Suburban Propane Partners LP (SPH) 2014 Q3 法說會逐字稿

Welcome to Suburban Propane third quarter 2014 financial 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 attributed to the partnership or persons acting on its behalf are expressly qualified in their entirety by such cautionary statements.

And now I'd like to turn the meeting over to our host, Mr. Davin D'Ambrosio. Please go ahead.

Thank you and good morning everyone. Welcome to Suburban' s fiscal 2014 third quarter earnings conference call. I am Davin D'Ambrosio, Vice President and Treasurer at Suburban. Joining me this morning is Mike Dunn, our Chief Executive Officer; Mike Stivala, President; Mark Weinberg our Chief Operating Officer; and Mike Kuglin, Vice President of Finance and Chief Accounting Officer.

The purpose of today's call is to review our third quarter financial results, along with our outlook for the business, including an update on the status of our integration efforts with regards to the energy propane acquisition that was completed on August 1, 2012. As usual, once we have concluded our prepared remarks, we will open the session to questions.

Before getting started, 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 fiscal year ended September 28, 2013 and its form 10-Q for the period ended June 28, 2014, 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 provide id a description of those measures as well as a discussion of why we believe that information to be useful in our form 8-K furnished to the SEC this morning. Form 8-K can accessed through a link on our website at www.SuburbanPropane.com.

At this point, I would like to turn the call started by turning it over to Mike Stivala for some hoping remarks. Mike?

Thanks Davin and thanks everyone for joining us this morning. Our results for the quarter reflect the lingering effects from this past heating season on customer buying habits, as well as warmer temperatures compared to the prior year third quarter, which benefited from a late burst of cold weather that favorably impacted April 2013 volumes.

Following a winter in which residential customers, on average, experienced a 25% to 30% increase in their energy costs, both as a result of greater usage and the rise in wholesale product costs, customer demand in the third quarter slowed, as customers delayed deliveries while making payments on their winter usage.

This, coupled with our efforts to assist customers with managing their balances, resulted in lower volumes and higher provisions for potential bad debts during the third quarter. Nonetheless, taken together with our first half performance, our year to date adjusted EBITDA improved 2% compared to the comparable prior year period and we view the factors that had a negative impact on the third quarter results as timing issues, as customers take a break in order to manage their finances after a difficult heating season in many parts of the country.

Now that the heating season is behind us, our integration activities continue to progress on or ahead of schedule. We remain on target to substantially complete our system conversions and physical blending activities by the end of this fiscal year.

Finally, in May, we took proactive steps to further strengthen our balance sheet, with the successful refinancing of our 7.5% senior notes due 2018, with new 5.5% senior notes due in 2024. As a result of this refinancing, we effectively extended maturities on this portion of our debt by six years and reduced our cash interest requirement by more than $8 million annually.

In a moment I will comment further on our integration activities, along with our current outlook for the business, however at this point, I'd like to turn the call over to Mike Kuglin to discuss our third quarter results in a little more detail. Mike?

Thanks Mike and good morning everyone. As I discuss our third quarter results, I am excluding the impact of unrealized non-cash mark-to-market adjustments on derivative instruments used in risk management activities which resulted in an unrealized gain of $700,000 in the third quarter of fiscal 2014, compared to a di minimis under-realized loss in the prior year third quarter.

Additionally, net income and EBITDA for the third quarter of fiscal 2014, including a loss on debt extinguishment of $11.6 million associated with refinancing of our 2018 senior notes and $4.3 million of expenses related to our ongoing integration of Energy Propane.

Net income and EBITDA for the third quarter of fiscal 2013 included a $6 million charge for our voluntary withdrawal from multiemployer pension plans covering certain employees acquired in the Energy Propane acquisition, as well as $2.2 million in expansion related to our integration efforts.

Therefore, adjusted EBITDA for the third quarter of fiscal 2014 amounted to $10 million compared to $19 million in the prior year third quarter.

Typically, due to the seasonality of our business, we report a net loss in the third quarter. With that being said, our net loss in the third quarter of fiscal 2014 was $59.7 million or $0.99 per common unit compared to a net loss of $45.1 million or $0.77 per common unit in the prior year third quarter.

