Martin Midstream Partners Q4 2023 Earnings Call Transcript

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February 15, 2024

There are 7 speakers on the call.

Operator

Good morning. My name is Audra, and I will be your conference operator today.

Operator

At this time, I would like to welcome everyone The MMLP 4th Quarter Earnings Conference Call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. At this time, I'd like to turn the conference over to Sharon Taylor, Chief Financial Officer.

Operator

Please go ahead.

Speaker 1

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 Kavan, Director of FP and A. I'll begin with our cautionary statements. 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.

Speaker 1

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 4th quarter and full year results.

Speaker 2

Thanks, Sharon. I would now like to begin my discussion with a recap of Martin Midstream Partners' execution of significant achievements in 2023. In February, we refinanced our existing secured notes, extending their maturity to February 2028. At the same time, we amended our revolving credit facility and extended its maturity to February 2027. In the Q2 of 2023, we completed our exit from the volatile butane optimization business, while retaining the stable cash flow component of the business associated with our North Louisiana underground storage assets.

Speaker 2

Also in 2023, we began construction of the oleum tower at our sulfuric acid plant in Plainview, Texas in order to be the supplier of OEM to the DSM Semicon joint venture. This joint venture is between us, Samsung C&T America Inc. And Dong Jin USA. The joint venture is currently in the construction phase of facilities that will provide electronic level sulfuric acid, commonly known as Elsa to the semiconductor manufacturing industry. The final significant achievement we had in 2023 was exceeding our disclosed EBITDA guidance and also meeting our targeted leverage ratio of 3 point 75 times.

Speaker 2

I would like to acknowledge and thank our team of executive leadership, segment leadership and the entire Martin Midstream workforce for executing our 2023 game plan in order to achieve these goals. Now I would like to focus on our 4th quarter operating performance. For the 4th quarter, we had adjusted EBITDA of $29,200,000 compared to a 4th quarter revised guidance of $26,900,000 an improvement over guidance of $2,300,000 or 9%. For the year, we had adjusted EBITDA of $117,700,000 exceeding our beginning of the year guidance of $115,400,000 For the Q4, our largest cash flow generator was our transportation segment, which had adjusted EBITDA of $12,000,000 compared to revised guidance of $11,300,000 Within this segment, our land transportation business had adjusted EBITDA of $9,600,000 compared to revised guidance of $7,300,000 During the Q4, our revenue per load was greater than forecasted as we began to see a recovery in our longer distance loads. We also began to see a reduction in our equipment repair and maintenance cost as we continue to lower the average age of our fleet with new leased equipment purchases.

Speaker 2

The effect of this recapitalization of our equipment fleet over the longer term will be to increase our equipment lease expense, which will be partially offset by reduced repair and maintenance costs. We also believe newer equipment will help our driver retention. Our marine transportation business had adjusted EBITDA of $2,300,000 compared to revised guidance of $4,000,000 The primary reason for this EBITDA miss was due to supplemental insurance calls from our protection and indemnity insurance carrier. These supplemental calls totaling $1,100,000 were due to losses by our P and I carrier related to their overall underwriting losses. These losses were not the result of Martin Midstream's marine transportation lost performance, but were the result of the entire global marine industry lost performance.

Speaker 2

This was a one time charge hitting the 4th quarter income statement. Our 2nd strongest cash flow generator in the 4th quarter was our Terminalling and Storage segment, which had adjusted EBITDA of $9,000,000 which was the same as our 4th quarter guidance. Overall, in this segment, our revenue slightly missed forecast by 3%, primarily due to reduced throughput volumes, which were offset by a 5% reduction in operating expenses from lower utility cost when compared to guidance. Now, I would like to discuss the performance of our Sulfur Services segment, which was our 3rd largest cash flow generator in the 4th quarter. In this segment, we had adjusted EBITDA of $7,400,000 compared to guidance of 6,000,000 Our fertilizer group had adjusted EBITDA of $3,900,000 compared to guidance of $3,000,000 We had stronger 4th quarter sales compared to forecast for both liquid fertilizer and degradable sulfur products.

