Suburban Propane Partners LP (SPH) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Suburban Propane Third Quarter 2007 Results Conference Call.

At this time, all lines are in a listen-only mode. Later there will be a question-and-answer session and instructions will be given at that time.

(OPERATOR INSTRUCTIONS)

At this time, then, I'd like to read some Safe Harbor language provided by the company.

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.

Cautionary statements include, among other things, the impact of weather conditions on the demand for propane, fluctuations in the unit cost 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 for 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 and 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.

At this time, then, I'd like to turn the conference over to Davin D'Ambrosio. Please go ahead, sir.

And thank you. And good morning, everyone. Welcome to Suburban's Third Quarter fiscal 2007 conference call. I'm Davin D'Ambrosio, Treasurer at Suburban.

With me this morning is Mike Dunn, our President, and Michael Stivala, Controller and Chief Accounting Officer and incoming Chief Financial Officer. The purpose of today's call is to review our third quarter fiscal 2007 financial results along with the current outlook for our 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 material 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 30th, 2006 and its Form 10-Q for the period ended March 31st, 2007. Copies of those 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 furnished to the SEC this morning. Form 8-K can be accessed through a link on our Web site at SuburbanPropane.com.

At this point, I'd like to get the call started by turning it over to Mike Dunn. Mike?

Thanks, Davin. And thank you, everyone for joining us.

The strong results reported this morning in our press release reflect the benefits of streamlining our cost structure and driving efficiencies. The continued improvement in our cash flow has left us in the strongest financial position since our IPO in 1996. Furthermore, our distribution coverage ratio remains one of the highest among the entire MLP sector.

A little later, I'll comment on our increased quarterly distribution. At this point, however, I'll turn it over to Mike Stivala to discuss our third quarter results in more detail.

Thanks, Mike. And good morning, everyone.

As we discuss our financial results for the quarter, to be consistent with our reporting for a previous period, I'm excluding the impact of a $200,000 unrealized non-cash loss from our current quarter results applicable to FAS-133 accounting, compared to a $1 million gain in the prior year quarter.

EBITDA for our third fiscal quarter ending June 30th totaled $15.5 million, compared to $6.1 million for the same quarter a year ago, an increase of 154%. Our seasonal net loss for the quarter totaled $900,000, or $0.03 per common unit, compared to $11.5 million, or $0.38 per common unit, in the prior year, a 92% improvement.

As Mike mentioned, these improved results reflect the continued operational efficiencies and cost savings achieved through our efforts over the past two years to streamline our operating footprint, reduce costs and focus on our core operating segments.

Retail propane gallons sold in the third quarter of fiscal 2007 decreased 8.7 million gallons, or 9.8%, to 80 million gallons, compared to 88.7 million gallons in the prior year quarter. Sales of fuel oil and refined fuels decreased 7.5 million gallons, or 28%, to 19.1 million gallons during the third quarter of fiscal 2007, compared to 26.6 million gallons in the prior year quarter. Lower volumes in both segments were attributable to ongoing customer conservation in the high energy price environment as well as the Partnership's efforts to improve its customer mix by exiting lower margin business.

In the propane segment, lower commercial and industrial volumes accounted for 58% of the volume decline, while in the refined fuel segment lower gasoline and diesel activities accounted for 67% of the volume decline.

On the commodity side for the quarter, average posted prices of propane increased 7.7% compared to the prior year, and the price of fuel oil declined 3.4% compared to the prior year third quarter. Lower volumes in both propane and refined fuels were offset to an extent by higher average margins from an improved customer mix, better margin management at the field level and a general marketplace trend toward increased prices.

Spot propane is currently trading around $1.17 basis Mt. Bellevue, and spot heating oil is trading at about $1.95. Total gross margins decreased $5.7 million, or 5.1%, to $105.3 million for the three months ended June 30, 2007, compared to $111 million in the prior year quarter, primarily as a result of lower propane and refined fuels volumes described above, as well as from decreased HVAC activities resulting from the reorganization of that segment which began at the end of fiscal 2006.

Combined operating and G&A expenses of $90 million decreased $12 million, or 11.8%, compared to the prior year quarter of $102 million. The most significant cost savings were achieved in payroll and benefit-related expenses which declined $5 million, as well as from a $1.5 million reduction in vehicle expenditures, $9.9 million lower bad debt expense, and savings and other costs to operate the Partnership's customer service centers. Capital spending during the quarter totaled $6.5 million, of which $2.8 million was deemed maintenance-related.

Turning to our balance sheet, with our increased earnings and operating cash flow through the first nine months of fiscal 2007, we ended the quarter with nearly $107 million in cash on hand, even after making a voluntary contribution of $20 million to fully fund the estimated accumulated benefit obligation under our pension plan during the quarter.

Our short-term working capital requirements continue to be funded through internally generated cash, as we have not accessed our bank revolving credit facility since April 2006.

Mike?

As announced in our press release on July 26, Suburban has declared another increase in our quarterly distribution, from $0.70 a quarter to $0.7125 per common unit payable on August the 14th to common unit holders of record on August the 7th. This is the fifth consecutive quarter in which we have increased the annual distribution rate by at least $0.05 per common unit.

This increase represents a 12% increase in our quarterly distribution rate over the prior year third quarter. Our distribution coverage ratio is now 1.83 times after considering maintenance CapEx. And with the strength of our balance sheet and success we've had in driving efficiencies, we are well positioned to take advantage of growth opportunities as they may arise.

As a result of what we've learned from our more streamlined and efficient operating structure, we are more excited than ever about what we can achieve should the right acquisition opportunity present itself. In the meantime, we will continue to focus on providing unparalleled service to our customers, driving further operating efficiencies, and continuing to deliver increasing value to our unit holders.

To that end, as discussed in our press release this morning, on July 31, our board of supervisors established a goal of continuing to increase distributions for the foreseeable future in line with our operating performance, with a target distribution coverage ratio of 1.2 times after considering maintenance capital expenditures.

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

Kent?

Great. Thank you.

(OPERATOR INSTRUCTIONS)

And our first question this morning comes from the line of Darren Horowitz with Raymond James. Please go ahead.

Yes, good morning, guys. My first question on the propane side is just looking at the volumes, you know, it looked like volumes were down, as you mentioned, pretty good on a year-over-year basis.

And I was curious, based on what you see right now, and given the seasonality to the business -- I would imagine that you probably still expect to see volume slip a little bit to the September quarter before rebounding sharply into December. I'm just curious as to the magnitude that you think September could be down over and above what you saw the decrease in June.

Our volumes, Darren, will continue to slip a little bit as we continue to cull through our agriculture business. As long as prices are high you're still going to experience conservation. And I think an inherent deficiency in volumes with respect to the propane sector, of course, is the ongoing improvement of the appliances that use propane, okay, and the houses -- you know, things in general are becoming more efficient.

So there is a slight decline that you're going to expect, particularly in a high-priced environment. But we would expect that our volume declines will have subsided somewhat, you know, as we've gone full circle with respect to our drive to efficiencies.

Okay. That's helpful. Now, can you -- when you look at the fuel and refined oils, also a similar question on volumes. It looked like the volumes this quarter were almost in line with what you guys had reported last year in the September quarter, which is seasonally your low point.

Kind of extrapolating that thesis about volumes over to the fuel and refined oil side, do you also expect it to slip a little bit more into the September quarter as it seasonally does, or is that kind of 19 million gallons kind of a floor threshold?

No, it will slip a little bit more. I mean, we continue, again, to cull through the -- when you look at the refined fuels category, we break it down into two parts, power fuels and heating oil.

As far as the heating oil business is concerned, for the most part that's a will-call business, and with prices where they are, people are waiting till the last minute to give you a call. So, the volumes there are somewhat unpredictable, at least at this stage. However, on the power fuels side, we're still making a deliberate effort to cleanse ourselves of low margin-type business.

Okay. I appreciate the insight there. And then just one final question.

On the outlook, you mentioned that you're well positioned to take advantage of growth activities as any opportunity might arise. Certainly, looking at your balance sheet, that speaks to that point. Just hoping for a little bit of color on what you see out there and across your different business lines, where you think there could be something in the near term that might fit the best economically.

I think it's difficult to put anything in terms of a time line, okay? But with respect to what we've learned over the course of the last two years with our operating platform, obviously a like-kind acquisition would be our primary target at this stage.

I think with respect to multiples on the midstream side and without the obvious growth prospects around what may be available, it's difficult to get excited about, you know, the realities of that kind of an acquisition, at least at this stage.

So more or less just keep the powder dry until something economically makes sense.

Yes, and you know what? And it's going to happen. And yes, that is exactly what our thought process is today.

I appreciate it. Thanks, guys.

You're welcome.

Thanks. And we have a question now from the line of Yves Siegel with Wachovia Securities. Please go ahead.

Good morning, everybody.

Good morning, Yves.

Good morning.

Good morning.

Just a couple of quick ones, I think. Number one, just thinking on the acquisition topic, do you see more opportunities today at better valuations, perhaps, on the propane and heating oil side than you have in a while?

Not really. I mean, we're looking at a couple of mid-size regional-type acquisitions, and the expectation is there, obviously. People compare them to the public market environment. So multiples are at the high end still, okay?

So, given what you've learned on your ability to cut costs, will that change the way you bid on these properties, i.e., something that nominally may look like it's going for eight times EBITDA but because you think you can come in and significantly reduce costs that an acquisition like that becomes attractive to you?

Yes, particularly if it was an opportunity with a sizeable organization.

Okay. So what does that mean in -- is that like north of $100 million? Is that sizeable, or --

Ideally, in these, we'd like to -- we'd like to look at the top five.

Okay. Then moving on to cost cutting, how much more is there to do? I mean, it's phenomenal, what you've done to date.

I think, Yves -- this is Mike. You know, this -- it's always an ongoing process to -- it's not a -- it's not a project that we went through. It's an ongoing process to continually look at our business. And I think what we've done is really gotten our management team, both here and at the field, focused on becoming much more efficient in everything that we do. In terms of specific cost-cutting opportunities from here, we still see a little opportunity.

We're still going to expect to see some benefits in the fourth quarter due to some of the HVAC reorganization that started late last year and some continuance of our -- of looking at our service model that carried into 2007 in terms of looking at trucks and where we want to actually play in the HVAC arena. So, I would expect to see a little bit more, but probably starting to trend down from what we've seen in the first three quarters of this year.

Okay. Is that like $5 million magnitude, or -- bigger than a bread basket?

Yes, but smaller than a house.

Trending down from the current 10% that we just presented for the quarter.

Okay. Then I'll ask two more quick ones and then pass it on. Where are you guys in terms of funding for the pension plan?

We've put -- as we said at our last conference call, our target was to put in the necessary money by the end of the third quarter to fully fund it, and we did that.

We put in $20 million into the plan in June, and what that does is -- we actually estimated what the accumulated benefit obligation was and we were about $17 million short of what our assets were, so we put $20 million in to give ourselves a little bit of cushion and be a little bit overfunded for a period of time here.

The strategy relative to the pension is really two-prong, is to get the assets up to the level of the liability, and now what we're doing is looking at the mix of those assets and shifting that mix to a portfolio that is expected to match the movement of that liability over the long term.

And so, we're actually executing that second prong of that strategy now so that we can, over the long term, hopefully maintain that fully funded status. And what we expect is certainly reduce, if not eliminate, future funding requirements.

What kind of returns are you assuming in the calculations?

Well, our current -- our current long-term rate of return has been 8%, and as we shift the asset mix -- we're not going to go fully to a bond mix, but we are going to have a heavily -- heavily invested in bonds, so we'll probably be closer to the 5.5%, 6% range on our long-term assumption, which is what we expect the liability to grow at as well.

And then the last question, I promise, is -- I think Mike or Mark used the term unparalleled customer service. How are you measuring that now?

Yves, it's Mike Dunn. We do a lot of statistical studies on the way our people handle customers. We actually call customers after they -- if we lose a customer for whatever the reason, whether they move, whether we did something and caused them to leave with regard to a service issue, and so forth and so on.

And one of the things that we've learned in consolidating some of our operating -- keep in mind, we're running out of the same markets that we were running out of five years ago but with much larger centers, so we're able to focus more attention on our customers.

So instead of having smaller units, for example, where you have one CSR who has difficulty handling three calls at a time, we may have some centers that have four or five or six CSRs, so we're able to focus our attention on the customer's needs. We're able to focus our attention on our receivables, scheduling service, our routing. It's a whole basket of things that we've been able to achieve by consolidating the operating management, if you will, on a more centralized but yet decentralized basis.

I don't know if I'm making any sense to you. I mean, it's not an easy question to just answer, other than to say that we, in fact, do measure on a quarterly basis. We review what we learned from our mystery shopping surveys that are done by an outside service, as well as follow-up calls to customers that have either complained to us or have left us.

Well, the intent of the question was really more to say that the decline in -- that the decline in propane sales is something that you're comfortable with, and it's not because you're losing business that you don't want to lose.

Oh, no. You're absolutely right. I mean, it's -- we have -- I mean, another way to answer your question, too, is we removed a lot of the distractions from our people. In other words, when you have a workforce that you're trying to keep busy 12 months out of the year in a seasonal business, you're kidding yourself in a lot of cases.

And we had a reasonably large -- particularly with the Agway piece, we had a reasonably large service workforce, if you will, doing a lot of things that we weren't able to do 12 months out of the year. So, in some cases, we got ourselves in trouble with customers, okay, because we weren't able to follow through on some of the things or some of the promises that we led them to believe when it would get busy during the winter period.

So we've drastically reduced a lot of the activities that were not in direct support of our core business, which is our propane and heating oil business. So I mean -- and that's where you're seeing a lot of the savings for at least this fiscal year. But by no stretch of the imagination have we reduced that service force to put our heating oil business in any jeopardy, okay?

We can still -- we will still continue to provide the service needed to support that business with respect to 24-hour, seven-day emergency service, installation when needed, and so forth and so on. So no, we're not losing that. As a matter of fact, Yves, our customer count year-over-year is reasonably fat.

What we are learning is that if you look at what a customer used three years ago versus this past winter on a heating degree days basis, you're seeing a significant shrink in volume in different parts of the country, okay? And unfortunately, when you -- when you look at some of our competitors' releases, they don't tend to compare volumes using same-store sales, so it's difficult to see what kind of trend they're in, okay?

But I think that would be obviously an interesting statistic to follow, to see what kind of volume is kept on some of these acquisitions. But in any event, when you look at the conservation because of the high price, when you look at better use, more efficient users of the product, your volumes are flat at best, at least at this particular point in time. And I think that carries through to the natural gas sector as well.

Thanks, Mike.

You're welcome.

Thanks.

(OPERATOR INSTRUCTIONS)

And we're going to go to a question, then, from the line of Eric Kalamaras. Please go ahead.

Hi, guys. Good morning. If I could follow just on Yves' question a few minutes ago, could we get a little more granularity in terms of the acquisitions or potentials? Would you be more interested in being the acquirer or potentially doing a merger?

Eric, it would depend. I mean, we obviously would like to be the acquirer. We obviously would like to be running whatever that business looks like.

And in that context, you've done a good job about creating some organizational efficiencies and lowering the cost structures and created a nice equity currency. But your balance sheet's also in a pretty good spot as well.

How do you think about financing? Regardless of whatever you do, how do you feel about the balance sheet at this point?

Oh, I think we would continue to maintain the -- I mean, obviously, we would go back to our 50-50, which is what we've always -- what we got the company to a few years back, and that's what we would maintain it at.

And so that would imply that you -- a 50-50 at 2.5 times leverage, you would -- it seems like you might be under-leveraged at this point.

Oh, we are. There's no doubt about it. There's no doubt about it. But that's the opportunity. In other words, if we're able to -- we'd like to dream and think that perhaps we could be a consolidator. And you're not -- we don't believe that buying these local -- I mean, if we -- if it makes sense for a piece of property or a clean blend or whatever have you, we'll do one of the smaller acquisitions.

But we're not going to spend a whole lot of time looking to buy a 10,000-customer business, quite frankly. It doesn't do anything to us. It doesn't do anything for us. And I think with what we've gone through with respect to our operating platform I think, quite frankly, we're poised to do a sizeable acquisition should the opportunity present itself. And that's really what we'd like to do, and that's really what we've set the stage for.

Thank you very much. I appreciate the comments, Mike. Thank you.

You're welcome, Eric.

Thanks, Eric.

Thanks.

(OPERATOR INSTRUCTIONS)

And, gentlemen, at this time I'm showing no further questions in queue.

Well, Kent, thank you, and thank --

Thank you, everyone, for your continued support.

Great, and thank you.

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