Suburban Propane Partners LP (SPH) 2006 Q2 法說會逐字稿

Thank you. Ladies and gentlemen, thank you for standing by. Welcome to the Suburban Propane Second Quarter 2006 Financial Results Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. Instructions will be given at that time. [Operator Instructions]

I'll now turn the conference over to our host Bob Plante. Please go ahead.

Thank you Karen. And good morning, everyone. Welcome to Suburban's Second Quarter Fiscal 2006 conference call. I'm Bob Plante, Vice President and Chief Financial Officer at Suburban.

Joining me this morning is Mike Dunn, President of Suburban, along with our Chief Operating Officer, Denny Trautman, and Michael Stivala, our Controller and Chief Accounting Officer.

The purpose of today's call is to review our second quarter fiscal 2006 financial results, along with our current outlook for the business. As usual, once we have concluded our prepared remarks, we will open the session up to questions.

Before we get started, I would like to remind you that statements made in the course of this conference call that 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 24, 2005, and its Form 10-Q for the quarter ended December 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 to our website at suburbanpropane.com.

At this point I would like to get started by turning the call over to Mike Dunn. Michael.

Thanks Bob. And thank you everyone for joining us. Our strong second quarter performance, despite considerably warmer than normal weather conditions, particularly in January and February, underscores the favorable impact of 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 improvements in our cost structure resulting from our recent field alignment.

80 degree days in our areas of operations were 88% of normal for the quarter, compared to 96% of normal for the prior year quarter. For the critical months of January and February, 80 degree days were 80% of normal, more than offsetting the impact of the warmer weather, and the continued conservation efforts of our customers, with our success in maintaining our strong retail margins and improving expense controls throughout the quarter.

Our EBIDTA improved 19% year-over-year for the second quarter. We told you we expected significant earnings improvement. Our results for the second quarter and the six month periods are proof of that.

A little later I'll comment 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 second quarter results in more detail. Bob.

Thanks Mike. As we discuss our financial results for the quarter, to be consistent with our reporting for previous periods, I'm excluding the impact of unrealized non-cash losses of $600,000 and $2.8 million from our current quarter and prior period results, respectively, applicable to FAS133 accounting.

EBIDTA for our second fiscal quarter ending March 25, 2006 totaled $104.5 million compared to $88.1 million for the same quarter a year ago. Results for the second quarter include $1.5 million of restructuring charges, mostly applicable to our field reorganization initiatives.

Net income for the quarter totaled $84.6 million, or $2.45 per Common Unit, compared to $68.3 million, or $1.99 per Common Unit in the prior year. Keep in mind when looking at our earnings per unit for the first and second quarters, as well as for the six months ended March, it reflects the application of EITF03-6.

This accounting requirement, which first took effect at the end of fiscal 2004, requires us to assume that all undistributed earnings were allocated to the limited partners, and the general partner, in accordance with participation rights set forth in our partnership agreement.

Compared to the traditional computation under FAS128, which I believe some of you may still be using in your estimates, application of this requirement resulted in negative impact of $0.24 and $0.18 per Common Unit, for the three months ended March 2006 and 2005, respectively.

Retail sales of propane during the quarter pulled 168.8 million gallons, a decrease of 30.3 million gallons from a year ago. Sales of fuel oil and other refined fuels amounted to 54.7 million gallons for the quarter, compared to 92.9 million gallons in the prior year quarter, a decrease of 38.2 million gallons.

The decrease in sales volumes is attributable to the impact of significantly warmer weather, customer conservation, and to a significant extent, our continued efforts to strategically exit certain lower margin, commercial, industrial, and agricultural businesses in both our propane and refined fuel segments.

Although it's difficult to specifically isolate customer attrition attributable to the elimination of the fuel oil cap program, it's clear that the impact was less than anticipated in our fiscal 2006 budget. The revenues for the second quarter increased $3.6 million to $590.9 million, from $587.4 million dollars, in the second 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 March averaged $94.64 per gallon basis in our [bale view], versus about $0.79 per gallon for the same quarter a year ago- a 20% increase in base product costs year-over-year. Propane is currently trading in the $1.02 to $1.04 range, basis around [bale view].

Heating oil prices for the quarter ending March averaged about $1.75 per gallon, a 25% increase over the same quarter last year. Heating oil has rallied significantly since the quarter closed and is currently trading at over $2.00 per gallon.

Gross margin of $222.6 million for the quarter was $15.8 million dollars, or 8% higher than in the prior year quarter, due principally to improve gross margin contribution from both our propane and refined fuel businesses. In particular, the elimination of the fuel oil cap program for fiscal 2006 had a significant positive impact on gross margin, as we no longer incur the cost of hedging, associated with this program, and we have been successful in implementing our market based pricing strategies in our field operations without significant customer losses.

Combined operating and general administrative expenses of $116.6 million decreased $2.9 million from a year ago. With our field realignment, which began in the fourth quarter of fiscal 2005, we have significantly restructured our operating footprint, and reduced our cost structure through the achievement of operating efficiencies.

The most significant cost savings were experienced in the payroll and benefit related expenses, along with routing efficiencies, reflecting reduced head count and elimination of nearly 300 vehicles from our operating fleet. The sustainable expense reductions were offset partially by increases in variable compensation expenses in line with our improved earnings, increased fuel, and other costs to operate and maintain our fleet, and higher bad debt expense resulting from the environment of higher energy costs.

Capital spending during the quarter totaled $4.7 million dollars, of which $2.3 million was deemed maintenance related. For the six month period, capital spending totaled $10.9 million, including $4.1 million of maintenance-related expenditures.

Turning to our balance sheet, as anticipated, we made use of our bank revolving credit facility throughout the heating season to fund our seasonal working capital [needs]. The balance outstanding under our working capital line was reduced to 21.8 million dollars as of the end of the second quarter and, as expected, was fully repaid in early April.

We are now a net investor of cash in excess of about $20 million. Mike?

Thanks Bob. As announced in our press release on April 20, Suburban has declared a quarterly distribution of $0.6125 per Common Unit. This distribution, which equates to an annual distribution of $2.45 per unit will be paid on May 9 for our second quarter ended March 25, 2006.

In addition, on the strength of our results for the first six months of fiscal 2006, and our expectations going forward, the partnership's Board of Supervisors has declared a $0.10 per unit annualized increase in the quarterly distribution for the third quarter that is payable on August 8, 2006 to Common Unitholders of record on August 1, 2006.

This increase, which brings our annualized distribution rate to $2.55 per unit, is our tenth distribution increase since our recap in 1999.

Looking forward to the balance of fiscal 2006. With the bulk of the heating season behind us, and given our strong results despite the exceptionally warm weather, we're very encouraged with the outlook for the full fiscal year.

Our field personnel remain focused on driving operational efficiencies, and we fully expect our year-over-year results for the remaining six months of the fiscal year to reflect continued progress in reducing our operating cost structure.

In addition, the third quarter of fiscal 2005, most specifically, the month of April 2005, was significantly impacted by the fuel oil cap program, the elimination of which will favorably impact the third quarter of fiscal 2006 on a comparative basis.

As Bob indicated, our balance sheet remains strong, and despite continued high commodity prices, we have clearly demonstrated that 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. Karen. Karen. Hello?

I apologize.

That's okay.

(Operator Instructions). And we have a question from the line of Jeff Musser. Please go ahead, sir.

Good morning, a couple of quick questions. I wonder if you could just talk a little bit about inventories of propane and heating oil that you might have left after the heating season is over and what--are you going to be basically trying to sell that, given the high market price environment. What's the strategy related to the inventories at this point?

Jeff, our propane and fuel oil inventories are typically hedged, so I don't know what point you are trying to get to.

Okay, so you're completely hedged then?

Yes.

How about on the debt--the total debt at the end of the quarter? Could you give us a sense of where that would be?

At the end of December?

At the end of the March quarter.

I'm sorry, the March quarter, yes. Well, you know what our fixed debt is.

Right.

And we had--I think I mentioned $21 million outstanding on our working capital line, so that would be it.

Okay, and then you basically put that to a net cash position then by--during this quarter?

Yes, during April.

Okay, graet. Thank you.

Okay. Thank you, Jeff.

The next question comes from the line of Yves Siegel. Go ahead.

Good morning guys. How are you?

Hi Yves. How are you doing?

I can't believe you raised the distribution and Mark's not around. That wasn't my question though.

Ok.

Mike, you mentioned the fuel cap in April. What was the negative impact? Was it $5 million a year ago?

Yves, if you look at the second quarter in total, it is about a $10 million total impact last year, and most of it was in the month of April.

Second question is, how much more is there to come in terms of the savings from the realignment and, also, could you just remind me in terms of the hedge cap reduction, where you are there?

We took about 150 people so far since the beginning of the fourth quarter, and we're in the third quarter. We're taking a few additional initiatives which will probably get that number close to about the same.

Another 150?

Yes. Potentially, yes.

