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Edited Transcript of CLMT earnings conference call or presentation 9-Nov-18 2:00pm GMT

Q3 2018 Calumet Specialty Products Partners LP Earnings Call

Indianapolis Nov 21, 2018 (Thomson StreetEvents) -- Edited Transcript of Calumet Specialty Products Partners LP earnings conference call or presentation Friday, November 9, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David West Griffin

Calumet Specialty Products Partners, L.P. - Executive VP & CFO of Calumet GP, LLC

* Joseph Caminiti

* Timothy Go

Calumet Specialty Products Partners, L.P. - CEO of Calumet GP, LLC

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Conference Call Participants

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* Carly S. Davenport

Goldman Sachs Group Inc., Research Division - Business Analyst

* Jason Daniel Gabelman

Cowen and Company, LLC, Research Division - VP

* Michael Christopher Gyure

Janney Montgomery Scott LLC, Research Division - MD of Forensic Accounting and MLPs

* Roger David Read

Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Research Analyst

* Sean M. Sneeden

Guggenheim Securities, LLC, Research Division - MD & Trading Desk Credit Strategist

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Third Quarter 2018 Calumet Specialty Products Partners, L.P. Earnings Conference Call. (Operator Instructions) As a reminder, this conference may be recorded.

I would like to introduce your host for today's conference, Mr. Joe Caminiti with Investor Relations. Sir, please go ahead.

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Joseph Caminiti, [2]

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Thank you, Michelle. Good morning, everyone, and thank you for joining us today for our third quarter earnings results call. With us on today's call are Tim Go, CEO; West Griffin CFO; and Bruce Fleming, EVP of Strategy and Growth.

Before we proceed, allow me to remind everyone that during the course of this call, we may provide various forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Such statements are based on the beliefs of our management as well as assumptions made by them, and in each case, based on information currently available to them. Although our management believes that these expectations reflected in such forward-looking statements are reasonable, neither the partnership, its general partner nor our management can provide any assurances that the expectations will prove to be correct.

Please refer to the partnership's press release that was issued this morning as well as our latest filings with the Securities and Exchange Commission for a list of factors that may affect our actual results and could cause them to differ from our forward-looking statements made on this call.

And as a reminder, you may now download a PDF of the presentation slides that accompany the remarks made on today's conference call as indicated in the press release we issued earlier today. You may access these slides in the Investor Relations section of our website at calumetspecialty.com.

Also, a webcast replay of this call will be available on our site within a few hours, and you can contact Alpha IR Group for Investor Relations support at (312) 445-2870.

With that, please turn to Slide 3 as I pass the call to Tim Go. Tim?

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Timothy Go, Calumet Specialty Products Partners, L.P. - CEO of Calumet GP, LLC [3]

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Thanks, Joe. Good morning everyone, and thank you for joining us. As you can see in the chart on the bottom of Slide 3, our string of 7 quarters in a row with improved quarterly EBITDA growth year-over-year came to an end, primarily due to planned downtime across our facilities as we completed the heaviest portion of our turnaround activity for 2018. The planned downtime decreased our production and sales volume across both Specialty and Fuels, which negatively impacted EBITDA. Calumet generated total adjusted EBITDA of $54.3 million for the most recent quarter. Excluding special items such as the LCM adjustment, ERP expenses and realized hedging losses, our adjusted EBITDA results were $60 million compared to pro forma third quarter results 1 year ago of $63.7 million.

At the company level, our results benefited from widening crude differentials year-over-year but were more than offset by declining crack spreads and the impacts associated with the planned downtime.

Our Princeton Naphthenic Base Oil facility had roughly 40 days of maintenance on the lubes hydrofiner and our Great Falls fuels refinery had roughly 32 days of maintenance at the Cat unit and the Alky unit.

On a GAAP basis, our net loss from continuing operations was $16 million or $0.20 per common unit. It should be noted that this loss included noncash, unrealized net loss associated with the mark-to-market provision of our inventory financing agreement. Excluding this and the previously mentioned special items, net loss would have been $1.5 million or a net loss per common unit of $0.02.

Our self-help program continues to improve our overall business performance, and during the third quarter, we were able to capture an additional $10.8 million in EBITDA, which I will cover later in the call. Our self-help program has had a significant impact on our business since its inception, making meaningful contributions to our profitability in underpinning our larger transformation efforts. Now that we are near the end of this original scope, we are going to be launching our self-help phase 2 program beginning in 2019, details of which I will cover later on this call.

