MMLP - NASDAQ

Good morning. My name is Audrey, and I will be your conference operator today. At this time, I would like to welcome everyone to the MMLP Q2 Earnings Call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. [Operator Instructions]. At this time, I would like to turn the conference over to Sharon Taylor, Chief Financial Officer. Please go ahead.

Thank you, operator, and good morning to everyone who has joined the call. With me today are Bob Bondurant, CEO; David Cannon, Controller; and Danny Cavin, Director of FP&A. I'll begin with our cautionary statements. During this call, management may be making forward-looking statements as defined by the SEC. These statements are based upon our current beliefs as well as assumptions and information currently available to us. Please refer to our press release issued yesterday afternoon as well as our latest filings with the SEC for a list of factors that could impact the future performance of Martin and cause our actual results to differ from our expectations. We will discuss non-GAAP financial measures on today's call, such as adjusted EBITDA, distributable cash flow and free cash flow. In addition, we will refer to adjusted EBITDA after giving effect to the exit of the butane optimization business. You will find a reconciliation of these non-GAAP measures to their nearest GAAP measures in our earnings press release posted on our website. Now I will turn the call over to Bob to discuss second quarter results by segment.

Thanks, Sharon. Before I speak to the performance of our continuing operations, I want to briefly discuss the final liquidation and exit of our butane optimization business. We sold the remaining butane inventory in stores during the month of April, using the proceeds to pay down our revolving line of credit. However, because butane prices continued to fall during the month of April, we realized negative EBITDA of 6.3 million in the second quarter. And for the 6 months, we had negative EBITDA in butane of 15.1 million. Finally, for the trailing 12 months, we had negative EBITDA in butane optimization of 27.4 million. These losses are not included in our bank leverage debt as we have exited the butane optimization business. However, we will continue to operate our underground NGL storage facility in North Louisiana, which has both truck and rail access, utilizing a fee-based volume-driven business model. The result of our underground storage facility are included in the terminalling and storage segment. I would now like to discuss the performance of our ongoing operations, comparing the actual results of the second quarter to our second quarter guidance. Excluding the losses of the butane optimization business, we had adjusted EBITDA of 31.8 million compared to our second quarter adjusted EBITDA guidance of $32.2 million, a difference of 1%. For the trailing 12 months, excluding the results of the butane optimization business, we had adjusted EBITDA of 111.3 million through the second quarter of 2023. For the second quarter, our largest cash flow generator was our transportation segment, which had adjusted EBITDA of 12.1 million compared to guidance of 11.6 million. Within this segment, our land transportation business had adjusted EBITDA of 8.7 million compared to guidance of 8.8 million. Our actual line haul revenue was approximately 1.2 million less than forecasted as we missed our mileage forecast by 4%. This revenue mix was offset by the associated reduction in our variable costs from fewer miles driven and also from reduced fixed costs, which were less than our second quarter forecast. Our marine transportation business had adjusted EBITDA of 3.5 million compared to guidance of 2.8 million. For the second quarter, we exceeded our average daily tow rate forecast by approximately 11%. These improved day rates are reflective of the strong supply-demand fundamentals in the inland barge market. Looking forward, we believe that rates should continue to strengthen and we should also continue to have very strong utilization of our barge fleet. Our second strongest cash flow generator in the second quarter was our terminalling and storage segment, which had adjusted EBITDA of $9.6 million compared to guidance of $8.3 million. The biggest contribution to the excess cash flow compared to guidance in our terminalling segment was reduced operating costs, the majority of which were reduced natural gas costs at the Smackover refinery when compared to forecast. Looking forward, based on current natural gas pricing fundamentals, we should continue to see reduced natural gas costs relative to our original forecast for the remainder of the year. Now I would like to discuss our sulfur services segment, which was our third largest cash flow provider in the second quarter. This segment had adjusted EBITDA of $8 million compared to guidance of 10.6 million. The cash flow miss in our guidance was driven by the underperformance in our fertilizer group, which had adjusted EBITDA of 4.9 million in the second quarter compared to guidance of 7.7 million. When the second quarter began, we were still optimistic our fertilizer group would meet our volume projections and ultimately cash flow projections for the quarter. However, during the quarter, poor weather conditions, which included droughts in the Southwest and winter weather continuing into spring in the Midwest negatively impacted farmer demand for fertilizer products. As a result, our forecasted sales volumes were off 17%. Additionally, because of overall reduced agriculture demand in the U.S. due to poor weather conditions, fertilizer prices continued to fall throughout the second quarter. This negatively impacted our margins as we destocked higher cost inventory. As a result, our margin per ton was 27% less than forecasted in the second quarter. While the performance in our fertilizer group was disappointing, it was not unique to us. Most, if not all, fertilizer producers will likely report reduced earnings in the second quarter as a result of these poor market conditions. Looking toward the remainder of the year, we have reduced our fertilizer guidance by approximately $1 million, primarily due to high industry inventory levels caused by slow fertilizer sales. For the full year, when considering the actual results to forecast, we brought annual guidance for the fertilizer business down by $6.6 million. The pure sulfur side of our sulfur services segment had adjusted EBITDA of $3.2 million in the second quarter compared to guidance of $2.9 million. In the second quarter, we saw an increase in sulfur production from area refineries. As a result, the sulfur we handled in the quarter was approximately 16% greater than our forecast. This volume increase was the primary driver of our outperformance in the pure sulfur side of the business. Now I'd like to discuss the performance of our specialty products business segment. In this segment, excluding the impact of our exit of the butane optimization business, we had adjusted EBITDA of $5.9 million compared to guidance of $6 million. While we had strength in our NGL and propane groups, which both outperformed guidance, we faced continued weakness in our packaged lubricant business. This particular business has significant exposure to the agriculture market, which provided weak product demand in the second quarter. This week, agriculture demand was primarily driven by the same poor weather conditions that impacted our fertilizer business. Looking forward, we see some continued weakness in the agriculture markets in the third quarter and as a result, have reduced our packaged lubricant guidance in the third quarter by $1 million or $2.3 million for the entire year. Now let me take a moment to summarize. From our ongoing operations, we missed second quarter guidance by 0.4 million. However, if we exclude the guidance missed from our two business lines that has significant agriculture exposure, both fertilizer and packaged lubricants, we would have exceeded guidance by $3.3 million. Using the same thought process of excluding fertilizer and packaged lubricants for the first 6 months instead of missing guidance by $1.2 million, we would have exceeded guidance by $5.7 million. I'm making this point to demonstrate the strength of our performance in the majority of our business lines, which we believe will continue in the last half of the year. Regarding our two lines of business having significant agriculture exposure, subject to unusual negative weather events, we believe the agriculture market should begin to recover and we should see more normal performance from these two business lines, most likely beginning in the fourth quarter. This concludes my thoughts, and I would now like to turn the call over to Sharon to discuss our balance sheet, capital resources and further revisions to our 2023 guidance.

