Operator: Good morning and welcome to the Calumet Specialty Products Partners, L.P. Fourth Quarter and Full Year 2022 Earnings Conference Call. All participants will be in listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Brad McMurray, Director of Investor Relations at Calumet. Please go ahead.
Brad McMurray: Good morning. Thank you for joining us today. With me on today's call are Todd Borgmann, CEO; Vince Donargo, CFO; Bruce Fleming, EVP Montana/Renewables and Corporate Development; Scott Obermeier, EVP of Specialty; and Marc Lawn, EVP of Sustainable Products and Strategy. 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 Web site at www.calumetspecialty.com. Additionally, a webcast replay of this call will be available on our site within a few hours. Turning to the presentation, on Slide 2 you can find our cautionary statements. I 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 Securities and Exchange Commission for a list of factors that may affect our actual results and cause them to differ from our expectations. Also, please note that last week, we launched a municipal bond offering from Montana/Renewables. That process is ongoing, and as such, we may be limited in regard to questions about the bond offering on this call. I'll now pass the call to Todd.
Todd Borgmann: Thanks, Brad, and welcome to Calumet's year-end 2022 earnings call. 2022 was a breakthrough year for Calumet. As Montana Renewables launched operations and our specialty business led the company to a record setting full year adjusted EBITDA of $390 million, a new high for Calumet. The successful startup of Montana Renewables was our most recent strategic milestone as targeted production levels were quickly reached and we've operated well ever since. Strategically, our vision has become reality. We now have demonstrated the power of our industry leading specialty business and have turned a great project into a top tier renewable diesel business. From this platform, we believe further substantial unitholder value can be delivered.
Talking about strategic progress, let's turn to Slide 3. Calumet is a company in the final stages of a strategic transformation, and before we get into the financial details, let's pause and take stock of where we are and why we believe Calumet is particularly well-positioned. 2 years ago, we announced how a small, highly leveraged company could use the energy transition that transform itself by converting part of our assets to renewable service. We developed some views that were, at least at the time, contrary to prevailing wisdom. It's worth a few moments to revisit the most consequential of those core axioms as it lays the foundation for what we are today. First, let's talk about decarbonization and the global energy transition. It's always been our thinking that too fundamental, the conflicting truths exist.
One, the transition is important and it will happen. Two, it will be much more lengthy, complicated, and expensive than popular consensus. The best we have made are consistent with that strategic view and the conventional wisdom seems to be coming into line with our thinking. Our view was fundamental to forming our initial design framework. It was when we confirmed that we could retain significant conventional processing capacity and thus 60% of our Great Falls to EBITDA, all while standing up leading renewables venture, the Montana Renewables became a . With the consensus expectation that the industry norm going forward will include under investment and conventional processing, our legacy Great Falls site should continue to generate strong cash flows.
At the same time, we're accelerating the development of sustainable products in our specialties business. Over the past year, we've seen rapid growth in our BioMax brand, which is a biodegradable brand that doesn't compromise on the first rate performance attributes of Royal Purple. We also launched a zero carbon wax solution called TitanZero and inbound inquiries are accelerating across our specialty offerings as our customers look for sustainable solutions. During today's opening remarks, you heard a new title from Marc Lawn. As executive Vice President of Sustainable Strategy and Products, Marc will dedicate his energy to accelerating our sustainable offering across our specialty business through partnering and innovating with our unique customer base.
Technical customer collaboration is a sweet spot for Calumet and Marc will bring a dedicated executive focus to leveraging calumet's legacy core capabilities and the renewable product experience we've gained through Montana Renewables to innovate in this fertile area. The second core differentiator to our Montana Renewables strategy was how we thought about the renewable diesel market in margin formation. Our once contentious strong and stable margin theory has now gone mainstream as it has subsequently appeared in competitor's marketing decks from here to Italy. From our view on industry margin formation, the concept of CI parity and the importance of our unique geography was born. At one point, feedstock supply was the most popular pushback we received and it now feels our competitive advantage to preferentially source speed in Montana is widely accepted.
The other frequent challenge we would receive in the early days was concerns of already overbuild . When we started down this track, it felt like there was an announcement a week, and I don't believe we've seen a new announcement in the U.S in over a year. It's actually contrary as we've seen projects canceled or stalled due to cost pressures, financing, legal and permitting challenges. We're seeing that location and feedstock flexibility are lasting advantage in this business and new builds are extremely challenging. The obvious locations have already been announced or already converted. Further, with consensus being that traditional fuels refining will be more profitable for longer, the pressure for less advantaged sites convert has waned.
Of course, if the consensus holds, our specialty business is well-positioned to benefit from traditional margins being better for longer as well. The third axiom from Montana Renewables is SAF. As we've discussed in prior calls, we made a decision to invest in SAF prior to the Inflation Reduction Act. At the time it looked like a niche largely private market, but similar to the overwhelming positive response we received early in the RD marketing stage, SAF was highly sought after and we could sell every job we could make at margin substantially higher than RD. From there, the IRA was a pleasant surprise and it changed our SAF outlook. The Montana Renewables strategy shifted from serving a niche specialty like opportunity to becoming a first mover in a global mega trend.
The U.S is positioning itself as a SAF leader and it's fair to say that decarbonization of the rapidly growing aviation market will be a real challenge. It's also the case that SAF is the leader in the aviation decarbonization clubhouse and Montana Renewables is poised to be the largest SAF producer in North America next quarter. With these early views playing out, we retain our strong expectations around Montana Renewables run rate profitability once the feedstock pre-treater is in place next month. We see immediate upside with the scope edition of SAF and we are increasingly optimistic about the opportunity to potentially double Montana Renewables EBITDA through our MAX SAF expansion, which we'll talk more about later. Turning to Slide 4, we shift the lens from strategic to execution.
2022 was the year in which strong execution and a favorable market environment met generating exceptional results. With all the energy we see around Montana Renewables, it's easy to lose track of the transformation that has occurred within our specialties business. 2022 was a record year and strategically could not have happened at a better time as the cash performance of this business allowed us to hold onto MAX equity in Montana Renewables through a time of immense value escalation. The results refueled by record operations nearly across the board, exceptional commercial execution and favorable market forces that looked to remain strong in 2023. Our entire organization was nimble through the supply chain disruptions and a highly inflationary environment.
In three short years, Calumet's integrated platform has displayed what we mean by advantaged optionality. In COVID, we lowered rates, focused on specialties and generated positive cash flow. In '22, we ran MAX rates, sometimes even intentionally maximizing fuel yields and we set an EBITDA record. Over the same time period, our operations teams have also demonstrated their ability. In 2021, we lost the majority of the year to winter storm Uri. In December of '22, we encountered a similar challenge, the week of Christmas nonetheless, but with lessons learned from the year prior and well-placed capital early in the year, the result was different. That storm cost us the last week of the year, which essentially negated all of December's EBITDA, but we still delivered a record fourth quarter and all of our sites are back and fully operating.
What a difference a year makes, and I can't thank our teams out of the sites enough for their commitment, skill and agility over the past few years. At Montana Renewables, an entire business was built and launched in roughly 2 years. Let's turn to Slide 5 for the current status. As expected, our renewable diesel unit came up in the fourth quarter and has ran exceptionally well. Catalyst performance and throughput rates have been as planned as we run up to our hydrogen limit. We took the entire site down in the third quarter and separated into a niche cash flow generating specialty asphalt refinery, plus a world class renewable diesel and SAF facility. While these businesses are independent and unique, we operate them as one site with one mission.
Delivering this project largely on schedule amid supply chain challenges and a few shots of intense cold weather has been a gargantuan effort and the team remains on track to deliver the sequential commissioning. Since startup, we've been successfully selling to customers and have fully de-risked our supply chain, which is incredibly important to suppliers in this industry. Our renewable hydrogen plant commenced startup on March 4, and we're ramping up to 12,000 barrels a day. Our pre-treater will be mechanically complete in March and running in April. Last, the SAF scope that we added midway through the project will complete startup in April as well and will be the largest SAF producer in North America next quarter. This takes the commitment of our project teams and operational teams working together and we're really proud of the tractor team is on.
During the second quarter, we expect to achieve our run rate EBITDA, which we have previously guided to be in the mid 250s with growth from there. With that, I'll turn it over to Vince to take you further into segment level results. Vince?
Vincent Donargo: Thank you, Todd, and good morning. As Todd mentioned, Calumet had an exceptional year as shown on the financial summary table on Slide 6. The strong margin environment and operational performance carried through into the fourth quarter as you can see in both our quarterly and full year results. We exceeded our financial metrics and targets for 2022. Before I take you through the segment, I wanted to highlight our continued focus on the balance sheet. Delevering has been at the heart of Calumet's strategy for many years, and we took a transformational step in 2022. 12 months ago, our net debt was 10x our trailing 12-month adjusted EBITDA, and by the end of 2022, we improved to 4x. Our delevering mission is not yet complete, but it has progressed meaningfully and we now have a clear path to achieving our goal of gaining access to competitively priced capital.
