U.S. Markets closed

Edited Transcript of MMLP earnings conference call or presentation 24-Oct-19 1:00pm GMT

Q3 2019 Martin Midstream Partners LP Earnings Call

Kilgore Oct 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Martin Midstream Partners LP earnings conference call or presentation Thursday, October 24, 2019 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* 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

================================================================================

Conference Call Participants

================================================================================

* Kyle May

Capital One Securities, Inc., Research Division - Associate

* Selman Akyol

Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for standing by, and welcome to the Martin Midstream Partners LP Third Quarter 2019 Earnings Conference Call and Webcast. (Operator Instructions)

Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to your speaker today, Sharon Taylor, Director of Finance and Investor Relations. Please go ahead.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Sarah. Good morning, everyone, and welcome to the Martin Midstream Partners conference call to discuss third quarter 2019 results. In the room 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 opinions 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 the reconciliation of non-GAAP financial measures referenced in today's call to their corresponding GAAP measures.

I'll now turn the call over to Bob Bondurant.

--------------------------------------------------------------------------------

Robert D. Bondurant, Martin Midstream Partners L.P. - Executive VP, CFO & Director of Martin Midstream GP LLC [3]

--------------------------------------------------------------------------------

Thanks, Sharon. I would like to discuss our third quarter performance, which is our seasonally weakest quarter in relation to EBITDA performance. For the third quarter, we had adjusted EBITDA of $22 million compared to adjusted guidance of $25.2 million. During the quarter, relative to guidance, we experienced strength in our Terminalling and Natural Gas Liquids segments, offset by weakness in our Transportation and Sulfur Services segments.

Our Terminalling and Storage segment exceeded forecast for the third quarter by $1.3 million. In this segment, our packaged lubricant and grease business exceeded forecast by $0.6 million as a result of both sales volumes and margins exceeding forecast as we have been expanding our customer base.

Also our Terminalling operations exceeded forecast primarily at our lubricant refinery, which was $0.7 million over forecast as a result of reduced operating expenses.

Looking toward the fourth quarter. Guidance remains the same, however, fourth quarter EBITDA is anticipated to be lower than third quarter as there will be most likely be reduced sales volumes due to seasonality in the packaged lubricant and grease business as demand for these products slows during this quarter primarily during the time between Thanksgiving and the New Year.

Our natural gas liquids business exceeded forecast by $1.3 million as butane sales were above expectations primarily due to an unanticipated increase in butane demand from our customers in September.

Looking toward the fourth quarter in our butane business, we have decreased our guidance primarily driven by anticipated pricing in the fourth quarter. Although we anticipate strong demand from our refinery customers, the expected amount of increase in butane pricing should not be as significant as originally forecasted due to the continued oversupply of NGLs in the Mont Belvieu market.

We do have a significant portion of our inventory hedged at pricing above our inventory carrying costs. So we believe our earnings in this business will be significantly greater than what we experienced in the fourth quarter of 2018.

Our Sulfur Services business missed guidance by $3.8 million, of which $2.7 million was in our fertilizer business and the balance was in our pure sulfur side of the business. Our fertilizer business missed forecast due to U.S. farmers' late fall field preparations.

This was a result of the delay in this year's crop harvest, which was due to late crop planning as a result of the heavy rains this spring and early summer. The impact of this chain of events has resulted in reduced third quarter sales until farmers begin their fall field preparation activity sometime in the fourth quarter.

Looking forward, we continue to see a decline in our raw material costs, including sulfur and ammonia, so we anticipate improve fertilizer margins due to these reduced input costs. Also based on current information, we believe there will be a harvest shortfall this year, which should improve crop pricing next year increasing fertilizer demand and benefiting our fertilizer business.

On the pure sulfur side of the business, our forecast miss of $1.1 million was primarily driven by reduced sulfur production from Beaumont area refineries due to multiple turnarounds and unplanned maintenance. As a result, the Beaumont area sulfur volumes we handled in the third quarter was down 17% when compared to the second quarter and down 30% from last year's third quarter. We anticipate full sulfur production from refineries in the Beaumont area will be realized beginning in early November.

The sulfur ship loader casualty loss, which occurred in May, has temporarily reduced Sulfur Services' cash flow. We anticipate the first business interruption insurance installment payment of $1 million during the fourth quarter, which is reflected in our guidance. We should receive additional business interruption installment payments in the first quarter of next year.

