Calumet, Inc. (CLMT) Q3 2022 Earnings Report, Transcript and Summary

Hello. And thank you for standing by. Welcome to the Q3 2022 Calumet Specialty Products Partners, L.P. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. It is now my pleasure to introduce, Head of Investor Relations Barry [Technical Difficulty].

Good morning. Thank you for joining us today for our third quarter 2022 earnings call. With me on today's call are Todd Borgmann, CEO; Vince Donargo, CFO; Bruce Fleming, EVP Montana/Renewables and Corporate Development; Scott Obermeier, EVP Specialty Products and Solutions; Marc Lawn, EVP Performance Brands; and Steve Mawer, our Executive Chairman. You may now download the slides that accompany the remarks made on today's conference call, which can be accessed in the Investor Relations section of our Web site at www.calumetspecialty.com. Additionally, a webcast replay of this call will be available on our site within a few hours. Turning to the presentation, on Slide two you can find our cautionary statements. I like to remind everyone that during this call, we may provide various forward-looking statements. 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 cause them to differ from expectations. As we turn to Slide three, I'll pass the call to Todd. Todd?

Thanks, Brad. And to our attendees. Welcome and thank you again for joining the call. Calumet continues to demonstrate that our strategic vision of creating two leading highly competitive businesses to becoming a reality. Our specialties business is performing superbly, and proving its capability. Montana Renewables is in completion and growth mode, and will provide a detailed update of our SAF, renewable hydrogen and renewable diesel launch in a few minutes. With respect to the third quarter, let's turn to Slide four. Our third quarter adjusted EBITDA of $127 million is the second best quarter we've seen at Calumet, despite our Montana plant taking a planned turnaround for most of the quarter. Of course, the commissioning of Montana Renewables marks a significant milestone for Calumet, as our vision of becoming a reality -- as our vision becomes a reality, and we enter the renewable diesel business. Since our last earnings call, we've also expanded our MRL product offering by adding sustainable aviation fuel to the mix. Our SAF has quickly contracted. And not only are these sales at a premium to renewable diesel, but once our engineering modifications are complete in early 2023, MRL should be the largest SAF producer in North America. It was less than one year ago, that we announced the initial funding of Montana Renewables. And we're proud of what the team has accomplished here in such a short amount of time. And the time that it took to stand up MRL, our specialties team has redefined what this unique business is capable of. This year alone, the business has generated $330 million of adjusted EBITDA and produced the best two quarters in company history. This is a combination of a favorable market, a competitively advantage business and a step change in execution across the board. When we're our ops and commercial teams have maximized the value of optionality that sets our integrated platform apart. The heart of our advantage is that Northwest Louisiana Specialty Complex, and specifically our Shreveport facility. Here we produced products for third-party sell. We make suite docks for our solvents division, basals and waxes for our Penreco and Paralogics brands, lubricants for our performance brand segment. And we gather intermediate throughout the system and upgrade them into finished meals. In the third quarter, we processed over 51,000 barrels of feed per day through this facility, a 40% improvement versus 2021 and more than 10% higher than any annual period we've seen. Further, the Northwest Louisiana team has now delivered two turnarounds this year, one in Shreveport and one at Princeton, both on time and on budget. This step change in execution has been fundamental to advancing the key strategic initiatives of deleveraging organically. At the same time Montana Renewables was advancing. At this time last year, our debt-to-EBITDA ratio was over 10 times. At the end of the third quarter, it was four times. Not where we want to ultimately be, but we're on pace to reach our destination quickly. I think the Shreveport team for their tireless commitment. They developed a plan to change the culture and prove our capability and invest capital wisely. Early in the year we talked about capital investment in Northwest Louisiana. We've been thrilled with these investments so far. And we'll continue to do that in a * disciplined way, as we further integrate and widen our competitive moat. It's underpinned by industry leading flexibility and optionality. Montana Renewables has quickly become a reality. A mere 355 days ago, we secured project funding from Oaktree and formally launched what's become known as MRL. Over the past year, we formed a strong partnership with Warburg Pincus and turn that project into both a business and a growth platform positioned for the future. During this time, we've seen our hypotheses tested. And we've learned a lot. Our hypotheses regarding the advantages of location, the over competed and increasingly expensive market for ECO, likelihood that Canola would gain EPA approval and how RD margins ultimately worked. We’re all viewed as outside the mainstream a year ago. But now they're being proven out and even becoming conventional. And in the case of MRL, they provide unique competitive advantage. We've overcome other challenges to. Like everyone, we scheduled materials to the peak of the global supply chain crisis, manage through a tight labor market, and fight inflation across the board. Our project timeline has been aggressive, and we ultimately commissioned the units within a few weeks of the planned date. I'd like to recognize the tenacity of our team that's made this reality. Delivering a schedule driven project in this environment is a tremendous accomplishment. From here, our focus is pointed towards operating this new unit and completing the hydrogen plant in pretreater, which provide the scale and feedstock flexibility that underpin our economics. As excited as we are about renewable diesel, the growing energy around SAF provides a new added growth platform. In a few short months we've pivoted to take advantage of this rapidly emerging opportunity. In the first quarter of next year, we * will be the largest SAF supplier in North America. We have contracted 2000 barrels a day, or 30 million gallons a year to a blue chip off taker. And that volume has contracted at margin substantially higher than renewable diesel. Like our RD experience, demand for SAF was oversubscribed. And interestingly enough this deal was in the works prior to the Infrastructure Reduction Act being signed into law a few months ago. Prior to the IRA, SAF was a niche market, supported largely by private jet demand. The IRA creates an incentive for producers to develop new technologies and generate more supply to meet increasing demand from commercial airlines. We believe this will create a growth trajectory similar or better than we've seen in renewable diesel. And we're perfectly positioned to be a first mover in a high growth West Coast and Canadian markets. The similarities between RD and SAF don't stop there. Many in industry have adopted our view that the RD market should see relatively steady margins over time. Biodiesel volumes are necessary to meet market demand, even if all announced RD projects were built, and renewable diesel has a net yield and cost advantages relative to biodiesel. We believe that in order to ultimately meet long term industry SAF demand, new expensive technologies are going to be required. Like biodiesel, those technologies require financial and technical certainty to get off the ground. One could deduce that the IRA bill projects whether it's enabling incentives might be. With our technology, SAF can be manufactured more economically than through these new technologies. RD producers that have invested in the ability to produce SAF could expect the lasting advantage. And Montana Renewables is expected to have an additional transportation cost advantage relative to its Gulf Coast competition. Warburg Pincus our partner* in MRL, had been even more impactful than we expected. In * just a few short months, they've helped us expand our thinking and their experience in decarbonisation continues to be a force multiplier. We believe this alliance was such a strong and global partner helps us cement our position as the leading independent SAF and renewable diesel producer in North America. Jointly, we continue to work with Lazard as they evaluate inbound investor interest, specifically from strategics and increasingly with regard to SAF. Later, we'll talk a bit more about the SAF opportunity. But before we go there, I'll turn the call over to Vince, to walk us through the segments. Vince?

Thank you, Todd. Let's turn to Slide six. Our specialty products and solutions business generated a record $131.7 million of adjusted EBITDA in the third quarter. This type of performance requires a combination of a strong market, exceptional execution and advantaged underlying business. Our specialty material margin of $93.93 per barrel is the highest ever, which is a combination of rapidly falling feedstock prices, and continued focus on executing commercially. Additionally, we continue to see strength in the fuels market, especially for distillates. Our integrated platform allows us to ramp up diesel fuel production in environments like these, and at the same time, so a large percentage of our specialty products and to markets that are highly correlated to diesel fuel, providing a commercial optionality that is highly valuable. Ultimately, in order to capitalize on this margin environment, we have to run well, which we did. We had great operational performance and production across our SPS facilities during the quarter. And Todd hit on some specific examples earlier, but the whole network turned in exceptional production. Additionally, our discretionary capital investments within this segment, and specifically street port continue. We are experiencing the benefits of these low risk, high reward investments through improved efficiency, reliability, and optionality that increases our advantage going forward. Moving to Slide eight, our performance brands business generated $8.5 million and adjusted EBITDA for the quarter. Performance brands is beginning to see a turnaround from the headwinds we have faced for more than a year now. Our price increases are gaining traction, and as we have discussed in previous quarters, we are finally starting to see our raw material cost stable. Costs still increased versus the prior quarter. But the magnitude of the increase was less than pricing, especially late in the quarter. Our supply chain is not perfect, but there too, we continue to trend in the right direction. This quarter, our largest supplier lifted a force majeure that had been in effect for 18 months. At this point, our largest ongoing supply challenge is Greece, which is a significant growth opportunity for us. But given the multiple challenges of the past year, narrowing it to Greece is a welcomed step forward. We expect to see some normal seasonality in the business as we head into the winter months. But we are excited at least for the time being to see a semi return to normalcy for this business. Moving to Slide 10. Our Montana business had a busy quarter with the plan turn around and renewable diesel conversion. As Todd mentioned, we are excited to move into the operating mode at MRL. Even with the planting and turnaround for much of the quarter, we did generate $11.3 million in adjusted EBITDA. Partly due to the ongoing improvements we have been seeing this year in differentials for heavy Canadian crude as WCS WTI discount was approximately $20 per barrel in the quarter. And partly due to the exceptional product margin environment that continues to be strong, even by pad force high standards. The legacy plant is fully running at 12,000 barrels per day. And as we have stated we expect this reconfigured facility to generate approximately 60% of the adjusted EBITDA of the historical plant performance, even though we are running at 40% of its capacity. With that, I will turn the call back to Todd to talk in more detail about MRL as the concluding remarks. Todd?

Thanks, Vince. Now let's get deeper into Montana Renewables on Slide 11. Our feedstock is sourced, our plants commissioned. The throughput expansion that renewable hydrogen provides is expected shortly and are pretreated will open the universe the full universe of feed stocks. Our plants full of feedstock, and we will quickly turn that to cash. At one point, feedstock availability was the most frequently asked question we received. Since then MRLs feedstock advantage has proven to be a massive differentiator, and we believe that's a lasting advantage. Feedstock for initial startup were secured months ago. Local suppliers liked the idea of shortening their supply chains with a high security off taker like MRL. Our supply chain has been proven as trans loading sites are working and rail cars are turning. Many of the same suppliers who are providing treated feed stocks now will be supplying the untreated feeds when our pretreated is complete in a few months. And the appending approval of Canola further differentiates MRL. As there's enormous volumes in our backyard, they're incrementally exported to Asia. Something we haven't discussed much is the emerging potential of Camelina oil. Camelina is high on our radar. It's a non-food feedstock that's currently grown in Montana. Camelina has intrinsic value to farmers as rotation cover crop. It also has an extremely low carbon intensity, and the crop continues to gain momentum as a future juggernaut in renewable fuels feedstock space. For Montana Renewables, that couldn't happen in a better place. As mentioned earlier, we've contracted 2000 barrels per day of SAF, which is part of our initial yield. And that makes us the largest North American SAF producer. On the bottom of slide 12, you'll see these initial volumes, all of which have been sold at a premium to renewable diesel. Immediately, we have an option to stretch the current SAF output, and we'll fine tune that as the plant completes its initial performance testing. Thereafter, we can capitalize for greater SAF production, which we in our technology licensor estimate could be up to 15,000 barrels a day. Preliminary engineering work has begun on this project, and its world class position has generated considerable interest from strategic investors. On the right half of this slide, we see a map of the West Coast major airports and SAF hubs in relation to Montana Renewables. To many of you, this map might look familiar as we viewed something similar for RD. Location underpins so much of our competitive advantage at MRL whether it's renewable diesel or SAF, and as all of you with refining and transportation fields knowledge, no location is the one competitive advantage that will stand the test of time. MRLs proximity to end product markets is exceptional. We serve renewable markets on the west coast with direct BNSF rail access, and we're perfectly positioned to support the continuously growing low carbon markets in Canada. Retail recently we've seen that location is more than just advantage great expense. The strong staples margins that we see in the RD business are vulnerable to backwardation for anyone with long supply chains. We believe the same is true for SAF. In a highly backward added market like we're in right now the price received for fuel is significantly less next month than it is if you can reach in market in the current month. We've heard more about this issue recently as backwardation has deepened. And with our shorter supply chains, we expect to largely avoid this challenge. In summary, Slide 13 puts everything in one place. Right now we're focused on ensuring we take the time to understand the nuances of operating our RD unit that only come with experience. We really don't generate much EBITDA until we gain the scale and feedstock flexibility that are coming soon. And right now the temperature is 30 degrees lower than the November average in great falls, so we're taking it slow. From there, the focus is on getting the pretreatment hydrogen plants stood up. It's at this point that Montana renewables is expected deliver financially. Next year, we'll be focused on operating the full plant, optimizing our feedstock advantage, and quite possibly finalizing our SAF expansion. All when it's been a busy year. We're excited about the future. We're proud of what's been accomplished thus far, and we believe the foundation is set for Montana Renewables as a leading growth platform in SAF and renewable diesel. With that, let's turn it back to the operator for Q&A. Operator.

[Operator Instructions] And our first question comes from the line of Carly Davenport with Goldman Sachs.

Hi, this is Nicolette Slusser on for Carly Daven, thanks for taking the time. So the first question would just be on broader capital allocation. And how Calumet is thinking about potential for shareholder returns over the coming quarters as you progress through continued leverage reduction?

Yes, we're excited about the upward potential of our units, obviously. First things first, we're focused on getting this business up and running. We think in generating cash, which, like we said, in the call, we think happens kind of early spring next year. From there, we'll continue to pursue the strategic deleveraging, which has been kind of priority number one now for a long time. So looking forward, we try not to get too far ahead of ourselves, we like this cash generation potential of the MRL business, obviously, our specialty business continues to generate a lot of cash and it looks like for the foreseeable future, that continues to be the case. And, we'll manage it accordingly.

Okay, great, thanks. And then just a follow-up there on Montana Renewables. And if you can talk a little bit about what else is kind of outstanding to get the renewable hydrogen plans and pretreatment unit online, as it relates to the asset?

Hey, Nicole, this is Vince. We’re operating on a small site and so from the beginning and we've talked about this, the sequential commissioning of the discrete projects was part of our approach to efficient execution. So, last summer, we completed the logistics segregation into the two trends, the crude oil processing and the renewables. We're presently commissioning the renewable diesel, which in the past, we've called the hydrocracker, when it was parcel service, hydrogen should come up next month and pretreated after that. So basically, through the winter, we're going to finish the complete commissioning and slide 13, which I should note has not changed in a long time, is telling you what that looks like in terms of throughput. And I'll echo Todd's sentiments earlier, I'm proud of the Calumet team having held the line on schedule here. That was our metric, that's what we set out to do and knock on wood, we're bringing it home.

Okay, great. Thanks for the color there.

Thank you. Our next question comes from the line of Amit Dayal with H.C. Wainwright.

Thank you. Good morning, guys. Congrats on the execution. Just paying respect to MRL. Should we expect -- you've indicated 4Q for MR Montana Renewables is going to be a flat from an adjusted EBITDA perspective. Will that continue potentially into 1Q ‘23, as well? Or will you have some of the SAF and already starting to contribute already by them?

Bruce you are not in here. It sounds like we're missing Bruce here. He's actually off site. So, I'll take a shot at it, Amit. The -- obviously, there's two steps to cash generation. The first one is scale with the hydrogen plant, that happens before the pretreat. So, I think you're right, we don't expect full cash flow, until we get both, the scale and the preatreater online. But we will, we'll do a little bit better, we expect to do a little bit better than flat, kind of early in the quarter, as late in this year, kind of early next year as we get kind of hydrogen plant fully tuned out, we'll obviously kind of just like we're doing with the RD creep up learning curve on pretreat. Those types of things. So, I don't think Q1 will be totally flat. But you're right to assume that, the large earnings power starts after both pretreat and hydrogen plant.

Honestly, thank you for that. And just from the monetization perspective, I mean, this has been out there in terms of the renewable diesel optionality that is on the table, with specialty, the SPS segment and performance brand segment, now showing this level of performance, have you -- are you reconsidering some of these options, that you know * have been in discussion previously. Just the organic cash flow seems pretty strong, I know, deleveraging efforts seem to be, moving in the right direction with this support. So, just wondering how we should think about, the options in front of you from, what do you have put out there with respect to the renewable diesel and SAF business?

Yeah, I think we got a very opportune. How are you? You're back, Bruce?

I am sorry, I don't know what happened. I'll take the Montana Renewables part. But I'm going to invite Todd to also cover that a little bit at the corporate level. So, we set out a year and a half ago to launch this business and I think there was a series of questions which we addressed along the way from analysts and investors and as each one of those guys satisfied, and as the value proposition became more clear, we shifted our thinking a bit. And the capstone on that was when Warburg came in and back the venture at an enterprise value mark of $2.25 billion. Now, was a pre-commissioning in number. So, we were, pretty happy with that accomplishment. We need to focus on getting this up safely and delivering what we've promised to the market. But at that point, Montana Renewables is standalone itself funding, all of the things that we talked about for future growth expansion SAF. Montana Renewables can do that on its own. So, we don't think that we need to monetize any of our ownership in order to deliver the business plan, that makes it optional and Calumet, was founded as a partnership, the general partner thinks in terms of partnerships, and at the moment, we're very interested in the strong inbound that we're getting on SAF, and a couple of other strategics, who have been waiting for us to derisk this by getting it turned on. So, I think all of that is long way around of saying that, we really like our position, but we still think a complementary strategic partner would make a lot of sense. It's in Calumet DNA to operate that way.

Yes, maybe I'll just add on there a bit, Amit. I think, like we said, we look at this very opportunistically at the parent. We had a process going before with Lazard. We talked about that. That process ended with the -- I shouldn't say, fully ended, but as far as, a process with a set deadline, an end date that ended with the Warburg deal. Lazard remains retained. They're out there. They're very opportunistic, like Bruce said, they are taking inbound, and an inbound honestly picked up with SAF. So, we don't feel a rush. But there could be an opportunistic deal here that we could consider. And I think we'll just take it one step at a time.

Well, that's helpful guys. Thank you so much. That's all I have. I’ll take my other questions offline. Thank you.

[Operator Instructions] Our next question [Technical Difficulty] comes with Bank of America.

Hey, good morning, guys. Just maybe talk a little bit more about what you're seeing on the demand side. Are you seeing any slowdown? And then on the industrial side or consumer, or are you seeing resilience?

Hey, Greg, this is Scott Obermeyer, I'd say, on a macro level, but we're aware of a lot of these forward indicators, signaling and more challenging economic environment. And we also we're starting to see some typical year-end seasonality across both industrial and the consumer side. But all in all, Greg, I mean, we're seeing a continued -- pretty solid demand overall. So I think as we look forward, we view Q4, and Q1 with overall pretty solid demand. I think we'll see some of our prices regress a little bit toward some normalization, but we're pretty bullish overall in the businesses running well.

And you mentioned, how SPS benefited from a decline in crude, I believe, in terms of helping our margins, could you help us understand how much that enhanced your margins?

Yes, I think if you look at that, the margin chart. This is Todd, Greg. The margin chart in the material on the SPS side, you can kind of see a pretty steady level over the past four or five months. And you saw kind of in Q1, a little bit of a dip when crude ran up about 30 bucks a barrel. And you saw the exact opposite happened here, when crude ran down about 30 bucks a barrel. So, it's hard to quantify exactly, but I think the way we like to look at it is assume that steady line is kind of the normal we expect to be able to maintain that in the current market. Looking forward and I'd say the pop above that steady line that we're seeing in the third quarter is large part crude related.

Got it. And then on the performance brand side, you talked about how a lot of the force majeure is behind you is the one remaining supply sides Greece. I know you were expecting some delay in terms of being able to improve your pricing relative to improvement in crude prices. That's obviously come down a bit. But I'm curious, it sounds like you're telling us what 2Q -- what 3Q was a reasonable expectation going forward for what type of EBITDA we should expect? But how do we -- am I misinterpreting that? Or should we expect that to improve?

Hi, Greg, it's Marc Lawn. Couple of things. Let me sort of disassemble that question just into a few component parts. So as Vince mentioned, we're still seeing inflationary pressures on the business albeit at a reduced rate. So the speed at which we're catching up with the pricing is a bit that we've seen come through there during the third quarter, Greece is one that we keep an eye on very carefully. We're doing a lot work around trying to stabilize further the Greece market, demand is strong there and continues to be remained strong. And that's not just the North American issue, it's sort of a global issue, which gives us opportunity. And as you look forward, there isn't any indication in the short range, that we're going to see a material change based on what we know at the moment. Albeit, we still think that there's still an element of catch up. So, while we've caught up an element on price lag, that's still not all the way through. So some pricing was still going into play as late as the second and third week of September, for example, there's still some compounding benefits there that we would expect to see rolling through.

I appreciate that, color. And just last one for you. I know you're -- there's some timing around bringing in the proceeds from your different Montana Renewable facilities. Are you providing guidance as to how much we should expect to come in from that facilities in the fourth quarter? In terms of enhancing the liquidity down there?

Well, I think a good rule of thumb is, we built inventory feedstock, inventory with feedstock that was around 50 million bucks. That's kind of just sitting there in the tanks. So, the supply and offtake deal in the ABL will combine to fund the inventory. And we'd expect that much back here as we progress through the quarter.

Okay, that's the time, guys. Appreciate it.

Thank you, Greg.

Thank you. I’ll now hand the call back over to Head of Investor Relations, Brad McMurray for any closing remarks.

Yes, thanks. So on behalf of the management team here in the room, and really all Calumet, thanks for your time and interest. Here this morning, we appreciate your participation on the call. And everyone have a great rest of the week. Thanks.

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