Suburban Propane Partners LP (SPH) 2016 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the first-quarter 2016 financial results conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions).

I would now like to read a script for Suburban Financial. This conference call -- Suburban Propane, I'm sorry. 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 and 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, Vice President and Treasurer, Mr. Davin D'Ambrosio. Please go ahead, sir.

Thank you, Robert. Good morning, everyone. Welcome to Suburban's fiscal 2016 first-quarter results conference call. Joining me this morning are Mike Stivala, President and Chief Executive Officer; Mike Kuglin, our Chief Financial Officer and Chief Accounting Officer; Mark Wienberg, Chief Development Officer; and Steve Boyd, our Senior Vice President Operations.

The purpose of today's call is to review our first-quarter financial results, along with our current outlook for the business. As usual once we have concluded our prepared remarks, we will open the session to 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 26, 2015, and its Form 10-Q for the period ended December 26, 2015, 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 these 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. The Form 8-K can be accessed through a link on our website at suburbanpropane.com.

At this point, I would like to turn the call over to Mike Stivala for some opening remarks. Mike?

Thanks, Davin, and thank you, everyone, for joining us this morning. Let me start with some thoughts on recent declines in the MLP equity markets, particularly in the fourth calendar quarter of 2015, along with some specific commentary relative to Suburban Propane.

Broadly speaking, some of the key factors driving MLP performance have been concerns over a lower for longer view on commodity prices and the impact not only on producers, but ultimately on the flow of activity throughout the midstream infrastructure; higher leverage and tighter distribution coverage heading into an earnings downturn; uncertainty over the sources and cost of capital to fund growth, particularly committed capital requirements; concerns over the prospect of distribution cuts and, in fact, several recently announced cuts; and widespread technical selling by many of the MLP funds among others.

As for Suburban Propane, our fundamentals haven't changed, and in fact, many of the factors I just mentioned don't necessarily apply.

To highlight some of our fundamentals, we've entered this fiscal year with a leverage profile that is lower than our peers and compares favorably to the broader MLP sector. Our maintenance capital needs are relatively low with no real committed growth capital to finance. We entered fiscal 2016 with more than $150 million of cash on the balance sheet and approximately $250 million available under our revolver. So we have more than adequate liquidity. We have a healthy distribution coverage, but do not have any immediate needs to access the capital markets. And as for commodity prices, an extended lower cost environment is a benefit to the industry and our customers.

As we stated at the beginning of fiscal 2016, our integration efforts for the Inergy propane acquisition are effectively behind us, and we are well-positioned to continue to focus on the next phase of growth for Suburban Propane and our unit holders.

All that being said, given the record warm temperatures across the majority of our service territories throughout the first quarter of fiscal 2016, our volumes were obviously impacted by the lack of customer demand for heating needs. While the lower volumes have had an effect on our earnings for the quarter, the strength of our balance sheet, flexible nature of our operating model and access to more than adequate liquidity provides good support for this short-term, weather-driven earnings impact.

In a moment, I'll provide some additional comments on our outlook for the remainder of fiscal year; however, at this point, I'd like to turn the call over to Mike Kuglin to discuss our first-quarter results in more detail. Mike?

Thanks, Mike. Good morning, everyone. To be consistent with previous reporting and to discuss our first-quarter results, I'm excluding the impact of unrealized non-cash mark-to-market adjustments on derivative instruments, user risk management activities, which resulted in unrealized loss of $1.2 million for the first quarter of fiscal 2016, and unrealized gain of $9.5 million in the prior year first quarter. Additionally net income and EBITDA for the first quarter of fiscal 2016 include a $3 million charge related to settlement of product liability matters. Net income and EBITDA for the first quarter of fiscal 2015 included $1.9 million of expenses related to the integration of energy propane. Therefore, excluding these items, as well as the unrealized mark-to-market adjustments on derivative instruments, net income for the first quarter of fiscal 2016 would have amounted to [$60.6] million or $0.27 per common unit compared to net income of $48.2 million or $0.80 per common unit in the prior year first quarter. Adjusted EBITDA for the first quarter of fiscal 2016 amounted to $67.2 million compared to $101 million in the prior year first quarter.

Retail propane gallons sold in the first-quarter 2016 decreased 24.8 million gallons or 18.4% to 109.8 million gallons from 134.5 million gallons in the prior year first quarter. Sales of fuel oil and other refined fuels decreased 2.7 million gallons to 8.6 million gallons compared to 11.3 million gallons in the prior year first quarter.