Slide 4 provides an adjusted EBITDA bridge compared to last year's third quarter. First, last year's third quarter results included roughly $32 million associated with previous asset divestitures. The biggest contributions to our results were the $10.7 million contribution from greater margins in our Specialty business due to improved mix effects, $7.2 million of reductions in our SG&A and the $10.8 million in benefit captured by our self-help program. The biggest headwinds were lower volumes associated with our downtimes during the quarter that resulted from turnaround activity in both our Specialty and Fuel segments. Together, the lower year-over-year volumes accounted for $14.6 million of lost profit.

Additionally, there was a $14.6-million unfavorable swing in our lower of cost to market inventory adjustment. This effectively tells the story of our quarter as the improvements to margins in our Specialty business in the face of a rising crude price environment and the benefits captured by our self-help program were more than offset from LCM and the lower volumes from the heavy maintenance.

With that, I'll turn the call over to West.

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David West Griffin, Calumet Specialty Products Partners, L.P. - Executive VP & CFO of Calumet GP, LLC [4]

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Thanks, Tim. Slide 5 shows that our Specialty products adjusted EBITDA of $37 million was down versus last year's result of $43 million, and down sequentially compared to $53.7 million in our seasonally stronger second quarter. As Tim mentioned, our Specialty adjusted EBITDA results were negatively impacted by lower volumes due to planned downtime at the Princeton lube hydrofiner. Additionally, the paraffinic base oil market was weaker than normal as market oversupply drove prices lower in the quarter. This oversupply resulted in a temporary price decrease towards the end of the quarter, but we've since raised prices.

Gross profit per barrel of $34.17 increased roughly 11% compared to $30.81 in the year-ago period but was down sequentially from $37.12 in the second quarter. This year-over-year increase was primarily a function of product mix as our higher-margin Finished Lubricants business continues to be a solid contributor to our segment performance, and we had lower volumes of our more price and quality-driven products given the aforementioned turnaround.

Quarter-over-quarter, the headwinds of higher crude prices, the higher spread of LLS to WTI of $1.30 per barrel combined with the oversupply in the paraffinic lubricants market squeezed margins.

Our adjusted EBITDA margin of 10.6% was down compared to 14.1% in the year-ago period and 14% in the sequential quarter as the decreased volumes more than offset the increases to gross profit, negatively impacting our margin capture for the quarter. We continued to adjust pricing to compensate for the higher raw material costs.

Slide 6 conceptualizes the underlying components of our Specialty segment results compared to the prior year. While trailing 12-month adjusted EBITDA of $159.2 million is lower than the $183.7 million last year. This is largely because of the lower volumes we've had due to planned downtime or turnarounds in maintenance activity at our specialties facilities in the first and third quarters as well as the unplanned event we had at Shreveport in the second quarter. We've always said that 2018 would be a heavy turnaround year, and this activity accounted for nearly $48 million in lost EBITDA over the last 12 months.

You'll also see there are strategic actions taken to improve our margins in specialty products mix, combined with the benefits from our self-help program, have contributed an additional $32.7 million in EBITDA compared to the prior year period, more than offsetting the continued negative impact of steadily rising crude prices.

Our core specialty business remains solid. And we believe the actions we've taken to strengthen the business over the past few years will be demonstrably more visible once we get through the heaviest portion of our turnaround cycle. We continued to view the Specialties business as roughly a $200-million plus business disposition for long-term growth.

As you see on Slide 7, our trailing 12-month adjusted EBITDA margin is fairly stable and predictable over the longer term despite quarterly fluctuations that are primarily driven by the direction and magnitude of crude price movements in the given period. in particular, the price of crude has been on a steady increase since the third quarter of 2017, and you can see the downward pressure it has placed on our overall Specialty margins as our price adjustments are continuing in catch-up mode. Given our self-help commitment and proactive approach to pricing as crude prices start to stabilize and even decline, we expect our margin profile will climb back to the long-term sustainable range of 14% to 15%.

