Good day, ladies and gentlemen. And welcome to the Fourth Quarter 2018 Calumet Specialty Products Partners Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will follow at that time [Operator Instructions]. I would now like to hand the call over to Mr. Joseph Caminiti. Your line is now open.

Thank you, Amanda. Good morning, everyone. And thank you for joining us today for our fourth quarter earnings results call. With us on today’s call are Tim Go, CEO; West Griffin, CFO; and Bruce Fleming, EVP of Strategy and Growth. Before we proceed, allow me remind everyone that during the course of this call, we may provide various forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Such statements are based on the beliefs of our management, as well as assumption made by them and in each case, based on the information currently available to them. Although, our management believes that these expectations reflected in such forward-looking statements are reasonable neither the partnership its general partner nor management, could provide any assurance that these expectations will prove to be correct. Please refer to the partnership’s press release that was issued this morning, as well as our latest filings with the Securities and Exchange Commission for a list of factors that may affect our actual results and could cause them to differ from our forward-looking statements made on this call. As a reminder, you may now download a PDF of the presentation slides that will accompany the remarks made on today’s conference call, as included in the press release we issued earlier today. You may access these slides in the Investor Relations section of our Web site at www.calumetspecialty.com. Also, a webcast replay of this call will also be available on our site within a few hours and you can contact the Alpha IR Group for Investor Relations support at 312-445-2870. I would also like to note that in an effort to present to more comparable discussions of our performance during the fourth quarter and fiscal year 2018, we will be referring to pro forma results for 2017, which removed the historical performance of prior divestitures of the Superior finery and Anchor Drilling Fluids. Additionally, we have substantial non-cash inventory adjustments for lower cost to market or LCM and last in first out the life of inventory layers. As a result, we have taken a few extra steps in today's materials so that our investors have a clear picture of our operating performance. With that, I will pass the call to Tim. Tim?

Good morning. I'm pleased to report that Calumet produced record financial performance in both the fourth quarter and for the full year 2018. This performance was driven by strong execution against our strategic plans. In terms of today's discussion, I will provide a high-level overview on our partnership's year-in review and our results over the most recent period. Then I'll hand the call over to West to talk more specifically about the fourth quarter and 2018's financial performance. I will end the call with a few closing comments before taking your questions. Turning to Slide 3, I'll begin with the 2018 year end review. Key achievements are shown on the left in blue boxes, and I will also talk about some challenges that we have overcome that are shown in the green boxes on the right. We generated record annual profits with adjusted EBITDA of $301 million and adjusted earnings per unit of $0.34. These figures exclude the non-cash impact of LCM and LIFO and the record is on a pro forma basis, excluding the Superior and Anchor divestments. Next is delivery of our strategic specialty products initiatives. In early 2018, we reorganized into five business units, four specialty and one fuels, each headed by a new general manager. Each business unit owns its P&L and its five-year strategic business plans to drive the profitability improvements. In the fourth quarter, we began to see the early signs that this new accountability and each unit strategic plans were starting to impact our financial performance. For example, our team's improved focus helped us deliver double-digit annual growth in our through field product, as well as substantial growth across our industrial lubricant business. As our internal plans started to show success, we also took a handful of proactive external steps as well, such…

Thanks, Tim. On Slide 5, you will see the adjusted EBITDA waterfall reconciling 2018's full year results to that of the prior year. Starting from a pro forma baseline of roughly $223 million, you'll see that strong margins from our fuels businesses in conjunction with improving margins in our core specialty product segment help to drive strong growth. That margin growth overcame lower volumes in both segments, much of which was associated with turnarounds. Additionally, self-help initiatives such as the finished lubricants capacity expansions and consolidated procurement efforts across our group of Louisiana plants were positive contributors to fourth quarter adjusted EBITDA. Lower SG&A, transportation and other items, help to partially offset the $28.8 million increase in operating costs, which were driven mainly by higher plant maintenance costs year-over-year. Taking all those together and deducting the high non-cash LCM of roughly $55 million, we ended up with adjusted EBITDA of almost $264 million for fiscal 2018. Adding back the LCM LIFO adjustments for the year, total adjusted EBITDA excluding non-cash LCM LIFO charges, was again just over $300 million. Given the noise that LCM LIFO has on our financials, we’re contemplating a potential change in our financial reporting to move towards FIFO and the modification of our profitability measure. While we are still investigating these changes, we contemplate that this could occur sometime in 2019. Concurrent with any change, we will provide historical financials to make it easier to understand the change. Turning to Slide 6, we bridge the fourth quarter Pro forma results from 2017 to this year period. Similar to the full year performance improving fuels and specialty margins combined with self-help benefits largely grow performance that exceeded the negative non-cash mark to market on our inventory values. Adjusting for the non-cash LCM LIFO changes during the quarter,…

Thanks West. For those of you who have been following Calumet for the last few years, you know that a large portion of the fundamental changes to our business performance have been attributable to the self-help program we launched at the beginning of 2016. We initially set a goal of capturing $150 million to $200 million through a series of initiatives focused on reducing our costs, better optimizing our use of raw materials and enhancing our margins. On Slide 15, you will see we more than met our goal with our three-year self-help capturing a total of $182 million in adjusted EBITDA. Last quarter, we announced that we would be launching phase two of the self-help program at the beginning of this year with the goal of capturing an additional $100 million by the end of 2021. While the DNA of this program is much like phase one, there are some differences the most important being that roughly two thirds of those EBITDA results are expected to be captured within our core specialty segment. Turning to Slide 16, we detail the timeline and expected contributions from the initiatives that underlie phase two. First, we expect to capture between $20 million to $30 million from projects and initiatives we put in place last year. These projects included expanded packaging lines for our finished lubricants, especially yield improvement project at Shreveport, as well as the naphtha project at Great Falls and the new isomerate unit in San Antonio. Second, we expect to capture between $30 million to $35 million from new quick hit projects brought forward by the new general managers. These projects will focus on the startup of our Versagel line in Karns City in the second quarter, which are lower costs in our specialty oils and wax business unit, improving…

Thank you [Operator Instructions]. Our first question comes from the line of Neil Mehta of Goldman Sachs. Your line is now open.

This is Carly on for Neil, thanks for taking the questions. You pointed to WCS spreads benefiting the fuel segments results, it's actually at Great Falls during 4Q. So as we think about 4Q to 1Q, WCS steps are one key piece that have changed in the macro environment. So can you give us your thoughts on that spread as we move through 2019? And then is there any sensitivity you can provide or quantity you can provide on the benefit that you received from WCS spreads during the quarter?

The WCS tailwinds were strong in the fourth quarter. As the Alberta government made some policy changes, we saw that spread tighten significantly. It's about $10 million, $11 right now. We believe that the short-term changes in the market will yield to the long term fundamentals. And as most people in the industry have commented, we believe and agree that WCS will trade at rail economics, long-term, which probably takes you into that $17 to $20 dip spread. If you look into the strip market, I think the markets believe something similar as well and you can see the WCS spread widening as the year goes on. So we believe the first quarter is an overreaction and that over time, the spreads will go back to long-term supply demand fundamentals.

And anything on that EBITDA impact that you expect to see from movements in that spread?

As you know, Carly, there's a lot of things that go in to impact the profitability of these plants. The WCS WTI spread was a significant help for us in the fourth quarter, there's no doubt. You can do the math. And I think the spread we saw around $34 was significantly higher than what we saw a year ago, which would have been about $17 spread. So you multiply that over the 25,000 barrels a day we run at Great Falls, take some factors into account in terms of yields like asphalt and so forth. And it presents a nice bump. But what I would tell you is just one factor. I mean you also have to look at the Gulf Coast 211 crack, which as we’re looking at today is strengthening above what we saw in the fourth quarter as those impact the balance of the Great Falls. We will see some positive offsets that will counteract the lower WCS spreads, so you can run it through your models. But we think that we will definitely see lower margins at Great Falls in the first quarter but we're encouraged to see the 211 crack improve. And again, we believe that long-term the WCS spread will return to long-term fundamentals.

And then the follow-up is just a little bit more broad. We've seen a bit of a derate in the equity markets for some of the chemicals companies in the specialty space. Can you talk about how this impacts your business and then maybe your thoughts on leaning into the specialty side of the business given some of these dynamics?

I think the derate you’re talking about, Carly, is we've seen it in other chemical companies. It's concerns about the global economy and maybe overall growth in the U.S. markets as well. We've seen that a little bit in the basal markets. We believe the paraffinic basal markets in the second half of the year were starting to get long and were starting to show some signs of length. But the rest of our business has, if anything, look stronger. West talked about the fourth quarter and our specialty business being the highest EBITDA since 2014. And as we pick up momentum and continue to drive that, I mentioned so far in the first quarter we're off to a good start and we’re seeing good volumes, we’re seeing decent margins and we're encouraged by our specialties business here in 2019. And we've said before that our first quarter and second quarters tend to be stronger from a specialties standpoint than the third and fourth quarters. And I’m pleased to tell you that are so far the start of the year that's showing to be true. So while the other chemical companies are maybe seeing some slowdowns, I can tell you that we're feeling optimistic about our 2019.

Thank you. Your next question comes from the line of Sean Sneeden of Guggenheim Partners. Your line is now open.

Tim or West, when you look at specialty, I guess we put up $166 million of EBITDA in 2018, which is well below the $200 million run rate that what talked about in the past. And I know that part of that is driven by the heavy turnaround schedule and some weakness in the paraffinic market. But when you think about the two thirds of the next phase of self-help initiatives on specialty, how should we think about that improvement? Is it really designed to bring you back to the $200 million run rate or is it designed to deliver something that puts you above that?

We showed in our bridge in the PowerPoint slides that we still believe that our specialties business is an underlying performance of $200 million of EBITDA, but clearly we're trying to improve even on top of that. Our phase two self-help initiatives specifically focused on growing that specialties business, we believe that with a strong start that I just mentioned that we had in specialties, our expectations are that we have a better than normal year in 2019. We have less turn around in 2019 and so we think that should improve our position. And our expectations as management as the general managers continue to execute their strategies are that we would be even be able to better that underlying specialties performance.

Thank you. Our next question comes from the line of Greg Brody of Bank of America. Your line is now open.

Just thinking about, you mentioned there is -- you took maintenance on San Antonio in the fourth quarter, which changes your turnaround schedule. Can you just outline for us the turnaround schedule for '19 and how you expect that to impact utilization?

Greg, we had originally planned for a turnaround in San Antonio here in the first half of the year. As I mentioned, we pulled that ahead in the fourth quarter, got the work done that we needed to. So that no longer is in 2019, that the only other major downtime as our Shreveport turnaround in the second half of the year, and that will involve both fuels and the specialty plants. All the plants have small downtimes across the year, hydrogen plants, sulfur plants and so forth. But really that Shreveport turnaround is really the only major one that I would call out here scheduled for 2019.

And should we think about that as 30 days being offline and…

Yes, we have two crude units at Shreveport. It'd be one of the crude units plus one of the specialty units, probably something in that three week time frame.

And can you put that impact volumes significantly, or you can build your volumes for the year? Or should we expect just in that time period a little bit of a decline?

Well, on the specialty side, we always try to manage our volumes. We'll build inventories prior to the turnaround like you saw we did here in the last year's third quarter, so that we can continue to meet our customers' demand. I think on the fuel side, you'll definitely see loss production associated with the downtime. But overall, we are going to try to meet all of our customers’ needs, but it will impact reporting as we saw in last third quarter as we build inventories in one quarter and draft inventories in the next.

And speaking on inventories, you mentioned that you harvested some excess inventory in the fourth quarter. So is your working capital -- should we should -- we shouldn’t think of any major builds throughout the year, is this the right level?

So our business, we've continued to optimize our business. So we used to have -- when we had Great Falls, we had a very, very significant build in our asphalt inventory during the spring gone into the summer and then we drafted from that on. And we also had some of that this year. We've been working more and more to minimize the big fluctuations in the changes of our inventory by changing some of the fundamentals of how we approach market, and you’re going to see us do that. Now to your question in terms of inventory levels at the end of the fourth quarter, I have to tell you that our inventory levels at the end of the fourth quarter were still elevated relative to what we would like them to be, roughly 300,000 barrels actually higher than they were at the end of 2017. So, there's a fair bit more that we can do in terms of our working capital to improve things.

Do you think you will rally that over this year or is that a couple of year process?

So as an example, we just didn’t quite get all the excess inventories associate with turnarounds down. At the end of January, we actually got it down to basically the same levels as we had at the end of 2017. So it was very, very transitory.

And then I just haven’t asked this, but just for thinking about 2019. How should we think about your SG&A and your transport costs?

SG&A, we’re continuing to focus on our SG&A. And as we -- towards the end of this year as we finish all the optimization and everything that we need to do to complete and get the ERP system really working where we wanted to, we'll then pivot a little bit more to take the next steps with respect to gaining further efficiencies associated with the company and take full advantage of the ERP system that we put in place.

Greg, if you look at our SG&A that we've reported really since third quarter '17, which is when we went live on S&P. You will see a nice steady decline every quarter in SG&A as we continue to take cost out and as we continue to take advantage of the ERP system to try to be more efficient. Our plans would be, as West just mentioned, to continue to do that and if anything to accelerate that through our self help initiative program.

And the transportation part of it? It looks like that went up a little bit in the fourth quarter just on a total number. That went throughout the year. Is that a function of sourcing crudes? What’s driving that higher?

So transportation costs, in general, the whole industry has been facing higher transportation costs and especially on the truck side. We've been working to actively take transportation costs out of our system. One of the advantages of the new ERP system that we put in place was that it optimized and bid out all of our trucking and other services. And we started to see some real benefits associate with that. We have just finished the implementation across all of our facilities to get that in place and we're seeing some real benefits associated with it. Now that said, we've got the industry headwinds of some higher fundamental costs, but we're seeing some real benefits associated with that. We also think that we’re going to be able to do some things on the rail side, and that's a major focus for 2019 as to lower our rail cost significantly.

And then just last question for you guys, the credit guide. You highlighted the free cash flow generation in '19. I know a lot of that maybe dependent on what happens with planning, or the fuel plants business. But do you have metrics that you’re thinking about for potential cash flow generation in '19 and where you can get leverage down to by the end of the year?

So one way to address it, I guess the street has us right in the $275 million, $280 million worth of EBITDA for the year. Pro forma our interest expense is roughly $120 million. We've got $80 million to $90 million worth of CapEx. We tend to comment oftentimes as we had last couple of years on the low-end of that, sometimes even down just slightly below that. So, that’s going to give us anywhere from $80 million, $90 million worth of positive cash flow.

By highlighting consensus, is that -- do you think that's a fair number? I think one of the questions investor have is how much differentials impact your numbers, and I recognize your view it's in improvement here and I guess…

We don’t really give guidance. About the most guidance we have given is what we said during this call, which is we believe our specialties business has a course of $200-ish million worth of EBITDA, business that we have some additional EBITDA that we can potentially add to that through our continued self-help efforts. And then on top of that, you all need to add to that whatever you think our fuels business is going to be able to generate.

Maybe I'll just add one follow on to that. So you mentioned crude has been a little bit of a headwind right now. Could you talk about how -- crude dropped significantly and now it's been going up. How is that works itself through fourth quarter? And did the decline -- the significant decline makes its way into the fourth quarter that’s something that maybe will help offset some of the increase in the first quarter. How should we think about that?

Greg, I will take a shot at that. I mean, what we saw was the sharp drop in crude prices at the end of the year resulted in some sharp drops in specialty prices as well. So I don't know if you're referring to how our specialty business lags crude. But when you have such a sharp drop or increase like what we saw, it becomes very difficult not to be noticed and not to have to be able to work that through the markets. So our base oil business actually saw two price decreases along the same time that crude was dropping that significantly. So I wouldn't say that we saw any significant lag in order. And as we watch the crude prices come up in first quarter, I mentioned crude volatility in my comments. It’s been about -- it's up about 10 bucks since beginning of the year. We’re watching that very closely, and try to manage our raw material costs accordingly.

Thank you. And we do have a follow up question from the line of Sean Sneeden of Guggenheim Partners. Your line is now open.

I guess, you highlighted a little bit on base oils being weak in the second half there. I guess, Tim, just from your higher level perspective. Do you think that's a result of group one and two being out-of-favor? Is it a cyclical thing or do you think its secular? And when you look at perhaps and part of the phase two of self-help. When you look at ways to improve profitability, specifically around base oils, are there ways to do that? Or is it just through reduced production of base oils in favor of something else?

Sean, it's good question on base oils. What we’re seeing -- I think Exxon just started up their Rotterdam group two facility in Europe. And as the supply demand fundamentals get along as the market gets along, I think that ends up putting some pressure on global markets. We’re seeing it primarily in the group tow and group three markets, that’s where there is a lot of new production, that’s where there is a lot of length right now in terms of supply and demand. We’re actually encouraged by the group one and the NAFTA NIC markets continuing to be more balanced and most of our production is in those areas. And so we continue to focus on managing that part of the business and having that drive our basic business right now.

And then just couple of quick housekeeping questions, I guess with the Macquarie inventory deal expiring within next 12 months. What’s the view on extension there and is that what the plan is? And can you just remind us what is that outstanding on that facility on this point?

We’re in the process of working with Macquarie, but I’m very confident that we will get an extension done here in next quarter or so.

And then just remind me what the balance was at the end of the fourth quarter on that facility?

I want to say that it was somewhere around $130 million. If you want, I can look in the details on it, but somewhere in there.

And then just if we look at Slide 10, I think the rough math on just the differential. It looks like if we do the comparison from Q4 this year versus last year, it look like there was about $50 million benefit to fuels for the year just on differentials. But if we just market-to-market or current differentials, it looks like there could be a comparable of not bigger hit to EBITDA. Is that the rough math that you're talking about before I think to one of the prior questions?

Yes, I think Carly was asking a similar question, Sean. We would say, the WCS spread was averaged about 34 bucks in the fourth quarter, that was versus say a year-over-year change of about 17 bucks in the fourth quarter of '17. When we run our models throughout the impact is, we think that’s about $25 million impact, favorable impact here in the fourth quarter of '18. But again, I you got to look at other things in our fuels numbers. We also saw an improvement on spread in the fourth quarter, so that was roughly $6 a barrel in the fourth quarter a year ago, fourth quarter '17 it was pretty much balanced or flat. So that contributes another, call it $10 million of help as well. So those are the things that if you’re doing your math, you can say, okay, maybe we had a little stronger than normal fourth quarter. But I would tell you in the first quarter we’re seeing much stronger cracks right now than we saw in the fourth quarter and a year ago first quarter. So you've got to play those off each other and try to understand the overall impacts across the sites. I would also tell you it's our self-help improvements have been focused on fuels as well. And so we think our fuels businesses is stronger now than it was even a year ago. Certainly more than two years ago. We last talked about the asphalt inventory dragnet we used to have every winter as we built, I think it was 500,000 barrels are still of the asphalt inventory. We don't do that anymore and that allows our fuels business to have less of a winter drag that we've been accustomed to seeing. As we continue to improve our placement of our products, we're putting our gasoline and our diesel more into our local markets, more across our own racks and more on term contracts. And all that is strengthening our fuels business. So, I wouldn't give all the credit to the WCS spread, and thinking that it’s going to fleeting. But instead, I would -- we are encouraged by the underlying improvements that we’re making in the fuels business as well. The last thing I would mention that we hadn’t come up yet today, but we have done some hedging into 2019. We've talked about that a little bit. It's detailed in the appendix in the PowerPoint slides. But we've got some Midland and some WCS hedges that we'll benefit from in 2019.

And then just one last one for me, on the phase one self-help. Can you just remind us how or what percentage of the $180 million was from, or was geared towards fuels? And how much of that is -- the initial $180 million is still yet to realized, was that just the $20 million to $30 million that you had on Slide 16?

What we’re saying is we realized the $180 million, Sean. We think it's about 50-50 between specialties and fuels. We think the carryover, the $20 million to $30 million we talked about in terms of phase two is value that yet to be realized, because we implemented these late in the year last year and didn't get the full year benefit of these projects, which is what's carrying over into phase two.

Thank you. And that does conclude our question and answer session for today. I would like to turn the conference back over to Mr. Tim Go for any closing further remarks.

Okay, thanks Amanda. As we close the call, I would like to first thank all of our employees for their ongoing commitment and contribution, which helped us bounce back in the fourth quarter and enter 2019 with more positive momentum. I would also like to thank our board and general partner for their support and guidance. And lastly, I would like to thank all of you, our investors and analysts, for joining us today and for your continued support. Have a great day.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone, have a great day.