Suburban Propane Partners LP (SPH) 2005 Q1 法說會逐字稿

Thank you so much. Ladies and gentlemen, thanks for standing by and welcome to the Suburban Propane first-quarter 2005 financial results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Bob Plante. Please go ahead.

Good morning, everyone. Welcome to Suburban's first-quarter fiscal 2005 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, Senior Vice President of Corporate Development.

The purpose of today's call, as you know, is to review our first-quarter fiscal 2005 financial results along with our current outlook for the business. As usual, once we've concluded our prepared remarks, we will open the session to questions.

Before getting started, I'd 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 25, 2004. Copies of these filings can be contained by contacting the Partnership or the SEC.

Certain non-GAAP measures will be discussed on the call this morning. We've provided a description of those measures as well as a discussion of why we believe the information to be useful in our Form 8-K, which was furnished to the SEC this morning. the Form 8-K can be accessed through a link on our Web site at suburbanpropane.com.

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

Good morning, everybody. While a healthy increase on a year-over-year basis, clearly our results for the first quarter were unfavorably impacted by both unseasonably warm weather throughout the country as well as other factors. Nationwide, degree-days were at 93 percent of normal for the quarter and as we stated in our press release this morning, energy prices have surged over 50 percent on a year-over-year basis. As a result, we are seeing persistent evidence that our customers are taking steps to conserve energy and put off purchases in the hopes that prices will fall.

To partially offset the impact of warmer weather and the conservation efforts of our customers, we've continued to successfully manage retail margins and maintained our prudent expense controls throughout the quarter. In just a minute, Bob will discuss our quarterly results in more detail.

Moving to the Agway acquisition, we are well along with the business of integrating the operations of Agway Energy with Suburban's operations in the Northeast and we are confident that a considerable portion of the synergies anticipated from this transaction will be achieved in our fiscal 2005. In a few minutes, I'll have some additional thoughts on our quarterly distribution as well as our outlook for the remainder of the fiscal year. At this point, however, I will turn it back over to Bob to discuss our first-quarter results in more detail. Bob?

Thanks, Mark. As we discuss the financial results for the quarter, to be consistent with our reporting for previous periods, I'm excluding the impact of an unrealized non-cash gain of $2.5 million from our current-quarter results applicable to FAS 133 accounting, which compares to an $800,000 loss in the prior-year quarter.

EBITDA for our first fiscal quarter ending December 25, 2004 totaled $41.4 million compared to 37.9 million for the same quarter a year ago. Net income for the quarter totaled $22.4 million or 70 cents per common unit, compared to 20.9 million or 73 cents per common unit in the prior year. Retail sales of propane during the quarter totaled 141.8 million gallons; that's an increase of 9.9 million gallons from a year ago. Sales of fuel oil and other refund fuels amounted to 65.9 million gallons for the quarter.

As Mark indicated, volumes were significantly impacted by the warmer-than-normal weather nationwide as well as the conservation efforts of our customers. These two negative factors partially offset the favorable impact of the Agway operations. Despite these conditions, revenues for the first quarter increased $208.4 million or 97 percent to $424 million from $215.6 million in the first quarter of fiscal 2004. This increase is attributable primarily to the sales generated by the Agway business lines, as well as higher commodity prices, partially offset by the impact of warm weather and conservation.

Propane prices for the quarter ending December averaged 84.88 cents per gallon (indiscernible) Bellevue versus 57.65 cents per gallon for the same quarter a year ago. That's a 47 percent increase in base product costs year-over-year. Propane prices have leveled off somewhat with the weakness in natural gas and are offered today for spot delivery at 76.5 cents per gallon (indiscernible) Bellevue.

Heating oil prices were the highest on record and heating oil as a commodity was the largest percentage gainer in price last year. Prices for the quarter ending December averaged about $1.40 per gallon, which is a 63 percent increase over last year's 85.81 cents per gallon average. Spot prices of $1.35 per gallon today remain at close to record levels.

Gross margin of $150.6 million for the quarter was 42.4 million or 39 percent higher than in the prior-year quarter, due principally to the inclusion of the Agway activity, again partially offset by the negative impact on sales volumes attributable to the warmer weather and conservation.

