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Edited Transcript of MMLP earnings conference call or presentation 14-Feb-19 2:00pm GMT

Q4 2018 Martin Midstream Partners LP Earnings Call

Kilgore Feb 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Martin Midstream Partners LP earnings conference call or presentation Thursday, February 14, 2019 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

* Scott A. Southard

Martin Resource Management Corporation - VP of Commercial Development

* Sharon L. Taylor

Martin Midstream Partners L.P. - Head of IR

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Conference Call Participants

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* Torrey Joseph Schultz

RBC Capital Markets, LLC, Research Division - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to Martin Midstream Partners Fourth Quarter 2018 Earnings Conference Call and Webcast. (Operator Instructions) And as a reminder, today's conference is being recorded.

I'd now like to hand the conference over to Sharon Taylor, Director of Investor Relations. Please go ahead.

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

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Thank you, James. Good morning, everyone. With me in the room is Ruben Martin, CEO; Bob Bondurant, CFO; Scott Southard, our VP of Commercial Development; David Cannon, the Director of Financial Reporting; and Danny Cavin, our Director of FP&A.

Before we get started with the financial and operational results for the fourth quarter and full year 2018, I need to make this disclaimer.

Certain statements made during this conference call may be forward-looking statements relating to financial forecasts, future performance and our ability to make distributions to unitholders. We report our financial results in accordance with generally accepted accounting principles and use certain non-GAAP financial measures within the meanings of the SEC Regulation G such as distributable cash flow and earnings before interest, taxes, depreciation and amortization, or EBITDA; and also adjusted EBITDA. We use these measures because we believe it provides users of our financial information with meaningful comparisons between current results and prior reported results, and it can be a meaningful measure of the partnership's cash available to pay distributions. We also included in our press release issued yesterday a reconciliation of EBITDA, adjusted EBITDA, distributable cash flow and quarterly adjusted EBITDA guidance to the most comparable GAAP financial measures.

Our earnings press release is available at our website, mmlp.com. Further, in the press release, is a link to the slide deck that outlines our 2019 financial guidance.

Now I will turn the call over to Bob Bondurant, our CFO.

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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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Thanks, Sharon. Before I begin discussion of our fourth quarter performance, I would like to comment on our recent drop-down acquisition transaction of Martin Transport. We closed the transaction effective January 1 of 2019 for $135 million. The purchase price was financed by drawing $123 million on our revolving line of credit and the assumption of $11.7 million of debt secured by certain trucks and trailers.

As many of you will recall, we have estimated EBIDTA for Martin Transport to be $23.6 million in 2019, implying the purchase price of 5.7x. We still feel confident in our projection, as our revenue per mile and our driver count is currently greater than our acquisition forecast, so we remain very bullish on this acquisition and believe it provides a very strategic fit with a strong organic growth profile while extending the value chain of our refinery service business lines.

Now I'd like to discuss our fourth quarter performance compared to our fourth quarter guidance. For the fourth quarter, we had adjusted EBITDA of $27 million compared to adjusted guidance of $41.2 million. The miss in adjusted EBITDA compared to adjusted guidance was in our Natural Gas Services segment, specifically in our butane optimization business, as our actual fourth quarter butane optimization EBITDA was $0.7 million compared to our forecast of $14.2 million.

When we last spoke during our third quarter earnings call on October 25, we had every reason to believe we were going to achieve our fourth quarter guidance in this business, as the average butane price for the first 24 days of October was a $1.15 per gallon, which was significantly higher than our per-gallon cost in storage. In fact, the butane price at the beginning of October was $1.31 per gallon, falling to $0.72 by the end of November. So over a 2-month period from October 1 to November 30, butane prices fell $0.59 per gallon. Directionally, this decline mirrored crude oil, although the butane price decline was 45% over the 2-month period, compared to the crude oil price decline of 32%.

Although we had approximately 55% of our butane inventory hedged at the beginning of the fourth quarter, we did not have any inventory that was to be sold in the first quarter of 2019 hedged, as butane-forged sale prices in those months were in backwardation relative to our inventory carrying cost. As a result of the fourth quarter price collapse, we had to write-down our unhedged inventory throughout the quarter. This write-down impacted us by $9.5 million, effectively eliminating the significant butane profits typically realized in the fourth quarter.

