Martin Midstream Partners L.P. (MMLP) Q4 2018 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen and welcome to Martin Midstream Partners Fourth Quarter 2018 Earnings Conference Call and Webcast. [Operator Instructions] And as a reminder, today's conference is being recorded. I would now like to hand the conference over to Sharon Taylor, Director of Investor Relations. Please go ahead.

Thank you, James. Good morning, everyone. With me in the room is Ruben Martin, CEO; Bob Bondurant, CFO; Scott Southard, our VP of Commercial Development; David Cannon, the Director of Financial Reporting; and [Denny Kevin] our Director of FC. Before we get started with the financial and operational results for the fourth quarter and full year 2018, I need to make this disclaimer. Certain statements made during this conference call may be forward-looking statements relating to financial forecasts, future performance, and our ability to make distributions to unit holders. We report our financial results in accordance with generally accepted accounting principles and use certain non-GAAP financial measures within the meaning of SEC Regulation G, such as distribution c ash flow, 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, distributable cash flow and quarterly adjusted EBITDA guidance to the most comparable GAAP financial measures. Our earnings press release is available at our website, mmlp.com. Further in the press release is the link to slide deck that outlines our 2019 financial guidance. Now I'll turn the call over to Bob Bondurant, our CFO.

Thanks, Sharon. Before l begin discussing our fourth quarter performance, I would like to comment on our recent drop-down acquisition transaction of Martin Transport. We closed the transaction effective January 1, 2019 for 135 million. The purchase price was financed by drawing a 123 million on our revolving line of credit and the assumption of 11.7 million of debt secured by certain trucks and trailers. As many of you will recall, we have estimated EBITDA for Martin Transport to be 23.6 million in 2019 implying the purchase price of 5.7 times. We still feel confident in our projection that our revenue per mile and our driver count is currently greater than our acquisition forecast. So we remain very bullish on this acquisition and believe it provides a very strategic fit with a strong organic growth profile while extending the value chain of our refinery service business lines. Now I’d like to discuss our fourth quarter performance compared to our fourth quarter guidance. For the fourth quarter, we had adjusted EBITDA of 27 million compared to adjusted guidance of 41.2 million. The mix in adjusted EBITDA compared to adjusted guidance was in our natural gas services segment specifically in our butane optimization business as our actual fourth quarter butane optimization EBITDA was 0.7 million compared to our forecast of 14.2 million. When we last spoke during our third quarter earnings call on October 25, we had every reason to believe we were going to achieve our fourth quarter guidance in this business as the average butane price for the first 24 days of October was a $1.15 per gallon which was significantly higher than our per gallon cost in storage. In fact the butane price at beginning of October was a $1.31 per gallon falling to $0.72 by the end of November. So over a two-month period from October 1 to November 30, butane prices fell $0.59 per gallon. Directionally this decline married crude oil although the butane price decline was 45% over the two months compared to the crude oil price decline of 32%. Although we had approximately 55% of our butane inventory hedged at the beginning of the fourth quarter, we did not have any inventory that was to be sold in the first quarter of 2019 hedged as butane forward sales prices in those months in backwardation relative to our inventory carrying costs. As a result of the fourth quarter price collapse, we had to write-down our unhedged inventory throughout the quarter. This write-down impacted us by $9.5 million effectively eliminating the significant butane profits typically realized in the fourth quarter. Marginally offsetting this 13.5 million shortfall in the butane business was 0.9 million of excess cash flow over the combined fourth quarter guidance of our propane NGL and gas storage business. Our Terminalling segment missed guidance by 1.2 million as our specially terminals and shore-based terminals each missed by $0.5 million. We continue to experience reduced diesel throughput volumes and lubricants sales volumes at our marine shore basis as demand for fuel and lubes to support offshore drilling activity remains weak. Our specialty terminals missed forecast as a result of increased operating costs of 0.4 million primarily repairs and maintenance expense. The balance of our miss in our specialty terminals was the result of selling the Dunphy Nevada sulfuric acid terminal in December. Since this asset was outside our primary Gulf Coast footprint and also outside our developing refinery services business model, we felt it was important for the Partnership to execute on this accretive transaction. Our Sulfur Services segment hit the dollar for the fourth quarter was 5.2 million compared to forecast of 5.9 million. Although our molten and peril sulfur business exceeded forecasts by 0.7 million, our fertilizer group missed forecast by 1.4 million which all occurred in the month of December as a result of heavy rain in our market area. We believe the loss of fertilizer sales which occurred in December will ultimately be realized when precipitation reverts to more normal patterns. And finally our Marine Transportation segment exceeded forecasts by 0.5 million in spite of accelerating the drydock of our offshore tow into December which will reduce offshore transportation revenue. We had originally planned to drydock this offshore vessel in March of 2019 but for commercial reasons we move the drydock up to the fourth quarter of 2018. This accelerated drydocking also increased our maintenance capital expenditures in the fourth quarter by 1.8 million. The interim Marine Transportation business continues to remain tied which supports current strong utilization rates and cash flow. So for the year of 2018 we only achieved 0.7 times DCF coverage of our $2 distribution. This entire miss can be accounted for in two areas, our butane optimization business which missed adjusted forecast by 13.3 million and our fertilizer business which missed adjusted forecast by 10.1 million. Both of these businesses are margin businesses and as a result had the most potential volatility both upside and downside. We are strategically thinking about how to protect the Partnership against downside inventory and margin risk while trying not to limit its upside. We're analyzing alternatives to hedge our butane inventory position if we are faced with similar backwardation issues in the future. In our fertilizer business, we should not have another significant write-down of physical inventory like we experienced this year when we converted to a laser system of measuring our ammonium sulfate piles. This is a one-time adjustment of $4 million. Also we are experiencing reduced raw material cost in early 2019 which should positively impact fertilizer margins in 2019 relative to 2018. Now I would like to turn the call back over to Sharon to discuss our balance sheet and capital resources.