Thank you, Bob. As always, I'll begin with our balance sheet metrics and liquidity. Then I'll discuss 2023 guidance revisions within our 4 operating segments. At June 30, 2023, the total of our long-term debt outstanding was $460.5 million, which is a reduction of $39.5 million from the end of last quarter. The outstanding debt consisted of $60.5 million drawn on our $175 million revolver that matures in 2027 and $400 million of senior secured second lien notes due 2028. At June 30 per the credit agreement, lender commitments to the revolver stepped down from 200 million to 175 million. However, our liquidity increased from approximately 40 million at March 31 to approximately 56 million at June 30, as we were able to reduce not only our credit facility borrowings but also our outstanding letters of credit that were issued to support the butane optimization business. By using the proceeds from the liquidation of our butane inventory, to significantly reduce borrowings under our revolver, we reduced total bank compliant leverage to 4.14x at the end of the second quarter compared to 4.25x at the end of the first quarter. Further, on June 30, our first lien leverage ratio was 0.54x, our interest coverage ratio was 2.16x, and the partnership was in compliance with all covenants, banking or otherwise at the end of the quarter. Capital expenditures for the quarter were a total of 9.8 million, of which 7.9 million was maintenance CapEx and 1.9 million was growth CapEx. Maintenance CapEx was forecasted to be 11.9 million for the quarter, a difference of 4 million and growth was forecasted to be 5.3 million, a difference of 3.3 million. And while year-to-date, we are below our forecasted capital expenditure totals, we still intend to complete maintenance CapEx of 26.6 million and growth CapEx of 17.5 million this year. Distributable cash flow for the quarter calculated using adjusted EBITDA after giving effect to the exit of the butane optimization business, was 9.7 million, and free cash flow was 7.8 million. Progress continues to be made regarding the DSM Semichem joint venture or ELSA facility, ELSA being an acronym for electronic level sulfuric acid. Included in the 1.9 million of growth CapEx that I referred to earlier in this call, is approximately 1.4 million related to the install of an oleum tower at our Plainview location which will provide feedstock to the ELSA facility. The ELSA facility is still forecasted to be online in the first quarter of 2024. Turning to our revision to our 2023 guidance, as you heard Bob say earlier, we made downward revisions in our sulfur and specialty products segments due to headwinds in the fertilizer and lubricants businesses as challenges in the agriculture industry from weather events that impact both pricing and margin stability resulted in lower-than-anticipated cash flows. However, these downward revisions are offset by stronger outlooks in both the transportation and terminalling and storage segments. The result of these positive and negative variances is the overall 2023 guidance of 115.4 million in adjusted EBITDA after giving effect to the exit of the butane business remains unchanged. Turning to Slide 4 of the second quarter earnings summary presentation released along with our earnings yesterday evening, I'll quickly walk through the changes by segment. In the transportation segment, we have increased guidance by $3.7 million, largely because the marine business is benefiting from both higher rates and increased utilization of the fleet. Guidance for the terminalling and storage segment has been increased by $3.5 million. The majority of the increase in this segment is at our Smackover refinery and as a result of decreased operating costs mostly from projected natural gas prices. As has already been discussed, guidance for the Sulfur Services segment is being reduced by $1 million in the third quarter in consideration of high inventories throughout the fertilizer industry. For the full year, the segment guidance is being reduced by 5.8 million, which takes into account the actual results of the first and second quarters. The specialty products segment guidance not including results for the butane optimization business is also being reduced by $2 million for the full year to allow for weakness in the lubricants business related to the agriculture industry. Finally, SG&A expenses have been lower than forecasted for the first 6 months of 2023 and those actual results are reflected in our total year forecasted number. This concludes my prepared remarks, so I'll turn the call over to the operator for Q&A.

Thank you. [Operator Instructions] And we'll take our first question from Selman Akyol at Stifel.

So I guess first thing, I just want to start with is just on the transportation. And I know you guys talked about higher rates, but you also talked about, I think increased mileage and higher production at the refineries, which also drove. So can you maybe discuss just the outlooks going forward?

Yes. I'll hit both pieces. On the truck transportation side, we've done a really good job of keeping rates strong. The sulfur production rates, which is a big piece of our business in the area primarily on the Gulf Coast, we had forecasted kind of more than the 3,000 tons per day of production. It's been averaging more than the 3,500 tons a day production and we see that going forward. We see a lot of sulfur production both from utilization in the refineries and also I think their crude slates that they're running. We are seeing a little bit of softness on the chemical side and on the lubricant as well, which we've been talking about in our prepared remarks related to the ag business. So those are kind of netting out on the trucking side. So we feel good about our guidance going forward there. On the barging side, rates are up significantly, especially from where they were a year ago. They're just a tightness in supply of units on the inland barge side, refinery utilization is high. We're seeing our average rate in the second quarter was probably 9,400, 9,500 a day with some dirty barges now getting over 10,000 a day. And as we roll over contracts, we see upward pressure on those rates. So that's the big piece of why we raised our marine guidance. Also in the first half of the year, we had several barges that go in for dry docks. We only have one unit in the back half of the year that goes in for dry dock. So utilization will also be a lot higher in the back half of the year compared to the first half of the year.

In relationship to contracting on the barges, are you getting any extension in time or duration?

Yes. We now have some barges that are actually off the spot market [indiscernible] term. There's still mostly 3 to 6 months term Selman, but we are starting to see folks wanting to lock up contracts for a longer period of time.

Got it. And I guess, longer period of time at higher rates, right?

Yes, sir.

Yes. And when we see the market doing that, we believe they see it continuing to rise, so they want to lock it up.

Got it. And then do you have a heavy dry-docking schedule for 2024 as we look forward?

No. This was a heavy year for us. It's going to be less next year. I can't [indiscernible], but I know it's significantly less next year compared to this year.

Awesome. And then, on the transportation side, you had picked up a good chunk of business over in Florida, and I was just wondering how that was going. I presume you've seen that slow, but just checking.

Yes. That's levered around the fertilizer business down there. However, that has been good. It's actually continuing to improve. We hold a lot of different products in addition to sulfuric acid. There's a lot of, what we call pond water down there that has to move around. And as Florida gets rains and water fills up these pits, it's a constant movement of pond water. So it's kind of not intuitive that something exposed to the fertilizer business, you're doing really well. But because of that kind of unique nature, we're still very strong in Central Florida.

