MMLP - NASDAQ

Good morning. My name is Sandra, and I will be your conference operator today. At this time, I would like to welcome everyone to the MMLP Fourth Quarter 2021 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. . Sharon Taylor, CFO, you may begin your conference.

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 Cavin, Director of FP&A. Before we get started with our comments, I will 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-19 pandemic, but actual outcomes could be materially different. You should review the risk factors and other information discussed in our SEC filings and form your own opinion about Martin's future performance. We will discuss non-GAAP financial measures on today's call. 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 fourth quarter and full year 2021 results.

Thank you, Sharon. First, I want to let our investor base and our employees know that for the fourth consecutive quarter, we have exceeded our internal EBITDA forecast. Our fourth quarter adjusted EBITDA was $39.7 million, which exceeded our forecast by almost $11 million. For the year, our adjusted EBITDA was $114.5 million compared to our disclosed adjusted EBITDA range of $95 million to $102 million for the year of 2021. This strong performance benefits us financially primarily in two ways. First, it helps us pay down our absolute debt at a much faster pace. And it also accelerates the reduction of our leverage ratio closer to our stated goal of below 4 times. Second, I believe this strong cash flow performance, along with significantly improved financial metrics should position us well with the bond rating agencies. This is a significant step to improving our ability to achieve a beneficial refinancing of our existing bonds by the end of the third quarter at a much cheaper cost of capital compared to what we are now paying. I'm very pleased that we are better positioned to achieve that goal. Now we need to continue to execute strong cash flow performance in 2022 in order to ultimately achieve our third quarter goal of refinancing this debt at a much lower cost. I'm very confident we can execute this plan. Now I'd like to discuss both our fourth quarter and our full year performance by business segment. Overall, as I previously mentioned, we had adjusted EBITDA of $39.7 million in the fourth quarter. This compared to adjusted EBITDA of $17.4 million in the fourth quarter of 2020. For the full year, we had adjusted EBITDA of $114.5 million compared to $94.9 million in 2020. For the fourth quarter, our largest cash flow contributor was our natural gas liquids segment, which had adjusted EBITDA of $12.8 million compared to just $2 million in the fourth quarter of 2020. The significant majority of our natural gas liquids cash flow was from the performance of our butane business, which had adjusted EBITDA of $11.1 million in the fourth quarter compared to a negative cash flow of $0.6 million a year ago. In the fourth quarter, we experienced expanded butane margins as strong refinery demand began in October. Just like every year, this was due to the seasonal change in gasoline vapor pressure rules which allow refineries to blend butane into their gasoline pool. Unlike a year ago, margins in this business were more typical of our historical fourth quarter butane margins. In the fourth quarter of 2020, we experienced reduced demand in our butane optimization business due to the impact of COVID-19 on refinery utilization and backwardation of the forward price curve delaying refinery purchases, causing misalignment of our physical sales and financially hedged volumes. This explains why there was a negative cash flow in last year's fourth quarter compared to more normal cash flow experienced in the fourth quarter this year. For the full year, our NGL segment had adjusted EBITDA of $28.4 million compared to $12 million in 2020. This improvement year-over-year was driven by our butane business, which experienced a normal fourth quarter in 2021 compared to the weak fourth quarter of 2020. Looking towards the first quarter of 2022, even though margins should be strong, first quarter cash flow will not be as much as the fourth quarter in our butane business as the volumes sold will be less. This is due to the smaller amount of inventory we have remaining in storage at December 31. In other words, we just have less to sell. Now I'd like to discuss our Sulfur Services segment, which was our second largest cash flow contributor in the fourth quarter. This segment had adjusted EBITDA of $11.4 million in the fourth quarter compared to $7.4 million a year ago. Our fertilizer business had adjusted EBITDA of $7.8 million in the fourth quarter compared to $5 million a year ago. Although our volume of fertilizers sold was very similar for both quarters, we experienced overall margin expansion in the fourth quarter, primarily driven by the fundamentals of supply and demand. This margin expansion was the primary reason for our improved cash flow in the fourth quarter compared to the fourth quarter of 2020. Our pure sulfur side of this segment had adjusted EBITDA of $3.6 million in the fourth quarter compared to $2.4 million a year ago. This improvement was primarily volume driven as refinery utilization was 88% in the fourth quarter compared to 77% a year ago, allowing us to handle more sulfur produced from refineries compared to 2020. For the year, our