Suburban Propane Partners LP (SPH) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Suburban Propane fourth quarter 2005 financial results conference call. At this time all lines are in a listen-only mode. Later there will be a question-and-answer session. Instructions will be given at that time. (OPERATOR INSTRUCTIONS). As a reminder, today's conference call is being recorded. I will now turn the conference call over to your host, Mister Robert Plante. Please go ahead sir.

Thank you. Good morning, everyone. Welcome to Suburban's fourth quarter and 2005 fiscal year-end conference call. I'm Bob Plante, Vice President and Chief Financial Officer. Hosting our call this morning is Mark Alexander, Chief Executive Officer of Suburban. Also joining us will be Mike Dunn, President, Denny Trautman, Chief Operating Officer, and Michael Stivala, our Controller. The purpose of today's call is to review the fourth quarter and fiscal 2005 full-year financial results, along with our current outlook for the business. As usual, once we have concluded our prepared remarks, we'll open the session up to 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. 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 fiscal year ended September 25, 2004 and its Form 10-Q for the quarter ended June 25, 2005. 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've provided a description of those measures, as well as the discussion of why we believe the information is useful, in our Form 8-K furnished to the SEC this morning. The Form 8-K can be accessed through a link on our Website at SuburbanPropane.com.

At this point I'd like to begin our discussion by turning the call over to Mark Alexander. Mark?

Thanks, Bob. And thanks, everybody, for joining us this morning. While our fourth quarter is seasonally a slow period, our results for the quarter were consistent with the full-year guidance provided to you on our last conference call. And if you navigate through and exclude all nonrecurring items, our fourth quarter was actually significantly improved from the prior year.

As Bob will discuss in a few moments, the fourth quarter of both the fiscal year and this fiscal year and last included several nonrecurring items related to asset sales, restructuring, hence some (ph) settlement charges, and goodwill impairment charges, many of which were non-cash in nature.

The fundamentals of our business remained sound and, in fact, continued to improve. The positive steps taken over the past six months to address the nonrecurring issues associated with our fuel oil business, as well as our continued progress made with the integration activities to achieve the synergies anticipated from the Agway acquisition, have us well-positioned for significant earnings growth in 2006 and continued strong distribution coverage.

In a few minutes I will have some additional thoughts on our quarterly distribution as well as our outlook for fiscal 2006 and beyond. At this point, however, let me turn it back over to Bob to review our financial results for the quarter and the full year.

Thanks, Mark. While seasonally a slow period, our results for the fourth quarter were well within our range of expectations. As we discuss our financial results for the quarter, to be consistent with our reporting from previous periods, I am excluding the impact of non-cash unrealized losses of 4.4 million and $4 million from our current and prior-period results, respectively, applicable to FAS 133 accounting.

Including all nonrecurring items, EBITDA for our fourth fiscal quarter ending September 24, 2005 was a loss of 13.3 million, compared to a $9 million loss for the same quarter a year ago. Our seasonal net loss totaled 34.1 million, or $1.09 per common unit, compared to $30 million, or $0.96 per common unit in the prior year.

As I mentioned, the fourth quarter of fiscal 2005 EBITDA and net loss included several items that are nonrecurring in nature. Specifically, we recorded a $2.2 million restructuring charge in the quarter to reflect severance and other expenses associated with the reorganization of our field management begun in late June to capture newly identified efficiencies and associated cost savings. In addition, the fourth-quarter EBITDA included a $700,000 write-down of goodwill, as well as an $800,000 write-down of intangible assets associated with the Agway HVAC business and a fixed asset write-down of $400,000. And both of those were recorded within depreciation and amortization expense.

During the prior year fourth quarter, we recorded an $11.5 million gain from the sale of certain less productive assets, primarily in the Upper Midwest. Partially offsetting this gain in the prior year quarter was a $5.3 million non-cash pension settlement accounting charge, as well as 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. In total, these nonrecurring items reduced our reported EBITDA for the fourth quarter of fiscal 2005 by $2.9 million, compared to an increase in EBITDA of 5.6 million attributable to nonrecurring items in the prior year fourth quarter.

