Suburban Propane Partners LP (SPH) 2006 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Suburban Propane Third Quarter 2006 Financial Results Conference Call. [OPERATOR INSTRUCTIONS] I would now like to turn the conference over to our host, Mr. Bob Plante. Please go ahead.

Good morning everyone. Welcome to Suburban's Third 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, our Chief Operating Officer, Denny Trautman and Mike Stivala our Controller and Chief Accounting Officer.

The purpose of today's call is to review our third quarter fiscal 2006 financial results along with our current outlook for the business. As usual, once we've concluded our prepared remarks we'll open the session 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 from 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 March 26, 2006. 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 the information to be useful in our Form 8-K which disbursed to the SEC this morning. The 8-K can be accessed through a link on our website at suburbanpropane.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. As anticipated our strong third quarter performance reflects the continuing favorable impact of the proactive steps taken during the second half of fiscal 2005 to address the nonrecurring issues associated with our fuel oil business as well as the continued improvements in our field cost structure. Also, as was the case during the first half of the fiscal year we continued to successfully maintain our strong retail margins and prudent expense controls throughout the third quarter.

A little later I'll comment on our increased quarterly distribution as well as our outlook for the remainder of the fiscal year. In addition, I'll have some thoughts on our announcement of last week concerning the Board's plans to convert the General Partner interest of the management group to Common Units.

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

Thanks, Mike. As we discuss our financial results for the quarter, to be consistent with our reporting from previous periods, I'm excluding the impact of unrealized gains of $1 million and $2.3 million from our current quarter and prior period results respectively - as applicable to FAS 133 accounting. These unrealized gains are now reported within the cost of products sold.

EBITDA for our third fiscal quarter ending June 24, 2006 totaled $6.1 million compared to a loss of $6.7 million for the same quarter of a year ago, an improvement of $12.8 million on a year-over-year basis. Results for the third quarter include $3.7 million of restructuring charges mostly applicable to our field reorganization initiatives. For the most part restructuring charges related to these activities are now substantially behind us. In addition, results for the quarter included certain professional fees related to the recently announced plan to exchange management's General Partner interests for Common Units of the partnership. Net income for the quarter was a seasonal loss of $11.5 million or $0.37 per common unit compared to a loss of $62.2 million or $1.99 for Common Units in the prior year quarter. Results for the prior year quarter include a one-time charge of $36.2 million to reflect the loss on debt extinguishment associated with our March 2005 debt refinancing.

On a normalized basis excluding the restructuring and one-time professional fees mentioned earlier, as well as the debt refinancing charge included in the prior year quarter, our earnings per unit for the quarter was a loss of $0.21 compared to a loss of $0.83 per common unit for the prior year quarter.

Retail sales of propane during the quarter totaled 88.7 million gallons, a decrease of 9.3 million gallons from a year ago. Sales of fuel oil and other refined fuels amounted to 26.6 million gallons for the quarter compared to 48.5 million gallons in the prior year quarter, a decrease of 21.9 million gallons. As has been the case for the entire fiscal year, the decrease in sales volumes is attributable to a significant extent to our continued efforts to strategically exit certain lower margin commercial, industrial and agricultural businesses in both our propane and refined fuel segments. Additionally, although weather is typically not a major factor in our third fiscal quarter, sales volumes for the third quarter were negatively impacted by the extremely warm weather in the month of April.

For the third quarter, weather in our areas of operation was 83% of normal compared to 94% for the prior year period. Also impacting volumes on a year-over-year basis was the continued conservation efforts of many of our customers in response to generally higher commodity prices. Revenues for the third quarter decreased $23.2 million to $304 million from $327.2 million in the third quarter of fiscal 2005. This decrease is attributable principally to lower revenues from sales of refined fuel products reflecting our proactive move to exit certain less profitable business as well as lower propane sales volumes attributable primarily to the warmer April weather and customer conservation; partially offset by the impact of higher commodity prices.

Propane prices for the quarter ending June averaged about $1.05 per gallon basis Mt. Belvieu versus about 82¼ cents per gallon for the same quarter a year ago, about a 28% increase in base product cost year-over-year. Propane is currently trading at around $1.15 basis Mt. Belvieu. Heating oil prices for the quarter ending June averaged about $1.98 per gallon. That's a 31% increase over the same quarter last year. Pricing in the energy markets obviously continued to be dominated by geo-political events.

Gross margin of $11 million for the quarter was $6 million or 6% higher than the prior year quarter due principally to improved gross margin contribution from both our propane and refined fuels businesses. In particular, as has been the case throughout fiscal 2006 the elimination of fuel oil cap program had a significant positive impact on gross margins as we no longer incur the costs of hedging associated with this program and we've been successful in implementing our market based pricing strategies in our field operations without significant customer losses.

Combined operating and general and administrative expenses of $102 million decreased $9.6 million from a year ago. As we discussed on our last call with our fuel 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 payroll as benefit related expenses along with routing efficiencies reflecting reduced headcount and the elimination of over 500 vehicles from our operating fleet.

These sustainable expense reductions were offset partially by increases in variable compensation expenses inline with improved earnings. Capital spending during the quarter totaled $4.4 million of which $3 million was deemed maintenance related. For the 9 month period, capital spending totaled $15.3 million including $7 million of maintenance related expenditures.

Mike?

Thanks, Bob. As announced in our press release on July 20th, Suburban has declared a quarterly distribution of $0.6375 per Common Unit for the third quarter payable August the 8th 2006 to Common Unit holders of record on August 1, 2006. This distribution which equates to an annual distribution rate of $2.55 per unit reflects a $0.10 per unit annualized increase. This increased distribution - attempt increase - since our recap at 1999 clearly reflects both management's and our Board's confidence that we are fully recovered encountered during 2005 and we are back on track. To that end, as announced last week, our Board of Supervisors has approved yet another $0.10 per unit increase in our annual distribution to $2.65 per unit annualized. That's effective with our fourth quarter distribution payable on November the 14th.

As announced last week, our Board of Supervisors has elected to acquire the General Partner interests and incentive distribution rates currently owned by Suburban Energy Services Group LLC, a majority of which is owned by the senior management of the Partnership. This anticipated transaction bodes well for the future of the partnership for a variety of reasons. First, with the elimination of the General Partners' incentive distribution rates which currently provide the General Partner with a 15% share of all future distribution increases, substantially all cash flow growth will be available to the Common Unit holders.

Going forward the economic interests of the General Partner and the members of the Partnership will be entirely in the form of Common Units which is intended to even further align the interests of management with those of the Common Unit holders. Additionally, by eliminating the incentive distribution rights, the proposed transaction will simplify our capital structure and should lower our future cost of capital leaving us in a better position to execute our strategy to achieve sustainable, profitable growth and increase quarterly distributions.

Unlike most other publicly traded partnerships, the diluted effect of our General Partners' incentive distribution rates is already capped at 15%. This transaction, if approved by our unit holders, will eliminate completely the General Partners' disproportionate 15% share of future distribution growth in exchange for 7% of the total Common Units to be outstanding.

Finally, demonstrating management's belief in the long-term viability of the partnership, both Mark Alexander and I have agreed not to sell the Common Units we will receive upon the exchange for a minimum of two years. I refer you to the Partnership's recently filed Form 8-K for more information about the proposed conversion transaction.

The proposed conversion transaction and governance changes will be submitted to our Common Unit holders for approval at our 2006 Tri-Annual Meeting currently expected to be held this Fall. And we will shortly be filing a proxy statement with the SEC in anticipation of this meeting.

Looking forward to the balance of fiscal 2006, given our strong results for the first 9 months of the year despite the exceptionally warm weather, we are very encouraged with the outlook for the full fiscal year. Our field personnel remained focused on driving operational efficiencies and we fully expect our year-over-year results for the remainder of the fiscal year to reflect continued progress in reducing our operating cost structure.

As always, we appreciate your attention this morning and would now like to open the call up for questions.

Tom?

[OPERATOR INSTRUCTIONS] Our first question today comes from the line of Yves Siegel. Please go ahead.

Good morning everybody. I just had one question. Could -- in terms of the cost savings that you've realized thus far year-to-date and what you think you'll realize for the balance of the year, how should we think about next year in terms of how much incremental savings could fall to the bottom line?

Okay. If you look at our 9 month numbers, there obviously are going to be some additional savings achieved in the fourth quarter. We're not prepared to quantify that at this point in time. I would suggest next year probably flat to just a modest increase for inflation would be something you should anticipate. We will have most of the synergies in place. We won't have the full year effect this year. Okay? So, yeah, it's tough to quantify, Yves.

As far as incremental savings I don't know that we can quantify at this point. Any comments?

I think it's an ongoing -- as we continue to refine this. But we've got the bulk of this behind us and we'll still have some of it go forward but the bulk of it's behind us.

Yves, I guess the best way for me to quantify it is, if you look at year-over-year we've taken over 500 vehicles out of the business from this point in time compared to 12 months ago. There's over 650 fewer employees; now that doesn't mean we've severed 650 people but through attrition we've eliminated about 650 positions year-over-year. Most of them recently related to the restructure of our HVAC business. Okay? You haven't seen the full year effect of that this year; obviously next year you will. And to look at that in terms of a percentage - 650 people - that's 16% of our total workforce. Okay? Vehicles probably -- 100%.

Yes. It's close to that.

So you'll start seeing the full year effect of both those initiatives next year.

That was the point. I'm just trying to figure out how much more is to come next year. So it sounds like there will be some incremental benefit going into next year.

Plus you'll have a full 12 months effect next year. Yes.

I think it will be significantly smaller with [inaudible].

And I guess I fibbed. I did have one follow-up question. I didn't want to disappoint Mike.

You never have, Yves.

As it relates to eliminating the IDRs going forward and having a better cost of capital going forward, any thoughts on how this positions you to make acquisitions and are we more likely to see something on the propane side than on the heating oil side?

I think at this stage with the exercise that we've gone through over the course of the last 18 months with the refinement of our base operating model, certainly a bolt-on acquisition would make the most sense these days. Now that could -- obviously will come in the form of propane first and heating oil, perhaps, secondly. One of the things that we want to pay attention to as well is not shift the balance of our principal EBITDA contributor too far away from propane to be quite frankly. I mean right now heating oil contributes less than 15 -- refined fuels contribute less than 15% of our overall EBITDA. At this stage we'd like to keep it more or less around that line.

Answer your question?

Well, you didn't answer when you're going to make the next acquisition.

I'll tell ya' -- you call me and I'll tell you that off-line. I have no idea and we certainly - as in the past, Yves - we certainly don't schedule, budget or set a drop-dead date for doing an acquisition. That would be reckless behavior.

Good deal. Thank you.

[OPERATOR INSTRUCTIONS] And we'll go the line of John Tysseland. Please go ahead.

Hi guys. I guess more on the back of Yves question, is considering the fact that the conversion of the GP into common and eliminating the IDRs is somewhat dilutive in the near years. It's kind of an important point to figure out if you are going to be more aggressive both in raising your distribution or acquisitions, I think, than what we've seen in the last call at three or four years.

Well, I don't think that there's a lack of aggression or interest in doing acquisitions. Okay? It's being prudent and making sure that when you do an acquisition you, in fact, have improved your business. Okay? And sustainable, predictable cash flow is important to us.

Right.

I think now that we've gotten 2005 pretty much off the agenda or at least off of everyone's mind, you can certainly do a calculation based on the numbers that you have 9 months to date and see what our distribution coverage is and I think with the elimination of the conflict or perceived conflict between the Board and the General Partnership, perhaps we'll be a little bit more free with our distribution policy. But as far as acquisitions are concerned - I mean, we continue and always have been in the market place and participating in any opportunity that has presented itself.

I guess another way of approaching that would be do you have like -- when you look at your opportunities that are in front of you today how would you gauge that versus historical opportunities that you've had? Do you have things that you are looking at actively today that you're pretty comfortable with that you're going to be able to execute over the course of the next couple of years?

You know what --? Yes. The answer to your question is - yes. But it has nothing to do with the conversion. Okay? It has to do with the overall market place. The ability -- you know 70%, 65% of the propane market is in the hands of mom and pop and regional-type operators. Okay? With the higher price points that we're dealing with today I would imagine that opportunities will present themselves as some of these owner operators become a little bit twitchy with their future. So I think that there are opportunities there. Again, we've gone to great pains to modify our footprint to be principally in the East and the West Coast and we're focused on both those market areas to see if there are any, in fact, accretive type opportunities that we can take advantage of. But, again, a lot of it has to do with the high prices of the commodity today. And of course the conversion of the General Partnership only helps.

So you're saying the high prices are just -- it's created more willingness of the mom and pop's to sell their businesses?

Well, yeah. I mean if you think about it - propane was $0.60 some cents a couple of years ago as was heating oil. People aren't going to be able to go to their banks and just continue to increase their working capital facilities without demonstrating an ability to make more money. And the reality is - you're not.

Fair enough. Thanks, guys.

[OPERATOR INSTRUCTIONS] At this time, Mr. Plante, I'll turn it back to you.

Okay. Thank you, Tom. And thanks, again, everyone for joining us. We look forward to speaking with you next quarter. That's the end of it, Tom.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using the AT&T Executive Teleconference Service. You may now disconnect.