Of course, these marks were achieved while Montana Renewables was in construction, and we expect this new business will essentially double the company's steady state EBITDA output when the pre-treater is up and running. Turning to Slide 8, our specialty products and solutions business generated $95.7 million of adjusted EBITDA in the fourth quarter. While the margin environment for specialties and fuels came off slightly from the record third quarter level, they continue to be quite strong through the end of the year. The SPS team continued their focus on commercial excellence and the benefits of that focus shows in our results. However, the arctic freeze that hit most of the U.S in late December did have an adverse, albeit small impact on our quarterly results as we had to shut down several of our facilities right around year-end.
Those plants quickly return to normal operations and have been running full out to start 2023. For the full year 2022, our SPS business delivered $379 million of adjusted EBITDA. We have continued to see the constructive margin environment early in 2023, and while we do not expect this extremely strong margin environment to remain forever, we do believe that the commercial excellence initiative, reliability improvements and integration, all contribute to an elevated bar that we call the new normal. Moving to Slide 10, our performance brand business generated $2.7 million in adjusted EBITDA for the fourth quarter and $20.1 million for the full year. As I mentioned on the last quarter's call back in November, the fourth quarter is typically the weakest for performance brands and we saw even more seasonal impact this quarter than we typically do as big box retailers focus on inventory control going into year-end.
We talk a lot about the benefits of our integrated business model and how tailwinds experience an SPS can often turn into headwinds for performance brands. This tradeoff is as we produce 20x more specialty products in SPS than we consume in performance brands. However, and not all of the anomalies of this business experienced in 2022 are directly offset by SPS. To name a few, the supply chain crisis hit this business more than others in the Calumet portfolio. We worked through a force majeure from our largest additive supplier, which was lifted near year-end. As we have discussed previously, we lost all supply from our largest grease supplier and sourcing alternative grease supply in a tight market has increased our input costs and limited our ability to meet demand in some of our highest growth areas.
And lastly, we continue trying to offset this inflationary environment. One example of how inflation is more acute in performance brands is of roughly $17 million of increased can costs over the past 2 years. This takes time to pass along. Near the end of the year, we saw steel prices revert to some semblance of normalcy and so far in 2023 we have seen big box consumer demand pick up. We are optimistic that the financial results of our performance brand segment will match the strength of its underlying brands as we start to normalize in 2023. Moving to Montana, our business had another busy quarter with the plant turnaround and renewable diesel conversion. We are very pleased that we're able to start the renewable diesel plant and begin to serve our customers so smoothly last quarter.
Todd has already discussed our progress on the RD and SAF front Montana, so let's turn to Slide 12 to discuss the quarter. Fourth quarter adjusted EBITDA of negative $13.1 million was a result of several one-time factors that impact us -- impacted us throughout the second half of the year. Most significantly, the plant was in turnaround for significant portion of the fourth quarter. That means there was no crude throughput and no production. We carried a fair amount of inventory over from the third quarter and what turned out to be a falling price environment, so we spent the back half of the quarter processing expensive inventory upon restart of operations. And finally, Great Falls was not immune from the extreme winter weather even by Montana's standards.
Temperature at times fell below minus 30 degrees Fahrenheit, making it for impossible working conditions and extremely expensive natural gas. In all, we estimate the impact of these one-time items to have cost us from $40 million to $45 million of adjusted EBITDA in the second half of 2022. Despite these challenges, Montana still delivered $75.9 million of adjusted EBITDA in 2022 and we look forward to 2023 as the legacy specialty asphalt plant is fully operational and Montana Renewables is close to achieving run rate EBITDA with the pre-treater coming online in April. With that, let's flip to Slide 13 and I will turn the call back to Todd for concluding remarks. Todd?
Todd Borgmann: Thanks, Vince. In 2023, we expect to close the turnaround chapter at Calumet for good. We have a few critical near-term items to accomplish that will allow us tenor this next phase of the Calumet story. First and foremost, we must continue to operate safely and reliably. Major steps were taken in 2022 and we expect to continue on this trajectory. Early last year after spending entire 2021 recovering from winter storm Uri, we commenced a 3-year capital plan focused on modernization, reliability and integration of our Northwest Louisiana assets. We are extremely pleased with the first year of that program and while reliability is a function of a lot more than capital, our specialties business saw 30% year-over-year volume growth, which was worth well north of $100 million in adjusted EBITDA.
We intend to keep the operating improvement to recognize last year and we expect to spend $125 million to $145 million of capital in our legacy business in 2023. We also have a nice portfolio of small to midsize low risk growth capital that we have not approved, but could pursue as the year develops. As exciting as those opportunities are, all discretionary capital will be evaluated using an extremely high internal hurdle rate as we compare those investments against allocating capital towards the purchase of our own securities in the marketplace. Further, we believe we have room to add differentiated integration without capital as well. Earlier we talked about the new sustainable specialties mission that Marc is leading and Scott will pick our performance brands as we look to leverage each segment strengths and positioning.
We'll continue to report SPS and performance brands separately as they're very different businesses, but we'll operate at the single specialty business with one unified vision. Next, we'll complete the Montana Renewables pre-treater that we've talked about so frequently. As we've mentioned before, good logistics and access to advantage feed are fundamental to making money in renewable diesel and Montana Renewables is ideally positioned to achieve both with the pre-treater in place. We expect to get that unit stood up shortly, work out any normal kinks and process our remaining clean feet in the next month or so. With that, we expect to be delivering run rate type EBITDA by middle to the end of the second quarter. Upon completion of the pre-treater, we've the next phase of Montana Renewables, which is an increasingly exciting one.
We believe we have a number of game changing options available to us and like the past couple years, we'll navigate them to achieve the maximum risk adjusted return for our unitholders. Let me frame up how we think about our planning case, as it serves the guidepost from which we try to add value. First, we're well in process with two exciting financing opportunities. The first is municipal bond offering announced last week. Further, we recently received news that we've been accepted into the second phase of the DOE process. Well, it's no guarantee that we'll ultimately receive the DOE support. Progressing into Phase 2 is a major hurdle. The relatively small percent of applicants are able to clear. We've mentioned DOE opportunity before and we believe renewable hydrogen, renewable diesel and SAF are right down the fairway of what this program was developed to support.
Next, we expect to work towards an IPO of Montana Renewables at a time when the unique earnings power of the operation is clearly demonstrated and markets are receptive. It's quite possible that before then we turn the high-level of strategic interest into an additional minority partner as our entire plan since inception is to partner thoughtfully in ways that deliver unitholder value. We did that with , its roughly 6 months ago, and we couldn't be more pleased with that relationship. We're working with a sharp experienced group of professionals who share a vision for the ultimate potential of Montana Renewables. As always, we remain focused on unitholder value and we'll keep our options open as we look for ways to enhance the base plan. Last, it's difficult to talk about the ultimate potential of Montana Renewables with talking -- without talking sustainable aviation fuel or what we call MAX SAF.
We continue to gain conviction that SAF is a tremendous opportunity with the same or maybe even more geographic advantages that exist in our renewable diesel business. We talk about SAF in different ways. So let me clarify. We have 2,004,000 barrels per day at SAF production coming online in the second quarter, which is a result of the SAF scope adding to the original RD project. MAX SAF is a future potential growth case in which we believe we can expand our existing plant capacity to 18,000 barrels a day of throughput, and then converted approximately 80% of that throughput or 15,000 barrels a day to SAF. As we discussed last quarter, we've already purchased the reactor needed to do the MAX SAF expansion to ensure we can move quickly, should we go forward or bring in a partner who wants to progress expeditiously.
The reason for the energy around SAF is the combination of the recent Inflation Reduction Act, the enormous potential for the future market size, and the current infantile size of supply, and the fact that Montana Renewables is already positioned as an early mover and the largest U.S supplier in 2023. Some reputable organizations have forecasted a 150 billion gallon SAF market in the next 30 years. To put that in perspective, today's U.S production is less than 75 million gallons or 0.05%. In MRO and MAX SAF mode could generate more than 200 million gallons annually by itself. These numbers are staggering and obviously extremely aggressive and early. That being said, we're very fortunate to have a front row seat as an industry leader as this market develops.
As soon as our pre-treater is complete, we'll ship our full focus to deeper engineering of this MAX SAF plan, as we expect it to be a major component of a potential IPO, and we'll certainly have additional information on this potential next step as we progress throughout the year. With that operator, we're ready to open up the queue for questions.
