Suburban Propane Partners LP (SPH) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Suburban Propane's second quarter 2008 financial results conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (OPERATOR INSTRUCTIONS.) As a reminder, this conference is being recorded.

This conference call contains forward-looking statements within the meanings 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. The Partnership has listed some of the important factors that could cause actual results to differ materially from those discussed in such forward-looking statements, which are referred to as cautionary statements, in its earnings press release which can be viewed on the company's website. All subsequent written and oral forward-looking statements attributable to the Partnership or persons acting upon its behalf are expressly qualified in their entirety by such cautionary statements.

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

Thank you, Ruth, and good morning, everyone. Welcome to Suburban's second quarter fiscal 2008 conference call. I'm Davin D'Ambrosio, Vice President and Treasurer at Suburban. Joining me this morning is Mark Alexander, 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 second quarter financial results, along with the 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'd 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 the fiscal year ended September 29, 2007 and Form 10-Q as of March 29, 2008, which will be filed by the end of business today. 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 of 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 website at suburbanpropane.com.

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

Thanks, Davin, and good morning, everybody. As stated in our press release, we are extremely pleased with our solid results for this quarter, despite one of the most challenging operating environments the propane industry has ever seen. Specifically, record high commodity prices are forcing our customers to be more conscious than ever of their home energy bills, and reasonably mild winter temperatures have helped our customers conserve or take short-term measures to seek alternative sources of heat. Although all of these factors have had a negative effect on our volumes and on the industry as a whole, our second-quarter and year-to-date results are proof that the steps we have taken over the past several years to create a more efficient and flexible operating platform were very timely.

With the recent increase in our annualized distribution rate of $3.10 per common unit that was announced on April 24th, our unit holders continue to benefit from our financial strength. This represents a distribution growth rate of nearly 11% year over year. I'll comment further on our quarterly distribution in a few minutes, but first I will turn it over to Mike Stivala to discuss our second-quarter results in more detail. Mike?

Thanks, Mark, and good morning, everyone. As Mark indicated, while this has certainly been a challenging environment for the entire industry, our flexible cost structure, efficient operating platform and overall financial strength continue to produce solid results and continued distribution growth. As we discuss these results, to be consistent with our reporting for previous periods, I am excluding the impact of the $2.3 million unrealized loss applicable to FAS 133 accounting, compared to a $6.6 million unrealized loss in the prior-year quarter, both reported within cost of products sold.

Net income for the quarter totaled $96.9 million, or $2.96 per common unit, a decrease of $15.5 million compared to the prior-year quarter of $112.4 million, or $3.44 per common unit. EBITDA totaled $113.8 million, compared to $129.7 million in the prior-year quarter, a decrease of $15.9 million.

As we discussed throughout last year and during the first quarter of this 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 year 2007. As anticipated, the absence of these favorable supply conditions in 2008 had the most significant impact on the year-over-year comparison of operating results, accounting for approximately $8.3 million of the second quarter variance and $20 million on the year-to-date basis.

In addition, the challenges presented by the unprecedented high priced commodity environment and generally mild winter weather certainly had a negative effect on volumes. Lower volumes were offset to an extent by higher average margins, and another 9% reduction in operating and G&A expenses.

In the commodity markets average posted prices for both propane and fuel oil remained at unprecedented high levels, increasing 52% and 55%, respectively, over the prior-year second quarter. Average temperatures for the second quarter in our service territories were 5% warmer than normal and 3% warmer than the prior-year second quarter, with significantly warmer than normal temperatures from mid-January throughout much of February.

Retail sales of propane during the quarter totaled 146.3 million gallons compared to 166.8 million gallons in the prior-year quarter, a decrease of 20.5 million gallons, or 12.3%. Sales of fuel oil and refined fuels decreased 12.6 million gallons, or 28.6% to 31.4 millions compared to 44 million gallons in the prior-year quarter. As Mark indicated, we're seeing customers take more proactive steps to manage their household energy costs in this high energy price environment.

Total gross margins of $208.7 million declined $25.6 million, or 10.9% compared to the prior-year second quarter. As a result of the $8.3 million of incremental margins in the prior-year quarter, as well as the impact of lower volumes, offset to an extent by higher average margins from an improved customer mix and excellent margin management at the field level in a particularly volatile commodity environment.

With our flexible cost structure and continued operating efficiencies, combined operating and G&A expenses declined $9.4 million, or 9% during the second quarter to $94.9 million. We continue to see savings in payroll- and benefit-related expenses, including lower variable compensation due to the lower earnings. One fairly significant sign of the favorable impact of our efforts to drive efficiencies is the fact that total vehicle expenditures were relatively flat compared to the prior year, despite a significant rise in diesel costs to operate our fleet.

Additionally, while bad debt expense was higher in the quarter compared to the prior-year quarter, as a result of higher prices, our overall receivable aging continues to improve. In this challenging economic environment, we are very proud of the efforts of our field personnel to balance effective price management, customer service, and receivable collections.

Turning to our balance sheet, we ended the quarter with more than $100 million of cash on hand and, as has been the case since April 2006, have not utilized our working capital facility. Now that the peak seasonal working capital period is behind us, as is typical, with these solid operating results and strong distribution coverage, we expect to generate incremental cash throughout the remainder of the fiscal year.

Finally, capital expenditures during the quarter totaled $4.5 million, of which $3 million was deemed maintenance-related. With the continued strength in operating results, our distribution coverage ratio was 1.4 times to end the fiscal 2008 second quarter.

Mark?

Thanks, Mike. As announced on April 24th, our Board of Supervisors declared the seventeenth increase since the Partnership's recap in 1999 in the quarterly distribution, from $0.7625 to $0.775 per common units. This distribution equates to $3.10 per common unit on an annualized basis, an increase of $0.05 per common unit, payable on May 13th to common unit holders of record on May 6th.

As I stated earlier, this distribution increase represents an annual growth rate of nearly 11% year over year. Again, we are extremely pleased with the performance of our operating personnel to be able to deliver bottom-line results for the first half of the fiscal year substantially in line with our expectations. While additional challenges lie ahead, particularly if the pricing environment continues its upward trend, we are confident that with the strength of our financial profile and our proven flexible cost structure, our dedicated operating personnel will help us effectively manage through these difficult external factors and continue to deliver increased value to our unit holders.

As always, we appreciate your support and attention this morning and would now like to open the call up for questions. Ruth, if you could help us with that, please?

Yes, thank you. (OPERATOR INSTRUCTIONS.) And we have a question from Ron Londe. Please go ahead.

Thanks. With conservation continuing to be kind of the nemesis of the industry, I noticed you mentioned that you had what you consider a very successful system of letting middle management, or lower management, field management, control margins in the field. Can you give us better insight into how you do that and what the reporting process is?

Ron, conservation -- I wouldn't describe it as a nemesis. I'd describe it as a reality and a fact of life, an understandable reaction that our consumers are exhibiting because their home heating costs have gone through the roof. I mean, you look at your own home heating costs; it's probably tripled in the past three years. So, while we're sympathetic to that, and certainly understand it, we need to react to that. Our -- what we focus on, as far as a critical role within our organization, is our store managers. They're business people. They're doing what they need to do, reacting spontaneously with the customer base and trying to work through some -- and exhibit even some compassion with respect to what the consumers of the world or the U.S. today are experiencing with respect to energy costs.

So, our front line people have the authority to react accordingly to whatever the circumstances are. We're too far removed here at central support to do that, and our people are doing a heck of a job with that, and we're proud of them. This is what I would describe as the perfect storm of bad economic news. We're in a recession. It's about time the politicians started to admit that. I think we've been in a recession for quite some time. You've got rising commodity prices. You've got a significant drop in housing starts. You name it; it's not good out there. Yet our people continue to perform day in, day out and deliver solid results.

And this is what we planned for all along, Ron, when we went through our efficiency strives and measures over the past few years. So it was very timely and we're delighted with the results and appreciate the question.

I mean, you've got the quickest finger on the block, so we're not surprised you're the first one to ask what -- I know you've got other questions, Ron. What you got?

Well, I was curious, just got your report a few min- -- little while ago. The gross profit per gallon for propane -- what was that number for this year and last year?

Ron, you'll probably get a better sense of that when we file our Q this afternoon. I mean, it's certainly up, probably about 10% over the prior-year quarter, but you'll be able to get a lot more detailed information this afternoon to be able to get right at the number.

Okay. Thank you.

(OPERATOR INSTRUCTIONS). And we have one from Darren Horowitz. Please go ahead.

Good morning, guys. Mark, first on the propane volumes year over year, and I recognize your comparisons are a little bit skewed because you had some positive tailwinds last year. But if you try and normalize for those benefits, what percent impact on volumes do you think that conservation has had this year? Some of your peers have said somewhere in the 8 to 10% range. Do you think that's appropriate?

Yes, I think that's within that range. We're seeing on a gallon-per-degree day it's probably not far off. Mark, do you want to -- ? Darren, can you hear? Go ahead,

This Mark Wienberg, Vice President, Operational Planning and Analysis. And we take a look at the burn rate on this every month, every quarter, and report to our board. And our experience for Suburban customer base, Suburban geography, has been in the 6 to 8% range that the conservation is impacting.

So when you normalize it for the difference in the weather pattern -- as Mike Stivala alluded to, we had that time period in February that was significantly warmer year on year, so. Our January was colder by 7%, but February was warmer by 18% versus prior year. And then we had a little bit of a late pop in March. So when you normalize all that out and normalize the customer base, which for us is pretty much intact, the conservation piece shows for a 6 to 8% range for us.

Okay. I appreciate that detail. It's helpful. Taking that one step further, if we assume that propane volumes are going to be flat on a year-over-basis for the back half of this fiscal year, that would point to aggregate volumes being down about 7%, all else being equal. Is that fair to assume?

We're probably expecting a little bit more of a decline in the second half, Darren, but not dramatically different than that. We're expecting a bit of this trend -- and frankly, we're seeing it in the first few weeks of the quarter here. But we're projecting a little bit bigger of a drop than that for the second half.

Another thing to think about, Darren -- this is Mike Dunn -- is that we are probably at record low levels with respect to inventory at the end user's storage, which is actually interesting. And that also took a bite out of the volumes that you would typically see end of February and into March. Those volumes may not actually ever reappear again.

So, Mike, do you think -- that's interesting that you point that out. Do you think maybe then there's the potential for an unseasonable fill or maybe a larger than expected fill, if people are gearing up?

Yes.

Okay.

But again, it's not probably going to happen until late summer, early fall, or if the commodity appears to be a tad cheaper than where it is today.

Okay.

Part of the other piece of that reduction that Mike Stivala was talking about, that potentially greater than our conservation experiences, in the back half of the year pool heat tends to kick in, along with other spa-type heating and stuff. And as the -- Mark alluded to with regards to the economy and the housing industry, that will also be impacted. And I think that's kind of where a little bit greater than that conservation experience is what we're kind of forecasting.

Sure.

Yes. And while you look at conservation as a reality here, Darren, and we expect it to continue, especially with where commodity prices are today. They're just continuing to go up. You can only conserve so much, but there's another factor that comes into place, that we're very much cognizant of. And that is if energy bills just get too high, it becomes an affordability issue, even though it's a necessity. So in that regard it's putting a big strain on the consumer and you've got to watch your receivables as well, which we are, very carefully. And fortunately, we haven't had any deterioration in that regard. So it's a tough environment and we feel for the consumer. And we're all consumers. But we're managing through it.

Sure. Well, I think, at least from our perspective in relative to what we model, I think you guys are doing a great job of that. You know, at the end of the day, while you have to deal with what the market gives you in terms of volume metric consumption, I think what you guys are doing on the margin line as well as on the controllable costs line is what is the most important, in my opinion.

So that's a good segue for me to move over to the operating expense line. Again this quarter, a very impressive number, about 13.5, 13.6% of this quarter's revenues, which is fantastic. You continue to surpass my expectations, specifically on the cost line. How much more is there to go?

Well, Darren, I guess first, we really appreciate the comments because we obviously strive very hard, and have focused internally for the past couple years, to get to the point where the cost structure can live through these times. And I think these earnings are proof of that and I'm glad you're recognizing that. And I appreciate it.

As for where do we go from here, there's no cost cutting necessarily that's going on, but I think what we've created over the past couple of years is a structure from top to bottom of the organization where everybody is much more cognizant of being that much more efficient in everything that they do. So we see, down to the store level, managers making good decisions about trucks, about tanks, about the need for seasonal help, and, frankly, our structure is such that we can be flexible in that regard. And so I don't know that we'll see another 9% reduction in the next six months, but I would expect to see the downward trend in expenses continue. Probably more single digit reductions year over year.

That's a hard one to predict, Darren. I think we get pleasantly surprised each quarter with the performance of our operating people. I think Mike's right. If you want to sort of put a range around it, it's low single digits. We'd be pleasantly surprised if it was more than that. And it could be but we don't bank that in.

With respect to volumes, just getting back to that, we're about the best pure-play you can see, meaning we're the best analytical formula with respect to same-store sales. We don't -- we haven't been that acquisitive, although we continue to look. We don't have a cylinder exchange business, which is a different type of business than we're in. So you can pretty much see that what the price of the commodity, the conservation, and what weather has done, pretty much on a same store basis, the volumes, for us and the entire industry.

So with that said, appreciate your questions. You got any more, Darren?

Yes. Just one last one and it's more big picture and you touched on it briefly, but I was hoping for a little more detail. When you look at your financial position, in my opinion that's one of the attributes relative to your partnership that I think separates you from a lot of your peers, especially given how fragmented the market is. Having a pristine balance sheet, I think, is of the utmost importance when you look at consolidation. And now, at quarter's end, with $100 million of cash on hand, certainly this was your seasonally strongest quarter in terms of excess cash relative to what you distributed. You're sitting in an excellent position from a balance sheet perspective. So can you give us a little bit more color on how you're looking at organic growth, what opportunities are in your fairway, or what opportunities you think make more sense than others?

Boy, I wish I could. I wish I could. We are certainly in a position to take advantage of that. And that's been by design. Our distribution increase is a very comfortable one. Our coverage ratios are rock solid, even in the environment we're in and the stress that it puts on our operating people. I wish I could, Darren. We're constantly looking. We're looking within the propane sector; we're looking outside the propane sector. We're looking at creative opportunities and creative structures and whatever it takes, because what really excites us is the operating infrastructure we have in place today. We're very excited about it and how it's performing and would love to leverage off of that. So we're constantly looking. I wish I could give you a little more detail, but you'd be an insider.

That's okay. I understand. Keep up the good work, guys. Thank you.

Thanks, Darren. Ruth, anybody else?

(OPERATOR INSTRUCTIONS.) And at this time there are no questions in queue. Please continue.

Ruth, thank you very much. And everyone, we really appreciate your attention and patience and support. And we're proud of the performance of our operating people in this past quarter, very optimistic about the rest of the year and the future of Suburban, even with respect to the environment that we're operating within. And we look forward to speaking to everybody in the next quarter and quarters to come. Thank you very much. And thank you, Ruth, for helping us.

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