Suburban Propane Partners LP (SPH) 2008 Q1 法說會逐字稿

Welcome to the Suburban Propane First Quarter 2008 financial results conference call. (OPERATOR INSTRUCTIONS)

This conference call contains forward-looking statements within the meanings of session 21-E of the Securities Exchange Commission of 1934 as amended, relating to the partnership's future business expectations and predictions and financial conditions 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, impact of weather conditions on the demand for propane, fluctuations in the unit costs of propane, the ability of the partnership to complete 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 businesses successfully 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.

As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Davin D'Ambrosio. Please go ahead.

Great, thank you, Linda.

Good morning, everyone. Welcome to Suburban's first quarter fiscal 2008 conference call. I'm Davin D'Ambrosio, Vice President and Treasurer at Suburban. Joining me is Mark Alexander, Chief Executive Officer, Mike Dunn, President, and Mike Stivala, Chief Financial Officer and Chief Accounting Officer. The purpose of today's call is to review the first quarter financial results, along with the current outlook for our business. As usual, once we have concluded our prepared remarks, we will open the session for questions. Before getting started, I would like to re-emphasize what the operator has just explained about forward-looking statements. Additional information about factors could cause actual results to differ materially from those discussed in forward-looking statements is contained in the partnership's SEC filings, including the form 10-K for the fiscal year ending September 29, 2007. 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 description 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 our link on our website at www.suburbanpropane.com.

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

Thanks, Davin. Good morning, everyone. Thanks for joining us this morning.

Today, we announced another strong quarter that exceeded our expectations despite a challenging operating environment characterized by unprecedented high commodity prices, coupled with extreme market volatility and ongoing customer conservation. Our financial strength and focus on operating efficiencies at all levels of the organization are contributing factors toward our ability to effectively manage this challenging operating environment. On the strength of these earnings and our continued strong financial position, we were able to deliver increased value to our unit holders with the recent increase on our annualized distribution rate to $3.05 per common unit. That's a growth rate of nearly 11% year-over-year. A little later, I'll comment further on our increased distributions and thoughts for the remainder of fiscal 2008.

But at this point, however, I'll turn it over now to Mike Stivala to discuss our first quarter results in more detail. Mike?

Thank you, Mark. Good morning, everyone.

As Mark indicated, we are extremely pleased with these operating results, and we continue to build upon our financial strength.

As we discuss the results to be consistent with our reporting from previous periods, I'm excluding the impact of a $2.7 million unrealized loss applicable to FAS 133 accounting, compared to a $1 million unrealized loss in the prior year quarter, both reported within costs of products sold. Net income for the quarter totaled $88.1 million, or $2.69 per common unit, an increase of $32.4 million, compared to the prior-year quarter of $55.7 million or $1.73 per common unit. EBITDA for our first fiscal quarter ended December 29, total totaled $105.3 million, compared to $72.8 million in the prior-year first quarter, an increase of $32.5 million. As we discussed throughout last year, favorable market conditions impacting the supply and pricing structure for propane and fuel oil provided incremental margin opportunities during the first half of fiscal 2007, of which approximately $11.7 million was realized in the first quarter of the prior year. As anticipated, these favorable market conditions and resulting incremental margins were not present during the fiscal 2008 first quarter.

Additionally, the fiscal 2008 results include a gain of $43.7 million from the previously-announced sale of our Tirzah, South Carolina, propane storage cavern, which generated $53.7 million. Therefore, excluding the items from both periods, adjusted EBITDA of $61.6 million increased approximately $500,000 compared to the prior-year first quarter.

Net income for the first quarter of 2008 also included a non-cash deferred tax provision of $1.3 million. On a normalized basis, therefore, adjusted net income for the first quarter of fiscal 2008 was $45.7 million or $1.40 per common unit.

On the commodity side, the average posted prices for both propane and fuel oil rose steadily throughout the first quarter and remained at unprecedented high levels. Overall, average posted prices for propane and heating oil during the quarter increased 58% and 46% respectively. From a weather perspective, while the heating degree days were 92% of normal and 5% colder than the prior year, the pattern was such that temperatures started the quarter significant significantly warmer than normal and progressed into December with temperatures that were closer to normal.

Retail sales of propane during the quarter totaled 111.9 million gallons, compared to 121.8 million gallons in the prior-year quarter; that's a decrease of 9.9 million gallons or 8%. The sales of fuel oil and refined fuels decreased 4.9 million gallons or 17% to 23.6 million gallons, compared to 28.5 million gallons in the prior-year quarter.

In this high-energy price environment, ongoing customer conservation is having an obvious impact on our volumes. Additionally, significantly warmer-than-normal temperatures during the first six weeks of the quarter, coupled with the high prices, created a late start for the heating season.

Total gross margins of $150 million declined $6.3 million or 6% compared to the prior-year first quarter, driven primarily by lower margins in the service segment from the residual effect of reducing our emphasis in that area, as well as the impact of lower volumes of propane and refined fuels, offset set to an extent by higher unit margins. The impact of lower total margins was offset by savings and combined operating and G&A expenses, which declined $8.1 million, or 8.4%, during the first quarter to $88.5 million. During the quarter, we continued to see savings of payroll and benefit-related expenses, as well as in vehicle expenditures from our focus on operating efficiencies.

Turning to our balance sheet, as a result of our continued strong operating performance and the resulting free cash flow, it's not been necessary to access our bank revolving credit facility during the first quarter to fund short-term working capital requirements, despite this unprecedented pricing environment. We closed the first quarter with nearly $79 million of cash and we have now reached our historical peak period of working capital needs and are entering our strongest cash flow-generating quarters; therefore, we don't anticipate utilizing our working capital facility at all this year. In fact, we haven't utilized our working capital line since April 2006, and have maintained a low leverage position, particularly in relation to our peer group.

Our net interest expense is down $800,000 or 9% from from the prior year to $8.4 million for the quarter. Capital spending during the quarter totaled $6.6 million, of which $2.1 million was deemed maintenance related. With the continued strength in operating results, our distribution/coverage ratio was 1.62 times to end the first, the fiscal 2008 first quarter.

Looking ahead, commodity prices remain high but have come down from their peak levels. Today's spot propane is trading in the $1.36 range basis Mt. Belvieu, compared to $1.59 at the end of December 2007. Spot heating oil is trading at around $2.42, compared to $2.64 at the end of December. Whole prices are somewhat lower, we expect that the second quarter operating environment will continue to be challenging with continued customer conservation; however, we have confidence in our operating personnel, and that, combined with our flexible cost structure, should continue to drive solid results.

Keep in mind as we just explain explained in comparing first quarter financial results, the second quarter of the prior year also benefited from similar market conditions that provided approximately $9 million of margin opportunities, which we do not expect to be present in the coming quarter.

Mark.

Thanks, Mike. Terrific.

As previously stated, during the past several quarters, our board of supervisors has outlined 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. Consistent with this objective on January 24th, our board of supervisors declared the 16th increase in our quarterly distribution, from $0.75 to $0.7625 per common unit. This increase equates to an annualized rate of $3.05 per common unit and pay payable on February 12, to common unit holders of record as of February 5. This distribution increase represents an annual growth rate of nearly 11% year-over-year.

Over the past several years, we have discussed the numerous proactive steps we have taken to drive operating efficiencies at all levels of the organization and to further strengthen our financial condition. During these periods of sustained high prices, which have had an exponential impact on working capital needs across the entire industry, it's this financial strength that placed us in the enviable position of be being able to aggressively expand our search for accretive acquisitions while maintaining our operating focus on steady growth of base-level earnings. In fact, we're more excited now than ever about the future prospect of continuing to deliver sustainable profitable growth and increasing value for our unit holders in spite of the general economic uncertainty, challenging price environment and ongoing customer conservation.

In closing, I would like to thank the employees of Suburban for the way they managed the operations during this challenge challenging period, balancing the demands of unprecedented high commodity prices, while continuing to provide outstanding services to our customers. As always, we appreciate your attention this morning, and would now like to open the call up for questions. Linda, if you could help us with that, please -- it would be great.

Thank you.

(OPERATOR INSTRUCTIONS)

Our first question will come from the line of Ron Londe. Please go ahead.

Thank you.

From the standpoint of gross profit per gallon, it looked to me that on total gallons is around $0.36 versus $0.35 last year. Is there a way that you can break it down between propane and refined fuels?

Ron, I think you will probably be able to see that this afternoon when we feel our 10-Q. We provide more segment breakdown in the 10-Q than we do in the press release. You should be able to get at that number.

Okay. Can you give us a feel for what your experience has been from a standpoint of gallons? For January and into early February here. Maybe -- with what the weather has been in your your areas.

Like we said, Ron, we saw carryover into January. The weather hasn't cooperated, so we saw an early pop in volume volumes, we're seeing that come off because of the weather patterns. You know, with the high-priced environment not only is conservation prevalent throughout our customer base, but people are able to almost turn it off because the weather's warm and like yesterday we set a record high yesterday at 10 degrees higher than ever. We don't make weather as an excuse, we'll still do fine, but it did certainly have an impact on volumes in the second quarter as well.

Okay. From the standpoint -- .

So far, that is.

Yes.

Still early in the second quarter.

Right. You said you had $79 million in cash as of the end of December. Usually your peak cash is around, if I'm not mistaken, end of April? Where do you think that is going to be at the end of April?

Our peak draw is right about now. So, that is 79-ish is really at a low period.

Right.

With respect to our cash on hand. We were at 150 right after the end of fiscal year. What is your question? Where are we going to get back to?

Yeah, where do you think you'll be in April. End of April. Isn't that when you really have your peak?

When do we -- we peak later.

In May.

Yes. We peak in May.

In May?

Yes, I think our peak, really, in terms of cash, Ron s more the end of the third quarter. We'll be generating the second quarter and third quarter is when we're generating the most cash flow as our customers are paying for the product that we delivered in the first and second quarters. So really, you will see this, the biggest pop in June and the reality is we have been funding working capital from cash. As Mark indicated, we ended last year if you add in the proceeds from the Tirzah sale, at bout $150 million in cash on hand and certainly I would expect getting back to that level, you know, by the end of the year is certainly within our capability.

We're still generating free cash flow with our coverages above our distribution. I think you could even see it going higher than that.

You said the Tirzah capital gain was around $43.7 million. You have got 32.7 million units outstanding, basic units.

Right.

That is about $1.34 per unit. How is that going to be handled from a K-1 standpoint for '07?

Well, from a distribution standpoint, what we started to do is raise our distribution permanently instead of giving back a one-time payment, so that which we think delivers more recurring value, sustainable value to our unit holders. From a K-1 perspective --

That would be, obviously, Ron, that would obviously be in our tax return of the partnership which will be allocated among all the 32 million units. By the time you unitize it, in addition to, obviously, the high degree of the depreciation charges that a typical investor expects to see, particularly in the first five years of ownership, it's really not a significant impact to the K-1 at all.

Okay, and when do you expect the K-1 to be available?

We pride ourselves, Ron, on being one of the first to get our K-1s out and they should be out by the end of this month.

Okay. Thank you.

Thank you, Ron. Welcome back. Who's next, Linda?

Our next question will come from the line of Darren Horowitz. Please go ahead.

Hey, good morning, guys.

Morning, Darren.

Mark, I want wanted to spend more time on your financial position. I think in this market that is where a lot of people are keying in. Would you guys not have to go access revolver, your capital needs which is great and as Ron just pointed out and you address addressed your cash flow continuing to build over the course of this year. When you look at consolidation and a lot of volatility in the current environment, can you give us an update for, you know, current multiples in terms of inorganic expansion? Has anything changed there?

We haven't quite seen that yet. I think the player mix is changing. I think you will see more from a strategic standpoint than you might from an LVL-type group. There is certainly a lot -- people are a lot more at risk adverse from the credit market. We know the credit markets have tightened up significantly.

From our perspective, though, we built and planned for this rainy day, if you will, pardon the cliche, but it's working great for us. We're in the enviable position of utilizing cash on our already strong balance sheet for working capital. If you look at the rapidly-increasing commodity environment, price commodity environment, that is an exponential impact on working capital needs.

So, a lot of people are suffering out there. It's not an issue for us at all. In fact, we look forward to the day where we can tap the credit markets where we have a need to tap the credit markets. So, we're out there pushing as hard as we can to try and find some transactions. We're an acquirer, and we're out there looking. We don't think it's going to be an issue for us to do something that makes economic sense. We don't think we're going to have a problem finding the capital.

Sure. With that said, can you remind us again, number one, the terms on your revolver and number two, if you were to go to the market today for incremental debt, what it might cost you?

We have a working capital line, Darren. This is Mike Stivala. Give us a $175 million access; we have some LCEs drawn on that, so we have access today that is about $125 million; we can upsize that pretty quickly.

In terms of capping the markets, particularly in the high-yield market, tough to say what the rate structure would be for us right now, but certainly if you look at our leverage, we're sitting here, today, net leverage of about 2.3 times and as the cash builds, that will just get better, obviously. So, we're pretty, we're in a good position that if we were to access those markets, I think that the financial condition would speak for itself. In terms of rate structures, I would be speculating if I tried to let you know what 10-year money would cost us today.

Okay.

As far as the equity marks, you have to question what is the size transaction we could do. Using equity, there are not many limits at all. We tend to throw the numbers around of a few billion dollars on an all-cash transaction because of the dynamics of the current equity markets and the MLP sector. On an all-cash transaction, we'd probably tap it out at about a billion dollars because it will take a while to issue equity to pay that down to what everyone's objective is in 50/50 financing. We don't see it as a constraint at all. We're a little troubled, frankly, if I get on my soap box here, that we just have come off record earnings, we raised our distribution $0.15 in the quarter. Our distribution growth rate is double digits and our units have been repriced from a high of 49 down into the 30s. We have come back a bit.

We, frankly, don't understand it it, why our units would have behaved the way they have done. We know there is turmoil in the capital and equity markets, but we have planned for this and we're poised to run through it and almost no matter what happens here. The strength of our balance sheet, the strength of our financial position, the quality of our base operating earnings just sets us up for this troubled environment that we're all living in. So, it translates to what we hope is opportunity ahead. So, we're excited about it and we are a little troubled with the way our units are trading. We think they should be trading higher than they are. That is my opinion but we appreciate the question.

Anything else, Darren?

No, Mark, that is fantastic. Maybe that begs the next question then.

From a 10,000-foot perspective, what do you think it takes to get people to differentiate you from your peers? Do you think that it's more of, you know, continued execution on the cost line and more integration of inorganic growth profitably? Do you think it's continued sequential increases of distribution above people's expectations? Or maybe a combination of those things?

I think we'll do both. That's what we plan on doing. It's frustrating.

I thought that the market was starting to see and differentiate us certainly from a risk perspective, in our opinion, it's relatively minimal relative to many of the others in the MLP sector. Our coverage ratios, depend depending on how you look at it, almost any way you look at it, are the best in the entire sector, not just propane. So, we struggled with that from our unit perspective. We think they deserve more value and we have that kind of distribution increases in our back pocket.

So it's not about whether we're going to earn that cash. It's a matter of when and they'll never get ahead of our board. The board looks at it every quarter, it makes the decision, so yes. We will continue to press.

I think the only think this can you do, Darren at this point, because the market is so fickle, we'll continue to deliver and we believe that sooner or later they'll see and they'll value the difference and the difference in the risk.

So, I think that the two points you make, yes. We'll keep on doing both of those things at a minimum and look for acquisitions. Yes.

Thanks, Mark. I appreciate it. Keep up the good work.

Thanks, Darren.

(OPERATOR INSTRUCTIONS)

We'll go to the line of Eric Kalamaras. Please go ahead.

Hi, guys, good morning.

Morning, Eric.

A couple of questions.

One, there are a rumors that there are a couple of meaningful sized co-ops that could be shopping the propane businesses. Is that something you're familiar with and would you care to comment on what your interest in those might be?

We wouldn't comment specifically on it. If anything is for sale, we're going to look at it. We're interested.

And look, there are not many secrets. All of the majors are inquisitive. They're all sharp and on their game, so we're all looking hard at things. We think that our financial position allows us to move quicker and we can sharpen the pencil a little more.

So, we're all over whatever those situations might be and we're very interested. We're in a position for that. One of the things that we're so excited about is what we, we think we're is accomplishing throughout our operations. Our people, they're out there humming. They're doing a hell of a job and really performing well. It's all about execution and what we're excited about is take taking that platform and apply applying it to a bigger and bigger audience. So, we're excited for our own operating people to give them that opportunity to do that. So we're anxiously looking to expand.

Given the balance sheet where it is and you have done a good job about cleaning that down and one would make the argument that you're probably underlevered here?

That's a good argument, I wouldn't argue with you there. That's right.

What is -- let me ask this another way. How far would you be willing to take the balance sheet for the right transaction?

We would be willing to push will envelope as long as we could see a way for us to bring it back within the, our typical parameters within a period of time, a short period of time.

There is only so much can you do in the credit markets, anyway. You don't want to be reckless. That is not in our vocabulary, but we're pushing the edge more than we might normally. You know, specific multiples you can't say, but we certainly think that because of our underleveraged situation they can help us in certain situations where we might not be able to play prior.

Okay and then one last one and again in the same topic, I guess, thoughts on consolidation, specifically as it relates to kind of the top three or four largest players there -- what is your sense of the appetite for that?

We have a strong appetite for that. We have not been shy about that. Mike said something on the call, Mike Dunn a few quarters ago that we think there should be a consolidation amongst the majors majors. There are five of them and think there should be two. We have not been shy about it. This is more than the first time we have said it publicly.

Sure.

So if we can be a catalyst for that, we're certainly going to give it a shot. So.

Okay. Thanks much. Appreciate it.

Thank you, Eric.

Thanks, Eric.

There are no further questions at this time. Please continue.

Great, Linda, thank you and we appreciate everyone's attention and support. And we look forward to speaking with you next quarter. Thanks for being with us this morning.

And, Ladies and gentlemen, this conference will be available for replay after 11:00 a.m. today through midnight on February 8 of 2008. You may access the AT&T executive playback service at any time by dialing 1-800-475-6701 and entering the access code of 905696. Those numbers gan are 1-800-475-6701 and access code is 905696.

That does conclude our conference for today. We thank you for your participation and for Using the AT&T executive teleconference service. You may now disconnect.