Suburban Propane Partners LP (SPH) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the second-quarter 2004 results conference call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session with instructions given at that time. (OPERATOR INSTRUCTIONS). As a reminder our conference is being recorded this morning. I would now like to turn the conference over to our host, Mr. Bob Plante. Please go ahead.

Good morning everyone. Welcome to Suburban's second-quarter fiscal 2004 conference call. I'm Bob Plante, Vice President and Chief Financial Officer at Suburban. Hosting our call this morning is Mark Alexander, President and Chief Executive Officer. Joining us is Mike Dunn, our Senior Vice President of Corporate Development. The purpose of today's call is to review our second-quarter 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 to 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 partnerships or management's expectation or predictions are forward-looking statements.

Partnerships' 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 the forward-looking statements is contained in the partnerships' SEC filings including Form 10-K for the fiscal year ended September 27, 2003, and its Form 10-Q for the quarter ended December 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 which was furnished to the SEC this morning. The Form 8-K can be accessed to a link on our website at SuburbanPropane.com. At this point I would like to get started. We'll turn the call over to Mark Alexander.

Thanks Bob and thanks everyone for joining us. As announced this morning despite warmer than normal temperatures nation-wide, we have reported record earnings for our second-quarter as due principally to the impact of our very successful acquisition of the assets of Agway Energy. As we reported last quarter we were well positioned to hit the ground running with our integration activities and during our first three months since the acquisition we have taken very positive steps to integrate operations management as well as many of the back office functions.

In just a few minutes. Mike Dunn will update you on the overall status of our integration activities, but suffice it to say we are very pleased with the progress to date as well as the plans we have in place for the balance at this fiscal year. As for our results for the quarter despite weather that averaged 3 percent warmer than normal nationwide versus 2 percent colder than normal temperatures during the prior year quarter, we are very pleased with the 52 percent increase in our EBITDA year over year which translates into earnings per unit of $2.97 for the quarter, a 29 percent increase from the prior year. At this point I will turn it back over to Bob to discuss our second-quarter results in more detail. Bob.

As we discuss our financial results for the quarter, to be consistent with our reporting from previous periods, I'm excluding the impact of an unrealized non-cash gain of $1.1 million and an unrealized non-cash loss of $400,000 from our current and prior period results, respectively, and that is applicable to FAS 133 accounting. In addition, our results for the quarter were impacted by three significant items of a nonrecurring nature. First, we recognized a $14.2 million gain from the sale of ten customer service centers in Texas, Oklahoma, Missouri, and Kansas that were considered non-strategic to our operating business.

The second-quarter of last year included a $2.4 million gain from the sale of five customer service centers that were also considered non-strategic. Second, our results for the quarter included a non-cash charge of $5.6 million from the settlement of futures contracts that were acquired in the Agway transaction which were mark to market in the opening balance sheet under purchase accounting. Thirdly, the current quarter's results included a $2.2 million restructuring charge related to our initial efforts to integrate certain management and back office functions of Agway. These onetime items had a net positive impact of $4 million on the year-over-year comparison of EBITDA.

EBITDA for our second fiscal quarter ending March 27, 2004, totaled $111.5 million compared with $74.4 million for the same quarter a year ago, an increase of 50 percent. Our net income totaled $91.5 million or $2.94 per common unit compared to $58.7 million or $2.32 per common unit in the prior year. Retail sales of propane during the quarter totaled 219.9 million gallons, that is an increase of 36.9 million gallons from a year ago. Sales of fuel oil and other refined fuels amounted to 110.6 million gallons for the quarter. As Mark indicated. although volumes were somewhat negatively impacted by the warmer than normal weather conditions nationwide, the inclusion of the Agway operations as well as our continued progress in moving toward an environment of positive customer growth, clearly overshadowed the effect of warmer weather.

On a nationwide basis degree days were at 97 percent of normal for the quarter compared to 102 percent of normal for the prior year quarter. Despite these conditions revenues for the second-quarter increased $286.9 million or just about 100 percent to 574.6 million from $287.7 million in the second-quarter of fiscal 2003. This increase is attributable primarily to the sales generated by the Agway Energy business lines. Propane prices for the quarter ending March averaged 67 and 3/4 cents per gallon basis Mt. Ebo (ph) versus about 66 and 3/4 cents per gallon for the same quarter a year ago. That is a mere 1.5 percent increase in base product cost year-over-year.

Propane prices have come off their highs and are offered today for spot delivery at 60 cents per gallon basis Mt. Ebo (ph). Gross margin of $227.9 million for the quarter was $82.4 million or 57 percent higher than in the prior year quarter due principally to the inclusion of the Agway activity. Combined operating and general administrative expenses of 128.3 million increased 53 million from a year ago principally as a result of the addition of expenses associated with the Agway Energy operations, as well as anticipated increases in insurance, pension and payroll related cost.

Given our record results for the second-quarter, our always solid distribution coverage improved to 1.71 times as of the end of March. Capital spending during the quarter totaled $7.7 million, of which about 2.2 million was deemed maintenance related. Now I will turn it over to Mike Dunn to update you on the status of the Agway integration.

Thanks Bob. As Mark mentioned earlier, we were very pleased and excited with the progress we are making in integrating the operations of Agway Energy with Suburban's operations in the Northeast. This transaction has increased our nationwide propane market share to about 6 percent. But more importantly has added about 400,000 customers to our already strong presence in the Northeast. Work has already begun in earnest to achieve a significant synergy opportunities afforded by this acquisition. To date we have completed a very thorough evaluation and reorganization of the management structure for our Northeast operations to ensure that we have the most talented people in the right leadership positions. In addition, we have outlined a very detailed plan to merge over 40 overlapping market areas. Work is already underway to complete as many of these mergers as possible before the start of the next heating season.

Finally, we are well done the path toward preparing for the full integration of our central support activities and we expect to accomplish a significant portion of this work during the current quarter. As Bob indicated, our current period results reflect a portion of the expenses associated with achieving these synergies, and as expected we will be incurring additional onetime costs in our third and fourth fiscal quarters to properly position ourselves to take full advantage of these synergistic opportunities. However we will not see the full favorable impact of these activities until the first quarter of fiscal 2005 and beyond. Mark.

As announced in our press release this morning, Suburban has declared another increase in our quarterly distribution to 60 cents per common unit. This distribution which equates to an annual distribution rate of $2.40 per unit represents our eighth distribution increase since our recap in 1999. The distribution will be paid on May 11 for our second quarter ended March 27. Looking forward for the balance of fiscal 2004, we are very encouraged by our second-quarter performance as well as the significant progress we are making with our Agway integration activities.

Now that the peak heating season is behind us, we have turned our attention to capitalizing on the synergistic opportunities in our field operations and driving the operational efficiencies available from the combined entity. As Mike indicated we will incur certain additional restructuring and other costs during the third and fourth fiscal quarters to achieve these synergies, so it's important that you consider this as well as the more pronounced seasonality of the fuel oil business when projecting our results for the balance of fiscal year. As we discussed with you for quite some time, our focus on net customer growth remains a top priority.

We have maintained positive net customer growth to date in fiscal 2004 and we remain steadfast in our determination to continue this trend throughout fiscal 2004 and beyond. 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 do not. As always we appreciate your attention this morning. We would now like to open the call up for questions. David, if you could help us with that I'd appreciate it. Thank you.

(OPERATOR INSTRUCTIONS). Dave Macrone (ph).

Mark, with Agway in the fold now, I was wondering if you could refresh us on your thinking and approach to what the optimal coverage ratio for Suburban is long-term, and give us a sense in terms of what the timeframe is to getting there.

I think your finger is as quick as your predecessor, David. Our optimal coverage ratio is 1.2 times.

When would you target getting there?

Base on the -- it's a very interesting point because I think we're in a very enviable position and poised to address the rising interest rate environments that were headed into, and it will be over a period of time. We'll get there gradually. You know us, we are conservative. It's fair criticism for us, we'll get there over time.

Just to play devil's advocate a little bit, to the extent you have a higher unit price resulting from a higher distribution relative to others, you have a relatively more competitive cost of capital to seek acquisitions. I was hoping for you to comment on that point and then address what you see as the acquisition landscape both within the propane and fuel oil sector, as well as outside of that for Suburban?

On the first point, you're right, having a more attractive currency for acquisitions is something we consider all the time and it's part of our distribution philosophy. But the mainstay of our distribution philosophy is sustainability, it's long-term ability to continue to increase our distribution and we've been painfully consistent with that over the years. From an acquisition environment, I struggle with this question all the time because it's never something you can predict. It's never something I think is wise to predict.

We are -- I can tell you that we're poised for another transaction now, we're ready for another transaction now. And that is a lot sooner than I would have thought. Agway was a sizable transaction for us but the way we financed it, the qualities of people that came with the transaction, the quality efforts among all the employees of Suburban has put us in a position to get right back in the acquisition fold, get right back in sooner than I would have imagined. Usually you would think that something that size would take six months, a year to absorb, but we could handle something right now. Our focus is the same as we have said in prior quarter conversations with you, it's midstream assets, it's propane and now it's also fuel oil.

In integrating it and feeling more confident about the direction that the Agway acquisition is going, does that make you more inclined to pursue propane and fuel oil deals?

No, the deals -- I'm a believer in the deal business that when a good opportunity comes along, we'll do it. If it's midstream, if it's fuel oil, if it's propane, we'll do it. Wishes were fishes (ph). You have your priority list but that really doesn't matter, it's got nothing to do with reality. I don't think anymore or less, David.

Thanks very much.

Thank you. I appreciate it.

(OPERATOR INSTRUCTIONS). Yves Siegel.

Good morning everybody. Could we just go through the income statement in a little bit more detail as it relates to the other revenues and as it relates to the cost of products sold relative to the other revenues? And maybe going down a little bit deeper to try to get a handle also on how you're doing on the retail gallon profit margin? And with the thought trying to -- how much improvement have you seen relative to the Agway legacy business?

And then after you go through that maybe you could also give some guidance on the tax rate going forward, also give some guidance on maintenance CAPEX for the full year and then finally, if you could also sort of comment on what kind of -- did you see any benefits in terms of cost savings this quarter and what kind of -- what are your thoughts in terms of additional restructuring charges going forward?

That's --

One big question.

One big question, yes it was, Yves. We appreciate that. Let me address a couple things and then I'm going to ask you to be more specific if you can. You've got to remember, or please keep in mind, that margins as a percentage of sales for propane and fuel oil are different. There's also different investment levels in both businesses. The returns are fairly similar but the margins tend to be higher on the propane side than they are in fuel oil. You have to keep that in mind. the -- and since we're going on the revenue side, but short of that Yves, I wrote a whole bunch of things down and I think you wanted to go from top to bottom on our P&L, so can you -- where do you want to start?

In terms of the other revenues, I'm trying to figure out in terms of the gross profit per gallon, trying to back into sort of where you are on the propane, where you are on the fuel oil and I remember that Agway had lower margins than you did. So I'm trying to get a sense of how much you have accomplished in that regard and then also trying to break out what kind of profitability. When you look at the cost of products sold, how much of that is relative to the other revenue and maybe if you could break out a little bit more detail, what's in that other revenue line?

I will let Bob handle the other revenue question. As far as what we've accomplished on margins with respect to historical margins with Agway, the answer is nothing yet. The stellar numbers you see in our second-quarter there is nothing in there for that. It was pretty much on it's own and we had little to do with it. What we purchased was a solid, quality business with quality people and that proved out in the second-quarter. What excites us is that there's a lot of that opportunity still ahead of us. Bob, do you want to talk about other revenues?

Sure. I think the biggest thing you're seeing in there, Yves, year-over-year is the (indiscernible) revenues, both from Suburban but more particularly from the Agway piece. There is also revenues in there for the small natural gas and electricity business, marketing business that was acquired as part of the transaction as well. Without getting too specific, our margins on the propane side have held their nicely year-over-year. There is still obviously opportunity there, but on a total basis our margins are as strong as they were last year at this time.

Let me try and address some of the other things because I think I caught about six or eight of your questions as you were going through that long, that long single question. Maintenance CAPEX, we have talked about $2.2 million in the quarter. I think if you go back to what we discussed in the pro formas and we talked about a maintenance CAPEX level of something in the $10 million to $12 million range. Annually we're still on track for that. We've seen nothing that would make us think that's going to be any different.

As far as the restructuring expenses, you were questioning what our expectations were for the balance of the fiscal year. Again if you go back to the pro forma, we had baked into the pro forma an expectation of about $15 million or $16 million cash requirement to achieve synergies, and at the time we said roughly 50 percent expense, 50 percent capital. If you equate those numbers to what we reported for the second-quarter, 2.2 million, do the math and that will pretty much tell you what we are anticipating for the balance of the year. And we really know nothing more now to make us think differently than what we actually have in the pro forma that is part of the public documents.

One -- aside from that Yves is, when you are several months into a transaction that's about the time when if there was going to be a surprise, you'd find it. We've not seen anything, any material sense good or bad for that matter, that is a surprise. Things are, there are pluses and minuses to what our projections were, our estimates were. Net, net, it's pretty much holding true.

Exactly. Then to the flip side of that Yves on the -- I believe part of your question was what we've seen to date with respect to expense savings, as we have said and continue to say, we really anticipate the major portion of expense savings to begin in the first quarter of 2005 and beyond.

Do want to give an update on, if there is an update, in terms of what that number could be? Have you revised that or are you willing to share any new thoughts there?

I think we're still on the same track as what we had in the pro forma.

Okay.

Again, it's early in the game.

If anything Yves, it will be -- I will step out on the edge Yves and say, if anything it will be better than what we think.

Okay. I just had a - the tax rate, is that --?

We are benefiting from some NOLs and we actually in the pro forma anticipated that there would be taxes to be paid, so we took a conservative approach. But the NOLs that we had historically as well as some that we will benefit from as a result of the acquisition, we are not anticipating at least for the next couple of years that there's going to be a real tax impact. That is, again, consistent with what we have said in the public documents.

Would I be pushing one more question?

You can always push, Yves.

Go ahead.

This is an easy one. How do you guys stand in terms of where your debt is right now and how much of the debt is floating?

None. All of our debt is fixed rate. We have the two Senior Notes, 754 and 737 coupon on those. We have a slug of that coming due July 1st on the 7.54 percent notes, and then of course we have the debt that was placed at 6 7/8 to transact the Agway purchase.

The traunch of debt due this summer. We are in the position, if we so choose, to pay that off.

We do have a -- the only floating component in our debt structure is our working capital facility but we haven't used that and there's nothing outstanding on that right now.

That's super. Thank you very much.

Thank you.

(OPERATOR INSTRUCTIONS). John Tysseland.

Good morning guys. I guess we are -- Yves was trying ahead and we're trying to get a sense of, if you look at the restructuring costs, you have about 2.1 million for the quarter. What was that included -- what did that entail specifically? I guess are you going to realize more of that type of restructuring costs in the summer as the season kind of settles down and you're able to get into Agway's business a little bit more?

I will let Bob answer that question, but our restructuring charges, our costs and expenses for the next couple of quarters, are going to be more than what you saw in the second-quarter. There will be a lot more, a lot more. Don't go too crazy with that estimate, but I think it will be a lot higher than 2 million bucks, probably around the nature of -- (multiple speakers).

The biggest part of it, John, is severance costs, other employment termination type costs, some stay in-place bonuses for people who are critical to help us through the transaction, etc., but that is the biggest piece of it in the second-quarter. We do expect to continue, as Mark indicated, in the third and fourth quarter, the same types of expenses will be incurred only in greater amounts. Again, if I can point you back to the pro forma and do the math, it will give you a pretty reasonable estimate of what I think of where our thought process is.

Again, they are one time. Most of them are cash charges but they are onetime charges and the payback on most of that is very quick.

Right now, post Agway and your sales of some of your more central in the central U.S. assets or retail stores, you have waiting up in the Northeast, are you trying -- are you looking at any acquisitions specifically I guess more on the West Coast to help balance that East Coast exposure out, or are you happy with where your current suite of assets is?

Ideally we balance it in different geographic climates. But no, it's not a concerted effort to balance the West out the East to Northeast. Again, John, it's where the opportunities come up that's where we will jump. No, there's not a specific strategy, if you will, to do something like a balancing act, no.

Also in the past you kind of mentioned that you'd be willing to possibly enter into the midstream segment. Is that still something you would entertain if the right asset came along?

Absolutely, I put that very high on our priority list if it made economic sense.

What would -- what kind of -- I guess what are you looking for? I mean, obviously, you know the propane business extraordinarily well. What type of asset would -- or attributes of that asset have?

A specific asset would be pipeline assets, storage assets but the attribute we'd like that thing, that target, to have is cash. I don't mean to be smug but what's critical in an MLP structure is stable, predictable, steady cash flow. BILO's (ph) midstream assets have that type of characteristic, assuming you're not fooling yourself with a trading piece around it. You know us to be conservative. We're disciplined, certainly, when it comes to acquisitions. And our list of midstream assets is much longer than the list of propane and fuel oil possibilities, but that doesn't mean anything really.

Ninety-nine percent of what we do in corporate development ends up in the trash and that's what your hit rate should be if you're being disciplined. So, yes John, the midstream assets would be probably our top priority, but it all depends on whether something comes our way that is economic.

If you look at your balance sheet now what size of transaction would you be comfortable with, if you don't mind sang?

I think in today's world $1 billion would be something we'd be comfortable with. Ideally I think the size of the Agway acquisition is just right. It's the right size for us, a couple hundred million dollars is the right size. We could go into the billions, it's just a matter of -- we'd be busy, but we're ready. I've got a management group that has done a remarkable job and I would like to give them kudos for the integration process, that is the Suburban management group plus the top quality management group that came with Agway. The groups have worked incredibly well together. It's a very similar culture with a common theme and that's what makes acquisitions work. And any midstream asset, I know people allude to, you don't the midstream business you know that propane business. Well, we are not a propane company, we're a service company. But you're right in the sense that any midstream acquisition we'd look for it to come with -- it would to come with local management, absolutely.

Thanks guys, great quarter.

Yves Siegel.

Yves Siegel.

Not to take --

Go-ahead, Yves, no problem.

What is the thought process? I would imagine, sitting in Manhattan, that it would be easier for you to do fuel oil acquisitions, less competition than in the midstream or even in the propane. I guess the question is, is that a reasonable characterization, number one. Number two, the effort to integrate a small acquisition versus a large acquisition, I don't know how that would vary but are there certain sizes that are just too small for you to look at or how would -- how do you think about that?

Your characterization of fuel oil I think is correct. If there are opportunities in fuel oil that make better economic sense for us as a platform to do more things in a specific market, absolutely. That could be -- that is a plausible conclusion to draw that we would look for some fuel oil acquisitions in some markets where we're not, and then with our capability as a multiple energy provider, cross-sell. That is a new attractive avenue for us as far as the deal business is concerned. With regard to large versus small, it really tends to be almost the same amount of work whether it's a large deal or a small deal to integrate the operation. You have the same issues, maybe some are just bigger but the effort is about the same. Our preference would be to do larger transactions.

I don't think there would be something too small, but it's certainly wouldn't excite us all that much. It all depends on the local basis and we are looking at one-off's and that if it makes economic sense we will do it. A lot of it depends on the strength and quality of our local management. We very well know that we're only as good as the management we have at our stores. We've got a solid leader in that store and if there's a deal to be had, we will be all over it. Our preference is always to do a larger transaction. But again, it is driven by economics.

On the flip side, are there any more assets that are candidates for disposition?

That's a never-ending process. In any kind of a business that has multiple stores or multiple locations, there are your best as a group and there are ones that are on the bottom of the ladder. It's taken a continuous calling process. That doesn't mean that the ones that don't generate an adequate return today are sale candidates. There are multiple options to first improve its return to acceptable level, but an option is always to sell. We view that as a never-ending process, every single one of our assets needs to generate an adequate return.

If you look at us over the years since our recap in '99, for the past five years we've sold, selectively sold non-strategic stores, and then where they weren't returning an adequate return, we've reinvested that money in the form of Scanna (ph) and Agway to grow our business and achieve a higher return. Net, net, that's a big positive for us. Back in the '90s this company only made in the '70s, 70 million of EBITDA. You do some pro formas on what a twelve-month number would look like now, it's more than double that. You can see that our net net, we are way ahead of the game. That would be our procedures going forward. It's a never-ending process.

That super, thanks again.

Thank you.

Ladies and gentlemen, at this time we have no one else queued up for questions, so please press star one if you do have a question. Mr. Plante, we have no one else queuing up for questions at this time.

We'd appreciate everyone's support. We're excited about certainly the early indications of the Agway acquisition. We have a lot of work still ahead us. You know us, we're not shy. We are conservative and were also determined to follow this one all the way through and get ready for the next one. We're ready for the next one. We're looking, we're anxious and determined so we're looking forward to the future. We are entering a negative interest rate environment when it comes to REITs and MLPs. We think we are very well poised for that environment and we are very well positioned for both that environment and for deal flow. Thank you for your support. If you have some detailed questions, feel free to give us a buzz. We look forward to speaking with you next quarter. David, thank you very much for your help today.

Thank you. Ladies and gentlemen, this conference will be available for replay after today at 4:00 Eastern time and running through tomorrow Friday, April 23, at midnight. You may access the AT&T executive playback service at any time by dialing 1-800-475-6701 and entering the access code 725474. International participants may dial 320-365-3844. Those numbers again are 1-800-475-6701 and 320-365-3844, with an access code of 725474. That concludes our conference call for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.