Calumet, Inc

Ladies and gentlemen, please stand by. Your Q2 2021 Calumet Specialty Products Partners LP Earnings Conference Call will begin momentarily. Again, please stand by for your conference will begin momentarily. Thank you. Thank you. Good day, ladies and gentlemen, and welcome to the Q2 2021 Calumet Specialty Products Partners LP Earnings Conference Call. 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. If anyone should require assistance during the conference, please press star zero on your touchtone telephone. As a reminder, this call is being recorded. I would now like to turn the conference over to your host, Mr. Brad McMurray, Vice President of Investor Relations. You may begin.

Good morning. Good morning. Thank you for joining us on today's call to discuss our second quarter results. Joining me on the call are Steve Marsh, CEO, Todd Borgman, CFO, Bruce Fleming, EVP of Montana Renewables and Corporate Development, Scott Obermeyer, EVP of Specialty Products and Solutions, and Mark Lott, EVP Performance Brands. Before we proceed, allow me to remind everyone that during this call, we may provide various forward-looking statements as defined under federal securities laws. Please refer to our press release that was issued this morning as well as our latest filings with the Securities and Exchange Commission for a list of factors that may affect our actual results and could cause them to differ from our forward-looking statements made on the call. As a reminder, you may now download the slides that will accompany the remarks made on the conference call. They can be accessed in the investor relations section of our website at www.cowumetspecialty.com. A replay of this call will also be available on the website later today. With that, I'll pass the call to Steve.

Thanks, Brad. Good morning, everybody, and thank you for joining us today. For the second quarter, the partnership generated $32.3 million of EBITDA. Specialty margins have been very good, increasing 19% over the first quarter, despite dramatic increases in input costs. Within the specialty products and solutions segment, most of our product lines have implemented six or seven price increases so far this year. Back in late 2020, Our team labeled 2021 as the year of the price increase and prepared our systems and teams for a rapid increase in our feedstock costs. We really appreciate how diligently our team has protected our margins in this environment. Sales volumes in specialty products and solutions improved over last quarter, but are still short of maximum rate given that we completed our post-turnaround inventory rebuild and also experienced an unplanned outage at our Shreveport facility in June. Performance Brands has also successfully implemented price increases with similar frequency this year. As one gets closer to the consumer, as we do in Performance Brands, price increases operate with a significantly longer lag time, and Performance Brands' second quarter is affected by this. One way to think about this lag cost effect is as a reversal of the positive price lag benefit that we accrued in the second and third quarter of 2020 when we are in a deflationary, depressed price environment. Demand in performance brands is extremely robust. And for now, we can't keep up, resulting in a record backlog. As a specialties-focused company with consumer brands, we're right in the thick of the supply chain challenges that the recovering global economy is experiencing. Performance brand second quarter shift volumes dipped versus first quarter due to the production complexity that comes with multiple shortages. And Todd will spend a few minutes sharing our supply chain perspective, challenges, and also opportunities a bit later in the call. Montana Renewables had a solid second quarter. Our Northern Rockies niche tends to manifest its advantage during the spring and summer, and this was again the case in the second quarter. Limited availability and expensive long-haul trucking in Utah and Nevada have increased the cost of resupply to our market, which has benefited us, although this has been partly offset by asphalt pricing not fully keeping up with crude's impressive rally. We also set production records both in Montana and several of our specialty products and solutions facilities during the quarter. I know there is a lot of interest in the excellent progress we're making on our renewable diesel conversion project, and so before Todd takes you deeper into segment performance, let me give you an update. June was the last time we shared an update on Montana Renewables conversion. At that point, we added feed pretreat as an additional project module and significantly raised EBITDA guidance. Since then, our estimates of the project cost and timing have not changed. We still plan to be producing renewable diesel after the plant-wide turnaround next April. As we have discussed before, de-risking the renewable diesel venture, or indeed any venture, is a key element of our operating philosophy and stewardship. This stewardship goes in three directions. The first direction is project readiness. Due to the excellent metallurgy of our existing hydrocracker and already rail-focused site logistics, the scope of work needed to complete the initial conversion is quite limited. We're holding fast to our modular step-by-step approach on the site, which simplifies execution and flattens the capex spending curve. We have decided to advance an FCC turnaround away from next April into the fall of this year in order to reduce execution complexity in 2022. We have secured a fixed-cost engineering and procurement contract for our renewable green hydrogen plant, which removes cost uncertainty from a major program element and assures us of lower carbon intensity. We've passed another internal front-end loading gate, as well as an external readiness review of our project without a change to forecasting timing, or spending. These are just examples. The core reason behind holding the line on cost and timing is the top-tier metallurgy we have at the plant already. This existing platform means we can dramatically reduce the cost and complexity of switching to renewable feedstock. Our metal is at the heart of why we believe this is arguably the best renewable diesel conversion project in North America. And as we've shown before, we have the lowest capex per barrel of any announced project. So right now, we feel good about capital stewardship. Our second stewardship element is commercial readiness, which also continues to make excellent progress. Our geographical advantage helps here as well. And we'll touch on that on the next slide, which I believe is slide four in the packet. In terms of feedstock access and logistics, We're starting up next spring using technical tallow and some soy, supported by our feedstock strategy, which is to emphasize local gathering and take advantage of our superior geographic location. Local supplies of non-soybean oils, such as camelina, canola, mustard, et cetera, offer lower carbon intensity and lower logistics costs because these temperate climate crops literally grow in our backyard. The dashed red circle on the map illustrates this. With the pretreater on deck for late 2022 commissioning, plus our hydrocracker metallurgy, we will be able to run any feedstock. Millions of acres in Montana, Alberta, and Saskatchewan either are or can produce oilseed crops. And our location within this temperate oilseed belt will make us one of the most feedstock-advantaged renewable producers in North America. While we plan to start up on technical tallow and some soy, the pre-treater then shrinks our soy dependency window to one that is quite manageable. And you can see that from a chart we put on slide 11 in the appendix of the package. When you look at the appendix slide, you'll also see that we have an opportunity to de-bottleneck our oversized hydrocracker and further expand the renewable diesel facility to over 18,000 barrels a day of throughput capacity for little capital cost. Many of you will recall that the hydrocracker was an off-the-shelf purchase and was oversized from day one, and we plan to take advantage of that. You can think about this as another exciting growth phase and opportunity for our renewable diesel business. Back to feedstocks, we've begun signing the initial supply agreements for startup, focusing on soybean oil and tallow producers close to our plant who are natural suppliers. We can get into this during Q&A if there's interest. But we strongly supported the comprehensive bipartisan Senate effort to have EPA approve the pending renewable diesel pathway application for canola. Canola is already approved in Canada, as well as being approved for biodiesel in the U.S. So we see its inclusion as inevitable. You probably haven't heard much about the canola feedstock opportunity from others. As for most of the renewable diesel projects in the U.S., canola production is far away from them. But for us, it grows right around the plant. On the marketing side, we've had strong interest in our production, particularly in the northwestern markets. Our position as the short-haul supplier to British Columbia and the PAC Northwest is readily apparent, and events of the last six months have reminded people of the risks of lengthy supply chains. We're also blessed with unique proximity to supply Alberta and Saskatchewan with renewable diesel when the rest of Canada goes to low-carbon fuels in 2023. So, while we conservatively forecast our EBITDA performance, assuming realization of the products in Los Angeles, we expect to do better than that. Indeed, our current modeling and buyer interest indicates that Canada may be our main or even possibly our entire market. Our third stewardship element is partnering. I'm happy to report that we've had tremendous interest in this project. Feedback from those who have dug in hard in the data room confirms our point of view that this is a truly exceptional value proposition and most definitely not one of the Me Too renewable diesel projects. It's also gratifying, it's always gratifying, when highly capable people go through a data room in depth and reinforce and confirm our competitive thinking. Funding for this project could be available to us from multiple sources. The field has been narrowed, and when we are ready to announce, we will announce. I'll now turn the call over to Todd to take you through our second quarter results in more depth. Todd. Thank you, Steve.

