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?