Calumet Specialty Products Partners - Q2 2023

Transcript

Operator (participant)

Good day, and welcome to the Calumet Specialty Products Partners Second Quarter 2023 Results Conference Call. All participants will be in a listen-only mode, and should you need any 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 telephone keypad, and to withdraw a question, please press star, then two. Please also note that this event is being recorded today. I would now like to turn the conference over to Brad McMurray in Investor Relations. Please go ahead, sir.

Brad McMurray (Director of Investor Relations)

Thank you for joining us today for our second quarter call. Me on today's call are Todd Borgmann, CEO, Vince Donargo, CFO, Bruce Fleming, EVP, Montana Renewables and Corporate Development, Scott Obermeier, EVP, Specialties, and Marc Long, EVP, Sustainable Products and 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'll 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. I'll now pass the call to Todd. Todd?

Todd Borgmann (CEO)

Thanks, Brad, and welcome to Calumet Second Quarter 2023 Earnings Call. This was a quarter of many strategic achievements. Most crucially, all elements of Montana Renewables, the RD unit, the renewable hydrogen plant, and the next generation pre-treater met or outperformed expectations. Our sustainable aviation fuel project came online, catapulting us from nowhere to the largest SAF producer in North America. At the corporate level, we continued the process of improving our balance sheet by successfully issuing unsecured debt, which will eliminate our secured notes. Our specialties business continued with excellent commercial execution, while asset operations overcame a series of tornadoes and extreme weather that limited production. We generated $67.7 million of Adjusted EBITDA for the quarter, which is a decrease of $10 million from the prior period.

Our Northwest Louisiana team spent much of the last quarter, the last half of the quarter, recovering from weather-driven power disruptions. While doing so, we elected to pull forward maintenance, and at this point, we have no meaningful planned downtime for the remainder of 2023, and we enter the third quarter running our assets at full rates. At the halfway point of our three-year plan to fortify operations, our assets continue to demonstrate an improved ability to recover quickly when challenges arise, and we're also adding redundancy to further prevent or lessen the impacts of external events on our business. Commercially, we're executing across all of Calumet with a focus on the customer. Montana Renewables has pointed half of our sales volume to Canada and seamlessly stepped into the SAF market.

Our Specialties team continues to capture value from our unique and integrated value chain, and our supply chain and planning teams spent the last half of the quarter ensuring customer needs were met as we navigated around the weather and maintenance. Further, it's nice to see a return to a more normal environment Performance Brands as input costs have stabilized. This is a business that we can grow, and we're seeing strong signs of that in our industrial business. Our branded products are well positioned to meet the industry's growing demand for high-performing and energy-efficient solutions, whether it be Bel-Ray products servicing the global mining industry or our new biodegradable BIOMAX products being utilized in the global marine market. The second quarter also saw the completion and full startup of Montana Renewables, and the team settled into the new operation nicely.

As we stepped into this new business, it was essential that we quickly proved out the core operating pillars, which were ensuring the RDU and hydrogen plant ran at planned rates, proving our new and leading pre-treater technology, demonstrating catalyst performance, and meeting SAF specifications. We've demonstrated all of these core concepts. As expected, we encountered a few blips as the team quickly scaled the learning curve, our commissioning experience feels like minor teething problems relative to the industry experience. MRL's operation is intricate, including a closed recycle in our net zero hydrogen production and serial number one of the next generation feedstock pre-treater technology. As our operators learned the intricacies of this new operation, they quickly got the plant running consistently at the planned 12,000 bbl a day by quarter end, with the subsequently commissioned pre-treater following the same upward trajectory.

We took our board of directors to visit the plant earlier this week, and we were all once again impressed with the quality and knowledge of our local Montana team and leadership. Naturally, we're in a period of rapid learning as we dig deeper into the operation and understand the true ability of our units. One quarter in, we both developed some new understanding and confirmed a few of our core hypotheses. First, and most importantly, we've proven our technology works and our team can operate this facility at expected levels. We are making on-spec product right out of the gate, and even some of our customers were surprised at how quickly we came online. We monitor our catalysts closely, and it's performing as planned, even as we introduced higher amounts of feed that we treated ourselves. Further, the capacity creep has already started.

As you might remember, we don't know the maximum capacity of our RDU, as we never filled the unit in fossil service, so its true capacity has not yet been tested. Just a few months in, our team has already demonstrated the RDU's ability to run over 13,000 bbl a day. Next, we're pleased with the decision we made to install the pre-treater with ARA technology. The amount of feedstock flexibility this unit opens is tremendous, and we're capturing the yield advantage that we expected. Over previous quarters, we've spent a lot of time talking about the need for a pre-treater in this business, and we're quickly seeing the field of renewable diesel producers naturally separated into those that have pretreatment ability and those that don't. Last quarter, I mentioned that the difference between treated and untreated feed costs was $0.80 a gallon.