And let's turn to slide five. As Steve mentioned, we generated $32.3 million in adjusted EBITDA for the quarter. Our SPS business generated $31.8 million, Montana Renewables generated $12.8 million, and Performance Brands $7.3. As you can see in the chart, Sales volumes improved relative to the first quarter as we came out of the street port turnaround in the polar vortex. However, despite exceptional demand, sales volumes fell below pre-COVID levels for some of the reasons Steve alluded to earlier, and we'll get deeper into that in the segment discussion. The story on so many calls this quarter has been around the global supply chain challenges that are affecting businesses across the country. And on slide six, let's go into more detail on how that impacts Calumet. In our SPS business, the primary supply chain impact was around trucking and driver availability during the quarter. Members of our team at Calumet were working around the clock to find transportation solutions to keep our customers satisfied, and the situation has progressed favorably throughout the quarter. Further, as an industry, we entered the quarter with low inventory levels after the Q1 freeze. When you stack low inventories on top of the global supply chain challenges and pair it with extraordinary demand, we're seeing spectacular specialty unit margins in SPS. As we look forward in SPS, we believe our most significant challenges around logistics are behind us, and we expect demand will remain strong as customers continue to restock. Our performance brands division has experienced the supply chain phenomenon most directly. This segment has our longest and most complicated supply chain, including various raw materials that are sourced internationally. As we know, Complexity increases as businesses get closer to the consumer, and in this business, we're all the way to retail shelves. Logistics, base oils, additives, packaging, steel, bottle caps, labels, and even cardboard have presented challenges. In addition, while our diversified supplier base is a strength, when the industry supply chain is as backed up as it was in the second quarter, a broad supply base actually added more variables in scheduling complexity. Balancing all of these moving parts required a litany of inefficient short production blocks and short shipments that don't come cheaply. In fact, our team was changing the production line more than quadruple the normal amount. And with these inefficiencies, we could not keep up with the demand growth this business is seeing. We really appreciate the dedication of our production team as they balance these challenges to meet as many of our customers' needs as they possibly could. And we also thank our customers for working with us patiently and collaboratively as we spared no cost and pulled every lever we had to meet your needs. Additionally, an item of note that didn't have a big impact on the quarter, but that will impact us for the rest of the year, is the loss of the industry's largest supplier of grease, as they suffered a catastrophic plant fire in June. We've already began receiving shipments from our alternative suppliers and expect this transition to continue smoothly as we serve our growing customer base, but a higher cost of alternative supply will likely weigh in on our short-term financial performance in these product lines. Our Montana renewables segment was impacted the least of all of our segments. In fact, we've seen extremely low pad four fuel inventories as logistics constraints have raised the cost of long haul truck imports from competitors outside the region. I'll now go into our business segment results and we'll begin on slide seven for SPS. Both Steve and I have referenced the strong specialty margin environment we are experiencing. I'll reiterate what Steve mentioned earlier around pricing discipline. We've averaged a price increase per month in 2021, and the result is material margins that are higher than they were even during Q2 of last year, in a period when crude oil prices went negative. As the world supply chain issues continue to be on display, we expect to remain in a strong margin environment for longer than we would have estimated earlier in the year as our customers continue to restock. In a bit, we'll see how these SPS margin tailwinds have the opposite effect on our performance brands division. But remember, we sell seven times as many gallons of base oil in SPS as we buy in performance brands. So it's a dynamic that can be favorable for Calumet. Unfortunately, in Q2, we did not recognize normal sales volumes. Our lube and wax inventory at the end of the first quarter was essentially at bottoms, which was 170,000 barrels lower than average levels. It took a little longer than expected, but we were able to replenish our inventories to acceptable levels during the quarter, and we expect to sell what we make in Q3. We also experienced some unplanned downtime at Shreveport, and we estimate the impact of the Q2 downtime and the inventory rebuild was approximately $24 million. Last, you can see that margins for transportation fuels continue to sit at depressed levels. We are pleased to see the market trending in the right direction. But after accruing for the impact of the RVO, fuels margins remain at bottom quartile levels. Outside of Shreveport, we had strong operational performance at our specialty manufacturing plants, even setting five-year production records at our Princeton plant and our Penrico specialty oil plants. Let's turn to slide eight. Our second quarter performance brand ZBDAV, $7.8 million, was below last quarter and the second quarter of 2020. A few things we've already discussed significantly affected this business. First was the inflationary environment and subsequent upward pressure on feedstocks and other materials, which impacted our costs. While we've implemented price increases in this segment at a similar rate to SPS, there's a natural timing lag on recognizing these increases in the consumer business. And we estimate the impact of that lag to be roughly $7 million during the quarter. Steve reminded us that we experienced the opposite effect a year ago, when feedstock prices were deflating and our consumer-facing products benefited from margin expansion. In a conference earlier this year, we estimated the impact of that deflationary environment to be an $8 million benefit to last year's performance brand EBITDA, so we're clearly seeing the reverse of that now. We've talked plenty about supply chain issues, but I do want to highlight the extremely strong demand for our performance products this quarter. Unfortunately, we haven't converted all of this demand to shipments yet, as we battled through the supply chain, and we've seen a record order backlog develop. Compared to last year's second quarter, we've seen sales grow by $6.5 million, but we've also seen our sales backlog double to roughly $19 million. To put that in perspective, had we been able to ship everything that was ordered throughout the first half of the year, we estimate EBITDA would be roughly $7 million stronger than it was, and we are working diligently to reduce the backlog and deliver product to our customers effectively and efficiently. On slide nine, you can see our Montana business had a reasonably good quarter. We saw the typical season demand increase as weather improved and so did margins for light products and asphalt. Remember that asphalt pricing tends to be negotiated a few months prior and will experience a margin lag in an inflationary environment and the opposite on the way down. As I mentioned earlier, Pad 4 light product inventories are low and supportive of the crack spreads and margins we are seeing. Now I'll turn the call back over to Steve for a few final remarks before Q&A.

