Suburban Propane Partners LP (SPH) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the fourth-quarter 2004 financial results conference call. (OPERATOR INSTRUCTIONS). I would now like to turn the conference over to our host, Mr. Robert Plante. Please go ahead, sir.

Thank you, David. Good morning, everyone. Welcome to Suburban's fourth-quarter and 2004 fiscal year-end conference call. I am Bob Plante, Vice President and Chief Financial Officer. Hosting our call this morning is Mike Dunn, Senior Vice President of Corporate Development. And also joining us on the call is Mike Stivala, our Controller.

The purpose of today's call is to review our fourth-quarter and fiscal 2004 full-year financial results, along with our current outlook for the business. And 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 relates 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 and its Form 10-Q for the quarter ended June 26, 2004. 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. This Form 8-K can be accessed through a link on our Web site at www.SuburbanPropane.com.

At this point, I would like to begin our discussion by turning the call over to Mike Dunn. Michael?

Thanks, Bob, and thank you everyone for joining us. We were very proud of the significant accomplishments achieved during our fiscal year 2004. In addition to our solid operating performance, we completed the very successful acquisition of the assets of Agway Energy and are well along with the business of integrating these assets into our Northeast operations.

To finance this transaction we successfully accessed both the equity and the debt markets and were well-received by both. In fact, our $175 million 6 7/8 10-year notes were well oversubscribed and, at the time, the lowest yielding single B-rated notes ever in the high-yield energy sector.

In addition, we further strengthened our balance sheet by repaying another $42.5 million of senior debt during the year. Also, although not required to do so, we made another voluntary contribution to our defined pension plan to proactively address our underfunded pension liability, bringing our total contributions since July of 2003 to $25.1 million.

In addition to taking these very positive steps to position our Company for the future, we increased the distribution on our common units twice during this past fiscal year -- our eighth and ninth increases since our recap in 1999.

All in all, we have just completed a very successful year, and we are very optimistic as we move into fiscal 2005. At this point, let me turn it back over to Bob to review our financial results for the quarter and the full year. Bob?

Thanks, Mike. While seasonally a slow period, our results for the fourth quarter are well within our range of expectations. As we discussed our financial results for the quarter to be consistent with our reporting the previous periods, I am excluding the impact of non-cash unrealized losses of $4 million and $300,000 from our current and prior period results respectively as applicable to FAS 133 accounting.

EBITDA for our fourth quarter ending September 25, 2004 was a loss of $3.6 million compared to a $6.1 million loss for the same quarter year ago. Our seasonal net loss totaled 24.7 million or 79 cents per common unit compared to 20.7 million or 74 cents per common unit in the prior year.

The fourth quarter of fiscal 2004 EBITDA and net loss included several items that are considered non-recurring in nature. Specifically we recorded an $11.5 million gain from the sale of certain less productive assets, primarily in the upper Midwest, and I will discuss those in a little more detail in a few minutes.

Also, the fourth quarter included a $1 million non-cash charge reflected in depreciation expense for accelerated depreciation on assets abandoned and a $600,000 restructuring charge, both primarily attributable to the Agway integration activities. Retail sales of propane during the quarter totaled 86 million gallons. That is an increase of 7 million gallons from a year ago. Sales of fuel oil and other refined fuels amounted to 48 million gallons for the quarter.

Revenues for the fourth quarter of $244.7 million more than doubled the revenues of 119.9 million reported for the fourth quarter of fiscal 2003. This increase resulted primarily from the inclusion of the Agway operations, but also reflected higher average selling prices consistent with the increase in the cost of both propane and fuel oil. Propane prices for the quarter ending September averaged 79.41 cents per gallon basis Mt. Belvieu versus about 53 1/4 cents per gallon for the same quarter a year ago. That is a 49 percent increase in base product costs year-over-year.

Propane prices continued to work higher and are offered today for spot delivery at about 91.5 cents per gallon basis Mt. Belvieu. Heating oil prices are also moving higher. Prices for the quarter ending September averaged $1.18 per gallon, which is also 49 percent higher than last year's 79.25 cents per gallon average.