Moving to our Fuels segment performance on Slide 8. You see that our business produced $17.5 million of adjusted EBITDA, down slightly compared to pro forma results of $20.7 million in the year-ago period. The lower results were driven by turnaround activity at Great Falls as well as the year-over-year decline in crack spreads, which were boosted last year due to the effect of hurricane Harvey.

Our gross profit per barrel of $4.47 was down 13.7% compared to last year's results of $5.18 and down sequentially compared to $5.09 in the second quarter this year. While widening crude differentials positively impacted our Fuels margins, they were more than offset by a decline in our benchmark Gulf Coast 2-1-1 crack spread, which decreased 10.2% versus the year-ago period. This reduced crack spread was somewhat mitigated by more favorable crude differentials as the average for the WCS/WTI in Midland-WTI differentials widened meaningfully relative to last year.

During the quarter, we increased our use of Midland priced crudes at Shreveport, and to a lesser extent, at San Antonio, and are currently processing roughly 19,000 barrels per day, up from 10,500 barrels per day in the second quarter.

On Slide 9, we detail our capital spending, which has totaled $55.1 million year-to-date. Based upon our projections for the fourth quarter, we're lowering our full year 2018 capital spending guidance to between $70 million to $80 million, down from the originally expected range of $80 million to $90 million. The lower capital guidance shows the efficiency of our new front-end loaded process for capital stewardship. We have not cut projects, but rather improved execution. Year-to-date, roughly 70% of our capital outlays have related to turnaround maintenance in EHS or environmental health and safety efforts. The remaining 30% has been focused on growth. We will remain disciplined in how we allocate and spend our available capital, and continue to actively develop growth opportunities that provide quick paybacks as we continue to focus on reducing our debt.

On Slide 10, we've provided a snapshot of the active hedges we have at the end of the quarter. Similar to last quarter, we have diesel WCS hedges in place as well as hedges on our Midland WTI. As always, the purpose of our hedging activity is to capture attractive market differentials while also reducing the overall volatility to our cash flows within our Fuels business. We will continue to evaluate our hedging activity as the year progresses and commodity prices fluctuate.

Before turning the call back to Tim for some closing remarks, I will speak briefly on our credit and balance sheet metrics, which we highlight on Slide 11. As you know, our primary financial priority remains reducing our leverage, primarily through our self-help program. While our leverage on an as-reported basis printed higher in the quarter, this was largely a function of EBITDA generated from previously divested assets rolling out of our numbers. On a true pro forma basis, our leverage has been on a secular downtrend since the third quarter of 2017 but ticked mostly up this quarter due to the large amount of turnaround activity versus last year. We've made significant and almost continuous progress in our -- reducing our leverage through our self-help program. We remain firmly committed to reducing our leverage to more sustainable long-term levels, and we expect to see our leverage metrics show continued improvement in the coming quarters.

Our liquidity continues to show improvement as the liquidity available to the partnership increased by $24 million versus the second quarter. Additionally, we recently received a number of positive developments regarding our corporate credit ratings, with S&P upgrading us to single B minus, Fitch Ratings initiating with a rating of B minus, and Moody is removing Calumet from negative outlook.

With that, I will turn the call back to Tim for our final remarks.

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Timothy Go, Calumet Specialty Products Partners, L.P. - CEO of Calumet GP, LLC [5]

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Slide 12 outlines the results of our self-help program since its inception nearly 3 years ago. As you can see, this quarter's contributions of nearly $11 million brings the program to-date total to a $170 million versus the original stated goal of $150 million to $200 million. The third quarter's benefits were driven by 3 primary initiatives: First, over $3 million of new procurement savings from consolidating several of our individual purchasing agreements from our 3 Louisiana refineries, Shreveport, Princeton and Cotton Valley, into 1 larger scale contract; second, the continued benefits of our isomerate project at San Antonio and the naphtha project at Great Falls that's starting up earlier this year; and third, continued contributions from the Finished Lubricants expansion projects.

