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Edited Transcript of MMLP earnings conference call or presentation 25-Jul-19 1:00pm GMT

Q2 2019 Martin Midstream Partners LP Earnings Call

Kilgore Jul 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Martin Midstream Partners LP earnings conference call or presentation Thursday, July 25, 2019 at 1:00:00pm 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

* Selman Akyol

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

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Martin Midstream Second Quarter 2019 Earnings Conference Call Webcast. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Sharon Taylor, Director of Investor Relations. Ms. Taylor, you may begin.

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

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Good morning. Thank you, Josh. 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 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 a reconciliation of non-GAAP financial measures referenced in today's call to their corresponding GAAP measures.

Now I'm going to turn the call over for opening remarks to 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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Good morning. Thanks, Sharon, for joining the call. Thank you all for joining the call today. On June 28, we closed a previously announced sale of our natural gas storage assets for $215 million. The sale of these assets was the next step in our strategy to strengthen the balance sheet and refocus our operational efforts around our diversified legacy assets that provide specialty services in the midstream space.

We have, in the last 12 months through divestitures and the drop-down of Martin Transport, Inc., received net proceeds of approximately $283 million, which were used to pay down debt under the revolving credit facility. Further because of that reduced debt, we will benefit from approximately $15.6 million in interest expense savings, while only reducing annual EBITDA by approximately $3.5 million. Or said another way, we have increased distributable cash flow by an estimated $12.1 million.

We will continue to concentrate on capital discipline and remain focused on reducing leverage to below 4x. And while dedicated to improving our balance sheet strength, we will look to grow our company through improved utilization and efficiency of our existing operational assets, capitalizing on current business segments with the stronger economic outlook and continuing to support strategic alliances at our Beaumont and Harbor Island terminals.

Now I'll turn it over to Bob Bondurant to discuss the second quarter.

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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. Now I'd like to discuss our second quarter performance compared to guidance for both continuing and discontinued operations. For the second quarter, we had adjusted EBITDA of $30.7 million compared to adjusted guidance of $37.5 million. The miss in adjusted guidance was primarily in our store-based terminals and our butane and fertilizer businesses.

Our Sulfur Services business missed guidance by $2.1 million, of which $1.5 million was in our fertilizer business. Although we were on target with our fertilizer cash flow forecast in April and May, June performance collapsed as the impact of the rain and flooding in the Midwest forced farmers to make a final decision to not plant corn in extremely wet field conditions. As a result, June sales were well below June forecast and accounts for our miss in this business in the second quarter. Now that's the bad news for this year's fertilizer season. Looking forward, corn prices have risen significantly in anticipation of reduced U.S. corn supply this year. If corn prices remain at these higher levels going into next year's planting season, demand for our niche sulfur-based fertilizer products should be very strong, allowing us to realize improved and also more normalized fertilizer cash flow next year.

On the pure sulfur side of the business, both our molten sulfur and prilled sulfur businesses each missed forecast by $0.3 million. The miss in the molten sulfur side of the business was due to temporary increased operating costs. The miss in the prilled sulfur side of the business was due to weak sulfur production out of the Northern California refineries that supply our stock in prilled sulfur terminal. This was a result of continued operating issues most of the Northern California refineries have been experiencing this year.

And looking at our revised guidance for our Sulfur Services business. We have lowered our cash flow for our Gulf Coast prilling operations as a result of our ship loader being out of service until January 2020. This was a result of the previously disclosed storm in May that significantly damaged our prilled sulfur ship loader. We have property damage insurance coverage with a deductible of $500,000 and business interruption coverage that has a deductible of 30 days. Although we have business interruption coverage, we will not be able to recognize any lost prilled services income until we are actually paid by our insurance carrier. As a result, we have lowered prilled sulfur guidance through the remainder of this year. When we do produce guidance for 2020, it will reflect a large business interruption payment in our prilled sulfur business forecast in the spring.

Now on our natural gas liquid segment, we missed forecast by $2 million, which was primarily in our butane logistics business. We carried over approximately 95,000 barrels of butane inventory at the end of the first quarter that had a carrying cost greater than our realized sales price for the second quarter as butane market prices trended downward throughout the quarter. The good news is that we have finally liquidated all of our higher cost butane inventory that was purchased last summer, and our current inventory carrying value is at a significantly lower price relative to last year. We will also

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the third quarter and are currently doing so at discounts to Mont Belvieu pricing. Barring any unforeseen price collapse, we should be positioned for significantly improved butane margins relative to a year ago during the sales season, which begins in October and runs through early March of 2020. Our revised guidance reflects an outlook based on current carrying values of inventory and is based on forward curve pricing.

In our terminal services segment, we missed forecast by $2.1 million. Of this miss, $1.9 million came from our marine shore-based business. This was a result of reduced contract renewal rates that took effect in the second quarter as a result of the continued weakness of the deepwater offshore rig count in the Gulf of Mexico. The Louisiana deepwater rig count in the Gulf collapsed from 53 at the beginning of 2015 to an average of 18 for the last 3 years. These new lower contract throughput rates are reflected in the guidance for the remainder of the year.

In our marine -- excuse me, in our transportation segment, we missed guidance by $0.3 million. Our Marine Transportation business exceeded forecast by $0.4 million, as there continues to be strengthening in the day rates we are earning. Offsetting this was our land transportation business, which missed forecast by $0.7 million. Although our second quarter cash flow from our land transportation business has increased over $1.8 million when compared to the second quarter of 2018 when compared to guidance, this business did miss forecast as the result of overall Gulf Coast refinery downtime due to extended turnarounds that carried over to the second quarter. We also experienced overall weaker demand from some of our chemical transportation customers. Looking forward, we have several new contracts beginning in the third quarter that support our forward guidance.

Finally, I would like to address the large net income loss from selling Cardinal Gas Storage. We started this business primarily as a greenfield development project in the 2008 to 2013 time frame, when storage rates were much higher than they are today. We executed long-term contracts at these higher rates that supported the cost of our investment during those years. However, beginning in 2016, these long-term contracts began to roll over. And over the course of the last 4 years, our adjusted EBITDA in this business steadily fell year-over-year from $44.5 million in 2015 to $20.3 million forecasted for 2019. In our just completed sale, the value received was, of course, based on current market conditions and the future outlook of Cardinal. As a result, we realized gross sales proceeds of $215 million, which was a significant deleveraging event for MMLP, but was much less than our original capitalized investment cost. As a result, we realized a second quarter loss from discontinued operations at Cardinal of $180.6 million.

Now I'd like to turn the call back over to Sharon who will discuss our balance sheet and provide a liquidity update.

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

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Thanks, Bob. On June 30, 2019, the partnership's balance sheet reflected long-term funded debt of $596 million. Our balance sheet funded debt is shown net of unamortized debt issuance costs and unamortized issuance premium as actual funded debt outstanding was $599 million. Reconciling this amount at quarter end, our revolving credit facility balance was $225 million and the notional number of senior unsecured notes was $374 million. Thus, our total available liquidity on June 30 was $275 million based on our then $500 million revolving credit facility.

For the quarter ended June 30, 2019, our bank-compliant leverage ratios, defined as senior secured indebtedness to adjusted EBITDA and total indebtedness to adjusted EBITDA, were 1.92x and 5.12x, respectively, compared to 2.59x and 5.45x on March 31. As a reminder, our total debt ratio is shown with adjustments from the working capital carve-out sublimit, which allows us to exclude certain debt directly attributed to our seasonal NGL inventory build if those volumes are either forward sold or hedged. At June 30, 2019, the calculated debt related to our inventory build was $10 million. Accordingly, we excluded that amount from our total debt when calculating our total debt-to-EBITDA ratio. Without this carve-out, our total debt to adjusted EBITDA would be 5.2x at June 30 compared to 5.51x at March 31. Our bank-compliant interest coverage ratio, as defined by adjusted EBITDA to consolidated interest expense, was 2.78x at June 30, compared to 2.59x at March 31. In all, on June 30, the partnership was in full compliance with all covenants, banking or otherwise.

On July 17, we announced the closing of an amended and extended revolving credit facility. The facility, which is our primary source of liquidity, was extended for over 3 years and now matures August of 2023 with a springing provision to 180 days ahead of the February 21 maturity of our senior notes if the notes are not refinanced by that time. Our committed facility is $400 million compared to the previous level of $500 million. With fewer committed dollars, the partnership will benefit from paying less unused fees in the future and still retain enough liquidity based on our forecasted capital spending needs. Likewise, our lending syndicate going forward will be smaller as we reduce total number of lenders from 18 to 12. As was previously the case, MMLP retains the ability to increase its commitment amount up to $100 million through an accordion feature in the agreement should additional credit facility requirements arise.

We are very pleased with the outcome of our refinancing, and we appreciate the fact that many of our long-term relationship banks stepped up and actually increased their commitments to Martin. And while our cost of borrowing will increase by 25 basis points across the leverage-based grid, our maturity date has been pushed out over 3 years, which we view as tremendously favorable.

Moving to the revised 2019 financial 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 $30.7 million to $128.8 million, which includes actual results for the first half of '19 and revised third quarter and fourth quarter outlook. Revisions to the second half of the year includes removing any guidance related to Cardinal Gas Storage and reducing revenues due to the storm damage at our Neches terminal and recontracting rate reductions in the shore-based terminals segment, both of which Bob spoke to earlier in his remarks.

Turning to our capital spending. Our growth capital during the second quarter of 2019 totaled approximately $5 million. We are revising our full year growth capital expenditures to approximately $18 million, an increase of $4 million, which is related to its construction of the new ship loader at the Neches facility. The majority of the costs related to the ship loader will be funded by insurance proceeds that should be received in the spring of 2020. Our maintenance capital expenditures during the quarter totaled approximately $4 million, which was $2 million less than our projection for the quarter. This decrease was attributable to maintenance in an offshore sulfur barge and tug, which was planned for the second quarter of '19 but was accelerated into the first quarter for scheduling purposes. For the full year, our revised maintenance CapEx will be approximately $24.1 million. That's an increase of $1.9 million related to higher maintenance on our marine equipment and turnaround cost at our Neches AT plant.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Kyle May with Capital One Securities.

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

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I wanted to start with the Terminalling and Storage segment, can you walk us through the percentage of the business that went through contract renewals and then the length of those new contracts?

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

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Well, the one area that we had a contract rollover was in our shore-based business. And while our minimum volume commitment remained the same, the pricing fell significantly. And this was a result of the -- really, the lack of demand in the Gulf of Mexico. So that is the only real contract rollover we have had. And it is reflected in our guidance going forward. You'll see a decrease in our shore-based forecast guidance. This -- well, our original guidance, I think, in this business was $10 million for the year. Our revised guidance is now $4.7 million.

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Ruben S. Martin, Martin Midstream Partners L.P. - President, CEO & Director of Martin Midstream GP LLC [4]

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And that contract had been in place for 5 years or so, right?

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

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Well, yes.

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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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5 or 6 years, it was just rolling over after 5 years. And like I said, at one time, there's 53 rigs out there. It probably peaked at 60. Now there's anywhere from 18 -- I understand it's up to 22 now. And our business -- we've always had a certain percentage of that business and still the -- but it's dropped to about those percentages.

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Robert D. Bondurant, Martin Midstream Partners L.P. - Executive VP, CFO & Director of Martin Midstream GP LLC [7]

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So if you look at the total Terminalling and Storage, our original guidance was $55 million for the year. Now as a whole, it's $48.7 million. So it's all in the -- it's in the shore-based business basically.

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Kyle May, Capital One Securities, Inc., Research Division - Associate [8]

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Okay, got it. And you had mentioned those contracts previously were in place for like 5 to 6 years. What's the length on the new contract?

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Ruben S. Martin, Martin Midstream Partners L.P. - President, CEO & Director of Martin Midstream GP LLC [9]

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Yes. It's probably -- it's just annually, I think.

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Sharon L. Taylor, Martin Midstream Partners L.P. - Head of IR [10]

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Yes, an annual contract.

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Robert D. Bondurant, Martin Midstream Partners L.P. - Executive VP, CFO & Director of Martin Midstream GP LLC [11]

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It's definitely annually.

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Kyle May, Capital One Securities, Inc., Research Division - Associate [12]

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Okay. Got it. That helps.

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Robert D. Bondurant, Martin Midstream Partners L.P. - Executive VP, CFO & Director of Martin Midstream GP LLC [13]

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It's got nowhere to go but up. So yes, I think all of that -- there's really very little cash flow. If you look at the shore-based business, so a little more clarity, we'll be at $4.7 million guidance this year, and the majority of that is coming from lubricant sales. About -- only now about $1 million is coming from this throughput contract. So to the extent the Gulf of Mexico ever comes back, there will be upside in these numbers. I think basically -- and this is the remaining upstream exposure we have. And we've now -- based upon our current contract position, there's no more real downside relative to upstream in our business anymore.

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Kyle May, Capital One Securities, Inc., Research Division - Associate [14]

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Okay. Got it. That's helpful. And then one other thing I wanted to ask about. You previously talked about potential noncore asset sales. Can you give us any details about those assets and maybe an update on how that process is going?

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

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So what we have said is that we don't want to give any detail about what we are looking at right now but we are in the process, and we expect that by year-end, we'll be able to announce some future sales.

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Operator [16]

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

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Selman Akyol, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research [17]

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I guess, let me start out with, can you talk about just, I guess, thinking about hedging your butane and just your strategies there on a go-forward basis?

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Robert D. Bondurant, Martin Midstream Partners L.P. - Executive VP, CFO & Director of Martin Midstream GP LLC [18]

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Well, typically, what we do as we get closer to the sale season and the market gets into contango, that's when we will consider hedging. We had some hedges on here recently. And we took them off when we realized some profits. So there is some little bit of opportunism in our hedging at this point in the purchasing cycle. But as we get closer to the sales cycle, we will tend to hedge especially as the market goes into contango. If it's flat or backward dated, it doesn't make sense to hedge that where you're just holding inventory and selling at a breakeven or a loss. So that's our strategy.

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Ruben S. Martin, Martin Midstream Partners L.P. - President, CEO & Director of Martin Midstream GP LLC [19]

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And we're in -- the things that we're buying now with the contracts, we're coming in at a number that's about 55% to less than 60% of where we were last year, so it is almost half of the values from last year and crude is even pretty flat. So relative to crude, it's a substantial differential now. And so we're looking at that every single day to determine. And that product will start moving here in late September or early October. It will start moving and it moves out pretty fast. So that's where there is a certain amount. But again, we're going into storage a lot less. And there's a lot of different types of pages, but it's just difficult sometimes in a thin market like that.

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Selman Akyol, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research [20]

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Okay. And then in transportation, I think you referenced sort of weaker demand on the chemical side. Can you talk just a little bit about in terms of how long you expect that to continue? Or are you seeing -- are you looking for any pickup anytime soon?

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

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I think we expect to see some pickup more towards the back end of the year, according to our business manager there. I don't really have any more details around that, but you can see with our transportation guidance, we have left it in the back half of the year, increased from the front half of the year. And we do have, as Bob mentioned, contracts that started or starting within the next 30 days that support those out quarter numbers.

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Selman Akyol, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research [22]

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Are those contracts either, I guess, MPCs, take-or-pays? Anything to think about, result or volume related?

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Ruben S. Martin, Martin Midstream Partners L.P. - President, CEO & Director of Martin Midstream GP LLC [23]

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Yes. Most of the contracts or the contracts for the transportation, we're the exclusive trailer on it. We actually have contracts where the customer pays if it's a specialty trailer. The customer will pay for that trailer, give us a return on capital on the trailer and pay us the freight rates that we require that are regular rates in the business. So that business, as always, can slow down due to certain things in the marketplace concerning the chemicals, but overall, it's pretty steady. And we saw some decrease due to the hurricane that came in. You shut down some plants. Of course, they've got to catch back up. So -- but overall, it's very, very steady.

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Operator [24]

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I'm not showing any further questions at this time. I would now like to turn the call back over 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 [25]

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Thank you, Josh. And I'd like to thank you all for joining the call today. Now over the last 5 quarters, we have faced headwinds in most of our business segments, but specifically in fertilizer and in butane. When our results were negatively impacted by a historically fast commodity price collapse or range in flooding throughout the U.S. during the planting season, we have not been distracted from our strategy to delever the balance sheet and strengthen the partnership for the future even while dealing with factors not under our control.

So what have we accomplished? First, we concentrated on strategic initiatives to lower our leverage. And while we have not gotten to our stated goal of below 4x, we have made progress and will continue that progress. Next, we simplified our operations through noncore asset sales and have gotten back to our roots of diversified specialty services concentrated on the Gulf Coast region. Another benefit of these noncore asset sales besides refocusing is that we have limited up our upstream exposure, which truly only remains within our shore-based terminal group. And though not popular nor desirable, we cut our distribution in half, ensuring that our annual coverage ratio will be above 1x even when the operating environment is as challenging as the last year.

Thank you for your interest in Martin Midstream, and we will look forward to answering any follow-up questions you may have. Thank you.

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Operator [26]

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