Calumet Specialty Products Partners Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 23, 2024

There are 12 speakers on the call.

Operator

Good day, and welcome to the Calumet Specialty Products Partners, LP 4th Quarter 2023 Results Conference Call. All participants will be in a listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Brad McMurray, Investor Relations. Please go ahead.

Speaker 1

Good morning. Thank you for joining us today for our Q4 and full year 2023 earnings call. With me on today's call are Todd Borgman, CEO David Lunan, CFO Bruce Fleming, EVP, Montana Renewables and Corporate Development and Scott Obermeyer, EVP, Specialties. You may now download the slides that accompany the remarks made on today's conference call, which can be accessed in the Investor Relations section of our website at www.calumet dotcom. Also, a webcast replay of this call will be available on our site within a few hours.

Speaker 1

Turning to the presentation, on Slides 23, you can find our cautionary statements and tax disclosures. 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 was 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 our expectations. I will now pass the call to Todd. Todd?

Speaker 2

Thanks, Brad, and welcome to Calumet's year end 2023 earnings call. To start, I'll provide an update on our conversion process. We'll then recap 2023, Dave will take us deeper into the quarter and I'll wrap with a 2024 outlook. Let's turn to Slide 4. In November, we announced that our General Partner and Conflicts Committee had agreed to terms that would convert Calumet to a C Corp from an MLP.

Speaker 2

And since then, we've been at work putting that into effect. Over the past few years, Calumet has transformed itself into a new company. And it became clear that the typical institutional investors who would invest in a leading specialty products company and a top tier renewable fuels business largely don't or even can't invest in MLPs. Further, almost no passive investment strategies, which make up nearly half of the capital being invested, allocate to MLPs. Thus, to increase our investor base and ultimately provide our shareholders the best opportunity to realize fair value for Calumet, we embarked on this change.

Speaker 2

2 weeks ago, we announced the signing of the official conversion agreement, which is a prerequisite to filing our S-four with the SEC. After we receive comments back from the SEC, a final S-four will be filed, a proxy vote held and we hope to gain approval from our shareholders and complete this conversion midyear. Again, I thank everyone involved, especially our general partner and conflicts committee for a fair and thorough negotiation, and we're looking forward to this vote and new opportunity. Turning to Slide 5, we see the 4th quarter in the 4th quarter Calumet generated $40,000,000 of adjusted EBITDA. And for the year, we generated $261,000,000 of adjusted EBITDA.

Speaker 2

Our 2023 financial results were driven by 3 things, all of which we've discussed previously. 1st, in Montana, a steam drum crack essentially set our strategic plan half a year and culminated with a month long outage in November, where we successfully replaced the unit. At that time, given we were down anyways, we pulled forward turnaround work and replaced the catalyst change that was previously scheduled for 2024. 2nd, the combination of a winter freeze and summer tornadoes in Shreveport underpinned roughly $70,000,000 of lost opportunity in our specialties business. 3rd and positively, we were able to offset some of the year's challenges with superb commercial execution throughout the business.

Speaker 2

Most notably, our specialties team increased margins for the 5th consecutive year. Strategically, 2023 was a foundational year, which positions us well to achieve our ultimate strategic objectives. Our specialties business has solidified itself as a commercial leader in the space. Our unique integrated asset base, customer focus and commercial and technical know how are lasting advantages. Last year, we built on this by successfully integrating our Performance Brands and Specialty Products and Solutions segments into a single specialties group.

Speaker 2

And we see additional opportunity here as we capture value from our agility, optionality and breadth of offering throughout the entire specialty product value chain. Further, in a few months, we'll be entering year 3 of our operational improvement plan in Shreveport. The events of 2023 highlighted some of our infrastructure weaknesses, both within and outside the plant. And while we'll never be immune to everything, the improvements made thus far have been meaningful and we're tackling reliability at Shreveport head on. Naturally, the most notable item of this past year was our Montana Renewables business came to fruition.

Speaker 2

The 1st year wasn't without setbacks as often as the case for projects as ambitious as this one. And ultimately, we stood up and de risked the key elements of the venture. We demonstrated our ability to source competitively advantaged feed. We de risked our technology and we showed our commercial agility and ability to capitalize on our location as half of our product ended up in a rapidly growing Canadian market. Last, in May, we launched North America's largest sustainable aviation fuel business, establishing Montana Renewables as a first mover in an area that is so promising that has since become a strategic focal point of many in our space.