Given the success and the positive contributions this programs has had to our profitability, we are launching phase 2 of this multiyear self-help program outlined on Slide 13. We are setting a goal to deliver an additional $100 million in EBITDA over the next 3 years beginning in first quarter '19. This program has been built bottoms-up as each of our newly created business unit presented their strategic plans to enhance profitability to our board. There are numerous initiatives that support this goal, but I'll highlight a few of the biggest contributors. For example, transportation and supply chain efficiencies. Our new ERP system is helping us identify new opportunities for both transportation efficiencies as well as supply chain opportunities; debottleneck projects at both Shreveport and Princeton, which should improve reliability and utilization; improvements in our product mix and the Finished Lubricant as we rationalize lower-margin SKUs; new product development in Specialty oils and waxes, including the introduction of our new Versastique gel products and the commercialization of our Biosynthetic Technologies renewable estolides; increased material margin and solvents supported by raw material flexibility projects; Fuels upgrade projects focused on upgrading intermediate feedstocks into higher-margin finished products, such as naphtha and gas oils at Great Falls, San Antonio and Shreveport; and reduced SG&A through improved capabilities enabled by our new ERP system.

Our leaders and their teams worked very hard building the foundation of phase 2 of this program, and we remain confident in our ability to deliver on our new $100 million profitability goal by year-end 2021.

Let's conclude by talking through our fourth quarter outlook on Slide 14. The fourth quarter tends to be our lowest volumes from a seasonality perspective and we expect those trends to remain consistent. That said, within our Specialties business, we expect improvement as we are through our Princeton turnaround, which will be offset to a minor extent by 10 days of planned maintenance at Shreveport. Combined with the pricing adjustments made after the quarter, we anticipate that we should have a solid fourth quarter for Specialty, recognizing that it is usually our weakest quarter in the year.

Our Fuels business should see typical seasonal patterns, but we remain focused on running more cost advantage crude through our 3 facilities, including higher amounts of crude tied to both WCS and Midland-TI.

Further, as we close out the final quarter of our initial self-help program, we expect to continue capturing additional EBITDA and structural cost savings and margin improvement.

Lastly, there's been a lot of talk about our new regulations, and specifically IMO 2020, and we believe we are well positioned to benefit. The regulation is expected to increase the demand for low sulfur diesel and vacuum gas oil as sulfur limits are reduced from Marine shipping. We will benefit directly from this. In our overall portfolio, roughly half of our products are directly or indirectly tied to diesel and middle distillates. Our refinery diesel yields are above the U.S. averages, the solvent market is tied to ULSD and the base oils market is tied to the vacuum gas oil market.

On the feedstock side, IMO 2020 should be beneficial for our Great Falls refinery as Canadian heavy sour crude is discounted for IMO.

Finally, our asphalt in Great Falls is tied to the same discounted WCS price that will be impacted by the IMO and is of very high-quality that will be in high demand post-IMO. In addition, our asphalt in Princeton is a specialty asphalt, which does not compete with typical road asphalt applications. So as you can see, our Great Falls refinery will be especially well positioned for IMO 2020, running a 100% WCS-based crudes, making high yields of ULSD and producing high-quality asphalt products. In fact, the diesel crack for Great Falls in the futures market is well over $50 per barrel.

With that, I would like to turn the call over to the operator and open the line to our analysts for Q&A. Michelle?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Roger Read with Wells Fargo.

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Roger David Read, Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Research Analyst [2]

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Just a ton of things to hit on here, but I'll try to limit myself to the 2. If you think about the self-help program, Tim, I mean, obviously tremendous delivery here over the last couple of years. You now have the new ERP program, which I would imagine makes it easier to sort of target this second phase of $100 million. But I was curious if you go back a couple of years and think about the $170 million, I already know the original target was less than that, but what did -- what you achieved come out of what you expected? Or were there obvious misses and where you exceeded the goals that surprised you or disappointed you along the way? I'm just trying to kind of get a feel for what the accomplishment was and where we should think about the next $100 million may be coming from?

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Timothy Go, Calumet Specialty Products Partners, L.P. - CEO of Calumet GP, LLC [3]

