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Edited Transcript of CLMT earnings conference call or presentation 7-Mar-19 2:00pm GMT

Q4 2018 Calumet Specialty Products Partners LP Earnings Call

Indianapolis Mar 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Calumet Specialty Products Partners LP earnings conference call or presentation Thursday, March 7, 2019 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

Alpha IR Group, LLC - Associate

* 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

* Gregg William Brody

BofA Merrill Lynch, Research Division - MD

* 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 Fourth Quarter 2018 Calumet Specialty Products Partners Conference Call. (Operator Instructions)

I would now like to hand the call over to Mr. Joseph Caminiti. Your line is open.

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Joseph Caminiti, Alpha IR Group, LLC - Associate [2]

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Thank you, Amanda. Good morning, everyone and thank you for joining us today for our fourth 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 the information currently available to them. Although our management believes that the 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.

As a reminder, you may now download a PDF presentation of slides that will be accompanying the remarks made on today's conference call as included in the press release we issued earlier today. You may access these slides in the Investor Relations section of our website at www.calumetspecialty.com. Also, a webcast replay of this call will also be available on our site within a few hours, and you can contact the Alpha IR Group for Investor Relations support at (312) 445-2870.

I'd also like to note that in an effort to present a more comparable discussion of our performance during the fourth quarter and fiscal year 2018, we will be referring to pro forma results for 2017, which remove the historical performance of the prior divestitures of the Superior Refinery and Anchor Drilling Fluids. Additionally, we had substantial noncash inventory adjustments for lower cost to market or LCM and last in/first out, or LIFO, inventory layers. As a result, we've taken a few extra steps in today's materials so that our investors have a clear picture of our operating performance.

With that, I'll pass the call to Tim. Tim?

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

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Good morning. I'm pleased to report that Calumet produced record financial performance in both the fourth quarter and for the full year 2018. This performance was driven by strong execution against our strategic plans. In terms of today's discussion, I'll provide a high-level overview on our partnership's year-end review and our results over the most recent period. Then I'll hand the call over to West to talk more specifically about the fourth quarter and 2018's financial performance. I'll end the call with a few closing comments before taking your questions.

Turning to Slide 3. I'll begin with the 2018 year in review. Key achievements are shown on the left in blue boxes and I will also talk about some challenges that we have overcome that are shown in the green boxes on the right.

We generated record annual profits, with adjusted EBITDA of $301 million and adjusted earnings per unit of $0.34. These figures exclude the noncash impact of LCM and LIFO and the record is on a pro forma basis, excluding the Superior and Anchor divestments.

Next is delivery of our strategic specialty products initiatives. In early 2018, we reorganized into 5 business units, 4 specialty and 1 fuels, each headed by a new General Manager. Each business unit owns its P&L and its 5-year strategic business plans to drive profitability improvements. In the fourth quarter, we began to see the early signs that this new accountability and each unit's strategic plans were starting to impact our financial performance. For example, our teams' improved focus helped us deliver double-digit annual growth in our TruFuel product as well as substantial growth across our industrial lubricant business.

As our internal plans started to show success, we also took a handful of proactive external steps as well, such as the Biosynthetic Technologies investment. This transaction was undertaken jointly with The Heritage Group and is an investment into our future. This renewable estolide technology is being developed at the Innovation Center.

I have discussed the Innovation Center with you previously as an example of the strong support that Calumet receives from our GP. Beyond driving research and development, the Innovation Center also provides practical technical service capabilities, including crude oil assays that allow us to identify better feedstocks for our specialty plants and product quality technology that allows us to optimize product value for our customers. The Innovation Center will help us drive growth in the specialties business for years to come.

Our third achievement in 2018 was the strong contribution we received from our remaining fuels assets, particularly at our Great Falls refinery. Great Falls set 3 operating records as we captured market benefits of wider crude differentials and stronger diesel markets throughout the year.

Fourth, we generated significant positive cash flow in 2018, including over $75 million cash flow from operations for the full year.

Lastly, leverage improvements are a direct result of this strong cash flow and operational performance. Our leverage ratio has been driven down to 4.9x EBITDA, excluding noncash inventory adjustments versus the 6.8x on a pro forma basis at the end of 2017. Additionally, we called in the $400 million face value secured notes earlier in the year and Standard & Poor's recognized this balance sheet progress by upgrading our credit rating to B- status.

These successes were achieved despite a number of challenges we faced across the year. 2018 represented a heavy downtime year, with turnarounds at 2 of our core specialty plants and at 1 of our fuels facilities. In addition to these turnarounds, we had a handful of unplanned events at our plants and third-party manufacturers, which negatively impacted our volumes and EBITDA capture, especially within our specialty products business. The most notable of these was last January's abnormally cold weather in Shreveport, which caused significant downtime.

Higher working inventories were built as planned to support that heavy turnaround activity, especially during the third quarter but have now returned to near normal levels. A weaker base oil market presented headwinds in the second half of the year, in particular, in our paraffinic category. This put additional pressure on base oil margins, which also weighed on our specialty results in 2018.

Lastly, ERP stabilization continued to be a top priority for us. We entered the year with a new ERP system that required stabilization and impacted the timeliness of reporting our financial results. As 2018 progressed, we were able to pivot to start to realize the benefits from the ERP system. We currently have more data and information at our disposal than the company has ever had. This is helping us better manage our business and drive further self-help initiatives. We have more work to do but we are beginning to see the benefits from our new ERP system.

On Slide 4, you will see our headline results for the fourth quarter as well as a chart that shows you the favorable trend that our profitability has taken over the last few years through our self-help program.

On a GAAP basis, Calumet produced quarterly net income of $18.1 million and net earnings per unit, or EPU, of $0.23. On an adjusted basis, which removes special items including the LCM and LIFO inventory adjustments, Calumet produced fourth quarter adjusted net income of $42.9 million and EPU of $0.55. These were meaningful improvements versus the prior year period as our business outperformed in what's typically a seasonally slower quarter.

Excluding the LCM and LIFO adjustments, our adjusted EBITDA results of $107 million set a pro forma record for fourth quarter reporting period. These results were substantially higher than the $14 million pro forma results we delivered in last year's fourth quarter. The primary drivers were stronger specialty products results that exceeded historical seasonal patterns for this segment and strong contribution from our fuel products segments, where our improved operations allowed us to capture prevailing market tailwinds.

Just as our fourth quarter results represented a company record, so did our full year 2018 results. Despite significant downtime in 2018, Calumet captured adjusted EBITDA of $301 million, excluding LCM and LIFO; and $264 million, including those adjustments, each of which was a company record on a pro forma basis.

With that, I will turn the call over to West to talk through the segment results. 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. On Slide 5, you'll see the adjusted EBITDA waterfall reconciling 2018's full year results to that of the prior year. Starting from a pro forma baseline of roughly $223 million, you'll see that strong margins from our fuels business, in conjunction with improving margins in our core specialty products segment, helped to drive strong growth. That margin growth overcame lower volumes in both segments, much of which was associated with turnarounds.

Additionally, self-help initiatives, such as the finished lubricants capacity expansions and consolidated procurement efforts across our group of Louisiana plants, were positive contributors to fourth quarter adjusted EBITDA. Lower SG&A, transportation and other items helped to partially offset the $28.8 million increase in operating costs, which were driven mainly by higher plant maintenance costs year-over-year. Taking all those together and deducting the high noncash LCM of roughly $55 million, we ended up with adjusted EBITDA of almost $264 million for fiscal 2018.

Adding back the LCM/LIFO adjustments for the year, total adjusted EBITDA, excluding noncash LCM/LIFO charges was again, just over $300 million. Given the noise that LCM/LIFO has on our financials, we're contemplating a potential change in our financial reporting to move towards FIFO and a modification of our profitability measure. While we are still investigating these changes, we contemplate that this could occur sometime in 2019. Concurrent with any change, we will provide historical financials to make it easier to understand the change.

Turning to Slide 6, we've raised the fourth quarter pro forma results from 2017 to this year's period. Similar to the full year performance, improving fuels and specialty margins, combined with self-help benefits largely grow performance that exceeded the negative noncash mark-to-market on our inventory values. Adjusting for the noncash LCM/LIFO changes during the quarter, 4Q '18 adjusted EBITDA was $107 million.

On Slide 7, we detailed the results from our core specialty products segment, which after excluding noncash inventory adjustments, generated fourth quarter adjusted EBITDA of $44.1 million, which increased year-over-year and quarter-over-quarter. For comparison purposes, inclusive of the net LCM/LIFO effects, fourth quarter 2018 adjusted EBITDA of $31.8 million exceeded the $30.8 million achieved in the year prior period and was the company's fourth -- or highest fourth quarter result since 2014.

Positive results were driven by stronger margins on specialty solvents products and higher base oil sales volumes, despite ongoing weakness in the paraffinic base oil market. These were partially offset by a $3 million inventory write-down taken in the quarter, as we began eliminating certain low margin SKUs with our finished lubes category. Segment gross profit per barrel of $33.86 was also up year-over-year after adjusting for LCM/LIFO.

The fourth quarter witnessed a fairly substantial decline in crude oil, which led to a lower raw material cost in our specialties segment. The segment's adjusted EBITDA margin came in at 9.7%, however, when adjusted for LCM/LIFO, the adjusted EBITDA margin was actually 13.4%, which was a substantial improvement year-over-year despite the fact that typical seasonal effects tend to adversely impact specialty margins in the fourth quarter.

On Slide 8, you get a better sense for that specialty products adjusted EBITDA margin over time. As you can see, the first 3 quarters of 2018 were heavily impacted by both planned and unplanned downtime across our specialty plants. This included major turnarounds at Shreveport as well as our Princeton facility. However, we began seeing margins tick up overall in the fourth quarter. And we've shown that on the chart as 13.4%, excluding LCM/LIFO.

We believe that our previous quarters impacted by heavy downtime roll-off, in addition to exiting lower margin businesses, our consolidated margin performance will be resilient and should improve towards the 14% to 15% margins that we typically see across our core specialty business.

Slide 9 outlines the pushes and pulls to our adjusted EBITDA results for the specialty business across the year. Consistent with what we saw in the first 3 quarters of 2018, the single most significant driver of our lower year-over-year adjusted EBITDA was the lost volume associated with our turnarounds as we took our specialty assets down for maintenance. Those lost volumes represented a headwind of over $37 million relative to the prior year. This, combined with the $14.3 million of unfavorable LCM adjustments, more than offset the nearly $29 million improvement to adjusted EBITDA gained through both self-help efforts and improvements to our margins and sales mix.

While we will always have some degree of maintenance across our facilities, the sizable headwind exhibited in 2018 should see improvement in the coming year as we have now completed the heaviest portion of our turnaround cycle affecting our specialties business. As we get volume improvement, combined with the steps we have taken to positively influence our sales mix and margins and further self-help capture, we expect our results to improve to the roughly $200 million in normalized base rate adjusted EBITDA that we expect for the business.

Turning to Slide 10, we detailed the results from our fuel segment, which excluding the impacts of LCM and LIFO adjustments, generated very strong results of $60.9 million in adjusted EBITDA for the quarter. Inclusive of the noncash inventory adjustments, adjusted EBITDA of $21.9 million meaningfully outperformed results of $10.7 million in the year-ago period. And it's worth noting that those results included $16.8 million from the Superior Refinery, which we divested during last year's fourth quarter. We were able to produce these results due in large part to a number of operational records set at our Great Falls refinery, which include records for volumes of heavy Canadian crude processed, diesel production and total crude throughput.

Our execution of these operational records enabled us to capture the benefit of widening crude differentials to WTI and strong crack spreads for our diesel production. The improving market backdrop we saw for fuels margins through the quarter, combined with positive steps that we have taken to align and prepare our assets to capture these kinds of market tailwinds is also observed through our gross profit and barrel performance.

Excluding the noncash impacts from inventory adjustments, gross profit reached $10.55 on a per barrel basis. Including LCM/LIFO, results of $5.11 marked an over 25.6% improvement to the $4.07 captured in the year-ago period as the decline in our benchmark, Gulf Coast 2-1-1 crack spread of 6% was more than offset by the benefits from capturing widening crude differentials.

The most significant initiative we have emphasized in the last 3 years, one that we expanded the scope of to include discounted Midland crudes earlier in 2018, is processing increasing amounts of cost-advantaged crude through our fuels refineries. This emphasis paid off handsomely this quarter as the expansion of those crude differentials most meaningful to our business, primarily WCS/WTI and Midland-WTI allowed us to capture strong profits.

Slide 11 details the discipline that we have displayed in our capital spending over the past 3 years. We had $75 million in CapEx during 2018, which declined from $80 million in fiscal 2017. Given that we funded a number of turnarounds at our facilities throughout the year, the decline in CapEx is a testament to how we have not only become more disciplined in our capital uses but also more efficient while continuing to find opportunities to invest in low-cost, high return projects aimed at driving profitable growth. Looking to 2019, we expect total capital expenditures to be in the range of $80 million to $90 million, which includes an expected turnaround at our Shreveport facility in the fall.

Slide 12 reconciles the changes to our cash position from the prior quarter. Calumet finished the fourth quarter with a cash balance of $155.7 million, which was up over $90 million compared to the cash balance we had at the end of the third quarter. This improved cash position was driven largely by strong operating cash flow of $71.5 million, as both of our businesses performed well across the quarter. Additionally, we saw our balance increase sequentially as we worked down excess inventories that we carried into the period, related to turnaround activity in addition to what we collected on accounts receivable. All in, these factors combined to improve our cash position by another $50.4 million, which more than offset CapEx and some small inventory financing obligations.

Our year-over-year cash bridge on Slide 13 tells much of the same story. Exclusive of the cash used to redeem our senior secured notes, which was funded last year -- which was funded by last year's divestitures of Superior and Anchor, Calumet's strong operating cash flows of $150.6 million drove a significant increase in cash balances over the year. This more than offset CapEx and changes in working capital. This $150.6 million figure represents the operating cash flow generated across the year, prior to any changes in working capital, which totaled $75.4 million for the year, leaving a net operating cash flow result of roughly $75 million.

We also collected an additional $60.8 million in proceeds stemming from the disposition of noncore assets in the year prior.

Looking ahead to 2019, we will continue to focus on remaining cash flow positive such that we can continue to improve our leverage position.

Slide 14 displays progress we have made against our credit metrics, with some meaningful improvements gained in the fourth quarter. Our liquidity is up by $45 million versus the sequential quarter, and as you can see in our liquidity chart, net of cash used to retire our secured notes, we have increased our cash balance by $88 million over the last few years. More importantly, our improved cash balance is helping our deleveraging process and, at the conclusion of the year, our net debt's trailing 12-month adjusted EBITDA, excluding the noncash LCM impacts, was 4.9x. While this marks meaningful progress from where we were not too long ago, being levered 4.9x is still too high, and we will continue to drive our leverage lower through improving operating performance in our new self-help phase-2 program.

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

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

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Thanks, West. For those of you who have been following Calumet for the last few years, you know that a large portion of the fundamental changes to our business performance have been attributable to the self-help program we launched at the beginning of 2016. We initially set a goal of capturing $150 million to $200 million through a series of initiatives focused on reducing our costs, better optimizing our use of raw materials and enhancing our margins. On Slide 15, you will see we more than met our goal, with our 3-year self-help capturing a total of $182 million in adjusted EBITDA.

Last quarter, we announced that we would be launching phase 2 of the self-help program at the beginning of this year, with the goal of capturing an additional $100 million by the end of 2021. While the DNA of this program is much like phase 1, there are some differences, the most important being that roughly 2/3 of those EBITDA results are expected to be captured within our core specialty segment.

Turning to Slide 16, we detailed a timeline and expected contributions from the initiatives that underlie phase 2. First, we expect to capture between $20 million to $30 million from projects and initiatives we put in place last year. These projects included expanded packaging lines for our finished lubricants, a special-yield improvement project at Shreveport as well as the naphtha project at Great Falls and the new isomerate unit in San Antonio.

Second, we expect to capture between $30 million to $35 million from new quick-hit projects brought forward by the new General Managers. These projects will focus on the startup of our Versagel line in Karns City in the second quarter, which will lower costs in our specialty oils and wax business unit, improving yields on our specialty solvents at Cotton Valley and upgrading asphalt made at Princeton into higher-value specialty products.

Third, we will also focus on a number of opportunities for improvement across our supply chain, which is leveraging the data and information we are receiving through our new ERP system. These will focus on reducing costs by optimizing our transportation and procurement spending, the elimination of low margin SKUs and by improving our logistics infrastructure to better utilize our facilities and reduce the amount of capital tied up in our off-site facilities.

It's important to remember that we've always positioned our self-help efforts as a program of continuous improvement and it's really taken root in our culture over the last few years. Given what we achieved in phase 1 and the enthusiasm we have as an organization as we put together the framework for phase 2, I am very proud of not only the results we captured but how everyone at Calumet has bought in and made this a fundamental element of Calumet's culture.

I'll close on Slide 17, where we've outlined a few forward-looking thoughts around the first quarter. In terms of our specialty products segment, we're off to a strong start in the year, with higher volumes so far and solid plant utilizations. Offsetting that will be the rationalization of several lower margin SKUs within our finished lubes business and lower margin products in our other specialty businesses. While this will reduce volumes in those areas in 2019, it should help improve our margin performance throughout the year and position us for long-term growth. Working against us has been some crude price volatility, which could impact our raw material costs in the short term.

On the fuel side, the first quarter has seen tightening of both the WCS/WTI and Midland-WTI differentials. We also elected to bring forward a plant shutdown in San Antonio in the fourth quarter, which will enable us to defer the turnaround that we had planned for the first half of 2019 into 2020. Given these actions, our fuels plant should run at higher utilizations in the first quarter and through the summer driving season.

Lastly, we continue to expect IMO 2020 to benefit both our specialties as well as our fuel products segments.

Finally, we are focused on self-help phase 2 initiatives that each of our general managers have established and we'll look forward to seeing those plans executed to continue to drive year-over-year improvements in our core specialty business.

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

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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 Neil Mehta of Goldman Sachs.

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Carly S. Davenport, Goldman Sachs Group Inc., Research Division - Business Analyst [2]

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This is Carly on for Neil. You pointed to WCS spreads benefiting the fuel segment's results, especially at Great Falls during 4Q. So as we think about 4Q to 1Q, WCS diffs are one key piece that have changed in the macroenvironment. So can you give us your thoughts on that spread as we move through 2019? And then is there any sensitivity you can provide or quantity you can provide on the benefit that you received from WCS spreads during the quarter?

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

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The WCS tailwinds were strong in the fourth quarter as the Alberta government made some policy changes, we saw that spread tighten significantly. It's about $10, $11 right now. We believe that the short-term changes in the market will yield to the long-term fundamentals. And as most people in the industry have commented, we believe and agree that WCS will trade at rail economics long-term, which probably takes you into that $17 to $20 diff spread. If you look into the strip market, I think the market believes something similar as well and you can see the WCS spread widen as the year goes on. So we believe the first quarter is an overreaction and that over time, the spreads will go back to long-term supply/demand fundamentals.

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Carly S. Davenport, Goldman Sachs Group Inc., Research Division - Business Analyst [4]

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Great. And anything on the EBITDA impact that you expect to see from movements in that spread?

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

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Well as you know, Carly, there's a lot of things that go in to impact the profitability of these plants. The WCS/WTI spread was a significant help for us in the fourth quarter, there's no doubt. You can do the math and I think the spread we saw, around $34, was significantly higher than what we saw a year ago, which would have been about $17 spread. So you multiply that over the 25,000 barrels a day that we run at Great Falls, take some factors into account in terms of yields, like asphalt and so forth, and it presents a nice bump. But what I would tell you is that this is just one factor. You also have to look at the Gulf Coast 2-1-1 crack, which as we're looking at today, is strengthening above what we saw in the fourth quarter. As those impact the balances at Great Falls, we'll see some positive offsets that will counteract the lower WCS spreads.

So -- I mean, you can run it through your models, but we think that we will definitely see lower margins at Great Falls in the first quarter but we're encouraged to see the 2-1-1 crack improve. And again, we believe that long term, the WCS spread will return to long-term fundamentals.

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Carly S. Davenport, Goldman Sachs Group Inc., Research Division - Business Analyst [6]

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Got it. That's super helpful. And then the follow-up is just a little bit more broad. We've seen a bit of a derate in the equity markets for some of the chemicals companies, in specialty space. Can you talk about how this impacts your business? And then maybe your thoughts on leaning into the specialty side of the business, given some of these dynamics?

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Timothy Go, Calumet Specialty Products Partners, L.P. - CEO of Calumet GP, LLC [7]

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Yes, I think the derate you're talking about, Carly, is -- we've seen it with the other chemical companies. It's concerns about the global economy and maybe overall growth in the U.S. markets as well. We've seen that a little bit in the base oil markets. We believe the paraffinic base oil markets in the second half of the year were starting to get long and were starting to show some signs of length. But the rest of our business has, if anything, looked stronger. West talked about the fourth quarter and our specialties business being the highest EBITDA since 2014. And as we pick up momentum and continue to drive that, I mentioned so far in the first quarter, we're off to a good start and we're seeing good volumes. We're seeing decent margins and we're encouraged by our specialties business here in 2019.

We've said before that our first quarter and second quarters tend to be stronger from a specialties standpoint than the third and the fourth quarters. And I'm pleased to tell you that so far, the start of the year, that is -- that's showing to be true. So while the other chemical companies are maybe seeing some slowdowns, I can tell you that we're feeling optimistic about our 2019.

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Operator [8]

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Your next question comes from the line of Sean Sneeden of Guggenheim Partners.

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

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Tim or West, I guess when you look at specialty, you put up $166 million of EBITDA in 2018, which is a little below the $200 million run rate, but we talked about it in the past and -- but part of that is driven by the heavy turnaround schedule and some of it is weakness in the paraffinic market. But I guess when you think about the 2/3 of the next phase of self-help initiatives on specialty, how should we think about that improvement? Is it really designed to bring you back to the $200 million run rate? Or is it designed to deliver something that puts you above that?

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

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Yes, Sean, thanks for the question. We showed in our bridge in the PowerPoint slides that we still believe that our specialties business is an underlying performance of call it, $200 million of EBITDA. But clearly, we're trying to improve, even on top of that. Our phase 2 self-help initiatives specifically focused on growing that specialties business. We believe that with the strong start that I just mentioned that we had in specialties, our expectations are that we have a better-than-normal year in 2019. We have less turnarounds in 2019. And so we think that should improve our position and our expectations as management, as the general managers continue to execute their strategies, are that we would have -- that we would be even -- be able to better that underlying specialties performance.

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Operator [11]

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Our next question comes from the line of Gregg Brody of Bank of America.

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Gregg William Brody, BofA Merrill Lynch, Research Division - MD [12]

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I was just thinking about -- you mentioned there was -- you took maintenance on the -- on one -- on San Antonio in the fourth quarter, which changes your turnaround schedule. Can you just outline for us the turnaround schedule for '19? And how you expect that to impact utilization?

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Timothy Go, Calumet Specialty Products Partners, L.P. - CEO of Calumet GP, LLC [13]

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Yes, Gregg. We have -- we had originally planned for a turnaround in San Antonio here in the first half of the year. As I mentioned, we've pulled that ahead in the fourth quarter, got the work done that we needed to so that no longer is in 2019, that leaves the only other major downtime as our Shreveport turnaround in the second half of the year. And that will involve both the fuels and the specialty plants. All the plants have small downtimes across the year, hydrogen plants, sulfur plants and so forth. But really, that Shreveport turnaround is really the only major one that I would call out here, scheduled for 2019.

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Gregg William Brody, BofA Merrill Lynch, Research Division - MD [14]

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And should we think about that as 30 days being offline?

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Timothy Go, Calumet Specialty Products Partners, L.P. - CEO of Calumet GP, LLC [15]

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Yes, we have 2 crude units at Shreveport. It would be one of the crude units plus one of the specialty units, probably something in that 3-week timeframe.

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Gregg William Brody, BofA Merrill Lynch, Research Division - MD [16]

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Okay, can you -- would that impact volumes significantly? Or if you could build your volumes for the year? Should we expect the -- just during that time period a little bit of a decline?

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

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Yes, well on the specialties side, we always try to manage our volumes. We'll build inventories prior to the turnaround like you saw we did here in the last year's third quarter so that we can continue to meet our customers' demand. I think on the fuel side, you'll definitely see lost production associated with the downtime. But overall, we're going to try to meet all of our customers' needs but it will impact reporting as we saw in the last third quarter as we build inventories in one quarter and draft inventories in the next.

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Gregg William Brody, BofA Merrill Lynch, Research Division - MD [18]

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Got it. And speaking of inventories, you mentioned that you harvested some excess inventory in the fourth quarter. So is your working capital -- should we -- we shouldn't think of any major builds throughout the year? This is the right level?

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David West Griffin, Calumet Specialty Products Partners, L.P. - Executive VP & CFO of Calumet GP, LLC [19]

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Yes, so our business -- we continue to optimize our business. So we used to have -- when we had Great Falls, we had a very, very significant build in our asphalt inventory during the spring going into the summer and then we drafted from then on. And we also had some of that this year. We've been working more and more to minimize big fluctuations in, and changes of our inventory by changing some of the fundamentals, kind of how we approach the market. And you're going to see us do that. Now to your question in terms of inventory levels at the end of the fourth quarter, I have to tell you that our inventory levels at the end of the fourth quarter were still elevated relative to what we would like them to be, roughly 300,000 barrels, actually, higher than they were at the end of 2017. So there's a fair bit more we could do in terms of our working capital to improve things.

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Gregg William Brody, BofA Merrill Lynch, Research Division - MD [20]

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Do they -- do you think you'll realize that over this year? Or is that a couple year process?

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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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No, I mean so as an example, we just didn't quite get all the excess inventories associated with the turnarounds down. At the end of January, we actually got it down to the same -- basically the same levels as we had at the end of 2017. So you know, it was very, very transitory.

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Gregg William Brody, BofA Merrill Lynch, Research Division - MD [22]

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Okay. And then I haven't asked you this but your -- just for thinking about 2019, how should we think about your SG&A and your transport costs?

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David West Griffin, Calumet Specialty Products Partners, L.P. - Executive VP & CFO of Calumet GP, LLC [23]

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Yes, so SG&A, we're continuing to focus on our SG&A. And as we -- towards the end of this year, as we finish all the optimization and everything that we need to do to complete our -- and get the ERP system really working the way we want it to, we'll then pivot a little bit more to take the next steps, with respect to gaining some further efficiencies associated with the company and take full advantage of the ERP system that we put in place.

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Timothy Go, Calumet Specialty Products Partners, L.P. - CEO of Calumet GP, LLC [24]

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Yes, Gregg, if you look at our SG&A that we've reported since -- really since third quarter '17, which was when we went live on S&P, you'll see a nice, steady decline every quarter in SG&A as we continue to take costs out. And as we continue to take advantage of the new ERP system to try to be more efficient, our plans would be, as West just mentioned, to continue to do that and, if anything, to accelerate that through our self-help initiative program.

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Gregg William Brody, BofA Merrill Lynch, Research Division - MD [25]

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Got you. And then the transportation part of it? It looks like that went up a little bit in the fourth quarter just on a total number. Is -- do you call -- that went up throughout the year. Is that a function of sourcing crudes? What's driving that higher?

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David West Griffin, Calumet Specialty Products Partners, L.P. - Executive VP & CFO of Calumet GP, LLC [26]

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Yes, so transportation costs in general, the whole industry has been facing higher transportation costs and especially on the truck side. We've been working to actively take transportation costs out of our system. One of the advantages of the new ERP system that we put in place was that it optimized the -- and bid out all of our trucking and other services. And we've started to see some real benefits associated with that. We've just finished the implementation across all of our facilities to get that in place. And we're seeing some real benefits associated with it. Now that said, we've got the industry headwinds of some higher fundamental costs, but we're seeing some real benefits associated with that.

We also think that we're going to be able to do some things on the rail side and that's the major focus for 2019, is to lower our rail costs significantly.

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Gregg William Brody, BofA Merrill Lynch, Research Division - MD [27]

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Got it. And then just last question for you guys, as the credit guy, you highlighted the free cash flow generation in '19. I know a lot of that may be dependent on what happens with refining but -- or the fuels product business, but do you have sort of metrics that you're thinking about for potential cash flow generation in '19? And where you can get leverage down to by the end of the year?

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David West Griffin, Calumet Specialty Products Partners, L.P. - Executive VP & CFO of Calumet GP, LLC [28]

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Yes, so the way to sort of -- one way to sort of address it, I guess The Street has us right in the $275 million, $280 million worth of EBITDA for the year. Pro forma, our interest expense is roughly $120 million. We've got $80 million to $90 million worth of CapEx. We tend to come in oftentimes, as we have last couple of years, kind of on the low end of that, sometimes even dipping down to slightly below that. So that's going to give us anywhere from $80 million, $90 million worth of positive cash flow.

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Gregg William Brody, BofA Merrill Lynch, Research Division - MD [29]

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By highlighting consensus is that -- do you think that's a fair number? I think the part of the questions was how much differentials will tend -- will differentials impact your numbers and I recognized your view that it's going to improve throughout the year but I guess you feel...

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David West Griffin, Calumet Specialty Products Partners, L.P. - Executive VP & CFO of Calumet GP, LLC [30]

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Yes, we don't really give guidance. About the most guidance we've given is what we said during this call, which is we believe our specialties business has a core sort of $200-million-ish worth of EBITDA business, that we have some additional EBITDA that we can potentially add to that through our continued self-help efforts. And then on top of that, you all need to add to that whatever you think our fuels business is going to be able to generate.

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Gregg William Brody, BofA Merrill Lynch, Research Division - MD [31]

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And maybe I'll just add one follow-on to that. So you mentioned crude was -- has become -- has been a little bit of a headwind right now. Can you talk about how -- because crude dropped significantly? And now it's been going up, how does that work itself through fourth quarter? And to some of the decline -- did the significant decline makes its way into the fourth quarter, is that something that maybe will help offset some of the increase in the first quarter? How should we think about that?

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

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Gregg, I'll take a shot at that. I mean, what we saw was the sharp drop in crude prices at the end of the year resulted in some sharp drops in specialty prices as well. So I don't know if you're referring to how our specialty business lags crude but when you have such a sharp drop or increase like what we saw, it becomes very difficult not to be noticed and not to have to be able to work that through the markets. So our base oil business actually saw 2 price decreases along the same time that crude was dropping that significantly. So I wouldn't say that we saw a significant lag in the fourth quarter. And as we watched the crude prices come up in first quarter, I mentioned crude volatility in my comments, it's been about -- it's up about $10 since the beginning of the year. We are watching that very closely, and trying to manage our raw material costs accordingly.

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Operator [33]

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We do have a follow-up question from the line of Sean Sneeden of Guggenheim Partners.

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Sean M. Sneeden, Guggenheim Securities, LLC, Research Division - MD & Trading Desk Credit Strategist [34]

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I guess you highlighted a little bit on base oils being kind of weak in the second half there. I guess, Tim, just from your higher level perspective, do you think that's a result of Group I and II kind of being out of favor? Is it a cyclical thing? Or do think it's secular? And when you look at, perhaps, part of the phase 2 of self-help, when you look at ways to improve profitability, specifically around base oils, are there ways to do that? Or is it just kind of through reduced production of base oils in favor of something else?

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Timothy Go, Calumet Specialty Products Partners, L.P. - CEO of Calumet GP, LLC [35]

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Yes, Sean, it's a good question on base oils. What we're seeing -- I think Exxon just started up their Rotterdam Group II facility in Europe, and as the supply/demand fundamentals get long, right, as the market gets long, I think that ends up putting some pressure on global markets. We're seeing it primarily in the Group II and Group III markets. That's where there's a lot of new production. That's where there's a lot of length right now in terms of supply and demand. We're actually encouraged by the Group I in the naphthenic markets continuing to be more balanced and most of our production is in those areas. And so we continue to focus on managing that part of the business and having that drive our base oil business right now.

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Sean M. Sneeden, Guggenheim Securities, LLC, Research Division - MD & Trading Desk Credit Strategist [36]

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Got it. That's helpful. And then just a couple of quick housekeeping questions. I guess with the Macquarie inventory deal expiring, I guess, within the next 12 months, what's your kind of view on extension there? And is that kind of what the plan is? And then can you just remind us what is that outstanding under that facility at this point?

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David West Griffin, Calumet Specialty Products Partners, L.P. - Executive VP & CFO of Calumet GP, LLC [37]

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Yes, so that is a great question. We're in the process of working with Macquarie, but I'm very confident that we'll get an extension done here in the next quarter or so.

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Sean M. Sneeden, Guggenheim Securities, LLC, Research Division - MD & Trading Desk Credit Strategist [38]

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Okay. And then just remind me what the balance was at the end of the fourth quarter on that facility?

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David West Griffin, Calumet Specialty Products Partners, L.P. - Executive VP & CFO of Calumet GP, LLC [39]

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I want to say that it was somewhere around $130 million, off the top of my head. If you want, I can look in the details on it but somewhere in that geography.

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Sean M. Sneeden, Guggenheim Securities, LLC, Research Division - MD & Trading Desk Credit Strategist [40]

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Okay. And then just -- if we look at Slide 10, the rough math on just the differential, it looked like, if we kind of do comparison from Q4 this year versus last year, it looks like there was about a $50 million benefit to fuels for the year. Just some differentials but if we mark-to-market for current differentials, it looks like there could be a comparable, if not bigger hit, to EBITDA. Is that kind of the rough math that you were talking about before, I think, to one of the prior questions?

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Timothy Go, Calumet Specialty Products Partners, L.P. - CEO of Calumet GP, LLC [41]

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Yes, I think Carly was asking a similar question, Sean. Look, we would say the WCS spread was averaged about $34 in the fourth quarter. That was versus say, a year-over-year change of about $17 in the fourth quarter of '17.

When we do -- when we run our models and look through what the impact is, we think that's about a $25 million impact -- favorable impact here in the fourth quarter of '18. But again, I think you've got to look at other things. In our fuels numbers, we also saw an improvement on spread in the fourth quarter. So that was roughly $6 a barrel in the fourth quarter. A year ago, fourth quarter '17, it was pretty much balanced or flat. So that contributes another call it, $10 million of help as well. So those are the kind of things that -- if you're doing your math, you can kind of say okay, maybe we had a little stronger-than-normal fourth quarter. But I would tell you, in the first quarter, we're seeing much stronger cracks right now than we saw in the fourth quarter and then a year ago's first quarter. So you've got to play those off each other and try to understand the overall impacts across the sites.

I would also tell you that our self-help improvements have been focused on fuels as well. And so we think our fuels business is stronger now than it was even a year ago, certainly, more than 2 years ago. West talked about the asphalt inventory drag that we used to have every winter as we built, I think it was 500,000 barrels or so of the asphalt inventory. We don't do that anymore. And that allows our fuels business to have less of a winter drag than we've been accustomed to seeing.

As we continue to improve our placement of our products, we're putting our gasoline and our diesel more into our local markets, more across our own racks and more on term contracts. And all of that is strengthening our fuels business. So I wouldn't give all of the credit to the WCS spread in thinking that it's going to be fleeting, but instead I would -- we're encouraged by the underlying improvements that we're making in the fuels business as well. The last thing I would mention, it hadn't come up yet today, but we have done some hedging into 2019. We've talked about that a little bit. It's detailed in the appendix, in the PowerPoint slides. But we've got some Midland and some WCS hedges that we'll benefit from in 2019.

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Sean M. Sneeden, Guggenheim Securities, LLC, Research Division - MD & Trading Desk Credit Strategist [42]

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Got it. That's super helpful. And then just one last one from me. On the phase 1 self-help, can you just remind us how or what percentage of the $180 million was from -- or was geared towards fuels? And how much of that -- of the initial $180 million was -- is still yet to be realized? Was that just the $20 million to $30 million that you had on Slide 16?

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Timothy Go, Calumet Specialty Products Partners, L.P. - CEO of Calumet GP, LLC [43]

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Yes, what we're saying is we realized $180 million, Sean. We think it's about 50-50 between specialties and fuels. We think the carryover, the $20 million to $30 million that we talked about in terms of phase 2 is value that's yet to be realized because we implemented these late in the year last year and didn't get the full year benefit of these projects, which is what's carrying over into phase 2.

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Operator [44]

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And that does conclude our question-and-answer session for today. I'd like to turn the conference back over to Mr. Tim Go for any closing remarks.

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Timothy Go, Calumet Specialty Products Partners, L.P. - CEO of Calumet GP, LLC [45]

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Okay, thanks, Amanda. Yes, as we close the call, I'd like to first thank all of our employees for their ongoing commitment and contribution, which helped us bounce back in the fourth quarter and enter 2019 with more positive momentum. I'd also like to thank our Board and general partner for their support and guidance. And lastly, I'd like to thank all of you, our investors and analysts, for joining us today and for your continued support. Have a great day.

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Operator [46]

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