Calumet Specialty Products Partners, L.P. (NASDAQ:CLMT) Q2 2023 Earnings Call Transcript

Calumet Specialty Products Partners, L.P. (NASDAQ:CLMT) Q2 2023 Earnings Call Transcript August 4, 2023

Operator: Good day, and welcome to the Calumet Specialty Products Partners Second Quarter 2023 Results Conference Call. [Operator Instructions]. I would now like to turn the conference over to Brad McMurray, an Investor Relations. Please go ahead, sir.

Brad McMurray: Good morning. Thank you for joining us today for our second quarter call. With me on today’s call are Todd Borgmann, CEO; Vincent Donargo, CFO; Bruce Fleming, EVP, Montana Renewables and Corporate Development; Scott Obermeier, EVP, Specialties; and Marc Lawn, EVP of Sustainable Products and Strategy. You may now download the slides that accompany the remark made on today’s conference call, which can be accessed in the Investor Relations section of our website at www.calumetspecialty.com. Also, a webcast replay of this call will be available on our site within a few hours. Turning to the presentation on Slide 2, you’ll find our cautionary statements. I’d like to remind everyone that during this call, we may provide various forward-looking statements.

Please refer to the partnership’s press release that’s issued this morning as well as our latest filings with the SEC for a list of factors that may affect our actual results and cause them to differ from expectations. I’ll now pass the call to Todd. Todd?

Louis Borgmann: Thanks, Brad, and welcome to Calumet’s Second Quarter 2023 Earnings Call. This was a quarter of many strategic achievements. Most recently, all elements of Montana Renewables, the RD unit, the Renewable Hydrogen Plant and the next-generation pretreater, met or outperformed expectations. Further, our Sustainable Aviation Fuel project came online, catapulting us from nowhere to the largest SAF producer in North America. At the corporate level, we continued the process of improving our balance sheet by successfully issuing unsecured debt, which will eliminate our secured notes. Our Specialties business continued with excellent commercial execution, while asset operations overcame a series of tornadoes and extreme weather that limited production.

Ultimately, we generated $67.7 million of adjusted EBITDA for the quarter, which is a decrease of $10 million from the prior period. Our Northwest Louisiana team spent much of the last quarter — last half of the quarter recovering from weather-driven power disruptions. While doing so, we elected to pull forward maintenance, and at this point, we have no meaningful planned downtime for the remainder of 2023 and we enter the third quarter through running our assets at full rates. At the halfway point of our 3-year plan to fortify operations, our assets continue to demonstrate an improved ability to recover quickly when challenges arise, and we’re also adding redundancy to further prevent or lessen the impacts of external events on our business.

Commercially, we’re executing across all of Calumet with a focus on the customer. Montana Renewables has pointed half of our sales volume to Canada and seamlessly stepped into the SAF market. Our Specialties team continues to capture value from our unique and integrated value chain, and our supply chain and planning teams spent the last half of the quarter ensuring customer needs were met as we navigated around the weather and maintenance. Further, it’s nice to see a return to a more normal environment performance brands as input costs have stabilized. This is a business that we can grow, and we’re seeing strong signs of that in our Industrial business. Our branded products are well positioned to meet the industry’s growing demand for high-performing and energy-efficient solutions, whether it would be Bel-Ray products servicing the global mining industry, or our new biodegradable Bio-MAX products being utilized in the global marine market.

The second quarter also saw the completion and full start-up of Montane Renewables, and the team settled into the new operation nicely. As we stepped into this new business, it was essential that we quickly proved out the core operating pillars, which were ensuring the RDU and hydrogen plant to run at planned rates, proving our new and leading pretreater technology, demonstrating catalyst performance and meeting SAF specifications. We’ve demonstrated all of these core concepts. As expected, we encountered a few blips as the team quickly scale the learning curve, and our commissioning experience feels like minor teething problems relative to the industry experience. MRL’s operation is intricate, including a closed recycle in our net 0 hydrogen production and serial #1 of the next-generation feedstock pre-treater technology.

As our operators learn the intricacies of this new operation, they quickly got the plant running consistently at the planned 12,000 barrels a day by quarter end, with the subsequently commissioned pre-treater following the same upward trajectory. We took our Board of Directors to visit the plant earlier this week, and we are all once again impressed with the quality and knowledge of our local Montana team and leadership. Naturally, we’re in a period of rapid learning as we dig deeper into the operation and understand the true ability of our units. One quarter in, we both developed some new understanding and confirmed a few of our core hypotheses. First and most importantly, we’ve proven our technology works and our team can operate this facility at expected levels.

We are making on-spec products right out of the gate, and even some of our customers were surprised at how quickly we came online. We monitor our catalysts closely and it’s performing as planned, even as we introduced higher amounts of feed that we treated ourselves. Further, the capacity creep has already started. As you might remember, we don’t know the maximum capacity of our RDU, as we never filled the unit in fossil service, so it’s true capacity has not yet been tested. Just a few months in, our team has already demonstrated the RDU’s ability to run over 13,000 barrels a day. Next, we’re pleased with the decision we made to install the pretreater with ARA technology. The amount of feedstock flexibility this unit opens is tremendous, and we’re capturing the yield advantage that we expected.

Over previous quarters, we spent a lot of time talking about the need for a pretreater in this business, and we’re quickly seeing the field of renewable diesel producers naturally separated into those that have pretreatment ability and those that don’t. Last quarter, I mentioned that the difference between treated and untreated feed cost was $0.80 a gallon. Right now, the pretreater advantage is roughly $1 a gallon. At these levels, the ability to process entry at the feed is even more important than location for the time being. Fundamentally, the next-generation technology allows us to lose 4% less feed than a standard treater. At current feedstock prices, that’s roughly a $0.20 a gallon advantage. With these data points, we expect the ARA technology will allow us to maintain a structural advantage even within the camp of competitors that do have pretreat.

We also are learning how different feeds are handled. They run at various speeds, cause filter changes at different intervals and differ in the amount of time it takes to unload a railcar. These are common items to work through, which will allow us to optimize as we continue to process more untreated material. We’re optimizing the drawdown of our previous market purchases of treated feed, and we continue to ramp up the pretreater rates as we gained comfort with the new technology. Further, we’ve confirmed the location is as important as we thought. We’ve seen generic industry margins tightening recently, especially for the treated feeds in the . This temporary dynamic has occurred before when markets rebalance from a short-term disruption. While we fully expect it to normalize quickly, our relative location advantage provides flexibility and allows us to pivot rapidly in a changing environment.

This is true on both the feed and product side of our business. On the feed side, the location advantage is magnified by our next-generation pretreater that we just discussed. In fact, we just placed our first order for Camelina, which will arrive in a next couple of weeks. Camelina is in its very early stages, but given its indigenous to Montana, extremely low CI and does not compete with food, this cover crop presents tremendous upside to Montana Renewables. On the product side, 50% of our existing R&D is now selling in Canada as we see our early theory playing out that our product will migrate to the spot of optimal logistic advantage. As the largest single market, California is often a reference point for renewable fuels in our industry.

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But with Canada sharing a land border with Montana, we fully expect our products to all land and premium locations. Next up, the level of ventures in SAF is even bigger than we expected, and industry seems to quickly be aligning that SAF is the best, fastest and most practical path to airline decarbonization. With the SAF market currently being a fully voluntary market, it’s been interesting to see the wide range of views that exist on how this material will price long-term. For us, Shell has been a great partner so far, and we’re pleased with the value they are bringing to the table in these early days. As Montana Renewables looks forward to the MaxSAF expansion, we continue to be enthusiastic. We expect to be in a position to share some early numbers on expected costs in EBITDA soon, and we believe that with MaxSAF, we can more than double our current EBITDA run rate in 2025.

The MaxSAF project leverages our early mover advantage, and we could sell all of the product we could make into California, Oregon, Washington, Canada, and even Illinois and Minnesota with the new state SAF credits. And finally, we’re already exploring opportunities to further integrate Montana Renewables molecules into specialty applications. As we speak, our development team is experimenting with renewable naphtha and diesel fractions for uses in our Solvents business. We’ve seen early successes with other sustainable product lines, and adding another example of unique and advantaged integration to our Specialty platform is exciting as we continue to look for ways to leverage our newly-found renewables expertise across our enterprise. With that, I’ll turn the call over to Vincent to take us through the quarterly results.

Vince?

Vincent Donargo: Thank you, Todd. Before we move forward, let’s pause on Slide 4 to take a closer look at 2 new brands we recently added to our SPS portfolio. TitanZero is our carbon-neutral wax product, and PenClear is an all-natural product developed to supplement our Penreco beauty care line. Moving to Slide 5, our SPS business generated $61 million of adjusted EBITDA during the quarter. Our production volumes were roughly in line with the first quarter, and as Todd mentioned, in June, our Northwest Louisiana plants were impacted by severe weather. Tornadoes and hurricane force winds knock the electrical grid offline on numerous occasions, which resulted in approximately 500,000 barrels of lost production. We estimate that the events cost approximately $20 million in profitability.

We use the unplanned downtime to pull some turnaround work forward. Further, we successfully completed a planned turnaround at our Cotton Valley facility. I can say that as of July 1, we were back to full operations across the entire Northwest Louisiana region. The margin environment continues to be constructive for both Fuels and Specialties here in the third quarter. While we have seen and expected a reversion from all-time highs we experienced late last year, margins are well above mid-cycle averages, and we expect that to remain. Our material margin for the quarter averaged $77.30 per barrel for Specialties and $10.21 per barrel for Fuels. We continue to be optimistic about the fundamentals of our SPS business, and our expectations are constructive for the rest of the year.

Moving to Slide 7. Our Performance Brands business had another solid quarter, generating $12.2 million of adjusted EBITDA. We continue to see price stability in the marketplace. Our production volumes were up quarter-over-quarter, and we saw significant demand in both the industrial lines and from TruFuel, our most direct retail offering. The second quarter trends to be — the second quarter tends to be the best demand quarter for TruFuel as both the spring weather and planning seasons coincide, and we were pleased to see strong demand within that channel. We have highlighted 2 of our other products on the slide as well. We have mentioned BioMax before as a high-performance biodegradable maritime solution that is now also being applied across other industries.

The line continues to show real promise in its early stages as more and more customers interact with it. And our Bel-Ray brands, which are particularly well known for performance and mining applications, have seen tremendous growth year-over-year. Our Industrial demand is up 35% year-to-date, and this is a segment of the business that we expect big things from as the world prioritizes high performance and power efficiency, especially in some of the leading megatrends like mining, food and energy. Moving to our Montana business. You could see on Slide 9 that we generated $12.6 million of adjusted EBITDA in the quarter. For the legacy asphalt plant, we operated at full capacity of nearly 12,000 barrels per day of production. We entered this year’s asphalt paving season during the second quarter, which was our first opportunity to utilize the recently-constructed polymer modified asphalt or PMA plan.

This unique and high-quality asphalt is being praised in the marketplace, and we are very pleased with early sales. The second quarter was also an important 1 for Montana Renewables. During the quarter, we bought our feedstock pretreater online, shipped our first SAF volumes and ramped up rates of both our RDU and pretreater. Average production for the quarter was a little over 7,000 barrels per day as our team quickly learned the plant, and with plant operations derisked, we were able to end the quarter producing over 12,000 barrels per day. During the quarter, we also announced an exclusive agreement to sell 100% of our SAF to Shell, who is also 1 of our 3 renewable diesel customers. We are excited at the SAF opportunity that is ahead of us.

We are running off the last of our treated renewable feedstocks and expect to rotate to a slate of primarily untreated feed. These are cheaper feedstocks that will allow us to capture the full earnings horsepower of Montana Renewables. To discuss our strategy for Montana in more detail, I’ll now turn the call back over to Todd.

Louis Borgmann: Thanks, Vince. Our priorities and next steps are clear. We entered the third quarter operating well across the board. In Specialties, we have some inventory to rebuild, but otherwise are planning on a strong second half. At Montana Renewables, we’ll continue to process what’s left of our treated safety stock and maximize pretreat throughput. For the quarter, we’ve implemented a 1 million-barrel challenge at the site for both our legacy and renewable businesses, and through the end of July, we’re tracking ahead on both. Our plan and intention is to demonstrate in the third quarter that Montana Renewables sits the top of the stack of competitively-advantaged renewable diesel and SAF producers. Looking forward a bit more, internal process design work for our MaxSAF expansion has already started, and we expect to make a final investment decision near the end of this year.

Zooming out, our strategy remains unchanged. We’re committed to completing the deleveraging of Calumet, unlocking value and increasing trading volume for our unitholders. Our Department of Energy loan process continues, and we remain hopeful and confident that we will receive positive news that enables us to go forward with the MaxSAF expansion that would take Montana Renewables from North America’s largest SAF producer to 1 of the world’s largest SAF producers. And last, we continue to expect the potential monetization of Montana Renewables to complete the deleveraging of Calumet. For some time, we’ve discussed the possibility of Montana Renewables IPO, private monetization or even both. Naturally, this has created a foray of interest in the adviser community and in potential investors, and we continue to receive clear feedback that Montana Renewables is a differentiated business with transformational value potential to Calumet, well in excess of the entire company’s current enterprise value.

As always, we’ll continue to execute against our stated strategic plan and we’ll also continue to actively explore all paths to best unlock the extreme unit holder value that we believe exists within Calumet. With that, I’ll hand the call back to the operator for questions. Operator?

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Q&A Session

Operator: [Operator Instructions]. At this time, we will take our first question, which will come from Roger Read with Wells Fargo.

Roger Read: Yes. Lots of hits here. But I guess, really, let’s dive into MRL first. Maybe a little more clarity on how some of the advantaged feedstocks have run through? You mentioned some learning curve issues with that. Is there 1 that’s worked a little better or is priced a little better? Has come up with a better yield? Just sort of curious any more you can offer there.

Bruce Fleming: Roger, it’s Bruce. The — yes, a couple of things as you think about the optimization. The feedstocks do have different yields, but that’s mostly in the split between diesel and SAF. The total distillate yields are substantially similar across feeds, so the pricing is interesting because there’s rotation among classes. So TALO can get an advantage and then corn oil can come in on top of it for a while. So we’ve got a pretty good supply and trading function, trying to follow those rotations. And we’re able to do that more quickly than an average competitor because we’re quite close to the sources. Most of our feeds are days to maybe 2 weeks away, and so we shift gears pretty quickly.

Roger Read: Yes, that’s helpful. And then the other question I have for you, since we are all attuned to California, the LCFS and the other things that drive us to see R&D sales in the U.S. What specifically do you see in Canada’s setup that makes it competitive from either in RD or a SAF standpoint?

Bruce Fleming: Higher price.

Roger Read: That’s an easy answer. All right. Well, that’s my 2 questions. I’ll turn it back.

Operator: And our next question will come from Amit Dayal with H.C. Wainwright.

Amit Dayal: Just staying on the feedstock topic, you mentioned Camelina. Could you give us any color on cost advantages Camelina presents for you guys? And whether this is a seasonal feedstock option for you? Or can it be available through the year?

Bruce Fleming: Amit, the best way to think about that is that commercial quantities of Camelina are actually not in the market yet, so this is experimentation. We were fortunate to pick up opportunistically some Camelina oil. We really like it. It’s in the low-20s carbon intensity, CI, and dramatically better than vegetable oils, and it grows in our latitude. So what we imagine is going to happen is that now that this is a cash crop, there will be more and more of it. There is some crushing activity now, and that’s simply going to speed up. So if you look at some of our public information, we’re forecasting commercial availability to us out in 2025, ’26 that shows up in some of our charts. The economics of it, I wouldn’t read too much into this because it is an experimentation phase. But this is competitive with untreated feeds, so that’s going to be quite a good margin, albeit a small volume.

Amit Dayal: Understood. Got it. So this is a little bit more of a longer-term development effort for you guys. Got it.

Bruce Fleming: Yes, we’re — just to be clear, we’re not doing the development. There are 4 developers in Montana. Now they’re backed by global majors. I mean this is — this is very visible, and so it will happen. We’re just speculating on how fast. So as I said, we put commercial availability to us about 2 years out.

Amit Dayal: Okay. Then on the topic of deleveraging, do you think, going into the second half of ’23, you could begin some deleveraging efforts just from cash flows? Or will you wait for some sort of a monetization event to undertake sort of that part of the strategy?