Right now, the pre-treater advantage is roughly $1 a gallon. At these levels, the ability to process untreated feed is even more important than location for the time being. Fundamentally, the next generation technology allows us to lose 4% less feed than a standard treater. At current feedstock prices, that's roughly a $0.20 a gallon advantage. With these data points, we expect the ARA technology will allow us to maintain a structural advantage, even within the camp of competitors that do have pretreat. We also are learning how different feeds are handled. They run at various speeds, cause filter changes at different intervals, and differ in the amount of time it takes to unload a rail car. These are common items to work through, which will allow us to optimize as we continue to process more untreated material.

We're optimizing the drawdown of our previous market purchases of treated feed, and we continue to ramp up the pre-treater rates as we gain comfort with the new technology. Further, we've confirmed that location is as important as we thought. We've seen generic industry margins tightening recently, especially for the treated feeds in the Gulf. This temporary dynamic has occurred before when markets rebalance from a short-term disruption. While we fully expect it to normalize quickly, our relative location advantage provides flexibility and allows us to pivot rapidly in a changing environment. This is true on both the feed and product side of our business. On the feed side, the location advantage is magnified by our next generation pre-treater that we just discussed. In fact, we just placed our first order for camelina, which will arrive in the next couple of weeks.

Camelina is in its very early stages. Given it's indigenous to Montana, extremely low CI, and does not compete with food, this cover crop presents tremendous upside to Montana Renewables. On the product side, 50% of our existing RD is now selling in Canada, as we see our early theory playing out that our products will migrate to the spot of optimal logistic advantage. As the largest single market, California is often the reference point for renewable fuels in our industry. With Canada sharing a land border with Montana, we fully expect our products to all land in premium locations. Next up, the level of interest in SAF is even bigger than we expected, and industry seems to quickly be aligning that SAF is the best, fastest, and most practical path to airline decarbonization.

With the SAF market currently being a fully voluntary market, it's been interesting to see the wide range of views that exist on how this material will price long term. For us, Shell has been a great partner so far, and we're pleased with the value they are bringing to the table in these early days. As Montana Renewables looks forward to the MaxSAF expansion, we continue to be enthusiastic. We expect to be in a position to share some early numbers on expected costs and EBITDA soon, and we believe that with MaxSAF, we can more than double our current EBITDA run rate in 2025. The MaxSAF project leverages our early mover advantage, and we could sell all of the product we could make into California, Oregon, Washington, Canada, and even Illinois and Minnesota with the new state SAF credits.

Finally, we're already exploring opportunities to further integrate Montana Renewables molecules into specialty applications. As we speak, our development team is experimenting with renewable naphtha and diesel fractions for uses in our solvents business. We've seen early successes with other sustainable product lines, and adding another example of unique and advantage integration to our specialty platform is exciting, as we continue to look for ways to leverage our newly found renewables expertise across our enterprise. With that, I'll turn the call over to Vince to take us through the quarterly results. Vince?

Vince Donargo (CFO)

Thank you, Todd. Before we move forward, let's pause on Slide four to take a closer look at two new brands we recently added to our SPS portfolio. TitanZero is our carbon neutral wax product, and PenClear is an all-natural product developed to supplement our Penreco beauty care line. Moving to Slide five, our SPS business generated $61 million of Adjusted EBITDA during the quarter. Our production volumes were roughly in line with the first quarter, and as Todd mentioned, in June, our Northwest Louisiana plants were impacted by severe weather. Tornadoes and hurricane force winds knocked the electrical grid offline on numerous occasions, which resulted in approximately 500,000 bbl of lost production. We estimate that the events cost approximately $20 million in profitability. We used the unplanned downtime to pull some turnaround work forward. We successfully completed a planned turnaround at our Cotton Valley facility.

I can say that as of July 1, we were back to full operations across the entire Northwest Louisiana region. The margin environment continues to be constructive for both fuels and specialties here in the third quarter. While we have seen and expected a reversion from all-time highs we experienced late last year, margins are well above mid-cycle averages, and we expect that to remain. Our material margin for the quarter averaged $77.30 per barrel for specialties, and $10.21 per barrel for fuels. We continue to be optimistic about the fundamentals of our SPS business, and our expectations are constructive for the rest of the year. Moving to Slide seven, our Performance Brands business had another solid quarter, generating $12.2 million of Adjusted EBITDA. We continue to see price stability in the marketplace.

Our production volumes were up quarter-over-quarter, and we saw significant demand in both the industrial lines and from True, TruFuel, our most direct retail offering. The second quarter tends to be the best demand quarter for TruFuel, as both the spring weather and planting seasons coincide, and we were pleased to see strong demand within that channel. We have highlighted two of our, our other products on the slide as well. We have mentioned BIOMAX before as a high-performance, biodegradable maritime solution that is now also being applied across other industries. The line continues to show real promise in its early stages as more and more customers interact with it. Our Bel-Ray brands, which are particularly well known for performance and mining applications, have seen tremendous growth year-over-year.

Our industrial demand is up 35% year-to-date. This is a segment of the business that we expect big things from as the world prioritizes high performance and power efficiency, especially in some of the leading megatrends like mining, food, and energy. Moving to our Montana business, you could see on Slide nine that we generated $12.6 million of Adjusted EBITDA in the quarter. For the legacy asphalt plant, we operated at full capacity of nearly 12,000 bbl per day of production. We entered this year's asphalt paving season during the second quarter, which was our first opportunity to utilize the recently constructed polymer modified asphalt or PMA plant. This unique and high-quality asphalt is being praised in the marketplace. We are very pleased with early sales. The second quarter was also an important one for Montana Renewables.

During the quarter, we bought our feedstock pre-treater online, shipped our first SAF volumes, and ramped up rates of both our RDU and pre-treater. Average production for the quarter was a little over 7,000 bbl per day. As our team quickly learned the plant, and with plant operations de-risked, we were able to end the quarter producing over 12,000 bbl per day. During the quarter, we also announced an exclusive agreement to sell 100% of our SAF to Shell, who is also one of our three renewable diesel customers. We are excited at the SAF opportunity that is ahead of us. We are running off the last of our treated renewable feedstocks and expect to rotate to a slate of primarily untreated feeds. These are cheaper feedstocks that will allow us to capture the full earnings horsepower of Montana Renewables.

To discuss our strategy for Montana in more detail, I'll now turn the call back over to Todd.

Todd Borgmann (CEO)

Thanks, Vince. Our priorities and next steps are clear. In specialties, we have some inventory to rebuild, but otherwise are planning on a strong second half. At Montana Renewables, we'll continue to process what's left of our trade and safety stock and maximize pretreat throughput. For the quarter, we've implemented a 1 million bbl challenge at the site for both our legacy and renewable businesses. Through the end of July, we're tracking ahead on both. Our plan and intention is to demonstrate in the third quarter that Montana Renewables sits atop the stack of competitively advantaged renewable diesel and SAF producers. Looking forward a bit more, internal process design work for our MaxSAF expansion has already started, and we expect to make a final investment decision near the end of this year. Zooming out, our strategy remains unchanged.

We're committed to completing the deleveraging of Calumet, unlocking value, and increasing trading volume for our unitholders. Our Department of Energy loan process continues, and we remain hopeful and confident that we will receive positive news that enables us to go forward with the MaxSAF expansion that would take Montana Renewables from North America's largest SAF producer to one of the world's largest SAF producers. Last, we continue to expect the potential monetization of Montana Renewables to complete the deleveraging of Calumet. For some time, we've discussed the possibility of a Montana Renewables IPO, private monetization, or even both. Naturally, this has created a flurry of interest in the advisor community and even potential investors, and we continue to receive clear feedback that Montana Renewables is a differentiated business with transformational value potential to Calumet, well in excess of the entire company's current enterprise value.

As always, we'll continue to execute against our stated strategic plan, and we'll also continue to actively explore all paths to best unlock the extreme unitholder value that we believe exists within Calumet. With that, I'll hand the call back to the operator for questions. Operator?

Operator (participant)

We will now begin the question-and-answer session. Again, to ask a question, you may press star, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw a question, please press star then two. At this time, we will take our first question, which will come from Roger Read with Wells Fargo. Please go ahead.

Roger Read (Senior Energy Analyst)

Yeah, thank you, and good morning. Lots to hit here, but I guess really, let's, let's dive into MRL first. Maybe a little more clarity on how some of the advantage feedstocks have run through. You mentioned, you know, some learning curve issues with that. Is there one that's worked a little better or is priced a little better, has come up with a better yield? Just sort of curious any more you can offer there.

Bruce Fleming (EVP of Montana Renewables and Corporate Development)

Hey, Roger, it's Bruce. Good morning. Excuse me. The... Yeah, the couple, couple things as you think about the optimization. The feedstocks do have different yields, but that's mostly in the split between diesel and SAF. The total distillate yields are substantially similar across feeds. The pricing is interesting because there's rotation among classes. You know, tallow can get an advantage, and then, you know, corn oil can come in on top of it for a while. We've got a, a pretty good supply and trading function, trying to follow those rotations, and we're able to do that more quickly than an average competitor because we're quite close to the sources. You know, most of our feeds are, are days to maybe two weeks away, and so we shift gears pretty quickly.

Roger Read (Senior Energy Analyst)

Yeah, that's helpful. Then the other question I have for you, since we are all attuned to California, the LCFS and, and, the other things that drive us to see RD sales in the U.S., what specifically do you see in Canada's setup that makes it competitive from either an RD or a, a SAF standpoint?

Bruce Fleming (EVP of Montana Renewables and Corporate Development)

Higher price.

Roger Read (Senior Energy Analyst)

That's an easy answer. All right, well, that's my two questions.

Bruce Fleming (EVP of Montana Renewables and Corporate Development)

Yeah.

Roger Read (Senior Energy Analyst)

I'll, I'll turn it back.

