Suburban Propane Partners LP (SPH) 2010 Q1 法說會逐字稿

Welcome to the first quarter, 2010 results conference call. At this time all participants are in a listen-only mode. Later there will be an opportunity for questions and answers. (Operator Instructions).

This conference call contains forward-looking statements within the meaning Section of 21E 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 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, Julia and good morning everyone. Welcome to Suburban's fiscal 2010 first quarter results conference call. I'm Davin D'Ambrosio, Vice President and Treasurer at Suburban. Joining me this morning is Mike Dunn, President and Chief Executive Officer and Mike Stivala, Chief Financial Officer.

The purpose of today's call is to review our first quarter financial 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 would like to re-emphasize 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 fiscal year ended September 26, 2009, and its Form 10-Q for the period ended December 26, 2009, 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 a link on our website at Suburbanpropane.com. At this point, I'd like to get started by turning the call over to Mike Dunn. Mike?

Thank you, Davin and thanks everyone for joining us this morning. The first quarter of fiscal 2010 presented several challenges for our operating personnel, particularly when compared to the operating environment from a year ago. Nonetheless, we are pleased with our earnings for the first quarter of fiscal 2010 and in fact, the adjusted EBITDA of $66.2 million was slightly ahead of our internal expectations for the quarter.

Some of the challenges faced in the quarter included a dramatic rise in commodity prices, continued adverse effects of the economy on our volumes and a weather pattern that produced significantly warmer than normal weather during a 6-week stretch from the beginning of November through the middle of December. This compares to a prior year first quarter that benefitted from both colder than normal weather and declining commodity prices which subsequently resulted in increased margins.

Our flexible cost structure coupled with our ability to manage margins in a volatile commodity price environment helped us handle these challenges effectively. We are also pleased to deliver our fifteenth consecutive increase in our quarterly distribution rate to an annualized rate of $3.34 per Common Unit.

In a moment, I will comment on our outlook for the remainder of the fiscal year, however, at this point, I'd like to turn the call over to Mike Stivala to discuss our first quarter results in more detail. Mike?

Thanks, Mike and good morning, everyone. As Mike indicated, despite the decrease in adjusted EBITDA compared to the prior year first quarter, these results were slightly better than our first quarter plan, however, for different reasons than we expected. As we reported throughout the prior year, the first six months of fiscal 2009 benefitted from a rapid and dramatic decline in wholesale propane prices that resulted in increased margins which we did not expect to be sustainable. The fiscal 2010 first quarter produced the opposite commodity price environment with steadily rising prices that presented challenges in managing unit margins. Nonetheless, overall our unit margins came in relatively flat to the prior year first quarter. However, total gross margins were negatively affected by lower volumes due to the economy and an unfavorable weather pattern.

As we discuss our first quarter results, to be consistent with previous reporting, I am excluding the impact of a $3.4 million unrealized non-cash loss applicable to FAS 133 accounting compared to an unrealized gain of $15 million in the prior year first quarter. EBITDA for our first fiscal quarter totaled $66.2 million, a decrease of $16 million compared to $82.2 million for the first quarter of fiscal 2009. Net income totaled $51.8 million or $1.47 per Common Unit for the first quarter of fiscal 2010, compared to a net income of $65.7 million, or $2.00 per Common Unit in the prior year first quarter.

Retail propane gallons sold in the first quarter of fiscal 2010 decreased 9.0 million gallons, or 9%, to 90.0 million gallons, from 99.0 million gallons in the prior year quarter. Sales of fuel oil and other refined fuels decreased 3.6 million gallons, or 22%, to 13.1 million gallons compared to 16.7 million gallons in the prior year. The primary factor contributing to the volume decline continues to be the adverse effects of the economy, particularly on our non-residential customer base and to a lesser extent, ongoing conservation.

Non-residential customers accounted for approximately 64% of the overall volume shortfall in the propane segment compared to the prior year. From a weather perspective, average temperatures across the Partnership's service territories in the first quarter of fiscal 2010 were 2% warmer than both normal temperatures in the prior year first quarter. However, as Mike pointed out, the timing of the weather was such that during the 6-week stretch from early November, 2009, through mid-December, average temperatures were 13% warmer than normal and 15% warmer than the prior year, further contributing to the volume decline.

In the commodities markets, average posted prices for propane and fuel oil for the first quarter of fiscal 2010 increased 36.5%, and 8.3%, respectively, compared to the prior year first quarter and on a sequential basis, propane prices increased 25.7% over the average prices in the fourth quarter of fiscal 2009. Today's spot propane is trading at about $1.40 per gallon basis Mt. Bellevue, and spot heating oil is trading around $2.00.

Total gross margins of $154.5 million for the first quarter of fiscal 2010, were $19.6 million, of 11% lower than the prior year of $174.1 million, primarily as a result of the lower volumes. Combined operating and G&A expenses of $88.2 million were $3.6 million or 3.9% lower than the prior year, primarily due to lower variable compensation attributable to the lower earnings, as well as continued savings in payroll and benefit-related expenses, as well as lower vehicle costs.

As for bad debts, we remain diligent about managing our receivables, especially considering the current economic environment. Our overall bad debt expense as a percentage of revenues has remained consistent with historical levels and our aging profile has actually improved thanks to the efforts of our field and central support employees. With the steps taken during fiscal 2009 to reduce indebtedness by $183 million, our interest expense for the first quarter of fiscal 2010 was $2.2 million, or 23.6% lower than the first quarter of the prior year. Total capital spending for the quarter was $4.5 million, which included $1.2 million of maintenance capital.

Turning to our balance sheet, we continue to fund all working capital requirements with internally generated cash. As we move through our historically high period of seasonal working capital needs, we once again have not accessed our bank revolver and in fact, we ended the quarter with more than $115 million of cash on hand. Our financial position remains very strong and in fact, our leverage profile at quarter end was 1.57 times.

We are confident that we are well-positioned to navigate the challenging operating environment. Mike?

As announced in our January 21 press release, we were extremely pleased to declare our fifteenth consecutive increase in our quarterly distribution, which equates to an annualized rate of $3.34 per Common Unit. This distribution will be paid on February 9 to Unitholders of record as of February 2. This represents a 3.1% growth over the prior year first quarter and our distribution coverage at the end of this quarter was 1.59 times.

Looking ahead to the remainder of fiscal 2010, the unpredictable commodity price environment, combined with challenging economic conditions will no doubt continue to test our field personnel when managing volumes and margins. On the other hand, our focus on growing our customer base has produced positive results during the first quarter of this fiscal year. Additionally, the colder than normal weather pattern that began in mid-December and extended into the first half of January provided some positive momentum heading into the second quarter.

With our strong balance sheet, efficient operating platform and flexible cost structure, we remain confident in our ability to effectively manage through today's challenging business environments. At this point, 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. And as always, we appreciate your support and attention this morning and would now like to open the call up for questions.

Julia, can you help us?

(Operator Instructions). And our first question will come from the line of Darren Horowitz. Please go ahead.

Good morning, guys. How are you?

Morning, Darren.

Hey, Mike, first question, and of course, I realize that the commercial-industrial demand is going to remain a wild card, but is the soft economy continuing to have the impact on current volumes here in the fiscal second quarter to the same magnitude that it impacted volumes in the fiscal first quarter?

Possibly not to the same magnitude. I think in the first quarter, unlike others, we didn't experience any of the agricultural drying, but I think from an economic perspective, the commercial numbers are going to be about the same as they were the first quarter, as well as the second half of last year.

Okay. Shifting over to the residential side of the business, how much is the continued conservation impacting volumes? Have you seen incremental conservation or is it really just a continuation of the existing trend?

You know, a lot of it depends, obviously, on the price of the commodity, but the trend seems to have tapered off some and it's probably a little lower. Last year I think we could say you were probably looking at about a 4% to 5%. Today, it's probably more like 3%.

Okay and then just one big picture question. Can you give us an update on the competitive landscape as it relates to any potential propane acquisitions and then secondly, any new developments in your consideration of possibly moving the model towards a fee-based, midstream asset?

I mean, as far as the competitive landscape, we're looking, as are others, at a lot of the smaller operators, certainly looking at businesses that would fit our footprint. That's an ongoing event. We have a couple of things going on that hopefully will mature into something positive. As far as moving into the midstream sector, obviously with all that's going on and the refinancing that needs to be done over the course of the next year or so, we still believe that there may be opportunities in that line as well.

Okay, thanks guys. Appreciate it.

You're welcome.

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

Thank you. Curious, can you give us some insight into what your experience with margins have been since the end of calendar 2009? And I noticed in your press release that you talked about rising commodity prices were not yet reflected in the cost of products sold. Is that going to put some pressure on second quarter margins?

Well, as you know Ron, we try to price off of replacement cost, so margins versus on-hand costs during the first quarter were about par with last year. However, when measured against replacement cost, you were significantly lower. However, the market has dipped as well as gone back up, so you've have an opportunity to where you're able to get your margins, or your pricing, better in line with today's market conditions. So I would suspect margins to be reasonably close to last year.

Okay. Also, you mentioned during the last question about growth of your customer base. Can you give us a little more insight into that?

As you know, we have our own little internal system of measuring customer count and using those same standards year-over-year, we've actually seen a small, but about a 1% customer growth and that's organic.

Okay, thank you.

Our next question will come from the line of Michael Cerasoli. Please go ahead.

Thanks. Just a quick question. Do you guys see any chance that there will be some more efficiency gains going forward or have you kind of done that already in the past few years?

No, I mean, you're always going to have efficiency gains because you're going to continue to improve your routing systems, but I mean, the numbers aren't going to be mind-boggling.

Okay. That's it. Thanks.

You're welcome. Thanks, Mike.

Thank you. At this time there are no further questions coming from the phone lines.

Good. So, with that, I would like to say thanks to everyone again for joining us today and that we look forward to speaking to you next quarter. Thank you, Julia.

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