Aug 5, 2009
Executives
Jennifer G. Straumins – Senior Vice President F.
William Grube – President and Chief Executive Officer R. Patrick Murray – Chief Financial Officer
Analysts
Darren Horowitz – Raymond James Adrayll Askew – Hartford Investment Management
Operator
Welcome to the second quarter 2009 Calumet Specialty earnings conference call. (Operator Instructions).
I would now like to turn the presentation over to your host for today's call, Ms. Jennifer Straumins, Senior Vice President.
Jennifer G. Straumins
Good afternoon and welcome to the Calumet Specialty Partners investors call to discuss our 2009 financial results. During this call Calumet Specialty Products Partners will be referred to at the partnership or Calumet.
Also participating in this call will be Bill Grube, our President and CEO and Pat Murray, our CFO. Following the presentation we will hold the line open for a question and answer session.
During the course of this call we will make various forward-looking statements within the meaning of Section 21(e) of the Securities Exchange Act of 1934. Such statements are based on the beliefs of our management, as well as assumptions made by them and in each case based on information currently available to them.
Although our management believes that the expectations reflected in such forward-looking statements are reasonable, neither the partnership, its general partner, nor our management, can provide any assurance that such 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 & 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.
The significant increase in crude oil prices and continued weakness in product demand resulted in a second quarter that was very challenging for all refiners, including Calumet's. This has caused us to focus even more on placing specialty products in higher value applications in market and developing additional specialty products and controlling operating costs.
We've continued to proactively manage our business during this volatile period. As the worldwide economy has weakened we've seen demand for some of our specialty products weaken, especially those used in the automotive and construction industries.
Many of our products are feed stocks for products. We've seen reduced demand for several of these products over the last several months.
We're attempting to offset the impacts of this weaker demand by broadening our markets, marketing efforts and focusing on specialty product development. We've also continued our fuel products and our crude oil hedging programs to help protect us against rapid changes in pricing levels for both fuel products and crude oil.
Compliance with the financial covenants pursuant to our credit agreements is measured quarterly. Based upon performance over the more recent four fiscal quarters, and as of June 30, 2009, we continue to be in compliance with all financial covenants under our credit agreements.
While assurances cannot be made regarding our future compliance with these covenants, and being cognizant of general uncertain economic environments, we believe that we will continue to maintain compliance with such financial covenants and preserve our liquidity. As announced on July 20, 2009, the partnership declared a quarterly cash distribution of $0.45 per unit for the quarter ended June 30, 2009, on all outstanding units.
The distribution will be paid on August 14 to unitholders of records as of the close of business on August 4, 2009. And now I'd like to turn the call over to Pat Murray for a review of our financial results.
R. Patrick Murray
Net loss for the three months ended June 30, 2009, was $26 million, compared to net income of $50 million for the same period in 2008. Partnership's performance for the quarter ended June 30, 2009, as compared to the same period in the prior year decreased by $76 million, due primarily to a decrease of $42.5 million in gross profit and increased non-cash derivative losses of $31 million.
The increase in non-cash derivative losses is primarily related to our fuel products segment and such losses either may not be realized, or may be realized in different amounts upon settlement. These non-cash derivative losses are not included in our adjusted EBITDA of $26.6 million for the second quarter of 2009.
We believe the non-GAAP measures that EBITDA, adjusted EBITDA and distributable cash flow are important financial performance measures for the partnership. EBITDA and adjusted EBITDA as defined by our credit agreements were negative $1.9 million and $26.6 million, respectively, for the three months ended June 30, 2009, as compared to $65.5 million and $48.0 million, respectively for the same period in 2008.
The partnership's distributable cash flow for the quarter ended June 30, 2009, was $14.3 million as compared to $36.9 million for the same period in 2008. Adjusted EBITDA quarter-over-quarter was negatively impacted by decreased gross profit as previously mentioned.
We encourage our investors to review the section of the earnings press release found on our Website entitled Non-GAAP Financial Measures and the attached tables for discussion and definitions of EBITDA, adjusted EBITDA and distributable cash flow financial measures and reconciliation of these non-GAAP measures to the comparable GAAP measures. Gross profit by segment for the second quarter 2009 for specialty products and fuel products was $20.7 million and negative $2.3 million, respectively, compared to $21.5 million and $39.4 million, respectively, for the second quarter of 2008.
Specialty products segment gross profit quarter-over-quarter was primarily impacted by reduced LIFO inventory gains of $50.2 million resulting from the liquidation of lower cost inventory layers in 2008, as well as lower sales volumes in lubricating oils, solvents and waxes due to economic conditions impacting product demand. This reduction in specialty products segment gross profit was positively impacted by significant improvements in overall specialty products selling prices in relation to crude oil prices from the 2008 quarter.
The decrease in our fuel products segment gross profit quarter-over-quarter was due primarily to lower overall fuel products crack spreads and reduced LIFO inventory gains of $10 million from liquidation of lower cost inventory layers in 2008, partially offset by increased sales volume resulting from higher throughput rates at the Shreveport refinery and increased gains on derivatives of $9.7 million. Selling, general and administrative expenses decreased $2.5 million, or 26.3% to $6.9 million in the three months ended June 30, 2009, from $9.4 million in the same period in the prior year.
This decrease was primarily due to reduced accrued incentive compensation costs resulting from the lower quarterly distributable cash flow in 2009 as compared to 2008 and a recovery of $0.9 million from a fully reserved account receivable in the current period. Transportation expenses decreased $5.1 million, or 24% to $16.1 million in the three months ended June 30, 2009, from $21.2 million in the prior year's quarter as a result of reduced sales volume of lubricating oils, solvents and waxes.
As of June 30, 2009, total capitalization consisted of partners' capital in the amount of $449.6 million and outstanding debt of $457.0 million, comprised of borrowings of $373.2 million under the term loan facility with an unamortized discount of $14.1 million on the term loan, borrowings of $95.8 million under the revolving credit facility and a long-term capital lease obligation of $2.1 million. The $23.6 million increase in partners' capital from December 31, 2008, was primarily due to net income of $49.7 million, offset by $29.6 million in distributions and a $43.7 million decrease in other comprehensive income, primarily to a decrease in the fair market value of our derivative instruments.
On June 30, 2009, we had availability on our revolving credit facility of $73 million, based on a $203.9 million borrowing base, $35.1 million in outstanding standby letters of credit and outstanding borrowings of $95.8 million. We believe we have sufficient cash flow from operations and borrowing capacity to meet our financial commitments, debt service obligations, contingencies and anticipated capital expenditures.
However we are subject to business and operational risks that could materially adversely affect our cash flows. Material decrease from our cash flow from operations or a significant sustained decline in crude oil prices would likely produce a corollary and material adverse effect on our borrowing capacity under our revolver and potentially our ability to comply with the covenants under our credit facilities.
Substantial declines in crude oil prices, if sustained, may materially diminish our borrowing base which is based in part on the value of our crude oil inventory, which could result in a material reduction in our borrowing capacity under our revolver. A significant increase in crude oil prices, if sustained, would likely result in increased working capital funded by borrowings under our revolver.
Now I'll turn the call over to Bill Grube.
F. William Grube
This concludes our remarks and I'll be happy to answer any questions you may have. Operator, could you please confirm if there are any questions?
Operator
(Operator Instructions). Our first question comes from Darren Horowitz – Raymond James.
Darren Horowitz – Raymond James
Could you give us a little bit more color on how you plan to offset the weakness that you're seeing in the specialty products, specifically maybe some more detail into other market segments that you're looking to enter? And also what else can be done to rationalize costs out of the equation?
Jennifer G. Straumins
We're doing several things. We've expanded a lot of our products lines.
We are looking at markets that we've participated in in the past and then had left based on our not having enough volume to service those markets so we're going back to some of those. We are looking at some higher valued added, small capital projects we can do at our plants to help us move further down the value chain, and we're continuing to look at any feed stock compatibility we have between our historical plants and the new Penreco plants that we acquired last year.
And all of these things will help upgrade our overall margin.
Darren Horowitz – Raymond James
When you look at all those things in total do you have a projected CapEx?
Jennifer G. Straumins
It's very minor, all-in it's probably less than $10 million.
Darren Horowitz – Raymond James
Moving over to your hedges, when you look at hedging incremental barrels from this point further, where do you want to be more hedged? It seems like you're pretty well hedged into 2010 on your crude oil with swaps.
But are there other areas on the diesel or the jet fuel side that you want to be a bit more hedged?
Jennifer G. Straumins
We are completely hedged to 2010 on any crack spreads that we plan on doing. And as we move into 2011 we're continuing to place those barrels more so on the diesel and jet side.
Those values are stronger than gasoline at this point in time. But we're hedging in order to remain in compliance with all of our credit agreements which require us to hedge on the crack spread side.
And on the crude oil side for the specialty products segment we're continuing to take a very short-term focus which we've done historically.
Operator
(Operator Instructions) Our last question comes from Adrayll Askew – HMCO
Adrayll Askew – Hartford Investment Management
So far as your hedges, you say you're layering your hedges on diesel and jet fuel. What price points are you layering the hedges for 2011?
Jennifer G. Straumins
The diesel and jet fuel are between $15 – I'm sorry, 2012 is between –
Adrayll Askew – Hartford Investment Management
No, I said 2011.
Jennifer G. Straumins
2011, $15 on the diesel.
Adrayll Askew – Hartford Investment Management
And could you update on your working capital, I guess, expectations over the next six months?
Jennifer G. Straumins
We don't really view those as being all that different than what they've been historically.
F. William Grube
Maybe a little lower.
R. Patrick Murray
I think we're looking at opportunities to continue to run barrels but also maybe lower some inventory levels to make sure those levels are in line with product demand. So I think we see some opportunity to reduce inventory levels a little further to help to lower our borrowings a bit under the revolver.
Adrayll Askew – Hartford Investment Management
Can you provide some indication, kind of order of magnitude? Is that somewhere in the range of like 5% or more than that?
R. Patrick Murray
I would say maybe a 10% reduction.
Adrayll Askew – Hartford Investment Management
Can you give a sense of your view on distillates, on the distillate demand and market there, kind of what you're seeing in your markets?
F. William Grube
We're seeing some weakness in the distillate markets at this point in time because I think in the trucking industry situation that's out there today that what you do is you look at the current distillate crack spreads are pretty ugly. If you go out two years I mean they're $15 so everybody kind of thinks that this economy is going to be turning.
It's just a matter of when.
Operator
With no further questions in queue, I would like to turn the call back to Ms. Straumins for closing remarks.
Jennifer G. Straumins
Thank you. This concludes our earnings conference call covering the second quarter 2009 results.
Thank you for your participation in the teleconference and please note that this teleconference will be available for replay using the instructions contained in the press release. Have a great afternoon, everybody.
Operator
Ladies and gentlemen, thank you for your participation in today's conference. This concludes your presentation.
You may now disconnect.