MMLP - NASDAQ

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

Thank you, operator, and good morning everyone and thank you for joining us today. In the room are, Bob Bondurant, CEO; Randy Tauscher, COO; David Cannon, Controller; and Danny Cavin, Director of FP&A. I'll begin with our cautionary statement. 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 fourth quarter and full year results. Presenter Speech

Thanks, Sharon. I would now like to begin my discussion with a recap of Martin Midstream Partners execution of significant achievements in 2023. In February, we refinanced our existing secured notes, extending their maturity to February 2028. At the same time, we amended our revolving credit facility and extended its maturity to February 2027. In the second quarter of 2023, we completed our exit from the volatile butane optimization business, while retaining the stable cash flow component of the business associated with our North Louisiana underground storage assets. Also in 2023, we began construction of the Oleum Tower at our sulfuric acid plant in Plainview Texas in order to be the supplier of Oleum to the DSM Semichem joint venture. This joint venture is between us, Samsung, C&T America Inc. and Dongjin, USA. The joint venture is currently in the construction phase of facilities that will provide electronic-level sulfuric acid commonly known as ELSA to the semiconductor manufacturing industry. The final significant achievement we had in 2023 was exceeding our disclosed EBITDA guidance and also meeting our targeted leverage ratio of 3.75 times. I would like to acknowledge and thank our team of executive leadership, segment leadership and the entire Martin Midstream workforce for executing our 2023 game plan in order to achieve these goals. Now, I would like to focus on our fourth quarter operating performance. For the fourth quarter, we had adjusted EBITDA of $29.2 million compared to a fourth quarter revised guidance of $26.9 million, an improvement over guidance of $2.3 million or 9%. For the year, we had adjusted EBITDA of $117.7 million, exceeding our beginning-of-the-year guidance of $115.4 million. For the fourth quarter, our largest cash flow generator was our Transportation segment, which had adjusted EBITDA of $12 million compared to revised guidance of $11.3 million. Within this segment, our land transportation business had adjusted EBITDA of $9.6 million compared to revised guidance of $7.3 million. During the fourth quarter, our revenue per load was greater than forecasted as we began to see a recovery in our longer-distance loads. We also began to see a reduction in our equipment repair and maintenance costs, as we continue to lower the average age of our fleet, with new leased equipment purchases. The effect of this recapitalization of our equipment fleet over the longer term will be to increase our equipment lease expense, which will be partially offset by reduced repair and maintenance costs. We also believe newer equipment will help our driver retention. Our marine transportation business had adjusted EBITDA of $2.3 million compared to revised guidance of $4 million. The primary reason for this EBITDA miss was due to supplemental insurance calls from our protection and indemnity insurance carrier. These supplemental costs totaling $1.1 million, were due to losses incurred by our P&I carrier related to their overall underwriting losses. These losses were not the result of Martin Midstream's Marine Transportation loss performance, but were the result of the entire global marine industry loss performance. This was a onetime charge hitting the fourth quarter income statement. Our second strongest cash flow generator in the fourth quarter was our Terminalling and Storage segment, which had adjusted EBITDA of $9 million, which was the same as our fourth quarter guidance. Overall in this segment, our revenue slightly missed forecast by 3% primarily due to reduced throughput volumes, which were offset by a 5% reduction in operating expenses from lower utility costs when compared to guidance. Now, I would like to discuss the performance of our Sulfur Services segment, which was our third largest cash flow generator in the fourth quarter. In this segment, we had adjusted EBITDA of $7.4 million compared to guidance of $6 million. Our fertilizer group had adjusted EBITDA of $3.9 million compared to guidance of $3 million. We have stronger fourth quarter sales compared to forecast for both liquid fertilizer and degradable sulfur products. This positive sales performance compared to forecast was partially offset by reduced ammonium sulfate sales in the fourth quarter, which we believe are being delayed to the first quarter. The pure sulfur side of our Sulfur Services segment had adjusted EBITDA of $3.6 million compared to guidance of $3 million. We experienced very strong sulfur production from our refinery suppliers as total sulfur volume received was 17% greater than our fourth quarter forecast, allowing this business line to exceed its financial forecast for the quarter. Finally, I would like to discuss the fourth quarter performance of our Specialty Products segment. In this segment, we had adjusted EBITDA of $4.9 million compared to guidance of $4.9 million. In this segment, we had strength in our grease business line, offset by a slight underperformance in our packaged lubricant line of business. To summarize our fourth quarter performance, we exceeded revised guidance by $2.3 million. The bulk of our outperformance came from our land transportation business and our Sulfur Services segment, partially offset by the one-time insurance charge in our marine transportation business. Now I would like to turn the call back over to Sharon to discuss our 2024 guidance, along with our balance sheet and capital resources.

