Suburban Propane Partners LP (SPH) 2006 Q4 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by. Welcome to the Suburban Propane fourth-quarter 2006 financial results conference call. At this time, all participation lines are in a listen-only mode. Later, there will be an opportunity for questions, with instructions given at that time. (OPERATOR INSTRUCTIONS)

As a reminder, today's conference call is being recorded. I will now turn the call over to your host, Mr. Bob Plante.

Thank you, Rod, and good morning, everyone. Welcome to Suburban's fourth-quarter and 2006 fiscal year-end conference call. I am Bob Plante, Vice President and Chief Financial Officer. Joining me this morning is Mark Alexander, our Chief Executive Officer. Also with us is Mike Dunn, our President; Denny Trautman, Chief Operating Officer; and Michael Stivala, our Controller and Chief Accounting Officer.

The purpose of today's call is to review our fourth-quarter and fiscal 2006 full-year 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 for questions.

Before we get started, I'd like to remind you that statements made in the course of this conference call that relate to the Partnership's or management's expectations or predictions are forward-looking statements. 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 the 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 June 24, 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 have 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, which was 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. Good morning, everyone and thank you for joining us. A year ago at this time, we reported to you on the significant challenges impacting our results for fiscal 2005, and more importantly, on the steps we'd taken to address these challenges. We told you that the business was sound and was poised for significant improvement. We also told you 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 made with the integration activities to achieve the synergies anticipated from the Agway acquisition, had us well positioned for significant earnings growth and strong distribution coverage in 2006.

I am pleased to report to you that we have not only met but have exceeded those expectations for 2006 and remain well positioned for continued earnings growth in fiscal 2007 and beyond. A little later, I will comment on our increased quarterly distribution, as well as our outlook for fiscal 2007. In addition, I will have some thoughts on the conversion of the general partner interest into common units, which was approved by our unit holders at our triannual meeting on October 17th.

At this point, however, let me turn it back over to Bob to review our financial results for the quarter and the full year. Bob?

Thanks, Mark. Before getting into the numbers, let me mention that because of the way the calendar falls, fiscal 2006 includes 53 weeks of operating results versus 52 weeks in the prior year. Likewise, the fourth quarter of fiscal 2006 includes 14 weeks versus 13 weeks in the prior year.

While seasonally a slow period, our results for the fourth quarter were well within our range of expectations, as we continued to experience the benefits of sustainable expense reductions resulting from the restructuring of our operating footprint. As we discuss our financial results for the quarter, to be consistent with our reporting for previous periods, I am excluding the impact of an unrealized gain of $7 million from our current quarter results applicable to FAS 133 accounting, which compares to unrealized loss of $4.4 million in the prior-year quarter.

Both the current and prior-year fourth quarter included several non-recurring items, which I will discuss in a moment. Including all of these non-recurring items, EBITDA for our fourth fiscal quarter ending September 30, 2006 was a loss of $9.8 million compared to a $13.3 million loss for the same quarter a year ago. Our seasonal net loss totaled $28 million, or $0.88 per common unit, compared to $34.1 million, or $1.09 per common unit in the prior year.

As I mentioned, the fourth quarter of fiscal 2006 EBITDA and net loss included several items that are non-recurring in nature. Specifically, we recorded $4 million of professional fees related to the conversion of the general partner interest to common units that Mark will discuss a little later.

In addition, the fourth-quarter results included a $4.4 million non-cash pension settlement accounting charge resulting from an increased level of lump sum benefit payments related to the significant reduction in headcount from our various restructuring activities, as well as $1.6 million of restructuring expenses and $1.2 million of inventory write-offs included within cost of products sold, mostly related to the restructuring of our HVAC service business. EBITDA for the fourth quarter fiscal of 2006 was reduced by $11.2 million as a result of these non-recurring items.

In the prior-year fourth quarter, we recorded a $2.1 million restructuring charge to reflect severance and other expenses associated with the reorganization of our field management. In addition, the fourth quarter of fiscal 2005 included a $700,000 write-down of goodwill, as well as a $800,000 write-down of intangible assets associated with the Agway HVAC business, and a fixed asset write-down of $400,000, both recorded within depreciation and amortization expense. These non-recurring items in the fourth quarter of fiscal 2005 resulted in a reduction in EBITDA of $2.8 million.

On a normalized basis, excluding the non-recurring items from both periods, our EBITDA for the fourth quarter of 2006 totaled $1.4 million compared to a loss of $10.5 million for the prior-year quarter. That is an improvement of $11.9 million year-over-year.

Retail sales of propane during the quarter totaled 75.5 million gallons compared to 77.1 million gallons a year ago. Sales of fuel oil and other refined fuels amounted to 20.5 million gallons for the quarter compared to 37.3 million gallons in the prior-year quarter. Sales volumes for the quarter as compared to the prior year were impacted primarily by our emphasis during 2006 on eliminating certain low-margin business, including exiting the low-sulfur diesel markets and the retail gasoline business.

Revenues for the fourth quarter totaled $279.2 million compared to $281.6 million reported for the fourth quarter fiscal 2005. This modest decrease resulted primarily from reduced sales volumes, particularly in our refined fuel segment, attributable to the elimination of marginally profitable business, as well as lower service revenues resulting from our decision to restructure our HVAC service business, substantially offset by the impact of higher commodity prices on our selling prices.

Propane prices for the quarter ending September averaged $1.105 per gallon basis Mont Belvieu versus $0.972 per gallon for the same quarter a year ago. That is a 13.5% increase in base product cost year-over-year. Propane is currently trading at around $0.95 per gallon basis Mont Belvieu.

Heating oil prices for the quarter ending September averaged $1.928 per gallon, a 5% increase over the same quarter a year ago. Energy prices have dropped off dramatically since the beginning of August, in lockstep with general selloff of commodities. Food prices have fallen approximately $17 since August 1. That is about a 22% decline.

Total gross margin of $97.2 million for the quarter was $6.7 million higher than in the prior year's fourth quarter, due principally to improved gross margin in both the propane and refined fuel businesses, which offset the impact of lower sales volumes, reflecting the elimination of less profitable business.

Combined operating and general and administrative expenses of $100.9 million were slightly favorable to the prior year despite the inclusion of an additional week of operations in the current-year quarter, as well as higher variable compensation in line with increased earnings and the incremental onetime professional fees of $4 million mentioned earlier.

Moving to the full fiscal year, again, to be consistent with our reporting for previous periods, I am excluding the impact of an unrealized gain of $14.5 million from our fiscal 2006 results attributable to FAS 133 accounting, which compares to an unrealized loss of $2.5 million in the prior year.

Including all non-recurring items, EBITDA for our full fiscal year totaled $150.9 million, compared to $109.6 million in fiscal 2005, an increase of 38%. Net income totaled $76.3 million, or $2.44 per common unit, for fiscal 2006, compared to a net loss of $5.6 million, or $0.18 per common unit, for fiscal year 2005.

As discussed, for the fourth quarter, fiscal 2006 full-year results were impacted by several non-recurring items, including the $4.4 million non-cash pension settlement charge, $5 million for professional fees related to the conversion of the general partner interests, and $6.1 million of restructuring charges resulting from our fuel realignment and $2 million of inventory write-offs included within the cost of products sold resulting from the restructuring of our HVAC service business.

In addition to the onetime debt refinancing cost of $36.2 million, fiscal 2005 results were impacted by two items of a non-recurring nature, most of which was reflected in the fourth quarter results, including restructuring charges of $2.8 million, primarily related to severance charges associated with our fuel 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. These non-recurring items had a $17.5 million unfavorable impact on fiscal 2006 EBITDA compared to a $3.4 million unfavorable impact on fiscal 2005 EBITDA.

On a normalized basis, again excluding all non-recurring items from both periods, EBITDA for fiscal 2006 totaled $168.4 million compared to $113 million for the prior year. That is an increase of $55.4 million, or 49%.

Capital spending during the quarter totaled $7.8 million, of which $4.1 million was deemed maintenance related. For the full fiscal year, capital spending totaled $23.1 million, which included $11.1 million of maintenance capital.

Our strong operating results, coupled with continued effective asset management, have positioned us to make yet another voluntary contribution to our pension plan to proactively address our underfunded pension liability. During the fourth quarter of fiscal 2006, we made a $10 million contribution to the plan, bringing our total voluntary contributions since July 2003 to $35.1 million. Despite this contribution to the pension plan, we still ended the fiscal year with a cash balance of about $61 million, with no outstanding borrowing under our bank revolving credit facility. Mark?

Thanks, Bob. As announced in our press release on October 18, Suburban declared a quarterly distribution of $0.6625 per common unit. This distribution, which equates to an annual distribution rate of $2.65 per unit, and reflects a $0.10 per unit annualized increase, was paid on November 14 for our fourth quarter ended September 30.

Having eliminated the adverse pricing risk that negatively impacted last year's fuel oil business, along with our continued driving of the other initiatives that Bob discussed earlier, we believe that we have returned to our historic trend of achieving regular distribution increases. Our strong cash flow enabled us to raise our distribution rate twice this year for a total of 8.2% during fiscal 2006, while still maintaining our very solid distribution coverage, which amounted to 1.46 times as of the end of September.

Last quarter, we announced that our Board of Supervisors had elected to acquire the general partner interest and incentive distribution rights owned by Suburban Energy Services Group, a majority of which was owned by the senior management of the Partnership. This transaction, which was approved by our unit holders at our triannual meeting on October 17, and closed on October 19, bodes well for the future of the Partnership for a variety of reasons.

First, with the elimination of the general partners' incentive distribution rights, substantially all cash flow growth will be available to our common unit holders. Going forward, the economic interest of the general partner formally held by senior management will be entirely in the form of common units, which is intended to even further align the interests of management with those of our common unit holders.

Additionally, by eliminating the incentive distribution rights, the transaction has simplified our capital structure and should lower our future cost of capital, leaving us in a better position to execute our strategy of achieving sustainable profitable growth and increased quarterly distributions.

Finally, demonstrating management's belief in the long-term viability of this partnership, both Mike Dunn and myself have agreed not to sell the units we received for a minimum of two years.

Looking forward, given our strong performance during fiscal 2006, we are confident that we are well-positioned to achieve continued earnings growth in fiscal 2006 and beyond. We are off to a good start in the first quarter and a return to more normal weather conditions as we enter the heating season will only enhance our prospects for the new year.

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

(OPERATOR INSTRUCTIONS) Yves Siegel.

Can you quantify what you think -- if you have any more upside in terms of expense savings for next year? And how do you think about the expense savings relative to normal sort of cost creep?

I think clearly we don't have a full-year benefit in this year, 2006. We will see that in 2007. You are talking several millions of dollars in terms of full-year impact incremental in 2007. Beyond that, I really -- I think you're going to have the offset of inflation on the one hand and just normal expense creep. I would say at least offset, if not more than offset, by the full year impact of the savings that we've achieved in 2006.

Do you have any other residual charges that might impact '07's results?

Nothing that we are aware of at this point. The restructuring is pretty much complete or at least accounted for, so no.

Last question. Given a normal winter, do you think -- I think I ask this question every quarter anyhow -- do you think the margins that you had this year, gross profit margins, are sustainable into '07?

Yes. Seriously, we think so, certainly within that ballpark. Absolutely.

Great. Thanks, guys.

(OPERATOR INSTRUCTIONS) At this time, we will turn the call back to the host line. Please go ahead.

All right. That wraps it up, Rod. If there's no further questions, we thank everyone for joining us this morning and look forward to speaking with you all next quarter. Thank you.

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