Bruce Fleming (EVP of Montana Renewables and Corporate Development)

Thanks, Roger.

Operator (participant)

Our next question will come from Amit Dayal with H.C. Wainwright. Please go ahead.

Amit Dayal (Managing Director and Senior Equity Analyst)

Thank you. Good morning, everyone. Just staying on the feedstock topic, you mentioned camelina. Could you give us any color on, you know, cost advantages camelina presents for you guys? You know, whether this is a seasonal feedstock option for you, or can it be available through the year?

Bruce Fleming (EVP of Montana Renewables and Corporate Development)

Amit, the best way to think about that is that commercial quantities of camelina are actually not in the market yet, so this is experimentation. We were fortunate to pick up opportunistically some camelina oil. We really like it. You know, it's in the low 20s, carbon intensity, CI, and dramatically better than vegetable oils, and it grows in our latitude. What we imagine is going to happen is that now that this is a cash crop, there will be more and more of it. There is some crushing activity now, and that's simply gonna speed up. If you look at some of our public information, we're forecasting commercial availability to us out in 2025, 2026. That shows up in some of our, our charts.

The economics of it, I wouldn't read too much into this because it is an experimentation phase. This is competitive with untreated feeds. You know, that's gonna be quite a good margin, albeit a small volume.

Amit Dayal (Managing Director and Senior Equity Analyst)

Understood. Got it. This is a little bit more of a longer-term development effort for you guys. Got it.

Bruce Fleming (EVP of Montana Renewables and Corporate Development)

Yeah, we're. Just to be clear, we're not doing the development. There are four developers in Montana now. They're backed by global majors. I mean, this is very visible, so it will happen. We're just speculating on how fast. As I said, we've put commercial availability to us about two years out.

Amit Dayal (Managing Director and Senior Equity Analyst)

Okay. Thank you for that. On the topic of deleveraging, do you think, you know, going into the second half of 2023, you could begin some deleveraging efforts just from cash flows, or will you wait for, you know, some sort of a monetization event to undertake sort of that part of the strategy?

Todd Borgmann (CEO)

Yeah, Amit, this is Todd. I think we're certainly gonna generate positive cash flow in the second half of the year, you know, with Montana Renewables now running fully, construction over, so on and so forth. Absolutely we would expect cash flow to be available. That being said, I think the major, you know, big bang deleveraging event, it's still going to be tied to monetization. You know, there'd certainly be the option to delever over time with operating cash flow. With MRL on and our specialties business operating as well as it has over the past couple of years, we'd expect that to be an option, but I think we've been pretty clear that we want to complete the deleveraging of Calumet as quickly as possible.

We've been talking about it for a while here. We want to get back to growing the business, and the most logical path is minority, you know, monetization of Montana Renewables.

Amit Dayal (Managing Director and Senior Equity Analyst)

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

Operator (participant)

Our next question will come from Manav Gupta with UBS. Please go ahead.

Manav Gupta (Senior Equity Analyst)

Good morning, guys. My question to you here is: can you help us understand your SAF strategy? How much are you producing right now? Once you do expand, if you do, then how much SAF could you produce? Just a quick follow-up is, how much more do you actually expect to make on a EBITDA per gallon basis in SAF versus RD? If you think you can make $1.40 in RD, can you actually make $2.50 in SAF? I'll turn it over after that. Thank you.

Bruce Fleming (EVP of Montana Renewables and Corporate Development)

Hi, Manav, it's Bruce. Good morning.

If I take those in reverse order, we've got an undisclosed commercial premium above renewable diesel. That is very sufficient to incent SAF recovery. The volume part is, we've contracted 30 million gallons per year. That's that's a percentage of our yield, you know, kind of 12%-15%. The expansion case, the licensors tell us we can go to full conversion, 100% SAF. We think there will be an optimization short of that, so we are tentatively advertising 230 million gallons of SAF capacity post, post installation of our yield flexibility project.

Manav Gupta (Senior Equity Analyst)

Thank you.

Operator (participant)

Again, if you have a question, you may press star, then one to join the queue. Our next question here will come from Jason Gabelman with TD Cowen. Please go ahead.

Jason Gabelman (Managing Director and Director of Energy Equity Research)

Hey, morning. Thanks for taking my questions. I wanted to ask about the monetization strategy and efforts going on, and specifically, you know, Todd mentioned two things at the end that you're receiving indications that the value of MRL is higher than the value of the current enterprise value of the company. I was wondering if you just could elaborate on that a bit. How do you translate that into actual value for shareholders? What does that process look like over the next few months? Tied to that, considerations for converting to a C-corp, do you see that as a necessary step in unlocking the value? Thanks.

Todd Borgmann (CEO)

Let's have Bruce start with, kind of MRL valuation, and then, and then I'll pile on, if that's all right with, kind of the last question.

Bruce Fleming (EVP of Montana Renewables and Corporate Development)

Sure. Good morning, Jason, it's Bruce. The MRL valuation's reasonably clear. You know, the energy transition companies, the public peer companies, are trading in a enterprise value to EBITDA multiple that's, you know, that's visible. We expect to lay in with that at a minimum, if not get a premium for the competitive advantages that we've got due to location, due to the advanced pre-treater technology, and due to the fact that we're now North America's largest SAF producer. So when you put all that together, you know, that's, that's the public valuation signal that we would expect to target. I'll tell you that the bulge bracket banks we're talking to have no concern about some kind of an overhang from the parent, which I, I think is part of what you were getting at.

We're, we're simply gonna stand it up, and looks like it's gonna be a pretty straightforward process. Now, how long that takes and the condition of the capital markets will obviously give us a shot at, you know, positioning our timing. From here, you know, in early, early August, we're presumably targeting, you know, first part of next year for closing and funds realization.

Todd Borgmann (CEO)

Yeah, I think, you know, just to pile on a little bit, we know there's intrinsic value in Calumet, right? You know, Bruce just talked about some of the value that we'd expect. We can, we can look at comps in the marketplace. We can look at a number of, of point, of points to triangulate into what Montana Renewables is worth. We've talked about unlocking that through IPO or monetization. You know, primarily, we think, we think MRL would be very liquid, as a publicly traded company, and that would certainly help Calumet. We've also said we're exploring optimal paths, like we always do. Natural time for all stakeholders, I guess, Jason, is to look at the full strategy, would be when we're talking about selling or, or spinning some of it to create a new entity.

Could something with the structure be one of those options? Sure. I mean, I guess everything's an option. Everyone involved is, is rational economic creatures, and we all want what's best for Calumet. I guess I'd just say the entire strategy is complex. It takes time, and what we do from here with, with this large amount of value sitting in Montana Renewables, is arguably the most important decision in the history of Calumet. Getting that step right is, is the most important thing, and we're gonna prioritize that over rushing down a particular path. We'll be talking with the market, we'll be seeking input, and at the end of the day, there's a heck of a lot of value here. We're focused on unlocking that, and we'll go from there.

Jason Gabelman (Managing Director and Director of Energy Equity Research)

Got it. Thanks. I appreciate the comments. My follow-up just on the margin outlook and specifically related to RIN prices, following the EPA's decision on the Renewable Volume Obligations for 2023-2025. I think there's a decent amount of concern that RIN prices are gonna be volatile next year as the industry brings on new renewable diesel capacity. I know you, Calumet has a view of kind of a stable margin for renewable diesel over the medium term, but do you anticipate some elevated bouts of volatility in the renewable diesel margin next year, due to a potential RIN oversupply? How do you think the market kind of evolves through that? Thanks.

Bruce Fleming (EVP of Montana Renewables and Corporate Development)

Sure, Jason, it's Bruce again. The individual components of the industry margin index that we use are, you know, independently volatile, and RINs is getting a lot of attention. A couple things that are talked about less. California is clearly going to accelerate their LCFS reduction profile, so that's that goes on the credit side. The more SAF we pull out of the renewable diesel pool, the shorter it is. There's an interaction there. Then the final comment, I don't see a lot of analytics that recognize that Canada is part of our trading market, but it is. Not to be flip, but I'm not sure I care where California goes, because we're not going there.

Jason Gabelman (Managing Director and Director of Energy Equity Research)

Got it. And just to elaborate on that last point, could you sell 100% of your product into Canada while kind of sustaining the current margin profile?

Bruce Fleming (EVP of Montana Renewables and Corporate Development)

We could. That would potentially not be optimal distribution, but, you know, I'm on record for the last two years as saying our physicals shouldn't fall more than 100 mi from Puget Sound. If you look that up, that means we hit Oregon, Oregon, Washington, British Columbia, and now all of federal Canada. You know, we're pretty excited about the fact that there are small rule differences, normal seasonal patterns, and a lot of trading volatility. I was a West Coast operator for 12 years before I came to Calumet. There is a lot going on out there, and because of our geographic proximity, we're close in, in time, and we can take advantage of that. You know, I think the fact that federal Canada brought an addressable diesel market equal to the PADD 5 volumes probably ought to get more attention.

Jason Gabelman (Managing Director and Director of Energy Equity Research)

Yeah. Understood. Appreciate the color, guys.

Bruce Fleming (EVP of Montana Renewables and Corporate Development)

Thanks, Jason.

Operator (participant)

Our next question will be a follow-up from Roger Read with Wells Fargo. Please go ahead.

Roger Read (Senior Energy Analyst)

Yeah, thanks. Good morning again. Maybe just turn off of MRL a little bit here and talk about the other core parts of the business. Obviously, the weather issues had an impact. Q2 sounds like that's pretty well worked out of the system by the time we get to Q3. I was just curious, as you look at the overall sort of supply and demand that's been in here, you know, we've had a lot of supply chain issues throughout the industry, just how things are shaking out, and how should we think about a normal market? It's been, what, three years since we've seen a normal market, I think.

