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

Good morning, and welcome to the Calumet Inc. Analyst update. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to John Kompa, Investor Relations for Calumet. Please go ahead.

Thank you, Drew. Good morning, everyone. Thanks for joining our call today for our DOE Loan Closing analyst briefing. With me on today's call are Todd Borgmann, CEO; David Lunin, EVP and Chief Financial Officer; Bruce Fleming, EVP, Montana Renewables and Corporate Development; and Scott Obermeier, EVP Specialties. You may now download the slides that accompany the remarks made on today's conference call, which can be accessed in the IR section of our website at calumet.com. Also, webcast -- replay of this call will be available on our site within a few hours. Turning to the presentation, on Slide 2, please see our cautionary statements. I'd like to remind everyone that during the call, we may provide various forward-looking statements. Please refer to our press release and Form 8-K that was issued Friday afternoon as well as our latest filings with the SEC for listed factors that may affect our actual results and cause them to differ from our expectations. As we turn to Slide 3, I'll now pass the call to Todd.

All right. Thanks, John, and good morning, and thank you for joining today's call to discuss Calumet's recently released news regarding the closing of Montana Renewables DOE Loan. Before we get too deep in the material, let me thank the team that's work this deal for the past 3 years to reach the outcome we're discussing today. This process has been a massive investment of time and energy for our Montana Renewables team, much of our Calumet team, our partners at Warburg Pincus, a host of critical third-party support, the truly impressive team at the Department of Energy's Loan Program Office, who is an extremely thorough professional and committed group. I also want to recognize the importance of the public policy support we've had at Montana Renewables. From the beginning, this has been a journey of complete bipartisan support, spanning from local and state legislators all the way to the federal level. We believe Montana Renewables is likely the largest agricultural investment in the history of Montana as we already buy roughly 1.5 billion pounds of renewable feedstock from regional farms and ranches. And this number will roughly double to 3 billion pounds in the coming years on the back of this DOE loan. Montana is an agricultural state. There's always been light on processing its agricultural wealth and keeping that value at home, sending raw materials across state line for processing. Not only is this investment the largest of its kind for the state, but we also hope it will act as an economic anchor in attracting further investments in crushing and rendering. And we're already seeing real development as farmers look at emerging opportunities by planting more local camelina oil on fallow land. We brought thousands of jobs, both permanent and contract and union and nonunion to Great Falls, Montana, and we launched this business immediately after COVID at a time when the community really needed this economic activity. Today, our products enter a global supply chain at renewable diesel, renewable naphtha and sustainable aviation fuel. They're sold through the -- throughout the Pacific Northwest, the Rocky Mountains, Canada and more recently, Midwestern airports like Chicago and Minneapolis. We've developed and deployed advanced technology that is now fully proven, completely derisked, and we'll stay right here in the United States as our country continues to be a technology and innovation leader in all fuels. The U.S. is also turning into a global leader in sustainable aviation fuel production specifically where we supply demand here in North America and also large and growing international volumes as global mandates for our industry products take off. And last, at Montana Renewables we're positioned in the right point geographically on top of abundant regional feedstock supply source and with access to the premier global markets for low-carbon fuels in Western North America. At Calumet, we started this journey with a stock that was about $1 and we went all in on this plan. Montana Renewables has been a first mover in sustainable aviation fuel, and as a company, we and our partners have invested roughly $1 billion to get to the point we're at today. We've demonstrated that this is a top-tier competitively advantaged renewable fuels business that can generate substantial cash flow from operations, which will enable us to continue to invest alongside DOE as we expand our facility and continue to compound the value of our enterprise. Today's partnership with the DOE means this journey continues. Let's turn to Slide 