Good morning, ladies and gentlemen and welcome to the Martin Midstream Partners Third Quarter 2018 Earnings Conference Call. [Operator Instructions]. As a reminder, this call will be recorded. I would now like to introduce your host for today's conference, Ms. Sharon Taylor, Head of Investor Relations. You may begin..

Thank you, Catherine and good morning. In the room with me today is Ruben Martin, our CEO; Bob Bondurant, our CFO; Chris Booth, General counsel; and Michael Newton, Director of Strategic Development. Before we get started with the financial and operational results for the third quarter, I need to make this disclaimer.

Certain statements made during this conference call may be forward-looking statements relating to financial forecast, future performance and our ability to make distributions to unit holders.

We report our financial results in accordance with generally accepted accounting principles and use certain non-GAAP financial measures within the meanings of the SEC Regulation G such as distributable cash flow, DCF and earnings before interest taxes, depreciation and amortization or EBITDA and also adjusted EBITDA.

We use these measures because we believe it provides users of our financial information with meaningful comparisons between current results and prior reported results and it can be a meaningful measure of the partnerships to cash available to pay distributions.

We also included in our press release issued yesterday a reconciliation of EBITDA, adjusted EBITDA, distributable cash flow and quarterly adjusted EBITDA guidance to the most compatible GAAP financial measure.

Our earnings press release is available at our website, martinmidstream.com and further in the press release is the link to slide deck that will provide further details of the announced Martin Transport acquisition. Now I'll turn it over to Bob Bondurant, our CFO..

Thank you, Sharon. First, I would like to discuss our recently announced acquisition of Martin Transport from our general partner and our reasoning behind this transaction.

As we thought about our investment in West Texas LPG and it's significant demand for growth capital, combined with our current elevated cost to capital, we decide to sell our ownership interest in West Texas LPG in order to deleverage our balance sheet.

We accomplished this by selling a trailing 12-month cash flow of $5.9 million from West Texas LPG for $195 million. This put us in a much better leverage position, but it basically eliminated any significant growth potential for our company.

So we found ourselves in a position of needing to redeploy capital at a good casual multiple in a business we understand well that was also strategic fit with our existing businesses and moves us toward our goal becoming a more refinery services focused company. The Martin Transport acquisition fit all the requirements.

Strategically, this is a business we have been in over 40 years, so we have great relationships with customers, understand their needs and in some cases are integrated in their operations.

This acquisition also supports our continued emphasis on refinery services and lengthens the value chain of our other businesses including sulfur, butane and propane to ensure we continue to serve our customers needs during the current and future tight supply of trucking services.

Including MMLP and our general partner, our top 10 customers, of which a significant portion of our investment grade, make up 75% of revenues. So we have a strong but diversified customer base. MMLP was 22% of Martin Transport revenue in 2017 and our general partner accounted for 7%.

As far as Martin Transport's growth profile goes, we see growth in cash flow in this business primarily driven by ongoing rate increases caused by a very tight tank truck market. Additionally, we can grow its cash flow by increasing our driver cap, which has increased 7% over the last 6 months to 466 drivers.

The whole industry is experiencing a driver shortage, and many have a lack of equipment with new truck lead times of over 9 months. However, we recapitalized the business in 2012 through 2016 and we'll reap the benefits over the next few years with our low mileage fleet of trucks and trailers.

Also, on a macro level, we see the new marine fuel spread known as IMO 2020 leading to increased [indiscernible] of refinery intermediate products moving from low complexity refineries to higher complexity refineries. We see increased trucking demand from this change as these new products will not likely be moved by pipeline.

We also believe that the start of a new ethane crackers and other chemical units should lead to increased trucking demand for products that can't economically be moved by pipeline or rail. We're very bullish on this acquisition at such an attractive less than 6x multiple, is strategic fit and its organic growth profile.

Over time, we believe this addition will help us improve our distributable cash flow coverage and also either continue to delever the partnership or reinvest excess cash flow and low multiple organic growth projects. Now I'd like to discuss our third quarter performance compared to third quarter guidance.

For the third quarter, we had adjusted EBITDA of $25.4 million compared to original guidance of $32.5 million. Guidance included distributions from West Texas LPG of $2.5 million, which, of course, was sold in July. So our adjusted guidance for the third quarter excluding West Texas LPG was $30 million, creating a guidance miss of $4.6 million.

The miss in adjusted EBITDA compared to adjusted guidance of $30 million was primarily in our fertilizer business. We had small misses in our Natural Gas Services business and our terming business all set by positive performance in our Marine Transportation business.

Let me begin this operating performance discussion with our Sulfur Services segment, primarily our fertilizer business which missed forecast by $3.4 million. We have experienced continued increases in raw material cost, specifically in sulfur and ammonia that began to negatively impact our margins in the third quarter.

Competitive pressure, coupled with seasonally weak demand, did not allow us to increase prices in the third quarter. The third quarter is the weakest fertilizer demand quarter so there was no demand strength to help drive sales prices upward.

We are continuing to see these market conditions carry over into the fourth quarter and do not see improvement in our margins into the first quarter of 2019. Because of these market conditions and also due to longer turnaround time at one of our plants, we have reduced fertilizer EBITDA guidance in the fourth quarter by $1 million.

While, these fertilizer headwinds are impacting us in the third and fourth quarter, we are looking for stronger overall demand in 2019 as the forecasted planting of corn acreage is 93 million acres compared to 88 million acres in 2018.

This metric is a significant driver all of our fertilizer profitability at this forecasted increase in corn acreage planted will increase sulfate demand and ultimately, will improve margins on our products. Our Natural Gas Services segment missed guidance by $1.5 million.

This was primarily in our butane optimization business was primarily related to the timing of sales between the third and fourth quarter. Our third quarter actual butane volumes sold to refineries was less than forecasted as demand, which normally starts in mid- to late September, did not materialize until early October.

So the overall forecasted volume sales will ultimately be realized, it would just transition from third to fourth quarter and carry into the first quarter of '19. We believe our physical inventory carrying costs is positioned well and should create the cash flow projected in our guidance for the fourth quarter.

Our terminalling business missed its guidance by $0.5 million, which was all set by positive performance in our Marine Transportation segment which exceeded guidance by the same amount.

Our Inland Marine Transportation rates and utilization exceeded guidance as there continues to be tightening inter Marine Transportation business and the terming miss was primarily in our shore-based terminal business as diesel and lubricant throughput volume through the terminals that service Gulf of Mexico Drilling [indiscernible] was less than forecasted.

Looking for 2019, we believe our Marine Transportation business will continue to improve, especially overall utilization since we had significant portion of our fleet in dry dock the first half of 2018 and we will not -- we will have only minimal drydockings in 2019.

Regarding the shore-based terminals, currently we, do not see a drilling increase in the Gulf of Mexico but we are receiving indications that there may be more marginal activity in 2019 compared to 2018, which would improve this business line.

As we move toward the completion of 2018, we have modified our guidance to reduce fertilizer income by $1 million in the fourth quarter, removed distributions from West Texas LPG since we sold it in the third quarter and show a slight improvement of $200,000 in our Marine Transportation segment.

Based on these adjustments, combined with strong performance in Q1, all set by weaker performance in Q2 and Q3, we are forecasting 2018 DCF coverage of 0.9x, a shortfall $7.8 million to our original guidance of onetime in 2018.

Although we have had up and downs across different business lines in 2018 within our 4 segments, the entire project DCF miss really comes down to the performance in our fertilizer business.

As most of you will recall I can recall, we had a onetime $3.9 million inventory write-down in our bulk ammonium sulfate inventory during the second quarter as we upgraded to a more sophisticated 3D measurement process with a numerous of dry bulk inventory.

These measurements are now being performed by an independent third party company that specializes in measuring dry bulk inventory. Combining this onetime adjustment with reduced fertilizer margins in the second half of the year accounts for an overall forecasted 2018 DCF miss of $7.8 million.

Now looking towards 2019, there should be no more significant fertilizer inventory adjustments and there should be improved fertilizer margins based on increased sales prices to cover rising raw material costs, coupled with the increasing demand for fertilizer.

Supporting this thesis is the recent strength in equity prices for pure play public fertilizer companies as their equity prices have risen approximately 50% on average over the last year. Now I would like to turn the call over to Sharon to discuss our balance sheet liquidity and leverage..

Thanks, Bob. Let's start with the normal walk through of the debt components of our balance sheet tying in our bank ratios at quarter end. We'll then discuss the capital spending during the third quarter and revised full year 2018 capital spending estimate as it pertains to our leverage ratios and guidance.

And lastly, we'll touch on some matrix around the acquisition of Martin Transport Inc. On September 30, 2018, the partnership's balance sheet reflected total long-term funded debt of approximately $699 million.

Our balance sheet funded debt is shown before unamortized debt issuance and unamortized issuance premiums as actual funded debt outstanding was $704 million.

Reconciling this amount at quarter end, our revolving credit facility balance was $330 million and the notional number of senior unsecured notes was $374 million, thus our total available liquidity on September 30, was $334 million based on our $664 million revolving credit facility.

For the quarter ended September 30, 2018, our bank compliant leverage ratios, defined as senior secured indebtedness to adjusted EBITDA and total indebtedness to adjusted EBITDA, were 2.25x and 4.29x, respectively. Our total debt ratio is shown with adjustments from the working capital carve out sublimit.

This sublimit allows us to exclude certain debt directly attributed to our seasonal NGL inventory build. Yes, the volumes are either forward sold or hedged from our total debt-to-EBITDA calculation. At September 30, 2018, the actual calculated debt related to our inventory build was $74 million.

Accordingly, we excluded that amount from our total debt when calculating our total debt-to-EBITDA ratio. Without this carve out, our total debt-to-adjusted EBITDA would be 4.8x, which is still well within our covenant of 5.25x. Our bank compliant interest coverage ratio as defined by adjusted EBITDA to consolidated interest expense was 2.9x.

Looking at the balance sheet. Total debt-to-total capitalization on September 30, was 71%. In all, on September 30, the partnership was in full compliance with all covenants, banking or otherwise. Now let's focus on capitalized spending during the third quarter and how that projects for the rest of 2018.

First, with respect to growth capital expenditures. We spent approximately $2 million during the third quarter. Total growth capital expenditures through 3 quarters have been approximately $12 million, of which around $6 million was allocated to marine equipment.

For the remainder of 2018, we anticipate spending an additional $1 million on growth CapEx. Switching to maintenance capital expenditures. During the third quarter, we spent approximately $6 million on maintenance CapEx, bringing the total for the year to roughly $17 million.

Through 3 quarters, we trail our forecasted maintenance CapEx level due to both lower project cost and timing related to those projects. You may recall, we revised our full year maintenance capital forecast from approximately $29 million down to approximately $24 million on last quarter's call.

We are again revising our full year maintenance CapEx forecast down from that $24 million to approximately $21 million, or around an $8 million reduction for the full year of 2018. Now turning to Martin Transport.

The MCI acquisition is forecasted to contribute additional EBITDA of approximately $23.6 million in 2019, while only adding roughly $1.5 million of maintenance CapEx. And while at this time, we are only beginning our budget process, our base case assumptions forecast coverage of 1.21x and leverage of 4.68x at year-end 2019.

Further, that leverage number is prior to the working capital supplement carve out, which will reduce the final leverage number. And lastly, due to the amount of chemicals that MPI transports, we are keeping the current C Corp. structure at 35% of its income is nonqualifying.

The complexity and cost of the administrative burden, if we did not keep the seaport structure, would be greater than the tax leakage of approximately $2.4 million over the next 4 years. And it should be noted that any dividends flowing from MTI to MMLP are considered 100% qualifying.

Okay, Catherine, that concludes our prepared remarks this morning, and we would now like to open the lines for Q&A. Thank you..

[Operator Instructions]. And our first question comes from Selman Akyol with Stifel. Your line is open..

Thank you. So good morning and just want to focus on the transportation drop down, the transport drop down. Can you just talk about, and I appreciate your customer you talked about, the partnership and you talked about MMRC as well, but can you talk about who else our customers there and what does the contracts look like..

Well, we're probably not going to name the customers but they're large integrated energy companies, investment grade and large chemical companies that are investment grade. The term of the contract are typically -- go ahead, Sharon..

They're typically, at this point, we've been running this business for 40-some odd years, so we are integrated within our company's supply chain, our customers' supply chain. So well they're not long term 12, 18 months contracts, there are customers we've been doing business with for 10, 20, 30 years.

So the contracts are mostly 30-, 60-, 90-day rollovers, but we believe due to the amount of time we've been with these customers 10, 20, 30 years, we are not in any peril of losing any of those contracts..

And some of our contracts, those are the majority, but we do have some assemblies major integrated for specific line hauls that are 1 to 2 years and, for example, we probably we're the largest companies in the country, we just think a 3-year deal that has price escalators a significant rate increases over the next 3 years.

So it is a mix but the key thing is we are logistics -- we solve logistic problems for these primarily by products we think of refineries and then specific specialized chemicals for the chemical companies..

That is a lot of our products that we haul are not commodity type products that are cyclical with the crude oil prices and those type of things. There's a lot of different chemicals, hard to handle chemicals that have to kept at 200-plus degrees, some has to be kept cold. It's so a lot of different products.

But if you want to know who the customers are just look at every refinery on the Gulf Coast..

Okay.

And then in terms of the ramp, I know you said that most was going to come from price increases, but is there any additional capital that you'll have to spend on this business when you look out over the next several years?.