Appreciate that. And then remind us on the ELSA project, total capital to be invested and what kind of returns are you looking for?

Yes. So the investment in the oleum tower over the course of the remainder of this year and maybe a little into early next year, but primarily this year is roughly $13.5 million. And then next year, when the project ELSA comes online into the JV, we'll invest $6.5 million of cash into the JV. So net-net, you have $20 million invested. We've been telling the market kind of the midpoint of the range of EBITDA is about -- between the two pieces is about $6 million.

Got it. And don't mean to split hairs here, but when you talk about it coming, the tower comes online in the first quarter. And you think about them making an additional investment into the JV. Should we think of that JV then ramping up pretty quickly and so you'll get a return on that additional $6 million starting in the second quarter or should we think of it that it's going to be more like in the third or the fourth quarter?

I would move it towards the back half of the year. The distributions from the JV, I would say the contract related to the oleum, we're providing the JV would start in the second quarter.

Got it.

Sharon?

Yes. And then distributions from the JV towards the back -- the third quarter.

Got it. Okay. That's very helpful. Thank you. And then, in terms of the agriculture market, and I know you guys marked it down for Q3 and the rest of the year. But I guess, is it really waiting until next year to see the improvement, is that the way we should be thinking about it?

I think so. Now what could happen is in the fourth quarter, you do sometimes see if farmers believe the prices are going to go up, they'll start pulling in the fourth quarter and advance that price. So you could maybe see some volume in the fourth quarter, but that's hard to predict at this point in time. But on a more macro level, with the Russia doing their thing in Odessa here the last few days, corn price, Beaumont, Odessa in that port there. Corn prices are up about 10% in the last 3 or 4 days. So I believe the farmer demand provided weather cooperates will be really strong next year.

[Operator Instructions]. And we'll go to Patrick Fitzgerald at Baird.

I just have just a couple of cash flow questions. What is now that you're through the butane inventory, what does working capital look like from here?

I do not have that number in front of me, right at this moment, Patrick, I apologize for that. As you know, it's been changing for us since we've been exiting the butane optimization business. So what I would say historically is not what I would be looking at the moment.

Keep asking your question, I'll do a little research here. Keep asking questions.

And then I just kind of wanted to ask a bigger picture question. So with your CapEx, with your guidance, which is very helpful, in terms of EBITDA and your CapEx guidance, in your cash interest now, you'll be on a run rate to generate about, I don't know, $15 million of free cash flow annually, which is relative to your market cap, not a small amount. So what's the plan going forward? You're close to your 4x leverage target for the end of the year. Are you just going to keep paying down the revolver and take leverage lower or is there something more strategic you can do to kind of get your equity moving?

So per the covenants of our credit facility and our notes, until we reach 3.75x leverage, we don't have the ability to increase our distributions. There's some capital constraints that we will have. So we will continue to use that free cash flow to get that leverage number down below 3.75x. And based on our current forecast, we get there towards the back end of next year.

And then I guess your view is, you would just turn the distributions on at that point?

Well, we'll look at where we are, what type of growth projects we might have, we should be past the capital required for the ELSA facility at that time, but we still have opportunities down in the Beaumont, Neches area with some of our assets down there in the property. So we'll look at what's the best use of that capital. Do we have anything right now that we're planning on spending that capital on as far as growth projects? No, nothing outside of ELSA. But I hate to say, yes, our entire focus will be on increasing the distributions. Of course, that will be a big one that we -- I just don't want to put us in a box. But yes, that is when you look at the priorities, doing something to enhance our unit price and provide value for our unitholders is certainly number one on our minds. And to get back to your working capital number, the range right now is between $45 million and $50 million over the next 4 quarters.

And there are no further questions at this time. I would like to turn the call back over to Bob Bondurant for closing remarks.

Thank you, Audrey. In summary, we've had a good start to 2023. Our diversified refinery services business model has served us well, and we anticipate meeting our full year adjusted EBITDA guidance even in the face of headwinds in a couple of our businesses. By exiting the butane optimization business, we expect our future earnings to be less volatile and the reduction of working capital needs to be significant. Looking to the future, we believe we have a significant opportunity to improve the success of our partnership with the DSM Semichem joint venture that is scheduled for start-up at the end of the first quarter of next year. And we intend to continue to strengthen the balance sheet by paying down debt and lowering our leverage to below 3.75x. Thanks to everyone who joined the call. I look forward to speaking with you again next quarter.