Suburban Propane Partners LP (SPH) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the first-quarter 2012 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 call is being recorded.

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 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, Davin D'Ambrosio. Please, go ahead.

Thank you, Greg, and good morning, everyone. Welcome to Surburban's fiscal 2012 first-quarter 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 Michael Stivala, our Chief Financial Officer.

The purpose of today's call is to review our first-quarter financial results along with the current outlook for the business. 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 its Form 10-K for the fiscal year ended September 24, 2011 and its Form 10-Q for the period ended December 24, 2011, 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 why those measures -- 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 the call started by turning it over to Mike Dunn for some opening remarks. Mike?

Thanks, Davin. And thanks, everyone, for joining us this morning. As we discussed on last quarter's conference call, we fully expected that fiscal 2012 would continue to present a challenging operating environment for the propane industry, with the continued weakness in the economy, limited new housing opportunities and stubbornly high commodity prices being the key drivers for our concerns.

However, our fiscal 2012 first-quarter results were most negatively affected by the unseasonably warm weather experienced throughout most of our service territories during the quarter and in particular during the month of December, 2011. In fact, according to NOAA, many areas of the country have experienced record warm temperatures so far this heating season.

Obviously we are disappointed with our results. However, as we've discussed for several quarters now, the industry has been in a cyclical downturn resulting from the more macroeconomic factors. The significantly warmer than normal temperatures for the first quarter across much of the nation only exacerbates the impact of these factors on both volumes and margins.

Nonetheless it is an environment such as this that reaffirms the importance of the steps we have taken to invest in our people, our technology and to restructure our operating model while at the same time strengthening our balance sheet and our cash position.

Despite these conditions I am pleased by the responsiveness of our flexible cost structure and the level of commitment by our field personnel in providing exceptional customer service while managing our customer base.

Furthermore, our financial position remains sound (technical difficulty) profile and more than $89 million of cash on hand, which not only provides us and our unitholders with a level of comfort in this slump, but will enable us to be responsive as opportunities present themselves.

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 thanks, everybody, for joining us this morning. As we discuss our first-quarter results, to be consistent with previous reporting I am excluding the impact of a $1 million unrealized non-cash loss applicable to FAS 133 accounting, that compares to an unrealized loss of $1.6 million in the prior year first quarter.

Adjusted EBITDA for our first fiscal quarter totaled $39.1 million, a decrease of $21 million, compared to $60.1 million for the first quarter of fiscal 2011. Net income totaled $24.3 million or $0.68 per common unit for the first quarter of fiscal 2012 compared to net income of $44.7 million or $1.26 per common unit in the prior year first quarter.

Retail propane gallons sold in the first quarter of fiscal 2012 decreased 12 million gallons or 13.9% to 74.3 million gallons from 86.3 million gallons in the prior year quarter. Sales of fuel oil and other refined fuels decreased 3.7 million gallons to 7.7 million gallons compared to 11.4 million gallons in the prior year first quarter.

As Mike stated earlier, the primary factor contributing to the volume decline and therefore the lower EBITDA was the lack of weather in most of our service territories throughout the quarter and in particular during the month of December. For the quarter average temperatures across our service territories were 11% warmer than normal and 9% warmer than the prior year first quarter.

Record warm temperatures were experienced throughout much of the Northeast and significantly warmer than normal temperatures were reported throughout the East Coast. While average temperatures in the West for the first quarter of fiscal 2012 were close to normal, temperatures in the upper Northwest and Alaska were significantly warmer than normal particularly in the month of December.

In fact, when you look at heating degree days in the Northeast for the quarter, they were 19% warmer than the prior year and in the South 30% warmer than the prior year.

In the commodity markets crude oil prices increased steadily throughout the first three months of fiscal 2012 while propane prices were relatively flat during the same period. From a pricing perspective average posted prices for propane of $1.44 per gallon for the first quarter of fiscal 2012 were 14.4% higher than the prior year first quarter, while the average posted prices for fuel oil of $2.98 per gallon were 26.1% higher than the prior year first quarter.

Total gross margins of $117.4 million for the first quarter of fiscal 2012 were $26 million or 18.1% lower than the prior year first quarter of $143.4 million, primarily as a result of the lower volumes. In addition, unit margins were slightly lower as a result of the competitive landscape along with the effects of a higher percentage of non-residential volume given the impact of weather on our residential volumes.

Combined operating and G&A expenses of $78.2 million were $5.1 million or 6.1% lower than the prior year first quarter primarily due to lower variable compensation attributable to the lower earnings as well as continued savings of payroll and benefit-related expenses as a result of the organizational realignment efforts initiated in mid-2011.

As for bad debts, we remain diligent about managing our receivables especially considering the current economic environment. During the quarter bad debt expense was lower when compared to the prior year first quarter and bad debt expense as a percentage of revenues has remained consistent with historical levels. Total capital spending for the quarter was $5.4 million which included $1.9 million of maintenance capital.

Turning to our balance sheet, we continue to fund all working capital requirements with cash on hand? As we move through our historically high period of seasonal working capital needs, which will typically peak in early February, once again we have not accessed our bank revolver and, in fact, we ended the quarter with $89.3 million of cash on hand.

Overall our financial position remains very strong as our leverage at quarter end was 2.2 times which represents one of the lowest in the MLP space.

During the quarter we took advantage of the opportunity to amend and restate our $250 million senior secured credit facility, as we announced on January 6. Our new five-year credit facility which was executed on January 5, 2012 extended the maturity date from June 25, 2013 to January 5, 2017. It also reduces our borrowing rate and commitment fees and provides us with greater flexibility within our covenant package.