Speaker 2

The emergence of a rapidly growing SaaS market is extremely exciting for industry and we're thrilled to be positioned at the tip of the spear along with our partners at Shell. We compare the sustainable aviation fuel transition today to the one we saw in renewable diesel nearly a decade ago. Like renewable diesel, SAF is the only drop in fuel that's available today. Other alternatives are interesting, but they require decades of research and development and huge investment completely overhaul the airline industry's infrastructure, which we view as unlikely anytime soon. It's now common knowledge that our industry is producing less than 1% of the SAF that would be required in 6 years to meet the government's 3,000,000,000 gallon milestone in the Grand SAF Challenge.

Speaker 2

And this 2,030 milestone is only 9% of the ultimate 35,000,000,000 gallon plan laid out by federal agencies. Naturally more capacity and additional technologies are going to be required. There are a few ways to make SAF, the most economic of which by far is the HEPA process, which Montana Renewables currently uses. That being said, the growth prospects for this industry are so large that all technologies are likely to be required, most of which are meaningfully more expensive than the HEPA process. Further, we're seeing demand for staff change quickly.

Speaker 2

Staff mandates exist in the UK, individual airlines have announced targets, we see airports setting staff requirements And just this week, Singapore announced the requirement for all departing planes to use staff. This rapidly growing demand is exactly why some of the largest players in industry are investing heavily in this space. And it's why Montana Renewables made the change in our original project nearly 2 years ago to add SAP capability. Throughout 2023, we progressed plans to build on Montana Renewables 1st mover advantage via our MAX SAP project. We've progressed engineering, interviewed construction partners, and we eagerly await feedback from the DOE on final funding to move forward.

Speaker 2

The DOE process continues to move well, in fact accelerate and we're hopeful to receive confirmatory feedback in the not too distant future that will allow us to officially launch the next phase of MAX SAF, which we expect will make us one of the largest SAF facilities in the world. A growth in SAF demand also should be expected to change the landscape of renewable diesel. As we evaluate MAX SAF, we ask if these margins exist and the addressable market is so large, why wouldn't every renewable diesel player convert? Naturally, our industry is full of sharp competitors who are considering just that. What we quickly find is despite all of the growth we've seen in renewable diesel, the entire U.

Speaker 2

S. RD capacity just reached 3,000,000,000 gallons this year. In other words, it would take all of the RD to meet the 2,030 Grand Saff Challenge. Of course, we're also seeing demand grow in renewable diesel with Canada being early in their program and New Mexico reminding us that individual states will continue to implement new low carbon fuel standards. Further, all the renewable diesel that's being produced today is needed to remain in compliance with existing low carbon fuel requirements.

Speaker 2

And as RD is converted to SAF, the obligated RD volume demand will necessitate the need for market to incentivize the production of renewable diesel. As this dynamic plays out, we'll take our traditional approach at Montana Renewables of building an optionality, remaining nimble commercially and leveraging our relative location and cost advantage in any scenario. This includes the ability to produce either renewable diesel or SAF. It also includes utilizing our advantaged logistics cost structure to weather any industry volatility. Recently, we've seen market renewable diesel margins hit a trough.

Speaker 2

While short term volatility exists in any business, we believe the historic structure of the market will continue to hold in time. When the price of rooms, diesel and LCFS, all independent variables are reduced at the same time, the needed equal and opposite impact of feed price is dramatic. Suppliers try to mitigate a sharp decline by all means available to them, including reducing crush rates and building inventory, which can delay the reaction in feed prices. We would expect the impact of price lag on industry margins to be larger than normal in this scenario and we're seeing that today. Of course, over time, biodiesel would have a difficult time competing at low industry margins, inventories in the supply chain should build and one of the variables in the property equation has to react.

Speaker 2

And just in the past couple of weeks, we've seen the vegetable oil margin indicators start to turn. We've also seen tallow, a waste product, adjust rapidly and strong tallow margins continue to exist. In a normal environment, we'd expect relatively short length of Montana Renewables supply chain to be a differentiated advantage in times like this. But during this current trough, we've been full of inventory that was originally contracted for the second half of twenty twenty three before the facility was cut back. This impacts us as the feed is higher priced, but it also limits our flexibility to react to short term changes in the relative feed dynamics, which otherwise would be a core advantage.

Speaker 2

We started processing our old feed when we restarted in December and expect to be through it in the Q1. To put the impact of these items in perspective, the difference between Q3 average CVOT price levels in December was over $1.20 per gallon. Further, over the past couple of months, margins have remained over $1 a gallon higher for tallow than oils. With normal inventory levels, we'd be switching to tallow and capturing this advantage, which would deliver margins reasonably in line with previously stated expectations. With full inventory, we are processing what we have.

