Martin Midstream Partners L.P. (NASDAQ:MMLP) Q4 2022 Earnings Conference Call February 16, 2023 9:00 AM ET

Company Participants

Sharon Taylor - Chief Financial Officer
Bob Bondurant - Chief Executive Officer
Randy Tauscher - Chief Operating Officer

Conference Call Participants

Selman Akyol - Stifel
Patrick Fitzgerald - Baird

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the MMLP's Fourth Quarter 2022 Earnings Call. I would now like to turn the call over to Sharon Taylor, CFO. Please go ahead.

Sharon Taylor

Thank you, operator, and good morning, everyone. With me today are Bob Bondurant, CEO; Randy Tauscher, COO; David Cannon, Controller; and Danny Cavin, Director of FP&A.

Before we get started, I will 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, 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 today's call. Please refer to the table in our earnings press release posted in the Investor Relations section of our website to find information regarding those non-GAAP financial measures, including a reconciliation of historical non-GAAP financial measures referenced in today's call to their corresponding GAAP measures.

And now, I will turn the call over to Bob.

Bob Bondurant

Thanks, Sharon. Before I get started with my normal discussion of our operating performance, I would like to discuss our thoughts around the recent decision to exit the butane optimization business. We experienced an EBITDA loss in the fourth quarter of $10.7 million in this line of business.

While we took a noncash write-down of butane inventory to market prices at the end of the third quarter, on a cash basis, we carried approximately 1.65 million barrels into the fourth quarter selling season at an investment cost greater than market. We bought this inventory throughout the late spring and summer but we did not hedge our inventory as the forward pricing curve was significantly backward-dated.

As we approach the fourth quarter selling season, butane pricing did not improve and we experienced losses from the actual volumes sold out of inventory, resulting in the $10.7 million EBITDA loss experienced in the fourth quarter.

As a result of the significant negative financial performance in the fourth quarter of our butane optimization business, we concluded any future positive cash flow opportunity associated with this business line was no longer worth the commodity risk associated with carrying inventory from the summer purchasing season to the winter selling season.

As a result of the decision to exit this particular business line, we will sell the remaining butane inventory in storage with the majority of inventories sold in Q1 and the remaining volume being sold in April and May. The cash realized from our butane inventory liquidation will be used to pay down our revolving line of credit. We believe proceeds from this inventory liquidation should approximate $45 million to $50 million.

Going forward, our intent is to operate as a fee-based butane logistics business, primarily utilizing our North Louisiana underground storage assets, which have both truck and rail capability. This logistics business will also utilize our truck transportation assets for fee-based product movements. As a result of this new business model, we will no longer carry any butane inventory going forward. This will eliminate commodity risk, reduce cash flow and earnings volatility, and will also substantially lower our working capital requirements.

I would now like to move to a discussion of our fourth quarter operating performance. For the fourth quarter, we had adjusted EBITDA of $17.8 million compared to $39.7 million a year ago. The difference between the two quarters is attributable to the butane optimization business. In the fourth quarter a year ago, butane optimization made $11 million in EBITDA and this year it had an EBITDA loss of $10.7 million, a negative swing of $21.7 million.

Excluding the results of the butane optimization business for both fourth quarters, we had adjusted EBITDA of $28.5 million in the fourth quarter compared to $28.7 million a year ago. For the year, Martin Midstream had adjusted EBITDA of $114.9 million compared to $114.5 million a year ago. This year we had negative EBITDA of $7.2 million in the butane optimization business, compared to positive EBITDA of $22.3 million, a year ago a negative swing of $29.5 million.

Excluding the results of the butane optimization business for both years, we had adjusted EBITDA of $122.1 million compared to $92.2 million, a year ago, an increase in cash flow of approximately $30 million for the year. For the fourth quarter, our largest cash flow generator was our Transportation business, which had adjusted EBITDA of $14.7 million compared to $8.8 million a year ago.

Our land transportation improved over last year, as we had $11.3 million of adjusted EBITDA compared to $7.6 million a year ago. We had a 28% increase in our load count in the fourth quarter of this year compared to last year, primarily driven by a corresponding increase in our driver count. Also our revenue per mile improved over the prior year, which helped absorb the inflationary cost increases we have been experiencing.

