Calumet, Inc

Good morning, everyone, and welcome to the Calumet Specialty Products Partners LP First Quarter 2024 Results Conference Call. All participants will be in a listen-only mode. Should 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 and then one on a telephone keypad. To withdraw your questions, you may press star and two. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to John Compa, Investor Relations for Calumet. Sir, please go ahead.

Good morning. Thank you, Jamie. And thank you for joining us today for our first quarter 2024 earnings call. With me on today's call are Todd Borgman, CEO, David Lunin, CFO, Bruce Fleming, EDP Montana Renewables and Corporate Development, and Scott Obermeyer, EDP Specialties. You may now download the slides that accompany remarks made on today's conference call, which can be accessed in the investor relations section of our website at 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 and three, you can find our cautionary statements and tax disclosures. 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. With that, I'll now pass the call to Todd.

Thanks, Sean, and welcome to Calumet's first quarter 2024 earnings call. We have a number of items to discuss today as we enter what we expect to be a spring and summer full of strategic value-creating catalysts here at Calumet. Let's turn to slide four, and I'll start with an update on our C-Corp conversion. In short, the conversion remains on track. And we're optimistic that we'll complete the process in the next 60 days. This process has moved quickly. And I'm thankful to the general partner, conflicts committee, employees, attorneys, and everyone else involved for a thorough negotiation and efficient process today. During the first quarter, we announced the completion of the conversion agreement. We filed the S4 with the SEC. And upon final feedback, we'll distribute the proxy and schedule an investor vote. We continue to be optimistic about the opportunity this conversion provides for Calumet and our unit holders. Our current shareholder base is comprised of our general partner, insiders, a small group of loyal and significant deep value investors, and a broad set of retail investors. It's a good, stable investor base, but it lacks large institutional investors and passive index funds. Passive investment strategies now make up over 50% of the public equity market, yet they own almost zero Calumet. as most indices can't hold MLPs by charter. From a pure technical trading lens, this conversion is arguably one of the most important strategic steps the company's ever taken. Since we initially announced the conversion, we've seen an increase in our average daily trading volume of a little over 20%. The trading volumes are still quite a liquid compared to most publicly traded companies, and this conversion is a major milestone in removing that burden. For example, Calumet C-Corp peers typically have 20 to 30% of their shares outstanding held by passive indices. And again, we have almost none. The ability to add significant demand to the investor pool is exciting in itself, but we think it's compounded with the fact that Calumet presents a compelling opportunity to larger active institutional investors. We've been on the road talking to this group since our announcement. And like I mentioned with passive indices, our MLP status put most of this group practically off limits. Of course, this all changes post-conversion. The next near-term priority is taking the last step in demonstrating the competitively advantaged position of Montana Renewables. With the construction behind us, our startup year in the rear view, and all the expensive feed processed, we believe financial demonstration of the top tier position that Montana Renewables holds is the next step in capturing the value of MRL for our unit holders. Third, we're deep into the DOE loan process. which we hope will unlock our max-out expansion soon. And last, we continue to demonstrate the uniqueness and wide moat that exists in our specialties business. I'll hit on each of these items further, but let's first move to results on slide five. In the first quarter, we generated $21.6 million of adjusted EBITDA. We had previously communicated that the quarter was marked by a rate ramp-up and inventory drawdown at Montana Renewables and a successful turnaround at Shreveport. both of which impacted results within our expectations. The one negative to expectations was the magnitude of the seasonal weakness experienced in the Northern Rockies, as both gasoline and asphalt realizations were lower than normal. Every year, the Montana retail asphalt racks closed for the winter, and our asphalt sales mix shifts to 100% wholesale. This past winter, that occurred as normal, but a huge increase in WCS costs created a major price lag. As we sit here today, we're seeing retail asphalt sales start to pick back up as the paving season, supported by our polymer modified asphalt plant, will be full steam ahead in June like normal. Let's turn to slide six and talk Montana renewables. In past calls, we've talked about the significant milestones MRL has accomplished as it turned from an idea into a leading SAF and renewable diesel business in a few short years. The next milestone is demonstrating a clean financial quarter. As we talk today, we've been operating for five months since the December restart. Each month has improved sequentially as we've ramped up rates, increased staff production, reduced our feedstock carbon intensity, and worked through the old expensive feed. A primary advantage point for Montana Renewables is our access to a host of feeds and ability to utilize our leading pretreatment technology to switch quickly to whatever market opportunities exist, which simply was not an option when our tanks were full. We expect industry feedstocks to price at CI parity over time, at least in the clearinghouse on the Gulf Coast. But as we have often discussed, the various feed classes, including tallow, corn oil, and vegetable oil, rotate among themselves, and we can take advantage of that. This optimization value is driven by a short local supply chain, and it started to help again in March, as demonstrated by moving back into the black financially. And it's now unconstrained. as we have cleared the backlog of inventory built in the second half of last year. Of course, the current question outstanding for all participants in our space is the market environment, which we track using the index for renewable diesel margins made from soybean oil. This index has become the standard industry benchmark in RD. A couple weeks ago, we hosted an analyst day in Great Falls, and industry outlook was a primary topic of the conversation. In fact, the slides and script from that event are on our website for anyone who would like to go deeper. Staying on slide six and looking at the right-hand chart, we show the renewable diesel industry capacity as a supply stack based on total net cost, and we overlay the normal index margin across the top. This top-line margin is a regime that's governed industry margins historically, at least until September of last year. In its normal regime, renewable diesel players expect to see a fairly steady index margin, around $2 a gallon. We've