4 and go through the specifics of the loan. Many of you will notice that the details of this loan look very familiar, which is correct. As expected, there were no material changes from the conditional commitment previously released in October to Friday's closing. This is a 15-year $1.44 billion loan with a rate of treasury plus [ 3/8% ], which currently puts the total cost right around 5%. The closing of the loan means the irrevocable commitment has been executed and the loan will now be handed to treasury to disseminate funds. The first disbursement of $782 million will occur promptly and no servicing requirements exist until the entire MaxSAF project is complete. Montana Renewables will separately retire $535 million of existing third-party debt in order to secure all assets and collateral under the new loan. Importantly, MRL's previous capital structure required $80 million of cash annually to service it. This new loan is not serviced until the expansion project is complete, which is roughly in 4 years. This $80 million of annual cash savings is critical and it ensures that Montana Renewables is a fully self-sufficient entity that even at an all-time low margin environment we witnessed during the third quarter of last year would generate positive free cash flow. Other activity in the source of the news is that includes a $150 million cash investment from Calumet, pay down of some intercompany payables and increased cash on the MRL balance sheet. We'll come back to a more granular look at sources uses and ongoing expectations shortly. Turning to Slide 5, we see the near-term expectations for the MaxSAF project. Montana Renewable staff capacity grew substantially during 2024. After we completed the 2023 sequential commissioning and shakedown of multiple new process units, MRL demonstrated strong growth in SAF production, which reached a 30 million-gallon per year run rate around midyear. This was up to 40 million gallons in Q3, and by the end of the year, we were operating in a 50-million-gallon annual run rate. For this new baseline, the MaxSAF project will allow us to increase our SAF capacity to 150 million gallons over the next 2 years and then grow to 300 million gallons annually. This additional SAF capacity is a game changer for Montana Renewables. We don't disclose SAF premium under our commercial agreements, but we have said that our margin premium relative to renewable diesel is over $1 per gallon and international SAF premiums have been reported as much as $3 per gallon. Existing and growing volume mandates around the world look to meaningfully outpace new supply as we expand production, and we expect the supply store market to continue to demand a strong premium and this first part of our expansion to be an extremely accretive investment and an exciting next step for Montana Renewables. With that, let's spend a minute on the initial capital costs. As we previously disclosed, the first step up in capacity to 150 million gallons is expected to cost a total of $150 million to $250 million. In 2025, we're expecting the total MaxSAF project spend to be between $40 million and $60 million meaning that $18 million to $27 million of the MRL cash flow will be invested in the project this year to meet our 45% requirement, and that will be matched with $22 million to $33 million of draws funded by the DOE. The project will continue over the next 4 years with a series of discrete individually supported investments, for both increased capacity and provide [indiscernible] efficiencies. Montana Renewables' entire 45% portion of the investment is expected to be generated from operating cash flow inside the business. And of course, we also have a large amount of cash on the MRL's balance sheet. Let's turn to Slide 6 and review sources and use of this transaction a little more closely. As we discussed earlier, the DOE is investing in new $782 million into Montana Renewables and Calumet is investing an additional $150 million. This $932 million of sources will fund MRL's balance sheet. MRL will purchase collateral presently held by third parties at a cost of $534 million, including deal fees, and with that, eliminate $80 million per year principal and interest payments. The $193 million of cash is expected to sit on the balance sheet at MRL and $205 million will be used to pay down the Calumet intercompany. On Slide 7, we view the new balance sheet at Montana Renewables and the expected cash flow potential as the fundamental industry index margin level expected at the current RVO mandate. Previously, we've talked a lot about the market's margin setting mechanism for renewable diesel, and we see that again on the right side of this screen. At the current RVO of roughly 4.5 billion gallons of biomass based diesel equivalent, large biodiesel is the market setter as shutdowns occur and imports are eliminated to balance the market. We've seen these actions happening in real time. In the third quarter, industry index margins dropped at just over $1 per gallon. From there, we saw industry adjust rapidly with biodiesel shutdowns and even some uneconomic renewable diesel exited the market. Next, we've seen the start of what most expect to total roughly 1 billion gallons of imports to be backed out of the market as new laws disadvantage these imports. We've seen industry index margins increase from the Q3 trough to roughly $1.40 a gallon at the end of the year, we isn't quite the $1.50 fundamental level, but well on its way. As we know, the [indiscernible] is often low margins. Further, we continue to expect the long-term index margin in this business to return to its historic $2-plus per gallon level as the RVO is adjusted to reflect the capacity additions made over the past 2 years. In the meantime, Montana Renewables is successful in reaching our year-end operational expense target of $0.70 per gallon. At $1.50 index margin and the newly demonstrated OpEx levels, we'd expect roughly $0.80 per gallon of cash flow before fixed charges at MRL, which is a full capture of the industry index as our SAF premium offsets transportation and byproduct charges that typically would act as a negative to the index margin for renewable diesel producers. This $0.80 per gallon on our current run rate is $140 million annually. As it relates to fixed charges, Mountain Renewables is expecting to spend $10 million to $20 million of normal maintenance in '25, and as mentioned earlier, we expect the portion of the MaxSAF project spend funded by MRL earnings to be $18 million to $27 million in 2025. With the DOE closed now behind us, we have no third-party cash debt expenses, and MRL is expected to pay Calumet roughly $28 million of annual interest on its existing intercompany instruments. Combining these variables, at this fundamental index margin level, Montana Renewables would be expected to generate $65 million to $85 million of free cash flow. Of course, this range did not include the MaxSAF expansion as it won't be operational this year, and it also ignores the impact of return to the historic $2+ plus per gallon industry margin index level that we expect to prevail over time. Moving forward to Slide 8, we provide a similar analysis for the rest of Calumet. Starting at the top, our company has averaged $285 million of cash flow before fixed charges since 2019, which is the time period that includes a broad mix of industry margin environments, including COVID. As many will remember, Calumet has also experienced a number of costly operational challenges during that period, which on the back of our reliability focus, a record throughput in Q3 and similar strong operational performance in Q4, we expect to continue to improve upon. Further, in 2025, with the previously disclosed Shreveport liability capital program over the past 3 years behind us, we expect to spend $50 million to $70 million of capital outside of Montana Renewables. Next, at our current debt levels, we're expecting to pay $120 million of net cash interest. This includes $148 million of outbound interest on our recourse debt, which is offset by the $28 million of inbound interest for Montana Renewables. Of course, as we further pay down our expensive 2026 notes, this number will continue to improve. Ultimately, Calumet will use incoming funds and free cash flow we generate to reduce debt. And given the current performance of our bonds, we can also consider a small refinancing to opportunistically reduce our cost of capital. Combining our average free cash flow before fixed charges with our 2025 expected CapEx and interest payments, we see Calumet business outside of MRL is expected to generate $95 million to $115 million of average free cash flow. On a consolidated basis, using the fundamental margin levels discussed earlier for MRL and this average level for the rest of Calumet, we see $160 million to $200 million of consolidated free cash flow. For those who have followed Calumet over the past year, you've heard us talk quite a bit about the major catalysts we've been focused on to create shareholder value. They included a C-corp conversion that allowed us to improve our shareholder base and trading liquidity, this DOE loan to transform our cash flow profile and enable the MaxSAF expansion and focus on deleveraging. With the conversion done and the DOE closed, we'll now be focused on executing the MaxSAF project and deleveraging throughout the business, and the free cash flow we just analyzed will be a major enabler and huge first step in that process. With that, thank you for your time today. And I'm going to turn the call back to the operator for Q&A.

[Operator Instructions] The first question comes from Roger Read with Wells Fargo.

Congrats guys on getting this thing across the line finally.

Thank you, Roger.

A lot of moving parts here. I guess what I really want to make sure I understand, as you talked about the guidance items, you've got the intercompany payable reduction coming to $205 million. What's the -- I assume that's now all included in the $148 million of gross interest, $120 million of net going out. I just -- I want to make sure I understand like what the balance sheet of Calumet looks like ex-MRL and what the process maybe of further debt reduction opportunities are?

Yes, you bet. We -- let's see if David wants to chime in here, but if you look at Slide 8, we're basically saying that, that proforma this close, that the net recourse debt to Calumet is a little over $1.5 billion. And then on an interest basis, yes, to service that we have $148 million going outbound. Now also, we have $322 million Calumet owns this asset, this intercompany asset that Montana Renewables will serve us to the tune of $28 million. So on a net basis, what we're saying is $1.582 billion of net recourse debt, $322 million of intercompany. The net of that is $1.26 billion and the net outbound interest required to pay to service that $1.26 billion is $120 million a year.

Okay. So you're getting the -- that's what I'm trying to make sure I understand. You're getting the $205 million back, or that's a reduction? So $205 million comes back and then there's still this $322 million that's out there. Is that correct?

That's correct?

All right. Appreciate that clarification. And then the other one, just what, if anything, do we need to pay attention to in terms of now that you've got all the funding in place, the process of bringing SAF here. You laid out, obviously, the plan to '26, the longer-term plan to '27, '28, any particular we need to really watch this from a permitting standpoint or a long lead item or just getting workers in Montana, I'm thinking that you might have a little more competition for construction people given what happened in [indiscernible] here.

Roger, it's Bruce. I might take that. I think I heard about 4 things. So let's start off with the...

First guy asking a question, so I'm all over the place. Apologies for that, but I'm trying to understand, are there any hurdles we need to be paying attention to here?

Yes. So that was a comprehensive question. Let me walk through the components. So the answer is not really, but let's get there with some support. So the fact that we did this once already in the very recent past gives us the practical experience with exactly how things like the permitting process work in Montana. The workforce, we were very satisfied with what [indiscernible] did for us last time to marginal forces into a low population that city part of the country and give us effective productivity. The fact that we have a half dozen or so, depending on how you want to count, of small discrete projects, you'll hear us talk about a modular approach. That's actually what we did last time as well. So it's not like we're doing some EPC mega project, we've got I don't believe there's any one discrete component that itself is more than about $100 million. So we're not doing a major lift here. This is a scale that Calumet is used to operating on in our system. So we feel pretty good about all that. We have the permitting strategy laid out. It was actually one of the things the DOE was particularly interested in. And so I think we've got a very clear line of sight on how this is going to go.

The next question comes from Neil Mehta with Goldman Sachs.

Congratulations, Todd and team. My first question was just around how we should think about SAF premium, sustainable aviation fuel premiums. It's a little tricky to get our head around. So how do you think about the range of outcomes there? And can you give us a sense of how those customer conversations have progressed?

Neil, Bruce again. So look, that's the 64-carat question everybody wants to know. And we don't disclose that for a couple of reasons, but we are trying to range the guidance. So the reasons for not disclosing include the obvious, like it's commercially sensitive to our offtaker, and we've got a side contract that says that, that's material and nonpublic. The prudent fact, I think, though, for this forming industry is things are changing fast. Anybody that figured out their 10-year SaaS program 2 years ago has been dramatically reset by subsequent developments like volume mandates popping up in the rest of the world, like Illinois and Minnesota providing a state tax incentive, a significant one, and a couple of other details. So the space is forming very, very fast. That's a problem for the tracking services. I've seen published reports that say SAF is selling for less than diesel. And I call those people up and say, in essence, what are you doing? That's impossible because the SAF will just be left in the diesel. It's got a floor value. And so everybody wants to know, it's forming fast, it's changing fast. You're going to see waterborne movements from the U.S., gulf to Europe. There's a lot going on there. So we're very satisfied with our premium. Todd has explained in his remarks that floor of 1 and a ceiling of 3 are observable in the market, that's very, very strong. And apologies that we're not going to publish our contracts, but hopefully, all of that sounds like what we have always consistently reported.