Speaker 2

This positive sales performance compared to forecast was partially offset by reduced ammonium sulfate sales in the 4th quarter, which we believe are being delayed to the Q1. The Pure Sulfur side of our Sulfur Services segment had adjusted EBITDA of $3,600,000 compared to guidance of $3,000,000 We experienced very strong sulfur production from our refinery suppliers as total sulfur volume received was 17% greater than our 4th quarter forecast, allowing this business line to exceed its financial forecast for the quarter. Finally, I would like to discuss the 4th quarter performance of our Specialty Products segment. In this segment, we had adjusted EBITDA of $4,900,000 compared to guidance of $4,900,000 In this segment, we had strength in our grease business line, offset by a slight underperformance in our packaged lubricant line of business. To summarize our 4th quarter performance, we exceeded revised guidance by 2,300,000 The bulk of our outperformance came from our Land Transportation business and our Sulfur Services segment, partially offset by the one time insurance charge in our marine transportation business.

Speaker 2

Now, I would like to turn the call back over to Sharon to

Speaker 1

had total long term debt outstanding of $442,500,000 compared to 500 $16,100,000 on December 31, 2022, a $73,600,000 reduction year over year. Of this balance, dollars 42,500,000 was drawn under our $175,000,000 credit facility, leaving us with $109,000,000 in availability under the facility after consideration of outstanding letters of credit and a slight constraint due to our leverage ratio covenant. For the last few years, the partnership has focused on strengthening the balance sheet through debt reduction, using free cash flow and divesting non core assets in order to reach our targeted leverage ratio of 3.75 times are lower. As Bob spoke to earlier, after adjusting for losses related to the exit at the butane optimization business, We met that goal as our bank compliant adjusted leverage was 3.75 times as of December 31. However, we know we still have work to do to ensure that we remain at or below that target on a sustainable basis And that knowledge will continue to guide our decisions regarding capital allocation.

Speaker 1

Also at December 31, our senior leverage was 0.36 times and our interest coverage was 2.19 times. At year end, the partnership was in compliance with all covenants, debt or otherwise, and is forecasted to remain so. Moving on to capital expenditures. Total CapEx for the quarter was $12,100,000 of which $4,900,000 was growth, including $3,700,000 related to the DSM Semichim joint venture, also referred to as the Elsa project. Maintenance CapEx for the quarter was $7,200,000 which includes $2,500,000 in turnaround costs at our fertilizer plants.

Speaker 1

Total CapEx for the year was $40,100,000 including $11,000,000 for growth, of which $8,300,000 was related to the Elsa project and $29,100,000 was maintenance CapEx, including a total of $4,800,000 for turnaround costs at our fertilizer plants. For the quarter, distributable cash flow was $8,600,000 and adjusted free cash flow was $3,700,000 bringing distributed cash flow for the year to $32,800,000 and adjusted free cash flow to $21,700,000 Both of those numbers presented after adjusting for losses associated with the butane optimization business. Now I'd like to walk through our guidance for 2024, which is on Page 5 of the presentation attached to our earnings press release yesterday afternoon and can also be found on our website. The partnership is forecasting approximately $116,100,000 in adjusted EBITDA for 2024. Of the total, 71% is provided by fixed fee contracts with 29% being margin based.

Speaker 1

Now let's look at each segment individually. In 2024, we anticipate transportation services to generate $41,200,000 of adjusted EBITDA as compared to actual results of $46,800,000 in 2023. While we anticipate the Marine Group to continue to benefit From the higher day rate environment we've experienced this past year, the Land Group will see reduced EBITDA from higher equipment lease expense offset somewhat by lower repairs and maintenance expense. The forecast for adjusted EBITDA in the Terminalling and Storage segment is $37,700,000 which is an improvement of $1,800,000 from 2023's actual results. The businesses in this segment are fee based with some contract escalators that along with anticipated reductions in operational expenses should improve results year over year.

Speaker 1

The Sulfur Services segment adjusted EBITDA is projected to be $29,700,000 in 20.24 compared to 2023's results of 28,100,000 While the pure sulfur side looks to remain relatively flat, we are projecting the fertilizer business will experience higher margins, slightly offset by decreased sales volumes. And new to the Sulfur Services segment this year is approximately $835,000 of EBITDA forecasted to begin in the Q4 for reservation fees associated with the Elsa project. Lastly, the Specialty Products segment is forecasted to generate $22,700,000 in adjusted EBITDA. The businesses within this segment are projected to remain relatively stable as compared to 2023's actual results of 22,800,000 For 2024, we are forecasting growth capital expenditures of approximately 17,400,000 With $10,400,000 for the Olim tower expansion at Plainview, which is part of the capital spend relating to the Elsevier project. Also included in the growth number is $6,500,000 for our cash contribution related to the partnership's 10% ownership in that joint venture.