Now in our Transportation segment, we missed guidance by $1.8 million. Our Marine Transportation business exceeded guidance by $300,000 as utilization and day rate pricing continues to remain strong. More than offsetting this positive performance was our land transportation business, which missed guidance by $2.1 million.

Although our third quarter cash flow from our land transportation has increased by $1 million when compared to the third quarter of 2018, when compared to guidance, similar to our pure sulfur business, this business missed forecast primarily as a result of overall Gulf Coast refinery downtime due to turnarounds and unplanned maintenance, which occurred in the third quarter. This has negatively impacted our sulfur truck load count as reduced sulfur production from Gulf Coast refineries has lowered our overall truck count -- truck load count, excuse me.

Also due to larger macroeconomic factors, the demand for truck transportation from our chemical customers has softened. As a result of this and also because of continuing refinery maintenance projects due October, we have lowered land transportation guidance by $1.2 million.

Now in spite of this lower overall guidance at the partnership, we're looking towards our anticipated fourth quarter performance. We expect EBITDA to be approximately $32.1 million and distribution coverage to approximate 1.7x for the fourth quarter.

Now I would like to turn the call back over to Sharon to discuss our balance sheet, capital resources and recent asset sales.

--------------------------------------------------------------------------------

Sharon L. Taylor, Martin Midstream Partners L.P. - Head of IR [4]

--------------------------------------------------------------------------------

Thanks, Bob. On September 30, 2019, the partnership's balance sheet reflected long-term funded debt of $609 million plus short-term debt related to finance lease obligations of $6 million for a total of $615 million of debt. Our balance sheet long-term funded debt is shown net of unamortized debt issuance costs and unamortized issuance premiums as actual funded debt outstanding was $621 million. Of that, we had $238 million outstanding under our $400 million revolving credit facility resulting in total available liquidity of $162 million.

Our bank-compliant leverage ratios, defined as senior secured indebtedness to adjusted EBITDA and total indebtedness to adjusted EBITDA, were 1.80x and 5.10x, respectively, which is a slight decrease in our total leverage ratio from 5.12x on June 30. As a reminder, our total debt ratio is shown with adjustments from the working capital carve-out sublimit defined in our credit agreement.

This provision excludes certain debt directly attributed to our seasonal NGL inventory build from our total debt-to-EBITDA calculation if the volumes are either forward sold or hedged. At September 30, the calculated debt related to our inventory build was $42.8 million, which, accordingly, was excluded from total debt when calculating our debt-to-EBITDA ratio.

Finally, our bank-compliant interest coverage ratio, as defined by adjusted EBITDA to consolidated interest expense, was 2.75x. Meaning, on September 30, the partnership was in full compliance with all covenants.

On August 12, we announced the sale of East Texas pipeline, a 200-mile NGL pipeline running from Kilgore, Texas to Beaumont, Texas. Proceeds of $17.5 million from the sale were used to reduce borrowings under our revolving credit facility. The pipeline was sold as part of our announced strategic initiatives to divest the noncore assets, to delever the balance sheet and position the partnership for growth opportunities.

Moving to our revised 2019 guidance, which was attached to the press release yesterday and can be found on our website at mmlp.com. Full year 2019 adjusted EBITDA has been reduced approximately $13.1 million to $115.7 million, which includes actual results for Q1 through Q3 of '19 and our revised fourth quarter outlook.

Revisions to the fourth quarter include lowering guidance related to our NGL and Transportation segments. In our NGL segment, we believe higher butane inventories will result in a lower seasonal uplift in pricing. However, as Bob said, we do have a significant portion of our inventory hedged and expect positive cash flow of approximately $8.3 million in the fourth quarter related to our butane optimization business.

In the Transportation segment, we lowered guidance due to extended third-party refinery turnarounds and unplanned maintenance that have resulted in lower tank truck sulfur hauls. Though this issue will resolve itself as certain refineries that utilize our land transportation assets, were back online in mid-October or are scheduled to be online by mid-November.

Moving to capital spending. Our growth capital during the third quarter of 2019 totaled approximately $5.1 million. I'm sure you'll recall at the end of the second quarter, we revised our full year growth capital expenditures to include construction costs related to the new ship loader at the Neches facility.

At this time, we have better visibility to total costs and the timing of both CapEx related to the construction of the new ship loader and property insurance proceeds for the damage claim. Total capital expenditures for the new ship loader are anticipated to be approximately $12 million. The majority of this should be funded by property insurance proceeds.