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Yes, Roger, it's a good question. When we originally rolled out phase 1 of this self-help program, we knew there was some low-hanging fruit, in particular around some of our cost structures. And I think you've seen over the past 3 years, for example, our SG&A costs have dropped significantly since 2016. We also knew that there were opportunities to manage our plants as more of a consolidated entity, a lot through procurement and logistics savings than we had in the past as more individual plants. I think we captured what we expected along those cost savings. I think there's still some opportunity in utilization and reliability that I think we captured some in the first phase, but our business teams have really focused on for this next phase. That becomes not just a plant-focused effort, but a plant and sales combination that we're going to be really focusing on for this next phase. It's making the right products that the customers are looking for and are willing to pay a premium for and trying to integrate and do a better job of rationalizing lower margin products and SKUs, as I mentioned for the finished lubes, and focusing more on the higher-margin products that we can fill out our spare capacity in our plants. There is a lot more of that coming in phase 2 of the self-help program. The ERP system as you mentioned, it was -- this last year, and it's been officially a year now that we've been working our new ERP system, has certainly been a rough transition as West has mentioned before. But we're at that point now where we're really starting to see the benefits of having better insight into the data, understanding where our costs are, understanding where our products are going and getting into that next layer of analysis and that next layer of detail to know how to optimize our portfolio. So that's more of where we're going to be focused on here for phase 2, Roger.

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Roger David Read, Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Research Analyst [4]

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All right. And shifting gears, West, you mentioned the improvement in the balance sheet. If we look -- I'd say year-to-date, a significant portion of cash improvement has been on the working capital side. So I guess, first part is that: a, sustainable change or do we need to consider that, that maybe reverses against us? And then the second part, what should we be looking for here in terms of where you want to go with the next phase of balance sheet improvement given that you've got a couple of different pieces of debt due in coming years, what should we look for as a maybe a preamble on that front?

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Timothy Go, Calumet Specialty Products Partners, L.P. - CEO of Calumet GP, LLC [5]

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Yes. So let me take it sequentially for you. In terms of the business, you're right in that. So the first portion of this year, we have had some build in working capital, especially in the third quarter, we had some inventory builds, roughly 400,000 barrels, a little over that build in inventory during the third quarter. And that's largely related to the turnaround activity. Our objective is to get those builds down to a lower level, and that's going to release a lot of cash from the system as we do that. The way I kind of look at our business is, I look at kind of what the EBITDA is associated with the business and then what our cash uses are. And our cash uses right now are roughly $200-ish million a year, about $120 million worth of interest expense, plus a further roughly $80 million worth of CapEx. So total of $200 million. So you kind of take a look at kind of whatever you -- you anticipate for us to generate in terms of our EBITDA to track roughly $200 million and that gets you how much positive cash flow we have. We've been generating positive cash flow based upon that metric, give or take the ebbs and flows in terms of working capital. As we move forward, one of the things that I would, and people sometimes get a little confused about this, our mix of our business has changed with sales earlier. And so historically, we've had fairly significant inventory builds during the wintertime for the asphalt season. We've reconfigured our business and sold Superior. And so our inventory build is going to be fairly modest this year. We may have roughly 100,000 barrel to build in our inventory associated with asphalt, but that should be about it. So I think the way to sort of think about the business is much more stable sort of platform that we've got right now, now that after we sold Superior in terms of our changes and fluctuations in the inventory over the course of the year. So that sort of brings me to your second question, which is kind of what's on the forecast for -- on the capital market side and looking at refinancing potentially some of our 2021 notes. You're correct, we've got roughly $900 million of notes due in 2021. So we've got a fair bit of time between now and when those notes mature, about 2.5 years or so. So we do have more and ample time to get those refinanced. Ideally, we'd like to do that in the bond market in 1 or 2 bites at the apple. The high-yield market as we all know has backed up just a little bit over the last month. And so we're continuing to monitor the market closely and look for opportunities to tap that market. But we're not in any hurry to do anything until it's -- until the timing appears to be about right.

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Roger David Read, Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Research Analyst [6]

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I appreciate that. I noticed the bonds had come off a little bit here recently. So yes, maybe open market purchases remains an option at least?

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David West Griffin, Calumet Specialty Products Partners, L.P. - Executive VP & CFO of Calumet GP, LLC [7]

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It could be. But right now, I think where we are is -- we are focused on being cash flow positive. We are focused on reducing our debt. We'll look at anything and everything as we've said in the past including potentially open market purchases. But at this stage, there's no indication right now that we'll do anything as far as that's concerned.

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Operator [8]

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And our next question comes from the line of Sean Sneeden with Guggenheim.

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Sean M. Sneeden, Guggenheim Securities, LLC, Research Division - MD & Trading Desk Credit Strategist [9]

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Tim, from the big picture perspective, could you -- I'm sure you've seen, but your chemical valuations have come in of late I guess in part due to some fears around the slowdown in '19. And I guess, when you think about kind of your internal planning and your kind of core businesses, how are you guys kind of thinking about -- how you kind of start leaning into '19? And how does the -- kind of some of the market moves and some of your peers impact some of that thinking?