Hey, thank you, Todd. We've covered a lot this morning. We're very happy with the progress and the opportunity in Montana. Inventory rebuilds and the final legacy of Winter Snow Murie are behind us, and we move into a third quarter characterized by good specialties margins and the continuing slow recovery of fuels margins. The Rockies markets are showing their usual seasonal strength. Demand in performance brands keeps growing, and the team is focused on turning that record backlog into income. So with that, I'll thank you, and I'll turn it over to questions.

Ladies and gentlemen, if you have a question at this time, please press star, then the number one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Your first question comes from the line of Neil Meda with Goldman Sachs.

Hi, good morning. This is Carly on for Neil. Thanks for taking the questions. Just wanted to talk a little bit about the base oil markets where you talked about margins have been really strong and kind of you expect that strength to continue longer, you know, than you would have initially anticipated. So just wanted to get your thoughts on kind of as we move through the back half of the year, And as we go into 2022, kind of when do you see the path to those kind of normalizing?

Hey, Carly. Scott Obermeyer here. Yeah, the base oil market, as you've probably heard from others, remains at very, very strong demand, very high profit levels for the producers out there. We see that trend and that plateau, if you will, continuing through Q3. And at this point, really, even into Q4, as Production continues to ramp up and the global supply chain works to stabilize. So we see a strong forecast for the remainder of the year. Outside of that, Carly, it's hard to look too far out into 2022.

Yes, Steve, if I could add, I mean, I think that the choice of words by Scott was very good plateau there. You know, we're not expecting margins to improve from here. I mean, there are record levels already. You know, we think that they'll be good for a while, but at the margin, the U.S. is pulling base oil inputs at this point. And so we would kind of generally speaking see that as maybe a cap on margins here, but I would reiterate Scott's point of view that we think they'll be good for a ways to come as our customers are still clearly in restock mode.

Great, thank you. And then just wanted to touch on leverage and cash. You guys obviously took out a portion of the 22s during the quarter, so just wanted to get your thoughts on kind of the remaining balance there as we move towards 2022. And then on the cash side, The $35 million balance at the end of the quarter seems a bit low relative to recent quarters. So could you just maybe remind us if there's a target level that you'd look for around cash balances going forward?

Yeah, I'll take the cash first, Carly. This is Todd. Thanks for the question. We really had too much cash sitting on the balance sheet with the $100 million. So we focused on overall liquidity. We didn't think that that was a level that we needed to maintain. So we're just managing cash, managing interest costs with the move to use cash to kind of pay down the revolver.

Great, thanks. And if I could just sneak one more in. You guys talked about Great Falls and kind of the Rockies regions margins being really robust right now. Based on the timing of the FCC turnaround that you had mentioned, do you expect to be up and running to kind of capture the full 3Q kind of summer driving season strength.

Hey Carly, this is Bruce. I'll take that one. So the Rockies margins are actually at reasonably typical historical levels for this time of the year. So that's relatively strong to last year or to the winter season and the spring season. So in terms of the FCC conditions, Mini outage, that's going to be after the fall peak season.

And your next question comes from the line of Roger Reed with Wells Fargo.

Yep, thank you. Good morning. Morning, Roger. Good morning, Roger.

Just hoping to dig in first to some of the things you talked about, like the $7 million lag in the second quarter. You mentioned that that's a function of price versus feedstock costs coming in, but is that something that generally gets recaptured in a 30- to 90-day period? Does it take longer than that? And then if crude and some of these supply chain things get ironed out as we go through the back half of the year? Would you look for pricing improvements that have occurred and may still occur to ultimately lead to a little better margin environment than, say, as typical as we look at maybe year end into the first part of 2022?

Mark, would you like to take that one?

Yes, of course. Thanks for the question, Roger. So typically, yes, the price lag is in that 30 to 90-day range versus the contracts and the different channels that we operate through. So that assumption is correct. As we work through the balance of the year, there's a number of elements that play their way through into this. Obviously, there's the The unknown on the supply chain side of things would be at that intersection, as we mentioned, of supply challenges, customer and consumer needs, and then the operational efficiency piece. Assuming that the supply chain naturally starts to ease up, we would expect to see all of Margin recaptured further down the line. You've seen the record backlogs that we have, and we believe that there's upside potential in the second half of the year of playing catch up with those elements. But there's still a lot of unknown to be able to navigate as the way through. But we would expect to, right back to the start of your question, we would expect some normalization back in terms of the margins that we've enjoyed historically.

Okay.

Yeah, let me add a little bit, Roger. This is Todd. You know, earlier we heard from Scott kind of the concept of plateauing SPS margins. So as March, you know, pricing catches up to the rising feedstock prices over that 30 to 90 days, we should see, you know, and Scott's margins remain where they're at, we should see that margin impact flow all the way through, right? So you get the benefit of price increases in performance brands catching up, and then you also get the benefit of feedstock prices kind of plateauing and not continuing to increase.

That's helpful. Very clear. Changing gears a little bit to look at the renewable diesel project, I have just two questions, one of them on page 12 of the presentation where it talks about a renewable hydrogen project. Just curious what the factors are behind that. And then the other question, as we look at the various alternative feedstocks, say to soybean oil, what, as we understand in soybean oil, one of the limitations here is not so much soybeans as it is soybean processing into oil. So are you comfortable as you look at the alternatives that you mentioned that there will actually be oil processing capacity as well as farming capacity and, you know, maybe how all that fits into the supply chains.

Hey, Roger. I'll take a start at that and Steve may want to add a couple of comments. So in reverse order, yeah, there is a agricultural commodities value chain First, the farming and ranching. Remember that we're also planning to run tallow. Then the crop processing, seed crushing, and importantly, the oil pretreatment. Every renewable diesel plant in the country, without exception, has to have a pretreated feed. The question is, does the pretreater sit on your site or is it some kind of an industry service at the crop processing point. And by choosing to put our pretreater on our site, we'll be able to run anything at all. What you're seeing in the markets is mostly a distortion due to lack of pretreating capacity. It's not lack of crops.

Okay, thanks. And then the renewable hydrogen.