Excluding the impact of the items that I previously mentioned, net loss for the third quarter of fiscal 2014 would have been $43.8 million or $0.72 per common unit compared to $36.9 million or $0.63 per common unit in the prior year third quarter.

Retail propane gallons sold in the third quarter of fiscal 2014 decreased 8.9 million gallons to 83.2 million gallons from 92.1 million gallons in the prior year third quarter. Sales of fuel oil and over refined fuels decreased 1.3 million gallons to 7 million gallons compared to 8.3 million gallons in the prior year third quarter.

The decline in volume was primarily due to a combination of factors that Mike already mentioned, namely lower customer demand following a winter heating season which customers experienced significantly higher energy bills as a result of both greater usage and higher average prices. Our efforts to manage exposure to higher than normal customer receivable balances and warmer temperatures during the month of April 2014 compared to colder temperatures during the month of April 2013, which had an unfavorable impact on volumes sold year-over-year.

Average temperatures across all of our service territories starting April 2014, were 5% warmer than normal and 7% warmer than April 2013. Overall, average temperatures across all of our service territories for the third quarter of fiscal 2014 were 10% warmer than normal and 4% warmer than the prior year third quarter.

In the commodity market, average posted prices for propane for the third quarter of fiscal 2014 increased 16.6% compared to the prior year third quarter basis Mont Belvieu. Average fuel oil prices increased 2.1% compared to the prior year third quarter. While wholesale propane prices have abated since we exited the heating season, they still remain somewhat elevated compared to historical norms.

Total gross margins of $135 million for the third quarter of 2014 was $7.7 million lower than the prior year third quarter of $142.7 million, primarily due to lower volumes sold, offset to an extent by slightly higher unit margins.

Combined operating and G&A expenses of $1292.2 million for the third quarter of fiscal 2014, were $2.5 million lower than the prior year third quarter, primarily due to operating efficiencies and synergies realized as a result of the continuing integration of Energy Propane, including lower payroll and benefit related expenses attributable to reduced headcount and lower vehicle expenses attributable to the reduction of vehicles in our fleet.

Savings in payroll and vehicle expenses were partially offset by a $4.1 million increase in bad debt expense, primarily due to an increase in the allowance for potential uncollectable accounts and to a lesser extent, a decrease in the level of write-offs. Our receivable balance at the end of the third quarter of fiscal 2014 was significantly higher than June 2013 levels, due to the combination of higher selling prices and greater customer usage during the heating season.

However, through the first nine months of fiscal 2014, bad debt expense as a percentage of revenues was relatively consistent with our typical experience and we expect to work with our customers to continue to manage write-offs to a level in line with historical percentages, despite the higher receivable balances coming out of this year's heating season.

Net interest expense of $21.7 million for the third quarter fiscal 2014, was $3.7 million lower than the prior year third quarter and is the result of the reduction of $157.3 million in debt during the fourth quarter of fiscal 2013 and to a lesser extent, the refinancing of the 2018 notes completed this past May.

Total capital spending for the quarter was $7.3 million, which included $5.2 million of maintenance capital.

With the third quarter of fiscal 2014 behind us, our year to date adjusted EBITDA for the first nine months of fiscal 2014 was $334 million, an increase of $6.7 million compared to the same period the prior year.

Turning to our balance sheet, as mentioned earlier, during the third quarter of fiscal 2014, we took steps to further strengthen our balance sheet with the refinancing of $496.6 million in aggregate principle amount of our 7.5% senior notes for 2018, with net proceeds from the issuance of $525 million aggregate principle amount of 5.5% senior due 2024 and $12.5 million of cash on hand. With the completion of this refinancing, we will realize annual cash interest savings of $8.4 million.

Our liquidity position remains strong as we ended the quarter with $69.3 million of cash on hand and availability of approximately $246 million under our revolving credit facility. Back to you, Mike.

Thanks Mike. As announced in our July 23 press release, we were pleased to declare our quarterly distribution of $0.875 per common unit, which equate to an annualized rate of $3.50 per common unit. This quarterly distribution will be paid on August 12 to our unit holders of record as of August 5.

As far as integration efforts are concerned, we remain on schedule with our detailed plans to fully integrate onto one common system platform and one common operating model. As previously communicated, we expect to be fully completed with system conversions and blending activities by the end of this fiscal year.

