Good day, and welcome to the Calumet Specialty Products Third Quarter 2023 Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Brad McMurray, Head of Investor Relations. Please go ahead.

Thank you, Betsy. Good morning. Thank you all for joining us today for our third quarter 2023 earnings call. With me on today's call are Todd Borgmann, CEO; Vincent Donargo, CFO; Bruce Fleming, EVP, Montana Renewables and Corporate Development; and Scott Obermeier, EVP, Specialties. I would also like to introduce David Lunin, who recently joined the company as our Incoming CFO, which will be effective January 1, upon Vince's retirement from Calumet. You may now download the slides that accompany the remarks made on today's conference call, which can be accessed in the Investor Relations section of our website at www.calumet.com. Also, a webcast replay of this call will be available on our site within a few hours. Turning to the presentation on Slide 2, you'll find our cautionary statements. I'd like to remind everyone that during this call, we may provide various forward-looking statements. Please refer to the partnership's press release that was issued this morning as well as our latest filings with the SEC for a list of factors that may affect our actual results and cause them to differ from our expectations. I'll now pass the call to Todd. Todd?

Thanks, Brad, and welcome to Calumet's third quarter 2023 earnings call. I’m sure many of you saw that Calumet issued two press releases this morning. One was our traditional earnings release and the other was an announcement that after a thorough and productive negotiation, our general partner and conflicts committee reached agreement that Calumet will be transitioning to a C-Corp. I'm going to start with the quarterly report, and we'll transition to the conversion shortly thereafter. To do that, let's turn to Slide 3. During the quarter, Calumet generated $75.5 million of adjusted EBITDA, and what was in many ways a tale of two halves. The period started strong with the July, the directionally represented what we expect out of Montana Renewables now that all units within the operation had been proven. However, the second half of the quarter was driven by two specific transient operational issues at our largest plants in Shreveport and Great Falls. Our Shreveport plant is fully repaired, and the Great Falls drum replacement is on track to be completed in a week -- in the next week. Let me begin with more detail on the progress at Montana Renewables. First in July, we demonstrated the financially representative result consistent with guidance. That was an important milestone as it marked the first full month that a majority of Montana Renewables feed was untreated. Specifically, 70% of our July throughput was local discounted untreated feedstock and MRL generated $14.2 million of adjusted EBITDA in the month. As mentioned, these results fell within our previous guidance of $1.25 to $1.45 per gallon on untreated feed and demonstrate the location and feedstock advantage that underpins Montana Renewables lasting competitive positioning. Second, and unfortunately, as our August press release highlighted, we also found a crack in a steam drum that…

Thanks, Todd. Before I comment on our business segment, I would like to turn your attention to the RINs slides in the appendix. Our net income included a noncash gain of $173 million related to our RINs mark-to-market adjustment. We do not view these mark-to-market gains or losses as meaningful with respect to our business performance and our strategy regarding RINs remains unchanged. So let's turn back to Slide 6. Our SPS business generated $38.7 million of adjusted EBITDA during the quarter. As Todd mentioned, we had a temporary operational issue at Shreveport that resulted in a loss of roughly 3,000 barrels of specialty product production. We purchased some third-party material where we could to ensure our long-term customers were kept hold [ph], while the operations team at the facility brought the affected units back to normal production levels, which has occurred. The other notable item that impacted the quarter was a $19 per barrel increase in crude prices. Our commercial team implemented price increases that largely took effect on October 1. So we are seeing the benefit of the price increases this quarter. as crude has stabilized. We continue to be constructive on the margin environment going forward, although we'd expect normal seasonality late in the year. On the fuel side, both volumes and margins improved quarter-over-quarter. And while the winter is typically weak or seasonally, especially for gasoline, we continue to see strong distillate margins. Not only do we produce more diesel and gasoline, but our specialty business and Steve Bennett produce more diesel and gasoline but our specialty business tends to benefit from higher diesel prices as it's an alternative for solvents and light lubes. With product inventories at/or below their historical averages, the fundamentals continue to point to healthy margins in the near to medium term.…

