Suburban Propane Partners LP (SPH) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the first-quarter 2013 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, today's conference 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 our host, Davin D'Ambrosio. Please go ahead.

Thank you, Paul and good morning. Welcome to Suburban's fiscal 2013 first-quarter results conference call. I am Davin D'Ambrosio, Vice President and Treasurer at Suburban. With me this morning is Mike Dunn, 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 the 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 concluded our prepared remarks, we will open the session to questions.

However, before getting started, let me quickly 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 the partnership's SEC filings, including its Form 10-K for the fiscal year ended September 29, 2012 and its Form 10-Q for the period ended December 29, 2012, which will be filed by the end of 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. Form 8-K can be accessed through a link on our website, suburbanpropane.com. At this point, I would like to turn the call over to Mike Dunn for some opening remarks. Mike?

Thank you, Davin and thanks, everyone, for joining us this morning. We have completed our first full quarter following the Inergy Propane acquisition and we are very pleased with our overall results despite the unseasonably warm temperatures experienced throughout much of our service territories, particularly during the month of December. However, a lower commodity price environment, coupled with the initial benefits of combining our two operations, has helped to mitigate the negative effects of the warm weather on overall profitability.

With respect to our ongoing integration effort, we have made significant progress in advance of this year's heating season, steps that will allow our field personnel to continue to focus on our customer base that, especially during the remainder of the critical heating season.

To name a few key accomplishments, key operations management positions were identified and in place at the start of the heating season. We have centralized certain key functions such as inventory management, dispatch fleet and tank management activities. We have made significant progress in the development of our eventual combined operating footprint and management structure utilizing Suburban's operating philosophy and we have developed and tested system migration plans for the conversions of key operating systems, which will begin in earnest as we exit this year's heating season.

Additionally, we have established regular communication with the entire Inergy Propane customer base in order to effectively manage any possible disruption resulting from our integration activities. Although the integration is progressing very well, and we have not experienced any surprises to date, we still have much work ahead of us. We will continue to provide you with updates throughout the year. In a moment, I will comment on our outlook for the remainder of the fiscal year; however, at this point, I would like to turn the call over to Mike Stivala to discuss our first-quarter results in more detail. Mike?

Thanks, Mike. Good morning, everyone. With this being the first full quarter inclusive of the Inergy Propane operations acquired on August 1, let me emphasize that the majority of the quarter-over-quarter variances were attributable to the addition of Inergy Propane. Therefore, for certain key metrics, which I will point out, I will provide a comparison of the actual fiscal 2013 first-quarter results versus the prior-year first quarter on a pro forma combined basis as this transaction had occurred at the beginning of fiscal 2012.

Furthermore, to be consistent with previous reporting, I am excluding the impact of a $3.6 million unrealized non-cash loss applicable to FAS 133 accounting compared to an unrealized loss of $1 million in the prior-year first quarter.

With all that being said, adjusted EBITDA for our first fiscal quarter totaled $116.4 million, an increase of $77.3 million compared to $39.1 million for the first quarter of fiscal 2012. Net income totaled $63.4 million, or $1.11 per common unit, for the first quarter of fiscal 2013 compared to net income of $24.3 million, or $0.68 per common unit in the prior-year first quarter. The improvements in adjusted EBITDA and net income compared to the prior-year first quarter resulted primarily from the Inergy Propane activities, as well as favorability in Suburban's base business.

For comparative purposes, the adjusted EBITDA of $116.4 million was about $31 million, or approximately 37%, higher than the pro forma combined adjusted EBITDA of the two businesses for the first quarter of fiscal 2012.

Retail propane gallons sold in the first quarter of fiscal 2013 increased 79.6 million gallons to 153.9 million gallons from 74.3 million gallons in the prior-year quarter. Again, for comparative purposes, on a pro forma combined basis, propane volumes sold in the first quarter of 2013 were 5.5 million gallons, or 3.5% lower than the prior-year first quarter. Sales of fuel oil and other refined fuels increased 8.2 million gallons to 15.9 million gallons. Compared to the pro forma combined refined fuels gallons in the prior-year first quarter, the 15.9 million gallons sold in the first quarter of this year were 700,000 gallons, or 4% lower.

For the quarter, average temperatures across our service territories were 9% warmer than normal and 4% cooler than the prior-year first quarter. As has been well-documented, last year ended up being one of the warmest years on record. Despite a promising start to this year's heating season whereby through November our average temperatures were just 1% warmer than normal, December ended up essentially comparable to the prior-year average at 15% warmer than normal, which certainly had a negative effect on volumes sold in both segments.

In the commodity markets, average posted prices for propane of $0.89 per gallon basis Mont Belvieu for the first quarter of fiscal 2013 were 38.5% lower than the prior-year first quarter. While the average posted prices for fuel oil of $3.05 per gallon were 2.4% higher than the prior-year first quarter.

With high levels of domestic propane inventories compared to historical norms, coupled with the proliferation of natural gas shale plays, the downward trend in propane prices that began at the beginning of 2012 has persisted. As a result, propane pricing has become somewhat disconnected from its historical relationship to crude oil prices from a historical norm of 70% to 75% of the value of crude to today's ratio of about 37%. This is a positive trend for the industry and our customers.

Total gross margins of $249.2 million for the first quarter of fiscal 2013 were $131.8 million higher than the prior-year first quarter of $117.4 million primarily from the addition of Inergy Propane. Overall unit margins have improved slightly as a result of declining wholesale propane costs.

Combined operating in G&A expenses of $132.8 million were $54.6 million, or 70% higher than the prior-year first quarter, due to the addition of the Inergy Propane operations, offset to an extent by savings in our base business and to a lesser degree cost savings achieved through our initial integration efforts. For comparative purposes, combined operating and G&A expenses were about 10% lower than the pro forma combined expenses for the prior-year first quarter.

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.

Net interest expense of $24.6 million was $17.8 million higher than the prior-year first quarter as a direct result of the additional debt issued to finance the Inergy Propane acquisition. Total capital spending for the quarter was $6.8 million (inaudible) $1.4 million of maintenance capital.

Turning to our balance sheet, our overall financial position remains sound even with the additional debt incurred to fund a portion of the Inergy Propane acquisition. Despite the increased size of the organization and the added working capital needs, we continue to fund all working capital requirements with cash on hand. In fact, during the quarter, our cash flow provided by operating activities was $61.5 million. That is an increase of $86.8 million compared to cash used in the prior-year first quarter of $25.3 million. This significant improvement is a function of the lower commodity price environment, good working capital management and the realization of cash flow from the positive working capital acquired on the closing date of the Inergy Propane acquisition.

As we move through our historically high period of seasonal working capital needs, which will typically peak in mid-to-late February, once again, we have not accessed our bank revolver and we ended the quarter with $149.1 million of cash on hand. With more than $250 million of borrowing capacity available under our revolver, we have more than ample liquidity to fund our increased working capital requirements and any incremental capital associated with our integration efforts that will ramp up significantly during the remainder of the fiscal year.

Now let me turn it back to Mike for some closing remarks.

Thanks, Mike. As announced on January 24, our Board of Supervisors reaffirmed the increase in our annualized distribution rate to $3.50 per common unit. This represents an increase of $0.09 per common unit, or 2.6% over the previous distribution rate. Our quarterly distribution of $0.875 per unit will be paid on February 12 to our unitholders of record as of February 5. This increase demonstrates our confidence in the future prospects for the combined business and our ability to effectively integrate. We remain firmly committed to delivering sustainable profitable growth to our valued unitholders.

Looking ahead to the remainder of fiscal 2013, we are now several weeks into the second fiscal quarter and the weather continues to be erratic with generally warmer than normal average temperatures across the country thus far, albeit cooler than the same period last year in most of our service territories.