Thereafter, as we have proven in the past, we will continue to refine our operating model and cost structure in order to enhance customer service, realize operating efficiencies and maximize the overall profitability of the combined enterprise. We remain confident that we will achieve our targeted synergies of $50 million over the first three years following the acquisition.

As for the remainder of fiscal 2014, we remain focused on working with our customers as they continue to make payments on their winter heating bills and look to replenish their inventories ahead of the new heating season. Additionally, as we approach the upcoming heating season, we will be functioning on one system and employing our model across the combined platform.

Our dedicated employees stand ready to respond to the level of customer service and comfort that our customer base has come to expect from us. With that being said, I'd like to acknowledge the continued efforts of all of our dedicated employees, both in the field and in our home office, in executing our integration plans, while maintaining their focus on delivering outstanding service to our customer base.

And finally, as previously announced, Mike Dunn will retire from the partnership, effective September 27. As this is Mike's last earnings call with us, I would like to take the opportunity to acknowledge and thank him for his overall leadership over the past 17-plus years and for the countless and significant contributions he has made to the partnership. I, along with the other members of the executive team, am excited and focused on building upon the strong platform that Mike leaves behind. We wish Mike all the best as he enters this exciting next stage in his life. Thanks Mike.

Thanks Mike and thank you all for your support throughout my tenure here at Suburban. It has been my pleasure to serve the employees, customers, unit holders and other stakeholders of Suburban over the past 17 years and I truly look forward to watching this management team continue to seek out growth opportunities while leveraging the strength of our operating structure and balance sheet for the long term benefit of our unit holders.

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

(Operator Instructions) Darren Horowitz; Raymond James.

To Mike Dunn, congratulations. It's been great working with you and we wish you the best. Mike Stivala, quick question for you, just if you could on a percentage basis. How much higher relative to historical norms is the current receivable balance running and more importantly, do you have an estimate as to the timing that you think it will take to get it back to a more normalized level?

The receivable balance is currently about almost 50% higher than this time last year and we expect to be able to turn that within the next few months, frankly. As it gets closer to next year's heating season, I think we're going to see an acceleration of those payments come through.

The good thing is we're not seeing an elevation in the percentage of write-offs as a percentage of sales. We're still in our typical less than half a percentage of write-offs and we expect that trend to continue. So it is really just a timing issue Darren. Customers are clearly taking a break off of last year's heating season and just focusing on getting their finances in order, getting their bills paid and getting prepared for next year's heating season. So we do believe that it's a bit of a timing issue.

Switching gears a little bit, back to the prepared commentary regarding wholesale propane costs being elevated, they've been that way for a while, especially when you're looking at inventory numbers and the incremental bid for propane to propylene or from a cracker consumption perspective.

I'm just curious, as we're approaching the back half of this year from a calendar perspective, how do you think about propane costs going forward, as a function of where Mid-Con and Gulf Coast inventories are? And if wholesale costs for propane continue to be elevated or possibly trend a little bit higher, how do you think that plays out for your ability to expand retail margins into the heating season?

I think you categorized the expectation for price pretty well, Darren. I think we probably have a similar view as you do, although it's tough to predict what's going to happen as the heating season gets started. Obviously last year there was some tremendous factors that changed the dynamics from a pricing perspective as the heating season progressed. So who knows what types of supply/demand dynamics can occur again, as this year's heating season gets kick started. I think you're starting from a level that is similar to last year. Propane seems to be kind of stuck in a range here of $1.00 to $1.10, basis Mont Belvieu. And there's nothing that I can see that would change that dynamic that dramatically at this stage.

So as it relates to propane margins, the economy continues to weigh on what we're seeing the customer behavior. So it's difficult in any pricing environment to raise prices and I think you have to be very careful with respect to the expectation that you have for continuing to raise margins on an economy that is still trying to come out of some difficult times here.

As you guys might progress with the system conversion and blending activities and as integration activities ultimately get done here by the fiscal year, seemingly from an economies of scale perspective that should benefit you. And I know it's tough to quantify, but I would imagine it gives you greater purchasing power, which should theoretically help you, especially if wholesale prices rise. Do you have a rough sense as to what that could mean across the system?

Obviously it's a benefit; I'd just love to put some numbers around it if that's possible.

