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Q3 2023 Martin Midstream Partners LP Earnings Call

Participants

Randall L. Tauscher; Executive VP & COO of Martin Midstream GP LLC; Martin Midstream Partners L.P.

Robert D. Bondurant; President, CEO & Director of Martin Midstream GP LLC; Martin Midstream Partners L.P.

Sharon L. Taylor; Executive VP & CFO of Martin Midstream GP LLC; Martin Midstream Partners L.P.

Kyle May; Equity Research Analyst; Sidoti & Company, LLC

Unidentified Analyst

Presentation

Operator

Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the MMLP's Third Quarter Earnings Conference Call. Today's conference is being recorded. (Operator Instructions).
At this time, I would like to turn the conference over to Sharon Taylor, Chief Financial Officer. Please go ahead.

Sharon L. Taylor

Thank you, operator, and good morning, everyone, and thank you for joining us today. In the room are Bob Bondurant, CEO; Randy Tauscher, COO; David Cannon, Controller; and Danny Cavin, Director of FP&A.
I'll begin with our cautionary statement. During this call, management may be making forward-looking statements as defined by the SEC. These statements are based upon our current beliefs as well as assumptions and information currently available to us. Please refer to our press release issued yesterday afternoon as well as our latest filings with the SEC for a list of factors that could impact the future performance of Martin, and cause our actual results to differ from our expectations.
We will discuss non-GAAP financial measures on today's call such as adjusted EBITDA, distributable cash flow and free cash flow. In addition, we will refer to adjusted EBITDA after giving effect to the exit of the butane optimization business. You will find a reconciliation of these non-GAAP measures to their nearest GAAP measures in our earnings press release posted on our website.
Now I will turn the call over to Bob to discuss second quarter results by segment.

Robert D. Bondurant

Thanks, Sharon. I would now like to discuss the performance of Martin Midstream's operations comparing the actual results of the third quarter to our third quarter revised guidance. As a reminder, the third quarter is typically our weakest cash flow quarter relative to the other 3 quarters of the year, primarily due to the seasonality in our fertilizer business, which is historically weaker in Q3.
For the third quarter, we had adjusted EBITDA of $26.2 million compared to our third quarter revised guidance of $25.1 million, an improvement over guidance of $1.1 million or 4.4%. For the trailing 12 months ending September 30, 2023, excluding the results of our recently Exit Butane Optimization business, we had adjusted EBITDA of $117.1 million.
For the third quarter, our largest cash flow generator was our Transportation segment, which had adjusted EBITDA of $9.5 million compared to revised guidance of $12 million. Within this segment, our land transportation business had adjusted EBITDA of $6.7 million compared to a revised guidance of $8.5 million.
The miss in adjusted EBITDA compared to our forecast for the land transportation business was primarily due to an 8% reduction in forecasted miles driven. While the third quarter had the strongest daily low count of the year, our long-haul load count was down due to a slowing demand primarily from our specialty industrial customers. We believe this is due to the weakening U.S. economy. As a result of the weakened economic outlook, which we believe will negatively impact the transportation requirements from our specialty industrial customer base, we have lowered guidance for land transportation for the fourth quarter by $1.1 million.
Our Marine Transportation business had adjusted EBITDA of $2.8 million compared to guidance of $3.5 million. While we missed guidance in the third quarter, we do see continued strength in both demand and daily market rates in the inland barge market. Compared to the second quarter, our average inland 2 barge tow day rate increased over 3%. However, negatively impacting our third quarter performance was a decrease in overall fleet utilization compared to forecast as one of our inland tows went into the shipyard for a lengthy dry dock. This inland tow is now currently working at an improved day rate.
The other negative impact to third quarter performance was a onetime charge to Marine Transportation's unallocated SG&A. Looking toward the end of the year, we feel comfortable with our existing fourth quarter guidance for Marine Transportation. Our second strongest cash flow generator in the third quarter was our Terminalling and Storage segment which had adjusted EBITDA of $8.2 million compared to guidance of $9.1 million.
We had a slight 1% revenue decrease compared to guidance and a 3% increase in total expenses some of which were onetime charges. Now I would like to discuss the performance of our Specialty Products business segment, which was our third largest cash flow generator in the third quarter. In this segment, we had adjusted EBITDA of $6.8 million compared to guidance of $5.2 million.
While our combined NGL and propane groups met their third quarter guidance, our Packaged Lubricant and our Grease businesses combined to exceed third quarter guidance by $1.7 million. Our sales volume for packaged lubricants and grease both approximated our forecast but margins for both business lines exceeded forecast. Our packaged lubricant margins on a per gallon basis exceeded forecast by 35% and our grease margin on a per pound basis exceeded forecast by 19%.
Finally, I would like to discuss our Sulfur Services segment. This segment had adjusted EBITDA of $5.4 million compared to guidance of $3.1 million. Our fertilizer group had adjusted EBITDA of $2.2 million, exceeding third quarter guidance by $2.1 million, as we had forecasted a breakeven quarter. Our overall fertilizer sales volume exceeded forecast by 13% as we had unforecasted liquid fertilizer sales to the South American export market.
We also had unforecasted dispersal sales to the U.S. markets as our customer base began to perceive the continued decline in dispersal pricing had floored due to upward pressure in sulfur commodity prices, the primary feedstock for dispersal. Also by having unforecasted liquid and dispersal sales in the third quarter, it allowed us to improve manufacturing utilization at 2 of our fertilizer plants, which also contributed to improved profitability.
The pure sulfur side of our Sulfur Services segment had adjusted EBITDA of $3.2 million, which exceeded guidance by $0.2 million. We continue to see strong sulfur production from our refinery suppliers, which continues to support this business line with greater volumes and profitability than originally forecasted.
To summarize, in the third quarter, we had strength in our margin businesses offset to a certain degree by underperformance in some of our fee-based business lines. However, on a combined basis, Martin Midstream exceeded guidance by $1.1 million, confirming that in spite of certain cash flow variability between segments, overall, our restructured refinery services business model is designed to deliver long-term stable and sustainable cash flows.
Now I'd like to turn the call over to Sharon to discuss our balance sheet, capital resources, leverage and capital investment.

Sharon L. Taylor

Thank you, Bob. Total long-term debt outstanding on September 30 consisted of $62.5 million drawn on our $175 million revolver that matures in 2027, and $400 million of senior secured second lien notes due 2028 for a total of $462.5 million, which is an increase of $2.5 million from the end of last quarter.
The slight increase quarter-over-quarter was expected as the semiannual payment for interest related to our outstanding notes was due in August of the quarter. Our total bank compliant leverage was 3.95x at the end of the quarter compared to 4.14x on June 30. A 0.19x reduction driven by an increase in our trailing 12-month EBITDA after giving effect to the exit of the Butane Optimization business.
Rounding out our financial ratios. First lien leverage was 0.53x and interest coverage was 2.2x. Liquidity under the revolving credit facility was approximately $84 million, and the partnership was in compliance with all covenants at the end of the quarter. Now let's focus on capitalized spending during the quarter and how that projects for the rest of 2023.
Maintenance capital expenditures for the quarter were $7.2 million, a slight increase from our forecast of $7.1 million. We are now forecasting maintenance CapEx to be $7.4 million in the fourth quarter, bringing our total for the year to $29.4 million, which is an increase of $2.8 million from our guidance. The majority of this increase is within the Shore-based segment related to repairs on the Galveston Bulkhead and to the Port Arthur dock structure.
Growth CapEx was $3.4 million for the quarter or $2.1 million less than forecasted. Capital expenditures related to the Oleum Tower, which will provide feedstock to the DSM Semichem joint venture was $2.6 million of the quarterly total. The original budget for 2023 related to the Oleum Tower was $12.7 million. However, we are now forecasting a total spend of only $7.2 million for the year as construction costs are now more heavily weighted to the latter months of the project in the first quarter of 2024.
Accordingly, the total growth CapEx forecast for 2023 is reduced as we now expect 2023 spend to be approximately $10.1 million compared to our guidance of $17.5 million. For clarity, year-to-date gross CapEx expenditures through the third quarter were $6.1 million, with an additional $4 million forecasted for the fourth quarter.
Distributable cash flow for the quarter was $5 million and adjusted free cash flow was $1.5 million. Finally, 2023 EBITDA guidance remains unchanged at $115.4 million after giving effect to the exit of the butane business. We have adjusted fourth quarter guidance for the Land Transportation division down by approximately $1 million, but all other segments remain the same.
For the full guidance by business line, please refer to Slide 3 of the third quarter earnings summary presentation released along with our earnings yesterday evening and available on our website.
This concludes my prepared remarks, so I'll turn the call back to the operator for Q&A.

Question and Answer Session

Operator

(Operator Instructions) We'll take our first question from Kyle May from Sidoti & Company.

Kyle May

Bob, wondering if you could maybe expand on the lower mileage in the Transportation segment for this quarter. And I know you mentioned you've already made some adjustments for the fourth quarter, but just kind of how you're thinking about that aspect of the business and then when it could potentially turn around.