Marginally offsetting this $13.5 million shortfall in the butane business was $0.9 million of excess cash flow over the combined fourth-quarter guidance of our propane, NGL, and gas storage business.

Our Terminalling segment missed guidance by $1.2 million, as our specialty terminals and shore base terminals each missed by $0.5 million. We've continued to experience reduced diesel throughput volumes and lubricant sales volumes at our marine shore bases as demand for fuel and lubes to support offshore drilling activity remains weak.

Our specialty terminals missed forecast as a result of increased operating cost of $0.4 million, primarily repairs and maintenance expense. The balance of our miss in our specialty terminals was the result of selling the Dunphy Nevada sulfuric acid terminal in December. Since this asset was outside our primary Gulf Coast footprint and also outside our developing refinery services business model, we felt it was important for the partnership to execute on this accretive transaction.

Our Sulfur Services segment EBITDA for the fourth quarter was $5.2 million compared to forecast of $5.9 million. Although our molten and prilled sulfur business exceeded forecast by $0.7 million, our fertilizer group missed forecast by $1.4 million, which all occurred in the month of December as a result of heavy rain in our market area. We believe the loss of fertilizer sales which occurred in December will ultimately be realized when precipitation reverts to more normal patterns.

And finally, our Marine Transportation segment exceeded forecast by $0.5 million in spite of accelerating the dry-dock of our offshore tow into December, which reduced offshore transportation revenue. We had originally planned to dry-dock this offshore vessel in March of 2019, but for commercial reasons, we moved the drydock up to the fourth quarter of 2018. This accelerated dry-docking also increased our maintenance capital expenditures in the fourth quarter by $1.8 million. Being in the marine transportation business continues to remain tight, which supports current strong utilization rates and cash flow.

So for the year of 2018, we only achieved 0.7 times DCF coverage of our $2 distribution. This entire miss can be accounted for in 2 areas -- our butane optimization business, which missed adjusted forecast by $13.3 million, and our fertilizer business, which missed adjusted forecast by $10.1 million. Both of these businesses are margin businesses, and as a result have the most potential volatility, both upside and downside. We are strategically thinking about how to protect the partnership against downside inventory and margin risk while trying not to limit its upside. We are analyzing alternatives to hedge our butane inventory position if we are faced with similar backwardation issues in the future.

In our fertilizer business, we should not have another significant write-down of physical inventory like we experienced this year when we converted to a [ledger] system of measuring our ammonium sulfate [piles]. This was a one-time adjustment of $4 million. Also, we are experiencing reduced raw material cost in early 2019, which should positively impact fertilizer margins in 2019 relative to 2018.

Now I'd like to turn the call back over to Sharon to discuss our balance sheet and capital resources.

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

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Thanks, Bob. We'll start with the normal walk-through of the debt components of our balance sheet, tying in our bank ratios at quarter end. Then we'll provide a quick review of fourth quarter and full year capital spending. Next, I'll discuss financial guidance for 2019, and then I'll be turning the call over to Ruben Martin for his remarks around strategic initiatives for the partnership.

On December 31, 2018, the partnership's balance sheet reflected total long-term funded debt of approximately $656 million. Our balance sheet-funded debt is shown before unamortized debt issuance and unamortized issuance premiums as actual funded debt outstanding was $661 million. Reconciling this amount at quarter-end, our revolving credit facility balance was $287 million and the notional number of senior unsecured notes was $374 million. Thus, our total available liquidity on December 31 was $377 million based on our $664 million revolving credit facility.

For the quarter and year ended December 31, 2018, our bank-compliant leverage ratios, defined as senior secured indebtedness-to-adjusted EBITDA and total indebtedness-to-adjusted EBITDA, were 2.14x and 4.61x respectively. 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 the volumes are either forward-sold or hedged from our total debt-to-EBITDA calculation.

At December 31, 2018, the calculated debt related to our inventory build was $43.5 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 4.93x.

Our bank-compliant interest coverage ratio, as defined by adjusted EBITDA to consolidated interest expense, was 2.9x.

Looking at the balance sheet, total debt to total capitalization on December 31 was 71.4%. In all, on December 31, the partnership was in full compliance with all covenants, banking or otherwise.

Now let's discuss the capital spending during the fourth quarter and full-year 2018. I'll start with growth CapEx. We spent approximately $2 million during the fourth quarter, for a total of $13 million in full-year 2018. And of that total, around $6 million was allocated to our marine equipment.

For maintenance CapEx, during the fourth quarter, we spent approximately $6 million on maintenance, bringing the total for the year to roughly $23 million. This number was approximately $2 million greater than our third quarter projection of $21 million. As Bob mentioned earlier, this increase is attributable to maintenance of our offshore tow, which was scheduled for the first quarter of 2019. However, the work was accelerated to the fourth quarter of 2018 for commercial reasons.

Turning to the 2019 cash flow and capital spending guidance for the partnership. Attached to the press release yesterday was our 2019 financial guidance, which provides detail by segment and by quarter. The presentation can also be found on our website at mmlp.com. Our Terminalling and Storage segment is forecasted to be the largest contributor to 2019 cash flow, with $55.4 million in adjusted EBITDA. That will be followed by our Natural Gas Services segment, at $50.1 million, then our Transportation segment, estimated at $35.8 million, which, as of January 1, includes the land division, or MTI. And finally, our Sulfur Services division forecasted EBITDA of $34.1 million. This totals $175.4 million before unallocated SG&A of $15.9 million, so $159.5 million for adjusted EBITDA after unallocated SG&A.

One thing to note on our adjusted EBITDA guidance reconciliation is the effect of the seasonality of our businesses on our quarterly cash flows. And while the acquisition of Martin Transport, Inc., does help smooth the quarterly results somewhat, our third quarter remains our seasonally weakest.

Our fixed-fee businesses continue to make up the majority of our forecasted cash flows, or 62% for 2019. Looking at our Natural Gas Services segment, we have strong fee-based cash flows in multiple-year gas storage contracts, with a weighted average life of approximately 3 years as of year-end 2018. We also have margin-based cash flows from our wholesale NGL operations, which includes our Butane Optimization business.

In our Terminalling and Storage segment, we enjoy fee-based contracts within our specialty and marine shore base terminals, a long-term tolling agreement with MRMC at our Smackover Refinery, and margin-based revenues in our Lubricants division.

In our Sulfur Services segment, we have long-term take-or-pay contracts for our sulfur prilling assets, fee-based transportation and handling contracts for molten sulfur, and margin-based revenues within the fertilizer group. Our Transportation segment consists of fee-based day rates for our marine assets and fee-based line haul rates for our newly-acquired land transportation assets.

To bridge the gap between 2018 results and 2019 estimates, for 2018, our actual adjusted EBITDA number was $123.7 million, which excludes approximately $3 million related to WTLPG, which was sold July 31, 2018. You recall that in June of 2018, we had several contracts expire at our Perryville Gas Storage location. This re-contracting resulted in reduced cash flows related to Cardinal Gas Storage of $11 million annually for 2019 and forward.

Offsetting that reduction is a forecasted return to historical normals for both our fertilizer and butane businesses, which will result in increased 2019 EBITDA of approximately $11 million and $14 million respectively. And as we have discussed, our estimated contribution to EBITDA from MTI is approximately $24 million. Netting together all those differences, that's an approximate total of $36 million of additional cash flow in 2019 compared to 2018.

Moving on to our estimated capital expenditures for 2019, we anticipate maintenance CapEx to be between $20 million and $23 million for the year. Included in that range is $3.4 million for the Smackover Refinery turnaround, which occurs every 2 years, and $2 million for a 10-year inspection due on one of our ammonia tanks. For gross capital expenditures, we are forecasting between $13 million and $14 million, with 40% of that to be spent in the fourth quarter of 2019.

In summary, our 2019 adjusted EBITDA forecast is $175.4 million before unallocated SG&A of $15.9 million, or $159.5 million in total. Total capital expenditures will be between $33 million and $37 million, with maintenance CapEx being approximately $20 million to $23 million and expansion CapEx estimated between $13 million and $14 million.

I'm now going to turn the call over to our CEO, Ruben Martin.

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Ruben S. Martin, Martin Midstream Partners L.P. - President, CEO & Director of Martin Midstream GP LLC [5]

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Thank you, Sharon. Good morning to everyone. I will begin briefly by addressing our participation in two potential projects that you most likely have read about in the media, and then announce an important strategic initiative the partnership has launched recently.

