Suburban Propane Partners LP (SPH) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the fourth 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. Instructions will be given at that time.

(Operator Instructions)

As a reminder, this conference is being recorded. Also, this call contains forward-looking statements within the meaning of Section 21E of 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 reviewed on the Company's website. All subsequent written and oral forward-looking statements attributed to the Partnerships or persons acting on its behalf, are expressly qualified in their entirety by such cautionary statements.

With that, I would now like to turn the conference over to Davin D'Ambrosio. Please go ahead.

Thank you, Linda, and good morning, everyone. Welcome to Suburban's fourth quarter and fiscal 2010 full-year conference call. I'm Davin D'Ambrosio, Vice President and Treasurer at Suburban. Joining me this morning is Mike Dunn, our President and Chief Executive Officer; Mike Stivala, our Chief Financial Officer.

Today's call is to review our fourth quarter and fiscal 2010 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.

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 our Form 10-K for fiscal year ended September 26, 2009, and our Form 10-K for fiscal year ended September 25, 2010, which will be filed on or about November 24, 2010. 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, which will be filed with the SEC on Friday morning due to Veterans Day holiday today. The Form 8-K will be available through a link on our website at www.SuburbanPropane.com.

At this point, I'd like to turn the call over to Mike Dunn for some opening remarks; Mike?

Thanks, Davin, and thanks everyone for joining us this morning.

Although fiscal 2010 proved to be one of the more challenging operating environments in quite some time, the Management team and employees of Suburban kept their focus, enhancing customer service, diligently managing our cost base, driving efficiencies, and further strengthening our balance sheet. Despite the many challenges that fiscal 2010 presented, our Adjusted EBITDA of $192.4 million was in-line with our internal expectations established at the beginning of the fiscal year.

During the year, we had several notable achievements, and to recap a few of those achievements, we refinanced all $250 million of our senior notes through 2020 at attractive rates. We acquired four independent propane operators, expanding our customer base in markets where we already have a strong presence.

Through our internal efforts to focus on net customer growth, we grew our propane customer base in an increasing percentage of our customer service centers, compared to the prior year. We expanded within our current territories for the natural gas and electricity marketing segment, increasing our customer base by 13%. We increased the annualized distribution rate each quarter during the fiscal year for a total increase of $0.08 per common unit, or 2.4%, compared to the end of fiscal 2009, and we ended the year with nearly $157 million of cash on-hand, and a distribution coverage ratio of greater than 1.3 times.

A little later, I will provide some closing remarks including thoughts for the coming year. At this point, however, I will turn it over to Mike Stivala to discuss our full-year and fourth quarter results in more detail; Mike?

Thank you, Mike, and good morning, everyone.

As we reported throughout the year, the fiscal 2010 challenges included the obvious negative effects of the prolonged weakness in the economy, mild weather during the peak [heating] season, particularly in the West and Northeast regions of the country, and somewhat volatile commodity prices. In many ways, other than the impact of the economy, this fiscal year was in stark contrast to the operating environment of fiscal 2009. Nonetheless, as Mike indicated, we are very pleased with our operating results, which were in-line with our expectations.

Furthermore, we took proactive steps to further strengthen our balance sheet through the refinancing of our senior notes, which has essentially eliminated refinancing risk until our revolving credit facility matures in June 2013. Our balance sheet and overall distributable cash flow remains strong, as we ended the year with $156.9 million of cash on hand, and a leverage profile of just 1.79 times.

Looking at our full-year results, to be consistent with previous reporting, I am excluding the impact of a $5.4 million unrealized non-cash loss applicable to FAS 133 accounting, compared to an unrealized gain of $1.7 million in fiscal 2009. Net income totaled $120.7 million, or $3.41 per common unit for fiscal 2010, compared to net income of $163.5 million, or $4.94 per common unit in the prior year.