Thank you, Bob. As of December 31, 2023, the partnership had total long-term debt outstanding of $442.5 million, compared to $516.1 million on December 31, 2022, a $73.6 million reduction year-over-year. Of this balance, $42.5 million was drawn under our $175 million credit facility, leaving us with $109 million in availability under the facility after consideration of outstanding letters of credit and a slight constraint due to our leverage ratio covenant. For the last few years, the partnership has focused on strengthening the balance sheet through debt reduction, using free cash flow and divesting non-core assets in order to reach our targeted leverage ratio of 3.75x or lower. As Bob spoke to earlier, after adjusting for losses related to the exit of the butane optimization business, we met that goal as our bank-compliant adjusted leverage was 3.75x as of December 31. However, we know we still have work to do to ensure that we remain at or below that target on a sustainable basis, and that knowledge will continue to guide our decisions regarding capital allocation. Also, at December 31, our senior leverage was 0.36x and our interest coverage was 2.19x. At year-end, the partnership was in compliance with all covenants, debt or otherwise, and is forecasted to remain so. Moving on to capital expenditures. Total CapEx for the quarter was $12.1 million, of which $4.9 million was gross, including $3.7 million related to the DSM Semichem joint venture, also referred to as the ELSA project. Maintenance CapEx for the quarter was $7.2 million, which includes $2.5 million in turnaround costs at our fertilizer plant. Total CapEx for the year was $40.1 million, including $11 million for growth, of which $8.3 million was related to the ELSA project and $29.1 million was maintenance CapEx, including a total of $4.8 million for turnaround costs at our fertilizer plant. For the quarter, distributable cash flow was $8.6 million and adjusted free cash flow was $3.7 million, bringing distributable cash flow for the year to $32.8 million and adjusted free cash flow to $21.7 million. Both of those numbers presented after adjusting for losses associated with the butane optimization business. Now I'd like to walk through our guidance for 2024, which is on Page 5 of the presentation attached to our earnings press release yesterday afternoon and can also be found on our website. The partnership is forecasting approximately $116.1 million in adjusted EBITDA for 2024. Of the total, 71% is provided by fixed fee contracts with 29% being margin-based. Now let's look at each segment individually. In 2024, we anticipate transportation services to generate $41.2 million of adjusted EBITDA as compared to actual results of $46.8 million in 2023. While we anticipate the Marine Group to continue to benefit from the higher day rate environment we've experienced this past year, the Land Group will see reduced EBITDA from higher equipment lease expense offset somewhat by lower repairs and maintenance expense. The forecast for adjusted EBITDA in the Terminalling & Storage segment is $37.7 million, which is an improvement of $1.8 million from 2023's actual results. The businesses in this segment are fee-based with some contract escalators that along with anticipated reductions in operational expenses should improve results year-over-year. The Sulfur Services segment, adjusted EBITDA is projected to be $29.7 million in 2024, compared to 2023's results of $28.1 million. And while the pure sulfur side looks to remain relatively flat, we are projecting the Fertilizer business will experience higher margins, slightly offset by decreased sales volumes. And new to the Sulfur Services segment this year is approximately $835,000 of EBITDA, forecasted to begin in the fourth quarter for reservation fees associated with the ELSA project. Lastly the Specialty Products segment is forecasted to generate $22.7 million in adjusted EBITDA. The businesses within this segment are projected to remain relatively stable, as compared to 2023's actual results of $22.8 million. For 2024 we are forecasting growth capital expenditures of approximately $17.4 million, with $10.4 million for the Oleum Tower expansion at Plainview which is part of the capital spend relating to the ELSA project. Also included in the growth number is $6.5 million for our cash contribution related to the partnership's 10% ownership, in that joint venture. Maintenance capital is anticipated to be approximately $32 million for the year, which is above average for the partnership. We do have some larger expenditures forecasted, including $8.1 million for regulatory inspections related to our Marine Equipment; $4 million in Turnaround Costs at our Fertilizer Plant where 50% of that is at our Sulfuric Acid Plant in Plainview and $4.8 million for the Smackover Refinery turnaround which occurs every two years. Finally for full year 2024, we anticipate distributable cash flow to be $30.4 million and free cash flow of $13.3 million. With that, I will turn it back to the operator for Q&A.

Thank you. [Operator Instructions] We'll go first to Kyle May at Sidoti & Company.

Hi. Good morning, everyone.

Good morning.

Good morning.

Good morning.

Maybe starting with the Terminalling & Storage segment, you mentioned that volumes were lower in the fourth quarter. Just wondering if maybe you can provide some context of what happened in 4Q and then, how you're thinking about those volumes in 1Q and the remainder of 2024?

Yeah. This is Randy. Kyle, thank you for the question, specifically to the terminals most of the shortfall in the fourth quarter -- as a matter of fact all the shortfall in the fourth quarter came around the shore-based terminals, where we had really low diesel sales volumes in the month of October and November. In the month of December and what we've seen through the first 45 days of 2024, those sales have improved significantly. And we expect that, improvement in that business to stay because we have agreed to a new contract beginning in January 1, 2024 where we do have minimum volume commitments that we didn't have in 2023. So, yes, we expect that to be -- that business will be stable going into 2024.

Great. That's very helpful. And then maybe a question for Sharon. As we're thinking about the CapEx in 2024, I was wondering if maybe you could kind of help us out with the cadence. Because I know you've got the Oleum Tower and then you've got the $6.5 million contribution. So how should we think about that kind of through the course of the year?

Yes. The $10.4 million we should spend in the first and second quarters of this year. And the $6.5 million will be spent in the second quarter -- actually towards the first of the second quarter.

Okay. Great. That's helpful. And – sorry,

Sorry, this is Randy. I'll throw in on that that the $6.5 million is contingent on the completion of the DSM joint venture and that's the ELSA plant itself. And that's projected to be done in the second quarter but that's something Martin doesn't really have control of. And to the extent that slips that $6.5 million commitment slips also.

Okay. Got it. That makes sense. And on the DSM Semichem, maybe can you give us a little bit more insight into the progression of that project? Because you do have the ELSA contribution showing in the fourth quarter – excuse me, in your guidance, but just maybe how we think about that going forward?

Yes. So the fourth quarter the EBITDA contribution you see around that is due to the completion of the Martin capital commitments to build the Oleum Tower and everything we've committed to the project. And so to the extent we get that done in the second quarter which we're expecting to those payments to us begin no later than the fourth quarter. And so that's why we have that pinned in the 4Q. So that's really for the reservation fee that we have -- will receive from DSM. Okay? And then just to start paying it down the line then the rest of the EBITDA contribution we expect primarily from the DSM joint venture will begin when actual sales begin. We do anticipate sales in the 4Q, but a very small amount because most of our intended customers are delaying their projects. And so those sales won't begin until those projects actually start securing their raw materials, which should be into 2025.

Okay. Great. Appreciate the color this morning. I will jump back in the queue.

Thank you, Kyle.

We'll go next to Selman Akyol at Stifel.

Thank you. Good morning. So just following up on ELSA and DSM. So sales start in the fourth quarter and then roll forward into 2025. You're getting paid for reservation. Is there any I guess sort of where you would owe them services in lieu of the reservation fee? Or should we kind of think of this as a steady $1 million run rate as we enter into 2025?

Can you expand your question a little bit more? I had a tough time connecting. Selman, I apologize.

Okay. Yes. No worries, no worries. So, I think you guided to like $850,000 from a reservation payment. And as we roll forward into 2025, if the reservation -- if there's no volumes associated with it is there any catch-up they get to do? So, when I think about 1Q 2025, is it still sort of a ratable reservation fee of $850,000 or is there a catch-up? Is there anything that would take you off that sort of, call it, $1 million run rate as we go further out?

Okay. Thank you. I understand clearly now. You -- when you said the $1 million, you were talking about on a quarterly basis.

Yes.

So, yes, we get a reservation fee of approximately $1 million a quarter going forward. And we have costs that offset some of that, of course. But yes, there's no catch-up. That is going forward for the term of the agreement.

Got you. And then -- and I know customers are kind of moving a little bit to the right. But at one point I thought there was some discussion of maybe could this get larger as you guys go along. Is there any of those discussions that are continuing? Or should we just sort of think about what you guys have planned right now is what we should expect over the next several years?

Yes. We haven't had any formal discussions about any expansion at that site, but we certainly have the ability from an oleum production standpoint to do that. And if you look at the fundamentals with the new plants getting built and the types of semiconductors that they're going to build, consumption of the asset we're producing, sure looks like that's poised for growth going forward. But we haven't had any significant discussions around that yet at this point in time.

Understood. And then just pivoting back to Transportation. On the marine rates, any locking up at all, or are you guys really still doing everything in the spot market there? Any one-year contracts or any discussions in and around that at all?

Yes. We've only locked up for a year length our offshore equipment those two units. The inland tows, we have 11 of those units. We have currently four on spot and seven on some sort of three to six-month contract arrangement. And that's what we anticipate going forward. We have five tows coming off of contract within the next 30 to 60 days and we anticipate renewing those at another three to six-month arrangement, but nothing longer than that.

Got it. And can you just say how pricing is going on that? Is -- do you expect it to be at a higher level in line? Any indications you can give there?

