Suburban Propane Partners LP (SPH) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the first quarter 2000 results -- 2011 results conference call for Suburban Propane.

This conference call contains forward-looking statements within the meaning of Section 21E 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 earnings press release, which can be viewed on the Company's website. All subsequent written and oral forward-looking statements attributed to the Partnership or persons acting on its behalf are expressly qualified in their entirety by such cautionary statements.

(Operator Instructions).

As a reminder, today's conference is being recorded.

I would now like to turn the conference over to our host, Mr. Davin D'Ambrosio. Please go ahead.

Thank you, Shannon, and good morning, everyone. Welcome to Suburban's fiscal 2011 first quarter results 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, and Mike Stivala, our 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. Before getting started I would 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 our partnership's SEC filings, including its Form 10-K for the Fiscal Year ended September 25, 2010, and our Form 10-Q for the period ended December 25, 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'd like to get started by turning the call over to Mike Dunn for some opening remarks.

Mike?

Thank you, Davin, and thanks, everyone, for joining us this morning.

The first quarter of fiscal 2011 presented us with a number of challenges, including volumes that were negatively affected by significantly warmer than normal weather during the first six weeks of the quarter, continued customer conservation attributable to the ongoing weakness in the economy. Commodity prices also rose steadily throughout the quarter, negatively impacting our risk management activities. However, as weather conditions improved we ended the quarter strongly, with December volumes that were higher than the prior year. In light of the late start to the heating season, we are pleased with our earnings for our first quarter, as our field personnel did an excellent job managing operating expenses and responding when the weather finally did arrive.

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 the Mike Stivala to discuss our first quarter results in more detail.

Mike?

Thanks, Mike, and good morning, everyone.

As we discussed on our last conference call, we anticipated that continued weakness in the economy and potential volatility in the commodity markets would again present operational challenges in terms of managing volumes and margins in the current fiscal year. The first quarter was every bit as challenging as we anticipated. However, our flexible operating structure provides a critical advantage for us as we navigate through the challenging landscape that the industry as a whole continues to experience.

Looking at our first quarter in detail, as we discuss our first quarter results, to be consistent with previous reporting, I am excluding the impact of a $1.6 million unrealized noncash loss applicable to FAS 133 accounting compared to an unrealized loss of $3.4 million in the prior year first quarter.

Adjusted EBITDA for our first quarter totaled $60.1 million, a decrease of $6.1 million compared to $66.2 million for the first quarter of fiscal 2010. Net income totaled $44.7 million, or $1.26 per common unit, for the first quarter of fiscal 2011, compared to net income of $51.8 million, or $1.47 per common unit, in the prior year first quarter.

Retail propane gallons sold in the first quarter of fiscal 2011 decreased 3.7 million gallons, or 4.1%, to 86.3 million gallons, from 90 million gallons in the prior year quarter. Sales of fuel oil and other refined fuels decreased 1.7 million gallons, or 13%, to 11.4 million gallons, compared to 13.1 million gallons in the prior year. The primary factor contributing to the volume decline was the unseasonably warm weather during the first six weeks of the quarter, and, to a lesser extent, customer conservation attributable to the economy and the higher priced commodity environment.

For the quarter as a whole, average temperatures across our service territories were close to normal and slightly colder than the prior year first quarter. However, during the first six weeks of fiscal 2011 average temperatures were 13% warmer than normal and 18% warmer than the prior year comparable period. In the commodity markets, average posted prices for propane and fuel oil for the quarter increased 15.5% and 18.5%, respectively, compared to the prior year first quarter, and on a sequential basis propane prices increased 17.8% over the average prices in the fourth quarter of fiscal 2010. Today spot propane is trading at about $1.35 per gallon basis Mont Belvieu and spot heating oil is trading around $2.75.

Total gross margins of $143.4 million for the first quarter of fiscal 2011 were $11 million, or 7.1%, lower than the prior year first quarter of $154.4 million, primarily as a result of the lower volumes as well as from realized losses on derivative instruments used in risk management activities, resulting from the steady rise in commodity prices during the quarter.