Speaker 1

Maintenance capital is anticipated to be approximately $32,000,000 for the year, which is above average for the partnership. We do have some larger expenditures forecasted, including $8,100,000 For regulatory inspections related to our marine equipment, dollars 4,000,000 in turnaround costs at our fertilizer plants, where 50% of that is at our sulfuric acid plant in Plainview and $4,800,000 for the Smackover refinery turnaround, which occurs every 2 years. Finally, for full year 2024, we anticipate distributable cash flow to be 30,400,000 and free cash flow of $13,300,000 With that, I will turn it back to the operator for Q and A.

Operator

Thank you. We'll go first to Kyle May at Sidoti and Company.

Speaker 3

Hi. Good morning, everyone.

Speaker 1

Good morning.

Speaker 3

Maybe starting with the Terminalling and Storage segment. You mentioned that volumes were lower in the Q4. Just wondering if maybe you could provide some context of what happened in 4Q and then How you're thinking about those volumes in 1Q and the remainder of 2024?

Speaker 4

Yes. This is Randy, Kyle. Thank you for the question. Specifically the terminals, most of the shortfall in the Q4, matter of fact all the shortfall in the Q4 came around the shore based terminals where we had really low diesel sales volumes in the month of October November. In the month of December and what we've seen through the 1st 45 days of 2024, those sales have improved significantly.

Speaker 4

And we expect that improvement in that business to stay because we have agreed to a new contract beginning in January 1, 2024, but we do have minimum volume commitments that we didn't have in 2023. So yes, we expect that to be that business to be stable going into 2024.

Speaker 3

Great. That's very helpful. And then maybe a question for Sharon. As we're thinking about the CapEx in 2024. I was

Speaker 4

wondering if maybe you could kind

Speaker 3

of help us out with the cadence because I know you've got the OEM tower and then you've got the $6,500,000 contribution. So how should we think about that kind of through the course of the year?

Speaker 1

Yes. The $10,400,000 we should spend in the 1st and second quarters of this year and the $6,500,000 will be spent in the second quarter actually towards the 1st of the second quarter.

Speaker 3

Okay, great. That's helpful.

Speaker 4

I'll throw in on that The $6,500,000 is contingent on the completion of the DSM joint venture and that's the ELSO plan itself And that's projected to be done in the Q2, but that's something Martin doesn't really have control of and to the extent that slips That $6,500,000 commitment slips also.

Speaker 3

Okay, got it. That makes sense. And on the DSM semi chem, maybe can you give us a little bit more insight into the progression of that project Because you do have the ELSA contribution showing in the 4th quarter, excuse me, in your guidance, but just maybe how we think about that going forward? Yes.

Speaker 4

So the 4th quarter, The EBITDA contribution you see around that is due to the completion of the Martin Capital commitments to build the OEM tower and everything we've committed to the project. And so To the extent we get that done in the second quarter, which we're expecting to, those payments to us begin no later in the Q4. And so that's why we have that pinned in, in the 4Q. So that's really for the reservation fee that we have will receive from DSM, okay. And then just to start playing it down the line, Then the rest of the EBITDA contribution we expect primarily from the DSM joint venture We'll begin when actual sales begin.

Speaker 4

We do anticipate sales in the 4Q, but A very small amount because most of our intended customers are delaying their projects and those sales won't begin until those projects actually start securing their raw materials which should be into 2025.

Speaker 3

Okay, great. Appreciate the color this morning. I'll jump back in the queue.

Speaker 1

Thank you, Kyle. Bye.

Operator

We'll go next to Selman Akyol at Stifel.

Speaker 5

Thank you. Good morning. So just following up on Elsa and DSM. So sales start in the Q4 and then roll forward into 2025. You're getting paid for reservations.

Speaker 5

Is there any, I guess sort of where you would owe them services in lieu of the reservation fee or should we kind of think of this as a steady million run rate as we enter into 2025?

Speaker 4

Can you expand your question a little bit more? I had a tough time connecting someone. I apologize.

