Calumet, Inc

Good day, and welcome to the Calumet Specialty Products Partners second quarter 2023 results conference call. All participants will be in a listen-only mode, and should you need any assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. And to withdraw a question, please press star, then two. Please also note that this event is being recorded today. I would now like to turn the conference over to Brad McMurray and Investor Relations. Please go ahead, sir.

Thank you for joining us today for our second quarter call. With me on today's call are Todd Borgman, CEO, Instant Argo CFO, Bruce Fleming, EVP Montana Renewables and Corporate Development, Scott Obermeyer, EVP Specialties, and Mark Long, EVP Sustainable Products and Strategies. You may now download the slides that accompany the remarks made on today's conference call, which can be accessed in the investor relations section of our website at www.cowumetspecialty.com. Also, a webcast replay of this call will be available on our site within a few hours. Turning to the presentation on slide two, you'll find our cautionary statements. I'd like to remind everyone that during this call, we may provide various forward-looking statements. Please refer to the partnership's press release. That was issued this morning as well as our latest filings with the SEC for a list of factors that may affect our actual results and cause them to differ from expectations. I'll now pass the call to Todd.

Todd? Thanks, Brad. And welcome to Calumet's second quarter 2023 earnings call. This was a quarter of many strategic achievements. Most crucially, all elements of Montana Renewables, the RD unit, the renewable hydrogen plant, and the next generation pretreater met or outperformed expectations. Further, our sustainable aviation fuel project came online, catapulting us from nowhere to the largest SAF producer in North America. At the corporate level, we continued the process of improving our balance sheet by successfully issuing unsecured debt, which will eliminate our secured notes. Our specialties business continued with excellent commercial execution while asset operations overcame a series of tornadoes and extreme weather that limited production. Ultimately, we generated $67.7 million of adjusted EBITDA for the quarter, which is a decrease of $10 million from the prior period. Our Northwest Louisiana team spent much of the last quarter, the last half of the quarter, recovering from weather-driven power disruptions. While doing so, we elected to pull forward maintenance, and at this point, we have no meaningful planned downtime for the remainder of 2023, and we enter the third quarter running our assets at full rates. At the halfway point of our three-year plan to fortify operations, our assets continue to demonstrate an improved ability to recover quickly when challenges arise. And we're also adding redundancy to further prevent or lessen the impacts of external events on our business. Commercially, we're executing across all of Calumet with a focus on the customer. Montana Renewables has pointed half of our sales volume to Canada and seamlessly stepped into the SAF market. Our specialties team continues to capture value from a unique and integrated value chain, and our supply chain and planning teams spent the last half of the quarter ensuring customer needs were met as we navigated around the weather and maintenance. Further, it's nice to see a return to a more normal environment in performance brands as input costs have stabilized. This is a business that we can grow, and we're seeing strong signs of that in our industrial business. Our branded products are well-positioned to meet the industry's growing demand for high-performing and energy-efficient solutions, whether it be Bellray products servicing the global mining industry or our new biodegradable Biomax products being utilized in the global marine market. The second quarter also saw the completion and full startup of Montana Renewables, and the team settled into the new operation nicely. As we stepped into this new business, it was essential that we quickly proved out the core operating pillars – which were ensuring the RDU and hydrogen plant ran at planned rates, proving our new and leading pre-treater technology, demonstrating catalyst performance, and meeting staff specifications. We've demonstrated all of these core concepts. As expected, we encountered a few blips as the team quickly scaled the learning curve, and our commissioning experience feels like minor teething problems relative to the industry experience. MRL's operation is intricate, including a closed recycle in our net zero hydrogen production and serial number one of the next generation feedstock pre-treater technology. As our operators learned the intricacies of this new operation, they quickly got the plant running consistently at the planned 12,000 barrels a day by quarter end, with the subsequently commissioned pre-treater following the same upward trajectory. We took our board of directors to visit the plant earlier this week, and we were all once again impressed with the quality and knowledge of our local Montana team and leadership. Naturally, we're in a period of rapid learning as we dig deeper into the operation and understand the true ability of our units. One quarter in, we both developed some new understanding and confirmed a few of our core hypotheses. First and most importantly, we've proven our technology works and our team can operate this facility at expected levels. We were making on-spec product right out of the gate, and even some of our customers were surprised at how quickly we came online. We monitor our catalysts closely, and it's performing as planned, even as we introduced higher amounts of feed that we treated ourselves. Further, the capacity creep has already started. As you might remember, we don't know the maximum capacity of our RDU, as we never filled the unit in fossil service, so its true capacity has not yet been tested. Just a few months in, our team has already demonstrated the already-used ability to run over 13,000 barrels a day. Next, we're pleased with the decision we made to install the pre-trader with ARA technology. The amount of feedstock flexibility this unit opens is tremendous, and we're capturing the yield advantage that we expected. Over previous quarters, we spent a lot of time talking about the need for a pretreater in this business, and we're quickly seeing the field of renewable diesel producers naturally separated into those that have pretreatment ability and those that don't. Last quarter, I mentioned that the difference between treated and untreated feed costs was $0.80 a gallon. Right now, the pretreater advantage is roughly $1 a gallon. At these levels, the ability to process untreated feed is even more important than location for the time being. Fundamentally, the next-generation technology allows us to lose 4% less feed than a standard treater. At current feedstock prices, that's roughly a 20-cent-a-gallon advantage. With these data points, we expect the ARA technology will allow us to maintain a structural advantage even within the camp of competitors that do have pretreat. We also are learning how different feeds are handled. They run at various speeds, cause filter changes at different intervals, and differ in the amount of time it takes to unload a railcar. These are common items to work through, which will allow us to optimize as we continue to process more untreated material. We're optimizing the drawdown of our previous market purchases of treated feed, and we continue to ramp up the pre-shooter rates as we gain comfort with the new technology. Further, we've confirmed that location is as important as we thought. We've seen generic industry margins tightening recently, especially for the treated feeds in the Gulf. This temporary dynamic has occurred before when markets rebalanced from a short-term disruption. While we fully expect it to normalize quickly, our relative location advantage provides flexibility and allows us to pivot rapidly in a changing environment. This is true on both the feed and product side of our business. On the feed side, the location advantage is magnified by our next-generation pre-trader that we just discussed. In fact, we just placed our first order for Camelina, which will arrive in the next couple weeks. Camelina is in its very early stages, but given its indigenous to Montana, extremely low CI, and does not compete with food, this cover crop presents tremendous upside to Montana renewables. On the product side, 50% of our existing RD is now selling in Canada, as we see our early theory playing out that our product will migrate to the spot of optimal logistic advantage. As the largest single market, California is often the reference point for renewable fuels in our industry. But with Canada sharing a land border with Montana, we fully expect our products to all land in premium locations. Next up, the level of interest in SAF is even bigger than we expected, and industry seems to quickly be aligning that SAF is the best, fastest, and most practical path to airline decarbonization. With the SAF market currently being a fully voluntary market, it's been interesting to see the wide range of views that exist on how this material will price long-term. For us, Shell has been a great partner so far, and we're pleased with the value they're bringing to the table in these early days. As Montana Renewables looks forward to the MAC SAF expansion, we continue to be enthusiastic. We expect to be in a position to share some early numbers on expected costs in EBITDA cents. And we believe that with MaxSaf, we can more than double our current EBITDA run rate in 2025. The MaxSaf project leverages our early mover advantage, and we could sell all of the product we could make into California, Oregon, Washington, Canada, and even Illinois and Minnesota with the new state SAF credits. And finally, we're already exploring opportunities to further integrate Montana Renewables molecules into specialty applications. As we speak, our development team is experimenting with renewable naphtha and diesel fractions for uses in our solvents business. We've seen early successes with other sustainable product lines, and adding another example of unique and advantaged integration to our specialty platform is exciting as we continue to look for ways to leverage our newly found renewables expertise across our enterprise. With that, I'll turn the call over to Vince to take us through the quarterly results. Vince?

Thank you, Todd. Before we move forward, let's pause on slide four to take a closer look at two new brands we recently added to our SPS portfolio. Titan Zero is our carbon-neutral wax product, and PenClear is an all-natural product developed to supplement our Penrico Beauty Care line. Moving to slide five, our SPS business generated 61 million of adjusted EBITDA during the quarter. Our production volumes were roughly in line with the first quarter. And as Todd mentioned, in June, our Northwest Louisiana plants were impacted by severe weather. Tornadoes and hurricane-force winds knocked the electrical grid offline on numerous occasions, which resulted in approximately 500,000 barrels of lost production. We estimate that the events cost approximately $20 million in profitability. We used the unplanned downtime to pull some turnaround work forward. we successfully completed a planned turnaround at our Cotton Valley facility. I can say that as of July 1, we were back to full operations across the entire northwest Louisiana region. The margin environment continues to be constructive for both fuels and specialties here in the third quarter. While we have seen and expected a reversion from all-time highs we experienced late last year, margins are well above mid-cycle averages, and we expect that to remain. Our material margin for the quarter averaged 77.30 cents per barrel for specialties and $10.21 per barrel for fuels. We continue to be optimistic about the fundamentals of our SPS business, and our expectations are constructive for the rest of the year. Moving to slide seven, our performance brand business had another solid quarter, generating $12.2 million of adjusted EBITDA. We continue to see price stability in the marketplace. Our production volumes were up quarter over quarter, and we saw significant demand in both the industrial lines and from TruFuel, our most direct retail offer. The second quarter tends to be the best demand quarter for TruFuel as both the spring weather and planting seasons coincide, and we were pleased to see strong demand within that channel. We have highlighted two of our other products on the slide as well. We have mentioned BioMax before as a high-performance biodegradable maritime solution that is now also being applied across other industries. The line continues to show real promise in its early stages as more and more customers interact with it. And our Bellray brand, which are particularly well-known for performance and mining applications, have seen tremendous growth year over year. Our industrial demand is up 35% year-to-date, and this is a segment of the business that we expect big things from as the world prioritizes high performance and power efficiencies. especially in some of the leading megatrends like mining, food, and energy. Moving to our Montana business, you can see on slide 9 that we generated $12.6 million of adjusted EBITDA in the quarter. For the legacy asphalt plant, we operated at full capacity of nearly 12,000 barrels per day of production. We entered this year's asphalt paving season during the second quarter, which was our first opportunity to utilize the recently constructed polymer-modified asphalt, or PMA, plant. This unique and high-quality asphalt is being praised in the marketplace, and we are very pleased with early sales. The second quarter was also an important one for Montana Renewable. During the quarter, we bought our feedstock pretreater online, shipped our first staff volume, and ramped up rates of both our RDU and pretreater. Average production for the quarter was a little over 7,000 barrels per day. As our team quickly learned the plant, and with plant operations de-risked, we were able to end the quarter producing over 12,000 barrels per day. During the quarter, we also announced an exclusive agreement to sell 100% of our SAF to Shell, who is also one of our three renewable diesel customers. We are excited at the SAF opportunity that is ahead of us. We are running off the last of our treated renewable feedstocks and expect to rotate to a slate of primarily untreated feeds. These are cheaper feedstocks that will allow us to capture the full earnings horsepower of Montana renewables. To discuss our strategy for Montana in more detail, I'll now turn the call back over to Todd. Thanks, Ben.

Our priorities and next steps are clear. We entered the third quarter operating well across the board. In specialties, we have some inventory to rebuild, but otherwise are planning on a strong second half. At Montana Renewables, we'll continue to process what's left of our trade and safety stock and maximize pre-treat throughput. For the quarter, we've implemented a one million barrel challenge at the site for both our legacy and renewable businesses. And through the end of July, we're tracking ahead on both. Our plan and intention is to demonstrate in the third quarter that Montana Renewables sits atop the stack of competitively advantaged renewable diesel and SAF producers. Looking forward a bit more, internal process design work for our max SAF expansion has already started, and we expect to make a final investment decision near the end of this year. Zooming out, our strategy remains unchanged. We're committed to completing the deleveraging of Calumet, unlocking value, and increasing trading volume for our unit holders. Our Department of Energy loan process continues, and we remain hopeful and confident that we will receive positive news that enables us to go forward with the mass SAF expansion that would take Montana Renewables from North America's largest SAF producer to one of the world's largest SAF producers. And last, we continue to expect the potential monetization of Montana Renewables to complete the deleveraging of Calumet. For some time, we've discussed the possibility of a Montana Renewables IPO, private monetization, or even both. Naturally, this has created a flurry of interest in the advisor community and even potential investors. and we continue to receive clear feedback that Montana Renewables is a differentiated business with transformational value potential to Calumet, well in excess of the entire company's current enterprise value. As always, we'll continue to execute against our stated strategic plan, and we'll also continue to actively explore all paths to best unlock the extreme unit holder value that we believe exists within Calumet. With that, I'll hand the call back to the operator for questions. Operator?

We will now begin the question and answer session. Again, to ask a question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. And to withdraw a question, please press star, then 2. At this time, we will take our first question, which will come from Roger Reed with Wells Fargo. Please go ahead.

Yeah, thank you, and good morning. Lots of hit here, but I guess really let's dive into MRL first. Maybe a little more clarity on how some of the advantage feed stocks have run through. You mentioned, you know, some learning curve issues with that. Is there one that's worked a little better or is priced a little better, has come up with a better yield? Just sort of curious any more you can offer there.

Hey, Roger, it's Bruce. Good morning. Excuse me. Yeah, a couple things as you think about the optimization. The feedstocks do have different yields, but that's mostly in the split between diesel and SAF. The total distillate yields are substantially similar across feeds. So the pricing is interesting because There's rotation among classes, so tallow can get an advantage, and then corn oil can come in on top of it for a while. So we've got a pretty good supply and trading function trying to follow those rotations, and we're able to do that more quickly than an average competitor because we're quite close to the sources. Most of our feeds are days to maybe two weeks away, and so we shift gears pretty quickly.

Yeah, that's helpful. And then the other question I have for you, since we are all attuned to California, the LCFS, and the other things that drive us to see RD sales in the U.S., what specifically do you see in Canada's setup that makes it competitive from either an RD or a SAF standpoint?

Higher priced.

That's an easy answer. All right. Well, that's my two questions. I'll turn it back. Thanks, Roger.

And our next question will come from Amit Nail with HC Wainwright. Please go ahead.

Thank you. Good morning, everyone. Just staying on the feedstock topic, you mentioned Camelina. Could you give us any color on cost advantages Camelina presents for you guys and you know, whether this is a seasonal feedstock option for you or can it be available through the year?

The best way to think about that is that commercial quantities of camelina are actually not in the market yet. So this is experimentation. We were fortunate to pick up opportunistically some camelina oil. We really like it. You know, it's in the low 20s carbon intensity, CI, and dramatically better than vegetable oils, and it grows in our latitude. So what we imagine is going to happen is that now that this is a cash crop, there will be more and more of it. There is some crushing activity now. And that's simply going to speed up. So if you look at some of our public information, we're forecasting commercial availability to us out in 2025, 26. That shows up in some of our charts. The economics of it, I wouldn't read too much into this because it is an experimentation phase, but This is competitive with untreated feeds. So, you know, that's going to be quite a good margin, albeit a small volume.

Understood. Got it. So this is a little bit more of a longer-term development effort for you guys. Got it.

Yeah, just to be clear, we're not doing the development. There are four developers in Montana now. They're backed by global majors. I mean, this is... This is very visible, and so it will happen. We're just speculating on how fast. So as I said, we've put commercial availability to us about two years out.

Okay. Thank you for that. Then on the topic of deleveraging, do you think, you know, going into the second half of 2023, you could begin some deleveraging efforts just from cash flows, or will you wait for, you know, some sort of an monetization event? to undertake sort of that part of the strategy?

Yeah, I mean, this is Todd. I think we're certainly going to generate positive cash flow in the second half of the year, you know, with Montana Renewables now running fully, construction over, so on and so forth. So absolutely, we would expect cash flow to be available. That being said, I think the major, you know, big bang deleveraging event, it's still going to be tied to monetization. You know, there'd certainly be the option to delever over time with operating cash flow, with MRL on and our specialty business operating as well as it has over the past couple years. We'd expect that to be an option, but I think we've been pretty clear that we want to – Complete the deleveraging of Calumet as quickly as possible. We've been talking about it for a while here. We want to get back to growing the business. And the most logical path is minority, you know, monetization of Montana Renewables.

Understood. Thank you, guys. That's all I have.

And our next question will come from Manav Gupta with UBS. Please go ahead.

Good morning, guys. My question to you here is can you help us understand your SAF strategy? How much are you producing right now? Once you do expand, if you do, then how much SAF could you produce? And then just a quick follow-up is how much more do you actually expect to make on an EBITDA per gallon basis in SAF versus RD? So if you think you can make 140 in RD, can you actually make 250 in SAF? And I'll turn it over after that. Thank you.

Hi, Manav. It's Bruce. Good morning. If I take those in reverse order, we've got an undisclosed commercial premium above renewable diesel. That is very sufficient to incent SAF recovery. The volume part is we've contracted 30 million gallons per year. That's a percentage of our yield, you know, kind of 12% to 15%. The expansion case, the licensors tell us we can go to full conversion, 100% SAF. We think there will be an optimization short of that. So we are tentatively advertising 230 million gallons of SAF capacity post-installation of our yield flexibility project.

Thank you.

Again, if you have a question, you may press star then 1 to join the queue. Our next question here will come from Jason Gabelman with TD Cowen. Please go ahead.

Hey, good morning. Thanks for taking my questions. I wanted to ask about the monetization strategy and efforts going on. And specifically, you know, Todd mentioned a couple things at the end that you're receiving indications that the value of MRL is higher than the value of the current enterprise value of the company. So I was wondering if you just could elaborate on that a bit. How do you translate that into actual value for shareholders, and what does that process look like over the next few months? And then tied to that, considerations for converting companies to a C-Corp, do you see that as a necessary step in unlocking the value? Thanks.

Let's have Bruce start with kind of MRL valuation and then I'll pile on if that's all right with the last question.

Sure. Good morning, Jason, Bruce. The MRL valuation is reasonably clear. The energy transition companies, the public peer companies, are trading in an enterprise-valued EBITDA multiple that's visible. We expect to lay in with that at a minimum, if not get a premium for the competitive advantages that we've got due to location, due to the advanced pretreater technology, and due to the fact that we're now North America's largest SAF producer. So when you put all that together, you know, that's the public valuation signal that we would expect the target. I'll tell you that the bulk bracket banks were talking to have no concern about some kind of an overhang from the parent, which I think is part of what you were getting at. And so we're simply going to stand it up. And it looks like it's going to be a pretty straightforward process. Now, how long that takes and the condition of the capital markets will obviously give us a shot at, you know, positioning our timing. But from here, you know, in early August, we're presumably targeting, you know, first part of next year for closing and funds realization.

Yeah, and I think, you know, just to pile on a little bit, We know there's intrinsic value in Calumet, right? Bruce just talked about some of the value that we'd expect. We can look at comps in the marketplace. We can look at a number of points to triangulate into what Montana Renewables is worth. And we've talked about unlocking that through IPO or monetization. Primarily, we think MRL would be very liquid. as a publicly traded company, and that would certainly help Calumet. We've also said we're exploring optimal paths, like we always do. Natural time for all stakeholders, I guess, Jason, is to look at the full strategy would be when we're talking about selling or spinning some of it to create a new entity. So could something with a structure be one of those options? Sure. I mean, I guess Everything's an option. Everyone involved is rational economic creatures, and we all want what's best for Calumet. So I guess I just say the entire strategy is complex. It takes time. And what we do from here with this large amount of value sitting in Montana Renewables is arguably the most important decision in the history of Calumet. So getting that step right is the most important thing, and we're going to prioritize that. overrushing down a particular path. We'll be talking with the market. We'll be seeking input. And at the end of the day, there's a heck of a lot of value here. So we're focused on unlocking that, and we'll go from there.

Got it. Thanks. I appreciate the comments. And then my follow-up just on the margin outlook and specifically related to RIN prices, following the EPA's decision on the renewable volume obligations for 23 to 25, I think There's a decent amount of concern that RIN prices are going to be volatile next year as the industry brings on new renewable diesel capacity. I know Calumet has a view of kind of a stable margin for renewable diesel over the medium term, but do you anticipate some elevated bouts of volatility in the renewable diesel margin next year due to a potential RIN oversupply? And how do you think the market kind of evolves through that? Thanks.

Sure, Jason. It's Bruce again. The individual components of the industry margin index that we use are, you know, independently volatile, and RINs is getting a lot of attention. A couple things that are talked about less. California is clearly going to accelerate their LCFS reduction profile. So that goes on the credit side. And the more SAF we pull out of the renewable diesel pool, the shorter it is. So there's an interaction there. And then the final comment, I don't see a lot of analytics that recognize that Canada is part of our trading market, but it is. not to be flip but i'm not sure i care where california goes because we're not going there and just to elaborate on that last point could you sell 100 of your product into canada while kind of sustaining the current margin profile we could that would potentially not be optimal distribution but you know i'm on record for the last two years as saying our physicals shouldn't fall more than 100 miles from Puget Sound. If you look that up, that means we hit Oregon, Washington, British Columbia, and now all of federal Canada. So, you know, we're pretty excited about the fact that there are small rule differences, normal seasonal patterns, and a lot of trading volatility. I was a West Coast operator for 12 years before I came to Calumet. There is a lot going on out there, and because of our geographic proximity, we're close in in time, and we can take advantage of that. So, you know, I think the fact that federal Canada brought an addressable diesel market equal to the Pad 5 volumes last probably ought to get more attention.

Yeah, understood. Appreciate the call, guys.

Thanks, Jason. And our next question will be a follow-up from Roger Reed with Wells Fargo. Please go ahead.

Yeah, thanks. Good morning again. And maybe just turn off of MRL a little bit here and talk about the other core parts of the business. Obviously, the weather issues had an impact. Q2 sounds like that's pretty well worked out of the system by the time we get to Q3. But I was just curious, as you look at the overall sort of supply and demand that's been in here, you know, we've had a lot of supply chain issues throughout the industry. just how things are shaking out and how should we think about a normal market? Because it's been, what, three years since we've seen a normal market, I think.

Well, Roger, this is Scott. I think a few comments here. I think he hit the nail on the head when he said it feels like we're more of a normal market now after a couple highly volatile years, and we agree with that assessment. We feel like our business right now is – about as normalized as what it's been over the past few years. As we look at sort of what I would say, Roger, is additional context here, sort of a headline summary of our view of the market right now, you know, we do see some moderating demand and some of the normalizing margins going on at that macro level. But, you know, we remain bullish overall with our business. We've got, as you know, Roger, a diverse portfolio of specialty products, a great base of customers. and our unique integrated business model that continues to be strengthened. Just some final color commentary, Roger, as we look at the business through, I'll say, three lenses. Our performance brands business, our SPS fuels business, and the SPS specialties business. On the performance brands, you know, we've been commenting for the past couple years, you know, where we felt like a normal market would be for the business, and we're in it now. You know, the demand on the retail side is a little soft. But as mentioned in the call, our industrial business is very strong right now. Margins are, I'll say, normalized within the business. And so we've got a pretty good outlook going forward on the performance brands piece. On the fuels piece, Roger, you know, overall, tough second quarter is fuel cracks. The 211 came down $9.00. although that's spiked back up here as we start Q3. But overall, you know, I think inventory is relatively short, and we've got a constructive outlook within the fuels business moving forward. And the last piece I would just say on the specialty SPS, you know, this business we see continuing to perform very well. We've done a lot of work over the past few years to really strengthen the foundation and optimize the business. And so we feel really good about where we're at. Yes, the margins are normalizing a little bit, but we're still, you know, talking $75, $80 a barrel type of margins when I think three, four, five years ago, that number was more in the 30s. So feel really good about where we're at within our specialty business.

Okay. Thanks for that. I guess I was a little surprised to hear industrial demand is strong and retail demand soft. It seems like all the other data points, we see that macro level would imply the opposite of that, but good to hear. One other question to follow up on, you know, the base oil markets were pretty oversupplied, roughly, you know, call it 2015 to at least 2020. That seems to have improved. I'm just curious as you think about, you know, Group 1, 2, and 3 on the base oil front, have we seen demand increase or are we seeing supply go down? Just kind of what's helped out on that side of the margin ledger.

Roger, Scott, Scott again. Actually, let me start though with a comment on the retail and the industrial, just to comment on that. You know, on the retail market, I think consistent with what's going on out there, there's a lot of, I'll call it de-risking by the big box retailers. The consumer market's been strong on the service front. On the retail front, I think a lot of the retail market has been de-risking inventory. It's led to some choppy demand on the retail side. The industrial side for our performance brands, on the question around how we've seen it strong, I think Todd or Vince alluded to in the earnings statements for the call, a lot of our products are put in the high-value markets. So we've got a great brand and great products that go into mining, as an example. that go into environmentally friendly marine lubricants, that go into the energy transition market. Our high-value products are experiencing great demand, great growth because of the uniqueness of them versus just more of a commoditized industrial play. Now, Roger, on this last question on the base oils, a few thoughts. It's mostly on the production side. So I'll call it less supply on the Group 1 over the past five years than what there was. We like our Group 1s. It's a niche product. You know, we try to stay out of the commoditized PCMO markets and focus more on the high-value applications, Group 1, Group 2. So less supply there, and there's been some global trade disconnects the past couple years on the Group 3 as well.

