Suburban Propane Partners LP (SPH) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by and welcome to the second quarter 2010 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 to you at that time. (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 your host, Mr. Davin D'Ambrosio. Please go ahead.

Thank you, Perky, and good morning everyone. Welcome to Suburban's fiscal 2010 second quarter results conference call. I'm Davin D'Ambrosio, Vice President and Treasurer at Suburban. With me this morning is Mike Dunn, President and Chief Executive Officer and Mike Stivala, our Chief Financial Officer.

The purpose of today's call is to review our second 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. 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 the fiscal year ended September 26, 2009, and its Form 10-Q for the period ended March 27, 2010, 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 will turn the call over to Mike Dunn for some opening remarks. Mike?

Thanks, Davin and thanks everyone for joining us this morning. The operating environment in the second quarter continued to present several challenges in managing volumes and margins. Our volumes were negatively effected by the economy and a very inconsistent weather pattern throughout our service territories, while at the same time commodity price volatility had an impact on our overall gross margins. Nonetheless, we remain well positioned to respond to the ongoing challenges with our efficient operating platform, flexible cost structure, and strong balance sheet.

That being said, as announced this morning, we are very pleased to deliver adjusted EBITDA of $123.7 million, which was ahead of our expectations for the quarter. Additionally, during the quarter we took proactive steps to further strengthen our balance sheet by successfully accessing the capital markets and extending the maturity on all of our $250 million in senior debt until March 2020 at a very attractive rate. 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 second quarter results in more detail.

Mike?

Thanks, Mike and good morning, everyone. As Mike indicated, our results for the quarter exceeded our expectations despite an operating environment that can be characterized as one of the more challenging that we have seen in quite some time. Our field and central support employees should be commended for their efforts in managing through the challenges in the current economy and delivering these solid operating results.

As we discussed our second quarter results, to be consistent with previous reporting, I am excluding the impact of a $1.7 million unrealized non-cash loss applicable to FAS 133 accounting compared to an unrealized non-cash loss of $9.7 million in the prior year second quarter. Additionally, in arriving at adjusted EBITDA I am excluding a charge of $9.5 million reported as a loss on debt extinguishment from the senior debt refinancing completed during March 2010.

Therefore, adjusted EBITDA for our fiscal 2010 second quarter totaled $123.7 million, a decrease of $18.3 million compared to $142 million for the second quarter of fiscal 2009. Net income totaled $100.1 million or $2.83 per Common Unit for the second quarter of fiscal 2010 compared to net income of $124.6 million or $3.79 per Common Unit in the prior year second quarter. Excluding the impact from the loss on debt extinguishment, net income for the fiscal 2010 second quarter would be $109.6 million or $3.10 per Common Unit.

Retail propane gallons sold in the second quarter of fiscal 2010 decreased 10 million gallons or 7.4% to 124.5 million gallons from 134.5 million gallons in the prior year quarter. Sales of fuel oil and other refined fuels decreased 5.7 million or 23.7% to 18.4 million gallons compared to 24.1 million gallons in the prior year. The key driver 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 63% of the overall volume shortfall in the propane segment compared to the prior year second quarter. From a weather perspective, average temperatures across the Partnership's service territories in the second quarter of fiscal 2010 were 3% warmer than both normal temperatures in the prior year second quarter. The bulk of the favorable weather was experienced in our Southeast operations. We experienced a very erratic and inconsistent weather pattern in our Northeast and Western operations. Average temperature in both of those areas of the country were approximately 6% warmer than both normal and the prior year. And in fact, in the month of March 2010 the Northeast experienced virtually no weather, as average temperatures were 17% warmer than normal.

In the commodity markets, propane prices have risen steadily since the summer of 2009, peaking in early February 2010 at about $1.40 per gallon. Prices began to retreat some during the remainder of the quarter. For the quarter, though, average posted prices for propane and fuel oil for the second quarter of fiscal 2010 increased 84.4% and 52.3% respectively, compared to the prior year second quarter. Today, spot propane is trading at about $1.13 per gallon basis Mt. Bellevue, and spot heating oil is trading at about $1.92.

Total gross margins of $222.4 million for the second quarter of fiscal 2010 were $24.3 million, of 9.9% lower than the prior year of $246.7 million. The lower gross margins were attributable to lower volumes, and as we previously discussed, the first six months of the prior year benefited from a rapid and dramatic decline in wholesale propane prices that resulted in increased margins, which we did not expect to be sustainable in the first and second quarters of the current year. Combined operating and G&A expenses of $98.8 million were $5.8 million or 5.5% lower than the prior year, primarily due to lower variable compensation attributable to the lower earnings, as well as continued savings in insurance costs and vehicle expenses.

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 continues to improve. Interest expense for the second quarter of fiscal 2010 of $6.6 million was $2.8 million or nearly 30% lower than the second quarter of the prior year, as a result of the overall reduction of $183 million in total debt during the second half of fiscal 2009. Total capital spending for the quarter was $4.9 million, which included $2.8 million of maintenance capital.

Turning to our balance sheet, despite the increased commodity price environment, we continue to fund all of our seasonal working capital needs with cash on hand. In fact, even after using approximately $15 million of cash to fund the costs associated with the debt refinancing in March 2010, we ended the second quarter of fiscal 2010 with more than $140 million of cash on the balance sheet.

Finally, as Mike stated earlier, we just completed the refinancing of our $250 million of senior notes that were due to mature in December 2013. We were successful in raising $250 million of new senior notes with a coupon rate of seven and three-eighths that will mature in March 2020. The new issuance was well over subscribed and we appreciate the interest and continued support of our investors. With the completion of this refinancing, we did not have any debt maturities until our revolver matures in June of 2013.

Our financial position remains very strong and in fact, our leverage profile at the end of the quarter was 1.7 times. We remain confident that we are well positioned to navigate the challenging operating environment that we foresee ahead of us. Back to you, Mike.

Thanks, Mike. On the strength of these earnings and cash flows as announced on April 22, we were pleased to deliver our 16th consecutive increase on our quarterly distribution rate to an annualized rate of $3.36 per Common Unit, which will be paid on May 11 to our unit holders of record as of May 4. This represents 3.1% growth over the prior year second quarter. Our distribution coverage at the end of this quarter was 1.31 times. Looking ahead to the remainder of fiscal 2010 as the peak heating season is now behind us, our mix of business shifts to a higher concentration of non-residential volumes, which as we have discussed for several quarters now has been the most negatively impacted by the current economy.

Therefore, we expect that volumes will continue to be under pressure and the margin environment to be influenced by competitive factors, as well as the direction of the commodity price. Our customer base has remained largely intact and we are hopeful that as the overall economy strengthens, we will see a return to more stark volume levels in our commercial and industrial business. Again, we remain confident that our flexible cost structure and the strength of our financial position will enable us to respond positively to the continuing challenges.

In the meantime, as we have indicated in previous conference calls, we have begun a focused effort to expand our existing operation through mid-side, bolt-on acquisition opportunities. During this fiscal year, we have completed two such acquisitions in strategic markets to expand our customer base and take advantage of our efficient operating platform. While we do not forecast external growth targets, we are seeing opportunities among the small to midsize propane operators that can compliment our existing footprint, opportunities that we are actively pursuing.

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

Perky?

(Operator Instructions) And our first question comes from Michael Cerasoli. Please go ahead.

Thanks and good morning. Just given the challenging environment, do you expect the market for a third-party asset to tighten? Because if I remember correctly, last winter when it was a little bit colder, I think the spreads had widened a bit.

Repeat your question, Mike.

On third party assets, the acquisition market.

I mean it's actually more fluid than it has been in the last two years. So opportunities should, as I said, opportunities should certainly present themselves.

Okay, but is the bid-ask spread tightening? Because if I remember correctly, last year --

The bid-ask spread is almost irrelevant as far as we're concerned. We're looking at the synergy opportunities that we can drive out of a business. So we're not going into it with a particular entrance multiple in mind. We're focusing more on an exit multiple. So we're looking to pay a fair price for a business and obviously generate synergies that will support the price.

That's fair. On non-residential, you spoke in the press release about with the weak economy impacting non-residential customer base, is the trend for those customers improving. Is it continuing to deteriorate, or is it just simply stable?

It's slowing down some, but it's still a factor of our business.

Okay. Thanks. That's it for me.

Thank you and our next question comes from Darren Horowitz. Please go ahead.

Good morning, guys. How are you doing this morning?

Good, Darren. How are you?

Good, thanks. A couple quick questions. Mike, you had mentioned that you expect volumes to remain under pressure and as we try and get our arms around the economic malaise's impact on those volumes, can you give us some help in trying to quantify, say what that impact could be on third quarter volumes?

I would expect the commercial industrial sector to be fairly consistent with the second quarter. But it's -- when you start forecasting where you're going to come out of this thing, you either look good or you look bad. At this particular point in time with the emphasis that we've put on credit and with the weather pattern the way it's been, quite frankly you could see a repeat of the second quarter with respect to a 10ish% volume decline.

Okay. Do you get any sense when you're conducting your channel checks as to where the pricing sensitivity is for a lot of these non-residential consumers? I mean, when you look at the price at Mt. Bellevue propane per gallon, is it merely a situation where if prices were 5% or 10% lower than you could see an incremental pick up in consumption? Or can you give us any sort of insight as to the sensitivity?

Yes, unfortunately I don't think price has anything to do with it. It's actual need. You're just -- what's happening, Darren, is you're losing small business folks, okay, that were typically -- used propane in their business for a variety of reasons. Those businesses are either shutting down or merging with another business or whatever have you and I can say that confidently, because in a particular geography in our footprint we actually went out and tested to see if price could induce people to use more propane. And in fact, we were actually disappointed with the outcome.

Okay. I appreciate the color. Thanks, guys.

Thank you. And our next question comes from Ron Londe. Please go ahead.

Yes, could you give us some insight into your interest cost going forward on an annualized basis given the refinancing you've done?

Yes, Ron. I think when you blend out the cost of the revolver, we have $100 million outstanding on the revolver that is LIBOR plus base and we did fixed LIBOR at 3.1%. So that blends out at about 6.5% and we have $250 million at 7.375%. So when you blend all that out, you're going to look at about $25 million, $26 million of annualized interest expense.

Now, in the second quarter you had interest savings of about $2.8 million. That's equivalent to about $0.08 per unit. Any thought about passing along those, just those savings on the interest expense side to unit holders as distribution increases?

There was, Ron, there was a momentary thought, and we elected not to do anything with it.

Okay, I'm talking about going forward.

I understand.

I think, Ron, when you look at what we've done the past two quarters, well the fourth quarter of '09 and the first quarter of -- second quarter of '10 here, the pay down of debt was funded partially by equity issuance. So the net savings of all that was about $4 million and then we just added about $1 million to our interest requirement for this last refinancing. So on a net basis, the annualized interest impact is only about $2.5 million. But it is very positive, obviously, to the bottom line.

I mean that's still around $0.07 or $0.08 a unit. Okay. Thank you.

(Operator Instructions) And allowing a few moments, there are no questions in queue. Please continue.

Perky and everyone on the phone, thank you for joining us today and we look forward to speaking to you at the end of next quarter. Thank you.

Thank you, ladies and gentlemen. This conference will be available for replay starting today at 11 am and will run until May 7 at midnight. You may access the replay service by dialing 1-800-475-6701 and entering the access code of 153999. Those numbers again are 1-800-475-6701 and entering the access code of 153999. That does conclude your conference for today. Thank you very much for your participation and for using the AT&T Executive Teleconference. You may now disconnect.