Suburban Propane Partners LP (SPH) 2013 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the third quarter 2013 results conference call. (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 conditions, 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.

At this time I would like to turn the conference over to your host Davin D'Ambrosio. Please go ahead.

Thank you, Terry, and good morning. Welcome to Suburban's fiscal 2013 third quarter earnings conference call. I am Davin D'Ambrosio, Vice President and Treasurer of Suburban. With me this morning is Mike Dunn, President and Chief Executive Officer; and Mike Stivala, our Chief Financial Officer.

On today's call we will review our third quarter financial 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, 2012. As usual once we have conclude our prepared remarks, we will open the session for questions.

However, 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 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 June 29, 2013, 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, which was furnished to the SEC this morning. The Form 8-K can be accessed 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. As reported this morning, we are very pleased by our over results for the quarter, which was our third full quarter of operations since acquisition of Inergy retail propane on August 1, 2012.

Our results benefited from both a colder than normal weather pattern that began toward the end of the second quarter and lasted through April as well as improvements in Suburban Legacy operations. During the quarter our employees at every level have been hard at work bringing the combined businesses together while at the same time continuing to focus on our ongoing customer satisfaction and growth initiatives. Our integration activities are progressing very nicely and we have accomplished a lot in a relatively short period of time.

Additionally in May we took proactive steps to continue to strengthen our balance sheet with the issuance of 3.1 millioncommon units for net proceeds of $143.4 million, which were used to repay a $133.4 million of our outstanding 7.375% senior notesdue 2021.

In a moment I will comment on our outlook for the remainder of the fiscal along with providing some color on our integration efforts. However, at this point I would like to turn the call over to Mike Stivala to discuss our third quarter results in more detail. Mike.

Thanks, Mike, and good morning everyone. August 1st marked the one year anniversary of our purchase of Inergy Propane; therefore, the majority of the year-over-year variances for the third quarter were attributable to the acquisition as well as to a lesser extent improvements in the Suburban Legacy operations resulting from colder average temperatures, lower wholesale propane costs and continued expense savings through efficiencies.

In order to provide a more meaningful comparison of year-over-year operating performance for certain key metrics I will, as I did last two quarters, provide a comparison of the actual fiscal 2013 third quarter results versus the prior year third quarter on a pro forma combined basis as if the Inergy Propane acquisition had occurred at the beginning of fiscal 2012.

Furthermore to be consistent with previous reporting, I am excluding the impact of unrealized non cash mark-to-market adjustments on privative instruments used in risk management activities under FAS 133 accounting. This resulting in a de minimus unrealized loss in the third quarter of this year compared to an unrealized gain of $8.2 million in the prior year third quarter.

Additionally net income and EBITDA for the fiscal 2013 third quarter included a $6 million charge related to our voluntary withdraw from multi employer pension plans covering certain employees acquired in the Inergy Propane acquisition. As well as $2.2 million in expenses relating to our ongoing integration efforts. This compares with $5.9 million in acquisition related costs associated with the acquisition of Inergy Propane which were include in the actual results in the prior year third quarter. Therefore adjusted EBITDA for our fiscal 2013 third quarter amounted to $19.2 million , which is an increase of approximately $10 million compared to the pro forma combined adjusted EBITDA for the prior year third quarter.

Typically due to the seasonality of our business we report a net loss in our third quarter. With that being said, our net loss for the third quarter of fiscal 2013 totaled $45.1 million or $0.77 per common unit compared to a reported net loss of $17.5 million or $0.49 per common unit in the prior year third quarter. Excluding the effects of the charges in both periods that I referenced earlier, net loss for fiscal 2013 third quarter would have been $36.9 million or $0.63 per common unit. Compared to a pro forma combined net loss of $45.5 million or $0.81 per common unit in the prior year third quarter.

Retail propane gallons sold in the third quarter of fiscal 2013 increased 43.1 million gallons to 92.1 million gallons from 49 million gallons reported in the prior year third quarter. Again for comparative purposes propane volumes sold in the third quarter of fiscal 2013 were 4.2 million gallons or 4.8% higher than the prior year third quarter on a pro forma combined basis.

Sales of fuel oil and other refined fuels increased 4 million gallons to 8.3 million gallons compared to 4.3 million gallons reported in the prior year third quarter. Compared to the pro forma combined refined fuel gallons in the prior year third quarter the 8.3 million gallons sold this year were 1.2 million gallons lower which difference was entirely attributable to lower gasoline and diesel volumes as our heating oil volumes were essentially flat.

Volumes sold in both segments were favorably impacted by the colder than normal average temperatures which began toward the end of the second quarter of fiscal 2013 and lasted through April. In fact our residential volumes accounted for approximately 75% of the overall increase in propane volumes sold during the third quarter of this year compared to the prior year third quarter on the a pro forma combined basis. For the quarter average temperatures across our service territories were 4% colder than normal.