Fiscal 2010 results included a loss on debt extinguishment of $9.5 million associated with the refinancing of our senior notes, as well as a $2.8 million non-cash pension settlement charge, while fiscal 2009 included a $4.6 million loss on debt extinguishment associated with the debt-tender offer completed in September 2009. Therefore, excluding the effects of these significant items from both years, Adjusted EBITDA was $192.4 million for fiscal 2010, a decrease of $46.8 million, or 19.6%, compared to Adjusted EBITDA of $239.2 million in the prior year. Just to note as well, the significant items had a negative impact of $0.35 per common unit, and $0.14 per common unit, on the current and prior year income per unit, respectively.

As we have previously reported, the prior year earnings benefited from a rapid and dramatic decline in commodity prices, which resulted in increased margins that we did not expect to be repeatable in fiscal 2010. Looking at our results in a little bit more detail, retail propane gallons sold in fiscal 2010 decreased 26 million gallons, or 7.6%, to 317.9 million gallons, from 343.9 million gallons in the prior year.

Sales of fuel oil and other refined fuels decreased 14.2 million gallons, or 24.7%, to 43.2 million gallons, compared to 57.4 million gallons in the prior year. The predominant factor contributing to the volume decline during fiscal 2010 was the weak economy, particularly in the non-residential sectors of our business and, to a lesser extent, continued residential customer conservation. In fact, within our propane segment, the non-residential customer base accounted for more than 60% of the year-over-year volume decline.

In addition to the impact of the economy, volumes in both segments were negatively affected by warmer average temperatures in the Northeast and Western regions of the country, particularly during the peak heating months from October to March. While average heating degree days across all of our areas of operations were 5% warmer than normal and 4% warmer than the prior year, colder than normal temperatures in the Southeast, where average heating degree days were 8% colder than normal, offset warmer temperatures in the Northeast and the West. Additionally, as a result of our organic growth initiatives and favorable weather in the Southeast, we experienced growth in residential volumes in approximately one-third of our customer service centers, which offset a portion of the volume shortfall.

The commodity markets were a roller coaster ride as propane prices rose steadily beginning in the summer of 2009, peaking in February 2010, only to begin a retreat, which lasted through June 2010. However, prices again rose steadily in the fourth quarter. For the year, average posted prices for propane and fuel oil increased 46.3% and 26.1%, respectively, compared to the prior year.

Spot propane was trading around $1.20, basis [Mont Belvieu], at the end of September 2010, compared to $0.93 a year earlier. Today, spot propane is trading around $1.28, basis Mont Belvieu, and spot heating oil is trading at about $2.40. Total gross margins of $543.6 million for fiscal 2010 were $57.5 million, or 9.6% lower than the prior year of $601.1 million. Again, as discussed throughout the year, the prior year earnings benefited from the dramatic decline of commodity prices in 2009, which produced increased margins that were not repeatable in 2010. Also, contributing to the lower gross margins in fiscal 2010 was the impact of lower volumes.

Combined operating and G&A expenses of $351.2 million, or $10.6 million, or 2.9% lower than the prior year of $361.8 million, primarily due to lower variable compensation associated with the lower earnings of fiscal 2010, coupled with lower general insurance costs, and continued savings and payroll and vehicle expenses attributable to further efficiencies. Offsetting some of the expense savings was an increase of $1.9 million in bad-debt expense associated with generally higher prices. While overall bad-debt expense was higher compared to the prior year, as a percentage of revenues, the expense remains below 0.5% , which is in-line with our historical average.

Capital spending for the year totaled $19.1 million, which included $9.7 million of maintenance capital. And, turning to our balance sheet, we ended the year of $156.9 million of cash on hand and, as has been the case since April 2006, we funded all working capital needs, along with our capital expenditures, as well as the four acquisitions that Mike mentioned, from internal cash without the need to borrow from our revolver.

Turning to our fourth quarter results, given the seasonal nature of our business, we typically report losses for our fiscal fourth quarter. As I discussed the results for the quarter, I am excluding the impact of a $500,000 unrealized non-cash loss from our current quarter results applicable to FAS 133 accounting, as well as the $2.8 million non-cash pension settlement charge that I mentioned earlier, compared to $2.5 million unrealized gain in the prior-year quarter applicable to FAS 133 accounting, and the $4.6 million loss on debt extinguishment recorded in the prior year. We reported a net loss of $21.5 million, or $0.61 per common unit for the fourth quarter of fiscal 2010, compared to a net loss of $20.8 million, or $0.61 per common unit in the prior-year quarter. Adjusted EBITDA for the fiscal 2010 fourth quarter was a loss of $6.6 million, compared to a loss of $2.7 million in the prior-year quarter.

Retail propane gallons sold in the fiscal 2010 fourth quarter amounted to 47.4 million gallons, after a decrease of 1.7 million gallons, or 3.5%, compared to 49.1 million gallons in the prior-year fourth quarter. Sales of fuel oil and other refined fuels decreased 1.8 million gallons to 5.1 million gallons, compared to 6.9 million gallons in the prior-year fourth quarter. With the highest concentration of non-residential business typically reported during our fiscal fourth quarter, the volume decline was primarily in the commercial and industrial sectors of our business, reflecting the continued affects of the economy. Lower volumes in both propane and fuel oil contributed to the lower EBITDA in the fourth quarter of fiscal 2010 compared to the prior year, as well as higher G&A expenses, which was associated with higher bad-debt expense, increased advertising costs, and higher compensation expenses related to our long-term incentive programs.

Back to

Thanks, Mike.

As announced in our October 21 press release, we were extremely pleased to declare our 18th consecutive increase in our quarterly distribution, which now equates to an annualized rate of $3.40 per common unit, an increase of $0.08 per common unit, or 2.4%, compared to annualized rate at the end of 2009. Quarterly distribution was paid on November 9 to our unit holders of record as of November 2.

Looking ahead to fiscal 2011, economic uncertainty and volatility in the commodity markets will undoubtedly, again, present operational challenges in terms of managing volumes and margins. However, we remain focused on the things we can control. Providing exceptional service to our existing customer base, continuing and to continue to execute on our customer growth initiatives. Additionally, we will remain active in our efforts to expand our existing operations through small- to mid-size bolt-on acquisitions.

While we do not budget or forecast acquisitions, we were optimistic about the opportunities that lie ahead. Furthermore, we are confident in our proven ability to successfully integrate the acquired businesses into our existing platform from both the financial and operational perspective.

We are also poised to take a more aggressive posture with incremental volume opportunities in fiscal 2011, as we seek to enhance our return on assets employed, and capitalize on our operational efficiencies. As we continue to maneuver through these difficult times, we are confident that our solid financial position, flexible cost structure, and experienced Management team provide us with the necessary components to successfully navigate through what could be an even more challenging year.

Lastly, I would like to again acknowledge the continued efforts of our employees in making fiscal 2010 a success. And, as always, we appreciate your support and attention this morning, and would like to open the call up for questions.

Linda, could you help with us that?

Certainly, thank you. (Operator Instructions) And our first question comes from the line of Darren Horowitz. Please go ahead.

Good morning, guys. How are you?

Good, Darren. How are you?

Good, thanks. Mike, first question and obviously, I realize that the fiscal fourth quarter has had a higher concentration of non-residential business. But as it relates to the impact of conservatism into the first month and a half of your fiscal first quarter here, how are volumes tracking versus the same period last year? I'm trying to get my arms around any sort of lingering customer conservation as it relates to year-over-year volume expectations.

I think what we are seeing in the first quarter here, Darren, is more the effects of the weather. Particularly on the east coast, as well as on the west, but to a little bit lesser extent. The weather in October was extremely warmer than normal. So, I think it's more, so far, reflective of the weather patterns than continued conservation.

Okay. As it relates to where propane prices are basis Bellevue and the expectation for that to possibly to continue, what are your thoughts there on customer conservation?

This is Mike Dunn, Darren. For customer conservation, the interesting thing is when you dissect our numbers, as we do all the time, when we had weather, our residential volumes were in fact in line with previous years. So, the conservation aspect may not be as big an issue as it's been over the course of the last couple of years. However, not knowing what prices are going to be over the course of the next six months, it's difficult to say that definitively.

Sure. Okay, and then just shifting gears, Mike, you mentioned that you would be focusing on a lot of the small to mid-sized bolt-on acquisitions. But if you were to expand the fairway a bit beyond that, has the bid/ask spread narrowed to a point where you guys think that something transformative could materialize? In particular, we had heard from one of your larger competitors yesterday that the multiple range they thought for acquisitions was in the 5 to 7 times EBITDA. And I'm curious as to your thoughts.

That's about right on an exit basis.

Okay, is there anything out there that maybe has come a bit more closely into focus for you?

We actually have about four or five right now in the pipeline that we're actually studying. So, we are hopeful that we can continue. Obviously, we would like to increase and build on the pace that we experienced in 2010.

Sure. Keep up the good work. I appreciate it. Thanks.

Thanks Darren.

Thank you, and next we will go to the line of Michael Cerasoli. Please go ahead.

Thanks, good morning. Kind of just going more on the acquisitions. You added a few in strategic markets. And given your wide footprint, how do you determine the level of importance of each market ? And separately, how do you determine the amount of synergies that an acquisition

Well, if I refer back to the four that we did in 2010, we essentially moved that customer base with a couple of the acquired employees into an existing operation.

So, it's central -- it's more of a logistical synergies than anything else?

Correct. But the synergies are significant when you look at the reduced need for certain capital equipment such as trucks and tanks and so forth and so on. So the synergies are actually pretty good. It's the customer retention piece that always becomes the challenge and we actually face off with those customers, particularly the larger customers that we may acquire so that they at least understand that this is a big company coming in and just replacing a small local operator. So far, knock on wood, the integrations have been pretty successful.

From a footprint perspective, you know what our map looks like and obviously, we will continue. There really isn't any one market that is better than an other with respect to looking harder for acquisitions. Obviously, the management of a particular center or the management in that particular region, if it's -- particularly if it's new people, we may be a little less inclined to take on something that might have a little more risk to it. But when we are actually looking at these acquisitions, we are looking at the safety record of the potentially acquired company, their record keeping, their base business practices, et cetera. And we have actually walked away from a couple that we didn't think were operating in a safe manner.

And you talked about the larger customers. Do they use that as an opportunity to renegotiate terms? Or is it more just, I'm not really familiar with Suburban or just trying to get comfortable with the new supplier?

It's really more just a relationship kind of thing. Fortunately -- and basically looking at us and saying, you better not let me down, that kind of thing. They got to pull the macho stuff on you.

(Laughter) And then separately, if you could just talk a little bit more about propane supplies as we head into the winter, just a more details on your base case assumptions for this coming winter, the trend of pricing, et cetera. It would be very helpful.

Again, you know what? Mike, we have seen how volatile crude oil has been and obviously, propane will tend to track to the higher of the two being natural gas or crude oil. So, the volatility is going to -- I believe the volatility is going to come from the crude oil market, which we were led to believe is subsequently tied to the stock market, which is subsequently tied to the dollar. So, in any event, I don't think you are going to see crude prices get too crazy, ie two years ago. But however, I think that the choppiness could be a challenge to manage.

And then longer term, if -- we'd love to hear any thoughts you may have on how the Marcellus Shale may impact the propane markets over the next few years.

It's actually going to be interesting. Obviously, you are going to have to build some infrastructure there with respect to fractionization plants so forth and so on. We believe that on a differential basis, we may be able to access supply in the northeast at some discount to the normal movement via the Bellevue techo pipeline.

Thanks for your time.

You're welcome.

Thank you. (Operator Instructions) And our next question comes from the line of John Tysseland. Please go ahead.

Hi, guys. Good morning.

Hi, John.

Just to hit on the acquisitions one more time. Just over the last few years, you guys have been a bit more cautious on the acquisition side of the equation, and now it sounds like you are being a little bit more aggressive, and I just wanted to get a feel for what's changed in the market. Is it more the market has come to you, or are you just more comfortable going out there and deploying capital?

It's the latter, John. But more importantly, you have been following us for a long time, so you have watched the evolution of our operating platform, the development of our systems, the consolidation of operating units and satellites and so forth and so on. And coming out of 2009, we felt comfortable that we could do exactly what we have done with these four acquisitions which is in fact, buy a business and fold it completely into an existing service center. We spent a lot of time over the course of the last ten years training people, setting up our regions that would make sense, getting our routing in line, getting -- et cetera, et cetera, et cetera. All of the things that have obviously generated some significant operational saving over the course of the years. So, it's really more that we are sitting here, we are looking at it. It is an opportunity. The market is a little bit easier because there is a lot of uncertainty in the minds of the mom and pop operators. And we are operationally better poised today than we were two or three years ago.

Is it something where the operators that you are looking at would rather sell in the January, February timeframe so they get a few months of cash flow, or you think you could shake them loose before then?

Again, it all depends on the location, okay, and what January and February really mean to them in terms of cash flow dollars. I think that if you are looking at negotiating with them at today's -- more or less today's multiples, the calendar doesn't get in the way.

And then also on the -- last year, we saw -- in the last couple of years, we have seen industrial sensitive volumes coming out. What -- has that reached a base line, do you think, in this point in time, and now we are more or less looking at weather? In other words, you should expect industrial to pick up a little bit on the base line volumes and then weather sensitive volumes, it is going to be whatever the weather is.

Yes, I think in general terms, I think if you've come close to the bottom with respect to the industrial market. Obviously, the economy will have a part in that, particularly -- especially in some markets. However, from Suburban's perspective, our intention is to become a whole lot more aggressive in that marketplace. And I'm not suggesting that we're going to start being careless with the kind of business we are doing, but we're going to -- we look at our minimum cost base, okay? What we need to service our existing platform. And needless to say, because it is a cyclical business, there is a surplus of usage. There is an opportunity to use the assets better. And that's what we are classifying or calling incremental growth opportunities. And those are the kinds of opportunities that we're going to seek out.

Great, guys. Thank you very much.

You're very welcome.

(Operator Instructions) Next we'll go to the line of Ron Londe, please go ahead.

Thanks. In your closing remarks, it seemed to me like between the lines you were saying that you were going to become more aggressive on a price basis. Am I reading too much into that?

Yes, you are. Yes, you are. Basically, a follow on to what I was just saying to John. We are going to look at some bigger volume opportunities, and we are going to look at them more on an incremental basis. We are able to do that, and Ron, you have followed us for a long time. We believe that our -- we can look at our business, separating the base business, okay? And then looking at incremental opportunities to build off of any excess capacity that we may be having in certain markets. So, it is going to vary from region to region.

In the fourth quarter, cost of products sold was up 32%. What is that looking like so far in this quarter, and how do you perceive your ability to pass those costs along to your customers?

We are still able to pass those costs on. Obviously, with the economy, it becomes a little bit more difficult. You can do the math, and I think as an industry, you will see that margins have somewhat stabilized over the last year as opposed to going back three or four years. I think for the moment,one has to be realistic with respect to the upside potential for margins, and I think it's somewhat limited at this stage.

From the standpoint of the return that you get on your cash balance versus what it costs you to maintain a line of credit, is that a breakeven type of situation? Or do you actually mange money on that, or?

It's closer to breakeven. We are not making any money on it, Ron, on a net basis, but it is closer to breakeven, yes.

Alright, that's all I have.

Thanks, Ron.

Thank you. At this time, we have no further questions. Please continue.

Everyone, I like to again say thank you. We will catch up with you again in the new year. Wish everyone a happy holiday season and needless to say, if anyone comes up with a question or whatever have you, Mike, Dav and myself are certainly available to any one of you. So, again, thank you. Thank you, Linda.

Thank you. Ladies and gentlemen, this conference will be available for replay after 11 AM eastern time today through November 12. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code of 174458. International participants may dial 320-365-3844. Those numbers again are 1-800-475-6701 and 320-365-3844 with the access code of 174458. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference.