Suburban Propane Partners LP (SPH) 2012 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Suburban Propane full-year and fourth-quarter 2012 financial results conference call. For the conference, all the participants are in a listen-only mode. There will be an opportunity for your questions, instructions will be given at that time.

(Operator Instructions)

As a reminder, today's call is being recorded. Ladies and gentlemen, 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 it's 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.

With that being said, I'll turn the conference now to Mr. Davin D'Ambrosio. Please go ahead, sir.

Thank you, John, and good morning, welcome to Suburban's fourth-quarter and fiscal 2012 full-year 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. Purpose of today's call is to review our fourth-quarter and fiscal 2012 full-year results, along with our current outlook for the business, including an update on the status of our integration efforts with regards to the Inergy Propane acquisition that was completed on August 1. As usual, once we've concluded our prepared remarks, we will open the session to questions.

However before getting started, I would like to reemphasize with 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 29, 2012, which will be filed by the end of today. Copies of these filings will 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'd like to turn the call over to Mike Dunn for some opening remarks.

Thanks, Davin, and thanks everyone for joining us this morning. Record warm temperatures will certainly define the past fiscal year as one of the most challenging operating environments this industry has faced in a long time. Nonetheless, for Suburban, we were able to redefine our position within the propane community with the completion of the Inergy Propane acquisition of August 1, 2012. This acquisition was a transformative event for Suburban, effectively doubling the size of our customer base and expanding our geographic region to 11 more states, including a new presence in portions of the Midwest region of the United States. The acquisition will present an opportunity for us to apply our operational expertise and customer oriented initiatives to a much larger platform, boosting our growth prospects and cash flow profile. We arranged a good mix of debt and equity to finance the acquisition and we upsized our revolving credit capacity to provide enhanced liquidity for the larger enterprise.

We also preserved our on hand cash position to end fiscal 2012 with $134.3 million. Our balance sheet is well positioned as we head into the new fiscal year and we have more than adequate liquidity to fund our integration efforts and to remain focused on our ongoing internal initiatives around customer growth and efficiencies. A little later I will provide some closing remarks, including an update on the Inergy integration process. At this point however, I'll turn it over to Mike Stivala to discuss our full year and fourth-quarter results in more detail. Mike?

Thanks, Mike, and good morning, everyone. I'll start by focusing our full-year results and then give a little color on the fourth quarter towards the end of my remarks. First, fiscal 2012 included 53 weeks of operations that compares to 52 weeks in the prior year and also includes the results of operations for Inergy Propane since August 1, 2012. I'll point out that while the extra week of operations in fiscal 2012 compared to 2011 had an obvious positive impact on volumes and margins, the bottom line affect was insignificant when factoring in the incremental operating and G&A expenses. To be consistent with previous reporting on excluding the impact of a $4.6 million unrealized non-cash gain applicable to FAS 133 accounting, that compares to an unrealized gain of $1.4 million in fiscal 2011.

We reported a net loss of $2.8 million, or $0.07 per common unit for fiscal 2012, compared to net income of $113.5 million, or $3.20 per common unit in the prior year. There were several significant charges that had a negative impact on our net income and EBITDA for fiscal 2012, specifically $17.9 million in acquisition related costs associated with the Inergy Propane acquisition, a $4.5 million charge associated with a legal settlement reached during the fourth quarter, a loss on debt extinguishment of $2.2 million associated with the refinancing of our revolving credit facility and some of the financing activities associated with the acquisition, and finally a $2.1 million non-cash charge from a loss on disposal of an asset in our Natural Gas and Electric segment. Fiscal 2011 net income and EBITDA were negatively affected by a $2 million charge for severance costs related to the realignment of the Partnership's field operations. Therefore, excluding the effects of these items for both years, adjusted EBITDA was $108.5 million for fiscal 2012 compared to $179.4 million in the prior year, a decrease of $70.9 million.

Retail propane gallons sold in fiscal 2012 of 283.8 million gallons decreased 15.1 million gallons, or 5.1%, compared to 298.9 million gallons in the prior year. Sales of fuel oil and other refined fuels decreased 8.7 million gallons, or 23.4%, to 28.5 million gallons which compares to 37.2 million gallons in the prior year. The impact of record warm temperatures on volume sold was offset to an extent by the additional of propane and refined fuel volumes from Inergy Propane operations since August 1.

The record warm weather experienced throughout most of the country was evident during the critical heating months from October 2011 through March 2012. And according to NOAA, average temperatures in our service territories during fiscal 2012 were 14% warmer than normal and 13% warmer than fiscal 2011. And in our Northeast and Southeast operations, where we have a higher concentration of residential customers, the impact of warmer weather was even more pronounced with average temperatures that were 18% and 26% respectively warmer than the prior year. The Inergy Propane operations contributed 27 million gallons of propane and 2.5 million gallons of refined fuels for the two months that we owned them in fiscal 2012.

In the commodity markets, propane prices trended down throughout much of the fiscal year with average posted prices for the year reported lower than the prior year by approximately 20%. Spot propane was trading around $0.92 per gallon basis Mont Belvieu at the end of September 2012 compared to $1.51 a year earlier. Conversely, average fuel oil prices for the year remained elevated and were approximately 7.4% higher than the prior year. Total gross margins of $459.8 million for fiscal 2012 were $50.6 million, or 9.9% lower than the prior year of $510.4 million. Lower margins were attributable to the lower volumes sold and to a much lesser extent lower unit margins. Lower gross margins were offset to the extent by the addition of Inergy Propane.

Combined operating and G&A expenses of $357.8 million were $26.8 million or 8.1% higher than the prior year of $331 million, primarily as a result of the addition of Inergy Propane and the $4.5 million legal settlement that I referred to earlier. This was offset to an extent by lower variable compensation attributable to lower earnings as well as continued savings and benefit payroll related expenses. Capital expenditures for the year totaled $17.5 million which included $9.2 million of maintenance capital. Turning to our balance sheet, as Mike said, we ended the year with $134.3 million of cash on hand and as has been the case for the past six years, we funded all working capital needs along with our capital expenditures from internal cash without the need to borrow on our revolving credit facility.

Now looking specifically at the fourth-quarter results, the fourth quarter of fiscal 2012 included 14 weeks of operations compared to 13 weeks in the prior year fourth quarter and includes the results of operations for Inergy Propane since August 1. Consistent with the seasonal nature of our business, we typically report losses for our fiscal fourth quarter. And as I discuss the results for the quarter, I am excluding the impact of a $2.5 million non-cash loss from our current quarter results applicable to FAS 133 accounting which compares to an $806,000 unrealized non-cash loss in the prior year fourth quarter. Net loss of $59.1 million, or $1.24 per common unit for the fourth quarter of fiscal 2012, compares to a net loss of $20.9 million, or $0.59 per common unit in the prior-year quarter. Adjusted EBITDA for the fiscal 2012 fourth quarter improved by $4.7 million to $100,000 income compared to a loss of $4.6 million in the prior-year quarter.

Retail propane gallons sold in the fiscal 2012 fourth quarter amounted to 70.6 million gallons, an increase of 26.6 million gallons compared to 44 million gallons in the prior-year fourth quarter, and that's as a result of the added 27 million gallons from Inergy Propane operations. Sales of fuel oil and other refined fuels increased 1.9 million gallons to 5.9 million gallons in the fiscal 2012 fourth quarter, of which 2.5 million gallons were attributable to the Inergy Propane operations. Total gross margins of $110.6 million for the fiscal 2012 fourth quarter were $35.4 million higher than the prior-year fourth quarter of $75.2 million, primarily from the addition of Inergy Propane. Combined operating and G&A expenses increased $35.3 million to $115 million, primarily due to the addition of Inergy Propane as well as the legal settlement that are mentioned earlier. And these were offset to an extent by lower variable compensation through lower earnings and our continued efficiencies.

Lastly, despite the added leverage from the Inergy Propane acquisition, overall our balance sheet remains fundamentally sound. We have more than adequate liquidity to fund our cash needs for the foreseeable future. And in fact, from a liquidity perspective, in addition to the $134.3 million of cash on hand, we have approximately $253 million of availability under our upsized revolver. We are well positioned as we enter the new heating season and we look forward to the benefits of the much larger platform as we seek to apply the steps we have taken over the past several years within our own operations to achieve the operational synergies anticipated from the combined business. Back over to you, Mike.

Thanks, Mike. Just a brief comment on our quarterly distribution. As announced in our October 25 press release, our Board of Supervisors declared our quarterly distribution of $0.8525 per common unit in respect to the fourth quarter of fiscal 2012, which equates to an annualized rate of $3.41 per common units. The quarterly distribution was paid on November 13 to our unit holders of record as of November 6. Additionally, as a reminder, in announcing the Inergy Propane acquisition in late April 2012, our Board approved an increase in our quarterly distribution rate to $0.875 per common unit, or $3.50 on an annualized basis, which would take effect for first fiscal quarter of 2013.

With fiscal 2012 officially in the rear view mirror, and now nearly four months after the closing of the acquisition, we are well underway with executing on our integration plans. Within a short period of time, we are please with the progress we have made with several notable achievements. Our combined operational footprint for the fiscal 2013 heating season is set and our field leadership teams are in place. We have bridged multiple operating systems into our general ledger and analytical systems in order to have sufficient visibility into the combined operations. We have begun to centralize certain back-office functions. We are managing the supply and dispatch function for the majority of operations in a more centralized fashion.

The acquired employee base was enrolled in our benefit programs and has been paid through our payroll department since day one and we are shaping the culture of the combined organization through effective employee communication. And we have communicated directly with the more than 630,000 acquired customers on two separate occasions, just to name a few. We have stated that we anticipate the full integration process to take up to three years. And by that, we mean that our systems and operating platform will ultimately be one. I would like to again welcome the Inergy employees to the Suburban family, now more than 4100 employees nationwide. Together we will maintain our focus on delivering the highest quality customer service through our combined customer base and delivering an enhanced unit value going forward.

Lastly I would like to take this opportunity to welcome two new members to our Board of Supervisors, Larry Caldwell and Matt Chanin. Each brings to us a wealth of experience across a broad range of industries which will be beneficial to Suburban in light of our recent growth and expansion objectives. And as always, we appreciate your support and attention this morning and would now like to open the call up for questions. John can you help us with that?

(Operator Instructions)

Sharon Lui with Wells Fargo.

Even though it's a bit early in the integration process, can you maybe provide some color on the customer churn rate, what you've been seeing and your expectations of how much of the target synergies you'll realize this year?

As far as customer churn is concerned, it's a little early to put a number on that. However, I will say that, for the most part, we haven't experienced anything that would be noticeable with respect to churn. As far as synergies are concerned, we're on our way. Obviously, we're in the middle of -- or the beginning of the heating season, so we're not going to be doing too much blending there. But the plans are reasonably well developed, as far as our first couple of stats, once we come out of the heating season. In addition to that, I don't know whether you noticed, we have set the geography up, we've assigned the lead Management Teams to that geography. So, our primary focus right now is to make sure that we provide the Inergy folks with all the support that they expect from our corporate environment as we migrate some of the functions that they did on a decentralized basis. So that actually is moving along quite nicely.

Okay. I guess, trying to put some numbers around that, since it is a three-year process, would it be reasonable to assume that you'll realize maybe a third of the target synergies in year one?

No, most likely we will realize somewhere in the vicinity of $10 million, maybe $15 million in the first year.

Okay. And then, with regards to Sandy, any impact on your financials or operations in the Northeast?

No. From a structural perspective, we experienced less than $100,000 of damage to our facilities. From a customer base perspective, obviously we're still working our way through that. But, again, fortunately, nothing too noticeable.

Okay, great. Thank you.

You're welcome.

(Operator Instructions)

Ted Durbin with Goldman Sachs.

I'm wondering if you can talk on the other side of the acquisition, how are you doing with employee retention following the acquisition of the Inergy assets?

Actually, we're doing quite well. And, as we said, we've been communicating with them on a regular basis. And I do believe they feel as though they have very quickly become part of the Suburban family.

Okay, that's great. Just a little bit on the macro, it sounds like the housing market is starting to recover some here. I'm wondering if you're seeing any green shoots of customer growth in any of your territories so far?

Not anything substantial.

Okay. And then, just last one for me, any early read here on the winter, we're starting to get some cold weather, how's demand looking so far relative to your expectations?

Better than last year, but obviously we'll have a better feel for that once we finish our quarter and we have this call in February.

Okay, that's it for me. Thanks, guys.

Thanks, Ted.

And to the presenters, no additional questions in queue.

Okay. With that said, I'd like to wish everyone on the call a very happy holiday season, Merry Christmas, Happy New Year, whatever holiday you tend to celebrate. And we thank you all for your support and we look forward to the next call. Thank you, John.

You're welcome. And, ladies and gentlemen, this conference is available for replay. It starts today at 11 AM Eastern, will last until tomorrow at midnight. You may access the replay at any time by dialing 800-475-6701 and entering the access code 269283. That number again 800-475-6701 and the access code 269283. That does conclude your conference for today. Thank you for your participation, you may now disconnect.