Combined operating and general and administrative expenses of $109.2 million increased 39 million from a year ago principally as a result of the addition of expenses associated with the Agway operations. In addition, expenses as compared to the prior-year quarter reflected anticipated higher insurance, pension and payroll-related costs.

Despite the negative impact of weather and conservation, our distribution coverage remained very strong at 1.23 times as of the end of December. Capital spending during the quarter totaled 8.7 million, which -- about 1.5 million of which was deemed maintenance-related.

Turning to our balance sheet, we ended our first quarter with a cash balance of approximately $15.8 million. As anticipated, we began using our bank revolving credit facility during the first quarter to fund short-term working capital requirements, and we expect that this (indiscernible) will be fully repaid by early spring.

Looking ahead, we again expect to be in a position to repay the next $42.5 million installment on our senior Notes which come due this summer until we (ph) conclude that repayment is the best option at the time. Mark?

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 rate of $2.45 per unit, will be paid on February 8 for our first quarter ended December 25, 2004.

Looking forward to the balance of fiscal 2005, although recent weather conditions are working in our favor, the effects of considerably warmer-than-normal weather and conservation have already had a significant impact on our volumes for the start of our second quarter. Degree-days for the first 3 weeks of the second quarter were 80 percent of normal nationwide. It will take a relatively quick return to sustain colder weather in order for us to achieve our target results for the remainder of the fiscal year. At this point, we do not expect weather and volumes to turn quickly enough to make up all of the early shortfall.

While this Perfect Storm, if you will, of conditions is having a negative impact on volumes throughout the entire propane industry, our financial strength allows us to maintain strong and positive distribution coverage. In the interim, we're concentrating on those things that are within our control. Our field personnel in the Northeast are very focused on driving the operational efficiency available from the combined Agway/Suburban entity. In addition, throughout our operating areas, we've taken steps to reduce the variable component of our expenses in response to lower sales volumes.

Beyond prudent expense controls, as we have discussed with you for quite some time, our focus on net customer growth remains a top priority. We've maintained positive net customer growth throughout the first quarter of fiscal 2005, and we remain committed to continue this trend for the balance of the fiscal year and beyond.

As Bob indicated, our balance sheet remains 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, and would now like to open the call for questions. Karen, can you help us with that, please?

Thank you. (OPERATOR INSTRUCTIONS). Yves Siegel.

Good morning, Bob and Mark and Mr. Dunn. Just a couple of housekeeping stuff first, and then a little bit more. Could you just describe what's going on on the G&A line and DD&A? It looks like those numbers have come in low. How would you expect them to trend during the year?

I think we had, on a combined basis, if you look at our expenses, these were about 7.5 or 7.6 million favorable to the prior year. I think, from a trend standpoint, a lot of it will depend on volumes throughout the second quarter. A lot of that is variable expense that varies with volume, so I really can't give you a trend indication until we know where the volumes are going to go.

For instance, depreciation dropped from the fourth quarter to the first quarter by about 2 million, and G&A also dropped.

I think, if you recall, the fourth quarter had a non-recurring item in there of 1 million-plus related to purchase accounting for Agway. Also, our capital spending right now -- we are anticipating maybe a little lower than what we had originally anticipated for the year, but I think the big difference, variance, quarter-to-quarter was the non-recurring item in the fourth quarter.

Okay. What about maintenance CapEx for the full year?

I think you could probably take that number for the first quarter and trend it out on a percentage basis. I mean, typically we run about -- we've been running around 25 percent maintenance/75 percent growth, but I think you can probably still use those as a trend going forward.

Do you have the number for the full year, then, for CapEx?

We've been projecting this year, you know, if you go back to the pro forma, we anticipated something in the 25 million as kind of a run rate for CapEx in total, but this year, I think we also discussed that there's some one-time expenses associated with merging locations together, etc., etc., so you're probably looking at something in the high 20s to 30 million range for total CapEx for the year.

Okay. Then two more quick ones -- can you describe -- how did you guys do in terms of margins on the propane side and the fuel-oil side? Were you able to maintain them in both segments?

Yes, we were. Year-over-year, we were slightly ahead on the propane side and we were very close on the fuel-oil side.

Okay. Then the last question and then I will get back into the queue -- as it relates to the HVAC business, you had it looked like a pretty good quarter. Can you just describe what's going on there, and are you making any money?