On a normalized basis, excluding the nonrecurring items from both periods, our EBITDA loss for 2005 fourth quarter was $10.5 million compared to $14.6 million for the prior year quarter. That's a 28.1% year-over-year improvement.

Retail sales of propane during the quarter totaled 77.1 million gallons compared to 86 million gallons a year ago. Sales of fuel oil and other refined fuels amounted to 37.3 million gallons for the quarter compared to 48 million gallons in the prior year quarter. Although the fourth quarter is typically not impacted significantly by weather, the extension of summer weather through the end of September can have a negative impact on volumes compared to a more normal weather scenario, when the arrival of cool weather can influence September volumes favorably.

Heating degree days were 39% of normal for the quarter, reflecting a very warm September. 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 and the retail gasoline station business, as well as from customer conservation due to continued high prices.

Revenues for the fourth quarter totaled $281.6 million compared to 244.7 million reported for the fourth quarter of fiscal 2004. This increase resulted primarily from higher average selling prices, consistent with the increase in the cost of both propane and fuel oil, which more than offset the impact of lower sales volumes. Propane prices for the quarter ending September averaged 97.2 cents per gallon basis Mount Bellevue (ph) versus 79.41 cents per gallon for the same quarter a year ago. That's a 22% increase in base product loss year-over-year.

Propane prices peaked in early October, tracking the rally in natural gas, reaching highs of $1.20 in Mount Bellevue. Propane has since fallen off, again mirroring the sell-off in natural gas, and is currently offered at about $1.02 per gallon basis Mount Bellevue.

Heating oil prices for the quarter ending September averaged $1.83.29 per gallon and are currently trading at around $1.80 per gallon. The market peaked this past quarter, reaching all-time highs of to $2.21 per gallon. Last year at this time, heating oil prices were trading at around $1.26, reflecting about a 43% increase year-over-year.

Total gross margin of $90.5 million for the quarter was 2.2 million higher than in the prior year's fourth quarter. That's due principally to improved gross margin in both the propane and refined fuels businesses, which offset the impact of sales line shortfalls. Combined operating and general and administrative expenses of 101 million were about 900,000 lower than a year ago.

Moving to the full-year results, again, to be consistent with our reporting for previous periods, I am excluding the impact of non-cash unrealized losses of $2.5 million and $4.5 million attributable to FAS 133 accounting from our current and prior-period results, respectively. Including all nonrecurring items, EBITDA for our full fiscal year totaled $109.6 million compared to 136.4 million in fiscal 2004. Net loss for fiscal year 2005, including debt refinancing charges of $36.2 million, totaled 5.6 million, or $0.18 per common unit. That compares to net income of 58.8 million, or $1.94 per common unit in the prior year.

In addition to the onetime debt refinancing costs incurred during the third quarter, fiscal year 2005 results were impacted by two items of a nonrecurring nature, most of which is reflected in the fourth-quarter results, including a restructuring charge of $2.8 million primarily related to severance charges associated with our field reorganization, and a $1.5 million write-down of intangible assets related to the Agway HVAC business, 800,000 of which was reflected in amortization expense.

Likewise, fiscal 2004 results were impacted by several items of a nonrecurring 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, a goodwill impairment charge of $3.2 million, a non-cash charge of $6.3 million included within cost of products sold relating to purchase accounting for the Agway Energy acquisition, restructuring charges amounting to $2.9 million related to severance and other exit costs associated with our Agway integration efforts, and a non-cash pension settlement accounting charge of $5.3 million. These nonrecurring items had a $3.4 million unfavorable impact on fiscal 2005 EBITDA compared to an $8.6 million favorable impact on fiscal 2004 EBITDA.

On a normalized basis, excluding all the nonrecurring items from both periods, EBITDA for fiscal 2005 totaled $112.1 million compared to 127.9 million for the prior year, reflecting the significant negative effect of the fuel oil cap program experienced last winter, as well as delays in achieving the full impact of synergies from the integration of the Agway assets. As discussed on prior calls, we have fully addressed these issues and are well-positioned as we move into the fiscal 2006 heating season.

Capital spending during the quarter totaled $7 million, of which 3.3 million was deemed maintenance related. For the full fiscal year, capital spending totaled 29.3 million, of which -- actually included 10.7 million of maintenance cap spending. Mark?

Thanks, Bob. As announced in our press release on October 19, Suburban 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, was paid on November 8th for our fourth quarter ended September 25. Having eliminated the adverse risks that negatively impacted last year's fuel oil business, we are driving the other initiatives that Bob discussed earlier with the goal of getting back to our historic track record of regular distribution increases. As I have said before, it's not a question of if, it's only a question of when we raise our distribution. It's only going up.

Looking forward, we are confident that the positive steps taken over the past six months to address the nonrecurring issues associated with our fuel oil business leave us well-positioned to achieve significant earnings growth in fiscal 2006. We are already seeing early tangible signs of progress.

With regard to our balance sheet, liquidity is not and has never been a problem for Suburban. As you know, this past summer we extended our bank revolving credit facility as part of our overall debt restructuring, increasing the facility to 175 million and eliminating all debt maturities in the next five years, as well as providing flexibility by eliminating our private placement notes. This credit facility will provide more than adequate working capital for the upcoming heating season, regardless of commodity prices.

In conclusion, we're very optimistic about our prospects for fiscal 2006 and beyond. As always, we appreciate your attention this morning and would now like to open the call for questions. Barb, if you could help us out there please?

(OPERATOR INSTRUCTIONS). Eric Kalamaras.

A question regarding the decline in the heating oil margins, or I'm sorry, in the heating oil volumes. How much of that is related to getting rid of low-margin contracts?

We don't have a specific number on that, Eric, because there's really -- there's a couple of things where there's specific contracts that we have eliminated, and there is also just kind of a general review of the business to kind of eliminate some lower-margin business on a customer-by-customer bases. So, it would be difficult to quantify. I wouldn't be comfortable throwing a number out to quantify it.

Additionally --

Let me make one more point that Mike was just making. It's really -- it's not heating oil, it's refined fuels. And that is the stuff that we have been kind of culling out because it's low-margin business.

Additionally, did I hear you right that in September, weather was 39% warmer than normal?

That was actually for the quarter, the full quarter. Now, obviously, July and August are not a factor there. The real issue is the month of September, particularly in this area, in the Northeast. Summer continued right through until the first week of October.

You made signs that -- you said you are seeing early signs of progress. Can you just elaborate a little bit more about what you're seeing for '06?

Part of that is -- with respect to our fuel oil business, with us eliminating the cap program, one could anticipate a loss in customers. Our net loss in customers is much better than we could have anticipated. And our expense control, our efforts -- we're seeing tangible evidence of our -- we can see clearly the expenses we have already eliminated and the synergies that we are getting now from the Agway acquisition. And frankly, we are positioned as good as we can be. And really all we are waiting for is weather. It was 70 degrees here yesterday and you can't control weather. So, the only thing left is for mother nature to corporate. We are in good shape.

You talked about net losses is better than you expected. Can you give us some indication as to what kind of numbers we are dealing with?

It's Mike Dunn. We budgeted for 2006 a 5% attrition factor based on the cap program, and I can tell you -- unfortunately I can't tell you for fact, because the weather hasn't really kicked in yet, so you don't know for sure -- but we're not experiencing that 5% yet.

Okay. What about on the propane side?

What about on the propane side?

Specifically, what kind of attrition if any are you seeing there? Are you getting net gains?

The propane business is performing as it has over the course of the last nine years, to be quite frank with you. We budget a small gain every year and we experience a small gain every year, when you take into aside the net effect of churn.

That business is solid.

Absolutely. Additionally, can you -- given the fact we had such a (indiscernible) warm winter, can you handicap for us what kind of volume impact you would typically have in November? What would be a normal volume for (multiple speakers)

You really can't, because the first quarter really depends on December. And October and November volumes are no indication of where our quarter is going to end up, good or bad. If our October/November volumes were ahead of schedule or behind, it's not really an indication.

It just doesn't matter that much, okay.

No.

I guess lastly, can we get some balance sheet numbers, cash and debt?

We ended the year with about a little over $14 million cash on the balance sheet and our total debt position is about $575 million, which includes about 26.8 million drawn on our revolver.

John Freeman.

I have first a general question. We have heard kind of that supply hasn't really been an issue currently for propane heading into the winter. I'm just wondering if you can say kind of what your propane inventory situation is and kind of how that compares to the prior year?

It's the same. That's a question, John, that we -- we basically contract for about 80% of what our anticipated supply needs are, leaving some room for spot purchases. And the program this year is no different than it has been for the last eight years.

It's not going to be an issue, John.

Okay. This is just more for, I guess, my curiosity. You obviously have to build up your volumes ahead of the winter, and we have seen propane prices come down pretty dramatically over the past few months. Is there any situation where you ended up buying your inventory at a much higher price than where it is currently now?

No, we buy most of our stuff on a price to be fixed basis, so the turnaround time is usually within 10 to 12 days.

Okay. Looking at the acquisition environment, you know, obviously, with commodity prices it's been a tough operating environment. I'm trying to get a sense of whether it's created a much more favorable acquisition environment with like smaller players that have just had enough and are ready to get out?

It could. Every time I get asked that question, it's a good question, John. We just do not predict what we think we are going to buy in any given year. In any given day, things will change. I think the environment is -- there hasn't been a big change in the environment on the deal side over the years. It's very active and it continues to be active. It is unpredictable.

Yves Siegel.

Could you quantify what kind of impact -- positive impact the restructuring charges can give you in terms of, I guess, lower costs in fiscal year '06?

Yes, Yves, we can. Let me start by saying that what we have baked into our internal budgets is really kind of based on and comports with where we stand, or where we stood October 1st, if you well. That is to say the people who were taken out, the other expense reductions are all lined up and ready to go October 1st. So, what we have in our budget, we think, is not only realistic, it's probably conservative. Okay? But with respect to the actual restructuring that took place, there's probably a 7 to $8 million annualized favorable impact. And actually it's quite -- it was about 75 to 100 people, okay, and the expenses associated with those people. That was all done by September 30, and so that is really the 2 million and change of restructuring that you're looking at in the fourth quarter. And we expect 7 to $8 million annualized going forward of savings as a result.

What kind of people were those?

It's more at the kind of the -- there are several layers of management that we consolidated, in particular the regional managers and their staffs. We have gone from about 20 regions to 10 regions, and the resulting impact on their staff. We have then also taken that, the next step in the field, and then are in the process of doing and have completed a lot of consolidation of individual customer service centers and the management thereof, not necessarily the physical locations as much as the management thereof. And it's really mostly field reorganization.

Is that mostly related to Agway, from the Agway merger?

No, it's really company-wide and it's really kind of the next step in the natural evolution, Yves. Towards the end of last fiscal year and the early part of this past fiscal year, we pretty much completed what we had set out to do with respect to reorganize the Northeast and blend Agway in from a management standpoint. What this really is is more of a nationwide and kind of the next extension of that philosophy.

When we think of '06, are there additional cost savings from the Agway that we haven't seen yet that will show up in '06?

Yes, there are. And a lot of it relates to systems. We are still operating with two systems in a lot of those locations, and we are working hard to get those conversions done in '06. And there is definitely more favorable impact to come from that.

Would you like to throw out a number?

