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Martin Midstream Partners (NASDAQ:MMLP)
Q1 2019 Earnings Call
April 25, 2019 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to Martin Midstream first-quarter 2019 earnings conference call webcast. [Operator instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Ms. Sharon Taylor, director of investor relations.

Please go ahead.

Sharon Taylor -- Director of Investor Relations

Thank you, Charlie. Good morning, everyone. In the room today, we have Ruben Martin, president and chief executive officer; Bob Bondurant, chief financial officer; Scott Southard, vice president of Commercial Development; Danny Cavin, director of FP&A; and David Cannon, director of Financial Reporting. Before we begin, I'll remind you that management may be making forward-looking statements as defined by the SEC.

Such statements are based on our current judgments regarding the factors that could impact the future performance of Martin, but actual outcomes could be materially different. You should review the risk factors and other information discussed in our filings with the SEC and form your own opinions about Martin's future performance. We will discuss non-GAAP financial measures on today's call. Please refer to the table in our earnings press release posted in the Investor Relations section of our website to find a reconciliation of non-GAAP financial measures referenced in today's call to their corresponding GAAP measures.

And now I'll turn the call over to Ruben Martin.

Ruben Martin -- President and Chief Executive Officer

Good morning. Thank you for joining the call today. By the time you've all read this, I'm sure you've read the press release announcing the reset of our distribution to $0.25 per quarter or $1 per year, so I will address that first. As our investors are all aware, the partnership's 2018 results were negatively affected by the speed of the collapse in commodity prices, specifically normal butane pricing that occurred from mid-October through December of last year.

That same week, butane pricing environment carried over into the first months of 2019, resulting in a missed guidance in our Natural Gas Services segment for the first quarter. Also in 2018, we dealt with weakness in our fertilizer business due to collapsing margins. Although margins have improved, the first quarter of 2019 brought a rainy weather pattern through mid-March that affected our fertilizer and lubricants business as demand from agricultural, timber and construction-based customers have been lower than forecasted. While activity began to increase in -- late in the first quarter and accelerate into the second quarter, it became clear that in order to meet our stated coverage goal, we would no longer wait for clarity around the sale of our gas storage asset.

And the distribution would need to be reset to achieve greater than 1.3 coverage for 2019 and continued increases going forward. We also feel in this challenging environment, it's important to increase our liquidity, so we were forced to make the high -- the tough but wise decision to rightsize our cash distribution. Rightsizing means that the partnership can focus on the best use of its cash flow. Rightsizing means greater financial flexibility when we experience headwinds in our margins business and provides a buffer in the event of further turbulence in commodity prices.

Rightsizing means we could build value over the long term, not just over the next few quarters. And rightsizing provides greater security and opportunity for the distribution going forward for our current and future investors. I appreciate the support shown to us, some of you, since the company went public. It is regrettable that the unforeseeable energy price collapse in the fourth quarter of '18, followed by the weather events in the first quarter of '19, has resulted in our announcement today.

And while we believe our current situation is not our permanent situation, as stated in our press release, it would not be prudent for the company to continue to borrow funds to cover our quarterly distribution. Finally, I'd like to update you on the sale of our natural gas storage assets, a strategy we announced last quarter to strengthen our balance sheet and refocus our operational efforts. Back in February, we spoke to a 16-week marketing plan. At that time, we were two weeks into the process, so while the marketing process is not complete, we can say that the timing remains the same as of today.

We are optimistic about the outcome of that divestiture and the resulting effect on the partnership. I'll now turn it over to Bob Bondurant, CFO, to talk about the first quarter.

Bob Bondurant -- Chief Financial Officer

OK. Thank you, Ruben. Now I'd like to discuss our first-quarter performance compared to our first-quarter guidance. For the first quarter, we had adjusted EBITDA of $30.8 million, compared to adjusted guidance of $37.9 million.

The miss in adjusted EBITDA compared to adjusted guidance was primarily in our Sulfur Services segment and our Natural Gas Services segment. Our Sulfur Services segment missed guidance by $3 million, of which $2.9 million was in our fertilizer business. Unfortunately, wet weather patterns, which began in December in our market area, continued throughout the first quarter. These heavy rain patterns have caused demand for fertilizer to be delayed until drier conditions will allow farmers to work in their fields.

During the first quarter, we missed our tonnage volume forecast by 24% due to these wet conditions. Now we believe a good portion of these sales will carry over to the second quarter provided excess rainfall ends. So far in April, we are seeing an increase in tonnage sold relative to our original April forecast, so there are early indications of a stronger second quarter. Our Natural Gas Services segment missed forecast by $2.8 million as we saw a continued weak pricing in the butane market, which negatively impacted our margins on the inventory we carried over from the fourth quarter to the first quarter.

As we exit the first-quarter, butane sales to refineries have essentially ended and we are now gathering excess butane production and moving it to storage. At current pricing, we are storing inventory at lower price levels than what we did a year ago, which should give us the opportunity to return to historical levels of cash flow achieved in this business the previous four years. Our Terminalling segment missed guidance by $0.7 million, primarily in our packaged lubricant business. The demand from our agricultural, timber and construction-based customers was less than expected due to rainy weather.

We believe this will improve as wet weather subsides and this customer base can run their businesses under more normal operating conditions. Also in our Terminalling segment, we see continued softness in our shore-based terminals due to weak Gulf of Mexico drilling demand as offshore rig counts continue to remain depressed. Finally, in our Transportation segment, we missed forecast by $0.6 million, primarily in the land transportation side of this segment. One of the most significant industries our land transportation business serves is the refining business, primarily hauling refined by-products.

Now during the first quarter, many of our refinery customers experienced downtime with extended turnarounds, and some even had to cut their production runs due to accidental fires inside their facilities. In spite of this first-quarter miss in our land transportation business, we are positive about our long-term forecast as our driver count and current revenue rates per mile are higher than our acquisition model. Also we continue to feel positive about our Marine Transportation business as the market appears to still be tightening, which results in strong utilization of our marine assets combined with an increasing day rate. Now I would like to turn the call over to Sharon to discuss our balance sheet, maintenance capital expenditures and capital resources.

Sharon Taylor -- Director of Investor Relations

Thank you, Bob. On March 31, the partnership's balance sheet reflected both long-term and short-term funded debt as our revolving credit facility was due within 12 months. And although this is unusual, this positioning was a tactical maneuver as we determined that the proceeds from the sale of our natural gas storage assets, which is expected to occur prior to second quarter close, was an important consideration when determining both the commitment amount and the maturity date of the new facility. As such, at the end of the first-quarter 2019, total funded debt was $785 million, an increase of approximately $127 million, the majority of which is attributable to the acquisition of Martin Transport, Inc.

on January 1. Long-term funded debt was approximately $378 million, and short-term funded debt was approximately $407 million. Our balance sheet funded debt is shown net of unamortized debt issuance costs and unamortized issuance premiums and is increased by finance lease obligations as actual funded debt outstanding was $788 million. Reconciling this amount at quarter end, our revolving credit facility balance was $404 million, the notional number of senior unsecured notes was $374 million, and finance lease obligations were $10 million.

Thus our total available liquidity on March 31 was $260 million based on our $664 million revolving credit facility that was effective at that time. Now the partnership amended its revolving credit facility to allow for increased liquidity during the second quarter of 2019. The amendment, among other things, allows for the sale of our natural gas storage assets, provides short-term covenant relief by excluding undrawn letters of credit from the leverage ratio calculation and increases maximum leverage to 5.85 times for the first and second quarters of 2019. The maximum leverage ratio returns to 5.5 times in third-quarter 2019 or the quarter the gas storage assets are sold, whichever comes first.

In addition, the outstanding commitments were reduced to $500 million. For the quarter ended March 31, 2019, our bank compliant leverage ratios, defined as senior secured indebtedness to adjusted EBITDA and total indebtedness to adjusted EBITDA, were 2.83 times and 5.45 times, respectively. As a reminder, our total debt ratio is shown with adjustments from the working capital carve-out sublimit, which allows us to exclude certain debt directly attributed to our seasonal NGL inventory build, if the volumes are either forward sold or hedged, from our total debt to EBITDA calculation. At March 31, the calculated debt related to our inventory build was $10 million.

Accordingly, we excluded that amount from our total debt when calculating our total debt-to-EBITDA ratio. Without the carve-out, our total debt to adjusted EBITDA would be 5.52 times. Our bank compliant interest coverage ratio, as defined by adjusted EBITDA to consolidated interest expense, was 2.59 times. In all, on March 31, the partnership was in full compliance with all covenants, banking or otherwise.

Our gross capital spending during the first quarter of 2019 totaled approximately $3 million, which is in line with guidance of approximately $14 million for 2019. Our maintenance capital expenditures during the quarter totaled approximately $8 million, which was $2 million greater than our projection for the quarter. This increase is attributable to maintenance of an offshore sulfur barge and tug, which was planned for the second quarter of 2019, but was accelerated into the first quarter for scheduling purposes. This concludes our prepared remarks for the morning.

And I will turn the call back to Charlie for the Q&A session. 

Questions and Answers:

Operator

[Operator instructions] We do have our first question from Selman Akyol from Stifel. Your line is open.

Selman Akyol -- Stifel Financial Corp. -- Analyst

Thank you. You guys also talked about in the press release active negotiation of sales of certain non-core assets. And I presume that's beyond Cardinal since that was already disclosed. So can you talk about what other assets you may be looking at?

Sharon Taylor -- Director of Investor Relations

Yes. This is Sharon. We are not going to be able to speak to specific assets, but I would like to give you an example. We have currently a signed contract to sell a negative cash flowing asset subject to due diligence, which, of course, makes it immediately accretive.

So those are the types of transactions we're currently exploring.

Selman Akyol -- Stifel Financial Corp. -- Analyst

OK. And then I guess you had talked about sort of a more refinery-centric business model on a go-forward basis. Is there any additional disclosures around that or any thoughts around that?

Sharon Taylor -- Director of Investor Relations

No. We don't have any other disclosures around that.

Selman Akyol -- Stifel Financial Corp. -- Analyst

OK. And then in terms of just -- and I know you've made your comments on the transportation and the trucking, some refinery turnarounds, I guess, impacting that. Do you see additional turnarounds coming in Q2? My understanding is that, that may have been a higher turnaround quarter upcoming, so just wondering if you expect further pressure from that at all.

Bob Bondurant -- Chief Financial Officer

The overall system may have turnarounds, but the customers we're operating with are all up and running, and that issue is behind us currently.

Selman Akyol -- Stifel Financial Corp. -- Analyst

All right. Thanks very much.

Operator

Our next question comes from the line of Kyle May from Capital One Securities. Your line is open.

Kyle May -- Capital One Securities -- Analyst

Good morning. Thanks for taking the question. Just wondering, you pointed to several different factors that kind of affected your first-quarter results. As we think about the second quarter, are you comfortable with the guidance that was provided in February? Or should we think about some of these issues from the first quarter having an effect on the second quarter?

Sharon Taylor -- Director of Investor Relations

What we're seeing is that the issues we experienced in the first quarter were abetting toward the end, mid-March and forward. So we expect to see some of the first-quarter move into our second quarter. So we view it positively for the second quarter at this time.

Bob Bondurant -- Chief Financial Officer

And I'll add additional comment and specifically on the fertilizer, we feel confident there. And then also, as Sharon mentioned, we had a -- we sped up a maintenance cap item, which was approximately $2 million that we had in our forecast in Q2, that showed up in Q1, so we believe our maintenance capex will be lower in Q2.Kyle MayOK. Got it. That's helpful.

And then maybe following up from one of the earlier questions, you've already talked about a number of changes to the portfolio, you already did some things last year. How do you think about maybe the vision for the company going forward? And what direction should we think of Martin Midstream?

Ruben Martin -- President and Chief Executive Officer

Well, this is Ruben. As we look, we're downsizing the company obviously from several aspects, but as we get back closer, it's more, as we like to say, refinery-centric from the standpoint of our services and other things that we're providing the services for, are basically related to refinery-type operations. Now with that said, our fertilizer business is separate from that, but we do depend a lot on it. And it doesn't have the same drivers as a lot of those same types of businesses.

So we still have a little bit of a diverse portfolio, but servicing refineries with all of their hard-to-handle products, heated-type products, bottom of the barrel and so forth, is something that we do best, and we're getting back to that basics that we started with 20-plus years ago. And so that's kind of where we are focusing on. All the businesses that are around us, such as dropping and the trucking business, services, that type of businesses, and all those businesses seem to be very good, performing well and growing. Do you want to add anything on that, Scott, from the standpoint of refinery? We're looking at a lot of other things that will continue to service the refineries and service the producers that are tied into the refineries also, part of our growth capex in the future if we can get our cost of capital at the levels we wanted.

Kyle May -- Capital One Securities -- Analyst

Got it. OK. That's helpful. That's all for me.

Thank you.

Ruben Martin -- President and Chief Executive Officer

Yes. Do you want to add anything on that, Scott? From the standpoint of refinery, we're looking at a lot of other things that will continue to service the refineries and service the producers. That are tied into the refining results also. Lot of our growth capex in the future if we can get our cost to capital at the levels we want wanted.

Operator

[Operator instructions] We have no question at this time. Presenters, please continue.

Ruben Martin -- President and Chief Executive Officer

Thank you, operator. In closing, we believe that the actions we have taken or in the process of taking will allow us to achieve in the near future our stated objectives of reducing leverage, improving our distribution coverage ratio and providing a means to go back to our long-term growth strategy. We will now have the ability to allocate capital to the many viable prospects that we have surrounding our existing portfolio of assets, and in doing so, maximize profitability. We look forward to a future where Martin transitions back into the company that it has over the course of its history, returned over $1 billion in cash distributions to our unitholders.

We thank you for your interest and support of our company. Have a nice day.

Operator

[Operator signoff]

Duration: 20 minutes

Call Participants:

Sharon Taylor -- Director of Investor Relations

Ruben Martin -- President and Chief Executive Officer

Bob Bondurant -- Chief Financial Officer

Selman Akyol -- Stifel Financial Corp. -- Analyst

Kyle May -- Capital One Securities -- Analyst

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This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

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