Suburban Propane Partners LP (SPH) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Suburban Propane first quarter 2009 first quarter financial results. 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 conference is being recorded.

This conference contains forward-looking statements within the meaning of Section 21 E of the Securities Exchange Act of 1934, as amended, relating to the partnership's future business, expectations and predictions, and financial conditions and results of operation. 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 forward-looking statements, which are referred 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 are attributable to the partnership or persons acting on its behalf are qualified in their entirety by such cautionary statements.

With that said I would now like to turn the conference over to your host, Davin D'Ambrosio, please go ahead.

Thank you, Lisa, and good morning, everyone. Welcome to Suburban's fiscal 2009 first quarter conference call. I'm Davin D'Ambrosio, Vice President and Treasurer at Suburban. Joining me this morning are 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 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 to questions.

However, before getting started,I would like to reemphasize what the operator has 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 27th, 2008, and Form 10-Q for the period ended December 27th, 2008, which will be filed at 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 a link on our website at Suburban Propane.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. In the midst of an obviously poor economic environment, we're delighted to have announced this morning more than 33% year-over-year growth in adjusted EBITDA as well as more than $130 million of cash on the balance sheet, and still no need to access our bank credit facility for working capital purposes. On the strength of these earnings, and our solid financial position, we again delivered increased value to our unit hold with the recent increase in our annualized distribution rate to $3.24 per common unit, a growth rate of 6% year-over-year. While these are terrific results, I would caution everyone to not assume that our current margin levels are sustainable for the long term. Mike Stivala, our Chief Financial Officer, will shed more light on this point as well as discuss our first quarter results in detail. When Mike completes his prepared remarks I will offer some closing comments, then we will open it up for questions. Mike, over to you.

Thanks, Mark, and good morning, everyone. As Mark indicated, we are not immune to the challenges presented by the current state of the economy. However, with the strength of our balance sheet, and efficient operating platform, we are confident that we can effectively meet today's challenges, and with the uncertainty in the financial markets, having adequate liquidity puts us in an enviable position. Looking at our first quarter results, as we discuss the first quarter, to be consistent with previous reporting, I am excluding the impact of the $15 million unrealized noncash gain applicable to FAS 133 accounting, compared to an unrealized loss of $2.7 million in the prior year quarter. EBITDA for our first fiscal quarter totaled $82.2 million compared to $105.2 million for first quarter of fiscal 2008. Net income totals $55.7 million or $2 per common unit for the quarter compared to net income of $88.1 million or $2.59 per common unit in the prior year quarter which included the gain of $43.7 million from the sale of our Tirzah, South Carolina storage facility. Excluding the Tirzah gain from the prior year results, adjusted EBITDA of $82.2 million for first quarter fiscal 2009 increased $20.7 million or 33.7% compared to adjusted EBITDA in the prior year first quarter of $61.5 million. Retail propane gallons sold in the first quarter of fiscal 2009 decreased 12.9 million gallons, or 11.5%, to 99 million gallons from 111.9 million gallons in the prior year quarter.

Sales of fuel oil and other refined fuels decreased 6.9 million gallons or 29.2% to 16.7 million gallons compared to 23.6 million gallons in the prior year quarter. While average heating degree days in our areas of operation were at normal levels for first quarter fiscal 2009, and 8% colder than the prior year quarter, volumes in both segments were negatively impacted by the economy. Unfavorable economic conditions have had a marked effect on our commercial and industrial volumes, and to a much lesser extent, our residential volumes. In the commodity markets, through the first quarter fiscal 2009, prices trended in the opposite direction as the prior year but with similar volatility. Commodity prices have declined significantly from last year's highs. However, remain high when compared to historical levels. At the end of first quarter, crude oil closed around $40 per barrel which was 60% lower than the beginning of the quarter and 58% lower than the prior year first quarter.

As a result, average posted prices for both propane and fuel oil declined. Although not to the same degree experienced in the crude oil market. For the quarter, propane and fuel oil posted prices were 47% and 26% lower, respectively, than the prior year's quarter. Today, spot propane is traded at about $0.73. [Basis mount bellevue] and spot heating oil is trading around $1.33. In both the propane and refined fuel segments, average retail margin per gallon improved compared to the prior year, primarily as a result of the dramatic decline in wholesale prices within a relatively short period of time. However, as Mark indicated, depending on price volatility in the commodity markets, retail margins may experience some pressure in the coming quarters. Total gross margins of $174.1 million for the first quarter of fiscal 2009 were $24 million, or 16% higher than the prior year of $150.1 million, primarily as a result of higher unit margins, as well as higher margins from risk management activities resulting from the declining commodity environment in the first quarter fiscal 2009. Offset to an extent by the lower volumes. Combined operating and G&A expenses of $91.8 million were $3.3 million or 3.7% higher than the prior year, primarily as a result of increased variable compensation due to higher earnings. However, this increase was partially offset by continued savings in payroll and vehicle expenses resulting from additional operating efficiencies and lower vehicle costs. As for bad debt, we remain diligent about managing our receivables, especially considering the current economic environment.

Our overall expense as a percentage of revenues has remained consistent with historical levels and our aging profile has not experienced much deterioration. Total capital spending for the quarter was $4.4 million which included $1.6 million of maintenance capital.

Finally, looking at our balance sheet, strong operating results and corresponding cash flow have again allowed us to fund all working capital requirements with internally generated cash. In fact, during the quarter, we generated more than $25 million in cash flow from operations, a quarter which is historically a seasonal consumer of cash. As a result, we ended the quarter with more than $130 million of cash on hand. Once again, we do not foresee the need to access our bank revolver for the remainder of the fiscal year. As a reminder, our senior debt does not mature until 2013. Therefore, we have no immediate need to access the capital markets. During the quarter we made an additional prepayment on our term loan bringing the outstanding amount to $108 million. Our revolving credit agreement comes due in March 2010. And given the lack of predictability in today's credit markets, we have begun to develop a strategy for its renewal and are very confident in our ability to renew this facility even in today's credit markets. Mark.

Thanks, Mike. Good stuff. As previously announced in our January 21st press release, we were extremely pleased to declare our 11th consecutive increase in our quarterly distribution which equates to an annualized rate of $3.24 per common unit which will be paid on February 10th to our unit holders of record as of February 3rd. This represents a 6% growth over the prior year first quarter and our distribution coverage at the end of this quarter improved to 1.44 times. Our achievements this quarter are a reflection of the steps we have taken over the past several years to prepare our operating platform and balance sheet to compete most effectively in a mature industry and to withstand the many challenges presented during an economic downturn.

As Mike clearly stated, we remain financially strong and have ample liquidity at our disposal. Obviously, we still have a significant portion of the heating season ahead of us, and we cannot predict what will happen with the weather or with commodity prices. However, given our strong first quarter performance, and a favorable weather pattern to start the second quarter, we are certainly well positioned to achieve our targeted results for the remainder of this fiscal year. In the meantime, we are very aware of the challenges that lie ahead of us in light of our current economic environments. We remain committed to our ongoing business strategy of delivering increasing value to our unit holders by achieving sustainable and profitable growth. Again, I would like to take this opportunity to acknowledge the ongoing efforts of all of our dedicated employees who continue to provide outstanding customer service and remain focused on driving efficiencies in all aspects of our business. As always, we appreciate your support and attention this morning and would now like to open the call up for questions. Lisa, if you could help us with that, please, I'd appreciate it.

Thank you. (Operator Instructions) Our first question will go to the line of Ron Londe.

Thank you. I'm curious, given the volume performance, can you give us a breakdown between the declines you experienced in commercial versus residential? And what sectors might be affecting you more in the commercial.

Ron, this is Mike Stivala. Of the total propane decline, about 55% of that came from the commercial and industrial, or really the nonresidential side of our business.

Okay. And I guess the rest was residential. Any guesstimate on how much of the residential decline was conservation?

Probably most of it.

Well, yes and no. You're probably looking at about 8% to 10% of it perhaps being conservation, but the other piece, Ron, we didn't get weather on the West coast, so if we look at that you've had a volume decline, coupled with the combination of conservation and weather on the West coast, and, quite frankly, in the Northeast, and even in parts of the Southeast where we did experience colder temperatures than last year, we, in fact, saw volume improvements, which was actually encouraging, quite frankly.

Why was your interest expense up $1 million?

Invested cash these days, Ron, is not really achieving much of a return, unfortunately.

Okay. So that was factored in there. Okay.

Yes.

You know, you mentioned that margins in the -- I assume the second and third quarter, might not be as good as the first quarter. Can you kind of talk a little bit about that?

Well, you know, you have experienced the opposite effect of what you went through last year, Ron. This year, to date, you have seen the dramatic decline. Commodity prices are half what they were at the end of the quarter, and, you know, that volatility seems to be tapering off some, so I don't think you are going to be -- just by that fact you are not going to see the same sort of production in margins.

So you are not going to see the same kind of lead lag situation versus product costs?

Unless the market decides to turn around and go back up. Then, in fact, you'll see the same kind of thing you saw last year. But I think for the moment the market seems to have stabilized. Crude oil seems to want to be in that $40 to $45 range. Propane seems to be content a around $70 to $75. Heating oil actually is still a tad overpriced when you look at it on a ratio to the other commodities. However, it seems to be getting comfortable in that $130 level. So market prices just seem to have stabilized a tad.

Okay. Thank you.

Thank you, Ron, appreciate it.

(Operator Instructions). We will go to the line of Darren Horowitz. Please go ahead.

Good morning, guys. Congratulations on a great quarter.

Thank you.

Mark, from a liquidity standpoint, and I know that we discuss this every quarter, but certainly as your cash position builds I think it becomes more relevant, how has the financial environment impacted the small players to the extent that it's changed the acquisition landscape as guys see it today?

Well, when it comes to the small players, certainly some of the -- I'd say the mid-size marketers, I think they're all pretty solid, because a lot of their banking is with regional bankers and they're pretty good business people. With respect to multiples, and or -- multiples certainly have to come down because interest rates are going up. It's a more expensive environment to borrow in. So something's got to give. So multiples have to come down. There's not a lot of activity that we're seeing right now because, frankly, the banks are closed, or at least they have been closed, and almost regardless of your credit. And that's something that everybody is dealing with, in all industries. But when it opens up, we believe that rates will be higher, and it's starting to open up, so it's not doom and gloom like it just sounded, but it's starting to get some sense of, I don't want to say normalcy, but it's coming back.

You saw there was a deal yesterday done, giving us some hope that the banks are going to start opening the doors again so we expect that to loosen up during 2009, but rates will be higher and multiples will come down.

Sure. That's a good segue into my next question. When you are talking about external financing opening up, can you give us a little bit of insight as to your strategy for that revolver renewal?

Well, Darren, this is Mike. When you look at our current business and our working capital needs, today we have a $300 million revolver. $125 million of it was a term loan, and we have a $175 million working capital piece which we use -- today all we use it for is letters of credit. So, you know, we are looking at the size of the facility and whether it needs to be as high as it currently is, given the amount of cash that we have on our balance sheet and the lack of a need to use the revolver for working capital purposes since we haven't for three years now. And so we'll likely bring that facility down a bit, which should help in the bank market. But the strategy really is to access the bank market and put a comparable deal in place when the markets are -- makes sense to do it. We're starting the process. We have a strategy to get started early. We obviously have over a year to go on that facility, and we're already starting to have discussions to begin that renewal process, just so that when the bank markets open, we're ready to go in and with our balance sheet, we're confident that we should be able to get that deal done, to have a working capital facility at our disposal, to the extent things change in the business or the environment that require us to actually tap into it.

Sure. No, that makes a lot of sense. Just quickly for you, Mike, one housekeeping question, from an operating platform standpoint, you guys continue to do a great job on the cost side, and I think when all the stars align for the business model you really see the magnitude of earnings power. Can you give us a little bit more color on any incremental savings you can get, either on variable comp or payroll, or is it possible to make the platform, as it sits today, more efficient?

Darren, Mike Dunn. Yes, we continue to drive efficiencies. We're getting better with our routing. We continue to expand the geography in certain areas where the distribution network is a little bit broader. We're finding better ways of dispatching our service entity. So yes, there are, but they're going to be reasonably small, okay, compared to what we've experienced the last three years. But there are still opportunities with respect to efficiency.

Thanks, guys, keep up the good work.

Appreciate it.

Thank you. We'll go to the line of Eric Calamaras. Please go ahead.

My question for you on the cash balance as well as the amount of LCs outstanding on the credit facility.

The amount of -- the cash balance right now, or as of the end of December was $130 million. The LCs that we have is $55 million, Eric. Obviously, December is typically our lowest point for cash in the middle of the heating season.

I guess as it relates to the economic activity and the change in volumes, how do you think about that going forward ,and kind of what steps might you take to the extent we continue to see economic conditions pretty weak here over the next year, 18 months, 24 months? What further steps might you take?

Eric, it's Mike Dunn. One of the things is, from an efficiency perspective, customers trying to control their deliveries in conjunction with their pocketbook, certainly can mess around with our efficiency goals. So we're working on that and we're obviously working with customers that are experiencing that economic situation. But as we said earlier, I think when Ron asked the question, when we saw, in the areas where we saw normal to colder weather, okay, quite frankly, our volumes were encouraging, okay. So, you know, it wasn't so much of an economic thing there. On the West coast, on heating oil side, but more importantly, in the motor fuel commercial industrial agricultural side is where you are seeing the volume decline, that we experienced in the first quarter. I don't know if that's going to get better or worse, quite frankly. I don't think it can get much worse, but who knows.

Okay, great.

Does that answer your question?

Yes, look, it's -- some of these answers aren't always necessarily obvious, sitting from the outside.

It's tough. Customers are trying to take control of their routing. Customers are trying to take control of their deliveries. Obviously, that could put a little bit of a squeeze on our efficiency goals. That's from an operating perspective. From an overall volume perspective, you are seeing, particularly in some of our locations, for example,on the West coast that are high percentage commercial, okay, namely forklift, they are not -- the ships aren't coming in, for example, in one of our centers to feed the forklifts.

So when is that going to change? I don't know. I don't know. But the fact of the matter is that it can't get any worse in that particular area because they haven't done anything. So you can't take away from zero. In some cases. As far as weather is concerned, I think we -- as I said, not to be redundant, we are, in fact, encouraged -- I don't know if it's a combination of price and weather, or less of an economic strain, or what have you, but we actually did see pops in volumes in the areas where you experienced some weather. So it's -- the answer is kind of all over the place, quite frankly. But I want to make sure that when you get off this call you've at least got some direction with your question.

Sure. I appreciate that. The last thing I would ask is, anything you can say regarding the allowance for doubtful accounts? Any changes there? Anything that concerns you?

No, we -- as I said in the prepared remarks, the bad debt expense is pretty comparable to historical levels to last year's first quarter. We had actually, as part of our shift in our operating platform, we had moved our focus on receivables to be more of a centralized focus, and that's really helped us to stay on top of collection better than it ever had. So we're seeing the benefit of that in our aging, and so we're not really seeing a pop in our bad debt. That being said, we know that we need to be more and more diligent in this environment. So we're not getting complacent about it.

Great. Appreciate it.

Thank you, Eric.

Thank you.

Is there anybody else on the line?

No, we do not.

Thank you very much, we appreciate your support. We look forward to speaking to you next quarter. Thanks again. Thank you, Lisa.

Thank you. Ladies and gentlemen, this conference will be made available for replay after 11:00 a.m. today until February 6th, 2009, 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 981102. Those numbers again, 1-800-475-6701 with the access code 981102. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive TeleConference. You may now disconnect.