Suburban Propane Partners LP (SPH) 2023 Q3 法說會逐字稿

Good day, and welcome to the Suburban Propane Partners Third Quarter Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Davin D. Ambrosio, Vice President and Treasurer. Please go ahead.

Thanks, Betsy. Good morning, everyone. Thank you for joining us this morning for our fiscal 2023 third quarter earnings 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 Boy, our Chief Operating Officer. This morning, we will review our third quarter financial results, along with our current outlook for the business. Once we concluded our prepared remarks, we will open the session to questions.

Our conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended, related to the partnership's future business expectations and predictions, financial condition and results of operation. These forward-looking statements involve certain risks and uncertainties. We have 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 our earnings press release, which can be viewed on our website at www.suburbanpropane.com. All subsequent written and oral forward-looking statements attributable to the partnership or persons acting on its behalf are especially qualified in its parity by cautionary statements.

Our annual report on Form 10-K for the fiscal year ended September 24, 2022, in Form 10-Q for the period ended June 24, 2023, which will be filed by the end of business today, contain additional disclosures regarding forward-looking statements and risk factors. Copies may be obtained by contacting the partnership or 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 will be available through a link in the Investor Relations section of our website. At this time, I'll turn the call over to Mike Stivala for some opening remarks. Mike?

Great. Thanks, Davin. Good morning, and thank you all for joining us today. The fiscal 2023 third quarter was another strong quarter for Suburban Propane with adjusted EBITDA of $33 million, our highest reported results for any third quarter in our history and an improvement of nearly $4 million or 13% over the prior year third quarter. Operating results benefited from strong customer demand due to cooler spring temperatures in certain parts of our territories, which increased volumes by 3.9%. We also had continued success in our customer base growth and retention initiatives, effective selling price management and a great job by our operating personnel and managing expenses in a persistent inflationary environment. Additionally, the quarter included contributions from the RNG platform that we acquired at the beginning of the second quarter.

Within our developing renewable natural gas or RNG platform, we completed planned upgrades to help optimize plant operations at our Stanfield, Arizona facility and are now starting to exceed our initial projections for daily production and pipeline injection at that facility. Additionally, at the Stanfield facility, we are making great progress integrating support functions, including onboarding the operating personnel who were previously employed by a third-party operating and maintenance company. This will enhance our operating controls and reduce expenses. We also continue to advance the construction of the RNG production assets at AteronDeck Farms in New York and the capital improvements at the Columbus, Ohio facility, which include enhancements to asset performance and the installation of gas upgraded equipment for RNG production. These 2 facilities are expected to be fully constructed and beginning to reach run rate capacity in fiscal 2025.

During the quarter, we used excess cash flows in a very balanced way to acquire a well-run propane business in a strategic market on the West Coast to support the growth of our core propane business as well as to fund ongoing capital projects in our RNG operations, make additional investments in overall fuels, and we also reduced debt by approximately $21 million. As I have stated on a number of occasions on previous quarterly earnings calls, we are taking a very measured approach to positioning the business for long-term growth and sustainability. Leveraging the strength of our core propane business and our 95-year legacy of being a trusted provider of energy to local communities. In a moment, I'll come back for some closing remarks and provide added color on our strategic initiatives. However, at this point, I'll turn it over to Mike Kuglin to discuss our third quarter results in more detail. Mike?

Thanks, Mike, and good morning, everyone. To be consistent with previous reporting, as I discuss our third quarter results and excluding the impact of unrealized mark-to-market adjustments on our commodity hedges, which resulted in an unrealized loss of $3 million for the third quarter compared to an unrealized loss of $900,000 in the prior year. Along with certain other noncash items and acquisition-related transaction costs. Given the seasonal nature of our business, we typically experience a net loss in the third quarter of our fiscal year, with that said, the net loss for the third quarter was $1.5 million or $0.02 per common unit compared to breakeven in the prior year. Adjusted EBITDA for the third quarter increased $3.8 million or 13.2% to $33 million compared to $29.2 million in the prior year. As Mike mentioned, the improvement in earnings was driven by cooler spring temperatures and organic growth in our customer base that contributed to higher volumes sold, along with contribution from the RNG production facilities acquired at the beginning of the second quarter.

Retail propane gallons sold in the third quarter were 78.5 million gallons, which was 3.9% higher than the prior year, primarily due to cooler weather in certain markets and favorable customer base trends. While average temperatures as measured in heating grid days were 4% warmer than normal and comparable to the prior year third quarter, experienced cooler spring temperatures in much of our territories in the West and certain portions of the Northeast that contributed to an increase in heat-related demand. From a commodity perspective, propane inventory levels in the U.S. remained elevated during the third quarter and contributed to declines in wholesale prices compared to the prior year third quarter. According to the Energy Information Administration, U.S. propane inventories at the end of June 2023 were at 79.5 million barrels, which was 47% higher than June 2022 levels and 18% higher than historical averages for that time of the year.

As a result of the increase in inventories and other factors, average total sale prices for the third quarter of $0.68 per gallon that's basis Mont Belvieu, decreased 46% compared to the prior year third quarter. Excluding the impact of the mark-to-market adjustments on our commodity hedges that I mentioned earlier, total gross margin of $171.1 million for the third quarter increased $10.8 million or 6.7% compared to the prior year, primarily due to higher volumes sold and margin contribution from the RNG assets. Excluding the impact of the unrealized mark-to-market adjustments, Propane unit margins for the third quarter were flat compared to the prior year as effective selling price management during our period of declining commodity prices offset a less favorable benefit from commodity hedges that matured during the period. With respect to expenses, combined operating and G&A expenses of $137.4 million for the third quarter increased $7.4 million or 5.7% compared to the prior year, primarily due to higher variable operating costs in support of the increase in volumes sold, continued impact of inflation on payroll and vehicle lease and repair costs, albeit at a moderating pace as well as the operating costs associated with the new RNG assets.

Net interest expense of $18.7 million for the third quarter was $3.7 million higher than the prior year due to a higher level of average outstanding borrowings under our revolving credit facility to fund the RNG acquisition in the second quarter, coupled with higher benchmark interest rates for borrowings under the revolver as well as the impact of the $80.6 million in green bonds assumed in the RNG acquisition. Total capital spending for the quarter of $9.4 million was $1.6 million lower than the prior year, primarily due to our lower level of spending on propane tanks and cylinders as we leverage the inventory on hand that more than offset capital growth associated with the expansion and upgrade of the RNG production facility in Stanford, Arizona and the ongoing construction of the RNG facility at Adirondack Farms, which is expected to be completed by December 2024.

Overall, capital spending for the -- on the RNG projects is expected to range between $5 million and $10 million in fiscal 2023 and between $25 million to $35 million in fiscal 2024, excluding the benefit of potential investment tax credit. Turning to our balance sheet. As Mike mentioned, during the third quarter, we repaid $20.5 million of borrowings under the revolver with cash flows from operating activities. On a fiscal year-to-date basis, we have repaid $45 million of the $150 million borrowed on the revolver to fund the RNG acquisition. As a result of the increase in earnings and debt repayment during the third quarter, our consolidated leverage ratio for the trailing 12-month period ended June 2023 improved to 4.36x compared to 4.43x at the end of the second quarter. Although the leverage metric is elevated relative to our historical levels and our target level of 3.5x, we remain well within our debt covenant requirement of 5.75x.

Factoring in the projected run rate EBITDA contributions from the RNG assets, the pro-forma consolidated leverage ratio approaches 4x. We will continue to remain focused on utilizing excess cash flows to fund the planned growth capital within the RNG platform as well as to strengthen the balance sheet as opportunities arise to fund strategic growth of our core propane business and the renewable energy portfolio. We have more than ample borrowing capacity under our revolver to support our capital expansion plans and ongoing strategic growth initiatives. As we continue to focus on the execution of our long-term strategic goals, we will also stay focused on maintaining a strong balance sheet. Back to you, Mike.

Thanks, Mike. As announced on July 20, our Board of Supervisors declared our quarterly distribution of $0.325 per common unit in respect of our third quarter of fiscal 2023. That equates to an annualized rate of $1.30 per common unit. Our quarterly distribution will be paid on August 8 to our unitholders of record as of August 1. Our distribution coverage continues to remain very strong at 2.27x for the trailing 12 months ended June 2023. Just a few closing remarks. When we launched Argo Green with Suburban Propane corporate pillar in 2019, it highlighted our strategic focus on advocating for the inherent clean qualities of propane as a versatile energy solution to lowering the carbon footprint across multiple sectors of the economy, while also investing in innovative technologies and businesses that can help accelerate the energy transition to achieve aggressive low carbon standards. Since that time, we have made initial manageable investments in development stage companies like Oberon Fuels and independence hydrogen that can benefit from Suburban's deep logistics expertise, support infrastructure across multiple operational and back-office functions and strategic vision for developing commercial energy markets. while also providing Suburban Propane with a platform and exposure to potentially disruptive technologies or novel business processes in the transition to renewable energy.

With our assistance, both companies are making good progress toward their commercialization efforts. Most recently, we have begun to build out an RNG platform that Suburban Propane owns outright through our wholly owned subsidiary, Suburban Renewable Energy. The current portfolio of RNG producing facilities are diversified by geography, feedstock, offtake, qualifying environmental credit attributes and eligibility for investment in production tax credits. And as I stated in my opening remarks, the Stanfield, Arizona facility is currently producing and injecting RNG into a pipeline interconnect adjacent to the facility and through enhancements to the processing is exceeding our initial projections for daily volume injection. The Columbus and Adirondack facilities are undergoing planned construction of upgrading and as such, will begin flowing RNG toward the end of fiscal 2024 or the beginning of fiscal 2025.

We also have a number of additional RNG acquisition or development opportunities in our pipeline that are in various stages of evaluation. In conclusion, we are very much focused on continuing to foster the growth of our core propane business because it is the strength and stability of our propane business that helps provide the cash flow to support our investments in the energy transition. As I mentioned, we are making strategic investments in the ongoing energy transition to lower carbon, renewable energy alternatives in order to set the business up for the future in an effort to create long-term value for our employees, our valued unitholders and other stakeholders. We are taking a very measured and disciplined approach in the execution of our strategic growth plans while also staying focused on maintaining a strong balance sheet, which provides support for our long-term sustainability as an organization and access to capital to fund opportunistic growth.

Finally, I want to take this opportunity to thank the more than 3,200 employees at Suburban Propane for their hard work and unwavering focus on the safety and comfort of our customers and the communities we serve and to welcome the new employees that are supporting the operations and growth of the RNG business. Thank you all for all that you do every day. And as always, we appreciate your support and attention this morning. And now we'll open the call up to questions. And Betsy, if you wouldn't mind helping us with that.

(Operator Instructions) The first question today comes from Gabe Moreen from Mizuho.

Maybe I can start out, I think Mike made some comments. You made some comments about the moderating inflationary environment. Maybe you could elaborate on that and kind of what you're seeing out there, what your expectations may be on what inflation rate you may be facing from an OpEx standpoint next heading into next year?

Yes. One of the biggest drivers behind the increase in expenses was in payroll. And it was most pronounced, we would say, we saw in 2022 and then throughout 2023, but the rate of increase is certainly coming down. It's certainly not flatlining, but the rate of increase is certainly moderating compared to what we experienced in the last 18 to 24 months. Outside of that, I'd say vehicle expenses. They've been pretty elevated over the last couple of years. And as we look forward, remain elevated, but the rate of increase is starting to come down a bit.

And then maybe if I can ask about potential RNG acquisitions, there's the mention of looking at additional opportunities there. Can you just talk about how active the pipeline is, whether -- I don't know anything is potentially imminent here? And then how you play off allocating capital to more RNG right now versus doing additional propane acquisitions like the one you did on the West Coast?

Yes, there's nothing imminent, Gabe. I think we're always pretty active in evaluating opportunities. And now that we have an active portfolio of assets throughout the country, there's lots of opportunities that our team that's helping us operate that business as well as our strategic corporate development team. They're continuously evaluating different opportunities, building relationships in the space. And I think one of the things that we see with our involvement in the RNG platform is a lot of the RNG assets that are out there right now have been in the hands of investors and whether it be private equity or start-up companies that bootstrap themselves to create a platform. And I think we bring a whole different level of focus on long-term operation of the business. And I think that is giving us an advantage in the conversations that we're having. But there's nothing imminent. We're very deliberate in the way we look at and evaluate these opportunities. We're going to continue to be patient in that regard. As it relates to allocating capital, same thing with propane.

Propane, we're going to -- we're always active. I think the pipeline there, has gotten smaller over the years. There seems to be less and less mom-and-pops that come to market in the past 2 years. And I would say the 5 years prior to that. But we're always in the market looking at those opportunities, but they have to be in really strategic markets, and they have to be at the right multiple. And so the allocation is really dependent on how strategic the particular opportunity is that's in front of us. The good thing is that we're generating excess cash flow from the business. And we have capacity to allocate that excess cash flow. As I said in my opening remarks, we had a combination of a propane acquisition that was less than $10 million. We continue to fund the capital expansion of the renewable platform and we also reduced debt by $21 million. So that's the way we like to be opportunistic with the excess cash flow for now while we're building out this platform.

The next question comes from James Spicer with TD Securities.

In your prepared remarks, you mentioned pro forma leverage factoring in projected run rate EBITDA contributions from your RNG business. Just wondering what you're assuming there or thinking about in terms of EBITDA contributions? And then more broadly, how we should be thinking about build multiples for your various RNG projects.

Yes. I think you could do the math. We're at 4.3 now, and I say we're approaching 4. So you could do the math on how that -- what that means in terms of the incremental EBITDA that we have. We're not out there projecting out what the contribution is going to be. That's not our style. We don't typically give guidance like that. So that's the guidance we're giving that when you look at it on that basis and the way we looked at the deal before we did it, was on a pro forma basis to get us closer to 4x. So that's kind of the way we're -- the leverage is shaking out. As far as your second question... Remind me what your second question was?

Yes, yes. It was just on a business...

Yes, the build multiple... Sorry. So yes, on build multiples, obviously, we're still in the early stages here of renewable energy investments. I think build multiples are probably going to be in the high single digit, it's the way we're thinking about it at this stage. And that's what we expect in our Adirondack Farms facility. And so as we think about future deployment of capital for actually constructing assets, build multiples should be in that mid-to-high single digit.

Can you also remind me where you are on CapEx at this point relative to your full year budget?

Yes. So on the propane side, you would typically expect to see a CapEx running between tank and cylinder purchases. I would expect a similar number this year on a full year basis around $45 million. And then in addition to that, this year, we expect to see somewhere between an additional $5 million to $10 million associated with the build-out of the RNG assets.

Okay. And that includes both maintenance and growth CapEx?

That's correct.

The next question comes from Ned Baramov with Wells Fargo.

So it seems the Arizona RNG facility is tracking ahead of your internal volume expectations. Can you maybe touch on what is driving the outperformance there? And if there is any potential additional upside?

So the performance is really from some of the capital that we deployed to enhance the performance of the digester itself and the ability to get more yield out of the feedstock that we were bringing in. Growth from here, there are still some opportunities for expansion without putting in more capital, meaning bringing in more feedstock, both from other farms that are locally situated in the area that are not currently sending their manure into our facility. But also we do take in local biomass as bile solids in our D5 oriented digester as well. So there are some opportunities to increase the amount of feedstock that we're bringing in, in both of those streams so that we can increase the amount of production. That's going to take a bit of time. I think what we focused on since we've owned the assets for the past 6 months is really performance of the assets themselves, enhancing the -- streamlining the business, enhancing the actual performance of the digesters working through some challenges that they had previous to our ownership and we've worked all that out now and are really seeing great performance of those assets.

Got it. And my second question, can you provide more detail on your most recent Propane acquisition on the West Coast size, any details behind the process, synergy potential, et cetera?

It's relatively small, Ned. I said it I think in my first answer, it's less than $10 million of a purchase price. So it's not a significant contributor, but it is something that the way we look at propane acquisitions, they have to be in really good markets where we see opportunities, either through synergies or because of the population growth or other growth that market is experiencing. This particular one sits right in the middle of a really good territory of ours in the Upper Northwest, that's going to generate good synergies for us and gives our team up there an opportunity to take one of their competitors out and expand their market share while also putting in our operating platform to drive the synergies. So it's not a big deal, not a big acquisition, but it's important for our operations on the West Coast and it's the right kind of deal for us to be doing to continue to feed the propane business.

That's all I had.

(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Mike Stivala for any closing remarks.

Great. Thanks, Betsy. Thank you all again for joining us this morning. Appreciate your attention. Enjoy the rest of your summer. Please be safe out there. We look forward to talking to you in November as we close out another great fiscal year for Suburban Propane. So thank you again.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.