We anticipate that we may be at the higher end of the range as we have expanded the scope for the Shreveport turn around in the fourth quarter with the objective of minimizing downtime during 2020.Turning to Slide 13. We bridge our cash position against this year's sequential quarter. Starting with a cash position of $173.5 million as of the end of the second quarter, we generated nearly $38 million in operating cash flow and saw an additional release of working capital of just under $37 million.About a third of this improvement in working capital is due to improvements in trade credit. As you know, we've been repurchasing our bonds in the open market this year and used roughly $49 million of cash on hand to redeem bonds and reduce our debt levels in accord.We saw roughly a $15 million drop down in our cash principally due to a third party inventory financing provider. Additionally, we spent approximately $21 million in growth and maintenance capital during the quarter, bringing our position to $164.2 million as of quarter end.Slide 14 bridges our cash flow from operations on the trailing 12 month basis. As you can see, our trailing results at this point last year had produced negative cash flow from operations of nearly $53 million.Our improved earnings results have contributed roughly $130 million to our trailing 12 months total as structural improvements have generated improved results across both of our business segments. We've captured roughly $22 million of uplift versus the prior year through reduced interest costs, a function of the significant amount of debt reduction we have executed by buying back our bonds.On top of that, we've seen a significant reduction in working capital of over $160 million as changes to our operations means less cash tied up in the net working capital through lower inventory bills, combined with improved trade credit compared to last year.Slide 15, outlines or credit metrics, which continue to show steady improvement dating back to the beginning of 2017. Deleveraging our balance sheet has been our top priority over the past three years and our improved EBITDA results and strong cash flow performance has driven the continued reduction in our leverage. Debt to trailing 12 months EBITDA as of quarter end was 4.2 times or 4.0 times excluding LCM and LIFO adjustments. This number is down from 6.2 times in the third quarter of last year and more than three full turns after excluding the noncash inventory adjustments.Previously, we spoke to the 49 million of 2021 notes that we bought back in the quarter and the 139 million that we have repurchase since the beginning of the year. Utilizing improved cash flow and excess liquidity to reduce our debt burden and improve our balance sheet. Notably, we successfully refinanced 550 million of the 2021 notes in the unsecured market, a meaningful - [Technical Difficulty] step down from the 900 million of notes we originally issued, driven by the debt repurchases we have conducted here today.Our lenders and rating agencies have acknowledged this improving credit outlook and leverage reduction. Calumet recently achieved an upgrade to the company's corporate family rating to be B3 in July. This upgrade has been helpful in our efforts to increase grade credit with suppliers and vendors which in turn is helping boost our liquidity positions.Our available liquidity a 438 million measured as cash on hand and availability on a revolving credit facility is 32 million higher than last year’s comparable quarter in spite of our repurchasing $139 million of bonds over that period of time.On Slide 16, we give you a snapshot of how our interest burden has materially improved over the past three years. The chart on the left hand side shows our annual interest costs. Two years ago, we carried an annual interest burden to more than $180 million, which is declined by roughly $40 million today after redeeming the senior secured notes in April 2018, and our repurchasing 2021 notes throughout 2019.While we issued our new unsecured 2025 notes at an interest rate of 11%, reflecting the current conditions in the unsecured high yield market. We had materially stepped down the amount of debt we needed to refinance, resulting in our total interest expense forecast for 2020 being almost the same as is forecast for 2019. As you can see on the table on the right hand side of the page, we forecast our cash interest costs will be 138 million next year a number only slightly higher than what we will pay in 2019. Tim?