As Mike indicated, customer demand in the first quarter of fiscal 2016 was adversely impacted by record warm temperatures throughout most of our service territories, and seasonally warm weather was persistent as temperatures were warmer than normal and the prior year for all 13 weeks in the quarter. The only markets that experienced favorable weather compared to the prior year were California and the Pacific Northwest, and in those markets, our volumes responded strongly compared to the prior year.

Overall average temperatures in the first quarter of fiscal 2016 were 25% warmer than normal and 17% warmer than the prior year first quarter.

In the commodity markets, average propane prices were relatively stable during the first quarter and significantly lower than in the first quarter of the prior year as a result of the decline in propane prices experienced during fiscal 2015. Overall average post [dip] prices for propane of $0.42 per gallon basis Mont Belvieu for the first quarter of fiscal 2016 were 44.8% lower than the prior year first quarter. Average fuel oil prices of $1.37 per gallon for the first quarter of fiscal 2016 were 41% lower than the prior year first quarter.

As we said in the past, the sustained period of lower commodity prices has been a favorable development for consumers and propane distributors alike.

Total gross margins of $184.6 million in the first quarter of fiscal 2016 were $40.9 million lower than the prior year first quarter, primarily due to the lower volumes.

In addition, gross margins were also affected by slightly lower unit margins due to mix of volume as the warm weather during the quarter had less of an impact on usage by our non-residential customers than that of our heat-related residential customers.

Excluding the charge integration related expenses that I previously mentioned, combined operating and G&A expenses of $117.4 million in the first quarter of 2016 were $7.1 million or 5.7% lower than the prior year first quarter. Savings were primarily attributable to operating efficiencies, resulting in reduced headcount and vehicle count, lower variable compensation associated with lower earnings, lower vehicle fuel costs and other variable costs based on volumes sold.

Net interest expense of $18.9 million for the first quarter of fiscal 2016 decreased $1.1 million from the prior year first quarter. The refinancing of our 2020 senior notes completed in the second fiscal quarter of 2015.

Depreciation and amortization expenses of $31.6 million in the first quarter decreased $1 million due to the acceleration of depreciation expense recorded in the prior year first quarter for certain assets taken out of service from integration activities. Total capital spending for the quarter was $13 million compared to $7.9 million in the prior year first quarter. The increased level of capital spending was primarily driven by tank purchases to support new customer activity and expansion of relationships with certain existing customers.

Some of our capital spending for the fiscal year was accelerated for the first quarter, and as a result, we expect our overall capital spending levels for the remainder of the year to moderate back to more historical levels.

Turning to our balance sheet, our liquidity position remains strong as we ended the first quarter with $57 million of cash on hand and $250 million of availability under our revolving credit facility. The lower commodity price environment in the first quarter of fiscal 2016 continued to have a favorable impact on our working capital requirements.

For the quarter, we, once again, funded all of our working capital needs, as well as the acquisition of the assets of Propane USA, which we announced on December 15, 2015, from cash on hand, without need to borrow from our revolver.

While we have plenty of heating season ahead, historically our working capital needs will peak toward the end of February, at which time we expect to begin building our cash position once again.

Now I'll turn it back to Mike for some closing remarks.

Thanks, Mike. As announced on January 21, our Board of Supervisors declared our quarterly distribution of $0.8875 per common unit in respect of our first quarter of fiscal 2016, which equates an annualized rate of $3.55 per common unit, and an increase of 1.4% compared to the annualized rate at the end of the prior year first quarter. Our quarterly distribution will be paid on February 9 to our unitholders of record as of February 2.

Just one additional comment on our distribution. Our philosophy has remained consistent over the years in that we seek to provide our unitholders with a sense of long-term stability by maintaining a strong balance sheet and liquidity, while seeking opportunities to deliver a sustainable profitable growth to support growth in the distribution rate. This philosophy is unchanged by current market conditions.

Focusing a bit on our business strategy, we will continue to seek opportunities to invest in initiatives that can extend our presence in the strategic markets or complement or supplement our existing propane operations. In an otherwise challenging environment for the broader energy sector, given the backdrop of sustained low commodity prices, we are well-positioned to continue to focus on our growth initiatives while also refining our business model. We are certainly aware of the challenges that both the equity and debt markets present at this time, particularly with respect to financing of potential transaction and the market's bias toward stability.

As we've demonstrated during our long track record, we will continue to be deliberate in the execution of our strategy and will remain patient and disciplined.

