Calumet Specialty Products Partners, L.P. (NASDAQ:CLMT) Q4 2023 Earnings Call Transcript
Calumet Specialty Products Partners, L.P. (NASDAQ:CLMT) Q4 2023 Earnings Call Transcript February 23, 2024
Calumet Specialty Products Partners, L.P. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and welcome to the Calumet Specialty Products Partners, L.P. Fourth Quarter 2023 Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Brad McMurray, Investor Relations. Please go ahead.
Brad McMurray: Good morning. Thank you for joining us today for our fourth quarter and full-year 2023 earnings call. With me on today's call are Todd Borgmann, CEO; David Lunin, CFO; Bruce Fleming, EVP, Montana/Renewables and Corporate Development; and Scott Obermeier, EVP, Specialties. You may now download the slides that accompany the remarks made of today's conference call, which can be accessed in the Investor Relations section of our website at www.calumet.com. Also, a webcast replay of this call will be available on our site within a few hours. Turning to the presentation, on slides two and three, you can find our cautionary statements and tax disclosures. 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 our expectations. I will now pass the call to Todd. Todd?
Todd Borgmann: Thank you, Brad, and welcome to Calumet's year-end 2023 earnings call. To start, I'll provide an update on our conversion process, we'll then recap 2023, Dave will take us deeper into the quarter and I'll wrap with a '24 outlook. Let's turn to slide four. In November, we announced that our general partner and conflicts committee had agreed to terms that would convert Calumet to a C-Corp from an MLP, and since then we've been at work putting that into effect. Over the past few years, Calumet has transformed itself into a new company, and it became clear that the typical institutional investors who would invest in a leading specialty products company in a top-tier renewable fuels business largely don't or even can't invest in MLPs. Further, almost no passive investment strategies, which make up nearly half of the capital being invested allocate to MLPs. Thus, to increase our investor base and ultimately provide our shareholders the best opportunity to realize fair value for Calumet, we embarked on this change.
Two weeks ago we announced the signing of the official conversion agreement, which is a prerequisite to filing our S-4 with the SEC. After we receive comments back from the SEC, a final S-4 will be filed, a proxy vote held, and we hope to gain approval from our shareholders and complete this conversion midyear. Again, I thank everyone involved, especially our general partner and conflicts committee, for a fair and thorough negotiation, and we're looking forward to this vote and new opportunity. Turning to slide five, we see the fourth quarter. In the fourth quarter, Calumet generated $40 million of adjusted EBITDA, and for the year, we generated $261 million of adjusted EBITDA. Our 2023 financial results were driven by three things, all of which we've discussed previously.
First, in Montana, a steam drum crack essentially set our strategic plan back half a year and culminated with a month-long outage in November, where we successfully replaced the unit. At that time, given we were down anyways, we pulled forward turnaround work and replaced the catalyst change that was previously scheduled for 2024. Second, the combination of a winter freeze and summer tornadoes in Shreveport underpinned roughly $70 million of lost opportunity in our specialties business. Third, and positively, we were able to offset some of the year's challenges with superb commercial execution throughout the business. Most notably, our Specialties team increased margins for the fifth consecutive year. Strategically, 2023 was a foundational year which positions us well to achieve our ultimate strategic objectives.
Our Specialties business has solidified itself as a commercial leader in the space. Our unique integrated asset base, customer focus, and commercial and technical know-how are lasting advantages. Last year, we built on this by successfully integrating our Performance Brands and Specialty Products and Solutions segments into a single Specialties group. And we see additional opportunity here as we capture value from our agility, optionality and breadth of offering throughout the entire Specialty Products value chain. Further, in a few months, we'll be entering year three of our operational improvement plan in Shreveport. The events of 2023 highlighted some of our infrastructure weaknesses, both within and outside the plant. And while we'll never be immune to everything, the improvements made thus far have been meaningful and we're tackling reliability at Shreveport head on.
