Calumet, Inc. (CLMT) Earnings Call Transcript & Summary

This webcast presentation is for Bank of America clients only. If you are a member or a representative of the press or media, please disconnect now. And now I will turn the call over to you.

Hey, this is Gregg Brody. It's my pleasure to introduce Calumet Specialty Products Partners. We're fortunate to have Steve Mawer, the new CEO; and Keith Jennings, the relatively new CFO. It's their first time presenting at this conference. And I'll -- I'm going to turn it over to Steve to provide some introductory remarks, and then I'll jump in with some questions.

That's great. Thank you very much, Gregg, and I appreciate everybody joining this call. So let me just kind of start, maybe do a 2-minute quick history of who Calumet is and where we are. So we're, first and foremost, a specialty products company. We manufacture and formulate specialty hydrocarbon products for a very diverse range of customers, multiple industries and multiple applications. That's our route to the specialty manufacturer with a strong focus on these high-margin niche markets. In the late 2000s and early 2010s, we levered up our balance sheet to go through a process of making multiple acquisitions. Many of these acquisitions were focused on the fuels refining and oilfield services markets. Several of them did not realize what they were expected, which has resulted in a situation where our leverage levels remained somewhat elevated. But starting in 2016, we paused this growth through acquisition strategy and have been pursuing a 3-pronged strategy to turn our business around. So first is to refocus the business. So returning to a high-value specialty products market and make sure we're tending and growing those markets. The second prong is to dramatically improve just general execution, whether that's reducing costs, which we've done significantly, focus on self-help, by which I mean improved operations, small-scale investments and clearer and better executed commercial strategies, and we've made good progress there. And the third prong is to delever and exit the fuels refining business. We've delevered significantly, both in terms of metrics and quantum of debt, and we've sold 3 of the 4 fuels refineries that we purchased. So we spent the last 4 years in this delevering mode. During that time, we believe we created a lot of value for our bondholders, and we intend to create a lot more value for you all over the last couple of years of our turnaround here. Our journey is not totally complete. Recently, we announced, we're examining strategic options for our last fuels refinery, Great Falls. Great Falls is located in Montana. It's an almost unique refining facility, in that it's essentially brand new. And its ability to generate cash and its profitability profile is extremely unusual for a refinery and actually contributes to our ability to service debt right now. Having said that, our common priority is to continue to grow specialties and delever. But in the near term, given COVID, we're also focused on making sure we generate positive free cash flow during this uncertain time and address the 2022 notes, which is our next bond roll, that's 19 months from now. So we still got some time. That's just a quick snapshot of the company. Thanks, Gregg.

We'll start with the -- as I've -- thank you, Steve, and welcome to the -- to high yield. I know you've been -- I know you've been part of Calumet for a while. Maybe you can talk to us a little bit about how management transition is going. And then how you're building on sort of your predecessor, what management goals? And then what you might be doing differently?

Sure. So Gregg, generally, I think the transition is going very well. I've been on the Board of the company for 4 years. So I've got some decent familiarity with large chunks of the business, obviously, from that and I've been involved in a number of the strategic decisions that we've made. So obviously, that made it easier. Also, ironically, even though it's an interesting experience to become the CEO of a company right smack bang in the middle of the most negative economic event we've experienced possibly since the Great Depression. That's also actually a great learning time because everything has just accelerated. We've been focused in these few months on making sure that we execute with extreme professionalism, watch all our inventories, make sure we're selling at least as much product as we make, understand how much we're making of all products, make sure we've got margins versus volumes positioned correctly in all our commercial strategies. So it's been a very fast learning experience. So from that perspective, really happy with the transition. The other thing that's made it an easy and effective transition is we have a great team. So you talked a little bit about Tim's legacy. And I will commend Tim for -- he did a fantastic job for 4 years at Calumet in terms of helping us attack the leverage issues that we had, attack the lack of strategic direction and refocus the company, but most importantly of all, he built a really good management team. And so when you change out the CEO in our management team, that means you just changed 10% of the management team. Team's executed really well. So I'd say that's kind of talking about the transition experience. And then from a strategy standpoint, the fact that I came from the Board probably is meant to be a clear indication that generally, our strategy, direction remains unchanged. We still want to continue to evolve to be that specialty products company. COVID maybe changes the patent and the TAC that we have to take to get to where we want to be, but that core strategy and vision doesn't change. Really, the main thing that changes from a strategy, Gregg, is, I was born in the U.K., so I'm talking about us being a speciality company rather than a specialty company, that's really the only difference.

That makes a lot of sense, especially since you were on the Board and signed off on this plan. So -- but you've touched on, obviously, highly uncertain times. I think investors are most focused on are what you can tell us on the demand side, in particular, what you're seeing on the chems product? I think you mentioned on your May 7 call, things are highly uncertain. Things still feel very uncertain, but I imagine you have some color from the last 3, 4 weeks?

Yes, absolutely. So I think from a demand standpoint, we talked about it in the earnings call and if you look at the packet we put together for this conference, Page 14, shows how we tried to kind of use 3 colors to show which areas were performing well, which area is kind of performing in line with the general situation and which might be underperforming. So since then, I would say that we have seen green shoots. I would say that the larger the shoots, the closer to the consumer. I mean, just to kind of maybe walk you through the product line to some degree and give you some better context. When you get close to -- when you look at the close to consumer areas that we serve, so first of all, we are little more than 50% of the engineered fuels market, the fuel in a can, with our TruFuel brand and more than 70%, including the OEM packaging we do there. That particular consumer product has done phenomenally well, not just recently, but throughout the entire downturn. With the lockdown in place, I'm sure a lot of people couldn't connect with this that it seems that a locked down America turned to focusing on working on -- in their yards and working in their homes. And so product like TruFuel, we found it difficult to actually keep up with demand. We were worried that as the lockdown ended, so we would find out that some of our demand had been pulled forward. But we don't see that. So that continues to go strong. The next area that's really performed well since May 7 is the finished lubricants business, our Royal Purple brand, and so on where -- again, with retail activity picking up, we've seen a really good recovery there and good demand growth. We also believe that what we've seen in a lot of our customer areas is with most people's ERP systems being very effective these days, may be more effective than they were in the last economic downturn in 2008, people have destocked significantly, whether it's in stores or in their factories or whatever. And so our feel is that we're seeing as well as a return of demand, we're also seeing some restocking and you can see that in behaviors because people want product and they want it now. So we see that. As you move away from the consumer side, as a whole, we've been very fortunate because we have a highly diversified customer base and an industrially focused customer base outside of the areas I talked about. And many of our customers were deemed essential businesses. So they kept growing. So where we've seen the change is in areas where our customers were not deemed essential businesses and have come back. So for example, one of the areas that probably slowed a little more than average was waxes because most candle production was shut down. At the same time, I think a lot of people burnt a lot of candles while they were in lockdown. So now that's back up and running, we're very happy with the wax demand we're seeing right now. Kind of moving down, automotive. We're less exposed to automotive than the average lubricants player. We've deliberately been more industrialized focused. That's been a fortunate diversification move for us. I mean, we are seeing return of demand both in terms of lubricants that go into auto or maybe in a tire manufacture. But that's still kind of just getting started from a recovery mode, but it's definitely recovering. Oilfield services, some of our solvents go into oilfield services. The oilfield is not the main focus, again, of our diversified solvents business. But we're starting to see demand for drilling fluid come back. As people are turning on crude oil production fast and this price rise, and obviously we see that from our crude purchasing. Probably, the only area that we participate in that kind of -- for want of a better expression still seems to be dead on arrival. And it's a very small area for us, fortunately, is aviation. We haven't seen really any material recovery in aviation lubricants demand, but that's very much a tertiary business for us. So that's kind of how we're seeing the demand picture play out since early May.

And is it fair to say your late March through April volume behind track. What was -- will that be close to what GDP impact? Or is there a reason to think it will be better there? And then obviously -- I guess the real answer isn't everything really tracking a general GDP estimate?

Yes. And I think that it's a difficult question that I struggle to answer a little bit, Gregg, because we kind of use that GDP guidance and we just really use GDP as kind of a buzzword for general economic activity. I mean, I'm probably over generalizing, but a significant part of GDP came out of service sector and so on. And the industrial sector, generally, I don't think declined as much, right? So though I know I'm kind of hand waving a bit, and I apologize for that, but it's still really difficult to get your hands around kind of those numbers, to be honest.

No, I appreciate that. I have a feeling everyone's going to look through this quarter. It is just interesting to understand how much it can disappoint or be better than people anticipate. But I get it. So you mentioned -- you kind of touched about the reopening. And -- if you are seeing better data heading into June? Is there anything that's a greater lead time that's -- in your business that you can look out further where people are starting to place orders? Or is it all just, as you said, restocking and return to growth?

Yes. My feel, generally, and Keith, dive in if you have a different perspective, I think all -- so many of us in so many industries are still kind of operating on a day-by-day basis, right? I mean, it's looking better. We've got good green shoots. We feel good about how things are going to recover. It's going to be uneven, but to get much further ahead than that is super challenging.

I agree with you, Steve. I think the way we think about it is, I think everyone in our industry are part of the energy adjacent market or subsegment of the economy kind of braced for a crash landing in Q2. So if you are able to bring it in gently, I think we call that a win in this market.

Got it. Then you -- clearly, there was a question we had probably 4 weeks ago on your call or 3 weeks ago was are you benefiting from lower crude prices, and I guess the question is, it's reversed quite significantly. How have you been able to -- how is that likely to impact your specialty margins?

Well, I think the move -- like you said, the move back up has been rapid, and it clearly does create some margin pressure. But I'd point out that, that margin pressure is coming from what I would describe as very high-margin levels. So if you look at our Q1 specialty margin, it was north of $41 a barrel, which was extremely strong. So yes, would we prefer for the crude oil market not to rally quite as sharply? Absolutely. But I think what stands us in good stead is we start from a high-margin level to see that cyclical phenomenon.

Okay. And is that reasonable to think you can keep margins at $35 a barrel? And -- or do you think it's possible that it goes -- it [ shifts ] below that just on a temporary basis for the -- during that time period?

I think it's still a little bit too early to call it. I think it will be something that we are a number we're going to be proud of, but it's all going to come down to the portfolio mix. It's going to come down to how the product line that's close to the consumers behave, which is going to show the strongest margins because their margins won't have compressed as much in terms of their price not being affected. There's a demand story. And then on the other side, we're going to have some parts of the portfolio that are priced on 1 month index lags. And so they won't be very affected yet because of their -- the cost side, but then the pricing won't move as fast. And so it all comes out to the mix. So it's going to be a hard call. But like I said earlier, I don't think it will be a disaster, but I think it will be something that we can all look at and say, well, it's okay. We will look forward to going into Q3 from a decent position and hoping that there's no rebound of the virus and takes us down to that level again. But the downturn has to play through. And so it's just a question of can it play through in a way that we feel good about it.

Right. And you -- shifting more to the fuel product side. You alluded to the Montana -- the Great Falls refinery helping to service your debt today. And on your first quarter call, you talked about how refining margins were relatively strong in PADD 4. Is that still the case? Are you still seeing that? And then just in that context, have you seen a need to optimize gasoline production over diesel production because of weak diesel cracks?

Steve?

You want me to take, Keith?

Yes.