Scott Obermeier (EVP of Specialties)

Well, Roger Read, this is Scott. I think a few comments here. I think you hit the nail on the head when you said it feels like we're more of a normal market now after two highly volatile years, we agree with that assessment. We feel like our business right now is about as normalized as what it's been over the past few years. As we look at sort of what I would say, Roger Read, is additional context here, sort of the headline summary of our view of the market right now, you know, we do see some moderating demand and some of the normalizing margins going on at that macro level. You know, we remain bullish overall with our business.

We've got, as you know, Roger, a diverse portfolio of specialty products, a great base of customers, and our unique integrated business model that continues to be strengthened. Just some final color commentary, Roger, as we look at the business through I'll say three lenses: our Performance Brands business, our SPS Fuels business, and the SPS Specialties business. On the Performance Brands, you know, we've been commenting for the past couple of years, you know, where we felt like a normal market would be for the business, and we're in it now. You know, the demand on the retail side is a little soft, but as mentioned in the call, our industrial business is very strong right now. Margins are, I'll say, normalized within the business, and so we've got a pretty good outlook going forward on the Performance Brands piece.

On the fuels piece, Roger, you know, overall, tough second quarter as fuel cracks, the 2-1-1 came down $9. Although that spiked back up here as we start Q3. Overall, you know, I think inventory is relatively short, and we've got a constructive outlook within the fuels business moving forward. The last piece, I would just say, on the specialty SPS, you know, this business we see continuing to perform very well. We've done a lot of work over the past few years to really strengthen the foundation and optimize the business, so we feel really good about where we're at. Yes, the margins are normalizing a little bit, but we're still, you know, talking $75-$80 a barrel type of margins, when I think three, four, or five years ago, that number was more in the 30s.

Feel really good about where we're at within our Specialty Business.

Roger Read (Senior Energy Analyst)

Okay, thanks for that. I guess I was a little surprised to hear industrial demand is strong and retail demand soft. It seems like all the other data points we see at macro level would imply the opposite of that, but good to hear. One other question to follow up on. You know, the base oil markets were pretty oversupplied, roughly, you know, call it 2015 to at least 2020. That seems to have improved. I'm just curious, as you think about, you know, Group I, II, and III on the base oil front, have we seen demand increase, or are we seeing supply go down? Just kind of what's helped out on that side of the margin ledger?

Scott Obermeier (EVP of Specialties)

Yep, Roger, Scott. Scott, again. Actually, let me start, though, with a comment on the retail and industrial, just to comment on that. You know, on the retail market, I think consistent with what's going on out there, there's a lot of, I'll call it, de-risking by the big box retailers. The consumer market's been strong on the service front. On the retail front, I think a lot of the retail market has been de-risking inventory. It's led to some choppy demand on the retail side.

... The industrial side for our Performance Brands, on, on the question around how we've seen it strong, I think Todd or Vince alluded to in the earnings statements, for the call, a lot of our products are, are put in the high-value markets. We've got a great brand and great products that go into mining, as an example, that go into environmentally friendly marine lubricants, that go into the energy transition market. Our high-value products are, are experiencing great demand, great growth, because of the uniqueness of them, versus just more of a commoditized industrial play. Roger, on, on this last question on the base oils, a few thoughts. It's, it's mostly on the production side, so I'll call it less supply on the Group I over the past five years than, than what there was.

We like our Group I. It's a niche product. You know, we try to stay out of the commoditized PCMO markets and focus more on the high-value applications, Group I, Group II. Less, less supply there, there's been some global trade disconnects the past couple of years on the Group III as well.

Roger Read (Senior Energy Analyst)

Appreciate the clarifications. Thank you.

Todd Borgmann (CEO)

Thank you.

Operator (participant)

Our next question will be a follow-up from Amit Dayal with H.C. Wainwright. Please go ahead.

Amit Dayal (Managing Director and Senior Equity Analyst)

Thank you. Just following up on your comments about the Montana IPO. Did you say you are targeting early next year as a potential window to undertake this? I just wanted to see if, you know, that is sort of the timeline we should be thinking about?

Todd Borgmann (CEO)

Yeah, Amit, it's Todd. We've said that in the past and continue to think that that's, that that's reasonable. Obviously, no commitments. We've got to get through the process, get the feedback and kind of make a final decision. You know, what we want to do is be ready. A lot of this is going to be driven by the market, and, you know, we, we want to be there when the market's open, and if that's early next year, then great. If it takes longer than that, then so be it. We want to be there to kind of be opportunistically ready, when an opportunity presents itself.

Amit Dayal (Managing Director and Senior Equity Analyst)

Should we think about 3Q as a very sort of important quarter for the renewables business, where you want to demonstrate the full capability of this operation to support-

Todd Borgmann (CEO)

Yeah.

Amit Dayal (Managing Director and Senior Equity Analyst)

- That outcome?

Todd Borgmann (CEO)

You bet. I think our focus has been on the third quarter for a while. You know, we've had a number of milestones at Montana Renewables. First, we had to finance it, then we had to construct it, then we had to prove that it all worked, de-risk the technology, prove the operations. I think we've done all of that, and the very last milestone is prove it through a set of audited financials, which we've been saying for a while, we think that we'll do in the third quarter, and that continues to be our intention.

Amit Dayal (Managing Director and Senior Equity Analyst)

Okay, thank you so much. Appreciate it.

Todd Borgmann (CEO)

Thank you.

Operator (participant)

Our next question will be a follow-up from Jason Gabelman with TD Cowen. Please go ahead.

Jason Gabelman (Managing Director and Director of Energy Equity Research)

Yeah, hey. Just following up on MRL. Are you planning on, on splitting out results for MRL for 3Q? Just given it's an important quarter, and, and it sounds like you want to provide more transparency to the market. Then just a couple other operational, questions on MRL: Are you running all untreated feed at this point, and, and do you expect 3Q to be in that, EBITDA guidance range that you've previously provided? Thanks.

Todd Borgmann (CEO)

Yeah. I'll take the, I'll start us off here, see if Bruce wants to jump in. Yeah, it's been our intention to split out Montana Renewables when we reach, when we reach steady state. Like we said, we expect that to be Q3. As far as all, all untreated feed, I don't think we're at 100% untreated feed. We're certainly ramping up, very comfortable with where we've been. The guidance that we've given of $1.25-$1.45 per gallon obviously is on untreated feed. As we ramp up and work through the safety stock that we bought in prior periods of treated feed, the blended average EBITDA won't quite be that high.

We're focused on long term, $1.25-$1.45, and we're seeing that, you know, pretty much now when we look at, when we look at it on a, on an untreated basis, right, Bruce?

Bruce Fleming (EVP of Montana Renewables and Corporate Development)

Yes. Now we remain comfortable with our guidance. Remember that these California indicators that everybody likes to focus on are not that good a capture of our better position.

Todd Borgmann (CEO)

Mm-hmm.

Bruce Fleming (EVP of Montana Renewables and Corporate Development)

You know, between, Amit's question a second ago and yours, we're, we're committed to proving this in the third quarter. You know, whether or not we're ready to, to carve out the audited financials, you know, that's up to Vince, but we'll absolutely be doing a special look. You'll get, you'll get a clear, transparent sense of how that works for us.

Jason Gabelman (Managing Director and Director of Energy Equity Research)

Great. Thanks.

Operator (participant)

Again, if you have a question, you may press star, then one to join the queue. Our next question will come from Gregg Brody with Bank of America. Please go ahead.

Gregg Brody (High Yield Research Analyst)

Hey, good morning, guys.

Todd Borgmann (CEO)

Hey, Gregg.

Gregg Brody (High Yield Research Analyst)

Congrats on getting the facility, the renewable facility running as, as you have. My question is, is more about your optionality here, in terms of potential limitations which MLP status. Is there some limitations to how does this impact the way you're thinking about monetizing MRL? Because you're an MLP, is there some limit to how much cash you can take in? Maybe can you give us a little sense of that? Also, is there any update on timing, specifically around an IPO that, that we, we should be thinking about?

Todd Borgmann (CEO)

Yeah, I think the limitation you may be thinking about is, is around qualifying income. Sale of Montana Renewables, you know, through an IPO or otherwise, you know, it could be qualifying income. I think there are different points of views on that. If that's where you're going, that's a possibility. You know, certainly the, the, the plan always has been to make Montana Renewables a corporate at a certain point in time, you know, the right point in time. If that's a step in the process, then so be it. Like I said earlier, I think we have a number of options there as far as sequencing and, and how we'd go about that. We don't see any, any major, major road stops in monetizing Montana Renewables from, from our current position.

Gregg Brody (High Yield Research Analyst)

Too much because there's tax consequences for your, for your unit holders.

Todd Borgmann (CEO)

Correct.

Gregg Brody (High Yield Research Analyst)

Then maybe just timing on, on the IPO as part of that question?

Todd Borgmann (CEO)

I think that's what we're trying to hit on earlier. We've said around Q1, we'd like to be ready. You know, we could probably be ready late this year, but unlikely that, you know, the best market is going to be over the holiday season. Our plan right now is to get ready and see what opportunity the market provides us. If it's early in the year, then we'd be able to take advantage of that opportunity.

Gregg Brody (High Yield Research Analyst)

Then just moving on to the MaxSAF opportunity. You said you're going to make a decision by, by the end of the year. Can you help us think about the capital requirements for that, how you fund it, how does the DOE funding potentially fit into that? Maybe provide an update there as to what's happening with that?

Bruce Fleming (EVP of Montana Renewables and Corporate Development)

Sure, Gregg, this, this is Bruce Fleming. I'll take that. The ultimate throughput potential of our hardware is, is the first thing to hold in mind, and we're not sure what the upper bound is, because in fossil service, we never filled that unit. We're already substantially above its initial engineering design from when we put it up, so we will find the engineering basis, and then we'll stretch it. Our estimates are that's where we get the 18,000 barrel a day throughput number that you've heard us talk about. Optionally, we can install yield flexibility so that that 18,000 bbl a day can have a mix like the current mix, or rotate to, you know, all the way or almost all the way SAF fuel.

That's an incremental capital, incremental return decision that we would expect to execute in the field at the same time. There's two decisions, but we'd like to just do one project and have one outage to tie it in. That's what's being sorted this year, and by the end of the year, we expect to have that clarified. Capital is obviously contingent on whether or not we add the yield flexibility. You know, we've, we've floated some super notional ranges in a $200 million source of funds for that. DOE is very interested. Cash flow from operations is also sufficient, but if we fund it that way, we're interacting with the corporate strategy that Todd covered earlier.

By the end of this year, in summary, we'll have our capital pinned down, we'll have our investment basis, agreed, and we'll have DOE as a source of funds. That is the mainline planning.

Gregg Brody (High Yield Research Analyst)

DOE?

Todd Borgmann (CEO)

Okay.

Operator (participant)

Our next question will come from Justin Jenkins with Raymond James. Please go ahead.

Justin Jenkins (Managing Director and Senior Equity Analyst)

Great, thanks. Sorry, guys, I've just got two modeling questions here. I think over the past few quarters, we've seen a pretty big working capital build. I assume a lot of that's just related to Montana Renewables inventory, but just the progression here, maybe going forward on how that unwinds or doesn't.

Todd Borgmann (CEO)

Yeah, I, I think you're right. You know, as we've ramped up Montana Renewables, obviously we've built inventory. We'd expect that to normalize over time. This is, this is expensive feedstock, it's expensive product, so it adds up in a, in a hurry, kind of on the working capital front. As we've been building, you know, the, the front end of that supply chain, you know, naturally, we see that, and then over time, as, as revenues come in to offset it, we'll see, we'll see normalization.

Justin Jenkins (Managing Director and Senior Equity Analyst)

Perfect. Thanks. I guess second question is on, on maybe managing the, the RINs liability here in, in the context of, of recent EPA decisions and, and obviously in the context of, of you guys producing a lot more RINs here with, with RD production, just, just how we should think about that liability going forward.

Bruce Fleming (EVP of Montana Renewables and Corporate Development)

This is Bruce Fleming, Justin Jenkins, good morning. I think the, the key is that the obligated parties, which are the downsized Calumet Montana Refining, which we're referring to as a specialty asphalt refinery now-... Has got a much, much smaller RIN liability footprint. Shreveport remains about the same, but we're simply not very prominent on the, on the RINs landscape. The entire activity around about 29 legal challenges is gonna give you the answer, and, you know, you're gonna find out the same time we do as the courts rule on these things. I think I'll leave it at that.

Justin Jenkins (Managing Director and Senior Equity Analyst)

Understood. Thank you.

Bruce Fleming (EVP of Montana Renewables and Corporate Development)

Thanks, Justin.

Operator (participant)

Our next question will be a follow-up from Gregg Brody with Bank of America. Please go ahead.

Gregg Brody (High Yield Research Analyst)

Hey, guys, I got cut off there. Is there a timing on the DOE that we should expect in terms of having an answer? Maybe talk a little bit about how that process is going.

Bruce Fleming (EVP of Montana Renewables and Corporate Development)

Gregg, it's Bruce. That's the timing's going to be up to them, but I'll, I'll tell you that, you know, we announced we were admitted into the second part of their application process. The diligence is going well. We have a weekly standing meeting, the step in front of us would be the conditional loan commitment. That could really come at any time. Again, you know, that's, that's their business and their workload, but we're, we're optimistic that, you know, we will have that cornerstone of our strategic balance sheet planning in place this year.

Gregg Brody (High Yield Research Analyst)

That's helpful. And just my last one. When you, you raised the bond deal in June, you talked about tendering for bonds and actually redeeming the rest of the twenty-fours at some point. Curious how you're thinking about that. Is it something we should expect near term, or you, are you preserving some optionality there as you, as you think about cash for other uses right now?

Bruce Fleming (EVP of Montana Renewables and Corporate Development)

Yeah, no, we're actually surprised more didn't come through, during the tender. We'll go ahead and, and move forward like, like we said, and, and call those bonds here in the near future. That's fully the plan.

Gregg Brody (High Yield Research Analyst)

All right. That's it for me, guys. Thanks for the time.

Bruce Fleming (EVP of Montana Renewables and Corporate Development)

Thank you.

Operator (participant)

This will conclude our question and answer session. I'd like to turn the conference back over to Brad McMurray for any closing remarks.

Brad McMurray (Director of Investor Relations)

Yeah. Thanks, Joe. On behalf of the, the management team here in the room and, and all of us here at Calumet, we appreciate your time and interest in, in joining the call this morning. Thank you for your, your ongoing, interest in Calumet. With that, have a great weekend, everybody.

Operator (participant)

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