Earnings Call: Q3 2021

Oct 21, 2021

Ladies and gentlemen, thank you for standing by, and welcome to the MMLP Third Quarter 2021 Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Sharon Taylor. Thank you. Please go ahead. Thank you, operator, and good morning, everyone. I'm joined by Bob Bondurant, President and CEO Randy Tauscher, Chief Operating Officer David Cannon, Controller and Danny Caban, Director of FP and A. Before we get started with our comments, I'll remind you that management may be making forward looking statements as defined by the SEC. Such statements are based on our current judgments regarding the factors that could impact the future performance of Martin, including facts and assumptions related to the impact of the COVID-nineteen pandemic. Actual outcomes could be materially different. You should review the risk factors and other information Please refer to the table in our earnings press release posted in the Investor Relations section of our website to find information regarding those non GAAP financial measures, including a reconciliation of historical non GAAP financial measures referenced in today's call to their corresponding GAAP measures. And now, I will turn the call over to Bob for his remarks on our Q3 results. Bob? Thanks, Sharon. First, I want to let our investor base and our employees know that I'm very pleased with our performance in the 3rd quarter. We exceeded our internal EBITDA forecast by over $2,000,000 As a result of this stronger third quarter performance, I believe we are positioned to exceed the range of our disclosed EBITDA forecast of $95,000,000 to $102,000,000 for 2021. Our 3rd quarter performance, along with the anticipated 4th quarter performance, will be a significant catalyst to helping us achieve our deleveraging goals. This should set us up for a beneficial refinancing of our high cost secured notes next fall. I truly appreciate every employee at Martin Midstream for working together to help us positively position the company toward the refinancing of our notes. Let's now discuss our 3rd quarter performance by business segment. Overall, for the Q3, we had adjusted EBITDA of $21,500,000 compared to $22,500,000 in the Q3 of 2020. While our cash flow was less than a year ago, As I just said, we did exceed our internal forecast by over $2,000,000 which I believe positions us to exceed our range of EBITDA guidance provided at the 1st of the year. Our largest cash flow contributor for the Q3 was our Terminalling and Storage segment, which had adjusted EBITDA of $11,300,000 compared to $14,200,000 a year ago. While our cash flow from this segment in this quarter was less than a year ago. It was the strongest cash flow quarter in this segment this year, primarily due to strengthening margins in our package lubricant and grease business. Compared to a year ago, the cash flow at the Smackover refinery was down 1,300,000 This was due to the scheduled contract adjustment to the throughput rate related to capital recovery fees, which became effective January 1 this year. Additionally, the refinery experienced increased natural gas costs compared to a year ago. However, The refinery is protected against any natural gas cost above $4 per Mcf by throughput contract that runs through 2,031. The cash flow from our specialty terminals was down $900,000 compared to a year ago, primarily due to increased Operating expenses for required mechanical integrity testing at our Beaumont area terminals. This particular testing requirement will not be repeated again for 5 years. Finally in this segment, our shore based terminals were down $600,000 compared to a year ago. However, cash flow in last year's Q3 included the early termination of a commercial contract, which carried an extraordinary exit payment of $1,000,000 So excluding the one time exit payment from a year ago, our shore based cash flow actually improved by $400,000 Looking toward the Q4, we should see similar cash flow performance in this segment compared to the Q3. Our next largest cash flow generator for the Q3 was our transportation segment, which had adjusted EBITDA of $7,600,000 compared to $5,500,000 a year ago. The increase in this segment is from our land transportation business as cash flow increased $3,100,000 in the Q3 of this year when compared to last year. Our load count was up 23% in the 3rd quarter when compared to a year ago as last year's demand was very soft due to the pandemic combined with 2 major hurricanes that made landfall near Lake Charles, Louisiana. This impacted refinery utilization and chemical transportation demand. Looking forward, we expect continued demand growth for our trucking services, which should offset the inflationary pressure on our cost structure and provide strong cash flow again in the Q4. Our marine transportation was down $1,000,000 in the 3rd quarter when compared to a year ago. However, when compared to the previous quarter, our cash flow in our Marine Transportation segment increased almost $1,000,000 So we saw improvement to our marine transportation cash flow for the 2nd consecutive quarter when compared to the previous quarter. We believe this improving trend will continue into the 4th quarter as our asset utilization continues to slowly strengthen. Our next largest cash flow generator in the 3rd quarter was our sulfur services segment that had adjusted EBITDA of $4,900,000 compared to $4,200,000 a year ago. Fertilizer had a very strong quarter considering the 3rd quarter is our seasonally weakest quarter. Cash flow for fertilizer was $2,200,000 in the 3rd quarter compared to $600,000 a year ago. We had very strong demand in our ATS product line this year compared to a year ago, accounting for the majority of the improvement. Looking forward to the Q4, we plan to take the ATS production facility down for turnaround in November. So we will have lower production volumes of ATS, which will limit some of our fixed cost absorption. Offsetting this could be early demand from farmers of AMS product, which we manufacture in Plainview. In our pure sulfur side of this segment, Adjusted EBITDA was $2,700,000 in the 3rd quarter compared to $3,500,000 a year ago and $1,900,000 in the 2nd quarter. Compared to a year ago, sulfur margins were down by 14%. Also a year ago, we received a contractual settlement of 200,000 that did not occur this year. We also had no export sales out of our Stockton terminal in the 3rd quarter, solely due to the timing of sales opportunities compared to a year ago when we had 2 large export vessel sales. More importantly though is the $800,000 increase in cash flow from the Q2 of this year to the Q3. This is primarily a result of sulfur production in PAC III becoming more stabilized and approaching normal levels. Looking toward the Q4, our Pure Sulfur business should be similar to the Q3 due to a more stabilized Finally, I would like to discuss our natural gas liquids segment. For the Q3, we had adjusted EBITDA of $1,800,000 compared to $2,800,000 a year ago. This quarterly cash flow difference can be explained by the timing of seasonal sales in last year's Q3 As deliveries to our refinery customers started earlier in the 2020 butane blending season. As prices sit today, we are currently positioned to have a strong 4th quarter in this segment based on our carrying cost of inventory and storage compared to current market prices. Now this concludes my operating performance discussion. So I will now turn the call over to Sharon to discuss our balance sheet, Liquidity and Capital Resources. Thanks, Bob. At quarter end, the total of our long term debt outstanding was 5 $55,000,000 which consisted of $209,000,000 drawn on our revolving credit facility, dollars 54,000,000 of Secured 1.5 lien notes due $20.24 $292,000,000 of secured second lien notes due 2025. 1st lien leverage and adjusted leverage ratios were 1.72x and 5.47x respectively After adjusting debt for the working capital sublimit related to our NGL inventory volumes that are either forward sold or hedged. As I reminded folks on last quarter's call, the 3rd quarter brings an increase in working capital needs related to our butane optimization business As we began acquiring and storing inventories to be delivered to our customers in the butane blending season, which begins Q4 of this year continuing through Q1 of next year. As a result, although transitory, our leverage as it did this year, should increase and peak annually in the 3rd quarter as a result of higher working capital needs that occurred during our lowest cash flow quarter due to the seasonal nature of both the butane and fertilizer businesses. In addition, this year due to rising commodity prices, our working capital requirements ceded the maximum allowed sublimit reduction of $50,000,000 As we move further into the blending season, we anticipate our working capital And our leverage to be significantly reduced as a result of increased cash flows from the butane optimization business and improvement in our earnings results as the impacts of COVID-nineteen continue to abate. Distributable cash flow for the 3rd quarter totaled $5,200,000 $25,300,000 through 9 months of 2021. Free cash flow calculated as DCF less Growth capital expenditures and lease payments was $3,800,000 for the quarter $19,400,000 year to date. Growth capital totaled $1,400,000 for the quarter $3,300,000 for the year with no changes to our guidance between $4,000,000 $5,000,000 for the full year. Maintenance CapEx was approximately $2,900,000 for the 3rd quarter and $11,100,000 year to date. Again, no changes to our guidance, which is between $17,000,000 $19,000,000 for the year. And those numbers include our current forecast for maintenance CapEx at the Fushan terminal due to Hurricane Ida. Our EBITDA guidance has been between $95,000,000 $102,000,000 for the year. But as you have read in the press release and heard in Bob's remarks today, at this time, we are positioned to reach the high end of that range, which will result in approximately $34,000,000 in distributable cash flow and $26,000,000 of adjusted free cash flow in 2021. This concludes our prepared remarks for this morning. And I will now turn the call back to the operator for Q and A. Your first question is from the line of Selman Akyol with Stifel. Good morning. Good morning. First of all, can we just Start off on, I guess, the pace of activity that you're seeing at refineries and, I think you noted that what was good for transportation, but you just talk a little bit about what you see and how you see that rolling into Q4 and beyond? Yes. Selman, this is Randy. Good morning. Refinery utilization in the PADD III where we are primarily concerned has continued to improve throughout the year Through the end of the Q3. In the Q4, we've actually seen a decline really since Hurricane Ida came through and knocked out Hurricanes in the Louisiana area, but 7 of those 9 refineries came back on pretty quickly. 2 of the 9 are still down. But in the last month, we have seen in the last 3 weeks about 88.5% and then declined 87.5%. And last week, it was down to between 82% 83% PADD III refinery utilization. I think we're seeing a slightly heavier turnaround slate than we have seen in the recent year and a half because of COVID. And we really don't have a feel for the turnaround slate in the 1st and second quarter of next year yet. Although I would anticipate it's going to be heavier than what we've seen in the last several years. Got it. Thank you. That's helpful. And is of the 2 refineries that are not back up, is one of those your customers as well, either one of them? No, no, they're not our customers. The Alliance Refinery had a breach From flooding over there and they're going to be down for some time and the other refineries is not somebody we do business with. Okay. And then just kind of going back to Ida, our understanding is a lot of barge capacity was taken out as Ida came rolling through. Did your assets get impacted and then is the strengthening of that market or the less capacity there benefiting you by any chance? Well, we've heard that also. We didn't have any of our barges impacted or any of our equipment was not impacted. We in the month of September, really into the Q3 in general, we did not see an improvement in utilization We're not much of one, just a little improvement in utilization from the 2Q to the 3Q. As we're looking at And even for the first time this week, and this is the first time I can remember in 15 months, where we received calls from customers wanting to put marine equipment to work, And we didn't have marine equipment available to put to work for them. So we're a small part of the market in the marine world, But it sure seems like it's finally starting to tighten in the marine world from what we've seen over the last 18 months or so. But then just so I'm clear here, do you have any excess capacity that you could put to work Or anything rolling off that might roll on at higher prices? We still have 4 barges That without power, we don't have power for them. We can get power when we feel like we can put them to work and keep them utilized enough To bring the crews back and take the fire the power out on a full time basis to put them to work. So yes, everything we have available today, we have employed. We do have some more equipment that we can put to work when the need arises. And the current buses are operating today, I'd say we're generally on shorter term contracts. So the extent the market tightens and prices increase, we can realize that on existing equipment fairly quickly, I would say. Okay. Thank you for that. Thinking about sort of the forward curve for butane, it's backward dated. I know you guys have Signaled a strong 4Q. Is your 4Q already hedged and therefore So our hedge position is the same as the last time we spoke 90 days ago. We're approximately 33% Hedged on our butane book. 90 days ago, July, Bellevue average price was a little over $1.30 And as we're sitting here today on 21st, the October w average price for the month It's about $0.30 higher than that. So we have chosen not to increase our hedge position. As we spoke a little bit about the last call Because the macro trends in the butane market were favorable then and we consider them still to be favorable today. Got you. I'm sorry? Well, I was just going to say that so as you look at it towards November December, you're pretty confident there as well too. Yes. I mean, you never know the forward market, but if you look at the fundamentals, you look at the Amount of butane being stored in inventory on the Gulf Coast and around the country is very low. If you look at the butane production, it's very similar to what it was a year ago. The butane exports are much higher Than it was a year ago, and it looks like that's going to continue to be strong in the export market for butane. The WTI continues to increase. And the RBOB and the butane spread, a couple of days ago, even yesterday, it was $0.85 so very wide. So yes, we think the Fundamentals are in favor of the butane book at this point. Understood. And then just sort of the last one for me. Thinking about inflation And can you do you have, I don't know, cost of service agreements, any CPI, PPI adjusters, Appreciate you calling out the natural gas above $4 but is there anything else you can point to If we get into a rising price environment? Yes. Well, for the first I'll make this is Bob. The first point I'll make is I think we've done a really good job keeping up, Especially in the trucking business, we've gone to our customers. Our customers Who are primarily large refiners and large cable companies understand the inflationary pressure and they understand the need for drivers. And so we've been on an emphasis to increase driver pace so we can keep our driver pool. And we have done a really good job of passing those costs through And increasing our rates and you're seeing in the numbers in the Q3. In our Terminalling business, we have CPI adjustments On an annual basis, so it just depends on the contract when those will roll through. But yes, we're protected there. So I think we are positioned in a good place. It's a tight market. Our customers understand the need for increasing rates, And I think we've been very effective and will continue to be. All right. Thank you. And there are no further questions. I will now turn the call over to Bob Bondurant for closing remarks. Okay. Thanks to everyone on the call this morning. I appreciate your interest in MMLP. I heard a quote not too long ago that stuck with me. And although I really can't cite the source, I want to share it. Do not confuse the topography of the path with the trajectory of the journey. What does that mean? Why is that meaningful? To our investors, it's a reminder that the slight increase in leverage at the end of the Q3 was expected and is transitory due to the cyclical nature of our butane and fertilizer businesses. And that looking forward, we are positioned today for strengthening cash flows, even as we manage supply chain disruptions and inflationary pressures. As has been our focus, we will use those cash flows Thanks again to all and have a great day. This concludes the MMLP 3rd quarter 2021 earnings call.