Thanks Bob. We'll start with the normal walk-through at the debt components of our balance sheet tying in our bank ratios at quarter end. Then we’ll provide a quick review of fourth quarter and full year capital spending. Next I’ll discuss financial guidance for 2019 and then I'll be turning the call over to Ruben Martin for his remarks around strategic initiatives for the Partnership. On December 31, 2018 the Partnership's balance sheet reflected total long-term funded debt of approximately 656 million. Our balance sheet funded debt was shown before and amortize debt issuance and unamortized issuance premiums as actual funded debt outstanding was 661 million. Reconciling this amount at quarter end our revolving credit facility balance was 287 million and the notional number of senior unsecured notes was 374 million. Thus our total available liquidity on December 31 was 377 million based on our 664 million revolving credit facility. For the quarter and year ended December 31, 2018 our bank compliant leverage ratios defined as senior secured indebtedness to adjusted EBITDA and total indebtedness to adjusted EBITDA, were 2.14x and 4.61x respectively. As a reminder, our total debt ratio is shown with adjustments from the working capital carve out sublimit, which allows us to exclude certain debt directly attributed to our seasonal NGL inventory build. Yes, the volumes are either forward sold or hedged from our total debt-to-EBITDA calculation. At December 31, 2018, the calculated debt related to our inventory build was $43.5 million. Accordingly, we excluded that amount from our total debt when calculating our total debt-to-EBITDA ratio. Without this carve out, our total debt-to-adjusted EBITDA would be 4.93x. Our bank compliant interest coverage ratio is defined by adjusted EBITDA to consolidated interest expense was 2.72x. Looking at the balance sheet, total debt to total capitalization on December 31st was 71.4%. In all on December 31, the partnership was in full compliance with all covenants banking or otherwise. Now let's discuss the capital spending during the fourth quarter and full year 2018. I'll start with growth CapEx. We spent approximately $2 million during the fourth quarter for a total of $13 million in full year 2018. And of that total, around $6 million was allocated to our marine equipment. For maintenance CapEx during the fourth quarter we spent approximately $6 million on maintenance, bringing the total for the year to roughly $23 million. This number was approximately $2 million greater than our third quarter projection of $21 million. As Bob mentioned earlier, this increase is attributable to maintenance of our offshore tow, which was scheduled for the first quarter of 2019. However, the work was accelerated to the fourth quarter of 2018 for commercial reasons. Turning to the 2019 cash flow and capital spending guidance for the partnership; attached to the press release yesterday was our 2019 financial guidance which provides details by segment and by quarter. The presentation can also be found on our website at mmlp.com. Our Terminalling and Storage segment is forecasted to be the largest contributor to 2019 cash flow with $55.4 million in adjusted EBITDA. That will be followed by our natural gas services segment at $50.1 million, then our transportation segment estimated at $35.8 million which as of January 1st includes the land division or MTI. And finally our Sulfur Services division was forecasted EBITDA of $34.1 million. This totals $175.4 million before unallocated SG&A of $15.9 million, so $159.5 million for adjusted EBITDA after unallocated SG&A. One thing to note on our adjusted EBITDA guidance reconciliation is the effect of the seasonality of our businesses on our quarterly cash flows. And while the acquisition of Martin Transport Inc. does help move the quarterly results somewhat, our third quarter remains our seasonally weakest. Our fixed fee businesses continue to make up the majority of our forecasted cash flows or 62% for 2019. Let's move to our Natural Gas services segment. We have strong fee based cash flows in multiple year gas storage contracts with a weighted average life of approximately three years as of year-end 2018. We also have margin based cash flows from our wholesale NGL operations, which includes our butane optimization business. In our Terminalling and Storage segment we enjoy fee based contracts within our specialty and marine shore based terminal, a long-term towing agreement with MRMC at our Smackover refinery and margin based revenues in our Lubricants Division. In our Sulfur Services segment, we have long-term take-or-pay contracts for our Sulfur drilling assets, fee based transportation and handling contracts for molten sulfur and margin based revenues within the fertilizer group. Our transportation segment consists of fee based day rates for our marine assets and fee based line haul rates for our newly acquired land transportation assets. To bridge the gap between 2018 results and 2019 estimates, for 2018, our actual adjusted EBITDA number was $123.7 million, which excludes approximately $3 million related to WTLPG, which was sold July 31, 2018. You recall that in June of 2018 we had several contracts expire at our Perryville gas storage location. This re-contracting resulted in reduced cash flows related to cardinal gas storage of $11 million annually for 2019 and forward. Offsetting that reduction is the forecasted return to historical normals for both our fertilizer and butane businesses, which will result in increased 2019 EBITDA of approximately $11 million and $14 million respectively. And as we have discussed, our estimated contribution to EBITDA from MPI is approximately $24 million. Netting together all those differences, that's an approximate total of $36 million of additional cash flow in 2019 compared to 2018. Moving on to our estimated capital expenditures for 2019. We anticipate maintenance CapEx to be between $20 million and $23 million for the year. Included in that range is $3.4 million for the Smackover refinery turnaround which occurs every 2 years, and $2 million for a 10 year inspection due on one of our ammonia tank. For growth capital expenditures, we are forecasting between $13 million and $14 million with 40% of that to be spent in the fourth quarter of 2019. In summary, our 2019 adjusted EBITDA forecast is $175.4 million before unallocated SG&A of $15.9 million or $159.5 million in total. Total capital expenditures will be between $33 million and $37 million with maintenance CapEx being approximately $20 million to $23 million and expansion CapEx estimated between $13 million and $14 million. I'm now going to turn the call over to our CEO, Ruben Martin.