Okay. And that is... Please.

No, I just got to pile on a little bit more on kind of the go forward. So I highlighted in remarks earlier that we expect this premium to continue to exist and potentially even grow. And there's actually a fundamental reason for that. That's not just hope. When you kind of balance the market out today, we have about 300 million gallons of SAF annually produced and it's a balanced market, actually a short market, I should say, and everyone is experiencing these premiums. We're seeing 400 million gallons or so of new production come on from reliable producers here in the not-too-distant future. We've got Montana Renewables first step, which is an incremental 100 million gallons. So over the next couple of years, we look at an additional 0.5 billion gallons of volume coming on. And also, we get a question of, "Hey, is the market going to absorb that?" And the reality is there's 2 billion gallons of global mandates already made that are inching up towards 2030. So we kind of looked forward, and we think that the new production that's coming online matches the new mandates that are coming online in '25. Those continue to creep up. It will be a perfect timing for -- to creep up our supply right in line with them. So it's kind of a really short market over the next 5 years, if you look at mandates that already exist. And that doesn't include all of the voluntary supply and commitments that we're seeing from the airlines, et cetera. So it is very balanced and -- or I shouldn't say balance, let's say, balance in the short term and extremely short in the long term. So we expect to see this premium continue to grow.

Yes. I just support that further. The reason the market looks balanced is because it is supply short. And the second, there's a drop of supply, somebody takes it up. That's kind of a circular reference. There's a grotesque shortfall of supply versus global aspirations, and that's what everybody is talking about now. What that reinforces is the need for a stable policy. And because the whole space is forming and because public policy is forming along with it, we don't think that there is going to be a particularly stable planning environment for a typical 10-year DCF model. We are doing this because we think it's a very appealing direction for Calumet to go. We're a serial entrepreneur at heart, and we got in early, we got in relatively large. We sold more SAF than anybody else last year of 2024. And we think there's been an important learning curve. And we think that we're probably pretty well understanding how this is all playing out. I'm simply reinforcing that it's going to be very, very dynamic. You're probably going to see the same kind of volatility and uncertainty that you see in a 10-year cycle in energy commodities, you're going to see that in 10 months in SAF.

That is helpful. And the follow-up is just sort of a corporate structure. You've got 2 disparate businesses at this point. You've got a Specialties business. which is high margin, low volatility, and then you've got what's a rapidly growing Renewables business. And so does it -- do you see business logic to have this integrated and diversified business? Or does it make sense to monetize one of the two over time and become more of a pure play?

Yes. I think it's a great question. It's Todd, I think over time, you should see these businesses be separated. The question is when and how, and we're going to look to the market to guide us on the answer to that. Right now, it's quite nice. I think they put together really, really well when you look at our general strategy. On the one hand, you have the Specialty business, which is just rock solid, been around for decades, continues to grow and improve, has meaningful upside there actually as we generate -- and after we accomplish the deleveraging that we want to and are able to invest cash in that business we have meaningful upside in that business, but we're super excited about it. It provides a really nice just cash flow more as we think of it to the integrated business. And it's really given us the ability to build this Montana Renewables, the growth platform that you mentioned. So I think it creates a nice balance. As you look at how sustainable fuels develops, to have both of these and the stable cash flow, combined with the super high ultra growth business, but in time, certainly would expect that as Montana Renewables continues to establish itself and grow and looking forward on to the future, potentially even acquired, that you should see these businesses separated. I just think, at the current second, there's no rush. We're just going to make that decision based on whatever is best for the shareholder and look to the markets to guidance.

The next question comes from Saumya Jain with UBS.

Congrats. So with PTC now in, how do you see the feedstock and state credits for MRL varying or if they switch to PTC? I understand that this loan is supposed to double Calumet purchase of feed oil and tallow. So I guess how does that all play out with this?

You're covering through pretty blurry there, Saumya. Do you mind reasking?