Speaker 5

Okay. No worries. So I think you guided to like $850,000 from a reservation payment. And as we roll forward into 2025, if the reservation, if there's no volumes associated with it, is there any catch up they get to do? So when I think about 1Q 2025, is it still sort of a ratable reservation fee of $850,000 or is there a catch up?

Speaker 5

Is there anything that would take you off that sort of call it $1,000,000 run rate as we go further out?

Speaker 4

Okay. Thank you. I understand clearly. Now when you said the $1,000,000 You're talking about on a quarterly basis. So yes, we get a reservation fee Approximately $1,000,000 a quarter going forward.

Speaker 4

We have costs that offset some of that, of course. But yes, there's no catch of that. That is going forward for the term of the agreement.

Speaker 5

Got you. And then I know customers are moving a little bit to the right, but at one point I thought there was some discussion of maybe could this get larger as you guys go along? Is there any of those discussions that are Continuing or should we just sort of think about what you guys have planned right now is what we should expect over the next several years?

Speaker 4

We haven't had any formal discussions about any expansion at that site, but we certainly have the ability from an OEM production standpoint to do that. And if you look at the fundamentals with the new plants getting built And the types of semiconductors that they're going to build consumption of the asset we're producing sure looks like that's poised for growth going forward. But we haven't had any significant discussions around that yet at Point in time.

Speaker 5

Understood. And then, just pivoting back to transportation. On the marine rates, Any locking up at all or you guys really still doing everything in the spot market there? Any 1 year contracts or any discussions in and around that at all?

Speaker 4

Yes, we've only locked up For a year length, our offshore equipment, those 2 units, The inland tows, we have 11 of those units. We have currently 4 on spot and 7 on some sort of 3 to 6 month contract arrangement. And that's what we anticipate going forward. We have 5 tows coming off of contract within the next 30 to 60 days And we anticipate renewing those at another 3 to 6 month arrangement, but nothing longer than that.

Speaker 5

Got it. And can you just say how pricing is going on that? Is it expected to be at a higher level in line? Any indications you can give there?

Speaker 4

Pricing has been good. I mean, 2 years ago to last year, we went up $2,000 a day On average, a year ago to now, it's up about $1,000 to $1500 a day. Our spot agreements are above our contract agreements. So I would assume the contract agreements are going to move up a little bit when those are renegotiated, but they haven't been negotiated yet.

Speaker 5

Got you. And then does your guidance also assume that or did you guys guide Fairly conservative there.

Speaker 4

Yes, our guidance assumes that.

Speaker 5

Okay. And then last one for me. Just on the free cash flow, Sharon, if I heard everything correctly, That will just be directed at debt reductions. And so hopefully at the end of the year, you're $10,000,000 plus a little less?

Speaker 1

Yes, that we will continue to direct free cash flow to reducing outstandings under the revolver. And we talked about or what we're trying to do is to state, yes, we're at 3.75 times When we consider the cadence of our capital expenditures this year, which are heavily weighted to the first half of the year, along with our interest payments on our notes, we see that by the end of the year, we are still below the 3.75 times, but quarter over quarter in 2024, we could see some lift in that leverage ratio.

Speaker 2

And I'll make it this is Bob, an additional comment, which we really don't really forecast significant changes in working capital. There could be some slight variability, if working capital is up or down, that could impact that number to a smaller degree.

Speaker 5

Got you. Yes. I know you guys have been chasing that leverage ratio for a while. So congratulations on the improvement.

Speaker 1

Thank you.

Speaker 2

Thanks.

Operator

We'll go next to Patrick Fitzgerald at Baird.

Speaker 6

Thanks for taking the questions. $32,000,000 in maintenance CapEx, could you provide a little more detail on where that's going? Yes. So like if you bought some new tank trucks to replace old tank trucks, is that maintenance or is that growth or how do you think about that?

Speaker 4

So the maintenance CapEx And I think Sharon hit this a little bit in her comments. We have about $32,000,000 which is up We were almost $30,000,000 this past year. We have from a marine perspective, we take our MES equipment out of this, so you just look at our 11 2 bars tows and our offshore equipment. We have 16 Piece of equipment out of our 37 or 8 going to dry. So we have almost 40% of our marine fleet going to dry dock this year, which is a very high number because the 2 bars tows, they only go every 5 years.