So to the earlier point when we talked recapitalizing the business in '12 through '16, we really built up our fleet. Significantly, there was a bullish run in the trucking business primarily driven by crude oil transportation and as pipeline got built out, the demand decreased. So we actually have excess capacity right now of about 60 to 70 trucks.

So we have a long time, we believe, before we have to start reinvesting capital. Matter fact or internal model that drove the drop down that the conference committee, they hired an investment banker to review, we really don't see any new growth capital having to be spent until 2022..

Got you.

And then is this going to be reported as a separate segment, I presume?.

So what we're going to do, we're going to have -- we're going to combine Marine Transportation with truck transportation, we have a transportation segment. But the data, the guidance, et cetera will be broken out so you'll be able to see how both groups are performing within the transportation segment..

Okay.

And then just for modeling purposes, can we assume a January 1 close on this?.

Definitely. It's going to be in my closing comment..

Okay. And then just can you say what the EBITDA run rate was in 3Q so we can kind of base some off of that..

Yes..

I'm sorry, [indiscernible] the page..

Yes, I don't have the data in front of me. But I would say, if you model -- we would disclose $23.6 million next year.

You're talking about transport, right?.

Correct..

Yes.

The rate between the fourth quarter from next year?.

Yes. We're going up.

So this quarter -- you're asking about 2018?.

Well, 2019 is your projection, so I'm just kind of trying to wonder what the quarterly run rate should look like and I assume there's some build throughout the year, but....

Yes, we're going to look at -- Selman, we're going to look that up and we'll take further questions and when we get that answer, we'll comment here..

Our next question comes from Mike Gyure with Janney. Your line is open..

Yes. Can you talk a little bit within your spending guidance kind of where you're thinking of spending dollars, I guess, the remainder of the year on the growth side and then maybe can you talk a little bit on your Cardinal gas storage business, I guess, what you're seeing there as far as trends related to the margins..

Well, the growth CapEx for the fourth quarter is only $1 million and it's a slight investment in the terming business..

Yes..

Nothing significant though. And as far as Cardinal gas storage, we are not saying, really any rate growth in the near term. And because of that we're terming up as and we had a big contract rollover in July at peraveal [ph]. So those higher price -- Pricing rolled off effective July 1.

And because of that, we reinvest -- our repricing of commercial contracts was lower. We're only doing probably, well generally 1-year rollover contracts because we're not seeing increased pricing. It just is not there. I think the winter, summer spreads are just not allowing it to increase. Ruben, you got any more comment....

I guess, the forward curve, it doesn't allow, it may live on that. But we do expect, hopefully, in the future, that the volatility will increase due to exports but we have not seen that yet in the marketplace. So we're settled down.

We modeled in all of the new rates and everything and we fully expect -- we have a very good projections on carve on exactly where it's going based on today's right. So if there's any rate increases that are significant at all, it goes straight to the bottom line at Cardinal..

Our next question comes from TJ Schultz with RBC Capital Markets. Your line is open..

Great. Just one clarification just trying to understand the MTI cash flow ramp, what you pointed to over the next year or two is driven by these rate increases primarily.

But when the opportunity that you pointed out to capitalize on IMO 2020 and the ethane crackers be additionally upside and you just get there by utilizing those 60 to 70 trucks that you have..

That is correct. And in addition -- that is correct. In addition to the rate increases and hopefully increase in driver count that it can absorb those excess truck. We are -- we have some crack lease expense that is rolling off.

It's rolling off at the end of '18 and throughout '19 and we're going to -- because of the low mileage trucks, we're not going to replace markets into 2022. So this big chunk of lease expense is coming off as well.

So it's an easily -- we put the cash flow out for years and a lot of that increase is driven by the fact lease expensive dropping off as it will buy out the truck leases of a small amount and run them for another 3 or 4 years..

The drivers is [indiscernible]..

Yes, and that should be noted in our forecasted numbers for we kept our driver count flat when we're doing our projections and we kept our miles flat. So the only increase that we put in there was a rate increase. So we can ramp up drivers for our excess truck capacity, that will just add to those numbers..

The whole business model of that is changed from the standpoint of its not where you're out searching for business and finding to get new business that I grew up with and that business, it's all about truck drivers.

And so we have full time recruiters all over the country that are constantly attracting people with this, we got good benefits and good things that the drivers can depend on it. And of course, a lot of our stuff is local. You don't have to -- you're not gone from home for days on end.

so we've managed to increase our driver count pretty good look 6, 7 full time recruiters that all they do that and we have our own training -- in-house training that we have maybe 15 drivers right now in training.

But for the purposes of the model, we kept the drivers flat and did not increase it, although I believe we'll be able to force out some increases here pretty soon but it's all about truck drivers now..

And I'm going to give a couple other metrics. On the lease expense side, we have -- we are dropping off $5.8 million of lease expense in 2019 and in 2020, we're dropping off another $2 million of lease expense. So that's a big contributor to the cash increase and it is the rate increases and we'll have upside as Ruben said, with driver count.

And then back to Selman, your earlier question of quarterly growth. In the fourth quarter, we're at $5.7 million, second quarter and third quarter $5.9 million of EBITDA going to $6.1 million in the fourth quarter..

But he was asking about '18..

No, he's asking about '19..

Okay, that's helpful. Just one more on the distribution, I guess. You previously kind of indicated the MRMC capital structure is somewhat dependent on distributions from the MLP and keeping those impact, obviously.

Just any change to MRMC after the proceeds from MTI and just how do you envision that GPLP structure relationship to change if at all, moving forward?.

It will not change going forward. We are still dependent. We're a big shareholder -- approximately 16 -- approximately 16% of then units still held at the general partner's account and we don't see anything changing as far as the $2 distribution..

And our next question comes from Kyle May with Capital One. Your line is open..

Good morning. So you've talked about focusing on your core business of downstream and refinery service services.

Are there any other opportunities like the trucking acquisition that are out there that fit within the scope of your core business?.

As far as on the acquisition side, we haven't identify anything. This might give us an opportunity now that we have a trucking business in there to roll up some if the act but we're not -- because of our cost to call capital, we're not going to do anything crazy as far as paying up pricing.

But it would be kind of maybe some strategic growth where, it really gives us a different platform to grow. And as far as other growth, it's got to be organic projects within our terming business, primarily and our NGL business as well, if we can do some things right around our butane optimization business..

Got it. And so you also talked about the outlook for the fertilizer business improving next year, really based on demand.

As we're looking at kind of triangulating our projections with the overview that you've provided from '19 to '22, are there any other aspects of the business that we should think about growing or is the overall outlook more stable or flat for the next couple of years?.

I think as you big picture macro look at it, our businesses, I would, tend to mild or stable, maybe slight a slight increase but the real growth coming out now for Martin Transport..

[Operator Instructions]. And we have a question from Lin Shen with Hite. Your line is open..

Good morning and thanks for taking my question. So all for fertilizer business, can you talk a little bit about that why, for this year, you won't be able to pass the cost to their -- to the price but next year, you're saying -- you should be able to do it..

So prior to the -- sulfur prices have been rising really strong midyear and through the third quarter and ammonia as well. Well, there's nobody out -- so you're buying -- you're selling little pieces because the demand is so slow. There's no strength to demand to raise prices, so you have everybody still producing.

And so if you think about like this there's kind of what in the market place in these weaker seasonal quarters and some of our competition is not raising prices. That will happen when demand picks up, it happened 2 years ago, we were kind of in the same situation.

And going out of the fourth -- in the first quarter when the fertilizer demand kicks in and you'll have this flooded demand and the supply that starts to get tight, prices will rise. And again, I get back to the pure play pure larger companies, that reprices there, everybody is bullish for rising prices. You have to pass it through.

The market can't sustain itself at these levels. It's just more of a timing between the raw materials cost rising during weaker demand periods versus stronger demand periods. Again, a function of seasonality. I hope that long winded explanation answered your question..

And I'm showing no further questions in the queue. I'd like to turn the call back to Mr. Bob Bondurant for any closing comments..

Thanks, Catherine. So to summarize, we're going to fall short of '18 guidance in DCF coverage of 1x primarily due to the performance in our fertilizer business.

Although we have not completed our 2019 budgeting process, we feel we should have achieved 1.2x DCF coverage due to our announced Martin Transport acquisition that close -- should close effective January 1, improve fertilizer margins, improve Marine Transportation outlook and reduce overall maintenance capital expenditures as we will not have the level of marine dry dockings or the record regulatory capital expenditures at the refinery when compared to 2018.

I know [indiscernible] price performance this year has been a disappointment, however, we believe our outlook is much brighter considering where are DCF coverage is heading, combined with a significantly reduced financial leverage profile. We appreciate all of our long term equity holder sticking with us to this time of market and company transition.

We believe the outlook is brighter for MMLP as we focus on growing our cash flow and distribution coverage. Thanks, everyone..

Ladies and gentlemen, thank you for participating in today's conference. This does concludes today's program. You may all disconnect. Everyone, have a great day..