Suburban Propane Partners LP (SPH) 2011 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the full-year and 4th-quarter 2011 financial results conference call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session with instructions given at that time. As a reminder, this conference is being recorded. (Operator Instructions).

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 the operation. 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 to 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, Cathy. Good morning, everyone. Welcome to Suburban's 4th-quarter and fiscal 2011 full-year results. I am 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 4th-quarter and fiscal 2011 full-year results, along with our current outlook for the business. As usual, once we have concluded our prepared remarks we will open the session to questions. Before getting started, however, 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 the fiscal year ended September 25, 2010, and our Form 10-K for fiscal year ending September 24, 2011 which will be filed on or about November 23, 2011. 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 was furnished to the SEC this morning. Form 8-K will be available through a link on our website at www.Suburbanpropane.com.

At this point, I would like to turn the call over to Mike Dunn for some opening remarks. Mike?

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

Fiscal 2011 proved to be every bit as challenging as we expected. The weak economy combined with persistent high commodity prices continued to put pressure on both volumes and margins. As we have proven in the past, and this year is no different, we have the ability to adapt our systems and operational model to effectively manage our cost structure and drive efficiencies. Specifically, the steps we took this past spring to realign our operating model will not only have an influence on our overall cost structure, but more importantly, place our operating personnel in the best position to focus on quality customer service and customer growth. With this quarter's $2 million improvement in adjustment EBITDA compared to the prior year 4th quarter, we have already started to realize some of the operational and financial benefits that we anticipated from our realignment efforts.

A little later I will provide some closing remarks including thoughts for the coming year. However, at this point, I'll turn it over to Mike Stivala to discuss our full-year and 4th-quarter results in more detail.

Thanks, Mike. Good morning, everyone. I'll start by focusing on our full-year results and then give a little color on the 4th quarter toward the end of my remarks. To be consistent with previous reporting, I am excluding the impact of a $1.4 million unrealized non-cash gain applicable to FAS 133 accounting that compares to an unrealized loss of $5.4 million in fiscal 2010.

Net income totaled $113.5 million, or $3.20 per Common Unit, for fiscal 2011 compared to net income of $120.7 million, or $3.41 per Common Unit in the prior year. Fiscal 2011 results included a $2 million charge for severance costs associated with the realignment efforts during our 2nd quarter as well as a non-cash charge of $2.9 million within depreciation expense to accelerate depreciation on assets taken out of service. By comparison, net income and EBITDA for fiscal 2010 included a loss on debt extinguishment of $9.5 million associated with the refinancing of our senior notes, a $2.8 million non-cash pension settlement charge as well, as a non-cash charge of $1.8 million within depreciation expense. Therefore, excluding the affects of these items from both years, adjusted EBITDA was $179.4 million for fiscal 2011, a decrease of $13 million, or 6.8% compared to adjusted EBITDA of $192.4 million in the prior year.

Retail propane gallons sold in fiscal 2011 of 298.9 million gallons, decreased 19 million gallons, or 6% compared to 317.9 million gallons in the prior year. Sales of fuel oil and other refined fuels decreased 6 million gallons, or 13.9% to 37.2 million gallons compared to 43.2 million gallons in the prior year. As Mike mentioned, the ongoing weakness in the economy coupled with high commodity prices continue to negatively affect the buying habits of both residential consumers as well as commercial industrial accounts. To a much lesser extent, a slow start to the heating season with significantly warmer than normal temperatures during the first six weeks of the fiscal year also contributed to the volume decline. Overall, average temperatures for the year were 1% warmer than normal which compares to 4% warmer than normal in the prior year.

In the commodities markets, base commodity prices trended higher throughout much of the fiscal year and, in particular, propane prices continue to rise even as crude oil prices abated a bit toward the end of the summer. Spot propane was trading about $1.51 per gallon basis Mont Belvieu at the end of September 2011, which compares to $1.20 a year earlier. For the year, average posted prices for propane and fuel oil increased 26.7% and 36.6% respectively compared to the prior year.

Total gross margins of $510.4 million for fiscal 2011 were $33.2 million or 6.1% lower than the prior year of $543.6 million. Lower margins were attributable to the lower volumes sold and, to a lesser extent, lower unit margins. Combined operating and G&A expenses of $331 million were $20.2 million, or 5.8% lower than the prior year of $351.2 million. Savings were attributable to lower variable compensation from the lower earnings, lower payroll and medical costs as a result of lower head count, and lower insurances costs, partially offset by higher fuel costs to operate our fleet. Capital spending for the year totaled $22.3 million, which included $10.1 million of maintenance capital.

Turning to our balance sheet, we ended the year with approximately $150 million of cash on hand and a leverage ratio of just 1.98 times. As has been the case since April 2006, we funded all working capital needs along with our capital expenditures from internal cash without the need to borrow on our revolver. Looking specifically at the 4th-quarter results, consistent with the seasonal nature of the business, we typically report losses for our fiscal 4th quarter. As I discussed the results for the quarter, I am excluding the impact of an $800,000 unrealized non-cash loss from our current quarter results applicable to FAS 133 accounting compared to a $500,000 unrealized non-cash loss in the prior year quarter, as well as the $2.8 million non-cash pension settlement charge that I referenced in the full-year comparison, which we reported in the prior year 4th quarter.

We reported a net loss of $20.9 million, or $0.59 per Common Unit for the 4th quarter of fiscal 2011, compared to a net loss of $21.5 million, or $0.61 per Common Unit in the prior year quarter. Adjusted EBITDA for the fiscal 2011 4th quarter improved by $2 million to a loss of $4.6 million compared to a loss of $6.6 million in the prior year quarter. Retail propane gallons sold in the fiscal 2011 4th quarter amounted to 44 million gallons, a decrease of 3.4 million gallons compared to 47.4 million gallons in the prior year 4th quarter. Sales of fuel oil and other refined fuels decreased 1.1 million gallons to 4 million gallons in the fiscal 2011 4th quarter.

Total gross margins of $75.2 million for the fiscal 2011 4th quarter were slightly below the prior year 4th quarter of $75.6 million. Combined operating and G&A expenses decreased $2.5 million, or 3%, to $79.7 million compared to the prior year 4th quarter, due to lower variable compensation and continued savings in payroll, benefits, and field-related expenses. Overall, we ended the year with two consecutive quarters of improvement in year-over-year adjusted EBITDA, and we believe we are well positioned to effectively operate through the continued challenges facing the industry.

Back to you, Mike.

Thanks, Mike. As announced in our October 20 press release, our Board of Supervisors declared our quarterly distribution of $0.8525 per Common Unit, which equates to an annualized rate of $3.41 per Common Unit. Quarterly distribution was paid this past Tuesday, November 8, to our unit holders of record as of November 1.

Looking ahead, with the absence of any real growth in the economy, stubbornly high unemployment and persistent high commodity prices, we fully expect the pressure on volumes and margins to continue throughout fiscal 2012. In particular, as these macro factors persist, consumers are becoming more and more mindful of their overall household budgets, thus driving the potential for added energy conservation. Nonetheless, with the steps we've taken this past string, along with our proven track record of effectively managing our cost structure, we believe that we are well-positioned to navigate through the challenging environment, while at the same time being opportunistic in the marketplace.

Additionally, our field personnel will remain focused on providing exceptional service to our existing customer base, developing programs to help our customers manage their energy bills and continuing to execute on our customer growth initiatives. Finally, as Mike stated earlier, our balance sheet and distribution coverage remains strong with nearly $150 million in cash and a low leverage profile, we are in a good position to respond to opportunities that may arise and to provide our valued unit holders with the added comfort relative to the stability of their distributions.

Lastly, I would again like to acknowledge the continued efforts of our employees in making fiscal 2011 a success in the face of some significant headwinds. We have a dedicated work force focused on driving efficiencies while at the same time delivering quality customer service. And as always, we appreciate your support and attention this morning.

We would now like to open the call up with questions. Cathy, can you help us with that?

(Operator Instructions) The first question comes from Darren Horowitz. Go ahead, please.

Good morning, guys.

Good morning, Darren.

Hey, Darren.

Mike, a couple of questions for you. First, I wanted to go back to something you just mentioned in your closing remarks, and I recognize it's difficult to do, but as you guys are looking at the forward fiscal year, is there any way at this point to quantify what you think the magnitude of economic pressures and customer conservation is going to have on next year's volumes or margins?

No, you're right. It's difficult, I think, at this stage, but I would probably put the volume decline potentially in the 3% to 7% range. It's pretty broad. It's a guess obviously. But, we manage our receivables pretty well and that is the part that's pretty tough to put a number on.

Sure. As you guys are starting to see the benefit on the cost side regarding a lot of those realignment and efficiency initiatives that you enacted a couple of quarters ago, how are you thinking that's going to progress into the next fiscal year? Is there any way to quantify how much more incremental benefit you expect on the OpEx line?

There will be I think as we continue to drive the efficiencies. What we said last quarter, the principle purpose for changing that was to remove a layer of management, but not necessarily the people that were a part of that layer, and we have created a broader geography and put it in the hands of five of our regional type people. It's the benefits of having them manage a broader geography that should create some synergies.

Right. And then last question for me. I'm sure you expected to get this. But, I am just curious as to your thoughts how you think the competitive landscape changes with AmeriGas' acquisition of Heritage? Is your focus still on more of the smaller fragmented mom and pops? Or now are you thinking possibly something larger where you could gain greater economies of scale and cost efficiencies?

What, we're looking -- we obviously look at everything. I think from a competitive perspective, I don't really see too, too much changing. After all, they were already in the marketplaces. I think it will be interesting to watch the integration process, and I think based on the success of that, will determine the real value that they created for their unit holders. But as far as we're concerned, we continue to look at the mom and pops, and obviously it's an encouraging first step to see two of the majors get together, and one would think that, that might prompt another one.

I appreciate it, guys, thanks.

You're welcome.

Next question comes from John Tysseland. Go ahead, please.

Good morning, John.

Hi guys, good morning. Can you talk about what you expect or how your positioned to deal with the regulations that are requiring low sulfur heating oil that will be phased in over the next several years in the Northeast. Does that mean that there's a -- are you seeing customers switch to propane? Are they switching to something else? How do you deal with that as a distributer?

Well, we have been doing the low sulfur heating offer for a couple of years now, and we haven't seen that as an issue. From a customer attrition perspective, obviously most of your heating oil activity is in the Northeast. You do have people switching to natural gas wherefore it's a possibility, and we have converted some people from heating oil to propane. However, there's a cost attached to that for the customer, and in today's economy, their decision-making process has been slowed somewhat.

Is that a common trend to go from the heating oil to propane as this regulation comes in? Do you think that accelerates over the next couple of years?

It's going to be propane or natural gas. The reality is, John, and you know it, and I think we have talked about it. Heating oil is probably the least environmentally friendly energy source. Over time, and I can't tell you what that time will be, but when you look at the other heating oil companies, and you see their volume decline, ours is not a surprise. Keeping in mind, however, that the biggest percent an of our volume decline is in the refined fuels area, not the heating oil area.

Got it. And then lastly, if you look at year-to-date, or I guess quarter-to-date or October's data, that is, the weekly data for the EIA, you get wholesale and retail propane numbers, it looks like margins are up year over year nicely. Is this a trend that you have seen and do you expect to try and hold that line at all over the next --?

Well, I think you've got to look at it in two ways, John. Your margins on a dollar, cents per gallon basis are flat to higher, slightly higher. But if you look at it as a percentage of gross margin percent, it's significantly lower. So even though margins are higher, price structure is not keeping up with the cost base.

Okay.

You see, and one of the things -- I'll throw this out there. One of the things that I think the propane industry is fighting as well is the correlation in price of propane to natural gas as long as propane continues to resemble the relationship to crude oil. Okay, so on a BTU basis, it's a head scratcher. At some point in time, I certainly would hope with all the production particularly coming in on the Northeast with the Marcellus Shale, that propane wholesale prices will become a little bit more representative of natural gas, which is your real competition.

Yes. Understood. Thanks, guys.

You're welcome.

There are no further questions at this time.

Okay. Again, everyone, have a good holiday. And we look forward to catching back up with you again next year. Thank you.

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