Suburban Propane Partners LP (SPH) 2016 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the third 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; instructions will be given at that time. (Operator Instructions) As a reminder, this 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 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 Vice President and Treasurer, Davin D'Ambrosio. Please go ahead.

Thank you, Dave, and good morning, everyone. Welcome to Suburban's Fiscal 2016 Third Quarter Earnings Conference Call. Joining me this morning are Mike Stivala, President and Chief Executive Officer; Mike Kuglin, Chief Financial Officer and Chief Accounting Officer; and Steve Boyd, Senior Vice President of Operations.

Purpose of today's call is to review our third 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 our Form 10-K for the fiscal year ended September 26, 2015, and our Form 10-Q for the period ended June 25, 2016, 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, 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 thanks, everyone, for joining us this morning. Coming out of this year's record warm heating season, we're very pleased to report a 52% increase in adjusted EBITDA for our third fiscal quarter compared to the prior year. As we stated on our last earnings call, despite the dramatic effect of the record warm winter on customer demand, the fundamentals of our business remain strong.

These solid results certainly support that commentary. The improvement in earnings for the quarter was driven by a combination of higher volumes sold and continued expense savings. Additionally, our balance sheet and liquidity continue to be strengths of ours, allowing us to withstand these short-term weather-driven events, and to provide support for our long-term strategic initiatives.

In a moment, I'll provide some closing remarks, including comments on our outlook for the remainder of the fiscal year. However, at this point, I'd like to turn the call over to Mike Kuglin to discuss our third quarter results in more detail. Mike?

Thanks, Mike, and good morning, everyone. Our results for the quarter benefited from a combination of solid customer base performance, coolest spring temperatures, and our ongoing focus on achieving operating efficiencies and cost savings. Consistent with the seasonality of our business, we typically report a net loss in the third quarter.

But that being said, our net loss was $29.6 million or $0.49 per common unit compared to a net loss of $41 million or $0.67 per common unit in the prior year. To be consistent with previous reporting, as I discussed our third quarter results, I'm excluding the impact of unrealized non-cash mark-to-market adjustments on derivative instruments used in risk management activities, which resulted in a de minimis unrealized loss in the third quarter of both fiscal years.

Additionally, net loss and EBITDA for the third quarter of fiscal 2016 including $9.8 million gain on the sale of certain non-strategic assets and operations within the propane segment, which is partially offset by a $6.6 million charge related to our voluntary withdrawal for a multi-employer pension plan covering certain employees acquired in 2012 Energy Propane acquisition.

Net loss and EBITDA for the third quarter of fiscal 2015 include a $1.1 million of expenses related to the integration of Energy Propane. Excluding these items, net loss for the third quarter of fiscal 2016 would have amounted to $32.7 million or $0.54 per common unit compared to a net loss of $39.8 million or $0.66 per common unit in the prior year.

Adjusted EBITDA for the third quarter of fiscal 2016 amounted to $18.4 million, an increase of $6.3 million or 52% compared to the prior year. Retail propane gallons sold in the third quarter of fiscal 2016 of 80.2 million gallons increased 2.6 million gallons or 3.4% compared to the prior year. Sales of fuel oil and other refined fuels of 5.8 million gallons decreased 400,000 gallons compared to the prior year.

Although weather during the third quarter typically has less of an impact on volumes sold and it does during the heating season, volumes for the quarter benefited from coolest spring temperatures, especially in the northeast service territories in the month of May or average temperatures were 17% cooler than normal.

Overall, average temperatures across our service territories for the third quarter of fiscal 2016 were 9% warmer than normal and 7% cooler than the prior year.

In the commodity markets, the rally in wholesale propane prices has started in mid-February, continued through much of the third quarter with prices reaching a high of $0.57 per gallon in May, which is based on Mont Belvieu and settling at $0.52 per gallon at the end of June. As a result of the rally, average propane prices for the third quarter were 5% higher than the prior year. With respect to fuel oil, average prices for the third quarter were declined 27% compared to the prior year.

On a sequential basis, average propane prices and fuel prices were both more than 25% higher than the second quarter of fiscal 2016. A total gross margin of $129.6 million for the third quarter of fiscal 2016 was $3.5 million higher than the prior year, primarily due to higher volumes sold.

Combined operating and G&A expenses of $117.9 million for the third quarter of fiscal 2016 were $2.7 million or 2.3% higher than the prior year, primarily due to the multi-employer pension plan withdrawal charge that I previously mentioned, along with the charge for employee severance, resulting from headcount reductions during the quarter. The impact of these charges was partially offset by continued savings and payroll and benefit-related expenses attributable to lower headcount and lower vehicle expenses stemming from a reduction in the quantity of vehicles in use and lower fuel cost of operator fleet.

As I mentioned earlier, the multi-employer pension plan withdrawal charge in fiscal 2016 and integration-related expenses in 2015 were excluded from our calculation of adjusted EBITDA. Excluding the impact of these items from both periods combined operating and G&A expenses decreased $2.8 million or 2.5% compared to the prior year.

Net interest expense of $18.6 million for the third quarter of fiscal 2016 was $300,000 lower than the prior year due to savings and refinancing of our revolving credit facility in the second quarter. Total capital spending for the quarter was $7.4 million compared to $11.1 million in the prior year. The savings is primarily due to lower maintenance CapEx as the prior year including energy integration-related activities that have since been completed.

Turning to our balance sheet. During the third quarter, we once again funded all working capital needs from internally generated cash without the need to borrow under our revolver, and from a leverage perspective, the increase in adjusted EBITDA for the third quarter contributed to an improvement in our leverage compared to the second quarter. While our leverage remains elevated compared to historical levels has resulted the impact of the 2016 record warm heating season on trailing 12-month earnings, we are well within our debt cover requirement of 5.5 times debt to EBITDA.

Going forward, they'll return to a more normal weather pattern would bring our leverage profile more in line with our target of mid to upper 3 times. Our liquidity position remained strong with more than $67 million of cash on hand and more than ample borrowing capacity under our revolver to fund working capital needs.

Back to you, Mike.

Thanks, Mike. As announced in our July 21 press release, we were pleased to declare our quarterly distribution of $0.8875 per Common Unit which equates to an annualized rate of $3.55 per Common Unit. This quarterly distribution will be paid on August 9 to our unitholders of record as of August 2. Despite the very challenging winter season, our unitholders should take comfort in the sustainability of our distribution as a result of our conservative approach towards balance sheet management and strong liquidity position.

As for the remainder of fiscal 2016, we will continue to focus on the things within our control, customer base management, prudent margin management, further operating efficiencies to drive cost savings and preparing our operations for the upcoming heating season, regardless of what the weather brings. We continue to be well positioned to focus on our growth initiatives both internally through refinements of our business model and externally through strategic acquisitions.

In closing, I'd like to take the opportunity to thank all of the employees of Suburban Propane for maintaining their focus on delivering the highest quality safety standards while delivering an exceptional level of service to our customers in an otherwise challenging environment brought on by the weather.

And as always, we appreciate your support and attention this morning. And now, I'd like to open the call up for questions. And Dave, could you help us with that.

(Operator Instructions) Gabe Moreen, Bank of America.

Quick questions from me. Just on the buyout of the pension plan, can you just talk about what that may save you kind of on an ongoing basis, if anything?

In terms of savings, we would save from the lack of the need to make contribution requirements to the pension plan. And on an annual basis, that number is really not that significant. So I wouldn't expect a significant improvement to the earnings profile.

And then as a follow-up in terms of the asset sale since there are a little bit more dispositions, obviously not a huge number, is that -- can you just talk about what that sort of stemmed from and whether that's an ongoing process?

Yeah, Gabe. This is Mike. That was one location that we acquired from Energy that was really in the market that just didn't fit our business model. And so we went ahead and took the opportunity to sell the business and utilize that cash to offset some of the cash to fund the Propane USA acquisition that we did earlier in the year. So, I think it was just a good trade, if you will.

And then last question for me is a broader question kind of third-party M&A. There have been a couple of deals out there, but just wondering what you're seeing out there if anything is of interest?

On propane space, Gabe, this is obviously the time of year that smaller mom and pop businesses would put their businesses for sale. So, you're seeing the similar number of businesses on the market, but we've talked about this in the past. Our process with respect to propane M&A is a little different than some of the others where we have more of a target list that -- of good quality businesses and good quality markets of ours that we have our eye on. And that we have built relationships with the owners of those businesses such that when they're ready to sell, we're in a better position to help make that happen.

So, we have a handful of those on our list of watch and I would say we have a couple in the backlog right now that we're continuing to look at.

And anything on non-core, non-propane side?

We continue to see that the backdrop for midstream M&A, I think, continues to look to be favorable for us whether it be midstream players that are continuing to focus on balance sheet repair, whether it's the commodity markets seeming to balance out a little bit; the economy is sputtering, which is placing some concern on the short-term outlook, you've regional infrastructure constraints that need to clear themselves out to help balance the market.

And I think these are all things that bode well in the midstream acquisition space. But, as you know, and as we've stated all along, our strategic thinking has been very consistent. Our criteria is pretty simple, we are looking for opportunities that can help mitigate some of the weather dependency of the propane business.

So, obviously businesses that have a relatively stable cash flow profile, businesses that have a visible growth trajectory that the cash flow generating capacity of the propane business can help foster, and particularly with our first step, we would look to find good quality management teams to help run the business.

So, that's been our criteria all along. That hasn't changed, and as you followed us for long enough, you know that we're extremely disciplined and patient in our approach, and I think we're going to continue with that philosophy.

Sharon Lui, Wells Fargo.

Just a quick question on the cost savings, I mean your OpEx and G&A costs decreased pretty meaningfully year-over-year, just wondering if that pace of a decrease is sustainable and other measures that you guys are looking to take?

Good morning, Sharon, it's Mike. I won't give any guidance as to what you can expect going forward. But what I would say is the savings that we realized during the year was certainly attributable to headcount reductions, vehicle reductions, and blending locations that certainly gave rise to permanent savings. During the heating season, we also benefited from flexing our cost structure and flexing our cost down. So many lower costs will flex with volumes as we go into next year heating season, but the actions that we took during the current year to generate permanent savings certainly will carry forward into next year.

And you talked a little bit about the step-up in propane prices. Just wondering if you're starting to see any change in demand from that?

I think the third quarter we saw some good demand, our volumes were up as we said, and I think that was a function of a little bit of weather benefit, because it was cooler as we entered the third quarter, but the third quarter you don't really get that much out of weather. So I think it is a function of just demand picking up in an environment where you're coming out of the year where there hasn't been any demand.

So as prices have now retreated in the past six weeks or so, I think that bodes well for the consumer in relation to how they view getting themselves prepared for next year's heating season. So yes, we are seeing good behavior in the customer base, both from the stability of the customer base and also from the reaction to the price movement.

(Operator Instructions) Michael Gyure, Janney.

On the working capital side of the business, are your trends there that you essentially had no borrowings incrementally here in third quarter, do you expect that to continue into the fourth quarter or how are we looking here as we move into the fourth quarter?

Yeah. So our cash position remains strong and it looks for the remainder of fiscal year, I think we're also going to be in a good position. We typically don't give guidance, but to the extent commodity prices rise, we have a nice start to the heating season. We certainly have ample borrowing capacity under revolver to meet our working capital needs, but I certainly would refrain from giving guidance as to whether or not we would need to draw down from it, but if we did, it is certainly there and available.

And then maybe a little bit on your growth spending plans for the remainder of the year?

From a capital perspective, nothing out of the ordinary, Mike, really from what you've seen in the past. I think if you look at our rolling 12-month total CapEx between maintenance and growth, I think that's actually a bit of an elevated level, just given some of the steps that were taken towards the tail end of last year on the continued integration of energy, and some of the incremental spending that we had for that. So, probably, if you look at the rolling 12, I would say it's probably a little bit lower than that. So, nothing specific.

And at this time, there are no further questions in queue.

Okay, great, Dave. Appreciate your help today, and thank you all for joining us this morning and we look forward to talking to you at the end of our fiscal year-end in November. Thanks.

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