Suburban Propane Partners LP (SPH) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Suburban Propane second-quarter 2007 financial results conference call. For the conference today, all the participant lines are in a listen-only mode. However, there will be an opportunity for your questions, and instructions will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder, today's call is being recorded.

Ladies and gentlemen, this conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, relating to the Partnership's future business expectations and predictions and financial condition and results of operations. These forward-looking statements involve certain risks and uncertainties.

Important factors that could cause actual results to differ materially from those discussed in such forward-looking statements or cautionary statements include, among other things, the impact of weather conditions on the demand for propane; fluctuations in the unit costs of propane; the ability of the Partnership to compete with other suppliers of propane and other energy sources; the ability of the Partnership to retain customers; the impact of energy efficiency and technology advances on the demand for propane; the ability of management to continue to control expense; the impact of regulatory developments on the Partnership's business; the impact of legal proceedings on the Partnership's business; and the Partnership's ability to implement its expansion strategy to integrate acquired businesses successfully. All subsequent written and oral forward-looking statements attributable to the Partnership or persons acting on its behalf are expressly qualified in their entirety by such cautionary statements.

With that being said, I'd like to turn the conference now to Mr. Davin D'Ambrosio. Please go ahead, sir.

Thank you, John, and good morning everyone. Welcome to Suburban's second-quarter fiscal 2007 conference call. I'm Davin D'Ambrosio, Treasurer here at Suburban. Joining me this morning is Mark Alexander, our Chief Executive Officer; Mike Dunn, President; and Mark [Wienberg], Managing Director of Financial Planning and Analysis. Unfortunately, Michael Stivala, our current Controller and Chief Accounting Officer and incoming Chief Financial Officer, is unable to join us today due to a death in his family.

The purpose of today's call is to review our second-quarter fiscal 2007 financial results, along with our current outlook for the business. As usual, once we've concluded our prepared remarks, we will open the session to questions.

Before getting started, I would like to reemphasize what the operator has just explained about forward-looking statements. Additional information about factors 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 fiscal year ended September 30, 2006 and its Form 10-Q for period ended December 30, 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 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 website, suburbanpropane.com.

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

Thanks, Davin, and thank everybody for joining us this morning. As reflected this morning in our press release, we are very pleased to have reported another quarter of record earnings. Our successful results are principally attributable to the sustainable savings in our cost structure realized from our field and HVAC reorganization; also from continued operating efficiencies, our ongoing effort to improve our customer mix, as well as our ability to successfully maintain strong retail margins.

These solid results further strengthening our financial position and distribution coverage ratio. A little later, I will touch on our distribution philosophy and on our outlook for the remainder of the fiscal year, but at this point, however, I will turn it back to Davin to discuss the second-quarter results in more detail. Davin?

Thanks, Mark. As we discuss our financial results for the quarter, to be consistent with reporting from previous periods, I am excluding the impact of a $6.6 million unrealized non-cash loss from our current quarter results applicable to FAS 133 accounting, compared to a $600,000 loss in the prior-year quarter.

EBITDA for our second fiscal quarter ending March 31, 2007 totaled $129.7 million, compared to $104.5 million for the same quarter a year ago. That is an increase of 24.1%. Net income for the quarter totaled $112.4 million, or $3.44 per common unit, compared to $84.6 million, or $2.46 per common unit in the prior year, a 32.9% improvement.

As Mark mentioned, the continued improvement in earnings reflects the full-year effect of operating efficiencies, improved customer mix and cost savings from lower headcount and vehicle count from the prior-year field and HVAC reorganization, along with a return to more normal winter. Even though the most critical month of January was 14% warmer than normal, colder than normal temperatures throughout February and the early part of March resulted in heating degree days within our areas of operation that were 98% of normal for the quarter. This compares to 88% in the prior-year quarter.

Retail sales of propane during the quarter totaled 166.8 million gallons, which is relatively flat from a year ago. Sales of fuel oil and other refined fuels amounted to 44.0 million gallons for the quarter compared to 54.7 million gallons in the prior quarter. Lower volumes despite colder average temperatures were attributable to improved customer mix, particularly in the refined fuels segment, coupled with customer conservation from continued high energy prices.

Revenues for the second quarter decreased $34.8 million, or 5.9%, to $556.1 million. This was primarily due to lower volumes, particularly in the refined fuels segment, as well as a decreased emphasis on our HVAC activities. This decrease was offset somewhat by higher average selling prices from a higher concentration of residential volumes, as well as higher propane commodity prices.

On the commodity side for the quarter, the average posted price of propane increased 2.4% compared to the prior year's second quarter, and the price of fuel oil declined 5.1% compared to the prior year's second quarter. Spot propane is currently trading in the $1.12 to $1.14 range versus $1.02, $1.04 last year basis Mont Bellview. Spot heating oil is trading at $1.80 versus $1.95 last year.

Gross margin of $235.4 million for the quarter was $12.8 million, or 5.8% 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, particularly in the refined fuels segment, as well as lower gross margin contribution from our HVAC segment resulting from the reorganization.

Unit margin improvement in both propane and refined fuels also resulted from various favorable market conditions, particularly a volatile commodity price environment during the second part of the quarter, which contributed additional margin opportunities under certain supply arrangements and as a result of our hedging and risk management activities. The favorable market conditions presented in fiscal 2007 contributed approximately $8 million to the improvement of the earnings in the quarter. We can give no assurances that these favorable market conditions will be available in future periods.

Combined operating and G&A expenses of $104.5 million decreased $12.1 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. As reported in prior quarters, the most significant cost savings were achieved in the area of payroll and benefit-related expenses, which declined $6.1 million from last year as a result of overall reduction in headcount, as well as from a $3.1 million reduction in vehicle expenditures and $2.6 lower bad debt expense. Capital expense during the quarter totaled $5.3 million, of which $1.9 million was [being] maintenance related.

Turning to our balance sheet, our balance sheet remains solid as a result of our continued strong operating results. We continue to fund short-term working capital requirements through internally generated cash. We have not accessed our bank revolving credit facility during the first two quarters of fiscal 2007. In fact, we closed the second quarter with over $88 million of invested cash compared to a peak working capital borrowing of $84 million last winter.

Given our strong cash position, we do not anticipate using our working capital facility at all during the remaining part of the fiscal year. Additionally, as announced on April 26th, we plan to make a voluntary contribution of approximately $25 million to our defined benefit pension plan. We believe this contribution will substantially reduce, if not eliminate, future funding requirements. This contribution is scheduled to occur during the third quarter of fiscal 2007 from cash on hand. Mark?

Thanks, Davin. As announced in our press release on April 26th, Suburban has declared another increase in our quarterly distribution from $0.6875 to $0.70 per common unit. This distribution equates to $2.80 per common unit on an annualized basis, an increase of $0.05 per common unit, and is payable on May 15 to common unit holders of record on May 8. This increased distribution level represents a 14% increase in our quarterly distribution rate over the prior year.

On a trailing 12-month basis, our distribution coverage ratio remains solid. In fact, even using total CapEx -- that is not just maintenance CapEx, but total CapEx -- our trailing 12-month distribution coverage is 1.6 times. We believe our distribution coverage ratio is significantly better than our peer group, even when you adjust our current year-to-date results for some of the potentially nonsustainable margin opportunities we discussed earlier. That is as conservative a calculation ask you can make. This method truly puts our ability to further raise our distributions into perspective. To understand my point, you simply need to do the math.

I'm also delighted that our Board has approved what we anticipate will be a $25 million voluntary contribution to our pension plan. We are making this contribution from cash on hand.

To repeat a significant point that Davin made earlier, our net cash position -- our net cash position -- has improved by over $170 million over the past year. Coupled with our record results, these are remarkable accomplishments, and we're excited about the opportunities that lie ahead.

Looking forward to the balance of fiscal 2007, with the bulk of the heating season behind us and given our strong results for the first two quarters, we are very encouraged with the full-year outlook. The strength of our management team and balance sheet gives us the confidence that we have the foundation in place to successfully grow our business, both internally and externally, as opportunities present themselves.

Our employees continue to focus on the needs of our customers, as well as our unitholders. As always we appreciate your support and attention this morning, and would now like to open the call up for questions. John, if you could help us with that, please?

Certainly. (OPERATOR INSTRUCTIONS) Sharon Lui.

Good morning, guys. Can you just talk about -- since your coverage ratio is about 1.6 including total CapEx, what is your target? What do you think is an appropriate coverage ratio for the Partnership?

Well, it's a lot lower than 1.6. But we have been and will always be conservative when it comes to our distribution policy going forward. When you do the math, Sharon, let me try and help you with it. It is even more conservative than that.

We're starting with an EBITDA trailing 12-months of about 199. You can normalize us something even higher than that. But if you just start with a conservative 199, if you take total CapEx of around $25 million, interest of around 38 and taxes around 2, you end up with available cash for distribution of $133 million; that is 1.6 times our trailing 12 distribution.

What it does is it gives our Board the flexibility to consider -- and they do consider every quarter -- how to raise the distribution. What you have seen from us in the past has been slow, steady, regular increases in our distribution. It is a conservative approach. Frankly, we get criticized for being that conservative, but we just -- we have an awful lot of room to go, and will look at it quarterly. And our philosophy is to do regular, steady, predictable, defendable and sustainable distributions going forward.

Certainly, our Board would be comfortable if that 1.6 got a lot closer to 1.1, but we look at it every quarter. And even going to, say, a 1.1 times coverage ratio on total CapEx, that is still a lot more conservative than most of the other MLPs out there.

The point is that we have a lot of ammunition, both from the perspective of raising our distribution going forward and some dry powder, if you will, for that day when we find an acquisition that makes economic sense for our unitholders.

So we're in a great position. And you can see alone, just the contribution to the pension plan -- $25 million involuntary contribution to the pension plan, which fully funds that pension plan on an ABO basis. We're in an enviable position of having that cash to do that.

So it gives our Board a lot of flexibility. And again, don't want to get ahead of our Board. We look at every quarter, and the conversations are quite positive. And I appreciate the question, Sharon. Do you have anything else?

Just a follow-up. The [1 million 9] of EBITDA you quoted, that excludes the 8 million which was the favorable market conditions?

It is before the 133, FAS 133 adjustments.

Okay. So you are thinking maybe 200 million is a good base going forward?

What I'm saying, that is our trailing 12. That is all I'm saying about that, is that is our factual trailing 12, 199 normalized EBITDA. If you want to take some of the non-recurring things out of that, it would be even higher than that.

We have some -- Davin mentioned some -- wouldn't call them -- let's just say non-recurring, but we've had some margin opportunities in the first two quarters that we can't predict whether those opportunities will present themselves again. Certainly if they do, we will take advantage of them.

So we're not saying what a predictable base level of income is. And frankly, my point is no matter where you look at it, our coverage ratios are off the charts, and we still have tremendous flexibility to raise our distribution if our Board so chooses. So you could even cut that 199 lower; certainly you could make it higher. But you could move that around significantly and our coverage ratios are still very strong.

My final question, in terms of, I guess, the cost savings, do you anticipate any additional cost savings looking out through the balance of the year?

Sharon, it's Mark Wienberg. As we go forward, most, as we said, are behind us. There is some fine-tuning left to be done, but as we move forward, with inflationary pressures and stuff, I wouldn't expect to see anything significant going forward.

We will see a little bit in the third and fourth quarter.

A little bit of improvement as we continue the year, but nothing as dramatic as we've seen in the past year.

Any further questions?

No, that is all.

(OPERATOR INSTRUCTIONS) Ted Gardner.

Good morning, everybody. Just quick question. Would you guys mind just expounding a bit on the margin opportunities that you mentioned, that I guess that the supply agreements, just with the volatility, just a little bit more detail on that. And why or why not you might think that those opportunities would materialize again.

Let me just say something upfront, Ted, because then I will turn it over to Mike and Davin to answer that question. In the world we live in today, Sarbanes-Oxley -- I want to -- specifically referring to it; I think we all know that -- there is this push to -- certainly, if you had bad news, get it out there as quick as possible.

Well, that works both ways. Even if you have good news, they want you to get it out there. So that is what we are doing. We are sort of highlighting some favorable things that happened here -- for what it is worth. You guys want to -- Davin, Mike?

This is Mike Dunn. How are you?

Good.

I'm not going to get into a whole lot of detail because some of what we do is proprietary. However, the margin opportunity that we experienced that we consider to be somewhat extraordinary this year was a combination of supply contracts where in fact we were able to put on some refined fuels business at discounts that were historically lower than traditional. Okay? So when it came time for pricing them -- these contracts were put on the books a year ago for this past season. So when it came time to pricing them, we had ownership significantly lower than where the market was trading.

And we, through our normal hedging practices, were able to capture some additional income opportunities in the volatility of the marketplace. Just to remind everybody, the volatility for the quarter, for example, in propane -- and this is basis Bellview -- propane traded anywhere from $0.86 to $1.09. That is a $0.23 per gallon swing in three months. And heating oil, or refined fuels, traded between $1.55 and $1.86; that is $0.31.

Also keep in mind that we moved about 212 million gallons of stuff, if you will, and every penny is worth $2 million. So when you look at it in that perspective, $8 million isn't all that much, when you look at it on a cents-per-gallon opportunity basis. But that is principally where the additional income came from.

And you think of it is roughly $8 million for the quarter?

For the quarter, correct.

Okay, thanks.

Thank you, Ted.

That will conclude the Q&A session. I will turn it back to the presenters for any closing comments.

Great, John. We appreciate it. I want to emphasize a point on the pension plan contribution. Again, it's from -- we're using cash on the balance sheet; we're not increasing our debt load at all -- no need to do that, certainly, by a long shot.

There is another thing we're doing with our pension plan which gives us the confidence that, going forward, our cash requirements in this plan will be next to nothing in the long-term, or maybe for the rest of -- the remainder of the plan. And we are adjusting the investment philosophy of our assets.

We call it -- annuitizing is the term, where we're basically taking our assets into more of a conservative, fixed-income type investment strategy, which we anticipate will be mirror the requirements on the liability side.

So there is a two-pronged approach to this, which makes us very confident that going forward that the pension plan is fully funded on an ABO basis and we are in great shape throughout the runout of the plan. So I just wanted to emphasize that.

Again, we appreciate the support. We're excited about what this management team has accomplished, and particularly what our operating people in the field had done; they've done a remarkable job over the last 24 months, and excited about the future and our efforts to continue to push customer growth. So we really appreciate the support and look forward to speaking with you all in the following quarters ahead.

Thank you very much. And thanks, John, for helping us today. I appreciate it.

You are welcome. And ladies and gentlemen, this conference is available for replay. It starts today at 4 PM Eastern; will last until tomorrow, May 11th, at midnight. You may access the replay at any time by dialing 1-800-475-6701 and entering the access code 870358. That number again, 1-800-475-6701, and entering the access code 870358.

That does conclude your conference for today. Thank you for your participation. You may now disconnect.