Good day ladies and gentlemen, and welcome to the Q2 2021 Calumet Specialty Products Partners, L.P. Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this call is being recorded. I would now like to turn the conference over to your host, Mr. Brad McMurray, Vice President of Investor Relations. You may begin.

Good morning. Thank you for joining us on today’s call to discuss our second quarter results. Joining me on the call are Steve Mawer, CEO; Todd Borgmann, CFO; Bruce Fleming, EVP of Montana Renewables and Corporate Development; Scott Obermeier, EVP of Specialty Products & Solutions; and Marc Lawn, EVP, Performance Brands. Before we proceed, allow me to remind everyone that during this call, we may provide various forward-looking statements as defined under Federal Securities Laws. Please refer to our 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 defer from our forward-looking statements made on the call. As a reminder, you may now download the slides that will accompany the remarks made on the conference call. They can be accessed in the investor relations section of our website at www.calumetspecialty.com. A replay of this call will be available on the website later today. With that, I'll pass the call to Steve.

Thanks Brad. Good morning, everybody and thank you for joining us today. For the second quarter, the partnership generated $32.3 million of EBITDA. Specialty margins have been very good, increasing 19% over the first quarter, despite dramatic increases in input costs. Within the Specialty Products and Solutions segment, most of our product lines have implemented six or seven price increases so far this year. Back in late 2020, our team labeled 2021 as the year of the price increase and prepared our systems and teams for a rapid increase in our feedstock costs. We really appreciate how diligently our team has protected our margins in this environment. Sales volumes in Specialty Products and Solutions improved over last quarter, but are still short of maximum rate given that we completed our post turnaround inventory rebuild and also experienced an unplanned outage at our Shreveport facility in June. Performance Brands has also successfully implemented price increases with similar frequency this year. As one gets closer to the consumer, as we do in Performance Brands, price increases operate with a significantly longer lag time and performance brand second quarter is affected by this. One way to think about this lag cost effect is as a reversal of the positive price like benefit that we accrued in the second and third quarter of 2020 when we are in a deflationary depressed price environment. Demand in Performance Brands is extremely robust. And for now, we can't keep up resulting in a record backlog. As a specialties focused company with consumer brands, we're right in the thick of the supply chain challenges that the recovering global economy is experiencing. Performance Brands’ second quarter shipped volumes dipped versus first quarter, due to the production complexity that comes with multiple shortages. And Todd will spend a few minutes…

Thank you, Steve. I’d like to turn to Slide 5. As Steve mentioned, we generated 32.3 million and adjusted EBITDA for the quarter. Our SPS business generated 31.8 million, Montana Renewables generated 12.8 million, and Performance Brands 7.3. As you can see in the chart, sales volumes improved relative to the first quarter as we came out of the Shreveport turnaround in the . However, despite exceptional demand, sales volumes fell below pre-COVID levels, for some of the reasons Steve alluded to earlier, and we'll get deeper into that in the segment discussion. The story on so many calls this quarter has been around the global supply chain challenges that are affecting businesses across the country. And on Slide 6, let's go into more detail on how that impacts Calumet. In our SPS business, the primary supply chain impact was around trucking and driver availability during the quarter. Members of our team at Calumet were working around the clock to find transportation solutions to keep our customers satisfied, and the situation has progressed favorably throughout the quarter. Further, as an industry, we entered the quarter with low inventory levels after the Q1 freeze. When you stack low inventories on top of the global supply chain challenges and pair it with extraordinary demand we're seeing spectacular specialty unit margins in SPS. As we look forward in SPS, we believe our most significant challenges around logistics are behind us, and we expect demand will remain strong as customers continue to restock. Our Performance Brands division has experienced the supply chain phenomenon most directly. This segment has our longest and most complicated supply chain, including various raw materials that are sourced internationally. As we know, complexity increases as businesses get closer to the consumer. And in this business, we're all the way to…

Thank you, Todd. We've covered a lot this morning. We're very happy with the progress and the opportunity in Montana. Inventory rebuilds and the final legacy of winter storm Uri are behind us, and we move into a third quarter characterized by good specialties margins, and the continuing slow recovery of fuels margins. The Rockies markets are showing their usual seasonal strength, demand in Performance Brands keeps growing, and the team is focused on turning that record backlog into income. So, with that, I'll thank you and I'll turn it over to questions.

