Calumet, Inc

Good day and welcome to the Calumet Specialty Products third quarter 2023 results conference call. All participants will be in a listen-only mode. If you need 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 a touchtone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Brad McMurray, Head of Investor Relations. Please go ahead.

Thank you, Betsy. Good morning. Thank you all for joining us today for our third quarter 2023 earnings call. With me on today's call are Todd Borgman, CEO, Vince DiNargo, CFO, Bruce Fleming, EVP, Montana Renewables and Corporate Development, and Scott Obermeyer, EVP Specialties. I'd also like to introduce David Lunin, who recently joined the company as our incoming CFO, which will be effective January 1st upon Vince's retirement from Calumet. 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.calumet.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 can 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 partnerships 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 our expectations. I'll now pass the call to Todd. Todd?

Thanks, Brad, and welcome to Calumet's third quarter 2023 earnings call. I'm sure many of you saw that Calumet issued two press releases this morning. One was our traditional earnings release, And the other was an announcement that after a thorough and productive negotiation, our General Partner and Conflicts Committee reached agreement that Calumet will be transitioning to a C-Corp. I'm going to start with the quarterly report, and we'll transition to the conversion shortly thereafter. To do that, let's turn to slide three. During the quarter, Calumet generated $75.5 million of adjusted EBITDA in what was in many ways a tale of two halves. The period started strong with a July that directionally represented what we expect out of Montana Renewables now that all units within the operation have been proven. However, the second half of the quarter was driven by two specific transient operational issues at our largest plants in Shreveport and Great Falls. Our Shreveport plant is fully repaired and the Great Falls drum replacement is on track to be complete in the next week. Let me begin with more detail on the progress at Montana Renewables. First, in July, we demonstrated a financially representative result consistent with guidance. That was an important milestone as it marked the first full month that a majority of Montana Renewables feed was untreated. Specifically, 70% of our July throughput was local, discounted, untreated feedstock. And MRL generated $14.2 million of adjusted EBITDA in the month. As mentioned, these results fell within our previous guidance of $1.25 to $1.45 per gallon on untreated feed and demonstrated the location and feedstock advantage that underpins Montana Renewable's lasting competitive positioning. Second, and unfortunately, as our August press release highlighted, we also found a crack in a steam drum that is a component of our renewable hydrogen plant. Our team developed a plan to repair the drum quickly on site. However, after removing 469 tubes and getting a closer look, we made a decision to replace the steam drum. This replacement is now installed and will be mechanically complete in the next few days. We've included in the appendix a few pictures of the steam drum repair that might help put the event in perspective. Third, we demonstrated the site's hydrogen redundancy as we ran at reduced rates while the steam system was under repair. Given we were at reduced rates, we also took the opportunity to pull forward a catalyst change that was otherwise scheduled for April of next year. We're taking that catalyst change now. It's worth noting that our next-generation catalyst has performed well, and nearly change is simply an economic optimization. We'd rather take a few extra days to complete the turnaround when we're already cut back than taking a full multi-week shutdown this spring. This also sets us up to enter a strategically important first half of 2024 with a clean slate and no planned turnarounds. Turning to Shreveport. We also announced a few weeks ago that we had an operational issue that cost us roughly 300,000 barrels of specialty production during the quarter. The volume was limited primarily because of a plugged heater tube in our CDW unit. The plugging has been repaired, and our Shreveport plant has been operating well for about a month now. Because of the operational circumstances, the third quarter certainly resulted in lower capture of market opportunity. With Shreveport fully up, Montana completing its steam drum next week and its catalyst change by the end of this month. I have full faith that we'll learn from this and reclaim the trajectory that we've come to expect. While the quarter was a setback, our strategy is robust and remains unchanged. I'll take a few minutes to remind listeners of the strategic path we're on as we're deep into the plan. Our strategic transformation began three years ago in the depths of COVID. At that time, we determined that three things would be required to put our company onto a different financial trajectory, transform the business, and ultimately unlock value for our shareholders. First, we needed to transform our core specialty business. Second, we needed to fund, construct, and operate Montana Renewables. And third, we'd consider the structure of Calumet when the other two were behind us. In specialties, we've made exceptional progress, as highlighted by last year's record result, continual demonstration of commercial excellence, and despite a couple quarters of operational setbacks in Shreveport, marked improvement in the operations of this business. At Montana Renewables, in three years, we've turned an idea on a piece of paper into a leading business in renewable diesel and sustainable aviation fuel. MRL has been funded, constructed, fully demonstrated its operational and commercial leadership position, and has shown a glimpse of its economic potential. Over time, our thesis that Montana Renewables is at or near the top of the renewable fuels competitive stack is based on five key pillars, which we believe are largely proven. First is the geographic advantage and flexibility the business has in product marketing. From the beginning, our offering was oversubscribed, and through the first few months of operations, we've demonstrated the ability to partner with leading companies to flexibly find the best markets. Most recently, We've seen this with over 60% of our products finding its way to Canada, which is fitting with our location less than two hours south of the Canadian border by truck. As we see reports of backups in the Panama Canal extending supply chains in all industries, we're reminded how fortunate we are at Montana Renewables to be situated with direct rail access to critical markets. I think we're seeing while a steady margin theory applies to the industry as a whole, volatility can be driven by length of supply