Yeah, so that's because... Given our site balances and the fact that we're going to continue to have a crude oil business, we've got a good opportunity to reduce our carbon intensity of our renewable diesel product further by gathering some of the other hydrocracker products and using them in our hydrogen production. So that's what we're going to do, and that's why we're doing it.

Okay, so locally sourced and everything. Yeah.

Yeah, specifically, we're going to recycle some of the molecules from the tallow and vegetable oil processing, some of the light ends, back into hydrogen production.

Okay, great. Thank you.

Your next question comes from the line of Greg Brody with Bank of America.

Good morning, everybody. Good morning, Greg.

Just sort of two topics I wanted to cover. So obviously we got to see Supreme Court ruling on small refinery exemptions. I'm curious how you think this plays out from here with respect to your liability and what we should be looking for, what you're looking for for next steps there.

Bruce, do you want to go first on that one?

Yes. Thanks, Greg, for the question. I think it's safe to say at this point that no matter what the EPA decides, somebody will sue them for it. It's difficult to see anything happening in real time. It looks like it's all on a court docket kind of a timeline. So we wouldn't care to forecast how that's going to play out. I can tell you in our case that You know, as we discuss every quarter, a RIN is not a cash obligation, and I know that financial modelers are just itching to convert that to money, but that's not how it works.

That's helpful, and I appreciate that there's a lot of unknowns. Just wanted to hear your thoughts. And just turning to... you've previously said that your plan with a JV proceeds would be to pay down the rest of the 22 and some of the 23s. Is that still the plan or has anything changed there?

No, nothing's changed there. You know, this is Todd Gregg, but as you know, the markets continue to be very favorable should we want to kind of refi our debt stack now. But, you know, looking at the horizon and kind of seeing kind of where we're at in the partner search and our positioning there. We do plan to use proceeds from that to pay down the short-term debt. Great.

That's it for me, guys. I appreciate the time.

Thanks, Greg.

Your next question comes from the line of Jason Gabelman with Cowan.

Hey, thanks for taking my questions. I appreciate all the detail on the renewable diesel project. I had a couple questions on it. Firstly, I know you previously disclosed this pretreatment unit. Can you discuss the capex cost of that pretreatment? I don't think I've seen it in previous materials. And then secondly, on the renewable diesel project, is there something that needs to happen in the market in order for, in order to catalyze the JV partner signing an agreement. I'm thinking, you know, maybe the RBO is being announced or maybe there are other kind of public market milestones that need to occur. And then thirdly, what do you think, what's the likelihood that the refinery becomes part of the joint venture? It seems like there have been a handful of, refining deals recently, so just wondering if you're thinking the non-renewable diesel part of Montana will remain 100% owned by Calumetter, be part of the joint venture. Thanks.

Hey, thanks, excuse me, Jason, for the question. Maybe if I take those in reverse order, you know, the We told our unit holders in March that we were going to go in this direction after spending about 18 months reviewing our strategic options, including these reconfiguration opportunities on the site. And the majority of the inbound calls that we got in the next 100 days were focused on renewable only. There's a lot of money available. in the U.S. economy for green projects, and this is a really good green project. So for that reason, and we're flexible in our own thinking, but to the investors it looked like a renewable-only play was preferred, so we've set it up that way. The question of whether there's some sort of a market trigger, not that I'm aware of. I'll invite Todd or Steve to think about that a little bit. You know, it's not like we're waiting on an event. We funneled this down. The first part of the funnel was sorting out whether people wanted the whole site or the renewable part, which I've just covered. The second part of the funnel was what's the security of feedstock supply look like, which we've touched on in these remarks. And Steve had a slide at the very beginning with kind of an interesting color-coded eye test, but that's important. And I would suggest some focus there is appropriate. So the addition of pretreatment followed from that, which takes me to your first question, what's it cost? That is guidance that we've actually not given at the discrete project element level. What I can tell you is that our installed capital cost per barrel is the lowest of any project that's been announced. Adding the pretreater did not change that. Remember that the pretreater brings its own revenue stream We talked about that a little bit with Roger a second ago. So given all of that, we're pretty satisfied. We're not spending a great deal of money. We're getting an excellent leverage out of these program elements. It stretches out the field activity all during next year. It's not some kind of a big bang, turn on a giant project. It's discrete small elements that are very manageable. So we're pretty excited. But all of that, is what allows us to hold the line on cost and to hold the line on timing.

Got it. Great. I appreciate all that color. And then my other question, just going back to RIN, I know you took, I think it was $48 million non-cash market-to-market charge. What's the total liability sitting at right now? And can you discuss, do you have any type of strategy if you don't get all the small refinery exemptions that you previously got in. How are you thinking about handling the potential payments that you would be required to make? Thanks.

Let me maybe start with the second part of the question and pass it back to Todd for the current balance sheet part of the question. So in terms of how this plays out, we feel like it's going to play out in slow motion no matter what happens. Whether anybody wants it to or not, there always seems to be someone showing up to try to resolve the matter in court rather than through the administrative channels. So we feel reasonably good about our relationship with the EPA in this regard, but we can't say that we don't all get dragged into a larger controversy. So with respect to our strategy and our options, yes. We talk to the EPA a lot. We talk on multiple levels and for different tactical reasons. They have several authorities. It's not only the small refinery exemption. So they've certainly got the ability to navigate all of us into a better consensus as a society, and I think they're going to find a way. I just don't want to have an opinion on how fast. Todd, you want to tackle the balance sheet part?

Yeah. You know, the number on the balance sheet, $273 million is the total. And, you know, for all of the reasons Bruce has talked about, you know, in many calls before and some of which he just referenced, this isn't a number that we expect to turn to cash. It's more than just the SRE. There are a lot of layers to this. But just to answer your question, $273 million is the number we report on our balance sheet.

Okay.

Yeah.

Yeah. Sorry. Jason, this is Steve. If I could add, I mean, I just want to reiterate what Bruce said. I mean, we maintain what we would describe as the slow motion scenario. So if you go back to before the Supreme Court ruling, we said that the Supreme Court ruling wouldn't make that much difference. It would just spark off a wave of litigation. The Supreme Court ruling went effectively in Calumet's favor. But we don't change our position. We think it's just setting off a wave, a slow-motion wave of litigation. This thing will run and run and run. It's not a cash-settled end at all. And, you know, our internal expectation is that this situation runs at least well past the point where we will be a net-ring generator.

Got it. I appreciate all the callers. Thanks, guys.

Thanks, Jason.

I am showing no further questions in the queue at this time. I would now like to turn the conference back to the presenters.

Thanks, everyone. On behalf of Calumet, the management team here, and the entire company, we appreciate your interest and your time this morning. I hope everyone has a good weekend, so thanks again.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. Have a wonderful day.

Thank you. music Thank you.

Thank you.

Good day, ladies and gentlemen, and welcome to the Q2 2021 Calumet Specialty Products Partners LP Earnings Conference Call. 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. If anyone should require assistance during the conference, please press star zero on your touchtone telephone. As a reminder, this call is being recorded. I would now like to turn the conference over to your host, Mr. Brad McMurray, Vice President of Investor Relations. You may begin.

Good morning. Thank you for joining us on today's call to discuss our second quarter results. Joining me on the call are Steve Marsh, CEO, Todd Borgman, CFO, Bruce Fleming, EVP of Montana Renewables and Corporate Development, Scott Obermeyer, EVP of Specialty Products and Solutions, and Mark Lott, EVP Performance Brands. Before we proceed, allow me to remind everyone that during this call, we may provide various forward-looking statements as defined under federal securities laws. Please refer to our press release that was issued this morning, as well as our latest filings with the Securities and Exchange Commission for a list of factors that may affect our actual results and could cause them to differ from our forward-looking statements made on the call. As a reminder, you may now download the slides that will accompany the remarks made on the conference call. They can be accessed in the investor relations section of our website at www.calumetspecialty.com. A replay of this call will also be available on the website later today. With that, I'll pass the call to Steve.

Thanks, Brad. Good morning, everybody, and thank you for joining us today. For the second quarter, the partnership generated $32.3 million of EBITDA. Specialty margins have been very good, increasing 19% over the first quarter, despite dramatic increases in input costs. Within the specialty products and solutions segment, most of our product lines have implemented six or seven price increases so far this year. Back in late 2020, our team labeled 2021 as the year of the price increase and prepared our systems and teams for a rapid increase in our feedstock costs. We really appreciate how diligently our team has protected our margins in this environment. Sales volumes in specialty products and solutions improved over last quarter, but are still short of maximum rate given that we completed our post-turnaround inventory rebuild and also experienced an unplanned outage at our Shreveport facility in June. Performance Brands has also successfully implemented price increases with similar frequency this year. As one gets closer to the consumer, as we do in Performance Brands, price increases operate with a significantly longer lag time and performance brand second quarter is affected by this. One way to think about this lag cost effect is as a reversal of the positive price lag benefit that we accrued in the second and third quarter of 2020 when we were in a deflationary depressed price environment. Demand in performance brands is extremely robust, and for now we can't keep up, resulting in a record backlog. As a specialties-focused company with consumer brands, we're right in the thick of the supply chain challenges that the recovering global economy is experiencing. Performance brands' second quarter shipped volumes dipped versus first quarter due to the production complexity that comes with multiple shortages. And Todd will spend a few minutes sharing our supply chain perspective, challenges, and also opportunities a bit later in the call. Montana renewables had a solid second quarter. Our northern Rockies niche tends to manifest its advantage during the spring and summer, and this was again the case in the second quarter. Limited availability and expensive long-haul trucking in Utah and Nevada have increased the cost of resupply to our market, which has benefited us. Although this has been partly offset by asphalt pricing not fully keeping up with crude's impressive rally. We also set production records both in Montana and several of our specialty products and solutions facilities during the quarter. I know there is a lot of interest in the excellent progress we're making on our renewable diesel conversion project. And so before Todd takes you deeper into segment performance, let me give you an update. June was the last time we shared an update on Montana Renewables conversion. At that point, we added feed pretreat as an additional project module and significantly raised EBITDA guidance. Since then, our estimates of the project cost and timing have not changed. We still plan to be producing renewable diesel after the plant-wide turnaround next April. As we have discussed before, de-risking the renewable diesel venture, or indeed any venture, is a key element of our operating philosophy and stewardship. This stewardship goes in three directions. The first direction is project readiness. Due to the excellent metallurgy of our existing hydrocracker and already rail-focused site logistics, the scope of work needed to complete the initial conversion is quite limited. We're holding fast to our modular step-by-step approach on the site, which simplifies execution and flattens the capex spending curve. We have decided to advance an FCC turnaround away from next April into the fall of this year in order to reduce execution complexity in 2022. We have secured a fixed-cost engineering and procurement contract for our renewable green hydrogen plant, which removes cost uncertainty from a major program element and assures us of lower carbon intensity. We've passed another internal front-end loading gate, as well as an external readiness review of our project without a change to forecasting timing, or spending. These are just examples. The core reason behind holding the line on cost and timing is the top-tier metallurgy we have at the plant already. This existing platform means we can dramatically reduce the cost and complexity of switching to renewable feedstock. Our metal is at the heart of why we believe this is arguably the best renewable diesel conversion project in North America. And as we've shown before, we have the lowest capex per barrel of any announced project. So right now, we feel good about capital stewardship. Our second stewardship element is commercial readiness, which also continues to make excellent progress. Our geographical advantage helps here as well, and we'll touch on that on the next slide, which I believe is slide four in the packet. In terms of feedstock access and logistics, We're starting up next spring using technical tallow and some soy, supported by our feedstock strategy, which is to emphasize local gathering and take advantage of our superior geographic location. Local supplies of non-soybean oils, such as camelina, canola, mustard, et cetera, offer lower carbon intensity and lower logistics costs because these temperate climate crops literally grow in our backyard. The dashed red circle on the map illustrates this. With the pre-treater on deck for late 2022 commissioning, plus our hydrocracker metallurgy, we will be able to run any feedstock. Millions of acres in Montana, Alberta, and Saskatchewan either are or can produce oilseed crops. And our location within this temperate oilseed belt will make us one of the most feedstock-advantaged renewable producers in North America. While we plan to start up on technical tallow and some soy, the pre-treater then shrinks our soy dependency window to one that is quite manageable. And you can see that from a chart we put on slide 11 in the appendix of the packet. When you look at the appendix slide, you'll also see that we have an opportunity to de-bottleneck our oversized hydrocracker and further expand the renewable diesel facility to over 18,000 barrels a day of throughput capacity for little capital cost. Many of you will recall that the hydrocracker was an off-the-shelf purchase and was oversized from day one, and we plan to take advantage of that. You can think about this as another exciting growth phase and opportunity for our renewable diesel business. Back to feedstocks, we've begun signing the initial supply agreements for startup, focusing on soybean oil and tallow producers close to our plant who are natural suppliers. We can get into this during Q&A if there's interest, but we strongly supported the comprehensive bipartisan Senate effort to have EPA approve the pending renewable diesel pathway application for canola. Canola is already approved in Canada as well as being approved for biodiesel in the U.S., so we see its inclusion as inevitable. You probably haven't heard much about the canola feedstock opportunity from others. As for most of the renewable diesel projects in the US, canola production is far away from them. But for us, it grows right around the plant. On the marketing side, we've had strong interest in our production, particularly in the Northwestern markets. Our position as the short haul supplier to British Columbia and the Pac Northwest is readily apparent. and events of the last six months have reminded people of the risks of lengthy supply chains. We're also blessed with unique proximity to supply Alberta and Saskatchewan with renewable diesel when the rest of Canada goes to low-carbon fuels in 2023. So, while we conservatively forecast our EBITDA performance, assuming realization of the products in Los Angeles, we expect to do better than that. Indeed, our current modeling and buyer interest indicates that Canada may be our main or even possibly our entire market. Our third stewardship element is partnering. I'm happy to report that we've had tremendous interest in this project. Feedback from those who have dug in hard in the data room confirms our point of view that this is a truly exceptional value proposition and most definitely not one of the Me Too renewable diesel projects. It's also gratifying, it's always gratifying, when highly capable people go through a data room in depth and reinforce and confirm our competitive thinking. Funding for this project could be available to us from multiple sources. The field has been narrowed, and when we are ready to announce, we will announce. I'll now turn the call over to Todd to take you through our second quarter results in more depth. Todd. Thank you, Steve.