Naturally, the most notable item of this past year was our Montana/Renewables business came to fruition. The first year wasn't without setbacks as often as the case for projects as ambitious as this one, and ultimately, we stood up and de-risked the key elements of the venture. We demonstrated our ability to source competitively advantaged feed. We de-risked our technology and we showed our commercial agility and ability to capitalize on our location as half of our product ended up in the rapidly growing Canadian market. Last, in May, we launched North America's largest sustainable aviation fuel business, establishing Montana/Renewables as a first mover in an area that is so promising that it has since become a strategic focal point of many in our space.
The emergence of a rapidly growing SaaS market is extremely exciting for industry, and we're thrilled to be positioned at the tip of the spear along with our partners at Shell. We compare the sustainable aviation fuel transition today to the one we saw in renewable diesel nearly a decade ago. Like renewable diesel, SAF is the only drop in fuel that's available today. Other alternatives are interesting, but they require decades of research and development and huge investment to completely overhaul the airline industry's infrastructure, which we view as unlikely anytime soon. It's now common knowledge that our industry is producing less than 1% of the SAF that would be required in six years to meet the government's 3 billion gallon milestone in the grand SAF challenge.
And this 2030 milestone is only 9% of the ultimate 35 billion gallon plan laid out by federal agencies. Naturally, more capacity and additional technologies are going to be required. There are a few ways to make SAF, the most economic of which by far is the HEFA process which Montana/Renewables currently uses. That being said, the growth prospects for this industry are so large that all technologies are likely to be required, most of which are meaningfully more expensive than the HEFA process. Further, we're seeing demand for SAF change quickly. SAF mandates exist in the U.K., individual airlines have announced targets. We see airports setting SAF requirements, and just this week, Singapore announced the requirement for all departing planes to use SAF.
This rapidly growing demand is exactly why some of the largest players in the industry are investing heavily in this space. And it's why Montana/Renewables made the change in our original project nearly two years ago to add SAF capability. Throughout 2023, we progressed plans to build on Montana/Renewables' first mover advantage via our MaxSAF project. We've progressed engineering, interviewed construction partners, and we eagerly await feedback from the DOE on final funding to move forward. The DOE process continues to move well, in fact, accelerate, and we're hopeful to receive confirmatory feedback in a not-too-distant future that will allow us to officially launch the next phase of MaxSAF, which we expect will make us one of the largest SAF facilities in the world.
A growth in SAF demand also should be expected to change the landscape of renewable diesel. As we evaluate MaxSAF, we ask, if these margins exist and the addressable market is so large, why wouldn't every renewable diesel player convert? Naturally, our industry is full of sharp competitors who are considering just that. What we quickly find is despite all of the growth we've seen in renewable diesel, the entire US RD capacity just reached 3 billion gallons this year. In other words, it would take all of the RD to meet the 2030 Grand Theft Challenge. Of course, we're also seeing demand grow in renewable diesel, with Canada being early in their program and New Mexico reminding us that individual states will continue to implement new low-carbon fuel standards.
Further, all the renewable diesel that's being produced today is needed to remain in compliance with existing low-carbon fuel requirements. And as RD is converted to SAF, the obligated RD volume demand will necessitate the need for market to incentivize the production of renewable diesel. As this dynamic plays out, we'll take our traditional approach at Montana/Renewables of building an optionality, remaining nimble commercially, and leveraging our relative location and cost advantage in any scenario. This includes the ability to produce either renewable diesel or SAF. It also includes utilizing our advantage logistics cost structure to weather any industry volatility. Recently, we've seen market renewable diesel margins hit a trough. While short-term volatility exists in any business, we believe the historic structure of the market will continue to hold in time.
When the price of RINs, diesel and LCFS, all independent variables are reduced at the same time, the needed equal and opposite impact of feed price is dramatic. Suppliers try to mitigate a sharp decline by all means available to them, including reducing crush rates and building inventory, which can delay the reaction in feed prices. We would expect the impact of price lag on industry margins to be larger than normal in this scenario, and we're seeing that today. Of course, over time, biodiesel would have a difficult time competing at low industry margins, inventories in the supply chain should build, and one of the variables in the proxy equation has to react. And just in the past couple of weeks, we've seen the vegetable oil margin indicators start to turn.