Appreciate the clarifications. Thank you.

Thank you.

And our next question will be a follow-up from Amit Daya with HC Wainwright. Please go ahead. Thank you.

Just following up on your comments about the Montana IPO, did you say you are targeting early next year as a potential window to undertake this? I just wanted to see if, you know, that is sort of the timeline we should be thinking about.

Yeah, Amit, it's Todd. We've said that in the past and continue to think that that's reasonable. Obviously, no commitments. We've got to get through the process, get the feedback, and kind of make a final decision. But, you know, what we want to do is be ready. A lot of this is going to be driven by the market and our You know, we want to be there when the market's open, and if that's early next year, then great. And if it takes longer than that, then so be it. But we want to be there to kind of be opportunistically ready when an opportunity presents itself.

So should we think about 3Q as a very sort of important quarter for the renewables business where you want to demonstrate the full capability of this operation to support that outcome?

Yeah. You bet. I think our focus has been on the third quarter for a while. We've had a number of milestones at Montana Renewables. First, we had to finance it, then we had to construct it, then we had to prove that it all worked, de-risk the technology, prove the operations. I think we've done all of that, and the very last milestone is prove it through a set of audited financials, which we've been saying for a while we think that we'll do in the third quarter, and that continues to be our intention.

Okay, thank you so much.

Appreciate it. Thank you. And our next question will be a follow-up from Jason Gableman with TD Callen. Please go ahead.

Yeah, hey, just following up on MRL. Are you planning on splitting out results for MRL for 3Q? It's an important quarter, and it sounds like you want to provide more transparency to the market. And then just a couple other operational questions. questions on MRL. Are you running all untreated feed at this point, and do you expect ReQ to be in that EBITDA guidance range that you've previously provided? Thanks.

I'll take the I'll start us off here, see if Bruce wants to jump in. But yeah, it's been our intention to split out Montana renewables when we reach steady state. And like we said, we expect that to be Q3. As far as all untreated feed, I don't think we're at 100% untreated feed. We're certainly ramping up, very comfortable with where we've been. The guidance that we've given of $1.25 to $1.45 per gallon obviously is on untreated feed. So as we ramp up and work through The safety stock that we've bought in prior periods of treated feed, the blended average EBITDA won't quite be that high. But we're focused on long-term, about $25 to $45. And we're seeing that pretty much now when we look at it on an untreated basis. Right, Bruce? Yes.

We remain comfortable with our guidance. Remember that these California indicators that everybody likes to focus on are not that good a capture of our better position. So, you know, between Ahmed's question a second ago and yours, we're committed to proving this in the third quarter. And, you know, whether or not we're ready to carve out the audited financials, you know, that's up to Vince. But we'll absolutely be doing a special look. So you'll get a clear, transparent sense of how that works for us.

Great. Thanks.

Again, if you have a question, you may press star, then 1 to join the queue. Our next question will come from Greg Brody with Bank of America. Please go ahead.

Hey, good morning, guys. Congrats. Congrats on getting the facility, the renewable facility running as you have. My question is more about your optionality here in terms of potential limitations, which MLP status. So is there some limitations to how does this impact the way you're thinking about monetizing MRL because you're an MLP? And is there some limit to how much cash you can take in? Maybe give us a little sense of that. And then also, Is there any update on timing specifically around an IPO that we should be thinking about?

Yeah, I think a limitation you may be thinking about is around qualifying income. So sale of Montana renewables, you know, through an IPO or otherwise, you know, could be qualifying income. I think there are different points of views on that. So if that's where you're going, that's a possibility. You know, certainly the – The plan always has been to make Montana Renewables a corp at a certain point in time, you know, the right point in time. So if that's a step in the process, then so be it. Like I said earlier, I think we have a number of options there as far as sequencing and how we go about that. But we don't see any major, major road stops in monetizing Montana Renewables from our current position.

too much because there's tax consequences for your unit holders.

Correct.

And then maybe just timing on the IPO as part of that question.

Yeah, I think that's what we were trying to hit on earlier. We've said around Q1 we'd like to be ready. You know, we could probably be ready late this year, but unlikely that, you know, the best market is going to be over the holiday season. So our plan right now is to get ready and see what opportunity the market provides us. And if it's early in the year, then we'd be able to take advantage of that opportunity.

Okay. And then just moving on to the max staff opportunity, you said you're going to make a decision by the end of the year. Can you help us think about the capital requirements for that, how you fund it, how does the DOE funding potentially fit into that, and maybe provide an update there as to what's happening with that?

Sure, Greg. This is Bruce. I'll take that. The ultimate throughput potential of our hardware is the first thing to hold. And we're not sure what the upper bound is because in fossil service we never filled that unit. We're already substantially above its initial engineering design from when we put it up. So we will find the engineering basis and then we'll stretch it. Our estimates are that's where we get the 18,000 barrel a day throughput number that you've heard us talk about. Optionally, we can install yield flexibility so that that 18,000 barrels a day can have a mix like the current mix or rotate to all the way or almost all the way SAF yield. And that's an incremental capital, incremental return decision that we would expect to execute in the field at the same time. So there's two decisions, but we'd like to just do one project and have one outage to tie it in. That's what's being sorted this year. And by the end of the year, we expect to have that clarified. Capital is obviously contingent on whether or not we add the yield flexibility. So, you know, we've floated some super notional ranges in the couple hundred million dollar source of funds for that. DOE is very interested. Cash flow from operations is also sufficient. But if we fund it that way, we're interacting with the corporate strategy that Todd covered earlier. So by the end of this year, in summary, we'll have our capital pinned down, we'll have our investment basis agreed, and we'll have DOE as the source of funds. That is the main line planning. Okay.

And our next question will come from Justin Jenkins with Raymond James. Please go ahead.

Great. Thanks. Sorry, guys. I've just got a couple of modeling questions here. I think over the past few quarters, we've seen a pretty big working capital build. I assume a lot of that's just related to Montana Renewables inventory, but Just the progression here maybe going forward on how that unwinds or doesn't.

Yeah, I think you're right. You know, as we've ramped up Montana renewables, obviously we've built inventory. We'd expect that to normalize over time. This is expensive feedstock. It's an expensive product. So it adds up in a hurry kind of on the working capital front. And as we've been building, you know, the front end of that supply chain, you know, naturally we see that. And then over time, as revenues come in to offset it, we'll see normalization. Perfect. Thanks.

And I guess second question is on maybe managing the RIN liability here in the context of, of recent EPA decisions and obviously in the context of you guys producing a lot more RINs here with RD production, just how we should think about that liability going forward.

This is Bruce. Justin, good morning. I think the key is that the obligated parties, which are the downsized Calumet, Montana refinery, which we're referring to as the specialty asphalt refinery now, has got a much, much smaller RIN liability footprint. Shreveport remains about the same. But we're simply not very prominent on the RINs landscape. The entire activity around about 29 legal challenges is going to give you the answer, and you're going to find out the same time we do as the courts rule on these things. So I think I'll leave it at that.

Thanks, Jason. And our next question will be a follow-up from Greg Brody with Bank of America. Please go ahead.

Hey, guys, I got cut off there. Just is there a timing on the DOE that we should expect in terms of having an answer? Maybe you can talk a little bit about how that process is going.

Greg, it's Bruce. The timing is going to be up to them, but I'll tell you that, you know, we announced we were admitted into the second part of their application process. The diligence is going well. We have a weekly standing meeting. And the step in front of us would be the conditional loan commitment. That could really come at any time. Again, you know, that's their business and their workload. you know, we will have that cornerstone of our strategic balance sheet planning in place this year.

And that's helpful. And just my last one. When you raised the bond deal in June, you talked about tendering for bonds and actually redeeming the rest of the 24s at some point. I'm curious how you're thinking about that. Is that something we should expect near term, or are you preserving some optionality there as you think about cash for other uses right now?

Yeah, no, we're actually surprised more didn't come through during the tender, and we'll go ahead and move forward like we said and call those bonds here in the near future. That's fully the plan.

All right, that's it for me, guys. Thanks for the time.

Thank you. And this will conclude our question and answer session. I'd like to turn the conference back over to Brad McMurray for any closing remarks.

Thanks, Joe. On behalf of the management team here in the room and all of us here at Calumet, we appreciate your time and interest in joining the call this morning. So thank you for your ongoing interest in Calumet. And with that, have a great weekend, everybody.

The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines.