Suburban Propane Partners LP (SPH) 2008 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Suburban Propane fourth-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. Instructions will be given at that time. (Operator Instructions) As a reminder, this call is being recorded.

This conference call contains forward-looking statements within the meaning of Section 21E the Securities Exchange Act 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. 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 on 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, Linda, and good morning, everyone. Welcome to Suburban's fourth quarter and fiscal 2008 year-end conference call. I'm Davin D'Ambrosio, Vice President and Treasurer at Suburban. Joining me this morning is Mark Alexander, our Chief Executive Officer; Mike Dunn, our 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 2008 full-year financial results along with our current outlook for the business. As usual, once we have concluded our prepared remarks, we will open the session to questions.

Before getting started, though, I would like to reemphasize what the operator has just explained about forward-looking statements. Additional information about factors that could cause actual results to differ materially from those discussed in forward-looking statements is contained in the Partnership's SEC filings, including its Form 10-K for the fiscal year ended September 29, 2007, and its Form 10-K for the fiscal year ended September 27, 2008, which will be filed on November 26. Copies of these filings may be obtained by contacting the Partnership or the SEC.

Additionally, 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 a link on our website at SuburbanPropane.com.

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

Thanks, Davin. Good morning, everyone, and thanks for joining us this morning. Fiscal 2008 definitely presented a challenging operating environment, as we experienced unprecedented volatility in commodity prices, continued customer conservation, relatively mild temperatures during the peak heating season, and a general slowdown in the economy. Despite all these factors, our flexible operating platform has enabled us to successfully navigate through these difficult times.

While we are very pleased with our reporting results, perhaps one of the most positive factors is the strength of our balance sheet and distribution coverage. We ended the year with over $137 million of cash on hand and once again have not borrowed on our revolving credit facility to fund working capital needs, even when commodity prices reached historic levels.

With the uncertainty currently surrounding the credit markets, we are in an enviable financial position with sufficient liquidity to fund our projected operational needs without reliance on the financial community.

As evidence of our Board's confidence in our financial strength, we are pleased to continue to deliver increased value to our unit holders with our 10th consecutive increase in our annualized distribution rate to $3.22 per Common Unit, a growth rate of 7.3% over the prior-year fourth quarter.

And even amongst all this economic turmoil, we still ended fiscal 2008 with a coverage ratio of nearly 1.3 times. A little later I will comment further on our increased quarterly distribution and thoughts for the coming year. At this point, however, I will turn it over to Mike Stivala to discuss our year-end and fourth-quarter results in more detail. Mike?

Thanks, Mark, and good morning, everyone. As Mark indicated, in these times of economic uncertainty and instability in our financial markets, the steps taken over the past few years to strengthen our balance sheet and streamline our operating platform have proven quite timely. With the increased working capital requirements for our industry and the general lack of the liquidity flowing from the financial institutions, ending the fiscal year with over $137 million of cash on hand is certainly a distinct advantage for Suburban.

Looking at our full-year results, to be consistent with previous reporting I am excluding the impact of a $1.8 million unrealized non-cash gain applicable to FAS 133 accounting, compared to an unrealized loss of $7.6 million in fiscal 2007.

EBITDA for our full fiscal year totaled $220.5 million compared to $205.3 million for fiscal 2007, an increase of 7.4% or $15.2 million. Net income totaled $153.1 million or $4.57 per Common Unit for fiscal 2008 compared to net income of $134.8 million or $4.14 per Common Unit in the prior year.

Fiscal 2008 results included a gain of $43.7 million from the sale of our Tirzah, South Carolina, underground propane storage cavern, which occurred during October 2007. By comparison, net income and EBITDA for fiscal 2007 included a $3.3 million non-cash pension settlement charge; a $1.5 million charge for severance benefits; a gain of $2 million from the recovery of legal fees associated with the successful defense of a prior legal matter; gains of $1.9 million from the sale and exchange of customer service centers; a $3.8 million non-cash adjustment for the provision for income taxes related to deferred taxes; and $14.7 million of incremental margin opportunities.

Retail propane gallons sold for fiscal 2008 decreased 46.3 million gallons or 10.7% to 386.2 million gallons from 432.5 million gallons in fiscal 2007. Sale of the fuel oil and other refined fuels decreased 28 million gallons or 26.8% to 76.5 million gallons compared to 104.5 million gallons in the prior year.

Lower volumes in both segments were attributable to ongoing customer conservation resulting from historically high commodity prices; warmer average temperatures during the peak heating months; and to a lesser extent, elimination of certain lower-margin accounts. Average heating degree days in our service areas were 94% of normal for fiscal 2008.

While this full-year heating degree day index was comparable to fiscal 2007, the peak heating season of fiscal 2008 was warmer than the prior year, particularly in the Northeast, where average heating degree days were 7% warmer than the prior year, thus having a negative effect on our volumes.

In the commodities markets, average posted prices increased throughout the first three quarters of fiscal 2008, peaking in mid-July 2008 and then falling off dramatically during the fourth quarter. For the year, average posted prices for propane and fuel oil increased 48.6% and 53.8%, respectively, compared to the prior year.

Since the end of fiscal 2008, commodity prices have continued to decline, and today spot propane is trading around $0.58 based Mont Belvieu, and spot heating oil is trading about $1.8350.

As reported throughout the prior year, we achieved incremental margins from favorable market conditions impacting supply and pricing for propane and fuel oil, which had a favorable impact of $14.7 million on our fiscal 2007 results which were not present in fiscal 2008, thus having a negative effect on our year-over-year comparisons. Further, as we discussed in our third-quarter earnings release, the dramatic rise in commodity prices resulted in realized losses from risk management activities during the third quarter of fiscal 2008.

As anticipated, a portion of these realized losses were recovered during the fourth quarter through sales of physical product. As a result, fiscal 2008 was negatively impacted by $10.8 million from the net effect of realized losses, also contributing to the decline in year-over-year normalized results.

Total gross margins of $533 million for fiscal 2008 were $48.7 million or 8.4% lower than the prior year of $581.7 million, primarily as a result of the two factors that I just mentioned, as well as the impact of lower volumes.

Combined operating and G&A expenses of $356.2 million were nearly $20 million or 5.3% below the prior year of $376 million. As a result of operating efficiencies and our flexible cost structure, we continue to experience savings in payroll and benefit-related expenses, including variable compensation, as well as lower vehicle expenditures despite the impact of higher diesel costs to operate our fleet.

Additionally, while bad debt expense was higher as a result of generally higher revenues, we continue to remain diligent about managing our receivables, especially considering the current economic environment; and our overall expense approximates one-half of 1% of revenue.

Capital spending for the year totaled $21.8 million, which included $12 million of maintenance capital.

Turning to our balance sheet, as a result of our continued strong operating results and corresponding cash flow, we did not need to access our revolver to fund any short-term working capital requirements and in fact have not borrowed under our working capital line since April 2006.

As we mentioned earlier, we ended fiscal 2008 with more than $137 million in cash on hand; and that is even after making a $15 million prepayment on our term loan during the fourth quarter.

As we look forward to fiscal 2009, we believe we have adequate liquidity to fund ongoing operations without the need to access our bank revolver for the foreseeable future. We continue to maintain one of the lowest leverage positions in the MLP sector. Furthermore, we do not have any upcoming maturities on our senior debt that will need to be addressed in the capital markets for several years.

Looking specifically at our fourth-quarter results, given the seasonal nature of our business we typically report losses for our fiscal fourth quarter. However, we are proud today to report that EBITDA for the fourth quarter was positive for the first time in almost a decade. This accomplishment is particularly noteworthy since it was achieved during a very challenging operating environment.

As I discuss the results for the quarter, I am excluding the impact of a $2.1 million unrealized non-cash gain from our current-quarter results applicable to FAS 133 accounting, compared to a $200,000 unrealized gain in the prior-year quarter.

Despite the deteriorating macroeconomic conditions and the ongoing operating challenges, EBITDA for the quarter was $3.3 million, which was $15.9 million favorable compared to a loss of $12.6 million in the prior-year fourth quarter. Higher gross margins and lower operating and G&A expenses contributed to these strong results and favorable trends.

In addition, we realized increase margins of $3.7 million from the partial recovery of the $14.5 million of realized losses on our short heating oil futures reported for our fiscal 2008 third quarter. Therefore, our seasonal net loss for the quarter improved to $13.4 million or $0.41 per Common Unit compared to a net loss of $32.3 million or $0.99 per Common Unit in the prior-year quarter. Mark?

Thanks, Mike. Good stuff. As announced in our October 23 press release, we are extremely pleased to declare our 10th consecutive increase in our quarterly distribution, which now equates to an annualized rate of $3.22 per Common Unit, and which was paid on November 10 to our unit holders of record as of November 3.

To recap, the numerous steps we have taken over the years to create a more flexible and efficient operating platform continued to yield benefits. We have no immediate need to access the capital markets, as our balance sheet remains very healthy and our liquidity is expected to be sufficient to meet our needs for the foreseeable future.

As we stated this time last year, we were confident that our solid financial position, flexible cost structure, and strong coverage ratios would enable us to successfully deal with what proved to be a very challenging operating environment in fiscal 2008. These results, coupled with the strength of our balance sheet heading into fiscal 2009, continue to support that belief.

Looking ahead to fiscal 2009, commodity price volatility and the negative economic outlook are both factors that are expected to create ongoing challenges. However, we remain confident that our proven flexible cost structure and ability to drive operating efficiencies will once again help us navigate through these anticipated challenges.

That being said, we also believe that the current slowdown in the economy and instability in the capital markets will present challenges for many in our industry and in the energy sector. We are optimistic that increased opportunities will become available and believe that, given our financial strength, we will be in an advantageous position both financially and operationally to capitalize on any such opportunities that may arise.

In the interim, we remain focused on our business strategy of delivering increasing value to our unit holders through sustainable and profitable growth.

Lastly, I would be remiss in not acknowledging the ongoing efforts of all of our employees who continue to provide outstanding customer service and continue to drive efficiencies in many aspects of our business. To all of our employees, thank you.

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

(Operator Instructions) Ron Londe.

Thank you. Just curious if you could maybe give us some more color on your feeling toward your exposure to the downturn in the economy on your commercial side of your business. How you view maybe unemployment affecting maybe rural customers and lack of new housing out there versus your feel for how margins might be affected by lower propane prices; how you view the stresses being put on your competition, given the current credit crunch; and where you might stand with regard to weather situations.

Since weather was kind of negative last year, do you feel that this year that could be a positive factor, or likely to be more positive?

That is a mouthful, Ron. Let me take a first shot at that. Economically, it is not a bright picture at all. Anybody you talk to, 2009 looks fairly dismal from an overall economic standpoint, sitting there at 30,000 feet looking down, saying it's going to be a rough ride. Right now, I would say the old cliche, the rules they are a-changing.

The capital markets are basically shut. When they open up, who knows what it's going to look like? So, we are in a fortunate position that we have proven over the years that we can address our cost structure and adjust our cost structure to basically any type of perfect storm of bad economic news.

What does that do? It has the obvious impact that you would expect from our customers' perspective. It's going to put strain on it.

The consumer, they are retrenching already. Their confidence levels are low, and they are going to spend less. So I wouldn't be surprised if what we have seen prior to this in the form of conservation, with respect to or due to the spike in commodity prices, that you will see continued conservation as a result of the economic stress that we are going to experience over at least the next year.

Weather? Weather looks like it's -- whose crystal ball is better than who? But weather looks like it could be a positive this year. So although I don't if it's going to be enough to counter the conservation that we expect and that our customers and the consumer will drive. So who knows?

I wouldn't be surprised, Ron, if we see a further drop in volume and margins holding on. I wouldn't be surprised at that at all. It would just be a continuing of the trend that we've seen over the past few years.

Would the margins holding on be a function of lower prices or commodity prices, and the lag in passing those along?

Ron, Mike Dunn. I don't necessarily think that there is a correlation between the two, at least in this economic environment. You know you are going to have lower prices which could be helpful if we have some weather. But I don't think that there is the typical correlation.

I mean if you really want to look at propane prices, for example, propane prices one could argue are undervalued, trading at about a 51% ratio to crude oil. The 10-year average is closer to 70%. So if you take that, make that calculation, you could argue that propane prices could be $0.25 to $0.35 higher on a base cost basis.

So I think people in the industry are looking at that as well. I also think that the industry still has a fair bit of high-priced inventory to flush through the system. You know, inventories that were bought in the end of June, July, and the beginning of August. With weather being what it's been so far, that offtake hasn't been as quick as one would like. Obviously, in a market that continues to decline.

The other point I want to go back to also are volumes with respect to the commercial and industrial side. You know, we have seen over the course of the last two years, actually, a decline in volumes there. But we've also seen opportunities to pick up business because some of the smaller operators aren't able to access the capital and/or didn't have the working capital to invest in the steel.

So I'm not going to say it's a push, but it's not as dismal as one might think.

Okay, thank you.

(Operator Instructions) Darren Horowitz.

Good morning, guys. How are you? Mark, I want to go back to a point that you made on the liquidity side when you were discussing having sufficient liquidity to meet future needs. Can you just outline for us, when you look at the year ahead, your CapEx program? Is there any sort of capital that you are going to spend on improving efficiencies? Should we forecast somewhere around a $13 million to $14 million annual maintenance line?

Darren, this is Mike Stivala. Typically in total CapEx, we will spend about $20 million to $25 million a year, and that split between maintenance and capital is typically going to be between $10 million of maintenance and $15 million of growth.

This year it happened to be $22 million of capital spend and $12 million of that was maintenance. So $25 million is about what our typical run rate for total CapEx is; and that is not expected to change.

And from a capital needs perspective of liquidity, we have plenty of cash on hand. If that needed to be more -- we don't anticipate it -- but if it did, we would have no problem.

Sure. So, that is a good segue into my next question, and Ron kind of touched on it a little bit. But when you're looking at the challenges in the industry and market multiples, and as you pointed out, if you continue to see on a go-forward basis, continued customer conservation, is it a situation where, in terms of addressing opportunity, you just want to wait for the right opportunity? Or have you seen a concession in multiples that are being discussed and greater organic opportunities? How do you look at timing the market?

Let's again look at that from 30,000 feet. The indications are that when the debt markets open up, that rates are going to be higher. If that is the case, then something has got to give. The only other thing to give is multiples.

So, either something like that happens, Darren, or nothing happens at all. So, we do anticipate that if rates go up, which is what everybody, all the banks are pointing to, when they start lending again, multiples are going to have to come down.

Okay. Then finally, just a quick housekeeping question. Again, great job on the OpEx line. As we look at OpEx and more importantly your direct costs, you mentioned a lot of these internal efficiencies that you continue to extract; and I ask this question every quarter. How much more is there to go? Because it seems like every quarter you are making meaningful sequential improvements.

That's a good question. Frankly our workforce continues to amaze us as well. They combine efficiencies, drive efficiencies, and do a heck of a job in, if need be, right-size the business. It's been a continuation for years now.

Yes, that's why I said what I said at the end of my prepared remarks, we just applaud our operating people. They're doing a heck of a job out there in very, very difficult environment, and an environment we don't think is going to improve for at least another year.

Sure.

Do you want to add to that, Mike?

I think, Darren, the other side of what you see is in our cost structure, and we have talked about this for years, that we do have a fair amount of our expense base that is flexible. It's several millions of dollars that can flex up or down, depending on how the earnings are coming in.

That is the benefit that we've had in our cost structure for several years. From an efficiency perspective, Mark is right. We seem to try to uncover every stone and look for ways to be more efficient at absolutely everything we do; and those things are paying off.

If you look at next year, we are feeling fairly comfortable in what we are budgeting, that we will be able to offset the majority of inflationary-type increases.

So, I think there are still opportunities. How big they are and whether they will match the type of expense reductions that you have seen the past year all remains to be seen. But we are proud of our cost structure and our operating platform, more specifically.

You're right, Darren, in the sense that we don't expect the improvements to be at the same level historically; but we do continue to see and expect improvements. So. But just not to the extent we've seen in the past. But they are still doing a heck of a job out there.

Sure. Thanks, guys. I appreciate it.

We have no further questions at this time. Please continue.

Thanks, Linda. We appreciate the help and we really appreciate everybody's attention this morning and support. Do you have somebody else, Linda?

Ron Londe.

Ron? I thought you covered the entire economic (multiple speakers).

Yes, I just had a couple of follow-ups.

Go ahead.

From the standpoint of cost, I guess one of the costs that is going to be going down in the future is fuel cost for your vehicles. You have a fairly large fleet of vehicles. As that going to be really meaningful? How meaningful is it to the bottom line?

It could be millions, couldn't it?

I think for sure for this year, with where diesel costs went, our diesel costs year-over-year were up about $2 million. I'm sorry, $3 million.

So if you look at that, and we all know what happened to crude oil and corresponding impact to diesel costs, that was a significant impact to us this year. We were able to offset that such that our total vehicle expenditures were net down, because of a lower vehicle count and our continued focus on efficiencies with the way we route our customers' deliveries.

So that is $3 million of incremental expense this year that we covered through efficiencies, that as we get some relief, for sure, that is benefit to us.

From the standpoint of first fill, are you still -- how has that been going? I know October has been kind of warm and into November. Does that look like it is being put off until like it was last year? Or you expect it to be better or worse than last year?

It's Mike Dunn again, Ron. It is pretty much mirroring last year, actually. But for different reasons. Not so much price, but just general economics and weather.

Okay. Thank you.

We have no other questions at this time.

Okay, are we sure about that? Okay, great, Linda. Thank you very much. Appreciate the help again.

And again, thanks for everybody's attention this morning and support. We overall -- I don't know if you could -- you should be able to tell from our tone. We had a heck of a year even in the wake of some very, very negative -- and in the midst of what we'd call the perfect storm of poor economic conditions.

We don't expect economic conditions to improve. Actually, we expect them to probably deteriorate through most of 2009. However, with our financial position, our strength of our balance sheet, and with our operating expertise and our operating model, we are very confident that we are going to have a solid 2009. So again, we appreciate everyone's support and look forward to talking to you next quarter. Thank you very much. Thank you, Linda.

You are welcome. Ladies and gentlemen, this conference will be available for replay after 11 a.m. Eastern Time today until November 15, 2008, at midnight. You may access the AT&T executive playback service at any time by dialing 1-800-475-6701 and entering the access code 965099. International participants may dial 1-320-365-3844. (Operator Instructions)

That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference service. You may now disconnect.