Suburban Propane Partners LP (SPH) 2005 Q3 法說會逐字稿

Good morning ladies and gentlemen. Thank you so much for standing by and welcome to the Suburban Propane Third Quarter 2005 Financial Results Conference Call. (Operator Instructions). At this time, I’d like to introduce your host Mr. Bob Plante. Please go ahead.

Thank you Christine and good morning everyone. Welcome to Suburban’s Third Quarter Fiscal 2005 Conference Call. I’m Bob Plante, Vice President and Chief Financial Officer. Hosting our call this morning will be Mike Dunn, President of Suburban. Joining us is our controller Michael Stivala. The purpose of today’s call is to review our third quarter fiscal 2005 financial results along with our current outlook for the business. As usual, once we’ve concluded our prepared remarks we’ll open the session up for questions.

Before we get 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. 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 the partnership’s SEC filings, including its Form 10-K for the fiscal year ended September 25, 2004 as well as its quarterly reports on Form, 10-Q and interim reports on Form 8-K. Copies of these filings can be obtained by contacting the partnership on our web site at www.suburbanpropane.com or on the SEC’s Edgar Web site. Certain non-GAAP measures will be discussed on this call. We’ve provided a description of those measures as well as a discussion of why we believe this information to be useful in our Form 8-K furnished to the SEC this morning. The Form 8-K can be accessed through a link on our Web site at www.surburbanpropane.com. At this point, I’d like to get started by turning the call over to Mike Dunn. Mike.

Thanks Bob and thank you everyone for joining us. While seasonally a slow period our results for the third quarter were well within our range of expectations and are consistent with the full year guidance provided to you on our conference call last quarter. As we also discussed on our last call, early in the third quarter we completed a successful debt refinancing which resulted in a one-time charge of approximately $36.2 million in the third quarter of fiscal 2005 to reflect the loss on debt extinguishment associated with a $32 million pre-payment premium and a write-off of $4.2 million of un-amortized bond issuance costs associated with the redeemed notes.

Particularly with what has transpired with respect to interest rates and spread since the day we completed this refinancing we are very pleased that we are able to take advantage of the unique opportunity provided by the historically low interest rate environment.

Turning to our operations, as Bob will discuss in a moment, commodity prices especially fuel oil remain high. As a result we continue to see evidence that our customers took steps to conserve energy in response to high prices.

In addition, the fuel oil CAP program which had a significant negative impact on our second quarter results was also a factor in the month of April. As an aside, after a thorough evaluation of the costs associated with adequately hedging a program such as the CAP program we are determined that we will not offer this program for the upcoming heating season.

To partially offset the impact of customer conservation efforts and the negative impact on fuel oil margins attributable to the extreme volatility in the commodity price, we continue to successfully manage retail margins in our propane business and have maintained our prudent expense controls throughout the quarter.

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 and beyond. At this point, however, I’ll turn it back over to Bob to discuss our third quarter results in more detail.

Thanks Mike. As Mike indicated our results for the quarter included a $36.2 million one-time charge related to the debt extinguishment, while the prior year quarter included $3.9 million of non-recurring charges, the most significant of which was the recognition of a goodwill impairment charge that was associated with a small business that was acquired in the late 1990s. So for purposes of our discussion this morning, I’ll exclude these two non-recurring charges from our results.

EBITDA for our third fiscal quarter ended June 25, 2005 was a loss of $4.4 million, compared to a loss of $1 million for the same quarter a year ago. Net income for the quarter was a seasonal loss of $23.7 million or $0.76 per common unit, compared to a loss of $20.4 million, or $0.65 per common unit, in the prior year, again excluding the non-recurring charges from both periods described above. Retail sales of propane during the quarter totaled 98 million gallons compared to 99.5 million gallons a year ago. Sales of fuel oil and other refined fuels amounted to 48.5 million gallons for the quarter versus 60.3 million gallons in the prior year.

As Mike indicated, volumes were impacted by the continued conservation efforts of our customers. In addition, sales of refined fuels were lower than in the prior year quarter due to our decision to exit certain lower-margin, low-sulfur diesel markets as well as the retail gasoline station business. Considering these factors our sales volumes for the third quarter were in line with our expectations.

Propane prices for the June quarter averaged about $0.82.25 per gallon based (inaudible) versus $0.65.13 per gallon for the same quarter a year ago. That’s a 26% increase in posted prior costs year over year. Propane prices continue to track higher in a counter-seasonal rally. Propane is currently offered at about $0.89 per gallon based on (inaudible).

Heating oil prices for the quarter ending June averaged about $1.51 per gallon and are currently trading at around $1.73. Last year at this time heating oil prices were trading at around $1.17. That’s about a 48% increase year over year. Gross margin of $105 million for the quarter was $2.8 million or 2.6% lower than in the prior year quarter due principally to the negative impact on sales volumes attributable to the conservation in response to higher commodity prices.

In addition, as was the case during the second quarter margins were negatively impacted by the continuation of the fuel oil Cap program through the month of April. Partially offsetting the negative impact of these factors were the continued strong margins in our propane business.

Combined operating and general administrative expenses of $109.4 million increased about $800,000 or less than 1% compared to the prior year quarter. Lower compensation and employee benefit-related expenses as well as reductions in other variable expenses were offset by higher bad debt expenses associated with the impact of higher revenues, increased professional services expenses associated with our Sarbanes-Oxley compliance efforts and higher expenses related to the operation of our fleet. Interest expense of $9.9 million for the third quarter compared favorably to the $10.5 million in the prior year quarter. Capital spending during the quarter totaled $6.9 million of which $4.3 million was being maintenance related. Mike.

Thanks Bob. As announced in our press release on July 19th, Suburban has declared a quarterly distribution of $0.61.5 per common unit. This distribution which equates to an annual distribution rate of $2.45 per unit will be paid on August 9th for our third quarter ended June 25, 2005.

Obviously given the seasonal nature of our business it would be unrealistic to expect that we will be able to make up the entire year-to-date shortfall in our results over the remaining three months of the fiscal year. However, we feel that we have taken very proactive steps to ensure that we will be back on track for fiscal 2006 and beyond.

The risks associated with the fuel oil Cap program are behind us and we are working hard to complete our system integration activities which will enable us, beginning in fiscal 2006, to achieve additional synergies beyond those originally anticipated, particularly in the areas of routing and forecasting.

All said, we’ve identified the controllable issues that have negatively impacted fiscal 2005 and are currently implementing solutions. We view those challenges as non-recurring and believe we are well positioned for significant increase in earnings for next year, even if there is a repeat of unfavorable weather conditions and high product costs.

Our solid capital structure and historically strong coverage ratios have allowed us to weather this storm and focus on the future. As mentioned in our press release this morning, as the next logical step in the evolution of Suburban we have recently realigned our operations to gain further efficiencies and synergies at the field level. We firmly believe our core propane segment which has continued to perform quite well this year, despite the unfavorable weather conditions and volatile commodity environment, will be further enhanced by this reorganization. The reorganization of our field management will result in a restructuring charge to be recorded in the fourth quarter of fiscal 2005.

Our balance sheet remains solid and we’re in a strong position to obtain additional acquisition opportunities as they arrive. As always, we appreciate your attention this morning. I would now like to open the call up for questions. Christine.

(Operator Instructions). And our first question comes from the line of Eric Calamera (ph). Please go ahead.

Good morning guys.

Good morning.

Quick question regarding the bad debt expense. Could you just address the management of that?

Sure Eric. How you doing this morning?

Doing fine.

Good, good. Basically, the -- first of all the increase in bad expense is directly attributable to increases in the reserves that we’ve established for bad debt which is really kind of a mathematical exercise that we go through based on the various buckets of receivable if you will. It’s tied strictly to the higher commodity prices and higher selling prices, okay? Our experience quite frankly has not been that disturbing with respect to collections, okay? But we want to make sure that we’re adequately provided for. It’s across the board. It relates to all businesses -- fuel oil, propane, HVAC everything. And it’s really more tied to the increase in the commodity price.

So you haven’t seen anything really concrete? You’re just hedging just in case in the event that you do have to?

Yes. It’s strictly a – I mean we have a procedure we go through to establish the validity of our reserve and it’s strictly a numerical calculation and we’ve gone through that and we’ve established the appropriate reserve. Quite frankly, I hope it turns out to be conservative. The experience has not been bad to date.