Your first question comes from the line of Neil Mehta with Goldman Sachs.

Hi, good morning. This is on for Neil. Thanks for taking the questions. Just wanted to talk a little bit about the base oil markets more, you talked about margins have been really strong and kind of you expect that strength to continue longer than you would have initially anticipated. So, just wanted to get your thoughts on, kind of, as we move to the back half of the year, and as we go into 2022, kind of, when do you see the path to those, kind of, normalizing?

Hi , Scott Obermeier here. Yeah, the base oil market, as you've probably heard from others remained at very, very strong demand very high profit levels for the producers out there. We see that trend in that plateau, if you will, continuing through Q3. And at this point, really, even into Q4, as production continues to ramp up and the global supply chain works to stabilize. So, we see a strong forecast for the remainder of the year. Outside of that correlates hard to look too far out into 2022.

Yes, it’s Steve. If I could add, I mean, I think the choice of words by Scott was very good plateau there. You know, we're not expecting margins to improve from here. I mean, there are record levels are ready. You know, we think that they'll be good for a while. But the margin, the U.S. is pulling base oil imports at this point, and so we would, kind of generally speaking, see that as maybe a cap on margins here. But I would reiterate Scott's point of view that we think that will be good for ways to come, as our customers are still clearly in restock mode.

Great, thank you. And then just wanted to touch on leverage and cash, you guys obviously took out a portion of during the quarter, so just wanted to get your thoughts on, kind of the remaining balance there as we move towards 2022. And then on the cash side, the $35 million balance at the end of the quarter seems a bit low relative to recent quarters. So, could you just maybe remind us if there's a target level that you'd look for around cash balances going forward?

Yeah, I'll take the cash first, . This is Todd. Thanks for the question. We really had too much cash sitting on the balance sheet with $100 million. So, we focused on overall liquidity. We didn't think that that was a level that we needed to maintain. So, we're just managing cash, managing interest costs with the move to use cash to, kind of pay down the revolver.

Great, thanks. And if I could just sneak one more in, you guys talked about Great Falls and kind of the Rockies region's margins being really robust right now. Based on the timing of the that you had mentioned, do you expect to be up and running to, kind of, capture the full 3Q, kind of summer driving season strength?

Hey Carly, this is Bruce. I'll take that one. So, the Rockies margins are actually at reasonably typical historical levels for this time of the year. So that's relatively strong for last year or two, the winter season and the spring season. So, in terms of the FCC mini outage that's going to be after the fall, peak season.

And your next question comes from the line of Roger Read with Wells Fargo.

Thank you. Good morning.

Good morning, Roger.

Good morning, Roger.

Just hoping to dig in first to some of the things you talked about, like the $7 million lag in the second quarter. You mentioned that that's a function of price versus feedstock costs coming in, but is that something that generally gets recaptured in a 30 to 90 day period? Does it take longer than that? And then if crude and some of the supply chain things get ironed out as we go through the back half of the year, would you look for pricing improvements that have occurred and may still occur to ultimately lead to a little better margin environment than to say is typical as we look at maybe year-end into the first part of 2022?

Marc, would you like to take that one?

Yes, of course. Thanks for the question, Roger. So typically, yes, the price lag is in that 30 to 90 day range, versus the contracts and the different channels that we operate through. So that assumption is correct. As we work through the balance of the year, there's a number of elements that play their way through into this obviously. There's the unknown on the supply chain side of things. We're at that intersection as we mentioned have sort of supply challenges, customer and consumer needs, and then the operational efficiency piece. Assuming that the supply chain naturally starts to ease up, we would expect to see all of that margin recaptured further down the line. We've seen the record backlogs that we have and we believe that there's upside potential in the second half of the year. We’re playing catch up with those elements, but there's still a lot of unknown to be able to navigate as the way through, but we would expect to – right back to the start of the question, we would expect some normalization back in terms of the margins that we've enjoyed historically.

Okay.