chain. In a declining feedstock price environment, margins in our industry will be higher for those with short supply chains. Over time, the industry's volatility should balance out, and we simply would expect those with shorter supply chains to be more steady. Second is our feedstock advantage, which is underpinned by our geography and pretreatment capability. Montana Renewables is the nearest demand point for feedstock suppliers who collectively represent more than 10 times our capacity And our ability to competitively procure tallow, distillers corn oil, canola, and even camelina is well known. Our third competitive pillar is our SAF advantage. Sustainable aviation fuel is arguably the fastest growing area in energy. And Montana Renewables is the first mover here. It's the largest SAF producer in North America. A great majority of the headlines we see of airlines buying SAF are originated in Great Falls, Montana. As most of you know by now, we believe that SAF represents our next transformational opportunity as we look ahead to our MAC-SAF expansion. Through these first three pillars, I characterize Montana Renewables as fully proven, and the last two aren't far behind. The fourth pillar is operational capability. We started renewable operations in Great Falls at about this time last year. The sequential commissioning of four major process operations over a six-month period was a success, starting with our renewable diesel unit last winter and a catalyst that has proven to be robust, then the renewable hydrogen plant in the first quarter, and last, our SAF unit and our pre-shooter in the second quarter. We learned a lot over the first few months of operations, including some expected early teething pains, and we have proven that each of our units and the technology works as expected. The last proof point is routine EBITDA generation. which is ultimately an outcome of the previous four items. We saw a glimpse of this when Montana Renewables generated over $14 million of adjusted EBITDA in July on only 70% untreated feed. But the crack in our steam drum has set this back a few months. We fully expect to resume demonstrating this final proof point in December and into 2024. Turning to potential monetization, we expect that some duration of audited financials at steady state operating levels is an enabler to receive a proper valuation for this business. We've said before that our goal is not to over-optimize and play for the last dollar, but the difference between marketing a 100% proven business and a 90% proven business is enough to warrant pushing the expected timeline for a potential monetization back a quarter. And mid-year feels like a reasonable timeline for a potential next step. In parallel with taking this last step to complete the ultimate deleveraging of Calumet, we continue to be optimistic about the DOE process. We're in the final stage of the process, and while we can't say with certainty that we'll be successful or on what timeline, our optimism continues to increase as time progresses that Montana Renewables, with its unique renewable hydrogen system and first mover advantage in SAF, is right down the fairway for the type of project the Department of Energy is looking for. And last, we continue to progress engineering around our MAC staff project. We've narrowed the field to a short finalist list of technology providers and general contractors, and we expect to be in a position to fully launch this project as soon as we hear from the DOE that we're cleared for financing. All signs continue to point towards this project being one that can more than double the steady state EBITDA potential of Montana Renewables. We've discussed the specialty transformation and standing up Montana renewables. I mentioned earlier that the third leg to deliver the shareholder value that we ultimately expect was to evaluate the structure of Calumet. This topic has received a lot of attention over the past few years, and we believed it was critical to address the fundamental business first. We all were reminded of the unintended consequences of being a very thinly traded MLP recently when a block sale of only one and a half percent of our units had an outsized impact on our shareholders. We don't believe that was a reflection on the fundamentals of the business. It was rather the reality that without a broad institutional investor base, most of whom can't invest in MLPs, we can have wild swings in our equity price. While this event served as a reminder, our General Partner and Conflicts Committee were well into negotiations on the ultimate conversion of Calumet's MLP into a C-Corp when it occurred. Calumet's general partner, comprised of our founders and their families, has been an ardent supporter of Calumet since the beginning. If we back up a few years when Calumet was fighting for its survival, the general partner didn't waiver. With this transaction, the general partner will absorb a meaningful tax bill. And as Amy mentioned in this morning's press release, they're willing to lean in as they're believers in Calumet's growth vision and see the significant value available to all unit holders. There's no group more committed or financially aligned with the Calumet Value Unlock than our general partner. And on behalf of management and our unit holders, I thank the Heritage Group, Gruby Family, and our Conflicts Committee for negotiating a transaction that is exceptional for all parties. I truly believe this is a foundational launching pad for the future of our company. Let's flip to slide four for more details on a transaction. We're going to go over some detail here, and we likely won't be getting into any more detail in Q&A as this approval is hot off the press. First, the corporate conversion will close within the next nine months. We'll begin to prepare the necessary document for the filing process soon. From there, we'll file a Form S-4, hold a unit holder vote, and prepare for the ultimate closing. Upon closing, the general partner will exchange its existing IDRs and 2% general partner interest, which is approximately 1.6 million units, for 5.5 million shares of common stock and 2 million warrants. These warrants will have a strike price of $20 a share and will expire three years from the date of issuance. This represents a dilution of 4.5% to our current shareholders, which is illustrated in the appendix on slide 14. This slide also highlights a few governance features, including a staggered board, which will be made up of a majority of independent members. It's worth highlighting that upon conversion, there will be a single class of voting shares with economic interests fully aligned. As a management team, we look forward to getting out quickly to explain Calumet's growth strategy and immense value proposition to a new group of institutional investors that until now have not been able to invest in the company. With that, I'm going to turn the call over to Vince to review the quarter. Vince?