Robert D. Bondurant

Yes. So big picture, as I made in my comments, was our total load count was the highest average per day in the quarter. So what does that mean? How is your mileage down when your load count is up? And we've had a shift to a shorter haul kind of scenario around refinery bases, et cetera, because the demand in long hauling is down. .
A lot of it coming from the chemical industry, some from longer term from the lubricant business, just the demand because the economic slowdown is happening. So when you think about it, as you run shorter hauls, that's more expensive. You've got a higher pay rate to keep a driver employed. He's got to get paid even though he's running shorter versus longer-term haul. So that's one piece of it.
Another piece is the frequency of short hauls, as you have more over time, repair and maintenance related to that. So bigger picture, if you will, a shorter haul rate has probably a higher operating cost for mile what it does versus a long haul. So all that kind of plays into the equation. So when is this going to turn around? We've seen late in the third quarter a pickup in our Chemical Holland, and it's carried over a little bit into October. So hopefully, that's boding well for us. We're going to also try to increase our customer base. We have a fleet of chemical traders that need to be -- have a higher utilization.
So we're going to try and expand our chemical base -- customer base, if you will. So all that combined, I think we're going to see a slower fourth quarter overall, but probably, it will trend along with the U.S. economy probably late first quarter into the second quarter. That's our instinct. Any addition?

Randall L. Tauscher

Yes. This is Randy. I'd just add that we have a seasonality aspect to the chemical and lubricant business and typically, we'd see a little slowdown beginning around Thanksgiving time through the first of the year. But the element of the 4Q that we normally see an improvement is from the LPGs, particularly if we have any kind of long and sustained winter from the propane side, but our butane business -- or our customers in the butane business and our propane business typically elevates for the trucking department quite a bit in the fourth quarter and the first quarter.

Kyle May

Okay. Great. That's helpful. And then I also wanted to ask about, I believe, the release mentioned in some of your prepared comments. Talked about delays in the semiconductor manufacturing facility. Just wonder if you can give us kind of an update on the current status of development. And then should we expect any delays in the overall project completion?

Randall L. Tauscher

This is Randy, again. So the answer to that is we expect a slight delay in the project completion. And now I'm talking about our OEM plant to the second quarter of 2024 -- from late first quarter 2024. And then, yes, I mean, absolutely when our intended customers are announcing delays of their plant, our demand will be kicked down the road a little bit likely much of it into 2025. .

Operator

(Operator Instructions) We'll go next to Selman Akyol with Stifel.

Unidentified Analyst

This is [Tim] on for Selman. Previously, you guys had highlighted some potential projects in and around Beaumont. Just wondering if you could expand on what kind of projects you guys are seeing and potentially the scale of those projects?

Randall L. Tauscher

Yes. So the scale of those projects to us would be very similar to what you saw on our high purity deal. So we're not -- we're talking a couple of tens of millions of dollars that would be our contribution to the project that we had discussed previously. Now those projects have slowed down in 1 case. The project has been deferred because of the inability to get the carbon capture managed on their side. So I'd say there's -- we're still talking to people, and there's more to come on that, but nothing else to report at this time.

Unidentified Analyst

Got it. And you guys have also mentioned some onetime SG&A and OpEx cost within a couple of your segments. Is there any way for you guys to quantify how much that impact was for the quarter? And obviously, since they were one time, we should see a step-up in 4Q cash flow.

Sharon L. Taylor

So I want to clarify first, we are talking about the onetime expenses in the Marine group.

Unidentified Analyst

Correct. And then I think there was also some -- I thought you guys had mentioned some expenses within Terminalling and Storage.

Sharon L. Taylor

So we have what -- some of those are related to in both Terminalling and in the Marine group, is some phantom units that we gave out to management in July. So a couple of things happened in June, we already had 2 tranches of those -- on the books, and the unit price had come down to a point where we made an adjustment in June. And then we issued another tranche to our employees in July.
And so that tranche, the came on in the third quarter. And so when you look at those SG&A costs, you had a reduction in the second quarter and an additional tranche in the third quarter. So that's some of those differences there.

Unidentified Analyst

Got it. Makes sense. And then the last one for me is just wondering if you could give an update on your guys' business down in Florida, in Tampa.

Randall L. Tauscher

Yes. The trucking business in Tampa has continued to be strong. We're getting the types of returns in Tampa that we see throughout our trucking business, and that's been a good growth area for us. And we would anticipate for the rest of this winter and next spring and early next summer that the phosphate business do quite well, and there will be a lot of need for us moving products around there.

Operator

And there are no further questions at this time. I would like to turn the conference over to Bob Bondurant for closing remarks.

Robert D. Bondurant

Thank you, Audra. We are pleased with our third quarter results, beating guidance by a little over $1 million as our diversified refinery services model continues to return stable cash flows, allowing us to continue to strengthen the balance sheet and get closer to our leverage goal of below 3.75x. .
During the call, we discussed the delayed start-up of the ELSA plant. Even with the delay, we remain positive about the strategic alliance with Samsung C&T America and Dongjin USA, Inc. expanding our existing asset base to fuel growth and grow both revenue and cash flows with low capital requirements. Finally, I want to say that here at Martin, we are saddened by the recent attacks on Israel, the ongoing conflict and unimaginable human suffering.
Our hearts go out to every person and family impacted by these horrific events, and we pray for resolution to the complex time. That concludes our call. Thanks for joining us shortly. Good day.

Operator

And that does conclude today's conference call. Thank you for your participation. You may now disconnect.

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