Thanks West.Turning to Slide 17. Calumet captured $6.3 million of EBITDA through our self-help efforts in the third quarter, bringing our year-to-date total to $27.8 million. This uplift came through our continued focus on operational excellence and small high return capital projects. Specifically at Shreveport we realized higher volumes - due to the crude and PDA debottlenecking projects and better margin and mixed performance in our fields and specialty businesses in commending higher margin, local rent sales for our fuels business and improve yields for various specialty products.Combined, these efforts are helping drive greater gross profit per barrel performance, as evidenced by the chart on the top left hand side. As West mentioned, improvements to how we manage our inventories and working capital continue to contribute to our profitability, visible through the continued decline in our finished goods inventory.We've made significant changes to how we manage our asphalt business and we have instituted much improved coordination between our production and our sales team in order to produce the right product in the right amount at the right time to accurately meet demand and preserve our margins. Additionally, we continue to benefit from improvements across our supply chain as our ERP systems and the enhanced capabilities that it offers is helping identify opportunities to capture greater efficiencies.This in turn has resulted in lower freight costs as well lower storage and rail hard costs. Again, these are long lasting, sustainable performance improvements. And we look forward to keeping you updated as we execute against our Self-Help Phase 2 goals.Slide 18 covers our outlook for the coming quarter. Please remember, our interest expenses, balance sheet and asset portfolio are impacted by the refinancing of our 2021 notes and the San Antonio divestment and we expect to continue capturing benefits from our Self-Help program at the core.In our core Specialty business, the fourth quarter is a historically weak quarter for demand and the fourth quarter will also be impacted by our Shreveport turn around. However, after completing the turnaround, we will benefit from improved yields and product quality as we reset to start a run conditions with the new catalyst. We will further rationalize lower margin SKUs from our finished loose and chemicals business. And we are ending our third-party tolling agreement that altogether add up to 2,000 barrels per day of rationalized low margin business in the fourth quarter.In our fuels business, the fourth quarter is typically a weaker quarter for margins. Additionally, last year's fourth quarter benefited from the favorable crude differentials. And while we were seeing a current WCS/WTI diffs widened back to rail takeaway economics, we do not expect to experience the same tailwinds as the prior year. We will implement another small crude debottlenecking project at our Shreveport facility during this turnaround, setting up next year for improved throughput and utilization.And finally, we continue to prepare for IMO 2020, and the impacts at our fuels and specialty businesses. Before I close my prepared remarks, I want to take a minute to acknowledge West as this will be his last earnings call with Calumet. I want to thank West for his main contributions. West has played an instrumental role in our turnaround journey the past three years. And as West prepares to leave, we look forward to pivot for the next phase of the company, which is the focus on growing our core specialties business.Keith Jennings will take over as CFO starting January 1, and will take the company on the next leg of our journey. I would like to introduce Keith to you now, and asked him to say a few words. Keith?

Thank you, Tim.I'm excited to be a part of the Calumet team and look forward to meeting as many of you and our investors as possible over the coming months. Calumet’s transformation is clearly gaining momentum as evident by the regional refinancing, continued earnings growth and portfolio rationalization such as the San Antonio sales. I look forward to contributing to the company, becoming the world's premier specialty petroleum products company. Tim?

With that, I would like to turn the call over to the operator and to open up the lines to our analysts for Q&A. Andrew?

[Operator Instructions] And your first question comes from the line of Roger Read with Wells Fargo. Pardon me Roger Read, your phone might be on mute.Okay, our next question comes from the line of Neil Mehta with Goldman Sachs.

Good morning, this is Carly on for Neil, thanks for taking my question. The first one is just around specialties margins. Gross profit per barrel was down quarter-over-quarter. You mentioned a couple of time specific factors on that. I was just curious if there was anything else macro or industry related driving that delta. And then can you also touch on what you're seeing so far here in 4Q?

Yes, Carly, this is Tim. Specialty margins were lower sequentially, which I think is what you were referencing versus the second quarter of this year. But if you look at it, year-over-year, specialty margins of $34 per barrel were actually up versus the third quarter of last year. I think it's more of a seasonal effect Carly. The first two quarters of the year are generally are [indiscernible] quarters.And so we're positive on the specialty margins and feel like that continues to support our strategy of rationalizing low margin SKUs, getting our special margins up. You'll see that in the EBITDA margin that percentage was up this quarter versus both last quarter and year ago quarter.So we feel positive about that Carly. In the fourth quarter, I would tell you that, we've talked about the base oil margins all year and how that has been a headwind for our business. So far in the fourth quarter we've seen crude prices drop a little bit more versus at least last year, and we've seen product prices holding, but I will tell you, as we get into the fourth quarter, it's typically a weaker margin quarter, and we expect that to hold true this season as well.