Okay, okay great. Thanks Bob. Additionally, related to the heating oil business and the amount of, I guess, for a lack of a better word loss – loss that occurred because of hedging can you quantify that from the March 31 through the April 30th period what that amounted too? -- related to the Cap program and then the lack of hedging there?

Yes. The impact that’s in the second quarter and it’s all calendar April but from a fiscal month standpoint it’s a little bit into May just to make it clear -- it’s about $5 million. And then the program ended at the end of calendar April. So it’s done. Behind us. Finished.

Okay. So that was really the – I was expecting some amount but it was unclear as to what that was. And related to what you’re seeing on the propane business, which is really the -- basically the more important issue here, can you speak to what you’re seeing with related to conservation? I mean, this is a light-use quarter. Can you give any indications that maybe pricing persists to what we’re seeing that now and we carry that through forward into the heating season. Can you give any color? I know it’s early, but can you give any color as to why kind of conservation we might be looking at there?

I mean, propane to a lesser degree to be quite frank, I mean the volumes are off there because if you go back and really look at the full year, Eric, we never really at a position of weather that gave the market the opportunity to take on any traction to be quite frank with you. When you talk to the folks in the field you hear things like because of this warm weather -- this is going to sound somewhat silly but it’s real -- we have a big pool heater business, okay? And with the temperatures that we’ve experienced obviously in the Northeast and even in the Southeast this year, you haven’t had an opportunity for that to kick in. I mean, we have one service center in upstate New York – well not quite upstate New York that – its balance of sale is skewed almost 70% during the summer for pool heaters. So that’s one aspect of it. And again, I mean, this time of year, obviously, it’s tough to talk about a genuine conservation effort. We don’t see any real conservation on the commercial side of things.

Okay great. And I guess lastly related to acquisitions. You had indicated that you would still pursue those. We talked about this several, I guess, weeks ago. Can you just address for me one more time the context to which you would – you’re seeing things out there that are attractive to you, and particularly in this environment?

I mean there are a lot of things that are attractive to us as well as us possibly being attractive to others as well. So I mean it’s a frothy market. There are a limited number of MOPs that have the strength and balance sheet as we do. There are a number of propane operations that have the East and West Coast assets as we do. I mean, when you sit and you look at the business -- I know at our meeting in New York a while ago we talked a little bit -- we touched on the heating oil as being a possibility. That’s still a possibility. Is it the top of our list? No, not necessarily so.

When you look at some of the regional players – I mean, we believe that working capital constraints could conceivably create some additional opportunities that weren’t necessarily in the marketplace this past year – this coming year -- both in propane and in heating oil. We continue to look in the midstream sector which has really gotten priced well out of range for us to justify at least at this stage. But we continue to look and our conservative nature certainly puts us in a position where at any given point in time the right asset becomes available we can certainly react to it.

Okay. And aside, I guess, last question, Mike -- I appreciate that response. Related to the – specifically, the propane business you haven’t gone out and you haven’t not acquired a lot of smaller properties. And I guess the question is aside from some of the suspects in the heating oil side are there large acquisitions out there on the propane side? Or, I guess, or would you consider changing the strategy to do something smaller?

No we’re going to do that. I mean, it just doesn’t -- you’re doing that, really, for optic affect as opposed to bottom line affect. There are probably eight regional – sizeable regional players that we continue to monitor both on the East and the West coast and, obviously, if one of them became available in the propane – that’s in the propane sector -- if one of them became available certainly we would react accordingly.

Okay, great. Thanks Mike.

And next we’ll go to the line of Yves Siegel. Please go ahead.

Good morning Mike and Bob. How you guys doing?

Hi Yves.

Good Yves.

Number one, can you just verify the Cap program losses? Was it $15 million in the prior quarter and $5 million this quarter?

That’s correct Yves, $20 million.

Okay. Number two, Bob, can you quantify what the actual bad debt expense was in this quarter?

Mike, do you have that? Just a second Yves.

Could you also say in terms of the formula? Is it 2% of revenue? I mean is there a way for us to try to calibrate it?

Yes. It’s really based on our aging and a certain percentage of bucket in the aging -- over 60, over 90, over 30.

About $5 million in the quarter.

(audio gap) what was that versus a year ago?

About $1 million higher.

Do you have a sense of what S-Ox cost you and of the compliance, how much of that may be recurring or non-recurring next year?

Yes, we’ve got about $1.3 million in the third quarter for S-Ox compliance. The nine months has about $2.7 million and, quite frankly, we’re not done. We’ve got some S-Ox expense to be recorded in the fourth quarter to finish up. A good portion of that, we’re feeling pretty comfortable, is kind of one time because it’s getting things to where they should be. There will be an ongoing maintenance cost to remain compliant, but certainly it will be nothing like what we’re seeing this year to get ourselves to that point.

Okay. And then what about the restructuring charge in the next quarter?

I would have been disappointed I EG. We’re in the process of quantifying that and I don’t have a number to give you right now. I can tell you what we’re doing mechanically is we’ve gone through this reorganization -- and let me just make a couple of comments on the reorg that we’ve done through -- to make it clear. That’s not a response or a reaction to this year’s results, okay? It’s the next logical step in the evolution of Suburban. The reason it’s happening now is that we’ve kind of hit a milestone with respect to our systems conversions this year in that our retail system for the legacy Suburban operations that we’ve been working on for the last four years to get completed was completed in June, okay?

So we now have that system in place throughout the entire legacy organization. We’re working on converting the Aquay (ph) operations to that system as we speak. That -- hitting that milestone has really kind of put us in a position where we can start doing some things that we’ve been wanting to do for several years, so the reorganization really is now the first step in getting down the path on those types of things to get more efficiencies out of the business.

So what’s happening now is we’ve reduced our organization from about 20 to 10 regions. Those 10 key people who are going to be running our business in the field for us are in the process now of developing their organizations and are feeding back information to us. And there will be some costs associated with it and mostly people-type costs -- severance and that type of thing, okay? And so we’re in the process of quantifying it now and we’re anticipating that most or all of it will be quantifiable and recorded in the fourth quarter.

Okay. What kind of pay back do you get on something like that?

Well if you look at some of the things that we can do now that the systems are in place and by streamlining the organization in terms of further centralizing our operations -- taking advantage of the IP capabilities now with respect to dispatching and all that type of thing, it’s quite significant – quite significant and we’re quite excited to be in a position to start down the path.

Okay. Then my last two real quick -- as it relates to the heating oil and stop in the Cap program, do you anticipate losing customers?

Yes. Yves it’s Mike. Yes we do.

Any thoughts on how we should think about what kind of financial impact that could have on you?

Well let me give you the other side of the financial impact first, okay? And then I think you’ll see what the decision is. I’m not trying to make a short answer or a long answer but here’s the reality of things. Less than half of our competitors are offering Cap programs in markets that we participate in – okay, less than half. So a good many or not. Those that are offering Caps are pricing it somewhere in the $2.00 to $2.09 range, okay? Today heating oil is trading at $1.73 basis New York -- the NYMEX, okay? We’ve put together what we thought would be – what the forward price strip would look like if we were to - go into the marketplace and try to price calls and the forward strip comes out to about $1.83.50. To buy inner money call would cost anywhere from $0.16 to $0.17 a gallon, okay? And that would put us in a position to offer a cap at around $2.40 - $0.30 above your competition – your highest competitor, okay?

Our last call we talked about spending a nickel and going into the marketplace and seeing what kind of a program we could put together basis a nickel cost and that Cap would be $2.75. So for the sake of not embarrassing ourselves in front of our customer, we elected to not offer a Cap, okay? Now when you sit down an alternative to doing an inner money cap would have cost us between $16 and $17 million or we could have chose to spend that $0.05 a gallon and spend somewhere between $5-$7 million. So our best guess is we would have to lose between 25-30% of our customer base in order to break even. It’s a cold way to put it but that’s the fact of life.

Well that’s a pretty good answer. Thanks Mike.

You’re welcome.

And then my last question was, just to make sure that we think about this correctly, if I think about the $4.5 million EBITDA loss that you recorded this quarter and sort of add back the unusual items as it relates to bad debt expense and to the -- the Cap program you’ll easily be in the black at least at the EBITDA line? Is that the right way to think about it?

That’s correct Yves and I think the other thing you want to consider is the S-Ox compliance costs of $1.3 million. Without those things, clearly, we would have been in the black on an EBITDA basis.

All right, thanks for the answers guys.

Thank you, Yves.

You’re welcome Yves. Thank you.

And next we’ll go to the line of John Freeman. Please go ahead.

Good morning guys.

Hi John how you doing?

Yves got most of my questions but just following up briefly on the Caps program and obviously the thought process you all walked through makes perfect sense to me. The only I guess worry is if you have enough of these competitors – I guess you said about half of your competitors offering this program which makes absolutely zero sense. Is your thinking you’re just going to sit back this season, watch these guys get burned and then hopefully the following season they’ve learned their mistake? Because otherwise it would seem like the heating oil business in general -- if you have half your competition that just isn’t really interested in making any money it’s kind of hard to compete.

Yes, you’re right on. I mean, let’s – you back into these numbers. You got a guy that’s offered a $2 Cap. He’s not big enough to go into the options marketplace, so you can assume -- you can safely assume -- he’s really not hedging it. So if he’s buying heating oil on a spot basis -- today it’s $1.73 -- to get it to his place – let’s use a median -- $0.05 - $1.78 -- I mean this guy’s looking to make $0.22 a gallon. So if the market continues to go higher or stays where it is, we’re not so sure these people are going to be around to honor, to be quite frank with you, the commitment that they’re making to these customers. If they had come in, John, at like $2.30, $2.40, they’re the ones that could argue okay they could have hedged it and they’re shrinking their margins a little bit just to be in the marketplace. $2.00, $2.09 makes absolutely no sense whatsoever.

I mean, we’ve even heard prices as low as $1.93, to be quite frank with you. So half of the – and let me just clarify something here. Half of our competitors are offering – this is a market where 100% of your competitors were offering. So half of our competitors are not offering something this year that were offering something last year. Okay, that’s a good thing. We’re also developing, and we have been in very close contact with a good many of our customers explaining to them why we’re not offering a Cap and basically reminding them that we have various payment plans. The budget payment plan. We have the HVAC opportunity and so forth and so on to in fact re-establish a broader company that’s geared towards service in that customer’s mind. So we’re not so sure that the impact is – or we’re certainly hoping -- that the impact isn’t as negative as the numbers could conceivably dictate it could be.

Right. Kind of taking that thought process in terms of your competition over to the propane side. Obviously, you don’t have the Cap program to worry about over there. But is there any issue, whereas is in this kind of rapidly escalating kind of propane price environment where you all have done a good job of passing on the higher costs onto your customers, is there much of an issue with your competition in the propane sector of people just accepting lower and lower margins to keep their volumes up?

No that doesn’t seem to be the case. And one thing that’s kind of odd is when prices – when prices are reasonably steady to upward, the industry’s cognizant of it’s margins and they do try to stay ahead of the curve. I mean, you’re going to find the oddball that’s trying to establish himself and so forth and so on. But for the most part it’s reasonably sane.

Okay. So it’s more usually the volatility that gets you than the level of the price?

Your ability to change prices without – in other words two things. You want to react to the price market but you also want to make sure that you’re not creating a knee-jerk reaction to a one-base spike to a two base-spike. So you have to pay attention. You have to have some confidence that directionally the market’s headed where your pricing needs to go.

Okay. And the last question I had. I wanted to make sure on the delays you’ve had on kind of systems integration on kind of the routing the forecasting with the acquisition, just maybe a little bit of update on exactly where that stands and if I have the numbers right that you think that it could eventually be – you all realize about $8 to $10 million, is that number right?

That’s correct. The number is still accurate. And the -- as far as the timing, I would say we’re proceeding on the same schedule we talked about on last quarter’s call. We’re making a lot of progress. And 2006 is -- we anticipate to see a significant impact from the implementation of synergies.

Okay. I appreciate it guys.

Thank you.

Thank you.

Appreciate it, John.

(Operator Instructions). We have a follow-up question from the line of Yves Siegel. Please go ahead.

Do you have the number on what the marketing business did this quarter in terms of gross margin or EBITDA?

Sure hold on. For the quarter the EBITDA is about $1 million.

Okay. That’s Davin(ph), right?

No, it’s Mike Stivala.

It’s Mike Stivala.

Oh, okay thanks, Mike. Thank you guys.

Micheal J. Dunn, Jr.: You’re welcome.

Okay, thanks.

And we have no further questions at this time. Please continue.

Okay, that wraps it up then, Christine. Thank you everyone for joining us. We look forward to speaking with you again next quarter.

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