Suburban Propane Partners LP (SPH) 2009 Q4 法說會逐字稿

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

This conference call 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 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 earning 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, Mike Stivala. Please go ahead.

Thank you, Ruth. Good morning, everyone.

Welcome to the Suburban's fourth quarter and fiscal 2009 full year results conference call. I'm Michael Stivala, Chief Financial Officer at Suburban. With me this morning is Mike Dunn, our President and Chief Executive Officer.

The purpose of today's call is to review our fourth quarter and fiscal 2009 full year results, along with our current outlook for the business. As usual, once we've concluded our prepared remarks, we will open the session to questions.

However, 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 our Form 10-K for the fiscal year ended September 27, 2008, and our Form 10-K for the fiscal year ended September 26, 2009, which we will file on or about November 25, 2009. 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 8-K can be accessed through a link on our website at www.suburbanpropane.com.

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

Thanks, Mike. Thanks, everyone, for joining us this morning.

Despite the obvious challenges brought on by the economy and the tight credit market, fiscal 2009 proved to be a good year for Suburban. We maintained our focus on driving efficiencies, prudent margin management, enhancing our customer and further strengthening our balance sheet. To recap some of our significant achievements during fiscal 2009, we reduced our total debt by $185 million from a combination of cash on hand and the net proceeds of approximately $95.9 million from the successful offering of 2.4 million common units. This reduction in debt brought our ratio to debt to adjusted EBITDA to 1.5 times to end fiscal 2009.

Additionally, we refinanced our revolving credit agreement to a new four-year facility nine months prior to the maturity of our previous agreement. Our partnership credit rating was upgraded by both Moody's and S&P, and we increased the annualized distribution rate by $0.10 per common unit or 3.1% compared to the end of fiscal 2008. In addition to these important accomplishments, we delivered adjusted EBITDA of $239.2 million in fiscal 2009, an increase of $62.4 million or 35% compared to the prior year, after adjusting for certain significant noncash items in both years, which I will let Mike explain in a bit more detail. While we are very proud of our achievements and believe we are well positioned for the future, we expect the weak economy to continue to present challenges as we head into fiscal 2010. A little later, I will comment further on our thoughts for the coming year.

However, at this point I'll turn the call over to Mike Stivala. Mike?

Thanks, Mike.

As Mike indicated, during fiscal 2009 we took proactive steps to further strengthen our balance sheet and posture the business for growth. In particular, we reduced our overall leverage profile to be one of the lowest in the MLP space, and to improve our overall distributable cash flow. In fact, with the debt tender offer completed in September 2009, we reduced our interest expense requirement heading into fiscal 2010 by $12 million. At the same time we remained focused operationally, delivering a 35% increase in adjusted EBITDA and improving our operating cash flow by $126 million compared to the prior year.

Looking at our full year results, to be consistent with previous reporting I am excluding the impact of a $1.7 million unrealized noncash gain applicable to FAS 133 accounting, compared to an unrealized gain of $1.8 million in fiscal 2008. EBITDA for our full fiscal year totaled $234.6 million compared to $220.5 million for fiscal 2008, an increase of $14.1 million or 6.4%. Net income totaled $163.5 million or $4.94 per common unit for fiscal 2009, compared to net income of $153.1 million or $4.67 per common unit in the prior year. Fiscal 2009 results included a loss on debt extinguishment of $4.6 million associated with the debt tender offer completed in September 2009; whereas the fiscal 2008 results include a gain of $43.7 million from the sale of our Tirzah, South Carolina propane storage cavern. Therefore, excluding the effects of these two significant items from both years, adjusted EBITDA of $239.2 million for fiscal 2009 increased $62.4 million or 35% compared to adjusted EBITDA of $176.8 million in the prior year.

Retail propane gallons sold in fiscal 2009 decreased 42.3 million gallons or 10.9% to 343.9 million gallons, from 386.2 million gallons in the prior year. Sales of fuel oil and other refined fuels decreased 19.1 million gallons or 25% to 57.4 million gallons, compared to 76.5 million gallons in the prior year. While average heating degree days in our areas of operations were close to normal levels for the fiscal 2009 heating season, and 5% colder than the prior year, volumes in both segments were negatively impacted by the economy and conservation.

The current environment has had a marked effect on our commercial and industrial volumes, and to a lesser extent our residential volumes. To put that into perspective, within our propane segment, our nonresidential customer base accounted for more than 63% of the volume decline compared to the prior year. In the commodities markets, average posted prices for both propane and fuel oil dropped precipitously during the first five months of fiscal 2009 from the all-time highs reached during the summer of 2008. Commodity prices remained relatively flat throughout our third fiscal quarter and began to rise again throughout the fourth quarter of fiscal 2009, thus creating a potentially volatile price environment for fiscal 2010. For the year, average posted prices for propane and fuel oil decreased 51.7% and 46.1% respectively, compared to the prior year. Spot propane was trading around $0.93 per gallon basis [Mount Bellevue] at the end of September 2009, compared to $1.52 per gallon at the end of fiscal 2008. Today, spot propane is trading around $1.08 basis Mount Bellevue and spot heating oil is trading at about $2.05.

Total gross margins of $601.1 million for fiscal 2009 were $68.1 million or 12.8% higher than the prior year of $533 million. The increase resulted primarily from higher unit margins as well as higher margins from risk management activities, particularly during the first half of fiscal 2009, where we experienced dramatic declines in commodity prices. The increased margins were offset to an extent by the impact of the lower volumes. In addition, contributing to the increase in gross margin was the absence of $10.8 million of realized losses from risk management activities which were reported in fiscal 2008, the results of our decision to unwind our hedge position, given the unprecedented rise in commodity prices.

Combined operating and G&A expenses of $361.8 million were $5.6 million or 1.6% higher than the prior year of $356.2 million, primarily due to higher variable compensation associated with the higher earnings in fiscal 2009. Variable compensation aside, we continue to experience savings in payroll and benefit-related expenses, as well as lower vehicle expenditures from a combination of a lower vehicle count and lower diesel costs, as we continue to focus on operating efficiencies. Additionally, despite the challenges of the economy, our bad debt expense was $4.3 million lower compared to the prior year, as we remain diligent in managing our receivables. Unfortunately, however, this does tend to negatively impact our volumes. Capital spending for the year totaled $21.8 million, which included $12.2 million of maintenance capital.

Turning to our balance sheet, as Mike described in his opening remarks, we took several steps to further strengthen our balance sheet during a very difficult credit market. With our strong operating results and corresponding cash flow, as has been the case since April 2006, we continued to fund all working capital needs from internally generated cash. Despite the use of nearly $90 million of cash to fund a portion of the debt reduction in fiscal 2009, we ended the year with $163.2 million of cash on hand. That's an increase of $25.5 million or 18.5% compared to the cash balance at the end of fiscal 2008. As we look forward to fiscal 2010, we believe we have adequate liquidity to fund ongoing operations without the need to access our bank revolver. And with the steps taken in fiscal 2009, we've extended the maturities on all $350 million of our outstanding debt until 2013.

Looking specifically at our fourth quarter results, given the seasonal nature of our business, we typically report losses for our fiscal fourth quarter. As I discuss the results for the quarter, I am excluding the impact of a $2.5 million unrealized noncash gain from our current quarter results applicable to FAS 133 accounting, compared to a $2.1 million unrealized gain in the prior year quarter. We reported a net loss of $25.4 million or $0.75 per common unit for the fourth quarter of fiscal 2009, compared to a net loss of $13.4 million or $0.41 per common unit in the prior year quarter.

Adjusted EBITDA for the quarter, excluding the $4.6 million loss on debt extinguishment that I mentioned earlier, was a loss of $2.7 million compared to income of $3.3 million in the prior year quarter. The prior year quarter benefited by approximately $3.7 million from increased margins, resulting from the partial recovery of realized losses reported in the fiscal 2008 third quarter on short heating oil futures. With the highest concentration of nonresidential business typically reported during our fiscal fourth quarter, lower volumes in both propane and fuel oil, particularly in the commercial and industrial sectors, was also a significant contributor to the decline in EBITDA quarter over quarter.

Retail propane gallons sold in the fourth quarter of fiscal 2009 decreased 7.5 million gallons or 13.3% to 49.1 million gallons, from 56.6 million gallons in the prior year quarter. And sales of fuel oil and other refined fuels decreased 2 million gallons or 22.5% to 6.9 million gallons, compared to 8.9 million gallons in the prior year quarter.

Mike?

Thanks, Mike.

As announced in our October 22nd press release, we are extremely pleased to declare our 14th consecutive increase in our quarterly distribution, which now equates to an annualized rate of $3.32 per common unit, which was paid on November 10 to our unit holders of record as of November 3rd.

Looking ahead to fiscal 2010, the uncertain economic outlook as it relates to our customer base, coupled with the unpredictable behavior of our competition throughout our operating territories, is expected to put pressure on margins and possibly volumes, particularly when compared to fiscal 2009. However, we are confident that our solid financial position, flexible cost structure, experienced operating team and strong coverage ratios will enable us to successfully deal with what is likely to be a challenging business environment in fiscal 2010. That being said, we remain optimistic that opportunities will become available as others struggle through these challenges, and we believe that given our financial strength, we will be in an advantageous position to capitalize on any such opportunities that may arise.

Lastly, I would like to thank the more than 3,000 employees at Suburban for their efforts in making fiscal 2009 a success, and for their continued focus through these difficult economic times.

As always, we appreciate your support and attention this morning, and would like to open the call up for questions. Ruth?

Okay. Thank you.

(Operator Instructions)

And we do have a question from the line of Darren Horowitz. Please go ahead.

Hey, guys, good morning.

Good morning, Darren.

Darren, how are you doing?

Good, thanks. Just a couple of quick questions. You know, first from a retail volume standpoint, you know, you talked about the uncertain economic outlook, and certainly we've seen an upward bias to commodity prices, and when you put all those pieces together and you're starting to get your arms around what you think the impact from a residential standpoint is going to be in terms of consumption, can you give us an early snapshot of where you think aggregate volumes could approximate year over year? We heard from one of our competitors last night that they thought organically they could grow 1% to 2%. Does that sound fair based on what you see today?

No. I think anybody that thinks that they can organically grow their volume to that extreme in this economy is probably going to sacrifice margins to do that. So I don't know which is, you know, better or worse.

From a residential perspective, Darren, we're basically forecasting flat to a slight decline in volumes. It's the commercial/industrial piece that's a little bit of a wild card at this stage.

Okay. Yes, that makes sense. Do you think just in order of magnitude that we could see something similar to what we saw in fiscal '09?

We hope not.

Yes, okay.

I mean we're looking at -- we're looking at a decline significantly lower than what we experienced this year.

Okay. Moving over to the acquisition landscape, we've also heard through the channel that maybe over the past couple of months things may have improved a little bit in terms of the [bid ask] spread. Can you give us some color there on what you're hearing?

Yes, I think a lot of people are still basing their values on last year's numbers which, quite frankly, we're not sure is sustainable. So obviously the bid ask is possibly a little bit wider than it should be. You know, there are values in people's minds that, quite frankly, when you get down through the cash flow, they're a little distorted.

Okay. And then just one quick housekeeping question, when you're looking at total CapEx for fiscal 2010, do you think it's still going to be in the range of about $20 million to, call it, $23 million, with a similar split between maintenance and growth?

Yes.

Yes, Darren, that's our typical run rate.

Okay. Thanks, guys, I appreciate it.

Thank you.

Okay. Thank you. And next we will go to the line of John Tysseland. Please go ahead.

Hey, guys, good morning.

Hello, John.

Just one follow-up to Darren's questions. Just -- you touched on the volume side. I mean on the margin side, that's really where you saw a big jump last year, probably industry-wide, with commodity prices going down and, you know, the volume -- or the -- you being able to get your costs down, and the price to the consumer not down as -- quite as much. Do you expect margins to be able to hold on this year with the uptick in commodity price, or is that kind of what you're alluding to, that last year's numbers might be a little unsustainable?

Yes, I think last year's will be a little unsustainable. I don't think you're going to get the opportunity to go into the winter season in a steeply declining market, as you did last year, okay? If you're moving into a rising market, you'll always lag behind and before you know it, you'll come out of it. So the opportunity to replicate last year's margin profile, I think, is going to be difficult.

Is that -- how much of that -- I mean to what magnitude do you think that's going to be the case? I guess when you look at propane prices, is there any kind of time line that we could point to where margins were similarly compressed after a good year, or is it just going to be maybe down slightly from last?

I think if you look at the second half of last year, you'll see a more realistic margin profile, okay, than you would the first half of the year, if that's helpful.

No, that's definitely helpful. And then also on the mom and pops and the smaller companies, you know, are they -- their financings, their relationships with the banks, I know that you obviously have plenty of liquidity where you are. Any kind of -- any kind of things that you're hearing from the industry in terms of their ability to access capital in the smaller side?

I think that that's -- I don't think it's as tight as it was at the beginning of last fiscal year. However, it's still somewhat snug with respect to the smaller operators. But I don't think at least at this stage -- I mean, again, not to overdo the expression of a wild card, but I think that the mom and pops for the first time are really dealing with volume declines that they don't really have an answer for, okay? And in a lot of cases the mom and pops are unwilling to give customers payment terms, so, you know, you're seeing a little bit more COD-type activity than you've seen in the past as well, which is an indication that financing capabilities are tight.

Great, guys. Thank you.

Thanks, John.

Thanks, John.

Okay. Thank you. And next we will go to the line of Yves Siegel. Please go ahead.

Thanks, good morning, guys.

Hello, Yves, how are you?

Good, thanks. Mike, I was just keying off -- you used a word "unpredictable" and I'm curious to what you were really thinking when you used unpredictable to refer to competition, and again looking at, you know, potential margin?

Well, I think, I unfortunately believe -- still believe that the industry is more volume driven than they are bottom line driven; however, I think that that's altered some over the course of the last couple of years. So when I say unpredictable, I mean we see things in the marketplace that, quite frankly, are losing money at the opportunity to just say their volumes were either flat or growing, particularly on the industrial/commercial side.

So is that mostly the mom and pops, or is that larger competitors as well?

It's both, it's both.

Okay.

What people tend to do, Yves, is ignore the cost of capital.

Right.

But hey, that's not anything new.

No. But what -- if there's good news, I would assume that the commercial/industrial load is probably lower margin for you, so the mix probably gets a little bit more favorable, is that --

Correct. That's true, Yves. I think over the past couple of years, in fact, our mix has steadily shifted to a higher concentration of residential customer base and contribution to both volume and margins, and we expect that trend to continue.

So going into 2010, given the outlook that you have, any sense that you may do something a little bit different from recent history?

What do you --

Does your strategy change going into 2010 at all?

No, our strategy is -- is still the same. We're -- we look to continue for a -- to seek out opportunities to make good use of the investment we've put in our business. We continue to drive customer service. We continue to take advantage of the systems infrastructure that we have in place and, quite frankly, we would -- we would love to see some sellers that are real, so that we can possibly put our balance sheet to work.

My last question, when you think about acquisitions, is it primarily propane or are you also looking outside propane?

Well, if you're -- if the hidden question is are we looking at heating oil, the answer is no. We would ideally like to do propane acquisitions, because we believe that that's a platform that we can add value, based on the experience we have here. I certainly, you know -- at this stage I couldn't tell you if there was another MLP qualifiable type income stream, you know, that we would -- we would have an attraction to at this stage. However, a fee-based mid-stream type storage business certainly wouldn't be out of the question.

Okay. Thank you.

You're welcome.

Thanks, Yves.

Okay. Thank you. And there are no further questions at this time. Please go ahead.

Okay. Thank you, Ruth. And, again, thank you everybody for your support and your attention this morning, and we look forward to talking again in February. Thank you.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation, and for using AT&T executive teleconference services. You may now disconnect.