To begin with, let's discuss the two potential projects that are in very early stages of development but have been reported in the media, and as a result we received multiple inquiries concerning them. These are our crude oil export terminal at Harbor Island and an ethane export terminal at Beaumont, Texas. As was previously announced by the Carlyle Group, we are actively exploring with Carlyle Group in the Port of Corpus Christi the developments of a crude oil export terminal at Harbor Island. Although there are no definitive agreements in place, we believe our existing terminal adds strategic value to the project.

Moving to the proposed ethane export terminal in Beaumont, Texas, that American Ethane has announced, our existing Neches terminal site, which has access to deep water, is conducive to the construction of an ethane export terminal. As has been reported, the ethane export project is contingent upon licenses and permits that the Chinese government may issue, in addition to permits by multiple US and state agencies, none of which are in place today. Specifics regarding the ethane terminal and its operations are being developed at this time in conjunction with efforts to reach our definitive commercial agreements.

Finally, our strategy for the partnership has been for some time now to strengthen our balance sheet and focus our current operational efforts around our expertise in the refinery services industry. We believe that the timing is right to take the next meaningful steps toward our goals, the step being to market our Cardinal Gas Storage assets. We have hired an advisor to assist us and are approximately 2 weeks into the process that we estimate will take 16 weeks. Our objective remains constant -- a significant reduction in leverage for the partnership. Initial estimates of proceeds from the sale, coupled with our 2019 guidance resulted in pro forma leverage below 4x at the culmination of our successful transaction, strengthening our partnership, and providing the ability to pursue long-term strategic process.

Okay, James. That concludes our prepared remarks this morning, and now we can open the lines for question-and-answer.

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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 TJ Schultz with RBC Capital Markets.

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Torrey Joseph Schultz, RBC Capital Markets, LLC, Research Division - Analyst [2]

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I think, first, as you look at the kind of delevering process and a lot of moving parts there and some things in the hopper, just how much flexibility do you have on the distribution level? Maybe also in the context of MRMC's capitalization and need for that cash flow. Just any color on the policy for 2019 and in the scope of the proposed asset sale too.

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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, as far as MRMC is concerned, with the MTI drop-down transaction, our bank debt is very minimal, so the need for the distribution is not as large as it has been in the past. But I will say this. As Ruben discussed, we have a goal to delever the partnership and cover our distributions by at least 1.25x. And all strategic initiatives are focused on those goals, so we're entertaining any and all ideas that get us there in 2019. Would that include what you suggested? Maybe. A lot of it depends on the Cardinal transaction, what proceeds we receive from that.

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Torrey Joseph Schultz, RBC Capital Markets, LLC, Research Division - Analyst [4]

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Okay, makes sense. On the American Ethane terminal at Neches, are there any economics accruing to you as the deal is pending?

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Scott A. Southard, Martin Resource Management Corporation - VP of Commercial Development [5]

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We are very early in the process with them. We continue to negotiate definitive agreements, so I would say at this time we don't have anything more to share.

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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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I will say this, is that the assets that we're talking about in Beaumont are very strategically located when it comes to supply for all [LPGs] in that area. And so, the negotiation will involve the use of not only our land, our docks and the strategic location of the Beaumont terminal, and we have a lot of land that's available for expansion at that terminal. And so with the growth in that area and a lot of the supply and the product going close to Beaumont via pipeline and other avenues, we will be able to negotiate something that's good for the partnership.

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Operator [7]

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(Operator Instructions) And I'm not seeing any further questions in queue, so I'll turn the call back over to Mr. Martin for any closing remarks.

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Ruben S. Martin, Martin Midstream Partners L.P. - President, CEO & Director of Martin Midstream GP LLC [8]

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Thank you, James. In closing, I'd like to thank each of you for joining on the call and the continued support to our partnership. 2019 is shaping up to be a pivotal year for us, with the beginning of the sale of WTLPG in 2018, the Martin Transport acquisition in January 1 of this year, and the anticipated sale of Cardinal Gas.

From a big-picture view, we will trade cash flows from non-core assets with cash flow from MTI. Further, the difference between realized proceeds from WTLPG, combined with estimated proceeds from Cardinal, versus the acquisition cost of MTI, will result in a net surplus of cash that will substantially delever the partnership, allowing us to pursue our strategic long-term projects. Thank you.

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Operator [9]

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Thank you. Ladies and gentlemen, that does conclude today's conference. Thank you very much for your participation. You may all disconnect. Have a wonderful day.