entire Sulfur Services segment had adjusted EBITDA of $34.3 million compared to $32.5 million a year ago. Our fertilizer business had adjusted EBITDA of $24 million in 2021 compared to $17.3 million in 2020. Just like the fourth quarter, for the full year of 2021, we experienced improved supply and demand fundamentals, which has contributed to continuing rising fertilizer prices, helping us to expand our margins compared to 2020. These improved margins were the primary driver for our improved cash flow performance in our fertilizer business. For the year, our pure sulfur side of the business had adjusted EBITDA of $10.3 million compared to $15.1 million a year ago. Negatively impacting our sulfur volumes was the impact of Winter Storm Erie in the first quarter of 2021 and Hurricane Ira in the third quarter of 2021. These extreme weather events had a significant operational impact to the Beaumont and Lake Charles area refineries, which produced the majority of the sulfur we handle. Additionally, in 2020 we had business interruption proceeds of $2.7 million, which did not occur in 2021. Looking toward the first quarter of 2022, we continue to see strength in our fertilizer business due to strong pricing and consistent demand. We also see stability in our pure sulfur business as refinery utilization and sulfur production have become more consistent. Our third strongest cash flow generator in the fourth quarter was our Terminalling and Storage business, which had adjusted EBITDA of $11 million compared to $10.6 million a year ago. Our packaged lubricant and grease business improved $0.9 million compared to last year's fourth quarter. This was primarily due to strengthening margins driven by improving supply and demand fundamentals. This has been a continuing trend throughout the year. Offsetting this was the cash flow at our Smackover refinery, which was down $1.1 million in the fourth quarter compared to a year ago. This was due to the scheduled contract reduction to the throughput rate related to capital recovery fees, which became effective January 1 of 2021. 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 as commercial throughput contract that runs through 2031. For the year in this segment, our adjusted EBITDA was $43.5 million compared to $46.9 million a year ago. While our packaged lubricant and grease business had a cash flow increase of $1.8 million due to improving fundamentals, our Smackover refinery had a cash flow decrease of $3.6 million. This decrease was due to the scheduled contract reduction to the throughput rate in January 2021 and the increase in natural gas costs compared to a year ago. Looking toward the first quarter, we believe the cash flow from this business segment will be stable. Our final business segment to discuss is our Transportation segment, which had adjusted EBITDA of $8.8 million in the fourth quarter compared to $1.7 million a year ago. Our land transportation business saw a significant improvement as fourth quarter cash flow was $7.6 million compared to $3 million a year ago. While we experienced a modest low count increase of 3%, we were able to increase our revenue by 23% compared to a year ago. This revenue increase more than covered our increasing operating costs in our business. Our customer base has been very understanding of the inflationary pressure we are experiencing in our driver pay, insurance costs and other operating expenses and has supported our requested rate increases. Fundamentally, truck transportation was in very tight supply in 2021. And we continue to see tightness in the market continuing into 2022. Our Marine Transportation business also saw improvement compared to the fourth quarter of last year. Adjusted EBITDA was $1.2 million compared to a negative $1.3 million a year ago, an improvement of $2.5 million. This was the fourth consecutive quarter of increasing Marine Transportation cash flow as we continue to see steadily improving fundamentals in this business. Our daily barge rates are very similar to a year ago, but we experienced a significant 37% improvement in our third-party barge utilization. For the year, our Transportation segment had adjusted EBITDA of $24.1 million compared to $20 million in 2020. We saw significant improvement in our land transportation business as it had cash flow of $23.9 million in 2021 compared to $15.2 million a year ago. The cash flow in our land transportation business grew every quarter in 2021 when compared to the previous quarter. We believe there will be continuing cash flow growth in 2022 as fundamentals remain strong. For the year in our Marine Transportation business, we saw a decrease in cash flow from $4.8 million in 2020 to $0.2 million in 2021. Marine Transportation cash flow performance was strong in the first half of 2020 as we then operated under contract with rates that began to roll over to cheaper spot rate contract the second half of 2020. This weakness carried over into 2021, but we began to see slow improvement in cash flow throughout 2021, finally, turning positive in the third quarter. We believe this improving trends will continue throughout 2022, and our cash flow in this business will be better than 2021. This summarizes our performance by business segment for both the fourth quarter and the year. Now I would like to turn the call back over to Sharon to discuss our balance sheet, capital resources and our 2022 guidance.

Thanks, Bob. I'll begin with a walk-through of the debt components of our balance sheet and leverage ratio, briefly discuss the general partner ownership changes that occurred during the quarter and conclude with a discussion of 2022 financial guidance. At December 31, 2021, the total of our long-term debt outstanding was $506 million, a reduction of $49 million from the end of the third quarter. Outstanding debt consisted of $160 million drawn on our $275 million revolving credit facility, $54 million of secured 1.5 lien notes due 2024 and $292 million of secured second lien notes due 2025. Total available liquidity was approximately $93 million under our revolving credit facility on December 31, 2021. At quarter end, our adjusted leverage was 4.19 times, which is more than a turn lower from the third quarter when adjusted leverage peaked for the year at 5.47 times. Now as a reminder, this calculation excludes certain debt attributed to the seasonal NGL inventory build when the inventory has been either forward sold or hedged. At December 31, the total debt excluded from the adjusted leverage calculation was $23 million. The significant reduction in leverage was driven by, as Bob discussed earlier, our strong financial performance, allowing us to pay down debt at an accelerated rate as compared to our forecast. Total capital expenditures for the fourth quarter were $8.5 million. Maintenance CapEx was $7.2 million of the total, bringing full year 2021 maintenance capital expenditures to $18.2 million, including $4.1 million for turnaround costs compared to our guidance of between $17 million and $19 million. Growth capital expenditures for the fourth quarter were $1.4 million for a 2021 total of $4.7 million compared to guidance of between $4 million and $5 million for the year. Concerning the changes to our general partners' ownership structure, as previously announced, through a 2-step process, Martin Resource Management Corporation acquired a 49% voting interest, 50% economic interest from certain investment funds managed by Alinda Capital Partners, effectively consolidating control of our general partner back under the Martin Company's umbrella. And in addition, as a part of the transaction, MMLP's partnership agreement was amended to permanently eliminate the incentive distribution rights of the general partner, providing value to our unitholders over the long-term. Beginning our discussion of 2022 guidance, which can be found on Slide 5 of the latest presentation posted to the Investor Relations section of our website. Although we are still issuing guidance in an annual range for 2022, we have also provided range estimates per quarter. For full year 2022, we anticipate our adjusted EBITDA to be between $100 million and $110 million. As usual, due to the seasonality of both the fertilizer and butane businesses, the first and fourth quarters will be stronger than the second and third, with the third being the seasonally weakest as the fertilizer season has concluded and the butane blending season is just beginning. Maintenance capital expenditures are expected to be approximately $22 million, which includes estimated turnaround costs of approximately $4 million. Gross capital is anticipated to be approximately $8 million with the majority spent in the first two quarters related to one, an additional Martin Transport terminal in response to growing business opportunities in Florida. And two, additional storage at the Neches terminal to provide enhanced logistics in the Specialty Terminals division. This leads to distributable cash flow of between $31 million and $41 million and adjusted free cash flow of between $23 million and $33 million. Management believes at this time that our guidance assumptions are conservative with more potential for upside than downside. Our assumptions include slight margin contractions when comparing 2022 to 2021 as supply chain disruptions, inflation and rising commodity prices may create headwinds for our margin based businesses. On the positive side, the Transportation segment is expected to improve year-over-year as both the land and marine divisions see increased utilization and rising rates due to market conditions. Finally, at this time, we anticipate refinancing our existing notes after the $292 million secured second lien notes become callable at par, which is mid-August. We also intend to address an amendment and extension of our revolving credit facility at that time. And with that, I will turn the call back to the operator for Q&A.

Thank you. And we'll go first to Selman Akyol with Stifel.

Thank you. Good morning. Just a couple of questions for me. So let me just start off on the transportation side of things. Should we be expecting any large expenses maintenance wise for the fleet at all? Is this fleet still young enough that it's not requiring a lot of capital or there are going to be some capital injected this year?

Selman, this is Randy. Good morning. For the marine fleet, we have a very low maintenance CapEx year relative to normal. We don't have much of our equipment going into dry dock or ABS or coast guard inspections for the 2022 year. We did have a large capital expense on our M6000 unit up in the Northeast, but that occurred late in the fourth quarter. And all that work was completed before 2022 began.

Okay. And then on the fertilizer segment, it seemed like you had some stronger quarters than not. So I'm just wondering, do you think demand has been pulled forward at all as you look out into 2022? Or should we just think of it as sort of the normal seasonality that we'll see?

Yeah, there has been some demand pull forward, about 10% of our demand that we would typically have in inventory at the end of the calendar year was pulled forward into the fourth quarter of 2021. Now with that said, margins, particularly on our ammonium -- nitrogen-based fertilizers are very strong. And so we continue to think we're going to have a very strong year in the fertilizer business.

Got you. And then on the sulfur side, so with the improving refinery utilization, we should continue to expect those volumes to stay relatively strong as well, if I'm thinking about it correctly.

Yeah. And the sulfur performance, we would expect to improve year-over-year because of that.

Great. And then I guess, Sharon, can you just talk a little bit about what you're expecting in terms of when you do the refinancing at all, when you go to call those bonds? And any idea where you might get priced at or what you're going to be thinking about? And then same thing, I guess, on the revolver. And I guess as you're having to do the revolver in conjunction with that because it's going to want its maturity eventually in front of whatever you renegotiate on the bonds?

So the way we're thinking about it right now is, as we said, we'll look at those things together in August, both the revolver and redoing the notes. One thing we would want to do is take out both the 2Ls and the 1.5 at that time. And we really believe that they're 11.5% and 10%. We think the market is there to where we're going to get a significant reduction in that interest rate. I don't know that I want to comment on where we believe it will come out at. But I don't think that we're going to end up, will be more historical interest rates on our notes than where we are right now.

Okay. Great. That does it for me. Thanks so much.

Thank you, Selman.

We'll go next to Patrick Fitzgerald at Baird.

Hi. Thanks for taking the questions. Now when you refinance -- now is the expectation that you're going to be able to kind of increase distributions to unitholders going forward? Is that kind of the goal of it? Or is it just absolutely get a lower rate and continue to pay down debt? What's your thinking there?

So the number one goal is to get a better rate and to continue to pay down debt. I think we've been clear about that. Now we will look further down the road at capital allocation and where those additional free cash flow dollars should be placed. So we'll look at increasing distributions as a part of that total kind of consideration at that time.

Yeah, this is Bob. There's really 3 options. That what Sharon just said, growth CapEx opportunities that we probably have kind of punted on a little bit. That's another option. And then finally, if the market doesn't recognize our valuation, which our consistent theme has been we're undervalued as far as an enterprise valuation multiple, there could be a possibility of buying back units. We'll do what's in the best economic interest of our unitholders at that time.

Okay. What about M&A in terms of free cash flow?

There's nothing on plate as far as M&A goes at this time.

I mean if you look at your guidance, it's kind of the average over the last two years. And I know that like the butane business kind of fell into the first quarter of this year, a little bit of the fourth quarter of last year. Is that really kind of the -- and you also said you're probably on the conservative side of guidance, is that really kind of the difference in year-over-year, the $10 million difference?

Yeah, we did take a conservative approach in our margin businesses, primarily butane and the fertilizer. We brought those down because we had really good years in '21. We actually bought both within them below our 10-year average, just to be conservative. I think our margin-based business is just a little bit tougher to predict. To Randy's point, we think maybe the volume sales fertilizer could be down, but we think we can realize increased margins. But at the beginning of the year, it's just unclear to see all that visibility throughout the coming year. So we did -- those are the 2 areas we are very conservative on.

Okay. All right. And then just on the -- I know there was kind of a reset in pricing on the Smackover refinery. But going forward from here, is it -- should we expect kind of stable EBITDA, I guess?

Yes, you should. I think we've spoken to those capital recovery fees that rolled off both in '20 and in '21. So at this time, there's no more change to the throughput rate based on any of those capital recovery fees rolling off.

Okay. All right. Thank you very much.

Thank you, Patrick.

And that does conclude the question-and-answer session. At this time, I would like to turn the conference back to Bob Bondurant.

Thank you, operator. Throughout 2021, our business leaders were focused on optimizing our current asset base and expanding our business through long-term relationships with our partners. We remain intentional with respect to capital discipline resulting in our year-over-year debt reduction and a 117 basis point improvement to our adjusted leverage ratio. And at the end of the year, we had beaten our internal guidance each quarter and exceeded our earnings expectations for 2021. And as successful as 2021 was, it's time to turn the page and build on these positive results in 2022. We will do that by continuing to be innovative in our thinking and diligent in our work. We will continue to reduce debt and free cash flow, strengthening our balance sheet to attract investors and deliver value. We have provided what I believe is a conservative guidance for 2022. I see more opportunity to the upside than threat to the downside, opportunity to expand services with our business partners, particularly in the terminalling and land transportation groups, opportunity in higher utilization of our marine assets and opportunities as we pursue new alliances and consider potential means to enhance our services. I look forward to speaking to you on our next call. And as always, thank you for your interest in Martin Midstream.