Suburban Propane Partners LP (SPH) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you so much for standing by and welcome to Suburban Propane First Quarter 2006 Financial Results Teleconference.

During our meeting today, we will have all phone lines muted or in a listen-only mode, and following the presentation, there will be a facilitated question-and-answer session with instructions being given at that time. (OPERATOR INSTRUCTIONS). As a reminder, this conference call is being recorded.

I'd know like to introduce our host, Mr. Bob Plante. Please go ahead, sir.

Thank you, Christina, and good morning, everyone. Welcome to Suburban's first-quarter of fiscal 2006 conference call. I'm Bob Plante, Vice President and Chief Financial Officer at Suburban. Hosting our call this morning is Mark Alexander, our Chief Executive Officer. Joining us is Mike Dunn, our President, Chief Operating Officer Denny Trautman, and Michael Stivala, our Controller and Chief Accounting Officer.

The purpose of today's call is to review our first-quarter 2006 financial results, along with our current outlook for the business. As usual, once we've concluded our prepared remarks, we will 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 partnerships 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 24, 2005. Copies of these filings may 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 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 suburbanpropane.com.

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

Thanks, Bob, and thanks, everyone, for joining us this morning. We are both pleased with and encouraged by the significantly improved first-quarter results announced in our press release this morning, which were achieved despite warmer-than-normal weather throughout our operating areas, as well as continued conservation efforts by many of our customers in response to the high commodity environment.

Heating-degree days in our area of operations were at 95% of normal for the quarter. To partially offset the impact of warmer weather and the continued conservation efforts of our customers, we successfully maintained our strong retail margins and prudent expense controls throughout the quarter. Our results for the quarter clearly demonstrate that the positive steps taken during the second half of fiscal 2005 to address the non-recurring issues associated with our fuel oil business as well as the continued progress being made with our field realignment has positioned us to achieve significant earnings growth in 2006, along with strong distribution coverage.

Our EBITDA improved 21% year-over-year, and we haven't even gotten to the comparative prior-year period when the cap program affected us the most; that didn't start until February of 2005. We told you we expected significant earnings improvement, and our first-quarter results are proof of that. A little later, I will discuss some thoughts on our quarterly distribution, as well as our outlook for the remainder of the fiscal year. At this point though, however, I will turn it over to -- turn it back to Bob to discuss our first-quarter results in more detail. Bob?

Thanks, Mark.

As we discuss our financial results for the quarter, to be consistent with our reporting for previous periods, I am excluding the impact of unrealized gains of $7 million and $2.5 million from our current-quarter and prior-period results applicable to FAS 133 accounting. Having done that, EBITDA for our first fiscal quarter ending December 24, 2005 totaled $50.1 million compared to 41.4 million for the same quarter a year ago. As Mark said, that's an increase of 21%.

Net income for the quarter totaled 31.2 million or $0.95 per common unit, compared to 22.4 million or $0.70 per common unit in the prior year.

Retail sales of propane during the quarter totaled 133.8 million gallons. That's a decrease of 8 million gallons from a year ago, reflecting customer conservation as well as a proactive effort on our part to eliminate certain low-margin business. Sales of fuel oil and other refined fuels amounted to 43.8 million gallons for the quarter, compared to 65.9 million gallons in the prior-year quarter. The majority of this decline resulted from our continued efforts to exit certain lower-margin diesel and gasoline businesses, combined with conservation efforts of our customers in reaction to the continued high commodity prices. Although it's difficult to isolate customer attrition attributable to the elimination of the fuel oil cap program, all indications are that the impact is less than anticipated in our fiscal 2006 budget.

Revenues for the first quarter increased $63.4 million or 15% to $487.5 million from $424.1 million in the first quarter of fiscal 2005. This increase is attributable to higher commodity prices, partially offset by the impact of lower sales volumes.

Propane prices for the quarter ending December averaged $1.064 per gallon (indiscernible) versus $0.8487 per gallon for the same quarter a year ago. That's a 25% increase in base product costs year-over-year. Propane prices fell from early October highs before spiking briefly in December and remain steady, relative to crude and natural gas. Propane is currently offered at $0.95 per gallon basis (inaudible).

Heating oil prices for the quarter ending December averaged $1.8025 a gallon, a 30% increase over the same quarter of last year. Heating oil is currently trading around $1.80 a gallon. Gross margin of $164.6 million for the quarter was $14 million or 9% higher than in the prior-year quarter. That's due principally to improved unit margins in both our propane and refined fuels businesses, partially offset by lower sales volumes.

Combined operating and general administrative expenses of 114.4 million increased 5.3 million from a year ago, principally as the result of higher variable compensation expenses in line with the improved earnings, increased fuel and other costs to operate and maintain our fleet and some higher professional services expenses. The increase in expenses for the quarter was partially offset by efficiencies achieved and cost savings realized from our field realignment, which began during the fourth quarter of fiscal 2005. Capital spending during the quarter totaled $6.2 million, of which 1.8 million was deemed maintenance-related.

Turning to our balance sheet, as anticipated, we made use of our bank revolving credit facility during the first quarter to fund short-term working capital requirements and expect that this borrowing will be repaid during the spring. Mark?

Thanks, Bob.

As announced in our press release on January 18, Suburban has declared a quarterly distribution of $0.6125 per common unit. This distribution, which equates to an annual distribution rate of $2.45 per unit, will be paid on February 7 for our first quarter ended December 24, 2005. I said it in December and I will repeat it again. With the track we are on, it's only a matter of time before we will raise our distribution. It's not a matter of if; it's only a matter of when.

Looking forward to the balance of fiscal 2006, throughout most of January, we have experienced considerably warmer-than-normal weather, which has intensified the conservation efforts of many of our customers. Degree-days for the first five weeks of the second quarter were 77% of normal throughout our operating areas, bringing the fiscal year-to-date total to 88% of normal. However, given our strong first-quarter performance, a relatively quick return to more normal weather will put us in position to achieve our target results for the remainder of the fiscal year. In the interim, we are concentrating on those things that are within our control. Our field personnel remain very focused on driving operational efficiencies. As Bob indicated, our balance sheet remains strong and despite continued high commodity prices, liquidity is not a problem for Suburban.

As always, we appreciate your attention this morning and would now like to open the call up for questions. Christina, if you could, help us with that please?

Certainly. (OPERATOR INSTRUCTIONS). Eric Kalamaras.

Good morning. A question regarding the revolver balance -- can you give us a specific as to what that is?

We were at about $63 million outstanding as of the end of the quarter, Eric. That's -- (technical difficulty) -- the revolver, as you know, is a $175 million combined revolver.

Regarding the fall-off in the heating oil volumes, I realize a lot of that was obviously from the contract. Can you give us a sense as to what the actual margin is on the volumes that you decided to forego?

You're talking about the business that we basically turned away, the lower-margin business?

Yes, that's exactly right.

This is Denny Trautman. The margins on that business were, in many cases, minimal to some cases -- sometimes because the way they were structured, how we had to price them, actually we lost money on some of that business, hence the reason for us taking a hard look at it and really exiting that business. The way that those contracts are structured, it's -- in the competitive nature of it, it's tough to make money in that business and that's why we've exited that business.

Okay, guys. That's all I've got.

John Freeman.

Good morning, guys. Good quarter! You mentioned that it would be difficult to kind of isolate the customer attrition from the elimination of the price cap program on the fuel oil side, but it was definitely less than expected. Can you maybe elaborate more on that statement? Do you believe it was less than expected because many of your competitors just followed suit and dropped their price cap program, or was there some other issues in there?

Without a doubt, there's less programs in the marketplace than there were before. As we look at the attrition rate from that program, what we budgeted was about 10%, and what we think we're at, at this point, is about 8%. So that's when we say it's less than what we anticipated about.

We knew we were going to lose some business; we did lose some business. But as a general statement, we do have -- continue to have other products and services we offer to the marketplace that our customers are attracted to, and we continue to maintain those customers in fact and continue to grow that business in areas.

Great. Then regarding the field realignment, can you provide some specific details on how that has specifically improved efficiency? Do you have more work to do on that front or is the realignment basically done?

Yes, that is a -- (technical difficulty) -- on the onset of that, we said that was going to be an 18 to 24 month process. We're really about six months into that. We've achieved some savings in the synergies of how we manage that business, but the real savings we think, on a go-forward, is how we're going to utilize our assets in a more effectively way and efficient way that will drive a higher return on those assets. We haven't really seen all of that yet, and we anticipate, over the next 12 to 18 months, that we will work toward that and achieve those results.

Great, thanks, guys. That's all I had.

Yves Siegel.

Good morning. Just a couple -- number one, is that Mark in the background? (LAUGHTER).

Go-ahead, Yves. I'm sorry, we didn't hear you.

No, I didn't ask yet!

Oh, okay; that's why we didn't hear you! (LAUGHTER).

The cap program, was there any part of that at all in this quarter or was it all February and beyond?

I think that that -- let me take a shot at that. The best way to answer that, the real issue with the cap program was the fact that it became prohibitively expensive to hedge it. The impact of that is really February and beyond, okay? But, let's not lose sight of the fact that we had a lot of people in the cap program in the first quarter last year, so the pricing opportunities were not the same as you had this year, year-over-year. So there is some influence on the quarter because of the elimination of the cap, but the hedging impact really began in February.

That's the biggest part of [utilities].