In the commodity markets average posted prices for propane in for the third quarter of fiscal 2013 decreased 6.7% compared to the prior year third quarter , while average fuel oil posted prices remained essentially flat with the prior year. On a sequential basis propane prices increased 5.4% compared to the average prices in the second quarter of fiscal 2013 and fuel oil prices decrease 5.1% compared to second quarter.

Total gross margin of $142.7 million for the third quarter of fiscal 2013 were $60.1 million or 73% higher than the actual prior year third quarter of $82.6 million resulting primarily from the addition of Inergy Propane as well as higher volumes in our Legacy operations.

Combined operating and G&A expenses of $131.8 million were $52.7 million higher than the reported amounts in the prior year third quarter primarily due to the addition of the Inergy Propane operations. Offset to an extent by savings in our Legacy Suburban operations and cost saving achieved through our initial integration efforts. For comparative purposes combined operating and G&A expenses were nearly $10 million or 7% lower than the pro forma combined operating and G&A expenses for the prior year third quarter.

As for bad debts our overall expense as a percentage of revenues as well as our Asian profile have remained relatively consistent with historical levels. Net interest expense of $24.4 million for the third quarter of fiscal 2013 was $17.9 million than the prior year third quarter as direct result of the additional debt issued to finance the Inergy Propane acquisition. Total capital spending for the quarter was $8.3 million which included $2.5 million of maintenance capital.

With the third quarter fiscal of 2013 behind us, our year-to-date adjusted EBITDA for the nine months of fiscal 2013 was $327.3 million. That is an increase of approximately $102 million or 45% compared to the pro forma combined adjusted EBITDA for the comparable period in the prior year.

Now turning to our balance sheet. As Mike mentioned in his opening remarks we took steps to strengthen the balance sheet with the issuance of 3.1 million common units for net proceeds of $143.4 million, which were used to repay $133.4 million of aggregate principal amount of our 7.375% senior notes due 2021. This redemption took place this past Friday, August 2nd. Separately on August 6th, we repaid an additional $23.9 million of our 7.375% senior notes due in 2021 in a private transaction. Therefore, we have redeemed a total of $157.3 million of outstanding indebtedness since the end of the third quarter. Upon completion of these redemptions approximately $346 million of aggregate principal amount of the 2021 notes will remain outstanding and our leverage ratio post redemption would be around 3.6 times.

We continue to fund all working capital requirements with cash on hand, and, in fact, have not access our bank revolver since April 2006. In fact , before considering the impact of the redemptions we ended the quarter with approximately $320 million of cash on hand or over $150 million after considering the redemptions. In addition we have availability of approximately $250.8 million under our revolving credit facility, thus providing more than ample liquidity to fund our operations as well as our ongoing integration efforts.

With these latest steps we have continued to execute on our financing strategy following the Inergy Propane acquisition to further strengthen our balance sheet and bring our metrics back in line with historical levels. With our leverage statistics, strong cash position and access to liquidity we are welled positioned to continue to fund the ongoing integration as well as to react to additional growth opportunities that may present themselves.

With that, I will turn it back to Mike.

Thanks, Mike. As announced at our July 25th press release we were pleased to declare a quarterly distribution of $0.8750 per common unit, which equates to an annualized rate of $3.50 per common unit. This quarterly distribution will be paid on August 13th to unit holders of record as of August 6th. As far as our integration efforts are concerned we remain on schedule with our detail plans to fully integrate into one common system platform, one common operating model and ultimately one Company.

Some key achievements since our last conference call include we further refined our regional operating footprint and filled all key regional management positions within the new structure. We have defined the local operating footprint and have put management teams in place in substantially all of our local markets under the new structure. We have made substantial progress executing on our retail system conversion and blending plans. We have begun the rebranding process, and we have begun to install some of the operating tools that we have historically used within the Suburban platform to better manage of our deliveries and customer pricing, just to a name a few.

As I said earlier we have accomplished a great deal in relatively short period of time; however, much work lies ahead of us. Our system conversion and blending activities will continue through the end of October 2013. At which time we will pause in order to maintain our operating focus on serving our customers throughout the upcoming heating season. We will resume our field integration and system conversion efforts next March.

We remain on schedule, and anticipate having the majority of the system conversion and physical blending activities completed by the fall of 2014. Once the system conversion efforts and physical blending activities are fully completed, as we have proven in the past we will continue to refine our operating model and cost structure in order to enhance our customer service experience and maximize the overall profitable of the combined enterprise.