Pricing has been good. I mean two years ago and last year, it went up $2.000 a day on average. A year ago to now, it's up about $1,000 to $1,500 a day. Our spot agreements are above our contract agreements. So, I would assume the contract agreements are going to move up a little bit when those are renegotiated but they haven't been negotiated yet.

Got you. And then does your guidance also assume that? Or did you guys guide fairly conservative there?

Yes, our guidance assumes that.

Okay. And then last one for me just on the free cash flow. Sharon, if I heard everything correctly that will just be directed at debt reductions. And so hopefully, at the end of the year you're $10 million-plus a little less?

Yes. We will continue to direct free cash flow to reducing outstandings under the revolver. And we talked about what we're trying to do is to state, yes, we're at 3.75x when we consider the cadence of our capital expenditures this year, which are heavily weighted to the first half of the year, along with our interest payments on our notes. We see that by the end of the year we're still below the 3.75x, but quarter-over-quarter in 2024, we could see some lift in that leverage ratio.

And I'll make -- its Bob, an additional comment, which we really -- don't really forecast significant changes in working capital. There could be some slight variability if working capital is up or down that could impact that number to a smaller degree.

Got you. Yeah. I know you guys have been chasing that leverage ratio for a while, so congratulations on the improvement.

Thank you.

Thanks.

We'll go next to Patrick Fitzgerald at Baird.

Thanks for taking the questions. $32 million in maintenance CapEx. Could you provide a little more detail on where that's going? Yeah. So, like, if you bought some new tank trucks to replace old tank trucks, is that maintenance or is that growth or how do you think about that?

So the maintenance CapEx, and I think Sharon hit this a little bit in her comments, we have about $32 million, which is up almost 30 million this past year. We have from a marine perspective, if you take our MES equipment out of it, so you just look at our 11 two barge tows and our offshore equipment, we have 16 pieces of equipment out of our 37 or 8 going to dry dock. So we have almost 40% of our marine fleet going to dry dock this year, which is a very high number because with two barge tows, they only go up to five years. So we have a larger percentage of marine equipment going to dry dock than normal. And then the turnarounds, the refinery turnaround is an every other year event. We happen to have one in 2024. And then the turnarounds for the fertilizer plants at Plainview and ATS down in Beaumont are annual. And if you add all that up, that's 55% of the maintenance CapEx. The trucking and the new equipment there and the replacement has very little to do. We don't spend very much of the $32 million in the trucking business. Most of theirs would fall through on repairs and maintenance and just flow through the EBITDA calculation.

And this is Bob. Additional comment to that is the equipment we do buy in the trucking business is under effectively an operating lease. So it doesn't really flow through capital investment, i.e., maintenance CapEx.

Okay. Yeah, okay. No, that's helpful, color. The transportation segment. So how much of that you just talked about it with the previous question in terms of the marine, but is the -- what's the like contract length on the truck side? And is that essentially -- that would seem like the hardest segment to forecast, but maybe I'm wrong there. So, like, could you talk about how you forecast that? And like how much of that is just pure spot versus actually more contractual in nature? Thanks.

Yes. Most of the -- we do have some contracts annualized in that business for example. But most of the land transportation business is based on relationships and performance. And so, the way we forecast that and the reason you've seen it down in the last several years is because of the reinvestment that we had into building up a newer fleet of trucks and also bringing some newer trailers in, so we can provide the types of services we need to. And that has hit our operating expense. But it's -- yes, you're correct. Land transportation is probably other than fertilizer our most difficult business to forecast because it is so -- the key is it to -- the key to that business is our customers meeting our services, so their plant's operating where they anticipate them to operate and then having the shipments that they are anticipating and that we are prepared to handle.

And this is Bob again. I'll say from a macro level as far as forecasting, we run a very consistent number of miles per month or per year. And so that's the fundamental starting point in the forecast is, you estimate your mileage, you estimate your revenue per mile which has been ticking up in these inflationary times over time. So that's the fundamental beginning place, knowing our consistency with our customer base, because of our strong performance and service we provide our customers.

Thanks a lot. That’s helpful.

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

Well, thank you, Audra. I'll conclude the call with further comments on the DSM Semichem joint venture or ELSA project. As the partnership has concentrated on debt reduction and improved leverage the past few years, we have told you that our strategy for revenue and cash flow growth lies within expanding our services to current customers and creating strategic alliances around our existing core assets. The ELSA project is a result of focus on that strategy. This alliance with Samsung and Dongjin utilizes our existing assets in Plainview as a base for expansion as low capital requirements and provides an entry point into an industry poised for a decade of growth. Even with the delays in construction of our facilities due to labor and material availability, the ELSA project is an exciting growth opportunity for the partnership and our investors. Thanks for joining the call this morning. We look forward to speaking with you again on the next quarterly investor call. Thank you.