It's really not possible to put numbers around the benefit of that. The benefit that we see, Darren, is the benefit that we got last year of the relationships that we have with our suppliers in a very tight supply and logistics market, where we were able to ensure that we always had supply when and where we needed it. So I think that's the benefit that we see in our relationships with our suppliers.

Is there a slight financial benefit? Perhaps, but I think the bigger benefit is our ability to get product when we need it and where we need it. So how you quantify that, I don't really know.

I guess we could just classify that as supply assurance, which is a good thing. Last question, just if you could provide a brief update on the acquisition environment? Obviously we've seen a few things kind of transition here over the past few quarters and I know that you had mentioned in previous calls the focus on diversifying the operations, maybe with a bit more midstream. Has anything changed there? Has anything dislocated with regard to multiples where something may or may not look more or less attractive?

I think our strategy certainly is the same. We continue to look for opportunities to both grow within propane, as well as diversify the platform. As far as multiples, I haven't seen a dramatic decline in multiples and I think the level of dropdown activity that you're seeing in newly created MLPs over the past couple of years, also changes a bit of the dynamics in the M&A marketplace, just in terms of the level of assets that are available to the open market, if you will.

So I think that's what we're seeing. We're not seeing a dramatic decline in multiples yet and we're seeing a little bit more competition for assets on the market, just given the dropdown scenario that many of these MLPs have created for themselves.

Gabe Moreen; Bank of America Merrill Lynch.

Best of luck in retirement, Mike Dunn and sorry the Phillies don't appear to be worth watching in that retirement.

Just a couple of follow-up questions. Darren hit on most of mine, but just on the bad debt experience, I realize as a percentage of revenues it's sort of where you've been running historically. But as far as customer account and maintaining a customer account and the bad debt experience you've had here, do you think you're losing or cutting off more customers than usual because of what you've been seeing on the bad debt side?

No, I don't think we're losing more customers than usual, Gabe. As far as when you say cutting off. We're also not losing customers as a result of cutting off. Both the customer, as well as Suburban, are cautiously allowing deliveries to continue to progress so that people have the time to get caught up. So that means that we have a few more customers perhaps on a credit hold for now, but not customers that we are ready to shut the door on for sure.

Then maybe I should know this from last quarter and the Qs, but just a tick up in maintenance CapEx year-on-year, seems to be running also in this quarter as well. Can you just talk about that and whether that's sort of the new level going forward?

Is it a new level going forward? I think what you're seeing right now is a bit more capital being deployed as we integrate the two businesses. So I expect as we get into next year and certainly the year after that, we'll probably level down a little bit from where we are right now.

(Operator Instructions) Sharon Lui; Wachovia Securities.

Best of luck, Mike. Just a question on the integration costs. I know that the schedule remains in line with expectations but maybe if you could just comment on whether the integration costs incurred to date is tracking in line also?

Yes, Sharon, it is. We always say it takes a dollar of cost to get a dollar of synergies and I think over the three years, that is still what we expect to pan out that way. Not all of it is expense related; some of it's capital and that's what you're seeing in the maintenance and growth CapEx. You'll see a little bit more of that as we brand the two businesses in terms of signage and storage tank painting and so forth over the next couple of years. But no, we're not seeing an uptick in what's required.

Then I guess quarter to date, is customer deliveries still tracking behind schedule versus a year ago?

The fourth quarter?

Probably for just the month of July.

I think we're still seeing the lingering effects of what we experienced in the third quarter. Obviously until the weather starts to turn around and customers see the heating season a little bit more eminent, I think that's where you'll start to see the deliveries turn around a bit more. Right now, like I said, customers are just taking a break, if you will, both from deliveries, as well as our own efforts to help them get through and work their finances to get themselves whole and ready for next year's heating season.

I'll turn it back to our presenters for closing remarks.

Thank you all for joining us and thank you again, Mike Dunn, for all your leadership and we look forward to seeing everybody again after our fourth quarter. Thank you.

Ladies and gentlemen, this conference call will be made available for replay. That beings today, August 7 at 11 a.m. Eastern. The replay runs until August 8th at midnight Eastern. You can access the AT&T Teleconference replay system by dialing 1-800-475-6701. Please enter the replay access code 332298.

That will conclude our teleconference for today. Thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect.