Martin Midstream Partners L.P. (MMLP) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Martin Midstream Partners LP Third Quarter 2013 Earnings Conference Call Webcast Information. [Operator Instructions] And as a reminder, this call is being recorded. I would now like to turn the conference over to your host, Bob Bondurant, Chief Financial Officer. Please go ahead.

Thank you, Pablo. To let everyone know who's on the call today, we have Ruben Martin, President and Chief Executive Officer; Joe McCreery, VP of Finance and Head of our Investor Relations; and Wes Martin, VP of Corporate Development. Before we get started with the financial and operational results for the third 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 Regulation G, such as distributable cash flow, or DCF; and earnings before interest, taxes, depreciation and amortization, or EBITDA; and also adjusted EBITDA. 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. We also included in our press release issued yesterday, a reconciliation of EBITDA, adjusted EBITDA and distributable cash flow to the most comparable GAAP financial measure. Our earnings press release is available at our website, www.martinmidstream.com. Now I would like to discuss our third quarter performance. For the third quarter, we had adjusted EBITDA of $26.8 million compared to $33.8 million in the second quarter. This quarterly decrease was primarily driven by more extreme seasonality than normal in our fertilizer business. I will discuss that issue further later in the call. For the year through September, our adjusted EBITDA was $99.4 million compared to $89.3 million last year, an increase of $10.1 million. Our total distributable cash flow, or DCF, for the third quarter was $13.3 million, a distribution coverage of 0.63x, again negatively impacted by this year's extreme seasonality in the fertilizer business. For the trailing 12 months, however, our DCF was $82.9 million, a distribution coverage of 1.02x. 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 September 30, 2013, our cumulative suspension amount was $7.5 million. Now I would like to discuss our third quarter cash flow by segment compared to the second quarter. In the Terminalling segment, our third quarter EBITDA, which is defined as operating income plus depreciation and amortization but excluding any gain or loss from -- on sale of assets, was $16.6 million in the third quarter compared to $16.1 million in the second quarter, an increase of about $0.5 million. Our specialty terminals cash flow was $12.1 million in the third quarter compared to $12 million in the second quarter. And our marine shore-based cash flow was $4.5 million in the third compared to $4.1 million in the second. Although our specialty terminal cash flow was up slightly, there were operating issues that negatively affected our expected cash flow. In August, the Smackover refinery experienced operational issues with the crude tower, resulting in 8 days of downtime. The throughput was only 6,900 barrels per day compared to our forecast of 7,500 barrels per day. This negatively impacted our throughput revenue and also increased our repair and maintenance costs. Looking toward the fourth quarter, as a result of recently completed growth capital expenditures, the refinery throughput rate at our General Partner increased $0.51 per barrel beginning in October. That, combined with our expectation of operating at our capacity of 7,500 barrels per day, should increase cash flow by at least $1 million at the refinery in the fourth quarter when compared to the third quarter. Also in our specialty terminals, our crude throughput volumes across the barge dock has underperformed due to continued shared dock issues. Volumes only averaged 102,000 barrels per day in the third quarter against our forecast of 125,000 barrels per day. The barge dock bottleneck should be resolved by late November as the improvement to a second dock should be complete. When that happens, this bottleneck will be relieved, and we anticipate meeting or exceeding the volume forecast. Also we project our 3 new crude tanks to be complete by the second quarter of 2014. Now on the shore-based side of the terminal business, EBITDA improve $400,000. Although our diesel throughput volumes were flat, our lube margin at the terminals improved primarily because of improvement in our marine delivery cost structure. Now looking toward the fourth quarter, we believe we will have an overall increase in terminal cash flow due to the throughput increases at our Corpus crude terminal and our Smackover refinery because of the reasons I just described. Now in our Sulfur Services segment, our cash flow is $2.8 million in the third quarter compared to $10.8 million in the second