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

Hello, everyone. I would like to welcome everybody to Deutsche Bank's 29th Annual Leveraged Finance Conference. My name is [ Chris Griffin ], and I am a Vice President here at Deutsche Bank. Thank you all for participating in the Calumet presentation this morning. Joining me today, we have Todd Borgmann, who is the Chief Financial Officer of Calumet. And with that, I will turn it over to Todd to get us started. Todd?

Thanks, [ Chris ]. Good morning, everyone, and thank you for taking some time to join us this morning. Let's start with a quick reminder on forward-looking statements. Obviously, you'll hear me talking about expectations during this presentation, and any projections we make include risk and uncertainties. So with that, let's start with the most important question, which is, why should you be interested in investing in Calumet? And when I talk with investors, they usually fit into 1 of 2 groups. On one extreme, we have a very passionate, engaged investor base with this prodigious conviction in Calumet's story. And on the other, we have a group that really shows very little interest in learning more. Maybe we're too small. Maybe they don't like MLPs. Maybe they don't like leverage. Maybe the hybridized business model is too complex. Most likely all of the above. So in the next few minutes, I'd like to walk through Calumet's strategy, peel back some of the complexity and hopefully give that latter group a reason to dig in a little bit more as most of the investors that have recently have really gained conviction and ultimately been rewarded. So fundamentally, fundamentally, our strategy is and has been to dehybridize and delever the business. So this really hasn't changed. What has changed is the how and the little luck that has come our direction. So let's step back a little bit. Pre-COVID. Pre-COVID, the hybridization strategy was really to sell our Great Falls refinery and focus on the growth of our specialty business. Those businesses had been and continue to have great growth prospects, and we felt that the highest value option was to capture those growth prospects ourselves while removing some of the fuel stink from the business while really simplifying the story. But COVID hit, and that changed things. During COVID-19, we really wanted to avoid selling an extremely good asset in Great Falls at the absolute trough of the fuels business cycle. So it was really during this time that I think Calumet gained a lot of credibility as this superb specialty products company, as we generated positive cash flow during COVID and avoided the fire sale of assets when many others couldn't say that. At the same time, our Great Falls project team had stumbled across the idea that due to our location, asset base and metallurgy, we might have one of the best renewable diesel projects in North America. So this project could not only dehybridize the business, but it could also provide that transformational deleveraging, which could allow us to not only delever but really recatalyze the growth of our specialty business and access markets with a competitive cost of capital. So that's clearly what we're focused on right now. And so fundamentally, the specialty business is a steady business. It's a resilient business. It sets the risk floor for Calumet, and it has some real upside. We're in the early stages of the business cycle recovery and really tens of millions of dollars shy still of the mid-cycle performance ability of this business. So on this steady foundation, we have this transformational opportunity that exists with renewable diesel, and we'll spend plenty of time on this a little later in the deck. So could we advance here? So the capital markets have been steadily buying into this strategy, as we show here. And look, since the bottom in 2020, our equity is up over 800%. The debt has lagged that in the 2025s. They're up 65% from the trough and currently yielding just under 7%, which is a number that still goes strong but extremely excited about the progress and hope we have room to go. So I think this begs the question for investors, is it too late? And of course, Calumet wouldn't be here if we thought it was. So I know this is a debt conference, but let me talk equity for just a second, as some of you may have seen Calumet generating a little bit of noise in the analyst community this year. So early in the year, a big bank named us as a top investment opportunity. Another shop provided an equity upgrade back when we were trading around $4 a unit. A couple of weeks ago, an analyst published that we should be around -- a $20 stock, who we named an RD investor. And we were very pleased that just this past Monday, H.C. Wainwright, a leading cleantech shop, initiated coverage at $19 a unit. So strangely, historically, we've been covered by refining analysts. So we were really delighted to see a cleantech shop enter the name and provide some fresh perspective in this new, exciting area. So look, it's really relevant. Us reaching a $19 price assumes a credit profile that's obviously completely different than the split CCC/B rating that we're carrying for now. So no, we don't think it's too late. And that stands out even more when you look at our peer set. So let's do that here. And on the left side of the screen, you'll see how we stack up against other B-rated, CCC-rated companies and on the right, how we do versus high-yield chemical companies and refiners. So not only is our debt trading at a discount to the B index, and some of you have seen this slide in the past, but it's also yielding 275 basis points higher than the CCC index. Again, we carry a split rating. We've talked about the upside, and we're trading worse than the lower end of our split rating. Similarly, not only are we trading 480 bps wide of the high-yield chemical benchmark, but we're yielding 65 basis points higher than the high-yield refining index, too. So again, pick your benchmark. And whether we're measured against kind of rating comps or industry comps, we think the data is compelling, even though it's very clear that the bond market is giving us no valuable -- no value for renewable diesel. So with that, let's dive in a little bit more and talk about the segments. We introduced these new segments this year to communicate our business strategy more effectively. Earlier, we talked about kind of a misunderstanding or lack of understanding around Calumet, and a big piece of that is it's just a complex business. And we want to help shed some of that complexity. So I know everyone wants to get to Renewable Diesel, and I promise we'll get there. But first, I want to start with the Specialty Segments. This is really critical to the investment thesis. The bet investors are making with Calumet isn't just RD upside. RD is disproportionate. Risk and reward sits in our ability of the specialties business to put that firm floor under the company's risk profile that then Renewable Diesel can sit on top of. So first, Performance Brands. This is a segment that holds our premium brands and goes to market differently really than our specialties and SPS than I think people typically envision when they think about Calumet. So a quick overview of our brands. First, TruFuel. This is our fastest-growing brand, and it's primarily marketed through the consumer retail channel on stores at places like Home Depot, Lowe's, et cetera. Royal Purple is our synthetic lubricant brand for automotive, marine, high-tech kind of industrial applications. And it's marketed across a variety of channels, including consumer retail. And Bel-Ray is our longest tenured business that provides grease and lubricants really for many end markets where performance matters most. So a little history on this segment, and we can see how that history has played out as we look at the numbers. But in 2019, we really adopted a new business strategy that was intended to position the business for growth. We brought a new leadership team. We did a SKU rationalization, looked at the business differently and really wanted to focus on the most premium side of our package business. So in 2020, we saw the results of that as the business grew 85%. And this really allowed the business to become large enough and really relevant enough to be broken out as its own segment. And like I mentioned earlier, it's just so unique that we thought it was important to break it out for effective communication as well. So people can really understand the strategy, the growth strategy that's involved with this business. So now to be clear, 2020 had a major tailwind that has since reversed. So when we look at the slide here, you see the green bar, the $8 million that we call out as -- is kind of the tailwind that, that business was having last year in a very deflationary feedstock environment that came along with COVID that we all saw. So naturally, we've seen that come back the other way in 2021's inflationary environment. And price lag is always meaningful in this business, really just because unlike in our other segments, these products are marketed on retail shelves, and consumer price changes just a lot less frequently than they do in some of our other businesses. So yes, pricing has been a strain on 2021 results, but it's something that will absolutely level out over time. And what's really been even more impactful in 2021 is the supply chain nightmare that our entire industry is experiencing. So the industry has seen its largest grease manufacturing facility come off-line. Packaging materials are tied up at the ports. Additives have been extremely difficult to come by, and it's really been a challenging environment for everyone in this space. Having said that, we continue to see demand strengthening, which really bodes well for what we think of as the steady state of this business. Unfortunately, a meaningful amount of that demand is ending up in our order backlog, and we show that on the screen here. Our order backlog has doubled relative to 2020, and that's a pretty significant number. So those are orders that have come in. Demand continues to be strong. And due to supply chain issues, we've just been unable to fill that demand. So bottom line, I think 2021 is a unique situation. Let's hope this global supply chain kind of gets sorted out this year. We've experienced a lot of frustration, along with everyone else in this business. But we do really expect these to be onetime events, and we think this business is positioned extremely well for continued success as we look forward. So a closer look at that positioning and strategy. These brands that we have really have leading positions in what I call niches within huge markets, and these markets are growing rapidly. So at Royal Purple, for example, we expect to continue to build a moat in the super premium market, which is one that consumers are upgrading to in really so many industries. At Bel-Ray, we're a leading independent high-performance grease supplier. And with such a huge shortage in this area, along with a lot of fragmentation in this space, particularly with some of the recent shutdowns, we think a real opportunity exists here. And our TruFuel brand, of course, is the #1 engineered fuels brand in North America, in a market that's growing at an astonishing rate here over 20%. So bottom line, this business has been a tremendous story. It's a great asset for Calumet. It's extremely well positioned fundamentally, and we really expect long-term growth from this premium segment for years and years to come. So let's move forward here to our Specialty Products & Solutions segment. So I think this is what people think of when they think of Calumet historically. This has been the consistent cornerstone of the company, and it's been successful for so long because really, it's differentiated in several key areas. So first, we have a great and really highly diversified customer base, and we're committed to providing them a high level of service every day. Second is our product line. We sell over 750 different products across a variety of applications, and the fact that more than 50% of our customer base buys across multiple product lines gives us an edge really that others don't share. And finally, and it's a little bit along the same theme of diversification, we sell across a bunch of markets, as you can see in the chart here on the right, that are really helpful when it comes to weathering difficult markets like we saw last year in COVID or participating in bull markets like we're seeing right now. So I mentioned our customer base, and I'll just flash it here as an example. But you'll recognize many of these iconic brands. And these are some -- a small chunk of our customers and kind of the -- I think the diversity and the breadth of customers is really is impressive and sets us apart. Also, typically, our products are small but really important elements of these customers' products. And that fact, I think, has a lot to do with the strong margins and the steadiness of this business over time. So servicing all these customers across the globe with the right product line doesn't just happen, and we've built this business through a competitively advantaged and really deeply integrated asset base. Most things in SPS began in our Northwest Louisiana complex, where we have 3 integrated specialty plants. And from this base, we're able to really leverage our distribution, upgrading and formulating capabilities and brands to deliver even more highly tailored products that offer really great margins. So over time, we actually -- we expect there's real opportunity to grow in this kind of further downstream, highly specialized businesses where we can leverage brand names. We can leverage -- further leverage our technical expertise, ability to work with customers, do things that other won't and continue to leverage scale as well. So we've talked about specialty margins. And here, we see the margin that's created in this business. Needless to say, we're really pleased with this performance. And historically, I think it's worth pointing out that we've seen a price lag in this business in inflationary periods. But our team has really been extremely focused on staying in front of this, this year. And in specialty production process, it's also worth pointing out that we generate fuels byproducts. And those who track fuel markets know that these markets have been at a trough. And while we're showing signs of recovery, the difference between trough and mid-cycle on these products is tens of millions of dollars a year to Calumet. And we see -- as we see the cycle play out, we expect to use that upside, that excess cash generated from an increase in kind of global pricing and fuels and byproducts, to really continue to deleverage and further invest and grow our specialties business. So to summarize here, in SPS, we have a differentiated customer base. It's due to a large, flexible asset portfolio and an extensive product line. And these attributes really allow this business to produce stable cash flows regardless of the stage that we're in, in the business cycle. So with that, let's move to Renewable Diesel, which I think everyone is aware of. It seems to be the topic in every investor call, in every one-on-one that we have. So clearly, this is our single greatest opportunity at the enterprise level to transform Calumet. And in fact, we think that it could very well be the best renewable diesel project in all of North America. So let's step back and start with, how did a specialties company [ end up ] with this renewables opportunity? And Calumet purchased the Great Falls refinery in 2011. And at the time, it produced 10,000 barrels a day of really niche fuels and specialty asphalts, very stable business, very profitable business. And albeit really small by refining standards, it's been a great business for us, largely because it processes these highly discounted Canadian crudes and really services local, well-protected markets in the Rocky Mountains. So in 2016, the business had been successful that we wanted to do more of it. And we spent over $450 million upgrading the plant, expanding the refinery. And as part of that, we bought an existing hydrocracker with a nameplate capacity of 25,000 barrels a day, which really was way oversized for our needs and luckily so now, and we'll get to that. And we installed it with 317L stainless steel, which, again, a bit of luck, but that metallurgy is really what separates us from some of these other sites, and we'll talk about that. We did not know then, but the same metal that's needed to process highly acidic Canadian crude oils is needed to process highly acidic vegetable oils and tallows and renewable feedstocks. So hence, the advantage there. So we talked earlier about the strategic review of Montana in 2020. And after COVID hit, fuels assets fell more out of favor, obviously. And it became quite evident that renewables was the way of the future. So with this oversized hydrocracker and -- filled with the perfect metallurgy, we became convinced that we were sitting on the ideal energy transition asset. So over the past few months, it's been really nice to see others share that conviction as we discuss partnership opportunities with potential investors. So why is this project so transformational? Let's just spend a little bit of time on that. And obviously, not only is the potential EBITDA generation capability greater really than all of current Calumet, but also, we see how renewable-focused companies trade in the marketplace. So you don't need me to do the math for you here, and we won't say that we won't have some sort of discount on that type of math. But obviously, the enterprise value of this business is tremendous relative to the current enterprise value of Calumet. So before we dive too deep into the project, let's zoom out a little bit and differentiate between renewable diesel and biodiesel. These are often used interchangeably. And really, that's a mistake as they're very, very different products. Biodiesel is a product that was invented in 1897, and it has poor product quality. It can solidify in cold environments. And it can only be blended with fossil fuels in really small increments, while renewable diesel and sustainable aviation fuel are produced with modern catalytical hydroprocessing. And they're a total drop in fuel. So the growth in renewables is going to be in renewable diesel and sustainable aviation fuels, not in biodiesel, which we think is really important when thinking about our comp set and just understanding where we sit in that we're in a growth business and not just an old sustainable business. We're not focusing on biodiesel. So costs. And we hit on this a little bit earlier, but this project is extremely cost advantaged. And the reason is, is because of that oversized hydrocracker that I talked about earlier. It's because of the metallurgy that it came with. It's because of the $450 million project that we did in 2016. So that infrastructure already existed. It was already there. And with that there, this is really the most competitive project that's been announced thus far, at least that's our belief. And let's talk about project execution and schedule. So first, I think it's important to note here that nothing we're doing is new technology. But obviously, anytime you're doing a project as quickly as we are, project execution, risk management become very, very critical things. And with that in mind, we're taking a modular approach that allows us to manage this conversion in really bite-size chunks instead of a single mega project. So the first module, as we think about it, will produce 5,000 barrels a day of renewable diesel in the second quarter of next year, 2022. So during a prescheduled turnaround that was already scheduled for the existing refinery, we'll essentially change the catalyst in the hydrocracker and be ready to produce. The second module is where it gets bigger, is building the renewable hydrogen plant that takes our capacity from 5,000 barrels a day to 12,000 barrels a day. And this will be done in the second half of 2022. And then the third module is adding the pretreater that provides the flexibility to run any feedstock we want and will also allow us to increase capacity to 14,000 barrels a day. So this plant has a tremendous geographical advantage, and the ability to process any of the local feeds is yet another differentiating feature of this project, and we'll get to that more shortly. So I also don't want to understate that we have our own internal team that successfully completed the larger 2016 expansion with much of the same equipment. So it's very well known. It's very well understood. We think this project is very manageable. We're partnering with some of the best folks in the industry, and we're very confident in the folks that we have that have already worked with this equipment and done a project that's quite larger than the one that we're embarking on now very successfully. So if we can get up quickly and cost effectively, why is this project so advantaged after that? And really, it's all about location. So left side here displays where the low carbon fuel standards have been enacted. Currently, most of this material or all of this material is going to the West Coast, California, British Columbia. But next year, in 2022, legislation has been passed in Canada that the entire country will go LCFS. So obviously, as we look at where we sit on the map compared to where some of the other producers, competitors sit down here in the Gulf Coast, we think that we're tremendously advantaged on product supply. Likewise, on feedstock, we see this on the map on the right. Each color on this map shows different feedstocks available to renewable diesel suppliers, and you can see kind of up where we're at. We've circled what we call a trucking distance or trucking area. We can source canola. We can source cattle -- tallow from cattle. There's sorghum growing. There's Camelina, a lot of the tempered oilseeds that would have to go past us all the way to the Gulf Coast to find an alternate market for renewable diesel. So quite simply, we think our location is a huge advantage when we just add up the expected transportation benefits between us and one of the Gulf Coast competitors. We're talking a number like $65 million a year of EBITDA. So it's something that I think is really key to this project. So to summarize the opportunity we have with renewable diesel. It's an advantaged business in a growth industry. The White House announced the target for the U.S. to achieve a net 0 emissions economy by no later than 2050, and Montana is going to do it this April. Our project is uniquely cost advantaged and extremely fast to market due to its metallurgy, the existing hydrocracker, existing rail infrastructure. And we're managing project execution risk in what we think is a very prudent fashion with a modular approach, working with the best in the industries and doing it with a team that's kind of been there, done that with the same equipment in Montana. And last, of course, we have an unmatched location advantage due to the feedstock and end market proximity. So we won't spend too much time on this, but I mentioned earlier the renewable diesel business and the fossil business continuing -- being very distinct in that the original legacy business will continue to run post-RD. I'd be remiss if I didn't reiterate this at a debt conference is that legacy refinery is a very stable business. I mentioned before, it runs at discount of Canadian crude, supplies all the local fuels and niche asphalt needs of kind of that community. So we expect it to continue to be just like it was back when we originally bought it in 2011, a very stable cash contributor and a key piece of the company going forward. So in summary, we think this investment opportunity is unique at Calumet. Our core specialties business is positioned well. It's growing. It's proven its ability to generate cash in all markets. And on top of that, we have a best-in-class renewable diesel project that really can deliver transformational value. And that value appears to be completely ignored by the market or at least the debt market. So we're extremely excited about the opportunity. We hope to talk more to you -- talk more with you about that opportunity. Please feel free to reach out any time. We have the one-on-ones. And still, I think, have some flexibility in that schedule. So thank you for the time this afternoon. And I think that brings us to a close. So [ Chris ], maybe I'll turn it back to you and end there.

Great. Thank you, everyone, for joining this morning. As mentioned, please don't hesitate to reach out to your DB contact if you'd like to set up a one-on-one. Thanks, everyone.