Our Marine Transportation business also saw improvement compared to the fourth quarter of last year. Adjusted EBITDA was $3.4 million compared to $1.2 million, a year ago. Our average M&A rate was approximately 30% greater in the fourth quarter compared to a year ago, and our utilization improved 10% compared to a year ago.

For the year, our Transportation segment had adjusted EBITDA of $54.9 million compared to $24.1 million, a year ago, an increase of $30.8 million. We saw significant improvement in our land transportation business as it had adjusted EBITDA of $45.5 million compared to $23.9 million, a year ago.

Our load count increased 25% compared to a year ago, primarily driven by the increase in our driver count, in response to growing customer needs and our expansion in Central Florida. We also were able to manage overall inflationary cost increases, by improving our revenue per mile compared to last year.

For the year, in our Marine Transportation business, we saw an increase of $9.2 million in adjusted EBITDA from $0.2 million, a year ago to $9.4 million in 2022. We had an overall 20% increase in both inland barge utilization and day rates in 2022 compared to 2021, as we continue to experience a very tight tank barge market for refined products.

Our second strongest cash flow generator in the fourth quarter, was our Terminalling and Storage business, which had adjusted EBITDA of $10.5 million compared to $11 million, a year ago. On the positive side, our shore-based terminals had an increase in cash flow of $0.5 million compared to a year ago, as we amended the throughput contract with our general partner, which improved throughput pricing.

We believe the new contract pricing will enable our shore-based terminals to have approximately $1 million of adjusted EBITDA, per quarter going forward. Offsetting the shore-based cash flow improvement, were both specialty terminals and our packaged lubricants and grease business.

Specialty Terminals cash flow was down approximately $0.8 million compared to a year ago, primarily due to inflationary operating cost increases. A significant amount of our Specialty Terminal contracts have CPI adjustments, so our revenue should increase in the near term to catch up with the inflationary costs we have been experiencing.

Our packaged lubricant and grease adjusted EBITDA was down $0.6 million, primarily due to margin compression compared to a year ago. For the year, our Terminal and Storage segment had adjusted EBITDA of $47.3 million compared to $43.5 million, a year ago, an increase of $3.8 million.

Our packaged lubricant and grease business improved $4.7 million to $21.4 million in 2022, as we were able to expand our margins compared to 2021. Our shore-based business saw increased cash flow of $0.5 million, primarily due to the new contract pricing with our general partner, which became effective October 1, 2022.

For the year, our Specialty Terminals had a decrease in cash flow of $1.2 million, primarily due to overall inflationary cost increases. Again, a significant majority of our customer contracts in our Specialty Terminal business have CPI adjustments, which will benefit us in 2023.

Now, I'd like to discuss our Sulfur Services segment. We had adjusted EBITDA of $5.7 million in the fourth quarter, compared to $11.4 million a year ago, a decrease of $5.7 million. Our fertilizer business had adjusted EBITDA of $2.7 million in the fourth quarter compared to $7.8 million a year ago, a decrease of $5.2 million. The decline in cash flow can primarily be attributed to the timing of our customers' purchases, as total volumes sold in the fourth quarter, was down 35%.

A year ago in the fourth quarter, our customers held a view that prices would be rising throughout the spring, so they sped up some of their normal Q1 purchases into Q4. This year, our customers delayed normal Q4 purchases into Q1 of 2023, as they now hold a belief that there is downside pressure in pricing. However, based on the strong forecast for corn acres to be planted this spring, we believe an increase in demand for our fertilizer products will begin in the spring of this year.

Our pure sulfur side of this segment had adjusted EBITDA of $3.1 million, compared to $3.5 million a year ago, a decline of $0.4 million. This decline is fully explained by the sale of our Stockton prilling sulfur processing facility, which closed in October of 2022. For the year, our entire Sulfur Services segment had adjusted EBITDA of $30.7 million, compared to $34.3 million a year ago, a decrease of $3.5 million.

Our fertilizer business had adjusted EBITDA of $21.6 million in 2022, compared to $24 million a year ago, a decrease of $2.4 million. The decrease in annual cash flow in our fertilizer business can again be explained by the delayed buying activity of our customer base in the fourth quarter of 2022, compared to 2021.

For the year, our pure sulfur side of the business had adjusted EBITDA of $9.1 million, compared to $10.2 million a year ago, a decrease of $1.1 million. Both years were negatively impacted by unique events. In 2022, we had a write-down in the value of our sulfur inventory of $3.3 million in the third quarter, negatively affecting sulfur cash flow for the year.

In 2021, our pure sulfur business was negatively impacted by decreased refinery utilization and this corresponding decline in sulfur production from Winter Storm Uri in Q1 of 2021 and Hurricane Ida which impacted the Beaumont and Lake Charles area refineries in Q3 of 2021. Going forward, under normal refinery operating conditions, the annual adjusted EBITDA for the pure sulfur side of the business should approximate $12 million.

Now, I would finally like to discuss the performance of our NGL segment. For the fourth quarter, we had adjusted EBITDA of negative $9.1 million, compared to $12.8 million a year ago, a negative EBITDA swing of $21.9 million. This significant decline in cash flow can be fully explained by the previously discussed butane optimization business.

Without the butane optimization business included in the fourth quarter results, our NGL segment had adjusted EBITDA of $1.7 million in the fourth quarter, compared to adjusted EBITDA of $1.8 million a year ago. For the full year, our NGL segment had adjusted EBITDA of negative $1.3 million, compared to $28.4 million in 2021, a negative swing of $29.7 million.

Again, the significant decline in cash flow can be explained by the performance of the butane optimization business. Without the butane optimization business included in the annual results, our NGL segment had adjusted EBITDA of $5.9 million, compared to adjusted EBITDA of $6.1 million in 2021.

This concludes my discussion of our performance by business segment for both the fourth quarter and the year. Now, I would like to turn the call back over to Sharon to discuss our balance sheet, capital resources and our 2023 guidance.

Sharon Taylor

Thank you, Bob. As always, I'll begin with our balance sheet metrics and liquidity, discuss capital expenditures in the fourth quarter, review the note offering and revolver amendment completed in February and conclude with a discussion of 2023 financial guidance. At December 31, 2022, the total of our long-term debt outstanding was $516 million, a reduction of $31 million from the last quarter. Outstanding debt consists of $171 million drawn on our $275 million revolving credit facility; $54 million of secured 1.5 lien notes due 2024 and $292 million of secured second lien notes due 2025.

Total available liquidity was approximately $84 million under our revolving credit facility on December 31 2022. The Partnership's bank-compliant adjusted leverage ratio at the end of the quarter was 4.27 times which includes a $29.7 million debt carve-out, attributed to our seasonal NGL inventory build, when the inventory has been either forward sold or hedged.

During the fourth quarter, we incurred $5.4 million in maintenance capital expenditures for a total of $24.3 million for the year. Of that number, $5.2 million was attributable to turnaround costs at our fertilizer plants and maintenance at the Smackover refinery. Gross CapEx was $1.4 million for the quarter and $6.9 million for the year. The full year total includes approximately $218,000 in expenditures related to the DSM joint venture.

Turning to the new capital structure that was closed and funded in February of 2023. We have been communicating about our debt refinance for some time now and had hoped to initiate a transaction in late third quarter early fourth quarter of 2022. Internally, we worked on a few different avenues, but we're focused on a high-yield offering the timing of which did not materialize for us until January.

On January 30, we announced a proposed senior secured second lien note offering of $400 million along with a cash tender for our outstanding 1.5 and two lien notes. At that time, we also announced an amendment to our revolving credit facility that would be effective with the closing of the note offering. On January 31, we announced the pricing of the offered $400 million in senior secured notes, which closed and funded on February 8. The issued notes priced at 11.5% interest with an original issue discount of 3% and will mature in 2028.

The revolving credit facility amendment includes a lower commitment from $275 million to $200 million and a further step down to $175 million on June 30, 2023 to coincide with cash proceeds received from liquidating the remaining inventory related to the butane optimization business and one further reduction to $150 million on June 30, 2024. The facility does not include a working capital sublimit carve-out for purposes of leverage calculation, since that is no longer a concern with the exit of the butane optimization business.

Covenants for the new facility include maximum total leverage of 4.75 times, stepping down to 4.5 times on March 31, 2025 maximum first lien leverage of 1.5 times and minimum interest rate coverage of 2 times. The revolver will mature in February of 2027.

Next, I'll review our 2023 guidance, which is included as an attachment to our earnings press release and can be found on our website. We expect full year 2023 adjusted EBITDA of approximately $115 million after giving effect to the exit of the butane optimization business, which we forecast to have negative adjusted EBITDA of $9.9 million. You will note when reviewing guidance that we have returned to providing guidance by segment by business line instead of the annual range we have published the last few years.

As management contemplated the exit from the butane optimization business, we determined that our operating segments and the businesses that roll up into them needed it to be realigned. So beginning in 2023, Martin's underground storage will now be reported as part of the Terminalling and Storage segment. Further, we have chosen to rename the Natural Gas Liquids segment as the Specialty Products segment. The Lubricants and Grease businesses will now roll up into the Specialty Products segment instead of Terminalling and Storage.

Reviewing each segment briefly, for 2023, we anticipate Transportation Services to generate adjusted EBITDA of $46 million. Compared to 2022, we expect the Marine Group to benefit from higher day rates and increased utilization and we are forecasting the land group to have another strong year when compared to 2019 through 2021, but have some contraction from 2022's elevated results.

The Terminalling and Storage, forecasted EBITDA is $33.3 million. The remaining operations in this segment are fee-based with contract escalators that will improve results year-over-year. The shore-based terminals will increase approximately $3 million, due to a contract renegotiation that occurred in the fourth quarter of 2022.

And lastly, the segment will benefit from projected earnings related to Martin's underground storage that previously were reported in the Natural Gas Liquids segment. The Sulfur Services segment's adjusted EBITDA is projected to be $30.2 million with the sulfur and fertilizer businesses expected to return to more historical margins and volumes.

Those earnings will be offset slightly, due to the sale of the Stockton California Sulfur priller in October of 2022. Last, the Specialty Products segment is forecasted to have $23.1 million in EBITDA, after giving effect to the exit of the butane optimization business which we project to have negative adjusted EBITDA of $9.9 million.

Within this segment, the Lubricants and Grease businesses are projected to have strong results with some margin compression from last year and the natural gasoline and propane businesses remain steady year-over-year.

For 2023, we are forecasting growth capital expenditures of approximately $17.5 million with $12.7 million for the Oleum Tower at Planview which is part of the capital spend related to the DSM Joint Venture.

Maintenance capital is anticipated to be approximately $26.6 million for the year. Some of our larger expenditures include $4.7 million in our Marine Group related to regulatory inspections on our equipment, $4.2 million in turnaround costs at our fertilizer plants, $1.7 million for a 10-year inspection due on a sulfur tank and $1.5 million in bulk head repairs at the Galveston terminal.

Finally, for full year 2023, we anticipate distributable cash flow of $23.5 million and free cash flow of $6 million. Additionally, we expect to generate cash for debt repayment of approximately $45 million to $50 million from the liquidation of the butane optimization inventory.

This concludes our prepared remarks. I'll turn the call over to the operator for Q&A.

Question-and-Answer Session

Operator

The floor is now open for your question. [Operator Instructions] We will now take a moment to run our roster. Our first question comes from the line of Selman Akyol from Stifel. Please proceed.

Selman Akyol

Thank you. Good morning all. Quick question, just where does the revolver stand today? How much is on it?

Sharon Taylor

The revolver today has approximately $121 million borrowed.

Selman Akyol

So from there are you expected to get reduced by an additional $40 million to $50 million from the proceeds of the remaining butane?

Sharon Taylor

It's somewhere probably between $35 million and $40 million at this time, because we have received the cash from the sales from January.

Selman Akyol

Got it. Okay. All right. And so then should I be thinking about it that as, sort of, like a $480 million or so debt outstanding against your $115 million.

Sharon Taylor

Yes.

Q ??? Selman Akyol

When you think about leverage outcome?

Sharon Taylor

Yes.

Q ??? Selman Akyol

Okay. Thanks. And then just flipping over to your JV since we're limited in questions. I think when I looked at the original press release you talked about 1Q 2024 timing. Is that still good? And then you talked about an investment of $20 million which I guess now you're investing $12.5 million. Has anything changed in timing investment-wise anything we should be thinking about? And then lastly any idea where you're going to be reporting this?

Randy Tauscher

Selman, good morning.

Q ??? Selman Akyol

Good morning

Randy Tauscher

No nothing has changed from a timing perspective. Our target is still the first quarter of 2024 and nothing has changed from the investment capital amount. And to the extent you have more questions feel free to ask more questions.

Q ??? Selman Akyol

Okay. All right. I appreciate that. So then you're going to invest $12.5 million and then you still have approximately another $7.5 million to go sometime in 2024. And then the EBITDA run rate still of $5 million to $6 million that's still a good estimate out there?

Randy Tauscher

It is. We anticipate $13 million or so being spent prior to facility start-up and then upon facility start-up we would have the rest of the cash going out at that point to the JV. That would be the last $7 million-ish.

Q ??? Selman Akyol

Got it. Appreciate that. And then you alluded to I guess things look pretty good for Marine. Can you talk about are you seeing any lengthening in contracting there at all?

Randy Tauscher

Well, the Marine business has come a long way over the last year. Our rates are at $2,000 a day higher than they were a year ago and they're higher in January than they were in December. So the rates are still continuing to go up. As opposed to the answer to your term contract we do have three -- six months ago everything except for maybe one toe would have been in the spot market.

Today we have three to four toes that are in more term business, but we're not even talking a year out. We're talking three, six or nine months of term as opposed to a year or longer on the term. So I still consider most of us -- most of our those being in the spot business or will be back to the spot within a short amount of time.

Q ??? Selman Akyol

Got it. And then I think industry-wise they're looking for a heavier refinery turnaround season. Can you maybe just talk a little bit about that and what you expect in sulfur?

Randy Tauscher

Yes, that's correct. And it's going to come at us pretty quickly here as we get to the end of the first quarter and early in the second quarter. And when you think about the Beaumont area at least for the refineries we work with there and provide services to for trucking and sulfur, but do have turnarounds playing to variant lengths and varying degrees over the March-April maybe early May time frame and that will certainly impact the amount of sulfur we have coming into the sites and the trucking business. But we have all that addressed in our guidance.

Q ??? Selman Akyol

Got it. And then I heard you and I've seen certainly articles on higher acres being planted for corn this year, which certainly is good for you guys and need for fertilizer. Have you seen that strategy turn up in either conversations you're having or any orders that you're seeing? Is there any, sort of , confirmation of a stronger market this year?

Randy Tauscher

The answer to that is, no. We haven't seen it yet. Going back to the third quarter we had as you will recall very slow sales. We expected the fourth quarter to pick up significantly and the fourth quarter was on the low end of the range that we would consider normal for the fourth quarter and through the first half of February we're in the same place. So the sales have not picked up significantly even though the USDA is projecting 92 million acres of corn planted which is a big number.

So as the ammonia price has continued to come down and internationally we're seeing sulfur prices decline just a little bit. They're edging down. We think the farmers have made the decision to delay their purchases, until they need it. And so we do expect that business to pick up, and we expect that to pick up soon, but we haven't seen it yet.

Q ??? Selman Akyol

Got it. And then just the last one, for me. On the caverns and re-leasing, how is that going? I mean, you got contracts signed. Is there any update you can kind of just give on how that's going?

Randy Tauscher

Yes. We just very recently have started to approach potential customers, and we still have some to approach and that will all be happening within the month of February, and the first couple of days of March, and we really can't comment on that further until we have those meetings.

Q ??? Selman Akyol

Understood. All right. Thanks very much.

Operator

Our next question comes from the line of Patrick Fitzgerald from Baird. Please proceed.

Patrick Fitzgerald

Hi, thanks a lot for taking the questions. And congrats on the refinancing. So, if you wouldn't mind, I'm a little bit confused on how your revolver balance is so low after given the sources and uses of your bond deal, and they were issued at a discount and then there was some. Is that taking into account all of the redemption of all the notes?

Sharon Taylor

Yes. yes. So...

Patrick Fitzgerald

Because you were expected to have $161 million I believe on the revolver at close of the deal?

Sharon Taylor

That is correct, but we had -- we closed the deal on February 8. The majority of our butane cash proceeds for the monthly sales, are received between the tenth and the 15th of the month following. So the deal closed and then two days later, we received approximately $30 million in proceeds from the butane inventory sales.

Bob Bondurant

I would like to note. And would the numbers be pro forma as of September 30. Is that true?

Sharon Taylor

Yes.

Bob Bondurant

So we also collected money in the fourth quarter from butane business as well.

Patrick Fitzgerald

Okay. Yes, that's true. Okay. So -- and then you -- so if you expected $40 million to $45 million of unwinding it, and you just got did you say $30 million so $10 million to $15 million more and then you're expected to lose $10 million of adjusted EBITDA, in the first half. So from here, it's kind of neutral, or is that the wrong understanding of that?

Sharon Taylor

Well, I think first of all the $40 million to $45 million to Bob's point on the debt side, that was pro forma from a September 30 number, and our $45 million to $50 million left is from December 31 forward. So there's a slight disconnect there. And then, the other -- there was another piece of your question Patrick, I'm sorry.

Patrick Fitzgerald

Just how much more cash is going to be released, by the time you exit the butane business?

Bob Bondurant

Should be about $80 million left on the revolver, at the end of the butane unwind. So, total debt would be the $400 million plus the $80 million or $480 million.

Sharon Taylor

Yes.

Patrick Fitzgerald

Okay. Well, that's great. So -- and then is that business -- that business has just gone, no one will pay you, a fee to do it anymore, or how does that work?

Randy Tauscher

Yes. So, I know you're familiar with that business. So that's the way, we're taking as we were buying in the summer months and turning around and sell it in winter months. And we just are not going to take on the management of that risk, from this point going forward. So, we're -- as Bob mentioned in his comments, we're going to turn that into a fee business. We have an underground storage in Arcadia, Louisiana that has invested in rail assets there in 2014.

We have truck capabilities there. There are certain refineries that we think will value having storage there. And so our intent is to turn that into service fee-based as opposed to the way we were doing. And yes, we don't -- if there's somebody out there, and we're looking for this person that might be willing to take on the position we took on we would entertain that. We don't know if that's going to happen or not.

Patrick Fitzgerald

Got you. Okay. Thanks. In terms of your visibility -- and thank you for providing the projections, it's very, very helpful. But in terms of your visibility in the Transportation segment, you kind of have that business declining each quarter for the remainder of the year, at least in land. So what's kind of underpinning your assumptions for that segment and -- because I believe that's more of a spot market business. How much risk is there to those forecasts?

Randy Tauscher

Yes. So when you think about the land transportation business and go back to the middle of 2021 to the end of 2022, the environment we were in was our rates were rising quicker than our OpEx was rising. And we know that's not going to happen forever. The feedback we have received from our customers. Now the refineries, we expect to continue to run strong throughout the year. The feedback we've got from the chemical producers as we get through the year, they may be selling less pulling back a little bit than what they historically have. So those two factors, we have chosen to bring the EBITDA contributed from the Land Transportation down as we work through the year.

Patrick Fitzgerald

Okay. Thanks. Now with the butane gone, that was always kind of -- didn't really know what to expect your -- each year. So which business do you feel like is the hardest to forecast of yours right now with butane gone?

Randy Tauscher

I think fertilizer is the largest margin-based business we have left, and over the years we have seen between $14 million and $24 million-ish in that business annualized, and so I think going forward that would be the one we anticipate the most volatility in.

Patrick Fitzgerald

All right. Thanks a lot guys. Appreciate it.

Sharon Taylor

Thank you, Patrick.

Operator

[Operator Instructions] It appears there are no further questions at this time. I would now like to turn the call over to Bob Bondurant for closing remarks.

Bob Bondurant

Thank you, Mandeep. Thanks to everyone on the call today for your interest in Martin Midstream. We've had a quick start to 2023 as we refinanced our debt pushing the closest maturity out to 2027 and decided to exit the butane optimization business in order to remove a great deal of volatility from our earnings and significantly reduce future working capital.

In a short time frame, we have substantially lowered the risk profile of our company and we intend to do more by using the cash proceeds from the liquidation of the butane inventory to reduce outstanding debt and further improve our balance sheet in the near future. Thanks again for your time this morning.

Operator

Thank you, ladies and gentlemen. This concludes today's call. Thank you for your participation. You may now disconnect.