Great, thanks. That's helpful color. And then the follow up is just around CapEx. Is there any early read you can provide on 2020 capital spend and then perhaps how much you expect to be allocated towards the Self-Help?

Yes, so that's a great question. We're going to spend about the same amount this next year as we are spending this year so it will be in the same sort of $80 million to $90 million for a range. What you're going to see us do however with the sale of San Antonio is that’s going to with and also a [little wider] [ph] turnaround here quite honestly we're going to spend a little bit more money on our Self-Help projects. And have a little bit more focused on growth opportunities in 2020, relative to 2019.

Got it, thanks guys, congrats on a good quarter.

Our next question comes from the line of Roger Read with Wells Fargo.

Anyway, missed some of the prior question. So if I do repeat this, I apologize. But I just wanted to understand I think the comment it's on, you mentioned a couple of times, certainly at the end there were you introduced Keith, but it's on Slide 3, the preparing for growth in specialty products. Can you give us a little more clarity on what that exactly means? I understand that the bottlenecking you've done so far, obviously, the mix changes and while Q2 to Q3 volumes were up in specialty year-over-year, specialty volumes are essentially flat and they're down kind of over the last year or two. So I was just curious, how should we think about growth where would it come from and what do you anticipate toward the margin impacts and cash flow impacts from that to be?

Yes Roger, this is Tim. On specialty volumes let me just point out a couple of things first. We publish production volumes versus the detailed sales volumes. And so while the third quarter you're showing - or you're seeing a little bit lower production volumes we actually had very strong specialty sales volume quarter. We've talked all along about reducing working capital inventories. And so we've been able to have stronger sales as we continue to reduce the working capital.The second thing I would say is, we've talked about SKU rationalization in particular, in our finished lubes business and you'll notice in the production volumes that we do publish that finished lubes volumes are showing down about 600 barrels a day. And that is exactly what we would have expected and what we're intending to happen as we continue to drive our SKU rationalization program and drive higher margins.The other thing I would tell you is, there is the other category in our specialty volumes is down about 700 barrels a day. That was a reflection of the turnaround activity that we had last year. And some of the intermediates in the specialty business that was an outcome of those turnarounds, we would not expect to see those volumes continue in the future. And those are lower margin intermediate products as well. So those are intended.And then the last thing I'll mention is in the fourth quarter of this year, I had talked about it in my prepared remarks that we're taking some further rationalization steps, we had a third party tolling arrangement that was in those production numbers. It's about 1500 barrels a day. And we are ending that relationship in the fourth quarter. And you'll see those volumes lower starting in the first quarter.So the point here is don't use production volumes as a gauge of our specialties business. We will continue to drive growth on a volume basis, but it's going to be reset from a position where we've taken out these low margin products and grow it on a stronger platform, a higher margin business.Now, when you asked about where is the growth going to come from? I'm excited to talk about again, that pyramid of growth that we continue to show in our appendix, it starts with operational excellence at the back of the bottom of the pyramid. We've talked a lot about operational excellence and the Self-Help program from that standpoint.The next layer is small, high margin capital projects, high return capital projects. And I'm pleased to say that we are continuing to flex that step, more and more, West talked about our CapEx program for next year, is still in that $80 million to $90 million range. But that's without San Antonio and that's with a somewhat lighter turnaround year. And so the reason that it's still in that $80 million to $90 million range is because we have identified more specialty growth projects that we're going to be implementing at our facilities, Shreveport, Princeton, Karns City, all of our specialty sites are part of this program and we're going to continue to see more of these low cost and high return projects continue to drive growth.And you're going to see growth in volumes from the new base, you're going to see growth in margins. And then you're going to see growth in what we're - by resegmenting - we're going to be refocusing on our G&A and you're going to see growth as we continue to drive that G&A down as well.

