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Edited Transcript of MMLP earnings conference call or presentation 29-Jan-20 2:00pm GMT

Q4 2019 Martin Midstream Partners LP Earnings Call

Kilgore Feb 1, 2020 (Thomson StreetEvents) -- Edited Transcript of Martin Midstream Partners LP earnings conference call or presentation Wednesday, January 29, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Robert D. Bondurant

Martin Midstream Partners L.P. - Executive VP, CFO & Director of Martin Midstream GP LLC

* Ruben S. Martin

Martin Midstream Partners L.P. - President, CEO & Director of Martin Midstream GP LLC

* Sharon L. Taylor

Martin Midstream Partners L.P. - Head of IR

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Conference Call Participants

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* Kyle May

Capital One Securities, Inc., Research Division - Associate

* Sunil K. Sibal

Seaport Global Securities LLC - MD & Senior Energy Infrastructure Analyst

* Torrey Joseph Schultz

RBC Capital Markets, Research Division - Co-Head & MD of Master Limited Partnership Franchise

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Martin Midstream Partners Fourth Quarter 2019 Earnings Conference Call Webcast. (Operator Instructions) Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Sharon Taylor, Director of Finance and Investor Relations. Please go ahead, ma'am.

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Sharon L. Taylor, Martin Midstream Partners L.P. - Head of IR [2]

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Thank you, Sydney. Good morning, everyone, and welcome to the Martin Midstream Partners conference call to discuss fourth quarter 2019 results. In the room with me is Ruben Martin, President and Chief Executive Officer; Bob Bondurant, Chief Financial Officer; Danny Cavin, Director of FP&A; and David Cannon, Director of Financial Reporting.

Before we get started, I'll remind you that management may be making forward-looking statements as defined by the SEC. Such statements are based on our current judgments regarding the factors that could impact the future performance of Martin that actual outcomes could be materially different. You should review the risk factors and other information discussed in our filings with the SEC and form your own opinion about Martin's future performance.

We will discuss non-GAAP financial measures on today's call. Please refer to the table in our earnings press release posted in the Investor Relations section of our website to find a reconciliation of non-GAAP financial measures referenced in today's call to their corresponding GAAP measures.

I will now turn the call over to Mr. Ruben Martin.

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Ruben S. Martin, Martin Midstream Partners L.P. - President, CEO & Director of Martin Midstream GP LLC [3]

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Thanks, Sharon. Good morning. As you saw in our press release issued yesterday, we reset our per unit distribution to $0.25 annually, which equates to a quarterly unit distribution of $0.0625 per unit. Over the last 18 months, we have announced and executed on a number of strategic goals aimed at strengthening the balance sheet, reducing leverage and increasing coverage.

While we have made progress toward these targets, we are not where we want to need to be. Therefore, we're taking this step to ensure we meet our objectives in the not-so-distant future.

In addition to resetting the distribution, we also have implemented a distribution policy that quite simply states that the distribution remained where it is as long as our leverage exceeds 4x. Further, once our leverage is below 4x, we will not consider an increase unless our coverage is above 1.3x, calculated with the increase.

Looking at our 2020 guidance, we currently expect to maintain the quarterly distribution at this level throughout the year. As a company, we're dedicated to optimizing our current assets to enhance profitability and provide safe, reliable operations for our employees and our customers. We'll continue to focus on capital discipline and seek out ways to maximize efficiencies to provide value to our unitholders, and ensure that we have the ability to capitalize on opportunities such as those at our Harbor Island and Beaumont Terminals facilities.

So now I'll turn it over to Bob Bondurant to discuss our fourth quarter and 2019 results. Thank you.

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Robert D. Bondurant, Martin Midstream Partners L.P. - Executive VP, CFO & Director of Martin Midstream GP LLC [4]

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Okay. Thanks, Ruben. I'd like to discuss our fourth quarter performance, which exceeded our adjusted EBITDA forecast by $3.4 million or 10.6%. Actual adjusted EBITDA was $35.5 million compared to our adjusted forecast of $32.1 million. We exceeded guidance in 2 areas: our Sulfur Services segment and our Natural Gas Liquids segment. We're flat in our Terminalling and Storage segment and had a very slight miss in our Transportation segment.

