Martin Midstream Partners L.P. (NASDAQ:MMLP) Q4 2023 Earnings Call Transcript

Martin Midstream Partners L.P. (NASDAQ:MMLP) Q4 2023 Earnings Call Transcript February 15, 2024

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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 Fourth Quarter Earnings Conference Call. Today’s conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] At this time, I’d like to turn the conference over to Sharon Taylor, Chief Financial Officer. Please go ahead.

Sharon Taylor: Thank you, operator, and good morning everyone and thank you for joining us today. In the room are, Bob Bondurant, CEO; Randy Tauscher, COO; David Cannon, Controller; and Danny Cavin, Director of FP&A. I’ll begin with our cautionary statement. During this call, management may be making forward-looking statements as defined by the SEC. These statements are based upon our current beliefs, as well as assumptions and information currently available to us. Please refer to our press release issued yesterday afternoon, 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 from our expectations. We will discuss non-GAAP financial measures on today’s call, such as, adjusted EBITDA, distributable cash flow and free cash flow.

In addition, we will refer to adjusted EBITDA after giving effect to the exit of the butane optimization business. You will find a reconciliation of these non-GAAP measures to their nearest GAAP measures in our earnings press release posted on our website. Now, I will turn the call over to Bob to discuss fourth quarter and full year results. Presenter Speech

Bob Bondurant: Thanks, Sharon. I would now like to begin my discussion with a recap of Martin Midstream Partners execution of significant achievements in 2023. In February, we refinanced our existing secured notes, extending their maturity to February 2028. At the same time, we amended our revolving credit facility and extended its maturity to February 2027. In the second quarter of 2023, we completed our exit from the volatile butane optimization business, while retaining the stable cash flow component of the business associated with our North Louisiana underground storage assets. Also in 2023, we began construction of the Oleum Tower at our sulfuric acid plant in Plainview Texas in order to be the supplier of Oleum to the DSM Semichem joint venture.

This joint venture is between us, Samsung, C&T America Inc. and Dongjin, USA. The joint venture is currently in the construction phase of facilities that will provide electronic-level sulfuric acid commonly known as ELSA to the semiconductor manufacturing industry. The final significant achievement we had in 2023 was exceeding our disclosed EBITDA guidance and also meeting our targeted leverage ratio of 3.75 times. I would like to acknowledge and thank our team of executive leadership, segment leadership and the entire Martin Midstream workforce for executing our 2023 game plan in order to achieve these goals. Now, I would like to focus on our fourth quarter operating performance. For the fourth quarter, we had adjusted EBITDA of $29.2 million compared to a fourth quarter revised guidance of $26.9 million, an improvement over guidance of $2.3 million or 9%.

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Q&A Session

For the year, we had adjusted EBITDA of $117.7 million, exceeding our beginning-of-the-year guidance of $115.4 million. For the fourth quarter, our largest cash flow generator was our Transportation segment, which had adjusted EBITDA of $12 million compared to revised guidance of $11.3 million. Within this segment, our land transportation business had adjusted EBITDA of $9.6 million compared to revised guidance of $7.3 million. During the fourth quarter, our revenue per load was greater than forecasted as we began to see a recovery in our longer-distance loads. We also began to see a reduction in our equipment repair and maintenance costs, as we continue to lower the average age of our fleet, with new leased equipment purchases. The effect of this recapitalization of our equipment fleet over the longer term will be to increase our equipment lease expense, which will be partially offset by reduced repair and maintenance costs.

We also believe newer equipment will help our driver retention. Our marine transportation business had adjusted EBITDA of $2.3 million compared to revised guidance of $4 million. The primary reason for this EBITDA miss was due to supplemental insurance calls from our protection and indemnity insurance carrier. These supplemental costs totaling $1.1 million, were due to losses incurred by our P&I carrier related to their overall underwriting losses. These losses were not the result of Martin Midstream’s Marine Transportation loss performance, but were the result of the entire global marine industry loss performance. This was a onetime charge hitting the fourth quarter income statement. Our second strongest cash flow generator in the fourth quarter was our Terminalling and Storage segment, which had adjusted EBITDA of $9 million, which was the same as our fourth quarter guidance.

Overall in this segment, our revenue slightly missed forecast by 3% primarily due to reduced throughput volumes, which were offset by a 5% reduction in operating expenses from lower utility costs when compared to guidance. Now, I would like to discuss the performance of our Sulfur Services segment, which was our third largest cash flow generator in the fourth quarter. In this segment, we had adjusted EBITDA of $7.4 million compared to guidance of $6 million. Our fertilizer group had adjusted EBITDA of $3.9 million compared to guidance of $3 million. We have stronger fourth quarter sales compared to forecast for both liquid fertilizer and degradable sulfur products. This positive sales performance compared to forecast was partially offset by reduced ammonium sulfate sales in the fourth quarter, which we believe are being delayed to the first quarter.

The pure sulfur side of our Sulfur Services segment had adjusted EBITDA of $3.6 million compared to guidance of $3 million. We experienced very strong sulfur production from our refinery suppliers as total sulfur volume received was 17% greater than our fourth quarter forecast, allowing this business line to exceed its financial forecast for the quarter. Finally, I would like to discuss the fourth quarter performance of our Specialty Products segment. In this segment, we had adjusted EBITDA of $4.9 million compared to guidance of $4.9 million. In this segment, we had strength in our grease business line, offset by a slight underperformance in our packaged lubricant line of business. To summarize our fourth quarter performance, we exceeded revised guidance by $2.3 million.

The bulk of our outperformance came from our land transportation business and our Sulfur Services segment, partially offset by the one-time insurance charge in our marine transportation business. Now I would like to turn the call back over to Sharon to discuss our 2024 guidance, along with our balance sheet and capital resources.

Sharon Taylor: Thank you, Bob. As of December 31, 2023, the partnership had total long-term debt outstanding of $442.5 million, compared to $516.1 million on December 31, 2022, a $73.6 million reduction year-over-year. Of this balance, $42.5 million was drawn under our $175 million credit facility, leaving us with $109 million in availability under the facility after consideration of outstanding letters of credit and a slight constraint due to our leverage ratio covenant. For the last few years, the partnership has focused on strengthening the balance sheet through debt reduction, using free cash flow and divesting non-core assets in order to reach our targeted leverage ratio of 3.75x or lower. As Bob spoke to earlier, after adjusting for losses related to the exit of the butane optimization business, we met that goal as our bank-compliant adjusted leverage was 3.75x as of December 31.

However, we know we still have work to do to ensure that we remain at or below that target on a sustainable basis, and that knowledge will continue to guide our decisions regarding capital allocation. Also, at December 31, our senior leverage was 0.36x and our interest coverage was 2.19x. At year-end, the partnership was in compliance with all covenants, debt or otherwise, and is forecasted to remain so. Moving on to capital expenditures. Total CapEx for the quarter was $12.1 million, of which $4.9 million was gross, including $3.7 million related to the DSM Semichem joint venture, also referred to as the ELSA project. Maintenance CapEx for the quarter was $7.2 million, which includes $2.5 million in turnaround costs at our fertilizer plant.

Total CapEx for the year was $40.1 million, including $11 million for growth, of which $8.3 million was related to the ELSA project and $29.1 million was maintenance CapEx, including a total of $4.8 million for turnaround costs at our fertilizer plant. For the quarter, distributable cash flow was $8.6 million and adjusted free cash flow was $3.7 million, bringing distributable cash flow for the year to $32.8 million and adjusted free cash flow to $21.7 million. Both of those numbers presented after adjusting for losses associated with the butane optimization business. Now I’d like to walk through our guidance for 2024, which is on Page 5 of the presentation attached to our earnings press release yesterday afternoon and can also be found on our website.

The partnership is forecasting approximately $116.1 million in adjusted EBITDA for 2024. Of the total, 71% is provided by fixed fee contracts with 29% being margin-based. Now let’s look at each segment individually. In 2024, we anticipate transportation services to generate $41.2 million of adjusted EBITDA as compared to actual results of $46.8 million in 2023. While we anticipate the Marine Group to continue to benefit from the higher day rate environment we’ve experienced this past year, the Land Group will see reduced EBITDA from higher equipment lease expense offset somewhat by lower repairs and maintenance expense. The forecast for adjusted EBITDA in the Terminalling & Storage segment is $37.7 million, which is an improvement of $1.8 million from 2023’s actual results.

The businesses in this segment are fee-based with some contract escalators that along with anticipated reductions in operational expenses should improve results year-over-year. The Sulfur Services segment, adjusted EBITDA is projected to be $29.7 million in 2024, compared to 2023’s results of $28.1 million. And while the pure sulfur side looks to remain relatively flat, we are projecting the Fertilizer business will experience higher margins, slightly offset by decreased sales volumes. And new to the Sulfur Services segment this year is approximately $835,000 of EBITDA, forecasted to begin in the fourth quarter for reservation fees associated with the ELSA project. Lastly the Specialty Products segment is forecasted to generate $22.7 million in adjusted EBITDA.

The businesses within this segment are projected to remain relatively stable, as compared to 2023’s actual results of $22.8 million. For 2024 we are forecasting growth capital expenditures of approximately $17.4 million, with $10.4 million for the Oleum Tower expansion at Plainview which is part of the capital spend relating to the ELSA project. Also included in the growth number is $6.5 million for our cash contribution related to the partnership’s 10% ownership, in that joint venture. Maintenance capital is anticipated to be approximately $32 million for the year, which is above average for the partnership. We do have some larger expenditures forecasted, including $8.1 million for regulatory inspections related to our Marine Equipment; $4 million in Turnaround Costs at our Fertilizer Plant where 50% of that is at our Sulfuric Acid Plant in Plainview and $4.8 million for the Smackover Refinery turnaround which occurs every two years.

Finally for full year 2024, we anticipate distributable cash flow to be $30.4 million and free cash flow of $13.3 million. With that, I will turn it back to the operator for Q&A.

Operator: Thank you. [Operator Instructions] We’ll go first to Kyle May at Sidoti & Company.

Kyle May: Hi. Good morning, everyone.

Bob Bondurant: Good morning.

Sharon Taylor: Good morning.

Randy Tauscher: Good morning.

Kyle May: Maybe starting with the Terminalling & Storage segment, you mentioned that volumes were lower in the fourth quarter. Just wondering if maybe you can provide some context of what happened in 4Q and then, how you’re thinking about those volumes in 1Q and the remainder of 2024?

Randy Tauscher: Yeah. This is Randy. Kyle, thank you for the question, specifically to the terminals most of the shortfall in the fourth quarter — as a matter of fact all the shortfall in the fourth quarter came around the shore-based terminals, where we had really low diesel sales volumes in the month of October and November. In the month of December and what we’ve seen through the first 45 days of 2024, those sales have improved significantly. And we expect that, improvement in that business to stay because we have agreed to a new contract beginning in January 1, 2024 where we do have minimum volume commitments that we didn’t have in 2023. So, yes, we expect that to be — that business will be stable going into 2024.

Kyle May: Great. That’s very helpful. And then maybe a question for Sharon. As we’re thinking about the CapEx in 2024, I was wondering if maybe you could kind of help us out with the cadence. Because I know you’ve got the Oleum Tower and then you’ve got the $6.5 million contribution. So how should we think about that kind of through the course of the year?

Sharon Taylor: Yes. The $10.4 million we should spend in the first and second quarters of this year. And the $6.5 million will be spent in the second quarter — actually towards the first of the second quarter.