Okay, maybe as a follow up on that, as we think about these high return capital projects next year, give us an idea of kind of what you would anticipate the returns to be on that or a cash payback period, or this - invest ended in February, and your cash pay back in six months kind of real high impact projects, or was all about something that takes a little longer?And then my other follow up question based off your comment about having sold down some of the things from inventory. As we look at Slide 14 is probably for U.S., the networking capital contribution of $160 million, can you give us an idea of how much of that was the sale down of these excess volumes or inventory volumes versus what was just an improvement in working capitals results of the other efforts you've put through?

Yes, I'll take the capital project question first and then I'll turn it over to West for the working capital. On projects, we're targeting two year payback returns projects or you know roughly 30% IRR. Those are the type of targets we're going after Roger. Of course, they're all individual and we will make individual decisions. But that's the target range we're looking at. West?

And Roger with respect to the networking capital, the $160 million that you see there, that's driven in part by some of the recovery that we had post-implementation of our ERP system. As you know, we got some of our inventories and accounts receivable and various things out of whack. So we've had the finalization of the recovery associated with that.And then the balance of it is really been a secular decline in our inventory and how much is needed to really run the business and we've shown you some grass in the past but going back to 2017, you had a very, very nice steady decline in terms of our total inventories in the system. And those are all sort of permanent changes.I think what you're going to see on a go forward basis, we have had improvements in our trade credit roughly $12 million or so this year. And I think there's more yet associated with trade credit I think it will finally end up with no further changes in our credit ratings.I think we'll probably get close to double that amount over some period of time here. But I think the changes that you've seen are good solid structural changes. I don't think that you're going to see a tremendous amount, more coming out of the reduction in inventories. I think the bulk of that has already been achieved to-date.We may see some slight continued improvements in terms of our inventories as we get our availability of the promise in MRP elements of the ERP coming on all cylinders, but it's not going to be that significant on a go-forward basis. So don't count on this slide this next year, showing a light come out of $160 million reduction in net working capital.

And our next question comes from the line of Sean Sneeden with Guggenheim. Your line is now open.

West, maybe on the move to kind of a market based pricing scheme versus kind of cost base for the inner segment transfer pricing. Can you talk a little bit about how we should think about that going forward? And I guess, how do we think about that as in the context of as you continue to transition the business more towards kind of the core specialty, how do we kind of think about that corporate segments in kind of contrast of what the prior reporting period was?

So from the specialty side, we started off this slide talking about the specialties walk by comparing the third quarter last year as reported to what we're reporting this period. And was really to kind of give you a good sense that the change in the resegmentation really sort of sets things sort of on an equivalent basis.So if you're modeling the business while there are technical differences in that we no longer have the allocation of corporate overhead, you end up basically at the same place with the new resegmentation, with the market based transfer pricing. But on a go forward basis, it does provide greater transparency and clarity.What you're going to see us do and we've already realized the chunk of it today, but our SG&A obviously is something that we need to continue to focus on over time. And over the last couple of years, we've had a very significant decline in our SG&A and so going back to 2017, we reported G&A, total G&A of $138 million or $139 million; 2018, a $122 million; year-to-date based on the segment results if you sort of annualize that, that would imply something around $100 million this year. So you're going to see a continued secular decline there as we focus on our G&A going forward.

Let me circle back on a couple of questions offline, but maybe can you talk a little bit about this San Antonio sale. And it looks like the, kind of. pro forma financials are showing that the facility was a bit of a drag on EBITDA and I guess should we be thinking that the buyer assumes or takes on any kind of additional kind of corporate overhead associated with that facility, or is that all going to be reallocated to the remaining assets in the portfolio?