Speaker 2

As the energy transition continues to evolve, we believe Calumet is positioned for success. As discussed today, we're well positioned in Montana for both renewable diesel and SAF growth. And our specialties business can flex fuel production up or down as the market dictates. Further, our specialties business is positioned to benefit from many of the megatrends that we see in today's market as we produce high performing products going into mining, power transmission, food and pharma and clean water, including a growing list of environmentally friendly materials such as our biodegradable lubricants servicing the global shipping industry. We believe this breadth and flexibility positions us well as our industry continues to evolve.

Speaker 2

Our core belief continues to be that the energy transition will continue to occur, but will take longer than most think. It's complex, it requires investment and it will ebb and flow as businesses and society experiment and adapt. And at Calumet, we'll continue to focus on positioning ourselves to remain competitively advantaged in all scenarios. With that, I'll hand the call to David to review our quarterly financials. David?

Speaker 3

Thanks, Todd. I'll start with our announcement this morning that we entered into a note purchase agreement to issue $200,000,000 aggregate principal amount of 9.25 senior secured first lien notes due 2029. The use of proceeds will be to call and retire our existing 2024 secondured notes and we will also call along with available cash $50,000,000 of our 11% 2025 notes. This transaction allows us to remove the near term maturity, reduce overall indebtedness and reduce our annual interest expense. Given the potential Montana Renewables monetization was pushed back half a year due to last year's steam drum replacement and the need to demonstrate a few quarters of strong operations in order to capture proper value from a potential monetization, we want to ensure that we have ample flexibility and time for it to access the market properly.

Speaker 3

This financing provides that flexibility by adding a small quantum of debt that wouldn't otherwise trade well, is cheaper than a new unsecured issuance and will also be callable in a year, as well as leaving enough debt outstanding without protection to provide an efficient path for further deleveraging later in the year. Before I review the segments, I'd also like to comment on the 8 ks we released this morning and the associated restatement of 20222023 quarters. The restatement relates to our accounting for the preferred equity investment in MRL. We had been allocating net losses in the business in a proportion to the total ownership for the non controlling interest. We determined that these losses should not have been allocated to the preferred equity investment, thus $6,700,000 in 20.20 $2,000,000 $18,500,000 in 2023 of losses that were previously allocated to non controlling interest will now be allocated to Calumet's limited partners.

Speaker 3

To be clear, this has no impact on the net income, adjusted EBITDA or cash flow of the business and only it relates to the allocation of net losses. This restatement also has no impact on the timing of our conversion. More details can be found in the 8 ks. Turning to Slide 8, our STS business generated $75,600,000 of adjusted EBITDA during the quarter and $251,200,000 for the full year 2023. This was a very strong quarter for our SPS business.

Speaker 3

The plants operated well and we had one of the best quarters as our commercial team continued to execute our customer focused strategy. We saw unit margins increase with specialties during the quarter, while fuel and asphalt margins decreased seasonally. We continue to see an above mid cycle margin environment in this business. Moving to Slide 10, our Performance Brands business generated $6,100,000 of adjusted EBITDA, bringing our full year adjusted EBITDA to $47,900,000 for the Performance Brands segment. We typically see some seasonality in the business as some of our customers, especially the big box retailers manage year end inventory levels and that was no different this quarter.

Speaker 3

Industrial demand outpaced consumer demand, which weakened and we expect that trend likely to continue early in 2024. Our team continues to do a nice job capturing value from the optionality and integration of our various business across SPS and the PV segment. As you can see turning to Slide 11, we have delivered 5 consecutive years of growth in our specialties business. As a reminder, this is a combination of the specialty products within our STS segment and our Performance Brands segment. The team has done a really good job these last several years capitalizing on an improved margin environment, while also making lasting step change improvements within the business.

Speaker 3

You can see in the lower right hand chart a steadily increasing volume of intermediates between our SPS and PB business as the team continues to drive an integrated business model, which we believe provides a unique advantage across our platform. Moving to our Montana businesses, you can see on Slide 13 that we recorded a loss of 25 $800,000 of adjusted EBITDA in the quarter and generated $30,200,000 of adjusted EBITDA for the full year. While operations performed well at our legacy asphalt plant during the quarter, the winter is always difficult in this business as roads aren't being paved and local gasoline demand dries up. For our conventional asphalt and niche fuels plant, its 1st year post MRL was a good one. Going in, we expected the 50% smaller footprint would deliver roughly 60% of the specialty asphalt operations post MRL, and then we executed on that in 2023.

Speaker 3

At Montana Renewables, Todd spent time earlier on the previously disclosed closed steam drum outage and replacement. And I will briefly touch on that again as that was the story in Q4 and the second half of twenty twenty three. The repair work was completed during the Q4 along with the turnaround and catalyst change that we pulled forward into the period. The renewable diesel plant was completely shut down for the month of November and came back online at the beginning of December and has been operating well since. You can see in our renewables production volumes, the impact of the reduced rates and shutdown had on MRL's production.

Speaker 3

Now that the facility is back up and operating at close to full capacity, we are drawing the last of our excess inventory that was built during the unplanned outage and shutdown. We should be through that inventory in the next quarter, at which point we will resume our normal feedstock purchase program. We are glad to have the replacement work on the steam drum behind us. And while last year, while that had the impact of pushing back about 6 months, our strategy is unchanged as we continue to pursue the DOE loan, finalize our expansion from Mac Staff and prepare for potential monetization opportunities. Lastly, before I turn it back to Todd to wrap up prepared remarks, I'll provide a few guidance items for this year.

Speaker 3

We expect the corporate segment to incur approximately $80,000,000 of adjusted EBITDA cost in 2024, which is in line with previous years and our previously outlined annual expectations. And from a cash flow perspective, excluding MRL, we anticipate $100,000,000 to $120,000,000 of annual CapEx. On Montana Renewables, we expect $15,000,000 to $30,000,000 of sustaining CapEx this year, which includes the planned purchase of a long lead time catalyst that will be later in the year or next year. I'll now hand it back to Todd for closing comments before we move to Q and A. Thanks, David.

Speaker 3

Let's flip to

Speaker 2

the last slide and talk about the year ahead. 2024 is a pivotal year for the company and its investors. This is the 1st year that both our specialty business and renewables business are fully operating together, and we're committed to unlocking value through a number of near catalysts. The first of these is demonstrating the top decile profitability potential of Montana Renewables, which given the old feed inventory mentioned earlier, we expect to occur in the Q2. Next is the DOE process, which we mentioned earlier.

Speaker 2

This goes hand in hand with the launch of MAX SAF and we look forward to providing a more complete outlook on this project soon. Not only is MAX SAF a huge opportunity, but we also expect it to be another catalyst in a potential Montana renewables monetization, which continues to be an ultimate deleveraging step for the organization. And last, we're on track for a mid year conversion to a C Corp. Up to now, investors who are otherwise interested in Calumet have not been able to invest in our company due to common constraints that come with MLPs. Our institutional and passive investor base is tiny in size, which results in our units being very thinly traded, which also is a deterrent to new investors.

Speaker 2

Since the conversion announcement late last year, we've spoken to many potential new shareholders about the Calumet opportunity. We believe our story is an interesting one for investors and we're excited to provide the ability for them to partake in a new Calumet, one which has been transformed over the past few years, which has 2 competitively advantaged businesses and significant near term catalysts that we believe present a meaningful value proposition. Thank you. And with that, I'll turn the call back to the operator for questions. Operator?

Operator

We will now begin the question and answer session. The first question today comes from Roger Read with Wells Fargo. Please go ahead.

Speaker 4

Yes, thanks. Good morning, everybody. Yes, it does look like it's going to be a pretty exciting and also challenging 2024 for you. Coming to the MRL side, I'd like to just ask you, Todd, you mentioned product going into Canada, some of the other places. We recognize the issues with startup of these facilities and feedstock costs.

Speaker 4

But if you look at the distribution side, give us kind of an inkling of how that's turned out and maybe how those realizations are working so that as you fix the feedstock and the operational issues, we can get confidence on where margins ought to go?

Speaker 2

Yes, you bet. Hi, Roger. Thanks for calling in. I'll turn it over to Bruce here this second. I'm sure he has more to add.

Speaker 2

But in general, I'd say our product distribution has been exceptional. We have a super flexible group of partners. They're contracted long term. Remember, we sell everything FOB. So we have insight into where the product is going.

Speaker 2

And we benefit when products are upgraded to Canada, for example. But ultimately, all our sales are contracted formulaically. They align with the steady margin, the formula that we've talked about historically. And I'd say those are working very, very well exactly as expected. I don't know.

Speaker 2

Bruce, what would you add?

Speaker 5

Thanks, Roger. The fact that we have our pathways registered into all of the LCFS geographies, as well as having the CorSoa certification for our staff means that our off takers have a lot of flexibility to shift any of these materials to where they think is the best for their system operations. So we've had as much as 50% of physical production going to Canada on a monthly basis. And this is one of the hidden attributes of our geographic location. We share a land border with British Columbia.

Speaker 5

A lot of people are trying to get there the hard way by water and we literally drive the truck over. So there's a lot going on in the distribution optimization space.

