Suburban Propane Partners LP (SPH) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Suburban Propane fourth quarter 2007 financial results conference call.

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 actuality 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 units 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 and to integrate acquired business 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.

Ladies and gentlemen, at this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session with instructions given at that time. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Davin D'Ambrosio. Please go ahead.

Thank you, Julie. Good morning, everyone. Welcome to Suburban's fourth quarter and fiscal 2007 year-end conference call.

I am Davin D'Ambrosio, Vice President and Treasurer at Suburban. Joining me this morning is Mark Alexander, our Chief Executive Officer, Mike Dunn, President, and Michael Stivala, Chief Financial Officer and Chief Accounting Officer.

The purpose of today's call is to review our fourth quarter and fiscal 2007 full-year financial results along with a 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 re-emphasize 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 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 the period ended June 30, 2007. Copies of these filings may be attained 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 our link on our Web site at suburbanpropane.com.

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

Thanks, thanks, Julie, and thanks, everybody, for joining us this morning.

We are extremely pleased to report our second consecutive year of record earnings. Through our efforts over the past two years to drive operating efficiencies and improve our customer mix, we continue to deliver increasing value to our unit holders and further strengthen our balance sheet.

These efforts resulted in year-over-year growth in EBITDA of more than 22% despite lower volumes. These record earnings drove our already healthy distribution coverage ratio to over 1.74 times and as a result our unit holders enjoyed an annualized $0.35 per unit distribution rate increase in fiscal 2007 to the current rate of $3 per unit. A growth rate of 13% compared to a year ago.

A little later I'll comment further on our increased quarterly distribution and re-emphasize our overall distribution philosophy, however, at this point I'll turn it over to Mike Stivala to discuss our fourth quarter and year-end results in more detail. Mike?

Thanks, Mark, and good morning, everyone.

Before getting into the details of our performance, let me mention that our results for fiscal 2007 include 52 weeks of operations versus the 53 weeks reported in fiscal 2006. Likewise, the fourth quarter of fiscal 2007 includes 13 weeks versus 14 weeks in the prior year.

Looking at our fourth quarter results, while seasonally a slow period, our results for the fourth quarter were within our range of expectations as we continue to experience improvements in our cost structure. Overall, volumes across all business segments were down primarily as a result of two expected causes, that is one week less of operations in fiscal 2007, and our improved customer mix.

Additionally, the lack of weather during September and customer conservation in this unprecedented pricing environment negatively impacted volumes. While volumes were down, the favorable trend in our expense base experienced throughout the first three quarters of fiscal 2007 continued into the fourth quarter as combined operating and G&A expenses were nearly 15% lower than the prior year quarter.

As we discuss our financial results for the quarter, to be consistent with our reporting for previous periods, I am excluding the impact of a $200,000 unrealized non-cash gain from our current quarter results applicable to FAS 133 accounting compared to a $7 million gain in the prior year quarter.

EBITDA for our fiscal 2007 fourth quarter was a loss of $12.6 million compared to a loss of $10 million for the same quarter a year ago. Our seasonal net loss for the quarter totaled $32.3 million, or $0.99 per common unit compared to $28 million, or $0.88 per common unit in the prior year.

EBITDA and net loss for the fourth quarter of fiscal 2007 included a non-cash pension settlement charge of $3.3 million, a gain of $700,000 from the sale of two customer service centers considered to be non-strategic, and a non-cash adjustment to the provision for income taxes in the amount of $3.8 million.

In the fourth quarter of fiscal 2006 we recorded a $4.4 million non-cash pension settlement charge, $4 million of incremental professional services fees associated with the exchange of our GP interests for common units that was consummated in October of 2006, as well as $1.6 million of restructuring charges and a $1.2 million inventory write-off included within cost of products sold related to the restructuring of our HVAC business.

Retail propane gallons sold in the fourth quarter of fiscal 2007 decreased 11.6 million gallons, or 15% to 63.9 million gallons compared to 75.5 million gallons in the prior year quarter. Sales of fuel oil and refined fuels decreased 7.6 million gallons, or 37% to 12.9 million gallons during the fourth quarter of fiscal 2007 compared to 20.5 million gallons in the prior year quarter.

Again, the decrease in retail gallons sold is primarily attributable to the impact of the additional week of operations in the prior year quarter as well as ongoing customer conservation in the high energy price environment and our exit of certain lower margin business in both segments. Specifically, in the refined fuel segment diesel and gasoline volumes accounted for 65% of the volume decline compared to the prior year as a result of our decision to exit the majority of those businesses.

On the commodity side for the quarter the average posted price of propane of $1.22 per gallon increased 11% compared to the prior year quarter. And the average posted price of fuel oil at $2.09 per gallon increased 8% compared with the prior year fourth quarter.

In line with the recent spike in crude oil prices during September 2007 and into our first quarter of fiscal 2008, average posted prices of both propane and fuel oil continued to rise well beyond historical highs. Today spot propane is trading at $1.57 to $1.60 range, base is [Mount Bellevue] and spot heating oil is trading in the range of $2.50 to $2.55 per gallon.

The current spike in crude and refined oil products started back in August of this year and since that time crude has rallied approximately $25, and propane and fuel oil prices are 29% and 25% higher respectively.

Combined operating and G&A expenses of $85.5 million decreased $14.9 million, or 14.8% compared to the prior year quarter of $100.4 million, due to continued operating efficiencies from our prior [year] reorganization efforts and the absence of an additional week of business activity in fiscal 2007. The most significant cost savings continues to be reflected within payroll and benefit related expenses which declined $6.7 million, as well as from $2.3 million reduction in vehicle expenditures and savings and other costs to operate our customer service centers.

Heading to our full-year results, reported EBITDA for our fiscal year 2007 totaled $197.8 million compared to $165.3 million for fiscal 2006, an increase of nearly 20%, or $32.5 million. Net income totaled $127.3 million, or $3.91 per common unit for fiscal 2007 compared to net income of $90.7 million, or $2.84 per common unit in the prior year.

EBITDA and net income as reported is inclusive of the impact of an unrealized non-cash loss of $7.6 million from our fiscal 2007 results attributable to FAS 133 accounting which compares to a $14.5 million unrealized gain in the prior year. In addition, results for both periods were impacted by several non-recurring items, the net effect of which had an unfavorable impact of $900,000 and $17.5 million on EBITDA for fiscal 2007 and 2006 respectively.

Fiscal 2007 full-year results included a non-cash pension settlement charge of $3.3 million, restructuring charges of $1.5 million, a $2 million gain from the recovery of past legal fees, and gains of $1.9 million from the sale and exchange of customer service centers considered to be non-strategic. Net income for fiscal 2007 was also negatively impacted by the non-cash adjustment of $3.8 million to the tax provision noted above.

Our fiscal 2006 results included a $6.1 million restructuring charge, $5 million of incremental professional services fees associated with the exchange of the general partner's interest for common units, a non-cash pension settlement charge of 4.4, and a charge of $2 million within cost of products sold to reduce the carrying value of service inventory.

On a normalized basis excluding the impact of FAS 133 accounting and all non-recurring items from both periods, EBITDA for fiscal 2007 totaled $206.3 million compared to 168.3 for the prior year. That's an increase of $38 million, or 22.6%.

Total gross margins of $581.7 million for fiscal 2007 was $9.1 million, or 1.5% below the prior year due primarily to lower volumes offset to an extent by higher unit margins from our improved customer mix and better margin management at the field level. Additionally, we experienced incremental margin opportunities from favorable market conditions during the first half of fiscal 2007 impacting our supply and risk management activities.

We attribute approximately $14.7 million of the fiscal 2007 margins to these favorable market conditions which may not be present in the future. The benefit of which was primarily recognized in our first fiscal quarter of 2007 with some residual favorable impact during the second quarter.

For the year operating and G&A expenses of $376 million were $56.4 million, or 13% below the prior year, despite a year-over-year increase of $7 million in variable compensation in line with our higher earnings. Again, this favorable trend in operating and G&A expenses is the direct result of our efforts to drive efficiencies.

We've been talking about our field realignment process for over two years now. Let me put this into perspective. Since the process began during the third quarter of fiscal 2005, we have eliminated approximately 1,000 positions and 1,000 vehicles from our operations which we believe has translated into a permanent reduction in our cost structure of approximately $50 million.

Capital spending during the quarter totaled $7 million of which $3.2 million was deemed maintenance related. For the full fiscal year capital spending totaled $26.7 million which included $10 million of maintenance related capital.

The completion of a second consecutive year of solid operating results has left us in the strongest financial position since our IPO in 1996. Our balance sheet remains sound, maintaining one of the lowest leveraged positions in the MLM sector.

From a cash flow perspective despite the sustained period of high commodity prices, we continue to fund working capital requirements from cash on hand and have not borrowed under our working capital facility since April of 2006.

We ended fiscal 2007 with more than $96 million in cash on hand, even after making a voluntary contribution of $25 million to fully fund our pension plan bringing the funded status of that plan to 103% on an ABO basis. Additionally, with the sale of our Tirzah underground propane storage cavern on October 2, 2007, our cash position increased by another $54 million subsequent to fiscal year-end.

As we look forward to fiscal 2008, we continue to experience a period of unprecedented high commodity prices, which, coupled with the lack of weather for October has negatively affected our volumes. However, it's too early to conclude anything as we are heading into our more significant months from on operating standpoint.

Mark?

Thanks, Mike. Well done.

Because of our enviable financial position, flexible cost structure and strong coverage ratios, we are poised to deal with what has started out to be a challenging operating environment in fiscal 2008. As discussed on our last quarterly conference call, 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 Cap Ex.

This latest increase of $0.15 per unit in our annualized distribution rate is a reflection of the confidence shared by both our Board and management in the success that we have achieved in driving efficiencies to the bottom line while enhancing our customer base for the long-term benefit of our organization. We're extremely pleased to continue to pass along these benefits to our unit holders.

We look forward to building upon our successes as we maintain our focus on measures that support our long-term business strategy to deliver increasing value to our unit holders by achieving sustainable, profitable growth.

We're in the best financial shape we have ever been. We have a dedicated work force determined to continue to drive efficiencies while at the same time delivering quality customer service. And we are determined to continue to grow this business both organically and through acquisitions.

As always, we appreciate your support and attention this morning and would now like to open the call up for questions. Julie, if you could help us with that, please, it'd be great.

Thank you. (OPERATOR INSTRUCTIONS) We'll go to the line of Darren Horowitz. Please go ahead.

Good morning. Thank you.

My first question is really on the heels of a couple things that you just mentioned. You talked about, obviously, the challenging October weather and also the substantial increase in unit costs of both propane and fuel oil.

When we look at the prices today they're obviously higher than what you realized in the fiscal third quarter, excuse me, fiscal fourth quarter, so with that leading to ongoing customer conservation, how do you think that's going to impact your sequential propane volume growth expectations?

Because when you look at last year, obviously, volumes increased about 60% from the September to the December quarter and, obviously, now the pricing environment is very different. So is it fair to assume that that coupled with maybe some tough weather in October you might not see the same magnitude of that step change?

Yes, I think so. We certainly started out the quarter that way. Weather patterns in October were 58% of normal versus what we saw about normal, 101, 101% last year. We certainly -- do not use weather as an excuse. It's nothing we can control.

You see with our cost structure and our driving operating efficiencies we'll adjust. We're not worried on the downside. It's, you're going to see a volume drop, I think, in the first quarter because of the high priced commodity environment, you're seeing a lot of conservation, and you're going to see it in weather.

Weather's a temporary thing, but you're certainly going to see because of the commodity environment people are conserving, so you're going to see, so the answer to your question is, yes, we believe we're going to see a drop in volume.

Now the second part of that question is that when you guys look across the broad spectrum for all of fiscal '08, and you're looking at where crude prices are and the related hydrocarbon derivative products, does that lead you to believe that overall over the course of next fiscal year you might not see the same type of volume progression that we saw this year on a year-over-year basis?

That's possible. It's just too early to tell. One of the other things is we're not trying to send out an alarming signal. October is October, and it doesn't mean a whole heck of a lot in the first quarter.

December makes or breaks you in the first quarter. But then again, it's just timing. For any propane business, I think, the most important months are January, December, February, in that order.

Sure.

So it's really too early to tell. We're certainly not in a panic mode. On the contrary. With what we've seen fall to our bottom line through what our people in the field have done over the past two years, I think has positioned us extremely well for true organic growth.

What you see with us is probably your best case or example of same same-store sales volume analysis. And with conservation and weather you're seeing some drop in that. We're not seeing that in the form of customer count. As a matter of fact, it's going the other way. So our customer count is fine.

And so we think that what we've done is this volume issue is systemic throughout the industry. When you look at us, it's not clouded with acquisitions, it's pretty much a pure apples-to-apples comparison. And we've adjusted our cost base well ahead of time to account for this.

And in fact, we think that that adjustment and with what our people are doing in the field, we are offering better quality service today than we were a couple years ago, and we think that that positions us for growth in the long-term. You may very well see a temporary drop in volumes over the next year because of just general economic conditions.

Sure. But to that point I think it's also fair to say is that with the job that you guys have done on the income statement, you're probably the most insulated.

That's right.

From a lot of the pricing fluctuations and better suited to handle that and hopefully work that through the income statement in not of a dramatic fashion.

That's exactly my point. You just happened to articulate it better than I did.

Well, no problem.

My next question was actually on costs. You've done a great job there. When we're looking at further rationalization of the cost line on both an operating and a G&A basis, in percentage terms how much more improvement is there to go?

It's nominal at best, Darren.

Okay.

The majority of it's behind us. We still have tweaking to do, but you're not going to see the kinds of numbers that we've demonstrated in the last couple years, it's just not there. We're really poised to focus on our top line, and we will continue to adjust our expenses accordingly, but it's not big dollars.

Okay. Maybe a little bit more tweaking like on the HVAC side, stuff like that?

Yes, yes, right.

Okay. Thanks, guys. I appreciate it.

Thank you, Darren.

(OPERATOR INSTRUCTIONS) And I'll turn it back to you, speakers. We have no further questions.

Julie, thank you very much.

We thank everybody's support and attention and participation this morning. We look forward to getting out and seeing everybody and also look forward to talking to you in the quarters to follow. Thank you very much.

We're very excited about the future. As you can see with two record years and we think we're poised for some great things going forward. Thank you very much for your attention. Appreciate it. Thank you, Julie.

Thank you. Ladies and gentlemen, this conference will be available for replay after 12:30 p.m. today through midnight November 16, 2007. You may access the AT&T Teleconference Replay System at any time by dialing 800-475-6701 and entering the access code 891420. That number again is 1-800-475-6701 with the access code 891420.

That does conclude our conference for today. Thank you for your participation and for using Executive Teleconference. You may now disconnect.