No. I can tell you though, Yves, we've got -- from a synergy standpoint we are -- we have built into our budget 7 to $8 million of synergies. And you know, for us to build it into our budget, we're very comfortable with that and perhaps then some.

The last, just on the cost side. Every year you just have natural inflation creep and other sort of costs that move up. When we think about the year-over-year change, do you think you'll be able to keep most of the 7 to $8 million from the reduction in employees, or do you think a portion of that is just going to get eaten up by the normal course of inflation?

Actually, when I talk about 7 to 8 million, I'm really talking on a net basis, net of any inflationary increases. And we have done a lot of those things with other expense categories. Things don't happen automatically the way they used to and typically have in this industry. I'm thinking things like compensation and that type of thing. Merit increases, those types of things. You have to achieve in order to participate in those things.

Great. If I could just continue with a couple of more questions. A lot has been made about bad debt expense. Can you describe what the experience historically has been and what you saw in this quarter, and perhaps what you think you might see going into '06?

Sure. Mike, why don't you take that?

Yves, it's Mike's Stivala. Our experience has been fairly consistent year to year. Obviously, on a total dollar basis, the numbers go up because of the higher costs of the product and the higher selling prices. But on a percentage basis, we've still remained below 0.5% of revenues on a bad debt basis, which is really part of our collection efforts, just continuing to go after the right things. And we have been -- we've done a good job of managing that and not letting the receivables get away from us.

That's great. Thanks, Mike. Just a question on propane margins going forward. It looks like they have trended up over the last few years. Is that a trend that is likely to continue? Or do you think because of the high propane prices you might have to give back a little bit? How do you think of the gross margins?

To be quite frank with you, I think there's room on the upside. In a higher market, one would expect margins to improve, simply because your risk profile increases. So, on a percentage basis, we try to keep our margins pretty much in line with a reasonable expected rate of return. You're dealing with a commodity now that is worth about $1. Okay? So, going back to the question you just asked, Yves, is just your bad debt expense -- on a percentage basis it's reasonably normal, but on a dollar basis it's going to be a little higher, just by virtue of the cost of the commodity.

So, margins do need to improve. I don't think when you put propane prices up against natural gas prices they are extraordinarily higher. If anything they're probably cheaper. When you put propane prices up against heating oil, you'll find on a BTU basis they're probably cheaper. So, prices are in line with where they should be.

Thanks, Mike. The last two are just housekeeping. What is the expectation for maintenance CapEx in '06? And then, Mark, if everything goes -- I shouldn't say everything goes well -- but if I sort of just add back the loss that you had, or the opportunity costs that you had on the cap program, and add into the 7, 8 million of gains, you know, all things being equal based on a normalized EBITDA number that you guys gave, it seems like you'd be pretty close without any real change in weather to that 145, 150 range. That sort of begs the question of what kind of coverage ratio you are thinking about as it relates to the distribution, because it looks like you will have room to increase it in '06.

You are right, Yves. Absolutely. That is the right math. That's the right outlook. Could even be conservative. That is what I was implying when I said we are poised for significant earnings increases in 2006 and that our -- we'll be right back to our distribution policy of regular distribution increases.

Are you thinking about a 1.2 type of coverage?

Yes, that's about right. Right.

What would maintenance CapEx be for '06?

I think for '06, Yves, you can pretty much take a look at '05 and kind of mirror it. Probably something in the neighborhood of $10 million, 8 to $10 million of maintenance.

Gentlemen, that concludes the question-and-answer session for today. Gentlemen, go ahead with any closing remarks.

Thank you, Barbara. Appreciate everyone's support and look forward to seeing you in the next quarter results. Thanks very much.

Ladies and gentlemen, this conference is available for replay. It does begin today at 4 PM Eastern Time through November 18 at midnight. You can access the AT&T executive replay service by dialing 1-800-475-6701 and entering the access code 802953. This concludes your conference for today.