Our Sulfur Services segment exceeded forecast by $2.7 million. Breaking it out between our 2 business lines in this segment, our fertilizer group exceeded forecast by $1.5 million, and our pure sulfur business exceeded forecast by $1.2 million. In our fertilizer group, excess cash flow or forecast was primarily due to very strong ammonium thiosulfate sales primarily in South Texas. The strength of this ammonium thiosulfate demand in the fourth quarter was because farmers in South Texas have planted and are planting more corn and less cotton than previous years due to the strength in corn prices relative to cotton.

As many of you know, corn acres planted is a significant driver of our fertilizer business as corn production requires more usage of our products than any other agricultural commodity. We believe the planting of corn in South Texas could foreshadow strong corn plantings in other areas of the country, which should support our 2020 fertilizer forecast.

On the pure sulfur side of our business, we exceeded our fourth quarter forecast as a result of insurance proceeds received from our business interruption claim as a result of our ship loader casualty loss, which occurred in May. We will also receive additional business interruption proceeds in early 2020, and these proceeds are included in our 2020 guidance.

As of yesterday, the new ship loader is operational and our complete prilling ship loading operations at Beaumont are back online. Additionally, our prilling operations at the Port of Stockton in California exceeded forecast as a result of increased sulfur volumes from Bay Area refineries. These West Coast refineries, which support our Stockton operations, experienced more than normal downtime throughout 2019, but they appear to be now operating at normal sulfur production levels.

Now moving to our Natural Gas Liquids segment. We exceeded forecast by $0.8 million primarily in our butane logistics business. Also, our propane wholesale distribution business exceeded forecast as a result of better margins than forecasted. Our butane logistics business experienced normal historical seasonal price differential when compared to last year's anomaly as we had adjusted EBITDA of $9.4 million in the fourth quarter.

Because of last year's energy price collapse, which negatively affected our butane book in the fourth quarter of 2019 and the first quarter of -- excuse me, fourth quarter of 2018 and the first quarter of 2019, we were much more aggressive in hedging our inventory this year as we were approximately 100% hedged going into the fourth quarter selling season. This protected and locked in our cash flow for this business.

As a result of locking in our profits, we did experience an opportunity cost of approximately $4.2 million in the fourth quarter as butane market prices averaged higher than our hedge position price, but we felt it was very important to protect our book against any possibility of a repeat of last year's energy market collapse.

In our Transportation segment, we missed guidance by $100,000. Our Marine Transportation segment exceeded guidance by $700,000 as a result of almost 100% utilization and a continuing improvement in our inland average day rate.

In our land transportation business, we missed guidance by $800,000 as we achieved $4.7 million of adjusted EBITDA in the fourth quarter compared to a forecast of $5.5 million. This miss was, again, primarily attributable to reduced sulfur production from Beaumont area refineries during the fourth quarter when compared to our forecast. Although we did see a 7% sulfur production increase from our refinery customers in the fourth quarter when compared to the third quarter, it was not as much as anticipated. However, we have seen an 18% increase in sulfur production in January of 2020 from our refinery customers when compared to the fourth quarter, which is in line with what we believe will happen throughout 2020.

Now for the year, our land transportation business, which we acquired January 1, 2019, had EBITDA of $19.3 million. This was less than our acquisition economics, which originally forecasted $23.6 million of EBITDA for 2019. The miss in our annual forecasted EBITDA was primarily due to reduced sulfur production from our refinery customers, which occurred throughout the year.

Our overall daily truckload count was down 9% in 2019 compared to 2018 primarily because sulfur production from refineries we service was down 17%. This was due to extended turnarounds and downtime throughout the year. However, based on our conversations with our refinery customers, we believe sulfur production will return to more normal levels in 2020, which will benefit our land transportation business.

Our Terminalling Services segment had adjusted EBITDA of $11.6 million in the fourth quarter, which is almost right on forecast.

So with that being said, I'd like to turn the call over to Sharon to discuss our balance sheet, capital resources and our 2020 guidance released yesterday.

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Sharon L. Taylor, Martin Midstream Partners L.P. - Head of IR [5]

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Thanks, Bob. On December 31, 2019, the partnership's balance sheet reflected long-term funded debt of $570 million plus short-term debt related to finance lease obligations of $7 million for a total of $577 million of debt, net of unamortized debt issuance costs and unamortized issuance premiums. Actual funded debt outstanding was $582 million, which is a reduction of $39 million from the third quarter.

We had $201 million outstanding under our $400 million revolving credit facility, resulting in total available liquidity of $199 million.

From a leverage perspective, our debt-to-adjusted EBITDA ratio for the fourth quarter ended December 31, 2019, as calculated under our credit facility, was 4.69x compared to 5.1x in the third quarter.

As a reminder, our total debt ratio is shown with adjustments from a working capital carve-out sublimit, which excludes certain debt directly attributed to our seasonal NGL inventory build if the volumes have been hedged or forward sold. At December 31, the calculated debt related to that inventory build was $50 million, which accordingly was excluded from the total debt calculation.

All in all, on December 31, the partnership was in full compliance with all covenants.

Moving to capital spending. Our growth capital during the fourth quarter totaled approximately $3.6 million. Now in addition to that was $3.5 million related to the ship loader replacement at the Neches facility. As was mentioned in the press release, the new ship loader was commissioned and placed in service slightly ahead of schedule, with the first prilled sulfur shipment targeted for February 1.

As an update, our total capital expenditures for the new ship loader are still anticipated to be approximately $12 million. The majority of this will be funded by property insurance proceeds. Of the total $12 million, $7.7 million was spent in 2019, with the remaining $4.3 million to be spent in the first quarter of 2020.

As to the timing of the property insurance proceeds related to the ship loader, we received $2.5 million in the fourth quarter of '19 for a total of $5 million in 2019, with the remaining proceeds to be received in the first quarter of 2020.

Distributable cash flow for the quarter totaled $20.7 million and includes maintenance CapEx of approximately $4.1 million. This equates to 2.11x coverage for the quarter. For the full year of 2019, total distributable cash flow was $51.5 million for a total unit coverage of 1.05x.

Turning to our 2020 cash flow and capital spending guidance. Attached to the press release yesterday was our 2020 financial guidance, which provides detail by segment and by quarter. The presentation can also be found on our website at mmlp.com. We are forecasting $117.1 million of adjusted EBITDA after unallocated SG&A of approximately $16 million for the full year 2020. And of that number, approximately 62% is attributable to fee-based contracts.

Within our Terminalling and Storage segment, we expect Martin Lubricants to have another strong year as our grease business continues to expand, both its customer base and its geographical footprint.

In the second quarter of 2020, we are scheduled to open a new facility in Phoenix, Arizona, to service our West Coast customers. This facility will free up capacity at both our Houston and Kansas City locations, and we will benefit from lower distribution costs.

Now also within the Terminalling and Storage segment, as we have spoken to, there is a reduction in EBITDA at the Smackover refinery. This is related to capital recovery fees that are rolling off in 2020 and 2021 as well as contract renegotiation that suspended the CPI adjustments for 2020.

Moving to Sulfur Services. Our fertilizer guidance is reflective of a normalized planting and harvest season. While we cannot predict the weather, corn prices and the USDA outlook for corn acres planted in 2020 both remained strong, which as Bob mentioned, is supportive to our fertilizer business. Guidance for the Sulfur Services segment also includes cash receipt of $3 million in the first quarter for business interruption insurance proceeds, and that as well is related to the Neches ship loader.

Turning to Transportation. While rates and utilization in our Marine inland fleet remains strong, the contract on our offshore ATB unit renewed on December 19, 2019, at a reduced rate which decreased our guidance for the Marine business for 2020 when compared to 2019. And for MTI, the land transport business, our 2020 guidance reflects both load count and the mileage related to sulfur hauling returning to historical norms, which as Bob pointed out, has occurred in January.

And finally, the Natural Gas Liquids segment guidance reflects a baseline view of a typical winter-summer spread for the butane and propane businesses.

Now comparing our full year 2019 results to our 2020 outlook. We have forecasted adjusted EBITDA for full year 2020 of $117.1 million or an increase of $8.8 million. In 2019, our actual adjusted EBITDA from continuing operations was $108.3 million, which excludes approximately $11 million related to the natural gas storage assets, which were sold effective June 30, 2019.

Moving on to our estimated capital expenditures for 2020. We anticipate maintenance CapEx to be approximately $17 million for the year and growth capital expenditures to be approximately $11 million. Of the $11 million, over 50% will be spent in the first quarter, with the majority related to the new Phoenix grease plant. And as I spoke to earlier, we are forecasting $4.3 million to be spent on replacement costs for the new ship loader, which will be offset by property insurance proceeds received in the first quarter.

Finally, during the first quarter of 2020, we are addressing the refinancing of our senior notes that mature in February of 2021. The recent success of energy companies in the debt markets is encouraging as investor enthusiasm seems to have returned after being absent in the last months of 2019. We also feel that given the results of our efforts to delever the balance sheet, coupled with the retained cash flow following the distribution cut that was announced, we will have a successful offering. However, given the state of the debt markets, we do expect our interest rate for the new senior notes to be higher than our current 7.25%. We also intend for the amount of the notes issued to be similar to the outstanding amounts today.

This concludes our prepared remarks for this morning. I will now turn the call back to Sydney for Q&A. Sydney?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Kyle May with Capital One.

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Kyle May, Capital One Securities, Inc., Research Division - Associate [2]

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So with the distribution cut, you indicated that Martin wants to improve the leverage ratio below 4x and the coverage ratio above 1.3x. Just wondering, first, how you think about the balance between improving these 2 metrics? And then secondly, when do you think Martin could reach these goals?

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Sharon L. Taylor, Martin Midstream Partners L.P. - Head of IR [3]

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Could you repeat the first part of your question, Kyle? I'm sorry.

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Kyle May, Capital One Securities, Inc., Research Division - Associate [4]

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Sure, no problem. So -- and I'll just repeat the whole thing. So you talked about improving the leverage ratio below 4x and the coverage ratio above 1.3x. So as we're thinking about, I guess, the balance between these 2 metrics, how do you think about balancing between improving leverage ratio and improving the coverage? And then secondly, when do you think Martin will reach these goals?

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Sharon L. Taylor, Martin Midstream Partners L.P. - Head of IR [5]

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So first of all, I think when we start looking at our 2020 numbers, you'll see that the coverage ratio is going to be above 1.3x, substantially above 1.3x. So we're focused still on a leverage ratio getting below 4x. When we look out at our current forecast, that occurs after '21, so around the first and second quarter of 2022, with the assets we own today and just at a stable cash flow.

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Ruben S. Martin, Martin Midstream Partners L.P. - President, CEO & Director of Martin Midstream GP LLC [6]

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No increase in cash flow repayments.

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Sharon L. Taylor, Martin Midstream Partners L.P. - Head of IR [7]

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Correct.

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Robert D. Bondurant, Martin Midstream Partners L.P. - Executive VP, CFO & Director of Martin Midstream GP LLC [8]

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And I'll say this, on the DCF coverage, roughly -- it's going to be roughly $50 million of distributable cash flow or distribution of $10 million. So roughly 5x coverage next year, ballpark.

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Kyle May, Capital One Securities, Inc., Research Division - Associate [9]

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Okay. Got it. Okay, good. That's very helpful. And one of the things -- I know you touched on the Marine Transportation business. Can you maybe go into a little bit more detail on what you're seeing between, I guess, the offshore and the inshore and kind of the mix between those 2 businesses in 2020?

