Suburban Propane Partners LP (SPH) 2016 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the fourth-quarter 2016 financial results conference call. (Operator Instructions) And as a reminder, today's conference call is being recorded.

I will begin today's conference call with a Safe Harbor statement. This conference call contains forward-looking statements within the meaning of Section 21e of the Security (sic) 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 risk and uncertainties. The Partnership has listed some of the important factors that could cause actual results to differ materially from those disclosed in such forward-looking statements, which are referred to as cautionary statements in the 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.

And at this time, I will turn the conference over to our first speaker, Vice President and Treasurer Davin D'Ambrosio.

Thank you, Nick, and good morning, everyone. Welcome to Suburban's fourth-quarter and fiscal 2016 full-year results conference call. Joining me this morning are Mike Stivala, our President and Chief Executive Officer; Mike Kuglin, Chief Financial Officer and Chief Accounting Officer; and Steve Boyd, our Senior Vice President of Operations.

On today's call, we will review our fourth-quarter and fiscal 2016 full-year 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 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 our Form 10-K for the fiscal year ended September 24, 2016, which will be filed on November 23. Copies of these filings may be attained 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. Form 8-K will be available through a link in the investor relations section of our website at suburbanpropane.com.

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

Thanks, Davin, and thanks, everyone, for joining us this morning. As we have reported throughout much of this past fiscal year, the 2015/2016 heating season has been reported as the warmest winter on record.

Our results for fiscal 2016 reflected the challenging operating environment, driven by the record warm temperatures and their impacts on customer demand for heating needs and therefore our earnings for the year. Nonetheless, we relied on our flexible cost structure and the strength of our balance sheet to help mitigate some of the effects of the lower volumes.

Additionally, during this past year, we had some notable achievements that will further enhance our operational efficiencies and provide added support for our long-term strategic growth initiatives. Specifically, during the first quarter, we acquired the assets and operations of Propane USA for $45 million, which expanded our presence in the South Florida market, already a very strong market for us, and which provided us with an opportunity to apply our operating model to enhance overall returns.

We took proactive steps to further improve our liquidity position with the opportunistic refinancing of our revolving credit facility, which was scheduled to mature in January 2017. With very strong support we received from our bank group, we were able to improve our cost of capital, extend the maturity until 2021, and increase our available borrowing capacity by $100 million.

We extended our reach in certain strategic markets that were not previously served by our existing footprint. And we made further refinements to our business model to streamline our operational activities, reduce our cost structure, and enhance our position in several markets. These are all steps that set us up both financially and operationally to further support the stability of our platform as a help to achieve the next phase of growth for Suburban Propane and our unitholders.

A little later, I will provide some closing remarks. However, at this point, I will turn it over to Mike Kuglin to discuss our full-year and fourth-quarter results in a little more detail. Mike?

Thanks, Mike, and good morning, everyone. I will start by focusing on our full-year results, give a little color on the fourth quarter toward the end of my remarks. To be consistent with previous reporting, 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 loss of $1.2 million in fiscal 2016 compared to an unrealized gain of $1.9 million in fiscal 2015.

Additionally, net income and EBITDA for fiscal 2016 included several charges that are excluded from the calculation of adjusted EBITDA. Specifically, a $9.8 million gain from the sale of certain assets and operations in a nonstrategic market of the propane segment; a $6.6 million charge related to the Partnership's voluntary full withdrawal from a multi-employer pension plan, covering certain employees acquired in the 2012 acquisition of Inergy Propane; a $3 million charge related to the settlement of a product liability matter; a pension settlement charge of $2 million; and a loss on debt extinguishment of $300,000 associated with the refinancing of our revolver.

Net income and EBITDA for fiscal 2015 include a loss on debt extinguishment of $15.1 million and associate the refinancing of our 2020 senior notes; $11.5 million in expenses related to the integration of Inergy Propane; an $11.3 million charge of the voluntary partial withdrawal from a legacy energy propane multi-employer pension plan; and a pension settlement charge of $2 million.

Excluding these items as well as the unrealized mark to market adjustments on derivative instruments in both years, net income for fiscal 2016 would have amounted to $17.8 million or $0.29 per common unit compared to $122.4 million or $2.02 per common unit in the prior year. Adjusted EBITDA for fiscal 2016 was $223 million compared to $334 million in fiscal 2015.

