Good morning, ladies and gentlemen, and welcome to the Martin Midstream Partners Second Quarter 2020 Earnings Webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Sharon Taylor, Director of Finance and Investor Relations..

Thanks, Whitney. Good morning, everyone. I'm here with Ruben Martin, President and CEO; Bob Bondurant, CFO; and Randy Tauscher, COO. Also joining us in the room is Danny Cavin, Director of FP&A and David Cannon, Director of Financial Reporting.

As we get started, I need to 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 opinions 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.

I'll now turn the call over to Bob Bondurant.

Bob?.

Thanks, Sharon. Historically, on this call, as we walk through our quarterly performance by segment, we have compared our actual performance to guidance.

However, for this call and the remaining calls for this year, we will not be comparing actual performance to guidance as we pulled our detailed quarterly guidance by segment due to the uncertainty of COVID-19.

However, we replaced a specific quarterly guidance with an overall guidance range for the entire partnership of $95 million to $107 million for 2020, which we continue to support.

For the second quarter, our adjusted EBITDA was $23.9 million, which exceeded our internal non-public guidance as actual PADD 3 refinery utilization was greater than what we internally forecasted, benefiting our truck transportation and sulfur businesses.

Now for today's discussion, I would like to compare our second quarter performance by segment in 2020 to last year's corresponding quarter and provide some limited outlook for the third quarter. For the second quarter of 2020, we had adjusted EBITDA of $23.9 million compared to $25.1 million for the second quarter of last year.

For the first six months of 2020, we had adjusted EBITDA of $54.9 million compared to $50.8 million for the first six months of 2019. Our Sulfur Services segment was our largest cash flow provider in the second quarter as adjusted EBITDA was $10.8 million compared to $8.6 million a year-ago.

Within this segment, our fertilizer business experienced minimal impact from COVID-19 and had adjusted EBITDA of $6.8 million in the second quarter compared to $5.7 million a year-ago. The increase this year compared to last year was primarily due to better weather conditions in 2020.

Last year, we had tremendous amounts of rain, which impacted both volume and margin. Looking forward to the third quarter, we should experience the normal seasonal cash flow decline in the fertilizer business as this is the period when farmers typically harvest their crops, causing fertilizer demand to significantly decrease.

Our pure sulfur side of the Sulfur Services segment had adjusted EBITDA of $3.9 million in the second quarter compared to $2.9 million a year-ago.

In the second quarter of last year, we experienced a casualty loss due to extreme weather at our Neches terminal, which impacted the operations of our prilled sulfur ship-loader and kept it out of service from May of 2019 and to February of this year. This negatively impacted our sulfur operations last year compared to normal operations this quarter.

However, we did experience a degree of impact from COVID-19 as PADD 3 refinery utilization was 76% in the second quarter compared to 93% last year. This negatively impacted total sulfur volume handled as refinery production of sulfur was less due to reduced utilization.

Looking forward to the third quarter, PADD 3 utilization has been approximately 81% so far in July, which is greater than the second quarter average of 76%.

At this level of refinery utilization and corresponding sulfur production holds, we believe our financial performance in the pure sulfur side of the Sulfur Services segment should at least be similar to the second quarter. Our next largest contributor to cash flow in the second quarter was our Terminalling segment.

This segment had adjusted EBITDA of $10.6 million in the second quarter of 2020 compared to $12.3 million a year-ago, a decline of $1.7 million. $1 million of this decline was in our Martin Lubricants and Grease business, and $800,000 of the decline was in the fee-based side of the Terminalling business, primarily at our Smackover Refinery.

Because of COVID-19, we anticipated a decline in cash flow on our Packaged Lubricant and Grease business due to decreased demand from the oilfield and from commercial construction, and this is exactly what happened.

Also, because sales prices declined as a result of overall reduced demand, we realized smaller than normal margins in our Grease business due to the selling of higher cost inventory compared to the new sales price environment. However, we did see a significant strengthening of cash flow in this business in June compared to April and May.

So we believe the outlook for packaged lubricant and grease is continuing to improve. Regarding the reduced cash flow of the Smackover lubricant refinery relative to last year, the decline in cash flow was anticipated due to the repricing of the refinery processing and transportation fees, which were effective at the beginning of the year.

Now looking towards the third quarter, since the fee-based portion of our Terminalling business is primarily supported by minimum volume contracts, there has been minimal cash flow impact from COVID-19 and we anticipate the same performance going forward.

Additionally, the partnership has just signed a long-term contract to store crude oil at a previously idle tank in our Tampa terminal. We will be making certain capital upgrades to the tank, but expect it to be placed in service in the fourth quarter.

Our third largest contributor to cash in the second quarter was our Transportation Services segment, which had adjusted EBITDA of $4.9 million in the second quarter of 2020 compared to $8.7 million a year-ago, a decline of $3.8 million. This decline was not unexpected due to COVID-19.

In April, when we adjusted our overall guidance for 2020, we communicated to the market that both land and marine transportation would be impacted by COVID-19 due to reduced refinery utilization in PADD 3. This expectation of reduced cash flow from this segment certainly came to pass during the second quarter.