As we've discussed in the past, our risk management activities are intended to protect downside price risk on our priced physical inventory. Although our physical inventory benefited from rising commodity prices, sales volumes were such that we did not realize sufficient gains embedded in the lower priced inventory to offset the realized losses during the first quarter of fiscal 2011. Absent a significant retreat in commodity prices, margins could benefit in the second quarter.

Combined operating and G&A expenses of $83.3 million, or $4.9 million, or 5.6%, 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 and 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, while our aging profile has improved.

Depreciation and amortization expense for the quarter of $8.2 million increased $1.1 million compared to the prior year first quarter as a result of assets acquired in the prior year. Net interest expense of $6.8 million for the first quarter of fiscal 2011 was $400,000 lower than the first quarter of the prior year, a benefit from the debt restructuring that was completed late in fiscal 2009 and into the first quarter of fiscal 2010.

Total capital spending for the quarter was $5.8 million, which included $2.5 million of maintenance capital.

Turning to our balance sheet, we continue to fund all working capital requirements with cash on hand, and as we move through our historically high period of seasonal working capital needs, which will typically peak in the January-February time frame, we once again have not accessed our bank revolver, and in fact we entered the quarter with $115.6 million of cash on hand.

Our financial position remains very strong, with leverage of 1.85 times at the end of the quarter. And, as a reminder, we have no immediate debt maturities to address, as all of our senior notes mature in 2020 and our credit revolver matures in June 2013.

Mike, back to you.

As announced -- thanks, Mike -- as announced in our January 20 press release, we were pleased to declare our 19th consecutive increase in our quarterly distribution, which equates to an annualized rate of $3.41 per common unit, which will be paid on February the 8th to our unit holders of record as of February the 1st. This represents a 2.1% growth over the prior year first quarter, and our distribution coverage at the end of this quarter was 1.25 times.

Looking ahead to the remainder of fiscal 2011, as Mike stated earlier, we anticipated that fiscal 2011 would present a more difficult environment in terms of managing our volumes and margins, and through January this has proven to be the case. The favorable change in the weather pattern which began in late November and has extended throughout January has provided some positive momentum heading into the second quarter. However, it is still too early in the heating season to fully gauge the impact of the favorable weather pattern. As always, we remain focused on the things we can control by operating in a safe and efficient manner and providing exceptional customer service.

Additionally, with our financial strength we continue to focus on achieving our growth initiatives. In fact, during this past quarter we closed on our fifth bolt-on acquisition in the past 12 months, located in the North Carolina market, which will complement our existing presence there. We continue to look for small to midsize businesses that can add value to our existing operating footprint, and we remain optimistic that the challenges facing the industry will present us with more growth opportunities during the year.

In closing, I would like to take this opportunity to acknowledge the ongoing efforts of all of our dedicated employees, who remain focused on driving efficiencies in all aspects of our business during these challenging times. And, as always, we appreciate your support and attention this morning and would now like to open the call up for questions.

Shannon, can you (inaudible) that?

Thank you. (Operator Instructions).

The first question is from the line of Darren Horowitz. Please go ahead.

Good morning, guys. How are you?

Hey, Darren.

Hi, Darren. How are you?

Good, thanks. Mike, my first question goes back to a point that you had mentioned in your prepared commentary when you were talking about the favorable weather as we progress here through the fiscal second quarter. I'm curious as to how much of an impact you think the higher propane prices will act to somewhat offset that positive weather-driven benefit to volumes as we're now through January and into February.

I think certainly as we saw in the first quarter the high-priced environment continues to drive customer conservation. The weather has certainly had the benefit of offsetting some of that, although to some degree it also presents challenges for us to get our trucks on the road, and in other ways the weather affects our ability to deliver. So, I think as we progress through the second quarter we'll get a better sense of the impact of that weather, but clearly the high-priced environment is affecting customer behavior.

Sure. Switching gears over to the acquisition front, two questions here. First, if you include all five of these bolt-on acquisitions that you've announced, how much volume does that represent annually?

It's about 7.5 million, maybe 8 million gallons, Darren.

Okay. And then, just from a big-picture perspective, last quarter we had talked about you guys studying four or five potential acquisitions at that point in time, and I would imagine that this North Carolina acquisition is one of them, but as you look at the landscape for acquiring volumes what stands out to you? I mean, are there still kind of four or five key targets? Has there been any shift in thought process as it relates to geographic position and bolting on volumes maybe in a different way?

No, not at this stage. I mean, last quarter we did have four that we were studying. We ended up closing on one. We're still working on two others in addition to a couple of others that have popped up over the course of the last few weeks. At this particular point in time our inclination and our opportunity to create the most value is to stick with our existing footprint.

Okay. Thanks for the time, guys. I appreciate it.

You're welcome.

Thanks, Darren.

The next question is from the line of Ron Londe. Please go ahead.

Yes, could you characterize the margins per gallon in the first quarter versus what you've experienced in January so far, better, worse?

About the same, Ron.

About the same?

Yes.

Do you expect that to be carried through the first quarter, or the second quarter, pardon me?

Pretty much. I mean, there may be a little bit of an uptick as replacement cost gets higher, but for the most part we're not anticipating anything extraordinary.

On the commercial side of the business, what are you seeing there from the standpoint of improvement? Any significant new customers? Can you characterize what's going on in that part of the business?

Well, if you want to do business for nothing you could probably generate pretty aggressive volumes, okay? However, if you want to get a return on your investment you are seeing some improvement in the commercial area with respect to a lot of business opportunities.

What's your choice?

We prefer making money, Ron.

Okay.

We look for some (inaudible).

So do your investors.

I just thought it was important to indicate that, because anybody who thinks that this economy is on the right track back is smoking something funny.

Okay. Thank you.

You're welcome.

Thank you, Ron.

The next question is from the line of Michael Cerasoli. Please go ahead.

Hi. Good morning, guys.

Hey, Mike.

Good morning, Mike.

Just a couple of follow-up questions on those little acquisitions you guys executed on -- could you give us some -- just some insight as to the multiples or a range of multiples on these little acquisitions, and also, is that representative of the market right now?

If we stick to looking for opportunities within our footprint, we believe the multiple range will stay reasonably stagnant, and we're looking on an exit basis somewhere in the 5 to 6 times range.

Okay. And then, I mean, are you seeing a lot of these little opportunities out there, I mean, enough to kind of maybe lump -- I don't know if you want to quantify how many you think you can do on an annual basis. I mean, you don't want to put yourself into that corner. I was just curious. Do you see, I guess, frequent opportunities for these little acquisitions?

We end up turning away more than we do simply because when we look at them a lot of them are not quality acquisitions. They've either built their business on extremely low margins, they're price-driven businesses, or they're not very safe.

Okay. Just -- sorry? Oh, just kind of switching gears to the fuel oil, I just, I noticed that the, I guess the DOE is going to be selling a whole bunch of heating oil into the market and was wondering how that would impact your -- I guess they're replacing it with the ultra-low sulphur distillate fueler. I'm just wondering how that may impact your operations, your fuel oil operations.

I mean, it shouldn't have any real impact. I mean, it's not something that's new to us. We've been moving ultra-low sulphur fuel oil for the last two years.

Okay.

Keep in mind, it's a will-call business, so, taking into consideration the economy, people are managing their household budgets a lot closer than they have in the past.

Great. That's it for me. Thanks.

You're welcome.

(Operator Instructions).

Please continue, sir. There are no further questions.

Shannon, thank you, and, again, thank you all for participating in our call. Needless to say, if you get a follow-up question, feel free to give any one of us a phone call and we'll be happy to answer your questions. Thank you.

Ladies and gentlemen, this conference will be available for replay beginning today at 11.00 a.m. Eastern, running through Friday, February 4, at midnight Eastern Time. You may access the AT&T Playback Service by dialing 800-475-6701 and entering the access code of 189494. Again, this conference will be available for playback beginning today at 11.00 a.m. Eastern, running through Friday, February 4, at midnight Eastern Time. You may access the AT&T Playback Service by dialing 800-475-6701 and entering the access code of 189494.

That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.