Yes. So I mean, I think if you look at Page 11, what we tried to show in that packet, you can see the Rockies 3/2/1. I mean, just as an illustrative number using WCS as a feedstock and the Gulf Coast 3/2/1 LLS feedstock. So you can see here that the superiority of margins in the Rockies and also you can see that the volatility in the Rockies tends to be skewed to the upside, which is why I was talking earlier about the -- generally speaking, the extremely good cash generation profile or from a refining -- generic refining perspective, the abnormal cash generation profile of Great Falls. What we've been seeing so far is, our main issue at Great Falls, to be honest right now, Gregg, is keeping up with demand. That area was definitely not significantly affected to anything like the degree that the urban locations were. I mean, there's been this talk since the [indiscernible] call about retail refining. And we were definitely a beneficiary of that. We've been able to set record throughput levels at the refinery during the COVID phenomenon. We've also set record lifting rates at the rack. And also -- actually been on allocation at the rack on a significant number of occasions. One of our core strategies in our fuels businesses is to sell more product than we actually make. And that was a very fortuitous strategy in this particular scenario, as people who may be focused on a couple of key outlets got into containment problems, we were able to leverage our oversold strategy to maximize. And then as far as gasoline versus diesel goes, I mean, diesel has obviously held up much better in the Rockies than it has in the Gulf Coast. And our strategy has been one of -- we are -- obviously, we continue to optimize between gasoline and diesel make. But to be honest, the product demand for both has been so good up there. It has been so solid up there that it's just been kind of second order tweaking optimization as opposed to a huge pivot in the make schedule.

I'll give Joe a quick shout out or whoever put that slide together, very helpful. It really puts it in the context. All right. So I think -- I don't know, there is -- we haven't talked about this that much, but -- I haven't talked about this with you, but there was a row in the tenth circuit about small refinery exemptions -- exceptions in terms of blending obligations. Does that potentially impact this refinery or any of your business?

Gosh, good question. I mean I think a couple of things I would say. First of all, the Tenth Circuit does not geographically include this facility. Second, I think there's like 18 different pieces of RINs litigation going on of different forms. The Tenth Circuit was just one of them. The Tenth Circuit ruling was mainly around kind of people who didn't have a complete history of filing. We filed for every year at both Great Falls and Shreveport. So it's difficult for me to speculate where it will go. We got this minor issue of an election in the mix on the whole [indiscernible] refining discussion anyway. So it's tough. But maybe that was -- I was just trying to share with you kind of some of the key underlying drivers in why we're uncommitted to understanding what the heck is going to happen as anybody else.

No, that's helpful. When we start getting into the legal interpretations of RINs we believe it gets a little painful for us, too, just looking for your insight. Just for -- on this refinery, and I'll come back to some of the questions I want to ask. So clearly, you're talking about monetizing this refinery to potentially address the 22 maturities. Can you talk a little bit about how that process is going? And then if -- and if you -- I don't know if you put a -- how you think about the decision to sell versus hold on to it?

Keith, you want to go with that?

Sure. I can start. So the first thing, I think, it comes down to the strategy. We've decided to sell the refinery because we want to focus on continuing our journey back to focusing on specialty products. So our decision to sell the refinery has little to do with the performance of the refinery. It had to do more with the strategy of where we want to be. And so the refinery itself is performing well, as Steve indicated. Its fundamentals are really good. The PADD 4 market where it commercially plays is strong. The fact of being the first offtake point of WCS crude going in from Canada means its cost position is not just advantaged by the WCS/WTI diff, it's also advantaged by the transportation cost. The process so far, it continues to progress. We're into the second round and where we have the well-healed interested parties that have stood out from the first round. The way I looked at -- I look at it is none of the parties here have stepped away. We've completed all the management presentations virtually. Everyone continues to work pencils up diligently through the data room, through interactions with management and our investment banker. So the real challenge now is organizing the site visits, and so we are trying to get our arms around that so that we can, a, protect our employees there. We wouldn't like to introduce something into the environment that forces us to have to shut it because it's been a performing asset. It's running at close to max rates. And so to sort of move the process along, we know that the visits are important, and that's going to then move people to think about formalizing their offers. So that's where we are. How this plays out, we're working through that. How soon some folks will place an order -- place an offer or how soon we will be able to close is a function of who and the type of offer and so forth. For example, if a strategic makes an offer in reasonable time, then that's a different closing than if an LBO-type organization places an offer. And then if it's an LBO-type organization, is the capital markets there to support them. So there's a bunch of things to consider. And so that's where we are. But we're happy about the process. We're happy about the interest levels. We're happy that no one has stepped away. And we're happy that people still find the asset to be quite attractive.

After making -- after having made it through the first round and having had initial bids, are you comfortable putting a range out there for what people should expect?

So I think most of the people who we've spoken to in the process know what we think of the whole value. And so the fact that they're in the second round means that they are above that or have something in their offer that places them with an opportunity to go above that, plus other qualitative aspects. We don't think it adds anything to the process to put a range out there because they were only from the first round. I think at some point, when we get down to second and third rounds and so forth, then we might say what we're seeing or expecting or maybe just move to closure. But I don't think it adds anything for us to say what we saw in the first round.

Got it. And curious if you share with us what you think -- what you're communicating, what you think it's worth?

We continue to think it's the top -- it's a top decile refinery in the U.S. if you measure it based on cash margins. We continue to think that the WCS/WTI diff is advantaged. We continue to think that the PADD 4 commercial environment carries a superior crack spread. We continue to think that the volatility in that environment skews positive. We continue to think that we have invested enough capital in that to make it probably one of the newest refineries in the country. And it continues to generate cash flow that supports the organization or the enterprise. So in that context, I think the best way I can describe it is it has to be a credit accretive transaction for us to get excited.

I would say that you've held your negotiating position very well. That's probably helped in the outcome. All right. So when do you think we -- you mentioned COVID, it could be -- could slow things down. When do you think we'll see -- in your mind, what's your time line for second and third round type of offers?

Well, no one's going to submit anything until they visit, right? So I think that's the long pole in the tent right now. So we're working through that, trying to find the right way to space it out. We have bidders that are also international. So we have travel issues in terms of people crossing borders and getting into the U.S., and thinking about all these things. So that -- this has turned out to be a logistics challenge all on to itself.

Got it. No, I appreciate that. Maybe just jumping back to -- there's a couple of minutes left here. Maybe you can just quickly, you repaid the PPP loan. You took your liquidity slightly below the 250 target you were talking about. Can you just tell us where liquidity stands today and how you're comfortable -- how you're comfortable repaying the PPP loan?

So it's -- well, let's separate it into the PPP and liquidity. So let's go with PPP first. So Calumet, we always want to do what's in the best interest of our employees, the company, the stakeholders and our country, of course. And so when we applied for the loans, it was the right thing to do at that time. That program was created, documented and the facilities to apply were put through the commercial banks and so forth. We applied, we qualified, we were funded, but as the time and process developed, the requirements and expectations for the program continued to change even after you were funded, even after you executed the loan documents with the SBA, right, new rules were coming out, right? So we're dealing with a government, so that's a very, very different animal, right? So if I executed a loan document with any other counterparty, they couldn't change the game thereafter. But the rules kept changing. And what was apparent to us was that the government started to project and believe that it was never intended for publicly traded companies to receive PPP funding. So the PPP is now billed as what it's for Bob the Butcher and Joe the Barber and that sort of [indiscernible] base. And so we then decided the right thing to do for the company, for the distraction of management and for everyone was to repay it. And we have. Now repaying these loans will put additional stress on our business. But we're going to continue to do our best to manage our business through this challenging time. And so when we think about our liquidity post PPP, we were somewhere around the 230s in terms of available liquidity. I think today, we're in the same ballpark. So we're managing through. When we think about the 250 threshold, we think about it from the standpoint of -- that was a model put together to make sure that we have something to manage towards for black swan events. So we're in a black swan event. And so we're going to eat into that. But we think we're comfortable. We think the tactics we're using to manage our liquidity are making sure that we have self-determining rights. For example, we're holding $100 million cash on the sidelines in that context. We've already taken most of the markdowns for the drop in crude for the crude portion that goes through the ABL, and also on the receivables and inventory. So we don't expect to do any further. In fact, crude has strengthened. So the next time the borrowing base redetermination comes around, we should see a mark upwards on that. We don't expect the ABL to fall below a certain threshold. Because we've, through a collateralized trust agreement, pledged about $100 million of value from Great Falls into the ABL. So that kind of provides a floor. So our long-term ways of hardening and strengthening our capital structure, liquidity and balance sheet have been paying off. The short-term moves that we made to secure liquidity, along with the very hard and urgent actions we took to cut our capital expenditure, reduce costs across our business in terms of SG&A and other operating costs to preserve cash flow are all going to be helpful to make sure that we get through 2020 free cash flow positively.

Okay. And that's helpful. And then one -- I know we're over here, but I'll just ask one last one. Just when you take into account your self-help programs, how do you think about the normalized EBITDA at specialty products and then and your fuel products business? What's a reasonable way to think about that?

That's a good question. When we came into the year, and we did our Q4 earnings call, we talked about a run rate for specialty of about $215 million to $240 million of EBITDA. We talked about fuels being $125 million to $175 million. Obviously, that was before the oil war coupled with the pandemic. And so I think fuels has definitely stepped down. There's no other way to think about that with the falloff in jet demand, the falloff in gas -- in gasoline and diesel. However, we still think that what we've done to protect our fuels franchise with improved hedging, increased focus on our hedge ratios and the levels at which we hedge particularly as we look at Great Falls, and coupled with the commercial strength of Great Falls, we think the fuel business will be okay. I think that when we look at the specialty business, if you look at slide that we provided on specialty. Full year '18, we were 168. I'm on Slide 6, '19, we were 208. Over the last 12 months, we were at 214. The point I'm trying to make is I don't think the range of 215 to 240 is going to be the run rate at this time because there's going to be some step down. There's going to be margin compression, but we're not going to melt down. I think that, that business will probably still have a 2 handle in the next 12 months. The question for us is how to do it. And so we are executing by taking out costs out of the business that we don't need to have at this moment. We're focusing on picking the right end markets to focus on service. We're picking the right products. We continue to benefit from some of the self-help programs that we've put in place in the past. We've taken out the further growth self-help programs that we were going to put into the specialty business this year. So if you think about self-help, we were in Phase 2 of that program, starting in 2019. We had set a $100 million target for '19 through '21. We had hit $30-plus million in 2019. We had set a target for $40 million in 2020, $20 million coming from SG&A improvements, $20 million from further commercial growth and rationalization in specialty. We've taken out that expectation. I think I've put a slide in the deck on that as well on the self-help slide, which is, I believe, Slide '18. And so for 2020, we can only count on the $20 million that we would get from the SG&A reductions. In fact, we've already taken all of the actions that we were contemplating. And so that's going to be built into our earnings structure going forward. So -- and when I think about self-help, we always have to remember what it is. What it really is, is it falls into the side of the choices of -- you have 2 ways to grow earnings, right? You can either improve what you have or you can grow what you have. And so self-help is about improving what we have. And we've done a lot over the years to improve what we have, so we can offset inflation through productivity and so forth. But we were just about making the shift to starting to grow the base. And then we came into a pandemic and an oil war, so we've turned our back. So whatever we've done to improve the business will stay with us. It's going to be part of the culture. It's going to be the way we work. We're not going to do some of those things anymore, but that's there. So that's not going to go away. So the run rate will not be in the 215 to 240 range that we had set right now, but I still think it will have a 2 handle. We're still going through the forecast to see where it will land.

Okay. Unfortunately, we're over on time here. I just want to thank you guys for participating in this call and taking time out from your busy schedules in these unusual times to meet with investors and host this call with us. Operator, we can end the call here. Thank you, guys.

Thank you.

Thanks, Gregg.