quarter. On the pure sulfur side of the business, cash flow was $3.3 million in the third quarter compared to $3.6 million in the second quarter. However the story is on the fertilizer side of the business. Our fertilizer cash flow was a negative $0.6 million in the third quarter compared to $7.2 million in the second quarter, and reduction of cash flow was $7.8 million. Last year, our third quarter fertilizer cash flow was $4 million, which was more in line with what our forecast for this year's third quarter. Fertilizer sales volumes were 71,400 tons in the second quarter, following the 44,800 tons in the third quarter. A year ago, our third quarter sales were 61,200 tons. So what happened, and what is happening in the marketplace to reduce demand and pricing? Fertilizer market conditions have significantly changed over the last 90 days. The U.S. agriculture market has experienced a bumper corn crop and a later than normal harvest due to this year's weather patterns. Corn prices have fallen approximately $3 a bushel or approximately 40% since the beginning of 2013, most of the decline in the last 90 days. As corn prices have fallen, fertilizer prices have followed. Sales has declined at -- as farmers are delaying their fertilizer purchasing decisions due to declining fertilizer prices. Also the length in harvest is causing farmers to not yet be focused on next year's planting season. As a result, current market conditions will carry over to the fourth quarter, and we believe the fourth quarter fertilizer performance will also underperform relative to our forecast. The farmer cannot delay his fertilizer purchasing decision forever. At some point, he will enter the market and purchase fertilizer for next spring's planting season. However margins will probably be less next spring than what we experienced this past spring. So looking forward, our cash flow on Sulfur Services in the fourth quarter is projected to be similar to the third quarter due to a reduction in fertilizer demand. Again we believe demand will move to the first quarter. And when it does, our fertilizer cash flow will increase significantly. Now in our Natural Gas Services segment, we had cash flow of $5.2 million in the third quarter compared to $5.1 million in the second quarter. Typically our second and third quarters are our weaker quarters in this segment due to seasonality factors. We should see at least a doubling of cash flow in this segment in the fourth quarter compared to the third quarter. Also heating demand for propane begins in the fourth quarter, which will benefit our wholesale propane business. Now in our Marine Transportation segment, we had cash flow of $5.2 million in the third quarter compared to $3.7 million in the second quarter, an increase of $1.5 million. We had a cash flow increase of $2.1 million on the inland side of the business as a result of all inland vessels being out of shipyard in the third quarter. This was offset by a decrease in cash flow of $600,000 on the offshore side of the business as we experienced a decrease in offshore utilization. Looking forward, we believe our Marine cash flow in the fourth quarter should be comparable to our third quarter. So to summarize, 3 of our 4 business segments had increased cash flow in the third quarter compared to the second. More than offsetting this increased cash flow was the more-than-normal seasonal downturn in the fertilizer business. Due to quickly changing agriculture market conditions, the downturn in cash flow was greater than what we anticipated. Again we believe the fertilizer market conditions will improve significantly from where they are today but most likely not until the first quarter of 2014. In addition to our 4 business segments, we own 100% of Redbird Gas Storage, which now owns a 42.2% interest in Cardinal Gas Storage. For the third quarter, we had distributions from Cardinal of $0.2 million compared to $0.8 million in the second quarter. For the fourth quarter, we anticipate receiving a distribution of $0.2 million. Also our $15 million preferred stock investment in an affiliate of our General Partner, Martin Energy Trading, yielded a distribution of $0.6 million in the third quarter and should do the same in the fourth quarter. Finally our unallocated SG&A was $3.8 million in the third compared to $3.5 million in the second. And for the third quarter, we had maintenance CapEx and turnaround costs of $3 million and have experienced $7.5 million of these costs for the year. For all of 2013, we are forecasting approximately $11 million to $13 million in total maintenance and turnaround costs. Now I would like to turn the call over to Joe McCreery, who will speak about liquidity, capital resources and recent partnership activities.

Thanks, Bob. I'll start with a normal walk-through of the debt components of our balance sheet, our bank ratios, and then I'll highlight a small drop-down acquisition we made during the quarter and discuss our growth aspirations, which now include a partnership at the General Partner level to aid in MMLP's growth and development. At September 30, 2013, the partnership had total funded debt of approximately $651 million. This consists of approximately $424 million of senior unsecured notes, approximately $219 million drawn under our $600 million revolving credit facility and approximately $6 million of capitalized lease obligations and other long-term notes payable. Thus the partnership's available liquidity at September 30 was $381 million. For the third quarter 2013, our bank-compliant leverage ratios, defined as senior secured indebtedness to adjusted EBITDA and total indebtedness to adjusted EBITDA, were 1.67x and 4.78x respectively. Additionally our bank-compliant interest coverage ratio, as defined as adjusted EBITDA to consolidated interest expense, was 3.67x. Looking at the balance sheet, our total funded debt to total capitalization was 67.0%, which is higher than the quarter ended June 30 as a result of funding capital expenditures, a small drop-down acquisition of marine barges and increased seasonal working capital levels primarily associated with our butane business. In all, at September 30, the partnership was in full compliance with all banking covenants, financial or otherwise. Reconciling from quarter-end September 30 to today, our current revolver balance is $210 million and, thus, our available liquidity has improved to $390 million. The debt reduction is reflected of working capital being reduced through liquidated butane inventories. Now onto our small acquisition. I'll look ahead into overall growth initiatives of the partnership. At the third quarter -- at the end of the third quarter, we purchased 2 marine inland barge assets from the owner of our General Partner, MRMC, for a total of $7.1 million. These assets were dropped down to the partnership under contract with a major innovated oil company along the Gulf Coast and are under contract through the end of 2014. The barges were purchased at a 7.7x EBITDA acquisition multiple. Now let's take a look at where we expect the cash flow increase in the near term. With respect to the fourth quarter and early 2014, as Bob mentioned, we expect improved performance in multiple areas, including the butane distribution business within our Natural Gas Services segment, which enjoys winter blending demand throughout the fourth and first quarters. In addition, we expect to see significantly better efficiency at our Corpus Christi crude terminal as our new dock infrastructure will be in place by late November. We expect the new dock will improve throughput by approximately 30% to 40% going forward. Additionally we will be bringing our final 3 tanks online in early 2014, with 1 tank scheduled for completion in each of February, March and April next year. We expect a subsequent increase in throughput once those 3 tanks are put in service. And upon completion in the second quarter next year, we expect a 25% increase in year-over-year EBITDA contribution. Next I'd like to say a few comments regarding some of the growth initiatives that we're currently pursuing. First the partnership is in the late stages of evaluating the construction of a new condensate splitter to be located in the Corpus Christi market. We have been evaluating this opportunity for an extended period of time and are now well into detailed engineering and design. Our current intent is to construct a facility capable of handling 50,000 to 100,000 barrels per day with an overall construction time of approximately 24 to 30 months. In conjunction with the condensate splitter, we're also looking to add additional LPG storage and export capabilities. We anticipate finalizing plans for the project in the fourth quarter of this year, and we'll seek Board approval shortly thereafter. The growth in Eagle Ford Shale condensate production and associated market dynamics present favorable fee-based opportunities for MMLP, given our existing footprint in the Corpus Christi area. With respect to acquisitions, we continue to pursue multiple acquisitions across various platforms. Our new Partnership with Alinda Capital has provided us significant increase in deal flow in just the first 1.5 months. In general, the opportunities we are looking at are materially larger than the typically historical transactions. And while we do not have a definitive transaction lined up at this time, we continue to believe that the acquisitions will be a meaningful contributor to our growth over the next few years. And before we move to Q&A, I'd like to apologize for the late-arriving press release last night. We made a conscious decision to wait until after market close to send the release to our posting service. This is in response to irregular trading that occurred within the last 15 minutes of the session prior to the second quarter earnings release. Please understand, it's our intent to provide a timely dissemination of information to all parties in a manner that's consistent with market practice and considerate of both analysts' and investors' time going forward. So, Pablo, with that, this concludes our prepared remarks. We'd now like to open the lines for Q&A. Thank you.

[Operator Instructions] And our first question in queue is from Gabe Moreen of Bank of America Merrill Lynch.

A couple of questions. On the condensate splitter consideration, I just was wondering if you had, I guess, a ballpark estimate in terms of CapEx you'd be thinking about for that project, maybe all in? Well at least if that includes the LPG storage, too, and just also what you're thinking around kind of contracting that asset if you go forward with the project?

Sure, Gabe. This is Wes Martin. I'll take that. I think in terms -- obviously, it's contingent upon the ultimate size of the splitter. What we're looking at now, on the low side -- if it's a 50,000 barrel-a-day splitter, we're talking, call it, in excess of $200 million. So rough estimate right now would be $200 million to $300 million. As you go up in size, obviously, the capital increases accordingly. And I would say that, in terms of the contracting and the plan for contracting, we would look to contract that pretty close to full capacity under terms that are, I'd say, in the 5- to 6-year-type timeframe.

And I guess, as a followup to that, whether it's going ahead with the condensate splitter, which is a pretty big project or some of the acquisition opportunities you're seeing, in thinking about financing those, is that something where MRMC or Alinda would somehow warehouse some of that either on the CapEx or the acquisition side and spin it down to the MLP, or do you think the MLP is going to be able to finance that stuff upfront?

I think, in terms of -- and again, this is all sort of work in progress right now. But I think MRMC and/or Alinda would help maybe through some sort of structured equity investment potentially to do that. So I don't necessarily think that the development would go on upstairs, if you will. I think it would still take place down at the public company level. But I think MRMC and/or Alinda could step in to help finance that.

And even further, I would say, Gabe, that Alinda has broadened MMLP's access to capital just in the first kind of 1.5 months we've been together.

Got it. And then, last question for me. It's just -- I know the open season for, I think, the additional capacity of Cardinal or Arcadia is ramping up soon. I was wondering if you have any sort of initial thoughts on how that's going?

Yes. We can't really comment on that. I would just say, in general, versus where things were, call it, last quarter and just in the overall gas storage marketplace, looking at seasonal spreads and those kind of things, I think, there's really hasn't been any change.

And our next question in queue is from TJ Schultz of RBC Capital Markets.

I guess, just on the fertilizer seasonality that you discussed. I understand purchases will have to come back in the spring. But can you provide a little more color or quantify the margins that you discussed that may be negatively impacted then, maybe how margins have typically trended in previous periods that time of year versus what you expect next spring?

Well we can't really comment yet because we don't have enough visibility on margins. But just our instincts are, they will be less. We -- prices have been -- ammonium sulfate prices have fallen about $80 to $90 a ton, I believe. Now raw materials have fallen as well. Our sulfur input is down at -- a year ago, at January 1, sulfur was $150 a ton, now it's $75 a ton. Ammonium prices are...

At least $200.

Yes, ammonium prices are down $200. So our raw material side is down [ph] but until it settles out and the farmers come in and demand significant increases, personally, I think at that time, a floor will have been reached on the fertilizer pricing side and the sell side, and I think you could see a little pushup because of demand. I see a flood of demand coming. But to the extent I can project what our margins will be, I can't quantify that today.

Okay. And then, just, I guess, bigger picture on the Alinda relationship. Maybe if you can provide a little more color on, since the transaction, how you're evolved. And kind of looking at some of these larger deals, if you're -- how far along you are on some of those deals that you're looking at or any other discussions of the window on potential drop-downs of some of the assets there?

Yes. This is Wes again. I'll take the last part of that question first. I think no discussions on drop-downs. Again, our stance is still the same with respect to that. We got a lot of things that are on the docket right now that we're trying to get done, so I think any sort of drop-down discussion or talk would definitely take place in the, I'd call it, the later, later forecast years, if you will. So nothing imminent. Nothing being discussed at this point in time with respect to that. I think on the acquisition front, I think, clearly, we're looking at -- I can't give specifics, but looking at multiple deals right now that are, as Joe commented, materially larger. Some of them would be in the, I'd call it, the Terminalling and Storage -- would fit sort of in that Terminalling and Storage fee-based nature cash flow profile, if you will. Those are -- we're looking at a couple of deals that are in excess of, let's call it, $500 million. So those are big numbers for us on a historical basis. In terms of how far along we are in these -- some of the stuff we're looking at is -- are processes -- were part of a process, so not that far along, I would say, with respect to some of those deals. And then, on the other hand, some of the smaller deals, we're looking at 1 in particular that I'm thinking of that will be a little bit further along. It would be more of a negotiated transaction. So it depends. But I can just say we're looking at multiple deals right now, and I would say we're still in the early phase of those deals, just generally speaking, but see some positive momentum.

And I think, going back to the previous question that Gabe asked to you, we got the ability to finance these in different manners that we probably didn't have on a standalone basis, TJ. So it's been a very, very good positive start to this, and I'm sure we're going to land one of these big deals.

And our next question in queue is from Darren Horowitz of Raymond James. Darren Horowitz - Raymond James & Associates, Inc., Research Division: Wes, just curious if you think about the organic capital that you plan to spend next year and a lot of the other acquisitions that you've alluded to, whether or not all of them happen or a few don't, but if you just think about the partnerships on a pro forma basis for Alinda and MRMC, if you think about the partnership's ability to finance this whether or not it's dedicated MMLP equity or debt or some sort of structured financing, how much growth in aggregate do you guys think that you can finance on a yearly basis?

I'll point that question more so to Joe. But just in general, I think on -- particularly, it depends on the acquisitions, right? I mean, if you're acquiring a business that is cash flowing, up and running, has its sort of a traditional cash flow profile that you can -- the financing on those is clearly much less sophisticated in terms of what we would need to do to get that, but -- and there are opportunities, I mean, I can think of 2 opps off the top of my head right now that we're looking at that are more in that vein. I think, with respect to the structured deal, I think that's a discussion between MRMC, MMLP and then also Alinda to some extent. But in terms of bank financing, I'll let Joe sort of handle that and where he thinks our capabilities are on ongoing full basis.

Yes. I think, Darren, it's obviously very much market providing, but we always say around here there's good money for good deals. And the kind of deals we're seeing, the quality of the cash on these deals, to Wes' point, are very, very financeable. So what we're seeing, as I mentioned, is this broadening of financial relationships that MMLP just didn't have. And so, that's going to give us a lot more runway on what we can look at. But look, there's a lot of money out there available to us right now, and I think we've got a full plate to work forward here in the next, call it, 6, 9 months. Darren Horowitz - Raymond James & Associates, Inc., Research Division: Just from an organic basis, Joe, is it fair to assume that next year's growth CapEx looks similar to what you guys can round out this year, say, somewhere in the range of $120 million to $140 million?

This is Wes. I'll take that. In terms of where we're going to shake out for 2013, we're going to be on the high side of that. We do include in that number, that $120 million to $140 million, the LPG barges that we acquired and then also some of the new barges that we just acquired, the $7 million that Joe mentioned earlier. So that mixes organic in and acquisitions, if you will. But I'd say, particularly, with respect to the splitter project, when we seek Board approval on that, that's -- we're going through our 2014 budgeting process now, and I think the organic side of life is definitely going to be in excess of $100 million next year.

But I want to add that things like splitter project and so forth, a lot of that is back-end loaded, so it won't hit in until probably '15 on a lot of those types of equipment, things like that. So you got time to work what we need to do in the short run because it's -- the internal organic stuff is definitely back-end loaded on the projects. Darren Horowitz - Raymond James & Associates, Inc., Research Division: Okay. And then, last question, with that being said, I'm just curious, how do you guys think about getting further downstream with regard to possibly the export of light naptha or gas oil or some incremental storage capacity at Corpus in order to handle a lot of those volumes that are coming through the front door or the splitter, and you guys getting more vertically integrated and effectively downstream refined products movement?

Well, I think, that if you were vertically integrated, it would be more around the systems that are necessary to move that product out into the marketplace. The volatility in the marketplace and those kind of things are something that I don't believe the MMLP could -- would want to take on. But there is definitely a need for additional capacity, whether it's dock capacity, tank capacity and so forth. So I know that MMLP would be involved in building those assets. As far as the downstream marketing of the product and everything, I think the decision would have to be concerning the volatility and the amount of working capital that it does chew up to handle that types -- those types of products.

[Operator Instructions] Our next question in queue is from Michael Gaiden of Robert W. Baird. Michael W. Gaiden - Robert W. Baird & Co. Incorporated, Research Division: Are you, at all, actively trying to increase the mix of fee-based business as you think about these projects?

Yes. This is Wes. I'll take that. With respect to both on the acquisition side, as we mentioned, but also like for instance, let's just take the splitter. The splitter structure -- the structure on that bay [ph] will be a fee-based sort of, let's call it, a throughput arrangement similar to how we do Cross. We're spending an additional monies at Cross that will increase the throughput fee that we receive from MRMC. So a lot of these projects, particularly with respect to the splitter and the sort of LPG export concept, these will be fee-based sort of, call it, throughput-type rate structures. Michael W. Gaiden - Robert W. Baird & Co. Incorporated, Research Division: Great. And can I also ask, as it relates to the nearer term outlook, given the softer conditions on the sulfur and fertilizer side of the business, DCF coverage correspondingly likely to be tighter, how do you guys think about the tradeoff of modest incremental distribution growth versus trying to shore up that DCF coverage level that now has gotten tighter?

Well, I think that we have, as we've done the last 3 quarters, increased the distribution. And when you're looking at the view of the company like we do in a longer term's scenario and where we're going and the assets that we have, we don't believe that, that distribution growth is negative impact to the company at all. And so, when we're looking at it and where we're going, inside where we've been, and what we have coming in, in the next year, we believe the distribution growth is easily justifiable.

Yes, I think Ruben hit it, Mike. The longer term view here is at play, and I think the Board was comfortable with the increase. They've been comfortable with the modest increases all year, vis-à-vis where we're going with this thing, not the weakness we had in the third quarter because of sulfates. We're -- we obviously have a much broader longer-term horizon on the partnership.

And with that, I'm showing no further questions in queue. I'd like to turn back to Mr. Ruben Martin, President and CEO, for further comments.

Well, thanks, guys and girls. We are through our seasonal low with respect to this. And obviously, it's been there every year. It hit us harder this year, as you've seen. But with all of the other businesses, that's the good thing about our company as it has diverse operations, and we were not hit too hard concerning all of them at the same time. So everything else was good. The fertilizer was bad. We believe we're seeing that not only at our company, but we've seen it at a lot of other companies in the past few days. So we're excited about our new projects, both organic, new acquisitions. And with Alinda, we have seen an uptick in activity, the size of our deals, and it gives us the flexibility to do what's in the best interest of the partnership when it comes to the financing and when the cash flows are going to kick in And we can -- this partnership does give us that flexibility. And with the acquisitions that are coming into the marketplace, we have really been busy evaluating those acquisitions, and I believe it's because of this partnership. So with that, we appreciate everybody's time and appreciate everybody dialing in. Thank you.

Thank you. And once again, thank you, ladies and gentlemen, for joining today's conference. You may now disconnect. Have a great day.