In line with our growth strategy, as announced on December 15, 2015, we acquired the assets of Propane USA for a total consideration of $45 million, of which approximately $41 million was funded at closing, and the remainder will be paid over a noncompete period. We funded this acquisition with cash on hand, and it is expected to be immediately accretive to earnings.

Propane USA provides an additional 7600 residential and commercial customers and approximately 4.7 million gallons to an already strong market for Suburban on the east and west coast of southern Florida. This acquisition demonstrates our commitment to investing in external growth and strategic markets and provides an opportunity to apply our operating model to enhance overall returns through synergies.

As we look ahead to the remainder of fiscal 2016 and with plenty of the heating season still ahead, our operating personnel continue to focus on the things they can control: providing superior customer service, driving operating efficiencies, and managing our cost structure.

In closing, I would like to thank all of our dedicated employees for their hard work in managing through the challenges of record warm temperatures by continuing to deliver the highest quality service to our customers and for their continued focus on safety and comfort. As always, we appreciate your support and attention this morning, and with that, I'd like to open the call for questions.

Robert, can you help us with that?

(Operator Instructions). Brian Brungardt, Stifel.

Good morning, guys, and thank you for taking my questions. I guess to start off here, previously you've mentioned the months of December, January and February are crucial for your business. Obviously December was less than ideal, but could you provide some color around what you saw in January as it relates to last year?

There was fits and starts, let's say. We had certainly a couple of weeks there where there was some promising whether and a couple of weeks where the weather was unseasonably warm. So I think it's pretty -- those of us particularly who live on the East Coast have seen some good weather and some bad weather. So far in January I would say it was continuing the warmer trend, and we still have a good bit of February ahead of us here.

Got you. And then switching to the acquisition markets, we've seen increased discussion from the larger midstream players around selling non-core assets in this environment. Could you provide some insight into the type of midstream assets you may find ideal in complementing your core propane business?

Well, I think we've been pretty clear over the quarters as to what our strategy is. Our strategy is to focus on assets that have a relatively stable cash flow profile to diversify away from a business that is somewhat tied to weather. So that's one of our main criteria is going to be businesses that have less dependency on things like weather or commodity prices.

And then our next main criteria is a business that can demonstrate a good growth profile that we can continue to grow from and not just do one acquisition and feel like we are done.

And then the last main criteria that we been clear about is, as we step outside of propane, we are going to be looking for management teams that fit into our culture and can run that operating subsidiary on our behalf while we sit on top as a holding company. So a stable cash flow profile, good growth trajectory and a good management team.

That's all I have. Thank you very much, guys.

Ben Brownlow, Raymond James.

Good morning. You had commented on the low commodity cost environment being favorable for working capital and demand, etc. But just wondering if product costs remain depressed, how should we think about the retail margin inside of the business on a kind of pending per gallon basis?

Well, certainly a low sustained commodity environment with lack of volatility limits some of the potential upside in margins. But I think what I would say for profiling is you could expect margins to be flat to slightly up.

Sequentially or year over year?

Well, it depends on volume, the mix of customers. So sequentially if you are still in a heating season like we are now, sequentially you could expect to see stable. Coming off of a heating season, you would expect to see slightly up from prior year comparable periods.

That's helpful. Thank you. And on the Florida-based propane, I know you said it was going to be accretive day one. I'm just trying to get a sense of if you could elaborate on the typical timeline of what you see in terms of integration and efficiency scale, etc., until those are fully realized, and obviously that depends on the size of the acquisition. But kind of when you're looking at that regional M&A, like the Florida-based Propane USA, what does that timeline typically look like?

The beauty of our model is it is so conducive to folding in an acquisition of this nature and size. So the integration is months, not years.

And then just one more from me. On the OpEx structure, that OpEx decline year over year was pretty oppressive given the weaker quarter. Can you just remind us what the percentage of OpEx is kind of volume-based variable, seasonal wages, etc. versus fixed overhead?

It's probably about 25%. I think when you look at our 6% decline year over year, a good bit of that was volume related, but a good bit of it was the continued work on our end to drive efficiencies vis-a-vis lower vehicles and lower headcount. So I would say a good mix of longer-term expense savings and some volume-driven expenses.

Great. Thank you.

(Operator Instructions). We have no further questions, sir.

Well, thank you all for joining us this morning. We look forward to talking to you at the end of our second quarter.

Ladies and gentlemen, this conference will be available for replay from today starting at 11 a.m. until tomorrow at midnight. You may access the AT&T Replay System by dialing 1-800-475-6701 and entering the access code 384368. Once again, that number is 1-800-475-6701, access code of 384368.

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