This is Bruce. Let me help with the framework. It's an excellent question. We have a couple of things that have changed in San Antonio. And so the particular 12 month pro forma is probably not reflective of a run rate or even of current performance. I would guide you they're $9 million or $10 million of EBITDA if you want to think about what's the value of the facility in service.And then in terms of obligations or the balance sheet side of it, we're receiving a $63 million cash payment with a couple of adjustments. And then we also have on our books, it's basically leveraged or had on our books a capital lease, and that was at present value liability of $38 million. So think of the enterprise value is the sum of those parts against the run rate.

And, Sean, what I would tell you is, we had some downtime in San Antonio last year with some turnarounds. We had an impairment that affects the net income last year. So the trailing 12 months has all that in it. I would tell you on a run rate basis, the work that the employees have done this year to improve the profitability of the plant, $5.9 million of the $28 million of Self-Help that we've talked about this year was at San Antonio.And so the run rate for San Antonio is probably more than that. We'll call it $9 million to $10 million EBITDA range that we believe that that facility is producing and driving. So that gives you a little bit more color of kind of what's going on in the San Antonio business.However, there is a turnaround scheduled next year. It's going to require some additional turnaround capital. And if you look at some of the projects that we've implemented there over the last couple of years to improve the profitability, the Isom project that we've talked about before and some of the other improvements we've made; from our standpoint, cash flow has been a drag for us and this will be a positive impact to us on our cash flow basis.Turning back to your other question on transfer pricing and the resegmentation; what I would tell you is, if you look at the corporate segment, we're all getting used to the new resegmentation. And I know that a lot of questions are going to be around, how do you think of business? And what kind of run rates do you think we ought to be plugging into our models?And I will tell you that we're still working through that ourselves in terms of some of the additional kind of modeling and the way you think about it. But the corporate segment, as West talk about, we're kind of on a run rate basis over $100 million, that's probably the way you should think about the corporate segment.On the fuel segment, we're probably thinking we're at $155 million year-to-date. Some of that includes some LCM in LIFO. So what we're thinking about is run rate of basically $150 million to $200 million is what we believe that the fuels business is going to be, you ought to be thinking about it that way.In the specialty business, we talked about, it really hasn't changed. We've always talked about it as a $200 million business. We continue to believe that that's the case. But as we continue to implement these growth projects and as we can continue to implement our Self-Help in the specialties business, we believe the $200 million to $225 million range is probably more appropriate to kind of think about it on a run rate basis.So hopefully that's a little bit helpful to you. The one other piece of information that I think it's important for you guys to understand, West made some comments about this in his prepared remarks, is that Shreveport fuels, that component of Shreveport that produces fuels is in the fuel segment.But as you guys know, Shreveport fuels is highly integrated with Shreveport specialties. And so even in this resegmentation, we still have the Shreveport fuels component in the fuels business. And if you want to think about well, how do you move that Shreveport deals component and add that to the overall specialties business to come up with maybe what you might consider to be the core business? What I can tell you is Shreveport fuels contributed about $6.8 million in the third quarter, that's of the where $47 million or so reported for fuels. And year-to-date, Shreveport fuels was about $30 million of the total fuels year-to-date.So you really got to take that component and think about that as part of our core business, since it's highly integrated with our specialties business.

Did that help, Sean?

That's helpful and I appreciate all the commentary there. I guess just for avoiding the doubt there, but if you just for instance look at in Slide 11, should we try to interpret kind of the move from the prior number we're like just kind of using a year ago, the $82 million to $155 million. Is that delta all, the kind of G&A that was previously burdened on the segment or are there other aspects that I'm missing in that bridge?

Yes, there's two components there, Sean; the corporate G&A is just one piece of it. The market based transfer pricing is the second. So what you're seeing is and it affects only - the market based transfer pricing only effects Shreveport.So, what's happening is, by moving from a cost basis to a market based, you're seeing some of the margins move from the specialties segments into the Shreveport fuel segment. And those two factors combined are what bridges the $81.8 million to the $155.3 million.