As we have stated before our targeted net synergies are $50 million within a three year period. With approximately $10 million to $15 million being realized by the end of this fiscal year. I am confident that we will continue to successfully execute on our detailed integration plans and do not foresee any reason to believe we will not achieve our stated goals.

We continue to provide meaningful communication to both our new customers and employees keeping them advised as to overall expectations during this period of change. As for the remainder of fiscal 2013 we look forward to building what our early successes and executing our integration plans. As we approach the upcoming heating season our dedicated employees stand ready to respond with the level of customer service and comfort that our customer base has come to expect from us.

In closing, I would like to acknowledge the ongoing efforts of all our dedicated employees both in the field and in our home office in executing our integrations plans while maintaining their focus on our everyday business activities. And as always we appreciate your support and attention this morning. And would now like to open the call up for questions. Terry.

Thank you. (Operator Instructions). We will go to the line of Sharon Lui with Wells Fargo. Please go ahead.

Hi, good morning.

Good morning, Sharon.

With regards to the cost synergies, can you isolate or identify how much was realized during this top quarter?

We realized year-to-date now a little over $10 million, and I think as we said last quarter through the first half of the year we realized between $5 million and $7 million. So $3 million to $5 million in this quarter.

Okay. And any commentary or customer feedback from the rebranding process so far?

No, Sharon. We communicated with folks when we did the acquisition, so people knew it was coming. And the communication I think I sent three out under my name, and as we blend locations, we are sending one out now with our customer service manager signature basically continuing to advise people that they may not see quite yet a Suburban label truck, however you may see this and so forth and so on. This way the uniform issue, the truck issue, the tank issue isn't an issue, if you know what I mean. I think the customer base has certainly adjusted to the fact the non Suburban company that they were doing business with before August 1st is now a Suburban Company.

Okay. And then will the focus be on the integration process until the fall, or are you open to looking at acquisitions?

The reality of it is, it is two separate functions. Our people for years have been focused on what would we do should we do an acquisition of this size Inergy, so we didn't do this thing unprepared. So that process is a process. The acquisition process is another process and if an opportunity presented itself within our geography, we would certainly seriously look at it.

Okay. Great. And the last question is the $6 million charge is that reflected in the OpEx number or the G&A number in your financials?

That is in the OpEx number, Sharon.

Okay, great. Thank you.

Thank you.

And next we will go to the line of Darren Horowitz with Raymond James. Please go ahead.

Good morning, guys.

Hi, Darren.

Mike, quick question for you and I appreciate the color on the synergies, but beyond the $10 million to $15 million cost synergies that you hope to realize by the end of this fiscal year, for the remaining $35 million $40 million do you think that is going to be split relatively even over the next two years or is it going to be more concentrated around one specific year?

I think next year you will probably see about the same as we achieved in the first year maybe a little bit more. The real opportunity is going to be once we have the one system that we can start looking at the information in the same form we are used to and we go back and really fine-tune it that will probably occur I would say second half of next year and the first half of the following year. If that answers your question.

Okay. Yes, it does. So I guess that would point to that third year really being more lumpy in terms of what you are going to realize because from an integration perspective things should be a bit more seamless?

Correct.

Okay. And then a big picture question for you with regard to wholesale propane costs over the next six months or so. Obviously there is an underlying bid for propane just because this dramatic LPG export trend and the spread between Northwest Europe and Gulf Coast propane prices and also from a domestic perspective the propylene yield that propane gives [PEC] customers, so with those two things working in concert, it seems like propane prices at the wholesale level could be higher going into the winter season. And I am wondering your thoughts on you ability to further to expand retail margins if that is the case?

I don't necessarily think -- there is two answers to your question I think, Darren. One is the fact that propane is more representative of the natural gas marketplace is a good thing versus the crude oil marketplace because I don't know what is going to happen to crude prices. When you look at the supply of crude oil and the upcoming potential for production and so forth and so on, it certainly shouldn't be trading north of $100, okay?

But putting that aside, over the course of the last 18 months or two years, actually, propane prices became a little bit more reflective of natural gas as propane as a derivative commodity was produced more from natural gas as opposed to crude oil. With all that said, I think propane prices will remain reasonably steady to slightly higher based on the potential export activity. At least today I do not think you are going to see the sort of volatility that you could potentially or did see when propane was more linked to crude oil.

I appreciate it. Thank you.

(Operator Instructions). I am showing no questions.

Okay. Terry, I want to thank you. And everyone on the call I want to again thank you for your support, and enjoy the rest of your summer. Thank you, Terry.

And, ladies and gentlemen, that does conclude your conference call for today. This conference call will be available for replay starting today at 11 AM going through August 9th at 12 AM. You may access the AT&T Executive Replay System by dialing 1-800-475-6701 and entering the access code 299098. Again that number is 1-800-475-6701 and the access code is 299098.

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