Thanks, Vince. Earlier this quarter, we announced that after a thorough search Vince and I found a successor CFO. And I'll introduce David momentarily. But before that, I want to thank Vince for everything that he's done over the past few years at Calumet. By the time of our next call, David will be in the seat. Vince joined Calumet in August of 2020. Our stock was around $2.50. We had a material weakness in our financial reporting, and we were only shortly removed from a troubling SAP implementation. Vince's courage, tenacity and leadership were paramount in fixing all of the above. And he also led us through a re-segmentation which brought transparency to Calumet by aligning the way we report the business with the way we run it. Vince and I co-develop the succession plan. And Vince is going to be with us through April as David takes the reins. David Lunin who joined in September has been working closely with Vince since day one. He brings 20 years of experience advising companies on corporate financial matters, including M&A and capital market transactions in relevant industries. David was most recently with Goldman Sachs and he has hit the ground running as he leads the exploration of potential MRL monetization and [indiscernible] prepares to step in fully as CFO on January 1. Vince, congratulations and thank you. And David, welcome to Calumet. With today's news and game changing opportunities ahead of us, it's an incredibly exciting time to be joining this company. With that, I'll hand the call back to the operator for questions. Operator?

Thank you. [Operator Instructions] The first question today comes from Roger Read with Wells Fargo. Please go ahead.

Yes, thank you. Good morning. Congratulations on the announcement of the conversion to the C-Corp. I think that'll be something that's been looked for, hoped for and will be well warmly received. On the operational side, the specialty margins you discussed in the presentation. And if you look at the chart, are we essentially seeing specialty margins normalize here? Is that the right way to think about it, plus or minus $60? Or should we read into further strength based on the crude price moves in the comment about October price increases?

Hey, Roger, this is Scott. I would answer it with two parts. I think, overarching, we've seen some tapering and normalization of specialty margins that have come off all time records right over the past year. So there is some tapering down of specialty margins. I think what occurred though in Q3 was a little bit magnified on some margin compression as crude spiked up, and a lot of our operational issues created some additional headwind. So as we think about this quarter here in Q4, we've got a lot of our increases through depending on how crude shakes out, but we should see some improvement in fourth quarter to more normalized margins above Q3 results.

Okay. Thanks on that. And then on the MRL, the -- kind of what happened in the third quarter, the drum issue and all, I was wondering if we could get a little more clarity on the period at which you did achieve $1.25 to $1.45 margin, sort of, like what did you see in there? How well did the unit run? And is there upside from there if you're running really well, find the right markets, as you mentioned, whether it's Canada or somewhere else, just try to help understand, like, the real performance of the business when it -- isn't dealing with startup issues?

Hey, Roger, it's Bruce. I think the July performance was representative, in terms of most of the things we look for, and we ran well. We didn't run all the way full in July. So actually, as we get sped up again, you're going to see that margin improved, because we're going to spread the fixed costs on a unit basis, you'll see the margin improved. And then in terms of the implied optimization, the way we've got our product supply agreements said, we've got a distribution optimization that the customers benefit from, in return, we've got a very fully priced product. So that's kind of a synergistic partnership with them.

Okay. Appreciate it. I'll turn it back. Thanks.

The next question comes from Neil Mehta with Goldman Sachs. Please go ahead.

Yes. Good morning and congratulations, David. Welcome. And congrats on the good news about the conversion. I think liquidity has been long been a focus area for investors around the stock. The first question is just building on the lost opportunity profit in the quarter. As you think about the downtime and if you were to build back some of these issues, give a sense of how much EBITDA would have been higher in the absence of those issues?

Yes, we said about a little more than $50 million is what we think we lost in the third quarter, Neil. This is Todd, by the way. Thanks for the question. The two events, 300,000 barrels in specialty, if you look at our margins, routine margins in specialty, that's probably a little over $20 million of lost opportunity. And then the same thing for MRL, right, 2 months of cut back. So if we look at July and say that we should have had July going forward at a minimum, that's where we get the other 30 plus so. In total $50 million of lost opportunity for the quarter which is disappointing, but also reminds us of the potential that we have ahead of us.

Thank you. I know it's tricky to talk about the transaction, so [indiscernible] pass on this one, but I was just curious on tax implications to the extent you are at Calumet [indiscernible] MLP, it sounds like the way it's designed you'll -- there won't be a meaningful tax impact, but can you confirm that. And then as we think about you, as a cash tax payer, I would imagine the NOL will carry with this transaction, and therefore, I would imagine you'd be paying cash taxes for a while. But any thoughts on the tax side would be great and [indiscernible] understood.

No, I'll comment on it a little bit. I'll be careful, like normal year all over the topic. And I think you hit on a couple of the big ones. So, on the call, I mentioned the GPL make a meaningful tax cash payment. That depreciable basis step up actually gets shared across all shareholders. There's some tax arbitrage as things like passive loss carryforwards, like you mentioned, will flow into investor basis conversion and [indiscernible] tax the capital gains rates rather than ordinary income. The other tax impact that it's hard to quantify, but could be meaningful is the increase in price between now and conversion, as new investors enter will also result in a step up and depreciable tax basis that will be helpful to all investors. So I'll probably stop there. But I think you're right, as a whole to say, for most this should not be a negative tax event, in fact, should be very, very positive tax event for the great majority of our unitholders.

Okay, that's great. Thanks, guys.

You bet. Thank you.

The next question comes from Manav Gupta with UBS. Please go ahead.

Good afternoon. Good morning guys. Help us understand a little bit about the restart process here. Looks like you're firmly on course, to get the operations fixed at Montana. Should we assume that 1Q '24 you run all out and that kind of gives us that $1.30 or $1.40 EBITDA per gallon margin? Should we be watching that as the quarter where everything comes together for you in terms of RD?

Hey, Manav. It's Bruce. We're going to plan to be running full from, let's just say, December 1, so that you get a solid month, another proof point and then we'll stay fall. What we've got to do though the steam system repair work was an unplanned slowdown. So we've got a certain quantity of clean feeds still backed up in inventory that we're going to have to pull through to the buck 25 to buck 45 guidance is for dirty feed. And we've got a blend situation for a little while.

Perfect. Please follow-up -- yes. Yes, please go on.

I was going to say so if you look at July, we had about 70% dirty, 30% clean. The actual performance, if I recall correctly, it was $1.23 on a blended basis. So right at the kind of low end of the range. What you should look for, as you know, the spread between perhaps RBD, veg oil and crude veg oil in the market as a proxy for what happens when we blend.

Perfect. A quick follow-up is you already have a SAF transition strategy in place and expansion. I understand you're waiting for the full confirmation of the DOE loan, but help us walk through this SAF transition strategy. And when it's all over how much SAF could you be looking to produce in your system? Thank you.

We're advertising and we have been for a couple of years, 230 million gallons a year SAF at the moment based upon the engineering progress. That's looking conservative. There's a high case at 300 million gallons that we think is probably reasonably achievable. This is something that we'll be reporting back to you on as we go forward.

Thanks, guys.

Thanks, Manav.

The next question comes from Amit Dayal with H.C. Wainwright. Please go ahead.

Good morning. Thank you. The questions have been asked. Just on the timeline for the monetization with respect to this on a -- to C-Corp, how does that [technical difficulty], you're saying 2Q '24 for the monetization within 9 months to complete the C-Corp transition. So do these have a bearing on each other in terms of how we can move forward in the monetization?

Hey, Amit, it's Todd. It's a good question. I think a lot of that's driven by what type of market we're seeing at that point in time, right? The 9 months on conversions and outside date, that can be faster than that. If you think about what needs to get done, I guess starting now, or very shortly we start doing the documentation, we're getting ready, we're signing the official document that didn't transition us into filing the proxy, the S4 and receiving a shareholder vote. So it could be faster than 9 months. 9 months is the outside date. I think the Committee and the GP agreed to have a firm date. So there was certainty that a conversion would happen by a certain point in time, but it certainly can be pulled up. So I think we'll get a better view of that process once we're in it, in that timing. Obviously, Q1 is going to tell us a lot at Montana Renewables too and we're pretty confident about that, excited about that quarter. And then we're going to assess how the market looks. And I think it'd be a combination of those three things that really drives ultimate timing. But at this point, we don't see any reason to change anything. We think these are all additive. I think that adding more investors that potentially would have had to hold out for an MRL spin off can now invest in Calumet, and start to get inside the company and learn more about us. I know there's a lot of people out there who are very interested and excited in MRL itself. There's been a lot of interest in that as a standalone public company. So I think as we look forward, that continues to be the planning base. And hopefully, we'll get some of those investors to come in and take a look at it sooner than they otherwise would have.

Understood, Todd. Thank you for that. And just in relation to that, are there any unknowns in this transition process that could maybe delay the process? Or cause any sort of challenges, I guess?

I don't think so. I'd say that we will have to see, just because we haven't done it before. But we've got a lot of advisors and legal counsel that has, and I think there's a pretty clear path for these types of things. So as I look at the plan, it appears pretty straightforward. There's a lot to do, certainly. But I don't see a specific event or turning point or anything like that, that would leave us questioning the ultimate outcome.

I appreciate that. That's all I have guys. I'll take my other questions offline. Thank you.

Thank you.

[Operator Instructions] The next question comes from Jason Gabelman with TD Cowen. Please go ahead.

Yes. Hey, good morning. Thanks for taking my questions. I wanted to first ask on the MaxSAF expansion project. I think previously you had discussed that the growth CapEx was not tied to the DOE loan. It sounds now like they are kind of tied. So if that's changed, you discussed -- can you discuss why that's changed? And then additionally, as you've been going out to customers to contract the SAF available in the expansion case, are you confident? Or do you have enough confidence to provide some sort of earnings outlook on that project? Thanks.

Let me start out. Jason, it's Todd. And then Bruce [indiscernible] to add on. On the DOE question, what we've said consistently is we don't want to take on additional debt to the MaxSAF. And that continues to be the case. When I made a comment in the earnings call around, we'll be ready to go when DOE approves financing. What we're doing there is we're assuming that that's going to be the next opportunity for financing. There's certainly other opportunities for financing. I think you're probably referencing in the past where we've said, hey, as part of a monetization, proceeds could be used for MaxSAF expansion, those types of things. So all we're doing here is simply suggesting that DOE, we would predict DOE as sooner on the timeline, although obviously, we can't guarantee that don't know that, but sit on a timeline and ultimate monetization. I think the bigger point is we don't want to take on additional debt to do MaxSAF. We made that commitment when we went and did the [indiscernible] hold on to that.

Got it. And Bruce wants to …

Yes. The second part of your question revolved around product placement. I'll give you three thoughts. First, we read this sort of steady stream of announcements of people signing up for billions and billions of gallons of SAF, which may or may not ever be available in the market. That's a backdrop. The situation for us is, we're the largest of the only two producers on this side of the world. And we could sell all of the SAF to 12 different people tomorrow at the drop of a hat. So you're in the very early stages of what's going to be practically a vertical evolution for this new industry. So the third thought is, we're the low cost provider. No matter what happens, we're going to stand at the top of the competitive rankings on this. We had the lucky accident of having the hardware to recover the SAF at a relatively low capital cost, everybody else is going to have to build that. So we are there already. We're not first, World Energy [ph] was first, more second [indiscernible] advantage we are planning to stay advantaged.

Got it. And maybe two quick clarifications on those comments. First timing around the DOE loan. I know it continues to shift down. And it's always tough to guess when the government's going to move forward on something. And then on the SAF economics, where you're seeing those price premiums come in relative to renewable diesel. And I'll leave it there. Thanks.

The industry watchers seem to be centering on about $1 to $1.50 gallon premium to RD and that's substantially a European circumstance right now. But I think we could broadly suggest that it's going to be somewhere in North America. Anybody with an RD platform should be able to fish out about 15% or 20% of it as SAF. So those in our mind [indiscernible] together, they're going to have to [indiscernible] together through the nest of regulatory support mechanisms, including the new SAF blenders tax credit. And we think that's an appropriate spread, which is going to reflect an industry average player. I'm going to emphasize that we're doing better than that. The way the trade flows set up is also probably going to contribute because there are feedstock yield differences. There are catalyst yield differences, there's operational severity. And so if you think about refinery complexity and LP multivariable decision making, you'll be thinking the right way about SAF made from hydro processing, like us. I'll contrast that with something that's very, very linear. If your model is you buy ethanol, you convert almost all of it into SAF, you don't have all of that optimization flexibility. So our dependence on any premium in the market is different to a new entrant that lacks flexibility.

Got it. And then on the DOE loan timing.

That's up to the deal. We are very pleased with the relationship that we've established over the last year and a half. It is actively engaged. We are in underwriting. But I'm not going to forecast their eventual decision or their timing.

All right, great. Thanks for the color.

Thanks, Jason.

This concludes our question-and-answer session. I would like to turn the conference back over to Brad McMurray for any closing remarks.

Thanks. On behalf of the management team here in the room, and really on behalf of all of Calumet, we'd like to thank you for your time and your interest this morning. Have a great end of the week, and this concludes the call. Thanks.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.