Calumet - Q1 2023

Transcript

Operator (participant)

Hello, and welcome to the Calumet Specialty Products Partners, L.P. Q1 2023 Results. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note today's event is being recorded. I'd now like to turn the conference over to Brad McMurray in Investor Relations. Please go ahead.

Brad McMurray (Director of Investor Relations)

Good morning. Thank you for joining Calumet today for our Q1 2023 Earnings Call. With me on today's call are Todd Borgmann, CEO, Vince Donargo, CFO, Bruce Fleming, EVP, Montana Renewables and Corporate Development strategy. 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 website at www.calumetspecialty.com. Also, 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'd 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 SEC for a list of factors that may affect our actual results and cause them to differ from expectations. With that, I'll turn it over to Todd. Todd?

Todd Borgmann (CEO)

Thanks, Brad, and welcome to Calumet's Q1 2023 Earnings Call. Let's turn to slide three. The Q1 was an impactful one at Calumet. We generated strong earnings in our specialty business and achieved new milestones at Montana Renewables as we started up the final two units and are now fully operational. During the quarter, the company generated $77.7 million of adjusted EBITDA, up $14 million from Q4 of 2022 and $52 million versus last year's Q1. The step change in results we saw last year in our specialty business continued into 2023. Results in our Specialty Products and Solutions business were a combination of a constructive market, strong demand, and ongoing execution. We like to see specialty volumes hovering around the 20,000 barrel per day mark.

In the Q1, we hit 20,202 barrels per day of specialty product volume, all while specialty unit margins were up 60% versus the Q1 of 2022. Further, Calumet's integrated specialty system continues to run at max rates, given strong demand and compelling margins. Our Performance Brands business took the expected major positive step forward in the quarter, and our newly reconfigured and fully operating Montana Asphalt plant started the year strong, and we should continue to expect this business to generate stable, strong cash flows. The Montana team somewhat seamlessly eased into operations at the reconfigured plant, and it was nice to see our output being consumed in the local market, even in the winter months when things are typically slower in the Rockies. Vince will take us further into all of these segments shortly.

Before he does, I'll highlight that while Montana Renewables has been getting most of the airtime through the past couple of years, our core specialty business has delivered $444 million of adjusted EBITDA over the past 12 months. We continue to be committed to taking roughly $300 million of debt out of the Calumet system through excess cash flows and MRL monetization. It's also worth noting that over the past two years, our credit metrics have dramatically improved, even though we just now completed the Montana Renewables project that unlocks the extreme cash flow generation power of that business. We'll talk more about Montana Renewables shortly, and for now, I'll turn the call over to Vince. Vince?

Vince Donargo (CFO)

Thank you and good morning. As Todd mentioned, Calumet had another strong quarter led by our Specialty Products and Solutions business, as shown on slide five. Our SPS business generated $76.4 million of adjusted EBITDA in the Q1, and this business continues to deliver both operationally and commercially. While margins for specialties and fuels came off from the levels we saw in the back half of 2022, specialty margins increased over 60% and fuels margins increased over 50% versus this time last year. Shreveport, our largest plant, was production limited early in the quarter as the team made some repairs from December's arctic freeze, and since then, the plant is running at maximum fuels mode, and we expect that to continue in the current strong margin environment.

As we look forward into 2023, we continue to see a constructive market for this segment as we enter the summer driving and paving season. Our confidence in this segment is reinforced by the 20,000 barrels per day of 2-1-1 crack spread hedges at $27 per barrel. Moving to slide seven, our Performance Brands business generated $16.4 million in adjusted EBITDA for the quarter, a market improvement from our quarterly results in 2022. Input costs have stabilized, that's what drives the expected financial results for Performance Brands in the quarter. For over two years, the business has been increasing prices, and by the time price increases are enacted, input costs had also increased, leaving the business continuously in catch-up mode. The Q1's margins are more representative of what we should expect in a stable environment.

Further, we received a $5 million partial payment for business interruption insurance proceeds that resulted from the grease supplier force majeure that impacted our business throughout 2021 and 2022. Adjusting for that payment, PB still delivered over $11 million in adjusted EBITDA for the Q1 and delivered an adjusted gross profit of $3.95 a gallon, an increase over 60% versus both Q4 and Q1 results of last year. Moving to Montana on slide nine, Great Falls produced $4.8 million of adjusted EBITDA in the Q1. We ramped up both our renewable diesel operations at MRL and experienced our first full quarter of operations at our reconfigured specialty asphalt plant. Both businesses ran to plan during the quarter and our asphalt plant is gearing up for paving season.

Most importantly, with the renewable hydrogen plant, pretreater and SAF operations up, we are entering a new period in Great Falls and look forward to realizing the cash generation potential of this new business. With that, let's flip to slide 10, and I will turn the call back to Todd for concluding remarks. Todd?

Todd Borgmann (CEO)

Thank you, Vince. For two years, our quarterly calls have included progress reports on Montana Renewables. To now report that all units are operating is a huge accomplishment. As our focus shifts from construction and startup to delivering the full cash flow potential of MRL, I'll take a few minutes to remind listeners of the key operational milestones announced over the past few months. First, initial renewable diesel operations commenced late last year. In Q1, the renewable hydrogen plant was commissioned to increase the feedstock rate from 5,000 barrels a day to 12,000 barrels a day. Our hydrogen system is unique in that it lowers the carbon intensity of our end product by creating renewable hydrogen as opposed to more traditional gray hydrogen plants that are fed by fossil fuels.

Previously, we've talked about our expected MaxSAF expansion, which could increase rates to at least 18,000 barrels a day. An additional hydrogen plant will be required to achieve that next step, and it's nice to have our existing plant fully operating in de-risk, making the future project a low-risk venture. In the meantime, our engineers are hard at work figuring out how to creep up rates on our existing unit. Our pretreater, which was started up in April, is the single biggest driver value at Montana Renewables. The pretreater opens up all the regional logistically advanced feedstock that is so key to the lasting competitive advantage that sets Montana Renewables apart. As we gain experience in a renewable feedstock market, we've reinforced our initial hypotheses regarding the large advantages that both our geography and pretreater provide.

To put the value into perspective, we can currently buy regional untreated feed approximately $0.80 a gallon more cheaply than treated feed. As we transition into our steady state operation, we expect to process the majority of our existing safety stock of clean feed this quarter, clearing the slate to receive the full financial benefit of our pretreater in Q3. The last milestone in the Montana Renewables project was producing sustainable aviation fuel. SAF was added to the project when our team confirmed the significant premium this product demands in the marketplace. As a boutique high-margin product, the SAF value chain more closely resembled a specialty product than a fuel, Calumet was very comfortable in this environment. Since the Inflation Reduction Act was announced, the outlook for SAF has exploded.

As the only proven scalable solution to decarbonizing air travel, it has turned into one of the hottest topics in energy. As of last week, Montana Renewables is the largest producer of sustainable aviation fuel in North America. With all units running, we also recently reconfirmed Montana Renewables EBITDA expectation. With a clear line of sight into the cost of untreated feedstocks, the economies of scale enabled by our renewable hydrogen plant and margin uplift from SAF, we recently reconfirmed our run rate EBITDA expectation of $1.25-$1.45 per gallon, which we expect to hit when we are processing all dirty feed. Montana Renewables has evolved from an idea in 2020 to an operating leading renewable business in a very short amount of time. During that time, 2.7 million man-hours were worked on site with no lost time incidents.

This is quite an accomplishment, thank you to the team and our partners that have made Montana Renewables a reality. As we look forward, our strategy is clear and it remains unchanged. Priority number one is to demonstrate the cash earnings power of this new business. In parallel, we will continue to engineer the potential MaxSAF expansion. Last, we expect to progress down the path of an ultimate IPO of Montana Renewables as we believe a competitively advantaged pure-play SAF and renewable diesel business with the growth profile of ours is extremely valuable. Of course, we'll continue to remain flexible and opportunistically engaged with potential partners along the way. With that, I'll turn it to the operator for questions. Operator?

Operator (participant)

Yes, thank you. At this time, we will begin the question-and-answer session. To ask a question, you may press star then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble the roster. The first question comes from Neil Mehta with Goldman Sachs.

Nicolette Slusser (Equity Research Analyst)

Hey, good morning. Thanks for taking the time. This is Nicolette Slusser on for Neil Mehta. The first question here is on Montana Renewables, and I understand you guys recently reconfirmed the go-forward EBITDA guidance of $1.25 to $1.45 per gallon. Can you just talk us through the drivers between the lower and the upper end of the range and then kind of where you might see one skewing one way or another later this year?

Bruce Fleming (EVP, Montana Renewables and Corporate Development)

Nicolette, Bruce Fleming. We're simply given a range. You know, that's a market condition. There is a little bit of volatility. We've published a lot of, you know, look back and, gross margin information. That simply captures what's going on out there.

Nicolette Slusser (Equity Research Analyst)

All right. Helpful. Thank you. The follow-up here is just on Performance Brands and seems like that business has been inflecting, and obviously a stronger quarter here. Can you just talk about the Performance Brands inflection, and then pace for the rest of the year? Thank you.

Scott Obermeier (EVP, Specialty)

Yeah. Great. This is Scott Obermeier. As Vince alluded to during the commentary earlier, you know, I think we finally caught up. The market has stabilized. You know, we've been talking for the past 18 months about rising costs and the lag in our price increases. I think what you saw in the Q1 and what we saw in the Q1 was our pricing finally catching up to the rising cost structure as well as solid demand in the market. We would expect that to continue to move forward.

Nicolette Slusser (Equity Research Analyst)

Great. Thank you.

Operator (participant)

Thank you. The next question comes from Amit Dayal with H.C. Wainwright.

Amit Dayal (Managing Director, Senior Technology Analyst)

Hey, good morning, guys. Thank you for taking my questions.

Bruce Fleming (EVP, Montana Renewables and Corporate Development)

Mm-hmm.

Amit Dayal (Managing Director, Senior Technology Analyst)

Congrats on delivering against all these, you know, milestones in a timely manner. Very impressive. Just in terms of, you know, how you are now thinking about potentially managing the debt side of the story, you know, what are your, you know, priorities for the cash flow that now you are set up to sort of generate with this, new, setup?

Todd Borgmann (CEO)

Yeah. Hey, Amit. It's Todd. Reducing leverage continues to be a strategic priority. I think we've been pretty consistent about that. We have a number of ways to do it. You mentioned operating cash flow from Montana Renewables. That's certainly one. We also expect monetization proceeds at some point in the not too distant future from Montana Renewables. That's another. I think when you look out at quantum of that, we're in a pretty decent position right now when you look at our current EBITDA versus our kinda restricted debt. We're coming in at a 3.0 ratio, which is actually a pretty reasonable level. That being said, we think that in the long run, we wanna take $300 million more off the table, give or take. The plan is to do that with operating cash flow or Montana Renewables monetization.

Amit Dayal (Managing Director, Senior Technology Analyst)

Okay. Thank you. You know, you already focused on sort of expanding SAF capacity, you know, to 18,000 barrels per day. Once we get to that level, are we capped out at this facility, you know, or is there room for further capacity expansion in Montana?

Bruce Fleming (EVP, Montana Renewables and Corporate Development)

Amit, Bruce Fleming. The natural limits to our existing facility are something that we're gonna discover. We're gonna be creeping capacity without a project anyway. The guys in the field are already, you know, finding small wins. As we get the project online, you know, we'll find out. 18,000 barrels a day renewable feedstock is kind of a guideline figure. We may do better than that. But there will be some ultimate limit to the single train operation there. At that point, we think that with the competitive advantages we have with every study that we've gotten any bank or consultancy to do for us, we've simply got the best machine out there, and that puts us in a really good position as the industry structure continues to unfold around us to be the aggregator in this space. We're looking forward to rotating to some pretty conventional M&A activity.

Amit Dayal (Managing Director, Senior Technology Analyst)

Understood. Thank you for that. That's very helpful. Just last one from you guys. You know, there's talk about potential recession, et cetera, given what the macro environment is. Are you seeing sort of any adjustments from customers or industry players around demand, et cetera, you know, keeping in mind that type of scenario?

Scott Obermeier (EVP, Specialty)

Yep. This is Scott here. You know, overall demand remains solid. You know, we've seen it become a little choppier in certain areas within the consumer and retail space. I think we've seen the published cracks out there start to taper down to slightly more normalized levels. Although overall, we're bullish on the go-forward plan. You know, we've been through over the past three, four years, the extreme up and downs, and I think that the business has performed well. We're resilient, we're diversified, and we feel good about where we're at.

Amit Dayal (Managing Director, Senior Technology Analyst)

Thank you, guys. That's all I have.

Bruce Fleming (EVP, Montana Renewables and Corporate Development)

Thanks, Amit.

Operator (participant)

Next question comes from Gregg Brody with Bank of America.

Gregg Brody (Managing Director, High Yield Research Analyst)

Hey, good morning, guys.

Bruce Fleming (EVP, Montana Renewables and Corporate Development)

Hey, Greg.

Gregg Brody (Managing Director, High Yield Research Analyst)

You, you highlighted the IPO in the press release and something you've been talking about is amongst a bunch of alternative plans. Does the fact that you put it in the release indicate any sort of change in you considering all the other things that you had talked about in the past? Is there a potential timing on an IPO?

Bruce Fleming (EVP, Montana Renewables and Corporate Development)

Hey, Greg. Bruce. Let me take what I think was a three-parter there. You know, our Montana Renewables strategic options represents an abundance of riches, really. That's, and that's gonna cascade over to the parent as well. Todd may wanna comment on that after I'm through. You know, one of the key pivot points here is gonna be what the Department of Energy decides to do with our loan guarantee application, and we will keep you posted. I'll say that their underwriting conversations and their diligence is going well, and that is a material strategic anchor. The way that that plays out is with a clean balance sheet, the IPO is enabled. The over-under from the bulge bracket banks that we're talking to about that is, let's say, nine months, centered on nine months. It can go quicker.

The future speculation is what are the market conditions as we, you know, as we have that offering available. We'll see. You know, the last couple of years, as Scott Obermeier just mentioned in a different context, have seen a lot of things thrown at everybody from the macro, you know. Knock on wood, if the world economy is gonna be on a more stable footing, then we're gonna have a pretty compelling pure play energy transition offering.

It's not a small thing to suddenly be the biggest SAF producer in North America that nobody ever heard of. You know, we've just had our head down doing this. We're not promoters, you know, we're not developers, and we're no longer in the business of seeking financing to build a project. The project's built. It's there. It's running. We're real. What is that going to be worth in the market? You know, we all look forward to finding out how to maximize unit holder value off the back of this.

Todd Borgmann (CEO)

Yeah, maybe I'll pile on a little bit. I wouldn't read too much into, is it a signal of other items? Kinda like Bruce pointed out there at the end, you know, what we think about a potential IPO is it's doable. It's doable in the not too distant future. It's extremely accretive. It's not that we won't take any other actions. We, like normal, you know us by now, we'll continue to be opportunistic and evaluate options. What it does mean is that anything that we look at, we're gonna evaluate in the context of, is this supportive, you know, majorly supportive of what looks like a pretty controllable and positive end destination. That's kinda the lens we're looking through, if that makes sense, Gregg.

Gregg Brody (Managing Director, High Yield Research Analyst)

It does. Thank you for all the clarifications. It sounded like you're, you see business improving. I'm or at least maintaining, I should say. Are you seeing any cracks in anything you're seeing in terms of weakness in the economy and weakness in demand?

Todd Borgmann (CEO)

We, I think Greg or Scott commented a little earlier on not too much in specialty. You know, we continue to see pretty strong specialty margins. Kind of let that play from earlier. On cracks, obviously, we've seen them come in a little bit, so, you know, like they should in Q1. We're pretty comfortable with our plan, you know, at these levels. We're not saying that we expect cracks to turn around and reach the levels they were last year or anything like that. What we're saying is we can absolutely play out our business plan in the current environment. It supports running max rates, and we've got a little bit of hedges there too.

We put those on last year in a time when we were looking forward and saying, Hey, it could potentially be a volatile market, and we wanna make sure that our business plan plays out in any environment and isn't at risk. That's kinda how we're looking at it. You know, we've planned on the current levels we're at, and I think our plan is still very viable in the current market environment.

Gregg Brody (Managing Director, High Yield Research Analyst)

Great. That's it for me, guys. Thank you for the time.

Todd Borgmann (CEO)

Thanks, Greg.

Operator (participant)

Thank you. The next question comes from Jason Gabelman with TD Cowen.

Bruce Fleming (EVP, Montana Renewables and Corporate Development)

Okay.

Jason Gabelman (Director, Energy Equity Research)

Hey, guys. Morning. On MRL, the guidance you gave of $1.45-$1.65, I think last year when you talked about a base case, it was $1.85, so $1.85 per gallon. The indicative economics are a bit lower than that. I'm just wondering what's going on in the market now different than the base case that you provided last year.

Bruce Fleming (EVP, Montana Renewables and Corporate Development)

Jason, Bruce, I'll start. We have put out gross margins and EBITDA net margins. We're not actually reducing guidance. That's a change in frame of reference. You know, we've talked a lot about the location advantage. We've done differentials on our logistics, better than the Gulf Coast, and we've put out the constant $2 a gallon-ish gross margin. You know, we've had people ask us to just simply tell us what we're gonna earn. The answer is $1.25 to $1.45 a gallon, fully loaded, including SG&A, EBITDA, based upon gathering of untreated feedstocks in our local market. That's no change. If anything, that's probably up a little bit from some of the look backs that we've put out.

Jason Gabelman (Director, Energy Equity Research)

Okay, got it. If I just apply that math and use the $0.80 per gallon higher feed that you're running now, it implies 2Q, you should earn, you know, some amount of EBITDA on what you're running at the renewable diesel plant. Is that a fair assessment? Kinda $0.40 per gallon, $0.50 per gallon for 2Q and then a higher amount from 3Q as you ramp up use of untreated feed?

Bruce Fleming (EVP, Montana Renewables and Corporate Development)

You're thinking in the right direction. The rolling from purchased clean feeds to purchased untreated feeds has the compelling advantage that Todd mentioned. I think that's broadly understood in the market, and I think the startup performance of some of our peers without a pretreater is, you know, is gonna give you a benchmark for what the industry looks like. You know, our pretreater has, you know, literally come on in the last couple of weeks or so. We announced that as it did. You know, we're gonna get a partial benefit as we speed up the untreated supply chain. We've got to work out of the safety stocks, the clean inventory that we have on site. How fast we do that is gonna be an optimization. I'd probably prefer to stay away from tactical guidance quarter over quarter.

Jason Gabelman (Director, Energy Equity Research)

Mm-hmm.

Bruce Fleming (EVP, Montana Renewables and Corporate Development)

We may find that we accelerate the inbound and we hold the safety stocks. We may find the converse. It's, you know, it's simply time shifting. We're gonna eat the clean feeds, and they'll be gone. How fast we do that, we're gonna try to gain an optimization value.

Jason Gabelman (Director, Energy Equity Research)

Got it.

Todd Borgmann (CEO)

Yeah, I may just pile on a bit there. Our guys have to learn this new equipment, right? So far they've done really an exceptional job when you look at the track record from the initial startup of RDU and then hydrogen plant and now pretreating SAF. When we talk about the $1.25 to a buck forty-five, and you kinda backed out that $0.80, we're talking run rate numbers. We'll give them a little bit of a chance to have a toe stub or two in the next couple of months as they learn their equipment. So far so good. We're real proud of what they're doing in the field.

Jason Gabelman (Director, Energy Equity Research)

Got it. On the IPO timing, you know, I think when you talked about the potential IPO last year, you discussed wanting to have some trailing amount of indicative earnings released before going through an IPO process. Is that still how you think about it? 'Cause it seems like the first true quarter of earnings will be 3Q. Are you gonna want a little more of a track record before you pursue an IPO, or is 1-2 quarters of consistent operations enough?

Todd Borgmann (CEO)

I think we're gonna have a look at the market, and let that guide us. You're right that I do think, providing that first full quarter run rate of audited financials, we can think about that as kind of a key trigger point in launching the IPO process. I'd also say that, you know, the first few months of the process are confidential. don't expect to, you know, it all have to necessarily be in series. I think you're thinking about it the right way.

You know, it's gonna make a lot of sense, and I think we're all gonna benefit to put the numbers out there, let people see, you know, the bottom line of Montana Renewables as a standalone, you know, fully operating business, and we'll go from there.

Jason Gabelman (Director, Energy Equity Research)

Great. If I could just squeeze one more in, which was CapEx came in a little higher than we thought it would for Q1. Was that related to kind of the completion of the biofuels plant? If you could give kind of total amount of capital costs that the project ended up costing, that would be helpful. Thanks.

Bruce Fleming (EVP, Montana Renewables and Corporate Development)

Jason, Bruce, I'll start us, and Vince may wanna add some exact figures. You know, three things are happening here at the end game as we go live on our Montana Renewables business. You know, we did pile SAF opportunistically on top of the program that we first announced two years ago. That was kind of a mid-course correction. We've got some expenditures there. We've got the expansion ramping up. The Montana Renewables board last fall approved us spending this year on that, and you've got some of that starting to run through. As you indicated, the startup/one time is a consideration in the Q1. You know, we commissioned a whole bunch of units sequentially in a relatively short period of time. That's not without some teething opportunities.

You know, we will eventually have a full answer to your question on the total cost, but some of that is still running in. You know, we literally just came online with the pretreater. Some of the, you know, some of the payables are on 30-day terms and that sort of thing. We'll, we'll do a look back at some point in the future.

Jason Gabelman (Director, Energy Equity Research)

Great. Thanks for the color, guys.

Bruce Fleming (EVP, Montana Renewables and Corporate Development)

Thank you.

Operator (participant)

Thank you. This concludes the question and answer session. I now want to turn the call over to Brad McMurray for any closing comments.

Brad McMurray (Director of Investor Relations)

Yeah. On behalf of the executive team here in the room and really the entirety of Calumet, we appreciate your time and your interest this morning. Thanks, everybody, and have a good weekend.

Operator (participant)

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.