And let's turn to slide five. As Steve mentioned, we generated $32.3 million in adjusted EBITDA for the quarter. Our SPS business generated $31.8 million, Montana Renewables generated $12.8 million, and Performance Brands $7.3. As you can see in the chart, sales volumes improved relative to the first quarter as we came out of the street turnaround in the polar vortex. However, despite exceptional demand, sales volumes fell below pre-COVID levels for some of the reasons Steve alluded to earlier, and we'll get deeper into that in the segment discussion. The story on so many calls this quarter has been around the global supply chain challenges that are affecting businesses across the country. And on slide six, let's go into more detail on how that impacts Calumet. In our SPS business, the primary supply chain impact was around trucking and driver availability during the quarter. Members of our team at Calumet were working around the clock to find transportation solutions to keep our customers satisfied, and the situation has progressed favorably throughout the quarter. Further, as an industry, we entered the quarter with low inventory levels after the Q1 freeze. When you stack low inventories on top of the global supply chain challenges and pair it with extraordinary demand, we're seeing spectacular specialty unit margins in SPS. As we look forward in SPS, We believe our most significant challenges around logistics are behind us, and we expect demand will remain strong as customers continue to restock. Our performance brands division has experienced the supply chain phenomenon most directly. This segment has our longest and most complicated supply chain, including various raw materials that are sourced internationally. As we know, complexity increases as businesses get closer to the consumer, and in this business, we're all the way to retail shelves. Logistics, base oils, additives, packaging, steel, bottle caps, labels, and even cardboard have presented challenges. In addition, while our diversified supplier base is a strength, when the industry supply chain is as backed up as it was in the second quarter, a broad supply base actually added more variables in scheduling complexity. Balancing all of these moving parts required a litany of inefficient short production blocks and short shipments that don't come cheaply. In fact, our team was changing the production line more than quadruple the normal amount. And with these inefficiencies, we could not keep up with the demand growth this business is seeing. We really appreciate the dedication of our production team as they balance these challenges to meet as many of our customers' needs as they possibly could. And we also thank our customers for working with us patiently and collaboratively as we spared no cost and pulled every lever we had to meet your needs. Additionally, an item of note that didn't have a big impact on the quarter but that will impact us for the rest of the year is the loss of the industry's largest supplier of grease as they suffered a catastrophic plant fire in June. We've already began receiving shipments from our alternative suppliers and expect this transition to continue smoothly as we serve our growing customer base, but the higher cost of alternative supply will likely weigh in on our short-term financial performance in these product lines. Our Montana renewables segment was impacted the least of all of our segments. In fact, we've seen extremely low pad four fuel inventories as logistics constraints have raised the cost of long haul truck imports from competitors outside the region. I'll now go into our business segment results and we'll begin on slide seven for SPS. Both Steve and I have referenced the strong specialty margin environment we are experiencing. I'll reiterate what Steve mentioned earlier around pricing discipline. We've averaged a price increase per month in 2021, and the result is material margins that are higher than they were even during Q2 of last year, in a period when crude oil prices went negative. As the world supply chain issues continue to be on display, we expect to remain in a strong margin environment for longer than we would have estimated earlier in the year as our customers continue to restock. In a bit, we'll see how these SPS margin tailwinds have the opposite effect on our performance brands division. But remember, we sell seven times as many gallons of base oil in SPS as we buy in performance brands. So it's a dynamic that can be favorable for Calumet. Unfortunately, in Q2, we did not recognize normal sales volumes. Our lube and wax inventory at the end of the first quarter was essentially at bottoms, which was 170,000 barrels lower than average levels. It took a little longer than expected, but we were able to replenish our inventories to acceptable levels during the quarter, and we expect to sell what we make in Q3. We also experienced some unplanned downtime at Shreveport, and we estimate the impact of the Q2 downtime and the inventory rebuild was approximately $24 million. Last, you can see that margins for transportation fuels continue to sit at depressed levels. We are pleased to see the market trending in the right direction. But after accruing for the impact of the RVO, fuels margins remain at bottom quartile levels. Outside of Shreveport, we had strong operational performance at our specialty manufacturing plants, even setting five-year production records at our Princeton plant and our Penrico specialty oil plants. Let's turn to slide eight. Our second quarter performance brand EBITDA of $7.8 million was below last quarter and the second quarter of 2020. A few things we've already discussed significantly affected this business. First was the inflationary environment and subsequent upward pressure on feedstocks and other materials, which impacted our costs. While we've implemented price increases in this segment at a similar rate to SPS, there's a natural timing lag on recognizing these increases in the consumer business. And we estimate the impact of that lag to be roughly $7 million during the quarter. Steve reminded us that we experienced the opposite effect a year ago, when feedstock prices were deflating and our consumer-facing products benefited from margin expansion. In a conference earlier this year, we estimated the impact of that deflationary environment to be an $8 million benefit to last year's performance brand's EBITDA, so we're clearly seeing the reverse of that now. We've talked plenty about supply chain issues, but I do want to highlight the extremely strong demand for our performance products this quarter. Unfortunately, we haven't converted all of this demand to shipments yet, as we battled through the supply chain, and we've seen a record order backlog develop. Compared to last year's second quarter, we've seen sales grow by $6.5 million, but we've also seen our sales backlog double to roughly $19 million. To put that in perspective, had we been able to ship everything that was ordered throughout the first half of the year, we estimate EBITDA would be roughly $7 million stronger than it was, and we are working diligently to reduce the backlog and deliver product to our customers effectively and efficiently. On slide nine, you can see our Montana business had a reasonably good quarter. We saw the typical season demand increase as weather improved and so did margins for light products and asphalt. Remember that asphalt pricing tends to be negotiated a few months prior and will experience a margin lag in an inflationary environment and the opposite on the way down. As I mentioned earlier, Pad 4 light product inventories are low and supportive of the crack spreads and margins we are seeing. Now I'll turn the call back over to Steve for a few final remarks before Q&A.