(LAUGHTER). Well, it's early in the game as far as are we making any money. I think what you're seeing is the impact of the HVAC piece of business that was acquired from Agway influencing our total results. I think you're going to see that become more profitable on a company-wide basis as we go forward. It's not a major piece of the action at this point.

I lied. The last one was, with your competitor in the Northeast having problems, is there opportunity on the fuel-oil side to capture business?

Yes. (LAUGHTER). We think so. It tends to happen -- when a competitor has some turmoil internally, it drives customer churn.

Are you witnessing it yet or is it still too early?

I think it's still too early but I don't -- I wouldn't bank on something material -- materially impacting us on the positive side.

Okay, got it. Thanks.

We have no further questions at this time. Please continue.

Yves, do you have some more there? You said you were going to get back in the queue.

Yes, he did.

I was getting nervous that I was just monopolizing all of this time. Mark, you talk about acquisitions. Is it more likely to be on the propane side or do you think you have a shot at the midstream as you look throughout this year?

I would say that what we are seeing as far as multiple expansion on the midstream side is more likely on the propane side. We are still -- we're still spending a lot of time in both arenas, but the multiples tend to be running away from us on the midstream side. They are actually getting to the point where they are sort of irrational, to be polite.

Yes, irrational exuberance?

Yes, (Multiple Speakers).

(LAUGHTER). I stole that one, didn't I? As you look to the second quarter, what's your thought process on being able to continue to maintain margins? How do inventory levels look as you go into the second quarter?

Well, this isn't a supply situation at all. We're not concerned about that whatsoever. Our primary concern, based on what we've seen so far in the first 3 weeks of January, it's all volume primarily driven by almost an unprecedented and historically warm January. In the first 3 weeks of January, we were 80 percent of normal. In our industry, the most important months are January, February and December, in that order. For the industry, January is a killer. Again, I say that -- you know, we are fairly blunt and straightforward; that's our style.

On the other side of that, because of our approach over the years to shift expenses from fixed to variable, we are able to flex. So, a lot of our variable costs were eliminated and some of them get eliminated automatically, like compensation. So we are able to minimize the downside effect but it's not good throughout the whole industry. It's very warm.

Now, if it was a week ago, you would be saying, oh yes, it's warm. Today when it's below freezing in the Northeast and most of the East Coast, you wonder, but volumes haven't kicked yet because we've not yet had sustained cold weather. When you have 3 weeks of 80 percent weather in January, it's near-impossible to make up. That's the one month that's very difficult to make up. So we don't anticipate -- we expect a shortfall from where our budgets were for the entire year. We will make some of it up but I don't think we could possibly make it all up.

Within that context, how do you view the distribution in terms of increasing it? Would you take a year off or --?

That's always possible. We're not there yet. That's the benefit of us having such a strong balance sheet. We could continue to raise the distribution and it wouldn't impact us, because they certainly view a 80 percent weather in January as temporary. I don't think it's non-recurring. So right now, there's no indication that we're going to change our distribution policy. But that could be -- yes, if it persists and it doesn't turn, yes, that's a possibility. Never say never. I just never want to over-promise to our unitholders but -- (Multiple Speakers) -- over-deliver.

When you say change of distribution policy, you mean change the policy of growth rather than -- that's the context you're talking about?

That's it. All it would do is it would slow -- basically maybe defer a quarter -- an increase for the quarter or so. That's all. That's all we're talking about. Yes, no need to panic! I don't want to give people the wrong impression. It's just, right now, we're just feeling the pain of very poor volumes. That's tough in this industry.

Right. My last question is can you quantify what the customer gains were thus far? Is it 1 percent, 2 percent?

In our perspective right now, it's still around the 2 and change.

Thank you very much.

Thank you. We have no further questions at this time. Please continue.

Thanks, Karen. I think we've exhausted Yves' list there. If not, we can keep on going but at that point, I appreciate everyone who is on the call and thanks for your patience and your support. Even in the wake of this warm weather pattern, we're still quite confident. We've got a lot of flexibility in our cost structure, and we will make that happen, so no need to panic. We look forward to talking with you next quarter. Thanks again for your time this morning. We appreciate it. Karen, that concludes our conference.

Thank you. Ladies and gentlemen, this conference will be available for replay after 4 PM today through January 21 at 12 midnight. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 765-182. International participants dial 320-365-3844. (Operator repeats numbers). That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.