Calumet, Inc

Good morning, and welcome to the Calumet, Inc. conference call. All participants will be in 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 will press star, then one on your touch-tone phone. To withdraw your question, please press star, then two. Please note the session is being recorded. I would now like to turn the conference over to John Comple, Investor Relations. Please go ahead.

Thank you, Anthony. Good morning, everyone. Thank you for joining our third quarter 2024 earnings call. With me on today's call are Todd Borgman, CEO, David Lunen, EVP and Chief Financial Officer, Bruce Fleming, EVP, Montana Renewables and Corporate Development, and Scott Obermeyer, EVP Specialties. You may 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. Also, a replay of this call will be available on our site within a few hours. Turning to the presentation, on slide two, please see our cautionary statements. I'd like to remind everyone that during the call, we may provide various forward-looking statements. Please refer to our press release that was issued this morning, as well as our latest filings with the SEC, or list the factors that may affect our actual results and cause them to differ from our expectations.

As we turn to slide three, I'll now pass the call to Todd. Thanks, John, and welcome to Calumet's third quarter 2024 earnings call. We've had a lot of big news recently at Calumet, as we continue to take major steps and execute on the value creation catalysts that we started to socialize earlier this year. In July of this quarter, we successfully completed the conversion of Calumet into a C-Corp, and most recently, we announced the conditional commitment of a $1.44 billion DOE loan to move forward with Montana Renewables' MATSAF expansion, which I'll talk more about shortly. Calumet has been and continues to be laser-focused on maximizing shareholder value. Let me start with reinforcing the commercial transformation journey we've been on the past few years, which has built a competitive advantage in our leading specialty products business. Even in a softer commodity environment, it's remarkable to see the new mid-cycle margins we've realized compared to historic levels, and we saw that again in the third quarter. We integrated performance brands into our one specialty strategy two years ago and are now seeing record volumes and margins in this business as well. We've talked a lot about the role of commercial excellence at Calumet, which really underpins our specialty strategy. The focus starts with the customer, and we're fortunate enough to have thousands of customers globally across numerous industries, and we work hard to partner with them in a value creation manner that earns business. We implemented data-driven best-in-class processes and modern smart technology the past few years to make a step change in key areas such as advanced pricing, large account management, new business development, and cutting-edge logistics software that have accelerated business results. Finally, we've enacted a continuous focus on leveraging our unique integrated asset base to provide value-added optionality that will allow success across any business cycle. In addition to commercial, We set out two years ago to harden our assets and improve reliability throughout the system, particularly in Shrewsport. Here, we're seeing clear improvement, and we continue to focus on improving reliability and reducing operating costs. When David reviews our specialty products and solutions segment, you'll see this quarter represents the strongest production volumes we've had since we reported the business in its current form. I thank our teams out in the field who are leading this effort and so committed to Calumet's success. I mentioned our C-Corp conversion earlier, and while we're still in the early days, the impact has been meaningful. Over the past quarter, we've seen roughly 4 million shares of Calumet demand from passive investors, which we expect to continue to grow. And we've seen average daily trading volume increase nearly tenfold since the conversion, which is being seen by institutional investors to continue to gain interest in Calumet now that they're able to invest in the structure. Our new leveraging strategy isn't yet complete, but we have a clear path towards this strategic imperative. And last, we've carved out a market leadership position in the high-growth market of sustainable aviation fuel. And with the DOE loan, we expect to leverage this early-mover advantage into a global leadership position. This conditional commitment is an exceptional step for our company, and we believe for our country, as the United States gears up to become the world leader in sustainable aviation fuels. Growing our country's competitiveness in biofuels continues to receive bipartisan support as it creates a new form to serve a rapidly growing global energy need, creates great, highly skilled jobs, is critical to our agriculture industry, and is the most practical and cost-effective form of energy transition, all while keeping major investment dollars home right here in the United States. Before I get into the DOE loan, let me take a couple steps back and review some of the reasons sustainable aviation fuel is receiving so much attention, and why Calumet in particular is so exciting. Let's turn to slide four. The large size of the airline transportation market, fragmented nature of the supply chain, enormous replacement infrastructure costs for non-liquid fuels, and safety challenges, alternative energies, make decarbonization in the air travel sector uniquely difficult. The world consumes roughly 120 billion gallons per year of jet fuel, and about a quarter of this demand is in North America. Air transportation is growing rapidly, and according to IATA and the IEA, global demand is expected to be over 140 billion gallons annually by 2030, and by 2050, reach roughly 230 billion gallons. Next, let's talk about supply and demand. We're in the early stages of sustainable aviation fuel, and a vast number of mandates and incentive structures around the world mean plenty of forecasting complexity, and quite frankly, opportunity. Thus, we spend our time trying to understand inflection points, general trends, and potential risks, rather than nail down the precise forecast. The current fact is that we sell every drop of our SAF at substantial premiums through Renewable Diesel. In fact, we've previously communicated a 30-million-gallon annual run rate at Montana Renewables, and in the second quarter, we produced 2,500 barrels a day, which tracks closer to 40 million gallons per year. And in September, we produced at a 50-million-gallon annual run rate. All of the production was sold, and it was sold at the same premium. Of course, with Montana Renewables now expecting to increase capacity to 150 million gallons in 2026, we need to look out and evaluate future incentives. In addition to today's market, as there is little question that global policy, along with changing customer desires, is a major catalyst of the energy transition. To do this, let's break down future demand into a few components. The first demand category is driven by legislation that has already passed or deepened process. This includes 2 billion gallons of SAF demand by 2030 from policy in the EU, the UK, Canada, Japan, India, and Singapore. Some of these are active now, some start in 2025, and most increase annually. Further, they represent anywhere from 1% to 2% of their country's total jet demand, with the median being 3%. The next group is non-U.S. countries with proposed policies or stated goals. Some of these include Brazil, Malaysia, Indonesia, Turkey, UAE, New Zealand, Australia, South Korea, and China. This group represents approximately 1.3 billion gallons of potential demand, and China specifically has guided the 2 percent to 5 percent of their jet fuel demand being by 2030. Last is the United States. Airlines have made large decarbonization commitments, averaging to roughly 10% of their jet fuel demand being filled by sustainable aviation fuel. This represents roughly 3 billion gallons of annual demand. This level will only be reached or even approached if there is enough staff production capacity to meet the growing demand, which will require views on policy both domestically and globally. Using the past two decades of energy transition as guidance, including the LCFS, the RVO, the BTC, and recently the PTC, policy evolves to incentivize supply. We've seen this progress across every administration, as this critical ag and energy initiative has always been a bipartisan one. Further, the SAF drivers aren't just federal. We've seen states and individual airports play a major role. For example, there are SAF-specific initiatives in Washington, Illinois, Nebraska, and Minnesota many of which are direct shop for Montana renewables. Further, CARB has recently guided the 20% SAF usage on California flights by 2030. California is the largest jet fuel user in the country, and it alone consumes nearly 4 billion gallons a year of jet. Ten percent of that demand is roughly ten times the amount of SAF that is produced in the U.S. today. Montana's renewable SAF currently sold into California, Canada, Washington. During this past quarter, we, along with our partners at Shell, delivered the first SAP into Minneapolis and Detroit airports. Further, we don't sell directly to airlines. We partner with Shell through the largest known actual SAP supply agreement, and they optimize within their massive global supply chain to serve domestic private flight, corporate fleets, and both domestic and global commercial travel. Viewing all these drivers, we believe the market's unfolding rationally. New SAF supply that's coming on in the near future coincides with new international volume mandates, but by itself is not large enough to meet the future growth in these same mandates. Further, new sites are positioned in a way to service this new Asian and European mandated demand efficiently. And like today, Montenegro's geography provides an advantage to supply the northern U.S., the west coast, and Canada. all which provide their own individual exceptional growth prospects. Next, let's move to our recently announced DOE loan. This is something the company has been working on for over two years and a transformational step for our business. First, let's turn to slide five and describe the loan. And I'm going to stick to information that's been shared publicly here and in Q&A. The loan quantum is up to $1.44 billion. It's funded directly by the U.S. government, specifically guaranteed by the Department of Energy. The cost of this 15-year capital is expected to be Treasury plus three-eighths, which currently would be roughly four and three-eighths percent. The loan is designed to have two tranches, and on the right side of this slide, you'll see some details on tranche one. First, the size of the initial tranche is expected to be $778 million and would fund it closing. Our project started over two years ago, shortly after Initial conversations with the Department of Energy started, and its first tranche will pay for eligible expenses incurred today. As we previously communicated, the loan will clean up the existing balance sheet, which means the third-party project financing that funded our construction to date will be eliminated. Further, the tranche 1 funding is not expected to be serviced until the entire project is complete. Thus, the roughly $79 million of annual servicing that Montana Renewables is paying to third parties now will be fully available to MRLs, pay other expenses, and to retain an order to meet the equity requirements of tranche two and the max staff expansion, which I'll come to shortly. The last requirement of tranche one is that Montana Renewables obtains $150 million of new equity investment. Our current plan is for this investment to come from the existing owners of Montana Renewables. Calumet expects to have the funds to make this investment and does not intend to raise equity from public shareholders in order to make the $150 million investment into Montana and Nobles. Moving to slide six in the second tranche. This tranche is a delayed draw term loan, and it will be available to fund go-forward spend on a max-out project. The DOE loan is designed to remain at a 55% debt to total capitalization. At Tranche 1 funding, this requirement is met. And going forward, for each construction dollar that Montana Renewables wants to spend, MRL will fund 45% of it via cash, and DOE will allow 55% draw of the loan. The MRL cash is expected to be generated from retained earnings. Further, the VAT SAF project is designed to be modular, or a set of discrete projects in series. The first module is standing up the second SAF reactor that was purchased in 2022. We expect the first reactor step, which we're calling max SAF 150, to take roughly two years and to increase Montana renewable SAF capacity to 150 million gallons annually. An early estimate of the capital required to accomplish this is $150 to $250 million. Thus, MRL is planning to invest $65 to $115 million of retained earnings over the next two years, with the DOE loan being drawn for the remainder. Of course, the fact that Tranche 1 is expected to reduce our existing annual debt servicing by $79 million per year gives us a lot of confidence that the second phase of this project will be funded within Montana Renewables. The remaining modules, which will take longer to engineer and install, include an expansion of renewable hydrogen production, an expansion of our free-treater, a new wastewater system, renewable electricity and steam via cogeneration, enhanced staff truck loading capability, and other efficiency improvements. Each of these modules are justified independently and will be managed independently to control costs. Before turning the call over to David, I'll say that DOE has been excellent to work with. The department's proven extremely thoughtful and disciplined in how they've approached the process, and we're looking forward to partnering with DOE to make the United States a global staff leader while using local agricultural feedstocks and creating the jobs to produce this rapidly growing global demand right here at home. With that, I'll turn the call over to David to walk us through our quarterly results. David?

Thanks, Todd. We're very excited about the DOE loan. I also wanted to briefly comment on our other recently announced transaction, the exchange offer. We appreciate the overwhelming support of our bondholders based on the initial results. I want to reiterate we are still committed to deleveraging the business in the near term. We view this exchange as prudent capital structure management given the near-term maturity of the 2020 GLAD notes. Now let me run through our segment results. Across our specialty business, which is comprised of both specialty products and solutions and performance brands, we continue to see a strong production volume, particularly among our more specialty product lines. Operations were solid during the third quarter, as the reliability investments we've made over the past few years allowed us to recover quickly and minimize the impact of the July weather event I mentioned on the last call. Turning to slide seven, our specialty product segment generated $42.6 million of adjusted EBITDA during the quarter, an increase of approximately 10% compared to the prior year period. Quarterly results were driven by strong volume gains, in fact, the highest levels in some time, and resilient margins across specialty products, reflecting our customer and application diversity, as well as the incremental value earned through our integrated network. Year-over-year results were hampered by a weakened commodity environment, where we saw an over $20 a barrel decline in Gulf Coast industry fuel margins. Thank you. Specialty products margins have performed well despite this decline. You can see in the chart on the bottom right highlighting our specialty products margin, which trended upward in the third quarter and was at the upper end of the 60 to 70 per barrel range. We've recorded consistent performance during the last few quarters in specialties despite softer fuel and asphalt margins, which continued in the third quarter. Todd mentioned our commercial excellence efforts earlier, and if we go back a few years, you'd see Calumet specialty margins routinely in the $40 to $50 barrel range. The focus on transforming our commercial engine has resulted in us thinking of this 60 to 70 barrel range as the new and raised mid-cycle levels of these products. This performance highlights the relevant advantage of our specialty portfolio allowing us to provide stability and cash flow for this part of the business in periods of weak commodity margins. Our prominent customer base, brands, and assets within SDS position continue to position the company well across cycles. I'd like to thank all of the Calumet team for taking an aligned approach through optimization, sales, procurement, and operations to optimize our vast network of options and place our products into the right markets. Moving to slide eight and our performance brand segment, which posted strong quarterly results reflecting 19% period-over-period volume growth. This is a trend that has continued all year as volumes rose 21% on a year-to-date basis over the prior year period. We have a proven formula of commercial excellence, reliable operation, and strong brands as Royal Purple, Bellray, and TruFuel are all leading brands in their respective markets. The formula has allowed us to drive the growth you see and command strong margins in the marketplace. Also, I'd like to highlight our integration, which allows us to drive incremental dollar gain across the SPS system. We internally source into performance brands what it makes sense to do so and pivot to supply on the open market depending on prevailing market conditions. Integration across the business will continue to be a theme as we're focused on connecting our specialties and performance brand businesses wherever it makes sense to do so. On slide nine, our Montana slash renewable segment generated $12.7 million of adjusted EBITDA compared to $38.2 million in the prior year period. On the Montana asphalt side, the business continued to reflect significant commodity headwinds As anticipated, we did see improving sequential results in the third quarter due to a full quarter of modified retail asphalt volume, although results were significantly lower compared to the prior year as broader fuel threats remained much lower than they have been in the past couple of years. We are carefully managing inventories as we move into the winter season. On renewables, we are pleased to report this business contributed adjusted EBITDA at $7 million. on a 100% consolidated basis, $6 million of adjusted EBITDA that is attributable to Calumet's 86 proportional share ownership of the business. We process nearly 12,000 barrels a day of renewable feedstock and produce more than 2,500 barrels a day of sap compared to the 1,700 barrels per day in the second quarter. We're quite proud of the increased sap production as we continue to optimize operations to drive financial performance. Due to our low-cost geographic advantage, we continue to post positive EBITDA despite continued trough industry index margin conditions during the quarter. Results also reflected approximately $6 million negative impact to margins from feedstock price lag when the industry saw feedstocks decline approximately $0.40 a gallon rapidly in late July after August supply had been priced. As previously announced, we are safely and quickly managing a planned turnaround to change catalysts at MRL that started in late October. The timing allows depletion prior to the winter season and coincides with a period of margin uncertainty as the blender's tax credit is expected to change to the production tax credit. Moving to slide 10, as a testament to the Montana Renewables team, we drove another clean operational quarter and produced approximately 10 million gallons of SAF, up sequentially from 7 million gallons in the second quarter. More importantly, we drove a new SAF production record each month during the quarter, culminating in approximately 3,200 barrels per day of SAF during the month of September. And we've been able to successfully place the increased production, same SAF premium we've experienced through the base contracts. Following the completion of the turnaround, Any day now, we fully expect the strong operational momentum we've experienced in this business to continue. As we turn to slide 11 and prepare for questions, I'll just reiterate that we remain focused on executing against our key strategy and catalyst intended to drive shareholder value. It's been a busy and important year. We've delivered on the conditional commitment from the DOE of $1.4 billion and are now driving towards closing Two, we've delivered the C-Corp conversion this quarter. Three, we've proven out the competitiveness of our two leading businesses in Montana renewables and our unique specialties business. Next step is continuing on our plan to de-lever in the near term. Operator, that concludes our prepared remarks. We'd now like to open the line for questions. If you can remind the callers of those instructions. Thank you.

We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster. Our first question will come from Roger Reed with Wells Fargo. You may now go ahead.

Thank you. Good morning, everybody. There's a lot to cover here, but I think kind of where I'd like to start is the expectations for the construction and conversion process, you know, making a, I don't know, a base case assumption that the first tranche of the DOE loan closes, you know, into this year, start of next year. in terms of hitting your expectations for 2026 on the first expansion of SAP, and then, you know, tranche two can come for the later part, but what will be some of the key milestones we should be paying attention to? And the other thought is, if tranche one is delayed in its award, what does that mean for the timeline?

Hey, Roger, Bruce. I'll start us off and see if David or Todd want to get in on this. So the fact that we own the second reactor, we don't have the usual kind of schedule or cost uncertainties that you associate with these kind of large, long lead delivery items. So, you know, the project timeline is literally moving the reactor from Corpus to Great Falls and setting it on a foundation that we pour. We're just about done. That's all we got to do. So we feel good about the timeline. Reactor gives us a lot more SAF yield flexibility. It doesn't immediately give us more throughput. So that's why we're talking 150 million gallons of SAF for that step, and we're talking 300 for the larger program that will be more involved and take longer. So do we need Trans1? I think Todd covered that. We've got a really modest investment here in the grand scheme of things. You know, we can pay for that out of cash flow from operations. We expect we're not going to do that. We expect the DOE is, you know, is all over this thing. But, you know, if you want to entertain hypotheticals, we can proceed a bit further on our own.

Well, it's Wall Street, so every hypothetical will come into play in one way or another. Let me go that way. DOE loan, we've got an incoming change at the federal government level. I get this question for everybody, so I'm just going to ask you all to address it, which is anything we should be worried about in terms of tranche one or tranche two in terms of your expectations or conversations? et cetera, with the DOE. And I'll note that I believe all four members of Congress from Montana are wearing red jackets, so presumably they're quite happy to see a project like this go forward in their state.

Are we worried about the administration change relative to the undertaking here? In a word, no. It's fair to keep examining that question, but let's reframe it a bit. This is the biggest farm project in the history of Montana. Remember where our feedstock comes from. Second point is that the loan program office is not the IRA legislation. I think there's been a conflation of those two things that's not really proper. The LPO has been in the statute for 15-plus years. What we're talking about here is bipartisan ag support. And so I think we're differentiated from something that might narrowly depend upon some chapter or other in the IRA legislation.

Appreciate that clarification. I'll turn it back.

Thanks, Roger.

Our next question will come from Jason Gableman with TD College. You may now go ahead.

Hey, good morning. Thanks for taking my questions. I was hoping you could provide a bit more color on the use of proceeds from the DOE loan. You know, there's the debt outstanding at MRL. There's an intra-company loan that I believe is getting somewhat sizable, and then you know, funding the construction of the project. So, just hoping you could maybe delineate how you expect to use proceeds from the loan.

Hey, Jason. It's Todd. Be careful to get too far down the track here, but I think just take a step back reminding The purpose of the loan, and we've been consistent in this all along, it's to do the max half expansion and clean up the existing balance sheet. So, you know, we talked about $778 million coming in. The existing balance sheet would take about $500 million or so to clean up. The rest is available to MRL to pay for other, you know, things that they have, which, which could include, you know, other expensive project financing could include, you know, anything. MRL has that flexibility.

Okay. Understood. I wanted to also ask about the 45 Z credit, which, you know, treasury is yet to finalize the regulations there. So we could be in a period next year, where the market is operating without the Blender's tax credit and the producer tax credit. How do you expect renewable diesel margins to operate under that environment? And if you could help clarify, are you able to book any revenue associated with the 45Z credit before Treasury finalizes the rules?

Hey, Jason, Bruce, I'll start us off. The whole industry is focused on this expectation that we may have delayed compliance rules, but we're a producer, we're qualified, and we're going to begin booking that receivable from January 1st. What's the expectation for the market? Well, look, if that's delayed, I don't think there's a risk that the money is later not forthcoming. There is a timing question. Remembering that this is a tax credit, we do have, you know, I think a good secondary market. We've been approached by all kinds of, you know, organizations and institutions that would like to participate in the possible delay and, you know, basically factor that back to us. So, you know, we're not concerned that we don't collect the money. Historical response is that given this kind of uncertainty on the first of the year, what we've seen in the industry is that the biodiesel guys promptly turn off about half of their production. All you've got to do is pull the data off the EIA or USDA websites to see that response to uncertainty. So when David said earlier, and I want to reinforce this, that, you know, we took a tactical opportunity here at the end of the year to change catalysts, That's because the switchover from blenders to producers tax credit, particularly on SAF, means that you literally can't comply with either rule at the end of the calendar year. We're not the only ones that have signaled this and stopped SAF production for a couple of weeks. So that's what gave us our little window for the catalyst change. So I realize I gave you a bunch of information because I think you asked a multi-pronged question. Let me see if you want to redirect any of that.

I guess just how you're able to book a receivable given there's a lack of clarity on regulations, particularly around international feedstocks.

Well, we're not running any international feedstocks. So for this purpose, so the computation is not at issue. The detailed implementation rules come when they come. We can then file for the tax credit. So separate the fact that we're a qualified producer right now as we speak from filing from the tax credit, from collecting the remittance. You know, there's a couple of things in there.

And I think we separate, Jason, just the technical, you know, accounting revenue recognition from what we expect to happen here, right? That could be driven by details that have yet to surface. But to Bruce's point, you know, we're fully expecting to start applying for this, you know, PTC day one.

All right. That's useful color. Thanks for the answers.

Our next question will come from Samia Jane with UBS. You may now go ahead.

Hey, good morning. So what is your EBITDA per gallon margin looking like for the quarter, and I guess what's your outlook on that? I know last time you guys had noted 16 cents, if I believe.

Yeah. Hey, Samia, it's Todd. It was about the same, and that was including the – You know, the $6 million kind of impact that we got from feedstock lag that we called out, and that's about another 15 cents. So you kind of add those things together, and I think you're in line with the general thinking that we provided previously of, you know, kind of where we fall in the supply stack relative to industry index margins.

Got it. So it will be in line with last quarter then. Okay, cool. And then do you still hold the CapEx outlook of $100 million, or has that changed for the year as well?

No, our range remains unchanged. We may actually come in a tad bit lower, but as of right now, we think that's still the right range to be projecting.

Okay, thank you.

Thank you.

Our next question will come from Greg Brody with Bank of America. You may now go ahead.

Hey, good morning, guys, and a public congratulations on the last month or so. Two years is a long time. Actually, I'm sure you guys know better than anyone else. You mentioned deleveraging in the near term. Could you talk about how you think about achieving that?

Yeah, I think, you know, we're probably a bit premature to get too far into the details only because we still have an open exchange outstanding. So we want to be careful not to go too far down that path. But I guess what I'd reiterate is, you know, the extension of the 25s into this new 26s, Pretty excited about just the support we had there. You know, 97% early adoption rate. I think the market response that we're getting from the debt side is pretty supportive and provides a lot of just confidence in what we're doing. So the whole purpose of that exchange is really just to add some optionality and flexibility with a number of balls in the air here at the same time. You know, I think it's just kind of prudent path forward. But, you know, we do expect to take them out in the not-too-distant future. And, you know, I think you'll see that kind of playing out here over the next couple quarters, and we'll be able to shed more light as we move forward.

I appreciate that. And then just shifting gears to MRL, I know you have some – are you going to say something, David?

Oh, sorry, no.

No, I thought I heard someone talking. Just – MRL, the catalyst replacement this quarter, what should that do for volumes in terms of your throughput for the quarter? What type of utilization should we expect? And then just along the idea of volumes, you touched on, I heard two things. One, the reactors will be there in no time. And then actually a couple of things. By 26, you would have the first phase done, but I'll start to say two years. How should we think about the ramping of volumes there, sort of volumes in fourth quarter, and then how should we see volumes ramping as we get to phase one?

Sure. It's Todd. I'll take the first shot, and then let's get Bruce to kind of dive in. I think on the timing, you were mentioning first the 2026 and then kind of the reactors there. Really what we're trying to talk to here is just the risk of the project. It's within our control. It still takes a while to move a giant reactor from the Gulf Coast up to Montana, make sure everything's safe, engineer the tie-ins, stand it up. It's just not a complex, high-risk maneuver, but it certainly still takes some time. So that's kind of the difference probably that you're sensing when we talk about the control we have over the project and the confidence in it, and then why does that, you know, take a year or two, right? So hopefully that bridges that gap.

Yeah, and then on the fourth quarter volume question, it's Bruce again. You know, look, real rough farmer's map here. If we have a 30-day oil-to-oil production outage for the cattle exchange and, you know, you know, say that the quarter is going to be two-thirds of a quarter, you're going to be in the ballpark. Great.

And then I think there's one question for you going back to Montana refining. There's been some headwinds this year, and I'm curious how you see that turning around to get to what you think is a mid-cycle number, or do you think the mid-cycle has potentially changed?

Well, you know, mid-cycle is mid-cycle, so no, we don't think that's potentially changed. You know, over time, there's a little bit of an upward bias. The industry follows, you know, cost inflationary pressure up. And in terms of the local performance, we're actually pretty excited that we've got our asphalt retail business lined out. You know, we made a substantive investment there. couple of, you know, kind of 20 months ago, let's say. And, you know, we're really seeing that come back. The fact that 40% of a crude barrel at that refinery comes out as a super high quality asphalt means that we focus differently than on clean product cracks. And so we've done a number of things to enhance and optimize around that 40% of the barrel. Clean cracks are going to go where they go, but You know, in the northern tier along the Canadian border, there's a strong spring planting and fall harvesting season, and so we're much more diesel-tilted. I would at least suggest that if you want to model that part of the world, you know, pay attention to the diesel crack, not the 3-2-1 crack.

And that's it for me, guys. Thanks for the time. Thanks, Greg.

Our next question will come from Adam with Goldman Sachs. You may now go ahead.

Hey, good morning, team, and thank you for taking my questions. I wanted to ask my first one just on the base business, so I guess two parts to this question here. Where are we from a mid-cycle margin perspective? And then as you think about the asset portfolio, is there anything on the organic growth side that we should be mindful of? Or on the flip side, is there anything on a potential asset sale that we should be thinking about as we head into 2025 with all the announcements around MaxSaf?

The, uh, Adam and Todd, let me, let me start and see if you get Scott to jump in on, on some of the margins. The, um, I think right now you've seen this year has probably played out currently in outlook of slightly below mid cycle, I'd say, um, you know, particularly on, on the fuel side that you've seen throughout industry. Um, been just super proud of our commercial organization and their ability to really raise what we think of as the specialties mid-cycle level. If you went back five, six years ago, you'd see that dollar per barrel in kind of our specialty margin slide around 40, 45. And now we're seeing it pretty consistently between 60 and 70, even in a pretty soft commodity environment that we're in right now. So it's a real testament to the team and all the work they've done over the past couple years on that. As far as organic growth and asset sales, and let's get Scott to pile back on to that original, you know, the margin comments. We have some organic growth opportunities. that we're pretty excited about. Our first focus is deleveraging. So I think as you see us manage our capital, we'll be allocating our capital towards deleveraging, you know, first and foremost. Of course, we do have, you know, low hit, low risk, high return kind of optimizations. There's always a number of those that pop up every year, but I don't think there's anything that would be of note to talk about a specific big project. You know, as we move forward and think about life after, you know, Montana renewables, partial monetization or something like that, when our balance sheet is, you know, completely solved, then, yeah, we've got some really interesting organic and inorganic growth projects, and we look forward to getting to that that state and focused on it clearly. I think your third part was asset sale. And, you know, can it be part of the plan? Sure. I think an asset sale M&A should always be part of the plan, part of the thinking. It's not our goal to simply be a hoarder of assets. You know, we're going to win in the long run because we compile a group of assets that work together well and are worth more. in a combined system than they are as individual businesses. So, I think M&A asset sales are always in the conversation. I also would say not trying to forecast that we have anything M&A or something like that to talk about, just to highlight that it's always in our thinking you know, we're focused on shareholder value creation. We can sell anything that's worth more to somebody else than it is to ourselves. So that's just the way we think about it. But anyway, Scott, back to margins. Any more on how we see the world?

Yeah, Adam, let me toss out a couple quick things. So in terms of the margin, I think if we look at it in the two broader buckets on the fuels piece, as we're all aware, right, that crack spreads have been dropping this year and are probably now falling below mid-cycle, and we're entering the the difficult, you know, two-floor seasonality. So, on the fuel side, a little bit below mid-cycle. On the specialty side, and to Todd's point, you know, certainly there's some macro pressure out there with seasonality and what's going on with the economy, some global geopolitical challenges. But, you know, we've really taken the business specialty products piece from a $40 a barrel, up to at one point, you know, into the 80s. But we've called out that mid-cycle is probably somewhere between 60 and 70. Q3 came in at the high end of that mid-cycle. Q4 will probably be a little bit more at the lower end of that. But we've really still changed the margin. And just maybe one comment for me on the inorganic and the organic. You know, I think on the organic growth piece for the special needs business, Adam, we've You know, as we look at our balance sheet, we've really had to do some very low-capital work, low-risk, low-capital, quick return, high return type of IRR, organic investments, and it's been very successful. On the inorganic side, I think, you know, we have ideas, and we talk about it, and as we continue to work on our balance sheet, I think those will come into the picture a little bit with more clarity.

Got it. That is super helpful color. Thanks guys. I guess my last question is just on MRL. So maybe we could switch gears to that. On the feedstock side of the equation, is there anything you would highlight as to how feedstock costs are trending right now? And then given Montana's strategic geographic position and putting into context the SAP expansion, what's the outlook on the feedstock side of the equation going forward? Thanks.

Hey Adam Bruce. So, The volume outlook is we're not concerned about it. Montana Renewable sits in the middle of a really large production area for these kinds of feedstocks. There's a lot of diversity, and we're actually dynamically optimizing as those feed classes move around relative to each other. So then you come to the price, in a way, The view that we have is all of these feeds over a reasonable short time scale are going to be arbitraged based upon their carbon intensity. So the prices will be different. But if I focus you on margin, the margin add is not as differentiated as the prices. As a margin-add business, we're floating on the flat price. So the secular decline for two years now in the flat price, everybody's written that down. That does show up on a lot of balance sheets. And we have talked in the past on this call about gains or losses from short-term price movements. But in the long run, you know, we don't think that's a structural concern for the industry.

Let me pile on with just one more thought, Adam. As we think about change to PTC, you know, our competitive advantage from location that we obviously spend a lot of time thinking about and talking about publicly We think that actually grows. So volatility in the near term, you know, the whole industry is going to have to figure out how this works, and feedstock prices will have to adjust, and everybody will get used to the new system, right? So not trying to signal anything here for the next couple of months. But I think as we see the PTC play out, a business like Montana Renewables that is based on a core competitive advantage of really flexibility – has a lot of options here that maybe some others don't. So we can sell our product into Canada, for example, that has different rules. So there's a potential of buying discounted feedstocks that maybe aren't worth as much to the normal kind of average U.S. producer that could have standalone value to Montana Renewables. We have SAS that obviously runs at a different operates in a different way when it comes to the PTC. So, I think just the flexibility that we have in market products, in market geographies, our ability to take advantage of state credits, and the ability to access a wide variety of different feedstocks, we should see that really play into our favor as we shift into a world that adds kind of more complexity with the PTC.

Got it. Super helpful. Thanks, guys. Thank you.

Our next question will come from Amit Dayal with HC Wainwright. You may now go ahead.

Thank you. Good morning, everyone. With respect to this $150 million equity raise, guys, is that already underway, that process, you know, in terms of taking care of the tranche one side of things?

Yeah, it's – you know, we're not expecting – this is Todd, by the way. Thanks for the question. We're not expecting to have, like, an additional process for it. If you think back to some of the financing that we've already done here in the not-too-distant past, You know, it's probably not major coincidence that you see 150 in one of them. So, you know, I think we've expected that this is going to come. We've been working on this for a while and have kind of planned accordingly. So kind of like I said a little earlier, we're not planning. We've got some questions from investors. around, hey, are you going to go raise equity for this $150 million? Do you have to do a quick sale of Montana Renewables to raise this? And the answer is no. The existing investors of Montana Renewables plan to do this. Now, the second point is we always have flexibility, and we've talked about kind of monetization, partial monetization of Montana Renewables at the right time whenever that is. So... I just wanted to draw out or point out that it shouldn't be tied mentally to this first $150 million.

Okay. Thank you for that, caller. Appreciate it. And can you maybe remind us, you know, 3Q23 MR adjusted EBITDA was quite a bit higher. Was there any one-time type of benefit in that quarter that, you know, provided those kinds of results versus...

No, no. So remember, you know, the index margins have been $2 a gallon in renewable diesel for decades, you know, for years, until the RBO reset occurred, you know, late in the year. So what you see in Q3 last year is really, even though we weren't running at that point in time nearly as well as we are now, and we still had some clean feet in the system and all of that, that just represents a couple months before we saw index margins kind of fall apart after the RBO. So that's all you're seeing in those Q3 numbers. And we think it represents, you know, the earnings power of this business because that was a period where, if you remember, we weren't operating all that well and still were able to post those numbers in a more normal margin environment.

Yeah, I mean, the contrast is so, you know, so broad. I wasn't sure whether it was just pricing or if there were any other factors. But, yeah, it's good to see, you know, that the business has this level of potential for cash flows. That's all I have, guys. Thank you so much. I'll take my other questions offline. Thank you.

Thank you.

Our next question will be a follow-up from Jason Gableman with TD Cohen. You may now go ahead.

Hey, I want to ask yet another policy question. Sorry about that. Wondering what your outlook is on small refinery exemptions. If you could just remind us the litigations that are ongoing and if those impact future administration's abilities to grant those SREs.

Hi, Jason Bruce. The fact that this is a difficult subject to administer means that, you know, we're tracking 29 lawsuits. We're not party to 29, but we're tracking them. And, you know, there have been circuit splits. Several of these things have elevated to the Supreme Court. So I think, you know, our view is we'll have some statesman-like solutions that kind of damp all of this down. Will that include some kind of inhibition for the small refinery exemption? No, that's going the other way. The suits that we are a party to, we are winning, and the courts are saying that the law is clear. We're entitled to these. We qualify on the merits, and we're not concerned about the future of the program.

Got it. I think some of the previously approved and then rescinded SREs were put forth to the EPA to be reapproved. I'm not sure if you're part of that group and if you are, any expectation on timing there?

I would not set any expectation on timing for either the legal process or the EPA. You know, our interest is in helping the EPA get these things to be technically correct, to be validly assessed. And, you know, the law requires they consult with the Department of Energy. Todd said earlier that's an agency we've got a lot of confidence in. So, you know, we think this will play out. I'm assuming we're talking months, not years, but I don't want to have an opinion on work done by others.

Understood. Thanks for those answers.

This concludes your question and answer session. I'd like to turn the conference back over to John Comple for any closing remarks.

Thanks, Anthony. On behalf of the management team, I'd like to thank everyone for their time this morning and continue to interest in Calumet. Have a great weekend. Thank you again very much.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.