And could you just give us a sense of kind of what the rough breakdown is just for like historical comparison, so we kind of hopefully true up our models to that between corporate G&A and the market base transfer pricing?

We can't break that out Sean. But what I can tell you is, again, if you look at the specialties breakdown on Slide 9, you see the 128.4 moving to 129.3. And what that is, is it's a combination of the removal of G&A but offset by the market based transfer pricing of margin moving from specialties to Shreveport fuels.So as you look at your models, think about specialties as the G&A help is offset by the market price change, and then on fuels the G&A help plus the market base transfer price help, it bridges the gap on the fuels. And I think as you play around with your models, I think you'll be able to fine tune it accordingly.

And our next question comes from the line of Jason Gabelman with Cowen.

If I could just ask one on the remaining non-core assets; and I was wondering if you could just provide some color on what you're seeing in the M&A market for remaining non-core asset sales and any thoughts on timing of those assets sales?And then if I could just go back to Shreveport, can you just provide a bit more detail on this crude debottlenecking project? I guess what's the impact of throughput, and does that add output on the fuel side or the specialty side?And then lastly also on Shreveport, what is the - if you could provide the impact for throughput on the asset in fourth quarter related to maintenance?

Jason, this is Bruce again. So, I'll try those in reverse order. The Shreveport debottlenecking, we did two small projects. It's more of a restoration of capacity. That's the 60,000 barrel a day nameplate plant. It's been limited in a couple of points and we've addressed those.So, in two steps, we're getting plus 7,000 barrels a day of throughput capability at the front end. More importantly, we've got this fall, the fourth quarter, couple of key catalyst change outs, end of run. These are units that do a couple of years run in service and it's going to come back stronger after that. So, in 2020, we've got zero plant downtime, fresh catalyst and a larger facility. That's kind of been our focus.If I go back to the question on core versus non-core, we don't really think about portfolio in that way. The family of holdings is value accretive. We've been, I think, patient portfolio holders and once in a while somebody comes along to whom one of our facilities is worth more than our keep value and we're very disciplined about our keep value.So we've had a couple of opportunities over the last few years to find the one right buyer. But I think we're not interested in enforcing this along. And so the journey to a specialty products company back to the roots, back to the origins of the company is in active patience and value creation.

Yes, I would just tell you Jason, if you look at how we've been approaching our portfolio over the last four years, we've always talked about the right buyer. We've always talked about the right opportunity. We've always talked about the right decision for the shareholders.And if you look at the moves we've made over the last four years with the Dakota Prairie refinery then you go to Superior then you're go to Anchor and now you look at San Antonio. We found a natural buyer for those assets. It took us some time. We were not in any fire sale or rush to do so.We have - all of those assets were valuable in our portfolio and had a certain hold value that we needed to be able to compare against to make sure that we made the right decision for the shareholders. And I can tell you, I think you're referencing our Great Falls fuels refinery when you asked your question.Great Falls has a significant value in our portfolio. It is, as you saw in the fourth quarter of last year, it has the ability to generate lots of cash flow. And we appreciate that and view it highly in our asset portfolio.We don't comment on M&A. But if there was an opportunity for someone to buy that asset, they would have to have a higher value in their portfolio than in our portfolio. And that would be a good thing for all the parties involved, including the employees and the community. So that's kind of how we view them.

I appreciate that. Just - sorry, going back to the Great Falls answer; you said it was 7,000 barrels a day throughput increase. Can you provide the split of the output from that 7,000 barrels a day between fuels and specialty products?

When you think about it that way, in the two projects, one was implemented in the fourth quarter of last year. One is going to be implemented in the fourth quarter of this year to total that seven. It's a crude debottleneck project. So that's probably going to be impacting fuels the most, Jason.We make more VGO than our loops plants can run. So it will result in excess VGO sales. But with IMO 2020 coming, we believe that that is going to be profitable for Shreveport.In addition, when Bruce talked about going back to start run conditions and we're going to have fresh catalyst to the extent that we're able to continue to debottleneck our specialty plants, that excess VGO will be available to go into the specialty plant as margins and demand continue.

And our next question comes from the line of Gregg Brody with Bank of America.

I think you helped us quite a bit there. But just maybe to simplify it, do you have a third quarter number that you would have reported if, if without the adjustments just as we think about like in our models before today with adjusted EBITDA?

No, we don't have a third quarter number for specialties versus fuels for the third quarter based upon the old segmentation.

And then it looks like you didn't restate the historical numbers and the expectation is you won't do that?

No, we did restate the previous numbers for all numbers present. So we reported the third quarter 2018 specialties and fuels breakout in corporate segment and then the grand total and then the nine months ending September 2018, and then the quarter for 2019 and the year-to-date 2019. So those are all there.

Yes, so Gregg, this is Tim. What I would tell you is, in the press release and in our slides we compare the third quarter 2019 on the new resegmented basis with the third quarter 2018 on a resegmented basis.Okay, so if that is apples-to-apples, you can easily go back to the third quarter 2018 press release and see what was reported a year ago. And you can see that it hasn't changed much, the things we're talking about on the specialty side. The specialties number for the third quarter of 2018 hasn't changed much, which is consistent with what we were showing you on the third quarter year-to-date. So you can do that. Look up and verify that yourself, Gregg, but I think that's what you'll find.

And then you mentioned that you're seeing some benefit from IMO 2020. Have you - can you quantify what you think that could add and sort of a ballpark EBITDA number for us next year? Yes, I appreciate that, those moving parts, but I'm curious how much you think that could add to business?

Yes, Gregg, and we've not been able to do that. I know that that this question comes up in a lot of calls, as a lot of people are still trying to get their arms around it. I think we were encouraged to see the impact on the high sulfur fuel market is something that you would expect that to be discounting as a result of IMO 2020. And we were starting to see that here in the second half of the year.So that was good to show us some signs of what we would - what the thesis is and what people are thinking. The next thing we started seeing the ULSD crack starting to go up. And that's probably the second step that you would expect to be able to see as part of this IMO 2020 impact.And then really, we were waiting to see if the WCS crude diffs would start to widen as a result of, again, the logic or the thought process behind it. And in the fourth quarter here, we are starting to see the WCS/WTI widen.This is even before the pipeline leak, we were starting to see the diffs starting to widen back out again. And all of those are, we think positive indicators that there is going to be an impact on our both our fuels and our specialties business with IMO 2020.And the only thing I would just point out is between our fuels and specialty product mix, we're about 50% leverage to that ULSD/VGO market.

I appreciate, there's a lot of moving parts. I'll use that 50% number somewhere once I figure it out. Just you mentioned that - you gave a lot of EBITDA numbers for the San Antonio refinery, was there much CapEx savings there we should expect going forward in terms of what your maintenance capital is or 2020?

I think if you zoom out to a high level and you strip out the growth CapEx, because we did put in a couple of good growth projects in the past to get that EBITDA. But I would guide you to kind of $7 million to $10 million run rate of CapEx specific for next year, including the turnaround that Tim mentioned, which we're imagining would have been late in the year on our watch. That is probably more like a $13 million for 2020 capital avoidance for us.

And I guess just lastly, West, good luck. Hope you enjoy whatever you do next. We appreciate the interaction with you over the last three years and just before that your predecessor. And Keith, welcome aboard.

Thank you.

Thank you. And I'm showing no further questions at this time. I will now turn the call back over to CEO, Tim Go, for closing remarks.

Thank you again for your time today and your interest in Calumet. We are executing our plan. We remain focused on delivering solid performance, driving improved profitability in cash flow, and deleveraging our balance sheet. Our efforts to transform our business are working and gaining momentum. And we look forward to updating you on our progress next quarter. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.