Q3 2024 Martin Midstream Partners LP Earnings Call

Thomson Reuters StreetEvents

18 October 2024 at 2:31 am·18-min read

Participants

Sharon Taylor; Chief Financial Officer, Executive Vice President of Martin Midstream GP LLC; Martin Midstream Partners LP

Robert Bondurant; President, Chief Executive Officer, Director of Martin Midstream GP LLC; Martin Midstream Partners LP

Randall Tauscher; Chief Operating Officer, Executive Vice President of Martin Midstream GP LLC; Martin Midstream Partners LP

Timothy O'Toole; Analyst; Stifel

Kyle May May; Analyst; Sidoti

Patrick John Fitzgerald John Fitzgerald; Analyst; Baird

Presentation

Operator

Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the MMLP third quarter earnings conference call. Today's conference is being recorded. (Operator Instructions) At this time, I would like to turn the conference over to Sharon Taylor, Chief Financial Officer.
Please go ahead.

Sharon Taylor

Good morning, and thank you to everyone joining us on the call today. Here in the room are Bob Bondurant, CEO; Randy Tauscher, COO; David Cannon, Controller; and Danny Cavin, Director of FP&A.
During this call, we will make forward-looking statements as defined by the SEC. These statements are based upon our current beliefs as well as assumptions made by the management team and information currently available to us. Please refer to our earnings press release issued yesterday afternoon and posted on our website as well as our latest filings with the SEC for a list of factors that could impact the future performance of Martin, and cause our actual results to differ materially from our expectations.
We will discuss non-GAAP financial measures on today's call. The earnings press release includes a reconciliation of these non-GAAP financial measures to their comparable GAAP financial measures.
And with that, I will turn it over to Bob to discuss third quarter earnings.

Robert Bondurant

Thanks, Sharon. First, I would like to begin with comments regarding the impact of Hurricane Milton on our people and on our assets. Our Martin team members who operate and manage our Tampa terminal and our trucking operations in Central Florida are all safe and accounted for. We shut down both operations more than 24 hours before landfall. And as a result, our people were able to reposition themselves to safety.
Regarding our assets, our Tampa terminal had no storm surge issues, but the heavy rain filled our tank farm infield and submerged several of our pumps, which will be repaired. We also have some tank insulation damage that will also need to be repaired. Our trucking terminal located in Mulberry had only very minor damage. All in all, we feel very blessed to have experienced minimal impact to our people and to our locations.
Now I would like to focus on our overall third quarter operating performance. For the third quarter, we fell short of guidance by $1.3 million as we had adjusted EBITDA of $25.1 million compared to third quarter guidance of $26.4 million. As I mentioned in yesterday's press release, the primary contributor to our guidance shortfall was an increase in expense related to our long-term incentive plans, which are tied to the fair market value of our common units. As a result, we recognized an additional $1.4 million in expense when compared to guidance.
Without this expense recognition, we would have exceeded forecast by $0.1 million. The impact of this expense recognition when compared to guidance negatively impacted our terminalling and storage segment by $0.6 million. Both our sulfur services and our specialty products segments by $0.3 million each and our transportation segment by $0.2 million.
Now I would like to break down our adjusted EBITDA performance by each segment. For the third quarter, our largest cash flow generator was once again our transportation segment, which had adjusted EBITDA of $11.6 million compared to guidance of $10.8 million. Within this segment, our land transportation business had a very stable quarter and had adjusted EBITDA of $6.5 million compared to guidance of $6.4 million. We believe this stability will continue in the fourth quarter in this business.
Our marine transportation business had adjusted EBITDA of $5.1 million compared to guidance of $4.4 million. While our forecasted utilization was on target with guidance, our average inland day rate exceeded forecast by 8%. We continued to see stability in rates due to tightness in the inland market and as a result, expect stable cash flow in this business line in the fourth quarter.
Our next strongest cash flow generator in the third quarter was our terminalling and storage segment, which had adjusted EBITDA of $8.4 million compared to guidance of $9 million. The missing guidance can be entirely attributed to the increased incentive compensation expense of $0.6 million. Without this charge, our terminalling and storage segment was in line with guidance. Looking toward the fourth quarter, we believe both operations and adjusted EBITDA will remain stable for our terminalling and storage segment.
Our third largest cash flow generator was our specialty products segment, which had adjusted EBITDA of $4.6 million compared to guidance of $6.5 million, a miss of $1.9 million. Excluding the long-term incentive compensation expense charge of $0.3 million, we missed guidance by $1.6 million. This miss was primarily the result of weak performance from both our packaged lubricant and grease business lines. Both groups saw weaker demand for their products than forecasted. We believe this weak demand is being driven by the slowing US economy.
Looking toward the fourth quarter, the overall weaker economy combined with the seasonal reduced demand for our lubricant and grease products should result in softer cash flow in the fourth quarter relative to the other three quarters.
Finally, I would like to discuss the performance of our sulfur services segment, which had adjusted EBITDA of $4.2 million compared to guidance of $3.7 million. Without the long-term incentive-based compensation charge of $0.3 million, we would have exceeded guidance in this segment by $0.8 million. The pure sulfur side of our sulfur services segment had adjusted EBITDA of $3.7 million compared to guidance of $3.1 million. The primary driver of this outperformance was the strong volume of sulfur production from our Gulf Coast refinery customers. The daily volume of sulfur handled was 12% greater than our forecast as we logistically manage approximately 3,600 tons per day of sulfur production into or through our Beaumont terminals.
Looking toward the fourth quarter, subject to any unexpected refinery turnarounds, we remain optimistic that sulfur production from our refinery customers will continue to remain at these higher levels which should allow us to achieve or exceed guidance in the pure sulfur side of the business. Our fertilizer group had adjusted EBITDA of $0.4 million which was $0.3 million less than EBITDA guidance for the third quarter. While the volume of fertilizers sold in the third quarter was 27% less than forecast, we realized an improvement in actual gross margin per ton relative to guidance. This margin improvement was a result of the mix of fertilizer products sold in the third quarter when compared to our forecast. Looking toward the fourth quarter, we anticipate the normal seasonal trough in cash flow relative to the first and second quarters for the fertilizer business.
Before I turn the call over to Sharon, I would like to make a few comments regarding our pending transaction with Martin Resource Management Corporation. As you know, MRMC approached MMLP with an initial buyout proposal on May 24, 2024, which was reviewed by our Board's Conflicts Committee which consists of three independent directors and was assisted by independent financial and legal advisers. A robust process ensued and the committee negotiated hard on behalf of the unaffiliated unitholders to maximize value. The pending transaction will deliver nearly $1 more per unit than the initial proposal.
In the weeks ahead, we will follow a proxy statement with more detail on the transaction and we look forward to engaging with unitholders as we work to secure the necessary approvals to complete the transaction. While we look forward to keeping you all updated until the proxy is filed, we have no more information to share regarding the pending transaction. As such, the focus of our call today will be on our third quarter performance. We ask that you please keep questions focused on our financial and operational performance.
Now I'll turn the call back over to Sharon.

Sharon Taylor

Thank you, Bob. As of September 30, 2024, our total long-term debt outstanding was $486.5 million of which $86.5 million was drawn under our revolving credit facility, and the remaining $400 million consists of our second lien 11.5% notes due February 2028. Our available borrowing capacity under our $150 million revolving credit facility was approximately $54.3 million, including a reduction for approximately $9.2 million of issued letters of credit. Our bank compliant adjusted leverage ratio was 4.14 times at the end of the quarter, and interest coverage was 2.23x. While both our total outstanding debt and adjusted leverage increased from the second quarter due to working capital needs, coupled with the August interest payment on our outstanding notes we remain committed to debt reduction and anticipate exiting the year at a debt level that reduces our adjusted leverage to below 4 times.
At the end of the quarter, the partnership was in full compliance with all of our covenants, banking or otherwise. Capital expenditures in the third quarter were $12.5 million, consisting of $8.6 million in maintenance CapEx and $3.9 million in expansion CapEx. The majority of maintenance CapEx during the quarter was associated with regulatory inspection costs on marine equipment and turnarounds at our fertilizer plants. The expansion CapEx was primarily related to improvements to the oleum tower in Plainview, Texas, in support of the ELSA joint venture.
Our forecast for full year 2024 capital expenditures now totals $57.4 million, down from the previous $58.4 million discussed during the second quarter conference call. We currently anticipate full year maintenance CapEx to be $34.8 million and full year expansion CapEx to be $22.6 million which includes $18.8 million for the ELSA JV either through improvements to the oleum tower or cash contributions for our 10% ownership of the joint venture. As Bob discussed, overall, the partnership performed well in the third quarter, allowing us to maintain our adjusted EBITDA guidance for full year 2024 of $116.1 million. For the fourth quarter, we have adjusted our forecast slightly for both the Marine and Sulfur Services divisions. You will find our 2024 adjusted EBITDA guidance for each individual business under our four reportable segments in the presentation attached to yesterday's earnings press release. That concludes my remarks for today, and I will turn it back over to Audra for Q&A.

Question and Answer Session

Operator

(Operator Instructions) We'll take our first question from Selman Akyol at Stifel.

Timothy O'Toole

This is Tim on for Selman. I appreciate you taking my call. So I just wanted to start off in Florida, and I appreciate the update, and I'm glad the personnel are all okay. But just wanted to kind of see if this will have any implications for the remainder of the year as far as cash flow from those assets and potentially any capital that needs to be allocated to kind of fix some of the minor damage there?

Randall Tauscher

Tim, this is Randy. Our Tampa terminal did sustain a little bit of damage installation of some of the tanks. Pumps are going to have to be repaired. So we're going to have a CapEx outlay of somewhere between $0.5 million and $1 million over the fourth quarter and first quarter to cover those expenses. Other than that, we don't expect much impact commercially.

Timothy O'Toole

Got it. I appreciate that. And then I guess jumping over to ELSA. Just wanted to get any updates there, everything still on track? And then has there been any other indications from Samsung on potential future prospects for growth out of that JV?

Randall Tauscher

Yes. So the ELSA plant was supposed to begin taking feedstock from Martin in August. We talked about that the last call in July. It hasn't taken feedstock yet. We're ready to provide the feedstock as soon as DSM is ready to take it.
We expect that to be within the month of October. So -- but I'm told not this week. So next week, it should be ready to start taking the feedstock, and that's going to start the whole process of producing ELSA, testing the ELSA, improving their processes and then qualifying it with the customers. So that is imminent.
In terms of the sales program, I think the sales program is likely to be delayed from what we thought it was going to be. You've probably seen the news articles out there on delays. We've seen some public announcements for that. I think sales in 2025 probably are not going to be as robust as we were hoping they would be. And until we see that development, there's probably not going to be much discussion around the next plant because we need to make sure this plant is commercial first.

Robert Bondurant

And I'll add one more comment is that we do have a reservation fee that does begin October 1 that will be earned. But to Randy's point, the sales of the actual ELSA to the customers will be most likely muted for a while.

Timothy O'Toole

Understood. And then I guess, turning to the barge business that you guys have kind of highlighted strength there, and it's certainly outperformed, but just kind of curious on what you're currently seeing for rates and any updates to contracting there?

Randall Tauscher

Yes. So the rates are currently $11,000 to $11,500 a day, which is a couple of thousand dollars greater than it was a year ago and the clean rates are currently $9,600 to $9,800 per day, which is on par of where it was a year ago. So we've seen a continued rise in the heated rates. We've seen stable over the last year in the clean rates now. What we are seeing now is a stable market for the unit rates.
We don't see those rates continuing to rise at least through the winter months. They've stabilized out. But we expect that business to do very well in the fourth quarter and the first quarter.
In terms of the term of the rates, we have one of our third-party tows in dry dock. Other than that, we had 50% of our tows locked up on term into 2025. I think some of those are 5, some of those are 12 months long, yet remaining. And then we have 20% of our remaining fleet on a term contract that is coming to its end during the next 30 or 45 days, and those rates were being negotiated. The rest of them are on spot.

Timothy O'Toole

Got it. And then one last one, if I could. And I understand if you guys can't answer it. But just regarding the proposed merger, will the vote be kind of a simple majority? Or will it be a majority of the holders outside of inside ownership?

Sharon Taylor

Yes. That will be a simple majority vote.

Operator

We'll move next to Kyle May at Sidoti.

Kyle May May

So I appreciate it's too soon for formal guidance next year, but just wondering if you can give us any preliminary thoughts about capital spend in 2025 just given we're probably getting wrapped up on the capital needed for ELSA. So just curious kind of preliminary thoughts about next year.

Randall Tauscher

Yes. So from a growth capital perspective, not near as significant as what we saw this year because of the ELSA. The ELSA still has a few dollars to spend but I think somewhere in the ballpark of $1 million as we believe and will be done with everything we committed to on that project. From a maintenance perspective, we haven't -- really haven't gotten to our budgeting process yet. I will tell you, we don't right now have a planned refinery turnaround for next year, and we have less barges going to the shipyard next year.
So I would think that we would be under the $34.8 million that looks like we're going to achieve this year. But we don't -- we haven't done enough yet to talk with any certainty around that.

Kyle May May

Okay. Great. That's helpful. And then another question on the ELSA project. I believe previously, you've indicated that once it's fully operational, it could generate about $6 million on an annual basis for Martin.
Can you give us an update on your outlook maybe first on that total amount, once it's fully operational, is that $6 million still a good figure. And then with the slowdown next year, just kind of how you're thinking about that progression to that full run rate?

Randall Tauscher

Yes. So as Bob commented, we're getting the reservation fee starting this month. And then when we originally ran the economics and value the ELSA. When the ELSA gets sold to the consumers, about 60% to 70% of the value in the project would come with the reservation fee and the other 30% to 40% would come depending upon the ultimate sales price we get in the volume we would sell. So I would say for 2025, again, we're working on our budget for next year.
We're relying -- remember, we're a minority in this, we're relying on our marketer, Samsung to feed us with that information. We don't have good information yet what their expectations are around 2025.

Operator

We'll move next to Patrick Fitzgerald at Baird.