Hey, thank you, Todd. We've covered a lot this morning. We're very happy with the progress and the opportunity in Montana. Inventory rebuilds and the final legacy of Winter Snow Murie are behind us, and we move into a third quarter characterized by good specialties margins and the continuing slow recovery of fuels margins. The Rockies markets are showing their usual seasonal strength. Demand in performance brands keeps growing, and the team is focused on turning that record backlog into income. So with that, I'll thank you, and I'll turn it over to questions.

Ladies and gentlemen, if you have a question at this time, please press star, then the number one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Your first question comes from the line of Neil Meda with Goldman Sachs.

Hi, good morning. This is Carly on for Neil. Thanks for taking the questions. Just wanted to talk a little bit about the base oil markets where you talked about margins have been really strong and kind of you expect that strength to continue longer, you know, than you would have initially anticipated. So just wanted to get your thoughts on kind of as we move through the back half of the year, And as we go into 2022, kind of when do you see the path to those kind of normalizing?

Hey, Carly. Scott Obermeyer here. Yeah, the base oil market, as you've probably heard from others, remains at very, very strong demand, very high profit levels for the producers out there. We see that trend and that plateau, if you will, continuing through Q3. And at this point, really, even into Q4, as Production continues to ramp up and the global supply chain works to stabilize. So we see a strong forecast for the remainder of the year. Outside of that, Carly, it's hard to look too far out into 2022.

Yes, Steve, if I could add, I mean, I think that the choice of words by Scott was a very good plateau there. You know, we're not expecting margins to improve from here. I mean, there are record levels already. You know, we think that they'll be good for a while, but at the margin, the U.S. is pulling base oil inputs at this point. And so we would kind of generally speaking see that as maybe a cap on margins here. But I would reiterate Scott's point of view that we think they'll be good for a ways to come as our customers are still clearly in restock mode.

Great. Thank you. And then just wanted to touch on leverage and cash. You guys obviously took out a portion of the 22s during the quarter. So just wanted to get your thoughts on kind of the remaining balance there as we move towards 2022. And then on the cash side, the $35 million balance at the end of the quarter seems a bit low relative to recent quarters. So could you just maybe remind us if there's a target level that you'd look for around cash balances going forward?

Yeah, I'll take the cash first, Carly. This is Todd. Thanks for the question. We really had too much cash sitting on the balance sheet with the $100 million. So we focused on overall liquidity. We didn't think that that was a level that we needed to maintain. So we're just managing cash, managing interest costs with the move to use cash to kind of pay down the revolver.

Great. Thanks. And if I could just sneak one more in. You guys talked about Great Falls and kind of the Rockies regions margins being really robust right now. Based on the timing of the FCC turnaround that you had mentioned, do you expect to be up and running to kind of capture the full 3Q turnaround? kind of summer driving season strength.

Hey Carly, this is Bruce. I'll take that one. So the Rockies margins are actually at reasonably typical historical levels for this time of the year. So that's relatively strong to last year or to the winter season and the spring season. So in terms of the FCC conditions, Mini outage, that's going to be after the fall peak season.

And your next question comes from the line of Roger Reed with Wells Fargo.

Yep, thank you. Good morning. Morning, Roger. Good morning, Roger.

Just hoping to dig in first to some of the things you talked about, like the $7 million lag in the second quarter. You mentioned that that's a function of price versus feedstock costs coming in, but is that something that generally gets recaptured in a 30- to 90-day period? Does it take longer than that? And then if crude and some of these supply chain things get ironed out as we go through the back half of the year? Would you look for pricing improvements that have occurred and may still occur to ultimately lead to a little better margin environment than, say, as typical as we look at maybe year-end into the first part of 2022?

Mark, would you like to take that one?

Yes, of course. Thanks for the question, Roger. So typically, yes, the price lag is in that 30 to 90 day range versus the contracts and the different channels that we operate through. So that assumption is correct. As we work through the balance of the year, there's a number of elements that play their way through into this. Obviously, there's the The unknown on the supply chain side of things, that intersection, as we mentioned, of sort of supply challenges, customer and consumer needs, and then the operational efficiency piece. Assuming that the supply chain naturally starts to ease up, we would expect to see all of that change. Margin recaptured further down the line. You've seen the record backlogs that we have, and we believe that there's upside potential in the second half of the year of playing catch up with those elements. But there's still a lot of unknown to be able to navigate as the way through. But we would expect to, right back to the start of your question, we would expect some normalization back in terms of the margins that we've enjoyed historically. Okay.

Yeah, let me add a little bit, Roger. This is Todd. You know, earlier we heard from Scott kind of the concept of plateauing SPS margins. So as March, you know, pricing catches up to the rising feedstock prices over that 30 to 90 days, we should see, you know, and Scott's margins remain where they're at, we should see that margin impact flow all the way through, right? So you get the benefit of price increases in performance brands catching up, and then you also get the benefit of feedstock prices kind of plateauing and not continuing to increase.

That's helpful. Very clear. Changing gears a little bit to look at the renewable diesel project, I have just two questions, one of them on page 12 of the presentation where it talks about a renewable hydrogen project. Just curious what the factors are behind that. And then the other question, as we look at the various alternative feedstocks, say to soybean oil, what, as we understand in soybean oil, one of the limitations here is not so much soybeans as it is soybean processing into oil. So are you comfortable as you look at the alternatives that you mentioned that there will actually be, uh, oil processing capacity as well as farming capacity and, and, you know, maybe how all that fits into the supply chains.

Hey Roger. Um, I'll take a start at that and Steve may want to add a couple of comments. So in, in reverse order, yeah, there is a agricultural commodities value chain. First, the farming and ranching. Remember that we're also planning to run tallow. Then the crop processing, seed crushing, and importantly, the oil pretreatment. Every renewable diesel plant in the country, without exception, has to have a pretreated feed. The question is, does the pretreater sit on your site or is it some kind of an industry service at the crop processing point. And by choosing to put our pretreater on our site, we'll be able to run anything at all. What you're seeing in the markets is mostly a distortion due to lack of pretreating capacity. It's not lack of crops.

Okay, thanks. And then the renewable hydrogen?

Yeah, so that's because... Given our site balances and the fact that we're going to continue to have a crude oil business, we've got a good opportunity to reduce our carbon intensity of our renewable diesel product further by gathering some of the other hydrocracker products and using them in our hydrogen production. So that's what we're going to do, and that's why we're doing it. Okay, so locally sourced and everything.

Yeah.

Yeah, specifically we're going to recycle some of the molecules from the tallow and vegetable oil processing, some of the light ends, back into hydrogen production.

Okay, great. Thank you.

Your next question comes from the line of Greg Brody with Bank of America.

Good morning, everybody. Good morning, Greg.

Just sort of two topics I wanted to cover. So obviously we got the Supreme Court ruling on small refinery interventions. I'm curious how you think this plays out from here with respect to your liability and what we should be looking for, what you're looking for for next steps there.

Bruce, do you want to go first on that one?

Yes, thanks, Greg, for the question. I think it's safe to say at this point that no matter what the EPA decides, somebody will sue them for it. It's difficult to see anything happening in real time. It looks like it's all on a court docket kind of a timeline, so we wouldn't care to forecast how that's going to play out. I can tell you in our case that You know, as we discuss every quarter, a RIN is not a cash obligation, and I know that financial modelers are just itching to convert that to money, but that's not how it works.

That's helpful, and I appreciate that there's a lot of unknowns. Just wanted to hear your thoughts. And just turning to... you've previously said that your plan with a JV proceeds would be to pay down the rest of the 22 and some of the 23s. Is that still the plan or has anything changed there?

No, nothing's changed there. You know, this is Todd Gregg, but as you know, the markets continue to be very favorable should we want to kind of refi our debt stack now. But, you know, looking at the horizon and kind of seeing kind of where we're at in the partner search and our positioning there. We do plan to use proceeds from that to pay down the short-term debt. Great.

That's it for me, guys. I appreciate the time.

Thanks, Greg.

Our next question comes from the line of Jason Gableman with Cowan.

Hey, thanks for taking my questions. I appreciate all the detail on the renewable diesel project. I had a couple questions on it. Firstly, I know you previously disclosed this pre-treatment unit. Can you discuss the capex cost of that pre-treatment? I don't think I've seen it in previous materials. And then secondly, on the renewable diesel project, is there something that needs to happen in the market in order for, in order to catalyze the JV partner signing an agreement. I'm thinking, you know, maybe the RBO is being announced or maybe there are other kind of public market milestones that need to occur. And then thirdly, what do you think, what's the likelihood that the refinery becomes part of the joint venture? It seems like there have been a handful of refining deals recently, so just wondering if you're thinking the non-renewable diesel part of Montana will remain 100% owned by Calumet or be part of the joint venture. Thanks.

Hey, thanks, excuse me, Jason, for the question. Maybe if I take those in reverse order, you know, the We told our unit holders in March that we were going to go in this direction after spending about 18 months reviewing our strategic options, including these reconfiguration opportunities on the site. And the majority of the inbound calls that we got in the next 100 days were focused on renewable only. There's a lot of money available. in the U.S. economy for green projects, and this is a really good green project. So for that reason, and we're flexible in our own thinking, but to the investors, it looked like a renewable-only play was preferred, so we've set it up that way. The question of whether there's some sort of a market trigger, not that I'm aware of. I'll invite Todd or Steve to think about that a little bit, but You know, it's not like we're waiting on an event. We funneled this down. The first part of the funnel was sorting out whether people wanted the whole site or the renewable part, which I've just covered. Second part of the funnel was what's the security of feedstock supply look like, which we've touched on in these remarks. And Steve had a slide at the very beginning with kind of an interesting color-coded eye test, but that's important. And I would suggest, you know, some focus there is appropriate. So the addition of pretreatment followed from that, which takes me to your first question, what's it cost? That is guidance that we've actually not given at the discrete project element level. What I can tell you is that our installed capital cost per barrel is the lowest of any project that's been announced. Adding the pretreater did not change that. Remember that the pretreater brings its own revenue stream We talked about that a little bit with Roger a second ago. So given all of that, we're pretty satisfied. We're not spending a great deal of money. We're getting an excellent leverage out of these program elements. It stretches out the field activity all during next year. It's not some kind of a big bang, turn on a giant project. It's discrete small elements that are very manageable. So we're pretty excited, but all of that, is what allows us to hold the line on cost and to hold the line on timing.

Got it. Great. I appreciate all that, Collar. And then my other question, just going back to Wren, I know you took, I think it was a $48 million non-cash market-to-market charge. What's the total liability sitting at right now? And can you discuss, do you have any type of strategy if you don't get all the small refinery exemptions that you previously got in. How are you thinking about handling the potential payments that you would be required to make? Thanks.

Let me maybe start with the second part of the question and pass it back to Todd for the current balance sheet part of the question. So in terms of how this plays out, we feel like it's going to play out in slow motion no matter what happens. whether anybody wants it to or not, there always seems to be someone showing up to try to resolve the matter in court rather than through the administrative channels. So we feel reasonably good about our relationship with the EPA in this regard, but, you know, we can't say that we don't all get dragged into a larger controversy. So with respect to our strategy and our options, yes, I mean, we, We talk to the EPA a lot. We talk on multiple levels and for different tactical reasons. They have several authorities. It's not only the small refinery exemption. So they've certainly got the ability to navigate all of us into a better consensus as a society, and I think they're going to find a way. I just don't want to have an opinion on how fast. Todd, you want to tackle the balance sheet part?

Yeah. You know, the number on the balance sheet is, $273 million is the total. And, you know, for all of the reasons Bruce has talked about, you know, in many calls before and some of which he just referenced, this isn't a number that we expect to turn to cash. It's more than just the SRE. There are a lot of layers to this. But just to answer your question, $273 million is the number we report on our balance sheet.

Okay.

Yeah. Yeah. Sorry. Jason, this is Steve. If I could add, I mean, I just want to reiterate what Bruce said. I mean, we maintain what we would describe as the slow motion scenario. So if you go back to before the Supreme Court ruling, you know, we said that the Supreme Court ruling wouldn't make that much difference. It would just spark off a wave of litigation. The Supreme Court ruling went effectively in Calumet's favor. But we don't change our position. We think it's just setting off a wave, a slow-motion wave of litigation. This thing will run and run and run. It's not a cash-settled end at all. And, you know, our internal expectation is that this situation runs at least well past the point where we will be a net-ring generator.

Got it. I appreciate all the callers. Thanks, guys.

Thanks, Jason.

I am showing no further questions in the queue at this time. I would like to turn the conference back to the presenters.

Thanks, everyone. On behalf of Calumet, the management team here, and the entire company, we appreciate your interest and your time this morning. I hope everyone has a good weekend, so thanks again.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. Have a wonderful day.