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Robert D. Bondurant, Martin Midstream Partners L.P. - Executive VP, CFO & Director of Martin Midstream GP LLC [10]

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Yes. So this year, our offshore business had -- these are rough numbers, cash flow of about $3 million roughly, and the balance was inland. With this contract adjustments, our offshore will be about $800,000 roughly, and the inland will be -- let me see the numbers here.

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Sharon L. Taylor, Martin Midstream Partners L.P. - Head of IR [11]

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It's about $9.5 million.

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Robert D. Bondurant, Martin Midstream Partners L.P. - Executive VP, CFO & Director of Martin Midstream GP LLC [12]

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About $9.5 million. And that's after unallocated SG&A of $5 million. So the numbers -- the $9.5 million is applying the full $5 million of unallocated SG&A. So as a business unit, it's $14 million-plus on inland and about $800,000 on offshore, and then there's unallocated issue -- SG&A of $5 million, you get it down to roughly the $10 million, $10 million or $11 million. So that's the breakup. We just have one offshore unit. It is the M 6000 that works for the private company. And then the balance are inland, roughly about 1/3 of our cash flow from the Marine business comes from the private company, the General Partner.

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Operator [13]

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(Operator Instructions) And our next question comes from TJ Schultz with RBC Capital.

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Torrey Joseph Schultz, RBC Capital Markets, Research Division - Co-Head & MD of Master Limited Partnership Franchise [14]

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In the guidance for 2020 EBITDA of $117 million, does that make any assumptions on changes in contracts between MRMC and MMLP that would fully offset the impact from lower distributions to MRMC? Or is that something we need to consider?

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Sharon L. Taylor, Martin Midstream Partners L.P. - Head of IR [15]

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That -- any contract changes with MRMC that we expect to occur in 2020 are already loaded into this guidance as well as the distribution cut when we talked about DCF. Right now, we're looking at MRMC's percentage of EBITDA -- or MMLP's percent of EBITDA associated with MRMC to be approximately 25%.

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Torrey Joseph Schultz, RBC Capital Markets, Research Division - Co-Head & MD of Master Limited Partnership Franchise [16]

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Got it. Okay. Beaumont and Corpus, what's the latest there? I know Harbor Island, Carlyle plan kind of fizzled out for the crude port or, at least, there's still some pushback from Port Aransas. So is something meaningful at Beaumont more likely? Just update there.

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Ruben S. Martin, Martin Midstream Partners L.P. - President, CEO & Director of Martin Midstream GP LLC [17]

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Yes, this is Ruben. I've had meetings over the last week and have 2 more scheduled between now and next week. We're visiting the facility. We've got all of the numbers. We've had some interest now relative to -- and I'm talking about Corpus mainly right now, but we've had some interest. And of course, Beaumont, we've got consistent interest in Beaumont and doing facilities there for a different -- a lot of different products. So yes, we've had a lot of interest lately.

It's very difficult now to look at longer-term contracts with dedicated crews, basically with some of the pipelines in West Texas now loosening up. It's tough to get people to come across with longer -- long-term contracts. But we have had some interest because I think of the cost and things on the single point mooring is expensive relative to what we can do. We can do it a lot cheaper if we can get the port to eventually dredge to 75 feet for it to do VLCC. So that's where we're working. So it's still going. I think Carlyle, the JV that they had kind of distracted a lot of the talking at some point in time and diverted it now that, that is kind of falling apart. People are back calling us.

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Torrey Joseph Schultz, RBC Capital Markets, Research Division - Co-Head & MD of Master Limited Partnership Franchise [18]

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Okay. Makes sense. Just lastly, on the debt refinancing. So are the distribution cut and the recent results here enough to get that done in your view? Or are there other liquidity measures you may have to consider, whether that's asset sales, private capital? Just any more thoughts on that process as you enter the debt markets here.

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Sharon L. Taylor, Martin Midstream Partners L.P. - Head of IR [19]

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Yes, as we have been looking at this for a little while now, we are actually in the process of beginning what I'd call the kickoff. We believe right now that what we have done will allow us to access the public debt markets, and we should be complete with that process before the end of the first quarter.

And to any asset sales, we've spoken before about noncore asset sales. We still have some smaller assets that are either not in service at this time or outside of our refinery business that we're concentrated on. So we might have some additional smaller asset sales still out there. Again, those won't move the needle much, but every piece of that helps.

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Ruben S. Martin, Martin Midstream Partners L.P. - President, CEO & Director of Martin Midstream GP LLC [20]

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But I think to answer the question, too, is that the answer is yes, we can get there with what we've done now. And any asset sales if we did decide to do any, we don't have to, but if we did, it would just move that time line up.

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Operator [21]

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(Operator Instructions) And our next question comes from Sunil Sibal with Seaport Global Securities.

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Sunil K. Sibal, Seaport Global Securities LLC - MD & Senior Energy Infrastructure Analyst [22]

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A couple of questions on the balance sheet. My understanding is that as far as the secured revolver is concerned, you have a leverage limit of 2.75 on that. Can you confirm that? And then where did you end up at the end of the year on that metric?

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Sharon L. Taylor, Martin Midstream Partners L.P. - Head of IR [23]

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Yes, that -- senior secured leverage was 2.75. We were at 1.77 at the end of the year.

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Sunil K. Sibal, Seaport Global Securities LLC - MD & Senior Energy Infrastructure Analyst [24]

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Okay. Then kind of related to that, in terms of when you're looking at refinancing the senior unsecured, is there a potential to kind of lessen that burden of the new by using some of this margin that you have on the secured side? Or is there something in the secured, which prohibits you from using this margin to, say, buyback unsecured bonds in the market or something like that?

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Sharon L. Taylor, Martin Midstream Partners L.P. - Head of IR [25]

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We are looking, as I spoke to, for the note amount to be substantially similar to where we are today, which is $374 million. And to the last part of your question, there is nothing that would preclude us from moving that amount around as needed.

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Sunil K. Sibal, Seaport Global Securities LLC - MD & Senior Energy Infrastructure Analyst [26]

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Okay. And then in terms of your sulfur margins or more so on the butane margins for the Q1, is that margin pretty much hedged in? I know you mentioned that you're pretty hedged going into the fourth quarter, but I was wondering how should we think about that for the first quarter.

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Robert D. Bondurant, Martin Midstream Partners L.P. - Executive VP, CFO & Director of Martin Midstream GP LLC [27]

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Yes. We were significantly hedged going into the quarter. Based upon our inventory cost position as hedges, we felt very comfortable about our first quarter performance in the butane business, and there's a potential to possibly exceed it.

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Sunil K. Sibal, Seaport Global Securities LLC - MD & Senior Energy Infrastructure Analyst [28]

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Okay. And then last one for me, I think you mentioned that as far as contracts between MMLP and MMRC, about 25% of the EBITDA is coming from MMRC in 2020. Could you remind us what was that -- what that number has been historically closer to?

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Robert D. Bondurant, Martin Midstream Partners L.P. - Executive VP, CFO & Director of Martin Midstream GP LLC [29]

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It's very similar. Plus or minus a few percentage points.

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Operator [30]

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And I'm not showing any further questions at this time. I will now turn the call to Bob Bondurant for any further remarks.

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Robert D. Bondurant, Martin Midstream Partners L.P. - Executive VP, CFO & Director of Martin Midstream GP LLC [31]

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Okay. Thank you, Sydney. And thank you as well to everyone listening to the call this morning. I want to take the opportunity to emphasize once more that our targets remain the same. Leverage below 4x and coverage greater than 1.3x. Through continued emphasis on capital discipline and efficient management of our business, we will make progress toward those targets.

In addition to improving the balance sheet management's top priorities include: one, delivering on our 2020 guidance; two, identifying opportunities to provide value to our unitholders, business partners and employees; and three, positioning the company for the future.

Thank you for your interest and investment in Martin Midstream Partners.

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Operator [32]

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Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.