Suburban Propane Partners LP (SPH) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Suburban Propane first-quarter 2004 results conference call. (OPERATOR INSTRUCTIONS). Now I would like to turn the conference over to our host Mr. Bob Plante. Please go ahead.

Thanks, Paul, and good morning everyone. Welcome to Suburban's first-quarter of fiscal 2004 conference call. I am Bob Plante, Vice President and Chief Financial Officer of Suburban. Hosting our call this morning is Mark Alexander, President and Chief Executive Officer. Joining us are Mike Dunn, Senior Vice President of Corporate Development, and David Eastin, our Senior Vice President and Chief Operating Officer.

The purpose of today's call is to review our first-quarter of fiscal 2004 financial results along with our current outlook for the business. As usual, once we have concluded our prepared remarks, we will open the session up for questions.

Before we get started, I would like to remind you that statements made in the course of this conference call that relate to the partnership's or management's expectations or predictions are forward-looking statements. The partnership's actual results may differ materially from those projected in such forward-looking statements. Additional information that could cause actual results to differ materially from those discussed in forward-looking statements is contained in the partnership's SEC filings, including its Form 10-K for the fiscal year ended September 27, 2003. Copies of these filings can be obtained by contacting the partnership or the SEC.

Certain non-GAAP measures will be discussed on this call. We have provided a description of those measures, as well as a discussion of why we believe this information is useful in our form 8-K furnished to the SEC this morning. The Form 8-K can be accessed through a link on our Website at SuburbanPropane.com.

At this point, I would like to get started by turning the call over to Mark Alexander. Mark?

Thanks, Bob, and thanks everyone for joining us this morning. The first-quarter of our fiscal year 2004 was highlighted by several significant events that bode well for the future of our Company. In late December, we closed on a very strategic and accretive acquisition of the assets of Agway Energy. Mike Dunn will update you on the status of this exciting opportunity in just a few minutes.

To finance this transaction, we completed very successful equity and public debt offerings, both of which were upsized due to the favorable response in the markets. Our balanced approach to financing the Agway transaction leaves our balance sheet every bit as strong on a postacquisition basis as it was going in.

As to our results for the quarter, despite weather that was considerably warmer than both normal and the prior year, we are pleased with our performance, and we are now beginning to see the favorable impact of the recent more seasonable weather in our sales volumes.

At this point, I will turn it back over to Bob to discuss our first-quarter results in more detail. Bob?

As we discussed in our financial results for the quarter, to be consistent with our reporting for previous periods, I am excluding the impact of unrealized non-cash losses of 800,000 and $1 million from our current and prior year periods respectively. Those are applicable to FAS 133 accounting.

EBITDA for our first fiscal quarter ending December 27, 2003 totaled $37.9 million compared to 40.2 million for the same quarter a year ago. That is a decrease of 6 percent. Our net income totaled 20.9 million or 74 cents per common unit compared to $24.3 million or 96 cents per common unit in the prior year. Net income for the first quarter of 2004 was impacted by a $1.9 million onetime charge to interest expense related to fees paid in connection with the financing commitment for the acquisition of the Agway assets. This charge amounted to about 7 cents per common unit.

Retail sales of propane during the quarter totaled 131.9 million gallons, a decrease of 8 million gallons from a year ago. As Mark indicated, this decrease in retail volumes was due principally to the warmer than normal weather conditions in all of our operating areas. On a nationwide basis, degree days were at 93 percent of normal for the quarter, and that compares to 102 percent of normal for the prior year quarter.

In spite of these conditions, revenues for the quarter increased $21.5 million or about 10.8 percent to $221.1 million from about 200 million in the first quarter of fiscal 2003. This increase is attributable primarily to higher average selling prices, reflecting the increase in the cost of propane, as well as the sales generated by the Agway Energy assets from the date of acquisition.

Propane prices for the quarter ending December averaged about 57.65 cents per gallon basis Mt. Bellevue (ph) versus about 49.20 cents per gallon for the same quarter a year ago. That is a 17 percent increase in base product costs year-over-year. In addition, propane prices continue working higher and are offered today for spot delivery at about 76.5 cents per gallon basis Mt. Bellevue (ph).

Gross margin of $110.8 million for the quarter was 3.7 million higher than the prior year quarter. As the decrease in retail sales volumes attributable to the warmer weather was more than offset by higher margins on retail sales of propane, higher margin contribution from our other sales activities, and the inclusion of the Agway activity from the date of acquisition. Combined operating, general and administrative expenses of $72.9 million increased about 6 million from a year ago, principally as a result of the anticipated increases in insurance, pension and payroll-related costs, as well as the addition of the Agway Energy operations for the last few days of the quarter.

Given our results for the first quarter, we have maintained very solid distribution coverage, which amounted to about 1.2 times as of the end of December. Capital spending during the quarter totaled about $5.1 million, of which 400,000 was maintenance-related.

Now I will turn it over to Mike Dunn to discuss the Agway acquisition and other recent activities on the business development front. Mike?

As Mark mentioned earlier, we are very pleased and excited with the acquisition of the Agway Energy assets. This transaction increases our nationwide propane market share to about 6 percent, but more importantly adds about 400,000 customers to our already strong presence in the Northeast.

Agway Energy is a leading regional marketer of propane, fuel oil and HVAC products and services that fits extremely well with our existing business model and geographical footprint. The potential benefits of this acquisition are quite substantial. Specifically in addition to further strengthening our already significant products in the Northeast, the transaction expands our energy product offerings by adding heating oil as another product that we can offer our are already existing customer base.

This expansion of our product offering provide significant potential for cross-selling opportunities between propane and heating oil customers. In addition, the Agway HVAC service business complements our existing service business and overnight gives our service business a much stronger presence in the Northeast.

Finally, the geographical footprint of the Agway assets provide significant cost savings opportunities from synergies, as our combined operations have about 50 overlapping service charge orders. Work has already begun to achieve these synergy opportunities as quickly as possible. As I am sure you have seen from the pro forma data provided in our public filings, this transaction is expected to be very accretive and a significant contributor to the overall results for Suburban going forward.

On the other side of the business development ledger, early last week we announced the sale of our propane assets in Texas, Oklahoma, Missouri and Kansas to Ferrellgas for cash proceeds. That sale represented a divestiture of about 11 service centers. The sale of these particular properties is consistent with our strategy of continuously evaluating and identifying opportunities to optimize our return on assets and reposition ourselves in markets that present the best opportunities for growth. Both the Agway acquisition and the divestiture of these nonstrategic assets in the middle part of the country represents significant positive developments in our ongoing efforts to profitably grow our business. Mark?

Thanks, Mike. As announced in our press release this morning, Suburban has declared a quarterly distribution of 58.75 per common unit. This distribution, which equates to an annual distribution rate of $2.35 per unit, will be paid on February 10, for our first quarter ended December 27. As you know, we have already announced our intent to increase our quarterly distribution to 60 cents per unit on quarterly basis payable in respect to the second fiscal quarter of 2004. This planned increase was subject to the completion of the Agway transaction and requires declaration by the Board of Supervisors.

Looking forward, for the balance of fiscal 2004, we are very encouraged by the return to more seasonable weather in early January as our operations prove to be well-prepared for the return of colder weather. As we have discussed with you for quite some time, our focus on net customer growth remains a top priority. We have achieved positive net customer growth to date in fiscal 2004, and we remain steadfast in our determination to continue this positive trend through our fiscal 2004 and beyond.

In addition, the significant proactive steps taken throughout fiscal 2003 to further strengthen our already solid balance sheet enabled us to secure very favorable financing for the Agway transaction. At the same time, our balance sheet remains very solid, and we are in a strong position to entertain additional acquisition opportunities as they arise as well as further debt reductions if they don't.

As always, we appreciate your attention this morning, and we would now like to open the call up for questions. (inaudible).

(OPERATOR INSTRUCTIONS). David Maccarrone, Goldman Sachs.

Good morning everyone. I wanted to ask a question. Acquiring a business of Agway's size midwinter has got to pose some significant challenges. Can you give us a since taking control of what you have found and what you are trying to affect midwinter versus the longer-term transition, and when do you expect that things such as the 50 overlapping territories will be completely incorporated into what you would say is the final business model?

I appreciate the question, David. As you know, Agway Energy is what we view as the and was the crown jewel within the Agway Inc. enterprise. Agway Inc., its parent company, was in Chapter 11, and that sale process -- we are not shy about it -- it is an ugly process, and something, frankly, we learned more about than we ever wanted to know. That process on the downside took eight months, but on the positive side, it gave us an awful lot of time to do an awful lot of homework and hit the ground running.

We have also -- we believe that this business has been very well-run. It has proven that, and it also comes with a top quality management group. So that really helps us even further hit the ground running and maybe avoid some of the pitfalls of merging companies during the winter season.

It is never a good time, though. Our process and our focus is in the following order. Our immediate focus is focused on the central support type operations and combining those, and that is something that does not quite affect the field. And our objective today is really to leave the field alone as best we can because they are busy delivering gas and taking care of our customers until the spring. Those 50 stores, 50 markets I should say, we will look to complete that by sometime in the summer. We will start that right coming out of the heating season, and we look to be done by the beginning of our new fiscal year 2005.

But it is never a good time. I would say based on what we have seen so far, the quality of the people that we have both from Suburban Propane in the Northeast and the Agway Group that has joined our family, they are doing -- it is a class act, and they are doing a heck of a job out there. We have had very few hiccups so far, and knock on wood, I think they are well-prepared and well-organized for it, and we are doing fine.

Coming out of the winter, do you anticipate your competitors in Agway service territories now to charge for your customers? And if so, what are you doing to forestall that?

I think we have to assume that would happen. That is really -- it is within our power to control. The competition would only be successful if we let our customers down, and that has been our theme since day one. Denny Trautman from Agway was the Chief Operating Officer of the Agway. He is running the Northeast for us combined both Agway and Suburban locations, and his leading message to everybody has been take care of your customers and there is no reason why we should lose one.

So while we have built-in attrition in the customers, we think we are being very conservative with our estimates. And to date we have not had much of anything of a service disruption or interference from our competition. And really it is within our control. We believe the quality people we have, the competitors will only be successful is we allow them the opportunity by a service mishap, and that is where our focus is. So never say never, David, but we are addressing that issue first and foremost.

Just finally, two small questions. One, I know it is small, especially the contribution in the quarter, but can you quantify what the impact to earnings and EBITDA from Agway was in the first-quarter results?

It was not much. First of all, it was only three days, David. With the Christmas holiday in there, we closed on the 23rd. So it was three days into our fiscal year. I would say less than $1 million of EBITDA contribution is what is baked in there.

And what has the weather been fiscal second quarter to date as you guys measure it?

It has been on a nationwide basis, it has been relatively close to normal. Okay? Certainly it is actually almost a reverse of what we saw last year at this time where it is a little colder in the East and West and certainly in the Northeast as you have seen for those of us who live in the Northeast now. The middle of part of the country has been a little bit warmer. It is particularly the last week or ten days in January that it has really started to get cold and influence the statistics considerably.

Okay. Thank you very much.

(OPERATOR INSTRUCTIONS). Mr. Plante and other speakers, at this time, there are no further questions in queue.

Thanks, Paul. We appreciate it. Thanks for the help, Paul, and thanks everyone for the support. We are very optimistic about our future with the Agway folks. It is a terrific deal for us. We have got a lot of work ahead of us to make it right and to make it even better than what some might think, so it is nothing but positives. Our destiny is within our own control, and we are looking forward to the challenges.

We appreciate the support, and we look forward to seeing you in the near future. Thanks everybody.

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