Suburban Propane Partners, L.P. F4Q08 (Qtr End 9/30/08) Earnings Call Transcript

| About: Suburban Propane (SPH)

Suburban Propane Partners, L.P. (NYSE:SPH)

F4Q08 Earnings Call

November 14, 2008 9:00 am ET


A. Davin D’Ambrosio – Vice President and Treasurer

Michael A. Stivala – Chief Financial Officer, Chief Accounting Officer

Mark A. Alexander – Chief Executive Officer & Member of Supervisory Board

Michael J. Dunn, Jr. – President, Member of the Supervisory Board


Ronald F. Londe – Wachovia Securities

Darren Horowitz – Raymond James

Welcome to the Suburban Propane fourth quarter 2008 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 call is being recorded. This conference call contains forward-looking statements within the meeting of Section 21E of the Securities Exchange Act of 1934 as amended relating to the partnership, future business expectations, and predictions, and financial conditions 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 discussed in such forward-looking statements which are referred to as cautionary statements in the earning’s 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, Mr. Davin D’Ambrosio. Please go ahead.

A. Davin D’Ambrosio

Welcome to Suburban’s fourth quarter and fiscal 2008 year end conference call. I am Davin D’Ambrosio, Vice President and Treasurer at Suburban. Joining me this morning is Mark Alexander our Chief Executive Officer, Mike Dunn Jr., our President and Michael Stivala our Chief Financial Officer and Chief Accounting Officer.

The purpose of today’s call is to review our fourth quarter and fiscal 2008 full year 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. Before getting starting though, I would like to reemphasis what the operator has just explained about forward-looking statements.

Additional information about factors that can cause actual results to differ materially from those discussed in forward-looking statements is contained in the partnership’s SEC filing including its Form 10K for the fiscal year ending September 29, 2007 and its Form 10K for the fiscal year ending September 27, 2008 which will be filed on November 26th. Copies of these filings may be attained by contacting the partnership or the SEC.

Additionally, 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 8K furnished to the SEC this morning. The Form 8K can be accessed through a link on our website at At this point I would like to get started by turning our call over to Mark Alexander. Mark.

Mark A. Alexander

Fiscal 2008 definitely presented a challenging operating environment as we experienced unprecedented volatility in commodity prices, continued customer conservation, relatively mild temperatures during the peak heating season and a general slowdown in the economy. Despite all these factors our flexible operating platform has enabled us to successfully navigate through these difficult times.

While we are very pleased with our reporting results perhaps one of the most positive factors is the strength of our balance sheet and distribution coverage. We ended the year with over $137 million in cash on hand and once again have not borrowed on our revolving credit facility to fund working capital needs even when commodity prices reached historical levels.

With the uncertainly currently surrounding the credit market we are in an enviable financial situation with sufficient liquidity to fund our projected operational needs without reliance on the financial community. As evidence of our boards’ confidence in our financial strength, we are pleased to continue to deliver increased value to our unit holders with our 10th consecutive increase in our annual distribution rate to $3.22 per common unit, a gross rate of 7.3% over the prior year fourth quarter.

Even amongst all this economic turmoil we still ended fiscal 2008 with a coverage ratio of nearly 1.3 times. A little later I will comment further on our increased quarterly distribution and thoughts for the coming year. At this point however, I will turn it over to Mike Stivala to discuss our year-end and fourth quarter results in more detail.

Michael A. Stivala

As Mark indicated in these times of economic uncertainty and instability in our financial markets, the steps taken over the last few years to strengthen our balance sheet and streamline our operating platform have proven quite timely. With the increased work in capital requirements for our industry and the general lack of liquidity flowing from the financial institutions ending the fiscal year with over $137 million of cash on hand is certainly a distinct advantage for Suburban.

Looking at our full year results, to be consistent with previous reporting I am excluding the impact of a $1.8 million unrealized non-cash gain applicable to FAS 133 accounting compared to an unrealized loss of $7.6 million in fiscal 2007. EBITDA for our full fiscal year totaled $220.5 million compared to $205.3 million for fiscal 2007, an increase of 7.4% or $15.2 million.

Net income totals $153.1 million or $4.57 per common unit for fiscal year 2008 compared to net income of $134.8 million or $414 per common unit in the prior year. Fiscal 2008 results included a gain of $43.7 million from the sale of our [Tarza], South Carolina underground propane storage cavern which occurred during October 2007.

By comparison net income and EBITDA for fiscal 2007 included a $3.3 million non-cash pension settlement charge, a $1.5 million charge for severance benefits, a gain of $2 million from the recovery of legal fees associated with the successful defense of a prior legal matter, gains of $1.9 million from the sale and exchange of customer service centers, a $3.8 million non-cash adjustment to the provision for income taxes related to deferred taxes and $14.7 million of incremental margin opportunities.

Retail propane gallons sold for fiscal year 2008 decreased 46.3 million gallons or 10.7% to 386.2 million gallons from 432.5 million gallons in fiscal 2007. Sales of fuel oil and other refined fuels decreased 28 million gallons or 26.8% to 76.5 million gallons compared to 104.5 million gallons in the prior year.

Lower volumes in both segments were attributable to ongoing customer conservation resulting from historically high commodity prices, warmer average temperatures during the peak heating months and to a lesser extent elimination of certain lower margin accounts. Average heating degree days in our service areas were 94% of normal for fiscal 2008.

While this full year heating degree day index was comparable to fiscal 2007, the peak heating season of fiscal 2008 was warmer than the prior year particularly in the Northeast where average heating degree days were 7% warmer than the prior year thus having a negative effect on our volumes.

In the commodities markets average poster prices increased throughout the first three quarters of fiscal 2008 peaking in mid-July 2008 and then falling off dramatically during the fourth quarter. For the year average poster prices for propane and fuel oil increased 48.6% and 53.8% respectively compared to the prior year. Since the end of fiscal 2008, commodity prices have continued to decline and today’s spot propane is trading around $0.58 basis [inaudible] and spot heating oil is trading at about $1.8350.

As reported throughout the prior year we achieved incremental margins from favorable market conditions impacting supply and pricing for propane and fuel oil which had a favorable impact of $14.7 million on our fiscal 2007 which were not present in fiscal 2008 thus having a negative effect on our year-over-year comparison.

Further, as we discussed in our third quarter earnings release, the dramatic rise in commodity prices resulted in realized losses from risk management activities during the third quarter of fiscal 2008. As anticipated, a portion of these realized losses were recovered during the fourth quarter through sales of physical product and as a result fiscal 2008 was negatively impacted by $10.8 million from the net effect of realized losses also contributing to the decline in year-over-year normalized results.

Total gross margins of $533 million for fiscal 2008, $48.7 million or 8.4% lower of $581.7 million primarily as a result of the two factors that I just mentioned as well as the impact of lower volumes. Combined operating and G&A expenses of $356.2 million were nearly $20 million or 5.3% below the prior year of $376 million.

As a result of operating efficiencies and our flexible cost structure, we continue to experience savings in payroll and benefit expenses including variable compensation as well as lower vehicle expenditures despite the impact of higher diesel costs to operate our fleet. Additionally, while bad debt expenses was higher as a result of generally higher revenues, we continue to remain diligent about managing our receivables especially considering the current economic environment and our overall expense approximately one half of 1% of revenues.

Capital spending for the year totaled $21.8 million which included $12 million of maintenance capital. Turning to our balance sheet, as a result of our continued strong operating result and corresponding cash flow, we did not need to access our revolver to fund any short term working capital requirement. In fact, have not borrowed under our working capital line since April, 2006.

As we mentioned earlier, we ended fiscal 2008 with more than $137 million of cash on hand and that’s even after making a $15 million prepayment on our term loan in the fourth quarter. As we look forward to fiscal 2009, we believe we have adequate liquidity to fund ongoing operations without the need to access our bank revolver for the foreseeable future. We continue to maintain one of the lowest leverage positions in the MLP sector and furthermore, we do not have any upcoming maturities on our senior debt that will need to be addressed in the capital markets for several years.

Looking specifically at our fourth quarter results, given the seasonal nature of our business we typically report losses for our fiscal fourth quarter. However, we are proud today to report that EBITDA for the fourth quarter was positive for the first time in almost a decade. This accomplishment is particularly noteworthy since it was achieved during a very challenging operating environment.

As I discuss the results for the quarter, I am excluding the impact of $2.1 million unrealized non-cash gain from our current quarter results applicable to FAS 133 accounting compared to a $200,000 unrealized gain in the prior year quarter. Despite the deteriorating macroeconomic condition and the ongoing operating challenges, EBITDA for the quarter was $3.3 million which was $15.9 million favorable compared to a loss of $12.6 million in the prior year fourth quarter.

Higher gross margins and lower operating and G&A expenses contributed to these stron2102g results and favorable trends. In addition, we realized increased margins of $3.7 million from the partial recovery of the $14.5 million of realized losses on our short heating oil futures reported for our fiscal 2008 third quarter. Therefore, our seasonal net loss for the quarter improved to $13.4 million or $0.41 per common unit compared to a net loss of $32.3 million or $0.99 per common unit in the prior year quarter.

Mark A. Alexander

As announced in our October 23rd press release, we are extremely pleased to declare our 10th consecutive increase in our quarterly distribution which now equates to an annualized rate of $3.22 per common unit and which was paid on November 10th to our unit holders of record as of November 3rd.

To recap, the numerous steps we have taken over the years to create a more flexible and efficient operating platform continue to yield benefits. We have no immediate need to access the capital markets as our balance sheet remains very healthy and our liquidity is expected to be positioned to meet our needs for the foreseeable future.

As we stated this time last year, we were confident that our solid financial position, flexible cost structure and strong coverage ratios would enable us to successfully deal with what proved to be a very challenging operating environment in fiscal 2008. These results coupled with the strength of our balancing sheet heading in to fiscal 2009 continue to support that belief.

Looking ahead to fiscal 2009, commodity price volatility and the negative economic outlook are both factors that are expected to create ongoing challenges. However, we remain confident that our proven flexible cost structure and ability to drive operating efficiencies will once again help us navigate through these anticipated challenges. That being said, we also believe that the current slowdown in the economy and instability in the capital markets will present challenges for many in our industry and in the energy sector.

We are optimistic that increased opportunities will become available and believe that given our financial strength we will be in an advantageous position both financially and operationally to capitalize on any such opportunities that may arise. In the interim, we remain focused on our business strategy of increasing value to our unit holders through sustainable and profitable growth.

Lastly, I would be remise in not acknowledging the ongoing efforts of all of our employees who continue to provide outstanding customer service and continue to drive efficiencies in many aspects of our business. Of all of our employees, thank you. As always, we appreciate your support and attention this morning and we’d now like to open the call up for questions.

Question-and-Answer Session


(Operator Instructions) Our first question comes from Ronald F. Londe – Wachovia Securities.

Ronald F. Londe – Wachovia Securities

Just curious if you could maybe give us some more color on your feeling towards your exposures to the downturn in the economy on your commercial side of your business? How you view maybe unemployment affecting maybe rural customers and lack of new housing out there versus your feel for how margins might be affected by lower propane prices?

How you view the stress that is being put on your competition given the current credit crunch? And, where you might stand with regard to weather situations? Since weather was kind of negative last year do you feel that this year that could be a positive factor or likely to be more positive?

Mark A. Alexander

That’s a mouthful Ron, let me take a first shot at that. Economically, it is not a bright picture at all. Anybody you talk to 2009 looks fairly dismal from an overall economic standpoint sitting here 30,000 feet looking down, it’s going to be a rough ride. Right now I’d say the old cliché, the rules they are changing. The capital markets are basically shut, when the open up who knows what it’s going to look like.

We’re in a fortunate position that we’ve proven over the years that we can address our cost structure and adjust our cost structure to basically any type of perfect storm of bad economic news. What does that do? It has the obvious impact that you’d expect from our customers’ perspective, it’s going to be a strain on it. The consumer, they’re retrenching already, they’re confidence levels are low and they’re going to spend less.

So, I wouldn’t be surprised if what we’ve seen prior to this in the form of conservation with respect to or do to the spike in commodity prices that you’ll see continued conservation as a result of the economic stress that we’re going to experience over at least the next year. Weather? Weather looks like – who’s crystal ball is better but weather looks like it could be a positive this year although I don’t know if it’s going to be enough to counter the conservation that we expect and that our customers and the consumer will drive.

Who knows, I would be surprised if we see a further drop in volume and margins holding on. That wouldn’t be surprising at all, that would just be a continuing of the trend we’ve seen over the past few years.

Ronald F. Londe – Wachovia Securities

Wouldn’t the margins holding on be a function of lower prices or commodity prices and the lag in passing those along?

Michael J. Dunn, Jr.

I don’t necessarily think that there’s a correlation between the two at least in this economic environment. You are going to have lower prices which could be helpful if we have some weather but I don’t think there’s the typical correlation. I mean, if you really want to look at propane prices for example, propane prices one could argue are undervalued trading at about a 51% ratio to crude oil. The 10 year average is closer to 70%.

So, if you make that calculation you could argue that propane prices could be $0.25 to $0.30 higher on a base cost basis. I think people in the industry are looking at that as well. I also think the industry still has a fair bit of high priced inventory to flush through the system. Inventories that were bought at the end of June, July and beginning of August and with weather being what it’s been so far, that off take hasn’t been as quick as one would like obviously in a market that continues to decline.

The other point I want to go back to also is our volumes with respect to the commercial and industrial side, we have seen over the course of the last two years actually a decline in volumes but we’ve also seen opportunities to pick up business because some of the smaller operators aren’t able to access the capital and/or get and have the working capital to invest in the steel. I’m not going to say it’s a push but it’s not as dismal as one might thing.


Our next question comes from Darren Horowitz – Raymond James.

Darren Horowitz – Raymond James

Mark, I want to go back to a point that you made on the liquidity side when you were discussing having sufficient liquidity to meet future needs, can you just outline for us when you look at the year ahead, your cap ex program is there any sort of capital that you’re going to spend on improving efficiencies? Should we forecast somewhere around a $13 million to $14 million annual maintenance line?

Michael A. Stivala

Typically, in total cap ex we’ll spend about $20 million to $25 million a year and that split between maintenance and capital is typically going to be between $10 million in maintenance and $15 of growth. This year happened to be $22 million of capital spend and $12 of that was maintenance. So, $25 million is about what our typical run rate for total cap ex is. That’s not expected to change.

Mark A. Alexander

From a capital needs perspective and liquidity, we have plenty of cash on hands that if that needed to be more. We don’t anticipate it but if we did, we’d have no problem.

Darren Horowitz – Raymond James

My next question, and Ron kind of touch on it a little bit but when you’re looking at the challenges in the industry and market multiples and as you pointed out, if you continue to see on a go forward basis, continued customer conservation, is it a situation where in terms of addressing opportunity you just want to wait for the right opportunity or have you see a concession in multiples that are being discussed for in organic opportunities? How do you look at timing the market?

Mark A. Alexander

Let’s again look at it from 30,000 feet. The indications are that when the debt markets open up that rates are going to be higher. If that’s the case then something’s got to give. The only other thing to give is multiples. So, either something like that happens or nothing happens at all so we do anticipate that if rates go up, which is what all the banks are pointing to when they start lending again, multiples are going to have to come down.

Darren Horowitz – Raymond James

Then finally, just a quick housekeeping question, again great job on the op ex line, as we look at op ex and more importantly your direct costs and you mentioned a lot of these internal efficiencies that you continue to extract and I ask this question every quarter, how much more is there to go? Because, it seems like every quarter you’re making meaningful sequential improvements.

Mark A. Alexander

Frankly, our workforce continues to amaze us as well. They find efficiencies, drive efficiencies and do a heck of a job and if need be right size the business. It’s been a continuation for years now and it’s why I said at the end of my prepared remarks, we just applaud our operating people, they’re doing a heck of a job out there in a very, very difficult environment, an environment we don’t think is going to improve for at least another year. Do you want to add to that Mike?

Michael A. Stivala

I think Darren, the other side of what you see is in our cost structure and we talked about this for years, that we do have a fair amount of our expenses base that is flexible and it’s several million of dollars that can flex up or down depending on how the earnings are coming in and that’s a benefit that we’ve had in our cost structure for several years.

From an efficiency perspective, Mark’s right, we seem to try and uncover every stone and look for ways to be more efficient at absolutely everything we do and those things are paying off. If you look at next year, we’re feeling fairly comfortable in what we’re budgeting that we’ll be able to offset the majority of inflationary type increases.

So, I think there’s still opportunities. How big they are and whether they’ll match the type of expense reductions that you see this past year all remains to be seen but we’re proud of our cost structure and our operating platform more specifically.

Mark A. Alexander

You’re right Darren in the sense that we don’t expect the improvements to be at the same levels historically but, we do continue to see and expect improvement just not to the extent that we’ve seen in the past. But, we’re still doing a heck of a job out there.


Our last question comes from Ronald F. Londe – Wachovia Securities.

Ronald F. Londe – Wachovia Securities

I just had a couple of follow ups, from the standpoint of cost, I guess one of the costs that is going to be going down in the future is fuel costs for your vehicles. You have a fairly large fleet of vehicles, is that going to be really meaningful? How meaningful is that to the bottom line?

Mark A. Alexander

That could be billions couldn’t it?

Michael A. Stivala

I think for sure for this year where diesel costs went our diesel costs year-over-year were up about $3 million. So, if you look at that and we all know what happened to crude oil and corresponding impact to diesel costs that was a significant impact to us this year. We were able to offset that such that our total vehicle expenditures were net down because of lower vehicle count and our continuing to focus on efficiencies with the way we route our customers’ deliveries.

That’s $3 million of incremental expenses this year that we covered through efficiencies that as we get some relief for sure that’s a benefit to us.

Ronald F. Londe – Wachovia Securities

From a standpoint of first fill how has that been going? I know October has been kind of warm and in to November it looks like it’s being put off like it was last year? Do you expect it to be better or worse than last year.

Michael J. Dunn, Jr.

It’s pretty much mirroring last year actually but for different reasons. Not so much price but just general economics and weather.


We have no other questions at this time.

Mark A. Alexander

Thanks for everybody’s attention this morning and support. Overall, you should be able to tell from our tone, we had a heck of a year even in the wake of some very negative in the midst of what we call the perfect storm of poor economic conditions and we don’t expect economic conditions to improve next year, we expect them to probably deteriorate a bit through most of 2009.

However, with our financial position, our strength of our balance sheet and our operating expertise and our operating model, we’re very confident that we’re going to have a solid 2009. Again, we appreciate everyone’s support and look forward to talking to you next quarter. Thank you very much.


Ladies and gentlemen this conference will be available for replay after 11 am Eastern time to November 15, 2008 at Midnight. You may access the AT&T executive playback service at anytime by dialing 1-800-475-6701 and entering the access code 965099. International participants may dial 1-320-365-3844. Again those numbers 1-800-475-6701 and 1-320-365-3844, access code 965099. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive teleconference service. You may now disconnect.

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