Martin Midstream Partners L.P. (MMLP) Q1 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Martin Midstream Partners LP First Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to your host for today Mr. Bob Bondurant, Chief Financial Officer. Sir, you may begin.

Thank you, Ben. Anyway, let everyone know who's on the call today, we have Ruben Martin, President and CEO; Joe McCreery, VP of Finance and Head of Investor Relations; and Wes Martin, VP of business development. Before we get started with the financial and operational results for the first quarter, I need to make this disclaimer. Certain statements made during this conference call may be forward-looking statements relating to financial forecast, future performance and our ability to make distributions to unitholders. We report our financial results in accordance with Generally Accepted Accounting Principles and use certain non-GAAP financial measures within the meanings of SEC Reg G, such as distributable cash flow and earnings before interest, taxes, depreciation and amortization. We use these measures because we believe it provides users of our financial information with meaningful comparisons between current results and prior reported results, and it can be a meaningful measure of the partnership's cash available to pay distributions. DCF should not be considered an alternative to cash flow from operating activities. Furthermore, DCF is not a measure of financial performance or liquidity under GAAP and should not be considered in isolation as an indicator of our performance. We also included in our press release issued yesterday a reconciliation of DCF to the most comparable GAAP financial measure. Earnings press release is available at our website, www.martinmidstream.com. Now I'd like to discuss our first quarter performance. For the first quarter, we had net income from continuing operations of $16.6 million, compared to $9.2 million for the fourth quarter. As with other MLPs, we believe the most important measure of performance is distributable cash flow. Our total distributable cash flow or DCF for the first quarter was $28.9 million, a distribution coverage of 1.38x. This coverage ratio does not include any IDR payments to the general partner as we have suspended IDR payments until a cumulative suspension of $18 million is met. At March 31 of '13, our cumulative suspension amount was $3.4 million. Now I would like to discuss the first quarter cash flow from continuing operations, compared to the fourth quarter. In the Terminalling segment, our first quarter cash flow, which is defined as operating income plus depreciation and amortization, but excluding any gain or loss on sale of assets, was $17.7 million in the first quarter, compared to $12.9 million in the fourth quarter. Our specialty terminals, which now includes our newly acquired lubricant packaging business, had cash flow of $12.6 million in the first quarter, compared to $9.2 million in the fourth quarter. Our lubricant packaging business accounted for the majority of this cash flow increase. The cash flow for the packaging business was $4.3 million in the first quarter, compared to $2.2 million in the fourth quarter. The performance in the first quarter is a reflection of a more normal quarter as there is some negative seasonal demand in this lube packaging business every fourth quarter. Also, our Corpus Christi crude terminal had an increase in cash flow of $1.3 million in the first quarter, compared to the fourth. Crude throughput volume increased approximately 33% in the first quarter, compared to the fourth quarter at this terminal. The other portion of our Terminalling segment, marine shore bases, had cash flow of $5.1 million in the first quarter, compared to $3.7 million in the fourth. The increase was primarily driven by increased diesel throughput volume from our Talen's acquisition, which closed at year end of 2012. Now looking toward the second quarter, we believe both the specialty and shore base terminals will remain strong and should actually improve when compared to our first quarter performance. In our Sulfur Services segment, our cash flow was $12 million in the first quarter compared to $8.6 million in the fourth quarter. Our cash flow in the fertilizer side of the Sulfur Services business was $9.6 million in the first quarter, compared to $5.1 million in the fourth quarter. The increase of cash flow was driven by a 55% increase in volumes sold and a 13% increase in margins. This improvement was anticipated as the fertilizer business experiences a stronger demand in the first quarter, compared to the fourth as the planting season for agricultural products significantly increases. Now on the pure sulfur side of the business, our cash flow was $2.4 million in the first quarter, compared to $3.5 million in the fourth quarter. The decrease in the first quarter, when compared to the fourth, was primarily driven by reduced volumes from refineries. This was a result of several refinery turnarounds which occurred in the quarter. Most of the turnarounds have been completed, so we anticipate increased volumes in the second quarter and corresponding increased cash flow in this business. Now moving to our Natural Gas Services segment. We had cash flow of $8.4 million in the first quarter compared to $8.8 million in the fourth quarter. Overall volumes were down 12%, which contributed to our slight decrease in cash flow. This decrease was primarily in our refinery grade butane business as refineries began to transition away from butane demand in March due to regulatory blending requirements that begin every year on April 1. Looking forward to the second quarter, cash flow in this segment will decrease as seasonal demand for refinery grade butanes will end and will not pick up again until the fourth quarter. In addition to the wholesale NGL marketing business, we own 100% of Redbird Gas Storage, which now owns a 42.2% Class A interest in Cardinal Gas Storage in a fully diluted 39.2% interest. For the first quarter, we had distributions from Cardinal of $0.5 million, compared to $800,000 for the fourth quarter. For the second quarter, we anticipate receiving a distribution of $800,000. Now in our Marine Transportation segment, we had cash flow of $3.7 million in the first quarter, compared to $6.1 million in the fourth quarter. While the offshore side of the business remained flat, our inland cash flow was down $1.1 million primarily driven by increased repair and maintenance costs driven by required Coast Guard dry dockings. Also in the fourth quarter of 2012, we benefited by $1.2 million from the recovery of a previously written-off bad debt. For the first quarter, we had no such recovery benefit, so our SG&A costs were up $1.2 million quarter-over-quarter. Now looking forward, we see an improvement in the second quarter cash flow from Marine Transportation, primarily on the inside of the business as repair and maintenance costs should decline. Finally, our unallocated SG&A was $3.9 million in the first quarter compared to $5.3 million in the fourth quarter. The decrease was driven by transaction cost that were incurred in the fourth quarter that did not occur in the first quarter. So to summarize, MMLP had overall cash flow from continuing operations and including distributions from Cardinal of $37.9 million in the first quarter, compared to $31.9 million in the fourth quarter, an improvement of $6 million or 19%. For the first quarter, we had maintenance capital expenditures and turnaround costs of $1.7 million. For all of 2013, we continue to forecast approximately $13 million to $15 million in total maintenance and turnaround costs. Now I would like to turn the call over to Joe McCreery who will speak about liquidity and capital resources.

Thanks, Bob. I'll start with our normal walk-through of the debt components of the balance sheet and then discuss our bank ratios. I'll then highlight the M&A activity for the Partnership followed by an overview of the financing activities that impacted our liquidity position. My first quarter remarks will be brief today so we can get to Q&A. At March 31, 2013, the Partnership had total funded debt of approximately $520 million. This consists of approximately $423 million of senior unsecured notes, approximately $91 million drawn under our $600 million revolving credit facility and approximately $9 million of capitalized lease obligations and other long-term notes payable. Thus, the Partnership's available liquidity on March 31 was $509 million. This large increase in liquidity is attributable to 2 financings which took place during the quarter, which I will highlight momentarily. For the first quarter 2013, our bank compliant leverage ratios, defined as senior secured indebtedness to adjusted EBITDA and total indebtedness to adjusted EBITDA, were 0.75x and 3.92x, respectively. Additionally, our bank compliant interest coverage ratio, as defined by adjusted EBITDA to consolidated interest expense, was 4.07x. Looking at the balance sheet, our total funded debt to total capitalization was 59.5%, which is slightly higher than the year end December 13 number as a result of growth capital spending during the quarter. In all, at March 31, the Partnership was in full compliance with all banking covenants, financial or otherwise. As of last Friday on May 3, the current amount borrowed under our revolving credit facility was $102 million. Now let's discuss the Partnership's M&A and growth initiatives during the first quarter. Back in February, the Partnership purchased 6 liquefied petroleum gas pressure barges and 2 commercial push boats for approximately $50.8 million from affiliates of Florida Marine Transporters Incorporated. Organizationally, the newly-acquired barges will be housed in our Natural Gas Services segment, greatly enhancing our NGL storage, handling and transport capabilities. The Partnership intends to use the barges to facilitate NGL logistics on the Gulf Coast. We believe incremental production volumes from the Eagle Ford Shale are driving the need for this particular type of asset. Our current estimate for cash flow impact of the NGL barges is $6 million to $7 million for 2013. Now let's move to financing activities for the Partnership during the first quarter. As we previously discussed on our last call, we completed a private placement of senior unsecured 8-year notes to qualified institutional buyers under Rule 144A in February. Net proceeds to the Partnership, after fees and expenses, were approximately $245 million, all of which was used to pay borrowings under our credit facility at the time. The notes were priced at 7.25% and mature in February of 2021. Just prior to quarter end, the Partnership amended and restated its revolving credit facility, upsizing from $400 million to $600 million of lender commitments. During the process, 6 new banks were added to the syndicate resulting in a group of 20 participating lenders. In addition to providing upsized borrowing capacity, we were able to relax certain financial covenants the Partnership is required to maintain as noted. Our new funded debt to EBITDA leverage test -- total funded debt to EBITDA leverage test is 5.25x and our new senior secured debt to EBITDA leverage test is now 3.5x. Likewise, our interest coverage ratio also came in our direction with a new minimum level of 2.5x. Finally, we have extended the tenure of the facility by approximately 2 years, with a new maturity date of March 28, 2018. Ben, this concludes our remarks this morning. We'd like to open the line for questions and answers. Thanks.

[Operator Instructions] We have a question from the line of Michael Gaiden of Robert W. Baird.

I just want to ask if you could provide some more detail around the strength in the lubricant side of the business and prospects for that continuing, not only in the second quarter, but throughout the balance of the year?

Sure, Michael. I think as we listed the lubricant side, the first quarter was the first full quarter of innovative business model there after the drop-down from Cross into the Partnership and I think we've organized that very well during the quarter. You saw from performance. We're thinking now that, that particular side of the business could do anywhere from maybe $15 million to $16 million of cash flow this year, which dropping the assets down, we thought it was maybe $11 million to $13 million. So it's certainly better than we anticipated 1 quarter out of the gate. And that being said, I think, as we've alluded to in our public remarks, it's also a very strong growth platform for us and I think we're looking closely at several growth initiatives in that side of the business.

Great. And can you maybe share what accounts for that side and expected cash flow performance? Is that revenue? Is that cost savings? What's driving that there?

Yes. It has been revenue on the demand side for those products.

Yes. There's certain large wholesale distributor -- or I guess, retail distributors. We're selling to wholesale companies -- large big-box type stores that are becoming new customers and we're spreading out countrywide on those type of customers.

That's great. And can I lastly ask, as you guys think about growth opportunities over the balance of the year and where you want to spend your expansion capital. Is there 1 part of the business that sticks out versus the other or are there a few that bubble up to the top as the most likely to receive those incremental expansion dollars?

Yes, I think on balance, the disproportion of that capital spending will be in Terminalling and Storage. We have an opportunity to continue to expand at Corpus Christi and we have the opportunity, as I mentioned, to continue to expand our growth platform within the Cross side, the lubricant side of the business. So I think abnormal amount of the attention will be at the Terminalling and Storage side.

[Operator Instructions] Our next question comes from the line of TJ Schultz of RBC Capital Markets.

Just on the Corpus Christi terminal, I missed the beginning of the call, but if you could just give any progress on contracting out the last 300,000 barrels of that facility. And then if you could maybe just expand on what other potential crude logistics opportunities could be in and around the asset?

Yes, at Corpus, I would say we're very close with a contract announcement there. We're getting to work with the counterparty. And I would suspect that will happen this quarter. As we think about the buildout there, TJ, you have probably 9 months to a year. So in our models for 2014, we're showing those assets, the last 300,000, coming online kind of in the late first quarter.

I think it's important to note, too, that on that last 300,000, we are adding dock capacity, too. One of the biggest problems that we have at Corpus Christi is getting to the dock. And so this will allow additional throughput through at simply because we'll have a dedicated dock for our storage that allows to mix and match when it comes to timing on the docks. It should help increase the throughput.

Than the original 6...

Yes, than the original 6. So we'll have more docks.

Okay, great. I guess just last for modeling purposes on the maintenance CapEx. Did you say you were still looking at $13 million to $15 million this year? So is that -- should we just kind of rate...

Yes, correct. And we spent basically $2 million in the first quarter. So that means you have an incremental of $11 million to $13 million the last 3 quarters.

Our next question comes from the line of Selman Akyol from Stifel, Nicolaus. Selman Akyol - Stifel, Nicolaus & Co., Inc., Research Division: Just real quickly. On Cardinal, you guys talked about the $500,000 versus $800,000 in the prior quarter and you expect to go back up, I guess next quarter, at $800,000. Can you just talk a little bit about the variance and what's going on there?

Yes, this is Wes. I'll take that. It's really a timing of certain contracts rolling over and then also a contribution of interruptible revenue. So we have this, as Bob mentioned, $500,000 last quarter. We're back up to $800,000. And we sort of -- I think we see that sort of flatlining from this point forward now that all the contracts have rolled over. So in that $700,000 to $800,000 range is where we see it.

And I'm showing no further questions in queue. I'd like to turn the conference back over to management for any closing remarks.

This is Ruben. I think everybody needs to keep in mind that we did go up on our distribution recently and we had a good strong quarter. I think every -- all the segments performed well. And we see that as we go forward, we've got different drivers in different segments that are going to help keep everything balanced. So we see a lot of growth in Corpus and packaging and our lubricant side of the business. So we appreciate everybody's time, and thanks for your interest in our company.

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