talked about this in the past, so I won't go too deeply into it here, but the premise is that the incremental competitor sets the market price. We specifically think that the incremental player is the group of small-scale biodiesel plants that run soybean oil, and this group typically requires an index margin of about $2 per gallon to be cash flow positive. However, for the last two quarters, industry has observed a lower index margin of around $1 per gallon. Although we expect that to be a temporary condition, it is already doing lasting damage to farmers, biodiesel, and even some renewable diesel producers. How did this happen? Historically, EPA has set the RVO to incentivize all forms of renewable energy and raised it annually to capture any increase in renewable supply. In that normal regime, All elements of the margin equation, the LCFS, CARB diesel, the BTC, REN, and the price of soybean oil must interact in a way that incentivizes the incremental player to produce or else the mandated renewable volumes will not be achieved. In contrast to this, EPA has set a 2023 to 2025 RVO at a level that's substantially below the industry's production capacity. For example, the industry's capacity is well above 6 billion gallons per year, but the EPA RBO was set at an implied level of 4.5 billion gallons. This challenges all biomass-based diesel producers, and we're seeing both biodiesel and renewable diesel producers being forced to close and reduce rates. Many have said that the level was set this way because it was difficult to predict reliability of startups in this new industry, and questions existed about the ability to source feedstock. With most of the large startups either now up or coming up this year and the feedstock situation clarified, we think that it's logical to revert to the now proven and normal methodology of including all production capacity in the RVO. After all, the original statutory demand for renewable fuels was to have reached 35 billion gallons per year by 2022, and the country has fallen well short of that plan as we're just over halfway there. In fact, closure and rate reduction announcements made so far this year have the industry moving backwards, not forwards. We need every drop of renewable fuels production capacity available, plus a lot more, to ultimately achieve our objectives. In short, the EPA should increase the RBO. Regardless of index margin, competitive advantage depends on total cost structure. The index margin will lift or lower all boats, but competitive advantage in this space is driven by access to a pretreater, advantage logistics costs, economies of scale, a flexible feed flight, product yield, specifically SAF, and access to the write-in markets. On a P&L, these items all met together to represent everything between the industry soybean index margin and EBITDA. In other words, the break-even level to the soybean index is a function of a company's operating costs, SGA, logistics costs, and relative yield and CI differences to the soybean index. Right now, we believe this breakeven EBITDA level is about 85 cents a gallon for Montana renewables, which we think is best in class. Ultimately, we think our costs will be closer to 65 cents a gallon as we continue to gain efficiencies, which is the gist of our original guidance of $1.35 a gallon of adjusted EBITDA in a normal regime of a $2 per gallon index margin. As I mentioned earlier, we do expect this normal regime to return, but that will require the RVO to be adjusted to incentivize the energy transition as it has historically. The next catalyst for Calumet will stay in the MRL category, is our max SAF expansion. Of course, this is directly tied to the DOE loan process, which is in the late stages and continues to progress well. We're going to refrain from sharing too much more on this project until we get to the finish line with DOE, but we're incredibly excited about it. SAF is a tremendous opportunity for the world, for our industry. It's the only proven way to materially reduce emissions in the hard-to-abate airline sector, and it's an area that is brand new and creates meaningful upside. Just recently, the UK issued a SAF mandate starting in 2026 and growing from there. Japan, Singapore, and India have also issued mandates or are in the late stages. And the United States Grand SAF Challenge calls for 3 billion gallons by 2030 and 35 billion gallons by 2050. Not only is this a new world of opportunity for SAF, but the SAF supply also impacts the renewable diesel balances and margin outlook. To illustrate that, simply reference the RD supply stack chart mentioned earlier. Add another 3 billion gallons to the existing RVO implied demand, and you'll see that if the Grand SAF challenge is met by conversion of renewable diesel plants, which is the only demonstrated proven option, we're once again in a scenario where demand, including all existing biodiesel, can't be met by current supply. Needless to say, not only is SAF a tremendous advantage for us right now, it's also an opportunity that will transform the underlying fundamentals of renewable diesel in a positive way as industry volumes grow. Let's transition back to specialties for a minute, and then I'll hand the call to David. At our recent analyst day, we opened with more info on specialties than we provided in some time. And the feedback was that while we've all been focused on a new Montana renewables, we haven't spent as much time talking about the rock-solid specialties business we have at Calumet and the growth that the team has delivered over the past few years. We've mentioned before that our specialties business has seen five straight years of margin growth, which is a major accomplishment. This has been a combination of a data-driven approach to commercial excellence, an asset base and market reach that's incredibly agile, a culture of innovation, and a differentiated appreciation and service of customers. It's these things that allow us to both weather storms, as we saw during COVID, and capture the upside of the extremely strong markets we've seen over the past couple years. The current market is in between these two extremes. Back during peak margin times, we highlighted that the increase in specialty margins from the historic $40 per barrel range was about half market and half a function of our commercial focus. I think especially margins have bounced between $60 and $70 a barrel over the past few quarters. We're seeing that in a more mid-cycle environment, this expectation was appropriate. The other thing we've mentioned in the past is the investment and reliability. We've made meaningful progress over the past couple years and still have room to go as we recently entered the third year of the plan. In the first quarter, we saw an example that we expect to see more of as we continue to fortify our operations. Two of the past three years, we've had winter storms that have paralyzed not only our Louisiana facilities, but a lot of Gulf Coast infrastructure. This past winter, we had a similar event. And while we experienced a few days of downtime, lessons learned and improvements made allowed the plant to restart in days, as opposed to having an event that would impact us much further. With that, I'll turn the call over to David.