Yeah. Let me add a little bit Roger. This is Todd, you know, earlier we heard from Scott, kind of the concept of plateauing SPS margin. So, as , you know, pricing catches up to the rising feedstock prices, over that 30 to 90 days, we should see, you know, and Scotts margins remain where they're at. We should see that margin impact flow all the way through, right, so you get the benefit of price increases in Performance Brands catching up, and then you also get the benefit of peak stock prices, kind of plateauing and not continuing to increase.

That's helpful, very clear. Changing gears a little bit to look at the Renewable Diesel project, I've just two questions. One of them, on Page 12 of the presentation where it talks about a renewable hydrogen project, just curious what the factors are behind that? And then the other question, as we look at the various alternative feedstocks say at soybean oil, what – as we understand in soybean oils, we are on limitation here. It’s not so much soy beans, as it is soybean processing into oil. So, are you comfortable as you look at the alternatives that you mentioned that there will actually be oil processing capacity, as well as farming capacity? And you know, maybe how all that fits into supply chains?

Hey Roger, I'll take a start at that, and Steve may want to add a couple of comments. So, in reverse order, yeah, there is a agricultural commodities value chain. You know, first the farming and ranching remember that we're also planning to run tallow. Then the, you know, the crop processing, seed crushing, and importantly, the oil pretreatment. Every renewable diesel plant in the country, without exception has to have a pre-treated feed. The question is, is the on your site or is it some kind of an industry service at the crop processing point? And by choosing to put our pre-treater on our site, we'll be able to run anything at all. What you're seeing in the markets is mostly a distortion due to lack of pre-treating capacity. It’s not lack of crops.

Okay, thanks. And then the renewable hydrogen?

Yeah, so that's because given our site balances, and the fact that we're going to continue to have a crude oil business, we've got a good opportunity to reduce our carbon intensity of our renewable diesel product further by gathering some of the other hydrocracker products and using them in our hydrogen production. So, that's what we're going to do and that's why we're doing it.

Okay. everything?

Yeah. Specifically, we're going to recycle some of the molecules from the tallow and vegetable oil processing, some of the light ends back into hydrogen production.

Okay, great. Thank you.

Your next question comes from the line of Gregg Brody with Bank of America.

Good morning, everybody.

Good morning, Gregg.

Just sort of two topics I wanted to cover. So, obviously, we have to see a Supreme Court ruling on small refinery exemptions. I'm curious, how do you think this plays out from here with respect to your liability and what we should be looking for? What you are looking for, for next steps there?

Bruce, do you want to go first on that one?

Yes. Thanks, Gregg, for the question. I think it's safe to say at this point that no matter what the EPA decides, somebody will sue them for it. It's difficult to see anything happening in real time. It looks like it's all on a Court dockets, kind of a timeline. So, we wouldn't care to forecast how that's going to play out. I can tell you in our case that, you know, as we discuss every quarter, a RIN is not a cash obligation. And I know that financial modelers are just itching to convert that to money, but that's not how it works.

That's helpful. I appreciate that. I just wanted to hear your thoughts, which, and just turning to, you've previously said that your plan with a JV process would be to pay down the rest of the 2022 and some of the 2023, is that still the plan or has anything changed there?

No, nothing's changed there. You know, this is Todd, Gregg. But as you know, the markets continue to be very favorable, should we want to kind of refi our debt stack now. But you know, looking at the horizon and, kind of seeing, kind of where we're at in the partner search and our positioning there, we do plan to use proceeds from that to pay down the short-term debt.

Great. That's it for me, guys. I appreciate the time.

Thanks Gregg.

Your next question comes from the line of Jason Gabelman with Cowen.

Hey, thanks for taking my questions. I appreciate all the detail on the renewable diesel project, had a couple questions on it. Firstly, I know you previously disclosed this pretreatment unit, can you discuss the CapEx cost of that pretreatment? I don't think I've seen it in previous materials. And then secondly, on the Renewable Diesel project, is there something that needs to happen in the market in order for – in order to catalyze the JV partner signing an agreement, I'm thinking, you know, maybe the RVO is being announced or maybe there are other kind of public market milestones that need to occur? And then thirdly, what do you think – what's the likelihood that the refinery becomes part of the joint venture? It seems like there have been a handful of refining deals recently. So, just wondering if you're thinking the non-Renewable Diesel part of Montana will remain 100% on by Calumet or be part of the joint venture? Thanks.