Speaker 4

All right. I get a geographic explanation as well as everything else, right? Shifting gears to the other two businesses, just asking really for sort of a macro outlook. We've seen the chemical industry have a lot of challenges. I know you all are not pure chemicals, but you kind of get put into that box.

Speaker 4

So I'm just curious as you look at beyond the weather issues at Shreveport, but what's the underlying kind of demand and pricing setup as we look at both specialty and performance?

Speaker 6

Hey, Roger, this is Scott. Thanks for the question. So as we sort of walk through, I'll call it the timeline, Roger, in Q4, I think the real headline theme was seasonality, right? So we saw the fuel cracks take a major step down on that side of the business. Within the specialties, both SPS and Performance Brands, I would say we saw the typical seasonal slower demand at year end.

Speaker 6

We also saw some customers looking to destock a little bit further and derisk their business where possible. Looking now into the early part of 2024, I would say it's a little bit mixed, Roger. Going back to the fuel side of the business, we have a constructive outlook within fuels. We've seen crack margins improve from 3 year lows that we hit in mid December. We've seen that improve back above mid cycle, although remain highly volatile.

Speaker 6

On the specialty side, Roger, overall, we say demand has slowed. As you alluded to, we've seen the demand slow. But with that said, and Todd and David touched on this during the script, we've delivered 5 years in a row of record results within that specialty side of the business. We've implemented commercial best in class programs that have allowed us to perform and deliver results really in any type of environment that we've encountered the past 3, 4, 5 years. So we remain confident in the business, but without question, there has been some

Speaker 2

market pullback from the customer demand. Maybe I'd add a little bit, Roger, and Scott, see what you think about this, but the if I look at the normal slide that we present in SPS, we show the margin per barrel on specialties and we saw that bounce back to a little bit above $70 a barrel in Q4, which I think we alluded to on the last earnings call. I think we'll continue to see margins kind of in between that Q4 and Q3 number. So $60, $70 type range as we look into 2024 and continue to expect that we'll be able to sell everything we make. So it's undoubtedly a little bit slower on kind of particularly on the retail front, but more broadly continues to be well above mid cycle and just very comfortable and confident in the sales team that Scott has built.

Speaker 2

They're doing an exceptional job and really able to go out and have a lot of confidence performing in any market.

Speaker 4

Great. Appreciate that. I'll turn it back. Thanks.

Operator

The next question comes from Neil Mehta with Goldman Sachs. Please go ahead.

Speaker 7

Yes. Good morning, Todd and team. Thanks for the time today. The first question I had was really on Montana. In trying to get a sense of what the lost profit opportunity was because it was a tougher quarter, but you had turnaround and you had a period where you're working through some high priced inventory.

Speaker 7

Now is there a way to strip back out and try to get a sense of what the profitability would have looked like? And that's any comments on when we can really see the run rate levels of profitability for that business?

Speaker 2

Hey, Neil, it's Todd. I'll kick again and then like I said, Bruce will have plenty to add, I'm sure. I'd say loss profit opportunity in the second half was between $80,000,000 $100,000,000 So the steam drum crack undoubtedly pushed us back. If we look forward to what we're doing now, and I alluded to this a little bit in the script. I think if we look forward, we look at what margins have done right now.

Speaker 2

Industry margins have softened a little bit. And we know we have some impact of old feed. But remember, Montana Renewables core advantage is our ability to switch feedstocks and take advantage of whatever market is strong. And what we've really seen is tallow has remained super profitable. Unfortunately, right now, we're not able to take advantage of it, largely because our inventory is full.

Speaker 2

So LPO is kind of hard to pull back too much because there are so many elements. But I'd say right now, if we were running in a normal steady state environment, looking at industry tallow margins of $1.70 ish a gallon or so, we'd be generating somewhere probably between $0.80 $1 a gallon. So it's a little bit softer out there. But undoubtedly, this is a top decile plant. The impact of Q4 was solely on operations and the turnaround and not being able to spread fixed costs and capture those economies of scale.

Speaker 2

So I don't know, Bruce, what would you add?

Speaker 5

I think that's a good capture. And Neil, in addition, I would flag with tallow margins at $2 if you wave the magic wand, we should be running 100 percent tallow and we have done that. We commissioned the unit on 100 percent tallow. So it's within our reach. The issue we ran into was with the downtime due to the steam drum.

Speaker 5

We underran production, all of our tanks are full, our supply chain is full. And our ability to shift gears and optimize feed classes is going to be delayed till we clear that inbound.

Speaker 7

Thanks Bruce. And then team, when do you see that happening? When do you get that inflection where we can see the run rate profitability of the renewables business? Is that middle of this year?

Speaker 5

Probably sooner, Neil. We're actually already climbing out of the hole when we look at our internal short timeframe metrics. The quarterly reporting will begin to show that at the end of this current quarter and it's going to continue to improve as we resume normal feed optimization activity.

Speaker 2

And I think if I'd add anything, it's expect Q2 for the first full kind of run rate quarter, right. So versus highlighting that we're getting through the end of our inventory challenges here. I think that we'll have that fully cleared in March And Q2 is what we're looking at for kind of the first normal, I'll call it, where we're buying feed in month and selling product in the same month at full rate.

Speaker 7

Thanks, Ty. Thanks, Chris.

Speaker 8

Thank you.

Operator

The next question comes from Manav Gupta with UBS. Please go ahead.

Speaker 9

Guys, I just have a quick macro question. You provided very detailed opening comments and one of the read throughs for me was that you were indicating that you are advantaged, we have advantaged feedstock, you're making renewable diesel with a lower feedstock prices eventually. But one side of the industry, which you kind of hinted was at a disadvantage was biodiesel producers using vegetable oil. And it looks like some of those guys could shut down and eventually that would help bring the whole industry more into balance, better D4 outlook, better LCFS outlook and also reduce the oversupply of BDRD. Is that what you're thinking that the advantaged projects like yours will run while weaker biodiesel projects using vegetable oil could have to eventually shut down?

Speaker 5

Manav, it's Bruce. Directionally, that's absolutely correct. The Siri Adam, the ordinal ranking of cash margin is absolutely going to favor the HEFA producers over the biodiesel. Logistics will also sort out individual competitors and ours are going to be the best because we're the closest to all of the markets. The question on the table is actually how fast does the EPA correct its error, they underrepresented the supply side and that has the effect when they set their targets, sorry, they set the targets too low to be clear.

Speaker 5

That's putting a lot of pressure on the farmers and on the ag sector. I'm not sure that's politically sustainable.

Speaker 9

Perfect guys. And a quick follow-up, looks like New Mexico is also moving ahead and from what we are hearing is that this delay in carb is actually a little more positive. They are looking at the current mechanism and saying maybe we need to be more strict about it to get the carbon price bank in a better balance. Anything you have heard either on New Mexico or the proposed card ruling, if you could help us out?

Speaker 5

Well, we know what you know from the public reports, but our thesis all along has been that the low carbon fuel standard is going to continue to spread geographically. So if you just look at recent history, you have all of Federal Canada opting in and they were careful with the rule. They took their time to get that right and it came on stream July 1 this past year. That doubles the addressable diesel volume subject to an LCFS standard just like that. New Mexico is smaller, I believe 100,000 barrels a day diesel is the volume I have in my head.

Speaker 5

But they're not going to be last, they're just next. A lot of state legislatures are considering this. Sometimes it's for farm support because it does pull crop based materials through into the transportation fuel pool. Sometimes it's for air quality, everybody's got a different motivation, but that's going to continue. And that's just the U.

Speaker 5

S. Or North American picture. These rules are continuing to come in around the world. As Todd indicated, there's been a lot of activity in SAF, most recently the Singapore requirement. And I want to reemphasize that renewable diesel plus SAF is the call on the HEFA hardware.

Speaker 5

Every gallon of SAF the industry makes has been taken away from diesel. And that's got to be part of the balances for anybody doing any forecasting.

Speaker 9

Thank you so much for detailed responses, guys.

Speaker 5

Thanks, Manav.

Operator

The next question comes from Sameer Joshi with H. C. Wainwright. Please go ahead.

Speaker 8

Hey, guys. Thanks for taking my questions. Just a clarification on the C Corp conversion and sort of the monetization of MRL. Is it possible for you to continue to sort of proceed on the divestiture while this C Corp process is going on or will it have to be only started after the C Corp is done?

Speaker 2

Hey, Samir, it's Todd. I think in general, our plan remains unchanged around both monetization and C Corp conversion. I see them as separate, but there certainly are connection points. Obviously, our core theory with all of this is as Montana Renewables comes online and just general investor sentiment towards MLPs, there's just it's just a completely different investor base. So to get the right type of interest, to get our trading volume up to where it needs to be and to be able to outreach to institutional and passive investors, it's just critical that we had a more investable corporate structure.

Speaker 2

So I think that's separate from a potential monetization of Montana Renewables. I also think it's generally helpful, right. So as we look at the Montana Renewables potential monetization, I don't think much has changed there. We've said all along that we need probably 2 quarters of strong steady operations, which we started in December. We need at least 1 quarter, if not 2, of steady state financials, which we said today, we expect in Q2.

Speaker 2

So if we kind of tie all of that together, we would be pointing towards second half of the year for potential monetization. Obviously, we don't have to monetize. We are focused on creating max shareholder value in this whole deal. But we're certainly interested in it and have been talking about it for a while. And I'd say our plan is that as a base case remains unchanged.

Speaker 2

The conversion or the change to a C Corp would happen before that. So we expect the conversion to be complete in Q2, which would be before a sale of Montana Renewables. Does that help?

Speaker 8

Understood. Yes, yes. No, thanks for that color. I understand. On the stepping back and looking at your overall financials, how has the RIN pricing environment helped or impacted overall profitability because you do have to buy the RINs for your nonrenewable business?

Speaker 8

And how is the rents on balance sheet, how are you playing that pricing that out? Just wanted to understand how you're managing profitability and impact of these elements?

Speaker 5

Hi, Samir. It's Bruce. I'll take a start at that. So we basically have an inventory accounting style treatment of RINs on our balance sheet. So we accumulate any length or shortage, treat that as an inventory and reprice it at the end of each quarter.

Speaker 5

And as we've communicated before, we're not sure that's really a very good estimate of financial liability for two reasons. 1, there's a lot of volatility in the RIN price itself, which you just noted and a rightful shot of 4 days out of the whole year is the first question. Secondly, you can't settle that liability with money. That's not how that program works. So with that disclaimer, I think I would also tell you that we're involved in a number of federal circuit court litigations, and I don't want to go too far into any forward looking statements other than to note that the status of each of those cases is a matter of public record and for example the 5th Circuit sided with us and we'll see how that plays out as we continue to talk to the EPA.

Speaker 8

Understood. And then one just last one. Of the actual production of renewals, what proportion was I think it was 5.4 barrels per day on average. What proportion was RD and what proportion was SAS?

Speaker 5

Our guidance is a 12,000 barrel per calendar day feedstock run. And if you convert that to gallons, you're going to get about 175,000,000 gallons a year. We've contracted 30,000,000 gallons of SAF.

Operator

The next question comes from Greg Brody with Bank of America. Please go ahead.

Speaker 10

Good morning, guys. And Bruce, are you a little bit surprised that I didn't get to ask the wrong question. Just to think, I'm trying to understand how to think about funding the MAX expansion project and I realize the DOE funding is part of that. But can you talk a little bit of the sequencing of MAX staff? Will you do you basically need the DOE funding to come in to start doing that?

Speaker 10

And then maybe you can try to tie that to ultimately the deleveraging of legacy Calumet?

Speaker 2

Hey, Greg, it's Todd. We've said before that we're not going to take on meaningful extra just senior notes to go fund Mac staff and that continues to be the plan, at least until we're completely delevered. So I wouldn't expect that to change. So what that means is it's directly linked to DOE. We've been progressing the engineering.

Speaker 2

We can do that internally. We can do that through very minor spend to an extent. We're getting to the point now where we have a pretty strong feel of what we have and we're very excited about it. We'll provide more details actually probably on the upcoming earnings call of what we actually expect MAXAF to be. But we don't expect to go forward and spend meaningful dollars until we get DOE approval.

Speaker 2

So we're quickly coming on to a plateau and just how productive we can be. It's kind of like with the DOE comes the launch of MaxSaf, it's that simple. We progress through the pre planning phases over the past few months and really excited about what we have. So the I guess to oversimplify, don't expect a whole bunch of excess new capital to come in to fund MAX assets strictly tied to DOE. No change in our long term deleveraging plan.

Speaker 2

We've said that we want to reduce $300,000,000 to $400,000,000 of outstanding debt. That continues to be the plan. Continued path A continues to be a minority sale of Montana Renewables and free cash flow.

Speaker 10

And would you expect any free cash flow from Montana Renewable to come out this year or is it all going to be reinvested?

Speaker 2

No, I would expect it to stay in Montana Renewables this year.

Speaker 10

And then just on the DOE, you made it sound like you're optimistic you'll hear something soon. Can you talk a little bit about what you're hearing that actually gives you confidence in that? Just help us understand what you're thinking when you made that statement.

Speaker 5

Greg, it's Brutus. I'll take that one. We are actively engaged with the DOE multiple times per week. It's a priority on both sides. And we will expect to have a go, no go in the foreseeable future.

Speaker 5

This is not a case where we've got some PowerPoint idea and we're running around looking for financing. We're launching the expansion off of a real platform and the economics are compelling.

Speaker 10

All right, guys. I think that's it for me. Thanks for the time.

Speaker 5

Thank you.

Operator

The next question comes from Jason Gabelman with T. B. Cowen. Please go ahead.