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Timothy Go, Calumet Specialty Products Partners, L.P. - CEO of Calumet GP, LLC [10]

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Yes, Sean. I think there's, as you see more volatility in the stock market these days, there is more concern around GDP and you see interest rates rising and what's that going to do the overall cycle. We watch that carefully, a lot of our Specialty products are tied to GDP. And so we, just like some of the other chemical companies, we do watch that. I think what gives us some offsetting things to think about I guess, is really just the IMO 2020 that we talked about a little bit in our prepared remarks. As we see that coming in 2019 and 2020, we think that's going to provide any offsets or some offsets to maybe any type of macroeconomic-type concerns. As we talked about our Fuels business, we'll certainly benefit from the IMO impacts, Great Falls in particular. But even our Specialties business, with solvents really tied to the ULSD market, with our base oils tied to really low sulfur vacuum gas oil market, we think that will provide us some additional tailwinds as even the economy starts to slow down. So that's kind of how we think about it, Sean.

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Sean M. Sneeden, Guggenheim Securities, LLC, Research Division - MD & Trading Desk Credit Strategist [11]

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Great. That's helpful. I guess, when you guys think about emphasizing deleveraging, I know the goal is ultimately kind of get below that 4x number that had previously been the target. How are you guys kind of thinking about the process? Is it really an organic process of trying to and with the combination of your self-help initiatives? Or do you think there are other mechanisms that you can use in order to kind of achieve that goal?

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David West Griffin, Calumet Specialty Products Partners, L.P. - Executive VP & CFO of Calumet GP, LLC [12]

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Yes. So look, we look at anything and everything to -- as far as possible options to delever. But our first and foremost methodology for deleveraging is our self-help program. We've generated quarter-over-quarter improvements in terms of our self-help program. This has been the first, while we had some incremental self-help this quarter, we did have a dip on a pro forma basis on the quarter-over-quarter EBITDA, absent the sort of the onetime effects and everything, it would have been an increase. So we feel pretty good about that as an overall process. It requires very little capital and it's generated tremendous results. And so it's working for us. Now that said, we do look at the possibility of other things, including asset dispositions and things of that nature from time to time, but that is not our primary focus. Our primary focus is our self-help program.

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Sean M. Sneeden, Guggenheim Securities, LLC, Research Division - MD & Trading Desk Credit Strategist [13]

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Got it. That's helpful. And then maybe just one last one. But you highlighted some free cash flow generation. I guess, one, should we anticipate with kind of some inventory destocking -- that working capital is a source of cash in Q4? And then, I guess, thinking about '19, is the plan there to kind of run somewhat of a minimal kind of capital program, such that you generate decent amount of free cash flow?

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Timothy Go, Calumet Specialty Products Partners, L.P. - CEO of Calumet GP, LLC [14]

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Yes, Sean, that's about right. I mean, the inventory increase that we saw here in the third quarter was primarily focused around our turnarounds. Our efforts continue to lower, overall lower our working capital targets, and we expect to get to the targets we want at the end of the year. So that means inventory should drop. In fact, we've already seen a drop here through October as we head towards the end of the year. And into next year as West mentioned, our typical asphalt build is no longer going to be part of our cycle, as not only did we divest Superior, but we divested several of the asphalt terminals that used to hold that asphalt material. So yes, you're going to continue to see us continue to optimize our working capital, which generally means lower.

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Operator [15]

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And our next question comes from the line of Jason Gabelman with Cowen.

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Jason Daniel Gabelman, Cowen and Company, LLC, Research Division - VP [16]

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If I could ask a question, just you were talking about the benefits of IMO 2020 and the active maintenance this year. Are you going to have to have another year of active maintenance next year in order to get your assets appropriately positioned to take advantage of IMO 2020?

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Timothy Go, Calumet Specialty Products Partners, L.P. - CEO of Calumet GP, LLC [17]

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Yes. Jason, it's a good question. We've always talked about 2018 as being our peak turnaround year. We also talked about trying to spread out these turnarounds so that it didn't quite hit us as hard in 1 year as it did I think in the 4-year ago cycle. And so we've done that, we pulled a little bit of the turnarounds into 2017. We will have some turnarounds push into 2019 as you're referencing. But all in all, 2019 is not going to be as heavy as 2018. We've got one significant turnaround, I would say, at Shreveport that pretty much picks up the rest of the units that were done this year, that will be in the second half of next year. But other than that, everything should be fairly, fairly light for 2019. And then in 2020, we're still working through those turnaround plans, and we'll talk about that as we get closer to that.

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Jason Daniel Gabelman, Cowen and Company, LLC, Research Division - VP [18]

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So is that $80 million CapEx in order that you referenced, is that a good benchmark to think about for 2019 and then on a go-forward basis?

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Timothy Go, Calumet Specialty Products Partners, L.P. - CEO of Calumet GP, LLC [19]

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Yes. We haven't given guidance out yet. We will, next quarter for CapEx for next year. But what I would tell you is while the turnaround portion of the CapEx budget will be lower, the growth side of that CapEx budget will be a little bit higher. So we started out this year -- that $90 million to $100 million guidance. And that's probably the way I would think about it at this point, but we'll give guidance out next quarter.

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Jason Daniel Gabelman, Cowen and Company, LLC, Research Division - VP [20]

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All right. If I could just ask another question on corporate structure. I know you guys have been exploring whether the annual fee structure is correct for Calumet at this point in time. Can you just talk about where you're at on that journey?

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David West Griffin, Calumet Specialty Products Partners, L.P. - Executive VP & CFO of Calumet GP, LLC [21]

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Yes. No. We spend a lot of time looking at the capital structure, et cetera. The reality is right now, if you think about the possibility of converting to a C corp., we don't really have any strong driver. We have from the tax perspective, we spent a lot of time looking at what our tax situation is over the next few years. We don't see any tax issue for the next 2 to 3 years. So we think that we should be able to fully shelter all the income that the company generates through various tax planning structures. And then we're also not looking to raise any equity. So our primary focus is on our self-help program. And finally, the exact timing of considering anything ultimately, that's a GP decision because of it is an MLP. But in the meantime, the thing that management has in its control is we're focused on the self-help program is the quarter-over-quarter improvement. In terms of our self-help program, it's focusing on deleveraging the balance sheet and improving the cash flows. Those 2 things, reducing our leverage as well as improving our cash flows, works independent of the capital structure. What I'd say is, we have bigger fish to fry right now than focusing on the capital structure, and the bigger fish to fry is focusing on our cash flow and reducing our debt.

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Operator [22]

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And our next question comes from the line of Neil Mehta with Goldman Sachs.

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Carly S. Davenport, Goldman Sachs Group Inc., Research Division - Business Analyst [23]

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This is Carly on for Neil. First one was, you talked a lot about leverage and thanks for the update there. Could you maybe just refresh us on the latest views around what your views on a target leverage level is? And where you'd kind of consider taking another look at the distribution? And then, I guess, can you just talk about any other potential milestones that you need to see before taking a look at that?

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David West Griffin, Calumet Specialty Products Partners, L.P. - Executive VP & CFO of Calumet GP, LLC [24]

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Yes. That's kind of -- everyone always asks us those 2 hot list items. And what I'd say is, that the company's always had a leverage target in the past of 4x. We know that we want to get down to at least below 4x in terms of our leverage target. We haven't really reassessed it beyond that. If you look at where the company is on a pro forma basis, we're about, well, we just reported 6.2x in the pro forma basis, excluding the effects of Superior and Anchor, it will be a little bit, just a little bit above that. So we got a lot of wood to chop to get down to below 4x. I don't think that we'll consider anything with respect to any distributions until our leverage is taken care of. And the reason for that is fairly straight, simple -- fairly straightforward, and that is from an investor perspective, if you look at our peers and they all have substantially lower leverage, et cetera, and you actually get punished on the equity side to the extent that you have higher leverage. So we want to continue to drive our leverage down so that we're more comparable to our peers. And we think that we need to get down below at least 4x so that we're somewhat more comparable to our peer group.

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Carly S. Davenport, Goldman Sachs Group Inc., Research Division - Business Analyst [25]

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That's great. And then, I guess, the follow-up is on WCS. We've seen those differentials widen out substantially here during the fourth quarter. And you mentioned the turnaround at Great Falls during 3Q. So just wondering, if that asset is expected to be back up and running to call it 25,000 barrels a day of WCS for the entirety of the quarter? And then are there other any numbers that you could put around the sensitivity of changes in that WTI/WCS spread in terms of the EBITDA uplift?

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Timothy Go, Calumet Specialty Products Partners, L.P. - CEO of Calumet GP, LLC [26]

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Yes, this is Tim. The turnaround at Great Falls was completed in the third quarter. It has been running full out for the fourth quarter to date, and we anticipate it to continue to run full for the rest of the quarter. So -- and in fact through 2019, we expect Great Falls to continue to run at these levels for the duration of the year. As far as the diff goes in terms of WCS, I mean, we are obviously, very happy to see a strong differential between WCS and WTI. I don't think 40-plus differential is going to last throughout the -- throughout next year, but we do think it will last pretty much through the fourth quarter. And as the balances continue to change here in next year, we do think that diff will come in a little tighter. But there is not going to be a substantial, any pipeline takeaway capacity coming on in 2019 that's going to substantially change the balances. So we -- we still think Great Falls is well positioned as we talked about on a couple of different occasions earlier on the call. Great Falls is very well positioned with 25,000 barrels a day of discounted WCS priced crudes with a 50% or greater yield of USD, and again a high-quality asphalt that we believe we'll be able to get placed fairly easily. So we are bullish on our Great Falls asset.

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Operator [27]

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And our last question is going to come from the line of Mike Gyure with Janney.

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Michael Christopher Gyure, Janney Montgomery Scott LLC, Research Division - MD of Forensic Accounting and MLPs [28]

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Can you guys talk a little bit about, I guess, what's left to go with the ERP system? I think you had about $3 million of cost this quarter, maybe your expectation for the rest of the year and in 2019?

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David West Griffin, Calumet Specialty Products Partners, L.P. - Executive VP & CFO of Calumet GP, LLC [29]

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That's a great question. I think where we're getting to at this stage is we're almost at the level of sort of the steady-state spend associated with the ERP system. We spent roughly $18 million on our ERP system in 2017, and we're down to a much lower level of spend, I think on a go-forward basis, if we spent roughly $10 million or so a year on the ERP system, I think that's probably what you'll see us spend. The reality is once you put these systems in place, you find there's always opportunities to improve things, that's what we're finding certainly. And we're continuing to make improvements in terms of the overall system. And what you'll also find is that once you put it in place, there's always one more thing that you can do, that will make it work just even that much better. And we've already identified some things to do over the next, actually looking out the next couple of years associated with the ERP system. So I think we're down to a pretty reasonable level. It will probably drift down a little bit further from where it is, but not a whole lot more.

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Michael Christopher Gyure, Janney Montgomery Scott LLC, Research Division - MD of Forensic Accounting and MLPs [30]

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Okay. And lastly, look like, you may be had about $15 million, $17 million of proceeds from sale of businesses, affiliated assets. Is that mostly the leftover from Anchor? Or I guess, potentially what did you sell this quarter?

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David West Griffin, Calumet Specialty Products Partners, L.P. - Executive VP & CFO of Calumet GP, LLC [31]

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Yes. I think that's a little left over from Superior.

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Timothy Go, Calumet Specialty Products Partners, L.P. - CEO of Calumet GP, LLC [32]

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This is inventory settle up, true-up type of things. Mike, It all went to gain on sale for the actual Superior sale -- is in our adjusted EBITDA numbers.

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Operator [33]

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Thank you, and that does conclude our Q&A session for today's conference. And I would like to turn the conference back over to Mr. Tim Go for any further remarks.

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Timothy Go, Calumet Specialty Products Partners, L.P. - CEO of Calumet GP, LLC [34]

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Thanks, Michelle. I would like to take a moment to formally welcome Dan Sheets to Calumet as Dan was recently appointed to our Board of Directors. Prior to joining our board, Mr. Sheets spent more than 3 decades developing and leading global specialty chemicals in lubricant businesses where he gained experience, knowledge and insights that will be instrumental for Calumet's development and continued transition to become the premier specialty petroleum products company in the world.

Thank you again for joining us today and for your continued support. Have a great day.

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Operator [35]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.