Of the total $12 million, approximately $9 million will be spent in 2019 with the remaining $3 million spent in the first quarter of 2020. And as to the timing of property insurance proceeds related to the ship loader, we received $2.5 million in the third quarter, expect to receive another $2.5 million in the fourth quarter and the remaining proceeds should be received in the first quarter of 2020.

Distributable cash flow for the quarter totaled $8.3 million and includes maintenance CapEx of approximately $2.7 million. This equates to a 0.84x coverage in what is typically, as Bob mentioned earlier, our lowest coverage quarter due to the seasonality of our businesses. For comparison purposes, the average of our previous 5 years third quarter coverage is 0.22x lower or a 5-year average of [0.62x] (corrected by company after the call) compared to 0.84x as reported. And for the fourth quarter of 2019, our maintenance capital expenditures will be approximately $4.7 million contributing to an estimated coverage of approximately 1.7x.

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

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from the line of Kyle May with Capital One.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I was wondering if we could start with the trucking business. When you acquired this asset, this business, Martin provided some guidance out through 2022. Just wondering if you can give us any preliminary updates or kind of how you're thinking about the business now that you've been operating for a few quarters?

--------------------------------------------------------------------------------

Robert D. Bondurant, Martin Midstream Partners L.P. - Executive VP, CFO & Director of Martin Midstream GP LLC [3]

--------------------------------------------------------------------------------

Well, when we bought that business, our anticipation was we would have approximately $23.6 million of EBITDA this year. We're roughly going to be a little bit above $20 million, kind of somewhere in the low to mid-20s. The -- really, the difference fundamentally has been the numerous turnarounds both at the first part of the year and the back half of the year. And our sulfur load count has been significantly lower period-over-period. We anticipate that to improve.

We don't have any fundamental knowledge if this could be IMO 2020 related, all these extra turnarounds, but it might be. Anyway, the pathway next year seems to be that sulfur production will be more normal. So the growth in CapEx, we are going to continue to reduce lease expense as we buy out these leases. And that's been classified as low dollar growth CapEx. So we do see a runway of continued improvement in cash flows.

We may not hit the '21 and '22 targets, but we would be near them. Fundamentally, probably the swing item if sulfur production comes on back to normal would be the chemical hauling. And that's really as much as anything economic driven. So extend -- if the country would go into recession, that might be sulfur. However, if it strengthens, it would be better.

So we still feel generally good about the trend of our growth in cash flow. It just may not be quite as much in those out years as originally forecasted.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Got it. That's very helpful. And then switching over. So the butane and fertilizer businesses have struggled this year. Just kind of curious if you have any preliminary thoughts on whether or not these will turn around next year or just kind of early expectations on how these could come together.

--------------------------------------------------------------------------------

Robert D. Bondurant, Martin Midstream Partners L.P. - Executive VP, CFO & Director of Martin Midstream GP LLC [5]

--------------------------------------------------------------------------------

Well, as I mentioned, this harvest, it's -- number one, it's late. Number two, the corn production is going to be, we believe, way under what was originally expected. So that will most likely drive increased crop prices, which means farmers will want to plant because values will be up.

And so you had 2 things with all these floodings. You're going to have that demand, we think, increase most likely acreage -- number of acreage planted in corn. And number two, with all this flooding, fundamental plant nutrients were washed away. So in addition to planting for crops, they got to supplement their lost nutrients. So we believe the demand's going to be strong next year.

Now the offset of that is there could be larger inventories that weren't consumed this year that may keep prices from moving too far north. We feel fundamentally on the -- our input costs, our sulfur prices, ammonia prices are down. We think that's going to help and crop prices help.

And then on the butane business, we did -- we laid in costs at historically low values since we've been in this business relative to crude oil. And the butane pricing relative to crude oil did move north not as much as we thought as the demand season has been kicking in. We think the real issue has been all the excess supply of butane in the Belvieu area because there's lack of export.

Production is up, which is temp, price is down and -- because there's no export capability. However, we do know -- I believe Enterprise is now up and running their new export facility. And I believe Targa has a new facility coming on in Q1 of next year. So we think that will help for next year. Again, we're going to be profitable in this business, strongly hedged, just not as much we recently forecasted because of all this excess supply.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from the line of Selman Akyol with Stifel.

--------------------------------------------------------------------------------

Selman Akyol, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research [7]

--------------------------------------------------------------------------------

Just starting off, I guess, on the balance sheet. Did you guys get any waivers this quarter? Or do you anticipate having to get any waivers next quarter given the lowered outlook?

--------------------------------------------------------------------------------

Sharon L. Taylor, Martin Midstream Partners L.P. - Head of IR [8]

--------------------------------------------------------------------------------

No. We did not have to get any waivers this quarter. And we do not anticipate based on our guidance and our forecast in needing those going forward fourth quarter or into 2020 and beyond.

--------------------------------------------------------------------------------

Selman Akyol, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research [9]

--------------------------------------------------------------------------------

Okay. And then just back to Transportation. Can you talk maybe a little bit about sort of utilization of the assets, where they were during the quarter, I guess, compared to originally where you thought they might be utilized at?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Are you talking about Trucking or Marine?

--------------------------------------------------------------------------------

Selman Akyol, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research [11]

--------------------------------------------------------------------------------

Trucking. Yes, Trucking.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. On trucking, so our average load count for the -- daily load count was about 376 loads a day. Our truck count is about 450-ish. So now we always have a certain percentage of excess supply for truck breakdowns and et cetera. So if you did the raw math, I'm going to say about 380 divided by roughly 410 or 420. That would be a rough picture of our utilization.

And that will improve with this sulfur coming online. The sulfur loads are a whole lot of loads that are very short, good revenue per mile and it's a profitable area, but -- and we could -- you could be talking at a 100-plus loads at any one time.

--------------------------------------------------------------------------------

Selman Akyol, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research [13]

--------------------------------------------------------------------------------

Helpful. You referenced noncore asset sale, completing the one in the quarter. Are there any more other assets that you're looking at?

--------------------------------------------------------------------------------

Sharon L. Taylor, Martin Midstream Partners L.P. - Head of IR [14]

--------------------------------------------------------------------------------

We have a few minor opportunities that are still being considered, small noncore assets. There's nothing that's going to move the needle as far as leverage.

--------------------------------------------------------------------------------

Selman Akyol, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research [15]

--------------------------------------------------------------------------------

Got you. And then just lastly, on butane, just trying to kind of understand. And I get pricing hasn't recovered to the point that you originally anticipated. But can you maybe just talk about how much sales -- or what is your assumptions for your guidance going into the fourth quarter, maybe either in terms of spreads or number of barrels you expect to move in the quarter?

--------------------------------------------------------------------------------

Ruben S. Martin, Martin Midstream Partners L.P. - President, CEO & Director of Martin Midstream GP LLC [16]

--------------------------------------------------------------------------------

Well, I'll say is that the barrels that you -- we go in, it's not dependent a lot on the pricing up, down or whatever. It's basically based upon purchases that we make. In the summertime, a lot of those purchases are hedged. And then it starts moving back out in October. It really kicks in really big in November. Then you start moving it.

So we will -- you basically -- or totally moved all of your inventory by about March of next year. And so you move through that inventory. And it's pretty much the same every year because based upon gasoline production and vapor pressure allowables in all of the refineries, so it's very consistent.

It's really restricted by the total amount that our system can handle when it comes to the truck deliveries back to the refineries, truck pickup, storage, all of those kinds of things. But it's pretty consistent and it's not real dependent upon pricing up or down. It's more about when it's going to move and certain things that happen. And so right now the volumes are back up, things have kicked in and it seems to be kind of back to business as usual.

--------------------------------------------------------------------------------

Robert D. Bondurant, Martin Midstream Partners L.P. - Executive VP, CFO & Director of Martin Midstream GP LLC [17]

--------------------------------------------------------------------------------

And I will say this. Roughly, of our inventory carrying into the season, probably 60% to 65% is sold in Q4. And probably, well, the difference be 35% to 40% in Q1 typically.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

This concludes today's question-and-answer session. I would now like to turn the call back over to Bob Bondurant for closing remarks.

--------------------------------------------------------------------------------

Robert D. Bondurant, Martin Midstream Partners L.P. - Executive VP, CFO & Director of Martin Midstream GP LLC [19]

--------------------------------------------------------------------------------

Thanks, Sarah, and thanks to everyone who joined the call today as we look forward to stronger performance in our fertilizer, butane and transportation business. Goodbye.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Sharon L. Taylor, Martin Midstream Partners L.P. - Head of IR [21]

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

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