We've also seen tallow, a waste product adjust rapidly and strong tallow margins continue to exist. In a normal environment, we'd expect the relatively short length of Montana/Renewables supply chain to be a differentiated advantage in times like this. But during this current trough, we've been full of inventory that was originally contracted for the second half of 2023 before the facility was cut back. This impacts us as the feed is higher priced, but it also limits our flexibility to react to short-term changes in the relative feed dynamics, which otherwise would be a core advantage. We started processing our old feed when we restarted in December, and expect to be through it in the first quarter. To put the impact of these items in perspective, the difference between Q3 average CBOT price levels in December was over a $1.20 per gallon.
Further, over the past couple of months, margins have remained over a dollar a gallon higher for tallow than vegetable oils. With normal inventory levels, we'd be switching to tallow and capturing this advantage, which would deliver margins reasonably in line with previously stated expectations. With full inventory, we are processing what we have. As the energy transition continues to evolve, we believe Calumet is positioned for success. As discussed today, we're well positioned in Montana for both renewable diesel and SAF growth, and our Specialties business can flex fuel production up or down as the market dictates. Further, our Specialties business is positioned to benefit from many of the megatrends that we see in today's market as we produce high-performing products going into mining, power transmission, food and pharma, and clean water, including a growing list of environmentally friendly materials such as our biodegradable lubricants servicing the global shipping industry.
We believe this breadth and flexibility positions us well as our industry continues to evolve. Our core belief continues to be that the energy transition will continue to occur but will take longer than most think. It's complex, it requires investment, and it will ebb and flow as businesses and society experiment and adapt. And at Calumet, we'll continue to focus on positioning ourselves to remain competitively advantaged in all scenarios. With that, I'll hand the call to David to review our quarterly financials. David?
David Lunin: Thanks, Todd. I'll start with our announcement this morning that we entered into a note purchase agreement to issue $200 million aggregate principal amount of 9.25% Senior Secured First Lien Notes due 2029. The use of proceeds will be to call and retire our existing 2024 secured notes and we will also call, along with available will, cash $50 million of our 11% 2025 notes. This transaction allows us to remove a near-term maturity, reduce overall indebtedness and reduce our annual interest expense. Given the potential Montana/Renewables monetization was pushed back half a year due to last year's steam drum replacement and the need to demonstrate a few quarters of strong operations in order to capture proper value from a potential monetization, we want to ensure that we had ample flexibility and time to kind of access the market properly.
This financing provides that flexibility by adding a small quantum of debt that wouldn't otherwise trade well is cheaper than a new unsecured issuance and will also be callable in a year, as well as leaving enough debt outstanding without call protection to provide an efficient path for further deleveraging later in the year. Before I review the segments, I'd also like to comment on the 8-K we released this morning and the associated restatement of 2022 and 2023 quarters. The restatement relates to our accounting for the preferred equity investment in MRL. We had been allocating net losses in the business in a proportion to the total ownership for the non-controlling interest. We've determined that these losses should not have been allocated to the preferred equity investment, thus, $6.7 million in 2022 and $18.5 million in 2023 of losses that were previously allocated to non-controlling interest will now be allocated to Calumet's limited partners.
To be clear, this has no impact on the net income, adjusted EBITDA or cash flow of the business, and only it relates to the allocation of net losses. This restatement also has no impact on the timing of our conversion, and more details can be found in the 8-K. Turning to Slide 8. Our SPS business generated $75.6 million of adjusted EBITDA during the quarter and $251.2 million for the full year 2023. This was a very strong quarter for our SPS business. The plants operated well and we had one of the best quarters as our commercial team continued to execute our customer-focused strategy. We saw unit margins increase with specialties during the quarter while fuel and asphalt margins decreased seasonally. We continue to see an above-mid-cycle margin environment in this business.
Moving to Slide 10. Our Performance Brands business generated $6.1 million of adjusted EBITDA, bringing our full-year adjusted EBITDA to $47.9 million for the Performance Brands segment. We typically see some seasonality in the business as some of our customers, especially the big box retailers, manage year-end inventory levels and that was no different this quarter. Industrial demand outpaced consumer demand which weakened and we expect that trend likely to continue early in 2024. Our team continues to do a nice job capturing value from the optionality and integration of our various business across SPS and the PB segment. As you can see turning to Slide 11, we have delivered five consecutive years of growth in our Specialties business. As a reminder, this is a combination of the Specialty Products within our SPS segment and our Performance Brands segment.