We continue to focus our efforts on our customer base, leveraging the size and strength of the combined operations along with all other items that are within our control. When we exit this heating season, our attention will turn to further merging our businesses and anticipate that a significant portion of our integration plans will be completed by the time the next heating season arrives. As we have previously stated, we remain comfortable that $50 million in synergies is achievable in the targeted three-year timeframe. When we are fully integrated, we will be functioning under one common operating platform and one common operating system. We will be one company.

In closing, I would like to take this opportunity to acknowledge the ongoing efforts of all of our dedicated employees. As a group, we remain focused on driving efficiencies, managing costs throughout our entire business platform, providing exceptional customer service while bringing together the best business practices of the two organizations.

As always, we appreciate your support and attention this morning and would now like to open the call up to questions. Paul?

(Operator Instructions). Sharon Lui, Wells Fargo.

Hi, good morning. So I guess looking at the pro forma decline in OpEx and G&A, it looks like it was about $13 million. I know that you can't really annualize that number, but it seems like the cost savings is tracking much higher than original forecasts of about $10 million to $15 million in year one. Can you maybe provide some color on that?

Yes, Sharon, this is Mike Stivala. Really the pro forma decline that I referenced comes from three things; it is not just synergies, okay? Suburban, as you have become accustomed, has historically been able to wring out costs through its efficiencies, so we have been able to do that again. So a portion of that year-over-year decline comes from the base business.

A portion of it comes from the Inergy business that we bought. Again, you are comparing to first quarter of last year and heading into last year's heating season. Inergy was cutting costs along the way prior to us closing the acquisition in August. So some of the savings comes from the Inergy base business and yes, we are getting some degree of initial synergies, particularly from some of the centralization that we have been able to do here in corporate. So it is not all synergies.

Okay. So you are still, I guess, comfortable with that initial guidance of $10 million to $15 million of synergies in year one?

That's right, Sharon.

Okay. And then I guess just looking at the 4% decline in volumes on a pro forma basis, is that mainly attributable to just customer attrition and is that tracking in line with your expectations?

Sharon, it's a combination of weather and economy. We are not seeing any extraordinary attrition levels to date.

Okay. And maybe I guess for the last question, if you could give us a sense in terms of, on a pro forma basis, the improvement in the retail unit margins.

Well, if you look at the margin profile of the two businesses, I think people have thought that the profile was quite different and in reality, what we are seeing is, when you look at the individual markets, the two businesses were pretty close in margin profile. So the improvement in pro forma margins isn't necessarily from changing either one of our businesses' margin profile. The improvement is really a function of being in a much lower wholesale environment, which has benefited to a degree both businesses.

Okay, and if I guess a low-cost propane environment persists through the year, do you think there is opportunities to further increase those margins?

No, probably not. I mean the -- no, probably not. I mean that is the long and short answer quite frankly. You are dealing in an economy, and I don't want to get up on a soapbox, but you are dealing with an economy that is clearly struggling and people are managing their spending habits a lot differently than they have in the past. So the last thing you want to do is become a little less responsible with respect to your pricing and exhibit what may be perceived by the public environment as windfall type profits.

So we are trying to keep our business responsible to Mike's point. Our margin profiles are reasonably similar to the respective businesses and the slight tickup in margins is a result of the lower wholesale prices and the market, okay, let's not forget that the market last year lost an enormous amount of cash flow. So you generally see the market pricing a little higher.

Okay, great. That's very helpful. Thank you.

(Operator Instructions). And there is no one in the question queue.

Okay, again, we would like to thank everyone and Paul, thank you for your help and we will see you next quarter.

Thank you. Ladies and gentlemen, this conference call will be available for replay after 11 a.m. Eastern today running through February 8 at midnight. You may access the AT&T executive replay system by dialing 1-800-475-6701 or international, 1-320-365-3844 and entering the access code 279037. Those numbers once more, 1-800-475-6701 or 1-320-365-3844, using access code 279037. That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.