Calumet, Inc. Common Stock 2026 Q2 Earnings Call

Good morning. Thank you for joining our second quarter 2026 earnings call. With me on today's call are Todd Borgman, CEO, David Lunin, EVP and Chief Financial Officer, Bruce Fleming, EVP, Montana Renewables and Corporate Development, and Scott Obermeier, President, Specialties. 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 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 two, you can find our cautionary statements. I'd like to remind everyone that during this call, we may provide various forward-looking statements.

Please refer to our press release that was issued this morning, as well as our related filings with the SEC for a list of factors that may affect our actual results and cause them to differ from our expectations. As we turn to slide three, I'll now pass the call to Todd.

Thanks, John. Good morning and welcome to today's call. The last time we were together, we expressed that this year was setting up a lot like 2022, and the second quarter delivered on that with $175 million of Adjusted EBITDA with tax attributes, despite starting the period with three planned turnarounds in Princeton, Cotton Valley, and Montana Renewables. Just as important as the quarterly earnings is what they mean for Calumet's strategic positioning. Our restricted group leverage ratio is now below four times, and with the first phase, our MaxSAF 150 expansion behind us and strong cash flows in all businesses, we're expecting to surpass three times next quarter. About a month ago, we called $100 million of notes, and last week, we terminated the sale leaseback of our CMR truck rack with $115 million repurchase, eliminating that high-interest debt. The outlook is for continued and accelerated deleveraging from here.

The conversation today is increasingly about what our self-funding and growing platform does next. Let's turn to slide four, and we'll start with our specialties business. We've long talked about our integrated specialty strategy. In this quarter, we saw it in spades. Our routinely high-margin specialty products are exposed to an extremely favorable market dynamic we'll hit on momentarily. As we've discussed previously, our specialty products are sourced from crude oil, which is a competitive advantage, since relying on sourcing intermediates in the current market is a challenging position given the value of those intermediates to fuels processors and the scarcity of them in general. Further, processing crude to generate specialties means we're exposed to the fuels and asphalt co-products that are generated during production as well. I'll take us a little deeper into the underlying drivers of the current specialty markets.

Last quarter, we talked about the disruptions in the global energy market and their expected impact on diesel, which drives solvents pricing at Cotton Valley, and lubes, which we make in varying forms at Shreveport and Princeton, and then upgrade further in other sites. We've now seen this impact of global disruptions on the market in real time. Historically, our industry produces a little over 700,000 barrels per day of paraffinic base oil globally. At the highest level, it's been well balanced with demand. Today, over 10% of that capacity is offline, leaving the market structurally imbalanced. Historically, the Middle East and U.S. were the two large export hubs, each of which were supplying about half of the base oils imported elsewhere throughout the world. With a third of Middle Eastern capacity fully or partially offline from the Iranian war, that export capability is turned upside down.

A disproportionate share of that is Group III, which is in even worse shape than the broader lube oil market, although the shortfall in Group III has meant changes in formulations, increasing Group II demand in motor oil segment. About half of Calumet's paraffinic base oils are Group II. Further, Europe has lost roughly a third of its Group I base oil production during the Russo-Ukrainian War, creating a shortage of that grade as well. Group I's typically tailored to industrial applications and represents the other half of Calumet's paraffinic base oil production. Pre-war, Europe was essentially balanced in supply and demand, but has now joined Asia as an extremely short market. In short, there's simply not enough base oil to go around. Further, logistics costs to ship oil around the globe have ballooned given the shortage of vessels and skyrocketing insurance costs.

Combine these elements with the refining industry already running at record utilization with no room to process more, you have a setup that is unlikely to be resolved quickly. Calumet's fortunate to have landed on the right side of each of these global dynamics. Our crude supply is largely domestic, nearby, and readily available. Our customers, while often being major global companies as a whole, are typically domestic shippers. We're a fully integrated producer, so we capture the intermediate value that non-integrated suppliers have to pay for. Given this strong backdrop, accelerated deleveraging in action, and a constructive outlook, we're also closely examining a pipeline of low-risk, high-return growth projects that we've been accumulating over the years as the majority of our discretionary capital was pointed towards building Montana Renewables and deleveraging.

While we won't take our eye off completing the deleveraging, that's occurring more quickly than previously anticipated. We're progressing this growth pipeline in a parallel and disciplined fashion. We're expecting a good chunk of this pipe to clear the FEL process and be deployed in 2027 and 2028. I thank our specialties team for the execution today. It's great to be talking about high return growth CapEx again in this business, and having a team that's rebuilt our operational and commercial foundation so successfully, albeit with little capital, adds to our conviction. Turning to slide five, we see a similarly strong market at Montana Renewables as the RVO is working out exactly as expected. The index margin has moved sharply higher as it has to, because the mandate requires biodiesel capacity to come back online.

As we said on prior calls, biodiesel producers have long memories and won't restart until they're confident. That's precisely what we're seeing, a measured, rational restart that supports margin, which is what the administration intended to do when it set the RVO. Step back and the pattern's clear. There have been 2 decades of RVO targets since 2006, and every single one of them, except the 2024 Set Rule wave, EPA set the target at existing capacity plus growth and let American ingenuity fill the gap. Plenty of opponents called the Set Rule policy too big and unreachable. What we've actually seen with the Set Rule is a 70% increase in biomass-based diesel production this year as the industry reignites. Also, the agriculture community is crushing more crop than ever. Soybean and canola crush are both at record levels, and we're seeing about 5% more crush capacity being added this year.

Throughout the value chain, we're seeing a lot more American jobs making American energy. You can see it on the RINs data on this slide, and this dynamic is why this critical ag and energy policy has been a longstanding and bipartisan issue. Last, let's turn to slide six and talk Montana Renewables growth. Dave will walk through the financials in a segment review, but the gist at MRL is we made $17 million of Adjusted EBITDA tax attributes in Q2, despite over $40 million of foregone margin while we were offline completing the first stage of the MaxSAF® 150 expansion. With July as an indication, we're on track to pace well ahead of this second quarter, even after normalizing for the downtime.

Also, since we last talked, we completed our performance test of the newly installed MaxSAF catalyst, and it met or exceeded expectations across the board. With the first step of MaxSAF behind us, we'll turn our efforts to the next steps of the expansion. First, I'll remind everyone that as we improve our project, we're also working with the DOE to ensure the supporting documents are updated. This is progressing well, and we'll disclose more details when that process concludes, which we expect will occur before our next call. Until then, I'll give a little more insight into how we're envisioning expansion in Montana, and we'll limit our comments on the further details until the full package is announced. Importantly, rather than a massive mega project, which includes transporting a second reactor from the Gulf Coast, we've identified a novel expansion.

It's much cheaper, faster, lower risk, and carries a much higher IRR. We plan to reconfigure some assets that CMR is already operating in Great Falls, with the anchor asset being a second reactor. Lining up this second reactor and SAF production will provide best-in-class SAF yields. The current industry standard practice for SAF production involves fractionating and isomerizing renewable diesel, which creates SAF, but also creates less valuable byproducts like naphtha and fuel gas. In times of strong renewable diesel margins, the net act of converting renewable diesel to SAF plus byproducts balances at an economic optimum of lower SAF output. In fact, that's why you may hear industry participants at times saying the economics favor making RD even though there's a SAF premium.

This second phase of our MaxSAF 150 project differentiates us by deploying the second reactor in a patent-pending polishing service instead of more severe cracking, which means minimal byproducts and in turn, an economic optimization that occurs at a much higher SAF output. Because the second reactor is repurposed from the crude refinery, we plan to have it running this winter. This reactor ultimately provides the capability to produce roughly 200 million gallons of SAF when we expand total fresh feed rates to 17,000 barrels a day over the next two years for a fraction of the capital originally expected. More imminently, it will pair with our existing reactor, ramping up late this year and then producing 120-150 million gallons of SAF next spring at an industry-leading yield and cost structure.