Speaker 2

Good morning. I wanted

Speaker 11

to ask about the political or I should say government support as it relates to your staff project. Given that it's an election year, one, how important is it that you get the loan from the DOE prior to the election? Do you see potential for risk if you don't get it by then? And then 2, how comfortable are you with the SaaS economics excluding support from the IRA given there could be some risk to the producer tax credit if there's a Republican wave?

Speaker 5

Jason, I'll start. It's difficult to speculate on an election result. And as far as the second part of your question, we are able to participate in the current legislated markets, which are not only federal. Remember that LCFS matters. Remember that there's a lot of global pressure to pull SAF into physical commerce.

Speaker 5

The commercial premiums in Europe are in the $3 a gallon range. The volumes are being mandated. State of Illinois has passed $1.50 per gallon tax credit. So it's a much, much broader tapestry of support than just is the future administration going to reverse the existing federal law. And I don't think we perceive that as a large risk because if there's not a premium for SAF, we're going to leave it in the diesel.

Speaker 5

No premium, no SAF, and that's globally true.

Speaker 11

Okay. And then just on the DOE loan process, has there been something that's been holding this up longer than expected? I don't know if there's something specific or if it's just typical kind of government delays that you run into. But I think when you first started talking about the DOE loan, you expected it to get it as early as Labor Day 2023?

Speaker 5

Yes, Bruce again. Your memory is correct. We actually began talking to the DOE 2 years ago. We didn't talk publicly about that earlier. But as it became a real prospect on both sides, we did have a step change improvement in that conversation after the IRA legislation came through.

Speaker 5

That changed a number of things. And so we're in actually a much better situation and assuming success, you're going to like it when it comes out. But it did require some rearchitecture based upon the change in legislative support.

Speaker 11

Okay. And then the final one, just on Canada, which you mentioned is an important market for your renewable diesel sales. Can you discuss it's a bit less transparent than kind of the U. S. LCFS programs, just given the federal program starting to ramp up.

Speaker 11

Can you discuss the outlook for that market? Do you expect that to become a major pull on U. S. Renewable diesel production over the next couple of years as their clean fuel standard program ramps up?

Speaker 5

Yes. And to give a little more color, if you make a loose analogy, the Canadian industry structure is similar to the U. S. Side. There's a leader on the West Coast that's British Columbia.

Speaker 5

They've got their own model and rules that are tighter than the national averages, same as the analogy to California or CARB and the U. S. Federal. There is a proliferation of provincial level requirements, some of which are direct volume mandates, not LCFS style. And then you've got the federal overlay of an LCSF program running off of a different model platform than the BC one.

Speaker 5

So the parallels are very, very reasonable. And if you take that and project it, the tightening program just calls in more and more volume. It's supplied by import now, and the forecast is that will continue. We're in a great position to be the shipper. Now, I want to give you a different thought.

Speaker 5

The model differences in Canada are not only on the product side. They treat carbon intensity calculations differently, particularly British Columbia does. And so there's a real incentive to take Canadian canola and round trip it through our plant back to Canadian placed product. We've got one of our off takers specifically requesting that we assign them product made from canola. So there's a lot going on under the surface.

Speaker 5

The forecast is that the global energy transition drive continues, different local political, local regional political players will find a way to properly tune that to their ag sector, their ranch sector in the case of Tallo. And there's no reason not to remain optimistic about the underlying industry structure.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Brad McMurray for any closing remarks.

Speaker 1

Thanks, Betsy. Thanks, Betsy. On behalf of the management team here in the room and really all of us here at Calumet, we appreciate your time and interest this morning. Thank you for joining us on today's earnings call. Have a great weekend, everybody.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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Key Takeaways

  • Calumet announced a mid-year conversion from an MLP to a C-Corp to broaden its institutional and passive investor base, pending S-4 filings and a shareholder vote.
  • In Q4 the partnership recorded $40 million of adjusted EBITDA (and $261 million for full-year 2023), with results weighed down by a steam drum outage at Montana Renewables and weather-driven interruptions in Shreveport, but partially offset by strong commercial execution.
  • Montana Renewables completed its steam drum replacement, de-risked its HEFA process and feed sourcing, shipped 50% of output into Canada, and launched North America’s largest sustainable aviation fuel business in partnership with Shell.
  • The specialties business achieved its fifth straight year of margin increases by integrating Performance Brands and SPS segments and is executing an operational improvement plan to boost Shreveport reliability.
  • Calumet issued $200 million of 9.25% senior secured notes to refinance near-term debt, reduce interest expense and extend maturities, and restated prior quarters’ allocations of preferred equity losses without impacting net income or cash flow.
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Earnings Conference Call
Calumet Specialty Products Partners Q4 2023
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