Thank you, Sharon. Good morning to everyone. I'll begin briefly by addressing our participation in two potential project that you most likely have read about in the media and then announce important strategic initiative that partnership has launched recently. To begin with, let's discuss the two potential projects that are in very early stages of development but have been reported in the media and as a result we received multiple inquires concerning them. These are our crude oil export terminal at Harbor Island and an ethane export terminal at Beaumont, Texas. As was previously announced by the Carlyle Group, we are actively exploring with Carlyle Group and for Corpus Christi the developments of the crude oil export terminal at Harbor Island. Although there are no definitive agreements in place, we believe our existing terminal add strategic value to the project. Moving to the proposed ethane export terminal in Beaumont, Texas; that American ethane has announced, our existing nature's terminal site which has access to deep water is conducive to the construction of an ethane export terminal. As has been reported, the ethane export project is contingent upon licenses and permits that the Chinese Government may issue in addition to permits by multiple U.S. and state agencies, none of which are in place today. Specifics regarding the ethane terminal and its operations are being developed at this time in conjunction with efforts to reach our definitive commercial agreements. Finally, our strategy for the partnership has been for some time now to strengthen our balance sheet and focus our current operational efforts around our expertise in refinery services industry. We believe that the timing is right to take the next meaningful steps toward our goals, the step being to market our Cardinal gas storage assets. We have hired an advisor to assist us in approximately two weeks into the process that we estimate will take 16 weeks. Our objective remains constant. A significant reduction in leverage for the partnership, initial estimates of proceeds from the sale coupled with our 2019 guidance, result in pro forma leverage below 4x at the culmination of our successful transaction, strengthening our partnerships and providing the ability to pursue long-term strategic process. Okay, James, that concludes our prepared remarks this morning and now we can open the lines for question-and-answer.

[Operator Instructions] Our first question comes from the line of TJ Schultz with RBC Capital Markets. Your line is now open.

I think first as you look at kind of delevering process and a lot of moving parts there and something in the offer. Just how much flexibility do you have on the distribution level maybe also in the context of MRMC's capitalization and need for that cash flow. Same color on the policy for 2019 and the scope of the proposed asset sale to?

As far MRMC is concerned with the MCI drop-down transaction our bank debt is very minimal. So the need for the distribution is not as large as it has been in the past, but I will say this as Ruben discussed we have a goal to delever the partnership and cover our distributions by at least 1.25x. And all strategic initiatives are focused on those goals so entertaining any and all ideas that get us there in 2019. Would that include what you suggested maybe a lot of it depends on the cardinal transaction what proceeds we have received from that

On the American ethane terminal measure, is there any or are there any economics accruing to you as the deals pending?

This is a Scott Southard. We are very early in the process with them we continue to negotiate definitive agreement. So I would say this time we don't have anything more to share.

This is Ruben. I will say this is that the assets that we’re talking about at Beaumont are very strategically located when it comes to supply for all LPG in that area. And so the negotiation will involve the use of not only our land, our docks and the strategic location of the Beaumont terminal and we have a lot of land that's available for expansion at that terminal. And so with the growth in that area and a lot of the supply and the product going close to Beaumont be a pipeline and other avenues, we will be able to negotiate that is good for the Partnership.

[Operator Instructions] And I am not seeing any further questions in queue. So I’ll turn the call back over to Mr. Martin for any closing remarks.

Thanks James. In closing I'd like to thank each of you for joining on the call and the continued support to our partnership. 2019 is shaping up to be a pivotal year for us with the beginning of the sale of the WTLPG in 2018, the Martin Transport acquisition in January 1 of this year, and the anticipated sale of Cardinal gas. From a big picture view we will try cash flows from non-core assets with cash flows from MTI. Further the difference between realized proceeds from WTLPG combined with estimated proceeds from Cardinal versus the acquisition cost of MTI will result in a net surplus of cash that will substantially delever the partnership allowing us to pursue our strategic long-term projects. Thank you.

Thank you. Ladies and gentlemen that does conclude today's conference. Thank you very much for your participation. You may all disconnect. Have a wonderful day.