With the completion of this amended facility we now have no immediate debt maturities to address until 2017. We are very pleased with the outcome of this amendment and the level of support provided by our bank group, which is a testament to, among other things, the strength of our balance sheet.

As further confirmation of the strength of our overall financial position, in December we received an issue level upgrade from S&P raising the rating on our $250 million of 7-3/8% Senior Notes to BB from BB-. Our overall corporate rating remained at BB with a stable outlook. Additionally, Moody's reaffirmed their ratings of a corporate rating of Ba2 and an issue rating of Ba3 with a stable outlook during the quarter. Mike, back to you.

Thanks, Mike. As announced in our January 19 press release, our Board of Supervisors declared a quarterly distribution of 0.8525 per common unit which equates to an annualized rate of $3.41 per common unit. This distribution will be paid on February 7 to our unitholders of record as of January 31.

Additionally, our Board of Supervisors declared the close of business on March 5 as the record date for the upcoming 2012 tri-annual meeting of our unitholders which will be held on May 1 at 9 a.m. at Suburban's headquarters here in Whippany.

Looking ahead to the remainder of fiscal 2012, we are now several weeks into the second fiscal quarter and the unseasonably warm weather experienced during the first quarter has persisted. We fully expect that volumes, and to a lesser extent margins, will continue to be adversely affected by this unseasonably warm weather.

While this year is shaping up to be even more challenging than anticipated as a result of the weather, we continue to focus on the things we can control. And in fact, we are confident that our operating philosophy, combined with our ability to be responsive and the strength of our financial position, will allow us to effectively manage through these challenging times for the industry.

Our field personnel will remain focused on operating in a safe and efficient manner, providing exceptional customer service while looking for opportunities to grow our existing customer base. We continue to actively look for growth opportunities that can add value to our existing operating footprint and/or complement our MLP structure. We are optimistic that the challenges facing the propane industry specifically, and the energy space in general, may present us with incremental opportunities.

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 and managing costs 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. Greg, can you help us with that?

(Operator Instructions). Darren Horowitz.

Two quick questions for me, the first on the cost side. As you guys continue to work towards realigning the cost structure and extracting more efficiencies, has there been any change in how you're thinking about doing that or any other opportunities where you think you can further ratchet down costs?

We have a lot of our compensation or a significant percentage of our compensation is incentive driven. So obviously with the kind of year we're having we experienced the benefits of that.

As far as the operational changes, we said previously the change there was to get us more focused on a bigger geography with our folks so that we could take advantage of expanding our business vis-a-vis organic customer growth, while at the same time the cost savings would be improving the routing and so forth and so on. So really nothing more to add to what we've talked about, Darren.

Okay. And then, Mike, just back to your closing remarks from a big picture perspective. As you guys are looking out at these growth opportunities to add value, either through the core propane platform or possibly, as you highlighted, complementary potential. Can you give just give us a little bit more color especially facing the challenges that you're facing, how you see your business platform growing over say the next 12 to 24 months?

Yes, 12 to 24 months I think is a short span. But to get to your question, I think one of the things that really has to happen if this industry is truly going to create value is people have to become a little bit more realistic with what their business is worth. And unfortunately the marketplace distorts that real value.

So until such time that that occurs I don't really see anything significant on the propane side happening. As far as add-on type businesses are concerned, to do something within the MLP structure, MLP to MLP type deal, is, as you are well aware, extremely difficult to do with all of the hurdles that the two companies would have to go through.

But, when you look at the leverage positions of a lot of say C-corp or businesses that are embedded in C-corp's that we're qualifying, there are opportunities out there. The question is getting people to ramp up, recognize the opportunity and go about focusing on their core business while at the same time disposing businesses that could be valuable to us that are less valuable to them.

It was kind of a political answer I just gave you, but the reality of it is we've expanded our horizons significantly and we do have the balance sheet and we do have the ability to make someone else's balance sheet look a little bit better and give them an opportunity to focus on the core businesses that they're in.

I appreciate it, Mike, thank you.

John Tysseland.

Just to follow up on that point, if large transactions are kind of difficult to do, for obvious reasons the public arena, do you think that you might or do you think the industry might trend toward swapping territories where consolidation without really losing gallons or losing market share is possible just to squeeze out some inefficiencies at least within a regional perspective?

I think that, John, would be a splendid idea. Again, I go back to the perception of value that people put on these swaps. The other thing people could also do is when they look at their footprint, which is something that Suburban did 10 years ago, is look at the geography that doesn't make a whole lot of sense to you and sell it to someone where it makes a little bit more sense.

You can use that money to pay down debt or reinvest in the territories that you have more density. But unfortunately I don't get a sense, at least today, that people are thinking that creatively.

If you were to look at your own I guess territories, where do you see your core territories, your core competencies and where would you see like potential for that I guess are more or less fringe territories where they never got fully built out?

As I said, we really disposed of all of that sort of geography a long time ago. Where we are we have density for the most part. You can pick a couple of states in the Southwest where we may not have enough locations, but then again there isn't a lot of population in those states either. But it's not a lot, John.

That's the one thing that I referenced in our prepared remarks is over the years we've taken -- and you're well aware of it -- taken a pretty critical view and a critical look at our business to become as efficient as we could. And we redeployed whatever savings we were able to get out of our business to both distribution increases and fixing our balance sheet.

We didn't get into the big acquisition game to mask any of our woes or to pay bigger prices for volumes that really never materialized and gave you the sort of return that you expected and so forth and so on. I actually think, again, if the market will become a little bit more realistic, we are in a good position to not only help ourselves, but also help a [seller].

Great, thanks for the color.

(Operator Instructions). At this time there are no further questions.

Greg, thank you. And thanks, all, for joining us. We'll see you next quarter.

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