And basically, what we're doing, Yves, is updating our business.

I mean, weve talked about it. And, I mean, the process is probably still 12 to 18 months away from completion, to be quite frank with you.

Because we don't want to skinny ourselves down to a point where we have a negative impact on our customer base. But in the same breath, some of the savings that we've taken out of the environment have been reasonably obvious, to be quite frank with you, with respect to some of the benefits that we've been able to achieve with respect to our improved routing and geographic amendments to our footprint.

Okay, what's the head--where is the head count now? Are you--like 300 people--what percentage does that represent?

It is about 10%.

Wow, okay. How should I think about the cost savings per employee? Can you just--does it make sense to say $50,000 per employee or something like that, in terms of trying to quantify that?

You're probably looking at something more or less than that, in that area, give or take 15% and fully loaded.

Now do you have to take any additional severance charges or anything regarding the reduction?

Yes, we will Yves. We've got, in our second quarter results is a $1.5 million restructuring charge that relates to this initiative. I think it would be reasonable to expect something probably in the neighborhood of twice that amount, in the remaining six months of the year, to complete the restructuring.

What type of people are you being able to rehire here? Are they mostly just field people, drivers or--?

Yves, it's pretty common. I think it is across the board as we continue to consolidate some of our locations and we look at our footprint and how we service our customers. We really started with how we manage that business. And that was part of the first pass, and then, now it is really trying to understand how do we drive the efficiencies of that business. So it's probably across all of our categories of employees.

Okay. And the last two questions, I assume these are full-time employees, not flex employees?

The seasonal employees come and go as you would think as we need them, and for the most part this is full-time workers here.

And the last question is, can you just repeat where you are in terms of your fleet, and where you think you're going with that? Have those reductions essentially been completed now?

No. We still haven't--as we continue to drive the efficiencies and re-tool our business, there will be additional reductions there as well.

And those are mostly leased rather than owned?

They are all leased, I believe. Yes. They are leased.

Okay. That is great. Thanks guys.

Okay. Thank you.

We do have one last question in queue at this time from the line of Eric Kalamaras. Please go ahead.

Hey. Good morning guys. Hey, a question regarding the-- just so I can kind of true up the--from the accounts on the heating oil side. Where do you stand as far as total account expiration related to some of the lower margin accounts that you had trimmed away, as well as the reallocation of the updated pricing program? Can you quantify as to what the account base shrunk to--from that?

If you look at what--the only way you can really look at that--let me back up. First of all, the heating and oil business is predominantly a will-call business because the customer does own their tank, okay.

So there is a certain percentage of your customer base that in fact, does shop the marketplace at the beginning of every season. Okay? But if you look at our automatic customer delivery base, year-over-year, the attrition there has been less than 5%, okay. And that's--that would probably be a direct result of the elimination of the cap program. All right?

As far as some of the other business, the customer count that Bob referred to--the customer count, is in--as in tanks in our residential business, but the gallons are big, okay. Some of the commercial and agricultural business that we walked away from with respect to, like the New York State bid. I mean, that would in principal be one customer, but it represented, Bob--what, something north of 15 million gallons, I think, between fuel, oil and propane.

Yes.

Okay, so I don't know if I answered your question specifically, but I think when you look at the residential sector, as Bob said, we certainly didn't experience the kind of attrition we thought we would as a result of eliminating the cap program. And as far as intentional customer shrink, you know, the number of customers is small in relationship to the actual gallons.

Okay, great, no, that's fine. And any thoughts you can give as to ways to increase the propane customer count by innovative programs such as some of your other competitors have offered, tank exchange programs, anything that we might expect coming up in the summer months that may change volumes positively from what we've seen historically?

No. I mean, first of all, the summer is not going to kick up that much volume. And with prices hanging around where they are, people are not inclined to step out of their normal buying pattern, unless they believe the market is going to go higher.

Right.

Okay, but as far as propane is concerned, we'll be doing our traditional things, but more importantly, we are hoping that our attention to the customer, and our ability to service our customers improve with our realignment.

Sure. And--okay. So you've done the--now you've got the distribution increase slated, like you indicated you would earlier. Where does that leave you in terms of you heading into the fall and repositioning some of the portfolio? And where does that leave you in terms of the strategic initiatives you might have on your plate, whether that be acquisitions or--anything else that you can comment to?

Well, I mean, aside from our internal organic growth plans, and the continuing effort dedicated toward this restructuring, I mena, we're always looking at acquisitions. But again, we're not going to buy something for the sake of buying something. And unless prices become a little bit more realistic with respect to sustainable cash flow and our ability to raise distribution, why bother doing acquisitions? I mean, if there aren't synergies, and the ability to raise distribution, what is the purpose of doing acquisitions?

It is proven that market share doesn't change.

No, I don't necessarily disagree with that. I just want to--really, it seems like some of the multiples have come to a point where the acquisitions certainly don't look as attractive as what they did 18, 24 months ago.

Exactly.

That being said though, would--I guess would it be fair to say that you'd still look at doing something away from the conventional residential or investor propane--?

Yes. Ideally, you'd like to take advantage of MLP structure and try to diversify. But again, that is even more difficult--.

--Sure--.

With the financial players still in the marketplace.

Yes. Okay guys. Thank you.

You're welcome.

You have a follow-up now from the line of Yves Siegel. Please go ahead, sir.

Thanks. With--I have a question on how you think about gross margin right now? And correct me if what I'm going to say is not proper but, it would seem that margins across the propane industry have gone up this year. And I think in part maybe that has been in response to the fact that--trying to make up for the warm weather and the conservation. So, if that indeed is the fact--if you and your competitors have been somewhat more disciplined in to raise margins, is that something--is the current margin sustainable? Or if we get a cold spell next year and so the volumes increase, would you think that you might see some margin erosion? How do you think about it?

Well, a couple of things with respect to [indiscernible]. Number one is on a percentage basis our gross margin percentage is actually lower than last year's. So one could argue that we left some money on the table, okay?

Our margin improvement overall, is a result of two things. One is we've become better and more knowledgeable in our individual marketplaces, okay. And two is the overall cost and risk of doing business has gone up. So I mean from an industry perspective, I would think that you have to raise your margins when your bad debt dollars have increased, your cost to deliver has increased. Basically, your overall risk profile has increased, so margins typically do go a little bit higher just to offset that.

As far as erosion is concerned, we continue to try to high-grade our customer business. For example, when you take out 14, 15 million gallons of business that your were virtually making nothing on, your margin average is going to go up just by eliminating that business.

So as far as we're concerned, could there be erosion? You don't know what people are going to do in the marketplace. We are going to continue to be competitive, however, we're also going to be disciplined. We're also going to be aware of what is going on in our marketplace and we act accordingly. I mean, it's a tough thing to say. I mean, if propane goes up to $3.00 a gallon, I would think margins should go higher.

Yves, let me just add to what Mike is saying just to kind of clarify when we talk about eliminating less profitable business. If you look at our volume shortfall in the second quarter, year-over-year, okay, about 45% of our volume reduction in the propane segment was in our commercial, agricultural, industrial categories, and a significant portion of that can be attributed to our initiatives to eliminate unprofitable business, okay.

So, this by virtue of point, unprofitable business out, your average margins are going to increase tremendously, okay. If you look at the refined fuel site, about 35% of our refined fuel reduction, year-over-year, in the second quarter was gasoline and diesel. And most of that relates to the proactive elimination of less profitable customers. So that's a really significant factor in our business that changes the way we are running our business.

And I think it needs to be emphasized because it's just not an incidental. It is a very important reason for why our average margins have increased.

That begs the question, where are you in terms of getting rid of those unprofitable accounts? Are you done or is still substantial--do you still have a lot more to do?

It is an ongoing process, but I would say that for the low-hangingfruit, if you will, we've identified that and we've dealt with that.

Okay. And then, that begs the last question--is that on a same store sale type of analogy, on the customers that you want to keep, are you able to raise the margin to be able to keep up with the higher cost of doing business or has the increase in margins then--just totally attributable to discontinuing service to unprofitable customers?

Well, it is a combination of both actually. I mean, I would honestly say that the impact of eliminating unprofitable business has certainly had a considerable effect on the margin improvement, but, okay, the margins have gone up this year. I mean, the industry as a whole has reported that, and where there are opportunities where we could still be competitive and improve on margins, we've done that.

Okay. That's great. Thanks.

Thank you, Yves.

Thanks, Yves.

And Mr. Plante, there are no further questions at this time. Please continue.

Okay. Well, that basically ends our conference call. Karen, if you could follow through with what you need to inform the group of, I would appreciate it.

Yes, sir. Ladies and gentlemen, this conference will be available for replay after today, May 4, 2006, 4:00 p.m. Central Standard Time through tomorrow, May 5, 2006, 11:59 p.m. You can access the AT&T Teleconference Replay System at any time by dialing 1-800-475-6701 and entering the access code 825665. That number again is 1-800-475-6701. The access code is 825665. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.