Martin Midstream Partners L.P.

Thank you for standing by and welcome to the third quarter 2020 earnings conference call and webcast. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Mr. Bob Bondurant, Chief Financial Officer. Thank you, sir. Please go ahead.

Thank you, Polly. And good morning, everyone. On the call today, we have Ruben Martin, President and CEO, Randy Tauscher, Chief Operating Officer, Also joining us is Danny Cavan, Director of Financial Planning and Analysis, and David Cannon, Director of Financial Reporting. The one person missing today is Sharon Taylor, Director of Finance and Investor Relations. Sharon currently has a significant personal situation with her daughter, Charlie, who was in a devastating head-on collision last week. Appropriately, Sharon will not be with us on the call today as she is bringing her mother to her daughter, who has had numerous surgeries over the past few days. Please pray for healing for Charlie and support comfort and peace for Sharon. Now, before we get started with the partnership comments, I'll remind you that management may be making forward-looking statements as defined by the SEC. Such statements are based on our current judgments regarding the factors that could impact the future performance of Martin, including facts and assumptions related to the impact of COVID-19, but actual outcomes could be materially different. You should review the risk factors and other information discussed in our SEC filings and form your own opinions about Martin's future performance. We will discuss non-GAAP financial measures on the call today. Please refer to the table in our earnings press release posted in the investor relations section on our website to find information regarding those non-GAAP financial measures, including a reconciliation of historical measures referenced in today's call to their corresponding GAAP measures. Now let's discuss our performance in the third quarter. As was the case with our second quarter earnings call, we will not be comparing our third quarter performance to third quarter guidance by segment as we previously pulled our quarterly guidance due to the uncertainty around COVID-19. However, we have given adjusted EBITDA guidance range of 95 to 107 million for 2020. Through the three months, or excuse me, for the three quarters of 2020, we have realized adjusted EBITDA of $77.5 million compared to $72.8 million for the first three quarters of 2019. Now for the third quarter, which is always our seasonally weakest quarter, our adjusted EBITDA was $22.5 million compared to $22 million for the third quarter of 2019. The third quarter's adjusted EBITDA performance of 22.5 million exceeded our internal nonpublic guidance in spite of frequent Gulf Coast hurricane activity and the continued negative impact of COVID-19 on refinery utilization. I would now like to compare our third quarter performance by segment in 2020 to last year's third quarter and also provide some limited outlook for the fourth quarter. Our terming and storage segment was our largest cash flow provider in the third quarter, as adjusted EBITDA was 14.2 million compared to 13.3 million a year ago. While the fee-based portion of our terming segment cash flow for the third quarter was marginally better year over year, the majority of the cash flow increase was primarily driven by improved performance in our packaged lubricant business. Although our third quarter volume was slightly less this year compared to last, we experienced better margins due to lower supply and production costs. Now looking toward the fourth quarter, we believe our overall term in cash flow will be less in the third quarter due to anticipated seasonal decline in customer demand of our packaged lubricants, which primarily occurs during the slower sales season between Thanksgiving and New Year. Now our second largest contributor to cash flow in the third quarter was our transportation segment, which had adjusted EBITDA of $5.5 million compared to $8.2 million a year ago, a decline of $2.7 million. The majority of this year-over-year decline for the third quarter occurred in our marine transportation business as its cash flow fell $2.3 million. Our inland marine utilization fell from 96% a year ago to 65% in the third quarter this year. This decline is a direct result of continued reduced refinery utilization, which has been negatively impacted by COVID-19. Refinery utilization was also impacted in the third quarter by hurricane activity this year, including Hurricane Laura and Beta, which had significant impact on the Lake Charles area refineries and, to a lesser extent, Beaumont area refineries. Our truck transportation was down 0.3 million compared to a year ago, primarily due to the impact of Gulf Coast hurricane activity, which significantly lowered our daily load count in late August and early September. Now, looking toward the fourth quarter, we believe marine transportation utilization will remain similar to the third quarter. While we believe our average daily truck transportation load count should increase as a result of an increase in butane demand from refineries, and from wholesale propane customers. We should also have no hurricane disruption in the fourth quarter. Our third largest contributor cash flow was our sulfur services segment, which had adjusted EBITDA of $4.2 million compared to $3.1 million a year ago. Our pure sulfur side of the sulfur services segment had adjusted EBITDA of $3.5 million compared to $1.3 million a year ago. This year's third quarter cash flow is normal. Last year our sulfur shiploader was out of service due to a windstorm casualty loss which occurred in May of 2019 causing last year's third quarter cash flow in this business to be weaker than normal. Our fertilizer business had cash flow of .6 million in the third quarter compared to 1.9 million a year ago. We had longer downtime due to our annual third quarter plant turnarounds this year compared to last year. As a result, our production levels at Plainview and Natchez were significantly less than they were a year ago, causing a negative impact to cash flow this quarter. However, all facilities have been producing fertilizer products in the fourth quarter, and we should be able to maximize production in anticipation of the annual first quarter demand for our fertilizer products. Now moving to our natural gas services segment, our adjusted EBITDA of $2.8 million in the third quarter compared to $1.6 million a year ago. In September this year, we saw a significant increase in butane demand from some of our refinery customers relative to a year ago, accounting for the increase in cash flow this quarter. Now looking toward the fourth quarter, we anticipate we will sell a significant portion of our butane inventory currently in storage and realize anticipated cash flow performance for this business. Our butane inventory volume is currently two-thirds hedged. Now I would like to discuss our recent bond exchange balance sheet and liquidity. I'll begin with a recap of the settlement of the exchange and cash tender offer for our 2021 notes, which was effective on August the 12th. With the closing, we have extended the maturities of the majority of our senior notes out to 2025 with a minimal balance of the 2021 notes due in February, which I will discuss further in a moment. The transaction was accounted for as a debt modification under U.S. GAAP, and thus the partnership was required to recognize an $8.5 million loss primarily related to the expensing of non-lender-related costs incurred with the debt restructuring. The transaction allowed us to extend our debt maturities reducing the outstanding commitments of our evolving credit facility from $400 million to $300 million, and adjust our total leverage, senior leverage, and interest coverage covenants so that they flex down as we work through our deleveraging plan to a total leverage ratio of less than 3.75 times. Under the new indenture, while the total leverage ratio is greater than our target leverage ratio, the partnership can use 25% of any excess free cash flow to reduce the obligation under the 2025 note indenture by making an annual offer to all holders of the 2025 notes at 100% of the principal amount. However, there is no obligation upon any of the note holders to accept this offer. Now, on September 30th, the partnerships balance sheet reflected approximately $573 million of both long-term and current installments of funded debt. This was an increase of approximately $28 million from June 30th and is primarily attributed to the inventory build associated with our butane optimization business. As I mentioned earlier, the current installment amount includes the remaining tranche of our senior unsecured notes due February 2021 that were not tendered during the recent exchange and also includes current capital lease obligations. The untendered balance remaining of the 2021 notes totals approximately $29 million and this balance will be funded with proceeds from the revolving line of credit when the notes mature in February. Long-term debt relates to our revolving credit facility and the new senior notes due in February 2024 and 2025. Our balance sheet funded debt is shown before unamortized debt issuance cost of $10 million as actual funded debt outstanding was $551 million. Reconciling this amount at quarter end, our revolving credit facility was $205 million. The notional amount of our senior secured second lien notes due in 25 was $292 million, and the notional amount of our senior secured one and a half lien notes due in 24 was $54 million. Our total available liquidity on September 30th reduced by outstanding letters of credit of approximately $17.4 million, with $78 million based on our current $300 million revolving credit facility. At quarter end, our bank-compliant ratios of senior secured leverage and total leverage were 1.81 times and 4.87 times, respectively. On September 30th, we had $31.2 million of debt assigned to the working capital carve-out which is directly attributed to the seasonal NGL inventory build where the partnership has either forward sold or hedged inventory. Accordingly, this amount of debt was carved out from the total debt for the total leverage calculation. And finally, our interest coverage ratio was 2.8 times, and all the partnership was in full compliance with all covenants a quarter in. Capitalized spending in the quarter included $2 million of expansion capital. In addition, in 2020, we have spent approximately $3 million related to the nature shiploader replacement and $10.7 million over the entire project. This expenditure amount was offset by net proceeds from insurance recoveries of $10.3 million, with $5 million received in 2019, $1.8 million received in the first quarter, and the balance was received in the third quarter. Amounts related to the shiploader are not included in our expansion CapEx guidance numbers. With respect to the quarter, a majority of the expansion capital spent was allocated to completing the development of the new Phoenix grease plant and to updates on an underutilized tank at our Tampa terminal. With respect to the new Phoenix grease plant, construction on the facility is complete and we are awaiting one final inspection and approval, which we anticipate to occur in the next several weeks. And regarding the Tampa terminal, the new tank storage agreement will begin generating revenue no later than December 1st. In all, we anticipate total spending for expansion CapEx to remain in the range of $10 and $13 million. Switching to maintenance CapEx, during the third quarter we spent approximately $3 million for a year-to-date total of $8.5 million. For the balance of 2020, We are estimating a total spend of approximately $1 million to cover the cost of repairs incurred from the recent Gulf Coast hurricanes, and we expect our total maintenance capex spend for 2020 to remain in the range of $14 to $16 million. Now, the partnership had a distributed cash flow of $8.1 million for the quarter and excess free cash flow of $4.8 million. For 2020, the measurement period for excess free cash flow spans from the month of September through December. To date, approximately 0.3 million can be used as consideration to buy back 2025 notes starting in January of 21. Finally, regarding adjusted EBITDA for 2020, with the favorable performance from the quarter, We feel comfortable that our performance for the fourth quarter will allow our annual adjusted EBITDA to fall within the previously provided range of $95 to $107 million. With continued volatility in the economy, specifically within the energy space, we will continue giving guidance by an annual range. This concludes our prepared remarks for this morning. I will now turn the call back to Polly for the Q&A.

Thank you. As a reminder, to ask a question, you will need to press Store 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. And your first question comes from the line of TJ Schultz with RBC Capital.