Spot prices remain at record levels of $1.50 per gallon today. Total gross margin of 88.3 million for the quarter was $28.2 million or 47 percent higher than in the prior year's fourth quarter, again due principally to the Agway acquisition. Combined operating and general and administrative expenses of 101.9 million were 36.9 million higher than a year ago, principally as a result of the additional expenses associated with Agway operations, as well as anticipated increases in marketing, professional services and travel expenses all associated with integration activities.

Moving to the full fiscal year ended September 25th of 2004, again to be consistent with our reporting for previous periods, I am excluding the impact of non-cash unrealized losses of $4.5 million and $1.5 million attributable to FAS 133 accounting from our current and prior period results prospectively.

EBITDA for our full fiscal year totaled $141.7 million, a 27 percent increase over the prior year results. Net income for fiscal year 2004 totaled $64.2 million or $2.11 per common unit compared to $50.2 million or $1.93 per unit in the prior year. Our fiscal year earnings were impacted by several items of a non-recurring nature, some of which were discussed in the fourth-quarter results including gains on sales of assets totaling $26.3 million from the sale of 24 customer service centers compared with 2.5 million gained in the prior year; a goodwill impairment charge of $3.2 million recorded in the third quarter; a non-cash charge of $6.3 million included within the cost of products sold, and that relates to purchase accounting for the Agway Energy acquisition, and restructuring charges amounting to $2.9 million related to severance and other exit costs associated with all of our integration activities. These items had a net favorable impact on year-over-year EBITDA of approximately $11.4 million.

As Mike mentioned, we've taken very significant steps during fiscal 2004 to further strengthen our balance sheet. Even after retiring an additional $42.5 million of debt and voluntarily contributing an additional $15.1 million towards defined benefit pension plan during the fourth quarter, we still ended the fiscal year with a cash balance of about $53.5 million, with no outstanding borrowing under our bank revolving credit facility.

With regard to our bank facility, just yesterday we closed on a new four-year $150 million revolving credit facility, replacing our previous agreement which was scheduled to expire in May of 2006. This new revolving credit facility will provide for any seasonal working capital needs, as well as letter of credit requirements through October 2008.

In addition to extending the term of the facility, we are very pleased to have added several new banks to our already strong group of financial partners.

Our strong cash flow has enabled us to take the significant steps we reviewed with you this morning, while maintaining our very solid distribution coverage which amounted to 1.42 times as of the end of September. Capital spending during the quarter totaled $8 million, of which 2 million was deemed maintenance-related. For the full fiscal year, capital spending totaled 26.5 million, which included 7.6 million of maintenance capital spending.

At this point, let me take a few minutes to update you on the status of several other activities. As Mike indicated earlier, we are well along with the business of integrating the operations of Agway Energy with Suburban's operations in the Northeast. As we discussed last quarter, our people have been working very hard to complete the blending of as many of the 37 overlapping marketing areas as possible prior to the arrival of the heating season.

I'm happy to report that we are on schedule, and many of our employees in overlapping markets are already now working under one roof. We are confident that a considerable portion of the synergies anticipated from this transaction will be achieved in fiscal 2005.

While we have have been focused on the integration activities associated with the Agway acquisition, we have continued with our ongoing evaluation of our business in general to ensure that we are maximizing the contribution from all of our assets. In that regard, we successfully completed the sale of 10 customer service centers in Minnesota, North Dakota and Wisconsin during the fourth quarter, thus fully realizing our objective of exiting less strategic markets in the middle part of the country.

Also, during the fourth quarter, we closed on the sale of three marginally profitable customer service centers in North Carolina. As I indicated earlier, these transactions resulted in a gain of about $11.5 million in the fourth quarter and, combined with divestitures during the second and third quarters of fiscal 2004, generated nearly $40 million in proceeds and 26.3 million in total gains for the year.

As we reported last quarter, upon the completion of our analysis of the Agway retail gasoline business, it was concluded that we should move forward to complete an orderly exit from this business. Communicating this decision to our customers has been underway since July, and we are well on track to complete the exit process by the end of the year. Mike?

As announced in our press release, this morning Suburban has declared a quarterly distribution of 61 25 cents per common unit. This distribution, which equates to an annual distribution rate of $2.45 per unit, will be paid on November 9th for our fourth quarter ended September 25.

Taking a moment to look forward to fiscal 2005, we are very encouraged by the considerable progress we have made with our efforts to integrate the assets of Agway Energy into our Northeast operations, and we are well-prepared as we move towards the heating season.

As we have discussed with you for sometime, our focus on net customer growth remains a top priority. We have achieved slightly positive net customer growth in fiscal 2004. That is our second consecutive year of net growth, despite the environment of increasing energy prices. We are determined to continue to improve upon this positive trend throughout fiscal 2005 and beyond.

In addition, the financing of the Agway transaction through a combination of debt and equity, along with the significant proactive steps taken throughout fiscal 2004 to strengthen our already solid balance sheet, leave us poised and ready to entertain additional potential acquisition opportunities as they arise.

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

(OPERATOR INSTRUCTIONS). Yves Siegel.

Thank you. Good morning, Bob and Mike. I know you're prepared for these questions, so here they go. Where are you right now in terms of building inventory on the heating oil and the propane side, number one? Typically what kind of days of supply are you looking at? Number two, what are your thoughts on passing through the higher prices and maintaining margins?

And number three, what portion of your customers, both on heating oil and propane, have entered contractually that you have contractually committed to fixed contracts? Do you hedge the other side of that?

And then the last question, can you just compare and contrast the two businesses? Why you may or may not see more competitive pressures on heating oil than you might on propane as it relates to potential customer loss? Thank you.

Okay. With respect to position, our philosophy has been and continues to be to make sure that we have access to available product. Whether or not that position is priced or not is certainly contingent upon market factors. I can assure you that both in propane and in heating oil our supply needs are well covered. That is not an issue.

Let me just share with you how much of that is priced. I did not think it would be confidential.

With respect to the portion of our customers that entered fixed-price contracts both in heating oil and propane, I can first assure you that any fixed-price business in light of the turmoil that the energy environments were certainly advertising the market to be over the course of the last six months, any fixed-price activity for the most part is hedged.

From a percentage perspective, propane is rather insignificant. From a heating oil perspective, it is a little bit more significant. From a propane perspective, it is actually less than 5 percent. From a heating oil perspective, it could conceivably be as high as 30 percent to be quite frank with you.

As far as contrasting the two businesses, with respect to heating oil, heating oil obviously is a little bit more competitive we think than propane insofar as the customers' ownership of the tank. Heating oil is a little less expensive to compete in because you do not have that additional capital outlay, so I think one offsets the other.

To date from a Suburban perspective we have been marketing today's market price structure to our customers. We have been keeping them in the loop with respect to changes as they have been occurring. So our ability to pass the higher price levels on to those customers that entertain a floating price opportunity certainly should not come as a surprise to them. It will be interesting to see what weather brings with respect to volume, which heating oil is probably a little bit more sensitive to it with respect to our business than propane.

I tried to answer your question as quickly as I could. Hopefully, I touched on all the areas. If not, come back.

I think you did. I think what you are saying is that you anticipate that you would be able to hold onto margins both on heating oil and propane going into '05, notwithstanding the higher commodity prices?

Correct.

John Tysseland.

If you could just go over I guess the covenants on your new credit facility and then also kind of where you stand on your balance sheet at the close of the quarter and where you stand on the relevant ratios?

Okay, sure. The covenants on our new facility that we closed yesterday are substantially the same as what we have had in place all along, basically consisting of a pretty typical standard leverage ratio and the new facility has a leverage ratio maximum of 4.7 times -- I'm sorry 4.75 times. And that is debt to EBITDA and that is at the OLP level, so that will be OLP debt, divided by, if you will, total EBITDA. To give you a perspective, we are in the range of the low twos, two, three something in that neighborhood right now.

It also has a typical interest coverage of about interest coverage of 2.5 times we are required to maintain. Those are the two maintenance covenants, and our interest coverage is in the neighborhood of the 5 range at this point, okay. It is something that we don't talk about quite frankly because it's a nonissue to us. We are so far from the covenant thresholds in our agreements that it's not something we are -- obviously we do the calculations and provide the certificates to the lenders as required, but it is not something we get too concerned about.

Also, I guess your working capital demands this year versus last year, are they significantly different, and what type of difference have you seen? Is it 50 percent, 60 percent greater or 80 percent more?

So far in all honestly we are not seeing a tremendous difference from last year's levels. We are providing for just about anything that could happen going forward, so if commodity prices should continue to rise throughout the winter, one of the reasons we recently went through and looked at our working capital facility and basically redid the facility was to ensure that regardless of circumstances with respect to commodity prices we are well covered.

We are not into our facility right now. We still have cash on the balance sheet. I mentioned the cash position at the end of September. I will also tell you that as of today it has not changed that much. So we are not using our facility right now. We are projecting that we will as we get further on into the season for the typical period of time of a couple months. We typically would expect to use our working capital facility from the December through March timeframe. But we feel that we are well covered in terms of availability under that line, particularly with the new facility in place.

Great. Thanks. Last question. If you could just go through I guess -- Agway came with about what we were looking at estimating somewhere around $34 million in EBITDA at a midrange. How much EBITDA do you think you have sold with your divestitures of some of your more undesirable or maybe not nonstrategic type assets in terms of EBITDA or gallons do you think?

From an EBITDA perspective, we are projecting about $2 million from the sold divestitures. From a gallons perspective of propane, those operations in a full 2003 year generated about $25 million, 25 million gallons of propane.

Okay. So all the divestitures you have made and those nonstrategic stuff made up about $2 million in EBITDA total?

Yes.

Yves Siegel.

Bob, what is a good run-rate for G&A now that you have Agway?

That is a good question. We are still kind of sorting through some of the transition activities, etc.. (multiple speakers). Yes, Mike, is saying probably something in the mid-50s is a number that we would probably expect on a going forward basis. But there may be some opportunities to still do some things there once we get through the initial integration activities and then start really really looking at what we have got and where we can make some further efficiency cuts if you will.

And what are your thoughts on maintenance CapEx for '05?

For '05 from a maintenance standpoint we felt, and I actually I will direct you back to the pro forma, because our thinking is really on an ongoing basis that those numbers both from a P&L and capital standpoint are still pretty good. And I think we basically were suggesting that an ongoing basis total CapEx of 20 to $25 million annually is what we need to support this business.

Now when you get into the maintenance growth split you know the story on all the shenanigans they go on with respect to that in this industry, but we typically try to be as truthful with ourselves as we can and we classify only, as growth CapEx, only customer equipment expenditures for those particular locations that are actually growing. If they are not growing, even if they are buying new tanks for whatever reason, we classify them as maintenance.

I think if you look at the ratio of growth to maintenance for this year that we just closed, you have got about $8 million of maintenance CapEx on an annual basis of 26.5. So probably in the 8 to 10 million range is a reasonable number on an annual basis for maintenance going forward.

What is your thought -- do you have a feel for how much weather might have cost you in terms of cash flow this past year?

It is difficult. The weather was obviously a little on the warm side. We have not really quantified it that much because as you know our business is really -- there are a lot of components of our business that really are not weather sensitive. We make attempts internally so that for our own information to try and understand the weather impact, but it is not an exact science. I would really hate to try and quantify the exact impact resulting from weather. (multiple speakers)

With respect to my last question --

I think one would expect, just to sum that up, if it's colder next year, we ought to see some better results.

My last question is how you think about the distribution growth, especially since you have a nice coverage ratio right now, and within that context, you always seem to have a ton of cash. I guess that is relative term, but a lot of cash on the balance sheet. What is your thought process in terms of how much cash do you want to retain on the balance sheet?

Let me say this. To use your words having a ton of cash, there are others in our industry that wish they were in that position right now quite frankly. Okay? And I think it's a function of our conservative nature, our board's conservative nature, and I will be quite frank with you I don't think you're going to see our board change their conservative nature going forward with respect to distribution increases.

We have a plan. Our plan is to -- we don't like to play too close to the edge, and our plan is to increase distribution steadily but certainly never getting beyond the point of sustainability. We have other issues that we want to provide for. We always want to keep our balance sheet in the position where should the proper acquisition opportunity come up, we are poised and ready to do it, and we have got the wherewithal to do it.

So I don't know if that answers your question specifically, but that is the most you are going to get from me.

(OPERATOR INSTRUCTIONS). Yves Siegel.

I wanted to give others a chance.

Thank you, Yves.

Could you just review just once again your comments on the business that you are exiting and what the financial impact may or may not be?

On the gasoline business or the sales of service centers this year?

The gasoline business. Are you contacting customers as you suggested?

It is quite honestly marginally profitable in terms of the total. Honestly it is a strategy -- the exit strategy is something that the Agway people had started long before we got involved with them. It's really just a continuation. We took a look at their conclusions and agreed with them and are moving forward.

In most cases, these are not stand-alone gas stations on the corner there. They are usually gas pumps that are part of a propane, fuel oil and/or fuel oil distribution center. So it is a question of eliminating those pieces of the business. From a profitability standpoint, not a big contributor in the past.

What about in a broader context potential for additional asset sales and potentially how much cash could that bring in the door if it is meaningful?

This is Mike. To add to the gasoline business as well, as far as customer notification, a lot of that business is state bid related, and those would be the type of customers that we would be notifying.

As for further divestitures, we started a divestiture program five or six years ago with respect to the middle part of the country, and we pretty much have achieved the major part of that goal. We will continue to evaluate service centers and obviously businesses that don't give a suitable satisfactory return and we will continue on.

But to project a number, we pretty much for the moment feel pretty comfortable that we have hit the singles and doubles that are going to be of any meaningfulness.

The only thing I would add to that is in connection with, if I may, with all the blending activities we have in the Northeast, we have generated a significant access property list, which are not stand-alones service centers but more land and buildings to that we will be looking to sell over the next year or so in generating proceeds.

Okay.

John Tysseland.

Last couple of questions. Do you expect any significant remediation expenses as a result of exiting your gasoline business or no?

As you are aware, or maybe not, we had a $15 million environmental escrow put into the purchase contract with the Agway situation, which was net of the advertised 206 sales price, so we are working against that for any of those issues.

Is there a timeline on that escrow?

Three years. So we have a little over two years.

Excellent. Also transition costs associated with Agway, where do you think you stand in that versus last year I guess on a percentage basis, and kind of what you think you might still spend in '05?

That is a tough question. Where we are with respect to integration, we are still working through the systems issues. Okay? And we have got most of the employees, if not all the employees, under one roof. And some of the outlying expenses are going to be moving storage and things like that, which require permitting and local ordinances and so forth and so on. So really to put a hard and fast number on that and to calendarize it would really be pretty difficult. I don't know, Bob (multiple speakers)

To try and quantify in total everything we have seen since the transaction, which now it is getting close to year, indicates that our initial assessments of integration costs are pretty accurate. So what we have built into the pro forma we feel very comfortable with. Some of it is behind us now. A good deal of it will be behind us certainly by the end of 2005, except for maybe a few things, as Mike indicated, where you have to wait for permits to do things, etc..

So I guess where are you on a percentage basis? Where do you stand today versus I guess in your full integration, are you 50 percent there?

Probably something better than 50 percent. (technical difficulty)-- I guess 60 percent. Those is always still a little unknown out there, but something in that neighborhood.

Ladies and gentlemen, we have no one else queued up at this time. (OPERATOR INSTRUCTIONS). We will return to the line of Mr. Siegel. Please go ahead.

I was just kidding, guys. Have a good day.

Thank you, Mr. Siegel.

And with that, we have no one else queued up for questions.

Well again everyone we would like to thank you for participating in our call this morning and we appreciate your support.

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