When we look at gross margins on propane and heating oil, it appears that, you know, you've done a great job and it appears that your competitors are also pushing margin. So the question is, if we just isolate propane for a moment, I guess the question is do you have any further that you think you can go in terms of pushing gross margins? When you think about it, I assume what you essentially do is sort of -- and elasticity analysis that says if we raise it, this is the impact and we could very well lose some volume but net/net we're better off pushing the margin.

Let me try first. Let me respond to the characterization of "pushing" prices and pushing margin. Really, what we are doing is high-grading, so you're seeing our mix and our average go up because of that. We think we are very competitive in all of our markets, so we don't think we are pricing ourselves out of the market. It's more of exiting businesses, like Denny Trautman said, that we are either losing money or had below-satisfactory margins that, when you do the straight math, our overall margins are going to rise. (indiscernible).

That was going to be my point. I think that is the most significant piece.

Then the follow-up would be is there more high-grading to go?

We continue to look at that. That never ends. As the competitive marketplace changes, we always look at the different segments of our business and make a determination of how we best can be competitive and serve that market. If there are markets out there and segments in that market that we can't effectively compete in, then we will make a determination of either exiting that business or, quite frankly, go and have a dialogue with our customers and talking to them about how our costs have increased over time and that if we've been on a fixed differential, we can't fixed differential any more. We've actually had some very good success talking to some of our larger commercial accounts and showing them that we can no longer do it for the margin level that we're at and talk with them about what we need to get a good return on our investment, and they've agreed and primarily have agreed because they recognize the quality service that we bring to their business.

That's more Business 101, is being the practical and common sense approach to it. But for modeling purposes, Yves, if you go in there at all, we don't bank on ever increasing margins.

Okay. Then you always keep track of customer gains and losses, and I realize there's customers you don't want, so that clearly is one part of the equation. But in terms of the customers that you do want, and how does that statistic look today?

Hard to isolate it necessarily, because our customer gains/loss report is obviously all inclusive, okay? We do have net customer gains for the first quarter, as we did last year, and you know, as far as dissecting it, it's difficult to do, Yves.

Okay. Then, when you look at the heating oil side, if you will, how much further do you think you may have to go in terms of upgrading the gross margin there, Bob?

Well, on the heating and oil side, I think we ought to separate the two pieces. On the heating oil side versus the gasoline and the diesel side, on the gas and diesel, we continue to look at that business; it isn't a core business to us at this point in time. It offset some of our expenses. We continue to look at that business, particularly the gasoline business, because that is a significantly declining business. But we will look at that and probably make some harder decisions on that.

So the biggest piece was a lot of this bid business in the power fuels that we exited starting really in July and August of last year. That was the most significant piece. We probably don't have anything with that degree to look at in that business right now.

So net/net, could we -- should we think about improving margins for heating oil, or --?

This is Mike Dunn. I think, at this stage, we are reasonably flat. We've got the field pricing off of replacement cost, so they know their market certainly better than we do. We certainly think that we've, at least for the moment, maximized our margin opportunity in the heating oil segment.

Okay, I promise I've just got three real quick to go away. One is, is there opportunity to recognize any asset sales? Can you monetize them, that gasoline business that you want to get out of, or --?

No, because they are co-operated or (indiscernible) -- we operate our propane and heating oil business, and we had a gas station in front. For the most part, all of those businesses are closed. The business that Denny is talking about is really transport deliveries of gasoline to major commercial and industrial users.

Okay. Then the second question is one that you guys always like -- is acquisitions. More opportunity on the heating oil side, or how would you characterize the opportunity going forward?

Well, I wouldn't say more opportunity anywhere. It's anything and everything -- that if it makes sense, Yves -- you know our style. If it makes sense, we will do it. We've looked at a lot of things in the last year. We got close on some things but it just didn't make sense to continue, so we stopped. It doesn't really matter how much work we have into a transaction. At the end of the day, if it doesn't make sense, we're not going to do it.

Values are high, so predicting whether they're going to come down or continue to go up, I don't know, but we certainly continue to look and we are very active. So, we're not seeing the activity slow down at all, which is a good sign. We think, with the efforts these guys are doing and all of our people in the field and improving efficiencies, that we really look at that as poised for growth. We are positioning ourselves for growth. So, we are excited about it. But we will keep on trying, you know? We will do it if it makes sense.

Thanks, Yves.

Can I ask one more last question?

You sure can!

Absolutely. ]

I apologize, but very direct -- if the weather cooperates -- February and beyond -- and you are able to hit your targeted budget for this fiscal year, do you think that you are more than likely to increase the distribution, given hitting your -- being able -- given that you are able to hit your budget for this year?

That's well put, Yves. In a perfect world, sure, but it would be probably career-threatening for me to be presumptuous of what the Board would do. I can tell you that our Board is very much aware of distributions. They review our position with respect to that on a quarterly basis. While I said it's only a matter of when, not if, I really can't define that any more. But we are on a good track here, and we are optimistic about the future.

Great, thank you, guys. Thanks again for answering the questions. I appreciate it.

Dirk Van Doren.

Mark, believe it or not, I do have one question. You mentioned that values are up. Are you talking that multiples are up when you look at acquisitions, or how would you classify that?

Yes, values are up across the board. They are particularly up in the midstream area.

But multiples of EBITDA, is that how you are looking at it?

Yes, yes.

Great. Thanks.

(OPERATOR INSTRUCTIONS). (indiscernible)

Good morning, guys. Great quarter. I just had a couple of housekeeping-type questions. Yves actually asked most of my questions.

I just didn't hear your name.

(indiscernible) with UBS.

Thank you.

No problem. The first question is, actually, was there any EITF impact this quarter at all?

On the EPU calculation?

Yes, on the EPU calculation.

Yes, the impact in the quarter was about $0.07, compared to about $0.03 last year.

$0.03 last year, okay, great. Also, the 7 million marked-to-market gain and so forth that you are adding Back in and what not, the adjustment kind is made at the OpEx line, which could result in the OpEx being greater than it was last year. Can I assume that that's mostly related to higher fuel costs for the delivery trucks?

The increase in operating expenses if you exclude FAS 133?

Yes. Because you came up with an EBITDA number of 50.1, so I am assuming you're adding back the 7 million of marked-to-market gains in -- (multiple speakers).

No, we are excluding that gain, not -- (multiple speakers) -- right.

Oh, you are excluding that gain. okay.

Yes, the gain would be 57, or the EBITDA would be 57 and change. We've excluded 7 million. (multiple speakers) -- the way we've analyzed it.

Okay, right. Where are you excluding that gain? Where would you be making that adjustment?

Operating expenses -- (multiple speakers).

In -- (technical difficulty). Would it be fair to say that operating expenses were, on a reoccurring basis, about 100 million for the quarter?

Just a second.

We are scrambling here.

No problem.

Yes.

Okay. Last year, I had it at about roughly about 95. Is that related to -- so I guess my questions is that, with a lot of the operating costs -- (multiple speakers).

For the quarter?

Yes, on a quarter-over-quarter basis, would it be due to the fact that there's higher costs to operate the truck and so forth?

Well, you have to also, for the prior year, add back 2.5 to your 95 million, so, you're comparing the 100 million to -- (multiple speakers).

The 97, 98. Okay, thanks. (multiple speakers).

That's a variety of things; you can't specifically say it's operating the fleet. You have variable compensation in there, because the -- (technical difficulty) -- better this year, you've got inflationary increases and other expenses, all of that offset, to some extent, by the improvements and efficiencies that we've already introduced to the field through our industry leader program.

Okay. I had another quick question on margins and so forth. You had mentioned before that you were focusing on higher-margin areas and what not. Should propane prices continue to decline through the balance of the quarter, would we be able to see a margin pick-up in the second quarter as well, too? Like, as in you would be able to continue charging the prices you're charging, yet your cost of propane could possibly decline if your (indiscernible) purchase or add to your inventories?

It wouldn't necessarily be a direct correlation. All of our margin depends on what the marketplace does, so there's multiple factors. Just because commodity prices or our cost of product goes down doesn't necessarily mean that our margins are going to go either way, frankly. So, that's not a direct correlation.

Okay. Just to sort of touch up on -- sort of refresh myself on the acquisitions comments that you'd made with respect to Yves and what not, it would be fair to say that you would still continue making acquisitions if you were to find something at acceptable multiples that you can justify and so forth?

Absolutely.

Great, that answers most of my questions. Thank you.

Gentlemen, we will turn the conference back to you at this time.

Thanks, Christina, and thanks, everyone, for your support. I'd like to say again that we told you -- (technical difficulty) -- our first quarter results I think are proof of that, and we appreciate the support, and we look forward to seeing you next quarter. Things are humming along -- (technical difficulty) -- I have a cold but it's not as a result of the weather -- (technical difficulty) -- outside. So we are all praying for cold weather but -- (technical difficulty) -- don't depend on the weather, so we operate this business as if we don't get it and when we do, it's gravy. So again, we appreciate the support and look forward to speaking to you next quarter.

Thanks, Christina. I appreciate it.

You're welcome. Ladies and gentlemen, the conference today will be available for replay beginning at 4 PM Eastern today through tomorrow at midnight. You may access to replay system by dialing 1-800-475-6701 and entering the access code 814995. (Operator repeats numbers).

That does conclude the conference. We thank you for your participation and for using AT&T's Executive Teleconference Service. You may now disconnect.