The team has done a really good job these last several years, capitalizing on an improved margin environment while also making lasting step-change improvements within the business. You can see in the lower right-hand chart a steadily increasing volume of intermediates between our SPS and PB business as the team continues to drive an integrated business model which we believe provides a unique advantage across our platform. Moving to our Montana businesses, you can see on Slide 13 that we recorded a loss of $25.8 million of adjusted EBITDA in the quarter and generated $30.2 million of adjusted EBITDA for the full year. While operations performed well at our legacy asphalt plant during the quarter, the winter is always difficult in this business as roads aren't being paved and local gasoline demand dries up.
For our conventional asphalt and niche fuels plant, its first year post-MRL was a good one. Going in we expected the 50% smaller footprint would deliver roughly 60% of the specialty asphalt operations post MRL, and then we executed on that in 2023. At Montana/Renewables, Todd spent time earlier on the previously disclosed closed steam drum outage and replacement, and I will briefly touch on that again as that was the story in Q4 and the second half of 2023. The repair work was completed during the fourth quarter along with the turnaround and catalyst change that we pulled forward into the period. The renewable diesel plant was completely shut down for the month of November and came back online at the beginning of December, and has been operating well since.
You can see in our renewables productions volumes the impact of the reduced rates and shutdown had on MRL's production. Now that the facility is back up and operating at close to full capacity, we are drawing the rest of our excess inventory that was built during the unplanned outage and shutdown. We should be through that inventory in the next quarter, at which point we will resume our normal feedstock purchase program. We are glad to have the replacement work on the steam drum behind us. And while last year, while that had the impact of pushing back about six months, our strategy is unchanged as we continue to pursue the DOE loan, finalize our expansion for MaxSAF, and prepare for potential monetization opportunities. Lastly, before I turn it back to Todd to wrap up prepared remarks, I'll provide a few guidance items for this year.
We expect the Corporate segment to incur approximately $80 million of adjusted EBITDA cost in 2024, which is in line with previous year's and our previously outlined annual expectations. And from a cash flow perspective, excluding MRL, we anticipate $100 million to $120 million of annual CapEx. On Montana/Renewables, we expect $15 million to $30 million of sustaining CapEx this year, which includes the planned purchase of a long lead time catalyst that will be later in the year or next year. I'll now hand it back to Todd for closing comments before we move to Q&A.
Todd Borgmann: Thanks, David. Let's flip to the last slide and talk about the year ahead. 2024 is a pivotal year for the Company and its investors. This is the first year that both our specialties business and renewables business are fully operating together, and we're committed to unlocking value through a number of near-term catalysts. The first of these is demonstrating the top decile profitability potential of Montana/Renewables, which given the old feed and inventory overhang mentioned earlier, we expect to occur in the second quarter. Next is the DOE process, which we mentioned earlier. This goes hand in hand with the launch of MaxSAF, and we look forward to providing a more complete outlook on this project soon. Not only is MaxSAF a huge opportunity, but we also expect it to be another catalyst in a potential Montana/Renewables monetization, which continues to be an ultimate deleveraging step for the organization.
And last, we're on track for a mid-year conversion to a C-Corp. Up to now, investors who are otherwise interested in Calumet have not been able to invest in our Company due to common constraints that come with MLPs. Our institutional and passive investor base is tiny in size which results in our units being very thinly traded, which also is a deterrent to new investors. Since the conversion announcement late last year, we've spoken to many potential new shareholders about the Calumet opportunity. We believe our story is an interesting one for investors, and we're excited to provide the ability for them to partake in a new Calumet, one which has been transformed over the past few years, which has two competitively advantaged businesses and significant near-term catalysts that we believe present a meaningful value proposition.
Thank you. And with that, I'll turn the call back to the operator for questions. Operator?
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