As Mike indicated, record warm weather during the heating season was really the story for fiscal 2016. As a result, retail propane gallons sold in fiscal 2016 of 414.8 million gallons decreased 65.6 million gallons or 13.7% compared to the prior year. Sales of fuel oil and other refined fuels of 30.9 million gallons decreased 11 million gallons or 26.3% compared to the prior year.

The unseasonably warm weather was persistent, as temperatures were warmer than normal and the prior year throughout most of the heating season, with the critical month of December 2015 reported as the warmest on record. And the months of February and March 2016 each ranking in the top eight warmest months of all time.

While average temperatures were considerably warmer than the prior year in nearly all of our service territories, California experienced cooler weather compared to the prior year, which contributed to a 13% increase of propane volumes sold in that market. Overall, average temperatures across all of our service territories were 17% warmer than normal and 15% warmer than the prior year.

From a commodity perspective, propane prices were somewhat volatile during the year, with wholesale prices trading in a range between $0.30 and $0.57 a gallon. Despite that movement, propane prices remain lower relative to historical levels as the nation's inventory remained high. Overall, average propane prices for fiscal 2016 were 18.4% lower than the prior year and average crude oil prices were 31% lower than the prior year.

Total gross margins of $685.3 million for fiscal 2016 were $136.4 million or 16.6% lower than the prior year, primarily due to lower volumes sold. EBITDA margins were slightly lower in the prior year as a result of lower mix of heat-related volumes.

Combined operating and G&A expenses of $462.3 million for fiscal 2016 were $25.4 million or 5.2% lower than the prior year as we leverage our flexible cost structure to reduce expenses. In addition, we made further refinements to our operating model to drive operating efficiencies that resulted in reduced headcount and vehicle count.

Total capital spending for the year was $38.4 million compared to $41.2 million in the prior year, of which $21.8 million accounted for growth capital in both periods. The $2.8 million reduction in maintenance CapEx was primarily due to lower tank refurbishment costs and the completion of Inergy Propane integration-related activities in the prior year.

Turning to our fourth-quarter results, due to the seasonality of our business, we typically report a net loss in the fourth quarter. With that being said, we reported a net loss of $60.2 million or $0.99 per common unit for the fourth quarter of fiscal 2016 compared to a net loss of $67.1 million or $1.11 per common unit in the prior year.

As I discuss the quarterly 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 $815,000 unrealized gain in the fourth quarter of fiscal 2016 compared to a $180,000 unrealized loss in the prior-year fourth quarter.

Additionally, net loss and EBITDA for the fourth quarter of fiscal 2016 include a pension settlement charge of $2 million. Net loss and EBITDA for the fourth quarter of fiscal 2015 included $6.4 million in expenses related to the integration of Inergy Propane; the $11.3 million charge related to the voluntary partial withdrawal from a multi-employer pension plan; and the $2 million pension settlement charge that I referenced in relation to the full-year results.

Excluding these items and the effects of the unrealized non-cash mark to market adjustments on derivative instruments in both quarters, net loss for the fourth quarter of fiscal 2016 was $59 million or $0.97 per common unit compared to $47.2 million or $0.78 per common unit in the prior year. Adjusted EBITDA for the fourth quarter of fiscal 2016 was a loss of $7.6 million compared to earnings of $6.7 million in the prior year.

Retail propane gallons sold in the fourth quarter of fiscal 2016 amounted to 63.2 million gallons, a decrease of 7.7% compared to the prior year. Volumes in the fourth quarter were negatively impacted by warm temperatures in the month of September, which were 26% warmer than September 2015. As well as the timing of customer deliveries, as the cooler start to the spring of 2016 resulted in higher deliveries in our fiscal third quarter, which created higher customer inventory levels heading into our fiscal fourth quarter.

Total gross margins of $103.3 million for the fourth quarter of fiscal 2016 were 11.7% lower than the prior-year fourth quarter, primarily due to lower volume sold. In addition, unit margins in the prior-year fourth quarter benefited from lower price inventory coming into the quarter as a result of the rapidly declining commodity price environment in fiscal 2015.

With respect to expenses, combined operating and G&A expenses of $110.9 million were essentially flat compared to the prior-year fourth quarter. Savings and payroll expenses from reduced headcount and vehicle expenses from a lower vehicle count were offset by an increase in reserves for general liability matters and higher professional services fees to support strategic initiatives.

Turning to our balance sheet, as a result of the impact of the record warm heating season on earnings, our leverage at the end of fiscal 2016 remains elevated compared to historical levels, but is within our debt covenant requirement of 5.5 times debt to EBITDA. Going forward, a return to a more normal weather pattern would bring our leverage profile more in line with our target of mid to upper 3 times.

From a liquidity perspective, we ended the fiscal year with more than $37 million of cash on hand and ample borrowing capacity under our revolver to fund working capital needs.

Back to you, Mike.

Thanks, Mike. As announced in our October 20 press release, our Board of Supervisors declared our quarterly distribution of $0.8875 per common unit in respect of the fourth quarter of fiscal 2016. That equates to an annualized rate of $3.55 per common unit. The quarterly distribution was paid on November 8 to our unitholders of record as of November 1.

In closing, as we reflect on the year that just passed, unfortunately these extreme warm weather scenarios come around every so often. This is why our approach towards managing our balance sheet and our unique operating philosophy have historically been a differentiator for us in managing through challenging times.

The streamlined and efficient nature of our operating model, coupled with the flexible nature of our cost structure and the strength of our balance sheet, allow us to be nimble in a year like this past year, in which so much customer demand is reduced due to the weather. It is these characteristics that also provide support for our ability to sustain our cash distribution and meet all of our cash needs, despite the short-term weather-driven earnings shortfall.

As I've stated before, the fundamentals of our business haven't changed. We are well positioned to continue to focus on the next phase of growth. We remain active in the pursuit of our strategic initiatives and believe that opportunities will become available, both within the propane space as well as in other energy-related sectors that can complement or supplement our current cash flow profile. Our stated criteria for evaluating acquisition targets has remained consistent and we will continue to remain patient and disciplined in our approach.

Finally, I am extremely proud of all of our Suburban Propane employees that have effectively navigated the challenges of the record warm heating season while maintaining a focus on the things they can control: providing unsurpassed customer service, adhering to the highest level of safety standards, and attracting and retaining customers across all customer segments. With fiscal 2016 now in the rearview mirror, we are excited about the opportunity to build on the momentum of our recent accomplishments and continuing to exceed our customers' expectations in every market we serve.

As always, we appreciate your support and attention this morning. And I would now like to open the call for questions. And Nick, if you could give us hand with that.

(Operator Instructions) Brian Brungardt, Stifel.

You mentioned the fourth quarter was impacted initially with customers entering the quarter and higher inventory levels. And it looks like fewer heating degree days in October compared to last year as well. Any color where customer inventories were in early fiscal first quarter or if we should expect another inventory impact in the current quarter?

No, I think -- look, with such little demand from last year, our delivery levels were obviously down. So I think as weather starts to pick up and all expectations -- all forecasts at this point show an improvement in weather is coming. So as soon as that weather picks up, I think the customer inventory issues will be behind us.

Got you. And then last question; I will jump back in Q2. You mentioned in the past that calendar third quarter is kind of a time of year smaller businesses are potentially up for sale. Any success during the quarter with hitting that targeted list you have?

No, we didn't close on any propane acquisitions in the fiscal fourth quarter. Actually, the period where you have the most potential activity is more coming out of the heating season. As we are starting up getting into the heating season here, we are -- the acquisition pipeline is a little bit lighter than it has been in the past. So the short answer is no, Brian, we didn't close on any propane acquisitions this quarter.

Got you. Thank you very much, guys.

Jeremy Tonet, JPMorgan.

Good morning. This is Charlie on for Jeremy. First question, more on the cost front, it seems like OpEx continues to come down a bit. I know you have mentioned headcount, vehicle counts being reduced and helping to kind of lower those operational and SG&A costs.

Just trying to understand if there any other costs that we should think about and how sustainable some of them are. And maybe what other levers there might be to pull down the road if need be?

This is Mike Kuglin. So with respect to the actions that we took in fiscal 2016 that gave rise to a reduction in our headcount and vehicle count, those actions will certainly give rise to permanent savings that would carry forward into next year.

But the other thing to think about, of course, is our flexible cost structure. A good portion of our operating expenses are variable base, which gives us the ability to flex our costs down in the event the weather does not cooperate, which is what you experienced and what you saw in fiscal 2016.

Okay. So that will allow you to -- given the flexibility, that will allow you to keep up with demand, given a rise or fall to help try and mitigate anything, correct?

Right. We had a pretty extensive seasonal part-time workforce for which we staff up when we see weather coming. And to the extent weather does not look like it's going to cooperate, such as what we're seeing in the early part of the 2016/2017 heating season, you could just managed your levels of how you staff up.

Right. Okay, that's helpful. And then just secondly, on the last call I touched on it a bit. Just -- I know last call, you mentioned that in terms of M&A that you kind of have a targeted list of quality businesses and that you currently have a few in your backlog.

Just wondering what that backlog looks like right now in regards to core or non-core. If you're looking to trying down the road cut exposure to the effects of obviously adverse weather, that sort of thing. Just wondering any developments or updates there.

So when we talk about a pipeline of backlog, that's more on the propane side. And so that backlog is typically going be a handful of businesses throughout the country. We are in 41 states, so our folks in the field have their eye on good businesses in each of their territories. And that backlog list at any given time is a handful to maybe a few more or a few less.

And as it relates to non-propane acquisitions, there is not a pipeline, if you will. We are constantly evaluating opportunities that fit our strategic criteria that we've laid out for the market, which is very simple.

The three criteria that we use and evaluate in opportunities is businesses that have relatively stable cash flow profile, that have a visible growth trajectory, and that have a quality management team that can join the business. So as far as non-propane, that's how we evaluate each individual circumstance. But at this point, there's nothing in the quote unquote backlog for non-propane activities.

Okay, great. Thank you. That's it for me.

Mike Gyure, Janney.

Can you guys talk a little bit, I guess maybe strategically, and how you think about the distribution in light of -- let's assume that, like you have pointed out, last year's winter was very warm. And maybe the winter the year before was a little bit more normalized.

If we have, let's say, other winter going through this year that is maybe in between those two, what would you look to do? I guess if you are short on the EBITDA, the ability to cover the distribution, would you lever up a little bit more to your limit of [55]? Would you use some of the excess cash? Or I guess what's the thinking there?

Well, I think first of all, Mike, you have to put the 2015/2016 heating season into proper context. This was a dramatic weather event. And these things, as I said in my opening remarks, they do come around every so often.

History has shown that it's highly unlikely that you would have a repeat in a weather pattern like that. And frankly, all indications at this point would suggest that this year's heating season is going to be much more seasonable than we experienced last year.

But nonetheless, I think, as we've always talked about, this is why you need to have flexibility and the ability to be nimble in the propane space. Meaning for Suburban in particular, you need to have good liquidity, a strong balance sheet, and a flexible cost structure that can react as you start to get visibility to what the weather pattern is shaping up to be.

And Mike Kuglin shared with you some of the flexible nature of our cost structure earlier. Those things are real. And so while we look back on this past year and it's a disappointment because there was virtually zero weather. When you are talking weather stats that are in the range of 18% to 20% warmer than normal, that is effectively no weather.

So when you ask the question about categorizing the coming winter as somewhere between 2016 and fiscal 2015, that is a significant improvement in weather, whether it's -- even if it doesn't get all the way back to normal, that is a significant improvement in weather trends that will translate into a significant improvement in earnings.

And so when we look at the earnings profile going forward, one: some of the steps that Mike talked about earlier about the permanent savings that we did from the steps we took in 2016, those are real costs that won't come back. So there will be a natural improvement in our cost structure.

Two: even a small improvement in weather is going to bring volumes back up. And an even better improvement in weather is going to have a much more dramatic effect on volumes for the year.

So when we look out for this year and we look at our cash needs, even if you had the worst case scenario, which was a repeat, we feel as though the steps that we took have put us in even a better position to be able to manage through that situation. And as I said earlier, all indications are we're going to be in a much better situation from a weather perspective this year anyway.

I will say it has been a slow start for the first five weeks of the quarter, but December is right around the corner. And all indications are that December is going to be much more seasonable in particular when you compare it to the last two Decembers, where December of 2015 was 27% warmer than normal and December of 2014 was 15% warmer than normal. So the ability to be better than that is I think something that we see that the forecast would indicate.

So bringing it back to your -- the base of your question, which is our cash distribution. Like I said at the end of my remarks, this year's effect of weather is short term in nature. It doesn't change who we are. It doesn't change the fundamentals of our business. It doesn't change the strength of our balance sheet.

And even just a slight return to normal -- or not even normal -- will have a significant impact on our earnings profile. And that will bring our leverage right back to our traditional level of below 4 times.

And so when you say, would we have to borrow up to our covenant threshold. The answer is no. That little bit of earnings improvement, even, will have a significant effect on leverage and cushion with respect to our current covenant threshold.

So we do view the cash distribution as something that we are here to provide a level of stability. And we're here to grow the business -- to be able to grow distributions. And so that is our task. And when you go through a year like this that the weather certainly didn't help, you deal with it. And that is why, as I say, we are built for that.

So we are happy to have that year behind us. And we're happy to be in the position that we are today to be able to now take on a brand-new challenge of a heating season to come. And our people are very excited about the prospect of the coming fiscal year.

Great. Thanks very much.

Sharon Lui, Wells Fargo.

Just to follow up on your commentary about coverage, just want to I guess ask a question specifically to the debt metrics. If you can just provide details on what the ratio was for this past quarter.

And I guess in light of the warmer weather experience to date this quarter, what is your confidence level in terms of staying within the covenant thresholds? And what are some of the options that you have to mitigate that risk?

Yes. As the -- when you look at our threshold at the end of September, our leverage was about 5.2. So that gives us plenty of cushion to our covenant level of 5.5. And as I just answered the earlier question about the first quarter, a combination of lower expenses and an improvement in weather.

And again, like I said, you do have to take this year's weather into context, and that starts with the first quarter, where we are -- you are going to be comparing against two past Decembers that had virtually no weather. So yes, the first five weeks of the quarter here, we're sort of at the -- sort of in a range of 20% to 25% warmer than normal, but you don't make the quarter based on October weather. December is really the start of the real meat of the heating season.

So when you ask about our confidence level, our confidence level is extremely high that we have plenty of cushion on our balance sheet. And even a slight improvement in earnings just enhances that cushion that much. If you think about it, a $5 million improvement in earnings adds $25 million, $30 million of cushion. So it's not something that we're concerned about, Sharon.

Okay, thank you. And just a question on the G&A expense. If you could just talk about the year-over-year variance excluding some nonrecurring items.

Yes, Sharon. It's Mike Kuglin. So G&A for the year excluding the items for which -- the only item that we really called out within our adjusted EBITDA was in the prior year, which impacted -- the integration expenses that impacted G&A. In the current year, there weren't any items that we excluded from the calculation of adjusted EBITDA. They would normalize.

So G&A is down about 8% year over year. And much of that saved, but much of that decline was attributable to lower variable compensation associated with lower earnings.

Okay. And I think in your release, you mentioned higher professional services as well as general liability. Where are those items I guess reported? Is it in operating expenses or in G&A?

It's a mix. So in the aggregate, we didn't disclose the number, but there was a mix and it was an equal mix that impacted both operating and G&A. Those numbers are included in the expenses and thus included in the calculation of adjusted EBITDA. Those numbers are not part of or excluded out in the measurement of adjusted EBITDA, but it did impact both.

Okay. But you what I guess classify this as sort of like a recurring item?

I would classify them as items that would not be recurring, but for purpose of trying to normalize numbers.

Okay. So would you be able to quantify the amount? Was it material?

No. I'd say in the aggregate, we are looking at about $6 million.

Okay, great. Thanks for the help.

Brian Brungardt, Stifel.

To expand on your commentary from the last couple questions, it looks like the western part of the US in particular is forecasting to be significantly colder than average in December. Could you remind me of the general geographic mix of your propane volumes sold on average?

In California, it's about 20%.

Got you. And then I guess relative to the northeast and southeast with the Propane USA.

So the northeast is about 35% and then southeast is about 35% as well, which includes -- and then the Midwest and the West is the rest.

Got you. Thank you very much, guys.

Thank you, speakers. At this time, there are no further questions in queue.

All right, great. Thank you, Nick. Thank you all for joining us today. We look forward to talking to you after our first-quarter results in early February. Have a great holiday season.

Thank you. Today's conference call was recorded and is available for replay starting today at 11 AM and running through tomorrow at midnight. You may access the AT&T playback service 24 hours a day by calling 1-800-475-6701 and enter the access code of 404355. (Operator Instructions)

That does conclude our conference for today. Thank you very much for your participation and for using AT&T executive teleconferencing. You may now disconnect.