Speaker 4

So we have a larger percentage of marine equipment going to drydock than normal. And then the turnarounds, The refinery turnaround is in every other year event. We happen to have 1 in 2024 and then The turnarounds for the fertilizer plants at Plainview and ATS down in Beaumont are annual. And if you add all that up, that's 55% of the maintenance CapEx. The trucking has And the new equipment there and replacement has very little to do.

Speaker 4

We don't spend very much of the $32,000,000 in the trucking business. Most of theirs would fall through on repairs and maintenance and just flow through the EBITDA calculation.

Speaker 2

And This is Bob. Additional comment to that is the equipment we do buy in the trucking business is under effectively an operating lease. So it doesn't really flow through capital investment, I. E, maintenance CapEx.

Speaker 6

Okay. Yes. Okay. No, that's helpful color. The transportation segment, so how much of that You just talked about it with the previous question, in terms of the Marine, but is the What's the like contract length on the truck side?

Speaker 6

And Is that essentially that would seem like the hardest segment to forecast, but maybe I'm wrong there. So like could you talk about how you forecast that and like How much of that is just pure spot versus actually more contractual in nature? Thanks.

Speaker 4

Most of the we do have some contracts for annualized in that business, For example, but most of the land transportation business is based on relationships and performance. And so The way we forecast that and the reason you've seen it down in the last several years is because of the reinvestment that we have had into building up a newer fleet of trucks and also bringing some newer trailers in So we can provide the types of services we need to and that has hit our operating expense. But it's yes, you're correct. Land transportation is probably other than fertilizer our most difficult business to forecast Because it is so the key to that business is our customers needing our services, so their plants operating where they anticipate them to operate and them having the shipments that they are anticipating and that we are prepared to handle.

Speaker 2

And this is Bob again. I'll say from a macro level as far as forecasting, we run a very consistent number of miles per month or per year. And so that's the fundamental starting point in the forecast is you estimate your mileage, you estimate your revenue per mile, which has been ticking up in these inflationary times over time. So that's the fundamental beginning place, knowing our consistency with our customer base because of our strong performance and service we provide our customers.

Operator

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

Speaker 2

Well, thank you, Audra. I'll conclude the call with further comments on the DSM, Semicon joint venture or Elsa project. As the partnership has concentrated on debt reduction and improved leverage the past few years, we have told you that our strategy for revenue and cash flow growth lies within expanding our services to current customers and creating strategic alliances around our existing core assets. The Elsa project is a result of focus on that strategy. This alliance with Samsung and Dong Jin utilizes our existing assets in Plainview as a base for expansion, has low capital requirements and provides an entry point to an industry poised for a decade of growth.

Speaker 2

Even with the delays in construction of our facilities due to labor and material availability, The Elsa project is an exciting growth opportunity for the partnership and our investors. Thanks for joining the call this morning. We look forward to speaking with you again on the next quarterly investor call. Thank you.

Operator

And this concludes today's conference call. Thank you for your participation. You may now disconnect.

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Key Takeaways

  • In 2023, Martin Midstream refinanced its secured notes through February 2028, extended its credit facility to February 2027, exited the volatile butane optimization business, initiated construction of an oleum tower for the DSM Semicon JV, and exceeded its adjusted EBITDA guidance while achieving a 3.75× leverage ratio.
  • In Q4, the company reported $29.2 million in adjusted EBITDA versus guidance of $26.9 million (+9%), led by strong Land transport and Sulfur Services performance, partially offset by a one-time $1.1 million P&I insurance charge in Marine transport.
  • At year-end, total long-term debt was reduced to $442.5 million (down $73.6 million YoY), with $109 million of available liquidity, distributable cash flow of $32.8 million, and adjusted free cash flow of $21.7 million after adjustments.
  • For 2024, Martin forecasts $116.1 million of adjusted EBITDA (71% fixed fee), segment contributions of $41.2 million in Transportation, $37.7 million in Terminalling and Storage, $29.7 million in Sulfur Services, and $22.7 million in Specialty Products, alongside $17.4 million of growth CapEx and $32.0 million of maintenance CapEx.
  • The DSM Semicon (Elsa) joint venture is expected to start generating ~$1 million per quarter in reservation fees from Q4 2024, with actual electronic-grade sulfuric acid sales ramping into 2025, leveraging Martin’s Plainview assets with low incremental capital requirements.
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Earnings Conference Call
Martin Midstream Partners Q4 2023
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