In our Land Transportation business, we had adjusted EBITDA of $3.3 million in the second quarter compared to $5.1 million a year-ago. This was primarily a result of reduced demand for land transportation services due to the economic slowdown caused by COVID-19.

Our mileage in the second quarter of 2020 was down 23% compared to our mileage as the previous year. A significant majority of this reduced mileage occurred in April and May as we saw June mileage only down 12% from the previous June, so the business trend is improving.

Looking towards the third quarter, our cash flow will still primarily be a function of PADD 3 refinery utilization in addition to economic expansion. So far in July, average refinery utilization is 5% higher than the average for the second quarter.

Our Marine Transportation business had adjusted EBITDA of $1.6 million in the second quarter compared to $3.6 million a year-ago. Similar to land transportation, our Marine Transportation group is primarily dependent on refinery utilization, which was significantly lower in the second quarter this year.

As a result, our barge utilization declined 12% in the inland side of the business. Additionally, the one offshore vessel we operate was recontracted at a reduced day rate at the beginning of the year. As a result, our offshore cash flow was down from the previous year in addition to the inland cash flow decline caused by COVID-19.

Looking towards the third quarter, we continue to see weakness in marine transportation utilization. Based on this weaker near-term outlook, we plan to accelerate the remaining four regulatory required barge dry dockings from the fourth quarter into the third quarter.

This move will position us with maximum operating capacity in the fourth quarter, when we believe marine transportation demand could be stronger relative to the third quarter. Moving to our Natural Gas Services segment. Our adjusted EBITDA was $1.6 million in the second quarter compared to a negative $0.2 million a year-ago.

A year-ago, we experienced butane inventory write-downs, which we did not experience this year, as butane pricing has remained relatively strong due to limited supply from refineries due to decreased refinery utilization.

The second quarter is also when we are buying and storing butane supply in anticipation of selling back to refineries beginning in October as gasoline vapor pressure rules are relaxed at that time.

As a result, sales are limited in the second quarter due to minimal refinery demand, so we typically have a seasonal trough of cash flow in the second quarter. We continue to buy butane supply in the third quarter, moving into storage, so there will also be minimal cash flow from this business in the third quarter.

Now I would like to turn the call back over to Sharon to discuss early participation results of our exchange offer, our balance sheet and liquidity..

Thanks, Bob. I want to start with a discussion of the exchange and cash tender offer for our 16 notes that it's currently in the market. On July 9, the partnership announced the launch of the offer to certain investors as a means of refinancing our notes due in February of 2021.

We felt that the offer was attractive for our noteholders while still being constructed to the partnership, especially in these unprecedented times. On Friday, July 24, we announced the early participation tender amount of approximately $335.5 million and corresponding percentage of a little over 92%.

The restructuring support agreement that was negotiated between the partnership and our supporting noteholders who own 74.25% of the outstanding notes calls for 95% participation in the exchange for it to be effective. The plan and solicitation offer expire on August 6.

We fully expect to meet the required percentage threshold and settle the transaction on August 12. In connection with the exchange transaction, we entered into an amendment with our revolving credit facility lenders to, among other things, allow for the 1.5 and second lien notes that were offered in the exchange transaction.

The amendment also lowers the outstanding commitments from $400 million to $300 million, revises the total leverage, senior leverage and interest coverage covenants, and limits our ability to increase distributions until our total average is below 3.75x.

It should be noted though that the amendment is not effective in full until the exchange offer closes. I want to take a moment to thank our lending group as well as the noteholders for their support of the partnership.

Obviously, these are uncertain times and none of us knows when the virus will be contained or our economy will recover, but these groups were able to see beyond the current environment and continue their support of the partnership and the management team. Moving to our quarter-end balance sheet components.

On June 30, the partnership's balance sheet reflected approximately $545 million of both long-term and current installments of funded debt. This was a slight increase, approximately $11 million from March 31 as the second quarter begins the buying season for our butane optimization business.

The current installment amount includes our senior notes due February, 2021, which the majority as discussed earlier will be refinanced via the exchange and reclassified back-to-long-term debt on our September 30 balance sheet. Any notes not tendered in the offer will remain current until redeemed.

At quarter end, our revolving credit facility balance was $181 million and the notional amount of our senior unsecured notes was $364 million. Our total available liquidity on June 30 reduced by outstanding letters of credit of approximately $22 million with $197 million based on the current $400 million revolving credit facility.

At quarter end, our bank compliant ratios of senior secured leverage and total leverage were 1.6x and 4.76x, respectively. On June 30, we had $11.5 million of debt assigned to the working capital carve out, which is directly attributed to the seasonal NGL inventory build where the partnership has either forward sold or hedged inventory.

Accordingly, this was carved out from total debt for the total leverage calculation. And finally, our interest coverage ratio was 2.83x and all the partnership was in full compliance with all covenants at quarter end. Looking at capitalized spending in the quarter, this included $3.2 million of expansion capital.

Added to that, in 2020, we have spent approximately $2.7 million related to the Neches ship-loader replacement. That amount will be offset by insurance proceeds of $1.8 million that was received in the first quarter and $4.9 million that we expect to receive in the third quarter.

Amounts related to the ship holder are not included in our expansion CapEx guidance numbers. The new Phoenix Grease plant, which is expected to be operational in the third quarter, was the largest contributor to the growth capital spend.

And lastly, we are increasing our 2020 expansion capital guidance range by approximately $2 million, bringing the range to between $10 million and $13 million. The additional dollars are associated with updates on the tank at the Tampa terminal needed to service the long-term terminal agreement that Bob spoke to earlier.

Switching to maintenance capital. During the second quarter, we spent approximately $2.4 million for a year-to-date total of $5.5 million. And we are affirming our estimated 2020 total maintenance CapEx of between $14 million and $16 million. The partnership had distributable cash flow of $12.5 million for the quarter or 5.1x coverage.

Finally, regarding our adjusted EBITDA guidance for 2020, we are still forecasting between $95 million and $107 million. And until we see stabilization across the economy, we intend to continue giving guidance by an annual range. This concludes our prepared remarks for the morning. I will now turn the call back to the operator for Q&A.

Whitney?.

[Operator Instructions] We do have a question from Selman Akyol with Stifel..

Thank you. Good morning. I guess, just a couple of quick questions for me.

So first of all, on your Tampa Bay terminal, can you just talk about how long that agreement is? And maybe sort of what kind of cash flows you're expecting in total for that?.

Yes. The Tampa Tank lease is a five-year agreement. We're going to spend a little over $1.5 million over the next 60 to 75 days of growth CapEx. So that contract will begin generating revenue into the fourth quarter, so the EBITDA contribution for 2020 is not meaningful.

But overall, if you remember last time we spoke, we had three tanks for lease there. And we put about $1 million to $1.5 million value on that, and we captured somewhere in the ballpark of half of that on this lease..

Got it.

And then, is there still potential for leasing the other two tanks? I mean, is there any comment you can make there? Or are there discussions going on?.

The other two tanks are the smaller tanks. But there are opportunities. We don't have anything eminent at the moment..

All right. Appreciate that.

And then maybe can you just talk a little bit about more what you're seeing on, I guess, the refinery side, and how things you expect to play out kind of going into the second half of the year there?.

You're thinking about our Smackover refinery?.

Yes. .

Yes. So the refinery is running well. We are running at a slightly reduced rate, which means our gas and chemical or fuel and our chemical costs are less. So we would expect in the third and fourth quarter and outperformance at the refinery due to the low fuel cost..

Okay. Thank you very much..

Your next question is from the line of Michael Blum with Wells Fargo..

Great. Good morning, everyone. I really just had one sort of high-level strategy question. Just in regards to how you dealt decide to go ahead with the debt restructuring. Just curious your thought process on why you chose to go that route versus – and remain a public company versus taking another route, which would have taken it private? Thanks..

Michael, this is Sharon. I think that as a management team, we looked at all the opportunities to refinance our 2021 notes, both, or what I'll say short-term opportunities and longer term as you've pointed out. And as a management team and a Board of Directors, refinancing the notes and continuing as a public company was the right outcome.

I don't think that currently with the MLP structure, although we know there's challenges there with investors. That is the right route for Martin. And when you look at corporate tax rates and what it would take to convert..

I'll make an additional comment. We always believed our unit price was severely depressed because of this overhang of refinancing. That was one piece.

We believe if we can delever, we can trade those debt values to equity value and really grow the unit price over the course of the next two, three, four years, relative to what we thought we could get for today in a private transaction, we believe we were better off to stay public and grow that, delever.

And even at these lower valuations, that equity price should rise. And to the extent there's any expansion of equity valuations because the world changes over the next two or three years, we think there could be an uplift there. So we did do – I'm not going to be – I'm going to be out frank.

We did think about it, but that was our analysis and why we decided to go that route..

All right. Thanks very much. Appreciate it..

[Operator Instructions] I am showing no further questions at this time. I would now like to turn the conference back to Bob Bonderant..

Okay. Thank you, Whitney. Again, we are very pleased with the early results of our bond exchange offer, which currently has 92% approval. We are highly confident that we'll be able to execute the exchange by August 12 and not be forced to go through any prepackaged bankruptcies reprocess.

The execution of the exchange will eliminate both the bond and bank credit facility maturity issue that has been an overhang for our company over the last year. Going forward, our management team will be laser focused on reducing leverage as we retain future earnings to achieve our debt reduction goal.

This plan will position us to then be able to execute on opportunistic internal growth projects that would create cash flow at levels greater than our cost of capital. Finally, I want to publicly say thank you to both our bank group and our noteholders for supporting us through the looming debt maturity issues we have been facing.

With their combined support, we are now positioned to return to focusing on growing equity value for our current and long-term unitholders. Thanks to all for joining us today..

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect..