Suburban Propane Partners LP (SPH) 2007 Q1 法說會逐字稿

Thank you for standing by and welcome to the Suburban Propane first-quarter 2007 financial results conference call. At this time all participants are in a listen-only mode. Later there will be an opportunity for questions and answers, and instructions will be given at that time. (OPERATOR INSTRUCTIONS). As a reminder, today's conference is being recorded. I would now like to turn the conference over to our host, Mr. Bob Plante. Please go ahead, sir.

Good morning, everyone. Welcome to Suburban's first-quarter of fiscal 2007 conference call. I'm Bob Plante, Vice President and Chief Financial Officer at Suburban. With me this morning is Mark Alexander, our Chief Executive Officer. Joining us is Mike Dunn, our President; 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 first-quarter fiscal 2007 financial results along with our current outlook for the business. And 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 30, 2006. Copies of these filings can be obtained by contacting the partnership or the SEC.

Certain non-GAAP measures will be discussed on the call, and we provide a description of those measures as well as a discussion of why we believe the information to be useful, in our Form 8-K that was 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 would like to get started by turning the call over to Mark Alexander. Mark?

Good morning, everyone. Let me begin by saying that we're obviously very pleased with our continued strong performance reflected in our first-quarter results announced in our press release this morning, which were achieved despite significantly warmer than normal weather throughout most of our operating areas. Heating degree days were 87% of normal for the quarter compared to 95% of normal for the prior-year quarter.

Our results clearly demonstrate that our proactive field realignment completed in 2006 and our restructuring of our HVAC service business, started in 2006, as well as our ability to successfully maintain our strong retail margins, has us well-positioned to continue to deliver solid earnings growth along with strong distribution coverage in spite of record warm weather.

A little later I will discuss some thoughts on our increased quarterly distribution as well as our outlook for the remainder of the fiscal year. However, at this point, I will turn it back over to Bob to discuss our first-quarter results in more detail.

As we discuss our financial results for the quarter, to be consistent with our reporting for previous periods I'm excluding the impact of a $1 million unrealized non-cash loss from our current quarter results, applicable to FAS 133 accounting. That compares to a $7 million gain in the prior-year quarter.

EBITDA for our first fiscal quarter ending December 30th, 2006, totaled $72.8 million compared to $50.1 million for the same quarter a year ago, an increase of 45%. Net income for the quarter totaled $55.6 million or $1.73 per common unit compared with $31.2 million or $0.95 per common unit in the prior year. This improvement in earnings was achieved despite significantly warmer than normal weather conditions throughout much of our service area. Degree days within our areas of operation, as Mark said, were 87% of normal for the quarter compared to 95% in the prior-year quarter. In addition, the month of December was 19% warmer than normal compared to 6% colder than normal last December.

Retail sales of propane during the quarter totaled 121.8 million gallons, a decrease of 12 million gallons from a year ago, directly reflecting the considerably warmer than normal weather conditions. Sales of fuel oil and other refined fuels amounted to 28.5 million gallons for the quarter compared to 43.8 million gallons in the prior-year quarter. The majority of this decline resulted from the unusually warm weather patterns in the northeast as well as our efforts during fiscal 2006 to exit certain lower-margin diesel and gasoline businesses which accounted for 46% of the volume shortfall. Revenues for the first quarter decreased $88.5 million or 18% to $399 million. This decrease is attributable to the impact of lower weather-related sales volumes and the elimination of lower-margin diesel and gasoline volumes, partially offset by higher average selling prices in both the propane and refined fuel segments.

In addition, revenues in our HVAC segment decreased $12.7 million as compared to the prior-year quarter, reflecting the 2006 reorganization of our HVAC service business to reduce the level of HVA installation activities while focusing more on the more profitable service offerings in support of our core commodity businesses.

On the commodities side, with the recent decline in crude oil prices from peak levels during the summer of 2006 as well as a reduced demand reflecting warmer weather conditions, propane and fuel oil prices began a steady decline in September of 2006, which continued throughout the first quarter of fiscal 2007.

As compared to the prior-year quarter, average posted prices of propane and fuel oil during the first quarter of fiscal 2007 declined 10% and 5%, respectively. Gross margin of $169.1 million for the quarter was $4.5 million or 3% higher than in the prior-year quarter, due principally to improved unit margins in both our propane and refined fuels businesses, partially offset by lower sales volumes as well as lower gross margin contribution from our HVAC segment, reflecting our elimination of certain HVAC installation activities.

Combined operating and general and administrative expenses of $97 million decreased $17.5 million from a year ago, reflecting continued efficiencies achieved and cost savings realized from our field realignment, which began during the fourth quarter of fiscal 2005 and continued throughout fiscal 2006, along with our more recent reorganization of our HVAC segment.

Consistent with results of the past several quarters, the most significant cost savings were achieved in the area of payroll and benefit-related expenses, which declined $7.8 million from the overall reduction in headcount as well as from lower vehicle expenditures resulting from the elimination of nearly 750 vehicles and lower fees for professional services.

General and administrative expenses were reduced by $2 million during the first quarter of fiscal '07 due to the favorable settlement of a prior lawsuit in which the partnership recovered its legal fees associated with the defense of the matter following the 1999 acquisition of certain propane assets in the Carolinas.

Capital spending during the quarter totaled $8.2 million, of which $2.1 million was deemed maintenance related.

Turning to our balance sheet, as a result of our continued strong operating results and the resulting cash flow, it has not been necessary to access our bank revolving credit facility during the first quarter to fund any short-term working capital requirements. In fact, we closed the first quarter with over $26 million from invested cash compared to a peak working capital borrowing of $84 million last winter.

Given our strong cash balance, which has grown even further since the end of the first quarter, it's unlikely that we will have to use our working capital facility at all during this winter season. Mark?

As announced in our press release on January 25th, Suburban has declared the 12th increase in our quarterly distribution from $0.6625, to $0.6875 per common unit. This distribution equates to $2.75 per common unit on an annualized basis, an increase of $0.10 per common unit, and is payable on February 13th to common unit-holders of record on February 6, 2007. This new higher distribution level represents a 12% increase in our quarterly distribution rate over the prior year and demonstrates our confidence in our ability to not only sustain an improved base level of earnings but to deliver continued growth in distributions, especially considering our strong distribution coverage of almost 1.7 times as of December.

Frankly, our earnings speak for themselves. We're not pushing margins, we are optimizing margin opportunities. We are driving efficiencies which continue to result in favorable variances in the expenses to both prior year and budget.

Looking forward to the balance of fiscal 2007, throughout the first half of January we have experienced a continuation of considerably warmer than normal weather in many of our operating areas, but winter seems to have finally arrived in the Northeast during the second half of January. Degree days for the first five weeks of the second quarter were 91% of normal throughout our operating areas, bringing the fiscal year-to-date total to only 88% of normal. However, given our strong first-quarter performance coupled with the apparent recent return to more normal weather, we're positioned well to achieve our targeted results for the remainder of the fiscal year. In the meantime, regardless of weather, we continue to concentrate on those things that are within our control.

As I alluded to earlier, our field personnel remain focused on driving our initiatives to sustain and improve upon the operational efficiencies achieved to date. As always, we appreciate your attention this morning and we'd now like to open the call up for questions.

(OPERATOR INSTRUCTIONS). [Sharon Liu].

Great quarter, guys. I was just looking at -- I guess a year ago it looks like you only eliminated about half of the field positions and half of the vehicles. I'm looking at, I guess, the second quarter and just wondering if you guys can realize an additional maybe $10 million in OpEx reductions?

Actually, if you look at our first-quarter results, you're seeing there really for the first time what is tantamount to the full benefit of what we have accomplished during 2006 in connection with the field realignment as well as the restructuring of our HVAC business. So going forward, yes, there's additional favorability. But I would not expect to see the same level of favorability in the remaining nine months as you see in the first quarter.

(OPERATOR INSTRUCTIONS). Schnear Grushani.

I just wanted to go over some of the expense items again, just, I guess, a follow-up to Sharon's question. You had mentioned that there was a $7.8 million payroll deduction. Now, is that just on a comp compared to last year, and that's something that we won't see going forward? Or is it something that we'll still see some of the benefits into the second quarter?

That is kind of similar to Sharon's question, which we are quantifying. Yes, the $7.8 million is the first quarter year-over-year favorability. But as I say, we started to achieve these efficiencies throughout 2006, so the further you get into the year, the year-over-year comparison is going to shrink. So you should expect to see additional favorability for the remaining nine months of the fiscal year, but it will be nowhere near the level that we have achieved year over year in the first quarter.

And the key to all this is that it's permanent.

Yes, exactly.

Or returning.

I guess one of the things that I find curious is that I typically expect operating expenses to be higher in Q1 and Q2 and a bit lower in Q3 and Q4. Yet the first-quarter number is pretty close to what the fourth-quarter number was. Should I expect that, I guess from a seasonality perspective, that operating expenses in the fourth quarter will actually be lower than what it is -- than what you have reported currently for this quarter?

Let me see if I understand your question. You're talking about Q4 of '07 being lower than the first quarter of '07?

Exactly. I guess the reason why I'm asking the question is that we were looking at $82.5 million for the fourth quarter of '06, and you come in around $83 million for the first quarter of '07. Usually, you expect a modest pickup, at least. So the fact that they are pretty close is kind of surprising, I guess, is the word I would use. Should I expect that the fourth quarter of '07 should be materially below the first quarter of '07 number, just due to the typical seasonality of operating expenses?

You should expect to see a favorable variance year over year for the fourth quarter. Now, if you're using the word material or materiality, that's a -- I don't know how to interpret that word. But I would say you should see favorability year over year for the fourth quarter. It won't be anywhere near as dramatic as what you have seen in the first quarter.

The second question is just with the reduction in headcount and so forth and reduction with the number of trucks, how much capacity do you have in case you see a 10% pickup in volumes or a 15% pickup in volumes that you would be able to achieve that type of expansion in your business if it came on pretty quickly and so forth?

I guess the answer to that is that we have looked at December of '05, which was 106% of weather across our Company, and we have used that as a benchmark to say, what is our capacity. So we have built into our operating model upside capacity if and when weather comes. We're seeing that in a lot part of the country right now, and quite frankly we're performing very well.

If I can switch over to margins for a second --

Let me add to Denny's point again and I'll reiterate the comment I made. These are permanent reductions. They are recurring benefits, and they are not hurting our business. As a matter of fact, they are improving the quality of our service to our customer base.

I completely understand, Mark. It was more of that you eliminated a lot of positions and so forth, and part of is due to the fact that we have seen a huge reduction in volumes over the past couple of years because of weather that kind of seems to be more permanent in its decline and so forth. But if we got a return to where it was, basically my question was is that, do you have the staffing available to handle a 10% increase in volumes?

The answer is obviously yes. We're nowhere near capacity, nowhere near capacity. With the quality of the operating people we have in the field, they can gear right up for much colder weather.

Let's talk about volumes for a second now that you alluded to that, because our volume drop quarter over quarter here is single digits, directly related to -- directly related to weather. So those global warming people out there -- David Letterman said that they canceled that conference last week when we're looking at February that's going to be the coldest on record for the last 35 years.

I joke, but I'm also serious. Our volume drops historically have been primarily at our decision-making. We're exiting low margin business, and frankly there's businesses that we're losing money on. So we're getting out of that; that's just good business sense. That's basic 101 good business.

We have seen on a same-store basis a single-digit drop in volume which is directly related to weather. Actually, our customer counts are growing. So it's directly related to weather. So we're not concerned about that. I don't know what you might have been alluding to, but the volume drop is absolutely in line with what we expected.

Basically what I was alluding to is that if we saw volumes similar to what we saw three years ago, just given that you have reduced head count, would you be able to meet it? Judging by your answer, it is yes.

The answer is yes. Technical answer is yes, yes.

The other thing to realize is that we didn't -- this wasn't a knee-jerk reaction. This was a reorganization of our business, and we took a look at a month, December of last year, that was 106% of normal, and we benchmarked where we could drive efficiencies to that volume level. We can even add capacity over top of that. So it wasn't a knee-jerk reaction; it was a restructuring, reorganizing of our operating footprint.

I guess you could say that this dramatic improvement, especially with record warm weather, is hard to believe. Well, we're telling you it's there. It's a fact. It's five quarters in a row, so we expect it to continue.

That definitely takes care of my question there. If I could just ask one last question on margins. In the second, third and fourth quarter last year we saw a significant margin improvement on the year-over-year basis, and it was an expansion even relative to the first quarter. We have seen -- I'm gathering, without the Q being released, I'm gathering there has been a bit of a margin expansion here as well, too. Is that something that's going to carry forward into the second, third and fourth quarter? Or are we just going to sort of see margin levels similar to last year?

Let me talk a little bit about what's happening.

I want to go back to the last question and keep (multiple speakers) --

Let me talk a little bit about what happened to margins, and I think it will kind of answer the question, that a good bit of what you're seeing is certainly sustainable and permanent. Because a lot of what you're seeing in the way of margin improvement year over year relates to the elimination of a lot of lower-margin business that Mark referred to, when we were talking about volumes.

We existed a lot of commercial propane business that we just weren't making any money on. We also, on the refined fuel side, eliminated an awful lot. When you see the volumes year over year, you can see the impact of that, exiting the low-margin gasoline and diesel businesses. So exiting those pieces of business has also had the effect of improving our overall average margins.

In addition, over the last two years we have had a substantial increase in our relative residential customer base. We have actually gone from about 79% of our customers being residential to about 84% over the last two years, which is a significant increase and can have a significant impact on average margins. Because, clearly, your residential customers on average are a higher-margin category than commercial and industrial.

So those are the kinds of things that have been contributing to our margin improvement, and there's no reason to think that that won't continue.

One other thing, going back to the last question. Sorry to beat that one to death, but when we made our announcement of a $0.10 dividend increase, we think that the reaction to that was woefully underestimated, just under-whelming, really. Our point that we're trying to make is our base level income has increased dramatically. You just do the math. Just I ask you, just do the math and you'll see the coverages, particularly with our base level of earnings and where we have come from in the last two years.

Do you have any other questions? Those are terrific questions. we appreciate that. You've given us an opportunity to toot our horns.

With that, I will turn it back over to you, sir.

No more questions? We appreciate everyone's support.

One other point I would like to make in closing is that usually with things that -- yield is a direct correlation of risk. So I wonder why the yield with respect to where our units trade is where it is. So I'll just leave that for room for thought.

Other than that, we appreciate everyone's support and following. We're excited -- delighted, frankly -- about this past quarter's results and very excited about what lies ahead. We appreciate everyone's support. Beverly, back to you.

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