Hi, thanks Jason for the question. The, maybe if I take those in reverse order, you know, the – we told our unit holders in March that we were going to go in this direction after spending about 18 months reviewing our strategic options, including these reconfiguration opportunities on the site. And, you know, the majority of the in-bound calls that we got, in the next 100 days we're focused on renewable only. There's a lot of money available in the U.S. economy for green projects, and this is a really good green project. So, for that reason, and we're flexible in our own thinking, but to the investors it looked like a renewable only play was preferred. So, we've set it up that way. The question of whether there's some sort of a market trigger, not that I'm aware of, I'll invite Todd or Steve to think about that a little bit, but, you know, it's not like we're waiting on an event. We funnel this down. The first part of the funnel was sorting out whether people wanted the whole side or the renewable part, which I've just covered. Second part of the funnel was, what's the security of feedstock supply look like, which we've touched on in these remarks. And Steve had a slide at the very beginning with a, kind of an interesting color coded , but that's important, you know, I would suggest some focus there as appropriate. So, the addition of pretreatment followed from that, which takes me to your first question, what's it cost? That is guidance that we've actually not given at the discrete project elements level. What I can tell you is that our installed capital cost per barrel is the lowest of any project that's been announced, adding the pre-treater did not change that. Remember that the pre-treater brings its own revenue stream. We talked about that a little bit with Roger a second ago. So, given all of that, we're pretty satisfied. We're not spending a great deal of money. We're getting an excellent leverage out of these program elements. It stretches out the field activity all during next year. It's not some kind of a big bang turn on a giant project, it's discrete small elements that are very manageable. So, you know, we're pretty excited, but all of that is what allows us to hold the line and cost and to hold the line and timing.

Got it. Great. I appreciate all that color. And then my other question just going back to RIN, I know you took a, but it was a 48 million non-cash market-to-market charge, what's the total liability sitting at right now? And can you discuss, is there – do you have any type of strategy if you don't get all the small refinery exemptions that you've previously got? And how are you thinking about handling the potential payments that you would be required to make? Thanks.

Maybe start with the second part of the question and pass it back to Todd for the current balance sheet part of the question. So, in terms of how this plays out, we feel like it's going to play out in slow motion, no matter what happens, whether anybody wants it to or not, there always seems to be someone showing up to try to resolve the matter in court, rather than through the administrative channels. So, we feel reasonably good about our relationship with the EPA in this regard. But, you know, we can't say that we don't all get dragged into a larger controversy. So, with respect to our strategy and our options, yes, I mean, we talk to the EPA a lot. We talk on multiple levels, and for different tactical reasons. They have several authorities. It's not only the small refinery exemption. So, they certainly got the ability to navigate all of us into a better consensus as a society. And I think they're going to find a way. I just don't want to have an opinion on how fast. Todd, you want to tackle the balance sheet part?

Yeah. You know, the number on the balance sheet, $273 million is the total. And, you know, for all of the reasons Bruce just talked about, you know, in many calls before, and some of what he just referenced, this isn't a number that we expect to turn to cash. It's more than just the SRE, there are a lot of layers to this, but just to answer your question, $273 million is the number we report on our balance sheet.

Okay, yeah.

Jason, this is Steve, if I could add. I just want to reiterate what Bruce said, I mean, we maintain what we would describe as the slow motion scenario. So, if you go back to before the Supreme Court ruling, you know, we said that the Supreme Court ruling wouldn't make that much different, it would just spark off a wave of litigation. The Supreme Court ruling went effectively in Calumet’s favor, but we don't change our position. We think it's just setting up a wave, a slow motion wave of litigation. This thing will run and run and run. It's not a cash settled end at all. And we, you know, our internal expectation is that this situation runs at least well past the point where we will be a net RIN generator.

Got it. Appreciate all the color. Thanks, guys.

Thanks Jason.

I am showing no further questions in the queue at this time. I would now like to turn the conference back to the presenters.

Thanks everyone, On behalf of Calumet, the management team here and the entire company, we appreciate your interest and your time this morning. Hope everyone has a good weekend. So, thanks again.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. Have a wonderful day. You may all disconnect.